20-F 1 form20-f.htm

 

 

 

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, 2018

 

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: 011 49 214 876 00

(Address of principal executive office)

 

 

 

Thomas Schaffer

Chief Financial Officer

Biofrontera AG

Hemmelrather Weg 201

51377 Leverkusen, Germany

Tel: +49 (0)214 873 3200, Fax: +49 (0)214 8763290

(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: 44,632,674 as of December 31, 2018

 

 

 

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, or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” 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 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
      i
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS  
       
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 39
       
Item 4A.   Unresolved Staff Comments 76
       
Item 5.   Operating and Financial Review and Prospects 76
       
Item 6.   Directors, Senior Management and Employees 95
       
Item 7.   Major Shareholders and Related Party Transactions 111
       
Item 8.   Financial Information 114
       
Item 9.   The Offer and Listing 117
       
Item 10.   Additional Information 118
       
Item 11.   Quantitative and Qualitative Disclosures About Market Risk 127
       
Item 12.   Description of Securities Other than Equity Securities 128
       
PART II      
       
Item 13.   Defaults, Dividend Arrearages and Delinquencies 130
       
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 132
       
Item 16C.   Principal Accountant Fees and Services 132
       
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 133
       
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, Maruho’s wholly owned subsidiary.

 

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, 2018: 1.1455 U.S. dollars to 1 euro; December 31, 2017: 1.2022 U.S. dollars to 1 euro; December 31, 2016: 1.0516 U.S. dollars to 1 euro), while the income and expenses have been translated at the average exchange rates (twelve months ended December 31, 2018: 1.1818 U.S. dollars to 1 euro; December 31, 2017: 1.1301 U.S. dollars to 1 euro; December 31, 2016: 1.1066 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.

 

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, 2019 was €1.00 to $1.1228. We make no representation that the euro or U.S. dollar amounts referred to in this annual report could have been converted into U.S. dollars or euros, as the case may be, at any particular rate or at all. See “Risk Factors — Our international operations may pose currency risks, which may adversely affect our operating results and net income.” We use the symbol “$” to refer to the U.S. dollar and use the symbol “€” to refer to the euro herein.

 

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, included in this annual report 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.

 

  i 
   

 

The forward-looking statements in this annual report include, but are not limited to, statements about:

 

  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 ability to successfully integrate Cutanea Life Sciences, Inc., which we acquired in March 25, 2019, and realize our goals for this acquisition;
     
  our estimates of preliminary unaudited revenue for the three months ended March 31, 2019;
     
  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;
     
  our ability to market, commercialize, achieve market acceptance for and sell our products and product candidates;
     
  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;
     
  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;
     
  the progress, timing and completion of our research, development and preclinical studies and clinical trials for our products and product candidates; and
     
  our expectations regarding the merits and outcomes of pending or threatened litigation.

 

We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements, and you should not place undue reliance on our forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements we make. We have included important factors in the cautionary statements included in this annual report, particularly the factors described in the “Risk Factors” section of this annual report, that could cause actual results or events to differ materially from the forward-looking statements that we make. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments that we may make.

 

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. We have based these forward-looking statements on our current expectations and projections about future events. These forward-looking statements are subject to risks, uncertainties and assumptions about us, including those listed in the sections of this annual report entitled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this annual report.

 

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.

 

  ii 
   

 

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. Selected Financial Data

 

The following table sets forth a summary of the consolidated historical financial information of, and for the periods ended on, the dates indicated for Biofrontera AG. We prepare our consolidated financial statements in accordance with IFRS as issued by the IASB. The selected consolidated statement of operations data for the fiscal years ended December 31, 2018, December 31, 2017 and December 31, 2016, and the selected consolidated balance sheet data as of December 31, 2018, December 31, 2017 and December 31, 2016 have been derived from our audited consolidated financial statements.

 

The following selected consolidated financial data for the periods and as of the dates indicated are qualified by reference to and should be read in conjunction with our consolidated financial statements and related notes beginning on page F-1 of this annual report, as well as the sections titled “Operating And Financial Review And Prospects” and “Foreign Currency Exchange Rates” included elsewhere in this annual report.

 

Our historical results for any prior period do not necessarily indicate our results to be expected for any future period.

 

You should read the following summary of consolidated financial information in conjunction with the section of this annual report entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes contained elsewhere in this annual report.

 

1
 

  

   Year Ended December 31, 
   2018   2017   201 6 
             
    (amounts in thousands, except share and per share data) 
Statement of operations data:               
Sales Revenue   21,107    12,025    6,130 
Gross Margin   78.91%   85.73%   73.05%
Research and development costs   (4,428)   (4,225)   (4,640)
Sales costs   (17,744)   (16,922)   (8,764)
General administrative costs   (12,963)   (3,097)   (2,853)
Loss from operations   (18,478)   (13,934)   (11,779)
Loss before income tax   (19,269)   (16,102)   (10,579)
Loss for the period   (8,878)   (16,102)   (10,579)

 

   Year Ended December 31, 
   2018   2017   2016 
          
Per share data:               
Basic and diluted loss per share   (0.20)   (0.42)   (0.36)
Basic and diluted operating loss per share   (0.42)   (0.37)   (0.40)
Shares used in computing basic and diluted loss per share   43,695,794    38,076,088    29,762,784 

 

   At December 31, 
   2018   2017   2016 
          
   (amounts in thousands) 
Balance sheet data:               
Cash and cash equivalents   19,451    11,083    15,126 
Other current financial assets   4,191    2,132    2,294 
Other current assets   3,945    5,239    4,561 
Non-current Assets   11,547    1,394    1,897 
Total assets   39,133    19,848    23,879 
Long-term liabilities   15,007    12,355    3,597 
Current liabilities   7,770    4,112    4,440 
Total shareholders’ equity   16,356    3,381    15,842 

 

(1) See Note 22 to our consolidated financial statements for further details on the calculation of basic and diluted loss per ordinary share.
   
(2) Per share data are calculated by dividing net consolidated loss by the weighted average number of outstanding ordinary shares during the year in accordance with IAS 33 (“Earnings per Share”).

 

2
 

 

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.

 

Risks Related to Our Financial Position and Capital Requirements

 

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, 2018, December 31, 2017 and December 31, 2016 was € 8.9 million, €16.1 million, and €10.6 million, respectively. As of December 31, 2018, we had an accumulated deficit of €145.4 million.

 

Our ability to become profitable depends on our ability to further commercialize our principal product Ameluz® and control costs, including general administrative costs incurred in connection with litigation. Even if we are successful in increasing our product sales, we may never achieve or sustain profitability. We anticipate substantially 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. 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, 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.

 

3
 

 

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, and to continue the clinical development of our product candidates, including further Phase III clinical trials. Going forward, we expect that we will also require significant funds in order to commercialize the drugs AKTIPAK® and XepiTM, the rights to which we recently acquired through our purchase of Cutanea Life Sciences, Inc. (“Cutanea”).

 

We believe that our existing cash and cash equivalents and revenue from product sales and future milestone or license payments will be sufficient to enable us to fund our operating expenses and to advance our commercialization strategy in the U.S. for the next 12 months. However, changing circumstances may cause us to consume capital significantly faster than we currently anticipate, and we may need to spend more money than currently expected because of circumstances beyond our control. After the next 12-month period, we may require additional capital for the further development and commercialization of our products. We may need substantial additional funds to fully develop, manufacture, market and sell our other potential products. 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; and
     
  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.

 

We cannot be certain that additional funding will be available on acceptable terms, or at all. If we are unable to raise additional capital in sufficient amounts and on terms acceptable to us, we may have to significantly delay, scale back or discontinue the commercialization of our products or development of product candidates. We also could be required to license our rights to our products and product candidates to third parties on unfavorable terms. In addition, any equity financing would likely result in dilution to our existing holders of our ordinary shares and ADSs, and any debt financing would likely involve significant cash payment obligations and include restrictive covenants that may restrict our ability to operate our business.

 

Any of the above events could significantly harm our business, prospects, financial condition and/or results of operations and could cause the price of our ordinary shares or ADSs to decline.

 

4
 

 

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 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, is guaranteed by certain of our subsidiaries, and is available to be drawn in tranches during a two-year period. Future tranches require the achievement of certain milestones. 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 January 2017, we issued convertible bonds maturing on January 1, 2022 in the aggregate initial principal amount of €5.0 million of which €2.4 million has already been converted into 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: €4.00 per share from April 1, 2017 until December 31, 2018 and €5.00 per share from January 1, 2018 until maturity. In March 2018 the conversion rate was changed from €5.00 to €4.75 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 546,379 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; and
     
  placing us at a competitive disadvantage to competitors that are better capitalized than we are.

 

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 on July 7, 2022 and the minimum € 6.5 million payment due on February 4, 2024. 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.

 

5
 

 

Risks Related to Our Business and Strategy

 

Certain of our important patents will expire in 2019. Although the process of developing generic topical dermatological products presents specific challenges that may deter potential generic competitors, generic versions of Ameluz® could enter the market after expiration of these patents. If this happens, we may need to reduce the price of Ameluz® significantly and may lose significant market share.

 

The patent family that protects aminolevulinic acid hydrochloride, an active ingredient in Ameluz®, against copying by competitors will expire on November 12, 2019. This patent family includes U.S. Patent No. 6,559,183, which is listed in the FDA Orange Book and identified as covering aminolevulinic acid hydrochloride, the active ingredient in Ameluz®. Patent No. 6,559,183 serves as a significant barrier to entry into the market by generic versions of Ameluz®. Although the process of developing generic topical dermatological products presents specific challenges that may deter potential generic competitors, once this patent expires, generic versions of Ameluz® may not be prevented from entering the market and competing with Ameluz®. This may cause a significant price drop and, therefore, a significant drop in our profits. We may also lose significant market share for Ameluz.

 

Our acquisition of Cutanea may not be successful, which could adversely affect our ability to develop and commercialize products and product candidates, impact our cash position, increase our expense and present significant distractions to our management.

 

On March 25, 2019, we announced that we, through our subsidiary Biofrontera Newderm LLC, had acquired Cutanea from Maruho, our major shareholder that holds approximately 20% of our outstanding ordinary shares. Cutanea markets AKTIPAK®, a prescription gel for the treatment of acne, and in November 2018 launched XepiTM, a prescription cream for the treatment of impetigo, a frequent bacterial skin infection (Staphylococcus aureus or Streptococcus pyogenes).

 

We do not have significant experience implementing acquisition transactions or integrating new business into our existing operations. The process of integrating the personnel and operations of Cutanea is expected to be complex and may require us to incur non-recurring or other charges, increase our near- and long-term expenditures and pose significant integration or implementation challenges or disrupt our management or business. These transactions could entail numerous operational and financial risks, including exposure to unknown future liabilities, disruption of our business and diversion of our management’s time and attention in order to implement its strategy with respect to the acquired products, incurrence of substantial debt or dilutive issuances of equity securities to pay higher than expected integration costs, write-downs of assets or goodwill or impairment charges, difficulty and cost in combining the operations and personnel of Cutanea, impairment of relationships with key suppliers, manufacturers or customers of Cutanea due to changes in management and ownership and the inability to retain key employees of Cutanea. If any of these risks materialize in connection with our integration of Cutanea, it may have a material adverse effect on our business, results of operations, financial condition and prospects.

 

Strategic transactions, such as our acquisition of Cutanea, further involve numerous business risks, including:

 

  the failure of markets for the products of acquired businesses, technologies or product lines to develop as expected;
     
  the risks that Cutanea’s current manufacturers and/or suppliers may no longer be available;
     
  the challenges in achieving strategic objectives, cost savings and other benefits expected from acquisitions;
     
  difficulties in assimilating the acquired businesses, technologies or product lines;
     
  the failure to successfully manage additional business locations, including the additional infrastructure and resources necessary to support and integrate such locations;
     
  the existence of unknown product defects related to acquired businesses, technologies or product lines that may not be identified due to the inherent limitations involved in the due diligence process of an acquisition;
     
  the diversion of management’s attention from other business concerns;
     
  risks associated with entering markets or conducting operations with which we have no or limited direct prior experience;
     
  risks associated with assuming the legal obligations of acquired businesses, technologies or product lines;

 

6
 

 

  risks related to the effect that internal control processes of acquired businesses might have on our financial reporting and management’s report on our internal control over financial reporting;
     
  the potential loss of key employees related to acquired businesses, technologies or product lines; and
     
  the incurrence of significant exit charges if products or technologies acquired in business combinations are unsuccessful.

 

We may never realize the perceived benefits of the Cutanea acquisition or potential future transactions. We cannot assure you that we will be successful in overcoming problems encountered in connection with the Cutanea transaction, and our inability to do so could significantly harm our business, results of operations and financial condition.

 

The UK’s pending 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 UK voted to leave the EU in an advisory referendum, which is generally referred to as Brexit. On March 29, 2017, the UK delivered notice under Article 50 of the Lisbon Treaty of its intent to leave the EU. The UK is currently scheduled to leave the EU by October 31, 2019. To date there has been no agreement between the EU and the UK on the terms of the exit.

 

Brexit, the subsequent high-profile failures of the UK to agree on an exit strategy, and the pending withdrawal of the UK, 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 United Kingdom for product candidates or (iii) the award of exclusivities that are normally part of the EU legal framework.

 

Brexit may also result in a reduction of funding to the EMA if the UK no longer makes financial contributions to European institutions, such as the EMA. If UK funding is so reduced, it could create delays in the EMA issuing regulatory approvals for our products and product candidates and, accordingly, have a material adverse effect on our business, financial position, results of operations and future growth prospects.

 

As a result of Brexit, other European countries may seek to conduct referenda with respect to their continuing membership with the EU. Given these possibilities and others we may not anticipate, as well as the absence of comparable precedent, it is unclear what financial, regulatory and legal implications the withdrawal of the United Kingdom from the EU would have and how such withdrawal would affect us, and the full extent to which our business could be adversely affected.

 

In addition, following the Brexit vote, the EU decided to move the headquarters of the EMA from the UK to the Netherlands. The EMA is currently in a temporary location and its relocation process is not expected to be completed until the end of 2019. It is expected that a significant percentage of the current employees of the EMA will decide not to make the move to the Netherlands. This raises the possibility that new drug approvals in the EU could be delayed as a result.

 

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Insurance coverage and medical expense reimbursement may be limited or unavailable in certain market segments for our products or product candidates, which could make it difficult for us to sell our products.

 

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.

 

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, was enacted. On January 20, 2017, President Donald Trump signed an executive order stating that the administration intended to seek prompt repeal of the Affordable Care Act, 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 Affordable Care Act. There is no guarantee whether the Affordable Care Act will remain in effect or be repealed/replaced. There is significant uncertainty about the future of the Affordable Care Act in particular and healthcare laws generally in the United States. This 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.

 

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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. In January 2017, Congress voted to adopt a budget resolution for fiscal year 2017, that while not a law, is widely viewed as the first step toward the passage of legislation that would repeal certain aspects of the Affordable Care Act. While Congress has not passed repeal legislation to date, the 2017 Tax Reform Act includes a provision repealing the individual mandate, effective January 1, 2019. On December 14, 2018, a U.S. District Court judge in the Northern District of Texas ruled that the individual mandate portion of the Affordable Care Act is an essential and inseverable feature of the Affordable Care Act, and therefore because the mandate was repealed, the remaining provisions of the Affordable Care Act are invalid as well. The Trump administration and the Centers for Medicare and Medicaid Services (“CMS”) have both stated that the ruling will have no immediate effect, and on December 30, 2018, the same judge issued an order staying the judgment pending appeal. On January 22, 2018, President Trump signed a continuing resolution on appropriations for fiscal year 2018 that delayed the implementation of certain Affordable Care Act-mandated fees, including the so-called “Cadillac” tax on certain high cost employer-sponsored insurance plans, the annual fee imposed on certain health insurance providers based on market share, and the medical device excise tax on non-exempt medical devices. Further, on January 20, 2017, President Trump signed an Executive Order directing federal agencies with authorities and responsibilities under the Affordable Care Act to waive, defer, grant exemptions from, or delay the implementation of any provision of the Affordable Care Act that would impose a fiscal burden on states or a cost, fee, tax, penalty or regulatory burden on individuals, healthcare providers, health insurers, or manufacturers of pharmaceuticals or medical devices. Congress also could consider subsequent legislation to replace elements of the Affordable Care Act that are repealed. On October 13, 2017, President Trump signed an Executive Order terminating the cost-sharing subsidies that reimburse insurers under the Affordable Care Act. Several state Attorneys General filed suit to stop the administration from terminating the subsidies, but their request for a restraining order was denied by a federal judge in California on October 25, 2017. In addition, CMS has recently proposed regulations that would give states greater flexibility in setting benchmarks for insurers in the individual and small group marketplaces, which may have the effect of relaxing the essential health benefits required under the Affordable Care Act for plans sold through such marketplaces. Congress will likely consider other legislation to replace elements of the Affordable Care Act. 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 U.S. 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. Recently there has been increased government scrutiny regarding the manner in which manufacturers set prices for and market commercial products. 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.

 

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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 our product candidates, if we obtain regulatory approvals;
     
  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.

 

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. In addition, the U.S. Privacy Shield (a mechanism for complying with data protection requirements when transferring personal data from the EU to the U.S.) is currently under review by the European Commission. As such, it is uncertain whether the Privacy Shield framework and/or model clauses will be invalidated in the near future. These changes 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.

 

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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 and commentators now expect it to be adopted during the second half of 2020 or during 2021 following a transition period.

 

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.

 

To date, we have engaged in only limited sales of our products, primarily in Germany and Spain and, more recently, in the U.S.

 

We have engaged in only limited sales of our products to date. In Germany, the majority of our sales have been generated in the private dermatology offices sector. Historically, our sales partners in European countries outside of Germany have experienced difficulty in selling Ameluz® because that process involves selling both 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 U.S. in October 2016 and have a limited history of marketing our products there. Our products may never gain significant acceptance in the European or U.S. marketplace and, therefore, 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. 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 familiar therapies, rather than trying 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.

 

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We face significant competition from other pharmaceutical and medical device companies and our operating results will suffer if we fail to compete effectively. We also must compete with existing treatments, such as simple curettage and cryotherapy, which do not involve the use of a drug but have gained significant market acceptance.

 

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 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. For example, Metvix® has also been approved in the EU for use in daylight photodynamic therapy for which it 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 approved to be used in daylight photodynamic therapy to treat actinic keratosis until March 2018, when we obtained such approval. Over a period of ten months in 2017, the market share of Ameluz® as a percentage of photodynamic therapy drugs for treatment of actinic keratosis dispensed by German public pharmacies fell from over 70% to approximately 50%, a decline which we believe resulted primarily from the introduction to the German market of Luxerm® in 2016. We believe that daylight photodynamic therapy products will play an increasingly important role in Europe in the future and will begin to be prescribed as an alternative to less effective, self-applied, topical prescription product creams (which have historically been market leaders in the EU in treating actinic keratosis). We applied to extend our indication for Ameluz® to daylight photodynamic therapy in the EU to better compete with Metvix® and Luxerm®, and in March 2018, the European Commission granted approval for label extension for the treatment of mild to moderate actinic keratosis on the face and scalp using Ameluz® in combination with daylight photodynamic therapy. Although in recent months we were able to regain market share lost to Luxerm® in 2017, there can be no assurance however that we will be able to successfully commercialize our products in this indication.

 

In addition, our products compete with other therapies, such as simple curettage and, particularly in the U.S., 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 discussed above, 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® and two unaffiliated contractors to produce 5-aminolevulinic acid, the active pharmaceutical ingredient in Ameluz®, for us. If we fail to maintain our relationship with these suppliers or if these suppliers are 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® and two unaffiliated contractors to produce 5-aminolevulinic acid, the active pharmaceutical ingredient in Ameluz®, for us. The initial terms of our contracts with these suppliers begin to expire in June 2020, and the contracts renew automatically for one- or two-year periods, as applicable, until they are terminated. For more information on the terms of our contracts with these suppliers, see “Business—Commercial Partners and Agreements”. If we fail to maintain our relationship with these parties, we may be unable to obtain an alternative manufacturer of Ameluz® or suppliers of 5-aminolevulinic acid that could deliver the quantity of the product at the quality and cost levels that we require. Even if acceptable alternative suppliers could be found, we may experience delays in transitioning the manufacturing from our existing suppliers to our new suppliers (in particular with respect to our manufacturer of Ameluz®). Problems of this kind could cause us to experience order cancellations and loss of market share. The failure of the suppliers to supply Ameluz® or 5-aminolevulinic acid that satisfies our quality, quantity and cost requirements in a timely manner could impair our ability to deliver Ameluz® and could increase our costs, particularly if we are unable to obtain Ameluz® or 5-aminolevulinic acid from alternative sources on a timely basis or on commercially reasonable terms. In addition, our suppliers are regulated by the FDA and must comply with applicable laws and regulations, including home-country laws. If the suppliers fail to comply, this could harm our business.

 

If we fail to manufacture Ameluz® or BF-RhodoLED® 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.

 

Because of a lack of comprehensive public data regarding the market for actinic keratosis treatments in the U.S., the U.S. market size for Ameluz® for the treatment of actinic keratosis may be smaller than we have estimated.

 

Because of a lack of comprehensive public data regarding the market for actinic keratosis treatments in the U.S., 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 U.S. 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 U.S., 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, 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 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. Even after obtaining regulatory approval for our products 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;
     
  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;

 

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  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 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, 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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A recall of our drug or medical device products, or the discovery of serious safety issues with our drug or medical device products, could have a significant negative impact on us.

 

The FDA, the EMA and other relevant regulatory agencies have the authority to require or request the recall of commercialized products in the event of material deficiencies or defects in design or manufacture or in the event that a product poses an unacceptable risk to health. Manufacturers may, under their own initiative, recall a product. A government-mandated or voluntary recall by us or one of our distributors could occur as a result of an unacceptable risk to health, component failures, manufacturing errors, design or labeling defects or other deficiencies and issues. Recalls of our products would divert managerial and financial resources and have an adverse effect on our reputation, financial condition and operating results, which could impair our ability to produce our products in a cost-effective and timely manner.

 

Further, under the FDA’s medical device reporting, or MDR, regulations, we are required to report to the FDA any event which reasonably suggests that our product may have caused or contributed to a death or serious injury or in which our product malfunctioned and, if the malfunction of the same or similar device marketed by us were to recur, would likely cause or contribute to death or serious injury. The FDA also requires reporting of serious, life-threatening, unexpected and other adverse drug experiences and the submission of periodic safety reports and other information. Product malfunctions or other adverse event reports may result in a voluntary or involuntary product recall and other adverse actions, which could divert managerial and financial resources, impair our ability to manufacture our products in a cost-effective and timely manner and have an adverse effect on our reputation, financial condition and operating results. Similar reporting requirements exist in Europe and other jurisdictions.

 

Any adverse event involving our products could result in future voluntary corrective actions, such as recalls or customer notifications, or regulatory agency action, which could include inspection, mandatory recall or other enforcement action. Any corrective action, whether voluntary or involuntary, will require the dedication of our time and capital, distract management from operating our business and may harm our reputation and financial results as well as threaten our marketing authority for such products.

 

Our medical device product, the BF-RhodoLED® lamp, is subject to extensive governmental regulation, and failure to comply with applicable requirements could cause our business to suffer.

 

The medical device industry is regulated extensively by governmental authorities, principally the FDA and corresponding state and European and other foreign governmental agencies. The regulations are very complex and are subject to rapid change and varying interpretations. Regulatory restrictions or changes could limit our ability to carry on or expand our operations or result in higher than anticipated costs or lower than anticipated sales. The FDA and other U.S. or European or other foreign governmental agencies regulate numerous elements of our business, including:

 

  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;

 

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

 

Before we can market or sell a new regulated product or a significant modification to an existing product in the U.S., we must obtain either marketing clearance under Section 510(k) of the Federal Food, Drug and Cosmetic Act, or FDCA, or approval of a Pre-Market Approval, or PMA, application from the FDA, unless an exemption from premarket clearance and approval applies. In the 510(k) clearance process, the FDA must determine that a proposed device is “substantially equivalent” to a device legally on the market, known as a “predicate” device, with respect to intended use, technology and safety and effectiveness, in order to clear the proposed device for marketing. Clinical data are sometimes required to support a finding of substantial equivalence. The PMA pathway requires an applicant to demonstrate the safety and effectiveness of the device based on extensive clinical data. The PMA process is typically required for devices that are deemed to pose the greatest risk, such as life-sustaining, life-supporting or certain implantable devices or products that do not have an adequate predicate product. The PMA process can be lengthy, expensive, and carries uncertainty of approval. Products that are approved through a PMA application generally need FDA approval before they can be modified. Similarly, some modifications made to products cleared through a 510(k) premarket notification submission may require a new 510(k) submission, including possibly with clinical data. Before we can offer our device products to any of the 31 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.

 

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.

 

17
 

 

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.

 

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 Prof. Hermann Lübbert, Ph.D., chairman of our management board and chief executive officer; Thomas Schaffer, member of our management board and chief financial officer and Christoph Dünwald, member of our management board and chief commercial officer. The loss of the services of any of our executive officers 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 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, 2018, we had 157 employees. 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 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. To date, 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.

 

Our initial estimate of the size of the required sales force may be materially different from the size of the sales force actually required to effectively commercialize our products and product candidates. As such, 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 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. If our future collaborators do not commit sufficient resources to commercialize our products or future products, if any, and we are unable to develop the necessary marketing capabilities on our own, we will be unable to generate sufficient product revenue to sustain our business. We may be competing with companies that currently have extensive and well-funded marketing and sales operations.

 

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Certain of our employees and patents are subject to foreign laws.

 

A majority of our employees work in Germany and are subject to German employment law. Ideas, developments, discoveries and inventions made by such employees and consultants are subject to the provisions of the German Act on Employees’ Inventions, which regulates the ownership of, and compensation for, inventions made by employees. We face the risk that disputes can occur between us and our employees or former employees pertaining to alleged non-adherence to the provisions of this act that may be costly to defend and take up our management’s time and efforts whether we prevail or fail in any such dispute. There is a risk that the compensation we provided to employees who assign patents to us may be deemed to be insufficient and we may be required under German law to increase the compensation due to such employees for the use of the patents. In those cases where employees have not assigned their interests to us, we may need to pay compensation for the use of those patents. If we are required to pay additional compensation or face other disputes under the German Act on Employees’ Inventions, our results of operations could be adversely affected.

 

We believe that our success depends, in part, upon our ability to protect our intellectual property throughout the world. However, the laws of some foreign countries, including Germany, may not be as comprehensive as those of the U.S. and may not be sufficient to protect our proprietary rights. In addition, we generally do not pursue patent protection in all jurisdictions because of cost and confidentiality concerns. Accordingly, our international competitors could obtain foreign patent protection for, and market overseas, products and technologies for which we are seeking patent protection in the U.S.

 

A variety of risks associated with commercializing our products and product candidates internationally could materially adversely affect our business.

 

We, or our licensing partners, may seek regulatory approval for our products or product candidates outside of the U.S. and EU and, accordingly, we expect that we will be subject to additional risks for our products and product candidates related to operating in foreign countries if we obtain the necessary approvals, including:

 

  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.;

 

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  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.

 

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;

 

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  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.

 

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 a Schedule 13D relating to our company. In this filing, the reporting persons state that they desire to change the composition of the management board and supervisory board of our company. In March and April of 2018, two of the reporting persons—Deutsche Balaton AG, Heidelberg and Deltus 30th AG, later renamed to Deutsche Balaton Biotech AG, Heidelberg (“DB Biotech”)—separately announced public offers to purchase our ordinary shares. Although the offer of Deutsche Balaton AG was not allowed to proceed under German law, DB Biotech’s offer was able to proceed and, on August 9, 2018, DB Biotech announced that it had acquired 1,286,401 shares of our company through this offer. For more information, see “Item 4.A—History and Development of the Company.” In addition, certain of the reporting persons have previously proposed a number of resolutions at our shareholder meetings and have filed legal actions against us relating to actions taken at our shareholder meetings. For more information, see “Item 8.A—Consolidated Statements and Other Financial Information—Legal Proceedings” for more information.

 

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.

 

22
 

 

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 2018, 29% of our revenue was generated and approximately 45% of our costs were incurred in euros (47% and 71%, , for 2017 and 2016, 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, 2018, an average 10% appreciation of the U.S. dollar against the euro would have resulted in an increase of approximately €2.6 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 a decrease of approximately €2.1 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 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 U.S. 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. The global financial crisis affecting the banking system and financial markets has resulted in a tightening of credit markets, lower levels of liquidity in many financial markets and extreme volatility in fixed income, credit, currency and equity markets.

 

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.

 

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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 U.S. for lesion- and field-directed treatment of actinic keratosis and in the EU for actinic keratosis, field cancerization and basal cell carcinoma. Although we have received these approvals, 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;
     
  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.

 

24
 

 

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;
     
  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.

 

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If we experience delays in the completion of, or termination of, any clinical trial of our products and product candidates, the commercial prospects of our products and product candidates will be materially harmed, and our ability to generate product revenues from any of these products and product candidates, if any, will cease or be delayed. We may have to repeat or redesign clinical trials, which could delay the regulatory approval process. In addition, any termination of, or delays 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 product Ameluz® and any other drug products we develop 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 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;
     
  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.

 

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Risks Related to Our Dependence on Third Parties

 

We 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 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 will rely heavily on these parties for proper execution of our clinical trials, and we will control only certain aspects of their activities. Nevertheless, we are responsible for ensuring that each of our studies is conducted in accordance with applicable protocol, legal and regulatory requirements, and scientific standards, and our reliance on our CROs does not relieve us of our regulatory responsibilities. We and our CROs will be required to comply with current Good Clinical Practices, or cGCP requirements, which are a collection of regulations enforced by the FDA or comparable foreign regulatory authorities for products and product candidates in clinical development in order to protect the health, safety and welfare of patients and assume the integrity of clinical data. These requirements are also intended to protect the health, safety and welfare of study subjects through requirements such as informed consent. The FDA enforces good clinical practices through periodic inspections of trial sponsors, principal investigators and trial sites. In Phase I, the initial introduction of the drug into human subjects, the drug is typically tested to assess the pharmacological actions and side effects associated with increasing doses. Phase II usually involves clinical trials in a limited patient population to determine the effectiveness of the drug for a particular indication or indications, dosage tolerance and optimum dosage and to identify common adverse effects and safety risks. If a drug demonstrates evidence of effectiveness and an acceptable safety profile in Phase II, Phase III clinical trials are undertaken to obtain additional information about clinical efficacy and safety in a larger number of patients. Throughout this process, regulatory authorities enforce these cGCPs through periodic inspections of trial sponsors, principal investigators and trial sites. If we or any of these CROs fail to comply with applicable cGCP regulations or record-keeping requirements at any point during the clinical trial process, the clinical data generated in our clinical trials may be deemed unreliable and the FDA or EMA or comparable foreign regulatory authorities may require us to perform additional clinical trials before approving our marketing applications or, in some instances, require us to suspend operations. We cannot assure you that, upon inspection, such regulatory authorities will determine that any of our clinical trials comply with the cGCP regulations. In addition, for drugs, our clinical trials must be conducted with products produced under cGMP regulations and will require a large number of test subjects. For our devices, clinical trials must use product manufactured in compliance with design controls under the QSR. Our failure or any failure by our CROs to comply with these regulations or to recruit a sufficient number of patients may require us to repeat clinical trials, which would delay the regulatory approval process. Moreover, we may be implicated if any of our CROs violate federal, state, local or foreign fraud and abuse or false claims laws and regulations, or healthcare privacy and security laws.

 

The CROs will not be employed directly by us and, except for remedies available to us under our agreements with such CROs, we cannot control whether they devote sufficient time and resources to our ongoing preclinical, clinical and nonclinical programs. These CROs may also have relationships with other commercial entities, including our competitors, for whom they may also be conducting clinical studies or other product development activities, which could affect their performance on our behalf. If the CROs do not successfully carry out their contractual duties or obligations or meet expected deadlines, if they need to be replaced or if the quality or accuracy of the clinical data they obtain is compromised due to the failure to adhere to our clinical protocols or regulatory requirements or for other reasons, our clinical trials may be extended, delayed or terminated and we may not be able to complete development of, obtain regulatory approval for or successfully commercialize our product or product candidates. As a result, our financial results and the commercial prospects for our products and product candidates would be harmed, our costs could increase and our ability to generate revenues could be delayed.

 

Switching or adding CROs involves substantial cost and requires extensive management time and focus. In addition, there is a natural transition period when a new CRO commences work. As a result, delays may occur, which can materially impact our ability to meet our desired clinical development timelines. Although we plan to carefully manage our relationships with our CROs, there can be no assurance that we will not encounter challenges or delays in the future or that these delays or challenges will not have a material adverse impact on our business, prospects, financial condition and results of operations.

 

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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 U.S., Germany, Spain and the UK, which exposes us to additional risks of conducting business in international markets.

 

Markets outside the U.S. and Germany 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, 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;
     
  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, or natural disasters, including earthquakes, volcanoes, typhoons, floods, hurricanes and fires.

 

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These and other risks may materially adversely affect our ability to attain or sustain revenue from international markets.

 

We may form or seek strategic alliances in the future and we may not realize the benefits of such alliances.

 

We may form or seek strategic alliances, create joint ventures or collaborations or enter into licensing arrangements with third parties that we believe will complement or augment our development and commercialization efforts with respect to our products and any future products that we may develop. Any of these relationships may require us to incur non-recurring and other charges, increase our near- and long-term expenditures, issue securities that dilute our existing holders of our ordinary shares or ADSs or disrupt our management and business. In addition, we face significant competition in seeking appropriate strategic partners and the negotiation process is time-consuming and complex. Moreover, we may not be successful in our efforts to establish a strategic partnership or other alternative arrangements for our product candidates because they may be deemed to be at too early of a stage of development for collaborative effort and third parties may not view our product candidates as having the requisite potential to demonstrate safety and efficacy. If we license products or businesses, we may not be able to realize the benefit of such transactions if we are unable to successfully integrate them with our existing operations and company culture and vice versa. We cannot be certain that, following a strategic transaction or license, we will achieve the revenue or specific net income that justifies such transaction. Any delays in entering into new strategic partnership agreements related to our products or product candidates could delay the development and commercialization of our products or product candidates in certain geographies or for certain indications, which would harm our business prospects, financial condition and results of operations.

 

Risks Related to Our Intellectual Property

 

If our efforts to protect the proprietary nature of the intellectual property related to our technologies are not adequate, we may not be able to compete effectively in our market.

 

We rely upon a combination of patents, trade secret protection and confidentiality agreements to protect the intellectual property related to our technologies and products. Any disclosure to or misappropriation by third parties of our confidential proprietary information could enable competitors to quickly duplicate or surpass our technological achievements, thus eroding our competitive position in our market.

 

In addition, the patent applications that we own or that we may license may fail to result in issued patents in the U.S., the EU or in other countries or jurisdictions. Even if the patents do successfully issue, third parties may challenge the validity, enforceability or scope thereof, which may result in such patents being narrowed, invalidated or held unenforceable. Furthermore, even if they are unchallenged, our patents and patent applications may not adequately protect our intellectual property or prevent others from designing around our claims. If the breadth or strength of protection provided by the issued patents and patent applications we hold with respect to our products is threatened, it could dissuade companies from collaborating with us to develop, and threaten our ability to commercialize, our products. Further, if we encounter delays in our clinical trials, the period of time during which we could market our products under patent protection would be reduced. Since patent applications in the U.S. and most other countries are confidential for a period of time after filing, we cannot be certain that we were the first to file any patent application related to our product candidates. Furthermore, for applications in which all claims are entitled to a priority date before March 16, 2013, an interference proceeding can be provoked by a third party or instituted by the U.S. Patent and Trademark Office, or USPTO, to determine who was the first to invent any of the subject matter covered by the patent claims of our applications. For applications containing a claim not entitled to priority before March 16, 2013, there is greater level of uncertainty in the patent law with the passage of the America Invents Act (2012) which brings into effect significant changes to the U.S. patent laws that 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.

 

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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 all of our employees to assign their inventions to us to the extent permitted by law, and require all of 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 that are untried and untested and will bring uncertainty to the possibility of challenge to our patents in the future. Numerous U.S. and foreign issued patents and pending patent applications, which are owned by third parties, exist in the fields in which we are developing our product candidates. As the biotechnology and pharmaceutical industries expand and more patents are issued, the risk increases that our products may give rise to claims of infringement of the patent rights of others.

 

Third parties may assert that we are employing their proprietary technology without authorization. There may be third party patents of which we are currently unaware with claims to materials, formulations, devices, methods of manufacture or methods for treatment related to the use or manufacture of our products. Because patent applications can take many years to issue, there may be currently pending patent applications which may later result in issued patents that our product candidates may infringe. In addition, third parties may obtain patents in the future and claim that use of our technologies infringes upon such patents. If any third-party patents were held by a court of competent jurisdiction to cover the manufacturing process of our products or product candidates, any molecules formed during the manufacturing process or any final product itself, the holders of any such patents may be able to block our ability to commercialize the product unless we obtained a license under the applicable patents, or until such patents expire or they are finally determined to be held invalid or unenforceable. Similarly, if any third-party patent were held by a court of competent jurisdiction to cover aspects of our formulations, processes for manufacture or methods of use, including combination therapy or patient selection methods, the holders of any such patent may be able to block our ability to develop and commercialize the product unless we obtained a license or until such patent expires or is finally determined to be held invalid or unenforceable. In either case, such a license may not be available on commercially reasonable terms or at all. If we are unable to obtain a necessary license to a third-party patent on commercially reasonable terms, or at all, our ability to commercialize our products or product candidates may be impaired or delayed, which could in turn significantly harm our business.

 

Parties making claims against us may seek and obtain injunctive or other equitable relief, which could effectively block our ability to sell our products and to further develop and commercialize our products and product candidates. Defense of these claims, regardless of their merit, would involve substantial litigation expense and would be a substantial diversion of employee resources from our business. In the event of a successful claim of infringement against us, we may have to pay substantial damages, including treble damages and attorneys’ fees for willful infringement, obtain one or more licenses from third parties, pay royalties or redesign our infringing products, which may be impossible or require substantial time and monetary expenditure. We cannot predict whether any such license would be available at all or whether it would be available on commercially reasonable terms. Furthermore, even in the absence of litigation, we may need to obtain licenses from third parties to advance our research or allow commercialization of our products or product candidates. We may fail to obtain any of these licenses at a reasonable cost or on reasonable terms, if at all. In that event, we would be unable to further develop and commercialize our products or product candidates, which could harm our business significantly.

 

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In March 2018, DUSA Pharmaceuticals, Inc. (“DUSA”) brought a lawsuit against Biofrontera AG and its subsidiaries before the District Court of Massachusetts due to alleged infringement of its patents No. 9,723,991 and No. 8,216,289 by sales of BF-RhodoLED® in the 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. Although we believe that these claims lack merit and intend to defend against them vigorously, we cannot guarantee that we will be successful. The court largely denied a motion by DUSA for a preliminary injunction, but did order Biofrontera not to use any documents, or documents derived from documents, that originated at DUSA. In addition, Biofrontera submitted petitions for inter partes review to the Patent Trial and Appeal Board (PTAB) seeking to have the patents declared invalid. The PTAB issued decisions on February 26, 2019, finding a reasonable likelihood of success on invalidity arguments for some claims, but nonetheless denying institution of the review petitions because the PTAB disagreed on the remainder of claims. We have incurred, and expect to continue to incur, significant expenses in defending these claims, and we expect to have to divert significant employee resources, including management resources, to defend the claims.

 

We are currently involved in lawsuits to defend or enforce our patents and may become involved in similar suits in the future, which could be expensive, time-consuming and unsuccessful.

 

Competitors may infringe upon our patents. To counter infringement or unauthorized use, we may be required to file infringement claims, which can be expensive and time-consuming. In addition, in an infringement proceeding, a court may decide that one or more of our patents is not valid or is unenforceable, or may refuse to stop the other party from using the technology at issue on the grounds that our patents do not cover the technology in question. An adverse result in any litigation or defense proceedings, including our litigation against DUSA as described above, could put one or more of our patents at risk of being invalidated, held unenforceable, or interpreted narrowly and could put our patent applications at risk of not issuing. Defense of these claims, regardless of their merit, would involve substantial litigation expense and would be a substantial diversion of employee resources from our business. In the event of a successful claim or counterclaim of infringement against us, we may have to pay substantial damages, including treble damages and attorneys’ fees for willful infringement, obtain one or more licenses from third parties, pay royalties or redesign our infringing products, which may be impossible or require substantial time and monetary expenditure.

 

Interference or derivation proceedings provoked by third parties or brought by the USPTO may be necessary to determine the priority of inventions with respect to our patents or patent applications. 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.

 

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Obtaining and maintaining our patent protection depends on compliance with various procedures, document submission requests, fee payments and other requirements imposed by governmental patent agencies, and our patent protection could be reduced or eliminated for noncompliance with these requirements.

 

Periodic maintenance fees on any issued patent are due to be paid to the USPTO and patent agencies in other jurisdictions in several stages over the lifetime of the patent. The USPTO and various foreign governmental patent agencies require compliance with a number of procedural, documentary, fee payment and other similar provisions during the patent application process. While an inadvertent lapse can in many cases be cured by payment of a late fee or by other means in accordance with the applicable rules, there are situations in which noncompliance can result in abandonment or lapse of the patent or patent application, resulting in partial or complete loss of patent rights in the relevant jurisdiction. Noncompliance events that could result in abandonment or lapse of a patent or patent application include, but are not limited to, failure to respond to official actions within prescribed time limits, non-payment of fees and failure to properly legalize and submit formal documents. In such an event, our competitors might be able to enter the market, which would have a material adverse effect on our business.

 

We may be subject to claims that our employees, consultants or independent contractors have wrongfully used or disclosed confidential information of third parties.

 

We have received confidential and proprietary information from third parties. In addition, we employ individuals who were previously employed at other biotechnology or pharmaceutical companies. We may be subject to claims that we or our employees, consultants or independent contractors have inadvertently or otherwise used or disclosed confidential information of these third parties or our employees’ former employers. Litigation may be necessary to defend against these claims. Even if we are successful in defending against these claims, litigation could result in substantial cost and be a distraction to our management and employees.

 

As part of its suit against us, DUSA has asserted claims of trade secret misappropriation, tortious interference with contractual relations, and deceptive and unfair trade practices. See “—Third party claims of intellectual property infringement may affect our ability to sell our products and may also prevent or delay our product discovery and development efforts” for more information.

 

We may not be able to protect our intellectual property rights throughout the world.

 

Filing, prosecuting and defending patents on all of our products and product candidates throughout the world would be prohibitively expensive. Competitors may use our technologies in jurisdictions where we have not obtained patent protection to develop their own products and, further, may export otherwise infringing products to territories where we have patent protection, but where enforcement is not as strong as that in the U.S. and the EU. These products may compete with our products in jurisdictions where we do not have any issued patents and our patent claims or other intellectual property rights may not be effective or sufficient to prevent them from so competing.

 

Many companies have encountered significant problems in protecting and defending intellectual property rights in foreign jurisdictions. The legal systems of certain countries, particularly certain developing countries, do not favor the enforcement of patents and other intellectual property protection, particularly those relating to biopharmaceuticals, which could make it difficult for us to stop the infringement of our patents or marketing of competing products in violation of our proprietary rights generally. Proceedings to enforce our patent rights in foreign jurisdictions could result in substantial cost and divert our efforts and attention from other aspects of our business.

 

Our trade secrets are difficult to protect.

 

Confidentiality agreements with employees and others may not adequately prevent disclosure of our trade secrets and other proprietary information and may not adequately protect our intellectual property.

 

Our success depends upon the skills, knowledge and experience of our scientific and technical personnel, our consultants and advisors as well as our partners, licensors and contractors. Because we operate in a highly competitive technical field of drug development, we rely in part on trade secrets to protect our proprietary technology and processes. However, trade secrets are difficult to protect. We enter into confidentiality agreements with our corporate partners, employees, consultants, sponsored researchers and other advisors. These agreements typically require that the receiving party keep confidential and not disclose to third parties all confidential information developed by the receiving party or made known to the receiving party by us during the course of the receiving party’s relationship with us. Our agreements also provide that any inventions made based solely upon our technology are our exclusive property, and we enter into assignment agreements that are recorded in patent, trademark and copyright offices around the world to perfect our rights.

 

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These confidentiality and assignment agreements may be breached and may not effectively assign intellectual property rights to us. Our trade secrets also could be independently discovered by competitors, in which case, we would not be able to prevent use of such trade secrets by our competitors. The enforcement of a claim alleging that a party illegally obtained and was using our trade secrets could be difficult, expensive and time consuming and the outcome would be unpredictable. In addition, courts outside the U.S. or the EU may be less willing to protect trade secrets. There exists a risk that we may not be able to detect when misappropriation of our trade secrets has occurred or where a third party is using our trade secrets without our knowledge. The failure to obtain or maintain meaningful trade secret protection could adversely affect our competitive position.

 

Generic manufacturers may launch products at risk of patent infringement.

 

If other manufacturers launch products to compete with our products or product candidates in spite of our patent position, these manufacturers would likely erode our market and negatively impact our sales revenues, liquidity and results of operations.

 

Risks Related to the Ownership of our ADSs

 

An active trading market for our ADSs may not be sustained.

 

Our ADS are listed and began trading on The NASDAQ Capital Market on February 14, 2018. An active trading market for our ADSs may not be sustained. If an active market for our ADSs does not continue, it may be difficult for the holders to sell our ADSs without depressing the market price for our ADSs or to sell our ADSs at or above the prices at which they acquired our ADSs or to sell our ADSs at the time they would like to sell. Any inactive trading market for our ADSs may also impair our ability to raise capital to continue to fund our operations by selling our ADSs and may impair our ability to acquire other companies or technologies by using our ADSs as consideration.

 

There has been varying trading volume for our ordinary shares.

 

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.

 

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. 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.

 

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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.

 

Raising additional capital may cause additional dilution of the percentage ownership of the holders of our ADSs or ordinary shares, restrict our operations, require us to relinquish rights to our technologies, products or product candidates and could cause our ADS or ordinary share price to fall.

 

We expect that significant additional capital may be needed in the future to continue our planned operations, including conducting clinical trials, commercialization efforts, expanded research and development activities and costs associated with operating a public company in the U.S. and Germany. To raise capital, we may sell ordinary shares, ADSs, convertible securities or other equity securities in one or more transactions at prices and in a manner we determine from time to time. If we sell ordinary shares, ADSs, convertible securities or other equity securities, investors may be materially diluted by subsequent sales. Such sales may also result in material dilution to our existing holders of ordinary shares or ADSs, and new investors could gain rights, preferences and privileges senior to the holders of our ordinary shares or ADSs. If we raise additional funds through strategic partnerships and alliances and licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, products or product candidates, or grant licenses on terms unfavorable to us.

 

We have created three sets of “contingent capital” (bedingtes Kapital) which, under German corporate law, means ordinary shares that we have been approved to issue, in the future, upon the exercise or conversion of specified outstanding options, warrants, convertible bonds or other convertible securities, totaling up to 6,278,739 ordinary shares, of which we expect to use 346,900 ordinary shares to cover issuances of ordinary shares pursuant to our 2010 employee stock option plan and 1,814,984 ordinary shares to cover issuances of ordinary shares pursuant to our 2015 employee stock option plan. 4,116,855 ordinary shares from contingent capital may be used by our company for the issuance of shares to holders of convertible bonds if the repayment price is covered by issuing shares. Our management board, with the approval of our supervisory board, can increase our capital by these amounts and issue new ordinary shares in a corresponding amount without additional shareholder approval and can, to a limited extent, exclude subscription rights of our shareholders in connection therewith. If beneficiaries exercise their options or additional ordinary shares are issued under any of our authorized capital or our contingent capital, you may experience additional dilution, which could cause our ordinary share or ADS price to fall.

 

Unstable market and economic conditions may have serious adverse consequences on our business, financial condition and ordinary share price.

 

As widely reported, global credit and financial markets have experienced extreme disruptions in the past several years, including severely diminished liquidity and credit availability, declines in consumer confidence, declines in economic growth, increases in unemployment rates and uncertainty about economic stability. There can be no assurance that further deterioration in credit and financial markets and confidence in economic conditions will not occur. Our general business strategy may be adversely affected by any such economic downturn, volatile business environment or continued unpredictable and unstable market conditions. If the current equity and credit markets deteriorate, or do not improve, it may make any necessary debt or equity financing more difficult, more costly, and more dilutive. Failure to secure any necessary financing in a timely manner and on favorable terms could have a material adverse effect on our growth strategy, financial performance and ADS price and could require us to delay or abandon clinical development or commercialization plans. In addition, there is a risk that one or more of our current service providers, manufacturers and other partners may not survive these difficult economic times, which could directly affect our ability to attain our operating goals on schedule and on budget.

 

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At December 31, 2018, we had approximately €19.5 million of cash and cash equivalents. While we are not aware of any downgrades, material losses, or other significant deterioration in the fair value of our cash equivalents since December 31, 2018, no assurance can be given that further deterioration of the global credit and financial markets would not negatively impact our current portfolio of cash and cash equivalents or our ability to meet our financing objectives. Furthermore, our ordinary share and ADS price may decline due in part to the volatility of the stock market and the general economic downturn.

 

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 share 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 U.S. Securities and Exchange Commission, or SEC, and, consequently, we are not subject to all of the disclosure requirements applicable to companies organized within the U.S. 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 U.S.

 

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 “Management — Differences between Our Corporate Governance Practices and the Rules of The NASDAQ Capital Market.”

 

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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, 2018, a portion of our assets were located in the United States, although this may change as we expand our operations in the U.S.

 

A foreign private issuer must determine its status on the last business day of its most recently completed second fiscal quarter. If a foreign private issuer no longer satisfies these requirements, it will become subject to U.S. domestic reporting requirements on the first day of its fiscal year immediately succeeding such determination. If we lost this status, we would be required to comply with the Exchange Act reporting and other requirements applicable to U.S. domestic issuers, which are more detailed and extensive than the requirements for foreign private issuers. We may also be required to make changes in our corporate governance practices in accordance with various SEC and The NASDAQ Capital Market rules. The regulatory and compliance costs to us under U.S. securities laws if we are required to comply with the reporting requirements applicable to a U.S. domestic issuer may be significantly higher than the cost we would incur as a foreign private issuer. As a result, we expect that a loss of foreign private issuer status would increase our legal and financial compliance costs and would make some activities highly time consuming and costly. We also expect that if we were required to comply with the rules and regulations applicable to U.S. domestic issuers, it would make it more difficult and expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. These rules and regulations could also make it more difficult for us to attract and retain qualified members to our management board and supervisory board.

 

Your rights as a shareholder in a German corporation may differ from your rights as a shareholder in a U.S. corporation.

 

We are organized as a stock corporation (Aktiengesellschaft or AG) under the laws of Germany, and our U.S. investors are holders of ADSs of a German stock corporation. The rights of shareholders of a German stock corporation under German law differ in important respects from those of shareholders of a U.S. corporation. These differences include, in particular:

 

  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.

 

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For more information, we have provided summaries of relevant German corporation law and of our articles of association under “Management”).

 

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”). 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.

 

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. 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. In addition, the composition of our income and assets will be affected by how, and how quickly, we use our liquid assets and the cash raised in our initial public offering of ADSs that we completed in February 2018. 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 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.

 

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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 or an exemption from the registration requirements is available. In addition, the deposit agreement provides that the depositary bank will not make rights available to you unless the distribution to ADS holders of both the rights and any related securities are either registered under the Securities Act or exempted from registration under the Securities Act. We are under no obligation to file a registration statement with respect to any such rights or securities or to endeavor to cause such a registration statement to be declared effective. Moreover, we may not be able to establish an exemption from registration under the Securities Act. Accordingly, you may be unable to participate in our rights offerings and may experience dilution in your holdings.

 

As a holder of ADSs, you may not receive distributions on our ordinary shares represented by the ADSs or any value for them if it is illegal or impractical to make them available to holders of ADSs.

 

Under the terms of the deposit agreement, the depositary has agreed to pay to you the cash dividends or other distributions it or the custodian receives on our ordinary shares or other deposited securities after deducting its fees and expenses. You will receive these distributions in proportion to the number of our ordinary shares your ADSs represent. However, in accordance with the limitations set forth in the deposit agreement, it may be unlawful or impractical to make a distribution available to holders of ADSs. We have no obligation to take any other action to permit the distribution of the ADSs, ordinary shares, rights or anything else to holders of the ADSs. This means that, as a holder of ADSs, you may not receive the distributions we make on our ordinary shares or any value from them if it is unlawful or impractical to make them available to you. These restrictions may have a material adverse effect on the value of your ADSs.

 

Exchange rate fluctuations may reduce the amount of U.S. dollars you receive in respect of any dividends or other distributions we may pay in the future in connection with your ADSs.

 

Under German law, the determination of whether we have been sufficiently profitable to pay dividends is made on the basis of our unconsolidated annual financial statements prepared under the German Commercial Code in accordance with accounting principles generally accepted in Germany. Exchange rate fluctuations may affect the amount in U.S. dollars that our shareholders receive upon the payment of cash dividends or other distributions we declare and pay in euros, if any. Such fluctuations could adversely affect the value of our ADSs and, in turn, the U.S. dollar proceeds that holders receive from the sale of our ADSs.

 

You may be subject to limitations on the transfer of your ADSs.

 

Your ADSs are transferable on the books of the depositary. However, the depositary may close its books at any time or from time to time when it deems doing so expedient in connection with the performance of its duties. The depositary may close its books from time to time for a number of reasons, including in connection with corporate events such as a rights offering, during which time the depositary needs to maintain an exact number of ADS holders on its books for a specified period. The depositary may also close its books in emergencies, and on weekends and public holidays. The depositary may refuse to deliver, transfer or register transfers of our ADSs generally when our share register or the books of the depositary are closed, or at any time if we or the depositary thinks that it is advisable to do so because of any requirement of law or of any government or governmental body, or under any provision of the deposit agreement, or for any other reason in accordance with the terms of the deposit agreement. As a result, you may be unable to transfer your ADSs when you wish.

 

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U.S. investors may have difficulty enforcing civil liabilities against our company or members of our supervisory and management boards and the experts named in this annual report.

 

Certain members of our supervisory and management boards are non-residents of the U.S., and all or a substantial portion of the assets of such persons are located outside the U.S. As a result, it may not be possible, or may be very difficult, to serve process on such persons or us in the U.S. or to enforce judgments obtained in U.S. courts against them or us based on civil liability provisions of the securities laws of the U.S. In addition, awards of punitive damages in actions brought in the U.S. or elsewhere may be unenforceable in Germany. An award for monetary damages under the U.S. securities laws would be considered punitive if it does not seek to compensate the claimant for loss or damage suffered and is intended to punish the defendant. The enforceability of any judgment in Germany will depend on the particular facts of the case as well as the laws and treaties in effect at the time. Litigation in Germany is also subject to rules of procedure that differ from the U.S. rules, including with respect to the taking and admissibility of evidence, the conduct of the proceedings and the allocation of costs. Proceedings in Germany would have to be conducted in the German language, and all documents submitted to the court would, in principle, have to be translated into German. For these reasons, it may be difficult for a U.S. investor to bring an original action in a German court predicated upon the civil liability provisions of the U.S. federal securities laws against us, certain members of our supervisory and management boards and the experts named in this annual report. The U.S. and Germany do not currently have a treaty providing for recognition and enforcement of judgments (other than arbitration awards) in civil and commercial matters, though recognition and enforcement of foreign judgments in Germany is possible in accordance with applicable German laws.

 

As a result of being a public company in the U.S., we are subject to additional regulatory compliance requirements, including Section 404 of the Sarbanes-Oxley Act, and if we fail to maintain an effective system of internal controls, we may not be able to accurately report our financial results or prevent fraud.

 

As a public company listed on The NASDAQ Capital Market, the Sarbanes-Oxley Act requires, among other things that we assess the effectiveness of our internal control over financial reporting at the end of each fiscal year.

 

The process of process of designing, implementing and testing our internal control over financial reporting required to comply with Section 404(a) of the Sarbanes-Oxley Act is time-consuming, costly and complicated. If we fail to maintain internal control over financial reporting adequate to meet the demands that will be placed upon us as a public company listed in the U.S., our business and reputation may be harmed, the accuracy and timeliness of our financial reporting may be adversely affected, and the price of our ADSs may decline.

 

In addition, our independent registered public accounting firm will be required to attest to the effectiveness of our internal controls over financial reporting beginning with our annual report following the date on which we are no longer an “emerging growth company,” which may be as late as the end of the 2023 fiscal year.

 

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.

 

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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., 201 Edgewater Dr., Wakefield, Massachusetts 01880, U.S. 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 are listed on The NASDAQ Capital Market under the ticker symbol “BFRA”. Each ADS represents two ordinary shares of Biofrontera AG.

 

On March 16, 2018, Deutsche Balaton AG, Heidelberg, published an announcement pursuant to German law that it decided to make a voluntary acquisition offer for up to 6,250,000 shares of Biofrontera AG. This acquisition offer was prohibited by an action of the German Federal Financial Supervisory Authority. On April 25, 2018, Deltus 30th AG, later renamed to Deutsche Balaton Biotech AG, Heidelberg (“DB Biotech”), published an announcement pursuant to German law that it had decided to make a voluntary acquisition offer for up to 6,250,000 shares of Biofrontera AG. The offer period ended on August 6, 2018. On August 9, 2018, DB Biotech announced, that it had acquired 1,286,401 shares of Biofrontera AG through this offer.

 

On March 25, 2019, we announced that we, through our subsidiary Biofrontera Newderm LLC, had acquired Cutanea Life Sciences, Inc. from Maruho, our major shareholder that holds approximately 20% of our outstanding ordinary shares. Cutanea markets AKTIPAK®, a prescription gel for the treatment of acne, and in November 2018 launched XepiTM, a prescription cream for the treatment of impetigo, a frequent bacterial skin infection (Staphylococcus aureus or Streptococcus pyogenes). The objective of our acquisition of Cutanea is to effectively exploit the sales potential of AKTIPAK® and XepiTm in the U.S. in order to strengthen our U.S. market presence. The operating results of Cutanea are not included in this annual report or in our consolidated financial statements included herein.

 

On April 1, 2019, Maruho Deutschland, a 100% subsidiary of Maruho, published an announcement pursuant to German law that it intends to make a voluntary offer to acquire up to 4,322,530 of our ordinary shares, or approximately 9.68% of our outstanding ordinary shares as per March 31, 2019, for a purchase price of €6.60 per share in cash. Maruho currently owns approximately 20% of our outstanding ordinary shares. If Maruho is able to purchase all of the ordinary shares it is seeking in its offer to purchase, Maruho will own 29.99% of our outstanding ordinary shares as per March 31, 2019. On April 15, 2019, Maruho published a notification pursuant to German Law, as well as its formal offer document for the voluntary public tender offer in the form of a partial offer (cash offer) to the shareholders of Biofrontera AG to acquire a total of up to 4,322,530 ordinary shares of Biofrontera AG. On April 10, 2019, we were requested by Deutsche Balaton AG pursuant to German Law convene an extraordinary shareholders’ meeting to discuss Maruho’s voluntary public tender offer. We will hold an extraordinary shareholders’ meeting on May 15, 2019.

 

The SEC maintains an internet site that contains reports, 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 and diseases caused primarily by exposure to sunlight that results in sun damage to the skin. Our approved products focus on the treatment in the U.S. and Europe 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. We conduct our own research and development and, in several regions, including the U.S., market and sell our own products.

 

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Our principal product is Ameluz®, which is a prescription drug approved for use in combination with photodynamic therapy (when used together, “Ameluz® PDT”) in all of the countries of the EU (including the UK), in Switzerland, in Israel 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., in 9 countries in Europe and in Israel.

 

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 and for treatment of actinic keratosis with Ameluz® in combination with daylight photodynamic therapy (i.e., using natural daylight to activate the drug). 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 in both the EU and the U.S.

 

The following table summarizes the indications for which we are currently approved to market Ameluz® or for which we are in the process of seeking approval to market Ameluz®, as well as products currently in development, organized by territory*†:

 

 

* “CH” = Switzerland; “IL” = Israel

† This table does not reflect the drugs AKTIPAK® and XepiTM, for which we acquired rights through our acquisition of Cutanea in March 2019.

 

For a breakdown of total revenues by category of activity and geographic market, please see “Item 5—Operating and Financial Review and Prospects—Components of Our Results of Operations—Revenue”.

 

Our Strategy

 

Our principal objectives are to obtain regulatory approvals for the marketing of Ameluz® PDT for additional indications and in additional countries, and to increase the sales of our approved products. The key elements of our strategy include the following:

 

  geographic expansion of Ameluz® sales worldwide, including by:

 

  expanding our sales in the U.S. 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 U.S., by growing our dedicated sales and marketing infrastructure in the U.S.;

 

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

 

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

 

  seeking to extend the approved label 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 U.S. for Ameluz® in combination with our BF-RhodoLED® lamp for the treatment of basal cell carcinoma; and
     
  seeking to extend the approved indications in the EU and U.S. for Ameluz® to additional indications, such as squamous cell carcinoma in situ, actinic cheilitis, acne, warts, wound healing, and/or cutaneous leichmania; all of which would require further clinical trials, and other research and development activities.

 

Following our acquisition of Cutanea in March 2019, our principal objectives will also include the commercialization of AKTIPAK® and XepiTM in the U.S. on the basis of their current approvals, as well as identification of potential opportunities to further capitalize on those drugs, potentially by means of obtaining new regulatory approvals or geographic expansion.

 

Our Products

 

Ameluz®

 

Our principal marketed product is Ameluz®. Ameluz® is used in photodynamic therapy to selectively remove tumor cells.

 

We are currently selling Ameluz® in the U.S., in 9 countries in Europe and in Israel. 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.

 

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.

 

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Photodynamic therapy can be a highly selective treatment that targets specific tissues while minimizing damage to normal surrounding tissues. It also can allow for multiple courses of therapy. The most common side effect of photosensitizers that are applied topically or taken systemically is temporary skin sensitivity to bright light. 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® (“love the light”) 78 mg/g Gel (development name BF-200 ALA) received a centralized European regulatory approval by the European Commission for the treatment of actinic keratosis of mild to moderate severity on the face and scalp. In the EU, Ameluz® is to be used in combination with exposure to a red light source (although the approved labelling does not specify the light source). We launched the commercialization of Ameluz® for the treatment of actinic keratosis in Germany for this indication in February 2012 followed by other EU countries during the following two years.

 

In November 2015, our license partner Louis Widmer SA obtained approval to market Ameluz® in Switzerland for the treatment of actinic keratosis of mild to moderate severity on the face and scalp. In April 2016, our licensee Perrigo Israel Agencies Ltd. obtained approval to market Ameluz® in Israel for the same indication. We launched the commercialization of Ameluz® in Switzerland in April 2016 and in Israel in August 2017.

 

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. Thus, in the U.S., Ameluz® is to be used in combination with exposure to light using our BF-RhodoLED® lamp. We launched the commercialization of Ameluz® and BF-RhodoLED® for the treatment actinic keratosis in the U.S. in October 2016.

 

In September 2016, the European Commission approved Ameluz® for the photodynamic therapy treatment of field cancerization following a prior recommendation of the EMA. This decision was based on a field-directed Phase III trial during which the skin rejuvenating effects of Ameluz® were also studied. The skin rejuvenation results of this trial are included in the authorized EU product information and are summarized in the table entitled “Table 3: Skin quality parameters in the treated area during 12-month follow-up” in the section “Research and Development and Regulatory Affairs — Ameluz® — Trial 3” below. We launched the commercialization of Ameluz® for the photodynamic therapy treatment of field cancerization in the EU shortly after approval.

 

We initiated our efforts to extend indications for Ameluz® to include basal cell carcinoma in 2014. We conducted Phase III clinical testing in direct comparison with the European competitor product Metvix®. We completed patient recruitment in May 2015 and the last patient concluded the clinical part of the trial in November 2015. We will have a 5-year follow-up period for all patients, of which 6-month and 12-month data are currently available. We published the results of the trial in January 2016, which demonstrated clinical benefits of Ameluz® for non-aggressive forms of basal cell carcinoma. In comparison with the competitor product Metvix®, in the clinical trials Ameluz® demonstrated generally higher clearance rates, especially for thicker and nodular carcinomas and significant non-inferiority of the clinical endpoint, which was total patient clearance of all basal cell carcinomas.2 These trial results demonstrated to the EMA that Ameluz® is a viable treatment option for superficial and nodular basal cell carcinoma unsuitable for surgical treatment due to possible treatment-related morbidity and/or poor cosmetic outcome, which resulted in approval of this indication in the EU in January 2017.

 

In March 2018, we received approval from the European Commission to include treatment of mild to moderate actinic keratosis on the face and scalp using Ameluz® in combination with daylight photodynamic therapy (i.e., using natural daylight to activate the drug), which we had applied for in the second quarter of 2017. We believed that this approval may enable us to increase the market potential of Ameluz® in the EU since Ameluz® can be used without doctor’s office procedures, which procedures can render photodynamic therapy treatment in European markets commercially unattractive due to lack of reimbursement. Based on our experience in 2018, we continue to believe that this approval may enable us to increase the market potential of Ameluz® in the EU.

 

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Actinic keratoses

 

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.

 

According to The Skin Cancer Foundation, actinic keratosis is becoming a widespread disease, with more than 58 million people affected in the U.S. According to The Skin Cancer Foundation, if left untreated, up to 1% of actinic keratosis lesions develop into squamous cell carcinomas every year. On average, this transformation into squamous cell carcinoma occurs within two years of formation of the initial actinic keratosis lesion.

 

Squamous cell carcinoma is an uncontrolled growth of abnormal cells arising in the squamous cells, which reside in the skin’s upper layer (the epidermis). Squamous cell carcinomas often appear as scaly red patches, open sores, elevated growths with a central depression, or warts; and they may crust or bleed. They can become disfiguring and sometimes deadly if allowed to grow. According to The Skin Cancer Foundation, squamous cell carcinoma has been the second most common form of skin cancer, but its incidence has been rapidly increasing. According to The Skin Cancer Foundation, more than one million cases of squamous cell carcinoma are diagnosed each year in the U.S., and it has been estimated that as many as 15,000 people die from the disease each year in the U.S. Incidence of the disease has increased by 200% in the past three decades in the U.S. and it has recently matched the incidence of basal cell carcinoma in the Medicare fee-for-service population, which had been the most common form of human cancers.

 

Because actinic keratosis can develop into squamous cell carcinomas, actinic keratosis is classified by The European Academy of Dermatology and Venereology and other international treatment guidelines as a tumor that requires treatment, and the international treatment guidelines list photodynamic therapy as the “gold standard” for the removal of actinic keratoses, particularly for patients with large keratotic areas.

 

Actinic keratosis was recognized as an occupational disease by the Federal Ministry of Labor and Social Affairs in Germany in 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.

 

2 We demonstrated this outcome through one controlled study. Generally, two controlled studies are necessary to support comparative claims in the marketing of drugs. Therefore, the results of this clinical trial comparing Ameluz® and Metvix® are presented for informational purposes only.

 

Market Overview for Treatment of Actinic Keratosis

 

Actinic keratosis is a disease that is most frequent in the Caucasian, light-skinned population. It has been estimated that actinic keratosis affects up to 10% of the entire Caucasian population worldwide. Only a fraction of these patients is currently being treated. 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;
     
  simple curettage;
     
  self-applied topical prescription products; and
     
  combination of medication with photodynamic therapy.

 

Although any of these methods can be effective, each has limitations and can result in significant side effects.

 

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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, resulting 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 is often very red and inflamed. Treatment with ingenol mebutate is faster, requiring application for only a few days, but side effects can be long-lasting and this drug has been labeled with a black-box warning by the FDA.

 

Simple curettage is generally most useful for one or a few individual lesions, but not for a large number of lesions, and it leaves permanent scars.

 

European Markets

 

In Europe, most actinic keratosis patients are treated with various available medications, which can be assessed through the number of prescriptions. Throughout Europe, there are more than 2 million prescriptions written per year for actinic keratosis drugs, and the number of prescriptions has been growing by about 10% annually over the past four years. In 2016 in Europe, total sales of prescription drugs to treat actinic keratosis were approximately €120.0 million, with PDT drugs accounting for approximately €22.0 million of sales. In Europe, although the total number of cryotherapy or simple curettage treatments for actinic keratosis is not available, we believe that only a small number of patients with actinic keratosis is treated by cryotherapy or simple curettage treatments. We therefore disregard treatment by cryotherapy or simple curettage treatments in the following estimates of European market share. We estimate that approximately 33% of all prescriptions for actinic keratosis drugs in Europe are written in Germany, followed by the UK (15%), France (12%), Italy (12%), Spain (10%) and Switzerland (3%), and the remaining European countries account for approximately 15% of such prescriptions.

 

In Europe, only a small portion of prescriptions written for drugs to treat actinic keratosis are for PDT drugs notwithstanding the fact that clinical trials have demonstrated that photodynamic therapy achieves higher clearance rates compared to other drugs used to treat actinic keratosis. We believe that, in Europe, the extra time and effort required from patients and medical practitioners have historically prevented significant market penetration in the statutory health insurance sector in Europe — a photodynamic therapy treatment requires a patient to visit a medical office for the procedure and requires time from doctors or other medical practitioners to administer it. In Europe, topical prescription product creams are reimbursed by government authorities (or other third-party payors) and do not require a medical office-based procedure, whereas photodynamic therapy requires a procedure that, to date, is not reimbursed in all markets in Europe. In March 2018, we received approval from the European Commission to include treatment of mild to moderate actinic keratosis on the face and scalp using Ameluz® in combination with daylight photodynamic therapy, which we had applied for in the second quarter of 2017. Daylight PDT eliminates the need for a medical office-based procedure and allows easier reimbursement in Germany, where PDT procedures performed by physicians have not been reviewed or approved for reimbursement by the relevant governmental authorities. As a result, we see the potential for daylight PDT to significantly grow its share of the actinic keratosis treatment market in Europe. In the fiscal year ended December 31, 2018, we were able to grow prescriptions significantly in markets where we have an established direct sales force. We grew our sales of units by 50% in Germany and by over 70% in Spain, in each case as compared to the fiscal year ended December 31, 2017. In the aggregate, we grew product sales in Europe by 41% in the fiscal year ended December 31, 2018, as compared to the fiscal year ended December 31, 2017.

 

We believe that sales of PDT drugs in the actinic keratosis market represent around 6% of all prescriptions for actinic keratosis, but growth accelerated in 2018. We believe that this acceleration results in part from increased sales of daylight PDT products, including Ameluz®. The market size may, however, be an underestimation since in many countries in Europe PDT drugs may be sold directly to hospitals and, therefore, are not tracked by market research sources. Since PDT drugs generally have a higher price than the self-applied topical drugs, their percentage of revenues is higher than that of prescription numbers.

 

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Available PDT drugs for treatment of actinic keratosis in Europe include Ameluz® gel, Metvix® cream, Alacare® adhesive plaster and Luxerm® cream. Metvix® has been on the market in the EU since 2002, and is the most frequently used PDT drug for treatment of actinic keratosis throughout the EU with the exception of Germany, where Ameluz® is the leader in the PDT therapy market with over 60% market share.

 

We estimate that throughout Europe, Metvix® and Luxerm® have about 70% market share among PDT treatments of actinic keratosis, followed by Ameluz® with around 30% of such market share.

 

Most of the prescriptions in Europe for treatment of actinic keratosis are for self-applied topical drugs, for which the driver seems to be the minimal amount of time required by doctors and other medical practitioners (since no office-based procedure is required). Almost half of all drug prescriptions in Europe for the treatment of actinic keratosis are for Solaraze® and generic versions of that drug which are now being produced, in spite of the rather low efficacy according to a meta-analysis of clinical trials by Vector and Tolley (2014)1. We believe that this supports our belief that another driver, such as time required to be spent in consultation as compared to time required for a medical office-based procedure, may be more determinative of treatment selection than efficacy. In Europe, the most commonly prescribed drugs for actinic keratosis at present are Solaraze®, Aldara®, Picato® and Actikerall®. We believe that daylight PDT therapy products will play an increasingly important role in Europe in the future and will be prescribed more often as an alternative to self-applied topical prescription product creams (which have historically been market leaders in the EU in treating actinic keratosis).

 

U.S. Market

 

The market for the treatment of actinic keratosis in the U.S. differs significantly from the European market. We believe this is because the U.S. reimbursement system generally has favored procedures, for which physicians get paid or reimbursed. In the U.S., the most common treatment for actinic keratosis is still cryotherapy. In 2013, Medicare alone paid for 5.9 million actinic keratosis patients to be treated with cryotherapy. This number of patients so treated had been growing by 2-3% per year since 2008. We estimate that, if the number of patients so treated is extrapolated to 2016 with an assumed 2% growth rate, approximately 6.4 million Medicare patients with actinic keratosis were treated with cryotherapy in 2016. An analysis of “National Ambulatory Medical Care Survey” and “Medicare Current Beneficiary Survey” data with respect to the frequency and cost of actinic keratosis treatment concluded that about 60% of actinic keratosis patients were covered by Medicare, and 40% of treatments were reimbursed by private payors during the period from 1998 through 2000 (Dermatology Surgery 2006;32(8):1045-9). Thus, we assume that the above number of cryotherapies for Medicare patients represents only 60% of all cryotherapy treatments performed in the U.S. in the relevant year, so the number of cryotherapies for Medicare patients should be divided by 0.6 in order to estimate the total number of cryotherapy treatments in the U.S. in that year. Simple curettage is generally not used to treat actinic keratosis in the U.S.

 

In the U.S., 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 2000. Levulan® contains 5-aminolevulinic acid (5-ALA) as its active ingredient. As with Ameluz®, in the treatment of actinic keratosis, Levulan® is used in a PDT treatment once, and the PDT treatment is repeated after several weeks if residual lesions remain. Levulan® had an effective monopoly on the market for the PDT treatment of actinic keratosis (in accordance with the applicable prescribing information) until our company launched Ameluz® in the U.S. in October 2016 (Galderma sold Metvix® in the U.S. market only for a short period and withdrew the product in 2013). We estimate that there are currently about 350,000 prescriptions of PDT drugs for actinic keratosis in the US per year. Based on our estimates and analysis, we believe that Ameluz® has achieved an estimated market share in the U.S. for the PDT treatment of actinic keratosis of about 18% in its second full year of commercialization.

 

 

1 This research was funded by Biofrontera AG. Our personnel commented on the draft manuscript but did not have control of the methodology, conduct, results, or conclusion of this study. Additionally, this paper was not dependent on our approval for submission to the PLoS One journal.

 

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We estimate that there were an additional 1.7 million prescriptions for self-applied topical drugs in the U.S. for the treatment of actinic keratosis in 2016. These prescriptions are for various topical products, with the most frequently prescribed ones being drugs with the active ingredient 5-fluorouracil (44% generic plus 4% branded), followed by imiquimod drugs (31%), diclofenac drugs (16%) and ingenol mebutate drugs (5.5%).

 

In 2016, the cryotherapy treatments and the topical products (including PDT drugs) in the aggregate constituted an estimated 12.6 million treatments for actinic keratosis in the U.S. According to these numbers, PDT was only applied in about 3% of all actinic keratosis treatments in the U.S., and, therefore, we believe there is substantial market potential and room for growth in the U.S. 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 our estimates of the U.S. market size for treatment of actinic keratosis with Ameluz® smaller, which may reduce our potential and ability to increase sales of Ameluz® and revenue in the U.S. Although we have not independently verified the data obtained from these sources, we believe that this data provides the best information available to us relating to the present market for actinic keratosis treatments in the U.S., and we often use these data for our business and planning purposes.

 

The chart below displays the relative percentages of these actinic keratosis treatments in 2016 in the U.S.: (i) cryotherapy, reimbursed by Medicare (Source: Resource-Based Relative Value Scale (RBRVS) of the American Medical Association); (ii) cryotherapy, not reimbursed by Medicare (the remaining 40% of cryotherapies) (Source: Dermatology Surgery 2006; 32(8):1045-9); (iii) self-applied topical drugs (Source: Biofrontera’s internal market research); and (iv) Levulan® (Source: Sun Pharma’s annual reports).

 

 

We believe our opportunities in the U.S. market for Ameluz® sales growth for treatment of actinic keratosis are to supersede Levulan® Kerastick as the leading PDT product in the current PDT market sector for actinic keratosis treatment and to expand the PDT market as a first-option therapy to treat actinic keratosis as compared to cryotherapy and self-applied topical products.

 

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.

 

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Market Overview for Treatment of Basal Cell Carcinoma

 

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.

 

According to a market study published in 2014 by Technavio, the international market for actinic keratosis medication is expected to grow by approximately 8% annually, from approximately $546.0 million in 2013 to approximately $942.0 million in 2020. During this same period, the global market for basal cell carcinoma medication is expected to grow from approximately $236.0 million in 2013 to nearly $5.0 billion in 2020, because of the availability of new drugs (such as Ameluz®), which would likely mean that fewer patients will undergo surgery for treatment of basal cell carcinoma.

 

BF-RhodoLED® Lamp

 

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 light emitted at this wavelength is effective for photodynamic therapy illumination with Ameluz® or other medications containing ALA or methyl ALA. The red light emitted by our BF-RhodoLED® lamp is outside the infrared range, reducing the likelihood for discomfort from warming. Other light wavelengths, including the blue range, can also activate the photosensitizer, but penetrate less deeply into tissues as compared to red light. We assemble our BF-RhodoLED® lamp at our corporate headquarters in Leverkusen, Germany.

 

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 any discomfort experienced during the treatment. Our BF-RhodoLED® lamp has been CE-certified since November 2012 and 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®.

 

We have been performing the final assembly of our BF-RhodoLED® lamp at our facilities in Leverkusen, Germany since July 2016 and, thus, we are considered the responsible manufacturer by the FDA.

 

History of Clinical Trials for Ameluz® and BF-RhodoLED® Lamp

 

Clinical trials relating to treatment of actinic keratosis with Ameluz® photodynamic therapy

 

The initial two Phase III trials we conducted in connection with obtaining approval for Ameluz® in the EU included a variety of CE marked photodynamic therapy light sources, and best results were achieved with LED lamps. The efficacy of Ameluz® was tested in comparison with Metvix®, the approved standard medication already available in the EU, that is a topical cream used in connection with photodynamic therapy. The results of the trial demonstrated that Ameluz® was significantly non-inferior to Metvix® for the treatment of actinic keratoses with photodynamic therapy. The complete clearance rates of patients from all keratoses at the average of all lamp types were 78% for Ameluz® and 64% for Metvix®. With LED lamps only, the clearance rates increased to 85% for Ameluz® and 68%for Metvix®. The side-effect profiles were comparable for both products. In another trial, using Ameluz® with LED lamps completely removed all keratoses in 87% of the patients. For the individual lesions, 96% and 94% were completely eradicated in the two trials using LED lamps (all values cited are from the intent to treat, or ITT, population). See “Research and Development and Regulatory Affairs-Ameluz® Actinic Keratosis-Trial 1 and —Trial 2”.

 

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Prior to obtaining approval in the U.S. for treatment of actinic keratoses using Ameluz® photodynamic therapy, the FDA requested two Phase I clinical trials for Ameluz®, one to determine the plasma concentration of the drug after application of an entire tube of Ameluz® to maximally damaged skin, the other to investigate a sensitizing effect of the product. These Phase I trials were performed with approximately 240 subjects and were completed in 2015.

 

A maximal use pharmacokinetics study was conducted in 12 patients bearing at least 10 mild to moderate actinic keratoses on the face or forehead. An entire tube of vehicle and Ameluz® followed by photodynamic therapy was applied in a fixed sequence design with a washout period of 7 days to evaluate baseline and Ameluz® dependent plasma concentrations of aminolevulinic acid, or ALA, and protoporphyrine IX, or PpIX. An up to 2.5-fold increase of basic ALA plasma concentrations was observed during the first three hours after Ameluz® application, still remaining within the normal range of previously reported and published endogenous ALA concentrations. The plasma concentrations of metabolite PpIX were generally low in all patients, and in none of the patients, was an obvious increase of PpIX plasma concentrations observed after Ameluz® application.

 

In a clinical trial designed to investigate the sensitization potential of ALA with 216 healthy subjects, 13 subjects (6%) developed allergic contact dermatitis after continuous exposure for 21 days with doses of ALA that were higher than doses normally used in the treatment of actinic keratosis. Allergic contact dermatitis was not observed under regular treatment conditions.

 

Approval of photodynamic therapy treatment of actinic keratoses in the U.S. required us to obtain a combination approval of both Ameluz® and the light source. As a result, we developed our own photodynamic therapy lamp, the BF-RhodoLED®. Our photodynamic therapy lamp is CE-certified in the EU, which required the company to be certified pursuant to the ISO 9001 and ISO 13485 standards.

 

In preparation for seeking FDA approval in the U.S., we conducted a Phase III trial using the combination of Ameluz® and our BF-RhodoLED® lamp. In this Phase III trial, completed in 2015, with this combination treatment, all keratoses of a patient were completely eradicated in 91% of patients, and 94% of all lesions were completely removed (99.1% of mild lesions and 91.7% of moderate lesions). Further, 63.3% of the patients who were completely asymptomatic 3 months after treatment were still asymptomatic one year later. In this Phase III trial, the drug was applied over large skin areas (field therapy) for the first time in a Phase III trial of photodynamic therapy. Field directed treatment is advisable if a patient has several actinic keratosis lesions in close proximity since multiple actinic keratoses are believed to arise from “cancerized fields,” i.e., skin areas in which neoplastic cells are spread over a larger area, and additional subclinical (not yet visible) lesions may exist in the same field. Based on this study, the EU granted Ameluz® the approval for the indication “field cancerization”, and the prescribing information in the U.S. specifically approves the field directed approach. See “Research and Development and Regulatory Affairs-Actinic Keratosis-Ameluz®-Trial 3”.

 

By testing larger skin areas, we could also investigate the effect of photodynamic therapy on photo-damaged skin. Thus, in this field directed Phase III trial for Ameluz®, we measured the improvement of previously existing skin impairment. Based on the parameters we tested for skin impairment, the patients with the treatment showed improvements as a result of the treatment. The proportion of patients with impaired skin surface, including rough, dry and scaly skin, decreased from 85% to 28%within 12 months after treatment with Ameluz®. Patients with skin hyperpigmentation or hypopigmentation decreased from 59% to 24% and from 46% to 11%, respectively. The proportion of patients with mottled pigmentation, mixed hyperpigmentation and hypopigmentation, decreased from 48% to 18%. Before treatment, 26% of the patients had mild to moderate/severe scarring, this decreased to 7% of patients after treatment. Atrophic skin was diagnosed in 31%before but only in 4% of patients 12 months after treatment. See table 3 under See “Research and Development and Regulatory Affairs-Ameluz®-Actinic Keratosis-Trial 3”. These skin improvement results are now included in our official EU product information for Ameluz®.

 

Clinical trials relating to treatment of basal cell carcinoma with Ameluz® photodynamic therapy

 

To extend the EU approval for Ameluz® to the treatment of basal cell carcinoma, we conducted another Phase III trial. A total of 281 patients with 1 to 3 non-aggressive basal cell carcinomas enrolled in this Phase III trial, of which 138 were treated with Ameluz® PDT. We conducted the trial under the clinical supervision of Prof. Colin Morton (UK) and Prof. Markus Szeimies (Germany) at 27 clinical trial centers in the UK and Germany. The comparative trial tested Ameluz® side by side with its major European competitor Metvix®, which was already approved in the EU for the treatment of basal cell carcinoma. Patient recruitment lasted until May 2015, the last patient completed the trial in November 2015, and we obtained results of the trial in January 2016. Non-aggressive basal cell carcinomas with a thickness of up to 2 mm were included in the trial.

 

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Photodynamic therapy treatment with Ameluz® completely eliminated all of a patient’s non-aggressive (superficial and nodular) basal cell carcinomas in 93.4% of cases, compared to 91.8% from photodynamic therapy treatment with Metvix®. Of the individual lesions, 94.6% were completely eliminated after Ameluz® treatment, 92.9% were completely eliminated after Metvix® treatment. Greater differences were observed in the case of thicker basal cell carcinomas. In photodynamic therapy treatment with Ameluz®, 89.3% of the nodular carcinomas were completely removed, compared to only 78.6%with Metvix®. Superficial basal cell carcinoma lesions were completely eradicated by photodynamic therapy treatment with Ameluz® in 95.8% of patients, compared to photodynamic therapy treatment with Metvix®, in which superficial basal cell carcinoma lesions were completely eradicated in 96.9% of the cases. After 12 months, recurrence rates were slightly higher for patients treated with Metvix® as compared to patients treated with Ameluz®. In the Ameluz® group, 6.7 % of the lesions were recurrent after 12 months, and in the Metvix® group 8.2% of the lesions were recurrent after 12 months. See table 4 under “Research and Development and Regulatory Affairs-Ameluz®-Basal Cell Carcinoma”.

 

In July 2016, Biofrontera applied to the EMA for approval for the photodynamic therapy treatment of basal cell carcinoma with Ameluz® based on the results of this Phase III trial. The approval was granted by the European Commission in January 2017.

 

Clinical trials relating to treatment of actinic keratosis with daylight photodynamic therapy

 

Between June and September 2016, we conducted a Phase III trial to evaluate the safety and efficacy of Ameluz® in combination with daylight photodynamic therapy, or daylight PDT, for the treatment of mild to moderate actinic keratosis. In the trial, Ameluz® was compared to Metvix®, which had previously obtained approval for daylight photodynamic therapy in some European countries. The intra-individual, randomized, observer-blinded, multi-center study took place at 7 sites in Spain and Germany, and evaluated a total of 52 patients, each with 3 to 9 mild to moderate actinic keratosis lesions in each of two comparable treatment areas on the face and/or scalp. For an intra-patient comparison of the treatments, each patient received daylight photodynamic therapy with Ameluz®, on one side, and Metvix®, on the other side, of the face or scalp.

 

The Phase III trial met its primary endpoint, exhibiting after a single treatment with daylight photodynamic therapy a total lesion clearance rate (percentage of completely cleared individual lesions per patient’s side) of 79.8 % for the areas treated with Ameluz®, which demonstrated non-inferiority to treatment with Metvix®, in which 76.5% of lesions were fully cleared after one daylight photodynamic therapy (p<0.0001). Histological evaluation of lesion clearance resulted in a similar outcome, with 72.5% versus 66.7% of lesions fully cleared after treatment with Ameluz® and Metvix®, respectively, in combination with daylight photodynamic therapy.

 

In the Phase III trial, the secondary endpoints for treatment with Ameluz® in combination with daylight photodynamic therapy compared favorably with Metvix® and showed equivalent or better clearance rates. After a single daylight photodynamic therapy with Ameluz®, 85% of lesions on the face were fully cleared, and 72 % of the more difficult to treat lesions on the scalp were fully cleared. After a single daylight photodynamic therapy with Metvix®, 84% of the lesions on the face were fully cleared and 65% of the lesions on the scalp were fully cleared. The treatment of moderate actinic keratosis lesions resulted in full clearance of 76% of the lesions treated with Ameluz® in combination with daylight photodynamic therapy, compared to 73% cleared by treatment with Metvix® in combination with daylight photodynamic therapy. Mild actinic keratosis lesions had a clearance rate of 94% after treatment with Ameluz® in combination with daylight photodynamic therapy compared to 91% after treatment with Metvix® in combination with daylight photodynamic therapy. Lesions in patients with five or fewer actinic keratoses were fully cleared in 83%of cases after treatment with Ameluz® in combination with daylight photodynamic therapy and in 81%of cases after treatment with Metvix® in combination with daylight photodynamic therapy. In patients with more than 5 actinic keratoses, 75.2% of lesions were fully cleared after treatment with Ameluz® in combination with daylight photodynamic therapy, while 77.6% of lesions were fully cleared after treatment with Metvix® in combination with daylight photodynamic therapy.

 

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In this Phase III trial, the most notable differences between Ameluz® and Metvix® clearance rates depended on the patient’s age and the weather conditions. In patients younger than 65 years of age, the lesion clearance rate was 83% after treatment with Ameluz® in combination with daylight photodynamic therapy compared to a lesion clearance rate of 74% after treatment with Metvix® in combination with daylight photodynamic therapy. For patients treated with daylight photodynamic therapy during cloudy weather, the lesion clearance rate was 75% after treatment with Ameluz® compared to a lesion clearance rate of 66% after treatment with Metvix®. For patients treated with daylight photodynamic therapy during sunny weather, lesion clearance rates improved to 85 % after treatment with Ameluz® and 83% after treatment with Metvix®. See “Research and Development and Regulatory Affairs-Ameluz®-Actinic Keratosis with daylight photodynamic therapy”.

 

There were no notable differences between Ameluz® and Metvix® in side effects in this Phase III trial. Furthermore, pain during the daylight photodynamic therapy illumination was rated by the patients on a scale of 0 (no pain) to 10 (very severe pain). The mean pain scale for Ameluz® was 1.2 and for Metvix® was 1.1.

 

We used these results to file, in the second quarter of 2017, for label extension in the EU for the treatment of actinic keratosis using Ameluz® in combination with daylight photodynamic therapy.

 

On January 23, 2018, we announced the twelve month follow up results from our Phase III trial of daylight PDT. The study evaluated the daylight PDT treatment of actinic keratosis with Ameluz® in direct comparison to Metvix®.

 

At the primary clinical endpoint, the paired comparison of complete removal of actinic keratosis lesions indicates that an average of 79.8% of lesions were no longer clinically visible three months following daylight PDT treatment with Ameluz®, as compared to 76.5% following Metvix® daylight PDT treatment. After twelve months, 19.9% of the lesions that had previously been completely removed with Ameluz® reappeared as compared to 31.6% of lesions with Metvix®.

 

The total removal of lesions on the face after 3 months was 85.2% with Ameluz® as compared to 84.2% with Metvix®. After 12 months, however, 25.0% of these lesions were again visible after daylight PDT treatment with Metvix® as compared to 20.1% after daylight PDT treatment with Ameluz®. Following actinic keratosis daylight PDT treatment with Ameluz®, a clinical clearing rate of 74.2% for lesions on the scalp was observed after 3 months, of which 23.4% recurred within 12 months. With daylight PDT treatment with Metvix®, this clearing rate was 67.5%, of which 43.7% recurred within twelve months.

 

In patients with mild actinic keratosis, 93.7% of all lesions were initially not visible following daylight PDT treatment with Ameluz®, and in patients with moderate actinic keratosis, 77.5% of actinic keratoses could no longer be diagnosed three months after treatment. After twelve months, these patients were diagnosed with 16.7% and 20.5%, respectively, of actinic keratoses not previously visible. With daylight PDT treatment with Metvix®, 91.2% of lesions in patients with mild actinic keratosis and 74.1% of lesions in patients with moderate actinic keratoses were not clinically detectable three months after treatment, while 17.5% and 34.3%, respectively, of these actinic keratoses, however, recurred after twelve months.

 

Weather conditions also affect the efficacy of Ameluz® in combination with daylight PDT. At temperatures up to 20°C and above 20°C, the healing rates for daylight PDT treatment with Ameluz® after three months were 80.1% and 79.5%, respectively, while recurrence rates were 21.5% at temperatures below 20°C and 18.6% at temperatures above 20°C. A significant difference was observed with daylight PDT treatment with Metvix®, for which clearing rates of 78.4% and 74.6% and recurrence rates of 26.8% and 36.1%, respectively, were observed.

 

In March 2018, we received approval from the European Commission for the treatment of mild to moderate actinic keratoses on the face and scalp using Ameluz® with daylight photodynamic therapy.

 

Clinical trials relating to Field-Directed Treatment of Actinic Keratosis on the Extremities and the Trunk

 

Between July 2018 and March 2019, we conducted a Phase III trial to evaluate the safety and efficacy of Ameluz® in combination BF-RhodoLED® illumination for the treatment of actinic keratoses on the extremities as well as the trunk and neck. This trial was a double blind, placebo controlled, intra-individual Phase III trial at four clinical centers in Germany. The study met its primary regulatory endpoint, demonstrating that Ameluz® was superior (p<0.0001) to placebo based on its mean total lesion clearance rate of 86% compared to 33% for placebo. Secondary endpoints of the study were total patient clearance, other efficacy variables and safety endpoints. All endpoints were stratified by lesion and patient subgroups, including lesion severity, lesion location and patient sex and age. The secondary endpoints for treatment with Ameluz® in combination with BF-RhodoLED® illumination compared favorably with treatment with the placebo. Even if mild AKs were ignored and only moderate AKs were considered, mean lesion clearance rates per patient's side were 84% with Ameluz® compared to 27% with placebo. In patients treated on the extremities, mean lesion clearance rates per patient's side were also 84% with Ameluz® compared to 27% with placebo. Mean lesion clearance rates in the area trunk/neck were even higher. Furthermore, the comparison parameter "patient complete clearance" also emphasized the superiority of Ameluz®: 67% of the patients' sides were completely cleared 12 weeks after the last PDT compared to 12% of the placebo-treated sides. All of the results were statistically highly significant. Thus, all secondary endpoints also confirm the high superiority of Ameluz® over the control group.

 

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The multi-center, randomized, double-blind, intra-individual study included 50 patients at six study sites in Germany, each with four to ten clinically confirmed actinic keratosis lesions in comparable areas on the right and left side of the extremities and/or trunk/neck. Mild, moderate and severe actinic keratoses were treated with one or two PDT treatments. The final examination of the patients took place three months after the last PDT treatment. The clinical study phase will now be followed by a follow-up phase of twelve months after the last PDT, in which recurrence rates and/or numbers of new actinic keratosis lesions and skin tumors will be determined. This follow-up phase will be reported separately.

 

We expect to use results in order to file in the third quarter of 2019 for the label extensions with the EMA in the EU and the FDA in the U.S.

 

Our Research and Development Programs

 

In addition to our approved products, we also have several research and development programs.

 

Current Clinical Trials for Ameluz®

 

Basal Cell Carcinoma

 

In August 2017, we agreed with the FDA on the requirements necessary to obtain approval for our application of Ameluz® PDT for the treatment of superficial basal cell carcinoma in the U.S. Under the agreed plan with the FDA, our application could be based on a single additional Phase III placebo-controlled pivotal trial to be conducted in the U.S., in which Ameluz® PDT will be compared to placebo PDT, which can be conducted with relatively few patients minimizing both time and expense. We will be required to present a combined read-out of clinical and histological clearance. In December 2017, we filed an investigational new drug application with the FDA for our proposed Phase III study protocol to evaluate Ameluz® PDT for the treatment of superficial basal cell carcinoma, and FDA performed a special protocol assessment. The study was initiated in September 2018.

 

Following the discussion with the FDA, we have initiated the study with the following design. The primary objective is to compare the efficacy of Ameluz® PDT with PDT using just the vehicle that is used to deliver the active ingredient in Ameluz®, in combination with BF-RhodoLED® illumination, in the treatment of superficial basal cell carcinoma. A randomized, double blind, vehicle-controlled multicenter Phase III study will be performed to evaluate the safety and efficacy of Ameluz® in combination with BF-RhodoLED®. We will work with 12 to 16 clinical centers in the U.S. and enroll 186 patients in order to achieve an alpha level of p<0.001. Ameluz® and placebo will be applied at a 4:1 ratio. The primary efficacy variable is the composite clinical and histological complete clearance rate of the patient’s main target lesion, assessed at the end of the clinical observation period, 12 weeks after the start of the first or second PDT cycle. Each PDT cycle will consist of two PDTs one to two weeks apart. Secondary objectives include the evaluation of the safety and secondary efficacy parameters (including stratification according to lesion size, location, patient age and sex) related to Ameluz® and BF-RhodoLED®, also including clinical clearance of additional treated lesions on the same patients. The double blind clinical observation period for each patient will be up to 7 months (up to four weeks screening and pre-randomization period, and three or six months double blind part of the study) followed by a 5-year follow-up period after the start of the last PDT cycle. The recruitment phase started in the third quarter of 2018 and is expected to be completed by the end of the second quarter in 2020. Clinical trial results are expected by the end of 2020, and we anticipate submission of our approval supplement to the FDA during the first half of 2021.

 

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Preparation of Additional Clinical Trials for Ameluz®

 

We have started preparation for the following phase III trials:

 

  (i) Squamous cell carcinoma: We are planning a randomized, double-blind, multi-center Phase III study to evaluate the safety and efficacy of Ameluz® versus placebo in the treatment of Bowen’s disease (squamous cell carcinoma in situ) with photodynamic therapy when using the BF-RhodoLED® lamp. The study is expected to have an inter-individual design similar in treatment regime and patient number to our planned trial for the treatment of superficial basal cell carcinoma in the U.S., as described above under “— Current Clinical Trials for Ameluz — Basal Cell Carcinoma.”
     
  (ii) Acne: A phase II trial is in the early planning stages. No trial design has been defined, and we are currently collecting information of investigators with off-label experience in this indication.

 

BF-derm1

 

BF-derm1 is a drug candidate we have been developing in the form of a tablet for the treatment of severe, chronic, antihistamine-resistant urticaria, or hives. In its most severe and chronic form, this illness cannot be treated adequately using currently available drugs. The BF-derm1 tablet contains an active ingredient that covalently binds to histidine decarboxylase that we believe to be a novel mechanism of action to soothe chronic urticarial (hives). The project is currently not being actively developed. Since we expect to focus on further commercializing Ameluz® PDT in the next several years, we intend to seek a partner for the further development and funding of the Phase III costs and regulatory approval expenses relating to developing BF-derm1.

 

BF-1

 

Our BF-1 candidate involves a patented active ingredient that is intended to be used for the prophylactic treatment of patients who frequently suffer from migraines. We have conducted preclinical investigations concerning the tissue distribution, metabolism and toxicology of the substance. We have further conducted a Phase 0 trial involving humans in which the substance was orally administered to healthy subjects, demonstrating favorable bioavailability and pharmacokinetics of the active agent. Since these trials did not yield any critical findings, we believe further tests on humans should be conducted. Because this product candidate no longer fits our dermatological product focus, we are not actively developing it, but we intend to explore licensing opportunities.

 

Our Development Collaboration with Maruho

 

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 major shareholder of our company. During phase 1 of this collaboration, in which the feasibility of the product development was tested, Biofrontera and Maruho examined potential formulations for various branded generic drugs in Europe. Stable formulations have been developed for some, but not for all active ingredients and combinations tested. Maruho covered all costs and expenses in connection with the research and development during phase 1. New intellectual property developed during phase 1 will be jointly owned by both parties, and both parties have retained their respective ownership to pre-existing intellectual property, such as Biofrontera’s patented nanoemulsion. We completed this initial phase in the first quarter of 2018. The initial agreement with Maruho has expired.

 

On March 19, 2019, we signed an agreement to continue our collaboration with Maruho. As part of the newly agreed project phase, we will prepare the formulation of one of the four active ingredients in our nanoemulsion jointly tested during Phase 1 (described above) for clinical trials. The agreement does not cover any potential clinical testing that may be carried out during a subsequent project phase. Any such clinical testing would be the subject of an additional agreement that would need to be concluded between the parties in due course, depending on the results of the new project phase. As with Phase 1, previously existing intellectual property, in particular our nanoemulsion technology, shall remain the property of the respective owner. New intellectual property and results of the new project phase, including project documentation, shall be shared equally by the parties. According to the current budget, the new project phase will require up to €1.1 million in research costs, which are to be borne exclusively by Maruho. Should the costs exceed the €1.1 million to be borne by Maruho, the parties have agreed to consult on the next steps and the issue of how to bear costs.

 

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We and Maruho have begun the process of negotiating a potential cooperation agreement regarding research and development of further indications for Ameluz® for the treatment of acne. On March 19, 2019, Maruho and Biofrontera signed a non-binding term sheet with respect to this potential collaboration. Currently, a proof of concept trial and maximal use pharmacokinetic-trial are planned, the costs of which will be borne by Maruho in an amount that has not yet been agreed. Depending on initial results and agreement of the parties, among other factors, these trials may be followed by additional clinical trials required for U.S. market approval of further indications. The term sheet contemplates that we will grant Maruho a license for marketing Ameluz® in parts of Asia and Oceania, the terms and conditions of which have not yet been negotiated.

 

Our Cosmetic Skin Care Products — Belixos®

 

Our Belixos® line is our over-the-counter line of skin care cosmetics products developed by us to help moisturize and soothe dry, itchy and irritated or sun-damaged skin. Our Belixos® cosmetic products are available for sale in Germany and certain other European countries at selected pharmacies, dermatological institutes, and through local Amazon websites. These cosmetic products are not currently available for sale in the U.S.

 

Sales, marketing and distribution

 

We are currently selling Ameluz® in the U.S., in 9 countries in Europe and in Israel.

 

Sales, marketing and distribution in Europe and Israel

 

With its central European approval, Ameluz® for the photodynamic therapy treatment of actinic keratosis and basal cell carcinoma, can be sold and distributed in all EU countries as well as in Norway, Iceland, and Liechtenstein. We have marketed and sold Ameluz® to dermatologists in Germany and, since March 2015, also in Spain through our own field sales force. We also started to market and sell UK through our own sales force beginning April 2018. We sell Ameluz® in other countries within the European Union, in Switzerland and in Israel through license partners.

 

In many European countries, the price and the medical reimbursement status have to be defined prior to market launch, which can be a lengthy process. To date, in Europe our company or our license partners have commenced sales in Germany, Spain, Austria, Denmark, Sweden, Norway, the UK as well as Switzerland and Liechtenstein. Ameluz® is available in these countries at a pharmacy retail price of between approximately €150 – €250 per 2 gram tube.

 

In the EU, distribution to public pharmacies generally takes place via pharmaceutical wholesalers, whereas hospital pharmacies may also be supplied directly. In addition to regular visits by our field sales force to dermatologists, we have since launch presented Ameluz® at major dermatological conferences both in Germany and in other European countries.

 

We have a license and supply agreement with Desitin Arzneimittel GmbH to market and sell Ameluz® and the BF-RhodoLED® lamp in Denmark, Sweden, and Norway; and we have a license and supply agreement with Pelpharma Handels GmbH to market and sell Ameluz® and the BF-RhodoLED® lamp in Austria.

 

In July 2015, we terminated a marketing collaboration agreement with Spirit Healthcare Limited to market Ameluz® in the UK and Ireland. In April 2018, we began marketing our products in the UK through our own sales force.

 

On September 13, 2017, we terminated our license and supply agreement with BiPharma B.V. in the Netherlands and Belgium, effective as of October 31, 2017.

 

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We initially marketed and sold Ameluz® in Spain pursuant to an agreement with Allergan SA. After termination of this agreement, since March 2015 we have marketed and sold our products in Spain through our branch, Biofrontera Pharma GmbH sucursal en España.

 

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. We have a 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. In these regions, the licensees were required to obtain independent regulatory approvals in collaboration with Biofrontera. In Switzerland, the regulatory approvals for Ameluz® and reimbursement were issued in December 2015 and commercial launch commenced in the beginning of 2016. In Israel, regulatory approval for Ameluz® was granted by the Israeli health agency in April 2016, reimbursement for treatment with Ameluz® of immunosuppressed patients was subsequently granted. We commenced sales in Israel in August 2017.

 

In these agreements with our sales partners 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 60% of net revenue.

 

Sales, marketing and distribution in the U.S.

 

We decided to market and sell Ameluz® in combination with our BF-RhodoLED® lamp for the treatment of actinic keratosis in the U.S. with our own sales force, and launched the commercialization of Ameluz® and our BF-RhodoLED® lamp for actinic keratosis in October 2016. Prior to launch, and with the help of a consulting firm specializing in market access, we analyzed the reimbursement mechanisms for photodynamic therapy in the U.S. healthcare system. Ameluz® is distributed as a “buy-and-bill” drug that is purchased by the dermatologist, rather than distribution through pharmacies.

 

Sales in the U.S. are made through our wholly-owned subsidiary, Biofrontera Inc., a Delaware corporation, which we established in March 2015. Based on our experience, we concluded that we could most effectively market our products in the U.S. by using our own sales force, which we can train to sell our drug Ameluz® in combination with the BF-RhodoLED® lamp and related procedure. During 2016, we hired 26 employees for our U.S. marketing and sales efforts, and we launched the commercialization of Ameluz® and BF-RhodoLED® lamp for actinic keratosis in the U.S. in October 2016. During 2017 and 2018 we have continued to build our organization in the U.S. and are operating now with over 60 employees in our salesforce and field based supporting functions in the medical and reimbursement field. We have filled the key positions for our U.S. operations with qualified and experienced employees from an array of companies and are proud of the assembled talented group of people. The field-based employees are supported by a back-office organization at our U.S. headquarters near Boston.

 

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Group structure

 

 

The Biofrontera group consists of a parent company, Biofrontera AG, five direct, wholly owned subsidiaries, and five indirect, wholly owned subsidiaries. Biofrontera AG’s direct, wholly owned subsidiaries are: Biofrontera Bioscience GmbH, Biofrontera Pharma GmbH, Biofrontera Development GmbH, Biofrontera Neuroscience GmbH and Biofrontera Inc. Biofrontera Newderm LLC is a direct, wholly-owned subsidiary of Biofrontera, Inc., Cutanea Life Sciences, Inc. is a direct wholly-owned subsidiary of Biofrontera Newderm LLC, and Dermarc, LLC and Dermapex, LLC are direct wholly-owned subsidiaries of Cutanea Life Sciences, Inc. All companies are based at Hemmelrather Weg 201, 51377 Leverkusen, Germany, except Biofrontera Inc., and Biofrontera Newderm LLC, which are based at 201 Edgewater Dr., Wakefield, Massachusetts 01880, U.S. (effective June 1, 2019, we will move our U.S. corporate office to new office facilities in Woburn, Massachusetts), and Cutanea Life Sciences, Inc., Dermarc, LLC and Dermapex, LLC which are based at 1500 Liberty Ridge Drive, Wayne, PA 19087, U.S.

 

Biofrontera AG is a holding company that leads financing activities for the group. Its subsidiary Biofrontera Bioscience GmbH has responsibility for research and development activities for the group and holds our patents and approvals for Ameluz®. Pursuant to a license agreement with Biofrontera Bioscience GmbH, our subsidiary Biofrontera Pharma GmbH is responsible for the manufacturing and further licensing and marketing of our approved products.

 

We established Biofrontera Development GmbH and Biofrontera Neuroscience GmbH in December 2012 as additional wholly-owned subsidiaries of Biofrontera AG. The purpose of these subsidiaries is to pursue the further development of pipeline products that are not part of our core business. To this end, in December 2012, Biofrontera AG purchased two projects, BF-derm1 and BF-1, from Biofrontera Bioscience GmbH pursuant to purchase and transfer agreements, and then transferred the projects to the two new subsidiaries, with the contribution agreement being effective from December 31, 2012. The product candidate BF-derm1, which we intend to develop as a treatment for severe chronic urticarial (hives), is the responsibility of Biofrontera Development GmbH, while the product candidate BF-1, which we intend to develop as a prophylactic treatment for migraines, is the responsibility of Biofrontera Neuroscience GmbH. Although we are not developing these two product candidates at this time, if we choose to develop them in the future we believe this corporate structure will better allow us to finance such development.

 

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We established Biofrontera Inc., a Delaware corporation, as a wholly-owned subsidiary, with a headquarters in Wakefield, Massachusetts to pursue our business and commercialization efforts in the U.S. under a license from our wholly-owned subsidiary Biofrontera Pharma GmbH.

 

Research and Development and Regulatory Affairs

 

Ameluz®

 

To date, we have focused our research and development efforts on Ameluz® in order to try to optimize its market potential. We have advanced our Ameluz® development program through additional clinical trials with the goal of extending approved indications and achieving better market positioning.

 

We have conducted three Phase III trials for Ameluz®. Two of them, trials CT002 and CT003, including 12-month follow-up studies, were used to apply for the centralized European marketing approval with the EMA. The third Phase III trial, CT007, was conducted to test Ameluz® for use in combination with our own light source, the BF-RhodoLED® lamp, as well as testing for field cancerization therapy. In September 2010, we submitted the dossier for Ameluz® for the treatment of actinic keratosis to the EMA for centralized EU approval, and obtained marketing approval in December 2011. In July 2015, we filed a new drug application, or NDA, with the FDA for Ameluz® and our BF-RhodoLED® 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 summary of clinical trials below discusses confidence intervals in relation to those trials. For clinical endpoints that are binary (i.e., the specified endpoint either is observed or not observed with respect to a patient), the result of a trial is a single number describing the percentage of patients reaching the endpoint. An example of this type of endpoint is total patient clearance, where patients are observed either to reach total clearance or not to do so. Total patient clearance is the primary endpoint in most of our trials. When the clinical endpoint is binary, there is no specific numerical result associated with individual patients, which does not give rise to a confidence interval for the results of the trial. In order to establish a confidence interval for such a trial, statisticians assume a binominal distribution, which forms the basis for the confidence interval. For a trial design where observation of the primary endpoint yields a quantifiable value for each patient, a confidence interval naturally arises from the results of the trial. For example, the primary clinical endpoint for our trial studying the safety and efficacy of Ameluz® in combination with daylight photodynamic therapy for the treatment of mild to moderate actinic keratosis was the pairwise comparison of the percentage of fully cleared lesions on each side of a patient’s body. See “— Actinic Keratosis with photodynamic therapy” below for more information. In such a trial, a confidence interval can be defined based on the distribution of values among all patients. The p-value is then calculated based on the difference between the average results of the two clinical groups and the size of the confidence intervals. A p-value of <0.05 is considered a significant result; however, at this level the FDA requires two independent trials to verify the result. The FDA may waive the requirement of a second trial if the first trial was excellent in all respects, including a higher p-value.

 

Actinic Keratosis

 

We evaluated the efficacy and safety of Ameluz® in combination with photodynamic therapy to treat mild and moderate actinic keratosis lesions on the face/forehead and/or bald scalp, using a narrow spectrum (red light lamp) light source in three pivotal, randomized, multicenter clinical Phase 3 trials (Trials 1, 2, and 3). Trial 1 was double-blind with respect to vehicle and observer-blind regarding the active comparator arm. Trials 2 and 3 were vehicle-controlled and double-blind. Each of these clinical trials included a follow-up assessment after 6 and 12 months.

 

In these trials, 212 patients with 4 to 8 mild to moderate actinic keratosis lesions on the face/forehead and/or bald scalp were treated with Ameluz® and a narrow spectrum red light source. Patients ranged from 49 to 87 years of age (with a mean of 71 years), and 92% had Fitzpatrick skin type I (always burns, never tans), Fitzpatrick skin type II (usually burns, tans minimally), or Fitzpatrick skin type III (sometimes mild burn, tans uniformly). No patients had Fitzpatrick skin type V (very rarely burns, tans very easily) or VI (never burns, always tans). Approximately 86% of the patients were male, and all of the patients were Caucasian.

 

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All sessions were comprised of lesion preparation to roughen the surface and remove crusts, application of Ameluz® with occlusion for 3 hours, and removal of the residual gel. Subsequently, the entire treatment area was given photodynamic therapy; it was illuminated with a narrow spectrum red light source, a lamp of either 630 nm or 633 nm, and a light dose of approximately 37 J/cm2. In Trial 3, illumination of the treatment area was performed with our BF-RhodoLED® lamp, a narrow spectrum red light source, around 635 nm, and a light dose of approximately 37 J/cm2.

 

In all trials, the lesions that were not completely cleared 12 weeks after the initial treatment were treated a second time with an identical regimen. In the trials, 42% (88/212) of the patients treated with Ameluz® needed a second photodynamic therapy.

 

The primary endpoint for all trials was complete clearance of all of a patient’s lesions 12 weeks after the last photodynamic therapy.

 

Trial 1 was performed in Germany, Austria and Switzerland. Trials 2 and 3 were performed in Germany. The results of Trials 1, 2 and 3 as shown in the U.S. package inserts, or USPI, are presented in Table 2.

 

Table 2: Complete clearance 12 weeks after the last narrow spectrum photodynamic therapy in patients with actinic keratoses

 

    Narrow Spectrum photodynamic therapy 
    Ameluz®    Vehicle 
Trial 1   106/125 (85%)    5/39 (13%) 
Trial 2   27/32 (84%)*    2/16 (13%)* 
Trial 3   50/55 (91%)    7/32 (22%) 

 

* In the EU product information, the EMA reviewers considered one less patient as part of the ITT population, such that in the European product information the clearance rate of Trial 2 is shown as 87%. The FDA reviewers’ position was that the ITT population includes all subjects randomized to treatment, whether or not they have had any post-baseline assessments, and included one more patient in the Ameluz® and the vehicle groups.

 

Patients who achieved complete clearance at 12 weeks after the last photodynamic therapy entered a 12-month follow-up period. In the three trials, patients who received Ameluz® with the narrow spectrum photodynamic therapy and achieved complete clearance 12 weeks after the last photodynamic therapy, had recurrence rates of 14%, 11%, and 25% in Trials 1, 2 and 3, respectively, at 6 months, and recurrence rates of 40%, 22%, and 37% in Trials 1, 2 and 3, respectively, at 12 months. Recurrence was defined as the percentage of patients with at least one recurrent lesion during the 6-month or 12-month follow up period in patients with completely cleared lesions 12 weeks after the last photodynamic therapy.

 

Trial 1

 

In Trial 1, a randomized, observer blinded clinical trial with 571 patients and a follow-up duration of 6 months and 12 months, photodynamic therapy with Ameluz® was tested for non-inferiority to Metvix and superiority over placebo. The red light sources were either narrow spectrum lamps (Aktilite CL 128 or Omnilux photodynamic therapy) or lamps with a broader and continuous light spectrum (Waldmann photodynamic therapy 1200 L, or Hydrosun Photodyn 505 or 750). The primary endpoint was complete patient clearance 12 weeks after the last photodynamic therapy on average with all lamp types. Ameluz® (78.2%) was significantly more effective than MAL (64.2%, [97.5%- confidence interval: 5.9; ∞], P<0.05) and placebo (17.1%, [95%-confidence interval: 51.2; 71.0], P<0.05). Total lesion clearance rates were higher for Ameluz® (90.4%) compared to MAL (83.2%) and placebo (37.1%). Clearance rates and tolerability were dependent on the illumination source. The following table presents the efficacy and the adverse reactions transient pain and erythema occurring at the application site during photodynamic therapy with different light sources.

 

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Table 2a: Efficacy and adverse reactions (transient pain and erythema) occurring at the application site during photodynamic therapy with different light sources for the treatment of actinic keratosis

 

Light  Medicinal  Total patient
   Application site erythema (%)   Application site pain (%) 
source  product  clearance (%)   Mild   moderate   severe   mild   moderate   severe 
Narrow  Ameluz®   85    13    43    35    12    33    46 
Spectrum  MAL   68    18    43    29    12    33    48 
Broad  Ameluz®   72    32    29    6    17    25    5 
Spectrum  MAL   61    31    33    3    20    23    8 

 

Clinical efficacy was re-assessed at follow-up visits 6 months and 12 months after the last photodynamic therapy. Recurrence rates after 12 months were slightly better for Ameluz® (41.6%, [95%-confidence interval: 34.4; 49.1]) as compared to MAL (44.8%, [95%-confidence interval: 36.8; 53.0]) and dependent on the light spectrum used for illumination, in favor of narrow spectrum lamps. The probability of a patient to be completely cleared 12 months after the last treatment was 53.1% or 47.2% for treatment with Ameluz® with narrow spectrum lamps or all lamp types, respectively, and 40.8% or 36.3% for treatment with MAL with narrow spectrum lamps or all lamp types, respectively. The probability of patients in the Ameluz® group to require only one treatment and remain completely cleared 12 months after the photodynamic therapy treatment was 32.3% that of patients in the MAL group and 22.4% on average with all lamps.

 

Trial 2

 

In Trial 2, Ameluz® was compared with placebo treatment in a randomized, double-blind clinical trial enrolling 122 patients. The red light source used was either a narrow spectrum, around 630 nm at a light dose of 37 J/cm2 (Aktilite CL 128), or a broader and continuous spectrum, in a range between 570 and 670 nm, at a light dose of 170 J/cm2 (Photodyn 750). The primary endpoint was complete patient clearance 12 weeks after the last photodynamic therapy. Photodynamic therapy with Ameluz® (66.3%) was significantly more effective than with placebo (12.5%, p < 0.0001). Total lesion clearance was higher for Ameluz® (81.1%) compared to placebo (20.9%). Clearance rates and tolerability were dependent on the illumination source, with the narrow spectrum light source being more effective. Clinical efficacy was maintained during the follow-up periods of 6 months and 12 months after the last photodynamic therapy. The probability of a patient being completely cleared 12 months after the last photodynamic therapy was 67.5% or 46.8% for treatment with Ameluz® with narrow spectrum lamps or all lamp types, respectively.

 

Table 2b: Efficacy and adverse reactions (transient pain and erythema) occurring at the application site during photodynamic therapy with different light sources for the treatment of actinic keratosis

 

Light  Medicinal  Total patient   Application site erythema (%)   Application site pain (%) 
source  product  clearance (%)   mild   moderate   severe   mild   moderate   severe 
Narrow Spectrum  Ameluz®   84
(87 in EU product information)*
    26    67    7    30    35    16 
Broad Spectrum  Ameluz®   53    47    19    0    35    14    0 

 

* See footnote to Table 2 above.

 

Trial 3

 

In Trial 3, one entire tube of Ameluz® was used for each photodynamic therapy session on skin areas with field cancerization containing several actinic keratosis lesions. A total of 87 patients were treated with one PDT using Ameluz® or vehicle, which was repeated if residual lesions remained. Illumination was performed with our BF-RhodoLED® lamp. Complete patient clearance 12 weeks after the last photodynamic therapy was 91% in the Ameluz® group and 22% in the vehicle group, respectively (p < 0.0001). The clearance rate for patients with lesions on the face was 97% while the clearance rate for patients with lesions on the scalp was 82%. Lesion clearance rates were 94% 12 weeks after the last photodynamic therapy, of which 6% were recurrent at 6 months after the last photodynamic therapy, and an additional 3% (a total of 9%) were recurrent at 12 months after the last photodynamic therapy. The clearance rate for patients with mild lesions only was 99%, while the clearance rate for patients with moderate lesions was 92%.

 

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In this Trial, by testing larger skin areas, we could also investigate the effect of photodynamic therapy on skin impairment. The proportion of patients with impaired skin surface, including rough, dry and scaly skin, decreased from 85% to 28% within 12 months after treatment with Ameluz®. Patients with skin hyperpigmentation or hypopigmentation decreased from 59% to 24% and from 46% to 11%, respectively. The proportion of patients with mottled pigmentation, mixed hyperpigmentation and hypopigmentation, decreased from 48% to 18%. Before treatment, 26% of the patients had mild scarring, this decreased to 7% of patients after treatment. Atrophic skin was diagnosed in 31% of patients before treatment, but only in 4% of patients 12 months after treatment.

 

Table 3: Skin quality parameters in the treated area during 12- month follow-up

 

      Ameluz®   Vehicle 
Type of skin
impairment
  Severity  Before
photodynamic
therapy
   12 months after
photodynamic
therapy
   Before
photodynamic
therapy
   12 months after
photodynamic
therapy
 
Roughness/  None      15%       72%        11%         58%
dryness/  Mild   50%   26%   56%   35%
Scaliness  Moderate/severe   35%   2%   33%   8%
Hyper-  None   41%   76%   30%   62%
pigmentation  Mild   52%   24%   59%   35%
   Moderate/severe   7%   0%   11%   4%
Hypo-  None   54%   89%   52%   69%
pigmentation  Mild   43%   11%   44%   27%
   Moderate/severe   4%   0%   4%   4%
Mottled or  None   52%   82%   48%   73%
irregular  Mild   44%   17%   41%   15%
pigmentation  Moderate/severe   4%   2%   11%   12%
Scarring  None   74%   93%   74%   89%
   Mild   22%   7%   22%   12%
   Moderate/severe   4%   0%   4%   0%
Atrophy  None   69%   96%   70%   92%
   Mild   30%   4%   30%   8%
   Moderate/severe   2%   0%   0%   0%

 

Basal Cell Carcinoma

 

We performed an additional Phase III clinical trial in Germany and the UK for Ameluz® to test the efficacy of treating basal cell carcinoma with Ameluz® and photodynamic therapy. After completion of the trial, patients entered a 5-year follow-up phase.

 

In this Phase III trial, efficacy and safety of Ameluz® for the treatment of non-aggressive basal cell carcinoma with a thickness of up to 2mm was evaluated in 281 patients. A total of 138 patients were treated with Ameluz® in combination with photodynamic therapy. After excluding drop-outs and patients with major protocol violations, the per-protocol set comprised 121 patients with 148 lesions. All patients had 1 to 3 basal cell carcinoma lesions on the face/forehead, bald scalp, extremities and/or neck/trunk. In this trial, photodynamic therapy with Ameluz® was tested for non-inferiority as compared to photodynamic therapy with a cream (Metvix®) containing 16% methyl-aminolevulinate (MAL, methyl-[5-amino-4-oxopentanoate]). Our BF-RhodoLED® lamp was used as the red light source, which provided a narrow spectrum around 635 nm at a light dose of 37 J/cm2. The primary endpoint was complete patient clearance 12 weeks after the last photodynamic therapy.

 

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The complete patient clearance rate for photodynamic therapy with Ameluz® was 93.4%, compared to 91.8% for the photodynamic therapy with MAL (Metvix®). The trial demonstrated the non-inferiority of Ameluz® compared to MAL (Metvix®) cream [97.5% -confidence interval -6.5]. Of the basal cell carcinoma lesions, 94.6% were cleared by treating with photodynamic therapy and Ameluz®, whereas 92.9% were cleared by treating with photodynamic therapy and MAL (Metvix®). For nodular basal cell carcinoma, 89.3% of the lesions were cleared with photodynamic therapy and Ameluz®, whereas 78.6% of the lesions were cleared with photodynamic therapy and MAL. Adverse events and tolerability were comparable for both treatments.

 

Clinical efficacy was re-assessed at follow-up visits 6 months and 12 months after the last photodynamic therapy. Lesion recurrence rates 6 months and 12 months after the last photodynamic therapy were 2.9% and 6.7%, respectively, for Ameluz®, and 4.3% and 8.2%, respectively, for MAL (Metvix®). For this Trial, patients will be assessed up to five years after the last photodynamic therapy.

 

 

Table 4: Efficacy of photodynamic therapy for the treatment of basal cell carcinoma for all patients and selected subgroups

 

   Ameluz®
Patient
number
number (%)
   Ameluz®
Full patient
clearance
number (%)
     Ameluz®
Full lesion
clearance
number (%)
     MAL
Patient
number
number (%)
   MAL
Full patient
clearance
number (%)
     MAL
Full lesion
clearance
number (%)
 
Total   121    113      140      110    101      118 
         (93.4)     (94.6)          (91.8)     (92.9)
Subgroups:                                    
Patients with more than 1 basal cell carcinoma   23    23/23     n.a.      16    14/16   n.a. 
    (19.0)   (100.0)            (14.5)   (87.5)       
Superficial (only)   95    90/95     114/119     83    80/83   95/98
    (78.5)   (94.7)     (95.8)     (75.5)   (96.4)     (96.9)
Nodular (only)   21    18/21     25/28     21    16/21   22/28
    (17.4)   (85.7)     (89.3)     (19.1)   (76.2)     (78.6)
Others (including mixed [s/n] basal cell carcinomas)   5    5/5     1/1     6    5/6   1/1
    (4.1)   (100.0)     (100.0)     (5.5)   (83.3)     (100.0)
Thickness >1mm   n.a.    n.a.      8/11     n.a.    n.a.      8/12
                (72.7)                 (66.7)
basal cell carcinoma on the head (only)   13    10/13     14/17     14    10/14   12/17
    (10.7)   (76.9)     (82.4)     (12.7)   (71.4)     (70.6)
basal cell carcinoma on the trunk (only)   77    75/77     95/97     73    70/73   84/87
    (63.6)   (97.4)     (97.9)     (66.4)   (95.9)     (96.6)

 

Patient distribution in the subgroups was similar for both products and represents the distribution in the general population, where more than 70% of basal cell carcinomas are located in the head/trunk region. Basal cell carcinomas located in this region mainly belong to the superficial subtype. In conclusion, even though subgroup sizes are too small to draw significant conclusions on individual groups, the distribution of the two products to the relevant subgroups is very similar. Thus, it seems not plausible that an imbalance in subgroups could negatively impact the non-inferiority claim of the primary study endpoint or the general trends observed across all subgroups.

 

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Actinic Keratosis with daylight photodynamic therapy

 

Between June and September 2016, we conducted a Phase III trial in Germany and Spain to evaluate the safety and efficacy of Ameluz® in combination with daylight photodynamic therapy for the treatment of mild to moderate actinic keratosis. In the trial, Ameluz® was compared to Metvix®, which has marketing approval for daylight photodynamic therapy treatment of actinic keratosis in some European countries. The intra-individual, randomized, observer-blinded, multi-center study took place at 7 sites in Spain and Germany, and evaluated a total of 52 patients, each with 3 to 9 mild to moderate actinic keratosis lesions in each of two comparable treatment areas on the face and/or scalp. For an intra-patient comparison of the treatments, each patient received daylight photodynamic therapy treatment with Ameluz®, on one side, and Metvix®, on the other side, of the face or scalp.

 

After a single daylight photodynamic therapy with Ameluz®, 79% of the actinic keratosis lesions were cleared, compared to 75% with Metvix® (intent-to-treat population), demonstrating the non-inferiority of Ameluz® (p < 0.0001). Subgroup analyses shown in the table below generally showed higher clearance rates for Ameluz® versus Metvix®.

 

Table 5: Total lesion clearance 12 weeks after a single photodynamic therapy with Ameluz® or Metvix®

 

   Ameluz® (%)   Metvix® (%) 
         
All lesions   79    75 
Age < 65   83    74 
Age >65 to < 84   78    75 
Face   85    84 
Scalp   72    65 
Mild   94    91 
Moderate   76    73 
≤ 5 lesions per side   83    81 
> 5 lesions per side   77    72 
Histologically controlled clearance   73    67 
Expression of the tumor marker p53   34    41 

 

This Phase III trial will be followed by assessments of lesion recurrence 6 months and 12 months after the treatment with daylight photodynamic therapy.

 

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.

 

A Biofrontera® word mark is registered in Armenia, Australia, China, the EU, Iran, Japan, Norway, Russia, Singapore, South Korea, Switzerland, Syria and the U.S. with an international registration. Two national Biofrontera® word marks are registered in Chile for the classes 1 and 5, respectively.

 

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A Biofrontera® figurative mark is registered in Armenia, Australia, China, the EU, Germany, Iran, Japan, Norway, Russia, South Korea, Singapore, Switzerland, Syria and the U.S. with an international registration. Another Biofrontera® combined mark is registered in Switzerland and yet another Biofrontera® figurative mark is registered in the EU.

 

An Ameluz® word mark is registered in Armenia, Australia, China, Canada, the EU, Iran, Liechtenstein, Norway, Russia, Singapore, South Korea, Switzerland, Syria and the U.S. with an international registration. Other national Ameluz® word marks are registered in Germany and Israel.

 

A Belixos® word mark is registered in class 3 in Algeria, Armenia, Australia, Bahrain, China, the EU, Iran, Japan, Morocco, Norway, Russia, Singapore, South Korea, Sudan, Oman, Switzerland, Syria and the U.S. with an international registration. Other national Belixos® word marks are registered in Brazil, Germany, Kuwait, Lebanon, Qatar, Saudi Arabia, Tunisia, the United Arab Emirates and Yemen. Other Belixos® word marks are pending in Iraq and Libya. A Belixos® word mark is registered in class 5 in Armenia, Australia, China, the EU, Iran, Japan, Norway, Russia, Singapore, South Korea, Switzerland, Syria and the U.S. with an international registration. Other national Belixos® word marks are registered in Canada, Germany and Israel.

 

A BF-RhodoLED® word mark is registered in Armenia, Australia, China, the EU, Iran, Japan, Norway, Liechtenstein, Russia, Singapore, South Korea, Switzerland, Syria and the U.S. with an international registration. Other national BF-RhodoLED® word marks are registered in Canada, Germany and Israel.

 

A Rhodoled® word mark is registered in Armenia, Australia, China, the EU, Iran, Japan, Norway, Russia, Singapore, South Korea, Syria, and the U.S. with an international registration. Other national Rhodoled® word marks are registered in Canada, Germany and Israel.

 

As part of our acquisition of Cutanea in March 2019, we acquired rights to certain trademarks and trademark applications relating to Cutanea and AKTIPAK®, which are registered or pending, as applicable, in Brazil, Canada, the International Bureau (WIPO), South Africa and the United States.

 

Patents

 

We have filed for and received issued patents in various jurisdictions for our technologies relating to our nanoemulsion, nanoemulsions with 5-aminolevulinic acid, migraine prophylaxis and PDT.

 

We have been issued composition of matter patents for our nanoemulsion technology in the EU (for France, Germany, Italy, Spain, Switzerland and the United Kingdom), Australia, Belarus, Canada, Chile, China, Hong Kong, Israel, Japan, Mexico, New Zealand, Russia, South Africa, Singapore and Ukraine. Patent protection in these jurisdictions will expire on December 21, 2027. We have filed patent applications which are pending in Brazil, the United Arab Emirates and the U.S. The patent in India and patent applications in Paraguay and Uruguay were dropped in 2018.

 

We have been issued composition of matter patents for our technology relating to nanoemulsion of 5-aminolevulinic acid in Australia, Canada, the EU (for Germany and Switzerland), Israel and the U.S. Patent protection in these jurisdictions will expire on November 12, 2019.

 

We have been issued composition of matter patents for our technology relating to derivatives of 4-(thio- or selenoxanthene-9-ylidene)-piperidine or acridine and its use as a selective 5-HT2B receptor antagonist in Australia, Canada, China, the European Union (for Denmark, France, Germany, Italy, Netherlands, Spain, Sweden, Switzerland, Turkey and the UK), India, Japan, Russia, South Africa, South Korea and the U.S. Patent protection in these jurisdictions will expire on October 23, 2022. These patents relate to our developmental migraine prophylaxis product candidate BF-1. Since it will not be possible to bring these compounds to market prior to the patent expiry date, we dropped the patent in 2018.

 

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Instead, we have filed an international patent application regarding anti-migraine compounds and their use through the World Intellectual Property Organization and national phases have commenced in the EU and the U.S. The U.S. patent has been granted, expiring in January 2034.

 

A new PCT application “Improved photodynamic therapy” was filed with the European Patent Office (EPA) on August 23, 2018 (PCT/EP2018/072823). All countries which were members of the patent cooperation treaty (PCT) on the date of application, which includes the U.S., were listed in the filing.

 

We have additionally filed a German utility model for our technology relating to pharmaceutical and/or cosmetic compositions for treating skin, which provides a type of intellectual property protection for a period of ten years after filing of the application, so that it will expire on April 9, 2020.

 

The composition of matter patent family that protects the combination of nanoemulsions with aminolevulinic acid hydrochloride, an active ingredient in Ameluz®, against copying by competitors will expire on November 12, 2019. This patent family includes U.S. Patent No. 6,559,183, which is listed in the U.S. Food and Drug Administration Orange Book and identified as covering nanoemulsions combined with aminolevulinic acid hydrochloride, the active ingredient in Ameluz®. Upon expiration of this patent family, we will not be able to rely on the expired patents to prevent competitors from copying, making or selling the active ingredient used in Ameluz®. The additional patent application on the specific nanoemulsion developed for Ameluz® would extend the protection until December 21, 2027. This additional patent has been granted in many countries but has not yet been (and may never be) granted in the U.S. 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, that may deter potential generic competitors. Nonetheless, if we are unable to prevent manufacture and sales of the active ingredient in Ameluz® in combination with our specific nanoemulsion, we may not be able to maintain a competitive advantage in our market, which could materially adversely affect our business, results of operations and financial condition.

 

In connection with our acquisition of Cutanea in March 2019, we acquired an exclusive license in the U.S., Puerto Rico and the U.S. Virgin Islands to certain patent rights held by Ferrer Internacional, S.A. These 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.

 

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Competition

 

There are many pharmaceutical companies that compete with us in the field of dermatology, some also in the photodynamic therapy market. The pharmaceutical and biotechnology industry is characterized by intense competition and rapid and significant innovation and change. Our competitors may be able to develop other drugs or products that are able to achieve similar or better results than our product candidates or marketed products. Several of these companies have significantly greater experience than we do in developing products, conducting preclinical and clinical testing, and obtaining regulatory approvals to commercialize products for health care. Our competitors include organizations such as major multinational pharmaceutical companies, established biotechnology companies, specialty pharmaceutical companies and generic drug companies. Many of our competitors have greater financial and other resources than we have, such as more commercial resources, larger research and development staffs, and more extensive marketing and manufacturing facilities and organizations. Our competitors may succeed in developing, acquiring or licensing on an exclusive basis technologies and products that are more effective or less costly than Ameluz® or any other products that we sell or are developing or that we may develop, which could render our products obsolete and noncompetitive. Our competitiveness may also be affected by our ability to manufacture and commercialize our products and by the level of reimbursement for the cost of our drug and treatment by third party payors, such as insurance companies, health maintenance organizations and government agencies.

 

Competition in the EU

 

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. We believe that, historically, we lost sales of Ameluz® in the EU to Metvix because Metvix was approved in the EU to treat both actinic keratosis and basal cell carcinoma. Since obtaining our indication extension to treat basal cell carcinoma in the EU in 2016, we expect improved sales of Ameluz® in the EU because of our product’s generally higher clearance rates, especially for thicker and nodular carcinomas, as demonstrated in our clinical trials.

 

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; Picato® (Ingenolmebutat), sold by LEO 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.

 

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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 and basal cell carcinoma in addition to actinic keratosis.

 

In addition, based on our experience in the fiscal year ended December 31, 2018, we believe that the recent extension of our indications in the EU for Ameluz® to include daylight photodynamic therapy has allowed Ameluz® to better compete with Metvix® and Luxerm® and with other topical prescription drugs, which are widely used in Europe, leading to significantly improved revenue in Germany and other EU countries in the fiscal year ended December 31, 2018.

 

Competition in the U.S.

 

In the U.S., we believe dermatologists have favored cryotherapy to treat actinic keratosis because of a favorable reimbursement regime; however, we believe that the photodynamic therapy market in the U.S. for actinic keratosis treatment has been growing in recent years. In addition, we believe that there is treatment guideline pressure towards field-directed therapy (as opposed to single lesion therapy), which may also help support sales of photodynamic therapy treatments.

 

In the U.S., our treatment of actinic keratosis with Ameluz® in combination with our BF-RhodoLED® red light device competes with Levulan®, an approved photodynamic therapy drug for actinic keratosis used in combination with a blue light lamp. The Ameluz® approval covers both lesion-directed and field-directed treatment, while the Levulan® approval is restricted to lesion-directed treatment. In addition, we also compete with a number of non-photodynamic therapy products for the treatment of actinic keratoses and certain other skin conditions similar to those listed above under “—Competition in the EU”, as well as cryotherapy with liquid nitrogen.

 

Because our approval for Ameluz® in the U.S. covers not only lesion-directed treatment, but also field-directed therapy, we believe our approval provides us with the ability to provide broader treatment possibilities compared to certain competitor products.

 

In addition, in August 2017, we agreed with the FDA on the requirements for the potential approval of our application to extend Ameluz® PDT for the treatment of superficial basal cell carcinoma in the U.S. Under the agreed plan with FDA, our application could be based on a single additional Phase III pivotal trial to be conducted in the U.S., in which Ameluz® PDT will be compared to placebo PDT. FDA requested a combined read-out of clinical and histological clearance. The trial started in September 2018. Clinical trial results are expected in the first half of 2020, and we anticipate submission of our approval supplement to the FDA during the second half of 2020. If the FDA approves this application, we believe this will further enhance our competitive advantage in the U.S.

 

Competitive Outlook

 

We expect that comparisons of the properties of various photosensitizing photodynamic therapy drugs will also highlight important competitive issues. We expect that our ability to compete with other photodynamic therapy companies will be based upon such factors as:

 

  the efficacy from treatment with Ameluz® photodynamic therapy as compared to other treatment options;

 

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  the lower recurrence rates from treatment with Ameluz® photodynamic therapy as compared to other treatment options;
     
  the ease of administration of our photodynamic therapy, including with respect to the ease of application of our formulation and the duration of illumination time;
     
  the ability of our drug to provide both lesion- and field-directed treatment;
     
  the ability of our drug to treat different indications;
     
  the cost of our drug and the type and cost of our photodynamic therapy light device;
     
  the number of required doses; and
     
  the cosmetic outcome and improvement of skin impairment.

 

We expect any products that we develop and commercialize to compete on the basis of, among other things, efficacy, safety, cosmetic outcome, convenience of administration and delivery, price and the availability of reimbursement from government and other third-party payors. We also expect to face competition in our efforts to identify appropriate collaborators or partners to help commercialize our product candidates in our target commercial markets. New drugs or future developments in photodynamic therapy, laser products or other drug technologies may provide therapeutic or cost advantages for competitive products. No assurance can be given that developments by other parties will not render our existing products or product candidates uncompetitive or obsolete.

 

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 major shareholder of our company. The term of our agreement with Maruho initially expired on December 31, 2017 and was extended to March 31, 2018. On March 19, 2019, we signed an agreement with Maruho to continue the expired research cooperation and a non-binding term sheet with Maruho with respect to a potential cooperation agreement regarding research and development of further indications for Ameluz® for the treatment of acne. We continue to negotiate with Maruho regarding certain details relating to this next phase of our collaboration. For more information, see “Business — Our Research and Development Plans — Our Development Collaboration with Maruho.

 

We have a license and supply agreement with Desitin Arzneimittel GmbH to market and sell Ameluz® and the BF-RhodoLED® lamp in Denmark, Sweden, and Norway; and we have a license and supply agreement with Pelpharma Handels GmbH to market and sell Ameluz® and the BF-RhodoLED® lamp in Austria.

 

In July 2015, we terminated a marketing collaboration agreement with Spirit Healthcare Limited to market Ameluz® in the UK and Ireland, and in April 2018 we commenced our own sales activities in the UK.

 

On September 13, 2017, we terminated our license and supply agreement with BiPharma B.V. in the Netherlands and Belgium, effective as of October 31, 2017.

 

We initially marketed and sold Ameluz® in Spain pursuant to an agreement with Allergan SA. After termination of this agreement, since March 2015 we have marketed and sold our products in Spain through our branch, Biofrontera Pharma GmbH sucursal en España.

 

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. We have a 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. In these regions, the licensees were required to obtain independent regulatory approvals in collaboration with Biofrontera. In Switzerland, the regulatory approvals for Ameluz® for actinic keratosis and reimbursement were issued in December 2015 and commercial launch commenced in the beginning of 2016. In September 2018, Ameluz® was approved in Switzerland for 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. In Israel, regulatory approval for Ameluz® was granted by the Israeli health agency in April 2016, reimbursement for treatment with Ameluz® of immunosuppressed patients was subsequently granted. We commenced sales in Israel in August 2017.

 

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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 60% of net revenue.

 

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.

 

We rely on two suppliers to obtain 5-aminolevulinic acid (5-ALA), the active pharmaceutical ingredient contained in Ameluz®. Hapila GmbH (“Hapila”), located in Germany, manufactures 5-ALA directly for us. Midas Pharma GmbH (“Midas”), located in Germany, relied on two sub-contractors, located in India and Italy, to manufacture the 5-ALA that it supplies to us. The sub-contractor in India has been removed from the list of registered manufacturers for 5-ALA in 2018, after this company went out of business. 5-ALA provided by Hapila is approved for use in Ameluz® in the EU, Switzerland and Israel. 5-ALA provided by Midas is approved for use in the U.S. and the EU. Pursuant to our contracts with Hapila and Midas, those entities supply, upon request by us, the volumes of 5-ALA that we require according to pre-agreed specifications. Our contract with Hapila has an initial term through May 2020. Thereafter, the contract with Hapila automatically renews for one-year periods, unless it is terminated by us upon 6 months’ prior notice. Our contract with Midas has an initial term through December 2021. Thereafter, the contract with Midas automatically renews for one-year periods, unless it is terminated by either party by notice to the other party given 6 months prior to the end of the initial contract term or renewal period, as applicable.

 

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® under an operating lease expiring on June 15, 2019. This lease extends automatically 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 Wakefield, Massachusetts. We lease approximately 5,300 square feet at this facility, in which we house our U.S. corporate offices under a sub-lease agreement expiring on June 15, 2019. We have entered into a new lease agreement effective June 1, 2019 according to which we will move our U.S. corporate office to new office facilities in Woburn, Massachusetts. The new office space will comprise approximately 10,372 square feet. The lease agreement has an initial term until September 2025.

 

Government Regulation

 

Regulation by governmental authorities in the U.S. and other countries is a significant factor in the development, manufacture and marketing of pharmaceutical products and in ongoing research and development activities. All of our products will require regulatory approval by governmental agencies prior to commercialization. In particular, pharmaceuticals are subject to rigorous preclinical testing and clinical trials and other pre-marketing approval requirements by the FDA and regulatory authorities in other countries.

 

Government authorities in the U.S. (at the federal, state and local level) and in other countries extensively regulate, among other things, the research, development, testing, manufacturing, quality control, approval, labeling, packaging, storage, record-keeping, promotion, advertising, distribution, post-approval monitoring and reporting, marketing and export and import of drug and medical device products such as those we are developing. Ameluz® and our medical device products are only marketed in certain countries and our products and product candidates must be approved or cleared by the FDA before they may be legally marketed in the U.S. and by the appropriate foreign regulatory agency before they may be legally marketed in foreign countries.

 

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U.S. Drug Development and Review

 

Drug Development Process

 

Post-Approval Requirements for Approved Drugs

 

Any drug products for which we receive FDA approvals are subject to continuing regulation by the FDA, including, among other things, record-keeping requirements, reporting of adverse experiences with the product, providing the FDA with updated safety and efficacy information, product sampling and distribution requirements, and complying with FDA promotion and advertising requirements, which include, among other requirements, standards for direct-to-consumer advertising, restrictions on promoting drugs for uses or in patient populations that are not described in the drug’s approved labeling (known as “off-label use”), limitations on industry sponsored scientific and educational activities, and requirements for promotional activities involving the internet. Although physicians may prescribe legally available drugs for off-label uses, manufacturers may not market or promote such off-label uses.

 

In addition, quality control and manufacturing procedures must continue to conform to applicable manufacturing requirements after approval. We are relying exclusively on our manufacturing partner’s facilities for the production of clinical and commercial quantities of our products in accordance with cGMP regulations. cGMP regulations require among other things, quality control and quality assurance as well as the corresponding maintenance of records and documentation and the obligation to investigate and correct any deviations from cGMP. Drug manufacturers and other entities involved in the manufacture and distribution of approved drugs are required to register their establishments with the FDA and certain state agencies, and are subject to periodic unannounced inspections by the FDA and certain state agencies for compliance with cGMP and other laws. Accordingly, manufacturers must continue to expend time, money and effort in the area of production and quality control to maintain cGMP compliance. Discovery of problems with a product after approval may result in restrictions on a product, manufacturer or holder of an approved NDA, including, among other things, recall or withdrawal of the product from the market. In addition, changes to the manufacturing process are strictly regulated, and depending on the significance of the change, may require prior FDA approval before being implemented and development of and submission of data to support the change. Other types of changes to the approved product, such as adding new indications and additional labeling claims, are also subject to further FDA review and approval, as well as, possibly, the development and submission of data to support the change.

 

The FDA also may require post-approval, sometimes referred to as Phase 4, trials and surveillance to monitor the effects of an approved product or place conditions on an approval that could restrict the distribution or use of the product. Discovery of previously unknown problems with a product or the failure to comply with applicable FDA requirements can have negative consequences, including adverse publicity, judicial or administrative enforcement, warning letters from the FDA, mandated corrective advertising or communications with doctors, and civil or criminal penalties, among others. Newly discovered or developed safety or effectiveness data may require changes to a product’s approved labeling, including the addition of new warnings and contraindications, and also may require the implementation of other risk management measures, such as a risk evaluation and mitigation strategy. Also, new government requirements, including those resulting from new legislation, may be established, or the FDA’s policies may change, which could delay or prevent regulatory approval of our product label extensions or products under development.

 

Pervasive and Continuing FDA Regulation for Medical Devices

 

After a device is placed on the market, regardless of its classification or premarket pathway, numerous regulatory requirements apply. These include, but are not limited to:

 

  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;

 

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  labeling statutes and regulations, which prohibit the promotion of products for uncleared or unapproved, or off-label, uses and impose other restrictions on labeling;
     
  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;
     
  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.

 

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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”).
     
  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.

 

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  As of 2010, a new Patient-Centered Outcomes Research Institute was established pursuant to the Affordable Care Act to oversee, identify priorities in, and conduct comparative clinical effectiveness research, along with funding for such research. The research conducted by the Patient-Centered Outcomes Research Institute may affect the market for certain pharmaceutical products.
     
  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.
     
  National MAs, which are issued by the competent authorities of the Member States of