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Biofrontera AGÂ (BFAG.Y)
Q1Â 2020 Earnings Call
May 20, 2020, 8:00 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Dear, ladies and gentlemen, welcome to the Conference Call of Biofrontera AG. [Operator Instructions]
Now, may I hand you over to Pamela Keck, Head of Investor Relations, who will lead you through this conference. Please go ahead.
Pamela Keck -- Head of Investor Relations
Thank you. Good morning and welcome to Biofrontera's earnings conference call for the first quarter 2020. Yesterday, we issued a press release announcing financial results for the three months ended March 31st, 2020. We encourage everyone to read the press release as well as the quarterly report, both of which are available on our website at www.biofrontera.com.
Please note that certain information discussed on the call today is covered under the safe harbor provisions of the Private Securities Litigation Reform Act. We caution listeners that during this call, Biofrontera's management will be making forward-looking statements. Actual results could differ materially from those stated or implied by these forward-looking statements due to risks and uncertainties associated with the Company's business. All risks and uncertainties are detailed in and are qualified by the cautionary statements contained in Biofrontera's press releases and SEC filings.
This conference call contains time-sensitive information that is accurate only as of the date of this live broadcast, today, on May 20th, 2020. Biofrontera undertakes no obligation to revise or update any forward-looking statements to reflect events or circumstances after the date of this conference call.
With that I would now like to turn the call over to Hermann Lubbert, our CEO.
Hermann Lubbert -- Chief Executive Officer
Thank you, Pamela, and thank you today very much, ladies and gentlemen for taking the time to participate in today's call. With me today is Thomas Schaffer, our CFO. He will present the final financial results in a second. I will then summarize the general business development and clinical updates and will provide an update on the current status of our commercial efforts. I will then also briefly comment on the upcoming Annual General Meeting and the proposed capital measures. But first, let's have a look at the financial results of the first quarter. For that, I would like to hand over to Thomas Schaffer.
Thomas Schaffer -- Chief Financial Officer
Thank you, Hermann. Good morning, good afternoon, everyone on the call. Welcome to Biofrontera and thanks for joining us today. I would like to start by giving you an overview of the financial results for the first quarter of 2020 for the period from January 1st to March 31, 2020, consolidated sales of EUR6.5 million reflect the decrease of 5% compared to the same period of last year. Following the fourth quarter of 2019 which was the best quarter in the Company's history to date, we experienced a mixed business performance in the first quarter.
In early 2020, sales in our largest market, United States were slightly lower than expected due to stockpiling of Ameluz by doctors at the end of 2019 prior to the price increase effective as of January 1st. Between mid-February and mid-March 2020 we were then able to generate sales revenues in line with our original budget. However, due to the coronavirus crisis in the second half of March, revenue dropped close to zero. While we were able to achieve product sales of EUR4.2 million in our largest market in the first quarter, this represents a decline in sales of 19% compared to EUR5.2 million in the same period last year.
Sales in Germany kicked off the new very strongly, clearly exceeding our expectations. Despite falling sales figures in March, product sales in the first quarter of 2020 rose by 22% to EUR1.3 million. Contributing to this positive development were our marketing and sales activities in connection with the label extension for Ameluz approved by the European Commission in March. We also succeeded in increasing our sales in other European countries during the reporting period from EUR0.6 million in Q1 2019 to EUR0.8 million this year. Apart from larger shipments to license partners, the extremely positive business development in Spain, prior to the start of the strict lock-down regulations, there was particularly noteworthy.
Gross profit on sales declined to EUR5.7 million compared to EUR5.9 million in the same period last year. The gross margin remained almost unchanged at 88% compared to 86% in the first quarter '19. Research and development cost amounted to EUR1.3 million compared to EUR1.1 million in the first quarter 2019. R&D costs primarily include costs for clinical studies as well as regulatory expenses, fees for maintaining and extending our regulatory approvals.
General, administrative expenses [Technical Issues] to EUR2.2 million compared to about EUR2 million in the previous-year period. The increase of about 13% is mainly due to the further development of our organizational structures during the course of the previous year. Sales and marketing costs totaled EUR8.7 million, a steep increase of EUR3.1 million or 57% compared to the same period in 2019. This increase is primarily due to the periodic amortization of Xepi license in the amount of EUR500,000 as well as the extra -- extraordinary impairment in the amount of EUR2 million resulting from the revaluation of the Xepi license in light of the current market situation. Both impairments are non-cash items.
That's the brief explanation. The COVID-19 pandemic was a so-called non-adjusting event, within the meaning of the applicable accounting guidelines. This means that we have prepared our financial statements for 2019, with the information available as of December 31, 2019. The corona crisis was not reflected therefore in these figures. At the end of the first quarter, we have now reassessed business plan for Xepi and performed an impairment test on the license. Based on the lower business expectations for Xepi from today's point of view, this resulted in a writedown of the Xepi license in the amount of approximately EUR2 million.
In this context, this also reduces the purchase price liability for the profit share to be paid to Maruho at a later date. For this purpose, we have recorded an income of EUR0.4 million under other income. We have also adjusted the interest accrued from the performance component of the EIB loan. This interest component is dependent on the market capitalization of Biofrontera. Since the market cap on March 31, was significantly lower than on December 31, 2019, an adjustment of EUR200,000 was made with an effect on other income.
In the first three months of 2020, the loss before tax amounted to EUR5.5 million, a decline of EUR2.9 million compared to a loss of EUR2.6 million in the prior-year period. This change is mainly due to the negative sales development described earlier. The impairment of the Xepi license as well as further expanding our operating activities. Cash and cash equivalents amounted to EUR7.8 million as of March 31 compared to EUR11.1 million as of December 31. This means that we currently still have sufficient liquidity available. However, in order to be able to maintain business operations reliably over a period of at least 12 months and to adequately finance our growth opportunities, we will require additional funding in the course of this year.
To this end, we have proposed an authorized capital increase to the Annual General Meeting to be held on May 28. More on this later. It is currently impossible to foresee how long and how strongly the pandemic will affect the economy. Still no reliable estimate or more precise quantification of the specific implications for sales and earnings can be made for the 2020 financial year. For this reason, Biofrontera's ability to forecast a significantly impaired [Technical Issues]. In its initial budget for the 2020 financial year, the Group had assumed a 25% increase in revenue compared to the previous year and operating costs at approximately the same level as the previous year.
However, the effects of the coronavirus pandemic may lead to a significant deviation from previous projections and to a noticeable decline in sales compared to previous plans. The anticipated reduced revenue will also have a negative impact on the profitability and the liquidity of the Group in the 2020 financial year as the lack of revenue may not be fully offset by cost reduction measures.
I would now like to hand over to Hermann Lubbert again, so that he can provide you with an update on current operational and strategic developments.
Hermann Lubbert -- Chief Executive Officer
Thank you, Thomas. Sales developed very positively at the beginning of the year before the COVID-19 pandemic and the associated restrictions had a strong impact on our business. With the restructuring of our US sales organization. We were able to further improve the positioning of all products and further accelerate market penetration. In particular, our already well-established product Ameluz will benefit from the experienced gains and methodically generated markets data, which will allow us to market it more efficiently and in a more targeted manner once business activities have fully resumed.
Since March, official recommendations by the American Academy of Dermatology, the largest dermatology organization in the United States to provide patients with remote diagnosis and treatment where possible during the crisis, resulted in a significantly -- significant decline in the number of patients treated in dermatology practices as well as temporary practice closures. After sales of our products have dropped to almost zero, we currently expect the situation to improve soon due to the increasing relaxation of measures to combat the coronavirus in some US states. Medical offices are already reopening and patients are increasingly willing to visit their doctors for treatment of actinic keratosis. At present, we are already observing a slow recovery of our US business, but cannot yet, says its dynamics conclusively.
In some US states, sales representatives are beginning to visit doctors' offices again. Apart from that, our focus in the USA is currently on preparatory work in order to take full advantage of the business opportunities arising from the expected pent-up demand for photodynamic therapy and thus Ameluz as quickly and effectively as possible after the crisis. In addition, we expect further growth in the USA from an equally more efficient exploitation of the market potential of Xepi.
In Germany, marketing and sales were able to successfully use the label extension as well as the current study data to communicate the advantages of Ameluz to dermatologists even during the crisis, albeit only in a written or electronic format. It was precisely during this period that the advantages of daylight PDT, which can be performed without direct contact with the doctor and then consistently good weather became apparent. In fact, we are told that some patients accurately preferred to undergo PDT at the moment, because the current contact restrictions meant that they had fewer concerns about the potentially visible side effects of the treatment.
Although our sales to wholesalers had declined significantly in April, pharmacy sales suffered considerably less as a result. In Spain, revenue growth was exceptionally strong prior to the strict lock-down restrictions introduced to the COVID-19 pandemic, which makes us confident that revenue will recover quickly once the restrictions are lifted. In January, following the reorganization of the US subsidiary, Biofrontera Inc., we also will start just the sales organization in Europe.
Biofrontera's worldwide sales organization now stands on two pillars, sales and marketing in the USA, Biofrontera's largest market and the unified management of all sales organizations in Europe. There was also positive news beyond our geographical key markets. Subsequent to the end of the first quarter on April 20, 2020, we signed an exclusive licensing agreement with Maruho for the commercialization and further development of Ameluz in all indications in East Asia and Oceania. This partnership gives us the opportunity to generate long-term revenues in markets at low cost and low business risk that we will not be able to serve with our own resources in the foreseeable future. At the same time, it allows us to focus on the USA and Europe, which are the most significant and already established markets for us.
The agreement with Maruho has a term of 15 years from the commencement of sales and includes milestone payments, royalties on sales and above all, an immediate upfront payment of EUR6 million. This one-time payment has already been received and is currently helping Biofrontera to ensure the necessary level of liquidity and maintain business operations during the unprecedented crisis. Alongside our commercial achievements since the beginning of the year, we also recorded further successes on the regulatory side. In March, the European Commission approved the label extension for Ameluz to include the treatment of actinic overdoses on the extremities as well as the tongue and neck. This puts Ameluz one step ahead of its competitor product.
Furthermore, the European Commission has allowed the inclusion of an additional superiority claim compared to the competitor product into the Ameluz product information. Compared to the competitor products Metvix and Luxerm, the follow up of the comparative study with daylight PDT showed significantly lower recurrence rates. During reporting period, the first patients enrolled in the pharmacokinetic study in the USA were treated to evaluate the safety of PDT using three tubes of Ameluz. This study is a prerequisite for the treatment of larger body areas with several tubes of Ameluz and aligning reimbursement modalities with those of our US competitor product. Following a temporary interruption of the study, patients cleaning has already been resumed following the first relaxation of the contact ban in the USA.
We are also working diligently to complete the development and the application for approval of the new BF-RhodoLED XL lamp which enables the application of Ameluz to larger areas. And we are continuing to pursue patient recruitment in the phase III study for the treatment of basal cell carcinoma with Ameluz in the United States. Despite the difficult conditions, we are striving to maintain the various clinical trials and to meet the communicated timelines to the extent possible. In addition, we are preparing studies to include the treatment of actinic keratosis in the periphery since the current label in the USA on the covers head and scalp. This will raise the approval for our key market to the same level as we have already achieved in Europe.
The phase III study for the treatment of basal cell carcinoma with Ameluz in the United States is an additional focus of the ongoing development of Ameluz patient. Here, patient recruitment has also resumed after the coronavirus related interruption. Despite the difficult conditions, we are working intensively to maintain the various clinical studies and to meet the communicated timelines as far as possible. An additional quite substantial market for PDT in the USA is moderate to severe acne. After the US Food and Drug Administration has already responded to our proposed clinical development plan, the necessary clinical trials are expected to begin this year, assuming the Company can commit the necessary financial resources. The faster we can implement our study program, the faster we can expand our sales activities primarily in our major market, the US.
The study program requires considerable financial resources, but ultimately serves as an investment into the continued future goals of Biofrontera. All these promising long-term initiatives require additional financial resources for investment in future growth. This is why we have decided to propose an authorized capital increase of up to 20% of our share capital to the Annual General Meeting scheduled for May 28, 2020. We trust our shareholders will support this proposal. The capital increase is vitally important for Biofrontera and for its future development. It would provide the Company with sufficient liquidity in the medium term as well as provide important flexibility for its strategic growth projects. Above all, the proceeds from the capital increase would enable us to better exploit the existing marketing -- market potential for actinic keratoses with Ameluz and for impetigo and MRSA with Xepi through our reorganized sales structure in the United States. Furthermore, the guaranteed progression of clinical trials would pave the way for the development of potential new growth markets, such as the treatment of acne with Ameluz in the US.
This capital increase is planned to be offered as rights offering to all shareholders. Each shareholder will have the opportunity to participate in the capital measure regardless of his or her approval at the Annual General Meeting. The Annual General Meeting will merely create the necessary framework for the capital increase. The decision on participating in the Company's financing remains entirely with the shareholders. Despite the impact of the current pandemic, the strategic growth drivers, which allow -- which will allow Biofrontera to profit in the long-term remain intact.
Actinic keratosis is a large market, both in the USA and in Europe. The reimbursement framework in the USA continues to expand. We continue to be granted important label extensions for Ameluz. Daylight PDT is gaining additional acceptance in Europe. And the demand for new antibiotics is undisputed. The strategic deployment of the proceeds should significantly accelerate revenue growth once the acute coronavirus crisis is behind us. We expect a return to the growth path later this year. We believe that given the necessary financial resources, Biofrontera has the potential to emerge stronger from the crisis than it was before.
I would now like to open the line for questions, and thank you for your time.
Questions and Answers:
Operator
Thank you. We will now begin our Q&A session. [Operator Instructions] Our first question is from Bruce Jackson from The Benchmark Company. Bruce, you may begin the question.
Bruce Jackson -- The Benchmark Company -- Analyst
Thank you. A couple of questions for Thomas. On the cash flow, for the first quarter, do you happen to have the operating cash flow number and the capex number?
Thomas Schaffer -- Chief Financial Officer
The capex is pretty much zero, since we are typically a company that doesn't need capital expenditures for its business, we don't need any production equipment and so on. And other than this, we do not prepare cash flow statements on a quarterly basis. We would do this on the -- in the semi-annual report.
Bruce Jackson -- The Benchmark Company -- Analyst
Okay. And then [Technical Issues] with the income statement going forward, and in particular, the operating expense line, I know that you've instituted a number of cost management programs. You've also -- you've had some change in your litigation expense. Do you have like a general target for operating expenses going forward? Is it going to be down over first quarter or about the same or at some point will it be moving back up?
Thomas Schaffer -- Chief Financial Officer
Yeah. So one -- we have this one extraordinary item in the operating expenses, which is the EUR2 million impairment on the Xepi license, which is recorded under sales cost this year. If you take that out of the equation, we would still expect that our operating expenses go down, would become lower in Q2. Simply because the measures we've taken, the cost reduction measures we've taken were effective beginning of mid-March. So at least in January and February, before the crisis, we were still operating kind of at full expenses. So in general, G&A and sales costs will be reduced in Q2 and going forward.
With regard to legal expenses, these are already significantly lower than the quarterly level we experienced in 2018 and in 2019. However, it's difficult to predict how these are going to turn out in the future, simply because the most important -- the most expensive trial is the DUSA litigation in Massachusetts. And for that one, we're waiting for the judge in Massachusetts to rule on further proceedings and on the timeline. Currently, there is hardly or no activity on that trial, and therefore, almost zero expenses these days.
Bruce Jackson -- The Benchmark Company -- Analyst
Okay, great. That's helpful. And then Hermann, you mentioned that -- you talked a little bit about Xepi. Can you just remind us where you are on the marketing plans for that product? I know there are some things that need to be put in place in terms of the marketing framework and distribution. And is that something that you're ramping up right now?
Hermann Lubbert -- Chief Executive Officer
Yes. It's clearly something that we intend to ramp up in the course of the year. After we took it over or when we took it over last year, Xepi wasn't covered by a single insurance company in the United States, and because of that, created a loss with every tube sold. And we are far away from this now -- right now more than 150 million US citizens are actually covered for Xepi without any pre-condition. And that, of course, changes the situation with Xepi drastically. So we do expect that now once the corona crisis is over and our reps can go out and start talking about it, in the -- really the first time that really intensively that we see sales for Xepi also coming up rapidly.
Bruce Jackson -- The Benchmark Company -- Analyst
All right. Those are the questions I had. Thank you very much.
Hermann Lubbert -- Chief Executive Officer
Thank you, Bruce.
Thomas Schaffer -- Chief Financial Officer
Thank you.
Operator
Thank you. [Operator Instructions] Moving on to the next question from Thomas Flaten from Lake Street Capital Markets. Thomas, you may now begin the question.
Thomas Flaten -- Lake Street Capital Markets -- Analyst
Good morning, good afternoon, guys. Thanks for taking the questions. Hermann, one for you. You mentioned the FDA feedback on the acne study design. Could you provide a little bit of detail on what that study might look like? And I know timing is dependent on capital. But just some more information on -- any color that you could provide would be great?
Hermann Lubbert -- Chief Executive Officer
Well, that's really straightforward. So the FDA gave us indications for some details that they like to see, which didn't really change our plan. So, basically what we tried to do is, we tried to stick with the same concentration of the active ingredient that we also use in the current Ameluz and -- but we play with the incubation time. So we do the clinical trials, the different incubation times -- the phase II trial, there's different incubation times, and then placebo, and select the best incubation time for phase III trials.
Thomas Flaten -- Lake Street Capital Markets -- Analyst
And if we assume that starts -- let me ask it differently. What -- over what time period do you think that could be completed, the phase II studies assuming the capital was in place?
Hermann Lubbert -- Chief Executive Officer
I think the study can be performed relatively quickly, because there are so many patients out there who would be willing to go into the study. The phase II study also doesn't have an extensive follow-up, which of course, would be an interesting question to ask, but we reserve that question to the phase III trial. So this could actually be done probably in about a year's time.
Thomas Flaten -- Lake Street Capital Markets -- Analyst
Great. And then with respect to the to the US salesforce, could you comment on how many reps are currently employed? And the second question to that is, during the crisis, have they been engaging with the customers virtually or have they been largely at a standstill given office closures etc.?
Hermann Lubbert -- Chief Executive Officer
In the US, we currently have 30 reps over there. So we reduced the number of reps slightly when we went into cost cutting measures. It also gave us an opportunity, of course, to optimize the sales territories at the same time. And during the crisis, basically they did three things. They did stay in contact with the doctors virtually where that was possible, a number of -- a large number of the dermatology offices were just closed, but others stayed open and the reps did have a chance to actually be in touch. But they also prepared -- and that was the major task for them, they've prepared for the time after. So basically, categorize and prioritize the customer base in the territories and plan for the time when they can actually go out physically again. And in parallel, they were trained by our new marketing staff about the sales efforts and where we want to put our core efforts afterwards.
And, so that kept them busy during those times. And now, as I said before, in some states, the reps can already start to go out. In Germany, we -- just on the side, in Germany, we have the reps starting to go out this week. So it's all sort of loosening up a little bit. Obviously, not everywhere in the United States, the Northeast is still pretty much closed, but they're somewhere in the center, and also in the Southeast or in the West. First visits are already possible again.
Thomas Flaten -- Lake Street Capital Markets -- Analyst
Thanks for all that detail. Just one final one from me. Following up on Bruce's question about Xepi. Over the -- well, pick a time period, that I'm just trying to understand what the magnitude of that sales opportunities for you, whether that's, this year, next year, whatever time period you think is appropriate, what kind of sales goals are you looking at for that product?
Thomas Schaffer -- Chief Financial Officer
Well, I'd say EUR1.5 million to EUR2 million revenue this year provided that we -- we come back to normal fairly soon in the United States. But that certainly is not going to be peak sales. That's something we're going to experience in a couple of years only. But I would say that certainly has -- more than double digit, millions in revenue numbers on an annual basis.
Thomas Flaten -- Lake Street Capital Markets -- Analyst
Great. Thanks, guys. I appreciate the [Technical Issues].
Thomas Schaffer -- Chief Financial Officer
Thank you.
Hermann Lubbert -- Chief Executive Officer
Thanks, Thomas.
Operator
Thank you. [Operator Instructions] As there are no further questions at this moment, I'll hand the session back to you Pamela. Please go ahead.
Pamela Keck -- Head of Investor Relations
Thank you, everyone for joining us today, and enjoy the rest of your day.
Hermann Lubbert -- Chief Executive Officer
Yeah, thank you very much.
Thomas Schaffer -- Chief Financial Officer
Thank you.
Operator
[Operator Closing Remarks]
Duration: 34 minutes
Call participants:
Pamela Keck -- Head of Investor Relations
Hermann Lubbert -- Chief Executive Officer
Thomas Schaffer -- Chief Financial Officer
Bruce Jackson -- The Benchmark Company -- Analyst
Thomas Flaten -- Lake Street Capital Markets -- Analyst
