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Biofrontera AGÂ (BFAG.Y)
Q2Â 2020 Earnings Call
Aug 27, 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] After the presentation there will be an opportunity to ask questions. [Operator Instructions]
May I now hand you over to Pamela Keck, Head of Investor Relations, who will lead you for this conference. Please go ahead, madam.
Pamela Keck -- Head of Investor Relations
Thank you. Hello and welcome to Biofrontera's earnings conference call for the first half of 2020. Yesterday, we issued a press release announcing financial results for the six months ended June 30, 2020. We encourage everyone to read the press release, as well as the interim report, both of which are available on Biofrontera's 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 August 27. Biofrontera undertakes no obligation to revise or update any forward-looking statements to reflect events or circumstances after the date of this conference call.And with that, I would now like to turn the call over to our CEO Hermann Lubbert.
Hermann Lubbert -- Managing Director and Chief Executive Officer
Thank you, Pamela. And thank you very much, ladies and gentlemen for taking the time to participate in today's call. With me today is Thomas Schaffer, our Chief Financial Officer. He will present the financial results in a second, I will then afterwards summarize the general business development and clinical updates and we'll provide an update on the current status of our commercial efforts. I will then also briefly comment on some strategic topics.
But first, let's have a look at the financial results for the first six months of 2020. For that I would like to hand over to Thomas Schaffer.
Thomas Schaffer -- Chief Financial Officer
Thank you, Hermann and thank you to everyone on the call for joining us today. I would like to start by giving you an overview of the financial results for the first half of 2020. In the first six months, we achieved a total revenue of EUR16.1 million, an increase of approximately 16%, compared to the same period last year. This however includes the one-time payment from Maruho under the license agreement, which we signed in April this year.
Revenues of EUR9.7 million were generated from product sales, a decrease of 30%, compared to the first half of 2019. Sales particularly in the second quarter were strongly influenced by the effects of the global Coronavirus crisis. Product sales in the United States experienced a significant impact due to the pandemic and amounted to EUR6.3 million almost 38% less than in the first half of 2019. This amount included EUR0.2 million from product sales of Xepi.
Given the circumstances, sales in Germany developed very positively. In the first six months of 2020, we were able to generate EUR2.4 million, an increase of 10%, compared to the previous year. Product sales in the remaining European countries amounted to EUR1 million, compared to EUR1.4 million in the prior year period.
Gross profit increased by EUR3.2 million in the first six months of 2020 to EUR14.6 million, compared to EUR11.4 million in the previous year period. The gross margin increased to 91%, compared to 82% in the same period of last year, mainly due to income from the one-time payment from Maruho under the license agreement, which does not have any directly associated cost of sales.
Research and development costs of EUR2.4 million for the first half of 2020 was slightly above last year's level of EUR2.3 million and include costs for clinical costs, as well as regulatory costs such as cost for obtaining, maintaining and expanding our market authorizations.
G&A, general and administrative expenses amounted to EUR4.4 million in the reporting period, compared to EUR7.8 million in the same period last year. This decrease was driven by the cost-saving measures introduced due to COVID-19 pandemic and also significantly lower legal costs. We were able to reduce our costs for sales and marketing by a total of EUR4 million, due to a special write-off of the Xepi license in the amount of EUR2 million, which was recorded in the first quarter of this year, only EUR2 million are reflected in our income statement in total. Our pandemic-related cost-cutting measures therefore showed a particularly strong impact here in sales and marketing.
Just one more word to the Xepi license. The continued uncertain business outlook, due to the COVID-19 crisis has had an impact on the valuation of certain assets and liabilities of the company. Reduced sales of Xepi have resulted in a different assessment of the medium-term business and profit outlook for this product and consequently in a reevaluation of both the balance sheet value of Xepi license and the purchase price liability to Maruho. It's right now somewhat difficult this time to compare our financial figures for this reporting period with those of the same period last year. As you may remember last year, we consolidated Cutanea for the first time and accounted for the purchase price allocation. Therefore, a few more explanations.
Earnings before taxes amounted to minus EUR5.2 million, compared to plus EUR9 million in the same period last year. In 2019, we accounted for other income in the amount of EUR17.4 million from badwill and EUR5.5 million from cost allocations to Maruho. These onetime effects excluded earnings before taxes have improved by approximately EUR2 million.
Cash and cash equivalents as of June 30 amounted to EUR10.6 million, compared to EUR11.1 million as of December 31. This amount includes the one-time payment of EUR6 million from Maruho, but of course not yet the proceeds from the recent capital measure in August, which closed after the reporting date.
To secure liquidity in the short term, on July 27, the company resolved to issue up to 2,638,150 bonds of a 1% qualified subordinated mandatory convertible bond 2020-'21 with a nominal value of EUR3 each and a total nominal value of up to EUR7.9 million. On August 18, we were able to announce that the mandatory convertible bond was fully placed. The gross proceeds from the issue accordingly amounted to EUR7.9 million. This has given us considerable financial levy and above all has enabled us to confirm our going concern assumption. The financing requirement of at least EUR5 million stated in our annual financial report 2019 to maintain business operations until the end of April 21 was met by the successfully completed capital measure. Thus, Biofrontera currently has sufficient liquidity as its disposal.
And finally, we confirm our revenue forecast of EUR34 million to EUR38 million for the 2020 financial year. However, due to the ongoing dynamic development of the Coronavirus pandemic, in particular, in the United States, our ability to forecast is still severely impaired. The company continues to assume that the expenditures in Q3 and Q4 this year will return to approximately the levels of Q1, 2020. In order to achieve the above mentioned revenue targets, it is necessary to increase spending and investing on sales and marketing, especially in the United States.
I would now like to hand over back to Hermann Lubbert again, so that he can provide you with an update on current operational and strategic developments. Over to you Hermann.
Hermann Lubbert -- Managing Director and Chief Executive Officer
Thank you, Thomas. We have previously reported on several occasions that sales developed very positively at the beginning of this year. This was before the COVID-19 pandemic with this associated restrictions severely impacted our business. In January, we significantly reorganized our global sales structure, which we had anticipated would further accelerate sales growth in the short-term. Since then, Biofrontera's global sales organization stands on two pillars: sales and marketing in the USA, Biofrontera's largest market and the uniform management of all sales organizations in Europe.
In the reporting period since mid-March, the dynamic development of the COVID-19 pandemic has led to declining sales figures especially in the USA and has forced us to implement companywide cost-reduction measures. We introduced short-term working for all employees in Germany and took comparable measures at our other European locations.
Our wholly owned US subsidiary Biofrontera Inc. reduced its workforce by 17 employees and at the same time, implemented a furlough program in which all employees were obliged to take temporary unpaid leave. In the meantime, due to the improvement of the general economic situation and the balancing of savings with a delay of strategically important progress, these measures have been discontinued. The overall decrease in revenues related to the pandemic was, however, compensated by the positive sales development in Germany and the one-time payment from Maruho under the licensing agreement.
As Mr. Schaffer has already mentioned, total sales in the first half of the year were significantly higher than in the previous year, although pure product sales declined. Since March, increasing numbers of infections, as well as the 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 significant decline in the number of patients treated in dermatology practices, as well as temporary practice closures.
As a result, our US sales plummeted. After-sales of our products had initially dropped to almost zero in April. We have been able to observe a slow recovery of our US business since May and June. In many parts of the US, medical practices have at least partially reopened and patients are increasingly willing to undergo treatment for actinic keratoses.
In spite of the recovery that has since started, we still find it difficult to assess the situation due to the continuing dynamics of the Coronavirus crisis, which is developing with a time lag in many US states. It also remains to be seen, how pronounced the traditional seasonality in Ameluz sales will be this year, compared to previous years. The strengthening of the commercial alignment of the US business through the reorganization of Biofrontera Inc., which came into effect in January will continue in the second half of the year.
In particular, the marketing expertise in the company has been significantly strengthened in the current year and will be further expanded in the future. Through broadening of our marketing resources as well as the successful establishment of Xepi co-payment program for patients, we expect a more efficient exploitation of the market potential for both products Ameluz and Xepi and thus further growth in the USA.
In Germany, marketing and sales were able to successfully use the recent label extension for the treatment of actinic keratoses on the extremities and trunk and neck to communicate the advantages of Ameluz to dermatologists even during the crisis albeit only in written-off electronic format. It was precisely during this period of contact restrictions and avoidance that the advantages of daylight PDT became very apparent, which could easily be performed in the consistently good weather we had this year and without direct contact to a doctor.
In the remaining EU markets, we were initially able to record a very positive sales trend. Particularly in Spain, revenue growth was exceptionally strong prior to the strict lockdown measures introduced due to the pandemic. However, already, we can detect a recovery in sales there as well as in the UK. This gives us confident that we will soon be able to build on our sales successes to-date and experience a rapid recovery in sales.
There was also positive news beyond our geographical key markets. Subsequent to the end of the first quarter on April 20 of this year, 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 would 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 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, which we have already received in April.
Alongside, our commercial achievements since the beginning of the year, we also recorded further successes in the clinical and regulatory side. In March, the European Commission approved the label extension for Ameluz to include the treatment of actinic keratoses on the extremities, as well as the trunk and neck. This puts Ameluz one further 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 identical competitor products Metvix and Luxerm, the follow-up of the comparative study with daylight PDT, showed significantly lower recurrence rates after PDT with Ameluz.
During the 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 pre-requisite for the treatment of larger body areas with several tubes of Ameluz and aligning reimbursement modalities with those of the US competitor product. Following a temporary interruption of the study, patient screening has already been resumed following the first relaxation of the contact ban in the United States.
We're also working diligently to complete the development of the new PDT lamp BF-RhodoLED XL, which enables the application of Ameluz on larger areas. Despite some delays due to the ongoing pandemic, the currently prepared application for marketing authorization together with the results of the pharmacokinetic study is expected to be submitted to the FDA in the second half of the year. 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 time lines to the extent possible.
An additional to provide substantial market for PDT in the USA is moderate to severe acne. After the FDA has already responded to our proposed clinical development program, the necessary clinical trials are expected to begin any time assuming the company can commit the necessary financial resources. The studies required by the FDA to extend the label of Ameluz to the treatment of AK also in extremities and trunk and neck also depend on the funding of the continued future growth of Biofrontera over and above the recently successfully completed capital measure.
This leads me to my next point. If we are to quickly realize the considerable future growth potential that we see for Biofrontera, we need additional capital to support this growth. The company's growth strategy is supported by the vast majority of our shareholders. At the Annual General Meeting in May this year, an ordinary capital increase of up to 20% of the company's share capital was approved. The funds from this capital increase are to be used for accelerated growth and the implementation of the study plans. That said, we expect a recovery in sales in the second half of the year along with the slowdown in infection rates and some normalization of the economic situation particularly in the US.
As mentioned by Mr. Schaffer, we are therefore maintaining our revenue guidance for 2020. Regardless of the current implications of the pandemic, we remain convinced that the structural growth drivers from which Biofrontera will benefit in the long term remain intact. Actinic keratoses is a large pharmaceutical market both in the USA and in Europe. The reimbursement framework in the US 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.
Before I open the line for questions, I would like to briefly address one more topic. In recent weeks, our securities on NASDAQ so-called American Depository Shares, or ADSs for short, which are equivalent to two ordinary shares each have experienced increased demand and in conjunction with this high volatility in the share price. Apparently the ADSs have been heavily traded in certain retail trading platforms and automated trading platforms with risk-oriented profiles. As a result, the price dispersion could be observed between the exchanges in the US and in Germany.
The reason for this was that during the subscription period of the rights issue, the conversion of shares into ADSs and vice versa had to be temporarily suspended and thus short-term arbitrage trading was not possible. After completion of the capital measure, the prices of the two securities converged again within a few days.
I would now like to open the line for questions.
Questions and Answers:
Operator
And we will now begin our question-and-answer session. [Operator Instructions] The first question is from Thomas Flaten of Lake Street Capital Markets. Your line is now open.
Thomas Flaten -- Lake Street Capital Markets -- Analyst
Thank you. Good morning. And thanks for taking the question. Just a couple of questions on the financials. Thomas in your comments you mentioned that operating expenses would be back to Q1 levels in Q3, Q4. Does that include the sales line as well? Because that was significantly down and I'm assuming that's because of cost cutting reductions in the US. So I just wanted to confirm that we're expecting a significant rebound in sales costs as well.
Thomas Schaffer -- Chief Financial Officer
Yes. That includes all cost profit. Yes, and also the sales cost. So our sales costs are mainly driven by two factors: one is the personnel expenses, which was reduced significantly due to short-term work in Europe. And the furlough program we had in the United States, but also in the United States due to some layoffs; and the second factor is the marketing expenses and marketing projects that we pursue. So I would think, as revenue grow in Q3 and Q4, we would then also be able to invest a little more into our marketing projects, thus compensating for at least some of the expenses that we saved due to the layoffs. It maybe [Speech Overlap] sorry.
Thomas Flaten -- Lake Street Capital Markets -- Analyst
And then with respect to the revenue guidance, so if we take out the payment from Maruho and just for round numbers say that there was about EUR10 million of product sales in the first half. You're looking at about a doubling of product sales in the second half over the first half to meet that guidance, am I understanding that correctly?
Thomas Schaffer -- Chief Financial Officer
That's correct.
Thomas Flaten -- Lake Street Capital Markets -- Analyst
Okay. And then just one final one. Is there anything qualitative you could provide us with respect to experience in sales in the US in July and August? I know you said you had a nice rebound, in May and June. What we've heard from a number of other companies is that, levels in July were similar to pre-COVID time. Some people have referred back to 2019. Is there anything qualitative you could share there, with respect to what you're seeing in the rebound?
Hermann Lubbert -- Managing Director and Chief Executive Officer
I think we can say a couple of words to that. If you -- if we look back to last year, last year, we had a very strong seasonality in our sales. This also relates to the expectation of two-thirds of the sales in the fall, that's exactly what we saw last year. And the PDT market is weak in summer. Now this year what we see in July and August is quite similar. Sales actually to what we had last year, but those were the low summer sales. And the big question is, will we see the same upswing in the fall, that we saw last year or perhaps even more, since there may be pent-up demand? Or is that not going to happen or at a lower pace. So that's really the question that we are asking ourselves and that obviously we are not able to answer yet, but we are actually quite confident that we see a strong market development in the fall similar to last year.
Thomas Flaten -- Lake Street Capital Markets -- Analyst
That's great. And then, sorry just one more, with respect to your cash position with the recent raise, which was obviously successful, you mentioned, Thomas that, you had solved the going concern question through April of next year. But if we just maybe think about that a little bit differently, with the cash you have on hand right now and operations that you're projecting what is your cash runway? Is it beyond April of 2021, or should we use that as the date for current cash reserves?
Thomas Schaffer -- Chief Financial Officer
It's hope, I have a question of at this point in time you made that going concern assumption. The EUR5 million was in the assumption, the financing requirement of EUR5 million was an assumption that we made when we published our last year's financial report, that was in April and we had to explain how much more financial needs do we have to continue operations for another 12-months. So, now we have a going concern assumption based on the June 30 financials. So, that also means we have sufficient liquidity to finance our operations at least until 12-months after June 30. So, the liquidity that is available to the company goes beyond that date.
Thomas Flaten -- Lake Street Capital Markets -- Analyst
Excellent. Thank you very much for taking the questions.
Thomas Schaffer -- Chief Financial Officer
Thank you.
Operator
The next question is from Bruce Jackson from The Benchmark Company. Your line is now open.
Bruce Jackson -- The Benchmark Company -- Analyst
Hi, thank you for taking my questions. So, in addition to the changes in the sales and marketing organization in the United States, I believe there's going to be a change in 2021 to the reimbursement codes for cryotherapy. Can you run through that real quickly and describe how that might be an advantage for Ameluz?
Thomas Schaffer -- Chief Financial Officer
The biggest change we expect in 2021 with respect to reimbursement isn't really the cryo codes. It's the remuneration, the doctors will get starting in January for an office visit. And this office visit will be remunerated much better than in the past. Now, what happened is that in the past, when a patient came into a doctor's office and the doctor did nothing to that patient except diagnosis and write a prescription, he got a certain amount of money. And if he did a cryo at that visit, then he got -- he could file the cryo code. But this code is exclusive of the code used to document the office visits. So he can get either/or. So, the tendency was to do cryo at the same visit and take the much higher cryo code.
Now, this office visit code will be raised to pretty much the same level where the cryo code is. So, if in the future a doctor decides to do cryo, he will not get additional money. Now, with PDT, when a doctor -- when a patient visits a doctor, the doctor gets the office visit code. And usually for PDT, the patient is rescheduled. Now in that second visit, then the doctor can only claim the PDT code. It's also exclusive similar to the cryo code, but since it's always done in a separate visit, it doesn't really eliminate the office visit code.
Now, for the doctors, the situation is now that either they do the cryo in the first visit and then they have to do it for free basically or they reschedule the patients for a second visit where they do the cryo and only then they get paid. And this eliminates a major advantage of cryotherapy, compared to PDT.
Bruce Jackson -- The Benchmark Company -- Analyst
Okay. And then with the timing of the FDA submissions for the XL and the PK/PD study, you said second half of this year. Should we be thinking more like fourth quarter in terms of the timing?
Hermann Lubbert -- Managing Director and Chief Executive Officer
Yes. It will be toward the end of the year. The -- we have some delays in the program and our development program, which are mostly related to the availability of parts. Those parts we have to buy from other companies. And a number of these companies currently have difficulties with delivering these parts and that's where the delays actually come from. We are still -- we are very confident that we -- at least right now we are confident that we will be able to still file around the end of the year or before the end of the year. And I hope that we won't hear any -- of any major catastrophe with respect to the availability of parts before that.
As you know, we have to manufacture a zero series of at least a few lamps with the final procedures and then the protocols for this zero series manufacturing are part of the documentation that you have to submit to the FDA. So before we can successfully manufacture lamps we can also not submit.
Bruce Jackson -- The Benchmark Company -- Analyst
Okay. Got it. And then lastly on the seasonality trends in the second half, you also have the timing of price increases. Do you have any plans for a price increase this year? And when might that be?
Thomas Schaffer -- Chief Financial Officer
Last year we increased the price -- or this year, we increased the price on January 1, which is what many pharmaceutical companies do, at least a small price increase. To which extent we will do this also next year, we haven't decided yet.
Bruce Jackson -- The Benchmark Company -- Analyst
All right. That's it for me. Thank you.
Thomas Schaffer -- Chief Financial Officer
Thank you, Bruce.
Operator
[Operator Instructions] As there are no further questions, I hand back to the speakers.
Hermann Lubbert -- Managing Director and Chief Executive Officer
Yes, then I would like to thank you again for attending the presentation and for your interest at the time you have spent. Thank you very much and have a nice day. Bye-bye.
Pamela Keck -- Head of Investor Relations
Bye.
Thomas Schaffer -- Chief Financial Officer
Thank you very much. Bye-bye.
Operator
[Operator Closing Remarks]
Duration: 35 minutes
Call participants:
Pamela Keck -- Head of Investor Relations
Hermann Lubbert -- Managing Director and Chief Executive Officer
Thomas Schaffer -- Chief Financial Officer
Thomas Flaten -- Lake Street Capital Markets -- Analyst
Bruce Jackson -- The Benchmark Company -- Analyst
