UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2005
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________
COMMISSION FILE NUMBER 001-31533
DUSA PHARMACEUTICALS, INC.
(Exact name of registrant as specified in its charter)
NEW JERSEY 22-3103129
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
25 Upton Drive, Wilmington, MA
01887
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:
(978) 657-7500
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
(TITLE OF CLASS)
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
(TITLE OF CLASS)
COMMON STOCK, NO PAR VALUE
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]
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act Yes [ ] No [X]
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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, or a non-accelerated filer (as defined in Rule
12b-2 of the Act).
Large Accelerated Filer [ ] Accelerated Filer [X] Non-accelerated Filer [ ]
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
As of March 6, 2006, the registrant had 17,046,197 shares of Common Stock, no
par value, outstanding.
Based on the last reported sale price of the Company's common stock on the
NASDAQ National Market on June 30, 2005 ($9.30) (the last business day of the
registrant's most recently completed second fiscal quarter), the aggregate
market value of the voting stock held by non-affiliates of the registrant was
approximately $100,843,825.
DOCUMENTS INCORPORATED BY REFERENCE
Document Description 10-K Part III
-------------------------------------------------------- --------------------
Portions of the Registrant's proxy statement to be filed Items 10, 11, 12, 13
pursuant to Regulation 14A within 120 days after and 14
Registrant's fiscal year end of December 31, 2005 are
incorporated by reference into Part III of this report.
PART I
This Annual Report on Form 10-K and certain written and oral statements
incorporated herein by reference of DUSA Pharmaceuticals, Inc. (referred to as
"DUSA," "we," and "us") contain forward-looking statements that have been made
pursuant to the provisions of the Private Securities Litigation Reform Act of
1995. Such forward-looking statements are based on current expectations,
estimates and projections about DUSA's industry, management's beliefs and
certain assumptions made by our management. Words such as "anticipates,"
"expects," "intends," "plans," "believes," "seeks," "estimates," or variations
of such words and similar expressions, are intended to identify such
forward-looking statements. These statements are not guarantees of future
performance and are subject to certain risks, uncertainties and assumptions that
are difficult to predict particularly in the highly regulated pharmaceutical
industry in which we operate. Therefore, actual results may differ materially
from those expressed or forecasted in any such forward-looking statements. Such
risks and uncertainties include those set forth herein under "Risk Factors" on
pages 26 through 38, as well as those noted in the documents incorporated herein
by reference. Unless required by law, we undertake no obligation to update
publicly any forward-looking statements, whether as a result of new information,
future events or otherwise. However, readers should carefully review the
statements set forth in other reports or documents we file from time to time
with the Securities and Exchange Commission, particularly the Quarterly Reports
on Form 10-Q and any Current Reports on Form 8-K.
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ITEM 1. BUSINESS
GENERAL
DUSA Pharmaceuticals, Inc. (referred to as "DUSA," "we," and "us") is a
pharmaceutical company engaged primarily in the research, development and
marketing of our first drug in combination with light devices to treat or detect
a variety of conditions in processes known as photodynamic therapy or
photodetection. Our drug, Levulan(R) brand of aminolevulinic acid HCl, or ALA,
is being used with light, for use in a broad range of medical conditions. When
we use Levulan(R) and follow it with exposure to light to treat a medical
condition, it is known as Levulan(R) photodynamic therapy, or Levulan(R) PDT.
When we use Levulan(R) and follow it with exposure to light to detect medical
conditions it is known as Levulan(R) photodetection, or Levulan(R) PD.
Our products, the Levulan(R) Kerastick(R) 20% Topical Solution with PDT
and the BLU-U(R) brand light source were launched in the United States, or U.S.,
in September 2000 for the treatment of actinic keratoses, or AKs, of the face or
scalp. AKs are precancerous skin lesions caused by chronic sun exposure that can
develop over time into a form of skin cancer called squamous cell carcinoma. In
addition, in September 2003 we received clearance from the U.S. Food and Drug
Administration, or FDA, to market the BLU-U(R) without Levulan(R) PDT for the
treatment of moderate inflammatory acne vulgaris and general dermatological
conditions.
We are a vertically integrated company, primarily responsible for
regulatory, sales, marketing, customer service, manufacturing of our
Kerastick(R), and other related product activities. Our objectives include
increasing the sales of our approved products in the U.S. and Canada, continuing
our efforts of exploring partnership opportunities for Levulan(R) PDT for
dermatology in Europe and/or other countries outside of the U.S., Canada and
Latin America, and continuing our clinical development programs for our facial
photodamage and moderate to severe acne indications. In January 2006, we entered
into a marketing and distribution agreement with Stiefel Laboratories, Inc.
granting Stiefel an exclusive right to distribute the Levulan(R) Kerastick(R) in
Mexico, Central and South America.
We have also signed clinical trial agreements with the National Cancer
Institute, or NCI, Division of Cancer Prevention, or DCP, for the clinical
development of Levulan(R) PDT for the treatment of high-grade dysplasia, or HGD,
within Barrett's Esophagus, or BE, and oral cavity dysplasia treatment, and are
working with the NCI DCP to advance the development of these programs. In
addition, we continue to support independent investigator trials to advance
research in the use and applicability of Levulan(R) PDT for other indications in
dermatology, and selected internal indications. See sections entitled "Business
- Internal Indications" and "Business - Distribution".
We are developing Levulan(R) PDT and PD under an exclusive worldwide
license of patents and technology from PARTEQ Research and Development
Innovations, the licensing arm of Queen's University, Kingston, Ontario, Canada.
We also own or license certain other patents relating to methods for using
pharmaceutical formulations which contain our drug and related processes and
improvements. In the United States, DUSA(R), DUSA Pharmaceuticals, Inc.(R),
Levulan(R), Kerastick(R) and BLU-U(R) are registered trademarks. Several of
these trademarks are also registered in Europe, Australia, Canada, and in other
parts of the world. Numerous other trademark applications are pending. See
sections entitled "Business - Licenses; and - Patents and Trademarks".
On December 30, 2005, we entered into a merger agreement, (the "Merger
Agreement"), to acquire all of the common stock of Sirius Laboratories, Inc. of
Vernon Hills, Illinois in exchange for cash and common stock of DUSA worth up to
$30,000,000. Of the up to $30,000,000, $8,000,000 less certain expenses will be
paid in cash upon closing, $17,000,000 will be paid in shares of DUSA's common
stock
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also upon closing, and up to $5,000,000 in cash or common stock may be paid
based on a combination of new product approvals or launches, and achievement of
certain pre-determined total cumulative sales milestones for Sirius products.
The products acquired in this transaction, called the Sirius Merger, focus
primarily on the treatment of acne vulgaris and acne rosacea. We expect that the
DUSA shares will be issued pursuant to Regulation D.
Further, the Merger Agreement provides for certain conditions precedent to
closing, including, but not limited to, (i) the approval of the transaction and
the terms and conditions of the Merger Agreement by the Sirius shareholders,
(ii) the receipt by DUSA of audited financial statements of Sirius for the
fiscal years ended 2003, 2004 and 2005, and (iii) the determination by DUSA that
the third party manufacturing and distribution facilities used by Sirius to
manufacture or distribute its products, as the case may be, are in material
compliance with all applicable legal requirements and that the third party
manufacturing facilities have the reasonable capability of continuing to
manufacture Sirius' products in compliance with cGMP. In addition, the Merger
Agreement provides DUSA, Sirius and certain Sirius shareholders with the right
to terminate the Merger Agreement under certain circumstances. The parties have
also made customary representations, warranties and covenants in the Merger
Agreement. The closing of the transaction is expected during the first quarter
of 2006, subject to the terms and conditions in the Merger Agreement.
We were incorporated on February 21, 1991, under the laws of the State of
New Jersey. Our principal executive offices are located at 25 Upton Drive,
Wilmington, Massachusetts 01887 (telephone: (978) 657-7500). On March 3, 1994,
we formed DUSA Pharmaceuticals New York, Inc., a wholly owned subsidiary located
in Valhalla, New York, to coordinate our research and development efforts. We
have financed our operations to date, primarily from sales of our products,
sales of securities in public offerings, private and offshore transactions that
are exempt from registration under the Securities Act of 1933, as amended, (the
"Act"), including a private placement under Regulation D of the Act which was
consummated on February 27, 2004, and from payments received as part of the
agreement with our former marketing collaborator. See sections entitled
"Management's Discussion and Analysis of Financial Condition - Overview; -
Results of Operations; and - Liquidity and Capital Resources".
BUSINESS STRATEGY
The key elements of our strategy include the following:
o Expand the Marketing and Sales of our Products. In 2005, DUSA
expanded its direct sales force to 24 representatives by year-end
and launched various marketing initiatives, which increased
revenues.
o Physician Education Support. DUSA supports various physician
education activities, including financial support for independent
medical education programs, participation in dermatological
conferences, and support for independent investigator studies that
could lead to new scientific papers and/or presentations.
o Leveraging our Levulan(R) PDT/PD Platform to Develop Additional
Products. During 2005, we conducted Phase II multi-center clinical
trials in the United States to determine the safety and efficacy of
Levulan(R) PDT in the treatment of facial photodamage and moderate
to severe inflammatory acne. If we are able to obtain FDA approval,
there may be significant additional market opportunities for our
products. We are also actively marketing the BLU-U(R) without
Levulan(R), to treat moderate inflammatory acne vulgaris, which
supports a multi-use capability of our BLU-U(R), in addition to its
use in our
4
approved AK therapy. Outside of dermatology, we are developing
Levulan(R) products for the treatment of high-grade dysplasia in
patients with Barrett's esophagus, both independently and in
co-operation with the NCI DCP, and for oral cavity dysplasia
treatment (with the NCI DCP) See sections entitled "Internal
Indications - Barrett's Esophagus Dysplasia; and - Oral Cavity
Dysplasia".
o Enter into Additional Strategic Alliances. If we determine that the
development program for a given indication may be beyond our own
resources or may be advanced to market more rapidly by collaborating
with a corporate partner, we may seek opportunities to license,
market or co-promote our products. We are currently exploring
opportunities to develop, market, and distribute our Levulan(R) PDT
platform in Europe and/or other countries outside of the United
States, Canada and Latin America following our recently completed
agreement with Stiefel Laboratories, Inc. We are also continuing to
seek to acquire and/or license additional dermatology products that
complement our current products, that would provide our sales force
with additional synergistic products to sell in the near term.
o Use the Results of Independent Researchers to Identify New
Applications. We continue to work closely with and support research
by independent investigators so that we have the benefit of the
resulting `anecdotal' human data for use in evaluating potential
indications for corporate development. We also continue to monitor
independent research in order to identify other potential new
indications.
o Improve Third-party Reimbursement for our Products. DUSA plans to
continue to support activities to improve and/or pursue third-party
reimbursement for our products.
PDT/PD OVERVIEW
In general, both photodynamic therapy and photodetection are two-step
processes:
o 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 specific cells.
o 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 PDT, 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. In PD, the activated
photosensitizer emits energy in the form of light, making the sensitized cells
fluoresce, or "glow".
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:
o the desired depth of penetration of the light into the target
tissue, and
o the efficiency of the light in activating the photosensitizer.
5
Blue light does not penetrate deeply into tissues, so it is generally
better suited for treating superficial lesions. However, it is also a potent
activator of some photosensitizers, including ours. Red light penetrates more
deeply into tissues, and is therefore generally better suited for treating
cancers and deeper tissues. However, it is generally not as strong an activator
of photosensitizers, including ours. Different photosensitizers do not absorb
all wavelengths (colors) of visible light in the same manner. For any given
photosensitizer, some colors are more strongly absorbed than others.
Another consideration in selecting a light source is the location of the
target tissue. Lesions on the skin which are easily accessible can be treated
with either laser or non-laser light sources. Internal indications, which are
often more difficult to access, usually require lasers in order to focus light
into small fiber optic delivery systems that can be passed through an endoscope
or into hollow organs.
PDT 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. Patients undergoing PDT and PD treatments are usually advised
to avoid direct sunlight and/or to wear protective clothing during this period.
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
PDT/PD effects.
OUR LEVULAN(R) PDT/PD PLATFORM
OUR LEVULAN(R) BRAND OF ALA
We have a unique approach to PDT and PD, using the human cell's own
natural processes. Levulan(R) PDT takes advantage of the fact that ALA is the
first product in a natural biosynthetic pathway present in virtually all living
human cells. In normal cells, the production of ALA is tightly regulated through
a feedback inhibition process. In our PDT/PD system, excess ALA (as Levulan(R))
is added from outside the cell, bypassing this normal feedback inhibition. The
ALA is then converted through a number of steps into a potent natural
photosensitizer named protoporphyrin IX, or PpIX. This is the compound that is
activated by light during Levulan(R) PDT/PD, especially in fast growing cells.
Any PpIX that remains after treatment is eliminated naturally by the same
biosynthetic pathway.
We believe that Levulan(R) is unique among PDT/PD agents. It has the
following features:
o Naturally Occurring. ALA is a naturally occurring substance found in
virtually all living human cells.
o Small Molecule. Levulan(R) is a small molecule that is easily
absorbed whether delivered topically, orally, or intravenously.
o Highly Selective. Levulan(R) is not itself a photosensitizer, but is
a pro-drug that is converted through a cell-based process into the
photosensitizer PpIX. The combination of topical application, tissue
specific uptake, conversion into PpIX and targeted light delivery
make this a highly selective process. Therefore, under appropriate
conditions, we can achieve selective clinical effects in targeted
tissues with minimal effects in normal surrounding and underlying
tissues.
o Controlled Activation. Levulan(R) has no PDT effect without exposure
to light at specific wavelengths, so the therapy is easily
controlled.
6
Scientists believe that the accumulation of PpIX following the application
of Levulan(R) is more pronounced in:
o rapidly growing diseased tissues, such as precancerous and cancerous
lesions,
o conditions characterized by rapidly proliferating cells such as
those found in psoriasis and certain microbes, and
o in certain normally fast-growing tissues, such as hair follicles,
sebaceous glands, esophageal mucosa and the lining of the uterus.
OUR KERASTICK(R) BRAND APPLICATOR
We designed our proprietary Kerastick(R) specifically for use with
Levulan(R). It is a single-use, disposable applicator, which allows for the
rapid preparation and uniform application of Levulan(R) topical solution in
standardized doses. The Kerastick(R) has two separate glass ampoules, one
containing Levulan(R) powder and one containing a liquid vehicle, both enclosed
within a single plastic tube and an outer cardboard sleeve. There is a filter
and a metered dosing tip at one end. Prior to application, the doctor or nurse
crushes the ampoules and shakes the Kerastick(R) according to directions to mix
the contents into a solution. The Kerastick(R) tip is then dabbed onto the
individual AK lesions, releasing a predetermined amount of Levulan(R) 20%
topical solution.
OUR LIGHT SOURCES
Customized light sources are critical to successful Levulan(R) PDT/PD
because the effectiveness of Levulan(R) therapy depends on delivering light at
an appropriate wavelength and intensity. We intend to continue to develop
combination drug and light device systems, in which the light sources:
o are compact and tailored to fit specific medical needs,
o are pre-programmed and easy to use, and
o provide cost-effective therapy.
Our proprietary BLU-U(R) is a continuous-wave (non-pulsed) fluorescent
light source that can treat the entire face or scalp at one time. The light
source is reasonably sized and can be moved from room to room if necessary. It
can be used in a physician's office, requires only a moderate amount of floor
space, and plugs into a standard electrical outlet. The BLU-U(R) also
incorporates a proprietary regulator that controls the optical power of the
light source to within specified limits. It has a simple control panel
consisting of an on-off key switch and digital timer which turns off the light
automatically at the end of the treatment. The BLU-U(R) is also compliant with
CE marking requirements.
We believe non-laser, non-pulsed light sources in comparison to lasers and
high-intensity pulsed light sources, are:
o safer,
o simpler to use,
o more reliable, and
o far less expensive.
7
For treatment of AKs, our BLU-U(R) uses blue light which is a potent
activator of PpIX and does not penetrate deeply into the skin. Longer red
wavelengths penetrate more deeply into tissue but are not as potent activators
of PpIX. Therefore, for treatment of superficial lesions of the skin, such as
AKs, we are using our relatively low intensity, non-laser, non-pulsed BLU-U,
which is designed to treat areas such as the face or scalp. For treatment of
diseases that may extend several millimeters into the skin or other tissues,
including many forms of cancer; high-powered red light is usually preferable. We
have also received clearance from the FDA to market the BLU-U(R) without
Levulan(R) for the treatment of moderate inflammatory acne vulgaris and general
dermatological conditions. We are also evaluating whether to develop and/or
license additional light devices for use with Levulan(R).
During 2005, we studied the use of Levulan(R) with three different light
devices, including our BLU-U for the repair of facial photodamage. Also in 2005,
we continued the study of our new proprietary endoscopic light delivery system
in a small Phase II single-center clinical study of the efficacy and safety of
Levulan(R) PDT for the treatment of high grade dysplasia in patients with
Barrett's esophagus. Our new system is designed to ease the process by which
physicians place fiber optics used for endoscopic light delivery within hollow
target organs such as the esophagus. See sections entitled "Business-Dermatology
Indications, Facial Photodamage and Internal Indications, Barrett's Esophagus
Dysplasia".
OUR PRODUCTS
The following table outlines our Levulan(R) and BLU-U(R) products and
currently planned product candidates. Our product sales for the last three years
were $11,337,461 in 2005, $7,987,656 in 2004, and $970,109 in 2003. Our research
and development expenses for the last three years were $5,587,599 in 2005,
$6,489,723 in 2004, and $5,403,961 in 2003.
STATUS OF
REGULATORY
INDICATION/PRODUCT STUDIES
------------------ --------------------------
DERMATOLOGY
Levulan(R) Kerastick(R) and BLU-U(R) for PDT of AKs Approved
Levulan(R) PDT for Photodamaged Skin Phase II(1)
Levulan(R) PDT for Moderate to Severe Acne Vulgaris Phase II(2)
BLU-U(R) Treatment of Moderate Inflammatory Acne Vulgaris
and general dermatological conditions Without Levulan(R) Market Clearance(3)
OTHER INDICATIONS
Levulan(R) PDT for Barrett's Esophagus Dysplasia using
DUSA(R) Endoscopic Light Delivery System Phase I/II(4), (5)
Levulan(R) Induced Fluorescence Guided Resection for
Brain Cancer European Phase III(6), (7)
Levulan(R) Oral Cavity Dysplasia Phase I/II(8)
----------
1 Phase II clinical trial interim results were released in the first quarter
of 2006
2 Phase II clinical trial results were released in the first quarter of 2006
3 In September 2003, the FDA provided market clearance
4 Phase II single-center clinical trial initiated in second quarter 2004
using DUSA's new endoscopic light delivery device. All patients have been
accrued and treated and follow-up is continuing.
5 Phase II clinical trial planned to be initiated with the NCI DCP in 2005
is still in process of protocol finalization. Initiation is expected in
2006.
6 Licensed from photonamic GmbH & Co. KG
7 European Phase III clinical trial results are not expected to be suitable
for NDA filing in the United States.
8
8 Phase I/II clinical trial planned to be initiated with the NCI DCP in
2005. Protocol finalization continuing and initiation is expected during
2006.
DERMATOLOGY INDICATIONS
We have been responsible for our Levulan(R) dermatology research and
development programs since reacquiring our product rights in late 2002 from a
former strategic alliance partner. We have focused on completing our AK post
approval development program, and have commenced Phase II clinical programs
examining the safety and efficacy of Levulan(R) PDT for the treatment of
photodamaged skin and moderate to severe acne vulgaris which, if successfully
developed through FDA approval, could lead to additional dermatological
indications and significant market opportunities. The results of our Phase II
trials were announced in early 2006. DUSA also continues to support a wide range
of independent investigator studies using the Levulan(R) Kerastick(R) that could
lead to additional new indications for future development.
Actinic Keratoses. AKs are superficial precancerous skin lesions usually
appearing in sun-exposed areas as rough, scaly patches of skin with some
underlying redness. The traditional methods of treating AKs are cryotherapy, or
the deep freezing of skin, using liquid nitrogen; 5-fluorouracil cream, or 5-FU;
and surgery, for especially thick or suspicious lesions. In recent years,
imiquimod and diclofenac have also been used for the treatment of AKs. Although
any of these methods can be effective, each has limitations and can result in
significant side effects. Cryotherapy is non-selective, is usually painful at
the site of freezing and can cause blistering and loss of skin pigmentation,
leaving permanent white spots. In addition, because there is no standardized
treatment protocol, results are not uniform. 5-FU can be highly irritating and
requires 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, an additional 1 to 2 weeks of healing is required. Surgery is
generally most useful for one or a few individual lesions, but not large numbers
of lesions, and leaves permanent scars. Imiquimod or diclofenac require extended
applications of cream, lasting up to 3 or 4 months, during which the skin is
often very red and inflamed. Our approved treatment method involves applying
Levulan(R) 20% topical solution using the Kerastick(R) to individual AK lesions,
followed 14 to 18 hours later with exposure to our BLU-U(R) for approximately 17
minutes. In our Phase III trials, using this overnight drug application, our
treatment was painful, but generally well tolerated. Resulting redness and/or
inflammation generally resolved within days without any change in pigmentation.
Facial Photodamaged Skin. Photodamaged skin, which is skin damaged by the
sun, occurs primarily in fair-skinned individuals after many years of sun
exposure. Signs of photodamaged skin include roughness, wrinkles and brown
spots. AKs also occur frequently in areas of photodamaged skin. There are
numerous consumer cosmetic and herbal products which claim to lessen or relieve
the symptoms of photodamaged skin. In most cases, there is little scientific
data to support these claims. The FDA has approved only one prescription drug,
Renova(R)(1), to treat this common skin condition. Patients generally use the
product for between six and 24 weeks before improvement may be observed. There
are also a number of FDA approved laser and light-based treatments being used in
the treatment of photodamaged skin.
As part of our AK clinical trials, we conducted a Phase II safety and
efficacy study, testing 64 patients with 3 to 7 AK lesions of the face or scalp
within an area of photodamaged skin. The physician
----------
(1) Renova(R) is a registered trademark of Johnson & Johnson.
9
investigators applied Levulan(R) 20% topical solution over the entire area
including the photodamaged skin. After 14 to 18 hours, the patients were treated
with blue light at differing light doses. Investigators noted marked improvement
in skin roughness in the treated areas in two-thirds of the patients after
treatment with Levulan(R) PDT as well as some degree of improvement of wrinkles
and brown spots. However, 10 of the 64 patients found that the burning and
stinging of the PDT therapy was too uncomfortable and as a result the treatment
was either terminated early or the light power was reduced. No patients reported
a serious treatment-related adverse event.
During 2003, DUSA-supported independent investigator studies for
photodamaged skin were completed, including short incubation studies using
different light sources: a BLU-U(R), pulsed dye lasers, and intense pulsed light
sources. Data from some of the independent investigator studies were used to
help determine the method of treatment for the Phase II study mentioned below.
According to peer-reviewed publications, these studies reported that, when
Levulan(R) is applied to the entire face for as little as one hour followed by
treatment with the BLU-U(R), or pulsed light sources, efficacy in removing AKs
is similar to that of our Phase III trials, which used spot application on each
AK and overnight incubation. Additionally, these studies report that patients'
skin have showed improvements in various photodamaged skin parameters, including
skin quality, sallowness, roughness, fine wrinkling, and Griffiths score, a
photonumeric scale for the assessment of skin photodamage. Investigator studies
have been published reporting that IPL plus Levulan(R) results in a
"photodynamic photorejuvenation" which enhances the results of IPL alone.
Published investigator studies have also reported that the LPDL together with
Levulan(R) can successfully remove AKs, and improve photodamage as well as treat
sebaceous gland hyperplasia (indications which the LPDL alone was unable to
treat). The positive results of an independent investigator prospective,
randomized, controlled split face clinical study using Levulan(R) photodynamic
therapy, together with intense pulsed light for the treatment of photodamaged
skin, were published in the October 2005 issue of the American Medical
Association Journal Archives of Dermatology.
In February, 2006 we reported the interim analysis results from our 80
patient, multi-center Phase II split-face clinical study of photodynamic therapy
(PDT) in the treatment of photodamaged skin using the Levulan(R) (aminolevulinic
acid HCl, ALA) Kerastick(R) in combination with either the Company's BLU-U(R),
an Intense Pulsed Light (`IPL'), or a Long Pulsed Dye Laser (`LPDL'). Each
patient served as his or her own control, using a `split-face' design. Following
skin cleansing with an acetone solution, and approximately 60 minutes of drug
and/or vehicle incubation, light treatment with a fixed dose was given using one
of the three light sources. Up to 3 treatments were given, 3 weeks apart.
Interim results were assessed at Weeks 9 and 12. The protocol includes
additional follow-up visits scheduled for Weeks 26 and 52.
The goal of the study was to guide selection of light source(s) for future
development in the treatment of photodamaged skin, using the Company's
proprietary Levulan PDT technology. The study was not designed to detect
differences between the light sources.
At Week 12, Levulan PDT with BLU-U light demonstrated material improvement
in photodamaged skin, in comparison to BLU-U and vehicle. Statistical
significance in net changes from baseline scores was achieved in 2 parameters of
photodamage, namely mottled pigmentation (p=0.0348) and tactile roughness
(p=0.0455). In addition, the trend toward improvement in a number of parameters
was notably greater at Week 12 than Week 9, without any additional treatments
with Levulan, which suggests that other parameters may also reach statistical
significance over time. Specifically, Levulan with BLU-U showed greater
improvements in mottled pigmentation, tactile roughness, fine wrinkling,
sallowness and Global Photodamage Score (i.e. all the parameters that were
measured except for telangiectasia (small blood vessels in the skin)), compared
with areas treated with BLU-U and vehicle. BLU-U by itself is not known to have
any effects on photodamaged skin.
10
These results support the conclusions of a prior independent study by
Touma et al (2004), using Levulan with BLU-U versus BLU-U alone, that achieved
statistical significance with the addition of Levulan in all photodamage
parameters measured, other than deep wrinkles. In that study, the investigators
treated more severely sun-damaged patients, each with a minimum of 4 actinic
keratoses. They also used twice the dose of blue light compared to the current
study (10 vs. 5 Joules/cm2), and drug incubation times ranging from 1-3 hours.
IPL by itself has previously been shown in independent studies to
significantly improve photodamage, predominantly by targeting brown
discoloration and red blood vessels. Therefore, as would be expected, at Week
12, significant improvement in photodamage was seen with IPL and vehicle,
especially with respect to mottled pigmentation and telangiectasia. With the
addition of Levulan, there was a trend toward even greater improvement in all
parameters of photodamage except for mottled pigmentation, although these trends
did not achieve statistical significance. However, similar to the BLU-U results,
the trend toward improvement was notably greater at Week 12 than Week 9 without
any additional treatments with Levulan, and additional follow up is scheduled at
weeks 26 and 52.
These results support the conclusions of prior independent studies by
Dover et al (2005), Alster et al (2005), and Gold et al (in press) using Levulan
with IPL versus IPL alone for photodamage. All of these studies reported
significant benefits from the addition of Levulan to IPL, especially in patients
with significant photodamage. In addition, although IPL itself does not treat
pre-cancerous cell damage, such as actinic keratoses, when combined with Levulan
(ALA) to produce a PDT effect, IPL has been reported to effectively remove these
lesions (Avram and Goldman, 2004, Ruiz-Rodrigues, 2002).
With LPDL, as would be expected, there was significant improvement in
photodamaged skin with LPDL and vehicle, especially with respect to
telangiectasia, the primary target of this device. However, with LPDL, the
addition of Levulan for the treatment of photodamage did not lead to any
discernable differences in photodamage parameters between the two groups, as
suggested by the results of an earlier study (Smith et al, 2004).
In general, safety was excellent in all groups, but treatment using
Levulan with BLU-U was better tolerated than treatment with IPL or LPDL (with or
without Levulan) i.e. the frequency and severity of stinging and burning during
treatment was greater with IPL and LPDL (with or without Levulan) compared to
Levulan with BLU-U, and for BLU-U with vehicle. Levulan with BLU-U was also easy
to use and less operator dependent.
Acne. Acne is a common skin condition caused by the blockage and/or
inflammation of sebaceous (oil) glands. Traditional treatments for mild to
moderate facial inflammatory acne include over-the-counter topical medications
for mild cases, and prescription topical medications or oral antibiotics for
mild to moderate cases. For nodulo-cystic acne, an oral retinoid drug called
Accutane(R)(2) is the most commonly prescribed treatment. It is also commonly
used for moderate to severe inflammatory acne. Over-the-counter treatments are
not effective for many patients and can result in side effects including drying,
flaking and redness of the skin. Prescription antibiotics lead to improvement in
many cases, but patients must often take them on a long-term basis, with the
associated risks of increased antibiotic resistance. With Levulan(R) PDT therapy
for moderate to severe acne vulgaris we are seeking to improve or clear
patients' acne without the need for long-term oral therapy and with fewer side
effects than current therapies.
----------
(2) Accutane(R) is a registered trademark of Hoffmann-La Roche, Inc.
11
DUSA has clearance from the FDA to market the BLU-U(R) without Levulan(R)
PDT for the treatment of moderate inflammatory acne vulgaris and general
dermatological conditions.
During the fourth quarter of 2004, we initiated a DUSA-sponsored Phase II
study which we recently completed. This 72 patient, investigator blinded study
was designed to examine various safety and efficacy parameters as a function of
varying Levulan/vehicle incubation times, namely 15, 60 and 120 minutes.
Patients were randomized within each incubation group so that 18 subjects
received `Levulan BLU-U' and six received `BLU-U alone'. There were no formal
placebo arms in this study. Up to four PDT treatments were given at 2-week
intervals. The primary efficacy parameters were the percent change in total acne
lesion count for inflammatory, non-inflammatory, and total lesions at 4 and 8
weeks after the final PDT session. Acne severity scores (grades 0 - 4) were also
assessed. Safety and tolerability were also followed throughout the study. The
results of the study indicate that both `Levulan BLU-U' and `BLU-U alone' appear
to effectively reduce the number of both inflammatory and non-inflammatory acne
lesions. Given the higher than anticipated `BLU-U alone' response rate using
this protocol, the study was not powered (sized) to discern differences between
these arms. Using an intent-to-treat analysis, at the Week 8 time point, the
median percent decrease in total lesion count, (inflammatory plus
non-inflammatory) for `Levulan BLU-U' and `BLU-U alone' was 61% and 80%,
respectively. In the overall `Acne Severity Assessment' at the Week 8 time
point, the `Levulan BLU-U' group showed 7/18 (39%) of subjects had at least 2
grades of improvement in their acne, compared with 4/6 (67%) in the `BLU-U
alone' group. In the group of 28 patients with the most severe (Grade 4) acne,
which included those with the highest number of inflammatory lesions at baseline
(> or = 60 lesions), the total lesion count at Week 8 decreased in the `Levulan
BLU-U' group, whereas total lesion count at Week 8 increased in the `BLU-U
alone' group. Treatment was well tolerated in both arms of the study with no
unanticipated adverse events being reported. Side effects were minimal. In the
15-minute Levulan BLU-U group, no PDT treatments were discontinued due to pain,
and at the Week 8 time-point, there were no significant differences between the
groups in erythema, edema or hyperpigmentation. The results of this study
suggest that for future development of the acne indication for Levulan PDT,
those patients with the most severe form(s) of acne should receive the greatest
benefit.
During September 2005, the FDA issued draft guidance for the
pharmaceutical industry regarding the development of new drugs for acne vulgaris
treatment. As a result of this newly issued guidance in combination with the
results of our own Phase II clinical study on inflammatory acne, additional
Phase II work will definitely be required before we commence Phase III acne
trials.
OTHER POTENTIAL DERMATOLOGY INDICATIONS
We believe that there are numerous other potential uses for Levulan(R)
PDT/PD in dermatology, and we continue to support, research in several of these
areas, with corporate-sponsored trials, pilot trials, and/or
investigator-sponsored studies, based on pre-clinical, clinical, regulatory and
marketing criteria we have established through our strategic planning processes.
Some of the additional potential uses for Levulan(R) in dermatology include
treatment of skin conditions such as psoriasis, onychomycosis, warts, molluscum
contagiosum, oily skin, acne rosacea, cystic acne, inflamed or infected sweat
glands (hidradenitis suppurativa), and cancers, such as squamous cell carcinomas
and cutaneous T-cell lymphomas. Of these potential indications, we have
supported investigator-sponsored studies for psoriasis, hidradenitis
suppurativa, acne vulgaris, basal cell carcinoma, and acne rosacea and are
currently supporting investigator-sponsored studies for psoriasis, non-melanoma
skin cancer, and inflammatory acne.
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INTERNAL INDICATIONS
Barrett's Esophagus Dysplasia. Barrett's esophagus is an acquired
condition in which the normal tissue lining of the esophagus is replaced by
abnormal tissue in response to chronic exposure to stomach acid. Over time, the
area of the esophagus affected can develop dysplastic (precancerous) cells. As
the dysplasia progresses from low-grade to high-grade, the risk of esophageal
cancer increases significantly, such that patients with confirmed high-grade
dysplasia often undergo major surgery to remove the affected portion of the
esophagus. The condition is often undetected until the disease reaches later
stages.
Medical treatment of the condition has commonly included lifelong
anti-reflux therapy with drugs called proton pump inhibitors to reduce stomach
acid, while treatment for more advanced, precancerous, Barrett's esophagus
dysplasia involves surgery to remove affected areas of the esophagus. The role
of anti-reflux surgery, and/or medical devices is also being evaluated by the
medical community. In August 2003, a competitor received approval for its PDT
therapy for Barrett's esophagus. See section entitled "Business - Competition".
Independent European studies have reported that in late-stage Barrett's
esophagus the high-grade dysplasia can be destroyed by ALA PDT. In a randomized,
controlled European investigator study supported by DUSA, the investigators
reported that Levulan(R) PDT allowed the conversion of early-stage Barrett's
esophagus with low-grade dysplasia and portions of non-dysplastic Barrett's back
to a normal esophageal lining.
During the second half of 2001, we started two Phase I/II studies for the
treatment of early and late-stage Barrett's esophagus, respectively, using
systemic Levulan(R) followed by red laser light in varying light doses. Patients
were randomized to receive various light doses, with retreatment if required,
and follow-up for 24 months after the initial treatment. In our clinical trial
in which the primary efficacy goal was the ablation of high-grade dysplasia, or
HGD, in Barrett's esophagus (late stage Barrett's esophagus), six patients with
HGD were treated with Levulan(R) PDT. Of the six patients treated, 5 had
complete clearing of their areas of high-grade dysplasia, and 4 of those
patients have now been followed for 24 months and remain free of HGD, which
indicates a durable response for complete HGD ablation. One patient dropped from
follow-up at the 2-month visit. No esophageal scarring or ruptures were noted in
the course of this study. HGD ablation continues in the patients followed. In
our low-grade dysplasia (early stage) clinical trial in which the primary
efficacy goal was the conversion of Barrett's esophagus to normal esophagus, 11
patients were treated with Levulan(R) PDT, and 4 were followed for 12 months
while six were followed for 24 months (n=6). Complete Barrett's esophagus
mucosal ablation after one or two Levulan(R) PDT treatment remained stable in
5/10 (50%) of patients for up to 2 years. Of those patients followed for 2
years, 4/6 (67%) remained clear for that time. There was 1 patient in this study
that had mild circumferential esophageal scarring without symptoms. The most
common adverse events in both studies were mild to moderate nausea and vomiting.
In order to control ongoing research and development costs, we chose not to
enroll any additional patients to these studies after 2002, but continued to
follow the patients that have already been treated.
Currently, for the treatment of HGD in BE, insertion of a fiber optic is
done by placement of a balloon catheter system, which requires approximately
three insertions into the patient's esophagus, with `blind' light treatment by
the physician (the endoscope is removed before light treatment and then replaced
afterwards). DUSA's proprietary endoscopic light delivery allows fiber optic
placement and light treatment to the esophagus to be performed under direct
visualization, utilizing a single insertion. The goal of this device is to allow
the endoscopic light treatment to be performed more rapidly, under direct
visualization, and with greater comfort for the patient. In preparation for a
larger Phase II clinical trial, in the second quarter of 2004 we initiated a
small single-center pilot Phase II clinical trial for enrollment of up to six
patients at a single site using DUSA's proprietary endoscopic light delivery
device
13
for the treatment of HGD. The protocol was amended to lower the light dosage and
to allow in-hospital observation for the remaining 3 patients commencing in
March 2005. As of the end of 2005, six patients received at least one Levulan(R)
PDT treatment in this single-center study, and 5 are evaluable for acute
efficacy. Four out of five (4/5, 80%) are currently free of HGD after treatment
and continue to be followed.
In addition, we are working with the National Cancer Institute Division of
Cancer Prevention (NCI DCP), for the clinical development of Levulan(R) PDT for
the treatment of high-grade dysplasia within Barrett's Esophagus. The Phase I/II
trial design is being finalized and the NCI DCP has identified two clinical
sites from its extramural expert clinical investigator consortium. The NCI DCP
will use its resources to file its own Investigational New Drug, or IND,
application. DUSA will provide Levulan(R), device(s) and the necessary training
for the investigators involved in the studies. DUSA will maintain full ownership
of its existing intellectual property, has options on new intellectual property,
and, subject to successful Phase II and III clinical trial results, intends to
seek FDA approval in due course. DUSA anticipates that the NCI DCP will begin
the clinical trial during 2006.
Oral Cavity Dysplasia. We have also signed a clinical trial agreement with
the NCI DCP for the clinical development of Levulan(R) PDT for the treatment of
oral cavity dysplasia. During 2005, DUSA and the NCI DCP collaborated to develop
the protocol for a Phase I study in subjects with oral leukoplakia (a
premalignant lesion) using NCI's Phase I/II Cancer Prevention Clinical Trials
Consortia to perform the studies. As of the end of 2005, the NCI DCP had
selected consortia for consideration as clinical trial sites. DUSA also expects
this study to begin during 2006.
Brain Cancer. Despite standard therapies that include surgical tumor
removal, radiation therapy, and chemotherapy, adult patients with the most
aggressive high-grade malignant brain tumor type, glioblastoma multiforme,
generally survive only 1 year. Independent European investigators have reported
that systemic ALA dosing before surgical resection of tumors resulted in
selective fluorescence of only the tumors. The normal white matter of the brain
showed no fluorescence. These investigators used ALA-induced fluorescence in a
study involving 52 patients with glioblastoma multiforme as a guide for the more
complete removal of tumors than would be possible using white light alone. This
technique is called fluorescence-guided resection.
In December 2002, we entered into a License and Development Agreement with
photonamic GmbH & Co. KG, a subsidiary of medac GmbH, a German pharmaceutical
company. This agreement provides for the licensing to us of photonamic's
proprietary technology related to ALA for systemic dosing in the field of brain
cancer. The technology provides DUSA with access to a systemic formulation of
ALA, and a significant amount of pre-clinical data, both of which could be
useful and are licensed to DUSA for certain other indications, including
Barrett's esophagus dysplasia. photonamic completed its European Phase III
clinical trial in which ALA-induced fluorescence was used to guide surgical
tumor resection in patients suffering from glioblastoma multiforme. DUSA
believes that the European Phase III clinical trial results, although they might
meet the primary efficacy parameters of the protocol as written, might require
the support of additional clinical trials which would take years to complete in
order to meet the regulatory requirements for approval in the United States. We
do not intend, at this time, to repeat this study or to carry out additional
studies in this indication in the United States. However, we have agreed to
accompany photonamics to the FDA should it wish to request a Pre-IND meeting
with the FDA for this indication. See section entitled "Business - Licenses".
THIRD-PARTY REIMBURSEMENT
We have continued to support efforts to improve reimbursement levels to
physicians. Such efforts included working with the Centers for Medicare and
Medicaid Services, or CMS, and the American
14
Academy of Dermatology Association, or AADA, on matters related to the PDT
procedure fee and the separate drug reimbursement fee. Doctors can also bill for
any applicable visit fees. Effective January 1, 2006, the CMS average national
reimbursement for the use of Levulan(R) PDT for AKs' Ambulatory Patient
Classifications code ("APC code") was increased. The APC code is used by many
hospitals. The CMS Current Procedural Terminology code ("CPT code"), which is
used by private physician clinics using Levulan(R) PDT for treating AKs was not
increased for 2006 (i.e. it will be unchanged from 2005 levels). DUSA had
expected reimbursement under the CPT code to increase on January 1, 2006;
however, we now believe that the increase will not be effective until January 1,
2007 based on information from CMS and the AADA. We are aware that some
physicians believe that reimbursement levels do not fully reflect the required
efforts to routinely execute our therapy in their practices. We believe that the
issues related to reimbursement have negatively impacted the economic
competitiveness of our therapy with other AK therapies and have hindered its
adoption in the past. DUSA continues to support ongoing efforts that might lead
to further increases in reimbursement in the future; and intends to continue
supporting efforts to seek reimbursement for our FDA-cleared use of the BLU-U(R)
alone in the treatment of mild to moderate inflammatory acne of the face.
Most major private insurers have approved coverage for our AK therapy. We
believe that due to these efforts, plus future improvements, along with our
education and marketing programs, a more widespread adoption of our therapy
should occur over time.
SUPPLY PARTNERS
National Biological Corporation. In November 1998, we entered into a
purchase and supply agreement with National Biological Corporation, or NBC, for
the manufacture of some of our light sources, including the BLU-U(R). We agreed
to order from NBC all of our supply needs of these light sources for the United
States and Canada, and NBC agreed to supply us with the quantities we order. If
an opportunity arises, the parties have agreed to negotiate the terms under
which NBC would supply us with light sources for sale in countries other than
the current territories. On June 21, 2004, DUSA signed an Amended and Restated
Purchase and Supply Agreement with NBC, which provides for the elimination of
certain exclusivity clauses, permits DUSA to order on a purchase order basis
without minimums, grants DUSA an exclusive irrevocable worldwide and fully-paid
up license to manufacture, or have the BLU-U(R) manufactured by any third party
subcontractor, and other modifications which provide both parties greater
flexibility related to the development and manufacture of light sources, and the
associated technology within the field of PDT. The agreement maintains the
original term, which will expire in November 2008, subject to earlier
termination for breach or insolvency or for convenience. However, a termination
for convenience requires 12 months' prior written notice.
Sochinaz SA. Under an agreement dated December 24, 1993, Sochinaz SA
manufactures and supplies our requirements of Levulan(R) from its FDA approved
facility in Switzerland. The agreement expires on December 31, 2009. While we
can obtain alternative supply sources in certain circumstances, any new supplier
would have to be inspected and qualified by the FDA.
medac GmbH. In December 2002, we entered into a supply agreement with
medac GmbH in connection with the photonamic license agreement mentioned above.
We have a license to market and sell the formulation exclusively in the United
States and in several other countries and non-exclusively in the rest of the
world subject to certain field limitations. The supply agreement covers medac's
current systemic dosage formulation for use in brain cancer, Barrett's
esophagus, as well as for other mutually agreed upon indications. The agreement
provides for minimum purchase requirements following our first commercial sale
and has a term of 10 years from the date of our first commercial sale, subject
to earlier termination rights, as well as successive one-year renewal terms.
15
LICENSES
PARTEQ Research and Development Innovations. We license (or, in the case
of the patents in Australia, were assigned) the patents underlying our
Levulan(R) PDT/PD systems under a license agreement with PARTEQ Research and
Development Innovations, or PARTEQ, the licensing arm of Queen's University,
Kingston, Ontario. Under the agreement, which became effective August 27, 1991,
we have been granted an exclusive worldwide license, with a right to sublicense,
under PARTEQ's patent rights, to make, have made, use and sell products which
are precursors of PpIX, including ALA. The agreement also covers any
improvements discovered, developed or acquired by or for PARTEQ, or Queen's
University, to which PARTEQ has the right to grant a license. A non-exclusive
right is reserved to Queen's University to use the subject matter of the
agreement for non-commercial educational and research purposes. A right is
reserved to the Department of National Defense Canada to use the licensed rights
for defense purposes including defense procurement but excluding sales to
third-parties.
When we are selling our products directly, we have agreed to pay to PARTEQ
royalties of 6% and 4% on 66% of the net selling price in countries where patent
rights do and do not exist, respectively. In cases where we have a sublicensee,
we will pay 6% and 4% when patent rights do and do not exist, respectively, on
our net selling price less the cost of goods for products sold to the
sublicensee, and 6% of royalty payments we receive on sales of products by the
sublicensee. We are also obligated to pay 5% of any lump sum sublicense fees
paid to us, such as milestone payments, excluding amounts designated by the
sublicensee for future research and development efforts. The agreement is
effective for the life of the latest United States patents and becomes perpetual
and royalty-free when no United States patent subsists. Annual minimum royalties
to PARTEQ must total at least CDN $100,000 (U.S. $85,793 as of December 31,
2005) in order to retain the license. For 2005, royalties exceeded this minimum.
We have the right to terminate the PARTEQ agreement with or without cause upon
90 days notice. See "Note 13(a) to the Company's Notes to the Consolidated
Financial Statements".
Together with PARTEQ and Draxis Health, Inc., our former parent, we
entered into an agreement, known as the ALA Assignment Agreement, effective
October 7, 1991. According to the terms of this agreement we assigned to Draxis
our rights and obligations under the PARTEQ license agreement to the extent they
relate to Canada. On February 24, 2004, we reacquired these rights and agreed to
pay an upfront fee and a 10% royalty on sales of the Levulan(R) Kerastick(R) in
Canada over a five-year term following the first commercial sale in Canada. We
are now responsible for any royalties which would be due to PARTEQ for Canadian
sales. Draxis also agreed to assign to us the Canadian regulatory approvals for
the Levulan(R) Kerastick(R) with PDT for AKs. We also hold Canadian regulatory
approval for the BLU-U(R). During 2004, we appointed a Canadian distributor who
launched our Levulan(R) Kerastick(R) and BLU-U(R) in Canada. See sections
entitled "Distribution" and "Note 13(b) to the Company's Notes to the
Consolidated Financial Statements".
photonamic GmbH & Co. KG. In December 2002, we entered into a license and
development agreement with photonamic GmbH & Co. KG, a subsidiary of medac GmbH,
a German pharmaceutical company. This agreement provides for the licensing to us
of photonamic's proprietary technology related to aminolevulinic acid (ALA), the
compound we use in our Levulan(R) PDT and photodetection (PD).
Under the terms of the agreement, we received a license for the United
States and several other countries, to use photonamic's technology, including
pre-clinical and clinical data, related to ALA for systemic dosing in the field
of brain cancer, and for indications which the parties may jointly develop
during the term of their collaboration. Additionally, we are entitled to use the
pre-clinical data for indications which we may develop on our own. See section
entitled "Our Products". We paid a $500,000 up-front license fee, and will be
obligated to pay certain regulatory milestones of $1,250,000 upon FDA acceptance
of a registration application for a brain cancer product in the United States,
an additional
16
$1,250,000 upon registration of the product, and royalties of 12.5% on net sales
under the terms of the license and development agreement and royalties on net
sales of any brain cancer product which utilizes the photonamic technology.
Although we do not believe that the results from medac's European Phase III
clinical study will be acceptable to the FDA, we have agreed to ask FDA for a
pre-IND meeting if medac determines that it wishes to proceed. Should
photonamic's clinical study be acceptable to the FDA, we will be obligated to
proceed with development of the product in the United States in order to retain
the license for the use of the technology in the treatment of brain cancer. The
agreement has a term of 10 years from the date of first approval of a product
using photonamic's technology, subject to earlier termination rights, as well as
one-year renewal terms.
We have also entered into a clinical trial agreement with photonamic to
fund an independent investigator study using oral Levulan(R) for the treatment
of psoriasis. A protocol for this study was established in 2005.
Stiefel Laboratories, Inc. On January 12, 2006, we entered into an
exclusive marketing, distribution and supply agreement with Stiefel
Laboratories, Inc. The agreement covers current and future uses of our
Levulan(R) Kerastick(R) PDT in dermatology. The agreement, which has an initial
term of ten years, grants Stiefel the right to market and distribute our product
in Mexico, Central and South America. We have completed the portion of the
Brazilian regulatory submission for the use of Levulan PDT for actinic
keratoses. Stiefel will complete final integration and submission of the data to
the Brazilian regulatory agency with market launch expected in late 2006 or
early 2007. Stiefel will prepare and file the regulatory applications in other
countries in the territory subject to the terms of the Agreement, perhaps first
launching in a country other than Brazil. All regulatory filings and
registrations for approval will be owned by DUSA, unless otherwise agreed by
DUSA. Stiefel will make up to $3,000,000 in milestone payments, based upon
receipt of final pricing approval of the product from Brazilian regulatory
authorities and achievement of certain minimum purchase levels in the territory,
subject to certain terms and conditions. We will manufacture the Kerastick(R)
for Stiefel in our manufacturing facility in Wilmington, Massachusetts. Stiefel
will pay to DUSA a percentage of Stiefel's final selling price to third-parties
subject to a certain minimum purchase price per unit and to other terms and
conditions. Steifel has certain minimum purchase obligations. The parties have
certain rights to terminate the Agreement prior to the end of the initial term,
and Stiefel has an option to extend the term for an additional ten years on
mutually agreeable terms and conditions.
PATENTS AND TRADEMARKS
We actively seek, when appropriate, to protect our products and
proprietary information through United States and foreign patents, trademarks
and contractual arrangements. In addition, we rely on trade secrets and
contractual arrangements to protect certain aspects of our proprietary
information and products.
Our ability to compete successfully depends, in part, on our ability to
defend our patents that have issued, obtain new patents, protect trade secrets
and operate without infringing the proprietary rights of others. We have no
product patent protection for the compound ALA itself, as our basic patents are
for methods of detecting and treating various diseased tissues using ALA or
related compounds called precursors, in combination with light. Even where we
have patent protection, there is no guarantee that we will be able to enforce
our patents. Patent litigation is expensive, and we may not be able to afford
the costs. We own or exclusively license patents and patent applications related
to the following:
o methods of using ALA and its unique physical forms in combination
with light,
o compositions and apparatus for those methods, and
o unique physical forms of ALA.
17
These patents expire no earlier than 2009, and certain patents are
entitled to terms beyond that date. Effective September 29, 2003, the United
States Patent and Trademark Office extended the term of U.S Patent No.
5,079,262, with respect to our approved AK indication for Levulan(R), until
September 29, 2013.
Under the license agreement with PARTEQ, we hold an exclusive worldwide
license to certain patent rights in the United States and a limited number of
foreign countries. See section entitled "Business - Licenses". All United States
patents and patent applications licensed from PARTEQ relating to ALA are method
of treatment patents. Method of treatment patents limit direct infringement to
users of the methods of treatment covered by the patents. We currently have
patents and/or pending patent applications in the United States and in a number
of foreign countries covering unique physical forms of ALA, compositions
containing ALA, as well as ALA applicators, light sources for use with ALA, and
other technology. We cannot guarantee that any pending patent applications will
mature into issued patents.
We have limited patent protection outside the United States, which may
make it easier for third-parties to compete there. Our basic method of treatment
patents and applications have counterparts in only six foreign countries and
under the European Patent Convention. See sections entitled "Risk Factors -
Risks Related to DUSA" and "Legal Proceedings".
We can provide no assurance that a third-party or parties will not claim,
with or without merit, that we have infringed or misappropriated their
proprietary rights. A number of entities have obtained, and are attempting to
obtain patent protection for various uses of ALA. We can provide no assurance as
to whether any issued patents, or patents that may later issue to third-parties,
may affect the uses on which we are working or whether such patents can be
avoided, invalidated or licensed if they cannot be avoided or invalidated. If
any third-party were to assert a claim for infringement, as one party has
already done, we can provide no assurance that we would be successful in the
litigation or that such litigation would not have a material adverse effect on
our business, financial condition and results of operation. Furthermore, we may
not be able to afford the expense of defending against any such additional
claim.
In addition, we cannot guarantee that our patents, whether owned or
licensed, or any future patents that may issue, will prevent other companies
from developing similar or functionally equivalent products. Further, we cannot
guarantee that we will continue to develop our own patentable technologies or
that our products or methods will not infringe upon the patents of
third-parties. In addition, we cannot guarantee that any of the patents that may
be issued to us will effectively protect our technology or provide a competitive
advantage for our products or will not be challenged, invalidated, or
circumvented in the future.
We also attempt to protect our proprietary information as trade secrets.
Generally agreements with employees, licensing partners, consultants,
universities, pharmaceutical companies and agents contain provisions designed to
protect the confidentiality of our proprietary information. However, we can
provide no assurance that these agreements will provide effective protection for
our proprietary information in the event of unauthorized use or disclosure of
such information. Furthermore, we can provide no assurance that our competitors
will not independently develop substantially equivalent proprietary information
or otherwise gain access to our proprietary information, or that we can
meaningfully protect our rights in unpatentable proprietary information.
Even in the absence of composition of matter patent protection for ALA, we
may receive financial benefits from: (i) patents relating to the use of such
products (like PARTEQ's patents); (ii) patents relating to special compositions
and formulations; (iii) limited marketing exclusivity that may be available
under the Hatch-Waxman Act and any counterpart protection available in foreign
countries and (iv) patent term extension under the Hatch-Waxman Act. See section
entitled "Business - Government
18
Regulation". Effective patent protection also depends on many other factors such
as the nature of the market and the position of the product in it, the growth of
the market, the complexities and economics of the process for manufacture of the
active ingredient of the product and the requirements of the new drug provisions
of the Food, Drug and Cosmetic Act, or similar laws and regulations in other
countries.
We seek registration of trademarks in the United States, and other
countries where we may market our products. To date, we have been issued 27
trademark registrations, and other applications are pending.
MANUFACTURING
On July 14, 2003, we received approval from the FDA to manufacture the
Levulan(R) Kerastick(R) at our Wilmington, Massachusetts manufacturing facility.
In February 2004, we began commercial production of our Levulan(R) Kerastick(R)
after having terminated the former third-party contract manufacturing
arrangement. We plan to maintain a reasonable level of Kerastick(R) inventory
based on sales projections. During the third quarter of 2005, we received FDA
approval to manufacture our BLU-U(R) brand light source in our Wilmington,
Massachusetts facility. However, at this time, we expect to utilize our own
facility only as a back-up to our current third-party manufacturer or for
repairs. Our drug, Levulan(R), and the BLU-U(R) brand light source are each
manufactured by single third-party suppliers.
DISTRIBUTION
We have been a direct distributor of the BLU-U(R) since its launch.
Effective January 1, 2006, we have increased our own distribution capacity and
have become the sole distributor for our Levulan(R) Kerastick(R) in the United
States. In March 2004, we signed an exclusive Canadian marketing and
distribution agreement for the Levulan(R) Kerastick(R) and BLU-U(R) with
Coherent-AMT Inc., or Coherent, a leading Canadian medical device and laser
distribution company. Coherent began marketing the BLU-U(R) in April 2004 and
the Kerastick(R) in June 2004, following receipt of the applicable regulatory
approval from Health Canada. The agreement has a three-year term, which can be
automatically renewed for additional one-year terms, unless either party
notifies the other party prior to a term expiration that it does not intend to
renew the agreement. Coherent has the right for a period of time following
termination of its agreement to return inventory of product.
In January 2006, we entered into a marketing and distribution agreement
for the Levulan(R) Kerastick(R) with Stiefel Laboratories, Inc. Under the
agreement, Stiefel was granted an exclusive right to distribute Levulan(R)
Kerastick(R) in Mexico, Central and South America. The Agreement has an initial
term of ten years. DUSA has completed its portion of the Brazilian regulatory
submission for the use of Levulan PDT for actinic keratoses. Effective with the
signing of the Agreement, Stiefel will complete final integration and submission
of the data to the Brazilian regulatory agency with market launch expected in
late 2006 or early 2007. Stiefel may launch the product in Mexico or other
countries in the territory prior to a launch in Brazil. See section entitled
"Business - Licenses, Stiefel Laboratories, Inc."
MARKETING AND SALES
DUSA markets its approved dermatology products in the United States. We
have appointed Coherent-AMT as marketing partner for our products in Canada and
Stiefel for our Levulan(R) Kerastick(R) in Mexico, Central and South America.
As a result of reacquiring our product rights in late 2002 from a former
marketing partner, we commenced marketing and sales activities for our products
in 2003, including the launch of our sales force in October 2003. Initially the
sales force was comprised of six direct representatives, various
19
independent representatives, and an independent sales distributor, designed to
focus on most of our key geographic markets in the United States. During 2005,
we continued our efforts to penetrate the market by expanding our sales coverage
in key geographic locations. As of December 31, 2005, we have further increased
the size of our sales force to 24 sales representatives deployed nationally.
Following the receipt of marketing approval from the Health Protection
Branch - Canada in June 2004, we started to market and sell the Levulan(R)
Kerastick(R) with PDT using the BLU-U(R) for AKs of the face or scalp in Canada
through Coherent-AMT. We anticipate that Stiefel will complete final integration
and submission of the data to the Brazilian regulatory agency with market launch
expected in late 2006 or early 2007 and perhaps sooner in other countries in its
territory. See sections entitled "Business - Licenses and Distribution".
COMPETITION
Commercial development of PDT agents other than Levulan(R) is currently
being pursued by a number of companies. These include: QLT Inc. (Canada); Axcan
Pharma Inc. (United States); Miravant, Inc. (United States); Pharmacyclics, Inc.
(United States); PhotoTherapeutics, Inc. (U.K.); medac GmbH and photonamic GmbH
& Co. KG (Germany); and PhotoCure ASA (Norway) who entered into a marketing
agreement with Galderma S.A. for countries outside of Nordic countries for
certain dermatology indications. Several of these companies are also
commercializing and/or conducting research with ALA or ALA-related compounds.
PhotoCure has received marketing approval of its ALA precursor (ALA
methyl-ester) compound for PDT treatment of AK and basal cell carcinoma, called
BCC, in the European Union, New Zealand, Australia, and countries in
Scandinavia. In July 2004, PhotoCure received FDA approval in the United States
for its AK therapy. However, in December 2004 the FDA notified PhotoCure that
its new drug application, or NDA, for BCC was not approvable. If PhotoCure
enters into the marketplace with its AK therapy, its product will directly
compete with our products. In April 2002, we received a copy of a notice issued
by PhotoCure ASA to Queen's University at Kingston, Ontario, alleging that one
of the patents covered by our agreement with PARTEQ, Australian Patent No.
624985, relating to ALA, was invalid. As a consequence of this action, Queen's
University assigned the Australian patent to us so that we could participate
directly in this litigation. In April 2005, the Federal Court of Australia ruled
that the Australian patent assigned to DUSA by Queen's University which relates
to DUSA's aminolevulinic acid photodynamic therapy is valid and remains in full
force and effect. However, the Court also ruled that PhotoCure's product,
Metvix, does not infringe the claims in the Australian patent. We have been
negotiating a settlement with PhotoCure pertaining to certain of our patents and
we expect the agreement to be finalized in the first half of 2006. See section
entitled "Legal Proceedings".
In August 2003, Axcan Pharma Inc. received FDA approval for the use of its
product, PHOTOFRIN(R)(3), for photodynamic therapy in the treatment of high
grade dysplasia associated with Barrett's esophagus. This approval enabled Axcan
to be the first company to market a PDT therapy for this indication which we are
also pursuing.
There are also non-PDT products for the treatment of AKs, including
cryotherapy with liquid nitrogen, 5-fluorouracil (Efudex(R))(4), diclofenac
sodium (Solaraze(R))(5), and imiquimod (ALDARA(TM))(6). Other
----------
(3) PHOTOFRIN(R) is a registered trademark of Axcan Pharma Inc.
(4) Efudex(R) is a registered trademark of Valeant Pharmaceuticals
International.
(5) Solaraze(R) is a registered trademark of SkyePharma PLC.
(6) ALDARA(TM) is a trademark of 3M Company.
20
AK therapies are also known to be under development, by companies such as
Medigene (GmbH), Peplin (Australia) and others. The pharmaceutical industry is
highly competitive, and 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 and obtaining
regulatory approvals to market products for health care. Our competitors may
succeed in developing products that are safer or more effective than ours and in
obtaining regulatory marketing approval of future products before we do. Our
competitiveness may also be affected by our ability to manufacture and market
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.
We believe that comparisons of the properties of various photosensitizing
PDT drugs will also highlight important competitive issues. We expect that our
principal methods of competition with other PDT companies will be based upon
such factors as the ease of administration of our photodynamic therapy; the
degree of generalized skin sensitivity to light; the number of required doses;
the selectivity of our drug for the target lesion or tissue of interest; and the
type and cost of our light systems. New drugs or future developments in PDT,
laser products or in 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 products uncompetitive or obsolete.
DUSA also markets the BLU-U(R) without Levulan(R) for the treatment of
moderate inflammatory acne vulgaris and general dermatological conditions. Our
competition for the BLU-U(R) without Levulan(R) for moderate inflammatory acne
vulgaris is primarily oral antibiotics, topical antibiotics and other topical
prescription drugs, as well as various laser and non-laser light sources. As
blue light alone for acne is still a relatively new therapy compared to existing
therapies, reimbursement has not been established by private insurance
companies, which may also affect our competitive position versus traditional
therapies which are reimbursed.
Our principal method of competition with existing therapies of AKs and
moderate inflammatory acne vulgaris is patient benefits, including rapid healing
and excellent cosmetic results. See section entitled "Business - Dermatology
Indications, Actinic Keratoses; Acne".
GOVERNMENT REGULATION
The manufacture and sale of pharmaceuticals and medical devices in the
United States are governed by a variety of statutes and regulations. These laws
require, among other things:
o approval of manufacturing facilities, including adherence to current
good manufacturing practices, laboratory and clinical practices
during production and storage known as cGMP, QSR, GLP and GCP,
o controlled research and testing of products,
o applications for marketing approval containing manufacturing,
preclinical and clinical data to establish the safety and efficacy
of the product, and
o control of marketing activities, including advertising and labeling.
The marketing of pharmaceutical products requires the approval of the FDA
in the United States, and similar agencies in other countries. The FDA has
established regulations and safety standards, which apply to the preclinical
evaluation, clinical testing, manufacture and marketing of pharmaceutical
products. The process of obtaining marketing approval for a new drug normally
takes several years and often involves significant costs. The steps required
before a new drug can be produced and marketed for human use in the United
States include:
21
o preclinical studies
o the filing of an Investigational New Drug, or IND, application,
o human clinical trials, and
o the approval of a New Drug Application, or NDA.
Preclinical studies are conducted in the laboratory and on animals to
obtain preliminary information on a drug's efficacy and safety. The time
required for conducting preclinical studies varies greatly depending on the
nature of the drug, and the nature and outcome of the studies. Such studies can
take many years to complete. The results of these studies are submitted to the
FDA as part of the IND application. Human testing can begin if the FDA does not
object to the IND application.
The human clinical testing program involves three phases. Each clinical
study is typically conducted under the auspices of an Institutional Review
Board, or IRB, at the institution where the study will be conducted. An IRB will
consider among other things, ethical factors, the safety of human subjects, and
the possible liability of the institution. A clinical plan, or "protocol," must
be submitted to the FDA prior to commencement of each clinical trial. All
patients involved in the clinical trial must provide informed consent prior to
their participation. The FDA may order the temporary or permanent discontinuance
of a clinical trial at any time for a variety of reasons, particularly if safety
concerns exist. These clinical studies must be conducted in conformance with the
FDA's bioresearch monitoring regulations.
In Phase I, studies are usually conducted on a small number of healthy
human volunteers to determine the maximum tolerated dose and any product-related
side effects of a product. Phase I studies generally require several months to
complete, but can take longer, depending on the drug and the nature of the
study. Phase II studies are conducted on a small number of patients having a
specific disease to determine the most effective doses and schedules of
administration. Phase II studies generally require from several months to 2
years to complete, but can take longer, depending on the drug and the nature of
the study. Phase III involves wide scale studies on patients with the same
disease in order to provide comparisons with currently available therapies.
Phase III studies generally require from six months to four years to complete,
but can take longer, depending on the drug and the nature of the study.
Data from Phase I, II and III trials are submitted to the FDA with the
NDA. The NDA involves considerable data collection, verification and analysis,
as well as the preparation of summaries of the manufacturing and testing
processes and preclinical and clinical trials. Submission of an NDA does not
assure FDA approval for marketing. The application review process generally
takes 1 to 4 years to complete, although reviews of treatments for AIDS, cancer
and other life-threatening diseases may be accelerated, expedited or subject to
fast track treatment. The process may take substantially longer if, among other
things, the FDA has questions or concerns about the safety and/or efficacy of a
product. In general, the FDA requires properly conducted, adequate and
well-controlled clinical studies demonstrating safety and efficacy with
sufficient levels of statistical assurance. However, additional information may
be required. For example, the FDA may also request long-term toxicity studies or
other studies relating to product safety or efficacy. Even with the submission
of such data, the FDA may decide that the application does not satisfy its
regulatory criteria for approval and may disapprove the NDA. Finally, the FDA
may require additional clinical tests following NDA approval to confirm safety
and efficacy, often referred to as Phase IV clinical trials.
Upon approval, a prescription drug may only be marketed for the approved
indications in the approved dosage forms and at the approved dosage with the
approved labeling. Adverse experiences with the product must be reported to the
FDA. In addition, the FDA may impose restrictions on the use of the drug that
may be difficult and expensive to administer. Product approvals may be withdrawn
if
22
compliance with regulatory requirements is not maintained or if problems occur
or are discovered after the product reaches the market. After a product is
approved for a given indication, subsequent new indications, dosage forms, or
dosage levels for the same product must be reviewed by the FDA after the filing
and upon approval of a supplemental NDA. The supplement deals primarily with
safety and effectiveness data related to the new indication or dosage. Finally,
the FDA requires reporting of certain safety and other information, often
referred to as "adverse events" that become known to a manufacturer of an
approved drug. Safety information collected through this process can result in
changes to a product's labeling or withdrawal of a product from the market. If
an active ingredient of a drug product has been previously approved, drug
applications can be filed that may be less time-consuming and costly.
On December 3, 1999, the FDA approved the marketing of our Levulan(R)
Kerastick(R) 20% Topical Solution with PDT for treatment of AKs of the face or
scalp. The commercial version of our BLU-U(R), used together with the
Kerastick(R) to provide PDT for the treatment of non-hyperkeratotic actinic
keratoses, or AKs, of the face or scalp, was approved on September 26, 2000. In
September 2003, we received clearance from the FDA to market the BLU-U(R)
without Levulan(R) PDT for the treatment of moderate inflammatory acne vulgaris
and general dermatological conditions.
Other than the FDA-approved use of the Levulan(R) Kerastick(R) with PDT
for treatment of AKs, and the FDA clearance to market the BLU-U for moderate
inflammatory acne and other dermatologic conditions, our other potential
products still require significant development, including additional preclinical
and/or clinical testing, and regulatory marketing approval prior to
commercialization. The process of obtaining required approvals can be costly and
time consuming and there can be no guarantee that the use of Levulan(R) in any
future products will be successfully developed, prove to be safe and effective
in clinical trials, or receive applicable regulatory marketing approvals.
Medical devices, such as our light source device, are also subject to the
FDA's rules and regulations. These products are required to be tested,
developed, manufactured and distributed in accordance with FDA regulations,
including good manufacturing, laboratory and clinical practices. Under the Food,
Drug & Cosmetic Act, all medical devices are classified as Class I, II or III
devices. The classification of a device affects the degree and extent of the
FDA's regulatory requirements, with Class III devices subject to the most
stringent requirements and FDA review. Generally, Class I devices are subject to
general controls (for example, labeling and adherence to the cGMP requirement
for medical devices), and Class II devices are subject to general controls and
special controls (for example, performance standards, postmarket surveillance,
patient registries and FDA guidelines). Class III devices, which typically are
life-sustaining or life-supporting and implantable devices, or new devices that
have been found not to be substantially equivalent to a legally marketed Class I
or Class II "predicate device," are subject to general controls and also require
clinical testing to assure safety and effectiveness before FDA approval is
obtained. The FDA also has the authority to require clinical testing of Class I
and II devices. The BLU-U(R) is part of a combination product as defined by FDA
and therefore has been classified as a Class III device. We are developing an
endoscopic device for the Barrett's esophagus indication which we believe will
also be classified as Class III and be subject to the highest level of FDA
regulation. Approval of Class III devices require the filing of a premarket
approval, or PMA, application supported by extensive data, including preclinical
and clinical trial data, to demonstrate the safety and effectiveness of the
device. If human clinical trials of a device are required and the device
presents a "significant risk," the manufacturer of the device must file an
investigational device exemption or "IDE" application and receive FDA approval
prior to commencing human clinical trials. At present, our devices are being
studied in preclinical and clinical trials under our INDs.
Following receipt of the PMA application, if the FDA determines that the
application is sufficiently complete to permit a substantive review, the agency
will accept it for filing and further review. Once the submission is filed, the
FDA begins a review of the PMA application. Under the
23
Medical Device User Fee and Modernization Act, the FDA has 180 days to review a
PMA application and respond to the sponsor. The review of PMA applications more
often occurs over a significantly protracted time period, and the FDA may take
up to 2 years or more from the date of filing to complete its review. In
addition, a PMA for a device which forms part of a combination product will not
be approved unless and until the NDA for the corresponding drug is also
approved.
The PMA process can be expensive, uncertain and lengthy. A number of other
companies have sought premarket approval for devices that have never been
approved for marketing. The review time is often significantly extended by the
FDA, which may require more information or clarification of information already
provided in the submission. During the review period, an advisory committee
likely will be convened to review and evaluate the PMA application and provide
recommendations to the FDA as to whether the device should be approved for
marketing. In addition, the FDA will inspect the manufacturing facility to
ensure compliance with cGMP requirements for medical devices prior to approval
of the PMA application. If granted, the premarket approval may include
significant limitations on the indicated uses for which the product may be
marketed, and the agency may require post-marketing studies of the device.
Medical products containing a combination of drugs, including biologic
drugs, or devices may be regulated as "combination products". A combination
product generally is defined as a product comprised of components from 2 or more
regulatory categories (drug/device, device/biologic, drug/biologic, etc.). In
December 2002, the FDA established the Office of Combination Products, or OCP,
whose responsibilities, according to the FDA, will cover the entire regulatory
life cycle of combination products, including jurisdiction decisions as well as
the timeliness and effectiveness of pre-market review, and the consistency and
appropriateness of post-market regulation.
In connection with our NDA for the Levulan(R) Kerastick(R) with PDT for
AKs, a combination filing (including a PMA for the BLU-U(R) light source device
and the NDA for the Levulan(R) Kerastick(R)) was submitted to the Center for
Drug Evaluation and Research. The PMA was then separated from the NDA submission
by the FDA and reviewed by the FDA's Center for Devices and Radiological Health.
Based upon this experience, we anticipate that any future NDAs for Levulan(R)
PDT/PD will be a combination filing accompanied by PMAs. There is no guarantee
that PDT products will continue to be regulated as combination products.
The United States Drug Price Competition and Patent Term Restoration Act
of 1984 known as the Hatch-Waxman Act establishes a 5-year period of marketing
exclusivity from the date of NDA approval for new chemical entities approved
after September 24, 1984. Levulan(R) is a new chemical entity and market
exclusivity under this law expired on December 3, 2004. During this Hatch-Waxman
marketing exclusivity period, the FDA will not approve another application
submitted by a third-party for approval of a drug product which has the same
reference listed drug as Levulan(R), i.e., ALA as its active ingredient. After
the expiration of the Hatch-Waxman exclusivity period, any third-party who
submits an application for approval for a drug product containing ALA must
provide a certification that (i) no patent information has been filed; (ii) that
such patent has expired; (iii) marketing will not commence until the patent(s)
has expired; or (iv) that the patent is invalid or will not be infringed by the
manufacture, use, or sale of the third-party applicant.
Any abbreviated or paper NDA applicant will be subject to the notification
provisions of the Hatch-Waxman Act, which should facilitate our notification
about potential infringement of our patent rights. The abbreviated or paper NDA
applicant must notify the NDA holder and the owner of any patent applicable to
the abbreviated or paper NDA product, of the application and intent to market
the drug that is the subject of the NDA.
24
In 2004, DUSA began marketing and selling our products in Canada.
Generally, we try to design our protocols for clinical studies so that the
results can be used in all the countries where we hope to market the product.
However, countries sometimes require additional studies to be conducted on
patients located in their country. Prior to marketing a product in other
countries, approval by that nation's regulatory authorities must be obtained.
Our former marketing partner had been responsible for applying for marketing
approvals outside the United States for Levulan(R) PDT for dermatology uses and
did file applications for approval in Austria, Australia, South Africa and
Brazil. However, our focus has been primarily on the North American markets
initially, and therefore we authorized our former partner to withdraw the
applications for regulatory approval of Levulan(R) PDT in Australia, Austria and
South Africa. In 2003, we also advised our former partner to withdraw the
applications for the Levulan(R) Kerastick(R) and BLU-U(R) in Brazil, even though
the Kerastick(R) had already been approved, as it was determined that such
rights cannot be transferred to us. We, together with Stiefel under our recently
completed agreement, are in the process of reapplying for approval in Brazil,
but have not determined if we will reapply in any of the other countries at this
time.
With the enactment of the Drug Export Amendments Act of the United States
in 1986, products not yet approved by the FDA may be exported to certain foreign
markets if the product is approved by the importing nation and approved for
export by the United States government. We can provide no assurance that we will
be able to get approval for any of our potential products from any importing
nations' regulatory authorities or be able to participate in the foreign
pharmaceutical market.
Our research and development activities have involved the controlled use
of certain hazardous materials, such as mercury in fluorescent tubes. We are
subject to various laws and regulations governing the use, manufacture, storage,
handling and disposal of hazardous materials and certain waste products. During
the design, construction and validation phases of our Kerastick(R) facility, we
have taken steps to ensure that appropriate environmental controls associated
with the facility comply with environmental laws and standards. We can provide
no assurance that we will not have to make significant additional expenditures
in order to comply with environmental laws and regulations in the future.
Furthermore, we cannot assure that current or future environmental laws or
regulations will not materially adversely effect our operations, business or
assets. Although we believe that our safety procedures for the handling and
disposal of such hazardous materials comply with the standards prescribed by
current environmental laws and regulations, the risk of accidental contamination
or injury from these materials cannot be completely eliminated. In the event of
such an accident, we could be held liable for any damages that result, and any
such liability could exceed our resources.
PRODUCT LIABILITY AND INSURANCE
We are subject to the inherent business risk of product liability claims
in the event that the use of our technology or any prospective product is
alleged to have resulted in adverse effects during testing or following
marketing approval of any such product for commercial sale. We maintain product
liability insurance for coverage of our clinical trial activities and for our
commercial supplies. There can be no assurance that such insurance will continue
to be available on commercially reasonable terms or that it will provide
adequate coverage against all potential claims. See section entitled "Legal
Proceedings".
EMPLOYEES
At the end of 2005, we had 64 full-time employees and two part-time
employees, which was an increase over the 2004 levels. We also retain numerous
independent consultants and temporary employees to support our business needs.
We have employment agreements with all of our key executive officers.
25
INTERNET INFORMATION
Our internet site is located at www.dusapharma.com. Copies of our reports
filed pursuant to Section 13(a) or 15(d) of the Exchange Act, including Annual
Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form
8-K, may be accessed from our website, free of charge, as soon as reasonably
practicable after we electronically file such reports with, or furnish such
reports to, the Securities and Exchange Commission. Please note that our
internet address is being provided for reference only and no information
contained therein is incorporated by reference into our Exchange Act filings.
ITEM 1A. RISK FACTORS
You should carefully consider and evaluate all of the information in, or
incorporated by reference in, this annual report on Form 10-K. The following are
among the risks we face related to our business, assets and operations. They are
not the only ones we face. Any of these risks could materially and adversely
affect our business, results of operations and financial condition, which in
turn could materially and adversely affect the value of the securities being
offered by this report.
This section of the annual report on Form 10-K contains forward-looking
statements of our plans, objectives, expectations and intentions. We use words
such as "anticipate," "believe," "expect," future" and "intend" and similar
expressions to identify forward-looking statements. Our actual results could
differ materially from those anticipated in these forward-looking statements for
many reasons, including the risks factors described below and elsewhere in this
report. You should not place undue reliance on these forward-looking statements,
which apply only as of the date of this report.
RISKS RELATED TO DUSA
WE ARE NOT CURRENTLY PROFITABLE AND MAY NOT BE PROFITABLE IN THE FUTURE UNLESS
WE CAN SUCCESSFULLY MARKET AND SELL SIGNIFICANTLY HIGHER QUANTITIES OF OUR
APPROVED PRODUCTS, THE LEVULAN(R) KERASTICK(R) WITH THE BLU-U(R) BRAND LIGHT
SOURCE FOR THE TREATMENT OF AKS OF THE FACE OR SCALP, AND THE BLU-U(R) WITHOUT
LEVULAN(R) FOR THE TREATMENT OF MODERATE INFLAMMATORY ACNE.
WE HAVE ONLY LIMITED EXPERIENCE MARKETING AND SELLING PHARMACEUTICAL
PRODUCTS AND, AS A RESULT, OUR REVENUES FROM PRODUCT SALES MAY SUFFER.
If we are unable to successfully market and sell sufficient quantities of
our products, revenues from product sales will be lower than anticipated and our
financial condition may be adversely affected. We are responsible for marketing
our approved dermatology products in the United States and the rest of the
world, except Canada, and Mexico and Central and South America, where we have
distributors. We are doing so without the experience of having marketed
pharmaceutical products prior to 2000. In October 2003, DUSA began hiring a
small direct sales force and we increased the size of our sales force to market
our products in the United States. Acquiring and retaining marketing and sales
force capabilities involves significant expense, and current sales levels are
not offsetting the expenses related to these efforts. If our sales and marketing
efforts fail, then sales of the Kerastick(R) and the BLU-U(R) will be adversely
affected.
26
IF WE CANNOT IMPROVE PHYSICIAN REIMBURSEMENT AND/OR CONVINCE MORE PRIVATE
INSURANCE CARRIERS TO ADEQUATELY REIMBURSE PHYSICIANS FOR OUR THERAPY,
SALES OF OUR LEVULAN(R) KERASTICK(R) FOR AKS MAY SUFFER.
Without adequate levels of reimbursement by government health care
programs and private health insurers, the market for our Levulan(R) Kerastick(R)
for AK therapy will be limited. While we continue to support efforts to improve
reimbursement levels to physicians and are working with the major private
insurance carriers to improve coverage for our therapy, if our efforts are not
successful, adoption of our therapy and sales of our products could be
negatively impacted. Although 2005 reimbursement changes related to AK were
made, some physicians still believe that reimbursement levels do not fully
reflect the required efforts to routinely execute our therapy in their
practices.
SINCE WE NOW OPERATE THE ONLY FDA APPROVED MANUFACTURING FACILITY FOR THE
KERASTICK(R) AND CONTINUE TO RELY HEAVILY ON SOLE SUPPLIERS FOR THE
MANUFACTURE OF LEVULAN(R) AND THE BLU-U(R), ANY SUPPLY OR MANUFACTURING
PROBLEMS COULD NEGATIVELY IMPACT OUR SALES.
If we experience problems producing Kerastick(R) units in our facility, or
if either of our contract suppliers fail to supply DUSA's requirements of
Levulan(R) or the BLU-U(R), our business, financial condition and results of
operations would suffer. Although we have received approval by the FDA to
manufacture the BLU-U(R) in our Wilmington, Massachusetts facility, at this time
we expect to utilize our own facility only as a back-up to our current third
party manufacturer or for repairs.
Manufacturers and their subcontractors often encounter difficulties when
commercial quantities of products are manufactured for the first time, or large
quantities of new products are manufactured, including problems involving:
o product yields,
o quality control,
o component and service availability,
o compliance with FDA regulations, and
o the need for further FDA approval if manufacturers make material
changes to manufacturing processes and/or facilities.
We cannot guarantee that problems will not arise with production yields,
costs or quality as we and our suppliers seek to increase production. Any
manufacturing problems could delay or limit our supplies which would hinder our
marketing and sales efforts.
If our facility, any facility of our contract manufacturers, or any
equipment in those facilities is damaged or destroyed, we may not be able to
quickly or inexpensively replace it. Likewise, if there are any quality or
supply problems with any components or materials needed to manufacturer our
products, we may not be able to quickly remedy the problem(s). Any of these
problems could cause our sales to suffer.
27
ANY FAILURE TO COMPLY WITH ONGOING GOVERNMENTAL REGULATIONS IN THE UNITED
STATES AND ELSEWHERE WILL LIMIT OUR ABILITY TO MARKET OUR PRODUCTS.
Both the manufacture and marketing of our products, the Levulan(R)
Kerastick(R) with the BLU-U(R) for AKs and the BLU-U(R) without Levulan(R) to
treat moderate inflammatory acne, are subject to continuing FDA review as well
as comprehensive regulation by the FDA and by state and local regulatory
authorities. These laws require, among other things:
o approval of manufacturing facilities, including adherence to good
manufacturing and laboratory practices during production and
storage,
o controlled research and testing of products even after approval, and
o control of marketing activities, including advertising and labeling.
If we, or any of our contract manufacturers, fail to comply with these
requirements, we may be limited in the jurisdictions in which we are permitted
to sell our products. Additionally, if we or our manufacturers fail to comply
with applicable regulatory approval requirements, a regulatory agency may also:
o send us warning letters,
o impose fines and other civil penalties on us,
o seize our products,
o suspend our regulatory approvals,
o refuse to approve pending applications or supplements to approved
applications filed by us,
o refuse to permit exports of our products from the United States,
o require us to recall products,
o require us to notify physicians of labeling changes and/or product
related problems,
o impose restrictions on our operations, and/or
o criminally prosecute us.
We and our manufacturers must continue to comply with the FDA's Good
Manufacturing Practice, commonly known as cGMP, and Quality System Regulation,
or QSR, and equivalent foreign regulatory requirements. The cGMP requirements
govern quality control and documentation policies and procedures. In complying
with cGMP and foreign regulatory requirements, we and our third-party
manufacturers will be obligated to expend time, money and effort in production,
record keeping and quality control to assure that our products meet applicable
specifications and other requirements.
As part of our FDA approval for the Levulan(R) Kerastick(R) for AK, we
were required to conduct two Phase IV follow-up studies. We successfully
completed the first study; and submitted our final report on the second study to
the FDA in January 2004. The FDA could request additional information and/or
studies. Additionally, if previously unknown problems with the product, a
manufacturer or its facility are
28
discovered in the future, changes in product labeling restrictions or withdrawal
of the product from the market may occur.
Manufacturing facilities are subject to ongoing periodic inspection by the
FDA, including unannounced inspections. We cannot guarantee that our third-party
supply sources, or our own Kerastick(R) facility, will continue to meet all
applicable FDA regulations. If we, or any of our manufacturers, fail to maintain
compliance with FDA regulatory requirements, it would be time consuming and
costly to remedy the problem(s) or to qualify other sources. These consequences
could have an adverse effect on our financial condition and operations.
IF PRODUCT SALES DO NOT INCREASE SIGNIFICANTLY WE MAY NOT BE ABLE TO
ADVANCE DEVELOPMENT OF OUR OTHER POTENTIAL PRODUCTS AS QUICKLY AS WE WOULD
LIKE TO, WHICH WOULD DELAY THE APPROVAL PROCESS AND MARKETING OF NEW
POTENTIAL PRODUCTS.
If we do not generate sufficient revenues from our approved products, we
may be forced to delay or abandon some or all of our product development
programs. The pharmaceutical development and commercialization process is time
consuming and costly, and any delays might result in higher costs which could
adversely affect our financial condition. Without sufficient product sales, we
might be required to seek additional funding. There is no guarantee that
adequate funding sources could be found to continue the development of all our
potential products. We might be required to commit substantially greater capital
than we have available to research and development of such products and we may
not have sufficient funds to complete all or any of our development programs.
THE COMMERCIAL SUCCESS OF ANY PRODUCTS THAT WE MAY DEVELOP WILL DEPEND
UPON THE DEGREE OF MARKET ACCEPTANCE OF OUR PRODUCTS AMONG PHYSICIANS,
PATIENTS, HEALTH CARE PAYORS, PRIVATE HEALTH INSURERS AND THE MEDICAL
COMMUNITY.
Our ability to commercialize any products that we may develop will be
highly dependent upon the extent to which these products gain market acceptance
among physicians, patients, health care payors, such as Medicare and Medicaid,
private health insurers, including managed care organizations and group
purchasing organizations, and the medical community. If these products do not
achieve an adequate level of acceptance, we may not generate material product
revenues, and we may not become profitable. The degree of market acceptance of
our product candidates, if approved for commercial sale, will depend on a number
of factors, including:
o the effectiveness, or perceived effectiveness, of our products in
comparison to competing products;
o the existence of any significant side effects, as well as their
severity in comparison to any competing products;
o potential advantages over alternative treatments;
o the ability to offer our products for sale at competitive prices;
o relative convenience and ease of administration;
o the strength of marketing and distribution support; and
o sufficient third-party coverage or reimbursement.
29
WE HAVE SIGNIFICANT LOSSES AND ANTICIPATE CONTINUED LOSSES FOR THE
FORESEEABLE FUTURE.
We have a history of operating losses. We expect to have continued losses
through at least 2006 as we attempt to increase sales of our approved products
in the marketplace and continue research and development of potential new
products. We incurred net losses of $15,628,980 for the year ended December 31,
2004 and net losses of $14,998,709 for the year ended December 31, 2005. As of
December 31, 2005, our accumulated deficit was approximately $89,537,000. We
cannot predict whether any of our products will achieve significant enough
market acceptance or generate sufficient revenues to enable us to become
profitable.
IF WE ARE UNABLE TO PROTECT OUR PROPRIETARY TECHNOLOGY, TRADE SECRETS OR
KNOW-HOW, WE MAY NOT BE ABLE TO OPERATE OUR BUSINESS PROFITABLY.
WE HAVE LIMITED PATENT PROTECTION AND IF WE ARE UNABLE TO PROTECT OUR
PROPRIETARY RIGHTS, COMPETITORS MIGHT BE ABLE TO DEVELOP SIMILAR PRODUCTS
TO COMPETE WITH OUR PRODUCTS AND TECHNOLOGY.
Our ability to compete successfully depends, in part, on our ability to
defend patents that have issued, obtain new patents, protect trade secrets and
operate without infringing the proprietary rights of others. We have no compound
patent protection for our Levulan(R) brand of the compound ALA. Our basic
patents are for methods of detecting and treating various diseased tissues using
ALA (or related compounds called precursors), in combination with light. We own
or exclusively license patents and patent applications related to the following:
o methods of using ALA and its unique physical forms in combination
with light,
o compositions and apparatus for those methods, and
o unique physical forms of ALA.
We have limited patent protection outside the United States, which may
make it easier for third-parties to compete there. Our basic method of treatment
patents and applications have counterparts in only six foreign countries, and
certain countries under the European Patent Convention. Even where we have
patent protection, there is no guarantee that we will be able to enforce our
patents. Additionally, enforcement of a given patent may not be practicable or
an economically viable alternative.
In 2002, we received notice of a lawsuit filed in Australia by PhotoCure
ASA alleging that Australian Patent No. 624985, which is one of the patents
licensed to us by PARTEQ Research & Development Innovations, the technology
transfer arm of Queen's University at Kingston, Ontario, relating to our ALA
technology, is invalid. As a consequence of this action, Queen's University
assigned the Australian patent to DUSA so that we could participate directly in
the litigation. On April 6, 2005, the Federal Court of Australia ruled that the
patent is valid and remains in full force and effect. However, the Court also
ruled that PhotoCure's product does not infringe the claims in the Australian
patent. The parties signed a Mediation Agreement in August 2004 to attempt to
settle their disputes and those discussions are ongoing. If the parties are
unable to amicably resolve matters, patent litigation could ensue in the United
States and there can be no guarantee that we would prevail.
Some of the indications for which we are developing therapies may not be
covered by the claims in any of our existing patents. Even with the issuance of
additional patents to DUSA, other parties are free to develop other uses of ALA,
including medical uses, and to market ALA for such uses, assuming that
30
they have obtained appropriate regulatory marketing approvals. ALA in the
chemical form has been commercially supplied for decades, and is not itself
subject to patent protection. There are reports of third-parties conducting
clinical studies with ALA in countries outside the United States where PARTEQ
does not have patent protection. In addition, a number of third-parties are
seeking patents for uses of ALA not covered by our patents. These other uses,
whether patented or not, and the commercial availability of ALA, could limit the
scope of our future operations because ALA products could come on the market
which would not infringe our patents but would compete with our Levulan(R)
products even though they are marketed for different uses.
While we attempt to protect our proprietary information as trade secrets
through agreements with each employee, licensing partner, consultant,
university, pharmaceutical company and agent, we cannot guarantee that these
agreements will provide effective protection for our proprietary information. It
is possible that:
o these persons or entities might breach the agreements,
o we might not have adequate remedies for a breach, and/or
o our competitors will independently develop or otherwise discover our
trade secrets.
PATENT LITIGATION IS EXPENSIVE, AND WE MAY NOT BE ABLE TO AFFORD THE
COSTS.
The costs of litigation or any proceeding relating to our intellectual
property rights could be substantial even if resolved in our favor. Some of our
competitors have far greater resources than we do and may be better able to
afford the costs of complex patent litigation. For example, third-party
competitors may infringe one or more of our patents, and we could be required to
spend significant resources to enforce our patent rights. Also, if we were to
sue a third-party for infringement of our patents in the United States, that
third-party could challenge the validity of our patent(s). We cannot guarantee
that a third-party will not claim, with or without merit, that we have infringed
their patent(s) or misappropriated their proprietary material. Defending this
type of legal action involves considerable expense and could negatively affect
our financial results.
Additionally, if a third-party were to file a United States patent
application in the United States, or be issued a patent claiming technology also
claimed by us in a pending United States application(s), we may be required to
participate in interference proceedings in the United States Patent and
Trademark Office to determine the priority of the invention. A third-party could
also request the declaration of a patent interference between one of our issued
United States patents and one of its patent applications. Any interference
proceedings likely would require participation by us and/or PARTEQ, could
involve substantial legal fees and result in a loss or lessening of our patent
protection.
During 2005 and into 2006, we filed several lawsuits against compounding
pharmacies and physicians alleging violations of patent law. While we have been
successful in obtaining a default judgment against one compounding pharmacy and
have obtained consent judgments from several physicians, we do not know whether
these lawsuits will prevent others from infringing our patents or whether we
will be successful in stopping these activities which we believe are negatively
affecting our revenues.
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WE HAVE ONLY TWO THERAPIES THAT HAVE RECEIVED REGULATORY APPROVAL OR
CLEARANCE AND WE CANNOT PREDICT WHETHER WE WILL EVER DEVELOP OR COMMERCIALIZE
ANY OTHER PRODUCTS.
EXCEPT FOR THE LEVULAN(R) KERASTICK(R) WITH THE BLU-U(R) TO TREAT AKS, AND
THE USE OF THE BLU-U(R) ALONE TO TREAT MODERATE INFLAMMATORY ACNE, ALL OF
OUR POTENTIAL PRODUCTS ARE IN EARLY STAGES OF DEVELOPMENT AND MAY NEVER
RESULT IN ANY COMMERCIALLY SUCCESSFUL PRODUCTS.
We do not know if the Levulan(R) Kerastick(R) or the BLU-U(R) products
will ever be commercially successful. To be profitable, we must successfully
research, develop, obtain regulatory approval for, manufacture, introduce,
market and distribute our products. Except for DUSA's two approved therapies,
all of our other potential Levulan(R) and BLU-U(R) products are at an early
stage of development and subject to the risks of failure inherent in the
development of new pharmaceutical products and products based on new
technologies. These risks include:
o delays in product development, clinical testing or manufacturing,
o unplanned expenditures in product development, clinical testing or
manufacturing,
o failure in clinical trials or failure to receive regulatory
approvals,
o emergence of superior or equivalent products,
o inability to market products due to third-party proprietary rights,
and
o failure to achieve market acceptance.
We cannot predict how long the development of our investigational stage
products will take or whether they will be medically effective. We cannot be
sure that a successful market will continue to develop for our Levulan(R) drug
technology.
WE MUST RECEIVE SEPARATE APPROVAL FOR EACH OF OUR POTENTIAL PRODUCTS
BEFORE WE CAN SELL THEM COMMERCIALLY IN THE UNITED STATES OR ABROAD.
All of our potential Levulan(R) products will require the approval of the
FDA before they can be marketed in the United States. If we fail to obtain the
required approvals for these products our revenues will be limited. Before an
application to the FDA seeking approval to market a new drug, called an NDA, can
be filed, a product must undergo, among other things, extensive animal testing
and human clinical trials. The process of obtaining FDA approvals can be
lengthy, costly, and time-consuming. Following the acceptance of an NDA, the
time required for regulatory approval can vary and is usually 1 to 3 years or
more. The FDA may require additional animal studies and/or human clinical trials
before granting approval. Our Levulan(R) PDT products are based on relatively
new technology. To the best of our knowledge, the FDA has approved only 3 drugs
for use in photodynamic therapy, including Levulan(R). This factor may lengthen
the approval process. We face much trial and error and we may fail at numerous
stages along the way.
We cannot predict whether we will obtain approval for any of our potential
products. Data obtained from preclinical testing and clinical trials can be
susceptible to varying interpretations which could delay, limit or prevent
regulatory approvals. Future clinical trials may not show that Levulan(R) PDT or
photodetection, known as PD, is safe and effective for any new use we are
studying. In addition, delays or disapprovals may be encountered based upon
additional governmental regulation resulting from future legislation or
administrative action or changes in FDA policy. During September 2005, the FDA
issued
32
guidance for the pharmaceutical industry regarding the development of new drugs
for acne vulgaris treatment. As a result, it is likely that the costs and time
to approval associated with seeking regulatory approval of this indication will
be increased. The FDA may issue additional guidance in the future, which may
result on additional costs and delays. We must also obtain foreign regulatory
clearances before we can market any potential products in foreign markets. The
foreign regulatory approval process includes all of the risks associated with
obtaining FDA marketing approval and may impose substantial additional costs.
IF WE ARE UNABLE TO OBTAIN THE NECESSARY CAPITAL TO FUND OUR OPERATIONS,
WE WILL HAVE TO DELAY OUR DEVELOPMENT PROGRAMS AND MAY NOT BE ABLE TO
COMPLETE OUR CLINICAL TRIALS.
Since our current sales goals for our products may not be met in the
future, we may need substantial additional funds to fully develop, manufacture,
market and sell our other potential products. We may obtain funds through other
public or private financings, including equity financing, and/or through
collaborative arrangements. We cannot predict whether any financing will be
available at all or on acceptable terms.
Dependent on the extent of available funding, we may delay, reduce in
scope or eliminate some of our research and development programs. We may also
choose to license rights to third parties to commercialize products or
technologies that we would otherwise have attempted to develop and commercialize
on our own which could reduce our potential revenues.
WE ARE EXPOSED TO RISKS ASSOCIATED WITH ACQUISITIONS.
On December 30, 2005 we entered into a Merger Agreement with Sirius
Laboratories, Inc. The transaction is expected to close during the first quarter
of 2006, subject to the terms and conditions in the Merger Agreement. We may in
the future make other acquisitions of, or significant investments in, businesses
with complementary products, services and/or technologies. Acquisitions involve
numerous risks, including, but not limited to:
o difficulties and increased costs in connection with integration of
the personnel, operations, technologies and products of acquired
companies;
o diversion of management's attention from other operational matters;
o the potential loss of key employees;
o the potential loss of key collaborators;
o lack of synergy, or the inability to realize expected synergies,
resulting from the acquisition;
o acquired intangible assets becoming impaired as a result of
technological advancements or worse-than-expected performance of the
acquired company;
o the potential for unexpected liabilities; and
o use of cash which could be difficult to replace on reasonable terms.
Mergers and acquisitions are inherently risky, and the inability to
effectively manage these risks could materially and adversely affect our
business, financial condition and results of operations.
33
BECAUSE OF THE NATURE OF OUR BUSINESS, THE LOSS OF KEY MEMBERS OF OUR MANAGEMENT
TEAM COULD DELAY ACHIEVEMENT OF OUR GOALS.
We are a small company with only 66 employees, including 2 part-time
employees as of December 31, 2005. We are highly dependent on several key
officer/employees with specialized scientific and technical skills without whom
our business, financial condition and results of operations would suffer. The
photodynamic therapy industry is still quite small and the number of experts is
limited. The loss of these key employees could cause significant delays in
achievement of our business and research goals since very few people with their
expertise could be hired. Our growth and future success will depend, in large
part, on the continued contributions of these key individuals as well as our
ability to motivate and retain other qualified personnel in our specialty drug
and light device areas.
OUR COLLABORATIONS WITH OUTSIDE SCIENTISTS MAY BE SUBJECT TO RESTRICTION AND
CHANGE.
We work with scientific and clinical advisors and collaborators at
academic and other institutions that assist us in our research and development
efforts. These scientists and advisors are not our employees and may have other
commitments that limit their availability to us. Although our advisors and
collaborators generally agree not to do competing work, if a conflict of
interest between their work for us and their work for another entity arises, we
may lose their services. In addition, although our advisors and collaborators
sign agreements not to disclose our confidential information, it is possible
that valuable proprietary knowledge may become publicly known through them.
RISKS RELATED TO OUR INDUSTRY
PRODUCT LIABILITY AND OTHER CLAIMS AGAINST US MAY REDUCE DEMAND FOR OUR PRODUCTS
OR RESULT IN DAMAGES.
WE ARE SUBJECT TO RISK FROM POTENTIAL PRODUCT LIABILITY LAWSUITS WHICH
COULD NEGATIVELY AFFECT OUR BUSINESS.
The development, manufacture and sale of medical products exposes us to
product liability claims related to the use or misuse of our products. Product
liability claims can be expensive to defend and may result in significant
judgments against us. A successful claim in excess of our insurance coverage
could materially harm our business, financial condition and results of
operations. Additionally, we cannot guarantee that continued product liability
insurance coverage will be available in the future at acceptable costs. If the
cost is too high, we may have to self-insure.
OUR BUSINESS INVOLVES ENVIRONMENTAL RISKS AND WE MAY INCUR SIGNIFICANT
COSTS COMPLYING WITH ENVIRONMENTAL LAWS AND REGULATIONS.
We have used various hazardous materials, such as mercury in fluorescent
tubes in our research and development activities. We are subject to federal,
state and local laws and regulations which govern the use, manufacture, storage,
handling and disposal of hazardous materials and specific waste products. Now
that we have established our own production line for the manufacture of the
Kerastick(R), we are subject to additional environmental laws and regulations.
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 assets. In addition, although we believe our safety
34
procedures for handling and disposing of these materials comply with federal,
state and local 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.
WE MAY NOT BE ABLE TO COMPETE AGAINST TRADITIONAL TREATMENT METHODS OR KEEP UP
WITH RAPID CHANGES IN THE BIOTECHNOLOGY AND PHARMACEUTICAL INDUSTRIES THAT COULD
MAKE SOME OR ALL OF OUR PRODUCTS NON-COMPETITIVE OR OBSOLETE.
COMPETING PRODUCTS AND TECHNOLOGIES BASED ON TRADITIONAL TREATMENT METHODS
MAY MAKE SOME OR ALL OF OUR PROGRAMS OR POTENTIAL PRODUCTS NONCOMPETITIVE
OR OBSOLETE.
Well-known pharmaceutical, biotechnology and medical device companies are
marketing well-established therapies for the treatment of many of the same
conditions that we are seeking to treat, including AKs, acne, photodamaged skin
and Barrett's esophagus. Doctors may prefer to use familiar methods, rather than
trying our products. Reimbursement issues affect the economic competitiveness of
our products as compared to other more traditional therapies.
If PhotoCure enters the United States marketplace with its PDT product,
our sales revenues may decline.
Many companies are also seeking to develop new products and technologies,
and receiving approval for medical conditions for which we are developing
treatments. Our industry is subject to rapid, unpredictable and significant
technological change. Competition is intense. Our competitors may succeed in
developing products that are safer or more effective 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 and obtaining regulatory approvals to market
products for health care.
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:
o price reductions,
o lower levels of third-party reimbursements,
o failure to achieve market acceptance, and
o loss of market share,
any of which could adversely affect our business. Further, we cannot give any
assurance that developments by our competitors or future competitors will not
render our technology obsolete.
OUR PRODUCTS MAY LOSE MARKET SHARE IF NEW MANUFACTURERS BEGIN PRODUCING
COMPETING PRODUCTS THAT ARE ABLE TO PENETRATE OUR MARKET.
WE HAVE LEARNED THAT COMPOUNDING PHARMACIES ARE PRODUCING A FORM OF
AMINOLEVULINIC ACID HCL AND ARE MARKETING IT TO THE MEDICAL COMMUNITY.
We are aware that there are compounding pharmacies that market compounded
versions of aminolevulinic acid HCl as an alternative to our Levulan(R) product.
On January 31, 2005, we filed a
35
lawsuit in the United States District Court for the District of Arizona against
The Cosmetic Pharmacy of Tucson, Arizona alleging violations of the Lanham Act
for false advertising and trademark infringement and of United States patent
law. A motion for default judgment was granted on July 25, 2005 in our favor for
failure of The Cosmetic Pharmacy of Tucson to appear, together with injunctive
relief and attorney fees and costs in the amount of approximately $20,700. Also,
on December 27, 2004, we filed a lawsuit in United States District Court for the
District of Massachusetts against New England Compounding Pharmacy, Inc. of
Framingham, Massachusetts alleging violations of United States patent law. New
England Compounding Pharmacy has filed an answer, including a defense alleging
invalidity of our patents, and several counterclaims against us, and we have
filed our response. The parties are now in the discovery stage of this
litigation and we have been unable to predict the outcome of the lawsuit at this
time. A tentative trial date has been set by the court for January 2007. We
cannot be certain whether we will be successful in defending such counterclaims,
however, we have not accrued any amounts for settlement at this time. While we
believe that certain actions of these pharmacies go beyond the activities which
are permitted under the Food, Drug and Cosmetic Act and have advised the FDA and
local health authorities of our concerns, we cannot be certain that our lawsuits
will be successful in curbing the practices of these pharmacies or that
regulatory authorities will intervene to stop their activities. In addition,
there may be other compounding pharmacies which are following FDA guidelines, or
others conducting illegal activities of which we are not aware, which may be
negatively impacting our sales revenues.
OUR PDT/PD COMPETITORS IN THE BIOTECHNOLOGY AND PHARMACEUTICAL INDUSTRIES
MAY HAVE BETTER PRODUCTS, MANUFACTURING CAPABILITIES OR MARKETING
EXPERTISE.
We anticipate that we will face increased competition as the scientific
development of PDT/PD advances and new companies enter our markets. Several
companies are developing PDT agents other than Levulan(R). These include: QLT
Inc. (Canada); Axcan Pharma Inc. (U.S.); Miravant, Inc. (U.S.); and
Pharmacyclics, Inc. (U.S.). We are also aware of several companies
commercializing and/or conducting research with ALA or ALA-related compounds,
including: medac GmbH and photonamic GmbH & Co. KG (Germany); PhotoTherapeutics,
Inc. (U.K.) and PhotoCure ASA (Norway) which entered into a marketing agreement
with Galderma S.A. for countries outside of Nordic countries for certain
dermatology indications.
PhotoCure has received marketing approval of its ALA precursor (ALA
methyl-ester) compound for PDT treatment of AKs and basal cell carcinoma in the
European Union, New Zealand, Australia and countries in Scandinavia. In July
2004, PhotoCure received FDA approval in the United States for its AK therapy.
If PhotoCure enters into the marketplace based on receiving approval, its
product will represent direct competition for our products.
Axcan Pharma Inc. has received FDA approval for the use of its product,
PHOTOFRIN(R), for PDT in the treatment of high grade dysplasia associated with
Barrett's esophagus. Axcan is the first company to market a PDT therapy for this
indication, which we are also pursuing.
We expect that our principal methods of competition with other PDT
companies will be based upon such factors as:
o the ease of administration of our method of PDT,
o the degree of generalized skin sensitivity to light,
o the number of required doses,
36
o the selectivity of our drug for the target lesion or tissue of
interest, and
o the type and cost of our light systems.
RISKS RELATED TO OUR STOCK
IF OUTSTANDING OPTIONS, WARRANTS AND RIGHTS ARE CONVERTED, THE VALUE OF THOSE
SHARES OF COMMON STOCK OUTSTANDING JUST PRIOR TO THE CONVERSION WILL BE DILUTED.
As of March 1, 2006 there were outstanding options and warrants to
purchase 2,867,875 shares of common stock, with exercise prices ranging from
U.S. $1.60 to $31.00 per share, and of CDN $6.79 per share, respectively. The
holders of the options and warrants have the opportunity to profit if the market
price for the common stock exceeds the exercise price of their respective
securities, without assuming the risk of ownership. The holders are likely to
exercise their securities when we would probably be able to raise capital from
the public on terms more favorable than those provided in these securities.
RESULTS OF OUR OPERATIONS AND GENERAL MARKET CONDITIONS FOR SPECIALTY
PHARMACEUTICAL AND BIOTECHNOLOGY STOCKS COULD RESULT IN SUDDEN CHANGES IN THE
MARKET VALUE OF OUR STOCK.
The price of our common stock has been highly volatile. These fluctuations
create a greater risk of capital losses for our shareholders as compared to less
volatile stocks. From January 1, 2005 to March 1, 2006, the price of our stock
has ranged from a low of $6.57 to a high of $16.30. Factors that contributed to
the volatility of our stock during the last 12 months included:
o quarterly levels of product sales;
o clinical trial results;
o general market conditions;
o increased marketing activities; and
o changes in third-party payor reimbursement for our therapy.
The significant general market volatility in similar stage pharmaceutical
and biotechnology companies made the market price of our common stock even more
volatile.
SIGNIFICANT FLUCTUATIONS IN ORDERS FOR OUR PRODUCTS, ON A MONTHLY AND QUARTERLY
BASIS, ARE COMMON BASED ON EXTERNAL FACTORS AND SALES PROMOTION ACTIVITIES.
THESE FLUCTUATIONS COULD INCREASE THE VOLATILITY OF OUR STOCK PRICE.
The price of our common stock may be affected by the amount of quarterly
shipments of our products to end-users. Since our products are still in the
early stages of adoption, and sales volumes are still low, a number of factors
could affect product sales levels and growth rates in any period. These could
include the timing of medical conferences, sales promotion activities, and large
volume purchases by our higher usage customers. In addition, seasonal
fluctuations in the number of patients seeking treatment at various times during
the year could impact sales volumes. These factors could, in turn, affect the
volatility of our stock price.
37
EFFECTING A CHANGE OF CONTROL OF DUSA WOULD BE DIFFICULT, WHICH MAY DISCOURAGE
OFFERS FOR SHARES OF OUR COMMON STOCK.
Our certificate of incorporation authorizes the board of directors to
issue up to 100,000,000 shares of stock, 40,000,000 of which are common stock.
The board of directors has the authority to determine the price, rights,
preferences and privileges, including voting rights, of the remaining 60,000,000
shares without any further vote or action by the shareholders. The rights of the
holders of our common stock will be subject to, and may be adversely affected
by, the rights of the holders of any preferred stock that may be issued in the
future.
On September 27, 2002, we adopted a shareholder rights plan at a special
meeting of DUSA's board of directors. The rights plan could discourage, delay or
prevent a person or group from acquiring 15% or more (or 20% or more in the case
of certain parties) of our common stock, thereby limiting, perhaps, the ability
of our shareholders to benefit from such a transaction.
The rights plan provides for the distribution of one right as a dividend
for each outstanding share of our common stock to holders of record as of
October 10, 2002. Each right entitles the registered holder to purchase one
one-thousandths of a share of preferred stock at an exercise price of $37.00 per
right. The rights will be exercisable subsequent to the date that a person or
group either has acquired, obtained the right to acquire, or commences or
discloses an intention to commence a tender offer to acquire, 15% or more of our
outstanding common stock (or 20% of the outstanding common stock in the case of
a shareholder or group who beneficially held in excess of 15% at the record
date), or if a person or group is declared an "Adverse Person", as such term is
defined in the rights plan. The rights may be redeemed by DUSA at a redemption
price of one one-hundredth of a cent per right until ten days following the date
the person or group acquires, or discloses an intention to acquire, 15% or 20%
or more, as the case may be, of DUSA, or until such later date as may be
determined by the our board of directors.
Under the rights plan, if a person or group acquires the threshold amount
of common stock, all holders of rights (other than the acquiring person or
group) may, upon payment of the purchase price then in effect, purchase shares
of common stock of DUSA having a value of twice the purchase price. In the event
that we are involved in a merger or other similar transaction where DUSA is not
the surviving corporation, all holders of rights (other than the acquiring
person or group) shall be entitled, upon payment of the purchase price then in
effect, to purchase common stock of the surviving corporation having a value of
twice the purchase price. The rights will expire on October 10, 2012, unless
previously redeemed. Our board of directors has also adopted certain amendments
to DUSA's certificate of incorporation consistent with the terms of the rights
plan.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
In May 1999, we entered into a five year lease for 16,000 sq. ft. of
office/warehouse space to be used for offices and manufacturing in Wilmington,
Massachusetts. In December 2001 we entered into a 15 year lease covering the
entire building through November 2016. We have the ability to terminate the
Wilmington lease after the 10th year (2011) of the lease by providing the
landlord with notice at least 7 and one-half months prior to the date on which
the termination would be effective. In October 2002, we entered into a five-year
lease commitment for approximately 2,000 sq. ft., for our wholly-owned
subsidiary, DUSA Pharmaceuticals New York, Inc., replacing the space DUSA
previously occupied.
38
Commencing in August 2002, we entered into a five year lease for office space
for our Toronto location which accommodates the Toronto office of our Chief
Executive Officer and shareholder services representative. See "Note 12(c) to
the Company's Notes to the Consolidated Financial Statements".
ITEM 3. LEGAL PROCEEDINGS
In April 2002, we received a copy of a notice issued by PhotoCure ASA to
Queen's University at Kingston, Ontario, alleging that Australian Patent No.
624985 was invalid. Australian Patent No. 624985 is one of the patents covered
by our agreement with PARTEQ Research & Development Innovations, the technology
transfer arm of Queen's University, relating to 5-aminolevulinic acid
technology. PhotoCure instituted this proceeding on April 12, 2002 in the
Federal Court of Australia, Victoria District Registry. As a consequence of this
action, Queen's University assigned the Australian patent to us so that we could
participate directly in this litigation. On April 6, 2005, the Federal Court of
Australia ruled that the patent is valid and remains in full force and effect.
However, the Court also ruled that PhotoCure's product does not infringe the
claims in the Australian patent. Since these claims are unique to the Australian
patent and Australian law differs from patent law in other jurisdictions, we do
not expect that this decision is determinative of the validity of any other
patents licensed by us from Queen's University or of whether PhotoCure's product
infringes claims in such other patents, including the United States patent. None
of the parties have appealed the decision and the date to do so has expired. The
parties, including PhotoCure's marketing partner, Galderma S.A., signed a
Mediation Agreement in August 2004 to attempt to settle their disputes. The
parties are negotiating a settlement agreement which is expected to be finalized
in the first half of 2006.
In December 2004, we filed a lawsuit against New England Compounding
Center of Framingham, Massachusetts alleging violations of United States patent
law in the United States Federal District Court in Boston, Massachusetts. On
March 17, 2005, New England Compounding Pharmacy filed an answer against us,
including a defense that our patents are invalid and several counterclaims
against us, and we filed our response on April 5, 2005. The parties are now in
the discovery stage of this litigation. A tentative trial date has been set by
the court for January 2007. We are seeking injunctive relief, monetary damages
and costs.
In January 2005, we filed a lawsuit against The Cosmetic Pharmacy of
Tucson, Arizona alleging violations of the Lanham Act for false advertising and
trademark infringement, and of United States patent law in the United States
District Court for the District of Arizona. A motion for default judgment was
granted on July 25, 2005 in our favor for failure of The Cosmetic Pharmacy of
Tucson to appear, together with injunctive relief and attorney fees and costs in
the amount of approximately $20,700.
In November of 2005 and January of 2006, we filed lawsuits against
physicians in several states to prevent their continued use of versions of our
Levulan (R) brand of aminolevulinic acid HCl (ALA) produced by compounding
pharmacies, for use in our patented photodynamic therapy (PDT) treatment for
actinic keratosis, basal cell carcinoma, acne and other dermatological
conditions. The suits allege that ALA obtained from sources other than DUSA is
being used by these physicians for patient treatments that are covered under
patents exclusively licensed by DUSA, resulting in direct infringement of these
patent(s). Additionally, some doctors are also being sued for misuse of DUSA's
trademarks and for violations of the Lanham Act for using the Levulan (R) brand
name on their web sites and promotional materials, but performing patient
treatments with ALA obtained from other sources. Most of the physicians have
entered Consent Judgments in which they admit the infringement and provide DUSA
with the right to review their books and records. Two lawsuits are currently
on-going.
39
For other patent matters, see section entitled "Risk Factors - If we are
unable to protect our proprietary technology, trade secrets or know-how, we may
not be able to operate our business profitably".
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock is traded on the NASDAQ National Market under the symbol
"DUSA." The following are the high and low sales prices for the common stock
reported for the quarterly periods shown.
Price range per common share by quarter, 2004:
First Second Third Fourth
------- ------- ------- -------
NASDAQ
High $ 14.87 $ 13.50 $ 12.20 $ 14.41
Low 5.02 8.46 8.23 9.95
Price range per common share by quarter, 2005:
First Second Third Fourth
------- ------- ------- -------
NASDAQ
High $ 16.30 $ 11.68 $ 11.33 $ 10.80
Low 8.70 8.33 8.50 8.67
On March 1, 2006, the closing price of our common stock was $7.42 per
share on the NASDAQ National Market. On March 1, 2006, there were 634 holders of
record of our common stock.
We have never paid cash dividends on our common stock and have no present
plans to do so in the foreseeable future.
40
ITEM 6. SELECTED FINANCIAL DATA
The following information should be read in conjunction with our
Consolidated Financial Statements and the Notes thereto and Management's
Discussion and Analysis of Financial Condition and Results of Operations
included elsewhere in this report. The selected financial data set forth below
has been derived from our audited consolidated financial statements.
CONSOLIDATED STATEMENTS OF
OPERATIONS DATA
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------
2005 2004 2003 2002 (1) 2001
------------- ------------- ------------- ------------ -------------
Revenues (1) $ 11,337,461 $ 7,987,656 $ 970,109 $ 25,483,238 $ 5,390,736
Net income (loss) (14,998,709) (15,628,980) (14,826,854) 5,762,518 (7,358,096)
Basic and diluted net income (loss) per
common share $ (0.89) $ (0.96) $ (1.06) $ 0.42 $ (0.53)
CONSOLIDATED BALANCE SHEETS
DATA
AS OF DECEMBER 31,
----------------------------------------------------------------------------
2005 2004 2003 2002 2001
------------- ------------- ------------- ------------ -------------
Total assets $ 42,330,631 $ 56,650,888 $ 44,697,488 $ 60,949,973 $ 75,864,221
Long-term obligations - - 1,247,500 1,517,500 -
Shareholders' equity 38,028,728 52,507,018 40,232,049 56,057,730 49,834,537
----------
(1) 2002 includes the recognition of approximately $20,990,000 in revenues,
$2,638,000 in cost of product sales and $639,000 in research and
development costs as a result of the termination of our former dermatology
collaboration arrangement. These amounts were previously deferred and were
being amortized into operations over periods ranging from 1 to 12.5 years.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
When you read this section of this report, it is important that you also
read the financial statements and related notes included elsewhere in this
report. This section contains forward-looking statements that involve risks and
uncertainties. Our actual results could differ materially from those we
anticipate in these forward-looking statements for many reasons, including the
factors described below and in "Risk Factors".
OVERVIEW
DUSA is a pharmaceutical company engaged primarily in the research,
development and marketing of our first drug in combination with light devices to
treat or detect a variety of conditions in processes known as photodynamic
therapy or photodetection. Our drug, Levulan(R) brand of aminolevulinic acid
HCl, or ALA, is being used with light, for use in a broad range of medical
conditions. When we use Levulan(R) and follow it with exposure to light to treat
a medical condition, it is known as Levulan(R) photodynamic therapy, or
Levulan(R) PDT. When we use Levulan(R) and follow it with exposure to light to
detect medical conditions it is known as Levulan(R) photodetection, or
Levulan(R) PD.
Our products, the Levulan(R) Kerastick(R) 20% Topical Solution with PDT
and the BLU-U(R) brand light source were launched in the United States, or U.S.,
in September 2000 for the treatment of actinic keratoses, or AKs, of the face or
scalp under a former dermatology collaboration. AKs are precancerous skin
lesions caused by chronic sun exposure that can develop over time into a form of
skin cancer called
41
squamous cell carcinoma. In addition, in September 2003 we received clearance
from the United States Food and Drug Administration, or FDA, to market the
BLU-U(R) without Levulan(R) PDT for the treatment of moderate inflammatory acne
vulgaris and general dermatological conditions.
We are a vertically integrated company, primarily responsible for
regulatory, sales, marketing, customer service, manufacturing of our
Kerastick(R), and other related product activities. Our objectives include
increasing the sales of our products in the United States and Canada, continuing
our efforts of exploring partnership opportunities for Levulan(R) PDT for
dermatology in Europe and/or other countries outside of the United States and
Canada and Latin America and continuing our clinical development programs for
our facial photodamage and moderate to severe acne indications. To further these
objectives, we entered into a marketing and distribution agreement with Stiefel
Laboratories, Inc. in January 2006 granting Stiefel an exclusive right to
distribute the Levulan(R) Kerastick(R) in Mexico, Central and South America.
During 2004 we signed clinical trial agreements with the National Cancer
Institute, or NCI, Division of Cancer Prevention, or DCP, for the clinical
development of Levulan(R) PDT for the treatment of high-grade dysplasia, or HGD,
within Barrett's Esophagus, or BE, and oral cavity dysplasia treatment, and are
working with the NCI DCP to advance the development of these programs. In
addition, we continue to support independent investigator trials to advance
research in the use and applicability of Levulan(R) PDT for other indications in
dermatology, and selected internal indications. See sections entitled "Business
- Internal Indications" and "Business - Distribution".
We are developing Levulan(R) PDT and PD under an exclusive worldwide
license of patents and technology from PARTEQ Research and Development
Innovations, the licensing arm of Queen's University, Kingston, Ontario, Canada.
We also own or license certain other patents relating to methods for using
pharmaceutical formulations which contain our drug and related processes and
improvements. In the United States, DUSA(R), DUSA Pharmaceuticals, Inc.(R),
Levulan(R), Kerastick(R) and BLU-U(R) are registered trademarks. Several of
these trademarks are also registered in Europe, Australia, Canada, and in other
parts of the world. Numerous other trademark applications are pending. See
sections entitled "Business - Licenses; and - Patents and Trademarks".
On December 30, 2005, we entered into a merger agreement to acquire all of
the common stock of Sirius Laboratories, Inc. of Vernon Hills, Illinois in
exchange for cash and common stock of DUSA worth up to $30,000,000. The
transaction is expected to close during the first quarter of 2006, subject to
the terms and conditions in the Merger Agreement. Of the up to $30,000,000,
$8,000,000 less certain expenses will be paid in cash upon closing, $17,000,000
was paid in shares of DUSA's common stock also upon closing, and up to
$5,000,000 in cash or common stock, as DUSA determines, may be paid based on a
combination of new product approvals or launches, and achievement of certain
pre-determined total cumulative sales milestones for Sirius products. The
products acquired in this transaction, called the Sirius Merger, focus primarily
on the treatment of acne vulgaris and acne rosacea. The DUSA shares are expected
to be issued pursuant to Regulation D. The number of shares to be paid will be
equal to $17,000,000 divided by the lesser of $10.10 or the average closing
price of DUSA's shares on the NASDAQ Stock Market for the twenty (20) trading
days prior to closing date.
The closing is subject to certain closing conditions as previously
disclosed which if not met, would provide a party the right to terminate the
Merger Agreement. See section entitled "Business - General." If the Merger
Agreement is terminated, a break-up fee in the amount of $250,000 might be due
from one party to the other. In addition, DUSA has incurred approximately
$800,000 of direct acquisition related costs which will affect the statement of
operations if the transaction does not close. We cannot be certain that the
merger will close.
Historically, we devoted most of our resources to fund research and
development efforts in order to advance the Levulan(R) PDT/PD technology
platform. More recently, we have also devoted significant
42
resources to our sales and marketing efforts. As a result, we have experienced
significant operating losses. During the quarter ended September 30, 2005, the
Company eliminated 14 staff positions, representing 16% of the workforce, to
align headcount more closely with management's assessment of its resource
requirements at that time. These workforce reductions were made across all
functions of the Company. As a result of these actions the Company recorded a
restructuring charge of approximately $150,000. As of December 31, 2005, the
Company had paid all of its obligations under the restructuring plan. As of
December 31, 2005, we had an accumulated deficit of approximately $89,537,000.
We expect to continue to incur operating losses until sales of our products
increase substantially. Achieving our goal of becoming a profitable operating
company is dependent upon greater acceptance of our therapy by the medical and
consumer constituencies, and our ability to develop and/or acquire new
profitable products.
We operate in a highly regulated and competitive environment. Our
competitors include larger fully integrated pharmaceutical companies and
biotechnology companies. Many of the organizations competing with us have
substantially greater capital resources, larger research and development staffs
and facilities, greater experience in drug development and in obtaining
regulatory approvals, and greater manufacturing and sales and marketing
capabilities than we do.
Marketing and sales activities since the October 2003 launch of our sales
force have resulted in significant additional revenues as well as expenses.
Kerastick(R) unit sales to end-users were 100,668 and 76,482 for the twelve
months ended December 31, 2005 and 2004, respectively, consisting of 87,210 and
69,870 units sold in the U.S., and 13,458 and 6,612 units sold in Canada, in
2005 and 2004 respectively. A summary of quarterly Kerastick(R) unit sales to
end users during the periods ended December 31, 2005 and 2004 is indicated
below:
2005
-----------------------------------------------
Q1 Q2 Q3 Q4 TOTAL
------ ------ ------ ------ -------
UNITED STATES 24,900 16,506 17,766 28,038 87,210
CANADA 3,804 3,666 2,520 3,468 13,458
------ ------ ------ ------ -------
TOTAL 28,704 20,172 20,286 31,506 100,668
====== ====== ====== ====== =======
2004
----------------------------------------------
Q1 Q2 Q3 Q4 TOTAL
------ ------ ------ ------ ------
UNITED STATES 12,054 16,002 18,870 22,944 69,870
CANADA - 1,908 1,326 3,378 6,612
------ ------ ------ ------ ------
TOTAL 12,054 17,910 20,196 26,322 76,482
====== ====== ====== ====== ======
The net number of BLU-U(R) units placed in doctors' offices during the
twelve months ended December 31, 2005 and 2004 was 423 and 508, respectively,
including 94 and 101 placed in Canada in 2005 and 2004, respectively. As of
December 31, 2005 and 2004 there were 1,337 and 914 units in doctor's offices,
consisting of 1,142 and 813 in the U.S. and 195 and 101 in Canada in 2005 and
2004,
43
respectively. In addition, during 2005 we began a BLU-U marketing effort to
allow prospective customers to evaluate a BLU-U for a short period of time prior
to making a purchase decision. BLU-U(R) commercial light sources placed in
physicians' offices pursuant to the Company's BLU-U(R) evaluation program are
classified as inventory in the accompanying Consolidated Balance Sheets. The
Company amortizes the cost of the evaluation units during the evaluation period
to cost of goods sold using an estimated useful life for the equipment of 3
years.
We have continued our efforts to penetrate the market by expanding our
sales coverage in key geographic locations. See section entitled "Management's
Discussion and Analysis - Results of Operations, Marketing and Sales Costs". We
are encouraged with the year-over-year increase in sales, as well as the
positive feedback we continue to receive from physicians across the country that
believe Levulan PDT should become a routine part of standard dermatological
practice. We are currently exploring opportunities to develop, market, and
distribute our Levulan(R) PDT platform in Europe and/or other countries outside
of the United States and Canada following our recently completed agreement with
Stiefel Laboratories, Inc. We are also continuing to seek to acquire and/or
license additional dermatology products that complement our current product
portfolio that would provide our sales force with additional complementary
products to sell in the near term.
We believe that the issues related to reimbursement have negatively
impacted the economic competitiveness of our therapy with other AK therapies and
have hindered its adoption in the past. We have continued to support efforts to
improve reimbursement levels to physicians. Such efforts included working with
the Centers for Medicare and Medicaid Services, or CMS, and the American Academy
of Dermatology, or AAD, on matters related to the PDT procedure fee and the
separate drug reimbursement fee. Doctors can also bill for any applicable visit
fees. Effective January 1, 2006, the CMS average national reimbursement for the
use of Levulan(R) PDT for AK's Ambulatory Patient Classifications code ("APC
code") was increased. The APC code is used by many hospitals. The CMS Current
Procedural Terminology code ("CPT code"), which is used by private physician
clinics using Levulan(R) PDT for treating AKs was not increased for 2006 (i.e.
it will be unchanged from 2005 levels). DUSA had expected reimbursement under
the CPT code to increase on January 1, 2006; however, we now believe that the
increase will not be effective until January 1, 2007 based on information from
CMS and the AAD. We are aware that some physicians believe that reimbursement
levels do not fully reflect the required efforts to routinely execute our
therapy in their practices. We continue to support ongoing efforts that might
lead to further increases in reimbursement in the future; and intend to continue
supporting efforts to seek reimbursement for our FDA-cleared use of the BLU-U(R)
alone in the treatment of mild to moderate inflammatory acne of the face.
Most major private insurers have approved coverage for our AK therapy. We
believe that due to these efforts, plus future improvements, along with our
education and marketing programs, a more widespread adoption of our therapy
should occur over time.
We have been encouraged by the positive response from many physicians and
patients who have used our therapy, but we recognize that we have to continue to
demonstrate the clinical value of our unique therapy, and the related product
benefits as compared to other well-established conventional therapies, in order
for the medical community to accept our products on a large scale. While our
financial position is strong, we cannot predict when product sales may offset
the costs associated with these efforts. We are aware that physicians have been
using Levulan(R) with the BLU-U(R) using short incubation, and with light
devices manufactured by other companies, and for uses other than our
FDA-approved use. While we are not permitted to market our products for
so-called `off-label' uses, we believe that these activities are positively
affecting the sales of our products.
44
We believe that some compounding pharmacies are exceeding the legal limits
for their activities, including manufacturing and/or selling quantities of ALA
in circumstances which may be inducing purchasers to infringe our intellectual
property. We believe that these activities are negatively impacting our sales
growth. Therefore in December 2004 and in January 2005, we filed lawsuits
against two compounding pharmacies and several physicians. See section entitled
"Legal Proceedings".
As of December 31, 2005, we had a staff of 64 full-time employees and 2
part-time employee, as compared to 65 full-time employees and 4 part-time
employees at the end of 2004, including marketing and sales, production,
maintenance, customer support, and financial operations personnel, as well as
those who support research and development programs for dermatology and internal
indications. During 2005, we increased the size of our sales force to 26 from 22
at the end of 2004. During 2005 we eliminated 14 positions through a
restructuring action, representing 16% of our workforce, to align headcount more
closely with our assessment of our resource requirements at this time. These
workforce reductions were made across all functions of the Company. We
anticipate that this reduction in staff will reduce our future operating costs
by $1,400,000 on an annualized basis. We may add and/or replace employees during
2006 as business circumstances deem necessary.
2005 TRANSACTIONS
During 2005 and early 2006, DUSA entered into a number of transactions,
all designed to foster future growth of its Levulan(R) PDT and early 2006
platform.
ENTERED INTO EXCLUSIVE MARKETING, DISTRIBUTION AND SUPPLY AGREEMENT WITH
STIEFEL LABORATORIES - In January, 2006, we announced that we had entered into
an exclusive Marketing, Distribution and Supply Agreement (the "Agreement") with
Stiefel Laboratories, Inc. ("Stiefel") covering current and future uses of
DUSA's proprietary Levulan(R) Kerastick(R) for photodynamic therapy (PDT) in
dermatology. The Agreement, grants Stiefel an exclusive right to distribute,
promote and sell the Levulan(R) Kerastick(R) in the western hemisphere from
south of and including Mexico and all other countries in the Caribbean,
excluding United States territories (collectively, the "Territory"). DUSA will
manufacture and supply to Stiefel on an exclusive basis in the Territory all of
Stiefel's reasonable requirements for the product. The Agreement, which has an
initial term of ten years, will expand the distribution of Levulan(R) beyond the
North American market for the first time into Mexico, Central and South America.
DUSA has completed its portion of the Brazilian regulatory submission for the
use of Levulan PDT for actinic keratoses. Effective with the signing of the
Agreement, Stiefel will complete final integration and submission of the data to
the Brazilian regulatory agency with market launch expected in late 2006 or
early 2007. Stiefel will prepare and file the regulatory applications in other
countries in the Territory subject to the terms of the Agreement. The parties
have certain rights to terminate the Agreement prior to the end of the initial
term, and Stiefel has an option to extend the term for an additional ten years
on mutually agreeable terms and conditions.
SIGNED MERGER AGREEMENT TO ACQUIRE SIRIUS LABORATORIES, INC. - In
December, 2005, we signed a definitive Merger Agreement to acquire all of the
common stock of Sirius Laboratories Inc. of Vernon Hills, Illinois in exchange
for cash and common stock worth up to $30,000,000. Sirius is a privately held
dermatology specialty pharmaceuticals company founded in 2000 with a primary
focus on the treatment of acne vulgaris and acne rosacea. Closing of the
transaction is expected in the first quarter of 2006, subject to the terms and
conditions in the Merger Agreement. Of the up to $30,000,000, $8,000,000 less
certain expenses will be paid in cash upon closing, $17,000,000 will be paid in
shares of DUSA's common stock also upon closing in a private placement, and up
to $5,000,000 in cash or common stock may be paid based on a combination of new
product approvals or launches, and achievement of certain pre-determined total
cumulative sales milestones for Sirius products.
45
LAWSUITS FILED FOR INFRINGEMENT OF OUR LEVULAN(R) PHOTODYNAMIC THERAPY
PATENTS- In November 2005, we filed lawsuits against physicians in California,
Florida, and Tennessee to prevent their continued use of versions of its
Levulan(R) brand of aminolevulinic acid HCl (ALA) produced by compounding
pharmacies, for use in DUSA's patented photodynamic therapy (PDT) treatment for
actinic keratosis, basal cell carcinoma, acne and other dermatological
conditions. Additionally, some doctors were sued for misuse of DUSA's trademarks
and for violations of the Latham Act for using the Levulan(R) brand name on
their web sites and promotional materials, but performing patient treatments
with ALA obtained from other sources. We also sued two compounding pharmacies.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Critical accounting policies are those that require application of
management's most difficult, subjective or complex judgments, often as a result
of the need to make estimates about the effect of matters that are inherently
uncertain and may change in subsequent periods and that can significantly affect
our financial position and results of operations. Our accounting policies are
disclosed in Note 2 to the Consolidated Financial Statements. We have discussed
these policies and the underlying estimates used in applying these accounting
policies with our Audit Committee. Since not all of these accounting policies
require management to make difficult, subjective or complex judgments or
estimates, they are not all considered critical accounting policies. We consider
the following policies and estimates to be critical to our financial statements.
REVENUE RECOGNITION - Revenues on product sales are recognized when
persuasive evidence of an arrangement exists, the price is fixed and final,
delivery has occurred, and there is reasonable expectation of collection.
Product sales made through distributors have been recorded as deferred revenue
until the product is sold by our distributors to the end user. Although we make
every effort to assure the reasonableness of our estimates, significant
unanticipated changes in our estimates due to business, economic, or industry
events could have a material impact on our results of operations.
INVENTORY - Inventories are stated at the lower of cost or market value.
Cost is determined using the first-in, first-out method. Inventories are
continually reviewed for slow moving, obsolete and excess items. Inventory items
identified as slow-moving are evaluated to determine if an adjustment is
required. Additionally, our industry is characterized by regular technological
developments that could result in obsolete inventory. Although we make every
effort to assure the reasonableness of our estimates, any significant
unanticipated changes in demand, technological development, or significant
changes to our business model could have a significant impact on the value of
our inventory and our results of operations. We use sales projections to
estimate the appropriate level of inventory reserves, if any, that are necessary
at each balance sheet date.
VALUATION OF LONG-LIVED AND INTANGIBLE ASSETS - We review long-lived
assets for impairment whenever events or changes in business circumstances
indicate that the carrying amount of assets may not be fully recoverable or that
the useful lives of these assets are no longer appropriate. Factors considered
important which could trigger an impairment review include significant changes
relative to: (i) projected future operating results; (ii) the use of the assets
or the strategy for the overall business; (iii) business collaborations; and
(iv) industry, business, or economic trends and developments. Each impairment
test is based on a comparison of the undiscounted cash flow to the recorded
value of the asset. If it is determined that the carrying value of long-lived or
intangible assets may not be recoverable, the asset is written down to its
estimated fair value on a discounted cash flow basis. At December 31, 2005 and
2004, respectively, total property, plant and equipment had a net carrying value
of $2,972,000 and $3,482,000 including $2,233,000 at December 31, 2005
associated with our manufacturing facility. As of December 31, 2005 and 2004,
respectively, we had intangible assets totaling $150,000 and $197,000 recorded
in deferred charges and other assets
46
relating to the unamortized balance of payments made in 2004 to a light source
supplier related to an amendment to our agreement and to a licensor related to
the reacquisition of our product rights in Canada.
STOCK-BASED COMPENSATION - Prior to January 1, 2006, we used the intrinsic
value-based method to account for employee stock option awards under the
provisions of Accounting Principles Board Opinion ("APB") No. 25, and to provide
disclosures based on the fair value method in the Notes to the Consolidated
Financial Statements as permitted by Statement of Financial Accounting Standards
("SFAS") No. 123, as amended. Stock or other equity-based compensation for
non-employees is accounted for under the fair value-based method as required by
SFAS No. 123 and Emerging Issues Task Force ("EITF") No. 96-18, "Accounting for
Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services" and other related interpretations.
Under this method, the equity-based instrument is valued at either the fair
value of the consideration received or the equity instrument issued on the date
of grant. The resulting compensation cost is recognized and charged to
operations over the service period which, in the case of stock options, is
generally the vesting period.
In December 2004, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 123(R), "Share-Based Payment," a revision of SFAS Statement No. 123.
The Company adopted SFAS 123(R) effective January 1, 2006, using the modified
prospective application method, and beginning with the first quarter of 2006
will be required to measure all employee share-based compensation awards using a
fair value based method and record share-based compensation expense in its
financial statements if the requisite service to earn the award is provided. The
pro forma results and assumptions used in fiscal years 2005, 2004 and 2003 were
based solely on historical volatility of our common stock over the most recent
period commensurate with the estimated expected life of our stock options. The
adoption of SFAS No. 123(R) will not affect the Company's cash flow, but it will
materially increase the Company's net loss and basic and diluted loss per common
share. In accordance with SFAS 123R, the Company will recognize the expense
attributable to stock awards that are granted or vest in periods ending
subsequent to December 31, 2005.
For 2006, total stock-based compensation expense is estimated to be in the
range of $1,500,000 to $2,500,000. In order to develop the fiscal 2006
stock-based compensation expense estimate, we utilized assumptions including,
among other items, projected option grants, volatility measures using a
combination of historical and current and historical implied volatility, and
expected life estimates for officer and non-officer employee groups. The amount
of the 2006 grants, if any, have not yet been determined and could result in a
change to the amounts included in the range reflected above. Total
unrecognized stock-based compensation expense related to unvested stock options,
expected to be recognized over approximately two years, amounted
to $3,300,000 at December 31, 2005 net of forfeitures.
47
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2005 AS COMPARED TO 2004
REVENUES - Total revenues for the year ended December 31, 2005 were
$11,337,000, as compared to $7,988,000 in 2004 and were comprised of the
following:
2005 2004 INCREASE
------------ ------------ ------------
KERASTICK(R) REVENUES
United States $ 7,957,000 $ 5,450,000 $ 2,507,000
Canada 935,000 401,000 534,000
------------ ------------ ------------
Total $ 8,892,000 $ 5,851,000 $ 3,041,000
BLU-U(R) REVENUES
United States $ 1,930,000 $ 1,795,000 $ 135,000
Canada 515,000 342,000 173,000
------------ ------------ ------------
Total $ 2,445,000 $ 2,137,000 $ 308,000
------------ ------------ ------------
Total product sales $ 11,337,000 $ 7,988,000 $ 3,349,000
============ ============ ============
For the year ended December 31, 2005, overall Kerastick(R) unit sales to
end-users were 100,668, including 87,210 sold in the United States and 13,458
sold in Canada by Coherent-AMT, our Canadian marketing and distribution partner.
This represents an increase from 76,482 Kerastick(R) units sold in the year
ended December 31, 2004, including 69,870 sold in the United States, and 6,612
sold in Canada by Coherent-AMT. The increase in Kerastick(R) revenues for 2005
compared with 2004 is attributable to increased sales volumes, an increase in
our average unit selling price, increased levels of our direct distribution to
customers and a reduction in our overall sales volume discount programs. Our
average net selling price for the Kerastick(R) increased to $88.33 for 2005 from
$76.50 in 2004. Our average net selling price for the Kerastick(R) includes
sales made directly to our end-user customers, as well as sales made to our
distributors, both in the United States and Canada.
The increase in 2005 BLU-U(R) revenue was driven by an increase in our
average selling price, which increased to $6,542 in 2005 from $4,368 in 2004.
During 2005, there were 368 units sold versus 489 units in 2004. The 2005 total
consists of 276 units sold in the United States and 92 units sold in Canada by
Coherent-AMT. The 2004 total consists of 398 sold in the United States and 91
sold in Canada. The decrease in BLU-U(R) units sold in 2005 compared to 2004 is
due primarily to the implementation of a more focused sales strategy aimed at
increasing Kerastick(R) sales volumes in existing accounts; as well as a
decrease in BLU-U(R) discounting programs. During the fourth quarter of 2005, we
introduced a BLU-U(R) evaluation program, which, for a limited number of
BLU-U(R) units, allows customers to take delivery of a unit for a period of up
to 4 months for private practitioners and up to one year for hospital clinics,
before a purchase decision is required. At December 31, 2005, there were 80
units in the field pursuant to this evaluation program. The units are classified
as inventory in the financial statements and are being amortized during the
evaluation period to cost of goods sold using an estimated life for the
equipment of 3 years. Revenues pursuant to the evaluation program were not
significant in 2005.
The increase of both Kerastick(R) and BLU-U(R) revenues during 2005 is a
result of the increased efforts of our sales force and related marketing and
sales activities. With respect to United States sales, we increased our average
selling prices, increased our direct selling and distribution efforts, while
still maintaining the services of one external distributor, and reduced our
overall sales volume discount programs, all of which have had a positive impact
on our average selling prices during 2005. Sales must increase significantly
from these levels in order for us to become profitable. We remain confident that
we
48
are in a good position to exploit our therapy and that sales will continue to
increase through increased consumption of the Kerastick(R) by our existing
customers as well as the addition of new customers.
COST OF PRODUCT SALES AND ROYALTIES - Cost of product sales and royalties
for the year ended December 31, 2005 were $6,214,000, as compared to $3,875,000
in 2004. The components of cost of product sales and royalties for the years
ended December 31, 2005 and 2004, including direct and indirect costs to support
our product are provided below:
INCREASE
KERASTICK(R) COST OF PRODUCT REVENUES AND ROYALTIES 2005 2004 (DECREASE)
---------- ---------- ----------
Direct Kerastick Product Costs $1,771,000 $1,478,000 $ 293,000
Other Kerastick(R) Product costs including internal costs assigned
to support products 1,357,000 261,000 1,096,000
Royalty and Supply fees (1) 456,000 285,000 171,000
---------- ---------- ----------
Total Kerastick(R) cost of product revenues and royalties $3,584,000 $2,024,000 $1,560,000
========== ========== ==========
INCREASE/
BLU-U(R) COST OF PRODUCT REVENUES 2005 2004 (DECREASE)
---------- ---------- ----------
Direct BLU-U(R) Product costs (2) $1,249,000 $ - $1,249,000
Other BLU-U(R) Product costs including internal costs
assigned to support products; as well as costs
incurred to ship, install and service the BLU-U(R)
in physicians offices 1,381,000 1,851,000 (470,000)
---------- ---------- ----------
Total BLU-U(R) cost of product revenues $2,630,000 $1,851,000 $ 779,000
---------- ---------- ----------
TOTAL COST OF PRODUCT REVENUES AND ROYALTIES $6,214,000 $3,875,000 $2,339,000
========== ========== ==========
----------
1) Royalty and supply fees are paid to our licensor, PARTEQ Research and
Development Innovations, the licensing arm of Queen's University,
Kingston, Ontario, and starting in 2004, amortization of an upfront fee
and a royalty are paid to Draxis, DUSA's former parent, on sales of the
Levulan(R) Kerastick(R) in Canada.
2) Although there were direct BLU-U(R) product revenues in 2004, there were
no related direct BLU-U(R) product costs as these units had a zero book
value due to inventory impairment charges recorded during 2002.
MARGINS - Total product margins for the year ended December 31, 2005, were
$5,124,000 as compared to $4,113,000 for the year ended December 31, 2004, as
shown below:
INCREASE/
2005 2004 (DECREASE)
------------------ ---------------- ------------
Kerastick(R) $ 5,308,000 60% $ 3,827,000 65% $ 1,481,000
BLU-U(R) (184,000) (8)% 286,000 13% (470,000)
----------- ----------- -----------
Total Margin $ 5,124,000 45% $ 4,113,000 51% $ 1,011,000
=========== =========== ===========
49
Kerastick(R) margins for the year ended December 31, 2005, were 60%
compared to 65% for the year ended December 31, 2004. The decrease in the
Kerastick(R) margin percentage for the year ended December 31, 2005 is due
primarily to an increase in unabsorbed manufacturing expenses incurred in 2005.
In general, we have been operating our Kerastick(R) manufacturing plant well
below capacity, resulting in underutilization charges, which have negatively
impacted margins. Due to this situation, we are realizing fluctuations in our
margins as a result of both the timing of production and unabsorbed expenses.
This has been somewhat offset by an increase in the overall selling price per
unit. Our long-term goal is to achieve higher margins on Kerastick(R) sales,
which is significantly dependent on increased volume.
BLU-U(R) margins for the year ended December 31, 2005, were (8)% compared
with 13% for the year ended December 31, 2004. The erosion on margin is directly
attributable to the fact that in 2005 we sold newly purchased units with an
associated production cost, whereas during 2004 period, we sold units which had
a zero net book value due to inventory impairment charges recorded during 2002
following termination of an agreement with a marketing partner. The margin
erosion is somewhat offset by an increase in the overall selling price per unit
and a decrease in Other BLU-U(R) Product costs. Our short-term strategy is to
break-even on device sales in an effort to drive Kerastick(R) sales volumes.
However, our longer term goal is to move towards a reasonable profit margin on
all device sales.
RESEARCH AND DEVELOPMENT COSTS - Research and development costs for the
year ended December 31, 2005 and 2004 were $5,588,000 as compared to $6,490,000
in 2004.
Contributing to the decrease in spending in 2005 compared with 2004 is the
receipt of a refund from the FDA for our 2003 and 2004 product and registration
fees in the amount of approximately $530,000.
INCREASE/
2005 2004 (DECREASE)
------------ ----------- ------------
Research & Development costs incurred $ 6,118,000 $ 6,490,000 $ (372,000)
Refund of FDA product and registration fees (530,000) - (530,000)
----------- ----------- -----------
Total Research and Development Expense $ 5,588,000 $ 6,490,000 $ (902,000)
=========== =========== ===========
During the fourth quarter of 2004, we initiated a DUSA-sponsored Phase II
study which we recently completed. This 72 patient, investigator blinded study
was designed to examine various safety and efficacy parameters as a function of
varying Levulan/vehicle incubation times, namely 15, 60 and 120 minutes.
Patients were randomized within each incubation group so that 18 subjects
received 'Levulan BLU-U' and six received `BLU-U alone'. There were no formal
placebo arms in this study. Up to four PDT treatments were given at 2-week
intervals. The primary efficacy parameters were the percent change in total acne
lesion count for inflammatory, non-inflammatory, and total lesions at 4 and 8
weeks after the final PDT session. Acne severity scores (grades 0 - 4) were also
assessed. Safety and tolerability were also followed throughout the study. The
results of the study indicate that both `Levulan BLU-U' and `BLU-U alone' appear
to effectively reduce the number of both inflammatory and non-inflammatory acne
lesions. Given the higher than anticipated `BLU-U alone' response rate using
this protocol, the study was not powered (sized) to discern differences between
these arms. Using an intent-to-treat analysis, at the Week 8 time point, the
median percent decrease in total lesion count, (inflammatory plus
non-inflammatory) for Levulan BLU-U and BU-U alone was 61% and 80%,
respectively. In the overall Acne Severity Assessment at the Week 8 time point,
the Levulan BLU-U group showed 7/18 (39%) of subjects had at least 2 grades of
improvement in their acne, compared with 4/6 (67%) in the BLU-U alone group.
50
In the group of 28 patients with the most severe (Grade 4) acne, which included
those with the highest number of inflammatory lesions at baseline (> or = 60
lesions), the total lesion count at Week 8 decreased in the Levulan BLU-U group,
whereas total lesion count at Week 8 increased in the BLU-U alone group.
Treatment was well tolerated in both arms of the study with no unanticipated
adverse events being reported. Side effects were minimal. In the 15-minute
Levulan BLU-U group, no PDT treatments were discontinued due to pain, and at the
Week 8 time-point, there were no significant differences between the groups in
erythema, edema or hyperpigmentation. The results of this study suggest that for
future development of the acne indication for Levulan PDT, those patients with
the most severe form(s) of acne should receive the greatest benefit.
In February 2006, we reported the interim analysis results from our 80
patient, multi-center Phase II split-face clinical study of PDT in the treatment
of photodamaged skin using the Levulan(R) (aminolevulinic acid HCl, ALA)
Kerastick(R) in combination with either the Company's BLU-U(R), an Intense
Pulsed Light, or IPL, or a Long Pulsed Dye Laser, or LPDL, Each patient served
as his or her own control, using a 'split-face' design. Following skin cleansing
with an acetone solution, and approximately 60 minutes of drug and/or vehicle
incubation, light treatment with a fixed dose was given using one of the three
light sources. Up to 3 treatments were given, 3 weeks apart. Interim results
were assessed at Weeks 9 and 12. The protocol includes additional follow-up
visits scheduled for Weeks 26 and 52.
The goal of the study was to guide selection of light source(s) for future
development in the treatment of photodamaged skin, using the Company's
proprietary Levulan PDT technology. The study was not designed to detect
differences between the light sources.
At Week 12, Levulan PDT with BLU-U light demonstrated material improvement
in photodamaged skin, in comparison to BLU-U and vehicle. Statistical
significance in net changes from baseline scores was achieved in 2 parameters of
photodamage, namely mottled pigmentation (p=0.0348) and tactile roughness
(p=0.0455). In addition, the trend toward improvement in a number of parameters
was notably greater at Week 12 than Week 9, without any additional treatments
with Levulan, which suggests that other parameters may also reach statistical
significance over time. Specifically, Levulan with BLU-U showed greater
improvements in mottled pigmentation, tactile roughness, fine wrinkling,
sallowness and Global Photodamage Score (i.e. all the parameters that were
measured except for telangiectasia (small blood vessels in the skin)), compared
with areas treated with BLU-U and vehicle. BLU-U by itself is not known to have
any effects on photodamaged skin.
These results support the conclusions of a prior independent study by
Touma et al (2004), using Levulan with BLU-U versus BLU-U alone, that achieved
statistical significance with the addition of Levulan in all photodamage
parameters measured, other than deep wrinkles. In that study, the investigators
treated more severely sun-damaged patients, each with a minimum of 4 actinic
keratoses. They also used twice the dose of blue light compared to the current
study (10 vs. 5 Joules/cm2), and drug incubation times ranging from 1-3 hours.
IPL by itself has previously been shown in independent studies to
significantly improve photodamage, predominantly by targeting brown
discoloration and red blood vessels. Therefore, as would be expected, at Week
12, significant improvement in photodamage was seen with IPL and vehicle,
especially with respect to mottled pigmentation and telangiectasia. With the
addition of Levulan, there was a trend toward even greater improvement in all
parameters of photodamage except for mottled pigmentation, although these trends
did not achieve statistical significance. However, similar to the BLU-U results,
the trend toward improvement was notably greater at Week 12 than Week 9 without
any additional treatments with Levulan, and additional follow up is scheduled at
weeks 26 and 52.
51
These results support the conclusions of prior independent studies by
Dover et al (2005), Alster et al (2005), and Gold et al (in press) using Levulan
with IPL versus IPL alone for photodamage. All of these studies reported
significant benefits from the addition of Levulan to IPL, especially in patients
with significant photodamage. In addition, although IPL itself does not treat
pre-cancerous cell damage, such as actinic keratoses, when combined with Levulan
(ALA) to produce a PDT effect, IPL has been reported to effectively remove these
lesions (Avram and Goldman, 2004, Ruiz-Rodrigues, 2002).
With LPDL, as would be expected, there was significant improvement in
photodamaged skin with LPDL and vehicle, especially with respect to
telangiectasia, the primary target of this device. However, with LPDL, the
addition of Levulan for the treatment of photodamage did not lead to any
discernable differences in photodamage parameters between the two groups, as
suggested by the results of an earlier study (Smith et al, 2004).
In general, safety was excellent in all groups, but treatment using
Levulan with BLU-U was better tolerated than treatment with IPL or LPDL (with or
without Levulan) i.e. the frequency and severity of stinging and burning during
treatment was greater with IPL and LPDL (with or without Levulan) compared to
Levulan with BLU-U, and for BLU-U with vehicle. Levulan with BLU-U was also easy
to use and less operator dependent.
During September 2005, the FDA issued a new draft guidance for the
pharmaceutical industry regarding the development of new drugs for acne vulgaris
treatment. As a result of the issuance of this guidance, in combination with the
results of our Phase II study, we believe that additional Phase II work will be
required before we commence Phase III acne trials. As our Phase II clinical
trials proceed, and especially at such time as we may commence Phase III trials
in these indications, research and development expenses are expected to increase
significantly. We have retained the services of a regulatory consultant to
assist us with seeking foreign marketing approvals for our products, which could
cause research and development expenses to increase.
On September 27, 2004, DUSA signed a clinical trial agreement with the
National Cancer Institute, Division of Cancer Prevention, or NCI DCP, for the
clinical development of Levulan(R) PDT for the treatment of high-grade dysplasia
within Barrett's Esophagus. In addition, to further our objectives concerning
treatment of internal indications using Levulan(R) photodynamic therapy ("PDT"),
on November 4, 2004, we signed an additional clinical trial agreement with the
NCI DCP for the treatment of oral cavity dysplasia. DUSA and the NCI DCP are
working together to prepare overall clinical development plans for Levulan(R)
PDT in these indications, starting with Phase I/II trials, and continuing
through Phase III studies, if appropriate. DUSA and the NCI DCP have prepared
outlines of clinical studies in both indications. The NCI DCP is currently
working with, DUSA and investigators to finalize the clinical trial designs. The
NCI DCP will use its resources to file its own Investigational New Drug
applications with the FDA. Our costs related to these studies will be limited to
providing Levulan(R), device(s) and the necessary training for the investigators
involved. All other costs of these studies will be the responsibility of the NCI
DCP. We will maintain full ownership of our existing intellectual property, have
options on new intellectual property and, subject to successful Phase II and III
clinical trial results, intend to seek FDA approvals in due course. In
preparation for new Phase II clinical trials for the treatment of high-grade
dysplasia associated Barrett's esophagus, our small single-center pilot Phase II
clinical trial using our new proprietary endoscopic light delivery device is
continuing.
We have entered into a series of agreements for our research projects and
clinical studies. As of December 31, 2005, future payments to be made pursuant
to these agreements, under certain terms and conditions, total approximately
$1,775,000 for 2006. This amount does not include any amounts which may become
due to photonamic GmbH & Co. KG under the terms of our License and Development
Agreement. See Note 13(f) to the Notes to the Consolidated Financial Statements.
We expect research
52
and development costs to increase in 2006 as compared to 2005 as we continue to
invest in our clinical programs.
MARKETING AND SALES COSTS -- Marketing and sales costs for the year ended
December 31, 2005 were $9,069,000 as compared to $7,622,000 for 2004. These
costs consist of overhead expenses such as salaries and benefits for the
marketing and sales staff, commissions, and related support expenses such as
travel, and telephone, totaling $6,934,000 in 2005 and $5,268,000 in 2004. These
increases were mainly attributable to the expansion of our sales force during
2005 and related marketing activities. The remaining expenses consist of trade
shows, miscellaneous marketing expenses and outside consultants totaling
$2,135,000 in 2005 and $2,354,000 in 2004. For 2006, we expect marketing and
sales costs will increase from 2005 levels reflecting our increased efforts to
generate higher sales volumes; as well as, a full year impact of our sales force
expansion that took place during 2005.
GENERAL AND ADMINISTRATIVE COSTS -- General and administrative expenses
for the year ended December 31, 2005, decreased to $6,703,000 as compared to
$7,210,000 for 2004. The increase/decrease is mainly attributable to lower legal
expenses of $1,902,000 as compared to $3,144,000 in the comparable period in
2004, due to the absence of patent litigation costs in Australia as the final
hearing in the PhotoCure litigation described below was held in 2004. The
savings related to the Australian litigation is partially offset by patent
litigation costs against compounding pharmacies and physicians, as described
below. Additionally, general corporate expenses, including increased personnel
related costs, have increased as our business has expanded. For 2006, we expect
general and administrative costs to be relatively consistent with 2005 levels.
General and administrative costs are highly dependent on our legal expenses,
which are difficult to predict.
OTHER INCOME, NET -- Other income for the year ended December 31, 2005,
decreased to $1,388,000, as compared to $1,580,000 in 2004. This decrease
reflects a reduction in our average investable cash balances during 2005 as we
used cash to support our operating activities. We expect other income, net will
decrease in 2006 as we continue to use cash in support of our operations, our
capital requirements and corporate transactions, particularly upon the expected
closing of the merger with Sirius Laboratories, Inc.
INCOME TAXES -- There is no provision for income taxes due to ongoing
operating losses. As of December 31, 2005, we had net operating loss
carryforwards of approximately $79,261,000 and tax credit carryforwards of
approximately $2,521,000 for Federal reporting purposes. These amounts expire at
various times through 2024. See Note 8 to the Notes to the Consolidated
Financial Statements. We have provided a full valuation allowance against the
net deferred tax assets at December 31, 2005 and 2004.
NET LOSS -- For the year ended December 31, 2005, we recognized a net loss
of $14,999,000, or $0.89 per share, as compared to $15,629,000, or $0.96 per
share, for the year ended 2004. Net losses are expected to continue until
product sales to physicians offset the cost of our sales force and marketing
initiatives, and the costs for other business support functions.
YEAR ENDED DECEMBER 31, 2004 AS COMPARED TO 2003
REVENUES -- Total revenues for the year ended December 31, 2004, were
$7,988,000, as compared to $970,000 in 2003 and were comprised of the following:
53
2004 2003 INCREASE
---------- -------- ----------
KERASTICK(R) PRODUCT REVENUES
United States $5,450,000 $901,000 $4,549,000
Canada 401,000 - 401,000
---------- -------- ----------
Total $5,851,000 $901,000 $4,950,000
BLU-U(R) PRODUCT REVENUES
United States $1,795,000 $ 69,000 $1,726,000
Canada 342,000 - 342,000
---------- -------- ----------
Total $2,137,000 $ 69,000 $2,068,000
---------- -------- ----------
Total Product Revenues $7,988,000 $970,000 $7,018,000
========== ======== ==========
The increase in 2004 product revenues reflects sales to physicians of
76,482 Kerastick(R) units, as compared to 11,172 Kerastick(R) units in 2003, and
an increase in the BLU-U(R) units in place in physician's offices of 914 units
as of December 31, 2004, up from 406 units at December 31, 2004. With respect to
U.S. Kerastick(R) sales, we increased our direct selling and distribution
efforts, while still maintaining the services of one external distributor.
On March 31, 2004, DUSA signed an exclusive marketing and distribution
agreement for the Kerastick(R) and BLU-U(R) in Canada with Coherent-AMT Inc.
("Coherent"), a leading Canadian medical device and laser distribution company.
Following receipt of regulatory approval from Health Canada, Coherent began
marketing the BLU-U(R) for moderate inflammatory acne in April 2004, and the
Kerastick(R) for the PDT treatment of non-hyperkeratotic actinic keratoses, or
AKs, in June 2004. DUSA recognizes product sales when Coherent sells the
Kerastick(R) and/or the BLU-U(R) to the end-user, as the price is fixed and
final at that point. Kerastick(R) product sales through our Canadian distributor
for the year ended December 31, 2004 were 6,612, and there were 101 BLU-U(R)
units in physician's offices as of December 31, 2004.
The increase of Kerastick(R) and BLU-U(R) revenues in the U.S. during 2004
is a result of the efforts of a larger sales force, and related marketing and
sales activities. In addition, the increase in BLU-U(R) placements was caused,
in part, by our ability to sell the BLU-U(R) to physicians as a stand alone
device for the treatment of moderate inflammatory acne vulgaris and general
dermatological conditions following FDA clearance in September 2003. BLU-U(R)
sales during the quarter ended December 31, 2004 decreased as expected, compared
with the prior quarter, due to a planned price increase that became effective at
the beginning of the fourth quarter, and a decreased emphasis on BLU-U(R)
placements by our sales-force, in light of diminishing BLU-U(R) inventory levels
at that time. We ordered additional BLU-U(R) units in the fourth quarter of
2004, and started to be re-supplied during the first quarter of 2005. As we
experienced a backlog until the new supply of light sources started to become
available, BLU-U(R) revenues were limited during the fourth quarter of 2004, and
were limited until being re-supplied during the first quarter of 2005.
Although the level of Kerastick(R) sales to end-users for 2004 was
substantially higher than the level in the prior year, we significantly
increased the size of our sales force and geographic reach during 2004.
COST OF PRODUCT REVENUES AND ROYALTIES -- Cost of product revenues and
royalties for the year ended December 31, 2004 were $3,875,000, as compared to
$3,481,000 in 2003. The components of cost of product revenues and royalties for
the years ended December 31, 2004 and 2003, including direct and indirect costs
to support our product are provided below:
54
KERASTICK(R) COST OF PRODUCT REVENUES AND ROYALTIES
INCREASE
2004 2003 (DECREASE)
---------- ---------- ----------
Direct Kerastick(R) Product Cost s(1) $1,478,000 $216,000 $1,262,000
Other Kerastick Product costs including internal costs assigned to
support products 261,000 1,972,000 (1,711,000)
Royalty and supply fees (3) 285,000 74,000 211,000
---------- ---------- ----------
Total Kerastick(R) cost of product revenues and royalties $2,024,000 $2,262,000 $ (238,000)
========== ========== ==========
BLU-U(R) COST OF PRODUCT REVENUES
INCREASE
2004 2003 (DECREASE)
---------- ---------- ----------
Other BLU-U(R) Product costs including internal costs assigned to support
products; as well as costs incurred to ship, install
and service the BLU-U(R) in physicians offices (2) 1,851,000 1,219,000 632,000
---------- ---------- --------
Total BLU-U(R) cost of product revenues $1,851,000 $1,219,000 $632,000
TOTAL COST OF PRODUCT REVENUES AND ROYALTIES $3,875,000 $3,481,000 $394,000
========== ========== ========
----------
(1)The decrease in product costs for 2004 primarily reflects the capitalization
of labor and overhead associated with the manufacture of Kerastick(R) units in
our facility. These costs were expensed in the prior year due to the absence of
production.
(2)Although there were direct BLU-U(R) product sales in 2004 and 2003, there
were no related direct BLU-U(R) product costs as these units had a zero book
value due to inventory impairment charges recorded during 2002.
(3) Royalty and supply fees are paid to our licensor, PARTEQ Research and
Development Innovations, the licensing arm of Queen's University, Kingston,
Ontario, and starting in 2004, amortization of an upfront fee and a royalty are
paid to Draxis, DUSA's former parent, on sales of the Levulan(R) Kerastick(R) in
Canada.
MARGINS -- Total product margins for the year ended December 31, 2004,
were $4,113,000 as compared to $(2,511,000) for the year ended December 31,
2003, as shown below:
INCREASE/
2004 2003 (DECREASE)
---------- ----------- ----------
Kerastick(R) $3,827,100 65% $(1,361,000) (151)% $5,188,000
BLU-U(R) 286,000 13% $(1,150,000) (1,660)% 1,436,000
---------- ----------- ----------
Total Margin $4,113,000 51% $(2,511,000) (259)% $6,624,000
========== =========== ==========
Kerastick(R) margins for the year ended December 31, 2004, were 65%
compared to (151)% for the year ended December 31, 2004. The increase in the
Kerastick(R) margins, in terms of both dollars and percentages, for the year
ended December 31, 2004 is due primarily to the capitalization of labor and
overhead associated with the manufacture of Kerastick(R) units in our facility
in 2004. These costs were expensed in 2003 due to the absence of production.
55
BLU-U(R) margins for the year ended December 31, 2004, were 13% compared
with (1,660) % for the year ended December 31, 2003. The increase in margin is
directly attributable to increased BLU-U(R) revenues during 2004 with no
associated direct costs, since the units being sold in both 2003 and 2004 had a
zero book value due to an inventory impairment charge recorded in 2002.
RESEARCH AND DEVELOPMENT COSTS -- Research and development costs for the
year ended December 31, 2004, were $6,490,000 as compared to $5,404,000 in 2003.
This increase reflects the preparation work associated with initiating the Phase
II photodamaged skin trial, protocol finalization and initiation of our Phase II
acne trial, and the start of our Phase II pilot study for Barrett's esophagus
offset, in part, by lower third-party expenditures for our FDA mandated Phase IV
clinical study of the long-term efficacy of the Kerastick(R). This FDA mandated
Phase IV study was completed in late 2003 and we incurred only limited costs to
file the final report with the FDA in 2004. We concentrated our dermatology
development program on indications that use our approved Kerastick(R). Based on
market research that was completed in 2003, we moved forward with our Phase II
clinical studies for use of Levulan(R) PDT in photodamaged skin and moderate to
severe acne vulgaris. We initiated the photodamaged skin study during the second
quarter of 2004, and a Phase II study on Levulan(R) PDT for the treatment of
acne vulgaris at the end of October 2004. In addition, 2004 expenses included
compensation of $241,000 for the services of 3 consultants. These consultants
originally received 30,000 fully vested stock options as compensation which were
subsequently repurchased for $240,000 in December 2004 in response to new
guidelines of pharmaceutical industry groups that prohibit physicians from
having an ownership interest in companies with which they are affiliated.
MARKETING AND SALES COSTS -- Marketing and sales costs for the year ended
December 31, 2004, were $7,622,000 as compared to $2,494,000 for 2003. These
costs consisted of overhead expenses such as salaries and benefits for the
marketing and sales staff, commissions, and related support expenses such as
travel, and telephone, totaling $5,268,000 in 2004 and $1,297,000 in 2003. The
remaining expenses consisted of trade shows, miscellaneous marketing expenses
and outside consultants totaling $2,354,000 in 2004 and $1,197,000 in 2003.
These increases were mainly attributable to the launch of our direct sales force
in October 2003 and related marketing and sales activities.
As of December 31, 2004, our sales force was comprised of 22 direct sales
professionals, including managers and representatives, and various independent
representatives in key target markets.
GENERAL AND ADMINISTRATIVE COSTS -- General and administrative expenses
for the year ended December 31, 2004 increased to $7,210,000 as compared to
$6,344,000 for 2003. Other than legal costs as described below, this increase
was mainly attributable to a higher level of general corporate expenses to
support our expanding business, including an increase in audit and consulting
fees primarily related to Sarbanes Oxley compliance work of $285,000, an
increase in personnel related costs of $335,000, and an increase in general
corporate expenses of $354,000. General and administrative costs also included
legal expenses incurred in 2004 of $3,144,000 and $3,253,000 in 2003, due
primarily to the PhotoCure patent litigation costs in Australia. Total patent
defense costs in 2004 were $2,150,000 as compared to $2,447,000 in 2003.
OTHER INCOME, NET -- Other income for the year ended December 31, 2004,
decreased to $1,580,000, as compared to $1,926,000 in 2003. This decrease
reflects a reduction in our average investable cash balances during early 2004
as we used cash to support our operating activities, offset by the additional
proceeds received from the private placement in March 2004. Additionally,
interest income had been negatively impacted by the general decrease in interest
rates which occurred during 2003 and early 2004. During 2004 and 2003, we
incurred interest expense of $20,000 and $56,000, respectively, on borrowings
associated with the construction of our Kerastick(R) manufacturing facility. Of
these amounts,
56
$36,000 was capitalized in property and equipment in the Consolidated Balance
Sheet in 2003. We repaid the outstanding secured term loan promissory note with
Citizens Bank of Massachusetts in June 2004.
INCOME TAXES -- There was no provision for income taxes due to ongoing
operating losses. As of December 31, 2004, we had net operating loss
carryforwards of approximately $74,243,000 and tax credit carryforwards of
approximately $2,278,000 for Federal reporting purposes. These amounts expire at
various times through 2024. See Note 8 to the Notes to the Consolidated
Financial Statements. We have provided a full valuation allowance against the
net deferred tax assets at December 31, 2004 and 2003.
NET LOSS -- For the year ended December 31, 2004, we recognized a net loss
of $15,629,000, or $0.96 per share, as compared to $14,827,000, or $1.06 per
share, for the year ended 2003. The decrease in net loss per share in 2004 as
compared to 2003 was primarily due to an increase in the number of weighted
average of common shares outstanding during 2004 as a result of our private
placement earlier in 2004. The increase in total net loss in 2004 was due to the
increase in operating costs offset, in part, by an increase in revenues. Net
losses are expected to continue until product sales to physicians offset the
cost of our sales force and marketing initiatives, and the costs for other
business support functions.
57
QUARTERLY RESULTS OF OPERATIONS
The following is a summary of the unaudited quarterly results of
operations for the years ended December 31, 2005 and 2004, respectively:
QUARTERLY RESULTS FOR YEAR ENDED DECEMBER 31, 2005
--------------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
---------- ---------- ------------ -----------
Total revenues $3,368,614 $2,228,116 $2,392,244 $3,348,487
Loss from operations (4,698,611) (5,178,714) (3,948,670) (2,560,692)
Net loss (4,331,614) (4,826,118) (3,608,281) (2,232,696)
Basic and diluted loss per share $ (0.26) $ (0.29) $ (0.21) $ (0.13)
QUARTERLY RESULTS FOR YEAR ENDED DECEMBER 31, 2004
--------------------------------------------------------------
MARCH JUNE
31 30 SEPTEMBER 30 DECEMBER 31
---------- ---------- ------------ -----------
Total revenues $1,255,685 $2,176,028 $2,010,619 $2,545,324
Loss from operations (4,800,791) (4,571,668) (3,325,565) (4,510,703)
Net loss (4,401,654) (4,196,087) (2,974,992) (4,056,247)
Basic and diluted loss per share (0.30) (0.25) (0.18) (0.24)
LIQUIDITY AND CAPITAL RESOURCES
We remain in a strong cash position to continue to fund increased
Levulan(R) PDT sales and marketing expenses and current research and development
activities for our Levulan(R) PDT/PD platform. At February 28, 2006, we had
approximately $31,147,000 of total cash resources comprised of $11,681,000 of
cash and cash equivalents, $19,466,000 of marketable securities.
The Company is also exposed to concentration of credit risk related to
accounts receivable that are generated from its distributors and customers. To
manage credit risk, the Company performs regular credit evaluations of its
customers' and provides allowances for potential credit losses, when applicable.
On December 30, 2005, we signed a definitive Merger Agreement to acquire
all of the common stock of Sirius Laboratories Inc. of Vernon Hills, Illinois in
exchange for cash and common stock worth up to $30,000,000. Sirius is a
privately held dermatology specialty pharmaceuticals company founded in 2000
with a primary focus on the treatment of acne vulgaris and acne rosacea. Closing
of the transaction is expected in the first quarter of 2006, subject to the
terms and conditions in the Merger Agreement. Of the up to $30,000,000,
$8,000,000 less certain expenses will be paid in cash upon closing, $17,000,000
will be paid in shares of DUSA's common stock also upon closing in a private
placement, and up to $5,000,000 in cash or common stock may be paid based on a
combination of new product approvals or launches, and achievement of certain
pre-determined total cumulative sales milestones for Sirius products. As part of
the Sirius Merger, we also expect to pay at closing certain expenses incurred by
Sirius related to the acquisition and Sirius' balance on their bank line of
credit, if any. We believe we have sufficient resources to finance the
acquisition utilizing our existing resources.
On February 27, 2004, we consummated a private placement of 2,250,000
shares of our common stock at a purchase price of $11.00 per share resulting in
gross proceeds of $24,750,000. We also granted the investors the right to
purchase up to an aggregate of an additional 337,500 shares of common stock at
$11.00 per share, which were exercised on April 14, 2004, resulting in
additional proceeds of $3,712,500.
58
Offering costs incurred in connection with the placement were $1,908,000, of
which $1,708,000 consisted of the placement agent's commission and
non-refundable retainer paid in the form of 155,250 shares of common stock
calculated at the offering price.
As of December 31, 2005, our working capital (total current assets minus
total current liabilities) was $34,889,000 as compared to $48,799,000 as of
December 31, 2004. Total current assets decreased $13,766,000 in 2005 due
primarily to a decrease in marketable securities, which was used to fund our
loss from operations. Total current liabilities increased $143,000 in 2005 due
to an increase in accounts payable and other accrued expenses, partially offset
by a decrease in deferred revenue.
During 2005, we used $14,101,000 of cash to support our operating
activities, purchased $415,000 of property, plant, and equipment, received
$928,000 in exercises of stock options and received $14,874,000 of net proceeds
from maturations and sales of marketable securities. During the comparable 2004
period, we used $14,070,000 of cash for operating activities, purchased $530,000
of property, plant and equipment, received $765,000 n proceeds from exercises of
stock options and invested $14,037,000 of net proceeds from maturations and
sales of marketable securities.
We believe that we have sufficient capital resources to proceed with our
current programs for Levulan(R) PDT, and to fund operations and capital
expenditures for approximately 2 years. We have invested our funds in liquid
investments, so that we have ready access to these cash reserves for funding our
needs on a short-term and long-term basis. However, upon the closing of the
Sirius Merger we will deplete a significant amount of our liquid assets and if
product revenues do not meet our expectations, we will need to raise capital in
order to continue our research and development activities as planned.
In addition to the contemplated merger with Sirius Laboratories, Inc., we
continue to seek opportunities to enhance our business by using resources to
acquire by license, purchase or other arrangements, businesses, new
technologies, or products, especially in dermatology-related areas in the near
term. For 2006, we are focusing primarily on increasing the sales of our
approved products in the U.S. and Canada, continuing our efforts of exploring
partnership opportunities for Levulan(R) PDT for dermatology in Europe and/or
other countries outside of the United States, Canada and Latin America, and
continuing our clinical development programs for our facial photodamage and
moderate to severe acne indications. In January 2006, we entered into a
marketing and distribution agreement with Stiefel Laboratories, Inc. granting
Stiefel an exclusive right to distribute the Levulan(R) Kerastick(R) in Mexico,
Central and South America. We have also signed clinical trial agreements with
the National Cancer Institute, or NCI, Division of Cancer Prevention, or DCP,
for the clinical development of Levulan(R) PDT for the treatment of high-grade
dysplasia, or HGD, within Barrett's Esophagus, or BE, and oral cavity dysplasia
treatment, and are working with the NCI DCP to advance the development of these
programs. In addition, we continue to support independent investigator trials to
advance research in the use and applicability of Levulan(R) PDT for other
indications in dermatology, and selected internal indications. We and the NCI
DCP have prepared outlines of clinical studies in both indications. The NCI DCP
is currently working with us and investigators to finalize the clinical trial
designs. The NCI DCP will use its resources to file its own Investigational New
Drug applications with the FDA. Our costs related to these studies will be
limited to providing Levulan(R), device(s) and the necessary training for the
investigators involved. All other costs of these studies will be the
responsibility of the NCI DCP.
Full development and testing of the use of Levulan PDT for treatment of
acne and facial photodamage would require additional funding. The timing of
expenditures will be dependent on various factors, including:
59
- the level of sales of our products including the success of our
marketing programs for the dermatological uses of Levulan(R) PDT,
- progress of our research and development programs,
- the results of preclinical and clinical trials,
- the timing of regulatory marketing approvals,
- competitive developments,
- the results of patent disputes,
- any new additional collaborative arrangements, if any, we may enter,
and
- the availability of other financing.
At this time, we cannot accurately predict the level of revenues from
sales of our products. In order to maintain and continue to expand our sales and
marketing endeavors, and to initiate our planned research and development
programs, we may need to raise additional funds through future corporate
alliances, financings, or other sources, depending upon the amount of sales we
generate.
DUSA has no off-sheet balance sheet financing arrangements other than its
operating leases.
CONTRACTUAL OBLIGATIONS AND OTHER COMMERCIAL COMMITMENTS
Our contractual obligations and other commercial commitments to make
future payments under contracts, including lease agreements, research and
development contracts, manufacturing contracts, or other related agreements, are
as follows at December 31, 2005:
OBLIGATIONS DUE BY PERIOD
---------------------------------------------------------------
1 YEAR OR AFTER 5
TOTAL LESS 2-3 YEARS 4-5 YEARS YEARS
---------- ---------- --------- --------- ---------
Operating lease obligations $2,959,000 $ 470,000 $ 887,000 $ 880,000 $722,000
Purchase obligations (1, 2) $1,934,000 $1,934,000 - - -
Minimum royalty obligations (3) $667,000 $ 86,000 $ 172,000 $ 172,000 $237,000
----------
1) Research and development projects include various commitments including
obligations for our Phase II clinical studies for photodamaged skin and
moderate to severe acne.
2) In addition to the obligations disclosed above, we have contracted with
Therapeutics, Inc., a clinical research organization, to manage the
clinical development of our products in the field of dermatology. This
organization has the opportunity for additional stock grants, bonuses, and
other incentives for each product indication ranging from $250,000 to
$1,250,000, depending on the regulatory phase of development of products
under Therapeutics' management.
3) Annual minimum royalties to PARTEQ must total at least CDN $100,000 (U.S.
$86,000 as of December 31, 2005) through the expiration of the term of the
agreement.
RECENTLY ISSUED ACCOUNTING GUIDANCE
60
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs, an
amendment of ARB No. 43, Chapter 4." The amendments made by SFAS No. 151 clarify
that abnormal amounts of idle facility expense, freight, handling costs, and
wasted materials should be recognized as current-period charges and require the
allocation of fixed production overheads to inventory based on the normal
capacity of the production facilities. The provisions of SFAS No. 151 are
effective for inventory costs incurred during fiscal years beginning after June
15, 2005. We have adopted this standard beginning the first quarter of 2006 and
do not believe the adoption will have a material impact on our results of
operations or financial position as such costs have historically been expensed
as incurred.
In November 2005, FASB issued FASB Staff Position FAS 115-1 and FAS 124-1,
"The Meaning of Other-Than-Temporary Impairment and Its Application to Certain
Investments" ("FSP FAS 115-1"), which provides guidance on determining when
investments in certain debt and equity securities are considered impaired,
whether that impairment is other-than-temporary, and on measuring such
impairment loss. FSP FAS 115-1 also includes accounting considerations
subsequent to the recognition of an other-than-temporary impairment and requires
certain disclosures about unrealized losses that have not been recognized as
other-than-temporary impairments. FSP FAS 115-1 is required to be applied to
reporting periods beginning after December 15, 2005. We are required to adopt
FSP FAS 115-1 in the first quarter of 2006. We do not expect that the adoption
of this statement will have a material impact on our results of operations or
financial condition. The unrealized losses on the Company's investments in U.S.
Treasury obligations, and direct obligations of U.S. government agencies and
investment grade corporate securities were caused by interest rate increases. It
is expected that these securities would not be settled at a price less than the
amortized cost of the Company's investment. Because the Company has the ability
and
61
intent to hold these investments until a recovery of fair value, which may be
maturity, the Company does not consider these investments to be
other-than-temporarily impaired at December 31, 2005.
INFLATION
Although inflation rates have been comparatively low in recent years,
inflation is expected to apply upward pressure on our operating costs. We have
included an inflation factor in our cost estimates. However, the overall net
effect of inflation on our operations is expected to be minimal.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to market risk for changes in interest rates relates
primarily to our investment portfolio. We do not use derivative financial
instruments in our investment portfolio. Our investment policy specifies credit
quality standards for our investments and limits the amount of credit exposure
to any single issue, issuer or type of investment. Our investments consist of
United States government securities and high grade corporate bonds. All
investments are carried at market value, which approximates cost.
As of December 31, 2005, the weighted average rate of return on our
investments was 4.08%. If market interest rates were to increase immediately and
uniformly by 100 basis points from levels as of December 31, 2005, the fair
market value of the portfolio would decline by $259,000. Declines in interest
rates could, over time, reduce our interest income.
FORWARD-LOOKING STATEMENTS SAFE HARBOR
This report, including the Management's Discussion and Analysis, contains
various "forward-looking statements" within the meaning of Section 27A of the
Securities Act of 1933 and 21E of the Securities Exchange Act of 1934 which
represent our expectations or beliefs concerning future events, including, but
not limited to management's goal of becoming profitable, statements regarding
our strategies and core objectives for 2006, our expectations regarding our
proposed merger with Sirius Laboratories, Inc. and matters relating thereto,
management's beliefs regarding the unique nature of Levulan(R) and its use and
potential use, expectations regarding the timing of results of clinical trials,
future development of Levulan(R) and our other products for cancer, warts,
onychomycosis, psoriasis, molluscum contagiosum, oily skin and acne rosacea,
facial photodamaged skin, cystic acne, acne vulgaris, Barrett's esophagus,
high-grade dysplasia, infected sweat glands (hidradenitis suppurativa) and other
potential indications, intention to pursue licensing, marketing, co-promotion,
collaboration or acquisition opportunities, status of clinical programs for all
other indications and beliefs regarding potential efficacy and marketing, our
intention to develop combination drug and light device systems, our expectations
regarding new proprietary endoscopic light delivery systems and the potential
use of other light devices, our beliefs regarding the safety, simplicity,
reliability and cost-effectiveness of certain light sources, our expectations
regarding product launches, our intention to expand our sales force, hope that
our products will be an AK therapy of choice and barriers to achieving that
status, our beliefs regarding revenues and market opportunities from approved
and potential products and Levulan's(R) competitive properties, our intention to
postpone or commence clinical trials and investigator studies in 2006, beliefs
regarding the clinical benefit of Levulan(R) PDT for acne and other indications,
beliefs regarding the suitability of clinical data, expectations of exclusivity
under the Hatch-Waxman Act and other patent laws and the potential benefits
thereof, expectations regarding the confidentiality of our proprietary
information, intentions to seek additional U.S. and foreign regulatory
approvals, trademarks, and to
62
market and increase sales outside the U.S., beliefs regarding regulatory
classifications, filings, timelines, off-label use and environmental compliance,
beliefs concerning patent disputes and litigation, the impact of a third-party's
regulatory compliance and fulfillment of contractual obligations, expectations
of increases in cost of product sales, expectations regarding margins on
Kerastick(R) and other products, estimations as to the time it takes for a sales
representative to break even in comparison to DUSA's investment, expected use of
cash resources in 2006, requirements of cash resources for our future liquidity,
beliefs regarding investments and economic conditions, beliefs regarding
accounting policies and practices, expectations regarding outstanding options
and warrants and our dividend policy, anticipation of increases or decreases in
personnel, effect of reimbursement policies on revenues and acceptance of our
therapies, expectations for future strategic opportunities and research and
development programs, expectations for continuing operating losses and
competition, expectations regarding the adequacy and availability of insurance,
expectations regarding stable general and administrative costs, expectations
regarding the status of research and development costs and our efforts with
respect thereto, expectations regarding increased sales and marketing costs,
levels of interest income and our capital resource needs, intention to sell
securities to meet capital requirements, potential for additional inspection and
testing of our manufacturing facilities, beliefs regarding the adequacy of our
inventory of Kerastick(R) and BLU-U(R) units, our manufacturing capabilities and
the impact of inventories on revenues, belief regarding interest rate risks to
our investments and effects of inflation and new and existing accounting
standards and policies, beliefs regarding the impact of any current or future
legal proceedings, dependence on key personnel, beliefs concerning product
liability insurance, intention to continue to develop an alternative BLU-U(R)
light device and integrated drug and light device systems, our principal methods
of competition, competition in general and competitive developments. These
forward-looking statements are further qualified by important factors that could
cause actual results to differ materially from those in the forward-looking
statements. These factors include, without limitation, changing market and
regulatory conditions, actual clinical results of our trials, the reimbursement
by third-parties for our treatments, the impact of competitive products and
pricing, the timely development, FDA and foreign regulatory approval, and market
acceptance of our products, environmental risks relating to our products,
reliance on third-parties for the production, manufacture, sales and marketing
of our products, the availability of products for acquisition and/or license on
terms agreeable to DUSA, sufficient sources of funds, the securities regulatory
process, the maintenance of our patent portfolio and ability to obtain
competitive levels of reimbursement by third-party payors, none of which can be
assured. Results actually achieved may differ materially from expected results
included in these statements as a result of these or other factors.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Registered Public Accounting Firm......... F-1
Consolidated Balance Sheets..................................... F-2
Consolidated Statements of Operations........................... F-3
Consolidated Statements of Shareholders' Equity................. F-4
Consolidated Statements of Cash Flows........................... F-5
Notes to the Consolidated Financial Statements.................. F-6
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
63
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures. We carried out an
evaluation, under the supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial Officer of the
effectiveness of the design and operation of our disclosure controls and
procedures pursuant to Exchange Act Rule 13a-14. Based upon that evaluation, the
Chief Executive Officer and Chief Financial Officer concluded that our
disclosure controls and procedures are effective in timely alerting them to
material information relating to our (including our subsidiaries) required to be
included in our periodic Securities and Exchange Commission filings. No
significant changes were made in our internal controls or in other factors that
could significantly affect these controls subsequent to the date of their
evaluation.
Changes in Internal Control Over Financial Reporting. There was no change
in our internal control over financial reporting that occurred during the period
covered by this Report that has materially affected, or is reasonably likely to
materially affect, our internal control over-financial reporting.
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining adequate
internal control over financial reporting, as such term is defined in Exchange
Act Rules 13a-15(f). Under the supervision and with the participation of our
management, including our Chief Executive Officer and Chief Financial Officer,
we conducted an evaluation of the effectiveness of our internal control over
financial reporting based on the framework in Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission. Based on our evaluation under the framework in Internal Control --
Integrated Framework, our management concluded that our internal control over
financial reporting was effective as of December 31, 2005.
Our management's assessment of the effectiveness of our internal control
over financial reporting as of December 31, 2005 has been audited by Deloitte &
Touche LLP, an independent registered public accounting firm, as stated in their
report which is included herein.
64
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
DUSA Pharmaceuticals, Inc.
Wilmington, Massachusetts
We have audited management's assessment, included in the accompanying
Management's Report on Internal Control over Financial Reporting that DUSA
Pharmaceuticals, Inc. and its subsidiary (the "Company") maintained effective
internal control over financial reporting as of December 31, 2005, based on
criteria established in Internal Control--Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission. The Company's
management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal
control over financial reporting. Our responsibility is to express an opinion on
management's assessment and an opinion on the effectiveness of the Company's
internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of internal
control over financial reporting, evaluating management's assessment, testing
and evaluating the design and operating effectiveness of internal control, and
performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our
opinions.
A company's internal control over financial reporting is a process
designed by, or under the supervision of, the company's principal executive and
principal financial officers, or persons performing similar functions, and
effected by the company's board of directors, management, and other personnel to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial
reporting, including the possibility of collusion or improper management
override of controls, material misstatements due to error or fraud may not be
prevented or detected on a timely basis. Also, projections of any evaluation of
the effectiveness of the internal control over financial reporting to future
periods are subject to the risk that the controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
In our opinion, management's assessment that the Company maintained
effective internal control over financial reporting as of December 31, 2005, is
fairly stated, in all material respects, based on the criteria established in
Internal Control--Integrated Framework issued by the Committee of Sponsoring
65
Organizations of the Treadway Commission. Also in our opinion, the Company
maintained, in all material respects, effective internal control over financial
reporting as of December 31, 2005, based on the criteria established in Internal
Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the consolidated financial
statements as of and for the year ended December 31, 2005, of the Company and
our report dated March 10, 2006, expressed an unqualified opinion on those
financial statements.
/s/ DELOITTE & TOUCHE LLP
Boston, Massachusetts
March 10, 2006
66
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by Item 10 is hereby incorporated by reference to
the sections entitled "Nominees," "Executive Officers who are not Directors,"
and "Compliance with Section 16(a) of the Exchange Act" of the Registrant's 2006
Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is hereby incorporated by reference to
the sections entitled "Director Compensation," "Executive Compensation," "Board
Compensation Committee Report on Executive Compensation," "Performance Graph,"
"Option Grants in 2005," "Aggregate Option Exercises in 2006 and Option Values
at December 31, 2005," and "Other Compensation" of Registrant's 2006 Proxy
Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information required by Item 12 is hereby incorporated by reference to
the section entitled "Security Ownership of Certain Beneficial Owners and
Management and Related Shareholder Matters" of the Registrant's 2006 Proxy
Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is hereby incorporated by reference to
the section entitled "Certain Relationships and Related Transactions" of the
Registrant's 2006 Proxy Statement.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by Item 14 is hereby incorporated by reference to
the section entitled "Ratification and Selection of Auditors" of the
Registrant's 2006 Proxy Statement.
67
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
A. List of Financial Statements and Schedules
Report of Independent Registered Public Accounting Firm..... F-1
Consolidated Balance Sheets................................. F-2
Consolidated Statements of Operations....................... F-3
Consolidated Statements of Shareholders' Equity............. F-4
Consolidated Statements of Cash Flows....................... F-5
Notes to the Consolidated Financial Statements.............. F-6
B. Exhibits filed as part of this Report
2(a.1)* Merger Agreement by and among the Company, Sirius Laboratories, Inc.,
and the shareholders of Sirius dated as of December 30, 2005; and
2(a.2) First Amendment to Merger Agreement by and among the Company, Sirius
Laboratories, Inc. and the shareholders of Sirius, dated as of
February 6, 2006.
3(a.1) Certificate of Incorporation, as amended, filed as Exhibit 3(a) to the
Registrant's Form 10-K for the fiscal year ended December 31, 1998, and
is incorporated herein by reference;
3(a.2) Certificate of Amendment to the Certificate of Incorporation, as
amended, dated October 28, 2002 and filed as Exhibit 99.3 to the
Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended
September 30, 2002, filed November 12, 2002 and is incorporated herein
by reference; and
3(b) By-laws of the Registrant, filed as Exhibit 3 to the Registrant's
current report on Form 8-K, filed on January 4, 2005, and is
incorporated herein by reference.
4(a) Common Stock specimen, filed as Exhibit 4(a) to the Registrant's Form
10-K for the fiscal year ended December 31, 2002, and is incorporated
herein by reference;
4(b) Class B Warrant, filed as Exhibit 4.3 to the Registrant's Registration
Statement on Form S-1, No. 33-43282, and is incorporated herein by
reference;
4(c) Rights Agreement filed as Exhibit 4.0 to Registrant's Current Report on
Form 8-K dated September 27, 2002, filed October 11, 2002, and is
incorporated herein by reference; and
4(d) Rights Certificate relating to the rights granted to holders of common
stock under the Rights Agreement filed as Exhibit 4.0 to Registrant's
Current Report on Form 8-K, dated September 27, 2002, filed October 11,
2002, and is incorporated herein by reference.
10(a) License Agreement between the Company, PARTEQ and Draxis Health Inc.
dated August 27, 1991, filed as Exhibit 10.1 to the Registrant's
Registration Statement on Form S-1, No. 33-43282, and is incorporated
herein by reference;
10(b) ALA Assignment Agreement between the Company, PARTEQ, and Draxis Health
Inc. dated October 7, 1991, filed as Exhibit 10.2 to the Registrant's
Registration Statement on Form S-1, No. 33-43282, and is incorporated
herein by reference;
10(b.1) Amended and Restated Assignment Agreement between the Company and
Draxis Health, Inc. dated April 16, 1999, filed as Exhibit 10(b.1) to
the Registrant's Form 10-K for the fiscal year ended December 31, 1999,
and is incorporated herein by reference;
68
10(b.2) Termination and Transfer Agreement between the Company and Draxis
Health Inc. dated as of February 24, 2004, filed as Exhibit 10(b.2) to
the Registrant's Form 10-K for the fiscal year ended December 31, 2003,
portions of which have been omitted pursuant to a request for
confidential treatment pursuant to Rule 24b-2 of the Securities
Exchange Act of 1934, as amended, and is incorporated herein by
reference;
10(c) Employment Agreement of D. Geoffrey Shulman, MD, FRCPC dated October 1,
1991, filed as Exhibit 10.4 to the Registrant's Registration Statement
on Form S-1, No. 33-43282, and is incorporated herein by reference; +
10(d) Amendment to Employment Agreement of D. Geoffrey Shulman, MD, FRCPC
dated April 14, 1994, filed as Exhibit 10.4 to the Registrant's
Registration Statement on Form S-2, No. 33-98030, and is incorporated
herein by reference; +
10(e) Amended and Restated License Agreement between the Company and PARTEQ
dated March 11, 1998, filed as Exhibit 10(e) to the Registrant's Form
10-K/A filed on June 18, 1999, portions of Exhibit A have been omitted
pursuant to a request for confidential treatment pursuant to Rule 24b-2
of the Securities Exchange Act of 1934, as amended, and is incorporated
herein by reference;
10(f) Incentive Stock Option Plan, filed as Exhibit 10.11 of Registrant's
Registration Statement on Form S-1, No. 33-43282, and is incorporated
herein by reference; +
10(g) 1994 Restricted Stock Option Plan, filed as Exhibit 1 to Registrant's
Schedule 14A definitive Proxy Statement dated April 26, 1995, and is
incorporated herein by reference; +
10(h) 1996 Omnibus Plan, as amended, filed as Appendix A to Registrant's
Schedule 14A Definitive Proxy Statement dated April 26, 2001, and is
incorporated herein by reference; +
10(h.1) 1996 Omnibus Plan, as amended on May 1, 2003, filed as Exhibit 10(h.1)
to the Registrant's Form 10-K for the fiscal year ended December 31,
2003, and is incorporated herein by reference; +
10(h.2) 1996 Omnibus Plan, as amended April 23, 2004, filed as Appendix A to
Registrant's Schedule 14A definitive Proxy Statement dated April 28,
2004, and is incorporated herein by reference; +
10(i) Purchase and Supply Agreement between the Company and National
Biological Corporation dated November 5, 1998, filed as Exhibit 10(i)
to the Registrant's Form 10-K/A filed on June 18, 1999, portions of
which have been omitted pursuant to a request for confidential
treatment pursuant to Rule 24b-2 of the Securities Exchange Act of
1934, as amended, and is incorporated herein by reference;
10(i.1) Amended and Restated Purchase and Supply Agreement between the Company
and National Biological Corporation dated as of June 21, 2004 filed as
Exhibit 10(a) to the Registrant's Quarterly Report on Form 10-Q for the
fiscal quarter ended June 30, 2004, portions of which have been omitted
pursuant to a request for confidential treatment pursuant to Rule 24b-2
of the Securities Exchange Act of 1934, as amended, filed August 11,
2004, and is incorporated herein by reference;
10(j) Supply Agreement between the Company and Sochinaz SA dated December 24,
1993, filed as Exhibit 10(q) to Registrant's Form 10-K/A filed on March
21, 2000, portions of which have been
69
omitted pursuant to a request for confidential treatment pursuant to
Rule 24b-2 of the Securities Exchange Act of 1934, as amended, and
is incorporated herein by reference;
10(j.1) First Amendment to Supply Agreement between the Company and Sochinaz SA
dated July 7, 1994, filed as Exhibit 10(q.1) to Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31, 1999, and is
incorporated herein by reference;
10(j.2) Second Amendment to Supply Agreement between the Company and Sochinaz
SA dated as of June 20, 2000, filed as Exhibit 10.1 to Registrant's
Current Report on Form 8-K dated June 28, 2000, and is incorporated
herein by reference;
10(j.3) Third Amendment to Supply Agreement between the Company and Sochinaz SA
dated July 29, 2005, filed as Exhibit 10.1 to the Registrant's Form
10-Q filed on August 3, 2005, portions of which have been omitted
pursuant to a request for confidential treatment pursuant to Rule 24b-2
of the Securities Exchange Act of 1934, as amended, and is incorporated
herein by reference;
10(k) Master Service Agreement between the Company and Therapeutics, Inc.
dated as of October 4, 2001, filed as Exhibit 10(b) to the Registrant's
Quarterly Report on Form 10-Q for the fiscal quarter ended September
30, 2001, filed November 8, 2001, portions of which have been omitted
pursuant to a request for confidential treatment under Rule 24b-2 of
the Securities Exchange Act of 1934, as amended and is incorporated
herein by reference;
10(l) License and Development Agreement between the Company and photonamic
GmbH & Co. KG dated as of December 30, 2002, filed as Exhibit 10(r) to
Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 2002, portions of which have been omitted pursuant to a
request for confidential treatment under Rule 24(b)-2 of the Securities
Exchange Act of 1934, as amended and is incorporated herein by
reference;
10(m) Supply Agreement between the Company and medac GmbH dated as of
December 30, 2002, filed as Exhibit 10(r) to Registrant's Annual Report
on Form 10-K for the fiscal year ended December 31, 2002, portions of
which have been omitted pursuant to a request for confidential
treatment under Rule 24(b)-2 of the Securities Exchange Act of 1934, as
amended and is incorporated herein by reference;
10(n) Securities Purchase Agreement dated as of February 27, 2004, by and
among the Company and certain investors, filed as Exhibit 10.1 to the
Registrant's current report on Form 8-K, filed on March 2, 2004,
portions of which have been omitted pursuant to a request for
confidential treatment under Rule 24(b) of the Securities Exchange Act
of 1934, as amended, and is incorporated herein by reference;
10(o) Registration Rights Agreement dated as of February 27, 2004 by and
among the Company and certain investors, filed as Exhibit 10.2 to the
Registrant's current report on Form 8-K, filed on March 2, 2004, and is
incorporated herein by reference;
10(p) Form of Additional Investment Right dated as of February 27, 2004,
filed as Exhibit 10.3 to the Registrant's current report on Form 8-K,
filed on March 2, 2004, and is incorporated herein by reference;
10(q) License, Promotion, Distribution and Supply Agreement between the
Company and Coherent-AMT dated as of March 31, 2004 filed as Exhibit
10(a) to the Registrant's Quarterly Report on
70
Form 10-Q for the fiscal quarter ended March 31, 2004, filed May 4,
2004, and is incorporated herein by reference;
10(r) Employment Agreement of Scott L. Lundahl dated as of June 23, 1999
filed as Exhibit 10(u) to the Registrant's Form 10-K for the fiscal
year ended December 31, 2004, and is incorporated herein by
reference; +
10(s) Amended Employment Agreement of Stuart L. Marcus, MD, PhD dated
December 9, 1999 filed as Exhibit 10(v) to the Registrant's Form 10-K
for the fiscal year ended December 31, 2004, and is incorporated herein
by reference; +
10(t) Employment Agreement of Mark C. Carota dated as of February 14, 2000
filed as Exhibit 10(w.1) to the Registrant's Form 10-K for the fiscal
year ended December 31, 2004, and is incorporated herein by
reference; +
10(t.1) First Amendment to Employment Agreement of Mark C. Carota dated October
31, 2001 filed as Exhibit 10(w.2) to the Registrant's Form 10-K for the
fiscal year ended December 31, 2004, and is incorporated herein by
reference; +
10(u) Employment Agreement of Paul A. Sowyrda dated as of July 31, 2001 filed
as Exhibit 10(x) to the Registrant's Form 10-K for the fiscal year
ended December 31, 2004, and is incorporated herein by reference; +
10(v) Employment Agreement of Richard Christopher dated as of January 1, 2004
filed as Exhibit 10(y) to the Registrant's Form 10-K for the fiscal
year ended December 31, 2004, and is incorporated herein by
reference; +
10(w) Employment Agreement of Robert F. Doman dated as of March 15, 2005
filed as Exhibit 10(z) to the Registrant's Form 10-K for the fiscal
year ended December 31, 2004, and is incorporated herein by
reference; +
10(x) Employment Agreement of Gary F. Talarico dated as of February 15, 2005
filed as Exhibit 10(aa) to the Registrant's Form 10-K for the fiscal
year ended December 31, 2004, and is incorporated herein by
reference; +
10(y) Severance Agreement and General Release between the Company and Peter
Chakoutis dated as of February 25, 2005 filed as Exhibit 10(bb) to the
Registrant's Form 10-K for the fiscal year ended December 31, 2004, and
is incorporated herein by reference; +
10(y.1) Final Agreement and General Release, between the Company and Peter
Chakoutis, dated as of April 4, 2005, filed as Exhibit 10.1 to the
Registrant's Current Report on Form 8-K, filed on April 4, 2005, and is
incorporated herein by reference; +
10(z) Compensation Policy Applicable to the Company's Non-Employee Directors
filed as Exhibit 10(cc) to the Registrant's Form 10-K for the fiscal
year ended December 31, 2004, and is incorporated herein by reference;
and +
10(aa) Marketing, Distribution and Supply Agreement between the Company and
Stiefel Laboratories, Inc., dated as of January 12, 2006, portions
of which have been omitted pursuant to a request for confidential
treatment under Rule 24(b)-2 of the Securities Exchange Act of 1934,
as amended.
14(a) Form of DUSA Pharmaceuticals, Inc. Code of Ethics Applicable to Senior
Officers, filed as Exhibit 14(a) to the Registrant's Form 10-K for the
fiscal year ended December 31, 2004, and is incorporated herein by
reference.
21(a) Subsidiaries of the Registrant.
23(a) Consent of Deloitte & Touche LLP, Independent Registered Public
Accounting Firm.
31(a) Rule 13a-14(a)/15d-14(a) Certification of the Chief Executive Officer;
and
31(b) Rule 13a-14(a)/15d-14(a) Certification of the Chief Financial Officer.
32(a) Certification of the Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002; and
32(b) Certification of the Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
+ Management contract or compensatory plan or arrangement.
71
* Schedules and exhibits omitted pursuant to Item 601(b)(2) of
Regulation S-K. The Company agrees to furnish supplementally a copy of
any omitted schedule or exhibit to the Commission upon request.
72
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
DUSA Pharmaceuticals, Inc.
Wilmington, Massachusetts
We have audited the accompanying consolidated balance sheets of DUSA
Pharmaceuticals, Inc. and its subsidiary (the "Company") as of December 31, 2005
and 2004, and the related consolidated statements of operations, shareholders'
equity, and cash flows for each of the three years in the period ended December
31, 2005. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Dusa Pharmaceuticals, Inc. and
subsidiaries as of December 31, 2005 and 2004, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2005, in conformity with accounting principles generally accepted
in the United States of America.
We have also audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the effectiveness of the
Company's internal control over financial reporting as of December 31, 2005,
based on the criteria established in Internal Control--Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission
and our report dated March 10, 2006, expressed an unqualified opinion on
management's assessment of the effectiveness of the Company's internal control
over financial reporting and an unqualified opinion on the effectiveness of the
Company's internal control over financial reporting.
/s/ DELOITTE & TOUCHE LLP
Boston, Massachusetts
March 10, 2006
F-1
DUSA PHARMACEUTICALS, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
-------------------------
2005 2004
----------- -----------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 4,210,675 $ 2,928,143
Marketable securities 30,579,486 46,222,969
Accrued interest receivable 353,449 641,797
Accounts receivable, net 373,130 711,016
Inventory 1,860,793 1,417,160
Deferred acquisition costs 831,875 --
Prepaids and other current assets 776,293 830,895
----------- -----------
TOTAL CURRENT ASSETS 38,985,701 52,751,980
Restricted cash 144,541 140,764
Property, plant and equipment, net 2,971,869 3,481,888
Deferred charges and other assets 228,520 276,256
----------- -----------
TOTAL ASSETS $42,330,631 $56,650,888
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 934,694 $ 857,268
Accrued compensation 1,071,677 963,607
Other accrued expenses 1,995,679 1,901,841
Deferred revenue 94,283 230,715
----------- -----------
TOTAL CURRENT LIABILITIES 4,096,333 3,953,431
Other liabilities 205,570 190,439
----------- -----------
TOTAL LIABILITIES 4,301,903 4,143,870
=========== ===========
COMMITMENTS AND CONTINGENCIES (NOTE 12)
SHAREHOLDERS' EQUITY
Capital Stock
Authorized: 100,000,000 shares; 40,000,000 shares designated as common
stock, no par, 60,000,000 shares issuable in series or classes; and
40,000 junior Series A preferred shares. Common stock shares issued
and outstanding: 17,041,197 in 2005 and 16,876,822 in 2004, no par 125,626,163 124,698,059
Additional paid-in capital 2,035,783 2,016,339
Accumulated deficit (89,537,470) (74,538,761)
Accumulated other comprehensive (loss) income (95,748) 331,381
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 38,028,728 52,507,018
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $42,330,631 $56,650,888
=========== ===========
See the accompanying Notes to the Consolidated Financial Statements.
F-2
DUSA PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
-----------------------------------------------
2005 2004 2003
-------------- ------------- ------------
REVENUES
Kerastick(R) Product Revenues $ 8,891,565 $ 5,850,835 $ 900,803
BLU-U(R) Product Revenues 2,445,896 2,136,821 69,306
-------------- ------------- ------------
PRODUCT REVENUES 11,337,461 7,987,656 970,109
COST OF PRODUCT REVENUES
Kerastick(R) Cost of Product Revenues and Royalties 3,583,650 2,023,685 2,261,749
BLU-U(R) Cost of Product Revenues 2,629,951 1,851,333 1,219,499
-------------- ------------- ------------
COST OF PRODUCT REVENUES AND ROYALTIES 6,213,601 3,875,018 3,481,248
GROSS MARGIN 5,123,860 4,112,638 (2,511,139)
OPERATING COSTS
Research and Development 5,587,599 6,489,723 5,403,961
Marketing and sales 9,068,984 7,622,106 2,494,405
General and administrative 6,703,047 7,209,536 6,343,680
Restructuring 150,917 - -
-------------- ------------- ------------
TOTAL OPERATING COSTS 21,510,547 21,321,365 14,242,046
-------------- ------------- ------------
LOSS FROM OPERATIONS (16,386,687) (17,208,727) (16,753,185)
-------------- ------------- ------------
OTHER INCOME
Interest income 1,387,978 1,579,747 1,926,331
-------------- ------------- ------------
NET LOSS $ (14,998,709) $ (15,628,980) $(14,826,854)
============== ============= ============
BASIC AND DILUTED NET LOSS PER COMMON SHARE $ (0.89) $ (0.96) $ (1.06)
============== ============= ============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 16,932,138 16,317,078 13,936,482
============== ============= ============
See the accompanying Notes to the Consolidated Financial Statements.
F-3
DUSA PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
COMMON STOCK
-------------------------- ACCUMULATED
ADDITIONAL OTHER
NUMBER OF PAID-IN ACCUMULATED COMPREHENSIVE
SHARES AMOUNT CAPITAL DEFICIT INCOME (LOSS) TOTAL
---------- ------------- ----------- -------------- ------------- -------------
BALANCE, JANUARY 1, 2003 13,887,612 $ 95,490,561 $ 2,015,586 $ (44,082,927) $ 2,634,510 $ 56,057,730
---------- ------------- ----------- -------------- ------------- -------------
Comprehensive loss:
Net loss for period (14,826,854) (14,826,854)
Net unrealized loss on marketable
securities available for sale (1,178,820) (1,178,820)
-------------
Total comprehensive loss (16,005,674)
Issuance of common stock to consultants 44,416 110,000 110,000
Exercises of options 11,000 32,870 32,870
Issuance of common stock to employee 23,219 37,123 37,123
---------- ------------- ----------- -------------- ------------- -------------
BALANCE, DECEMBER 31, 2003 13,966,247 $ 95,670,554 $ 2,015,586 $ (58,909,781) $ 1,455,690 $ 40,232,049
---------- ------------- ----------- -------------- ------------- -------------
Comprehensive loss:
Net loss for period (15,628,980) (15,628,980)
Net unrealized loss on marketable (1,124,309) (1,124,309)
securities available for sale
-------------
Total comprehensive loss (16,753,289)
Issuance of common stock for cash
through a private placement, net of
total offering costs of $1,907,952
including 155,250 shares issued to
placement agent 2,742,750 28,262,298 28,262,298
Exercises of options 167,825 765,207 765,207
Issuance of options to consultants 240,753 240,753
Repurchase of options issued to
consultants (240,000) (240,000)
---------- ------------- ----------- -------------- ------------- -------------
BALANCE, DECEMBER 31, 2004 16,876,822 124,698,059 2,016,339 (74,538,761) 331,381 52,507,018
Comprehensive loss
Net loss for period (14,998,709) (14,998,709)
Net unrealized loss on marketable (427,129) (427,129)
securities available for sale
-------------
Total comprehensive loss (15,425,838)
Exercises of options 164,375 928,104 928,104
Acceleration of vesting of stock
options 19,444 19,444
---------- ------------- ----------- -------------- ------------- -------------
BALANCE, DECEMBER 31, 2005 17,041,197 $ 125,626,163 $ 2,035,783 $ (89,537,470) $ (95,748) $ 38,028,728
========== ============= =========== ============== ============= =============
See the accompanying Notes to the Consolidated Financial Statements.
F-4
DUSA PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
---------------------------------------------
2005 2004 2003
------------- ------------ ------------
CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES
Net (loss) $ (14,998,709) $(15,628,980) $(14,826,854)
Adjustments to reconcile net loss to net cash used in operating
activities:
Amortization of premiums and accretion of discounts on debt
securities, net 416,550 225,614 100,346
Realized gain on sale of marketable securities (74,512) - -
Depreciation and amortization 925,185 1,299,308 1,610,848
Stock-based compensation 19,444 240,753 110,000
Changes in other assets and liabilities impacting cash flows from operating
activities:
Accrued interest receivable 288,348 (108,001) 165,868
Accounts receivable 337,886 (481,533) (192,763)
Inventory (443,632) (704,329) 475,828
Prepaid and other current assets (729,537) 169,518 (84,709)
Deferred charges and other assets - (276,256) -
Accounts payable 77,426 (2,014) 306,391
Accrued compensation and other accrued expenses 201,907 906,691 (550,872)
Deferred revenue (136,432) 100,815 124,800
Other liabilities-non current 15,131 190,439 -
------------- ------------ ------------
NET CASH USED IN OPERATING ACTIVITIES (14,100,945) (14,067,975) (12,761,117)
------------- ------------ ------------
CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES
Purchases of marketable securities (58,850,356) (58,858,323) (4,000,000)
Proceeds from maturities and sales of marketable securities 73,724,674 44,821,212 15,000,000
Restricted cash (3,777) (1,551) (1,330)
Purchases of property, plant and equipment (415,168) (529,707) (632,654)
Repurchase of options issued to consultants - (240,000) -
------------- ------------ ------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 14,455,373 (14,808,369) 10,366,016
------------- ------------ ------------
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES
Issuance of common stock (net of stock offering costs of $200,202) - 28,262,298 -
Payment of long-term debt - (1,517,500) (270,000)
Proceeds from exercise of options 928,104 765,207 32,870
------------- ------------ ------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 928,104 27,510,005 (237,130)
------------- ------------ ------------
NET DECREASE IN CASH AND CASH EQUIVALENTS 1,282,532 (1,366,339) (2,632,231)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 2,928,143 4,294,482 6,926,713
------------- ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 4,210,675 $ 2,928,143 $ 4,294,482
============= ============ ============
Cash paid for interest $ 20,186 $ 58,623
============= ============ ============
NON-CASH TRANSACTIONS
During 2004, the Company issued 155,250 shares of its common stock in a
private placement at $11.00 per share as commission and non-refundable
retainer to the placement agent for a total value of $1,707,750 (See Note
10.) Also during 2004, the Company granted 30,000 fully vested options to
three consultants. These options were valued at $240,753 (See Note 10.)
During 2003, the Company issued 23,219 shares of restricted common stock
at $1.599 per share to its Chief Executive Officer, reflecting payment of
the after-tax portion of his 2002 bonus compensation (See Note 10.)
See the accompanying Notes to the Consolidated Financial Statements.
F-5
DUSA PHARMACEUTICALS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED
DECEMBER 31, 2005, 2004, AND 2003
1) NATURE OF BUSINESS
DUSA Pharmaceuticals, Inc. ("DUSA" or the "Company") is a
pharmaceutical company engaged primarily in the research,
development and marketing of a drug named 5-aminoluvulinic acid, or
ALA, which is used in combination with light devices to treat or
detect a variety of conditions in processes known as photodynamic
therapy or photodetection. Our drug, Levulan(R) brand of
aminolevulinic acid HCl, or ALA, is being used with light, for use
in a broad range of medical conditions. When we use Levulan(R) and
follow it with exposure to light to treat a medical condition, it is
known as Levulan(R) photodynamic therapy, or Levulan(R) PDT. When we
use Levulan(R) and follow it with exposure to light to detect
medical conditions it is known as Levulan(R) photodetection, or
Levulan(R) PD.
The Company's products, the Levulan(R) Kerastick(R) 20%
Topical Solution with PDT and the BLU-U(R) brand light source were
launched in the United States of America, or U.S., in September 2000
for the treatment of actinic keratoses, or AKs, of the face or
scalp. AKs are precancerous skin lesions caused by chronic sun
exposure that can develop over time into a form of skin cancer
called squamous cell carcinoma. In addition, in September 2003 we
received clearance from the U.S. Food and Drug Administration, or
FDA, to market the BLU-U(R) without Levulan(R) PDT for the treatment
of moderate inflammatory acne vulgaris and general dermatological
conditions.
2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a) PRINCIPLES OF CONSOLIDATION - The Company's consolidated
financial statements include the accounts of the Company and its
wholly-owned subsidiary, DUSA Pharmaceuticals New York, Inc. All
intercompany balances and transactions have been eliminated.
b) BASIS OF PRESENTATION AND USE OF ESTIMATES - These financial
statements have been prepared in conformity with accounting
principles generally accepted in the United States. Such principles
require management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those
estimates.
c) CASH AND CASH EQUIVALENTS - Cash equivalents include money market
funds. All other investments are classified as marketable
securities. In December 2001, the Company executed a short-term,
renewable, irrevocable and unconditional letter of credit in lieu of
a security deposit for the Company's Kerastick(R) manufacturing
facility at its Wilmington, Massachusetts location. The cash in
support of the letter of credit is held in a separate bank account
and is recorded as restricted cash in the Consolidated Balance
Sheets. At December 31, 2005, the amount of the letter of credit was
$136,018, and the restricted cash balance was $144,541.
d) MARKETABLE SECURITIES - The Company classifies all investment
securities as available-for-sale and records such investments at
fair market value. Unrealized gains and losses on available for sale
securities are recorded as a separate component of shareholders'
equity. The premiums and discounts recorded on the purchase of the
debt securities are amortized into interest income over the life of
the securities. As the Company's marketable securities are available
to fund operations and as management expects to sell a portion of
its marketable securities in the next fiscal year in order to meet
its working capital requirements, all marketable securities are
classified as current assets.
F-6
DUSA PHARMACEUTICALS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED
DECEMBER 31, 2005, 2004, AND 2003
e) INVENTORY - Inventory is stated at the lower of cost (first-in,
first-out method) or market. Inventory identified for research and
development activities is expensed in the period in which that
inventory is designated for such use. BLU-U(R) commercial light
sources placed in physicians' offices for an initial evaluation
period are included in inventory in the accompanying Consolidated
Balance Sheets until all revenue recognition criteria are met.
f) DEFERRED ACQUISITION COSTS - Deferred acquisition costs are
direct costs incurred by the Company through December 31, 2005,
related to a pending acquisition (see Note 13). If the negotiations
are unsuccessful and a determination is made that the acquisition is
not likely to be consummated, the deferred acquisition costs will be
expensed in the period such a determination is made.
g) PROPERTY, PLANT AND EQUIPMENT - Property, plant and equipment is
carried at cost less accumulated depreciation and amortization.
Depreciation is computed on a straight-line basis over the estimated
lives of the related assets. Leasehold improvements are amortized
over the lesser of their useful lives or the lease terms.
h) VALUATION OF LONG-LIVED ASSETS - The Company reviews its
long-lived assets for impairment whenever events or changes in
circumstances indicate that the carrying amount of a long-lived
asset may not be recoverable or that the useful lives of these
assets are no longer appropriate. Recoverability of assets to be
held and used is measured by a comparison of the carrying amount of
an asset to future undiscounted net cash flows expected to be
generated by the asset. When it is determined that the carrying
value of a long-lived asset is not recoverable, the asset is written
down to its estimated fair value on a discounted cash flow basis.
i) REVENUE RECOGNITION - Revenues on product sales are recognized
when persuasive evidence of an arrangement exists, the price is
fixed and determinable, delivery has occurred to end-users, and
there is collection is probable. Product sales made through
distributors have been recorded as deferred revenue until the
product is sold by the distributors to the end user. The Company has
certain units held by physicians for a trial period. No revenue is
recognized until the physician elects to purchase the equipment and
all other revenue recognition criteria are met.
j) RESEARCH AND DEVELOPMENT COSTS - Costs related to the conceptual
formulation and design of products and processes are expensed as
research and development costs as they are incurred. Purchased
technology, including the costs of licensed technology for a
particular research project that do not have alternative future
uses, are expensed at the time the costs are incurred.
k) MARKETING AND SALES COSTS - The Company commenced certain
marketing and sales initiatives in 2003 including the launch of its
direct sales force in October 2003 and related marketing and sales
activities. Costs included in marketing and sales expense consist
mainly of overhead expenses such as salaries and benefits for the
marketing and sales staff, commissions, and related support expenses
such as travel, and telephone, as well as costs related to trade
shows, miscellaneous marketing and outside consultants. All such
costs are expensed as incurred.
l) INCOME TAXES - The Company recognizes deferred income tax assets
and liabilities for the expected future tax consequences for events
that have been included in the Company's financial statements or tax
returns. Deferred tax assets and liabilities are based on the
difference between the financial statement and tax bases of assets
and liabilities using tax rates expected to be in effect in the
years in which these differences are expected to reverse. A
valuation allowance is provided to reduce the deferred tax assets to
the amount that will more likely than not be realized.
F-7
DUSA PHARMACEUTICALS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED
DECEMBER 31, 2005, 2004, AND 2003
m) BASIC AND DILUTED NET LOSS PER COMMON SHARE - Basic net loss per
common share is based upon the weighted average number of shares
outstanding during each period. Stock options and warrants are not
included in the computation of the weighted average number of shares
outstanding for dilutive net loss per common share during each of
the periods presented in the Statement of Operations, as the effect
would be antidilutive. For the years ended December 31, 2005, 2004,
and 2003, stock options and warrants totaling approximately
3,150,000, 3,009,000, and 2,745,000 shares, respectively, have been
excluded from the computation of diluted net loss per share.
n) STOCK-BASED COMPENSATION - Statement of Financial Accounting
Standard ("SFAS") No. 123, "Accounting for Stock-Based
Compensation," as amended, addresses the financial accounting and
reporting standards for stock or other equity-based compensation
arrangements. The Company elected to continue to use the intrinsic
value-based method to account for employee stock option awards under
the provisions of Accounting Principles Board Opinion ("APB") No.
25, "Accounting for Stock Issued to Employees," and to provide
disclosures based on the fair value method in the Notes to the
Consolidated Financial Statements as permitted by SFAS No. 123.
Under the intrinsic value method, compensation expense, if any, is
recognized for the difference between the exercise price of the
option and the fair value of the underlying common stock as of a
measurement date. The measurement date is the time when both the
number of shares and the exercise price is known. Stock or other
equity-based compensation for non-employees must be accounted for
under the fair value-based method as required by SFAS No. 123, and
Emerging Issues Task Force ("EITF") No. 96-18, "Accounting for
Equity Instruments That Are Issued to Other Than Employees for
Acquiring, or in Conjunction with Selling, Goods or Services" and
other related interpretations. Under this method, the equity-based
instrument is valued at either the fair value of the consideration
received or the equity instrument issued on the measurement date,
which is generally the grant date. The resulting compensation cost
is recognized and charged to operations over the service period,
which is generally the vesting period.
As described above, prior to January 1, 2006 the Company used the
intrinsic value method to measure compensation expense associated
with grants of stock options to employees. Had the Company used the
fair value method to measure compensation, the net loss and net loss
per share would have been reported as follows for the years ended
December 31:
F-8
DUSA PHARMACEUTICALS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED
DECEMBER 31, 2005, 2004, AND 2003
2005 2004 2003
------------- ------------- -------------
Net loss: as reported $ (14,998,709) $ (15,628,980) $ (14,826,854)
------------- ------------- -------------
Add: stock-based compensation expense
included in reported net loss 19,444 - -
Deduct: effect on net loss
if fair value method had been used (1,738,275) (2,275,678) (3,445,951)
------------- ------------- -------------
Net loss: pro forma $ (16,717,540) $ (17,904,658) $ (18,272,805)
============= ============= =============
Basic and diluted net loss
per common share: as reported $ (0.89) $ (0.96) $ (1.06)
------------- ------------- -------------
Basic and diluted net loss
per common share: proforma $ (0.99) $ (1.10) $ (1.31)
============= ============= =============
The fair value of the options at the date of grant was estimated using the
Black-Scholes model with the following weighted average assumptions for the
years ended December 31:
2005 2004 2003
----- ----- -----
Expected life (years) 5 5 5
Risk free interest rate 3.97% 3.02% 3.02%
Expected volatility 72.05% 76.40% 80.85%
Dividend yield - - -
Using these assumptions, the weighted-average fair value per option
granted during the years ended December 31, 2005, 2004, and 2003, was
$6.71, $6.34, and $1.57, respectively.
In December 2004, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 123(R), "Share-Based Payment," a revision of SFAS Statement No.
123. The Company adopted SFAS 123(R) effective January 1, 2006, using the
modified prospective application method, and beginning with the first
quarter of 2006 will be required to measure all employee share-based
compensation awards using a fair value based method and record share-based
compensation expense in its financial statements if the requisite service
to earn the award is provided. The above disclosed pro forma results and
assumptions used in fiscal years 2005, 2004 and 2003 were based solely on
historical volatility of our common stock over the most recent period
commensurate with the estimated expected life of our stock options. The
adoption of SFAS No. 123(R) will not affect the Company's cash flow, but
it will materially increase the Company's net loss and basic and diluted
loss per common share. In accordance with SFAS 123R, the Company will
recognize the expense attributable to stock awards that are granted or
vest in periods ending subsequent to December 31, 2005.
For 2006, total stock-based compensation expense is estimated to be in a
range of $1,500,000 to $2,500,000. In order to develop the fiscal 2006
stock-based compensation expense estimate, we utilized assumptions
including, among other items, projected option grants, volatility measures
using a combination of historical and current and historical implied
volatility, and expected life estimates for officer and non-officer
employee groups. The amount of the 2006 grants, if any, have not yet been
determined and could result in a change to the amounts included in the
range reflected above. Total unrecognized stock-based compensation expense
related to unvested stock options, expected to be recognized over
approximately two years, amounted to $3,300,000 at December 31, 2005, net
of forfeitures.
F-9
DUSA PHARMACEUTICALS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED
DECEMBER 31, 2005, 2004, AND 2003
o) COMPREHENSIVE LOSS - The Company has reported comprehensive loss and
its components as part of its Consolidated Statements of Shareholders'
Equity. Comprehensive loss, apart from net loss, relates to net unrealized
gains and losses on marketable securities.
p) SEGMENT REPORTING - The Company presently operates in one segment,
which is the development and commercialization of emerging technologies
that use drugs in combination with light to treat and detect disease.
During the years ended 2005, 2004 and 2003, the Company derived revenues
from the following geographies (as a percentage of product revenues):
2005 2004 2003
---- ---- ----
UNITED STATES 87% 91% 100%
CANADA 13% 9% -
---- ---- ----
TOTAL 100% 100% 100%
==== ==== ====
q) FAIR VALUE OF FINANCIAL INSTRUMENTS - The carrying value of the
Company's financial assets and liabilities approximates their fair values
due to their short-term nature. Marketable securities classified as
available for sale are carried at fair market value.
r) CONCENTRATION OF CREDIT RISK - The Company invests cash in accordance
with a policy objective that seeks to preserve both liquidity and safety
of principal. The Company manages the credit risk associated with its
investments in marketable securities by investing in U.S. government
securities and investment grade corporate bonds.
The Company is also exposed to concentration of credit risk related to
accounts receivable that are generated from its distributors and
customers. To manage credit risk, the Company performs regular credit
evaluations of its customers' and provides allowances for potential credit
losses, when applicable. Concentrations in the Company's accounts
receivable as of December 31, 2005 and 2004 and in the Company's revenues
for the years ended December 31, 2005, 2004, and 2003, were as follows:
2005 2004 2003
-------------------- --------------------- -------
% OF % OF
% OF ACCOUNTS % OF ACCOUNTS % OF
REVENUE RECEIVABLE REVENUE RECEIVABLE REVENUE
------- ---------- ------- ---------- -------
Distributor A 16% - 31% 27% 89%
Distributor B - - 17% - -
Distributor C 13% 6% 5% 34% -
Direct Customers 71% 94% 47% 39% 11%
--- --- --- --- ---
Total 100% 100% 100% 100% 100%
=== === === === ===
The Company is dependent upon sole-source suppliers for a number of its
products. There can be no assurance that these suppliers will be able to
meet the Company's future requirements for such products or parts or that
they will be available at favorable terms. Any extended interruption in
the supply of any such products or parts or any significant price increase
could have a material adverse effect on the Company's operating results in
any given period.
s) RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
F-10
DUSA PHARMACEUTICALS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED
DECEMBER 31, 2005, 2004, AND 2003
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs, an
amendment of ARB No. 43, Chapter 4." The amendments made by SFAS No. 151
clarify that abnormal amounts of idle facility expense, freight, handling
costs, and wasted materials should be recognized as current-period charges
and require the allocation of fixed production overheads to inventory
based on the normal capacity of the production facilities. The provisions
of SFAS No. 151 are effective for inventory costs incurred during fiscal
years beginning after June 15, 2005. The Company has adopted this standard
beginning the first quarter of 2006 and does not believe the adoption will
have a material impact on its results of operations or financial position
as such costs have historically been expensed as incurred.
In November 2005, FASB issued FASB Staff Position FAS 115-1 and FAS 124-1,
"The Meaning of Other-Than-Temporary Impairment and Its Application to
Certain Investments" ("FSP FAS 115-1"), which provides guidance on
determining when investments in certain debt and equity securities are
considered impaired, whether that impairment is other-than-temporary, and
on measuring such impairment loss. FSP FAS 115-1 also includes accounting
considerations subsequent to the recognition of an other-than-temporary
impairment and requires certain disclosures about unrealized losses that
have not been recognized as other-than-temporary impairments. FSP FAS
115-1 is required to be applied to reporting periods beginning after
December 15, 2005. We
F-11
DUSA PHARMACEUTICALS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED
DECEMBER 31,2005, 2004, AND 2003
are required to adopt FSP FAS 115-1 in the first quarter of 2006. We do
not expect the adoption of this statement will have a material impact on
our results of operations or financial condition.
3) MARKETABLE SECURITIES
The Company's investment securities consist of securities of the U.S.
government and its agencies, and investment grade corporate bonds, all
classified as available for sale. As of December 31, 2005, current yields
range from 2.36% to 7.38% and maturity dates range from January 17, 2006
to June 15, 2008.
The estimated fair value and cost of marketable securities were as follows
as of December 31:
2005
-----------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
------------ ---------- ---------- ------------
United States government debt securities $ 19,857,171 $ 3,732 $ (72,243) $ 19,788,660
Investment grade corporate debt securities 10,818,063 15,136 (42,373) 10,790,826
------------ ---------- ---------- ------------
Total marketable debt securities $ 30,675,234 $ 18,868 ($114,616) $ 30,579,486
available for sale
============ ========== ========== ============
2004
----------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
------------ ---------- ---------- -----------
United States government debt securities $ 27,266,271 $ 389,585 ($ 15,315) $27,640,541
Investment grade corporate debt securities 18,625,317 504 (43,393) 18,582,428
------------ --------- --------- -----------
Total marketable debt securities $ 45,891,588 $ 390,089 ($ 58,708) $46,222,969
available for sale
============ ========= ========= ===========
The change in net unrealized gains and losses on such securities for the
years ended December 31, 2005, 2004 and 2003 was ($427,129), ($1,124,309)
and ($1,178,820), respectively, and has been recorded in accumulated other
comprehensive income, which is reported as part of shareholders' equity in
the Consolidated Balance Sheets. Realized gains on sales of marketable
securities were $75,000 in 2005. There were no realized gains or losses in
2004 or 2003.
F-12
DUSA PHARMACEUTICALS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED
DECEMBER 31, 2005, 2004, AND 2003
Because the Company has the ability and intent to hold these investments
until a recovery of fair value, which may be maturity, the Company does
not consider these investments to be other-than-temporarily impaired at
December 31, 2005.
F-13
DUSA PHARMACEUTICALS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED
DECEMBER 31, 2005, 2004, AND 2003
4) INVENTORY
Inventory consisted of the following at December 31:
2005 2004
---------- -----------
Finished goods $ 1,004,772 $ 1,226,071
BLU-U(R) evaluation units 292,129 -
Work in process 60,805 85,910
Raw materials 503,087 105,179
----------- -----------
$ 1,860,793 $ 1,417,160
=========== ===========
BLU-U(R) commercial light sources placed in physicians' offices pursuant
to the Company's BLU-U(R) evaluation program are classified as inventory
in the accompanying Consolidated Balance Sheets.
5) RESTRUCTURING CHARGE
During the quarter ended September 30, 2005, the Company eliminated 14
staff positions, representing 16% of the workforce, to align headcount
more closely with management's assessment of its resource requirements at
that time. These workforce reductions were made across all functions of
the Company. As a result of these actions the Company recorded a
restructuring charge of approximately $150,000. As of December 31, 2005,
the Company had paid all of its obligations under the restructuring plan.
F-14
DUSA PHARMACEUTICALS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED
DECEMBER 31, 2005, 2004, AND 2003
6) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, at cost, consisted of the following at
December 31:
USEFUL LIVES
(YEARS) 2005 2004
---------------------- ----------- -----------
Computer equipment and software 3 $ 2,389,562 $ 2,226,646
BLU-U units in physicians' offices 3 - 700,043
Furniture, fixtures and equipment 5 810,488 726,069
Manufacturing facility Term of lease 2,204,122 2,204,122
Manufacturing equipment 5 2,187,244 2,153,485
Leasehold improvements Lesser of their useful
Lives or term of lease 833,967 699,892
----------- -----------
8,425,383 8,710,257
Accumulated depreciation and amortization (5,453,514) (5,228,369)
$ 2,971,869 $ 3,481,888
=========== ===========
Depreciation and amortization totaled $925,000, $1,299,000, and $1,611,000
for 2005, 2004, and 2003, respectively.
7) OTHER ACCRUED EXPENSES
Other accrued expenses consisted of the following at December 31:
2005 2004
----------- -----------
Research and development costs $ 347,220 $ 778,926
Marketing and sales costs 173,092 153,167
Product related costs 667,388 261,444
Legal and other professional fees 488,401 374,142
Employee benefits 225,628 229,304
Other expenses 93,950 104,858
----------- -----------
$ 1,995,679 $ 1,901,841
=========== ===========
8) INCOME TAXES
The tax effect of significant temporary differences representing deferred
tax assets and liabilities at December 31:
2005 2004
----------- ------------
DEFERRED TAX ASSETS
Deferred revenue $ 19,000 $ 93,000
Intangible assets 917,000 632,000
Accrued charges 60,000 51,000
Research and development tax credit carryforwards 2,720,000 2,593,000
Capitalized R&D 3,571,000 -
Operating loss carryforwards 31,916,000 29,463,000
License fee 141,000 161,000
Reserves -
------------
F-15
DUSA PHARMACEUTICALS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED
DECEMBER 31, 2005, 2004, AND 2003
102,000
------------
Total deferred tax assets 39,446,000 32,993,000
------------ -------------
DEFERRED TAX LIABILITIES
Fixed assets (8,000) (8,000)
------------ -------------
Total deferred tax liabilities (8,000) (8,000)
------------ -------------
Net deferred tax assets before allowance 39,438,000 32,985,000
Valuation allowance (39,438,000) (32,985,000)
------------ -------------
Total $ - $ -
============ =============
During the years ended December 31, 2005, 2004, and 2003, the valuation
allowance was increased by approximately $6,453,000, $5,503,000, and
$5,022,000, respectively, due to the uncertainty of future realization of
the net deferred tax assets which were increasing.
Included in deferred tax assets at December 31, 2005 and 2004 is
$1,817,000 and $1,600,000 of future benefits attributable to the exercise
of stock options which, if realized, will be credited to additional
paid-in capital rather than results of operations.
As of December 31, 2005, the Company has Federal net operating loss
carryforwards for tax purposes of approximately $79,261,000 and research
and development tax credits of approximately $2,521,000, both of which, if
not utilized, will expire for Federal tax purposes as follows:
RESEARCH AND
OPERATING LOSS DEVELOPMENT TAX
CARRYFORWARDS CREDITS
-------------- ---------------
2010 $ 2,325,000 $ -
2011 6,638,000 7,000
2012 6,841,000 57,000
2013 - 66,000
2014 - 84,000
2015 - 44,000
2016 - 102,000
2017 - 235,000
2018 5,738,000 145,000
2019 - 81,000
2020 - 159,000
2021 1,772,000 343,000
2022 15,382,000 477,000
2023 12,716,000 232,000
2024 9,913,000 282,000
2025 17,936,000 207,000
------------ -----------
$ 79,261,000 $ 2,521,000
============ ===========
The tax loss carryforwards of the Company and its subsidiaries may be
subject to limitation by Section 382 of the Internal Revenue Code with
respect to the amount utilizable each year. The amount of the limitation,
if any, has not been quantified by the Company.
F-16
DUSA PHARMACEUTICALS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED
DECEMBER 31, 2005, 2004, AND 2003
A reconciliation between the effective tax rate and the statutory Federal
rate is as follows:
2005 2004 2003
--------------------- --------------------- --------------------
% % %
------------ ------- ------------ ------- ------------ ------
Income tax benefit at statutory rate ($5,100,000) (34.0) ($5,314,000) (34.0) ($5,041,000) (34.0)
State taxes (939,000) (6.3) (979,000) (6.3) (930,000) (6.3)
Tax credit carryforwards (234,000) (1.6) (435,000) (2.8) (329,000) (2.2)
Change in valuation allowance including
revisions of prior year estimates 6,233,000 41.6 6,676,000 42.7 6,268,000 42.3
Other 40,000 0.3 52,000 0.4 32,000 0.2
---------- ---- ---------- ---- ---------- ----
$ - - $ - - $ - -
========== ==== ========== ==== ========== ====
9) SHAREHOLDERS' EQUITY
COMMON STOCK ISSUANCES -
In March 2005, the vesting period for 18,875 options to purchase shares of
common stock was extended beyond the original terms and the vesting of
1,250 options was accelerated upon an employee's termination. As a result
of this stock option modification, the Company recorded compensation
expense of approximately $19,000 during 2005. The compensation expense was
calculated using the intrinsic value method, which compares the common
stock option exercise price to the fair market value of the underlying
common stock on the date of modification. The stock compensation expense
was recorded as part of general and administrative costs in the
Consolidated Statement of Operations.
On February 27, 2004, the Company completed a private placement of
2,250,000 shares of its common stock at a purchase price of $11.00 per
share, resulting in gross proceeds of $24,750,000. The closing date of the
private placement was March 2, 2004. The Company also granted the
investors the right to purchase up to an aggregate of an additional
337,500 shares of common stock at $11.00 per share. These additional
investment rights were exercised on April 14, 2004, resulting in
additional gross proceeds of $3,712,500. Offering costs incurred in
connection with the placement were $1,907,952, of which $1,707,750
consisted of the placement agent's commission and non-refundable retainer
paid in the form of 155,250 shares of common stock calculated at the
offering price.
On March 18, 2004, the Company granted a total of 30,000 fully vested
options to three consultants on its Medical Advisory Board as compensation
for services. These options were valued at $240,753 and recorded as part
of research and development costs in the Consolidated Statement of
Operations. On December 30, 2004 the Company repurchased these options for
a total cash payment of $240,000.
On June 15, 2003, the Company granted compensation of $50,000 to
Therapeutics, Inc. ("Therapeutics"), a clinical research organization,
pursuant to an agreement for services. This compensation was issued in
July 2003 and was comprised of 11,666 shares of common stock valued at
$35,000 and $15,000 of cash. The transaction was recorded in research and
development expense in the Consolidated Statements of Operations.
On May 2, 2003, the Company granted a total of 32,750 shares of
unregistered common stock to two outside consultants as compensation for
services rendered. These shares were valued at approximately $75,000 and
recorded as part of research and development costs in the Consolidated
Statements of Operations.
F-17
DUSA PHARMACEUTICALS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED
DECEMBER 31, 2005, 2004, AND 2003
On March 13, 2003, the Company issued 23,219 shares of restricted common
stock at the grant date fair value of $1.599 per share to its Chief
Executive Officer, reflecting payment of the after-tax portion of his
2002 bonus compensation. This amount had been accrued in the December 31,
2002 financial statements.
10) STOCK OPTIONS AND WARRANTS
a) 1996 OMNIBUS PLAN - The 1996 Omnibus Plan ("Omnibus Plan"), as amended,
provides for the granting of awards to purchase up to a maximum of 20% of
the Company's common stock outstanding or a maximum of 3,343,874 shares.
The Omnibus Plan is administered by a committee ("Committee") established
by the Board of Directors. The Omnibus Plan enables the Committee to grant
non-qualified stock options ("NQSO"), incentive stock options ("ISO"),
stock appreciation rights, restricted stock, or other securities
determined by the Company, to directors, employees and consultants.
NON-QUALIFIED STOCK OPTIONS - All the NQSOs granted under the Omnibus Plan
have an expiration period not exceeding ten years and are issued at a
price not less than the market value of the common stock on the grant
date. NQSO grants to employees become exercisable at a rate of one quarter
of the total granted on each of the first, second, third and fourth
anniversaries of the grant date, subject to satisfaction of certain
conditions involving continuous periods of service. In addition, the
Company initially grants each individual who agrees to become a director
15,000 NQSO to purchase common stock of the Company. Thereafter, each
director reelected at an Annual Meeting of Shareholders will automatically
receive an additional 10,000 NQSO on June 30 of each year. Grants to
directors immediately vest on the date of the grant.
INCENTIVE STOCK OPTIONS - ISOs granted under the Omnibus Plan have an
expiration period not exceeding ten years (five years for ISOs granted to
employees who are also ten percent shareholders) and are issued at a price
not less than the market value of the common stock on the grant date.
These options become exercisable at a rate of one quarter of the total
granted on each of the first, second, third and fourth anniversaries of
the grant date, subject to satisfaction of certain conditions involving
continuous periods of service.
The following table summarizes information about all stock options
outstanding at December 31, 2005:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------ ---------------------
WEIGHTED
NUMBER AVERAGE WEIGHTED NUMBER WEIGHTED
OUTSTANDING REMAINING AVERAGE EXERCISABLE AVERAGE
AT DECEMBER CONTRACTUAL EXERCISE AT DECEMBER EXERCISE
RANGE OF EXERCISE PRICE 31, 2005 LIFE PRICE 31, 2005 PRICE
----------------------- ------------ ------------ -------- ----------- --------
$1.60 to 5.10 461,625 6.85 years $ 2.86 303,625 $ 2.96
5.11 to 7.75 503,750 1.15 years 7.41 503,750 7.41
7.76 to 9.92 681,125 6.39 years 9.55 445,939 9.42
9.93 to 27.31 899,750 6.60 years 14.22 456,000 17.15
31.00 to 31.00 304,000 4.18 years 31.00 304,000 31.00
--------- ---------
2,850,250 5.37 years $ 11.85 2,013,314 $ 12.95
========= =========
F-18
DUSA PHARMACEUTICALS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED
DECEMBER 31, 2005, 2004, AND 2003
Activity under stock option plans during the years ended December
31, 2005, 2004 and 2003 was as follows:
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
2005 PRICE 2004 PRICE 2003 PRICE
--------- ------- --------- ------- --------- --------
Options outstanding, beginning of year 2,708,750 $ 11.62 2,444,950 $ 11.50 2,253,075 $ 12.95
Options granted 598,750 11.00 512,250 9.97 447,000 2.76
Options exercised (164,375) 5.65 (167,825) 4.50 (11,000) 2.99
Options cancelled (292,875) 11.46 (80,625) 12.28 (244,125) 11.21
--------- ------- --------- ------- --------- -------
Options outstanding, end of year 2,850,250 $ 11.85 2,708,750 $ 11.62 2,444,950 $ 11.50
========= ======= ========= ======= ========= =======
Options exercisable, end of year 2,013,314 $ 12.95 1,924,625 $ 13.46 1,771,325 $ 12.59
========= ======= ========= ======= ========= =======
Options that were granted during 2005, 2004 and 2003 have exercise prices
ranging from $9.04 to $15.90 per share, $9.05 to $12.87 per share, and
$1.60 to $5.20 per share, respectively.
Options which were exercised during 2005, 2004 and 2003 were exercised at
per share prices ranging from $1.60 to $9.92, $1.60 to $7.44, and $2.90 to
$3.87, respectively.
b) WARRANTS - On January, 17, 2002, the Company extended the term of
300,000 warrants, which were previously issued to the Chief Executive
Officer of the Company, from January 29, 2002 to January 29, 2007. The
warrants are convertible on a one-for-one basis into Shares of Common
Stock. No compensation expense resulted from the extension of these
warrants as the intrinsic value of these warrants at the date of extension
was zero. As of December 31, 2005, all of these warrants were outstanding.
The exercise price of the warrants is CDN $6.79 (U.S. $5.82 at December
31, 2005).
11) RETIREMENT PLAN
Effective January 1, 1996, the Company adopted a tax-qualified employee
savings and retirement 401(k) Profit Sharing Plan (the "401(k) Plan"),
covering all qualified employees. Participants may elect a salary deferral
of at least 1% as a contribution to the 401(k) Plan, up to the statutorily
prescribed annual limit for tax-deferred contributions. Effective February
1, 2003, DUSA matches a participant's contribution up to 1.25% of a
participant's salary (the "Match"), subject to certain limitations of the
401(k) Plan. Participants will vest in the Match at a rate of 25% for each
year of service to DUSA. The Company's matching contributions in 2005,
2004 and 2003 were $42,000, $39,000 and $33,000, respectively.
12) COMMITMENTS AND CONTINGENCIES
a) PARTEQ AGREEMENT - The Company licenses certain patents underlying its
Levulan(R) PDT/PD systems under a license agreement with PARTEQ Research
and Development Innovations, the licensing arm of Queen's University,
Kingston, Ontario. Under the agreement, the Company has been granted an
exclusive worldwide license, with a right to sublicense, under PARTEQ
patent rights, to make, have made, use and sell certain products,
including ALA. The agreement covers certain use patent rights.
F-19
DUSA PHARMACEUTICALS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED
DECEMBER 31, 2005, 2004, AND 2003
When the Company is selling its products directly, it has agreed to pay to
PARTEQ royalties of 6% and 4% on 66% of the net selling price in countries
where patent rights do and do not exist, respectively. In cases where the
Company has a sublicensee, it will pay 6% and 4% when patent rights do and
do not exist, respectively, on its net selling price less the cost of
goods for products sold to the sublicensee, and 6% of payments the Company
receives on sales of products by the sublicensee.
For the years ended December 31, 2005, 2004 and 2003, actual royalties
based on product sales were approximately $340,000, $229,000, and $36,000,
respectively. However, based on the annual minimum royalty requirements,
the Company incurred total royalty expense of $74,000 in 2003, which has
been recorded in cost of product sales and royalties. Commencing with the
initial product launch, annual minimum royalties to PARTEQ must total at
least CDN $100,000 (U.S. $86,000 as of December 31, 2005).
The Company is also obligated to pay to PARTEQ 5% of any lump sum
sublicense fees received, such as milestone payments, excluding amounts
designated by the sublicensee for future research and development efforts.
No amounts have been paid to PARTEQ as a result of sublicense fees
received.
b) DRAXIS TERMINATION AND TRANSFER AGREEMENT - On February 24, 2004, the
Company reacquired the rights to the aminolevulinic acid (Levulan(R))
technology for Canada held by Draxis Health Inc. ("Draxis"). These rights
were initially assigned to Draxis in 1991. The Company and Draxis
terminated the assignment and DUSA agreed to pay to Draxis an upfront fee
of $150,000 CDN ($114,000 USD at February 24, 2004) and a 10% royalty on
sales of the Levulan(R) Kerastick(R) in Canada over a five year term
commencing in June 2004 based on the first Kerastick(R) sale in Canada by
Coherent, our Canadian marketing and distribution partner. The upfront fee
was capitalized and is being amortized over the five year term of the
arrangement. At December 31, 2005, the remaining unamortized balance of
$78,000 is included in deferred charges and other assets. The Company
incurred total royalty expense of $116,000 and $56,000 in 2005 and 2004,
respectively, which has been recorded in cost of product sales and
royalties.
c) LEASE AGREEMENTS - The Company has entered into lease commitments for
office space in Wilmington, Massachusetts, Valhalla, New York, and
Toronto, Ontario. These leases generally have five or ten year terms. The
minimum lease payments disclosed below include the non-cancelable terms of
the leases. Future minimum lease payments are as follows:
MINIMUM LEASE
PAYMENTS
-------------
2006 $ 470,000
2007 469,000
2008 418,000
2009 432,000
2010 448,000
Beyond 2010 722,000
------------
$ 2,959,000
============
Rent expense incurred under these operating leases was approximately
$477,000, $472,000, and $471,000 for the years ended December 31, 2005,
2004, and 2003, respectively.
d) RESEARCH AGREEMENTS - The Company has entered into various agreements
for research projects and clinical studies. As of December 31, 2005,
future payments to be made pursuant to these agreements, under certain
terms and conditions, totaled approximately $1,775,000 for 2006. Included
in this future payment is a master service agreement, effective June 15,
2001, with
F-20
DUSA PHARMACEUTICALS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED
DECEMBER 31, 2005, 2004, AND 2003
Therapeutics, Inc. for an initial term of two years, with annual renewal
periods thereafter, to engage Therapeutics to manage the clinical
development of the Company's products in the field of dermatology. The
agreement was renewed on June 15, 2005 for a one year period. Therapeutics
is entitled to receive a bonus valued at $50,000, in cash or stock at the
Company's discretion, upon each anniversary of the effective date.
Therapeutics has the opportunity for additional stock grants, bonuses, and
other incentives for each product indication ranging from $250,000 to
$1,250,000 depending on the regulatory phase of development of products
during Therapeutics' management.
e) LEGAL MATTERS - In April 2002, we received a copy of a notice issued by
PhotoCure ASA to Queen's University at Kingston, Ontario, alleging that
Australian Patent No. 624985 was invalid. Australian Patent No. 624985 is
one of the patents covered by our agreement with PARTEQ Research &
Development Innovations, the technology transfer arm of Queen's
University, relating to 5-aminolevulinic acid technology. PhotoCure
instituted this proceeding on April 12, 2002 in the Federal Court of
Australia, Victoria District Registry. As a consequence of this action,
Queen's University assigned the Australian patent to us so that we could
participate directly in this litigation. On April 6, 2005, the Federal
Court of Australia ruled that the patent is valid and remains in full
force and effect. However, the Court also ruled that PhotoCure's product
does not infringe the claims in the Australian patent. Since these claims
are unique to the Australian patent and Australian law differs from patent
law in other jurisdictions, we do not expect that this decision is
determinative of the validity of any other patents licensed by us from
Queen's University or of whether PhotoCure's product infringes claims in
such other patents, including the United States patent. None of the
parties have appealed the decision and the date to do so has expired. The
parties, including PhotoCure's marketing partner, Galderma S.A., signed a
Mediation Agreement in August 2004 to attempt to settle their disputes and
negotiations are on-going.
In December 2004, we filed a lawsuit against New England Compounding
Center of Framingham, Massachusetts alleging violations of U.S. patent law
in the U.S. District Court in Boston, Massachusetts. On March 17, 2005,
New England Compounding Pharmacy filed an answer against us, including a
defense that our patents are invalid and several counterclaims against us,
and we filed our response on April 5, 2005. The parties are now in the
discovery stage of this litigation. A tentative trial date has been set by
the court for January 2007. We are seeking injunctive relief, monetary
damages and costs.
In January 2005, we filed a lawsuit against The Cosmetic Pharmacy of
Tucson, Arizona alleging violations of the Lanham Act for false
advertising and trademark infringement, and of U.S. patent law in the U.S.
District Court for the District of Arizona. A motion for default judgment
was granted on July 25, 2005 in our favor for failure of The Cosmetic
Pharmacy of Tucson to appear, together with injunctive relief and attorney
fees and costs in the amount of $20,668.
In November, 2005 and January, 2006 we filed lawsuits against
physicians in several states to prevent their continued use of versions of
our Levulan (R) brand of aminolevulinic acid HCl (ALA) produced, by
third-parties for use in our patented photodynamic therapy (PDT) treatment
for actinic keratosis, basal cell carcinoma, acne and other dermatological
conditions. The suits allege that ALA obtained from sources other than
DUSA is being used by physicians for patient treatments that are covered
under patents exclusively licensed by DUSA, resulting in direct
infringement of these patent(s). Additionally, some doctors are also being
sued for misuse of DUSA's trademarks and for violations of the Lanham Act
for using the Levulan (R) brand name on their web sites and promotional
materials, but performing patient treatments with ALA obtained from other
sources. Most of the physicians have entered Consent Judgments in which
F-21
DUSA PHARMACEUTICALS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED
DECEMBER 31, 2005, 2004, AND 2003
they admit the infringement and provide DUSA with the right to review
their books and records. Two lawsuits are currently on-going.
The Company has not accrued any amounts for these contingencies as
of December 31, 2005, as these amounts are neither probable nor estimable.
f) LICENSE AND SUPPLY AGREEMENTS - In December 2002, DUSA entered into a
License and Development Agreement with photonamic GmbH & Co. KG, a
subsidiary of medac GmbH, a German pharmaceutical company, and a supply
agreement with medac. These agreements provide for the licensing to DUSA
of photonamic's proprietary technology related to ALA for systemic dosing
in the field of brain cancer. Based on the license agreement, DUSA made a
non-refundable $500,000 milestone payment to photonamic in 2003. The
Company may also be obligated to pay certain regulatory milestones
including $1,250,000 upon FDA acceptance of a registration application for
a brain cancer product in the U.S., and an additional $1,250,000 upon
registration of the product and royalties of 12.5% on net sales under the
terms of the License and Development Agreement. The Company will also
purchase product under the supply agreement for mutually agreed upon
indications. Should photonamic's clinical study be successful, DUSA will
be obligated to proceed with development of the product in the U.S. in
order to retain the license for the use of the technology to treat brain
cancer. Such additional obligations are undeterminable at this time.
g) AMENDED AND RESTATED PURCHASE AND SUPPLY AGREEMENT - On June 21, 2004,
the Company signed an Amended and Restated Purchase and Supply Agreement
with National Biological Corporation ("NBC"), the manufacturer of its
BLU-U(R) light source. This agreement provides for the elimination of
certain exclusivity clauses, permits the Company to order on a purchase
order basis without minimums, and other modifications of the original
agreement providing both parties greater flexibility related to the
development and manufacture of light sources and the associated technology
within the field of PDT. The Company paid $110,000 to NBC upon execution
of the agreement which will be amortized over the remaining term of the
agreement, expiring November 5, 2008.
13) PENDING TRANSACTION
In December, 2005, we signed a definitive Merger Agreement to
acquire all of the common stock of Sirius Laboratories Inc. of Vernon
Hills, Illinois in exchange for cash and common stock worth up to
$30,000,000. Sirius is a privately held dermatology specialty
pharmaceuticals company founded in 2000 with a primary focus on the
treatment of acne vulgaris and acne rosacea. Closing of the transaction is
expected in the first quarter of 2006, subject to the terms and conditions
in the Merger Agreement. Of the potential $30,000,000 consideration,
$8,000,000 less certain expenses will be paid in cash upon closing,
$17,000,000 will be paid in shares of DUSA's common stock also upon
closing in a private placement, and up to $5,000,000 in cash or common
stock may be paid based on a combination of new product approvals or
launches, and achievement of certain pre-determined total cumulative sales
milestones for Sirius products. The amount of DUSA common stock to be
issued in the merger agreement will depend upon the average trading price
of DUSA's common stock during a 20 trading-day period just prior to the
closing.
Included in the accompanying Consolidated Balance Sheets as of
December 31, 2005 are deferred acquisition costs of approximately $830,000
related to the Sirius acquisition. If the negotiations are unsuccessful
and a determination is made that the acquisition is not likely to close,
the deferred acquisition costs will be expensed in the period such a
determination is made.
F-22
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
(Registrant) DUSA Pharmaceuticals, Inc.
By (Signature and Title) /s/D. Geoffrey Shulman
------------------------
Chairman of the Board and Chief Executive Officer
Date: March 10, 2006
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/s/ D. Geoffrey Shulman Director, Chairman of the Board and March 10, 2006
------------------------------- Chief Executive Officer (principal
D. Geoffrey Shulman, MD, executive officer)
FRCPC
/s/ Robert F. Doman President, Chief Operating Officer March 10, 2006
-------------------------------
Robert F. Doman
/s/ Richard C. Christopher Vice President, Finance and Chief March 10, 2006
------------------------------- Financial Officer (principal financial
Richard C. Christopher officer and principal accounting
officer)
/s/ John H. Abeles Director March 10, 2006
-------------------------------
John H. Abeles
/s/ David Bartash Director March 10, 2006
-------------------------------
David Bartash
/s/ Jay M. Haft Vice Chairman of the Board and Lead March 10, 2006
------------------------------- Director
Jay M. Haft, Esq.
/s/ Richard C. Lufkin Director March 10, 2006
-------------------------------
Richard C. Lufkin
/s/ Magnus Moliteus Director March 10, 2006
-------------------------------
Magnus Moliteus
EXHIBIT INDEX
2(a.1)* Merger Agreement by and among the Company, Sirius Laboratories, Inc.,
and the shareholders of Sirius dated as of December 30, 2005; and
2(a.2) First Amendment to Merger Agreement by and among the Company, Sirius
Laboratories, Inc. and the shareholders of Sirius, dated as of
February 6, 2006.
3(a.1) Certificate of Incorporation, as amended, filed as Exhibit 3(a) to the
Registrant's Form 10-K for the fiscal year ended December 31, 1998, and
is incorporated herein by reference;
3(a.2) Certificate of Amendment to the Certificate of Incorporation, as
amended, dated October 28, 2002 and filed as Exhibit 99.3 to the
Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended
September 30, 2002, filed November 12, 2002 and is incorporated herein
by reference; and
3(b) By-laws of the Registrant, filed as Exhibit 3 to the Registrant's
current report on Form 8-K, filed on January 4, 2005, and is
incorporated herein by reference.
4(a) Common Stock specimen, filed as Exhibit 4(a) to the Registrant's Form
10-K for the fiscal year ended December 31, 2002, and is incorporated
herein by reference;
4(b) Class B Warrant, filed as Exhibit 4.3 to the Registrant's Registration
Statement on Form S-1, No. 33-43282, and is incorporated herein by
reference;
4(c) Rights Agreement filed as Exhibit 4.0 to Registrant's Current Report on
Form 8-K dated September 27, 2002, filed October 11, 2002, and is
incorporated herein by reference; and
4(d) Rights Certificate relating to the rights granted to holders of common
stock under the Rights Agreement filed as Exhibit 4.0 to Registrant's
Current Report on Form 8-K, dated September 27, 2002, filed October 11,
2002, and is incorporated herein by reference.
10(a) License Agreement between the Company, PARTEQ and Draxis Health Inc.
dated August 27, 1991, filed as Exhibit 10.1 to the Registrant's
Registration Statement on Form S-1, No. 33-43282, and is incorporated
herein by reference;
10(b) ALA Assignment Agreement between the Company, PARTEQ, and Draxis Health
Inc. dated October 7, 1991, filed as Exhibit 10.2 to the Registrant's
Registration Statement on Form S-1, No. 33-43282, and is incorporated
herein by reference;
10(b.1) Amended and Restated Assignment Agreement between the Company and Draxis
Health, Inc. dated April 16, 1999, filed as Exhibit 10(b.1) to the
Registrant's Form 10-K for the fiscal year ended December 31, 1999, and
is incorporated herein by reference;
10(b.2) Termination and Transfer Agreement between the Company and Draxis Health
Inc. dated as of February 24, 2004, filed as Exhibit 10(b.2) to the
Registrant's Form 10-K for the fiscal year ended December 31, 2003,
portions of which have been omitted pursuant to a request for
confidential treatment pursuant to Rule 24b-2 of the Securities Exchange
Act of 1934, as amended, and is incorporated herein by reference;
10(c) Employment Agreement of D. Geoffrey Shulman, MD, FRCPC dated October 1,
1991, filed as Exhibit 10.4 to the Registrant's Registration Statement
on Form S-1, No. 33-43282, and is incorporated herein by reference; +
10(d) Amendment to Employment Agreement of D. Geoffrey Shulman, MD, FRCPC
dated April 14, 1994, filed as Exhibit 10.4 to the Registrant's
Registration Statement on Form S-2, No. 33-98030, and is incorporated
herein by reference; +
10(e) Amended and Restated License Agreement between the Company and PARTEQ
dated March 11, 1998, filed as Exhibit 10(e) to the Registrant's Form
10-K/A filed on June 18, 1999, portions of Exhibit A have been omitted
pursuant to a request for confidential treatment pursuant to Rule
24b-2 of the Securities Exchange Act of 1934, as amended, and is
incorporated herein by reference;
10(f) Incentive Stock Option Plan, filed as Exhibit 10.11 of Registrant's
Registration Statement on Form S-1, No. 33-43282, and is incorporated
herein by reference; +
10(g) 1994 Restricted Stock Option Plan, filed as Exhibit 1 to Registrant's
Schedule 14A definitive Proxy Statement dated April 26, 1995, and is
incorporated herein by reference; +
10(h) 1996 Omnibus Plan, as amended, filed as Appendix A to Registrant's
Schedule 14A Definitive Proxy Statement dated April 26, 2001, and is
incorporated herein by reference; +
10(h.1) 1996 Omnibus Plan, as amended on May 1, 2003, filed as Exhibit 10(h.1)
to the Registrant's Form 10-K for the fiscal year ended December 31,
2003, and is incorporated herein by reference; +
10(h.2) 1996 Omnibus Plan, as amended April 23, 2004, filed as Appendix A to
Registrant's Schedule 14A definitive Proxy Statement dated April 28,
2004, and is incorporated herein by reference; +
10(i) Purchase and Supply Agreement between the Company and National
Biological Corporation dated November 5, 1998, filed as Exhibit 10(i) to
the Registrant's Form 10-K/A filed on June 18, 1999, portions of which
have been omitted pursuant to a request for confidential treatment
pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as
amended, and is incorporated herein by reference;
10(i.1) Amended and Restated Purchase and Supply Agreement between the Company
and National Biological Corporation dated as of June 21, 2004 filed as
Exhibit 10(a) to the Registrant's Quarterly Report on Form 10-Q for the
fiscal quarter ended June 30, 2004, portions of which have been omitted
pursuant to a request for confidential treatment pursuant to Rule 24b-2
of the Securities Exchange Act of 1934, as amended, filed August 11,
2004, and is incorporated herein by reference;
10(j) Supply Agreement between the Company and Sochinaz SA dated December 24,
1993, filed as Exhibit 10(q) to Registrant's Form 10-K/A filed on March
21, 2000, portions of which have been omitted pursuant to a request for
confidential treatment pursuant to Rule 24b-2 of the Securities Exchange
Act of 1934, as amended, and is incorporated herein by reference;
10(j.1) First Amendment to Supply Agreement between the Company and Sochinaz SA
dated July 7, 1994, filed as Exhibit 10(q.1) to Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31, 1999, and is
incorporated herein by reference;
10(j.2) Second Amendment to Supply Agreement between the Company and Sochinaz SA
dated as of June 20, 2000, filed as Exhibit 10.1 to Registrant's Current
Report on Form 8-K dated June 28, 2000, and is incorporated herein by
reference;
10(j.3) Third Amendment to Supply Agreement between the Company and Sochinaz SA
dated July 29, 2005, filed as Exhibit 10.1 to the Registrant's Form 10-Q
filed on August 3, 2005, portions of which have been omitted pursuant to
a request for confidential treatment pursuant to Rule 24b-2 of the
Securities Exchange Act of 1934, as amended, and is incorporated herein
by reference;
10(k) Master Service Agreement between the Company and Therapeutics, Inc.
dated as of October 4, 2001, filed as Exhibit 10(b) to the Registrant's
Quarterly Report on Form 10-Q for the fiscal quarter ended September 30,
2001, filed November 8, 2001, portions of which have been omitted
pursuant to a request for confidential treatment under Rule 24b-2 of the
Securities Exchange Act of 1934, as amended and is incorporated herein
by reference;
10(l) License and Development Agreement between the Company and photonamic
GmbH & Co. KG dated as of December 30, 2002, filed as Exhibit 10(r) to
Registrant's Annual Report on Form 10-
K for the fiscal year ended December 31, 2002, portions of which have
been omitted pursuant to a request for confidential treatment under Rule
24(b)-2 of the Securities Exchange Act of 1934, as amended and is
incorporated herein by reference;
10(m) Supply Agreement between the Company and medac GmbH dated as of December
30, 2002, filed as Exhibit 10(r) to Registrant's Annual Report on Form
10-K for the fiscal year ended December 31, 2002, portions of which have
been omitted pursuant to a request for confidential treatment under Rule
24(b)-2 of the Securities Exchange Act of 1934, as amended and is
incorporated herein by reference;
10(n) Securities Purchase Agreement dated as of February 27, 2004, by and
among the Company and certain investors, filed as Exhibit 10.1 to the
Registrant's current report on Form 8-K, filed on March 2, 2004,
portions of which have been omitted pursuant to a request for
confidential treatment under Rule 24(b) of the Securities Exchange Act
of 1934, as amended, and is incorporated herein by reference;
10(o) Registration Rights Agreement dated as of February 27, 2004 by and among
the Company and certain investors, filed as Exhibit 10.2 to the
Registrant's current report on Form 8-K, filed on March 2, 2004, and is
incorporated herein by reference;
10(p) Form of Additional Investment Right dated as of February 27, 2004, filed
as Exhibit 10.3 to the Registrant's current report on Form 8-K, filed on
March 2, 2004, and is incorporated herein by reference;
10(q) License, Promotion, Distribution and Supply Agreement between the
Company and Coherent-AMT dated as of March 31, 2004 filed as Exhibit
10(a) to the Registrant's Quarterly Report on Form 10-Q for the fiscal
quarter ended March 31, 2004, filed May 4, 2004, and is incorporated
herein by reference;
10(r) Employment Agreement of Scott L. Lundahl dated as of June 23, 1999 filed
as Exhibit 10(u) to the Registrant's Form 10-K for the fiscal year ended
December 31, 2004, and is incorporated herein by reference; +
10(s) Amended Employment Agreement of Stuart L. Marcus, MD, PhD dated December
9, 1999 filed as Exhibit 10(v) to the Registrant's Form 10-K for the
fiscal year ended December 31, 2004, and is incorporated herein by
reference; +
10(t) Employment Agreement of Mark C. Carota dated as of February 14, 2000
filed as Exhibit 10(w.1) to the Registrant's Form 10-K for the fiscal
year ended December 31, 2004, and is incorporated herein by reference; +
10(t.1) First Amendment to Employment Agreement of Mark C. Carota dated October
31, 2001 filed as Exhibit 10(w.2) to the Registrant's Form 10-K for the
fiscal year ended December 31, 2004, and is incorporated herein by
reference; +
10(u) Employment Agreement of Paul A. Sowyrda dated as of July 31, 2001 filed
as Exhibit 10(x) to the Registrant's Form 10-K for the fiscal year ended
December 31, 2004, and is incorporated herein by reference; +
10(v) Employment Agreement of Richard Christopher dated as of January 1, 2004
filed as Exhibit 10(y) to the Registrant's Form 10-K for the fiscal year
ended December 31, 2004, and is incorporated herein by reference; +
10(w) Employment Agreement of Robert F. Doman dated as of March 15, 2005 filed
as Exhibit 10(z) to the Registrant's Form 10-K for the fiscal year ended
December 31, 2004, and is incorporated herein by reference; +
10(x) Employment Agreement of Gary F. Talarico dated as of February 15, 2005
filed as Exhibit 10(aa) to the Registrant's Form 10-K for the fiscal
year ended December 31, 2004, and is incorporated herein by reference; +
10(y) Severance Agreement and General Release between the Company and Peter
Chakoutis dated as of February 25, 2005 filed as Exhibit 10(bb) to the
Registrant's Form 10-K for the fiscal year ended December 31, 2004, and
is incorporated herein by reference; +
10(y.1) Final Agreement and General Release, between the Company and Peter
Chakoutis, dated as of April 4, 2005, filed as Exhibit 10.1 to the
Registrant's Current Report on Form 8-K, filed on April 4, 2005, and is
incorporated herein by reference; +
10(z) Compensation Policy Applicable to the Company's Non-Employee Directors
filed as Exhibit 10(cc) to the Registrant's Form 10-K for the fiscal
year ended December 31, 2004, and is incorporated herein by reference;
and +
10(aa) Marketing, Distribution and Supply Agreement between the Company and
Stiefel Laboratories, Inc., dated as of January 12, 2006, portions of
which have been omitted pursuant to a request for confidential treatment
under Rule 24(b)-2 of the Securities Exchange Act of 1934, as amended.
14(a) Form of DUSA Pharmaceuticals, Inc. Code of Ethics Applicable to Senior
Officers filed as Exhibit 14(a) to the Registrant's Form 10-K for the
fiscal year ended December 31, 2004, and is incorporated herein by
reference.
21(a) Subsidiaries of the Registrant.
23(a) Consent of Deloitte & Touche LLP, Independent Registered Public
Accounting Firm.
31(a) Rule 13a-14(a)/15d-14(a) Certification of the Chief Executive Officer;
and
31(b) Rule 13a-14(a)/15d-14(a) Certification of the Chief Financial Officer.
32(a) Certification of the Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002; and
32(b) Certification of the Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
-------------
+ Management contract or compensatory plan or arrangement.
* Schedules and exhibits omitted pursuant to Item 601(b)(2) of Regulation S-K.
The Company agrees to furnish supplementally a copy of any omitted schedule or
exhibit to the Commission upon request.