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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2000
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
25 Upton Drive 01887
Wilmington, Massachusetts (Zip Code)
(Address of principal executive offices)
Commission File Number: 0-19777
Registrant's telephone number, including area code: (978) 657-7500
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to section 12(g) of the Act:
Common Stock
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(Title of class)
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
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 or 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. [ ]
The aggregate market value of the voting stock held by non-affiliates
of the registrant computed by reference to the closing price of such stock as of
March 13, 2001 was $158,074,527.
The number of shares of common stock outstanding of the Registrant as
of March 13, 2001 was 13,755,890.
DOCUMENTS INCORPORATED BY REFERENCE
Document incorporated by reference to this Report is:
(1) Proxy Statement for the 2001 Annual Meeting of Shareholders.
Part III, Items 10 through 13.
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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 22-31, 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.
ITEM 1. BUSINESS
GENERAL
We are a pharmaceutical company developing drugs in combination with
light devices to treat or detect a variety of conditions in processes known as
photodynamic therapy or photodetection. We are engaged primarily in the research
and development of our first drug, Levulan(R) brand of aminolevulinic acid HCl,
or ALA, 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.
We launched our first product, the Levulan(R) Kerastick(R) 20% Topical
Solution with PDT using our first light device product, called the BLU-U(TM),
for the treatment of actinic keratoses, or AKs, of the face or scalp, in
September 2000. AKs are precancerous skin lesions caused by chronic sun
exposure. AKs can develop over time into a form of skin cancer called squamous
cell carcinoma.
In November 1999, we signed a marketing, development and supply
agreement with Schering AG, a German corporation, for dermatology products. We
granted to Schering AG the right to promote, market, sell, and distribute our
Levulan(R) Kerastick(R) with PDT for AKs of the face or scalp on a worldwide
basis (with the exception of Canada). Schering AG also promotes the BLU-U(TM);
however, we are responsible for distributing, primarily by leasing the units, as
well as for repairs and maintenance. In the United States, Schering AG's United
States affiliate, Berlex Laboratories, Inc., is marketing these products. We are
also co-developing and will commercialize with Schering AG additional Levulan(R)
products for other dermatology disorders. Under the agreement, Schering AG has
the exclusive right to market, promote, sell and distribute the products which
are developed in the co-development
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program. Schering AG has agreed to fund two-thirds of our co-development program
for dermatology in an amount up to $3,000,000 in 2001. The parties may agree to
continue to fund the co-development program beyond this date. Under the terms of
the agreement, we have received $30,000,000, including $23,750,000 in cash
milestone and unrestricted research payments and $6,250,000 for which a Schering
AG affiliate received 340,458 shares of our common stock. See "Business --
Strategic Partners."
During 2001, we decided with Schering AG to fund development of acne,
warts and onychomycosis, more commonly known as nail fungus. We started a new
acne trial in November 2000 and expect to begin trials in warts and
onychomycosis during 2001. We are also currently supporting independent
investigator trials to advance clinical programs such as the use of Levulan(R)
PDT to prevent restenosis, a narrowing of blood vessels following balloon
angioplasty; to treat Barrett's esophagus, a potentially precancerous condition
of the throat; and other internal disorders.
During the first quarter of 2000, we strengthened our financial
condition by selling 1,500,000 shares of our common stock in a private placement
at a purchase price of $28.50 per share. See "Management's Discussion and
Analysis Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
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, Levulan(R) and Kerastick(R) are registered
trademarks, and the trademark application for the BLU-U(TM) is pending. These
trademarks are also registered in Europe and applications are pending in other
parts of the world.
We were incorporated on February 21, 1991, under the laws of the State
of New Jersey. Our principal executive offices are currently 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 financed our development stage operations, prior to the market
launch of our first products, primarily from sales of securities in public
offerings, and in private and offshore transactions that are exempt from
registration under the Securities Act of 1933, as amended, (the "Act"). See
"Management's Discussion and Analysis of Financial Condition -- Overview; --
Results of Operations; and -- Liquidity and Capital Resources."
BUSINESS STRATEGY
The following are the key elements of our strategy:
- Support the Launch of our First Product. We are working with
our dermatology marketing partner, Schering AG in the United
States, to optimize the marketing efforts of the Berlex team
for our first PDT system, the Levulan(R) Kerastick(R) 20%
Topical Solution with our BLU-U(TM) for the treatment of AKs
of the face or scalp.
- Leveraging our Levulan(R) PDT/PD Platform to Develop
Additional Products. In dermatology, we intend, together with
Schering AG, to co-develop and commercialize additional
Levulan(R) products for other skin conditions. Outside
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dermatology, we intend to develop new drug formulations and
light devices to target large markets with unmet medical
needs, such as prevention of restenosis, treatment of
Barrett's Esophagus, treatment of brain cancer, and the
detection and/or treatment of a number of gynecological
conditions.
- Enter into Additional Strategic Alliances. When we believe
that the development program for a non-dermatology indication
may be beyond our own resources or may be advanced to market
more rapidly with the use of resources of a corporate partner,
we may seek opportunities to license, market or co-promote our
products.
- Use the Results of Independent Researchers to Identify New
Applications. We will continue to support independent
investigators' research so that we have the benefit of human
data when we evaluate potential indications for corporate
development. We will also continue to monitor independent
research in order to identify potential new indications.
- Consider the Addition of Complimentary Products. We intend to
evaluate and pursue licensing and acquisition opportunities
for complementary products which may include drugs, devices,
technologies or related businesses.
PDT/PD OVERVIEW
In general, both photodynamic therapy and photodetection are two-step
processes:
- The first step is the application of a drug known as a
"photosensitizer," which collects in specific cells.
- The second step is activation of the photosensitizer by
controlled exposure to a selective light source.
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:
- the desired depth of penetration of the light into the target
tissue, and
- the efficiency of the light in activating the photosensitizer.
Blue light does not penetrate deeply into tissues and is better suited
for treating superficial lesions. It is generally a potent activator of
photosensitizers. Red light penetrates more deeply into the skin. Therefore, it
is better suited for treating cancers and deeper tissues, but it is generally
not
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as strong an activator of photosensitizers. Different photosensitizers do not
absorb all 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 generally
be treated with a non-laser light source. Internal indications, which are often
more difficult to access, may require a laser in order to focus the light into a
small fiber optic delivery system which may be passed through an endoscope or
into a hollow organ.
PDT can be a highly selective treatment that targets specific tissue
while minimizing damage to normal surrounding tissue. It allows for a multiple
course of therapy. The photosensitizer and the light separately have no PDT/PD
effect. The most common side effect of photosensitizers that are 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
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.
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 the 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 enzyme
pathway.
We believe that Levulan(R) is unique among PDT/PD agents. It has the
following features:
- Naturally Occurring. ALA is a naturally occurring substance
found in virtually all human cells.
- Small Molecule. Levulan(R) is a small molecule that is easily
absorbed whether delivered topically, orally, or
intravenously.
- 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 and conversion
into PpIX and targeted light delivery make this a highly
selective process. Therefore, we can achieve clinical effects
in targeted tissue with minimal effects to normal surrounding
and underlying tissue.
- Controlled Activation. Levulan(R) has no PDT effect without
exposure to light at specific wavelengths, so the therapy is
easily controlled.
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Scientists believe that the accumulation of PpIX following the application of
Levulan(R) is more pronounced in:
- rapidly growing diseased tissues, such as precancerous and
cancerous lesions,
- conditions characterized by rapidly proliferating inflammatory
cells, such as acne and psoriasis, and
- in certain normally fast-growing tissues, such as hair
follicles 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 ampules, one
containing Levulan(R) powder and one containing a liquid vehicle, enclosed
within a 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
and shakes the Kerastick(R) according to directions to mix the contents into a
solution. The Kerastick(R) tip is then dabbed on to the individual AK lesions,
releasing a predetermined amount of Levulan(R) 20% 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
the appropriate wavelengths and intensities. We intend to continue to develop
integrated drug and light device systems, in which the light sources:
- are compact and tailored to fit specific medical needs;
- are pre-programmed and easy to use; and
- provide cost-effective therapy.
Our proprietary BLU-U(TM) is a fluorescent light source that can treat
the entire face or scalp at one time, which has been specifically designed for
use with Levulan(R). The light source is compact and easily portable. It can be
used in a physician's office, requires minimal floor space, and plugs into a
standard electrical outlet. The BLU-U(TM) 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.
We are using non-laser light sources whenever feasible because,
compared to lasers, they are:
- safer;
- simpler to use;
- more reliable; and
- far less expensive.
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For treatment of AKs, our BLU-U(TM) uses blue light which penetrates
superficial skin lesions and is a potent activator of PpIX. 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 relatively low intensity, non-laser blue light sources, which
are designed to treat large areas, such as the entire face or body. For
treatment of diseases which have lesions which may penetrate several millimeters
into the skin or other tissue, e.g. for acne or most forms of cancer,
high-powered red light is often preferable. We have United States and foreign
patents and patent applications pending which relate to devices and methods of
using light devices for use in Levulan(R) PDT and PD. See "Business -- Patents
and Trademarks."
We also have an agreement with Richard Wolf Medical Instruments Corp.
for the supply of proprietary non-laser light sources and cystoscopes to be used
in our clinical trials for bladder cancer detection. The Wolf light device was
utilized by the investigators in our Phase I/II clinical trial for bladder
cancer detection. See "Business -- Our Products, Internal Indications; --
Supply Partners."
Our Levulan(R) PDT/PD research and development team has experience in
the development and regulatory approval process of both drugs and devices for
use in clinical PDT/PD.
OUR PRODUCTS
The following table outlines our products and product candidates. Our
research and development expenses for the last three years were $8,163,419 in
2000, $4,194,532 in 1999 and $4,502,391 in 1998.
PRODUCT/INDICATION REGULATORY STATUS MARKETING RIGHTS(1)
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DERMATOLOGY
Levulan(R) Kerastick(R) and BLU-U(TM) for PDT of AKs Approved; Phase IV Schering AG
Levulan(R) PDT for Acne Phase I/II Schering AG
Levulan(R) PDT for Onychomycosis (Nail Fungus) Phase I/II2 Schering AG
Levulan(R) PDT for Persistent Hand and Foot Wart Removal Phase I/II2 Schering AG
Levulan(R) PDT for Psoriasis Investigator Study Schering AG
Levulan(R) PDT for Cutaneous T-Cell Lymphoma Investigator Study Schering AG
OTHER INDICATIONS
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Levulan(R) PDT for Prevention of Restenosis Investigator Study DUSA
Levulan(R) PDT for Barrett's Esophagus Investigator Study DUSA
Levulan(R) for Bladder Cancer Detection Phase I/II3 DUSA
Levulan(R) PDT for Dysfunctional Uterine Bleeding Investigator Study DUSA
Levulan(R) PDT/PD for Cervical Intraepitheleal Neoplasia Investigator Study DUSA
Levulan(R) PD-guided resection and PDT for Brain Cancer Protocol under development DUSA
(1) Draxis Health, Inc., our former parent, holds a license to
PARTEQ's ALA patents for Canada.
(2) To commence in 2001.
(3) No current trial.
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DERMATOLOGY INDICATIONS
Actinic Keratoses (AKs). AKs are superficial precancerous skin lesions
usually appearing as rough, scaly patches of skin with some underlying redness.
The current preferred methods of treating AKs are cryotherapy, or the freezing
of skin, using liquid nitrogen, and 5-flourouracil cream, or 5-FU. Although both
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 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 two to four weeks, resulting in
inflammation, redness and erosion or rawness of the skin. Following the
treatment an additional one to two weeks of healing is required. Our approved
treatment method involves applying Levulan(R) 20% topical solution using the
Kerastick(R) to the AK lesions, followed 14-18 hours later with exposure to our
BLU-U(TM) for approximately 17 minutes. We plan to complete two Phase IV trials
as required by the FDA. One study will evaluate the long-term effects of our
therapy. The second trial, which will be completed shortly, tests for allergic
skin reactions to our therapy. We believe that Levulan(R) PDT for AKs will
become a therapy of choice as more people become aware of its benefits.
Acne. Acne is a common skin condition caused by the blockage and/or
inflammation of sebaceous (oil) glands. In our ongoing dose-ranging clinical
trial, we are targeting 50 patients with mild to moderate facial inflammatory
acne. Traditional treatments for this form of acne include over-the-counter
topical medications for mild cases, and prescription topical medications or oral
antibiotics for mild to moderate cases. An oral retinoid drug called
Accutane(R)(1) is the treatment of choice for cystic acne and can be used for
moderate to severe inflammatory acne. Over-the-counter treatments are often not
effective and can result in side effects, including drying, flaking and redness.
Prescription antibiotics lead to improvement in many cases, but patients must
often take them on a long-term basis. Accutane(R) can have a variety of side
effects, from dryness of the lips and joint pains, to birth defects, and
elevated levels of triglycerides and liver enzymes. With Levulan(R) PDT therapy
for acne 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.
Onychomycosis. This condition is more commonly known as nail fungus.
Current topical therapies are only effective in a small percentage of patients.
Oral prescription medications are more effective but must be taken over 12 weeks
or more, and pose risks of systemic side effects such as liver disease and
adverse interactions with other medications. In an unpublished investigator
study, 12 patients received a single treatment of Levulan(R) to their infected
nail, which was then exposed to a non-laser red light source. Three patients
showed a complete response to the Levulan(R) PDT. They lost their nail after one
week and regrew a new nail which was free of nail fungus. DUSA and Schering AG
have begun co-development of a therapy for this indication, and expect to
commence clinical trials later this year. The first study will be a Phase I/II
fluorokinetic study to examine the PpIX uptake and accumulation in infected
nails using Levulan(R) topical solution and PDT.
Persistent Hand and Foot Warts. Warts, which are characterized by
abnormal epidermal skin cell growth, are a common skin condition caused by the
human papilloma virus. Warts are usually treated first with over-the-counter
salicylic acid preparations. Often, these treatments are successful. However, in
cases where the warts do not clear, patients normally consult a physician. The
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(1) Accutane(R)is a registered trademark of Hoffmann La-Roche.
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physician's next line of therapy is usually cryotherapy with liquid nitrogen,
which is applied by the doctor for anywhere from weeks to months to years in
rare cases. This treatment is painful and can occasionally leave scars. Some
dermatologists use lasers to treat warts, although this process can also take
many treatments with no guarantee of success. Often, the warts still persist
despite all attempts at treatment and we refer to them as recalcitrant warts.
In a 1999 independent Danish randomized clinical trial using ALA PDT on
30 patients with 250 recalcitrant warts, the investigator reported that one of
the treatment groups showed a 70% elimination of recalcitrant warts through a
12-month period. Based on these results, we have included development of
Levulan(R) PDT for warts in the dermatology co-development program with Schering
AG. We expect that a feasibility study will start later this year.
INTERNAL INDICATIONS
Prevention of Restenosis Following Balloon Angioplasty. Restenosis is
the re-narrowing of an artery after balloon angioplasty due to the rapid growth
of smooth muscle cells at the site of the angioplasty. Many patients who undergo
balloon angioplasty suffer restenosis within six months of the procedure.
Current forms of treatment for restenosis involve repeated angioplasty
procedures, stenting or by-pass surgery. Animal studies have shown that
Levulan(R) PDT prevents the rapid growth of smooth muscle cells within the
artery after balloon angioplasty. In October 1999, results were published in the
British Journal of Surgery from an investigator study using Levulan(R) PDT to
reduce restenosis after balloon angioplasty. The investigators studied seven
patients with a total of eight blockages of the femoral (leg) artery. Each of
the patients had undergone conventional balloon angioplasty for blockages in the
femoral artery within the previous two to six months, and all of the patients
had developed restenosis and associated symptoms, including leg pains, calf
pains, and muscle cramps while walking. In the study, patients received oral
doses of Levulan(R) and then underwent a second balloon angioplasty procedure.
After the angioplasty procedure, red laser light was delivered to the site
through the transparent angioplasty balloon. There were no reported
complications from the procedure. All of the patients had symptomatic relief
and, during the six-month follow-up period, none of the patients had any
recurrence of symptoms. At the end of the six-month period, the investigators
examined all the treated arteries, each of which remained open to some degree.
Testing showed no evidence of restenosis at three sites; 25% restenosis at three
sites; and 40% restenosis at two sites. We are currently supporting a new
randomized controlled investigator study to further evaluate the use of
Levulan(R) PDT in the prevention of restenosis following balloon angioplasty.
Should this second study show positive results, we plan to begin our own
development program for this indication.
Barrett's Esophagus. Barrett's esophagus is a potentially precancerous
condition of the esophagus which occurs when the lining of the esophagus
converts to stomach-type tissue in response to chronic exposure to stomach acid.
Over time, the area of the esophagus affected can develop precancerous and
eventually cancerous cells. The condition is often undetected until the disease
reaches later stages.
There are no effective treatments for early-stage Barrett's esophagus.
Doctors treat milder forms of the condition with medication, to reduce stomach
acid. A current treatment for more advanced, precancerous, Barrett's esophagus
involves surgery to remove affected areas of the esophagus.
Since European studies have shown that Barrett's esophagus cells can be
destroyed by Levulan(R) PDT and replaced by normal esophageal cells, we are
supporting a new investigator study
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involving the use of Levulan(R) PDT with red laser light for the treatment of
Barrett's esophagus. In addition, we expect to start our own Phase I study later
this year.
Bladder Cancer Detection. Bladder cancer is most often treated by
surgical removal of the tumor, but in many of these cases tumors recur within
two to three years. Doctors screen high-risk patients regularly for bladder
cancer, because of the risk of recurrence. One of the standard methods for
bladder cancer detection involves using a cystoscope to view the bladder with
white light.
We concluded our own Phase I/II multi-center clinical trial for
enhancement of bladder cancer detection during 1999 using Levulan(R) PD and an
endoscope light source provided by Richard Wolf Medical Instruments Corp.
The results suggested that significant further study would be necessary
to develop a commercially viable product to optimize bladder cancer detection
using Levulan(R) PD. In addition, we learned from a survey of urologists that an
oral dose of Levulan(R) and a flexible device would be preferable to the test
products used in the study. We delayed any further clinical trials for this
indication while a newly designed cystoscope was developed by Richard Wolf which
may be suitable for an office-based procedure. We have not yet decided on
further development plans for this indication.
OTHER POTENTIAL DERMATOLOGY INDICATIONS
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 tend to occur 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 to treat
this common skin condition, Renova(R)2. Patients generally use the product for
between six and 24 weeks before improvement may be seen.
As part of our AK clinical trials, we conducted a Phase II safety and
efficacy study, testing 64 patients with three to seven AK lesions of the face
or scalp within an area of photodamaged skin. The physician investigators
applied Levulan(R) 20% solution over the entire area including the photodamaged
skin. After 14-18 hours, the patients were treated with blue light at differing
light doses. Investigators noted marked improvement in skin roughness 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, ten 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. Based upon these results, we have proposed two studies on the
treatment of photodamaged skin to Schering AG for development after other
dermatology indications are further advanced.
Hair Removal. Unwanted hair is a common problem that is experienced by
both men and women of all races and skin colors. Currently, permanent hair
removal involves procedures using
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(2) Renova(R) is a registered trademark of Johnson & Johnson.
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electrolysis or lasers. Electrolysis requires insertion of an electrified needle
into each hair follicle. It requires numerous treatments over extended periods
of time that can have varying degrees of success. Laser treatments do not
require a needle but, instead, heat the hairs by absorption of laser light
energy. Laser treatments work best for individuals with light skin and dark
hair, but usually they do not work as well for individuals with darker skin
tones. We believe that due to the selective properties of Levulan(R) PDT for
targeting rapidly growing cells, such as hair follicle cells, as well as our
previously reported Phase I/II clinical trial results, we may be able to achieve
biologically targeted permanent hair removal without the need for heating or
burning the individual hairs. We have agreed with Schering AG to consider
co-development of this indication in the future.
OTHER POTENTIAL INTERNAL INDICATIONS
Dysfunctional Uterine Bleeding. Dysfunctional uterine bleeding occurs
when the lining of the uterus (the endometrium) responds abnormally to the
hormonal changes associated with menstruation. Treatments for dysfunctional
uterine bleeding include hysterectomy, or removal of the uterus by surgery, or
endometrial ablation, the destruction of the lining of the uterus by surgical or
thermal methods. In endometrial ablation treatments where the uterus is not
removed, incomplete ablation and/or damage to the muscle wall of the uterus can
result. Preclinical studies have shown that removal of the lining of the uterus
can be accomplished by a single Levulan(R) PDT treatment, without causing harm
to the underlying muscle layer. Therefore, we propose to use Levulan(R) PDT as a
less invasive and less costly treatment for dysfunctional uterine bleeding. We
have supported research by independent investigators using Levulan(R) to treat
this condition in clinical studies at centers in the United Kingdom and the
United States. These studies have shown that endometrial tissue selectively
absorbs Levulan(R) with no evidence of toxicity. We believe our product system
is a good candidate for clinical trials because Levulan(R) is selectively
absorbed by the lining of the uterus and activated by light sources which can be
inserted into the uterus without the need to anesthetize the patient. We began
supporting a pilot human trial for treatment of dysfunctional uterine bleeding
in January 2000. We now are considering modifications to the light probe used in
this study to facilitate development of this procedure.
Cervical Intraepitheleal Neoplasia. Cervical intraepitheleal neoplasia,
or CIN, is a common precancerous condition of the cervix. Doctors use the pap
smear (cervical cytology specimens) to screen for cancerous and precancerous
conditions of the cervix. Each year, millions of pap smear procedures are
performed in the United States. Approximately one-third of the test results
reveal some abnormality of the cervical tissue, and in many of these cases the
results are suspicious but not conclusive and therefore cannot be definitively
diagnosed. We believe that Levulan(R) PD could help doctors to locate and biopsy
the abnormal cervical tissue.
In March 1997, an investigator-sponsored study showed the selectivity
of Levulan(R) PDT/PD for CIN tissue. During 2001, we expect to consider
supporting a new investigator-sponsored study to examine the use of Levulan(R)
as an adjunct to pap smears.
Brain Cancer. Despite standard therapies which include surgical tumor
removal, radiation therapy, and chemotherapy, adult patients with newly
diagnosed high-grade malignant brain cancers generally survive only one to two
years. Independent European investigators have reported that systemic ALA may
cause photosensitization of tumors but not the normal white matter of the brain.
These investigators have used ALA-induced fluorescence as a guide for the more
complete removal of brain cancer than would be possible using white light alone.
During 2001 we intend to initiate a clinical study to examine the selectivity of
brain tumor fluorescence using different doses of
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Levulan(R) and to follow that study with one combining fluorescence-guided
resection and Levulan(R) PDT.
There may be numerous other potential therapeutic and cancer detection
uses for Levulan(R) PDT/PD, and we may support research in several of these
areas, as appropriate, with 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 these potential
uses in dermatology include treatment of skin cancers, such as squamous cell
carcinomas and cutaneous T-cell lymphomas, psoriasis, and genital warts; and
non-dermatology indications may include detection and/or treatment
gastro-intestinal tumors, and oral cavity cancer.
STRATEGIC PARTNERS
In November 1999, we signed a marketing, development and supply
agreement with Schering AG for the use of our Levulan(R) products to treat or
detect dermatology disorders. Schering AG is a large multi-national
pharmaceutical company which has significant dermatology sales outside the
United States. Under the agreement we granted to Schering AG the exclusive
worldwide right, except for Canada, to promote, market, sell and distribute our
Levulan(R) Kerastick(R) with PDT for AKs, and any additional dermatology
products developed under the co-development program. The parties have agreed to
jointly fund the dermatology co-development program through 2001, with Schering
AG contributing two-thirds of the joint committee-approved budget, while we
contribute the remaining one-third. For 2001, the parties have committed to a
budget of $3,954,000 thus far. Schering AG also has limited rights to negotiate
with us for rights to non-dermatology products which we intend to develop with
other corporate partners.
We have received $30,000,000 from Schering AG, including $23,750,000 in
cash milestones and unrestricted research payments and $6.25 million for which a
Schering AG affiliate received 340,458 shares of our common stock. No further
milestone payments are due for this first indication.
The launch of Levulan(R) PDT by Schering AG's United States affiliate,
Berlex Laboratories, Inc., represents our partner's entree into the U.S.
dermatology marketplace. We are responsible for the manufacture and supply of
the Kerastick(R) to Schering AG. Schering AG pays a supply price to us for the
drug products, as well as a royalty on drug sales. Schering AG also promotes the
BLU-U(TM). We primarily lease the BLU-U(TM) to dermatologists and other
physicians and we have engaged a leasing company to complete the leasing
transactions. We have agreed to maintain and repair the BLU-U(TM) units under
lease/maintenance agreements. Under the terms of a guaranty, Schering AG has
agreed to guarantee the lease payments by each lessee up to our cost of the
BLU-U(TM) from our third-party manufacturer. The guaranty will expire on the
second anniversary of the first delivery to an end-user of a BLU-U(TM). In
addition, Schering AG has agreed to provide us with an interest-free line of
credit for up to $1,000,000 to finance inventory of BLU-U(TM) units. The
BLU-U(TM) units would secure our repayment of any amounts which we may borrow
under the line of credit. Any amounts we draw on the line of credit must be
repaid within 12 months.
The marketing, development and supply agreement terminates on a
product-by-product basis in each country in the territory on the later of (a)
12-1/2 years after the first commercial sale of a respective product in such
country, or (b) the expiration of patents pertaining to the manufacture, sale or
use of such product in such country. It terminates in its entirety upon the
expiration of the agreement with respect to all products in all countries
covered by the agreement. Subject to various terms and conditions, the parties
may terminate the agreement earlier.
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SUPPLY PARTNERS
National Biological Corporation. In November 1998, we entered into a
purchase and supply agreement with NBC for the manufacture of some of our light
sources, including the BLU-U(TM). We have agreed to order from NBC all of our
supply needs of these light sources for the United States and Canada and NBC has
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.
NBC has granted to us a license to manufacture the light sources if NBC
fails to meet our supply needs. Under these circumstances, we would also have a
worldwide license to import, use, sell or dispose of the light sources under
NBC's technology within the field of PDT. Also, NBC has agreed that it will not
supply light sources that may be used to compete with our business. In order to
meet the production scheduling needs of our third-party manufacturer of the
BLU-U(TM), we have agreed to prepay for raw material costs in the amount of
$400,000 associated with our current order. This amount will be credited against
the final purchase price which will be due on delivery of finished units at a
rate of $1,000 per unit. In addition, we agreed that if we do not order a
certain number of BLU-U(TM) brand units for delivery in 2002, we will pay
$100,000 to our manufacturer to cover certain overhead costs. We do not know at
this time whether we will be required to make this payment as we depend upon
Berlex to market our products.
The agreement has a ten-year term, subject to earlier termination for
breach or insolvency or for convenience. However, a termination for convenience
requires 12 months' prior written notice, which may not be given before the
third anniversary of the date of the agreement.
Richard Wolf Medical Instruments Corp. We entered an agreement with
Wolf in May 1997 for the supply to us, at no cost, of proprietary non-laser
light sources and cystoscopes, along with technical and regulatory support, for
use in our first Phase I/II clinical trial for bladder cancer detection. The
Wolf light device was utilized by the investigators in the clinical trial and
Wolf has designed a new device for us to evaluate. We have the right under the
agreement to qualify other manufacturers' light sources and/or cystoscopes with
the FDA for use in Levulan(R) PD of bladder cancer.
North Safety Products. In September 1999, we entered into a purchase
and supply agreement with North, a unit of Norcross Safety Products, LLC., for
the manufacture and supply of our Kerastick(R) brand applicator. We have agreed
to purchase from North a significant portion of our total commercial
requirements for supply of the Kerastick(R) for sale in the United States and
Canada. Prices for the product are based on the quantities of Kerastick(R)
ordered which are subject to change depending on various product costs and
competitive market conditions.
The agreement has a five-year term, which may be extended. North has
the right to terminate the agreement earlier if certain minimum levels of
product orders are not reached. Similarly, we can terminate for stated breaches
of the agreement. In early 2001, we tentatively agreed to compensate North on an
interim basis for certain overhead expenses associated with the manufacture of
the Kerastick(R) if our orders fall below certain levels on an annual basis.
Sochinaz SA. Under an agreement dated December 24, 1993, Sochinaz
manufactures and supplies all of our requirements of Levulan(R) worldwide from
its FDA approved facility in Switzerland. In June 2000, we amended the agreement
to include an option to allow us to extend the term for an additional three (3)
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years until December 3, 2007. As consideration for the amendment, we agreed to
reimburse Sochinaz for a portion of its costs to bring its manufacturing
facilities into compliance with the FDA cGMPs. We paid $250,000 in cash and
issued 26,666.66 shares of our common stock having a fair market value of
$750,000. While we can obtain alternative supply sources in certain
circumstances, any new supplier would have to be inspected and qualified by the
FDA.
LICENSES
PARTEQ Research and Development Innovations. We license the patents
underlying our 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, we have been granted an exclusive
worldwide license, with a right to sublicense, under PARTEQ patent rights, to
make, have made, use and sell products which are precursors of PpIX, including
ALA. The agreement covers certain use patent rights. It also includes 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, such as Schering AG, 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. See Note 9a to the Company's Notes to the Consolidated Financial
Statements. We have the right to terminate the PARTEQ agreement with or without
cause upon 90 days notice.
We paid a minimum royalty of CDN $100,000 to PARTEQ during 1998.
Following the receipt of FDA approval in December 1999, we paid PARTEQ a
milestone payment of CDN $100,000 and, a prorated annual minimum royalty payment
on sales of products which totaled CDN $3,836. For 2000 and going forward,
annual minimum royalties to PARTEQ on sales of products must total at least CDN
$100,000. Since we entered into the agreement with Schering AG, we were also
obligated to pay to PARTEQ additional minimum payments in amounts up to CDN $1.1
million which has now been paid, including a credit for the CDN $100,000 paid in
1998, based upon the milestone payments we received from Schering AG.
Together with PARTEQ and Draxis Health, Inc., our former parent, we
entered into an agreement (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 license agreement to the extent they relate to Canada.
In addition, we have agreed to disclose to Draxis on an ongoing basis, any
technology which is available to us relating to the subject matter of the
license agreement which would assist Draxis in developing the Canadian market
under the assigned rights. Draxis is responsible for royalties which would
otherwise be payable by us in accordance with the license agreement for net
Canadian sales of products and sublicensing revenues. Draxis has also agreed to
pay us a royalty of two percent of net Canadian sales of products.
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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 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:
- unique physical forms of ALA;
- methods of using ALA and its unique physical forms in
combination with light; and
- compositions and apparatus for those methods.
These patents expire no earlier than 2009, and certain patents are
entitled to terms beyond that date.
We entered into a license agreement effective August 27, 1991 with
PARTEQ Research & Development Innovations, the licensing arm of Queen's
University at Kingston, Ontario, and Draxis Health, Inc. Under this agreement,
we hold an exclusive worldwide license to certain patent rights from PARTEQ in
the United States and a limited number of foreign countries.
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 guaranty 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 counter-parts in only three foreign countries.
Even with the issuance of additional patents, other parties are free to develop
other uses of ALA, including medical uses, and to market ALA for such uses,
assuming that they have obtained appropriate regulatory marketing approvals.
Certain forms of ALA are commercially available chemical products. ALA in the
form commercially supplied for decades is not itself subject to patent
protection. In fact, there are reports of several third-parties conducting
clinical studies with ALA for the treatment of certain conditions in countries
outside the United States of America where PARTEQ may not have patent
protection. Additionally, enforcement of a given patent may not be practicable
or an economically viable alternative.
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We can give 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 give no assurances 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, we can give no
assurances 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 such a claim.
Except for the opposition of Japanese Patent No. 273032, which we
license from PARTEQ, we are not aware of any formal challenges to the validity
of PARTEQ's or our patents. However, we cannot guarantee that other challenges
or claims will not be asserted in the future. Japanese Patent No. 273032, which
relates to the basic method of using ALA, has recently been opposed and, as a
result, the Japanese Patent Office Board of Appeals revoked the patent. With
PARTEQ's assistance, we are simultaneously pursuing an appeal at the Tokyo High
Court and an amendment trial before the Japanese Patent Office. We can at this
time give no assurance of the likelihood of success of such a contest or any
assurance that we will decide to spend the funds required to complete the
contest. If our response does not allay the concerns of the Board, they may
limit our patent protection or finalize the cancellation. Japan is a major
pharmaceutical market and loss of this patent could adversely affect us in at
least two ways. First, if we seek to enter the Japanese market, the lack of a
patent would probably retard or diminish our market share. Second, even if we
did not seek to market in Japan, third-parties might not be interested in
licensing the product in Japan without patent protection, and this might limit
our potential revenues from this market.
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 each employee, licensing partner, consultant,
university, pharmaceutical company and agent contain provisions designed to
protect the confidentiality of our proprietary information. However, we can give
no assurances 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 give no assurances 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
product (like PARTEQ's patents); (ii) patents relating to special compositions
and formulations; and (iii) limited marketing exclusivity that may be available
as a patent term extension under the Hatch/Waxman Act and any counterpart
protection available in foreign countries. See "Business -- Government
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
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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 intend to seek registration of trademarks in the United States, and
other countries where we may market our products when it is sufficiently close
to commercialization so that appropriate brand names may be selected in light of
the circumstances then existing. To date, we have been issued seven trademark
registrations, and other applications are pending.
MANUFACTURING
We do not currently operate any manufacturing facilities. Our drug,
Levulan(R), the Kerastick(R) brand applicator and the BLU-U(TM) brand light
source are each manufactured by a single third-party supplier. See "Business --
Supply Partners". Under our agreement with Schering AG, we are obligated to
maintain certain inventory levels of our Levulan(R) products until we qualify a
second source of supply for ALA. We have purchased key pieces of equipment to
prepare for the establishment of a limited production line so that a second
source could manufacture the Kerastick(R).
MARKETING AND SALES
Under our agreement with Schering AG, marketing and sales of Levulan(R)
PDT products for use in dermatology in the United States will be the
responsibility of Schering AG's affiliate, Berlex Laboratories, Inc. Following
receipt of marketing approval in the United States, Schering AG must select the
country, countries or key territories in which it intends to seek regulatory
approval and to sell our products on a product-by-product basis. If Schering AG
elects not to market a product in a specific territory or country, we regain the
right to market the product. We retain the rights to market and sell all future
products for non-dermatology indications. Subject to Schering AG's limited right
to negotiate, we can enter into marketing, co-promotional, distribution or
similar type agreements with corporate partners for our non-dermatology
indications.
Draxis has been granted the rights to market Levulan(R) PDT in Canada.
See "Business -- Licenses."
COMPETITION
Commercial development of PDT agents other than Levulan(R) are
currently being pursued by a number of companies. These include: QLT
PhotoTherapeutics Inc. (Canada); Miravant, Inc. (U.S.); Pharmacyclics, Inc.
(U.S.); Scotia Pharmaceuticals (United Kingdom); and Photogen Technologies, Inc.
(U.S.). We are also aware of several overseas companies doing research with ALA,
including: medac GmbH (Germany) which is 25% owned by Schering AG; ESC Medical
Systems Ltd. (Israel); and Photocure (Norway).
Photocure has completed clinical trials and has filed an application
for European marketing approval of its ALA precursor (ALA methylester) compound
with PDT for the treatment of AK's. Photocure is also conducting trials in the
United States. We are aware that medac is developing ALA PDT for bladder cancer
detection and for fluorescent-guided resection of brain cancer in Germany.
Our position in the PDT field could be adversely affected by product
developments achieved by other companies. The pharmaceutical industry is highly
competitive. Many of our competitors have substantially greater financial and
technical and marketing resources than we have. In addition,
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several of these companies have had 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 provide 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 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.
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:
- approval of manufacturing facilities, including adherence to
current good manufacturing, laboratory and clinical practices
during production and storage known as cGMPs, GLPs and GCPs
respectively;
- controlled research and testing of products;
- applications for marketing approval containing manufacturing,
preclinical and clinical data to establish the safety and
efficacy of the product; and
- 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:
- preclinical studies,
- the filing of an Investigational New Drug, or IND,
application;
- human clinical trials; and
- 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
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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 typically is 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 two
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 one to three 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 also may 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 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 are reviewed by the FDA via the
filing and upon approval of a supplemental NDA. The supplement deals primarily
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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. If an active ingredient of a drug product has been previously
approved, there may be other types of drug applications that 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 and the commercial version of our BLU-U(TM) was approved on September 26,
2000.
We are currently conducting Phase I/II studies on the use of ALA for
the treatment of acne. Other than the FDA-approved use of the Levulan(R)
Kerastick(R) with PDT for treatment of AKs, our other products still require
significant development, including additional preclinical and 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 devices, 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 (e.g., labeling and adherence to
the cGMP requirement for medical devices), and Class II devices are subject to
general controls and special controls (e.g., 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(TM) has been classified as a Class III
device. We anticipate that our other devices 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 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 "file it". Once the submission is filed, the FDA begins a review of
the PMA application. Under the Food, Drug and Cosmetics Act, the FDA has 180
days to review a PMA application. The review of PMA applications more often
occur over a significantly protracted time period, and the FDA may take up to
two years or more from the date of filing to complete its review.
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
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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" in the United
States. A combination product generally is defined as a product comprised of
components from two or more regulatory categories (drug/device, device/biologic,
drug/biologic, etc.) Each component of a combination product is subject to the
requirements established by the FDA for that type of component, whether a drug,
including a biologic drug, or device. Currently, PDT/PD treatments are defined
as drug/device combination products. The main responsibility for review of PDT
products (drugs and devices) is under the jurisdiction of the FDA's drug center,
the Center for Drug Evaluation and Research, with support from the Center for
Devices and Radiological Health. The FDA has not formally established the degree
and extent of the regulatory requirements for the various components of PDT/PD.
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(TM) 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 provides for the return of up to five
years of patent term for a patent that covers a new product or its use, to
compensate for time lost during the regulatory review process. The application
for patent term extension is subject to approval by the U.S. Patent and
Trademark Office in conjunction with the FDA. It takes at least six months to
obtain approval of the application for patent term extension, and there can be
no guarantee that the application will be granted. We believe that the FDA's
December 3, 1999 approval of our NDA for the Levulan(R) Kerastick(R) with PDT is
the first marketing approval for a medical use of ALA. We therefore believe that
this approval may form the basis for extending the term of one of our patents.
However, there can be no assurance that we will receive a patent term extension.
The Hatch-Waxman Act also establishes a five-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 will expire on December 3, 2004. During this Hatch-Waxman marketing
exclusivity period, no third-party may submit an "abbreviated NDA" or "paper
NDA" to the FDA.
Finally, 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.
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We also intend to market our products marketed outside of the United
States. Prior to marketing a product in other countries, approval by that
nation's regulatory authorities must be obtained. Our marketing partner,
Schering AG, will be responsible for applying for marketing approvals outside
the United States for Levulan(R) PDT for dermatology uses. 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.
With the enactment of the Drug Export Amendments Act of the United
States in 1986, products not yet approved in the United States 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 give you 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 involve the controlled use of
certain hazardous materials, such as mercury in fluorescent tubes. While we do
not currently manufacture any products, we are subject to various laws and
regulations governing the use, manufacture, storage, handling and disposal of
hazardous materials and certain waste products. We believe that we are in
material compliance with applicable environmental laws and regulations. For the
present, we do not have any plans to make any material capital expenditures for
environmental control facilities. However, we can give you no assurance that we
will not have to make significant expenditures in order to comply with
environmental laws and regulations in the future. Also, we cannot assure you
that current or future environmental laws or regulations will not materially
adversely effect our operations, business or assets. In addition, although we
believe that our safety procedures for the handling and disposal of such
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.
EMPLOYEES
At the end of 2000, we had 41 full-time employees. We have employment
agreements with several of our key executive officers. We have purchased, and
are the named beneficiary of, a key man life insurance policy, having a face
value of CDN $2,000,000, on the life of our President. We also retain numerous
independent consultants and the services of key researchers at leading
university centers whose activities are coordinated by our employees. We intend
to hire other employees and consultants as needed.
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RISK FACTORS
This section of our Annual Report on Form 10-K contains forward-looking
statements that involve risks and uncertainties, such as 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 factors described below and elsewhere in this Annual
Report. You should not place undue reliance on these forward-looking statements,
which apply only as of the date of this Annual Report.
The following are among the risk factors we face related to our
business, assets and operations. They are not the only ones we face. Additional
risks and uncertainties that we are not aware of or that we currently deem
immaterial also may impair our business. If any of the following risks actually
occur, our business, financial condition and operating results could be
materially adversely affected.
RISKS RELATED TO DUSA
WE ARE NOT CURRENTLY PROFITABLE AND MAY NOT BE PROFITABLE IN THE FUTURE UNLESS
WE CAN SUCCESSFULLY MARKET AND SELL OUR FIRST PRODUCT, THE LEVULAN(R)
KERASTICK(R) WITH PDT FOR THE TREATMENT OF AKS OF THE FACE OR SCALP.
IF WE FAIL TO OBTAIN ADEQUATE LEVELS OF REIMBURSEMENT FOR OUR PRODUCTS
FROM THIRD-PARTY PAYORS, OUR REVENUES AND PROFITS COULD BE
SIGNIFICANTLY LIMITED.
Our profitability will depend, in part, on the availability of
reimbursement to patients or physicians for the cost of our products from
third-party payors such as governmental programs, private insurance and private
health plans. To date, physicians in several states have received reimbursement
for treatments using our Levulan(R) with PDT therapy. However, official
reimbursement policy has been established in only a few jurisdictions. We cannot
predict whether levels of reimbursement for our drug and light combination
therapy will be high enough to allow us to realize a reasonable profit margin.
Third-party payors may deny reimbursement if the payor determines that our
particular new therapy is unnecessary, inappropriate or not cost effective. If
patients or physicians are not entitled to receive reimbursements similar to
reimbursements for competing therapies, patients will have to pay for the
unreimbursed amounts. Some medicare providers may require physicians to
prescribe 5-FU to treat AKs because 5-FU is an inexpensive treatment, or limit
the number of AK treatments in a particular year. These reimbursement factors
could limit our revenues, and our profits, if physicians or patients choose
therapies with higher reimbursements than may be assigned to our therapy, or if
government agencies or other third-party payors mandate a treatment regimen. The
reimbursement status of newly-approved health care products is highly uncertain.
We are relying on Schering AG to obtain reimbursement codes from third-party
payors. If levels of reimbursement are decreased in the future, the demand for
our products could diminish or our ability to sell our products on a profitable
basis could be hurt.
BECAUSE NEITHER WE NOR SCHERING AG, OUR MARKETING PARTNER FOR
DERMATOLOGY PRODUCTS, HAS ANY EXPERIENCE MARKETING OR SELLING
DERMATOLOGY PRODUCTS IN THE UNITED STATES, OUR REVENUES FROM ROYALTIES
AND PRODUCT SALES MAY BE LIMITED.
The commercial success of Levulan(R) Kerastick(R) with PDT for AKs of
the face or scalp will partly depend on the effective marketing in the United
States of Levulan(R) Kerastick(R) with PDT for
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AKs by Schering AG through its affiliate, Berlex Laboratories, Inc. While
Schering AG has experience marketing dermatology products in Europe, neither
Schering AG, Berlex nor DUSA has any experience marketing dermatology products
in the United States. Schering AG has hired and trained 43 sales representatives
and area managers who are dedicated to the marketing of the Levulan(R) PDT
system. However, many of our competitors in the AK market already have
experienced, well-funded, marketing and sales operations in the United States.
If Schering AG fails to adequately develop, train and manage a sufficiently
large sales force, the demand for our product will be limited and our royalties
from Schering AG on sales of the product, our income from our light device, and
our revenue on supply fees on the Kerastick(R) will be adversely affected.
SINCE WE RELY HEAVILY ON OUTSIDE CONTRACTORS AS SOLE SUPPLIERS AND
MANUFACTURERS OF OUR LEVULAN(R) KERASTICK(R) AND BLU-U(TM), OUR
MARKETING EFFORTS AND SALES MAY SUFFER IF THESE THIRD-PARTIES FAIL IN
ANY WAY TO ADEQUATELY SUPPLY US WITH THE QUALITY AND QUANTITY OF THE
PRODUCTS WE NEED.
We do not currently have the capacity to manufacture any of our
products on our own. We rely on third-parties to manufacture our products. We
have only one source for Levulan(R), one source for our Kerastick(R), and one
for the BLU-U(TM). While we have purchased equipment in order to establish a
second source with a limited production line for the manufacture of our
Kerastick(R), if it becomes necessary, any new manufacturer would have to pass
inspection by the FDA. None of our manufacturers have produced our products in
large commercial quantities. Manufacturers often encounter difficulties when
large quantities of new products are manufactured for the first time, including
problems involving:
- product yields;
- quality control;
- component and service availability;
- compliance with FDA regulations; and
- 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 our manufacturers seek to increase production. Any
manufacturing problems could delay or limit our supplies or prevent
commercialization of our products. If any of these suppliers fail to meet our
needs, our business, financial condition and results of operations would suffer.
If any facility or equipment in the facility of our manufacturers is
damaged or destroyed, we will not be able to quickly or inexpensively replace
it. If there are any quality or supply problems with any components supplied to
our manufacturers for our products, we may not be able to quickly replace them.
Under the terms of our agreement with Schering AG, our continuing
failure to supply Schering AG's requirements of Levulan(R), the Kerastick(R)
and/or the BLU-U(TM) would release Schering AG from its obligation to purchase
supplies from us. The supply fees Schering AG is required to pay to us would be
reduced by Schering's cost to manufacture and we would receive only a royalty
payment on sales. Our business, financial condition and results of operations
would be adversely affected.
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ANY FAILURE TO COMPLY WITH ONGOING GOVERNMENTAL REGULATIONS IN THE
UNITED STATES OR TO OBTAIN FOREIGN REGULATORY APPROVALS WILL LIMIT OUR
ABILITY TO MARKET OUR FIRST PRODUCT.
Our products are subject to continued and comprehensive regulation by
the FDA and by state and local regulations. These laws require, among other
things,
- approval of manufacturing facilities, including adherence to
"good manufacturing and laboratory practices" during
production and storage;
- controlled research and testing of products even after
approval; and
- control of marketing activities, including advertising and
labeling.
Both the manufacture and marketing of our first products, Levulan(R)
Kerastick(R) and the BLU-U(TM) are subject to continuing FDA review. Our
manufacturers must continue to comply with the FDA's current Good Manufacturing
Practices, commonly known as cGMP, and foreign regulatory requirements. The cGMP
requirements govern quality control and documentation policies and procedures.
In complying with cGMP and foreign regulatory requirements, 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. If our third-party manufacturers fail to
comply with these requirements, we would be subject to possible regulatory
action and may be limited in the jurisdictions in which we are permitted to sell
our products.
As part of our approval from the FDA, we are required to conduct two
Phase IV follow-up studies; one to evaluate the long-term recurrence rate of AKs
after treatment with our new therapy, and the second to test for allergic skin
reactions to the Levulan(R) Kerastick(R). If we discover a previously unknown
problem with the product, a manufacturer or its facility, 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 give you any assurance that our
third-party sole sources will continue to meet all applicable FDA regulations in
the future. If any of our manufacturers fail to maintain compliance with FDA
regulatory requirements, it would be time consuming and costly to qualify other
sources. These consequences could have an adverse effect on our financial
condition and operations. If we fail to comply with applicable regulatory
approval requirements, a regulatory agency may:
- send us warning letters;
- impose fines and other civil penalties on us;
- suspend our regulatory approvals;
- refuse to approve pending applications or supplements to
approved applications filed by us;
- refuse to permit exports or our products from the United
States;
- require us to recall products;
- require us to notify physicians of labeling changes and/or
product related problems;
- impose restrictions on our operations; or
- criminally prosecute us.
As part of our collaboration agreement with Schering AG, we will be
jointly seeking foreign regulatory approvals for Levulan(R) Kerastick(R) PDT for
AKs. We cannot give you any assurances that we will receive foreign approvals on
a timely basis, or at all, or that problems will not arise that could delay or
prevent the commercialization of our product in foreign countries. The
introduction
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of our product in foreign markets will subject us to foreign regulatory
clearances, which may be unpredictable and uncertain, and which may impose
substantial additional costs and burdens which Schering AG and DUSA may be
unwilling or unable to pay. At present, applications for foreign marketing
authorizations are made at the national level, although certain registration
procedures are available within the European Union to companies wishing to
market a product in more than one member country. A regulatory authority must be
satisfied that adequate evidence of safety, quality, and efficacy of the product
has been presented before marketing authorization is granted. In addition,
electrical medical devices, such as the BLU-U(TM), must be manufactured in
compliance with the current requirements of ISO 9000. Our third-party
manufacturer is not currently qualified under ISO 9000. The foreign regulatory
approval process includes all of the risks associated with obtaining FDA
marketing approval and approval by the FDA does not ensure approval by other
countries. Failure to obtain foreign regulatory approval could adversely affect
our financial condition and operations.
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 over the next several quarters as we expand research and development of
new products and establish ourselves in the marketplace. As of December 31,
2000, our accumulated deficit was approximately $42,487,000. We cannot predict
whether any of our products will achieve significant market acceptance or
generate sufficient revenues to become profitable. Our commercial success will
depend on whether:
- our products are more effective therapies that currently
available treatments;
- we receive sufficient reimbursement for our products; and
- we can, either together with a partner or alone, successfully
market our products.
WE HAVE ONLY ONE THERAPY THAT HAS RECEIVED REGULATORY APPROVAL 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(TM) FOR PDT TO
TREAT AKS, ALL OF OUR PRODUCTS ARE IN EARLY STAGES OF DEVELOPMENT AND
MAY NEVER RESULT IN ANY COMMERCIALLY SUCCESSFUL PRODUCTS.
Currently, we are developing a single drug compound for a number of
different medical conditions. To be profitable, we must successfully research,
develop, obtain regulatory approval for, manufacture, introduce, market and
distribute our products. All of our products, except for the Levulan(R)
Kerastick(R) with the BLU-U(TM) for PDT to treat AKs, are at an early stage of
development. We cannot predict how long the development for these products will
take or whether they will be medically effective. We cannot be sure that a
successful market will ever develop for our new drug technology. We do not know
if any of our products will ever be commercially successful.
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 other potential 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 other potential products our revenues will be limited.
Before an NDA, which is an application to the FDA seeking approval to market a
new drug, can be filed with the FDA, a product must undergo, among other things,
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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 one
to three 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 new technology. To the best of our knowledge, the FDA has approved only
two 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 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. We must also obtain foreign regulatory
clearances before we can market our 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.
OUR LACK OF SALES AND MARKETING EXPERIENCE COULD AFFECT OUR ABILITY TO
MARKET OUR NON-DERMATOLOGY PRODUCTS, WHICH COULD ADVERSELY AFFECT OUR
REVENUES FROM FUTURE PRODUCT SALES.
We are lacking the experience and capacity to market, sell and
distribute our products. In order to market non-dermatology products and/or if
Schering AG abandons its rights to any dermatology products and if we do not
enter an agreement with a corporate partner who has the experience and resources
to perform these roles for other products, we would be required to hire our own
staff and a sales force. We have no experience in developing, training or
managing a sales force. We will incur substantial additional expenses if we have
to develop, train and manage these business activities. We may be unable to
build a sales force and the costs of establishing a sales force may exceed our
product revenues. In addition, we compete with many companies that currently
have extensive and well-funded marketing and sales operations. Any marketing and
sales efforts we make may be unsuccessful.
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.
If our sales goals for our first product are not met, we may need
substantial additional funds to fully develop, manufacture, market and sell all
of our other potential products. We cannot predict exactly if or when additional
funds will be needed. We may obtain funds through a public or private financing,
including equity financing, and/or through collaborative arrangements. We cannot
predict whether any financing will be available on acceptable terms when we need
it because investors may be unwilling to invest in DUSA if we have setbacks in
the development program or if the public fails to use our products.
If funding is insufficient, we will have to delay, reduce in scope or
eliminate some or all of our research and development programs. We cannot
predict which programs will be affected since it will depend upon the status of
clinical trials at that time. We may license rights to third-parties to
commercialize products or technologies that we would otherwise have attempted to
develop and commercialize on our own.
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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 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. We own or exclusively license patents and patent applications related
to the following:
- unique physical forms of ALA;
- methods of using ALA and its unique physical forms in
combination with light; and
- compositions and apparatus for those methods.
Some of the indications we are developing may not be covered by the
claims in our existing patents. In addition, a number of third parties are
seeking patents for additional uses of ALA. These additional uses, whether
patented or not, could limit the scope of our future operations because other
ALA products might become available which would not infringe our patents. These
products would compete with ours even though they are marketed for a different
use.
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 three foreign countries.
Absent patent protection, third-parties may freely market ALA, subject to
appropriate regulatory approval. There are reports of several third-parties
conducting clinical studies using ALA, or ALA precursors, in countries where
DUSA lacks patent protection. These studies could provide the clinical data
necessary to gain regulatory approval, resulting in competition.
Our patent protection in Japan may be diminished or lost entirely.
Japanese Patent No. 273032, which we have licensed from PARTEQ Research and
Development Innovation, has been opposed and the Japanese Patent Office Board of
Appeals revoked this patent. With PARTEQ's assistance, we are simultaneously
pursuing an appeal of the revocation before the Tokyo High Court and an
amendment trial before the Japanese Patent Office. Japan is a major
pharmaceutical market and loss of this patent could adversely affect DUSA in at
least two ways. First, should DUSA seek to enter the Japanese market, the lack
of a patent would probably diminish our market share. Second, even if we did not
seek to market in Japan, third-parties might not be interested in licensing the
product in Japan without patent protection, and this might affect DUSA's
revenues.
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 guaranty that these
agreements will provide effective protection for our proprietary information. It
is possible that
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- these persons or entities might breach the agreements;
- we might not have adequate remedies for a breach; and/or
- 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 one or more of our patents, that
third-party could challenge the validity of our patent(s). Defending our patents
could also result in the expenditure of significant resources. We cannot
guarantee that a third-party or parties will not claim, with or without merit,
that we have infringed on their patent(s), or misappropriated their proprietary
material. Defending this type of legal action could also involve considerable
expense.
If a third-party were to file a United States patent application, 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 invention. A third-party also could request the declaration of a
patent interference between one of our issued patents, and a third-party United
States patent application. Any interference proceedings likely would require
participation by us and/or PARTEQ, and could involve substantial legal fees.
BECAUSE OF THE NATURE OF OUR BUSINESS, THE LOSS OF OUR KEY MEMBERS OF OUR
MANAGEMENT TEAM COULD DELAY ACHIEVEMENT OF OUR GOALS.
IF ANY OF THE KEY MEMBERS OF OUR MANAGEMENT WERE TO END HIS
RELATIONSHIP WITH US, WE COULD EXPERIENCE SIGNIFICANT DELAYS IN OUR
BUSINESS AND RESEARCH OBJECTIVES.
We are a small company with only approximately 40 employees. We are
highly dependent on several key officer/employees with specialized scientific
and technical skills. 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 these qualified personnel in our specialty drug and
light device areas. 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 business, financial
condition and results of operations could suffer.
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RISKS RELATED TO OUR INDUSTRY
PRODUCT LIABILITY AND OTHER CLAIMS AGAINST US MAY REDUCE DEMAND FOR OUR PRODUCTS
OR RESULT IN DAMAGES.
IF WE BECOME SUBJECT TO A PRODUCT LIABILITY CLAIM WE MAY NOT HAVE
ADEQUATE INSURANCE COVERAGE AND THE CLAIM COULD ADVERSELY AFFECT OUR
BUSINESS.
The development, manufacture and sale of medical products exposes us to
the risk of significant damages from product liability claims. Although we
currently maintain product liability insurance for coverage of our products in
amounts we believe to be commercially reasonable we cannot be certain that the
coverage amounts are adequate or that continued coverage will be available at
acceptable costs. If the cost is too high, we will have to self-insure. While we
have not experienced any product liability claims, a successful claim in excess
of our insurance coverage could have a materially adverse effect on our
business, financial condition and results of operations.
OUR BUSINESS INVOLVES ENVIRONMENTAL RISKS AND WE MAY INCUR SIGNIFICANT
COSTS COMPLYING WITH ENVIRONMENTAL LAWS AND REGULATIONS.
We use various hazardous materials, such as mercury in fluorescent
tubes in our research and development activities. Even though we do not
currently manufacture any products, 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. We believe that we
are in compliance in all material respects with applicable environmental laws
and regulations and we do not expect to make material capital expenditures for
environmental control facilities in the near-term. However, we cannot guaranty
that we will not incur significant costs to comply with environmental laws and
regulations in the future. We also cannot guaranty that current or future
environmental laws or regulations will not materially adversely effect our
operations, business or assets. In addition, although we believe our safety
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 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 MAY MAKE SOME OR ALL OF OUR
PROGRAMS OR POTENTIAL PRODUCTS NONCOMPETITIVE OR OBSOLETE.
Our industry is subject to rapid, unpredictable and significant
technological change. Competition is intense. Well-known pharmaceutical,
biotechnology and chemical companies are marketing well-established therapies
for the treatment of various dermatological conditions including AKs. Doctors
may prefer familiar methods that they are comfortable using rather than try our
products. Many companies are also seeking to develop new products and
technologies for medical conditions for which we are developing treatments. 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. We anticipate that we will face increased competition as new
companies enter our markets and as the scientific development of PDT/PD
advances.
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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.
We cannot give you any assurance that new drugs or future developments
in PDT or in other drug technologies will not have a material adverse effect on
our business. Increased competition could result in:
- price reductions,
- lower levels of third-party reimbursements,
- failure to achieve market acceptance, and
- loss of market share,
any of which could have an adverse effect on our business. Further, we cannot
give you any assurance that developments by our competitors or future
competitors will not render our technology obsolete.
OUR COMPETITORS IN THE BIOTECHNOLOGY AND PHARMACEUTICAL INDUSTRIES MAY
HAVE BETTER PRODUCTS, MANUFACTURING CAPABILITIES OR MARKETING
EXPERTISE.
Several companies are developing PDT agents other than Levulan(R).
These include: QLT PhotoTherapeutics Inc. (Canada); Miravant, Inc. (U.S.);
Pharmacyclics, Inc. (U.S.); Scotia Pharmaceuticals (United Kingdom); and
Photogen Technologies, Inc. (U.S.). We are also aware of several overseas
companies doing research with ALA, including: medac GmbH (Germany) which is 25%
owned by Schering AG; ESC Medical Systems Ltd. (Israel); and Photocure (Norway).
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.
Photocure has completed clinical trials and has filed an application
for European marketing approval of its ALA precursor (ALA methylester) compound
with PDT for the treatment of AKs. We are also aware that medac is developing
ALA PDT for bladder cancer detection and for flourescent-guided resection of
brain cancer in Germany.
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RISKS RELATED TO OUR STOCK
IF OUTSTANDING OPTIONS AND WARRANTS ARE CONVERTED, THE VALUE OF THOSE SHARES OF
COMMON STOCK OUTSTANDING JUST PRIOR TO THE CONVERSION WILL BE DILUTED.
As of February 28, 2001 there were outstanding options and warrants to
purchase 2,599,649 shares of common stock, with exercise prices ranging from
U.S. $3.25 to $31.00 per share, respectively, and ranging from CDN $4.69 to CDN
$10.875 per share, respectively. In addition, there are approximately 449
outstanding placement agent warrants from a private placement completed in 1999.
If the holders exercise a significant number of these securities at any one
time, the market price of the common stock could fall. The value of the common
stock held by other shareholders will be diluted. 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. If the market price of the common stock does not rise above
the exercise price of these securities, then they will expire without exercise.
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 BIOTECHNOLOGY STOCK
COULD RESULT IN THE SUDDEN CHANGE IN THE MARKET VALUE OF OUR STOCK.
From time to time and in particular during the last year, 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, 2000 to January 31, 2001, our stock price has ranged from a high
of $36.00 to a low of $12.375. Factors that contributed to the volatility of our
stock during the last 12 months included:
- timing of BLU-U(TM) receipt of marketing approval from the
FDA;
- timing and potential success of the launch of our first
products;
- timing and potential success in achieving satisfactory
third-party payor reimbursement for our first therapy; and
- general market conditions.
The significant general market volatility in similar stage
pharmaceutical and biotechnology companies made the market price of our common
stock even more volatile.
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 million shares of stock, 40 million 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 million
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.
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ITEM 2. PROPERTIES
In May 1999 we entered into a five (5) year lease for 16,000 sq. ft. of
office/warehouse space to be used for offices and manufacturing in Wilmington,
Massachusetts. On February 1, 2001, we entered into a five (5) year lease for an
additional 24,000 square feet of space at our Wilmington facility. Annual rent
on a triple net basis will total $314,000.00 per year beginning as of February
1, 2001 and will increase each year during the term up to approximately
$351,000. Our wholly owned subsidiary, DUSA Pharmaceuticals New York, Inc.,
relocated from Tarrytown, New York, to larger facilities, approximately 4,000
sq. ft., in Valhalla, New York in October 1997 under the terms of a five (5)
year lease at an annual rental in 2000 of approximately $123,000. In 1999, we
also entered into a three (3) year lease for approximately 1,300 sq. ft. of
office space in Toronto in the same building DUSA previously occupied. This
facility accommodates the offices of our President, shareholder services and
other staff. Annual rent payments will total CDN $31,272 per year beginning
August 1, 1999, plus approximately CDN $29,122 for lease operating costs this
year.
ITEM 3. LEGAL PROCEEDINGS
We are not involved in any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is traded on the Nasdaq National Market under the
symbol "DUSA." The following are the high and low closing prices for the common
stock reported for the quarterly periods shown.
Price range per common share by quarter, 1999:
First Second Third Fourth
Nasdaq
High $8.563 $11.563 $16.000 $31.875
Low 5.531 7.250 10.375 12.938
Price range per common share by quarter, 2000:
First Second Third Fourth
Nasdaq
High $36.00 $30.00 $31.250 $31.00
Low 21.50 16.00 25.813 14.50
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On March 13, 2001, the closing price of our common stock was $13.00 per
share on the Nasdaq Stock Market. On March 13, 2001, there were approximately
721 holders of record of the common stock.
We have never paid cash dividends on our common stock and have no
present plans to do so in the foreseeable future.
ITEM 6. SELECTED FINANCIAL DATA
The following information is qualified by reference to and should be
read in conjunction with the Company's Consolidated Financial Statements and the
Notes thereto and Management's Discussion and Analysis of Financial Condition
and Results of Operations included elsewhere herein. The selected financial data
for the Company presented below for the years ended December 31, 2000, 1999,
1998, 1997 and 1996 have been derived from the Company's audited financial
statements.
CONSOLIDATED STATEMENT OF OPERATING DATA
Year ended December 31,
2000 1999 1998 1997 1996
Revenues $ 2,120,557 $ -- $ -- $ -- $ --
Cost of product sales 1,104,664 -- -- -- --
Research and development costs 8,163,419 4,194,532 4,502,391 6,252,830 5,652,442
Other operating expenses 2,559,502 1,818,193 1,729,741 1,760,409 2,220,883
Loss from operations (9,707,028) (6,012,725) (6,232,132) (8,013,239) (7,873,325)
Other income 3,222,273 574,098 515,184 893,147 1,073,006
Income tax expense 56,000 90,000 -- -- --
Net loss (6,540,755) (5,528,627) (5,716,948) (7,120,092) (6,800,319)
Basic and diluted net loss per $ (0.49) $ (0.50) $ (0.61) $ (0.76) $ (0.75)
common share
Weighted average number of 13,285,472 11,061,016 9,365,950 9,358,038 9,087,823
shares outstanding
CONSOLIDATED BALANCE SHEET DATA
As of December 31,
2000 1999 1998 1997 1996
Total Assets $82,442,388 $28,156,845 $ 7,140,675 $13,081,248 $20,129,257
Cash and investment securities 74,496,577 26,897,580 6,722,132 12,767,142 19,719,496
Deferred revenue 24,805,041 9,791,667 -- -- --
Shareholders' equity 55,309,796 17,059,928 6,416,146 12,019,351 19,101,790
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
When you read this section of this report, it is important that you
also read the financial statements and related notes included elsewhere herein.
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
We are a pharmaceutical company focused on research and development of
our drug, Levulan(R), combined with exposure to light, to treat and detect
various medical conditions. From our inception in 1991 until September 2000 we
were classified as a development stage enterprise. However, in late September
2000, we launched our first commercial products, Levulan(R) Kerastick(R) 20%
Topical Solution and the BLU-U(TM) brand light device, in cooperation with
Berlex Laboratories, Inc. (Berlex), the United States affiliate of Schering AG.
From the product launch through the end of the year, DUSA entered into over 100
contracts for BLU-U(TM) brand light units. We primarily lease the BLU-U(TM) to
physicians, medical institutions and academic centers throughout the country.
Now that our products have been launched, we are no longer classified as a
development stage enterprise and, accordingly, the development stage disclosures
have been eliminated from the accompanying financial statements.
We have primarily devoted our resources to funding research and
development in order to advance the Levulan(R) PDT/PD technology platform, and
as a result, we have experienced significant operating losses. As of December
31, 2000, we had an accumulated deficit of $42,487,349. Our transition from a
development-stage company to a profitable operating company is dependent upon,
among other things, the market penetration by Berlex of our products and our
ability to meet the supply needs of the growing customer base.
While Schering AG has significant expertise in dermatology markets
outside the United States, and Berlex has significant expertise in
non-dermatology markets in the United States, our products represent Berlex's
first dermatology marketing effort in the United States. At the current time,
Berlex has hired and trained 43 sales representatives and area managers who are
dedicated to the Levulan(R) PDT system. We are excited about the early positive
response from physicians and patients who have used our therapy, but we do not
expect full market penetration until after third-party reimbursement costs for
our products are established during the coming months by insurance companies and
state and federal healthcare agencies.
Currently, we are meeting Berlex's supply requirements; however, any
significant delays in delivery of sufficient product supplies from our sole
source third-party suppliers of Levulan(R), the Kerastick(R) and/or the
BLU-U(TM), once reimbursement policies are determined, would have a significant
adverse impact on our financial results. We are increasing our inventory of raw
materials and products to help us manage the marketplace as it develops, and in
February 2001 we leased additional space in our Wilmington, Massachusetts
facilities to provide immediate warehouse, office space, and production areas
should we need to develop our own manufacturing capabilities. We are also
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investigating other suppliers for components of our products so that we could
react more quickly if our supply was interrupted for any reason.
DUSA's research and development efforts are continuing to expand, both
in dermatology (in partnership with Schering AG), and in our internal indication
development programs. During 2000, we doubled our staff to a total of 41
full-time employees by year end, in order to support all activities relating to
production, maintenance, customer support for our initial and future products,
as well as the research and development programs for dermatology and internal
indications. We expect that we will continue to significantly increase our staff
during 2001. While our financial position is strong following a private
placement early in 2000 and receipt of $15,000,000 of payments from Schering AG
in December 2000, DUSA cannot precisely predict when royalties and supply fees
that we are entitled to under our Schering AG agreement, along with interest
and/or other income, may offset the cost of these efforts.
In June 2000, we amended our Supply Agreement with Sochinaz SA, the
supplier of our bulk drug product, to include an option to allow us to extend
the term of the agreement for an additional three (3) years until December 3,
2007. As consideration for the amendment, we agreed to reimburse Sochinaz for a
portion of its costs to bring its manufacturing facilities into compliance with
the FDA cGMPs. We paid $250,000 in cash and issued 26,666.66 shares of our
common stock having a fair market value of $750,000. While we can obtain
alternative supply sources in certain circumstances, any new supplier would have
to be inspected and qualified by the FDA. The total $1,000,000 has been reported
as deferred charges and is being amortized over the original term of the Supply
Agreement which would have expired on December 3, 2004.
Also during the year, we terminated our shareholders rights plan and
redeemed all of the rights that were outstanding at a cost of approximately
$14,000.
For non-dermatology indications, we may enter into joint development or
licensing arrangements, both domestically and internationally, with
pharmaceutical companies. To the extent that we do not enter into such
arrangements, we may require separate funding to complete the regulatory
approval process for non-dermatology products and would likely need additional
funds to market these potential products. See "Risk Factors -- We must receive
separate approval for each of our potential products before we can sell them
commercially in the United States or abroad; and -- 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."
RESULTS OF OPERATIONS
Comparison of Years ended December 31, 2000, 1999 and 1998
Revenues - Revenue recognized by DUSA in 2000 was $2,120,557,
reflecting its first sales of the Kerastick(R) based on its product launch in
September 2000. This amount includes research and development revenue of
$722,570 reflecting revenue earned payments from Schering AG to support our
dermatology co-development program and $495,833 representing the amortization of
milestone and unrestricted grant payments also from Schering AG. The total
amount of up front payments has been recorded as deferred revenue upon receipt
and is recognized as income on a straight-line basis over the term of the
Company's alliance agreement with Schering AG. No revenue was recognized in 1999
and 1998 as DUSA was a development stage corporation.
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Product sales during 2000 were $902,154, primarily reflecting the sales
of the Kerastick(R). The royalties are earned and recognized by DUSA when the
Kerastick(R) is sold by Berlex to its distributor, and are due and payable to
DUSA during the quarter following the quarter in which the sales are made. DUSA
recognizes supply fee revenue related to these sales when DUSA's supplier ships
the Kerastick(R) to Berlex. We primarily lease the BLU-U(TM) to our customers
and have engaged a medical device leasing company to complete the leasing
transactions, including coordinating payment plans with the physicians. We sell
the BLU-U(TM)'s to the leasing company, which pays us for the units within
thirty (30) days after installation in the physician's offices. However, because
physicians have the right to cancel their leases after one year, these revenues
are reported as deferred revenues until the right to cancel the lease has
expired. In the event a customer does cancel a lease, we have agreed to
repurchase the units at an agreed upon price. Under this arrangement, we will
recognize revenue from the distribution of BLU-U(TM)s beginning in late 2001.
Under our agreement with Schering AG, two-thirds of the agreed upon
dermatology research and development expenses, up to $3,000,000 per year, are
reimbursable to DUSA by Schering AG, for 2000 and 2001. Based on the agreed upon
development plan and the timing of the start of the clinical trials, we are
entitled to reimbursement of $722,570 for the year ended December 31, 2000. In
early 2001, both parties agreed upon the development program that will be
subject to reimbursement for 2001. The total research and development budget for
approved co-development projects so far totals $3,954,000 for 2001, which will
entitle us to a reimbursement from Schering of $2,636,000. We expect that
Schering AG will continue to share the dermatology research and development
costs beyond this year. However, the level of reimbursement is not guaranteed
under our agreement.
Cost of Product Sales - Cost of product sales for the year ended
December 31, 2000 were $1,104,664, primarily reflecting Kerastick(R) sales to
Berlex in the amount of $796,219 and royalties and supply fees of approximately
$68,000 reflecting minimum royalty payments due to DUSA's licensor. Also
included in cost of product sales is the amortization of deferred charges of
approximately $113,000 reflecting consideration paid by us to amend our Supply
Agreement with Sochinaz SA, the manufacturer of the bulk drug ingredient used in
Levulan(R), as well as costs incurred for shipping and installing the BLU-U(TM)
in physician's offices. Inventory costs related to the BLU-U(TM) units that are
leased are deferred and recorded as other current assets until the customer's
right to cancel its lease after one year expires. As of December 31, 2000,
deferred inventory costs were $261,923. There were no product sales and
therefore no cost of product sales during 1998 or 1999.
In order to meet the production scheduling needs of our third-party
manufacturer of the BLU-U(TM), we have agreed to prepay for raw material costs
in the amount of $400,000 associated with our current orders. This amount will
be credited against the final purchase price, which will be due on delivery of
finished units at the rate of $1,000 per unit. In addition, if we do not order a
certain number of BLU-U(TM) brand units for delivery in 2002, we have agreed to
pay $100,000 to our manufacturer for certain overhead costs. We do not know at
this time whether we will be required to make this payment as we depend upon
Berlex to market our products. Similarly, in early 2001, we tentatively agreed
to compensate our third-party manufacturer of the Kerastick(R) on an interim
basis for certain overhead expenses if our orders fall below certain levels on
an annual basis.
Research and Development Costs - DUSA's research and development costs
for the years ended 2000, 1999 and, 1998 were $8,163,419, $4,194,532 and
$4,502,391, respectively. The
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$4,000,000 increase in 2000 over 1999 levels is mainly attributed to
manufacturing development expenses, reflecting increased personnel costs and
pre-production activities. As stated above under "Revenue", under our agreement
with Schering AG, approximately two-thirds of the agreed upon dermatology
research and development expenses, up to $3,000,000 for 2001, are reimbursable
to DUSA by Schering AG. The decrease in research and development costs from 1998
to 1999 reflected our efforts to delay some of our research programs while we
were awaiting FDA approval of our first product and completion of a dermatology
corporate alliance.
DUSA expects that 2001 research and development costs will increase as
compared to 2000 due to increased expenditures for dermatology and internal
indications coupled with a full year of higher personnel costs related to
manufacturing development activities. Costs and development fees associated with
agreements for research projects and clinical studies commit us to make payments
of $483,000, $399,000 and $112,000 for 2001, 2002 and 2003, respectively. See
Note 11d to the Notes to the Consolidated Financial Statements.
As we implement our dermatology program with Schering AG, and expand
our internal indication programs, we expect clinical research and development
expenses to increase significantly. In late 2000, we initiated a Phase I/II
clinical trial of Levulan(R) PDT for moderate to severe acne vulgaris of the
face, and we expect to begin clinical studies on onychomycosis, initially
testing drug uptake and conversion in infected nails, shortly. In addition, DUSA
plans to initiate clinical trials using Levulan(R) PDT for treatment of warts
during 2001.
With respect to internal indications for Levulan(R) PDT, we intend to
initiate new DUSA-sponsored clinical protocols for the treatment of Barrett's
esophagus and brain cancer during 2001. DUSA is also supporting and
collaborating in new investigator studies on Barrett's esophagus and restenosis
inhibition. Additional indications being considered for further development
include detection and treatment of cervical dysplasia and dysfunctional uterine
bleeding. Based upon a survey of urologists that followed our initial bladder
cancer photodetection study, we believe that this indication would require
significant development efforts with respect to a more flexible light device, as
well as a different drug formulation and we may seek an alliance partner to
pursue this indication. We have not yet decided on further development plans for
this indication.
General and Administrative Costs. General and administration expenses
for the years ended December 31, 2000, 1999, and 1998 were $2,559,502,
$1,818,193, and $1,729,741, respectively. During 2000, the Company hired
additional staff, including key management personnel in technical and operations
functions. These costs are expected to continue to increase significantly for
2001, then more slowly as we continue to add personnel at all levels of the
organization.
Interest Income. Interest income was $3,222,273, $574,098, and
$508,256 for the periods ended December 31, 2000, 1999 and 1998, respectively,
and is primarily earned on United States government securities. The $2,648,175
increase in interest income for 2000 as compared to 1999 is mainly attributed to
the $15,000,000 received from Schering AG during the fourth quarter of 1999, and
the net proceeds of approximately $40,700,000 received from a private placement
in March 2000. Interest income is expected to increase in 2001 due to additional
payments of $15,000,000 received from Schering in December 2000. However, if our
product sales, which are dependent upon the market penetration by Berlex and our
ability to meet the supply needs of the growing customer base do not offset our
expenditures, interest income will decline as funds are spent for our research
and development programs. See Note 5 to the Notes to Consolidated Financial
Statements.
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Income Taxes. As of December 31, 2000, we had net operating loss
carryforwards of approximately $15,753,000 and tax credit carryforwards of
approximately $928,000 for federal reporting purposes. These amounts expire at
various times through 2020. See Note 7 to the Notes to the Consolidated
Financial Statements. In 2000, a provision for taxes of $56,000 was recorded
primarily reflecting various states net worth tax. A provision for alternative
minimum tax was recorded in 1999 for $90,000.
Net Losses - The Company incurred a net loss of $6,540,755, or $0.49
per share, $5,528,627 or $.50 per share, and $5,716,948 or $.61 per share for
the years ended December 31, 2000, 1999 and 1998, respectively. These losses
were within management's expectations and losses are expected to be incurred
until the successful market penetration of our first products.
QUARTERLY RESULTS OF OPERATIONS
The following is a summary of the quarterly results of operations for
the years ended December 31, 2000 and 1999, respectively:
Quarterly Results For Year Ended December 31, 2000
___________________________________________________________________
March 31, June 30 September 30 December 31
_____________ _________ _____________ ____________
Total revenues $435,157 $167,347 $139,583 $1,378,470
Loss from operations (1,623,969) (2,382,555) (2,558,562) (3,141,942)
Net loss (1,241,225) (1,439,928) (1,614,087) (2,245,515)
Basic and diluted loss per
share (0.10) (0.11) (0.12) (0.16)
Quarterly Results For Year Ended December 31, 1999
___________________________________________________________________
March 31 June 30 September 30 December 31
_____________ _________ _____________ ____________
Total revenues $- $- $- $-
Loss from operations (1,189,582) (1,552,221) (1,321,701) (1,949,221)
Net loss (1,029,322) (1,429,282) (1,192,135) (1,877,888)
Basic and diluted loss per
share (0.10) (0.13) (0.11) (0.16)
RECENTLY ISSUED ACCOUNTING GUIDANCE
In December 1999, the staff of the Securities Exchange Commission (SEC)
issued Staff Accounting Bulletin No. 101 (SAB 101), "Revenue Recognition in
Financial Statements". SAB 101 provides guidance related to revenue recognition
based on interpretations and practices followed by the SEC and summarizes
certain of the SEC's view in applying generally accepted accounting principles
(GAAP) to revenue recognition in financial statements. We adopted SAB 101 as of
January 1, 2000 and we apply these revenue recognition policies in accordance
with GAAP.
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities. The new
standard, which must be adopted on January 1, 2001, requires that all companies
record derivatives on the balance sheet as assets or liabilities, measured at
fair value. Gains or losses resulting from changes in the values of those
derivatives would be accounted for depending on the use of the derivative and
whether it qualifies
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for hedge accounting. The adoption of SFAS No. 133 will not have a significant
impact on the financial position or results of operations of the Company.
LIQUIDITY AND CAPITAL RESOURCES
We are in a strong cash position to continue and expand our research
and development activities for our Levulan(R) PDT/PD platform. Our total assets
were $82,442,388 as of December 31, 2000 compared to $28,156,845 as of December
31, 1999. The increase is the direct result of the completion of the private
placement of the Company's shares in the first quarter of this year and the
receipt of $15,000,000 in milestone and research support payments from Schering
AG. These payments from Schering AG were based upon the parties' Marketing,
Development and Supply Agreement entered on November 22, 1999 and consisted of
an $8,000,000 unrestricted research grant for future research and development
support to be used at its discretion, and an additional milestone payment of
$7,000,000 based upon the first commercial sale of our products. These are the
final payments related to DUSA's initial products, the Levulan(R) Kerastick(R)
20% topical solution, and the BLU-U(TM) brand light device, for the treatment of
non-hyperkeratotic actinic keratoses of the face or scalp.
As of December 31, 2000, we had inventory of $1,331,966, representing
finished goods, raw material and purchased parts and subassemblies. Also, as of
the same date, we had net fixed assets of $1,699,530, as compared to $428,350 as
of December 31, 1999, due primarily to the acquisition of equipment. We expect
to make significant additional capital expenditures during 2001 in order to
acquire equipment for a back-up second source of supply for the manufacture of
the Kerastick(R), as required under our contract with Schering AG.
As of December 31, 2000, we had accounts receivable of $914,959
representing net sales associated with product sales. In addition, based on our
co-development program with Schering AG, a receivable of $722,570 has been
recorded as a current asset.
As of December 31, 2000, we had current liabilities of $2,836,758, as
compared to $1,305,250 as of December 31, 1999. Since our inception, we have had
no long-term debt. DUSA has a secured line of credit from Schering AG for up to
$1 million to help us finance inventory purchases of our BLU-U(TM) from our
supplier. This line of credit is interest-free but must be re-paid within one
year of our first draw down of funds. As of the end of the year, we had not
drawn down any part of this credit facility.
We invest our cash in United States government securities, all of which
are classified as available for sale. These securities have an aggregate cost of
$56,876,369, and a current aggregate market value of $58,055,463 as of December
31, 2000, resulting in a net unrealized gain on securities available for sale of
$1,179,094, which has been included in shareholders' equity. As of December 31,
1999, government securities had an aggregate cost of $19,951,281 and an
aggregate market value of $19,868,962, resulting in a net unrealized loss of
$82,319. Due to fluctuations in interest rates and depending upon the timing of
our need to convert government securities into cash to meet our working capital
requirements, some gains or losses could be realized. These securities currently
have interest rates and yields ranging from 4.67% to 7.20% and maturity dates
ranging from January 12, 2001 to August 15, 2005.
We believe that we have sufficient capital resources to proceed with
our current development program for Levulan(R) PDT/PD for the foreseeable
future. We have invested our funds in liquid investments, so that we will have
ready access to these cash reserves, as needed, for the funding of
39
41
development plans on a short-term and long-term basis. DUSA may also use its
resources to acquire by license, purchase or other arrangements, businesses,
technologies, or products that enhance or expand DUSA's business.
As of December 31, 2000, DUSA had deferred revenues of $24,805,041
compared to $9,791,667 at December 31, 1999 reflecting milestone and
unrestricted grant payments of $24,295,834 (including a premium of 20% on the
issuance of shares of DUSA's common stock to a Schering AG affiliate) and
the deferral of $509,207 in product sales related to our customer's one-year
right of return on leases of our commercial light sources. Commencing with our
product launch, we began to amortize the Schering AG milestone and unrestricted
grant payments during the fourth quarter of 2000, when the first products were
placed in physicians' offices. The amortization period is expected to be
approximately 12 years, the term of the Schering AG agreement, based upon
current revenue recognition principles. See Note 10 to the Notes to the
Consolidated Financial Statements.
Our management team is currently focusing its attention on providing
support to Berlex in its effort to penetrate the marketplace with our unique
Levulan(R) PDT therapy for AKs, on conducting the expanded dermatology
co-development program with Schering AG and on developing plans for several
internal research and development indications. Full development and testing of
all potential indications that are currently under development or being
considered for development may require additional funding. The timing of
expenditures will be dependent on various factors, including
- progress of our research and development programs;
- the results of preclinical and clinical trials;
- the timing of regulatory marketing approvals;
- competitive developments;
- the level of sales of our first products
- any new additional collaborative arrangements, if any, we may
enter; and
- the availability of other financing.
We cannot accurately predict the magnitude of revenues from sales of
our products. While the net proceeds of the January 1999 and March 2000
offerings coupled with payments received from Schering AG will enable us to
maintain our current research program as planned and support the
commercialization of Levulan(R) PDT for AKs for the foreseeable future, in order
to maintain and expand continuing research and development programs, DUSA may
need to raise additional funds through future corporate alliances, financings,
or other sources, depending upon the amount of revenues we receive from our
first product.
If sufficient funds are available, we may also use our resources to
acquire by license, purchase or other arrangements, businesses, technologies, or
products that complement, enhance, or expand our business. We continue to
actively seek relationships with pharmaceutical or other suitable organizations
to market some of our potential non-dermatology products and technologies, or to
provide funding for research projects.
As of the end of 2000, we had 41 full-time employees. We have
employment agreements with several of our key executive officers. We have
purchased and are the named beneficiary of a key man life insurance, having a
face value of CDN $2.0 million on the life of our President. We expect that we
will continue to hire or retain significantly more employees and consultants as
commercialization of Levulan(R) PDT continues, particularly in the operations,
financial and regulatory areas.
40
42
We have not made any material capital expenditures for environmental
control facilities in the near-term. If we decide, in the future, to establish a
limited production line for the manufacture of the Kerastick(R), we expect that
environmental laws will govern our facility, but we do not expect these laws to
require material capital expenditures. There can be no assurance, however, that
we will not be required to incur significant costs to comply with environmental
laws and regulations in the future, or any assurance that our operations,
business or assets will not be materially adversely affected by current or
future environmental laws or regulations. See "Business -- Government
Regulation."
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.
MARKET RISK
We hold fixed income U.S. government securities that are subject to
interest rate market risks. However, we do not believe that the risk is material
as we make our investments in relatively short-term instruments and we strive to
match the maturity dates of these instruments to our cash flow needs. A ten
percent decline in the average yield of these instruments would not have a
material effect on our results of operations or cash flows.
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 which represent our expectations or beliefs
concerning future events, including, but not limited to statements regarding
management's beliefs regarding the unique nature of Levulan(R), expectations
regarding the start of clinical trials in 2001 for warts, onychomycosis and
brain cancer, intention to develop new drug formulations and light devices and
to evaluate and pursue licensing and acquisition opportunities,
commercialization of additional Levulan(R) dermatology products with Schering
AG, belief that our new products will be the AK therapy of choice, beliefs
regarding the efficacy of potential hair removal, CIN and other indications and
Levulan(R)'s competitive properties, expectations of exclusivity under the
Hatch/Waxman Act and other patent laws, intentions to seek additional U.S. and
foreign regulatory approvals, trademarks, and to market outside the United
States, beliefs regarding environmental compliance, beliefs concerning patent
disputes, the impact of a third-parties regulatory compliance and fulfillment of
contractual obligations, the expectations regarding the future funding by
Schering AG, requirements of cash resources for our future liquidity,
anticipation of hiring additional personnel, dependence on reimbursement
policies for significant revenues, expectations to support independent
investigators, expectations for future strategic opportunities and research and
development programs, expectations for continuing operating losses, increasing
research and development costs, levels of interest income and our capital
resource needs. 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 impact of competitive products and pricing, the timely
development, FDA approval, and market acceptance of our products, reliance on
third parties for the production, manufacture, sales and marketing of our
products, the securities regulatory process, the maintenance of our patent
portfolio and levels of reimbursement by third-
41
43
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
Independent Auditors' Report.............................................................................. 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-6
Notes to the Consolidated Financial Statements............................................................. F-8
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
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 2001
Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
The information requested be 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 2000", "Aggregate Option Exercises in
2000 and Option Values at December 31, 2000", and "Other Compensation" of
Registrant's 2001 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 is hereby incorporated by reference
to the section entitled "Security Ownership of Certain Beneficial Owners and
Management" of the Registrant's 2001 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 Transactions" of the Registrant's 2001 Proxy
Statement.
42
44
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
A. List of Financial Statements and Schedules
Page
Number
INCLUDED IN ANNUAL REPORT TO SHAREHOLDERS
INCORPORATED HEREIN BY REFERENCE:
Independent Auditors' Report..................................................................... 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-6
Notes to the Consolidated Financial Statements................................................... F-8
Schedules other than those referred to above are omitted because they
are not required or the information is included in Notes to the Consolidated
Financial Statements.
B. Reports on Form 8-K
1. Form 8-K filed on December 21, 2000, which announced the
receipt of milestone payments from Schering AG based upon the parties Marketing
Development and Supply Agreement.
C. Exhibits filed as part of this Report
3(a) 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(b) By-laws of the Registrant, filed as Exhibit 3(ii) to the
Registrant's Quarterly Report on Form 10-Q for the fiscal
quarter ended September 30, 1997, filed November 12, 1997 and
are incorporated herein by reference;
4(a) Common Stock specimen, filed as Exhibit 4.1 to the
Registrant's Quarterly Report on Form 10-Q for the fiscal
quarter ended September 30, 1997 filed November 12, 1997, 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;
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
43
45
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(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 hereby 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 and Rule 406 of the Securities
Act of 1933, 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 Exhibit 1 to
Registrant's Schedule 14A Definitive Proxy Statement dated
April 27, 1998, 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 and Rule 406 of the
Securities Act of 1933, and is incorporated herein by
reference,
10(j) Marketing Development and Supply Agreement between the Company
and Schering AG dated November 22, 1999, filed as Exhibit 10.1
to the Registrant's Current Report on Form 8-K dated November
22, 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, and is incorporated
herein by reference;
10(k) Common Stock Purchase Agreement between the Company and
Schering Berlin Venture Corporation dated as of November 22,
1999, filed as Exhibit 10.2 to the
44
46
Registrant's Current Report on Form 8-K dated November 22,
1999, portions of which have been omitted pursuant to a
request for confidential treatment pursuant to Rule 24b of the
Securities Exchange Act of 1934, and is incorporated herein by
reference;
10(l) Light Source Agreement between the Company and Schering AG
dated as of November 22, 1999, filed as Exhibit 10.3 to the
Registrant's Current Report on Form 8-K dated November 22,
1999, portions of which have been omitted pursuant to a
request for confidential treatment pursuant to Rule 24b of the
Securities Exchange Act of 1934, and is incorporated herein by
reference;
10(m) Guaranty dated as of November 22, 1999 by Schering AG in favor
of the Company, filed as Exhibit 10.4 to the Registrant's
Current Report on Form 8-K dated November 22, 1999, portions
of which have been omitted pursuant to a request for
confidential treatment pursuant to Rule 24b of the Securities
Exchange Act of 1934, and is incorporated herein by reference;
10(n) Secured Line of Credit Promissory Note dated November 22, 1999
with the Company as payee and Schering AG as Holder filed as
Exhibit 10.5 to the Registrant's Current Report on Form 8-K
dated November 22, 1999, portions of which have been omitted
pursuant to a request for confidential treatment pursuant to
Rule 24b of the Securities Exchange Act of 1934, and is
incorporated herein by reference;
10(o) Security Agreement dated as of November 22, 1999 between the
Company and Schering AG filed as Exhibit 10.6 to the
Registrant's Current Report on Form 8-K dated November 22,
1999, portions of which have been omitted pursuant to a
request for confidential treatment pursuant to Rule 24b of the
Securities Exchange Act of 1934, and is incorporated herein by
reference;
10(p) Purchase and Supply Agreement between the Company and North
Safety Products, Inc. dated as of September 13, 1999, filed as
Exhibit 10.1 to the Registrant's Current Report on Form 8-K
dated October 13, 1999, portions of which have been omitted
pursuant to a request for confidential treatment pursuant to
Rule 24b of the Securities Exchange Act of 1934, and is
incorporated herein by reference;
10(q) Supply Agreement between the Company and Sochinaz SA dated
December 24, 1993, filed as Exhibit 10(q) to Registrant's Form
10K/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,
and is incorporated herein by reference;
10(q.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 Form 10K for the fiscal year ended December 31,
1999, and is incorporated herein by reference;
10(q.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;
45
47
10(r) Master Vendor Operating Agreement between the Company and
International Leasing Corporation dated September 21, 2000,
filed as Exhibit 10 to the Registrant's quarterly report on
Form 10-Q for the fiscal quarter ended September 30, 2000,
filed November 14, 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, and is
incorporated herein by reference.
23.1 Consent of Deloitte & Touche LLP
46
48
INDEPENDENT AUDITORS' REPORT
Board of Directors
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, 2000
and 1999 and the related consolidated statements of operations, shareholders'
equity and cash flows for each of the three years in the period ended December
31, 2000. 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 auditing standards generally accepted
in the United States of America. 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 the Company as of December 31, 2000
and 1999, and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 2000, in conformity with accounting
principles generally accepted in the United States of America.
/s/ DELOITTE & TOUCHE LLP
Deloitte & Touche LLP
Boston, Massachusetts
February 23, 2001
F-1
49
DUSA PHARMACEUTICALS, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
------------
2000 1999
---- ----
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 16,441,114 $ 7,028,618
U.S. government securities 58,055,463 19,868,962
Accrued interest receivable 990,083 266,621
Accounts receivable 914,959 --
Receivable under co-development program 722,570 --
Inventory 1,331,966 --
Other current assets 562,240 132,833
------------ ------------
TOTAL CURRENT ASSETS 79,018,395 27,297,034
Property and equipment, net 1,699,530 428,350
Deferred charges 886,792 --
Deferred royalty 739,671 403,830
Other assets 98,000 27,631
------------ ------------
$ 82,442,388 $ 28,156,845
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 100,500 $ 117,109
Accrued payroll 615,873 428,212
Other accrued expenses 1,138,174 299,929
Deferred revenue 509,207 --
Due to licensor 417,004 370,000
Income taxes payable 56,000 90,000
------------ ------------
TOTAL CURRENT LIABILITIES 2,836,758 1,305,250
Deferred revenue 24,295,834 9,791,667
------------ ------------
27,132,592 11,096,917
------------ ------------
COMMITMENTS AND CONTINGENCIES (NOTE 11)
SHAREHOLDERS' EQUITY
Capital Stock
Authorized: 100,000,000 shares; 40,000,000 shares designated as common
stock, no par, and 60,000,000 shares issuable in series or classes.
Issued and outstanding: 13,730,890 (1999: 11,908,357) shares of common
stock, no par. 94,757,532 51,749,987
Additional paid-in capital 1,860,519 1,338,854
Accumulated deficit (42,487,349) (35,946,594)
Accumulated other comprehensive income 1,179,094 (82,319)
------------ ------------
55,309,796 17,059,928
------------ ------------
$ 82,442,388 $ 28,156,845
============ ============
See the accompanying Notes to the Consolidated Financial Statements.
F-2
50
DUSA PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
-----------------------
2000 1999 1998
---- ---- ----
REVENUES
Product sales $ 902,154 $ -- $ --
Research grant and milestone revenue 495,833 -- --
Research revenue earned under collaborative agreements 722,570 -- --
------------ ------------ -----------
TOTAL REVENUES 2,120,557 -- --
------------ ------------ -----------
OPERATING COSTS
Cost of product sales 1,104,664 -- --
Research and development 8,163,419 4,194,532 4,502,391
General and administrative 2,559,502 1,818,193 1,729,741
------------ ------------ -----------
TOTAL OPERATING COSTS 11,827,585 6,012,725 6,232,132
------------ ------------ -----------
LOSS FROM OPERATIONS (9,707,028) (6,012,725) (6,232,132)
------------ ------------ -----------
OTHER INCOME
Interest income 3,222,273 574,098 508,256
Gain on foreign currency exchange -- -- 6,928
------------ ------------ -----------
3,222,273 574,098 515,184
------------ ------------ -----------
LOSS BEFORE INCOME TAX EXPENSE (6,484,755) (5,438,627) (5,716,948)
Income tax expense 56,000 90,000 --
------------ ------------ -----------
NET LOSS $ (6,540,755) $ (5,528,627) $(5,716,948)
============ ============ ===========
BASIC AND DILUTED NET LOSS PER COMMON SHARE $ (.49) $ (.50) $ (.61)
============ ============ ===========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 13,285,472 11,061,016 9,365,950
============ ============ ===========
See the accompanying Notes to the Consolidated Financial Statements.
F-3
51
DUSA PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(a)
ACCUMULATED
COMMON STOCK ACCUMULATED
------------------------ ADDITIONAL OTHER
NUMBER OF PAID-IN ACCUMULATED COMPREHENSIVE
SHARES AMOUNT CAPITAL DEFICIT INCOME TOTAL
------ ------ ------- ------- ------ -----
BALANCE, DECEMBER 31, 1997 9,365,950 $36,746,993 $ -- $(24,701,019) $(26,623) $ 12,019,351
---------- ----------- ---------- ------------ -------- -----------
Comprehensive loss:
Net loss for period (5,716,948) (5,716,948)
Net unrealized gain on U.S. government 32,157 32,157
securities available for sale
Total comprehensive loss $ (5,684,791)
-----------
Stock based compensation 81,586 81,586
---------- ----------- ---------- ------------ -------- -----------
BALANCE, DECEMBER 31, 1998 9,365,950 $36,746,993 $ 81,586 $(30,417,967) $ 5,534 $ 6,416,146
---------- ----------- ---------- ------------ -------- -----------
Comprehensive loss:
Net loss for period (5,528,627) (5,528,627)
Net unrealized loss on U.S. government (87,853) (87,853)
securities available for sale
Total comprehensive loss $ (5,616,480)
-----------
Issuance of common stock for cash through
a private placement (net of offering 1,500,000 5,397,139 5,397,139
costs of $2,102,861)
Issuance of common stock to placement
agent in connection with the private 130,435 900,784 900,784
placement
Issuance of 163,043 warrants to placement
agent in connection with the private 905,094 905,094
placement
Issuance of additional common stock to
placement agent in connection with the 15,000 143,445 143,445
private placement
Issuance of additional 1,630.43 warrants
to placement agent in connection with 9,050 9,050
the private placement
Issuance of common stock in connection 340,458 5,208,333 5,208,333
with collaborative agreement
Exercises of options 398,922 2,565,333 2,565,333
Exercises of warrants 157,592 787,960 787,960
Stock based compensation 343,124 343,124
---------- ----------- ---------- ------------ -------- -----------
BALANCE, DECEMBER 31, 1999 11,908,357 $51,749,987 $1,338,854 $(35,946,594) $(82,319) $17,059,928
---------- ----------- ---------- ------------ -------- -----------
F-4
52
DUSA PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (CONTINUED)
COMMON STOCK ACCUMULATED
------------ ADDITIONAL OTHER
NUMBER OF PAID-IN ACCUMULATED COMPREHENSIVE
SHARES AMOUNT CAPITAL DEFICIT INCOME TOTAL
------ ------ ------- ------- ------ -----
BALANCE, DECEMBER 31, 1999 11,908,357 $51,749,987 $1,338,854 $(35,946,594) $ (82,319) $17,059,928
---------- ----------- ---------- ------------ ---------- -----------
Comprehensive loss:
Net loss for period (6,540,755) (6,540,755)
Net unrealized gain on U.S.
government securities available for
sale 1,261,413 1,261,413
-----------
Total comprehensive loss $(5,279,342)
Issuance of common stock for cash (net 1,500,000 40,698,286 40,698,286
of offering costs of $2,051,714)
Issuance of common stock in connection 26,667 750,000 750,000
with supply agreement
Issuance of common stock to consultant 2,500 64,533 64,533
Exercises of options 248,350 1,264,646 1,264,646
Exercises of warrants 45,016 230,080 230,080
Stock based compensation 521,665 521,665
---------- ----------- ---------- ------------ ---------- -----------
BALANCE, DECEMBER 31, 2000 13,730,890 $94,757,532 $1,860,519 $(42,487,349) $1,179,094 $55,309,796
========== =========== ========== ============ ========== ===========
See the accompanying Notes to the Consolidated Financial Statements.
F-5
53
DUSA PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
-----------------------
2000 1999 1998
---- ---- ----
CASH FLOWS USED IN OPERATING ACTIVITIES
Net loss $ (6,540,755) $ (5,528,627) $ (5,716,948)
Adjustments to reconcile net loss to net cash used in operating
activities
Amortization of premiums and accretion of discounts on U.S. government (318,647) (166,500) 180,074
securities available for sale and investment securities, net
Depreciation and amortization expense 410,473 102,895 67,513
Amortization of deferred revenue (495,833) -- --
Gain on foreign currency exchange -- -- (6,928)
Stock based compensation to non-employees 521,665 343,124 81,586
Issue of shares of common stock and warrants to non-employees 64,533 152,495 --
Changes in other assets and liabilities impacting cash flows from
operations:
Accounts receivable (914,959) -- --
Receivable under co-development program (722,570) -- --
Inventory (1,331,966) -- --
Accrued interest receivable (723,463) (247,092) 68,263
Other current assets (429,407) (24,840) (23,842)
Accounts payable (16,609) (149,628) (478,337)
Income taxes payable (34,000) 90,000 --
Due to licensor 47,004 370,000 --
Accrued payroll and other accrued expenses 1,025,906 270,349 140,969
Deferred revenue 15,509,207 9,791,667 --
----------- ----------- ---------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 6,050,579 5,003,843 (5,687,650)
----------- ----------- ---------
CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES
Purchases of United States government securities (50,506,441) (28,481,940) (12,297,417)
Proceeds from maturing United States government securities 13,900,000 14,200,000 15,375,000
Purchases of property and equipment (1,553,350) (362,779) (93,816)
Deposits on equipment (70,369) 94,924 (122,555)
Payment to restructure supplier contract (250,000) -- --
Payments to licensor (350,936) (403,830) --
----------- ----------- ---------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES (38,831,096) (14,953,625) 2,861,212
----------- ----------- ---------
See the accompanying Notes to the Consolidated Financial Statements.
F-6
54
DUSA PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEAR ENDED DECEMBER 31,
-----------------------
2000 1999 1998
---- ---- ----
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES
Issuance of common stock and underwriters' options, net of offering
costs of $2,051,714 and $2,102,861 for 2000 and 1999, respectively 40,698,286 12,411,350 --
Proceeds from exercise of options and warrants 1,494,727 3,353,293 --
----------- ----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 42,193,013 15,764,643 --
----------- ----------- -----------
EFFECT OF EXCHANGE RATES ON CASH -- -- 6,928
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH 9,412,496 5,814,861 (2,819,510)
CASH AT BEGINNING OF PERIOD 7,028,618 1,213,757 4,033,267
----------- ----------- -----------
CASH AT END OF PERIOD $16,441,114 $ 7,028,618 $ 1,213,757
=========== =========== ===========
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION
Issuance of common stock and warrants as compensation to placement
agent $ 1,805,878
===========
Income tax payments $ 140,724
===========
During 2000, in connection with the amendment of a supply agreement, the
Company issued 26,666.66 unregistered shares of DUSA's Common Stock, at a fair
market value of $750,000, to Sochinaz SA (See Note 11.)
See the accompanying Notes to the Consolidated Financial Statements.
F-7
55
DUSA PHARMACEUTICALS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS
ENDED DECEMBER 31, 2000, 1999, AND 1998
1) NATURE OF BUSINESS
DUSA Pharmaceuticals, Inc. (the "Company" or "DUSA") was established to
develop prescription pharmaceutical products for all markets, primarily
in the field of photodynamic therapy ("PDT") and photodetection ("PD"),
which combines the use of a pharmaceutical product with exposure to
light to induce a therapeutic or detection effect. The Company was
classified as a development stage enterprise from its inception and has
concentrated its initial efforts upon seeking regulatory approval in
the United States for topical and/or local uses of aminolevulinic acid
HCl ("Levulan(R)") PDT/PD. During 1998, the Company filed a New Drug
Application (NDA) with the Food and Drug Administration (FDA) for use
of the Levulan(R) Kerastick(R) 20% Topical Solution with photodynamic
therapy for non-hyperkeratotic actinic keratoses (AKs) of the face or
scalp. On September 26, 2000, the Company received marketing approval
from the United States Food and Drug Administration (FDA) for its
commercial BLU-U(TM) brand light device. Effective September 28, 2000,
the Company launched its first commercial products, Levulan(R)
Kerastick(R) 20% Topical Solution and the BLU-U(TM) brand light source
for this indication in cooperation with Berlex Laboratories, (Berlex),
the United States affiliate of Schering AG. As such, the Company is no
longer classified as a development stage enterprise and, accordingly,
such disclosures have been eliminated from these financial statements.
2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a) Principles of Consolidation - The Company's consolidated financial
statements include the accounts of its subsidiary, DUSA Pharmaceuticals
New York, Inc., which was formed on March 3, 1994 to be the research
and development center for the Company. All significant 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 of America. 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) Reclassifications - Certain prior year amounts have been reclassified
to conform to the current year presentation. Such reclassifications had
no impact on the net loss or shareholders' equity for any period
presented.
F-8
56
DUSA PHARMACEUTICALS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS
ENDED DECEMBER 31, 2000, 1999, AND 1998
d) Cash Equivalents - Cash equivalents include short-term highly liquid
investments purchased with remaining maturities of 90 days or less.
e) U.S. Government Securities Available for Sale - The Company follows the
provisions of Statement of Financial Accounting Standards ("SFAS") No.
115, "Accounting for Certain Investments in Debt and Equity
Securities." This Statement requires the Company to record securities
which management has classified as available for sale at fair market
value and to record unrealized gains and losses on securities available
for sale as a separate component of shareholders' equity until
realized.
As the Company's management expects to sell a portion of its U.S.
government securities in the next fiscal year in order to meet its
working capital requirements, it has classified them as current assets.
The premiums paid and discounts allowed on the purchase of the
securities are amortized into interest income over the life of the
securities using the level-yield method.
f) 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 designed for such use.
Inventory related to commercial light sources, if the unit is leased
through a third-party, is reflected in other current assets until such
time as satisfaction of all conditions and terms of the sale of the
light source have been met, and when the customer's right of return
expires, normally after one year. Such inventory reflected in other
current assets at December 31, 2000 was $261,923.
g) Property and Equipment - Property and equipment are carried at cost
less accumulated depreciation. 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) Deferred Charges and Royalty - Deferred charges and royalty include
costs paid in advance to third parties under various agreements and are
being amortized on a straight-line basis over their expected terms (4 -
12 years).
i) Impairment of Long-lived Assets - The Company reviews its long-lived
assets for impairment when events or changes in circumstances indicate
that the carrying amount of a long-lived asset may not be recoverable.
Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows
expected to be generated by the asset. If such assets are considered to
be impaired, the
F-9
57
DUSA PHARMACEUTICALS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS
ENDED DECEMBER 31, 2000, 1999, AND 1998
impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceeds the fair value of the assets.
Assets to be disposed of are reported at the lower of the carrying
amount of fair value less cost to sell.
j) Revenue Recognition - Revenues on product sales of the drug applicator
are recognized upon shipment. Revenue on the sale of commercial light
sources is deferred, if the unit is leased through a third-party, and
recognized in income upon satisfaction of all conditions and terms of
the sale to the Company's third-party purchaser/lessor and when the
lessee/customer's right of return expires, normally after one year.
Research revenue earned under collaborative agreements consists of
non-refundable research and development funding from a corporate
partner. Research revenue generally compensates the Company for a
portion of agreed-upon research and development expenses and is
recognized as revenue at the time the research and development
activities are performed under the terms of the related agreements and
when no future performance obligations exist. Milestone or other
up-front payments have been recorded as deferred revenue upon receipt
and are recognized as income on a straight-line basis over the term of
the Company's agreement with Schering AG.
Deferred revenue associated with the Company's milestone payments,
unrestricted research grants, and the sale of commercial light sources
is reflected as follows:
2000 1999
---- ----
Milestone and unrestricted grant payments $24,295,834 $9,791,667
Sale of commercial light sources 509,207 --
----------- ----------
$24,805,041 $9,791,667
=========== ==========
k) 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.
l) Income Taxes - The Company follows the provisions of SFAS No. 109,
"Accounting for Income Taxes", which requires the Company to compute
deferred income taxes based on the difference between the financial
statement and tax basis of assets and liabilities using tax rates in
effect in the years in which these differences are expected to reverse
(Note 7).
m) Basic and Diluted Net Loss Per Share - The Company follows the
provisions of SFAS No. 128, "Earnings Per Share". Basic net loss per
common share is based on 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 the period,
as the effect would be antidilutive. For the years ended December 31,
2000, 1999, and 1998, stock options and warrants totaling
F-10
58
DUSA PHARMACEUTICALS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS
ENDED DECEMBER 31, 2000, 1999, AND 1998
approximately 2,340,000, 2,120,000, and 1,750,000, respectively, have
been excluded from the computation of net loss per share.
n) Stock-based compensation - SFAS No. 123, "Accounting for Stock-Based
Compensation," addresses the financial accounting and reporting
standards for stock or other equity-based compensation arrangements.
The Company has 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 No. 25 and to provide
disclosures based on the fair value method in the notes to the
financial statements as permitted by SFAS No. 123. 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 date of grant. The resulting
compensation cost is recognized and charged to operations over the
service period, which is generally the vesting period.
o) Comprehensive Income - The Company has reported comprehensive income
(loss) and its components as part of its statement of shareholders'
equity. The only element of comprehensive income that is recorded by
the Company relates to unrealized gains or losses on securities
available for sale.
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.
q) Fair Value of Financial Instruments - The carrying value of the
Company's financial assets and liabilities approximate their fair
values due to their short-term nature. Marketable securities 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 principle. The Company is subject to credit risk through
short-term investments and mitigates this risk by investing in United
States government securities. To date, substantially all of the
Company's revenues have been earned from a single collaborator.
s) Recently Issued Accounting Pronouncements - In December 1999, the staff
of the Securities Exchange Commission (SEC) issued Staff Accounting
Bulletin No. 101 (SAB 101), "Revenue Recognition in Financial
Statements". SAB 101 provides guidance related
F-11
59
DUSA PHARMACEUTICALS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS
ENDED DECEMBER 31, 2000, 1999, AND 1998
to revenue recognition based on interpretations and practices followed
by the SEC and summarizes certain of the SEC's view in applying
generally accepted accounting principles (GAAP) to revenue recognition
in financial statements. The Company's adoption of SAB 101 as of
January 1, 2000 did not have any effect on the its financial
statements.
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities."
The new standard, which must be adopted on January 1, 2001, requires
that all companies record derivatives on the balance sheet as assets or
liabilities, measured at fair value. Gains or losses resulting from
changes in the values of those derivatives would be accounted for
depending on the use of the derivative and whether it qualifies for
hedge accounting. The adoption of SFAS No. 133 will not have a
significant impact on the financial position or results of operations
of the Company.
3) OTHER CURRENT ASSETS
Other current assets consist of the following at December 31, 2000 and
1999:
2000 1999
---- ----
Prepaid expenses and deposits $293,069 $132,833
Commercial light sources under lease 261,923 --
Other current assets 7,248 --
-------- --------
$562,240 $132,833
======== ========
4) INVENTORY
Inventory commenced with the product launch in September 2000 and
consists of the following at December 31, 2000:
Finished goods $1,151,537
Raw materials 175,344
Purchased parts and subassemblies 5,085
----------
$1,331,966
==========
There was no inventory at December 31, 1999.
F-12
60
DUSA PHARMACEUTICALS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS
ENDED DECEMBER 31, 2000, 1999, AND 1998
5) U.S. GOVERNMENT SECURITIES
Securities available for sale consist of United States Treasury Bills,
Notes, and other United States government agencies with yields ranging
from 4.67% to 7.20% and maturity dates ranging from January 12, 2001 to
August 15, 2005. As of December 31, 2000 and 1999, the fair market
value and cost basis on such securities were as follows:
2000 1999
---- ----
Fair market value $58,055,463 $19,868,962
Cost basis 56,876,369 19,951,281
Net unrealized gain (loss) on such securities for the year ended
December 31, 2000 and 1999 was $1,261,413 and ($87,853), respectively,
and has been recorded as part of shareholders' equity as a component of
accumulated other comprehensive income (loss).
6) PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at December 31, 2000
and 1999:
USEFUL LIVES (YEARS) 2000 1999
-------------------- ---- ----
Computer equipment 3 $ 564,288 $282,009
Furniture, fixtures and equipment 5 382,685 144,595
Manufacturing equipment 5 822,872 267,786
Leasehold improvements Term of lease 485,809 8,568
2,255,654 702,958
---------- --------
Accumulated depreciation and amortization (556,124) (274,608)
---------- --------
$1,699,530 $428,350
========== ========
F-13
61
DUSA PHARMACEUTICALS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS
ENDED DECEMBER 31, 2000, 1999, AND 1998
7) INCOME TAXES
The tax effect of significant temporary differences representing
deferred tax assets is as follows:
2000 1999
---- ----
DEFERRED TAX ASSET
Deferred revenue $ 10,178,889 $ 3,916,667
Intangible assets 653,318 507,515
Research and development tax credits carryforwards 928,131 875,813
Minimum tax credit carryforward -- 90,000
Operating loss carryforwards 5,911,149 9,702,032
Capital loss carryforwards 165,240 162,766
Fixed assets 59,668 10,656
------------- -------------
Net deferred tax assets 17,896,395 15,265,449
Valuation allowance (17,896,395) (15,265,449)
------------- -------------
$ -- $ --
============= =============
Management cannot assess the likelihood that the future tax benefits
will be realized because the Company was a development stage
corporation from its inception through its product launch in September
2000 and has cumulative net losses. Accordingly, the net tax benefit
does not satisfy the recognition criteria set forth in SFAS No. 109
and, therefore, a valuation allowance has been provided.
As of December 31, 2000, the Company has net operating loss
carryforwards for tax purposes of approximately $15,753,000 and
research and development tax credits of approximately $928,000 both of
which, if not utilized, will expire for Federal tax purposes as
follows:
RESEARCH AND
OPERATING LOSS DEVELOPMENT TAX
CARRYFORWARDS CREDITS
------------- -------
2006 $ -- $ 6,731
2007 -- 57,111
2008 -- 65,795
2009 -- 83,961
2010 -- 43,825
2011 3,133,940 102,481
2012 6,840,914 235,314
2018 5,738,119 144,702
F-14
62
DUSA PHARMACEUTICALS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS
ENDED DECEMBER 31, 2000, 1999, AND 1998
2019 40,082 80,724
2020 -- 107,487
----------- --------
$15,753,055 $928,131
=========== ========
A reconciliation between the effective tax rate and the statutory
federal rate follows:
2000 1999
---- ----
$ % $ %
- - - -
Income tax expense (benefit) at statutory rate (2,205,322) (34.0) (1,849,134) (34.0)
State taxes (424,614) (6.5) (326,318) (6.0)
(Increase) decrease in tax credit carryforwards 37,682 0.5 (263,788) (4.8)
Increase in valuation allowance 2,630,946 40.6 2,461,854 45.3
Other 17,308 .3 67,386 1.2
---------- ----- ---------- -----
56,000 .9 90,000 1.7
========== ===== ========== =====
Income tax expense consists of:
Current 56,000 -- 90,000 --
Deferred -- -- -- --
---------- ----------
56,000 -- 90,000 --
========== ==========
8) SHAREHOLDERS' EQUITY
On January 15, 1999, the Company issued 1,500,000 shares of its common
stock at $5.00 per share in a private placement pursuant to Regulation
D of the Securities Act of 1933. In connection with the placement,
130,435 shares of common stock were issued as commission and
non-accountable expense allowance to the placement agent. Additional
compensation was paid to the placement agent in the form of 163,043
five-year warrants, each of which are exercisable into one share of
common stock at $5.00 per share. These shares and warrants have been
valued at $1,805,878 and have been recorded as stock offering costs.
Since the Form S-3 Registration Statement which was filed to register
the shares in the private placement was not effective as of June 1,
1999, the Company was obligated to issue and did issue 15,000 shares of
common stock to the investors and 1,630.43 additional warrants to the
placement agent, i.e. 1% of the shares issued to the investors and 1%
of the warrants issued to placement agent. These warrants have the same
terms and conditions as the original placement agent warrants. These
shares and warrants have been valued at $152,495 and both have been
recorded as part of general and administration costs in the
Consolidated Statements of Operations.
F-15
63
DUSA PHARMACEUTICALS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS
ENDED DECEMBER 31, 2000, 1999, AND 1998
On March 22, 2000, the Company issued 1,500,000 shares of its common
stock in a private placement pursuant to Regulation D of the Securities
Act of 1933. The Company received gross proceeds of $42,750,000. The
offering costs associated with the placement were $2,051,714. The
shares were registered on a Form S-3 Registration Statement which
became effective on March 22, 2000.
In June 2000, the Company amended its Supply Agreement with Sochinaz
SA, the manufacturer of the bulk drug ingredient used in Levulan(R). As
partial consideration for the amendment, DUSA issued 26,666.66
unregistered shares of DUSA's Common Stock, at a fair market value of
$750,000 (Note 11).
On September 18, 2000, the Company granted 2,500 shares of unregistered
common stock, without par value, to an outside consultant for
compensation of services. These shares were valued at approximately
$65,000 and recorded as part of general and administration costs in the
Consolidated Statements of Operations.
9) STOCK OPTIONS AND WARRANTS
a) 1996 Omnibus Plan - On April 11, 1996, the 1996 Omnibus Plan
("Omnibus Plan") was adopted by the Board of Directors and approved by
the shareholders on June 6, 1996. The Omnibus Plan supercedes the
Company's previously adopted 1994 Restricted Stock Option Plan and the
Incentive Stock Option Plan adopted in 1991. No further grants will be
made under the superceded plans. The Omnibus Plan provides for the
granting of awards to purchase up to a maximum of 15% of the Company's
common stock outstanding. 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
("SAR"), restricted stock options ("RSO") or other securities
determined by the Company, to directors, employees and consultants. To
date, the Company has made awards of NQSOs, ISOs, and restricted stock
grants under the Omnibus Plan.
Non-qualified stock options - All the non-qualified stock options
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. The Company has granted each
individual who agrees to become a director 15,000 NQSO to purchase
common stock of the Company. These shares vest annually over a
four-year period. Thereafter, each director reelected at an Annual
Meeting of Shareholders will automatically receive an additional 10,000
NQSO on June 30 of each year. The exercise price of such options is the
closing stock market price on the date of the grant. All of the stock
options granted
F-16
64
DUSA PHARMACEUTICALS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS
ENDED DECEMBER 31, 2000, 1999, AND 1998
automatically to directors of the Company subsequent to 1999
immediately vests on the date of the grant.
Incentive stock options - Incentive stock options granted under the
Omnibus Plan and the superceded 1991 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 or engagement.
The following table summarizes information about all stock options
outstanding at December 31, 2000:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------- -------------------
NUMBER WEIGHTED NUMBER WEIGHTED
OUTSTANDING AT WEIGHTED AVERAGE AVERAGE EXERCISABLE AVERAGE
DECEMBER 31, REMAINING EXERCISE AT DECEMBER EXERCISABLE
RANGE OF EXERCISE PRICE 2000 CONTRACTUAL LIFE PRICE 31, 2000 PRICE
----------------------- ---- ---------------- ----- -------- -----
$3.25 to 7.75 1,156,950 5.50 years $6.67 888,763 $6.65
8.38 to 16.94 444,500 7.18 years 12.11 253,750 10.67
26.19 to 31.00 539,000 9.33 years 29.45 52,500 26.21
--------- ---------
2,140,450 6.81 years 13.54 1,195,013 8.36
========= =========
Stock option plans activity during the years ended December 31, 2000,
1999 and 1998 were as follows:
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
2000 PRICE 1999 PRICE 1998 PRICE
---- ----- ---- ----- ---- -----
Options outstanding, beginning of year 1,757,800 $ 7.58 1,375,300 $ 7.27 1,283,300 $7.03
Options granted 641,500 28.44 465,000 8.30 202,000 8.66
Options exercised (188,350) 5.57 (72,500) 6.66 -- --
Options cancelled (70,500) 16.38 (10,000) 5.25 (110,000) 7.02
--------- ------ --------- --------- --------- -----
Options outstanding, end of year 2,140,450 $13.54 1,757,800 $ 7.58 1,375,300 $7.27
--------- ------ --------- --------- --------- -----
Options exercisable, end of year 1,195,013 $ 8.36 1,007,800 $ 7.06 937,550 $7.09
========= ====== ========= ========= ========= =====
Also during the years ended December 31, 2000 and 1999, underwriters'
purchase options of 60,000 and 326,422, respectively, were exercised.
F-17
65
DUSA PHARMACEUTICALS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS
ENDED DECEMBER 31, 2000, 1999, AND 1998
Options which were exercised during these years were exercised at per
share prices ranging from $3.25 to $11.50 during 2000, and at per share
prices ranging from $3.25 to $11.25 during 1999. No options were
exercised in fiscal 1998.
Options that were granted during 2000 have exercise prices ranging from
$16.88 to $31.00 per share. Those granted during 1999 have exercise
prices ranging from $6.375 to $20.50 per share. During 1998, options
were granted with exercise prices ranging from $3.25 to $11.50 per
share.
On August 16, 2000, the Company issued 2,500 fully-vested options to an
outside consultant for compensation of services. These options were
valued at approximately $26,000 and recorded as part of general and
administration costs in the Consolidated Statements of Operations.
As discussed in Note 11a, on October 21, 1997, the Company issued
85,000 options to PARTEQ, 26,511 of which have been assigned to certain
PARTEQ researchers. These options were valued at approximately
$496,000, $259,000, and $82,000 in 2000, 1999, and 1998, respectively
and recorded as part of research and development costs in the
Consolidated Statements of Operations.
Also as discussed in Note 11a, on June 23, 1999, the Company issued
10,000 options to PARTEQ, 3,166 of which have been assigned to certain
PARTEQ researchers. These options were valued at approximately $84,000
and recorded as part of research and development costs in the
Consolidated Statements of Operations.
As described in Note 2, the Company uses 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 loss per share would have been reported
as follows:
2000 1999 1998
---- ---- ----
NET LOSS
As reported ($6,540,755) ($5,528,627) ($5,716,948)
Proforma ($12,147,732) ($8,307,285) ($6,963,522)
BASIC AND DILUTED NET LOSS PER COMMON SHARE
As reported ($0.49) ($0.50) ($0.61)
Proforma ($0.91) ($0.75) ($0.74)
F-18
66
DUSA PHARMACEUTICALS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS
ENDED DECEMBER 31, 2000, 1999, AND 1998
The fair value of the options at the date of grant was estimated using
the Black-Scholes model with the following weighted average
assumptions:
2000 1999 1998
---- ---- ----
Expected life (years) 10 10 10
Risk free interest rate 5.76% 6.22% 5.57%
Expected volatility 74.55% 80.70% 68.94%
Dividend yield -- -- --
Using these assumptions, the weighted-average fair value per option for
the years ended December 31, 2000, 1999, and 1998, was $23.07, $7.50
and $6.83, respectively. As SFAS No. 123 has not been applied to
options granted prior to January 1, 1995, the resulting proforma
compensation cost may not be representative of that to be expected in
future years.
b) Warrants - In consideration of efforts related to the negotiation
and execution of various agreements including the License Agreement,
the Company issued warrants to purchase 350,000 shares of common stock
of the Company at CDN $6.79 ($4.53 at December 31, 2000) per share to
the Chief Executive Officer of the Company on January 17, 1992. These
warrants expire on January 28, 2002 and were all outstanding as of
December 31, 2000.
In connection with an agreement dated October 6, 1993, the Company
issued its investor relations firm a warrant to purchase up to 50,000
shares of the authorized stock of the Company at $6 per share. The
warrant expires on October 14, 2001. During 2000, the investor
relations firm exercised 25,000 shares underlying the warrant.
In connection with an agreement with its international investor
relations advisor, in 1995 the Company agreed to issue warrants for
20,000 shares of the Company's common stock, exercisable at a price of
$4.00 per share, a premium from the closing stock market price of the
Company's common stock on the day immediately preceding the date of the
grant. During 2000, all 20,000 warrants were exercised.
As discussed in Note 8, in 1999 the Company issued 164,673 warrants
with an exercise price of $5.00 per share. As of December 31, 2000, 449
of the warrants were outstanding and expire in 2004.
F-19
67
DUSA PHARMACEUTICALS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS
ENDED DECEMBER 31, 2000, 1999, AND 1998
10) COLLABORATION AGREEMENT
In November 1999, DUSA signed a dermatology marketing, development and
supply agreement with Schering AG, a German corporation. DUSA granted
to Schering AG the right to promote, market, sell and distribute the
Levulan(R) Kerastick(R) 20% Topical Solution with PDT for
non-hyperkeratotic AKs of the face or scalp on a worldwide basis (with
the exception of Canada). Schering AG and DUSA intend to co-develop and
commercialize additional ALA products for other dermatology disorders.
Under the agreement, Schering AG has the exclusive right to market,
promote and sell the products that are developed in the co-development
program. The co-development program reflects agreed upon dermatology
research and development projects with total spending, subject to the
agreement of the Development Committee, of $4,500,000 annually for 2000
and 2001. In accordance with this agreement, Schering AG has agreed to
fund two-thirds, up to $3,000,000, of the program. Due to timing of
the start of clinical trials, the reimbursement for 2000 was
approximately $723,000.
In December 1999, under the terms of this agreement, DUSA received
$15,000,000 million reflecting an $8,750,000 cash milestone payment and
$6,250,000 for which a Schering AG affiliate received 340,458 shares of
DUSA's common stock. In December 2000, the Company received an
additional $15,000,000 from Schering AG that reflected an unrestricted
research grant of $8,000,000 for future research and development
support to be used at DUSA's discretion, and a milestone payment of
$7,000,000 based on receiving FDA approval of the commercial model of
the BLU-U(TM) and the first commercial sale of a Levulan(R)
Kerastick(R). This is the final payment due from Schering AG related to
DUSA's initial products for the treatment of non-hyperkeratotic actinic
keratoses (AK's) of the face or scalp. The Company will continue to
receive royalties and supply fees from Schering AG based upon the sales
levels of the Kerastick(R). The issuance of shares to the Schering AG
affiliate was made at a premium of 20%, or $1,041,667, while the
milestone payments of $15,750,000 and the $8,000,000 for future
research and development support have been recorded as deferred revenue
and will be recognized over the term of the agreement.
The marketing, development and supply agreement terminates on a
product-by-product basis in each country in the territory on the later
of (i) 12-1/2 years after the first commercial sale of a respective
product in such country, or (ii) the expiration of patents pertaining
to the manufacture, sale or use of such product in such country. It
terminates in its entirety upon the expiration of the agreement with
respect to all products in all countries covered by the agreement.
Subject to various terms and conditions, the parties may terminate the
agreement earlier.
DUSA will be responsible for the manufacture and supply of the
Levulan(R) Kerastick(R) to Schering AG for resale to the medical
community. Schering AG will pay DUSA a supply
F-20
68
DUSA PHARMACEUTICALS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS
ENDED DECEMBER 31, 2000, 1999, AND 1998
price for products, as well as a royalty on product sales. Schering AG
has also agreed to promote the BLU-U(TM), which DUSA leases, through an
independent leasing company, to dermatologists, medical facilities and
other physicians. DUSA will maintain and repair the BLU-U(TM) units
under lease/maintenance agreements with the end-users. Under the terms
of a Guaranty, Schering AG has agreed to guarantee the lease payments
by each lessee up to the cost to DUSA of the BLU-U(TM) from DUSA's
third-party manufacturer. The Guaranty will expire on the second
anniversary of the first delivery to an end-user of a BLU-U(TM). In
addition, Schering AG has agreed to provide DUSA with an interest-free
line of credit for up to $1,000,000 to finance inventory of BLU-U(TM)
units. Under the terms of a Secured Line of Credit Promissory Note and
Security Agreement, repayment is secured by the BLU-U(TM) units. The
maturity date of the Note is twelve months following the date of the
first advance under the Note. No amounts have been advanced as of
December 31, 2000.
11) COMMITMENTS AND CONTINGENCIES
a) PARTEQ Agreements - 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.
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, such as Schering AG, 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, 2000,
1999 and 1998, the Company incurred a liability of $68,000, $70,000,
and $69,000, respectively, based on minimum royalty requirements. Going
forward, annual minimum royalties to PARTEQ on sales of products must
total at least CDN $100,000 ($66,667 as of December 31, 2000).
The Company is also obligated to pay 5% of any lump sum sublicense fees
paid to the Company, such as milestone payments, excluding amounts
designated by the sublicensee for future research and development
efforts.
In October 1997, the Company and PARTEQ revised the License Agreement
and the parties signed an Amended and Restated License Agreement on
March 11, 1998. PARTEQ received options on October 27, 1997 to purchase
85,000 shares of common stock of the
F-21
69
DUSA PHARMACEUTICALS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS
ENDED DECEMBER 31, 2000, 1999, AND 1998
Company at an exercise price of $10.875 per share which will vest over
four (4) years on the anniversary date of the granting of the option.
PARTEQ has assigned 26,511 of these options to certain of its
researchers. The value of the options included in the Consolidated
Statements of Operations as part of research and development costs was
$496,000, $259,000 and $82,000 for 2000, 1999 & 1998, respectively.
The Company entered into an extension of the Research Agreement
effective April 1, 1999 with PARTEQ. As partial consideration, the
Company granted options to PARTEQ to purchase 10,000 shares of common
stock of the Company at an exercise price of $9.25 per share. PARTEQ
has assigned 3,166 of these options to certain of its researchers. The
options have a term of 10 years and have been valued at $84,000 and
recorded as part of research and development costs in the Consolidated
Statements of Operations in 1999. The Company has also provided PARTEQ
with additional funding support of $29,000 and $50,000 in 2000 and
1999, respectively. The cash funding has been included in the
Consolidated Statements of Operations as part of research and
development costs.
b) Lease Agreements - The Company has entered into lease commitments for
office space rental in Valhalla, New York, in Wilmington, Massachusetts
and in Toronto, Ontario including a new lease commitment for additional
office space in its Wilmington headquarters. Future minimum lease
payments related to these agreements for years subsequent to December
31, 2000 are as follows:
MINIMUM LEASE
PAYMENTS
--------
2001 $ 463,000
2002 454,000
2003 331,000
2004 258,000
2005 211,000
Beyond 2005 18,000
----------
$1,735,000
==========
Rent paid under these operating leases was approximately $297,000,
$240,000, and $151,000 for the years ended December 31, 2000, 1999, and
1998, respectively.
c) Light Source Supply - Effective November 5, 1998, the Company entered
into a purchase and supply agreement with National Biological
Corporation (NBC), under which the Company has agreed to order all of
its supply of certain light sources from NBC. The agreement has a
ten-year term, subject to earlier termination for breach or insolvency
or for convenience. In order to meet the production scheduling needs of
NBC, DUSA has agreed to prepay for raw material costs in the amount of
$400,000 associated with our current order.
F-22
70
DUSA PHARMACEUTICALS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS
ENDED DECEMBER 31, 2000, 1999, AND 1998
This amount will be credited against the final purchase price which
will be due on delivery of finished units at the rate of $1,000 per
unit. In addition, we agreed that if we do not order a certain number
of BLU-U(TM) brand units for delivery in 2002, we will pay $100,000 to
our manufacturer to cover certain overhead costs.
d) Research Agreements - The Company has entered into a series of
agreements for research projects and clinical studies. As of December
31, 2000, future payments to be made pursuant to these agreements,
under certain terms and conditions, totaled approximately $483,000,
$399,000 and $112,000 for 2001, 2002 and 2003, respectively.
e) North Safety Products Inc. - In September 1999, DUSA entered in a
purchase and supply agreement with North Safety Products, Inc. (North)
for the manufacture and supply of the Kerastick(R) brand applicator.
The Company has agreed to purchase from North a certain portion of its
total commercial requirements for supply of the Kerastick(R) for sale
in the United States and Canada. Prices for the product are based on
the quantities of Kerastick(R) ordered, which are subject to change
depending on various product costs and competitive market conditions.
The agreement has a five-year term, which may be extended for
additional one-year periods. North has the right to terminate the
agreement earlier if certain minimum levels of product orders are not
reached. Similarly, DUSA can terminate the agreement early for stated
breaches of the agreement. The Company has committed to reimburse North
for the construction of certain facilities at North's manufacturing
facilities in the amount of $311,000. In early 2001, we tentatively
agreed to compensate North on an interim basis for certain overhead
expenses associated with the manufacture of the Kerastick(R) if our
orders fall below certain levels on an annual basis.
f) Supply Agreement Modification - In June 2000, the Company amended its
Supply Agreement with Sochinaz SA, the manufacturer of the bulk active
drug ingredient used in Levulan(R). The amendment grants an option to
DUSA to extend the term of the Supply Agreement for an additional three
years to December 3, 2007. As consideration for the amendment, DUSA
agreed to reimburse Sochinaz SA for a portion of its costs to bring its
manufacturing facilities in Switzerland into compliance with the FDA's
cGMPs. DUSA paid $250,000 in cash and issued 26,666.66 unregistered
shares of DUSA's Common Stock, at a fair market value of $750,000. The
$1,000,000 has been reported as deferred charges and is recognized in
cost of goods sold on a straight-line basis over the original term of
the contract.
12) OTHER AGREEMENT
Third-party Leasing Company - In September 2000, the Company engaged a
medical device leasing company to complete the leasing transactions,
including coordinating payment plans
F-23
71
DUSA PHARMACEUTICALS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS
ENDED DECEMBER 31, 2000, 1999, AND 1998
with the physicians, for its BLU-U(TM) brand light device. The Company
will sell the BLU-U(TM)'s to the leasing company, and will be paid for
the units by the leasing company shortly after installation in the
physician's offices. However, as physicians have the right to cancel
their leases after one year, such revenues will be deferred until their
right to cancel has expired. In the event a physician does cancel a
lease, the Company has agreed to repurchase the units at an agreed upon
price.
13) RELATED PARTY TRANSACTIONS
The Company's Vice President of Business Development and Vice President
of Technology are principal shareholders of Lumenetics, Inc., the
Company's former light device consultants. During 2000 and 1999, the
Company paid $2,000 and $46,000, respectively, for certain equipment
leased under operating leases from Lumenetics and also reimbursed
Lumenetics for office space and related expenses totaling approximately
$146,000. On February 26, 2001, the Company purchased such leased
equipment for $52,000.
The Company also paid legal fees and expenses of $382,000 in 2000,
$395,000 in 1999, and $183,550 in 1998 to Lane and Mantell, a
professional corporation in which the Company's secretary was a
principal.
F-24
72
EXHIBIT INDEX
3(a) 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(b) By-laws of the Registrant, filed as Exhibit 3(ii) to the Registrant's
Quarterly Report on Form 10-Q for the fiscal quarter ended September
30, 1997, and are incorporated herein by reference
4(a) Common Stock specimen, filed as Exhibit 4.1 to the Registrant's
Quarterly Report on Form 10-Q for the fiscal quarter ended September
30, 1997, and are 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
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 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(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
73
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
hereby 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 and Rule 406 of the Securities
Act of 1933, 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 Exhibit 1 to Registrant's
Schedule 14A definitive Proxy Statement dated April 27, 1998, 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
and Rule 406 of the Securities Act of 1933, and is incorporated herein
by reference
10(j) Marketing Development and Supply Agreement between the Company and
Schering AG dated November 22, 1999, filed as Exhibit 10.1 to the
Registrant's Current Report on Form 8-K dated November 22, 1999,
74
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, and is incorporated herein by reference
10(k) Common Stock Purchase Agreement between the Company and Schering Berlin
Venture Corporation dated as of November 22, 1999, filed as Exhibit
10.2 to the Registrant's Current Report on Form 8-K dated November 22,
1999, portions of which have been omitted pursuant to a request for
confidential treatment pursuant to Rule 24b of the Securities Exchange
Act of 1934, and is incorporated herein by reference
10(l) Light Source Agreement between the Company and Schering AG dated as of
November 22, 1999, filed as Exhibit 10.3 to the Registrant's Current
Report on Form 8-K dated November 22, 1999, portions of which have been
omitted pursuant to a request for confidential treatment pursuant to
Rule 24b of the Securities Exchange Act of 1934, and is incorporated
herein by reference
10(m) Guaranty dated as of November 22, 1999 by Schering AG in favor of the
Company, filed as Exhibit 10.4 to the Registrant's Current Report on
Form 8-K dated November 22, 1999, portions of which have been omitted
pursuant to a request for confidential treatment pursuant to Rule 24b
of the Securities Exchange Act of 1934, and is incorporated herein by
reference
10(n) Secured Line of Credit Promissory Note dated November 22, 1999 with the
Company as payee and Schering AG as Holder filed as Exhibit 10.5 to the
Registrant's Current Report on Form 8-K dated November 22, 1999,
portions of which have been omitted pursuant to a request for
confidential treatment pursuant to Rule 24b of the Securities Exchange
Act of 1934, and is incorporated herein by reference
10(o) Security Agreement dated as of November 22, 1999 between the Company
and Schering AG filed as Exhibit 10.6 to the Registrant's Current
Report on Form 8-K dated November 22, 1999, portions of which have been
omitted pursuant to a request for confidential treatment pursuant to
Rule 24b of the Securities Exchange Act of 1934, and is incorporated
herein by reference
75
10(p) Purchase and Supply Agreement between the Company and North Safety
Products, Inc. dated as of September 13, 1999, filed as Exhibit 10.1 to
the Registrant's Current Report on Form 8-K dated October 13, 1999,
portions of which have been omitted pursuant to a request for
confidential treatment pursuant to Rule 24b of the Securities Exchange
Act of 1934, and is incorporated herein by reference
10(q) Supply Agreement between the Company and Sochinaz SA dated December
dated December 24, 1993, filed as Exhibit 10(q) to Registrants Form
10K/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, and is incorporated herein by
reference
10(q.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 Form 10K
for the fiscal year ended December 31, 1999, and is incorporated herein
by reference
10(q.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(r) Master Vendor Operating Agreement between the Company and International
Leasing Corporation dated September 21, 2000, filed as Exhibit 10 to
the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter
ended September 30, 2000, filed November 14, 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, and is
incorporated herein by reference
23.1 Consent of Deloitte & Touche LLP
76
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 President
---------------------------------------------------
Date: March 16, 2001
---------------
/s/ D. Geoffrey Shulman Director, Chairman of the Board, March 16, 2001
---------------------- President, Chief Executive Officer, --------------
D. Geoffrey Shulman, MD, (Principal Executive Officer) Date
FRCPC
/s/ Mark C. Carota Vice President, Operations March 16, 2001
------------------ --------------
Mark C. Carota Date
/s/ Ronald L. Carroll Vice President, Business March 16, 2001
-------------------- Development --------------
Ronald L. Carroll Date
/s/ Scott L. Lundahl Vice President, Technology March 16, 2001
------------------- --------------
Scott L. Lundahl Date
/s/ Stuart L. Marcus Vice President, Scientific Affairs March 16, 2001
------------------- --------------
Stuart L. Marcus, MD, PhD Date
/s/ John E. Mattern Vice President of Finance and Chief March 16, 2001
------------------ Financial Officer (Principal Financial --------------
John E. Mattern and Accounting Officer) Date
/s/ William R. McIntyre Vice President, Regulatory Affairs March 16, 2001
---------------------- --------------
William R. McIntyre Date
/s/ Paul A. Sowyrda Vice President, Product March 16, 2001
------------------ Development and Marketing --------------
Paul A. Sowyrda Date
/s/ John H. Abeles Director March 16, 2001
----------------- --------------
John H. Abeles Date
/s/ James P. Doherty Director March 16, 2001
------------------- --------------
James P. Doherty, BSc Date
77
/s/ Jay M. Haft Director March 16, 2001
-------------- --------------
Jay M. Haft, Esq. Date
/s/ Richard C. Lufkin Director March 16, 2001
-------------------- --------------
Richard C. Lufkin Date
/s/ Nanette W. Mantell Secretary March 16, 2001
--------------------- --------------
Nanette W. Mantell Date