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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2001
--------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-19777
DUSA Pharmaceuticals, Inc.
(Exact name of registrant as specified in its charter)
New Jersey 22-3103129
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
25 Upton Drive
Wilmington, Massachusetts 01887
(Address of principal executive offices)
(Zip Code)
(978) 657-7500
(Registrant's telephone number, including area code)
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 month (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
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
13,799,890 shares as of August 9, 2001
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PART 1.
ITEM 1. FINANCIAL STATEMENTS
DUSA PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, December 31,
2001 2000
(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $4,386,928 $16,441,114
U.S. government securities available for sale 64,116,981 58,055,463
Accrued interest receivable 1,055,871 990,083
Accounts receivable 222,486 914,959
Receivable under co-development program 824,202 722,570
Inventory 1,796,002 1,331,966
Other current assets 1,383,249 562,240
----------- ------------
TOTAL CURRENT ASSETS 73,785,719 79,018,395
Property and equipment, net 2,483,566 1,699,530
Deferred charges 773,584 886,792
Deferred royalty 709,485 739,671
Other assets 281,393 98,000
----------- ------------
$78,033,747 $82,442,388
=========== ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $158,307 $100,500
Accrued payroll 411,640 615,873
Other accrued expenses 551,051 1,138,174
Deferred revenue 751,744 509,207
Due to licensor 189 417,004
Income taxes payable -- 56,000
----------- ------------
TOTAL CURRENT LIABILITIES 1,872,931 2,836,758
Deferred revenue 23,304,166 24,295,834
----------- ------------
25,177,097 27,132,592
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COMMITMENTS AND CONTINGENCIES (NOTE 8)
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. 94,965,212 94,757,532
Issued and outstanding: 13,768,640 (2000:
13,730,890) shares of common stock, no par.
Additional paid-in capital 1,860,519 1,860,519
Accumulated deficit (45,302,744) (42,487,349)
Accumulated other comprehensive income 1,333,663 1,179,094
----------- ------------
52,856,650 55,309,796
----------- ------------
$78,033,747 $82,442,388
=========== ============
See the accompanying Notes to the Condensed Consolidated Financial Statements.
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DUSA PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended June 30, Six Months Ended June 30,
(Unaudited) (Unaudited)
--------------------------------------------------------------
2001 2000 2001 2000
----------- ----------- ----------- -----------
REVENUES
Product sales $196,718 $ -- $410,679 $ --
Research grant and milestone revenue 495,834 -- 991,668 --
Research revenue earned under collaborative 824,202 167,347 1,304,367 602,504
agreements
----------- ----------- ----------- -----------
TOTAL REVENUES 1,516,754 167,347 2,706,714 602,504
----------- ----------- ----------- -----------
OPERATING COSTS
Cost of product sales 721,056 -- 1,376,085 --
Research and development 2,329,178 2,109,074 4,262,327 3,378,725
General and administrative 961,566 440,828 1,918,186 1,230,303
----------- ----------- ----------- -----------
TOTAL OPERATING COSTS 4,011,800 2,549,902 7,556,598 4,609,028
----------- ----------- ----------- -----------
LOSS FROM OPERATIONS (2,495,046) (2,382,555) (4,849,884) (4,006,524)
OTHER INCOME
Interest income 931,711 942,627 2,034,489 1,325,371
----------- ----------- ----------- -----------
NET LOSS $(1,563,335) $(1,439,928) $(2,815,395) $(2,681,153)
=========== =========== =========== ===========
BASIC AND DILUTED NET LOSS PER $ (.11) $ (.11) $ (.20) $ (.21)
COMMON SHARE
=========== =========== =========== ===========
WEIGHTED AVERAGE NUMBER OF 13,767,959 13,556,659 13,757,528 12,860,362
COMMON SHARES OUTSTANDING
=========== =========== =========== ===========
See the accompanying Notes to the Condensed Consolidated Financial Statements.
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DUSA PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended June 30,
(Unaudited)
------------------------------
2001 2000
----------- -----------
OPERATING ACTIVITIES:
Net loss $(2,815,395) $(2,681,153)
Adjustments to reconcile net loss to net cash used in operating
activities
Amortization of premiums and accretion of discounts on U.S. government (192,576) (129,677)
securities available for sale, net
Depreciation and amortization expense 416,558 105,231
Amortization of deferred revenue (991,668) --
Changes in other assets and liabilities impacting cash flows from
operations:
Accounts receivable 692,473 --
Receivable under co-development program (101,632) (602,504)
Inventory (464,036) (315,935)
Accrued interest receivable (65,788) (419,828)
Other current assets (821,009) (26,991)
Accounts payable 57,807 45,949
Accrued payroll and other accrued expenses (791,356) 171,022
Due to licensor (416,815) (370,000)
Income taxes payable (56,000) (90,000)
Deferred revenue 242,537 --
----------- -----------
NET CASH USED IN OPERATING ACTIVITIES (5,306,900) (4,313,886)
----------- -----------
INVESTING ACTIVITIES:
Purchases of U.S. government securities (18,232,131) (30,301,271)
Proceeds from maturing U.S. government securities 12,517,758 7,100,000
Payment to restructure supplier contract -- (250,000)
Purchases of property and equipment (1,057,200) (782,434)
Deposits on equipment (183,393) 27,631
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (6,954,966) (24,206,074)
----------- -----------
FINANCING ACTIVITIES:
Issuance of common stock and underwriters' options, net of offering -- 40,699,624
costs of $94,274
Proceeds from exercise of options and warrants 207,680 861,002
------------ -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 207,680 41,560,626
------------ -----------
NET INCREASE (DECREASE) IN CASH (12,054,186) 13,040,666
------------ -----------
CASH AT BEGINNING OF PERIOD 16,441,114 7,028,618
------------ -----------
CASH AT END OF PERIOD $4,386,928 $20,069,284
=========== ===========
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION
Income tax payments $160,700
===========
See the accompanying Notes to the Condensed Consolidated Financial Statements.
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DUSA PHARMACEUTICALS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1) BASIS OF PRESENTATION
The Condensed Consolidated Balance Sheet as of June 30, 2001, Condensed
Consolidated Statements of Operations for the three and six months ended
June 30, 2001 and 2000, and Condensed Consolidated Statements of Cash Flows
for the six months ended June 30, 2001 and 2000 have been prepared in
accordance with accounting principles generally accepted in the United
States of America. These condensed financial statements are unaudited but
include all normal recurring adjustments which the management of DUSA
Pharmaceuticals, Inc. ("DUSA" or the "Company") believes to be necessary
for fair presentation of the periods presented.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally
accepted in the United States of America have been condensed or omitted.
These condensed financial statements should be read in conjunction with the
Company's December 31, 2000 audited consolidated financial statements and
notes thereto.
2) UNITED STATES GOVERNMENT SECURITIES AVAILABLE FOR SALE
The Company's United States government securities available for sale
consist of securities of the United States government, and its agencies,
with current yields ranging from 4.61% to 7.22% and maturity dates ranging
from July 2, 2001 to May 30, 2006.
Accumulated other comprehensive income consists of net unrealized gains or
losses on United States government securities available for sale, which is
reported as part of shareholders' equity in the Condensed Consolidated
Balance Sheets.
3) INVENTORY
Inventory consisted of the following at June 30, 2001 and December 31,
2000:
JUNE 30, 2001 DECEMBER 31,
(UNAUDITED) 2000
------------ ------------
Finished goods $1,607,071 $1,151,537
Work in progress 72,612 -
Raw materials 116,319 175,344
Purchased parts and subassemblies -- 5,085
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$1,796,002 $1,331,966
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4) OTHER CURRENT ASSETS
Other current assets consisted of the following at June 30, 2001 and
December 31, 2000:
JUNE 30, 2001 DECEMBER 31,
(UNAUDITED) 2000
------------- ------------
Prepaid expenses and deposits $808,926 $293,069
Commercial light sources under lease 504,340 261,923
Other current assets 69,983 7,248
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$1,383,249 $562,240
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5) DEFERRED REVENUE
Deferred revenue associated with the Company's milestone payments,
unrestricted research grants, and the sale of commercial light sources,
sold primarily through a third-party leasing company, consisted of the
following at June 30, 2001 and December 31, 2000:
JUNE 30, 2001 DECEMBER 31,
(UNAUDITED) 2000
------------- ------------
Milestone and unrestricted grant payments $23,304,166 $24,295,834
Sale of commercial light sources 751,744 509,207
------------- ------------
$24,055,910 $24,805,041
============= ============
6) BASIC AND DILUTED NET LOSS 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 three and six-month periods ended
June 30, 2001, approximately 822,000 and 879,000 stock options and warrants
were excluded from the computation of net loss per share. For the three and
six-month periods ended June 30, 2000, approximately 1,352,000 and
1,438,000 stock options and warrants were excluded from the computation of
net loss per share.
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7) COMPREHENSIVE LOSS
For the three and six months ended June 30, 2001 and 2000, comprehensive
loss consisted of the following:
Three Months Ended June 30, Six Months Ended June 30,
(Unaudited) (Unaudited)
----------------------------- -----------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
NET LOSS $(1,563,335) $(1,439,928) $(2,815,395) $(2,681,153)
Net unrealized gains (losses) on United (418,497) 116,773 154,569 67,684
States securities available for sale
------------ ------------ ------------ ------------
COMPREHENSIVE LOSS $(1,981,832) $(1,323,155) $(2,660,826) $(2,613,469)
------------ ------------ ------------ ------------
8) COMMITMENTS AND CONTINGENCIES
The Company has entered into a series of agreements for research projects
and clinical studies. As of June 30, 2001, future payments to be made
pursuant to these agreements, under certain terms and conditions, totaled
approximately $527,000 for the remainder of 2001 and $562,000 thereafter.
In February 2001, the Company agreed to compensate North Safety Products,
Inc. ("North"), the manufacturer of our Kerastick(R) brand applicator, for
certain overhead expenses associated with the manufacture of the
Kerastick(R) to cover underutilization of North's facilities since current
orders are below certain previously anticipated levels. For the six months
ended June 30, 2001, approximately $401,000 of underutilization charges
were recorded in cost of product sales based on the current production
levels. In July 2001, the Company modified this agreement as defined in
Footnote 9, Subsequent Event.
9) SUBSEQUENT EVENT
On July 27, 2001, DUSA revised its agreement with North pertaining to the
payment of underutilization fees as current orders have been below certain
previously anticipated levels. With the execution of this amendment, the
Company paid North $1,000,000 in up-front underutilization fees and agreed
to pay payments totaling $400,000 covering the period from the execution of
this amendment to the agreement through December 31, 2002. In consideration
for the underutilization fees, North has agreed to maintain its Kerastick(R)
manufacturing capabilities in a state of readiness, with the capability of
producing at least 25,000 Kerastick(R) units per month in accordance with
established procedures. In addition, North will provide the Company with
manufacturing records, personnel support, and a list of consultants and
suppliers that have supported the development and manufacturing of the
Kerastick(R). The term of the agreement ends on December 31, 2002 unless
DUSA exercises an option to extend the term through June 30, 2003. If DUSA
should decide to extend the term, North will be entitled to payment of
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additional underutilization fees of up to $500,000, prorated based on the
level of Kerastick(R) units produced from July 1, 2001 through June 30,
2003.
10) RECENTLY ISSUED ACCOUNTING PRONOUNCEMENT
On July 20, 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations"
and SFAS No. 142 "Goodwill and Other Intangible Assets". SFAS No. 141
requires that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001 and that the use of the
pooling-of-interest method is no longer allowed. SFAS No. 142 requires that
upon adoption, amortization of goodwill will cease and instead, the carrying
value of goodwill will be evaluated for impairment on an annual basis.
Identifiable intangible assets will continue to be amortized over their
useful lives and reviewed for impairment in accordance with SFAS No. 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of". SFAS No. 142 is effective for fiscal years
beginning after December 15, 2001. The Company is evaluating the impact of
the adoption of these standards and does not believe the effect of adoption
of these statements will have any material effect on the Company's financial
position or results of operation.
On January 1, 2001, the Company adopted SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities", which was issued by the
Financial Accounting Standards Board. The adoption of this statement did not
have any effect on the Company's financial position or results of operation.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The following discussion should be read in conjunction with the
Company's Consolidated Financial Statements and Notes to the Consolidated
Financial Statements for the year ended December 31, 2000 and its Condensed
Consolidated Financial Statements and Notes to the Condensed Consolidated
Financial Statements for the three and six-month periods ended June 30, 2001.
DUSA is engaged primarily in the research and development of a drug named
5-aminolevulinic acid, or ALA, used in combination with appropriate light
devices in order to detect or treat a variety of medical conditions. The
trademark for our brand of ALA is Levulan(R). When Levulan(R) is used and is
followed with exposure to light to produce a therapeutic effect, the technology
is called photodynamic therapy, or PDT. When Levulan(R) is used and followed
with exposure to light to detect medical conditions, the technology is called
photodetection, or PD. Our first products are the Levulan(R) Kerastick(R) 20%
topical solution with photodynamic therapy, for treatment of non-hyperkeratotic
actinic keratoses (AKs) of the face or scalp, in combination with our BLU-U(TM)
brand light source. 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 the United States, in
cooperation with Berlex Laboratories, Inc. (Berlex), the United States affiliate
of Schering AG. At the end of June 2001, 190 BLU-U(TM) brand light units were in
place in physician's offices. We lease or rent the BLU-U(TM) to physicians,
medical institutions and academic centers throughout the country. Our other
dermatology and internal potential indications are at exploratory, Phase I or
Phase II stages. Our current products have now also been approved by the Health
Protection Branch - Canada. Our former Canadian affiliate, Draxis Health, Inc.,
retained the marketing rights for Canada, and we will be entitled to royalties
on its sales in that country. We will be working to establish a supply
arrangement for the Canadian market in the near future. In addition, Schering AG
has made regulatory filings for approval of our therapy outside of the United
States including the first filings in Austria, Australia, and Brazil. We are
bringing our products into compliance with CE marking and ISO 9000 requirements
in order to be ready to supply these markets upon regulatory approval which
Schering AG expects to occur next year.
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 June 30,
2001, we had an accumulated deficit of approximately $45,303,000.
Achieving our goal of becoming a profitable operating company is
dependent upon the market penetration by Berlex and Schering AG of our products,
acceptance of our therapy by the medical and consumer constituencies, and our
ability to meet the supply needs of our customer base. We have manufactured
sufficient inventory of Kerastick(R) units and BLU-U(TM) brand light devices to
meet Berlex's supply requirements in the United States for the balance of 2001;
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), in the future,
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could have a significant adverse impact on our financial results. In February
2001 we leased additional space in our Wilmington, Massachusetts facilities to
provide warehouse, office space, and production areas as we are evaluating the
option of developing our own Kerastick(R) manufacturing capabilities. We are
also investigating other suppliers for components or the complete manufacture of
our products so that we could react more quickly if our supply was interrupted
for any reason. Also see discussion of relationship with North Safety Products,
Inc., below.
We are encouraged by the early positive response from physicians and
patients who have used our therapy, but we recognize that market acceptance will
take longer than we originally anticipated, while third-party reimbursement
costs for our products are established during the coming months by insurance
companies and state and federal healthcare agencies. As reimbursement codes are
established at varying rates at both a national and/or state level, we believe
that reimbursement for our therapy will have to be competitive with other
reimbursement rates for treatment of actinic keratoses of the face and scalp, in
order for the medical community to accept our products on a large scale.
We expect to continue to incur operating losses as we continue to invest
in our research and development programs, and until product sales increase
significantly. We have incurred scale-up and certain fixed costs resulting in
under-absorbed overhead, which are included in cost of product sales. Management
plans to maintain a program to continuously monitor the cost of product sales
with the goal of reducing our cost of product sales over time. It is with this
focus that we are gathering cost estimates associated with development of our
own manufacturing operation in our leased Wilmington, Massachusetts facilities.
The development of our own facility should enable us to better manage and
control the costs of production; however, cost of product sales may increase if
we incur capital expenditures associated with developing our own facility and if
product sales do not increase significantly. Our research and development
efforts are expanding, both in dermatology (in partnership with Schering AG),
and in our internal indication development programs. We have increased our staff
in our Wilmington, Massachusetts headquarters and in our Valhalla, New York
clinical research and development center in order to properly support all
activities relating to production, maintenance, customer support for our
products, as well as the research and development programs for dermatology and
internal indications.
In February 2001, we agreed to compensate North Safety Products, Inc.
("North"), the manufacturer of our Kerastick(R) brand applicator, for certain
overhead expenses associated with the manufacture of the Kerastick(R) to cover
underutilization of North's facilities since current orders are below certain
previously anticipated levels. For the six months ended June 30, 2001,
approximately $401,000 of underutilization charges were recorded in cost of
product sales based on the current production levels. On July 27, 2001, we
revised this agreement and paid North $1,000,000 in up-front underutilization
fees and agreed to pay additional payments totaling $400,000 covering the period
from the execution of this amendment to the agreement through December 31, 2002.
In consideration for the underutilization fees, North has agreed to maintain its
Kerastick(R) manufacturing capabilities in a state of readiness, with the
capability of producing at least 25,000 Kerastick(R) units per month in
accordance with established procedures. In addition, North will provide us with
manufacturing records, personnel support, and a list of consultants and
suppliers that
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have supported the development and manufacturing of the Kerastick(R). The term
of the agreement ends on December 31, 2002 unless DUSA exercises an option to
extend the term through June 30, 2003. If DUSA should decide to extend the term,
North will be entitled to payment of additional underutilization fees of up to
$500,000, prorated based on the level of Kerastick(R) units produced from July
1, 2001 through June 30, 2003.
RESULTS OF OPERATIONS
REVENUES - Total revenues recognized for the three and six-month
periods ended June 30, 2001 were approximately $1,517,000 and $2,707,000, and
include product sales of $197,000 and $411,000, respectively, primarily
reflecting direct sales of the Kerastick(R) to Berlex. Based on the agreed upon
development plan and the timing of the start of the clinical trials, revenues
also include research and development revenue of approximately $824,000 and
$1,304,000 for the current three and six-month periods, reflecting revenue
earned payments from Schering AG to support our dermatology co-development
program. 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 2001. In early 2001, both parties agreed
upon the development program that will be subject to reimbursement for 2001. The
total budget for approved co-development, research and development projects
totals $3,954,000 so far for 2001, which will entitle us to a reimbursement from
Schering of $2,636,000, assuming the full budget is spent. Also included in
revenues for the current three and six-month periods are $496,000 and $992,000
of milestone and unrestricted grant payments, also from Schering AG, reflecting
the amortization of up front payments that 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 alliance agreement with Schering AG. During the
comparative three and six-month periods in 2000, total revenues recognized were
approximately $167,000 and $603,000, respectively, reflecting reimbursement for
earned revenue payments from Schering to support our dermatology co-development
program.
Based on Berlex's current forecast, we have met Berlex's entire 2001
Kerastick(R) supply needs as of June 30, 2001. We will earn royalties when
Berlex sells the Kerastick(R) into the marketplace; however, such royalties were
minimal during the first half of 2001 as Berlex met its distributor's initial
supply needs in the fourth quarter of 2000, and the royalties on those sales
were received in the first quarter of 2001. Since we do not control the
distribution channel of the Kerastick(R) and Berlex's forecast for the
manufacturing of Levulan(R), management is unable to predict the timing of
royalties on future Kerastick(R) sales by Berlex.
During the current three and six-month periods, the number of BLU-U(TM)
brand light units in place in physician's offices increased by 43 and 93,
respectively to 190. We primarily lease or rent the BLU-U(TM) to our customers
and have engaged a medical device leasing company to complete the leasing and/or
rental transactions, including coordinating payment plans with the physicians.
We sell the leased BLU-U(TM)s to the leasing company, which usually pays us for
the units within thirty (30) days after installation in the physicians' offices.
However, because physicians have the right to cancel their leases after periods
of up to 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 from the leasing company at an
agreed upon price. Under this
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arrangement, we will begin to recognize revenue from the distribution of
BLU-U(TM)s units in the second half of 2001.
COST OF PRODUCT SALES - Cost of product sales for the three and
six-month periods ended June 30, 2001 were approximately $721,000 and
$1,376,000, respectively, including $157,000 and $358,000 in direct Kerastick(R)
related product costs, and $198,000 and $401,000 incurred to our Kerastick(R)
manufacturer for underutilization costs due to orders falling below certain
previously anticipated levels. During the current three and six-month periods,
cost of product sales also includes $56,000 and $113,000 in amortization of
deferred charges reflecting consideration paid by us in 2000 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 physicians offices. In 2001, we commenced allocating personnel to product
sale operations and/or general and administrative functions, as a significant
percentage of manufacturing development activities have been completed for our
current products. Such personnel-related costs allocated to cost of product
sales were approximately $210,000 and $386,000 for the three and six-month
periods ended June 30, 2001. There were no product sales and therefore no cost
of product sales during the comparative period in 2000. 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 periods of
up to one year expires. As of June 30, 2001, deferred inventory costs were
approximately $504,000.
The higher cost of product sales as compared to product sales is
primarily a result of the lower than anticipated level of Kerastick(R) sales,
and under-absorbed overhead attributed to the payment of underutilization costs
to our Kerastick(R) supplier, as noted above, and the allocation of personnel to
product sales operations. Management expects that such costs will be covered by
product revenue as the level of Kerastick(R) sales increases.
In early 2001, in order to meet the production scheduling needs of our
third-party manufacturer of the BLU-U(TM), we prepaid raw material costs in the
amount of $400,000 associated with our current orders. This amount is being
credited against the final purchase price, which will be due on delivery of
finished units at the rate of $1,000 per completed unit. At the end of June
2001, approximately $248,000 of this prepayment remained outstanding and was
recorded in other current assets. 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. Accordingly, we have not recorded an accrual of this
liability at this point in time.
Research and Development Costs. Research and development costs for the
three and six-month periods ended June 30, 2001 increased approximately $220,000
and $884,000, respectively, to $2,329,000 and $4,262,000, as compared to same
periods in 2000. These increases were attributed to higher expenditures for
dermatology and internal indications coupled with increased personnel costs
related to certain on-going development activities. During the first half of
2001, this increase was partially offset by the reassignment of personnel costs
to product sale operations and/or general and administrative functions, rather
than to research and
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development costs, as a significant percentage of the development activities
were completed for our current products in 2000.
As we implement our dermatology program with Schering AG, and expand
our internal indication programs, we expect clinical research and development
expenses to continue 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.
In July 2001, the United States Food and Drug Administration completed
its review of three Investigational New Drug applications allowing initiation of
clinical trials using Levulan(R) Photodynamic Therapy for the treatment of
onychomycosis (nail fungus), warts, and Barrett's esophagus. Subject to success
in these Phase I/II feasibility studies, DUSA plans to move forward with more
expensive pre-pivotal Phase II studies for such indications, starting in 2002.
With respect to Levulan(R) PDT for brain cancer, although we also
originally intended to initiate a clinical study during 2001, we have decided to
first examine the market opportunities for various brain cancers. DUSA is also
supporting and collaborating in new investigator studies on Barrett's esophagus
and restenosis inhibition. In addition, independent investigators have reported
to DUSA that positive long-term results were achieved in a pilot study using
Levulan(R) PDT following balloon angioplasty to inhibit arterial restenosis.
Additional indications are being considered for future development including
detection and treatment of cervical dysplasia and dysfunctional uterine
bleeding. There have been no further developments regarding bladder cancer
detection, but DUSA continues to evaluate possible approaches for this
indication.
General and Administrative Costs. General and administration costs for
the three and six-month periods ended June 30, 2001 increased approximately
$521,000 and $688,000, respectively, to $962,000 and $1,918,000, as compared to
the same periods in 2000. These increases were mainly attributed to the hiring
of additional staff, including key management personnel in administrative,
technical and operations functions, during the second half of 2000 and first
half of 2001. In addition, this increase also reflects the aforementioned
reassignment of personnel to general and administrative functions and/or product
sale operations, as a significant percentage of the manufacturing development
activities have been completed for our current products. General and
administrative costs are expected to continue to increase for the remainder of
2001 as we continue to add personnel at all levels of the organization.
Interest Income. Interest income for the three-month period ended June
30, 2001 decreased slightly to $932,000 as compared to $943,000 for the
comparable period in 2000 and was attributed to lower interest rates and higher
broker fees, offset by higher investable cash balances. During the six-month
period ended June 30, 2001, interest income increased significantly to
$2,034,000 as compared to $1,325,000 for the same period in 2000 mainly due to
earnings on the $15,000,000 received from Schering AG during the fourth quarter
of 2000 and net proceeds of approximately $40,700,000 received from a private
placement in March 2000. If our product sales, which are dependent upon the
market penetration by Berlex in the United States and Schering AG in the rest of
the world, excluding Canada, and our ability to meet the supply needs of our
customer base, do not offset our expenditures, interest
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income will decline as our investable cash balances are reduced to support
operating activities of the company.
Net Losses. The Company incurred a net loss of approximately
$1,563,000, or $0.11 per share, and $2,815,000, or $0.20 per share, for the
three and six-month periods ended June 30, 2001, as compared to a net loss of
$1,440,000, or $0.11 per share, and $2,681,000, or $0.21 per share, for the
three and six-month periods ended June 30, 2000. These losses were within
management's expectations and losses are expected to be incurred until the
successful market penetration of our first products occurs.
LIQUIDITY AND CAPITAL RESOURCES
We are in a strong cash position to continue to expand our research and
development activities for our Levulan(R) PDT/PD platform. Our total assets were
approximately $78,034,000 at June 30, 2001, compared to $82,442,000 as of
December 31, 2000. This decrease is mainly the result of net operating
activities costs incurred during the first half of 2001.
As of June 30, 2001, we had inventory of $1,796,000, representing
finished goods, work-in-progress and raw materials, as compared to $1,332,000 as
of December 31, 2000. Also, at the end of the current quarter we had net fixed
assets of $2,484,000, compared to $1,700,000 as of December 31, 2000, due
primarily to the acquisition of equipment and software. We expect to make
additional capital expenditures during the second half of 2001 and 2002 in order
to acquire equipment for the manufacture of the Kerastick(R) for either a back
up second source of supply or the development of our own manufacturing
capabilities. As of June 30, 2001, the Company has acquired or incurred deposits
of approximately $248,000 in manufacturing equipment, which has been recorded in
other assets.
As of June 30, 2001, we had accounts receivable of $222,000,
representing net sales associated with product sales, compared to $915,000 at
the end of 2000. In addition, based on our co-development program with Schering
AG, a receivable of $824,000 has been recorded during the current quarter for
reimbursable research and development costs. As of December 31, 2000, we
recorded a co-development receivable of $723,000.
As of June 30, 2001, we had current liabilities of $1,873,000, compared
to $2,837,000 as of December 31, 2000. Since our inception, we have had no
long-term debt. DUSA has a secured line of credit from Schering AG for up to
$1,000,000 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 current quarter, we
had not drawn down any part of this credit facility.
We invest our cash in United States government securities, which are
classified as available for sale. As of June 30, 2001, we held securities with
an aggregate cost of approximately $62,783,000 and a current aggregate market
value of $64,117,000, resulting in a net unrealized gain on securities available
for sale of $1,334,000, which has been included in shareholders' equity. As of
December 31, 2000, these securities had an aggregate cost of $56,876,000 and a
current aggregate market value of $58,055,000 resulting in a net unrealized gain
on securities available for sale of
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$1,179,000. 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 yields ranging from 4.61% to 7.22% and maturity dates ranging
from July 2, 2001 to May 30, 2006.
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 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. We continue to actively seek
relationships with pharmaceutical or other suitable organizations to help
develop and/or market some of our potential non-dermatology products and
technologies.
As of June 30, 2001, we had deferred revenues of approximately
$24,056,000, compared to $24,805,000 at December 31, 2000. At the end of the
current quarter, deferred revenues reflected unamortized milestone and
unrestricted grant payments received from Schering AG in 1999 and 2000 of
$23,304,000, and the deferral of nearly $752,000 of BLU-U(TM) product sales
until the expiration of our customer's right of return on our commercial light
sources. Commencing with our product launch, we began to amortize the Schering
AG milestone and unrestricted grant payments over approximately 12 years, the
term of the Schering AG agreement, based upon current revenue recognition
principles.
While the current amount of our liquid assets 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, and/or
acquire products and/or new businesses, DUSA may need to raise additional funds
in the future through corporate alliances, financings, or other sources,
depending upon the amount of revenues we receive from our first product.
As of June 30, 2001, we had 51 full-time employees. We expect that we
will continue to hire more employees as commercialization of Levulan(R) PDT
continues, particularly in the operations, research and development, financial
and regulatory areas.
We have not made any material capital expenditures for environmental
control facilities. However, if we establish our own production line for the
manufacture of the Kerastick(R), we expect that environmental laws will govern
our facility. We are currently obtaining estimates for the capital costs
associated with this effort. 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.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENT
On July 20, 2001, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("SFAS") No. 141, "Business
Combinations" and SFAS No. 142
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"Goodwill and Other Intangible Assets". SFAS No. 141 requires that the purchase
method of accounting be used for all business combinations initiated after June
30, 2001 and that the use of the pooling-of-interest method is no longer
allowed. SFAS No. 142 requires that upon adoption, amortization of goodwill will
cease and instead, the carrying value of goodwill will be evaluated for
impairment on an annual basis. Identifiable intangible assets will continue to
be amortized over their useful lives and reviewed for impairment in accordance
with SFAS No. 121 "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of". SFAS No. 142 is effective for fiscal years
beginning after December 15, 2001. DUSA is evaluating the impact of the adoption
of these standards and does not believe the effect of adoption of these
statements will have any material effect on our financial position or results of
operation.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." On January 1,
2001, the Company adopted SFAS No. 133, which did not have any effect on our
financial position or results of operation.
INFLATION
Although inflation rates have been comparatively low in recent years,
inflation is expected to apply upward pressure on the operating costs of the
Company. We have included an inflation factor in its cost estimates. However,
the overall net effect of inflation on our operations is expected to be minimal.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We hold fixed income U.S. government securities that are subject to
interest rate market risks. We do not believe that the risk is material at this
time as we have apportioned our investments in short-term and longer-term
instruments, up to five years, 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. As noted above, if significant, sudden fluctuations in
interest rates occur, losses could be realized. We do not hold derivative
securities. Accordingly, we do not believe that there is a material market risk
exposure with respect to derivative or other financial instruments that would
require disclosure under this item.
FORWARD-LOOKING STATEMENTS
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 the
timing of the establishment of a Canadian supply arrangement, expectations for
regulatory approval of our products in non-U.S. countries, the achievement of
market acceptance of our products, belief that reimbursement levels must be
competitive with other AK products reimbursement levels, the goal of reducing
cost of product sales, timing of royalties on Kerastick(R) sales and recognition
of revenue on BLU-U(TM) distribution, expectations of the ability to cover
under-absorbed overhead, beliefs regarding environmental compliance,
expectations regarding the future funding of dermatology Phase II studies,
anticipation of hiring additional personnel, dependence on reimbursement
policies for significant revenues, expectations for continuing operating losses,
increasing research and development costs, levels of interest income, additional
capital expenditures, and beliefs regarding the sufficiency of our capital
resources.
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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 and
foreign regulatory 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-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
mentioned from time to time in our SEC filings.
PART II- OTHER INFORMATION
Items 1, 3, 5.
None.
Item 4. Submission of Matters to a Vote of Security Holders
Matters submitted to a vote of security holders of the Corporation at the Annual
Meeting of Shareholders held June 14, 2001 included the election of five (5)
directors and ratification of the selection of Deloitte and Touche LLP as the
independent auditors for the Corporation for 2001, and ratification of
amendments to the Company's 1996 Omnibus Plan, as amended;
a) The following persons were elected to serve as directors of the
Corporation:
Votes Cast Votes Cast Broker
For Against Abstained Non-votes
---------- ---------- --------- ----------
D. Geoffrey Shulman 10,082,671 552,823 0 0
John H. Abeles 10,531,536 103,958 0 0
James P. Doherty 10,531,536 103,958 0 0
Richard C. Lufkin 10,531,536 103,958 0 0
Jay Haft 10,531,536 103,958 0 0
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b) Shareholders ratified the selection of Deloitte & Touche LLP as the
independent auditors for the Corporation for 2001 as follows:
Votes Cast Votes Cast
For Against Abstained
--------------------- ------- ---------
Deloitte & Touche LLP 10,529,336 98,448 7,710
c) Shareholders also voted to ratified the amendments to the 1996 Omnibus
Plan, as amended, by casting the following votes:
Votes Cast Votes Cast
For Against Abstained
--------------------- ------- ---------
1996 Omnibus Plan Amendment 4,517,349 1,872,257 466,938
Item 6. Exhibits and Reports on Form 8-K.
a) Form 8-K dated July 17, 2001 regarding an update of the Registrant's
research and development advancements, particularly that the United
States Food and Drug Administration completed its review of three
Investigational New Drug applications.
SIGNATURES
Pursuant to the requirements 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.
DUSA PHARMACEUTICALS, INC.
DATE: AUGUST 13, 2001 BY: /S/JOHN E. MATTERN
_________________________________
JOHN E. MATTERN
VICE PRESIDENT, FINANCE,
AND CHIEF FINANCIAL OFFICER(Chief
Financial and Chief Accounting
Officer)
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