e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended: March 31, 2011
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the transition period from
to
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Commission file number: 001-31533
DUSA PHARMACEUTICALS, INC.
(Exact Name of Registrant as Specified in Its Charter)
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New Jersey
(State of Other Jurisdiction of
Incorporation or Organization)
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22-3103129
(I.R.S. Employer Identification No.) |
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25 Upton Drive, Wilmington, MA
(Address of Principal Executive Offices)
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01887
(Zip Code) |
(978) 657-7500
(Registrant’s Telephone Number, Including Area Code)
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
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 þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). Yes
o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated
filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
(Check one):
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| Large accelerated filer o
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Accelerated filer o
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Non-accelerated filer þ
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Smaller reporting company o |
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(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
As of May 4, 2011, the registrant had 24,433,969 shares of Common Stock, no par value per share,
outstanding.
DUSA PHARMACEUTICALS, INC.
TABLE OF CONTENTS TO FORM 10-Q
2
PART I.
ITEM 1. FINANCIAL STATEMENTS
DUSA PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
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March 31, |
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December 31, |
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2011 |
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2010 |
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ASSETS |
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CURRENT ASSETS |
|
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Cash and cash equivalents |
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$ |
12,474,249 |
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$ |
8,884,402 |
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Marketable securities |
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8,593,100 |
|
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10,762,559 |
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Accounts receivable, net of allowance for
doubtful accounts of $75,000 and $60,000 in
2011 and 2010, respectively |
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2,708,462 |
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3,311,467 |
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Inventory |
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2,528,236 |
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2,165,220 |
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Prepaid and other current assets |
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1,123,366 |
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1,344,062 |
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TOTAL CURRENT ASSETS |
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27,427,413 |
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26,467,710 |
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Restricted cash |
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175,028 |
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174,753 |
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Property, plant and equipment, net |
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1,552,104 |
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1,582,777 |
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Deferred charges and other assets |
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132,833 |
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68,099 |
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TOTAL ASSETS |
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$ |
29,287,378 |
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$ |
28,293,339 |
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LIABILITIES AND SHAREHOLDERS’ EQUITY |
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CURRENT LIABILITIES |
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Accounts payable |
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$ |
1,007,696 |
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$ |
162,742 |
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Accrued compensation |
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401,242 |
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2,243,997 |
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Other accrued expenses |
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2,777,896 |
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2,348,838 |
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Deferred revenue |
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648,006 |
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712,338 |
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TOTAL CURRENT LIABILITIES |
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4,834,840 |
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5,467,915 |
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Deferred revenue |
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1,861,972 |
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1,917,237 |
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Warrant liability |
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3,392,486 |
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1,203,553 |
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Other liabilities |
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170,998 |
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181,153 |
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TOTAL LIABILITIES |
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10,260,296 |
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8,769,858 |
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COMMITMENTS AND CONTINGENCIES (NOTE 12) |
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SHAREHOLDERS’ EQUITY |
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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; and 40,000
junior Series A preferred shares. Issued
and outstanding: 24,413,969 and 24,239,365
shares of common shares, no par, at March
31, 2011 and December 31, 2010,
respectively |
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151,638,956 |
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151,703,468 |
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Additional paid-in capital |
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9,596,083 |
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9,399,434 |
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Accumulated deficit |
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(142,261,500 |
) |
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(141,656,600 |
) |
Accumulated other comprehensive income |
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53,543 |
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77,179 |
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TOTAL SHAREHOLDERS’ EQUITY |
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19,027,082 |
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19,523,481 |
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TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY |
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$ |
29,287,378 |
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$ |
28,293,339 |
|
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See the accompanying Notes to the Condensed Consolidated Financial Statements.
3
DUSA PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
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Three Months Ended |
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March 31, |
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2011 |
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2010 |
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Product revenues |
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$ |
11,082,064 |
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$ |
8,713,880 |
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Cost of product revenues |
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1,760,370 |
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1,818,185 |
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GROSS MARGIN |
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9,321,694 |
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6,895,695 |
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Operating costs |
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Research and development |
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1,323,644 |
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1,109,667 |
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Marketing and sales |
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3,973,224 |
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3,613,799 |
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General and administrative |
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2,457,247 |
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2,463,164 |
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TOTAL OPERATING COSTS |
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7,754,115 |
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7,186,630 |
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INCOME (LOSS) FROM OPERATIONS |
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1,567,579 |
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(290,935 |
) |
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Loss on change in fair value of warrants |
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(2,188,933 |
) |
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(199,275 |
) |
Other income |
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16,454 |
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65,727 |
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NET LOSS |
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$ |
(604,900 |
) |
|
$ |
(424,483 |
) |
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BASIC AND DILUTED NET LOSS PER COMMON SHARE |
|
$ |
(0.02 |
) |
|
$ |
(0.02 |
) |
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WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING, BASIC AND DILUTED |
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24,283,398 |
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24,122,459 |
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See the accompanying Notes to the Condensed Consolidated Financial Statements.
4
DUSA PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
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Three months ended |
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March 31, |
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2011 |
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2010 |
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CASH FLOWS FROM OPERATING ACTIVITIES |
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Net loss |
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$ |
(604,900 |
) |
|
$ |
(424,483 |
) |
Adjustments to reconcile net loss to net cash provided by operating activities: |
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Accretion of premiums and discounts on marketable securities |
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(4,840 |
) |
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2,712 |
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Share-based compensation |
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196,649 |
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211,777 |
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Depreciation and amortization |
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106,284 |
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102,986 |
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Loss on change in fair value of warrants |
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2,188,933 |
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199,275 |
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Deferred revenues recognized |
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(119,597 |
) |
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(159,032 |
) |
Changes in other assets and liabilities impacting cash flows from operations: |
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Accounts receivable |
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603,005 |
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570,089 |
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Inventory |
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(363,016 |
) |
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223,683 |
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Prepaid and other assets |
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155,962 |
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|
370,387 |
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Accounts payable, accrued compensation and other accrued expenses |
|
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(568,743 |
) |
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|
(95,462 |
) |
Other liabilities |
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(10,155 |
) |
|
|
(14,332 |
) |
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NET CASH PROVIDED BY OPERATING ACTIVITIES |
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1,579,582 |
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|
987,600 |
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CASH FLOWS FROM INVESTING ACTIVITIES |
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Purchases of marketable securities |
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(1,499,337 |
) |
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— |
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Proceeds from maturities and sales of marketable securities |
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3,650,000 |
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|
— |
|
Restricted cash |
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(275 |
) |
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|
(91 |
) |
Purchases of property, plant and equipment |
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(75,611 |
) |
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(28,554 |
) |
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NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES |
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2,074,777 |
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(28,645 |
) |
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CASH FLOWS FROM FINANCING ACTIVITIES |
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Proceeds from exercise of options |
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126,508 |
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— |
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Settlements of restricted stock for tax withholding obligations |
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(191,020 |
) |
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(30,368 |
) |
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NET CASH USED IN FINANCING ACTIVITIES |
|
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(64,512 |
) |
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(30,368 |
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NET INCREASE IN CASH AND CASH EQUIVALENTS |
|
|
3,589,847 |
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928,587 |
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CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD |
|
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8,884,402 |
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7,613,378 |
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CASH AND CASH EQUIVALENTS AT END OF PERIOD |
|
$ |
12,474,249 |
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$ |
8,541,965 |
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|
See the accompanying Notes to the Condensed Consolidated Financial Statements.
5
DUSA PHARMACEUTICALS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1) BASIS OF PRESENTATION
The Condensed Consolidated Balance Sheet as of March 31, 2011, and the Condensed Consolidated
Statements of Operations and Cash Flows for the three-month periods ended March 31, 2011 and 2010
of DUSA Pharmaceuticals, Inc. (the “Company” or “DUSA”) have been prepared in accordance with
accounting principles generally accepted in the United States of America (“U.S. GAAP”). These
condensed consolidated financial statements are unaudited but include all normal recurring
adjustments, which management of the Company believes to be necessary for fair presentation of the
periods presented. The results of the Company’s operations for any interim period are not
necessarily indicative of the results of the Company’s operations for any other interim period or
for a full year.
Certain information and footnote disclosures normally included in financial statements prepared in
accordance with U.S. GAAP have been condensed or omitted. These condensed consolidated financial
statements should be read in conjunction with the Consolidated Financial Statements and Notes to
the Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended
December 31, 2010 filed with the Securities and Exchange Commission. The balance sheet as of
December 31, 2010 has been derived from the audited financial statements at that date but does not
include all of the information and footnotes required by U.S. GAAP for complete financial
statements.
2) FINANCIAL INSTRUMENTS
Fair Value Measurements
Fair value is defined as the price that would be received to sell an asset or paid to transfer
a liability in an orderly transaction between market participants at the measurement date. In order
to increase consistency and comparability in fair value measurements, financial instruments are
categorized based on a hierarchy that prioritizes observable and unobservable inputs used to
measure fair value into three broad levels, which are described below:
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Level 1: Quoted market prices in active markets for identical assets or liabilities. Level 1
primarily consists of financial instruments whose value is based on quoted market prices such as
exchange-traded instruments and listed equities. |
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Level 2: Observable market based inputs or unobservable inputs that are corroborated by market
data. Level 2 consists of financial instruments that are valued using quoted market prices,
broker or dealer quotations, or alternative pricing sources with reasonable levels of price
transparency in the determination of value. The Company accesses publicly available market
activity from third party databases and credit ratings of the issuers of the securities it holds
to corroborate the data used in the fair value calculations obtained from its primary pricing
source. The Company also takes into account credit rating changes, if any, of the securities or
recent marketplace activity. |
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Level 3: Unobservable inputs that are not corroborated by market data. Level 3 is comprised of
financial instruments whose fair value is estimated based on internally developed models or
methodologies utilizing significant inputs that are generally less readily observable. We
initially recorded the warrant liability at its fair value using the Black-Scholes option-pricing
model and revalue it at each reporting date until the warrants are exercised or expire. The fair
value of the warrants is subject to significant fluctuation based on changes in our stock price,
expected volatility, remaining contractual life and the risk-free interest rate. |
The Company’s cash equivalents and investments are classified within Level 1 or Level
2 of the fair value hierarchy because they are valued using quoted market prices, or broker
dealer quotations and matrix pricing compiled by third party pricing vendors, respectively,
which are based on third party pricing sources with reasonable levels of price
transparency. The Company’s investments are valued based on a market approach in which all
significant inputs are observable or can be derived from or corroborated by observable
market data such as interest rates, yield curves, and credit risk.
The following table presents the Company’s financial instruments recorded at fair value in the
Consolidated Balance Sheet, classified according to the three categories described above:
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Fair Value Measurements at March 31, 2011 |
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Carrying Value |
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(Level 1) |
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(Level 2) |
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(Level 3) |
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Assets |
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Cash and cash equivalents |
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$ |
12,474,000 |
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$ |
12,474,000 |
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|
— |
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— |
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United States government-backed securities |
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|
7,824,000 |
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— |
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$ |
7,824,000 |
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— |
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Corporate securities |
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|
769,000 |
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|
— |
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|
769,000 |
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— |
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Total assets at fair value |
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21,067,000 |
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|
12,474,000 |
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|
8,593,000 |
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— |
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Liabilities |
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Warrant liability |
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|
3,392,000 |
|
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|
— |
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|
— |
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|
$ |
3,392,000 |
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Total liabilities at fair value |
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$ |
3,392,000 |
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$ |
— |
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$ |
— |
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$ |
3,392,000 |
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6
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Fair Value Measurements at December 31, 2010 |
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Carrying Value |
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(Level 1) |
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(Level 2) |
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(Level 3) |
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Assets |
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Cash and cash equivalents |
|
$ |
8,884,000 |
|
|
$ |
8,884,000 |
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|
— |
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|
— |
|
United States government-backed securities |
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|
9,985,000 |
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|
— |
|
|
$ |
9,985,000 |
|
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|
— |
|
Corporate securities |
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|
778,000 |
|
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|
|
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|
778,000 |
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Total assets at fair value |
|
|
19,647,000 |
|
|
|
8,884,000 |
|
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|
10,763,000 |
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|
— |
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|
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|
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Liabilities |
|
|
|
|
|
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|
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|
|
|
Warrant liability |
|
|
1,203,000 |
|
|
|
— |
|
|
|
— |
|
|
$ |
1,203,000 |
|
|
|
|
|
|
|
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Total liabilities at fair value |
|
$ |
1,203,000 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
1,203,000 |
|
|
|
|
|
|
|
|
|
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|
The Company reviewed the level classifications of its investments at March 31, 2011
compared to December 31, 2010 and determined that there were no significant transfers between
levels in the three months ended March 31, 2011.
The
table below includes a roll forward of the balance sheet amounts for the three-month period
ended March 31, 2011 for the warrant liability, which is classified as Level 3. When a
determination is made to classify a financial instrument within Level 3, the determination is based
upon the significance of the unobservable parameters to the overall fair value measurement.
However, Level 3 financial instruments typically include, in addition to the unobservable
components, observable components (that is, components that are actively quoted and can be
validated to external sources). Accordingly, the gains and losses in the table below include
changes in fair value due in part to observable factors that are part of the methodology.
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Fair Value Measurements Using Significant Unobservable Inputs (Level 3) |
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| |
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Three-Month Period Ended March 31, 2011 |
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Total |
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Unrealized |
|
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Purchases, |
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Fair Value |
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Loss |
|
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Sales, |
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Transfers |
|
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at |
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Recognized in |
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Issuances, |
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In and/or |
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Fair Value at |
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Change in |
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January 1, |
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Statement |
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Settlements, |
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Out of |
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March 31, |
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Unrealized |
|
| |
|
2011 |
|
|
Of Operations |
|
|
net |
|
|
Level 3 |
|
|
2011 |
|
|
Losses in 2011 |
|
Warrant Liability |
|
$ |
1,203,000 |
|
|
$ |
2,189,000 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
3,392,000 |
|
|
$ |
(2,189,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Fair Value Measurements Using Significant Unobservable Inputs (Level 3) |
|
| |
|
Three-Month Period Ended March 31, 2010 |
|
| |
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Unrealized |
|
|
Purchases, |
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Loss |
|
|
Sales, |
|
|
Transfers |
|
|
|
|
|
|
|
| |
|
Fair Value at |
|
|
Recognized in |
|
|
Issuances, |
|
|
In and/or |
|
|
Fair Value at |
|
|
Change in |
|
| |
|
January 1, |
|
|
Statement |
|
|
Settlements, |
|
|
Out of |
|
|
March 31, |
|
|
Unrealized |
|
| |
|
2010 |
|
|
Of Operations |
|
|
net |
|
|
Level 3 |
|
|
2010 |
|
|
Gains in 2010 |
|
Warrant Liability |
|
$ |
813,000 |
|
|
$ |
199,000 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
1,012,000 |
|
|
$ |
(199,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable Securities
The Company’s marketable securities consist of the following:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
March 31, 2011 |
|
| |
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
| |
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Fair |
|
| |
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Value |
|
United States government-backed securities |
|
$ |
7,804,000 |
|
|
$ |
29,000 |
|
|
$ |
(9,000 |
) |
|
$ |
7,824,000 |
|
Corporate securities |
|
|
735,000 |
|
|
|
34,000 |
|
|
|
— |
|
|
|
769,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total marketable securities |
|
$ |
8,539,000 |
|
|
$ |
63,000 |
|
|
$ |
(9,000 |
) |
|
$ |
8,593,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
December 31, 2010 |
|
| |
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
| |
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Fair |
|
| |
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Value |
|
United States government-backed securities |
|
$ |
9,954,000 |
|
|
$ |
34,000 |
|
|
$ |
(3,000 |
) |
|
$ |
9,985,000 |
|
Corporate securities |
|
|
732,000 |
|
|
|
46,000 |
|
|
|
— |
|
|
|
778,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total marketable securities |
|
$ |
10,686,000 |
|
|
$ |
80,000 |
|
|
$ |
(3,000 |
) |
|
$ |
10,763,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company amortizes or accretes the premiums and discounts paid for the securities
into interest income over the period to maturity of the securities. The decrease in net unrealized
gains on such securities for the three-month periods ended March 31, 2011 and 2010 was $24,000 and
$34,000, respectively, which has been recorded in accumulated other comprehensive income and is
reported as part of
7
shareholders’ equity in the Condensed Consolidated Balance Sheets. Realized
losses on sales of marketable securities were $0 for the three-month periods ended March 31, 2011
and 2010. As of March 31, 2011, current yields range from 0.15% to 6.18% and maturity dates range
from April 2011 to December 2013.
Common Stock Warrants
Upon issuance of the warrants on October 29, 2007, the Company recorded the warrant liability
at its initial fair value of $1,950,000. Warrants that are classified as a liability are revalued
at each reporting date until the warrants are exercised or expire with changes in the fair value
reported in the Company’s Condensed Consolidated Statements of Operations as gain or loss on fair
value of warrants. Non-cash losses for the three-month periods ended March 31, 2011 and 2010, were
$2,189,000 and $199,000, respectively. At March 31, 2011 and December 31, 2010, the aggregate fair
value of these warrants was $3,392,000 and $1,204,000, respectively. Assumptions used for the
Black-Scholes option-pricing models in determining the fair value as of March 31, 2011 and December
31, 2010 are as follows:
| |
|
|
|
|
|
|
|
|
| |
|
March 31, |
|
December, 31 |
| |
|
2011 |
|
2010 |
Expected volatility |
|
|
68.1 |
% |
|
|
81 |
% |
Remaining contractual term (years) |
|
|
2.1 |
|
|
|
2.3 |
|
Risk-free interest rate |
|
|
0.8 |
% |
|
|
0.7 |
% |
Expected dividend yield |
|
|
0 |
% |
|
|
0 |
% |
Common stock price |
|
$ |
5.20 |
|
|
$ |
2.45 |
|
3) CONCENTRATIONS
The Company invests cash in accordance with a policy objective that seeks to preserve both
liquidity and safety of principal. The Company manages the credit risk associated with its
investments in marketable securities by investing in U.S. government securities and investment
grade corporate bonds. The Company’s exposure to credit risk relating to its accounts receivable is
limited. To manage credit risk in accounts receivable, the Company performs regular credit
evaluations of its customers and provides allowances for potential credit losses, when applicable.
The Company is dependent upon sole-source suppliers for a number of its products. There can be no
assurance that these suppliers will be able to meet the Company’s future requirements for such
products or parts or that they will be available at favorable terms. Any extended interruption in
the supply of any such products or parts or any significant price increase could have a material
adverse effect on the Company’s operating results in any given period.
4) INVENTORY
Inventory consisted of the following:
| |
|
|
|
|
|
|
|
|
| |
|
March 31, |
|
|
December 31, |
|
| |
|
2011 |
|
|
2010 |
|
| |
|
|
Finished goods |
|
$ |
1,104,000 |
|
|
$ |
907,000 |
|
BLU-U® evaluation units |
|
|
102,000 |
|
|
|
129,000 |
|
Work in process |
|
|
281,000 |
|
|
|
371,000 |
|
Raw materials |
|
|
1,041,000 |
|
|
|
758,000 |
|
| |
|
|
Total |
|
$ |
2,528,000 |
|
|
$ |
2,165,000 |
|
| |
|
|
BLU-U® commercial light sources placed in physicians’ offices for an initial
evaluation period are included in inventory until all revenue recognition criteria are met. The
Company amortizes the cost of the evaluation units during the evaluation period to cost of goods
sold using an estimated life for the equipment of three years to approximate its net realizable
value.
5) OTHER ACCRUED EXPENSES
Other accrued expenses consisted of the following:
| |
|
|
|
|
|
|
|
|
| |
|
March 31, |
|
|
December 31, |
|
| |
|
2011 |
|
|
2010 |
|
| |
|
|
Research and development costs |
|
$ |
240,000 |
|
|
$ |
231,000 |
|
Marketing and sales costs |
|
|
238,000 |
|
|
|
195,000 |
|
Reserve for sales returns and allowances |
|
|
158,000 |
|
|
|
125,000 |
|
Other product related costs |
|
|
831,000 |
|
|
|
798,000 |
|
Legal and other professional fees |
|
|
453,000 |
|
|
|
308,000 |
|
Due to former Sirius shareholders |
|
|
237,000 |
|
|
|
232,000 |
|
Employee benefits |
|
|
337,000 |
|
|
|
298,000 |
|
Other expenses |
|
|
284,000 |
|
|
|
162,000 |
|
| |
|
|
Total |
|
$ |
2,778,000 |
|
|
$ |
2,349,000 |
|
| |
|
|
8
6) SHARE-BASED COMPENSATION
Total share-based compensation expense, related to all of the Company’s share-based awards,
recognized for the three-month periods ended March 31, 2011 and 2010 is included in the following
line items:
| |
|
|
|
|
|
|
|
|
| |
|
Three months ended |
|
|
Three months ended |
|
| |
|
March 31, 2011 |
|
|
March 31, 2010 |
|
| |
|
|
Cost of product revenues |
|
$ |
9,000 |
|
|
$ |
14,000 |
|
Research and development |
|
|
27,000 |
|
|
|
35,000 |
|
Selling and marketing |
|
|
54,000 |
|
|
|
28,000 |
|
General and administrative |
|
|
107,000 |
|
|
|
135,000 |
|
| |
|
|
Total |
|
$ |
197,000 |
|
|
$ |
212,000 |
|
| |
|
|
The weighted-average estimated fair value of stock options granted during the three-month
periods ended March 31, 2011 and 2010 was $2.77 and $1.11 per share, respectively, using the
Black-Scholes option valuation model with the following weighted-average assumptions (annualized
percentages):
| |
|
|
|
|
|
|
|
|
| |
|
Three months |
|
|
Three months |
|
| |
|
ended |
|
|
ended |
|
| |
|
March 31, 2011 |
|
|
March 31, 2010 |
|
| |
|
|
Volatility |
|
|
77.0 |
% |
|
|
75.4 |
% |
Risk-free interest rate |
|
|
2.4 |
% |
|
|
2.7 |
% |
Expected dividend yield |
|
|
0 |
% |
|
|
0 |
% |
Expected life-directors and officers |
|
5.9 years |
|
6.0 years |
Expected life-non-officer employees |
|
5.6 years |
|
5.8 years |
A summary of stock option activity for the three-month period ended March 31, 2011 follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Weighted Average |
|
|
|
|
| |
|
|
|
|
|
Weighted |
|
|
Remaining |
|
|
|
|
| |
|
|
|
|
|
Average |
|
|
Contractual |
|
|
Aggregate |
|
| |
|
|
|
|
|
Exercise |
|
|
Term |
|
|
Intrinsic |
|
| |
|
|
|
|
|
Price |
|
|
(Years) |
|
|
Value |
|
Outstanding, beginning of period |
|
|
3,064,050 |
|
|
$ |
4.09 |
|
|
|
|
|
|
|
|
|
Options granted |
|
|
119,300 |
|
|
$ |
4.20 |
|
|
|
|
|
|
|
|
|
Options forfeited |
|
|
(6,425 |
) |
|
$ |
1.49 |
|
|
|
|
|
|
|
|
|
Options expired |
|
|
(62,500 |
) |
|
$ |
14.04 |
|
|
|
|
|
|
|
|
|
Options exercised |
|
|
(67,325 |
) |
|
$ |
1.88 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, end of period |
|
|
3,047,100 |
|
|
$ |
3.94 |
|
|
|
4.51 |
|
|
$ |
7,212,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, end of period |
|
|
2,016,377 |
|
|
$ |
5.00 |
|
|
|
3.99 |
|
|
$ |
3,776,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options vested and expected to vest, end of period |
|
|
2,934,208 |
|
|
$ |
4.01 |
|
|
|
4.46 |
|
|
$ |
6,869,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested Shares of Common Stock —
The Company has issued unvested shares of common stock, which vest over 4 years at a rate of
25% per year, as follows:
| |
|
|
|
|
|
|
|
|
| |
|
Three months |
|
|
Three months |
|
| |
|
ended |
|
|
ended |
|
| |
|
March 31, 2011 |
|
|
March 31, 2010 |
|
Outstanding unvested shares of common stock, beginning of period |
|
|
586,000 |
|
|
|
393,250 |
|
Shares granted |
|
|
450,000 |
|
|
|
308,000 |
|
Shares vested |
|
|
(154,000 |
) |
|
|
(81,250 |
) |
| |
|
|
Outstanding, end of period |
|
|
882,000 |
|
|
|
620,000 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
Weighted average grant date fair value of shares vested during period |
|
$ |
1.43 |
|
|
$ |
1.22 |
|
Weighted average grant date fair value of shares granted during period |
|
$ |
4.20 |
|
|
$ |
1.65 |
|
Weighted average grant date fair value of unvested shares, end of period |
|
$ |
2.90 |
|
|
$ |
1.54 |
|
Weighted average remaining years to vest |
|
|
3.17 |
|
|
|
3.25 |
|
At March 31, 2011 total unrecognized estimated compensation cost related to non-vested common
shares was $2,302,000, which is expected to be recognized over a weighted average period of 3.17
years. At March 31, 2011 total unrecognized estimated compensation cost related to stock options
was $1,066,000 which is expected to be recognized over a weighted average period of 2.53 years.
9
7) BASIC AND DILUTED NET LOSS PER SHARE
Basic net loss per common share is based upon the weighted average number of common shares
outstanding during each period. Stock options, unvested common stock grants and warrants are not
included in the computation of the weighted average number of common shares outstanding for
dilutive net loss per common share during each of the periods presented in the Consolidated
Statements of Operations, as the effect would be antidilutive. For the three-month periods ended
March 31, 2011, and 2010, the following are not included in weighted average common shares
outstanding because they are antidilutive:
| |
|
|
|
|
|
|
|
|
| |
|
Three-month periods ended March 31, |
|
| |
|
2011 |
|
|
2010 |
|
Stock options |
|
|
3,047,000 |
|
|
|
3,143,000 |
|
Warrants |
|
|
1,145,000 |
|
|
|
1,395,000 |
|
Unvested shares of common
stock |
|
|
882,000 |
|
|
|
620,000 |
|
|
|
|
|
|
|
|
Total |
|
|
5,074,000 |
|
|
|
5,158,000 |
|
|
|
|
|
|
|
|
8) SEGMENT REPORTING
The Company has two reportable segments: Photodynamic Therapy (PDT) Drug and Device Products and
Non-Photodynamic Therapy (Non-PDT) Drug Products. Operating segments are defined as components of
the Company for which separate financial information is available to manage resources and evaluate
performance regularly by the chief operating decision maker. The table below presents the revenues,
costs of revenues and gross margins attributable to these reportable segments for the periods
presented. The Company does not allocate research and development, selling and marketing and
general and administrative expenses to its reportable segments, because these activities are
managed at a corporate level.
| |
|
|
|
|
|
|
|
|
| |
|
Three-month
period ended March 31, |
|
| |
|
2011 |
|
|
2010 |
|
| |
|
|
REVENUES |
|
|
|
|
|
|
|
|
PDT drug and device product revenues |
|
$ |
10,982,000 |
|
|
$ |
8,296,000 |
|
Non-PDT drug product revenues |
|
|
100,000 |
|
|
|
418,000 |
|
| |
|
|
Total revenues |
|
|
11,082,000 |
|
|
|
8,714,000 |
|
| |
|
|
COSTS OF PRODUCT REVENUES |
|
|
|
|
|
|
|
|
PDT drug and device cost of product revenues |
|
|
1,617,000 |
|
|
|
1,581,000 |
|
Non-PDT drug cost of product revenues |
|
|
143,000 |
|
|
|
237,000 |
|
| |
|
|
Total cost of product revenues |
|
|
1,760,000 |
|
|
|
1,818,000 |
|
| |
|
|
GROSS MARGINS |
|
|
|
|
|
|
|
|
PDT drug and device product gross margins |
|
|
9,365,000 |
|
|
|
6,715,000 |
|
Non-PDT drug product gross margins |
|
|
(43,000 |
) |
|
|
181,000 |
|
| |
|
|
Total gross margins |
|
$ |
9,322,000 |
|
|
$ |
6,896,000 |
|
| |
|
|
During the three-month periods ended March 31, 2011 and 2010, the Company derived revenues
from the following geographies based on the location of the customer (as a percentage of product
revenues):
| |
|
|
|
|
|
|
|
|
| |
|
2011 |
|
|
2010 |
|
| |
|
|
United States |
|
|
97 |
% |
|
|
97 |
% |
Canada |
|
|
2 |
% |
|
|
1 |
% |
Korea |
|
|
1 |
% |
|
|
1 |
% |
Other |
|
|
— |
|
|
|
1 |
% |
| |
|
|
Total |
|
|
100 |
% |
|
|
100 |
% |
| |
|
|
9) COMPREHENSIVE LOSS
For the three-month periods ended March 31, 2011 and 2010, comprehensive loss consisted of the
following:
| |
|
|
|
|
|
|
|
|
| |
|
March 31, |
|
|
March 31, |
|
| |
|
2011 |
|
|
2010 |
|
| |
|
|
NET LOSS |
|
$ |
(605,000 |
) |
|
$ |
(424,000 |
) |
Change in net unrealized gains on marketable securities available-for-sale |
|
|
(24,000 |
) |
|
|
(34,000 |
) |
| |
|
|
COMPREHENSIVE LOSS |
|
$ |
(629,000 |
) |
|
$ |
(458,000 |
) |
| |
|
|
10
10) SIGNIFICANT PRODUCT AGREEMENTS
Stiefel Agreement
In the third quarter of 2010, the Company gave notice to Stiefel Laboratories, Inc.
terminating the parties’ Marketing, Distribution and Supply Agreement, dated January 12, 2006, as
amended, as of September 26, 2007. The termination of this Agreement, which had appointed Stiefel
as the Company’s exclusive marketing and distribution partner for the Company’s product, the
Levulan® Kerastick, in Latin America, resulted in the acceleration of the recognition of
deferred revenues of $555,000, comprised of deferred drug shipments of $87,000 and the unamortized
balance of milestone payments of $468,000, and the acceleration of deferred cost of revenues of
$42,000.
Daewoong Agreement
In January 2007 the Company licensed to Daewoong Pharmaceutical Co., LTD. and its
wholly-owned subsidiary DNC Daewoong Derma & Plastic Surgery Network Company, the exclusive rights
to market Levulan® PDT in Korea and other Asia Pacific countries for payments by
Daewoong of up to $3,500,000. The Company also manufactures and supplies finished product for
Daewoong, which the Company began shipping in October 2007. In consideration for the transaction
Daewoong agreed to pay the Company as follows: (i) $1,000,000 upon contract signing; (ii)
$1,000,000 upon achieving regulatory approval in Korea; and (iii) two installments of $750,000 each
for cumulative end-user sales totaling 200,000 units and 500,000 units. Daewoong launched the
product in November 2007 in Korea. The Company is deferring and recognizing the up-front and
regulatory approval milestones as license revenues on a straight-line basis, beginning with product
launch in the territory through the fourth quarter of 2016, which is the term of the Daewoong
Agreement. Daewoong pays a fixed price per unit for the inventory and an Excess Purchase Price, as
defined in the agreement, if the Average Selling Price to end-users during any calendar quarter
exceeds a certain threshold. During the three-month periods ended March 31, 2011 and 2010, the
Company’s shipments of Levulan® Kerastick® to Daewoong were $0. At March 31, 2011 and December 31,
2010 the total revenues deferred associated with shipments to Daewoong were $423,000 and $487,000,
respectively, in accordance with the Company’s policy of deferring revenues during a product’s
launch phase and recognizing revenues based on delivery to end-users. Deferred revenues at
March 31, 2011 and December 31, 2010 associated with milestone payments received from Daewoong were
$1,180,000 and $1,232,000, respectively. The agreement with Daewoong also establishes a cumulative
minimum purchase quantity over the first five years following regulatory approval. If Daewoong
fails to meet its minimum purchase quantities, the Company may, in addition to other remedies, at
its sole discretion, appoint one or more other distributors in the covered territories, or
terminate the agreement.
PhotoCure Agreement
On May 30, 2006, the Company entered into a patent license agreement under which the
Company granted PhotoCure ASA a non-exclusive license under the patents the Company licenses from
PARTEQ for ALA esters. In addition, the Company granted a non-exclusive license to PhotoCure for
its existing formulations of Hexvix® and Metvix® (known in the U.S. as
Metvixia®) for any patent the Company owns now or in the future. On October 1, 2009,
Photocure announced that it had sold Metvix/Metvixia to Galderma, S.A., a large dermatology
company. While we are entitled to royalties on net sales of Metvixia, Galderma has considerably
more resources than we have, which could significantly hamper our ability to maintain or increase
our market share.
Photocure is obligated to pay the Company royalties on sales of its ester products to the
extent they are covered by its patents in the U.S. and certain other territories. As part of the
agreement, PhotoCure paid the Company a prepaid royalty in the amount of $1,000,000 in 2006.
Revenues recognized pursuant to the Photocure Agreement have not been material to date. The balance
of the prepaid royalty under the Photocure Agreement is included in deferred revenues in the
accompanying Consolidated Balance Sheets.
11) INCOME TAXES
Based on an Internal Revenue Code (IRC) Section 382 study performed, the Company
determined that it has experienced prior ownership changes, as defined under IRC Section 382, with
the most recent change in ownership occurring in 2007 (the 2007 Ownership Change). The Company’s
pre-change NOL carryforwards are subject to an annual limitation of approximately $2.2 million per
year. Further, additional rules provide for the enhancement of the aforementioned annual limitation
for the first five years after the ownership change. A loss corporation may increase its IRC
Section 382 limitation by the amount of the net unrealized built-in gain (NUBIG) recognized within
five years of the ownership change. The calculated aggregate amount of NUBIG enhancement for the
Company is approximately $4.3 million (i.e., approximately $868,000 per year for the first five
years after the ownership change). This NUBIG enhancement will be utilized in conjunction with the
approximately $2.2 million of IRC Section 382 base annual limitation, resulting in approximately
$3.0 million per year for the first five years after the ownership change. Based on these
additional factors, the Company estimates that it will be able to utilize approximately $54.3
million of its current net operating losses, provided that sufficient income is generated and no
further ownership changes were to occur. However, it is reasonably possible that a future ownership
change, which could be the result of transactions involving the Company’s common stock that are
outside of its control (such as sales by existing shareholders), could occur during 2011 or
thereafter. Future ownership changes could further restrict the utilization of the Company’s net
operating losses and tax credits, reducing or eliminating the benefit of such net operating losses
and tax credits. An ownership change occurs under IRC Section 382 if the aggregate stock ownership
of certain shareholders increases by more than 50 percentage points over such shareholders’ lowest
percentage ownership during the testing period, which is generally three years.
11
12) COMMITMENTS AND CONTINGENCIES
Business Acquisition
On March 10, 2006, the Company acquired all of the outstanding common stock of Sirius
Laboratories, Inc. (“Sirius”). The Company agreed to pay additional consideration in future periods
to the former Sirius shareholders based upon the achievement of total cumulative sales milestones
for the Sirius products over the period beginning with the closing of the acquisition and ending
December 31, 2011, according to an amendment to the parties’ agreement.
If the remaining sales milestones are attained, additional consideration will be paid in
either common stock or cash, at the Company’s sole discretion. The remaining cumulative sales
milestones and related consideration are, as follows:
| |
|
|
| |
|
Additional |
| Cumulative Sales Milestone: |
|
Consideration: |
$35.0 million |
|
$1.0 million |
$45.0 million |
|
$1.0 million |
|
|
|
Total |
|
$2.0 million |
|
|
|
Third Amendment to Merger Agreement
In April 2009, the Company and the former shareholders of Sirius entered into a letter
agreement providing for the consent of the former Sirius shareholders to the Amendment to the
License Agreement with River’s Edge Pharmaceuticals, LLC, a release, and the Third Amendment to the
Merger Agreement, dated as of December 30, 2005, by and among the DUSA Pharmaceuticals, Inc.,
Sirius and the shareholders of Sirius. Pursuant to the Merger Agreement prior to this amendment,
the Company agreed to pay additional consideration after the closing of the merger to the former
shareholders of Sirius based upon the attainment of pre-determined total cumulative sales
milestones for the products acquired from Sirius over the period ending 50 months from the date of
the March 2006 closing of the original Merger Agreement. Pursuant to the agreements entered into in
April 2009, the Company agreed to extend the Milestone Termination Date from 50 months from the
date of the closing of the original Merger Agreement until December 31, 2011 and to include in the
definition of Net Sales in the Merger Agreement payments which the Company may receive from the
divestiture of Sirius products. The Third Amendment to the Merger Agreement also removes the
Company’s obligation to market the Sirius products according to certain previously required
standards and allows the Company to manage all business activities relating to the products
acquired from Sirius without further approval from the former Sirius shareholders. In April 2009
the Company paid to the former Sirius shareholders, on a pro rata basis, $100,000. In addition, in
the event that the $1,000,000 milestone payment that would become due to the former Sirius
shareholders under the Merger Agreement if cumulative Net Sales of the Sirius products reach
$35,000,000 is not, in fact, triggered by December 31, 2011, then the Company has agreed to pay
$250,000 to the former Sirius shareholders on a pro rata basis on or before January 6, 2012. The
present value of the guaranteed $250,000 milestone payment, or $237,000, is included in other
accrued expenses in the accompanying Consolidated Balance Sheets.
The Company has not accrued amounts for any other potential contingencies as of March 31,
2011.
The Company is involved in legal matters arising in the ordinary course of business. Although
the outcome of these matters cannot presently be determined, management does not expect that the
resolution of these matters will have a material adverse effect on the Company’s financial position
or results of operation.
Lease Arrangements
The Company leases its facilities under operating leases. The Company’s lease arrangements
have terms which expire through 2014. Total rent expense under operating leases was approximately
$85,000 and $97,000 for the three-month periods ended years ended March 31, 2011 and 2010,
respectively. Future minimum payments under lease arrangements at March 31, 2010 are as follows:
| |
|
|
| |
|
Operating |
| Years Ending December 31, |
|
Lease Obligations |
2011 |
|
$ 286,000 |
2012 |
|
389,000 |
2013 |
|
396,000 |
2014 |
|
366,000 |
|
|
|
Total |
|
$ 1,437,000 |
|
|
|
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
When you read this section of this report, it is important that you also read the financial
statements and related notes included elsewhere in this report. This section contains
forward-looking statements that involve risks and uncertainties. Our actual results could differ
materially from those we anticipate in these forward-looking statements for many reasons, including
the factors described below and in the section entitled “Risk Factors.”
We are a vertically integrated dermatology company that is developing and marketing
Levulan® PDT and other products for common skin conditions. Our marketed products
include Levulan® Kerastick® 20% Topical Solution with PDT, the
BLU-U® brand light source, and ClindaReach®.
12
We devote most of our resources to advancing the development and marketing of our
Levulan® PDT technology platform. In addition to our marketed products, our drug,
Levulan® brand of aminolevulinic acid HCl, or ALA, in combination with light, has been
studied in a broad range of medical conditions. When Levulan® is used and followed with
exposure to light to treat a medical condition, it is known as Levulan® PDT. The
Kerastick® is our proprietary applicator that delivers Levulan®. The
BLU-U® is our patented light device.
The Levulan® Kerastick® 20% Topical Solution with PDT and the
BLU-U® were launched in the United States, or U.S., in September 2000 for the treatment
of non-hyperkeratotic actinic keratoses, or AKs, of the face or scalp. AKs are precancerous skin
lesions caused by chronic sun exposure that can develop over time into a form of skin cancer called
squamous cell carcinoma. In addition, in September 2003 we received clearance from the United
States Food and Drug Administration, or FDA, to market the BLU-U® without
Levulan® PDT for the treatment of moderate inflammatory acne vulgaris and general
dermatological conditions.
Sirius Laboratories, Inc., or Sirius, a dermatology specialty pharmaceuticals company,
was founded in 2000 with a primary focus on the treatment of acne vulgaris and acne rosacea.
Nicomide® was its key product, a vitamin-mineral product prescribed by dermatologists.
We merged with Sirius in March 2006.
We are marketing Levulan® PDT under an exclusive worldwide license of patents,
many of which have expired, 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 our BLU-U® device and methods for using pharmaceutical
formulations which contain our drug and related processes and improvements. In the United States,
DUSA®, DUSA Pharmaceuticals, Inc.®, Levulan®,
Kerastick®, BLU-U®, Nicomide®, Nicomide-T®,
ClindaReach®, Meted®, and Psoriacap® are registered trademarks.
Several of these trademarks are also registered in Europe, Australia, Canada, and in other parts of
the world. Numerous other trademark applications are pending.
We are responsible for manufacturing our Levulan® Kerastick® and
for the regulatory, sales, marketing, and customer service and other related activities for all of
our products, including our Levulan® Kerastick®.
CRITICAL ACCOUNTING POLICIES
Our accounting policies are disclosed in Note 2 to the Notes to the Consolidated Financial
Statements in our Annual Report on Form 10-K for the year ended December 31, 2010. Since all of
these accounting policies do not require management to make difficult, subjective or complex
judgments or estimates, they are not all considered critical accounting policies. We have discussed
these policies and the underlying estimates used in applying these accounting policies with our
Audit Committee. There have been no changes to our critical accounting policies in the three months
ended March 31, 2011.
RESULTS OF OPERATIONS — THREE MONTHS ENDING MARCH 31, 2011 VERSUS MARCH 31, 2010
Revenues — Total revenues for the three-month period ended March 31, 2011 were $11,082,000, as
compared to $8,714,000 in 2010 and were comprised of the following:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2011 |
|
|
2010 |
|
|
Increase/(Decrease) |
|
PDT DRUG AND DEVICE PRODUCT REVENUES |
|
|
|
|
|
|
|
|
|
|
|
|
LEVULAN® KERASTICK® PRODUCT REVENUES |
|
|
|
|
|
|
|
|
|
|
|
|
United States |
|
$ |
10,187,000 |
|
|
$ |
7,549,000 |
|
|
|
$2,638,000 |
|
Canada |
|
|
183,000 |
|
|
|
57,000 |
|
|
|
126,000 |
|
Korea |
|
|
116,000 |
|
|
|
109,000 |
|
|
|
7,000 |
|
Rest of world |
|
|
7,000 |
|
|
|
87,000 |
|
|
|
(80,000 |
) |
| |
|
|
Subtotal Levulan® Kerastick® product revenues |
|
|
10,493,000 |
|
|
|
7,802,000 |
|
|
|
2,691,000 |
|
BLU-U® PRODUCT REVENUES |
|
|
|
|
|
|
|
|
|
|
|
|
United States |
|
|
489,000 |
|
|
|
489,000 |
|
|
|
— |
|
Canada |
|
|
— |
|
|
|
5,000 |
|
|
|
(5,000 |
) |
| |
|
|
Subtotal BLU-U® product revenues |
|
|
489,000 |
|
|
|
494,000 |
|
|
|
(5,000 |
) |
TOTAL PDT DRUG AND DEVICE PRODUCT REVENUES |
|
|
10,982,000 |
|
|
|
8,296,000 |
|
|
|
2,686,000 |
|
TOTAL NON-PDT DRUG PRODUCT REVENUES |
|
|
100,000 |
|
|
|
418,000 |
|
|
|
(318,000 |
) |
| |
|
|
TOTAL PRODUCT REVENUES |
|
$ |
11,082,000 |
|
|
$ |
8,714,000 |
|
|
|
$2,368,000 |
|
| |
|
|
For the three-month period ended March 31, 2011, total PDT drug and device products
revenues, comprised of revenues from our Kerastick® and BLU-U® products, were $10,982,000. This
represents an increase of $2,686,000 or 32%, over the comparable 2010 total of $8,296,000. The
increase in revenues was driven by increased Kerastick® revenues in the United States.
For the three-month period ended March 31, 2011, Kerastick® revenues were $10,493,000,
representing an increase of $2,691,000 or 35%, over the comparable 2010 total of $7,802,000.
Kerastick® unit sales to end-users for the three-month period ended March 31, 2011 were 75,213,
including 72,036 sold in the United States, 1,938 sold in Canada and 1,239 sold in Korea. This
represents an increase from 61,422 Kerastick® units sold in the three-month period ended March 31,
2010, including 59,214 sold in the United States, 600 sold in Canada, 1,116 sold in Korea and 492
sold in rest of world. Our average net selling price for the Kerastick® increased to $138.73 per
unit for the three-month period ended March 31, 2011 from $125.15 per unit in 2010. Our average net
selling price for the Kerastick® includes sales made directly to our end-user customers, as well as
sales made to our international distributors. The increase in 2011 Kerastick® revenues was driven
mainly by an increase in sales volumes in the United States as well as an increase in our overall
average unit selling price.
13
For the three-month period ended March 31, 2011, BLU-U® revenues were $489,000, a
decrease of $5,000, or 1%, compared to the 2010 total of $494,000. In the United States BLU-U®
revenues were flat with an increase in our overall average selling price being offset by a decrease
in our sales volumes. In the three-month period ended March 31, 2011, there were 64 units sold, as
compared to a total of 77 units sold in 2010. Our average net selling price for the BLU-U®
increased to $7,434 for the three-month period ended March 31, 2011 from $6,198 for 2010. The
increase in our average selling price over the prior year is a result of incentive discounting in
the prior year in advance of the introduction of our new upgraded unit. Our BLU-U® evaluation
program allows customers to take delivery for a limited number of BLU-U® units for a period of up
to four months for private practitioners and up to one year for hospital clinics, before we require
a purchase decision. At March 31, 2011, there were approximately 21 units in the field pursuant to
this evaluation program, compared to 28 units in the field at December 31, 2010. The units are
classified as inventory in the financial statements and are being amortized during the evaluation
period to cost of goods sold using an estimated life for the equipment of three years.
We have to continue to demonstrate the clinical value of our unique therapy, and the
related product benefits as compared to other well-established conventional therapies, in order for
the medical community to accept our products on a large scale. We are aware that physicians are
using Levulan® with the BLU-U® using short incubation times, and with light
devices manufactured by other companies, and for uses other than our FDA-approved use. While we are
not permitted to market our products for so-called “off-label” uses, we believe that these
activities are positively affecting the sales of our products. At present, we are continuing to
evaluate the initiation of a DUSA-sponsored clinical trial designed to study the broad area
application and/or short drug incubation, or BASDI, method of using the Levulan® Kerastick®. The
protocol objectives would be to compare the safety and efficacy of various incubation times (1, 2
or 3 hours) of Levulan® plus BLU-U® PDT versus vehicle plus BLU-U® for the treatment of multiple
actinic keratoses of the face or scalp. The timing of initiation of this study has been delayed as
we refine the protocol in consultation with outside experts. We expect to complete our
evaluation and determine next steps in the coming months.
Non-PDT drug product revenues reflect the revenues generated by the products acquired as
part of our acquisition of Sirius. Total Non-PDT drug product revenues for the three-month period
ended March 31, 2011 were $100,000, compared to $418,000 for the comparable 2010 period. In 2011,
the substantial majority of the Non-PDT Drug Product revenues were from sales of ClindaReach.®
In 2010, the substantial majority of the Non-PDT product revenues were from sales of
ClindaReach® and royalties received from River’s Edge from sales of the AVAR®
product line. Royalties from our license of the AVAR® product line with River’s Edge
ceased during the fourth quarter of 2010.
The increase in our total product revenues for the three-month period ended March 31,
2011 compared to the comparable 2010 period results primarily from increased Kerastick®
revenues in the United States, partially offset by a decrease in Non-PDT revenues. During 2011,
our PDT segment revenues in the United States grew as a result of increased demand for our product,
as well as our pricing strategies. With respect to Kerastick® prices, we announced a
price increase in the fourth quarter of 2010, which became effective January 1, 2011. We intend to
announce a price increase each year in the fourth quarter, which will become effective on January 1
of the following year. This strategy is likely to have a positive impact on sales in the fourth
quarter of each year.
Although we expect continued growth in our PDT segment revenues, we are susceptible to the
uncertain economic conditions, particularly with our customer base in the U.S. and internationally
where our product lacks reimbursement, and to increased competition particularly from Metvixia.
PhotoCure received FDA approval to market Metvixia® for treatment of AKs in July 2004,
and this product is directly competitive with our Levulan® Kerastick®
product. On October 1, 2009, Photocure announced that it had sold Metvix/Metvixia to Galderma,
S.A., a large dermatology company. While we are entitled to royalties on net sales of Metvixia,
Galderma has considerably more resources than we have, which could significantly hamper our ability
to maintain or increase our market share. Metvixia is commercially available in the U.S., however,
product revenues have not been significant to date. In addition, Leo Pharma, a Danish corporation
that acquired Peplin in 2009, has announced that in 2012 it will be launching PEP005 for the
treatment of AKs. We have also become aware that Photocure has announced plans to launch an ALA
ester-based product, AllumeraTM, as a cosmetic, during the second quarter of 2011, which
could cause disruption in the marketplace. These products could negatively impact the market
penetration of our PDT products. Also, softness in the international markets should be expected to
continue. Based on product quantities and projected monthly sales at our distributor in Korea, we
expect during 2011 some of that product will become short-dated and no longer saleable.
Accordingly, during 2011 we expect to recognize the related revenues and costs of revenues, which
are included in deferred revenues and other current assets, respectively, in the accompanying
condensed consolidated balance sheets.
Our ability to be profitable on a quarterly basis may also be affected by fluctuations in the
demand for our products caused by both seasonal changes, such as when patient visits slow during
summer months, and the timing of pricing changes, which may impact the purchasing patterns of our
customers. In addition, we expect our Non-PDT product revenues for the full year 2011 to be
reduced from 2010 levels since the AVAR® royalty period ended during the fourth quarter
of 2010. We are considering other strategic alternatives relative to the Non-PDT asset portfolio.
Also see the section entitled “Risk Factors —We May Not Achieve Profitability On A Quarterly
Basis Unless We Can Successfully Market And Sell Significantly Higher Quantities Of Our Products.”
14
Cost Of Product Revenues and Royalties — Cost of product revenues and royalties for the three-month
period ended March 31, 2011 were $1,760,000 as compared to $1,818,000 in 2010. A summary of the
components of cost of product revenues and royalties is provided below:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Increase/ |
|
| |
|
2011 |
|
|
2010 |
|
|
Decrease |
|
Levulan® Kerastick® Cost of Product Revenues and Royalties |
|
|
|
|
|
|
|
|
|
|
|
|
Direct Levulan ® Kerastick ® Product costs |
|
$ |
768,000 |
|
|
$ |
665,000 |
|
|
$ |
103,000 |
|
Other Levulan® Kerastick® production costs including internal costs
assigned to support products, net |
|
|
14,000 |
|
|
|
114,000 |
|
|
|
(100,000 |
) |
Royalty and supply fees (1) |
|
|
411,000 |
|
|
|
306,000 |
|
|
|
105,000 |
|
| |
|
|
Subtotal Levulan® Kerastick® Cost of Product Revenues and Royalties |
|
|
1,193,000 |
|
|
|
1,085,000 |
|
|
|
108,000 |
|
BLU-U ® Cost of Product Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
Direct BLU-U® Product Costs |
|
|
257,000 |
|
|
|
277,000 |
|
|
|
(20,000 |
) |
Other BLU-U® Product Costs including internal costs assigned to support products;
as well as, costs incurred to ship, install and service the BLU-U® in physicians’
offices |
|
|
167,000 |
|
|
|
219,000 |
|
|
|
(52,000 |
) |
| |
|
|
Subtotal BLU-U® Cost of Product Revenues |
|
|
424,000 |
|
|
|
496,000 |
|
|
|
(72,000 |
) |
TOTAL PDT DRUG AND DEVICE COST OF PRODUCT REVENUES AND ROYALTIES |
|
|
1,617,000 |
|
|
|
1,581,000 |
|
|
|
36,000 |
|
Non-PDT Drug Cost of Product Revenues and Royalties |
|
|
143,000 |
|
|
|
237,000 |
|
|
|
(94,000 |
) |
| |
|
|
TOTAL COST OF PRODUCT REVENUES AND ROYALTIES |
|
$ |
1,760,000 |
|
|
$ |
1,818,000 |
|
|
$ |
(58,000 |
) |
| |
|
|
|
|
|
| (1) |
|
Royalty and Supply fees reflect amounts paid to our licensor,
PARTEQ, and amortization of an upfront fee and royalties paid to
Draxis Health, Inc. on sales of Levulan®
Kerastick® in Canada. |
Margins — Total product margins for the three-month period ended March 31, 2011 was $9,322,000, or
84%, as compared to $6,896,000, or 79%, for the comparable 2010 period, as shown below:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase/ |
|
| |
|
2011 |
|
|
|
|
|
|
2010 |
|
|
|
|
|
|
(Decrease) |
|
Levulan ® Kerastick ® gross margin |
|
$ |
9,300,000 |
|
|
|
89 |
% |
|
$ |
6,717,000 |
|
|
|
86 |
% |
|
$ |
2,583,000 |
|
BLU-U ® gross margin |
|
|
65,000 |
|
|
|
13 |
% |
|
|
(2,000 |
) |
|
|
— |
|
|
|
67,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total PDT drug and device gross margin |
|
$ |
9,365,000 |
|
|
|
85 |
% |
|
$ |
6,715,000 |
|
|
|
81 |
% |
|
$ |
2,650,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Non-PDT gross margin |
|
|
(43,000 |
) |
|
|
(43 |
)% |
|
$ |
181,000 |
|
|
|
43 |
% |
|
|
(224,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL GROSS MARGIN |
|
$ |
9,322,000 |
|
|
|
84 |
% |
|
$ |
6,896,000 |
|
|
|
79 |
% |
|
$ |
2,426,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Kerastick® gross margins for the three-month period ended March 31, 2011
were 89% compared to 86% for the comparable 2010 period. The margin improvement for 2011 is
attributable to increased U.S. sales volumes and an increase in our overall average selling price.
Our long-term goal is to achieve higher gross margins on Kerastick® sales which will be
significantly dependent on increased volume. We believe that we can achieve improved gross margins
on our Kerastick® from further volume growth and price increases in the U.S.
BLU-U® margins for the three-month period ended March 31, 2011 were 13%
compared to 0% for the comparable 2010 period. The increase in gross margin is a result of an
increase in our average selling price. It is important for us to sell BLU-U® units in an
effort to increase Kerastick® sales volumes, and accordingly, we may sell
BLU-U® units at low profit margins.
Non-PDT drug product margins reflect the gross margin generated by the products acquired
as part of our merger with Sirius. Total Non-PDT drug product gross margins for the three-month
period ended March 31, 2011 were (43)% compared to 43% for the comparable period in 2010. Non-PDT
cost of goods sold for the first quarter of 2010 includes a charge of $48,000, net of insurance
recoveries of $273,000, related to a shipment of ClindaReach that was lost while in-transit to us
during the quarter.
Research and Development Costs — Research and development costs for the three-month period ended
March 31, 2011 were $1,324,000 as compared to $1,110,000 in the comparable 2010 period. The
increase in 2011 compared to 2010 was due primarily to increased spending related to the addition
of medical science liaisons.
At present, we are continuing to evaluate the initiation of a DUSA-sponsored clinical trial
designed to study the broad area application and/or short drug incubation, or BASDI, method of
using the Levulan® Kerastick®. The protocol objectives would be to compare the safety and efficacy
of various incubation times (1, 2 or 3 hours) of Levulan® plus BLU-U® PDT versus vehicle plus
BLU-U® for the treatment of multiple actinic keratoses of the face or scalp. The timing of
initiation of this study has been delayed as we refine the protocol in consultation with outside
experts. We expect to complete our evaluation and determine next steps in the coming
months.
Marketing and Sales Costs — Marketing and sales costs for the three-month period ended March 31,
2011 were $3,973,000 as compared to $3,614,000 for the comparable 2010 period. These costs
consisted primarily of expenses such as salaries and benefits for the marketing and sales staff,
commissions, and related support expenses such as travel, and telephone, totaling $2,590,000 for
the three-month period ended March 31, 2011, compared to $2,457,000 in the comparable 2010 period.
The increase in spending in 2011 in this category is due to increased headcount. The remaining
expenses consisted of tradeshows, miscellaneous marketing and outside consultants totaling
$1,383,000 for the three-month period ended March 31, 2011, compared to $1,157,000 for the
comparable 2010 period. The increase in this category is due primarily to an increase in
expenditures related to sales training and promotional materials. We expect marketing and sales
costs for the full year 2011 to increase over 2010 levels, but to decrease as a percentage of
revenues.
15
General and Administrative Costs —General and administrative costs were $2,457,000 for the
three-month period ended March 31, 2011 as compared to $2,463,000 for the comparable prior year
period. For the three-month period ended March 31, 2011, an increase in compensation related
charges was offset by a decrease in professional services fees. General and administrative
expenses are highly dependent on our legal and other professional fees, which can vary
significantly from period to period. For the full year 2011, we expect general and administrative
costs to increase compared with 2010, but to decrease as a percentage of revenues.
Loss on Change in Fair Value of Warrants — The warrants issued to investors in connection with the
October 29, 2007 private placement were recorded initially at fair value and are marked to market
each reporting period. The increase in the liability during the three-month periods ended March 31,
2011 and 2010 was $2,189,000 and $199,000, respectively, which resulted in non-cash losses in both
periods. The changes in the fair value of the warrants are primarily due to changes in our stock
price, our stock’s historical volatility and the length of time remaining prior to expiration.
Other Income, Net — Other income for the three-month period ended March 31, 2011 decreased compared
to the comparable prior year period. Other income decreased to $16,000 from $66,000 during the same
period in 2010. The decrease is generally due to decreased returns on our investments.
Income Taxes — There is no provision for income taxes due to the full valuation allowance. As of
December 31, 2010, we had net operating loss carryforwards remaining of approximately $91,504,000
and tax credit carryforwards of approximately $1,759,000 for Federal tax purposes. These amounts
expire at various times through 2030. We have provided a full valuation allowance against the net
deferred tax assets at March 31, 2011 and December 31, 2010.
Based on an Internal Revenue Code (IRC) Section 382 study performed, we determined that
we have experienced prior ownership changes, as defined under IRC Section 382, with the most recent
change in ownership occurring in 2007 (the 2007 Ownership Change). Our pre-change NOL carryforwards
are subject to an annual limitation of approximately $2.2 million per year. Further, additional
rules provide for the enhancement of the aforementioned annual limitation for the first five years
after the ownership change. A loss corporation may increase its IRC Section 382 limitation by the
amount of the net unrealized built-in gain, or NUBIG, recognized within five years of the ownership
change. Our calculated aggregate amount of NUBIG enhancement is approximately $4.3 million (i.e.,
approximately $868,000 per year for the first five years after the ownership change). This NUBIG
enhancement will be utilized in conjunction with the approximately $2.2 million of IRC Section 382
base annual limitation, resulting in approximately $3.0 million per year for the first five years
after the ownership change. Based on these additional factors, we estimate that we will be able to
utilize approximately $54.3 million of our current net operating losses, provided that sufficient
income is generated and no further ownership changes were to occur. However, it is reasonably
possible that a future ownership change, which could be the result of transactions involving our
common stock that are outside of our control (such as sales by existing shareholders), could occur
during 2011 or thereafter. Future ownership changes could further restrict our utilization of our
net operating losses and tax credits, reducing or eliminating the benefit of such net operating
losses and tax credits. An ownership change occurs under IRC Section 382 if the aggregate stock
ownership of certain shareholders increases by more than 50 percentage points over such
shareholders’ lowest percentage ownership during the testing period, which is generally three
years.
Net Loss — We reported a net loss of $605,000, or $0.02 per share, for the three-month period ended
March 31, 2011, as compared to a net loss of $424,000, or $0.02 per share, for the comparable 2010
period. The increase in net loss is attributable to the reasons discussed above.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity and Capital Resources
At March 31, 2011, we had approximately $21,067,000 of total liquid assets, comprised of
$12,474,000 of cash and cash equivalents and marketable securities available-for-sale totaling
$8,593,000. We believe that our liquidity will be sufficient to meet our cash requirements for at
least the next twelve months. As of March 31, 2011, our marketable securities had a weighted
average yield to maturity of 1.14% and maturity dates ranging from April 2011 to December 2013. Our
net cash generated by operations in 2011 was $1,580,000 versus $988,000 in 2010. The year-over-year
increase in cash generated by operations is primarily attributable to a small increase in our net
loss, offset by a significant increase in non-cash charges, including a loss of $2,189,000 on the
change in the fair value of our warrants. Our net cash provided by (used in) investing activities
was $2,075,000 in 2011 versus $(29,000) in 2010. Net cash provided by (used in) investing
activities is primarily the result of our net purchases and maturities of marketable securities.
Our net cash used in financing activities for 2011 and 2010 was $65,000 and $30,000, respectively;
and is comprised of proceeds from stock option exercises, offset by settlements of restricted stock
for tax withholding obligations. As of March 31, 2011 working capital (total current assets minus
total current liabilities) was $22,593,000, as compared to $21,000,000 as of December 31, 2010.
Total current assets increased by $960,000 during 2011, due primarily to increases in our cash and
cash equivalents and inventory, offset in part by a decrease in our marketable securities, accounts
receivable and prepaid and other current assets. Total current liabilities decreased by $633,000
during 2011 due primarily to decreases in accrued compensation and the current portion of deferred
revenues, offset in part by increases in accounts payable and other accrued expenses . In response
to the instability in the financial markets, we regularly review our marketable securities
holdings, and have invested primarily in securities of the U.S. government and its agencies.
Although we achieved profitability for the full year 2010, we generated losses for the
three-month periods ended March 31, 2011 and 2010 and have generated significant cumulative losses
through March 31, 2011 while we conducted preclinical and clinical trials, engaged in research and
development and dedicated resources to the commercialization of our products. We have also incurred
significant losses from the impairment of assets acquired in the acquisition of Sirius. We have
funded our operations primarily through public offerings, private placements of equity securities
and payments received under our collaboration agreements. We expect to incur additional research
and development and other costs including costs related to preclinical studies and clinical trials
during 2011. Our costs, including research and
16
development costs for our product candidates and
sales, marketing and promotion expenses for any of our existing or future products to be marketed
by us or our distributors may exceed revenues in the future, which may result in losses from
operations.
We may expand or enhance our business in the future by using our resources to acquire by
license, purchase or other arrangements, additional businesses, new technologies, or products in
the field of dermatology. In 2010 and the three-month period ended March 31, 2011, we focused
primarily on increasing the sales of the Levulan® Kerastick® and the
BLU-U®. If we cannot continue to maintain positive cash flow from operations, we may
reduce our headcount or reduce spending in other areas. We may also seek to raise funds through
financing transactions. We cannot predict whether financing will be available at all or on
reasonable terms.
As part of our merger with Sirius, as amended, we agreed to pay consideration to the
former shareholders of Sirius in future periods, based upon the attainment of pre-determined total
cumulative sales milestones for the Sirius products over the period ending December 31, 2011. The
pre-determined cumulative sales milestones for the Sirius products and the related milestone
payments which may be paid in cash or shares, as we may determine, are as follows:
| |
|
|
| Cumulative Sales Milestone: |
|
Additional
Consideration: |
$35.0 million |
|
$1.0 million |
$45.0 million |
|
$1.0 million |
|
|
|
Total |
|
$2.0 million |
|
|
|
The first cumulative sales milestone at $25.0 million was achieved during the third
quarter of 2008, and a cash payment in the amount of $1.5 million was paid to the former Sirius
shareholders during that period. The payment was recorded initially as goodwill and then
subsequently deemed impaired and expensed during the same period. In April 2009, we entered into
the Third Amendment to the Merger Agreement, or Third Amendment. As consideration for the Third
Amendment and related documents, we paid the former Sirius shareholders $100,000 on a pro rata
basis and have guaranteed a payment of $250,000 in January 2012 to the former Sirius shareholders
if the $35,000,000 sales milestone is not triggered.
We have no off-balance sheet financing arrangements.
Contractual Obligations and Other Commercial Commitments
L. Perrigo Company
On October 21, 2005, the former Sirius entered into a supply agreement with L. Perrigo
Company, or Perrigo, for the exclusive manufacture and supply of a proprietary device/drug kit
designed by Sirius pursuant to an approved ANDA owned by Perrigo. The agreement, which covers our
ClindaReach® product, was assigned to us as part of the Sirius merger, and has been
assigned by Perrigo to its affiliate, Perrigo Pharmaceuticals Company. During the fourth quarter of
2010, the parties executed an amendment to the agreement, which extends the initial term of the
agreement through December 31, 2011, subject to certain rights to early termination. Perrigo’s
affiliate is entitled to royalties on net sales of the product, including certain minimum
royalties. For calendar year 2011, the minimum annual royalty is
$250,000, subject to pro-ration in
the event that the agreement is terminated early.
Merger With Sirius Laboratories, Inc.
In March 2006, we closed our merger to acquire all of the common stock of Sirius Laboratories
Inc. in exchange for cash and common stock worth up to $30,000,000. Of the up to $30,000,000, up to
$5,000,000, ($1,500,000 of which would be paid in cash, and $3,500,000 of which would be paid in
cash or common stock) may be paid based on a combination of new product approvals or launches, and
achievement of certain pre-determined total cumulative sales milestones for Sirius products. With
the launch of ClindaReach®, one of the new Sirius products, we were obligated to make a
cash payment of $500,000 to the former shareholders of Sirius. Also, as a consequence of the
decision not to launch the product under development with another third party and pursuant to the
terms of the merger agreement with Sirius, we paid $250,000 on a pro rata basis to the former
Sirius shareholders. Similarly, with our decision in early 2008 not to develop a third product from
a list of product candidates acquired as part of the merger, another $250,000 was paid on a pro
rata basis to the former Sirius shareholders. The payments for ClindaReach® and the
other two product decisions satisfy our obligations for the $1,500,000 portion of the purchase
price mentioned above. In the third quarter of 2008, the first of the pre-determined total
cumulative sales milestones for Sirius products was achieved, and accordingly, we made a cash
payment of $1,500,000 to the former Sirius shareholders in consideration of the milestone
achievement.
Pursuant to the agreements we entered into in April 2009, including a third amendment to the
merger agreement, an amendment to a license agreement with River’s Edge and a release, we agreed to
extend the milestone termination date from 50 months from the date of the closing of the merger
until December 31, 2011 and to include in the definition of net sales in the merger agreement
payments which we may receive from the divestiture of Sirius products. This amendment to the merger
agreement also removes our obligation to market the Sirius products according to certain previously
required standards and allows us to manage all business activities relating to the products
acquired from Sirius without further approval from the former Sirius shareholders.
In April 2009 we paid to the former Sirius shareholders, on a pro rata basis, $100,000. In
addition, in the event that the $1,000,000 milestone payment that would become due to the former
Sirius shareholders under the merger agreement if cumulative net sales of the Sirius products reach
$35,000,000 is not, in fact, triggered by December 31, 2011, then we have agreed to pay $250,000 to
the former Sirius shareholders on a pro rata basis on or before January 6, 2012. The present value
of the guaranteed $250,000 milestone payment, or $237,000, is included in other accrued expenses in
the accompanying Condensed Consolidated Balance Sheet as of March 31, 2011.
17
PARTEQ Agreement
We license certain patents underlying our Levulan® PDT systems under a license
agreement with PARTEQ Research and Development Innovations, or PARTEQ. 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 certain products, including ALA. The agreement covers
certain use patent rights. When we sell our products directly, we have agreed to pay to PARTEQ
royalties of 6% and 4% on 66% of the net selling price in countries where patent rights do and do
not exist, respectively. In cases where we have a sublicensee, we will pay 6% and 4% when patent
rights do and do not exist, respectively, on our net selling price less the cost of goods for
products sold to the sublicensee, and 6% of payments we receive on sales of products by the
sublicensee. We are also obligated to pay to PARTEQ 5% of any lump sum sublicense fees received,
such as milestone payments, excluding amounts designated by the sublicensee for future research and
development efforts.
For the years ended December 31, 2010, 2009 and 2008, actual royalties based on product sales
were approximately $1,331,000, $1,019,000, and $873,000, respectively. Annual minimum royalties to
PARTEQ must total at least CDN $100,000 (U.S. $103,000 as of March 31, 2011).
National Biological Corporation Amended And Restated Purchase And Supply Agreement
On December 7, 2010, we extended the term of the 2004 Amended and Restated Purchase and Supply
Agreement with National Biological Corporation, or NBC, the primary manufacturer of our
BLU-U® light source, until December 31, 2011. We have an option to further extend the
term for an additional two years if we purchase a certain number of units. The parties agreed upon
a tiered price schedule based on the volume of purchases and updated certain quality control
provisions. All other terms and conditions of the 2004 agreement remain in effect.
Sochinaz SA
Under an agreement dated December 24, 1993, Sochinaz SA manufactures and supplies our
requirements of Levulan® from its FDA approved facility in Switzerland. In 2009, our
agreement was renewed until December 31, 2015 on substantially the same terms, albeit with a
revised pricing schedule to cover the new term. While we can obtain alternative supply sources in
certain circumstances, any new supplier would have to be GMP compliant and complete process
development, validation and stability programs to become fully qualified by us and acceptable to
FDA.
Lease Agreements
We have entered into a lease commitment for office space in Wilmington, Massachusetts. The
minimum lease payments disclosed below include the non-cancelable terms of the leases.
Research Agreements
We have entered into various agreements for research projects and clinical studies. As of
March 31, 2011, future payments to be made pursuant to these agreements, under certain terms and
conditions, totaled approximately $1,784,000. Included in this future payment is a master service
agreement, effective June 15, 2001, with Therapeutics, Inc. for management services in connection
with the clinical development of our products in the field of dermatology. The agreement was
renewed on June 15, 2010 for a one year period and is renewable annually. Therapeutics is entitled
to receive a bonus valued at $50,000, in cash or stock at our discretion, upon each anniversary of
the effective date.
Our contractual obligations and other commercial commitments to make future payments under
contracts, including lease agreements, research and development contracts, manufacturing contracts,
or other related agreements are as follows at March 31, 2011:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Total |
|
|
1 Yr or less |
|
|
2-3 Years |
|
|
4-5 Years |
|
|
After
5 Years |
|
Operating lease obligations |
|
$ |
1,437,000 |
|
|
$ |
383,000 |
|
|
$ |
788,000 |
|
|
$ |
266,000 |
|
|
$ |
— |
|
Purchase obligations (1, 2) |
|
|
3,230,000 |
|
|
|
3,230,000 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Minimum royalty obligations (3) |
|
|
508,000 |
|
|
|
353,000 |
|
|
|
155,000 |
|
|
|
— |
|
|
|
— |
|
| |
|
|
Total obligations |
|
$ |
5,175,000 |
|
|
$ |
3,966,000 |
|
|
$ |
943,000 |
|
|
$ |
266,000 |
|
|
$ |
— |
|
| |
|
|
|
|
|
| 1) |
|
Research and development projects include various commitments including obligations
for our study on a broad area application, short drug incubation method of using the
Levulan® Kerastick® |
| |
| 2) |
|
In addition to the obligations disclosed above, we have contracted with Therapeutics, Inc.,
a clinical research organization, to manage the clinical development of our products in the
field of dermatology. This organization has the opportunity for additional stock grants,
bonuses, and other incentives for each product indication ranging from $250,000 to
$1,250,000, depending on the regulatory phase of development of products under Therapeutics’
management. |
| |
| 3) |
|
Minimum royalty obligations relate to our agreements with PARTEQ and Perrigo described above. |
Rent expense incurred under these operating leases was approximately $85,000 and $97,000 for the
three-month periods ended March 31, 2011 and 2010, respectively.
18
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, we expect the overall net effect of inflation on our operations to be minimal.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rates
Our exposure to market risk for changes in interest rates relates primarily to our investment
portfolio. We do not use derivative financial instruments in our investment portfolio. Our
investment policy specifies credit quality standards for our investments and limits the amount of
credit exposure to any single issue, issuer or type of investment. Our investments consist of
United States government securities and high grade corporate bonds. All investments are carried at
market value, which approximates cost. In response to the instability in the global financial
markets, we have regularly reviewed our marketable securities holdings, and have reduced or avoided
investing in securities deemed to have increased risk.
As of March 31, 2011, the weighted average rate of return on our investments was 1.14%. If market
interest rates were to increase immediately and uniformly by 100 basis points from levels as of
March 31, 2011, the fair market value of the portfolio would decline by approximately $77,000.
Declines in interest rates could, over time, reduce our interest income.
Derivative Financial Instruments
The warrants that we issued on October 29, 2007 in connection with the private placement of our
common stock were determined to be derivative financial instruments and accounted for as a
liability. These warrants are revalued on a quarterly basis with the change in value reflected in
our earnings. We value these warrants using various assumptions, including the Company’s stock
price as of the end of each reporting period, the historical volatility of the Company’s stock
price, and risk-free interest rates commensurate with the remaining contractual term of the
warrants. Changes in the Company’s stock price or in interest rates would result in a change in the
value of the warrants.
Currency Exchange Rates
Under our agreement with Daewoong, revenues we earn under the excess purchase price provision of
the agreement, if any, are calculated based on end-user pricing in local currencies and converted
to United States dollars before a determination is made whether any payments are due to us. These
payments, if any, are made in United States dollars each reporting period.
Other exchange rates that we are subject to, such as the Canadian dollar, are not material to our
operations.
ITEM 4. CONTROLS AND PROCEDURES
We carried out an evaluation, under the direction of our Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of our disclosure controls and
procedures (as defined in the Securities Exchange Act of 1934, Rules 13a-15(e) and 15d-15(e)).
Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that
our disclosure controls and procedures were effective as of March 31, 2011.
There have been no changes in our internal control over financial reporting that occurred during
the quarter ended March 31, 2011 that have materially affected, or are reasonably likely to
materially affect, DUSA’s internal control over financial reporting.
Forward-Looking Statements Safe Harbor
This report, including the Management’s Discussion and Analysis of Financial Condition and Results
of Operations, contains various “forward-looking statements” within the meaning of Section 27A of
the Securities Act of 1933 and 21E of the Securities Exchange Act of 1934 which represent our
expectations or beliefs concerning future events, including, but not limited to our beliefs
regarding off-label use, our intention to announce a price increase on an annual basis in the
fourth quarter of each year, beliefs regarding softness in the international markets, beliefs
regarding improved gross margins on Kerastick® from further volume growth and price
increases in the United States, expectations regarding general and administrative costs, beliefs
regarding our liquidity and capital resources, ability to raise funds through financing transactions
and on reasonable terms, expectations regarding the payment of remaining milestones to former
Sirius shareholders, beliefs regarding the effects of inflation, our expectations regarding the
potential for reduction of headcount, curtailment of variable expenses, expectations regarding the
initiation of and timing of our BASDI clinical trial, beliefs regarding the future development of
Levulan® and other potential indications, expectations concerning manufacture of the
BLU-U® in our facility, intention to pursue licensing, marketing, co-promotion, other
arrangements, additional business or new technologies, expectations regarding additional market
expansion, the impact on our market share of Galderma’s promotion of Metvixia®,
expectations regarding the confidentiality of our proprietary information, beliefs regarding
regulatory approvals, filings, timelines and environmental compliance, beliefs concerning patent
disputes or patents issued to third parties, beliefs regarding litigation and the costs thereof,
ability and intentions to obtain, secure, defend and enforce our patents, beliefs
regarding the impact of a third-party’s regulatory compliance status and fulfillment of contractual
obligations, expectations of decreases in the prices we charge for our products, our beliefs
regarding the market for our products and our product candidate, expected use of cash resources,
beliefs regarding research and development programs, beliefs regarding investments and economic
conditions including the impact of our customer’s failure to meet our payment terms, expectations
regarding outstanding options and warrants, beliefs regarding the effect of reimbursement policies
on sales, revenues and market acceptance of our therapies, expectations for research and
development programs and
19
expenses, expectations for continuing operating losses and beliefs
regarding competition, expectations regarding the adequacy and availability of insurance,
expectations regarding sales and marketing costs and research and development costs, levels of
interest income, beliefs regarding the need to and impact of raising additional funds to meet
capital requirements and the potential dilution to our existing shareholders, beliefs regarding the
potential for additional inspection and testing of our manufacturing facilities or additional FDA
or legislative actions, beliefs regarding our manufacturing capabilities and impact on us if
problems arise, beliefs regarding the dependence on key personnel, beliefs concerning product
liability and insurance thereof, beliefs regarding our financial condition, results of operations
cash flows and profitability, our beliefs regarding our sales and marketing efforts, beliefs
regarding the adoption of our products, our beliefs regarding our compliance with applicable laws,
rules and regulations, our beliefs regarding available reimbursement for our products and plans to
seek improvement, our beliefs regarding the current and future preclinical and clinical development
and testing of our potential products and technologies and the timing and costs thereof, beliefs
regarding the volatility of our stock price, beliefs regarding the impact of our rights plan,
beliefs regarding the impact of future sales of securities, expectations related to the change in
revenues of our PDT and Non-PDT products, beliefs regarding market share, beliefs regarding the
growth in our PDT segment revenues, expectations regarding
our manufacturing facility or any facility of our contract manufacturers, beliefs regarding our
Nasdaq Global Market listing, beliefs regarding Section 382 on our current and future NOLs, beliefs
regarding our ability to use net operating loss carryforwards and tax credit carryforwards to
offset future taxable income, beliefs regarding a future ownership change or change of control,
beliefs regarding the outcome if some or all of our shares are sold into the public market over a
short period of time, beliefs regarding our ability to sell equity securities or equity-related
securities in the future, beliefs concerning safety procedures for hazardous materials, our
compliance and risks of liability, beliefs regarding competitive products, beliefs concerning
revenues, beliefs concerning Peplin’s and Allumera’s impact on the market penetration of our PDT products, beliefs
regarding our capital resource needs, beliefs regarding the sufficiency of our cash, cash
equivalents and marketable securities, beliefs regarding economic recovery, beliefs regarding the
failure to comply with FDA or other governmental regulatory requirements and the impact of such
failure, beliefs regarding the global credit and financial market conditions on our business,
including reimbursement, beliefs regarding production yields, costs or quality of our products,
beliefs regarding market acceptance of our products, beliefs regarding collaborations with outside
scientists, beliefs regarding our products becoming non-competitive or obsolete, expectations for
losses, beliefs regarding patent protection of our current and future indications and impact on
competition, beliefs regarding financial benefits from patent protection, beliefs regarding the
timing of pricing changes, beliefs regarding the purchasing patterns of our customers and our
beliefs regarding our ability to be profitable each quarter and the affect of fluctuations in the
demand for our product. 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,
environmental risks relating to our products, reliance on third-parties for the production,
manufacture, sales and marketing of our products, the availability of products for acquisition
and/or license on terms agreeable to us, sufficient sources of funds, the securities regulatory
process, the maintenance of our patent portfolio and ability to obtain competitive levels of
reimbursement by third-party payors, none of which can be assured. Results actually achieved may
differ materially from expected results included in these statements as a result of these or other
factors.
PART II — OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None.
ITEM 1A. RISK FACTORS
Investing in our common stock is very speculative and involves a high degree of risk. You
should carefully consider and evaluate all of the information in, or incorporated by reference in,
this report. The following are among the risks we face related to our business, assets and
operations. They are not the only ones we face. Any of these risks could materially and adversely
affect our business, results of operations and financial condition, which in turn could materially
and adversely affect the trading price of our common stock and you might lose all or part of our
investment.
This report contains forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995 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 business, financial condition and results of operations could differ materially from those
anticipated in these forward-looking statements for many reasons, including the factors described
below and elsewhere in this report. You should not place undue reliance on these forward-looking
statements, which apply only as of the date of this report.
Risks Related To DUSA
Any Failure To Comply With Ongoing Governmental Regulations In The United States And Elsewhere Will
Limit Our Ability To Market Our Products And Achieve Profitability On A Quarterly Basis.
The manufacture and marketing of our products are subject to continuing FDA review as well as
comprehensive regulation by the FDA and by state and local regulatory authorities. These laws
require, among other things:
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approval of manufacturing facilities, including adherence to good manufacturing and
laboratory practices during production and storage, |
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controlled research and testing of some of these products even after approval, |
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control of marketing activities, including sales promotions, advertising and labeling, and |
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state permits for the sale and distribution of products manufactured in and out-of-state. |
If we, or any of our contract manufacturers, fail to comply with these requirements, we may be
limited in the jurisdictions in which we are permitted to sell our products. Additionally, if we or
our manufacturers fail to comply with applicable regulatory approval requirements, a regulatory
agency may:
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send warning letters, |
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impose fines and other civil penalties on us, |
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seize our products, |
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suspend our regulatory approvals, |
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cease the manufacture of our products, |
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refuse to approve pending applications or supplements to approved applications filed by us, |
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refuse to permit exports of our products from the United States, |
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require us to recall products, |
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require us to notify physicians of labeling changes and/or product related problems, |
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impose restrictions on our operations, and/or |
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criminally prosecute us. |
We and our manufacturers must continue to comply with current Good Manufacturing Practice
regulations, or cGMP, and Quality System Regulations, or QSR, and equivalent foreign regulatory
requirements. The cGMP and QSR requirements govern quality control and documentation policies and
procedures. In complying with cGMP, QSR and foreign regulatory requirements, we and our third-party
manufacturers will be obligated to expend time, money and effort in production, record keeping and
quality control to assure that our products meet applicable specifications and other requirements.
Manufacturing facilities are subject to ongoing periodic inspection by the FDA, including
unannounced inspections. We cannot guarantee that our third-party supply sources, including our
sole source supplier for the active ingredient in Levulan® and the component parts in
the BLU-U®, or our own Kerastick® facility, will continue to meet all
applicable FDA regulations. If we, or any of our manufacturers, fail to maintain compliance with
FDA regulatory requirements, it would be time-consuming and costly to remedy the problem(s) or to
qualify other sources. These consequences could have a significant adverse effect on our financial
condition and operations. Additionally, if previously unknown problems with the product, a
manufacturer or its facility are discovered in the future, changes in product labeling restrictions
or withdrawal of the product from the market may occur. Any such problems could affect our ability
to become profitable on an ongoing basis.
Any significant interruption in our operation caused by FDA could have a negative effect on our
revenues.
We May Not Achieve Profitability On A Quarterly Basis Unless We Can Successfully Market And Sell
Significantly Higher Quantities Of Our Products.
If A Competitive Product Is Successful Our Revenues Could Decline, And Our Ability To Achieve
Profitability On A Quarterly Basis Could Be Delayed.
On May 30, 2006, we entered into a patent license agreement with Photocure ASA whereby we
granted a non-exclusive license to Photocure under the patents we license from PARTEQ, for esters
of ALA. Furthermore, we granted a non-exclusive license to Photocure for its existing formulations
of its Hexvix® and Metvix® (known in the United States as
Metvixia®) products for any of our patents that may issue or be licensed by us in the
future. Photocure received FDA approval to market Metvixia® for treatment of AKs in July
2004, and this product is directly competitive with our Levulan® Kerastick®
product. Photocure sold Metvix/Metvixia to Galderma, S.A., a large dermatology company, in October
2009, and while we are entitled to royalties on net sales of Metvixia, Galderma has considerably
more resources than we have, which could adversely affect our ability to maintain or increase our market share and
make it more difficult for us to achieve profitability on an ongoing basis. Metvixia’s U.S.
product revenues have not been significant to date. In addition, Leo Pharma, a Danish corporation
that acquired Peplin® in 2009, has announced that in 2012 it will be launching PEP005
for the treatment of AKs. We have also become aware that Photocure has announced plans to launch an
ALA ester-based product, AllumeraTM, as a cosmetic, during the second quarter of 2011,
which could cause disruption in the marketplace. These products could negatively impact the market
penetration of our PDT
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products. Our ability to be profitable on a quarterly basis may also be
affected by fluctuations in the demand for our products caused by both seasonal changes, such as
when patient visits slow during the summer months, and the timing of pricing changes, which may
impact the purchasing patterns of our customers.
If We Do Not Continue To Generate Positive Cash Flow, We May Need More Capital.
We have approximately $21,067,000 in cash, cash equivalents and marketable securities as of March
31, 2011. Our cash, cash equivalents and marketable securities should be sufficient for current
operations for at least the next 12 months. Although we expect continued growth in our PDT segment
revenues, we are susceptible to the uncertain economic conditions, particularly with our customer
base in the U.S. and internationally where our product lacks reimbursement, and to increased
competition particularly from Metvixia®. In addition, we expect our Non-PDT product
revenues for 2011 to be reduced from 2010 levels since the AVAR® royalty period ended
during the fourth quarter of 2010. If we are unable to continue to be profitable on an ongoing
basis, we may have to reduce our headcount, curtail certain variable expenses, or raise funds
through financing transactions.
We Have Had Significant Cumulative Losses And May Have Losses In The Future.
We reported net losses of $605,000 and $424,000 for the three-month periods ended March 31, 2011
and 2010, respectively. Prior to 2010, we had a history of annual operating losses and we may incur
losses in the future. We reported net income (loss) of $2,703,000, $(2,508,000) and $(6,250,000)
for the years ended December 31, 2010, 2009 and 2008, respectively. As of March 31, 2011, our
accumulated deficit was approximately $142,262,000. We expect to incur significant additional
research and development and other costs including costs related to preclinical studies and
clinical trials. Our costs, including research and development costs for our product candidates and
sales, marketing and promotion expenses for any of our existing or future products to be marketed
by us or our distributors may exceed revenues in the future, which may result in future losses from
operations.
If Product Sales Do Not Continue to Increase, We May Not Be Able To Advance Development Of Other
Potential Products As Quickly As We Would Like To, Which Would Delay The Approval Process And
Marketing Of New Potential Products, If Approved.
If we do not generate sufficient revenues from our approved products, we may be forced to delay or
abandon our development program for programs we may wish to initiate. The pharmaceutical
development and commercialization process is time consuming and costly, and any delays might result
in higher costs which could adversely affect our financial condition and results of operations.
Without sufficient product sales, we would need alternative sources of funding. There is no
guarantee that adequate funding sources could be found to continue the development of our
technology.
If We Are Unable To Obtain The Necessary Capital To Fund Our Operations, We Will Have To Delay Our
Development Program And May Not Be Able To Complete Our Clinical Trials.
We may need substantial additional funds to fully develop, manufacture, market and sell other
potential products. We may obtain funds through other public or private financings, including
equity financing, and/or through collaborative arrangements. We may also choose to license rights
to third parties to commercialize products or technologies that we would otherwise have attempted
to develop and commercialize on our own which could reduce our potential revenues.
The availability of additional capital to us is uncertain. There can be no assurance that
additional funding will be available to us on favorable terms, if at all. Any equity financing, if
needed, would likely result in dilution to our existing shareholders, and debt financing, if
available, would likely involve significant cash payment obligations and could include restrictive
covenants that would adversely affect the operation of our business. Failure to raise capital, if
needed, could materially adversely affect our clinical program, our financial condition, results of
operations and cash flows.
Global Credit And Financial Market Conditions May Affect Our Business.
Sales of our products are dependent, in large part, on reimbursement from government health and
administration authorities, private health insurers, distribution partners and other organizations.
As a result of the global credit and financial market conditions, government authorities and
private insurers may not satisfy their reimbursement obligations or may delay payment. In addition,
federal and state health authorities may reduce Medicare and Medicaid reimbursements, and private
insurers may increase their scrutiny of claims. A reduction in the availability or extent of
reimbursement could negatively affect our product sales and revenues.
Due to the tightening of global credit, there may be disruption or delay in the performance by our
third-party contractors, suppliers or collaborators. We rely on third parties for several important
aspects of our business, including the active ingredient in Levulan® and key portion of
the BLU-U®, portions of our product manufacturing, conduct of clinical trials and the
supply of raw materials. If such third parties are unable to satisfy their commitments to us, our
business would be adversely affected.
If The Economic Slowdown Adversely Affects Our Customer’s Ability To Meet Our Payment Terms, Our
Cash Flow Would Be Adversely Affected And Our Ability To Continue To Be Profitable Could Be
Jeopardized.
If any of our large customers were to fail to pay us or fail to pay us on a timely basis for their
purchases of our products, we may not be able to maintain profitability on a sustainable on-going
basis, and our financial position, results of operations and cash flows could be negatively
affected.
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We Have Only Three Therapies That Have Received Regulatory Approval Or Clearance, And We Cannot
Predict Whether We Will Ever Develop Or Commercialize Any Other Levulan® Product Or
Indications.
Potential Products Or PDT Indications Are In Early Stages Of Development And May Never Result In
Any Additional Commercially Successful Products.
Except for Levulan® PDT for AKs, the BLU-U® for acne, the
ClindaReach® pledget and other products we acquired in our merger with Sirius, all of
our other potential product candidates are being studied by independent investigators, or are at a
very early stage of development, including the planning of our BASDI clinical study, and subject to
the risks of failure inherent in the development of new pharmaceutical products and products based
on new technologies. These risks include:
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delays in product development, clinical testing or manufacturing, |
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unplanned expenditures in product development, clinical testing or manufacturing, |
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failure in clinical trials or failure to receive regulatory approvals, |
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emergence of superior or equivalent products, |
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inability to market products due to third-party proprietary rights, and |
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failure to achieve market acceptance. |
We cannot predict how long the development of our investigational stage products will take or
whether they will be medically effective. We cannot be sure that a successful market will continue
to develop for our Levulan® drug technology.
We Must Receive Separate Approval For Any Drug Or Medical Device Products Before We Can Sell Them
Commercially In The United States Or Abroad.
Any potential Levulan® product will require the approval of the FDA before it can be
marketed in the United States. Before an application to the FDA seeking approval to market a new
drug, called an NDA, can be filed, a product must undergo, among other things, extensive animal
testing and human clinical trials. The process of obtaining FDA approvals can be lengthy, costly,
and time-consuming. Following the acceptance of an NDA, the time required for regulatory approval
can vary and is usually one to three years or more. The FDA may require additional animal studies
and/or human clinical trials before granting approval. Our Levulan® PDT products are
based on relatively new technology. To our knowledge, the FDA has approved only four drugs for use
in photodynamic therapy, including Levulan®. 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 any other regulatory approvals. 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® PDT is safe and effective for any new use we may study. 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 Have Limited Patent Protection, And If We Are Unable To Protect Our Proprietary Rights,
Competitors Might Be Able To Develop Similar Products To Compete With Our Products And Technology.
Our ability to compete successfully depends, in part, on our ability to defend patents that have
issued, obtain new patents, protect trade secrets and operate without infringing the proprietary
rights of others. We have no compound patent protection for our Levulan® brand of the
compound ALA. Our basic ALA patents are for methods of detecting and treating various diseased
tissues using ALA (or related compounds called precursors), in combination with light. We own or
exclusively license ALA patents and patent applications related to the following:
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methods of using ALA and its unique physical forms in combination with light to treat conditions such as AKs and acne, |
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compositions and apparatus for those methods, and |
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unique physical forms of ALA. |
We also own patents covering our Kerastick® and BLU-U®, which also cover our
AK therapy. However, other third parties may have blue light devices or drug delivery devices that
do not infringe our patents.
The patents relating to methods of using ALA for detecting or treating disease, other than for acne
and our approved indication for AKs of the face or scalp, started to expire in July 2009. With the
newly allowed claims which issued on May 25, 2010, we now have additional claims that relate to our
AK product, and these will not expire until 2019. The reexamination by the USPTO of one of the
patents we license from PARTEQ, the licensor of our ALA patents, that cover our approved product until 2013, has
successfully concluded with the confirmation of the validity of all of the patent’s original claims
and the addition of eight new claims.
We have limited ALA patent protection outside the United States, which may make it easier for third
parties to compete there. Our basic methods of treatment patents and applications have counterparts
in only four foreign countries, and certain countries under the European Patent Convention. Even
where we have patent protection, there is no guarantee that we will be able to enforce our patents.
Additionally, enforcement of a given patent may not be practicable or an economically viable
alternative.
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Some of the indications for which we may develop PDT therapies may not be covered by the claims in
any of our existing patents. Even with the issuance of additional patents to us, 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. ALA in the chemical
form has been commercially supplied for decades, and is not itself subject to patent protection.
There are reports of third parties conducting clinical studies with ALA in countries outside the
United States where PARTEQ does not have patent protection. In addition, a number of third parties
are seeking patents for uses of ALA not covered by our patents. These other uses, whether patented
or not, and the commercial availability of ALA, could limit the scope of our future operations
because ALA products could come on the market which would not infringe our patents but would
compete with our Levulan ® product even though they are marketed for different uses.
Photocure ASA received FDA approval to market Metvixia® for treatment of AKs in July
2004, and this product is directly competitive with our Levulan® Kerastick®
product. Photocure sold Metvix/Metvixia to Galderma, S.A., a large dermatology company, in October
2009, and while we are entitled to royalties on net sales of Metvixia, Galderma has considerably
more resources than we have, which could adversely affect our ability to maintain or increase our
market share. Metvixia’s U.S. product revenues have not been significant to date.
While we attempt to protect our proprietary information as trade secrets through agreements with
each employee, licensing partner, consultant, university, pharmaceutical company and agent, we
cannot guarantee that these agreements will provide effective protection for our proprietary
information. It is possible that all of the following issues could negatively impact our ability to
be profitable:
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these persons or entities might breach the agreements, |
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we might not have adequate remedies for a breach, and/or, |
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our competitors will independently develop or otherwise discover our trade secrets. |
Since We Now Operate The Only FDA Approved Manufacturing Facility For The Kerastick® And
Continue To Rely Heavily On Sole Suppliers For The Manufacture Of Levulan®, The
BLU-U®, ClindaReach®, And Meted®, Any Supply Or Manufacturing
Problems Could Negatively Impact Our Sales.
If we experience problems producing Levulan® Kerastick® units in our
facility, or if any of our contract suppliers fail to supply our requirements for products or
services, our business, financial condition and results of operations would suffer. Although we
have received approval by the FDA to manufacture the BLU-U® and the Levulan®
Kerastick® in our Wilmington, Massachusetts facility, at this time, with respect to the
BLU-U®, we expect to utilize our own facility only as a back-up to our current third
party manufacturers or for repairs.
Manufacturers and their subcontractors often encounter difficulties when commercial quantities of
products are manufactured for the first time, or large quantities of products are manufactured,
including problems involving:
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product yields, |
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quality control, |
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component and service availability, |
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compliance with FDA regulations, and |
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the need for further FDA approval if manufacturers make material changes to manufacturing processes and/or facilities. |
We cannot guarantee that problems will not arise with production yields, costs or quality as we and
our suppliers manufacture our products. Any manufacturing problems could delay or limit our
supplies which would hinder our marketing and sales efforts. If our facility, any facility of our
contract manufacturers, or any equipment in those facilities is damaged or destroyed, we may not be
able to quickly or inexpensively replace it. Likewise, if there is quality or supply problems with
any components or materials needed to manufacture our products, we may not be able to quickly
remedy the problem(s). Any of these problems could cause our sales to suffer and could increase
costs.
Our Ability To Use Net Operating Loss Carryforwards and Tax Credit Carryforwards To Offset Future
Taxable Income May Be Further Limited As A Result Of Past Or Future Transactions Involving Our
Common Stock.
Under Internal Revenue Code, or IRC, Section 382 the amount of our net operating loss carryforwards
and other tax attributes that we may utilize to offset future taxable income, when earned, may be
subject to certain limitations, based upon changes in the ownership of our common stock. In
general, under IRC Section 382, a corporation that undergoes an “ownership change” is subject to
limitations on its ability to utilize its pre-change net operating losses and certain other tax
assets to offset future taxable income. An ownership change occurs if the
aggregate stock ownership of certain shareholders increases by more than 50 percentage points over
such shareholders’ lowest percentage ownership during the testing period, which is generally three
years.
Based on an Internal Revenue Code, or IRC, Section 382 evaluation, we determined that we have
experienced prior ownership changes, as defined under IRC Section 382, with the most recent change
in ownership occurring in 2007 (the 2007 Ownership Change). Our pre-change NOL carryforwards are
subject to an annual limitation of approximately $2.2 million per year. Further, additional rules
provide for the enhancement of the aforementioned annual limitation for the first five years after
the ownership change. A loss corporation may increase its IRC Section 382 limitation by the amount
of the net unrealized built-in gain, or NUBIG, recognized within five years of the ownership
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change. Our calculated aggregate amount of NUBIG enhancement is approximately $4.3 million (i.e.,
approximately $868,000 per year for the first five years after the ownership change). This NUBIG
enhancement will be utilized in conjunction with the approximately $2.2 million of IRC Section 382
base annual limitation, resulting in approximately $3.0 million per year for the first five years
after the ownership change. Based on these additional factors, we estimate that we will be able to
utilize approximately $54.3 million of our current net operating losses, provided that sufficient
income is generated and no further ownership changes were to occur. However, it is reasonably
possible that a future ownership change, which could be the result of transactions involving our
common stock that are outside of our control (such as sales by existing shareholders), could occur
during 2011 or thereafter. Future ownership changes could further restrict our utilization of our
net operating losses and tax credits, reducing or eliminating the benefit of such net operating
losses and tax credits. An ownership change occurs under IRC Section 382 if the aggregate stock
ownership of certain shareholders increases by more than 50 percentage points over such
shareholders’ lowest percentage ownership during the testing period, which is generally three
years.
We Have Only Limited Experience Marketing And Selling Pharmaceutical Products Outside Of The United
States And As A Result, Our Revenues From Product Sales May Suffer.
If we are unable to successfully market and sell sufficient quantities of our products, revenues
from product sales will be lower than anticipated and our financial condition may be adversely
affected. We are responsible for marketing our products in the United States and the rest of the
world, except Canada, and parts of Asia, where we have distributors. If our sales and marketing
efforts fail, then sales of the Levulan® Kerastick®, the BLU-U®,
and other products will be adversely affected, which would adversely affect our results of
operations and financial condition.
The Commercial Success Of Any Product That We May Develop Will Depend Upon The Degree Of Market
Acceptance Of Our Products Among Physicians, Patients, Health Care Payors, Private Health Insurers
And The Medical Community.
Our ability to commercialize any product that we may develop will be highly dependent upon the
extent to which the product gains market acceptance among physicians, patients, health care payors,
such as Medicare and Medicaid, private health insurers, including managed care organizations and
group purchasing organizations, and the medical community. If a product does not achieve an
adequate level of acceptance, we may not generate material product revenues. The degree of market
acceptance of our currently marketed products will depend on a number of factors, including:
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the effectiveness, or perceived effectiveness, of our product in comparison to competing products, |
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the existence of any significant side effects, as well as their severity in comparison to any competing products, |
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potential advantages over alternative treatments, |
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the ability to offer our product for sale at competitive prices, |
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relative convenience and ease of administration, |
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the strength of marketing and distribution support, and |
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sufficient third-party coverage or reimbursement. |
If We Cannot Maintain or Improve Physician Reimbursement And/Or Convince More Private Insurance
Carriers To Adequately Reimburse Physicians For Our Product, Sales May Suffer.
Without adequate levels of reimbursement by government health care programs and private health
insurers, the market for our Levulan® Kerastick® for AK therapy will be
limited. While we continue to support efforts to improve reimbursement levels to physicians and are
working with the major private insurance carriers to improve coverage for our therapy, if our
efforts are not successful, broader adoption of our therapy and sales of our products could be
negatively impacted. Although positive reimbursement changes related to AK were made over the last
five years, some physicians still believe that reimbursement levels do not fully reflect the
required efforts to routinely execute our therapy in their practices.
If insurance companies do not cover our products, or government payors, reduce the amounts of
coverage or stop covering our products which are covered, our sales could be dramatically reduced.
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 or contractual
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 litigation. Also, in a
lawsuit against a third party for infringement of our patents in the United States, that third
party may challenge the validity of our patent(s). We cannot guarantee that a third party will not
claim, with or without merit, that our patents are not valid or that we have infringed their
patent(s) or misappropriated their proprietary material. We could get drawn into or decide to join,
litigation as the holder of the patent. Defending these types of legal actions involve considerable
expense and could negatively affect our financial results.
Additionally, 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 USPTO to determine the priority of
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the invention. A third-party could also request the declaration of a patent interference between one of
our issued United States patents and one of its patent applications. Any interference proceedings
likely would require participation by us and/or PARTEQ, which could involve substantial legal fees
and result in a loss or lessening of our patent protection.
Because Of The Nature Of Our Business, The Loss Of Key Members Of Our Management Team Could Delay
Achievement Of Our Goals.
We are a small company with only 91 employees, including 1 part-time employee, as of March 31,
2011. We are highly dependent on several key officer/employees with specialized scientific and
technical skills without whom our business, financial condition and results of operations would
suffer, especially in the photodynamic therapy portion of our business. The photodynamic therapy
industry is still quite small and the number of experts is limited. The loss of these key employees
could cause significant delays in achievement of our business and research goals since very few
people with their expertise could be hired. Our growth and future success will depend, in large
part, on the continued contributions of these key individuals as well as our ability to motivate
and retain other qualified personnel in our specialty drug and light device areas.
Collaborations With Outside Scientists May Be Subject To Restriction And Change.
We work with scientific and clinical advisors and collaborators at academic and other institutions
that assist us in our research and development efforts. These scientists and advisors are not our
employees and may have other commitments that limit their availability to us. Although our advisors
and collaborators generally agree not to do competing work, if a conflict of interest between their
work for us and their work for another entity arises, we may lose their services. In addition,
although our advisors and collaborators sign agreements not to disclose our confidential
information, it is possible that valuable proprietary knowledge may become publicly known through
them.
Risks Related To Our Industry
Product Liability And Other Claims Against Us May Reduce Demand For Our Products Or Result In
Damages.
We Are Subject To Risk From Potential Product Liability Lawsuits Which Could Negatively Affect Our
Business.
The development, manufacture and sale of medical products expose us to product liability claims
related to the use or misuse of our products. Product liability claims can be expensive to defend
and may result in significant judgments against us. A successful claim could materially harm our
business, financial condition and results of operations. Additionally, we cannot guarantee that
continued product liability insurance coverage will be available in the future at acceptable costs.
If we believe the cost of coverage is too high, we may self-insure.
Our Business Involves Environmental Risks And We May Incur Significant Costs Complying With
Environmental Laws And Regulations.
We have used various hazardous materials, such as mercury in fluorescent tubes in our research and
development activities. We are subject to federal, state and local laws and regulations which
govern the use, manufacture, storage, handling and disposal of hazardous materials and specific
waste products. We believe that we are in compliance in all material respects with currently
applicable environmental laws and regulations. However, we cannot guarantee that we will not incur
significant costs to comply with environmental laws and regulations in the future. We also cannot
guarantee that current or future environmental laws or regulations will not materially adversely
affect our operations, business or financial condition. 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 Compete Against Traditional Treatment Methods Or Keep Up With Rapid Changes
In The Biotechnology And Pharmaceutical Industries That Could Make Some Or All Of Our Products
Non-Competitive Or Obsolete.
Competing Products And Technologies Based On Traditional Treatment Methods May Make Our Products Or
Potential Products Noncompetitive Or Obsolete.
Well-known pharmaceutical, biotechnology and medical device companies are marketing
well-established therapies for the treatment of AKs and acne. Doctors may prefer to use familiar
methods, rather than trying our products. Reimbursement issues affect the economic competitiveness
of our products as compared to other more traditional therapies.
Many companies are also seeking to develop new products and technologies, and receiving approval
for treatment of AKs and acne. Our industry is subject to rapid, unpredictable and significant
technological change. Competition is intense. Our competitors may succeed in developing products
that are safer, more effective or more desirable than ours. Many of our competitors have
substantially greater financial, technical and marketing resources than we have. In addition,
several of these companies have significantly greater experience than we do in developing products,
conducting preclinical and clinical testing and obtaining regulatory approvals to market products
for health care.
We cannot guarantee that new drugs or future developments in drug technologies will not have a
material adverse effect on our business. Increased competition could result in:
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price reductions, |
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lower levels of third-party reimbursements, |
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failure to achieve market acceptance, and |
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loss of market share, |
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any of which could adversely affect our business, results of operations and financial condition.
Further, we cannot give any assurance that developments by our competitors or future competitors
will not render our technology obsolete or less advantageous.
On May 30, 2006, we entered into a patent license agreement with Photocure ASA whereby we granted a
non-exclusive license to Photocure under the patents we license from PARTEQ, for esters of ALA.
Furthermore, we granted a non-exclusive license to Photocure for its existing formulations of its
Hexvix® and Metvix® (known in the United States as Metvixia®)
products for any of our patents that may issue or be licensed by us in the future. Photocure
received FDA approval to market Metvixia® for treatment of AKs in July 2004, and this
product is directly competitive with our Levulan® Kerastick® product, and its
price is comparable to the price of Levulan®. Photocure sold Metvix/Metvixia to
Galderma, S.A., a large dermatology company in October 2009, and while we are entitled to royalties
on net sales of Metvixia, Galderma has considerably more resources than we have, which could
significantly hamper our ability to maintain or increase our market share. Metvixia’s U.S. product
revenues have not been significant to date.
Our Competitors In The Biotechnology And Pharmaceutical Industries May Have Better Products,
Manufacturing Capabilities Or Marketing Expertise.
We are aware of several companies commercializing and/or conducting research with ALA or
ALA-related compounds, including: Galderma, medac GmbH and photonamic GmbH & Co. KG (Germany);
Biofrontera, PhotoTherapeutics, Inc. (U.K.), and Photocure ASA (Norway). We also anticipate that we
will face increased competition as the scientific development of PDT advances and new companies
enter our markets. Several companies are developing PDT agents other than Levulan®.
These include: QLT Inc. (Canada); Axcan Pharma Inc. (U.S.); Miravant, Inc. (U.S.); Leo Pharma A/S
(Denmark), and Pharmacyclics, Inc. (U.S.). There are many pharmaceutical companies that compete
with us in the field of dermatology, particularly in the acne market.
We expect that our principal methods of competition with other PDT products will be based upon such
factors as:
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the ease of administration of our method of PDT, |
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the degree of generalized skin sensitivity to light, |
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the number of required doses, |
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the selectivity of our drug for the target lesion or tissue of interest, and |
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the type and cost of our light systems. |
Our primary competition in the acne market includes oral and topical
antibiotics, other topical prescription and over-the-counter products, as well
as various laser and non-laser light treatments. The market is highly
competitive and other large and small companies have more experience than we do
which could make it difficult for us to penetrate the market. The entry of new
products from time to time would likely cause us to lose market share.
Risks Related To Our Stock
Our Common Stock May Not Continue To Trade On The Nasdaq Global Market, Which Could Reduce The
Value Of Your Investment And Make Your Shares More Difficult To Sell.
In order for our common stock to trade on the Nasdaq Global Market, we must continue to meet the
listing standards of that market. Among other things, those standards require that our common stock
maintain a minimum closing bid price of at least $1.00 per share. During 2009 and 2010, our common
stock traded at prices near and below $1.00. If we do not continue to meet Nasdaq’s applicable
minimum listing standards, Nasdaq could delist us from the Nasdaq Global Market. If our common
stock is delisted from the Nasdaq Global Market, we could seek to have our common stock listed on
the Nasdaq Capital Market or other Nasdaq markets. However, delisting of our common stock from the
Nasdaq Global Market could hinder your ability to sell, or obtain an accurate quotation for the
price of, your shares of our common stock. Delisting could also adversely affect the perception
among investors of DUSA and its prospects, which could lead to further declines in the market price
of our common stock. Delisting may also make it more difficult and expensive for us to raise
capital. In addition, delisting might subject us to a Securities and Exchange Commission rule that
could adversely affect the ability of broker-dealers to sell or make a market in our common stock,
thus hindering your ability to sell your shares.
Our Stock Price Is Highly Volatile And Sudden Changes In The Market Value Of Our Stock Occur Making
An Investment Risky.
The price of our common stock has been highly volatile, which may create an increase in the risk of
capital losses for our shareholders. From January 1, 2010 to March 31, 2011, the price of our stock
has ranged from a low of $1.32 to a high of $5.30. The significant general market volatility in
similar stage pharmaceutical and biotechnology companies also made the market price of our stock
volatile.
Significant Fluctuations In Orders For Our Products, On A Monthly And Quarterly Basis, Are Common
Based On External Factors And Sales Promotion Activities. These Fluctuations Could Increase The
Volatility Of Our Stock Price.
The price of our common stock may be affected by the amount of quarterly shipments of our products
to end-users. Since our PDT products are still in relatively early stages of adoption, and sales
volumes are still low, a number of factors could affect product sales levels and growth
27
rates in any period. These could include the level of penetration in new markets outside of the United
States, the timing of medical conferences, sales promotion activities, and large volume purchases
by our higher usage customers. In addition, seasonal fluctuations in the number of patients seeking
treatment at various times during the year could impact sales volumes. These factors could, in
turn, affect the volatility of our stock price.
Future Sales Of Securities May Cause Our Stock Price To Decline.
As of April 15, 2011, there were outstanding options and warrants to purchase 4,172,000 shares of
common stock, with exercise prices ranging from $1.10 to $15.90 per share for options, and $2.85
per share for warrants. In addition, there were 882,000 shares of unvested common stock. 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. Also, if some or all of such shares are sold into the public market over a short
period of time, the value of all publicly traded shares could decline, as the market may not be
able to absorb those shares at then-current market prices. Additionally, such sales may make it
more difficult for us to sell equity securities or equity-related securities in the future at a
time and price that our management deems acceptable, or at all. The holders may exercise their
securities during a time when we would likely be able to raise capital from the public on terms
more favorable than those provided in these securities.
Effecting A Change Of Control Of DUSA Would Be Difficult, Which May Discourage Offers For Shares Of
Our Common Stock.
Our certificate of incorporation authorizes the board of directors to issue up to 100,000,000
shares of stock, 40,000,000 of which are common stock. The board of directors has the authority to
determine the price, rights, preferences and privileges, including voting rights, of the remaining
60,000,000 shares without any further vote or action by the shareholders. The rights of the holders
of our common stock will be subject to, and may be adversely affected by, the rights of the holders
of any preferred stock that may be issued in the future.
On September 27, 2002, we adopted a shareholder rights plan at a special meeting of our board of
directors. The rights plan could discourage, delay or prevent a person or group from acquiring 15%
or more of our common stock, thereby limiting, perhaps, the ability of certain of our shareholders
to benefit from such a transaction.
The rights plan provides for the distribution of one right as a dividend for each outstanding share
of our common stock to holders of record as of October 10, 2002. Each right entitles the registered
holder to purchase one one-thousandths of a share of preferred stock at an exercise price of $37.00
per right. The rights will be exercisable subsequent to the date that a person or group either has
acquired, obtained the right to acquire, or commences or discloses an intention to commence a
tender offer to acquire, 15% or more of our outstanding common stock or if a person or group is
declared an “Adverse Person”, as such term is defined in the rights plan. The rights may be
redeemed by us at a redemption price of one one-hundredth of a cent per right until ten days
following the date the person or group acquires, or discloses an intention to acquire, 15% or more,
as the case may be, of DUSA, or until such later date as may be determined by our board of
directors.
Under the rights plan, if a person or group acquires the threshold amount of common stock, all
holders of rights (other than the acquiring person or group) may, upon payment of the purchase
price then in effect, purchase shares of common stock of DUSA having a value of twice the purchase
price. In the event that we are involved in a merger or other similar transaction where we are not
the surviving corporation, all holders of rights (other than the acquiring person or group) shall
be entitled, upon payment of the purchase price then in effect, to purchase common stock of the
surviving corporation having a value of twice the purchase price. The rights will expire on October
10, 2012, unless previously redeemed. Our board of directors has also adopted certain amendments to
our certificate of incorporation consistent with the terms of the rights plan.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. [REMOVED AND RESERVED].
ITEM 5. OTHER INFORMATION.
On May 5, 2011, DUSA Pharmaceuticals, Inc. issued a press release announcing summary financial
results for the fiscal quarter ended March 31, 2011. The press release issued in connection with
such announcement is attached hereto as Exhibit 99.1.
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ITEM 6. EXHIBITS
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| EXHIBIT |
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DESCRIPTION OF EXHIBIT |
3(a.1)
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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. |
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3(a.2)
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Certificate of Amendment to the Certificate of Incorporation, as amended, dated October 28, 2002 and filed as Exhibit
99.3 to the Registrant’s Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2002, filed November
12, 2002, and is incorporated herein by reference. |
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3(b)
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By-laws of the Registrant, filed as Exhibit 3.1 to the Registrant’s current report on Form 8-K, filed on November 2,
2010, and is incorporated herein by reference. |
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31(a)
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Certification pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934. |
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31(b)
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Certification pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934. |
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32(a)
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Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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32(b)
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Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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99.1
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Press Release dated May 5, 2011. |
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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.
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DUSA Pharmaceuticals, Inc.
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By: |
/s/ Robert F. Doman
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Robert Doman |
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President and Chief Executive Officer
(principal executive officer) |
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Dated: May 5, 2011
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By: |
/s/ Richard C. Christopher
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Richard C. Christopher |
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Vice President, Finance and Chief Financial
Officer (principal financial officer) |
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Dated: May 5, 2011
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EXHIBIT INDEX
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3(a.1)
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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. |
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3(a.2)
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Certificate of Amendment to the Certificate of Incorporation, as amended, dated October 28, 2002 and filed as Exhibit
99.3 to the Registrant’s Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2002, filed November
12, 2002, and is incorporated herein by reference. |
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3(b)
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By-laws of the Registrant, filed as Exhibit 3.1 to the Registrant’s current report on Form 8-K, filed on November 2,
2009, and is incorporated herein by reference. |
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31(a)
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Certification pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934. |
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31(b)
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Certification pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934. |
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32(a)
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Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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32(b)
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Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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99.1
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Press Release dated May 5, 2011. |
31