UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

		For the transition period from                      to

Commission file number: 001-31533

DUSA PHARMACEUTICALS, INC.

(Exact Name of Registrant as Specified in Its Charter)

New Jersey (State of Other Jurisdiction of Incorporation or Organization)		22-3103129 (I.R.S. Employer Identification No.)
25 Upton Drive, Wilmington, MA (Address of Principal Executive Offices)		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 þ 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):

Large accelerated filer o		Accelerated filer o		Non-accelerated filer þ (Do not check if a smaller reporting company)		Smaller reporting company o

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 November 9, 2011, the registrant had 24,649,364 shares of Common Stock, no par value per share, outstanding.

 

 

DUSA PHARMACEUTICALS, INC. TABLE OF CONTENTS TO FORM 10-Q

		Page
		Number
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
- Condensed Consolidated Balance Sheets at September 30, 2011 and December 31, 2010 (Unaudited)			3
- Condensed Consolidated Statements of Operations for the three and nine-month periods ended September 30, 2011 and 2010 (Unaudited)			4
- Condensed Consolidated Statements of Cash Flows for the nine-month periods ended September 30, 2011 and 2010 (Unaudited)			5
- Notes to the Condensed Consolidated Financial Statements (Unaudited)			6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			15
Item 3. Quantitative and Qualitative Disclosures About Market Risk			24
Item 4. Controls and Procedures			24
PART II. OTHER INFORMATION
Item 1. Legal Proceedings			24
Item 1A. Risk Factors			24
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			33
Item 3. Defaults Upon Senior Securities			33
Item 4. Removed and Reserved			33
Item 5. Other Information			33
Item 6. Exhibits			33
SIGNATURES			34
Exhibit Index			35
EX-31.A
EX-31.B
EX-32.A
EX-32.B
EX-99.1
EX-31.A
EX-31.B
EX-32.A
EX-32.B
EX-99.1
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

PART I.

ITEM 1. FINANCIAL STATEMENTS

DUSA PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

		September 30,				December 31,
		2011				2010
ASSETS
CURRENT ASSETS
Cash and cash equivalents		$	23,301,191			$	8,884,402
Marketable securities			1,116,215				10,762,559
Accounts receivable, net of allowance for doubtful accounts of $50,000 and $60,000 in 2011 and 2010, respectively			2,231,374				3,311,467
Inventory			2,967,131				2,165,220
Prepaid and other current assets			754,289				1,344,062
TOTAL CURRENT ASSETS			30,370,200				26,467,710
Restricted cash			175,587				174,753
Property, plant and equipment, net			1,521,601				1,582,777
Deferred charges and other assets			61,902				68,099
TOTAL ASSETS		$	32,129,290			$	28,293,339
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES
Accounts payable		$	1,017,419			$	162,742
Accrued compensation			960,489				2,243,997
Other accrued expenses			2,723,889				2,348,838
Deferred revenue			—				712,338
TOTAL CURRENT LIABILITIES			4,701,797				5,467,915
Deferred revenue			908,578				1,917,237
Warrant liability			1,698,769				1,203,553
Other liabilities			161,822				181,153
TOTAL LIABILITIES			7,470,966				8,769,858
COMMITMENTS AND CONTINGENCIES (NOTE 13)
SHAREHOLDERS’ EQUITY
Capital Stock Authorized: 100,000,000 shares; 40,000,000 shares designated as common stock, no par, and 60,000,000 shares issuable in series or classes; and 40,000 junior Series A preferred shares. Issued and outstanding: 24,649,364 and 24,239,365 shares of common stock, no par, at September 30, 2011 and December 31, 2010, respectively			151,985,400				151,703,468
Additional paid-in capital			10,283,724				9,399,434
Accumulated deficit			(137,644,010	)			(141,656,600	)
Accumulated other comprehensive income			33,210				77,179
TOTAL SHAREHOLDERS’ EQUITY			24,658,324				19,523,481
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY		$	32,129,290			$	28,293,339

See the accompanying Notes to the Condensed Consolidated Financial Statements.

DUSA PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

		Three-months ended								Nine-months ended
		September 30,								September 30,
		2011				2010				2011				2010
Product revenues		$	9,447,918			$	8,015,546			$	30,292,804			$	25,430,363
Cost of product revenues			1,536,581				1,627,782				4,891,140				5,228,075
GROSS MARGIN			7,911,337				6,387,764				25,401,664				20,202,288
Operating costs:
Research and development			1,307,054				1,283,771				3,739,472				3,643,849
Marketing and sales			3,352,535				2,792,780				10,614,332				9,544,564
General and administrative			2,323,072				2,208,898				7,335,106				6,919,128
Gain on sale of assets			—				—				(750,000	)			—
TOTAL OPERATING COSTS			6,982,661				6,285,449				20,938,910				20,107,541
INCOME FROM OPERATIONS			928,676				102,315				4,462,754				94,747
Gain (loss) on change in fair value of warrants			2,569,154				(130,674	)			(495,216	)			(486,964	)
Other income			9,065				61,183				45,052				188,752
NET INCOME (LOSS)		$	3,506,895			$	32,824			$	4,012,590			$	(203,465	)
BASIC NET INCOME (LOSS) PER COMMON SHARE		$	0.14			$	0.00			$	0.16			$	(0.01	)
DILUTED NET INCOME (LOSS) PER COMMON SHARE		$	0.13			$	0.00			$	0.15			$	(0.01	)
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING, BASIC			24,649,364				24,209,215				24,492,137				24,173,399
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING, DILUTED			26,442,251				24,658,844				26,385,140				24,173,399

See the accompanying Notes to the Condensed Consolidated Financial Statements.

DUSA PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

		Nine-months ended
		September 30,
		2011				2010
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)		$	4,012,590			$	(203,465	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Accretion of premiums and discounts on marketable securities			(13,288	)			5,236
Share-based compensation			884,290				920,755
Depreciation and amortization			332,254				295,020
Loss on change in fair value of warrants			495,216				486,964
Gain on sale of assets			(750,000	)			—
Deferred revenues recognized			(1,720,997	)			(1,077,933	)
Changes in other assets and liabilities impacting cash flows from operations:
Accounts receivable			1,080,093				177,480
Inventory			(801,911	)			(99,330	)
Prepaid and other assets			595,970				625,652
Accounts payable, accrued compensation and other accrued expenses			(53,780	)			(513,474	)
Other liabilities			(19,331	)			(43,001	)
NET CASH PROVIDED BY OPERATING ACTIVITIES			4,041,106				573,904
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of marketable securities			(1,499,337	)			(12,742,296	)
Proceeds from maturities and sales of marketable securities			11,115,000				10,885,000
Proceeds from sale of assets			750,000				—
Restricted cash			(834	)			(332	)
Purchases of property, plant and equipment			(271,078	)			(128,896	)
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES			10,093,751				(1,986,524	)
CASH FLOWS FROM FINANCING ACTIVITIES
Stock option exercises			515,689				25,993
Settlements of restricted stock for tax withholding obligations			(233,757	)			(42,490	)
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES			281,932				(16,497	)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS			14,416,789				(1,429,117	)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD			8,884,402				7,613,378
CASH AND CASH EQUIVALENTS AT END OF PERIOD		$	23,301,191			$	6,184,261

DUSA PHARMACEUTICALS, INC.

1) BASIS OF PRESENTATION

The Condensed Consolidated Balance Sheet as of September 30, 2011, the Condensed Consolidated Statements of Operations for the three- and nine-month periods ended September 30, 2011 and 2010, and the Condensed Consolidated Statements of Cash Flows for the nine-month periods ended September 30, 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 Condensed Consolidated Balance Sheet as of December 31, 2010 included herein was 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.

The Company considers events or transactions that occur after the balance sheet date but before the financial statements are issued to provide additional evidence relative to certain estimates or to identify matters that require disclosure. Subsequent events have been evaluated through the date of issuance of these financial statements.

2) NEW ACCOUNTING PRONOUNCEMENTS

In June 2011, the FASB issued Accounting Standards Update (ASU) No. 2011-05, “Comprehensive Income (Topic 220)” (ASU 2011-05). This newly issued accounting standard (1) eliminates the option to present the components of other comprehensive income as part of the statement of changes in shareholders’ equity; (2) requires the consecutive presentation of the statement of net income and other comprehensive income; and (3) requires an entity to present reclassification adjustments on the face of the financial statements from other comprehensive income to net income. The amendments in this ASU do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income nor do the amendments affect how earnings per share is calculated or presented. This ASU is required to be applied retrospectively and is effective for fiscal years and interim periods within those years beginning after December 15, 2011, which for the Company means January 1, 2012. As this accounting standard only requires enhanced disclosure, the adoption of this standard will not impact the Company’s financial position or results of operations.

In May 2011, the FASB issued ASU No. 2011-04, “Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs” (ASU 2011-04). This newly issued accounting standard clarifies the application of certain existing fair value measurement guidance and expands the disclosures for fair value measurements that are estimated using significant unobservable (Level 3) inputs. This ASU is effective on a prospective basis for annual and interim reporting periods beginning on or after December 15, 2011, which for the Company means January 1, 2012. The Company does not expect that adoption of this standard will have a material impact on our financial position or results of operations.

3) 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:

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.

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.

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 marketable securities 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 Condensed Consolidated Balance Sheet, classified according to the three categories described above:

						Fair Value Measurements at September 30, 2011
		Carrying Value				(Level 1)				(Level 2)				(Level 3)
Assets
Cash and cash equivalents		$	23,301,000			$	23,301,000			$	—			$	—
United States government-backed securities			576,000				—				576,000				—
Corporate securities			540,000				—				540,000				—
Total assets at fair value		$	24,417,000			$	23,301,000			$	1,116,000			$	—
Liabilities
Warrant liability			1,699,000				—				—				1,699,000
Total liabilities at fair value		$	1,699,000			$	—			$	—			$	1,699,000

						Fair Value Measurements at December 31, 2010
		Carrying Value				(Level 1)				(Level 2)				(Level 3)
Assets
Cash and cash equivalents		$	8,884,000			$	8,884,000			$	—			$	—
United States government-backed securities			9,985,000				—				9,985,000				—
Corporate securities			778,000				—				778,000				—
Total assets at fair value		$	19,647,000			$	8,884,000			$	10,763,000			$	—
Liabilities
Warrant liability			1,204,000				—				—				1,204,000
Total liabilities at fair value		$	1,204,000			$	—			$	—			$	1,204,000

     The Company reviewed the level classifications of its investments at September 30, 2011 compared to December 31, 2010 and determined that there were no significant transfers between levels in the nine-month period ended September 30, 2011.

     The table below includes a rollforward of the balance sheet amounts for the three and nine-month periods ended September 30, 2011 and 2010 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).

Fair Value Measurements Using Significant Unobservable Inputs (Level 3)

Three-Months Ended September 30, 2011

Total

Unrealized

Purchases,

Fair Value

Gain

Sales,

Transfers

at

Recognized in

Issuances,

In and/or

Fair Value at

Change in

July 1,

Statement

Settlements,

Out of

September 30,

Unrealized

2011

Of Operations

net

Level 3

2011

Gains in 2011

Warrant Liability

$

4,268,000

$

(2,569,000

)

$

—

$

—

$

1,699,000

$

(2,569,000

)

Fair Value Measurements Using Significant Unobservable Inputs (Level 3)

Three-Months Ended September 30, 2010

Total

Unrealized

Purchases,

Loss

Sales,

Transfers

Fair Value at

Recognized in

Issuances,

In and/or

Fair Value at

Change in

July 1,

Statement Of

Settlements,

Out of

September 30,

Unrealized

2010

Operations

net

Level 3

2010

Losses in 2011

Warrant Liability

$

1,169,000

$

131,000

$

—

$

—

$

1,300,000

$

131,000

Fair Value Measurements Using Significant Unobservable Inputs (Level 3)

Nine-Months Ended September 30, 2011

Total

Unrealized

Purchases,

Loss

Sales,

Transfers

Fair Value at

Recognized in

Issuances,

In and/or

Fair Value at

Change in

January 1,

Statement Of

Settlements,

Out of

September 30,

Unrealized

2011

Operations

net

Level 3

2011

Losses in 2011

Warrant Liability

$

1,204,000

$

495,000

$

—

$

—

$

1,699,000

$

495,000

Fair Value Measurements Using Significant Unobservable Inputs (Level 3)

Nine-Months Ended September 30, 2010

Total

Unrealized

Purchases,

Loss

Sales,

Transfers

Fair Value at

Recognized in

Issuances,

In and/or

Fair Value at

Change in

January 1,

Statement Of

Settlements,

Out of

September 30,

Unrealized

2010

Operations

net

Level 3

2010

Losses in 2011

Warrant Liability

$

813,000

$

487,000

$

—

$

—

$

1,300,000

$

487,000

Marketable Securities

     The Company’s marketable securities consist of the following:

		September 30, 2011
						Gross				Gross
		Amortized				Unrealized				Unrealized				Fair
		Cost				Gains				Losses				Value
United States government-backed securities		$	554,000			$	22,000			$	—			$	576,000
Corporate securities			529,000				11,000				—				540,000
Total marketable securities		$	1,083,000			$	33,000			$	—			$	1,116,000

		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 nine-month periods ended September 30, 2011 and 2010 was $44,000 and $111,000, respectively, which has been recorded in accumulated other comprehensive income and is reported as part of shareholders’ equity in the Condensed Consolidated Balance Sheets. Realized losses on sales of marketable securities were $0 for the nine-

month periods ended September 30, 2011 and 2010. As of September 30, 2011, current yields range from 4.27% to 6.36% and maturity dates range from October 2011 to January 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 gains (losses) for the three and nine-month periods ended September 30, 2011 were $2,569,000 and ($495,000), respectively, compared with ($131,000) and ($487,000), respectively, for the comparable 2010 periods. At September 30, 2011 and December 31, 2010, the aggregate fair value of these warrants was $1,699,000 and $1,204,000, respectively. Assumptions used for the Black-Scholes option-pricing models in determining the fair value as of September 30, 2011 and December 31, 2010 are as follows:

		September 30,				December 31,
		2011				2010
Expected volatility			62.5	%			81	%
Remaining contractual term (years)			1.6				2.3
Risk-free interest rate			0.25	%			0.7	%
Expected dividend yield			0	%			0	%
Common stock price		$	3.70			$	2.45

4) 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. At September 30, 2011, there were no customers representing over 10% of the Company’s accounts receivable balance. 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.

5) INVENTORY

Inventory consisted of the following:

		September 30,				December 31,
		2011				2010
Finished goods		$	1,398,000			$	907,000
BLU-U® evaluation units			105,000				129,000
Work in process			432,000				371,000
Raw materials			1,032,000				758,000
Total		$	2,967,000			$	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 of three years to approximate its net realizable value.

6) OTHER ACCRUED EXPENSES

Other accrued expenses consisted of the following:

		September 30,				December 31,
		2011				2010
Research and development costs		$	216,000			$	231,000
Marketing and sales costs			176,000				195,000
Reserve for sales returns and allowances			238,000				125,000
Other product related costs			878,000				798,000
Legal and other professional fees			495,000				308,000
Due to former Sirius shareholders			246,000				232,000
Employee benefits			326,000				298,000
Other expenses			149,000				162,000
Total		$	2,724,000			$	2,349,000

7) SHARE-BASED COMPENSATION

Total share-based compensation expense, related to all of the Company’s share-based awards, recognized for the three and nine-month periods ended September 30, 2011 and 2010 included the following line items:

		Three-months ended								Nine-months ended
		September 30,				September 30,				September 30,				September 30,
		2011				2010				2011				2010
Cost of product revenues		$	14,000			$	11,000			$	39,000			$	38,000
Research and development			39,000				29,000				106,000				94,000
Marketing and sales			57,000				37,000				164,000				83,000
General and administrative			202,000				356,000				575,000				706,000
Share-based compensation expense		$	312,000			$	433,000			$	884,000			$	921,000

Incentive And Non-qualified Stock Options —

The weighted-average estimated fair values of employee stock options granted during the three and nine-month periods ended September 30, 2011 were $2.85 and $2.89 per share, respectively, using the Black-Scholes option valuation model with the following weighted-average assumptions (annualized percentages):

		Three-months ended				Nine-months ended
		September 30, 2011
Expected volatility			78.72	%			77.21	%
Risk-free interest rate			1.29	%			2.22	%
Expected dividend yield			0	%			0	%
Expected life-directors and officers (years)			5.94				5.94
Expected life-non-officer employees (years)			5.58				5.58

A summary of stock option activity for the nine-month period ended September 30, 2011 is as follows:

										Average
						Weighted				Remaining
						Average				Contractual				Aggregate
						Exercise				Term				Intrinsic
						Price				(Years)				Value
Outstanding, beginning of period, January 1, 2011			3,064,050			$	4.09							$
Options granted			150,300			$	4.37
Options forfeited			(25,037	)		$	2.34
Options expired			(101,500	)		$	13.45
Options exercised			(273,338	)		$	1.89
Outstanding, end of period			2,814,475			$	3.99				4.12			$	3,488,000
Exercisable, end of period			1,839,314			$	5.08				3.57			$	1,674,000
Options vested and expected to vest, end of period			2,695,728			$	4.08				4.07			$	3,287,000

Unvested Shares Of Common Stock —

A summary of unvested shares of common stock activity for the nine-month periods ended September 30, 2011 and 2010 is as follows:

		2011				2010
Outstanding, beginning of period,			586,000				393,250
Shares granted			506,000				308,000
Shares vested			(191,250	)			(115,250	)
Outstanding, end of period			900,750				586,000

		2011				2010
Weighted average grant date fair value of shares vested during period		$	1.88			$	1.41
Weighted average grant date fair value of shares granted during period		$	4.42			$	1.65
Weighted average grant date fair value of unvested shares, end of period		$	3.08			$	1.52
Weighted average remaining years to vest			2.73				2.90

     At September 30, 2011 total unrecognized estimated compensation cost related to non-vested common shares was $2,212,000, which is expected to be recognized over a weighted average period of 2.73 years. At September 30, 2011 total unrecognized estimated compensation cost related to stock options was $924,000 which is expected to be recognized over a weighted average period of 2.16 years.

8) BASIC AND DILUTED NET INCOME (LOSS) PER SHARE

Basic net income (loss) per common share is based on the weighted-average number of common shares outstanding during each period. Diluted net income (loss) is based on the weighted-average shares outstanding and any contingently issuable shares. The net outstanding shares are adjusted for the dilutive effect of shares issuable upon the assumed conversion of the Company’s common stock equivalents, which consist of outstanding stock options, warrants and unvested shares of common stock.

		Three-months ended								Nine-months ended
		September 30, 2011				September 30, 2010				September 30, 2011				September 30, 2010
Weighted average common shares outstanding-basic			24,649,364				24,209,215				24,492,137				24,173,399
Stock options, warrants and unvested shares of common stock			1,792,887				449,629				1,893,003				—
Weighted average common shares outstanding-diluted			26,442,251				24,658,844				26,385,140				24,173,399

The following stock options were not included in weighted average diluted common shares outstanding because they are anti-dilutive:

		Three-months ended								Nine-months ended
		September 30, 2011				September 30, 2010				September 30, 2011				September 30, 2010
Stock options			902,000				2,934,000				894,000				3,173,000
Warrants			—				1,395,000				—				1,395,000
Unvested shares of common stock			42,000				375,000				14,000				586,000
Total			944,000				4,704,000				908,000				5,154,000

9) SEGMENT REPORTING

The Company has two reportable segments: Photodynamic Therapy (PDT) Drug and Device Products and Non-Photodynamic Therapy (Non-PDT) 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-months ended								Nine-months ended
		September 30, 2011				September 30, 2010				September 30, 2011				September 30, 2010
REVENUES
PDT drug and device product revenues		$	9,374,000			$	7,837,000			$	30,027,000			$	24,544,000
Non-PDT product revenues			74,000				179,000				266,000				886,000
Total revenues			9,448,000				8,016,000				30,293,000				25,430,000

		Three-months ended								Nine-months ended
		September 30,				September 30,				September 30,				September 30,
		2011				2010				2011				2010
COSTS OF REVENUES
PDT drug and device cost of product revenues			1,398,000				1,305,000				4,472,000				4,348,000
Non-PDT cost of product revenues			139,000				323,000				419,000				880,000
Total cost of revenues			1,537,000				1,628,000				4,891,000				5,228,000
GROSS MARGIN
PDT drug and device product gross margin			7,976,000				6,532,000				25,555,000				20,196,000
Non-PDT gross margin			(65,000	)			(144,000	)			(153,000	)			6,000
Total gross margin		$	7,911,000			$	6,388,000			$	25,402,000			$	20,202,000

During the three and nine-month periods ended September 30, 2011 and 2010, the Company derived revenues from the following geographies based on the location of the customer (as a percentage of revenues):

		Three-months ended								Nine-months ended
		September 30,				September 30,				September 30,				September 30,
		2011				2010				2011				2010
United States			83	%			89	%			93	%			94	%
Canada			1	%			2	%			1	%			2	%
Korea			16	%			1	%			6	%			1	%
Latin America			—	%			8	%			—	%			3	%
Total			100	%			100	%			100	%			100	%

10) COMPREHENSIVE INCOME (LOSS)

For the three and nine-month periods ended September 30, 2011 and 2010, comprehensive loss consisted of the following:

		Three-months ended								Nine-months ended
		September 30, 2011				September 30, 2010				September 30, 2011				September 30, 2010
NET INCOME (LOSS)		$	3,507,000			$	33,000			$	4,013,000			$	(203,000	)
Change in net unrealized gains on marketable securities available-for-sale			(16,000	)			(36,000	)			(44,000	)			(111,000	)
COMPREHENSIVE INCOME (LOSS)		$	3,491,000			$	(3,000	)		$	3,969,000			$	(314,000	)

11) SIGNIFICANT PRODUCT AGREEMENTS

Daewoong Agreement

In the third quarter of 2011, the Company terminated its Marketing, Distribution and Supply Agreement, dated January 4, 2007, as amended, as of January 10, 2007, September 8, 2008 and June 20, 2011 with Daewoong Pharmaceutical, Co., LTD. and DNC Daewoong Derma & Plastic Surgery Network Company (collectively “Daewoong”). The Company sent notice of termination of the agreement on August 31, 2011 based on DUSA’s contractual right to unilaterally terminate the agreement as a result of certain regulatory milestones that were not achieved. As a result of the termination, the Company has recorded $1,379,000 of revenues that were previously deferred, comprised of deferred drug shipments of $301,000 and the unamortized balance of milestone payments of $1,078,000, and has recorded $71,000 of costs of revenues that were previously deferred. For the three and nine-month periods ended September 30, 2011 the Daewoong termination resulted in the recognition of $1,308,000 of income from operations.

Stiefel Agreement

     In the third quarter of 2010, the Company gave notice to Stiefel Laboratories, Inc. (“Stiefel”) 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. For the three and nine-month periods ended September 30, 2010 the Stiefel termination resulted in the recognition of $513,000 of income from operations.

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.

     Photocure is obligated to pay the Company royalties on sales of its ester products to the extent they are covered by the Company’s 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 Condensed Consolidated Balance Sheets.

12) INCOME TAXES

     There is no provision for income taxes due to the utilization of operating loss carryforwards for which a full valuation allowance had been provided. As of December 31, 2010, the Company 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 concluded that it is not more-likely-than-not that the Company’s deferred tax assets will be realized and therefore have provided a full valuation allowance against the deferred tax assets at September 30, 2011 and December 31, 2010. In concluding that it is not more-likely-than-not that the Company’s deferred tax assets will be realized, the Company evaluated both positive and negative evidence regarding the future realization of these assets. This evaluation requires the Company to make difficult, subjective and complex judgments regarding its projections of taxable income and the amount and expiration dates of its net operating loss carryforwards and other deferred tax assets. In forming its conclusion as to whether the deferred tax assets are more likely than not to be realized, the Company has considered its historical cumulative profit and loss position, adjusted for non-recurring items, its sources of future taxable income and the projected stability of those sources. However, in future periods it is reasonably possible that the Company may release all or a portion of its valuation allowance if operations continue to improve.

     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 utilization of the NOL carryforwards generated prior to the 2007 Ownership Change are subject to an annual limitation of approximately $3.0 million per year for the first five years after the ownership change. 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. If such future ownership changes were to occur, it is a possibility that the Company could be required to pay federal income taxes in the near-term.

13) 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 $246,000, is included in other accrued expenses in the accompanying Condensed Consolidated Balance Sheets.

     The Company has not accrued amounts for any other potential contingencies as of September 30, 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 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. For the nine-month periods ended September 30, 2011 and 2010, total rent expense under operating leases was approximately $266,000 and $290,000, respectively. Future minimum payments under lease arrangements at September 30, 2011 are as follows:

		Operating
Years Ending December 31,		Lease Obligations
2011		$	96,000
2012			389,000
2013			396,000
2014			367,000
Total		$	1,248,000

14) GAIN ON SALE OF ASSETS

     On June 30, 2011 the Company entered into an Asset Purchase Agreement with Acella Pharmaceuticals, LLC (“Acella”) pursuant to which the Company sold to Acella U.S. Patent No. 6,979,468 covering Nicomide^®, together with the trademarks Nicomide^® and Nicomide-T^®, and related domain names (the “Divested Assets”). The Divested Assets, which had a book value of $0, were sold for cash consideration of $750,000, all of which was paid at the closing. The Company ceased selling Nicomide^® in June, 2008. The agreement includes customary representations, warranties and covenants for a transaction of this type.

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^®.

     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.

     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^®, 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. 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^®.

     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. We merged with Sirius in March 2006. In the second quarter of 2011, we sold the patent that covers Nicomide^®, the key product which we acquired from Sirius, together with the trademarks, Nicomide^® and Nicomide-T^®, and related domain names to Acella Pharmaceuticals, LLC for $750,000 in cash. The entire purchase price was paid at the closing of the transaction.

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. Other than noted below, there have been no other changes to our critical accounting policies in the nine-month period ended September 30, 2011.

Changes in Critical Accounting Policies

Income Taxes

Prior to 2010, we had historically incurred domestic operating losses from both a financial reporting and tax return standpoint. We establish valuation allowances if it appears more likely than not that our deferred tax assets will not be realized. In concluding that it is not more-likely-than-not that our deferred tax assets will be realized, we have evaluated both positive and negative evidence regarding the future realization of these assets. This evaluation requires us to make difficult, subjective and complex judgments regarding our projections of taxable income and the amount and expiration dates of our net operating loss carryforwards and other deferred tax assets. In forming our conclusions as to whether the deferred tax assets are more likely than not to be realized we considered our historical cumulative profit and loss position, adjusted for non-recurring items, the sources of our future taxable income and the projected stability of those sources. We have historically established valuation allowances against all of our net deferred tax assets because of our history of generating operating losses and restrictions on the use of certain items.

RESULTS OF OPERATIONS — THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2011 VERSUS SEPTEMBER 30, 2010

REVENUES — Total revenues for the three- and nine-month periods ended September 30, 2011 were $9,448,000 and $30,293,000, respectively, as compared to $8,016,000 and $25,430,000 in 2010, and were comprised of the following:

		Three-months ended												Nine-months ended
		September 30,												September 30,
										INCREASE/												INCREASE/
		2011				2010				(DECREASE)				2011				2010				(DECREASE)
LEVULAN® KERASTICK® PRODUCT REVENUES
United States		$	7,314,000			$	6,678,000			$	636,000			$	26,639,000			$	21,837,000			$	4,802,000
Canada			89,000				153,000				(64,000	)			272,000				379,000				(107,000	)
Korea (1)			1,516,000				109,000				1,407,000				1,720,000				322,000				1,398,000
Latin America (2)			—				602,000				(602,000	)			—				778,000				(778,000	)
Subtotal Levulan® Kerastick® product revenues			8,919,000				7,542,000				1,377,000				28,631,000				23,316,000				5,315,000
BLU-U® PRODUCT REVENUES
United States			455,000				295,000				160,000				1,396,000				1,223,000				173,000
Canada			—				—				—				—				5,000				(5,000	)
Subtotal BLU-U® product revenues			455,000				295,000				160,000				1,396,000				1,228,000				168,000
TOTAL PDT PRODUCT REVENUES			9,374,000				7,837,000				1,537,000				30,027,000				24,544,000				5,483,000
NON-PDT PRODUCT REVENUES			74,000				179,000				(105,000	)			266,000				886,000				(620,000	)
TOTAL REVENUES		$	9,448,000			$	8,016,000			$	1,432,000			$	30,293,000			$	25,430,000			$	4,863,000

For the three- and nine-month periods ended September 30, 2011, total PDT product revenues, comprised of revenues from our Kerastick^® and BLU-U^® products, were $9,374,000 and $30,027,000, respectively. This represents an increase of $1,537,000, or 20%, and $5,483,000, or 22%, over the comparable 2010 totals of $7,837,000 and $24,544,000, respectively. The incremental revenues on a year-to-date basis was driven primarily by increased Kerastick^® and BLU-U^® revenues in the United States and the acceleration of deferred revenues related to the termination of our Asia Pacific distribution agreement with Daewoong.

For the three- and nine-month periods ended September 30, 2011, Kerastick^® revenues were $8,919,000, and $28,631,000, respectively, representing a $1,377,000, or 18%, and $5,315,000, or 23%, increase over the comparable 2010 totals of $7,542,000, and $23,316,000, respectively. Kerastick^® unit sales to end-users were 54,258 and 195,177, for the three- and nine-month periods ended September 30, 2011, respectively, including on a year-to-date basis, 188,754 sold in the United States, 2,838 units sold in Canada and 3,585 sold in Korea. This represents an increase from 53,724 and 176,924 Levulan^® Kerastick^® units sold in the three- and nine-month periods ended September 30, 2010, respectively, including on a year-to-date basis, 167,910 sold in the United States, 4,014 units sold in Canada, 3,228 sold in Korea and 1,772 sold in Latin America. Our overall average net selling price for the Kerastick^® increased to $138.82 per unit for the first nine months of 2011 from $126.64 per unit for the first nine months of 2010. Our average net selling price for the Kerastick^® in the United States increased to $141.12 per unit in 2011 from $129.71 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 and the acceleration of deferred revenues of $1,379,000, comprised of deferred drug shipments of $301,000 and the unamortized balance of milestone payments of $1,078,000, related to the termination of our Asia Pacific distribution agreement with Daewoong in the third quarter of 2011, while in the third quarter of 2010 we accelerated the recognition of $555,000 of deferred revenues related to the termination of our Latin American distribution agreement with Stiefel.

For the three- and nine-month periods ended September 30, 2011, BLU-U^® revenues were $455,000 and $1,396,000, respectively, representing a $160,000, or 54%, and $168,000, or 14%, increase over the comparable 2010 totals of $295,000 and $1,228,000, respectively. On a year-to-date basis in the United States BLU-U^® revenues increased 14% overall resulting primarily from an increase in our overall average selling price. In the three- and nine-month periods ended September 30, 2011, there were 61 and 181 units sold, respectively, versus 39 and 179 units

sold, respectively, in the comparable 2010 periods. All of the units sold in both years were sold in the United States, except for one that was sold in Canada in the first quarter of 2010. For the first nine months of 2011, our average net selling price for the BLU-U^® increased to $7,526 from $6,679 in 2010. The average net selling price of the BLU-U^® increased, in part, due to incentive discounting in the prior year in advance of the introduction of our new upgraded unit, which was launched in April 2010. 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 September 30, 2011, there were approximately 25 units in the field pursuant to this evaluation program, compared to 26 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.

Non-PDT product revenues reflect the revenues generated by the products acquired as part of our acquisition of Sirius. Total Non-PDT product revenues for the three- and nine-month periods ended September 30, 2011 were $74,000 and $266,000, respectively, compared to $179,000 and $886,000, respectively for the comparable 2010 periods. In 2011, the substantial majority of the Non-PDT 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 Pharmaceuticals, LLC, or 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 pursuant to the terms of our agreement with River’s Edge.

The increase in our total revenues for the three and nine-month periods ended September 30, 2011 compared with the comparable periods in 2010 results primarily from increased Kerastick^® and BLU-U^® revenues in the United States and the acceleration of deferred revenues of $1,379,000, comprised of deferred drug shipments of $301,000 and the unamortized balance of milestone payments of $1,078,000, related to the termination of our Asia Pacific distribution agreement with Daewoong in the third quarter of 2011, while in the third quarter of 2010 we accelerated the recognition of $555,000 of deferred revenues related to the termination of our Latin American distribution agreement with Stiefel.

During 2011, our PDT segment revenues in the United States grew as a result of increased demand for our product. We intend to announce an annual price increase in the fourth quarter of each year, 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^® and Allumera™. Galderma, S.A., a large dermatology company, holds a non-exclusive license from us to Metvixia^®, which was transferred to Galderma by Photocure ASA, our original licensee. This product received FDA approval for treatment of AKs in July 2004 and this product is directly competitive with our Levulan^® Kerastick^® product. 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. Also, in June 2011 Photocure announced the commercial launch of an ALA ester-based product, Allumera™, as a cosmetic, which could cause disruption in the marketplace. In addition, Leo Pharma, a Danish corporation that acquired Peplin in 2010, has announced that in 2012 it will be launching PEP005 for the treatment of AKs. These products could negatively impact the market penetration of our PDT products.

Our ability to maintain profitability on a quarterly basis may 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. During the second quarter of 2011, we entered into an Asset Purchase Agreement with Acella Pharmaceuticals, LLC, or Acella, pursuant to which we sold to Acella U.S. Patent No. 6,979,468 covering Nicomide^®, together with the trademarks Nicomide^® and Nicomide-T^®, and related domain names. These assets were sold for cash consideration of $750,000, all of which was paid at the closing of the transaction. We ceased selling Nicomide^® in June 2008. We continue to consider other strategic transactions for the remaining Non-PDT asset portfolio we acquired from Sirius. If such a transaction were to occur, it is at least possible that we would become obligated under the next cumulative sales milestone as described further in Footnote 13 to the Notes to the Condensed Consolidated Financial Statements.

Also see the section entitled “Risk Factors —We May Not Achieve Profitability On A Quarterly Basis Unless We Can Successfully Market And Sell Higher Quantities Of Our Products.”

Cost of Product Revenues — Cost of product revenues for the three- and nine-month periods ended September 30, 2011 were $1,537,000 and $4,891,000 as compared to $1,628,000 and $5,228,000 in the comparable periods in 2010. A summary of the components of cost of product revenues and royalties is provided below:

		THREE-MONTHS ENDED SEPTEMBER 30,
										INCREASE/
		2011				2010				(DECREASE)
Levulan® Kerastick® cost of product revenues and royalties
Direct and indirect Levulan® Kerastick® product costs		$	628,000			$	713,000			$	(85,000	)
Royalty and supply fees (1)			307,000				275,000				32,000
Subtotal Levulan® Kerastick® cost of product revenues and royalties		$	935,000			$	988,000			$	(53,000	)
BLU-U® cost of product revenues
Direct BLU-U® product costs		$	245,000			$	151,000			$	94,000
Other BLU-U® product costs including internal costs assigned to support products; as well as, costs incurred to ship and install the BLU-U® in physicians offices			218,000				166,000				52,000
Subtotal BLU-U® cost of product revenues		$	463,000			$	317,000			$	146,000
TOTAL PDT COST OF REVENUES AND ROYALTIES		$	1,398,000			$	1,305,000			$	93,000
Non-PDT drug cost of product revenues and royalties		$	139,000			$	323,000			$	(184,000	)
TOTAL COST OF REVENUES AND ROYALTIES		$	1,537,000			$	1,628,000			$	(91,000	)

		NINE-MONTHS ENDED SEPTEMBER 30,
										INCREASE/
		2011				2010				(DECREASE)
Levulan® Kerastick® cost of product revenues and royalties
Direct and indirect Levulan® Kerastick® product costs		$	2,066,000			$	2,175,000			$	(109,000	)
Royalty and supply fees (1)			1,081,000				891,000				190,000
Subtotal Levulan® Kerastick® cost of product revenues and royalties		$	3,147,000			$	3,066,000			$	81,000
BLU-U® cost of product revenues
Direct BLU-U® product costs		$	727,000			$	663,000			$	64,000
Other BLU-U® product costs including internal costs assigned to support products; as well as, costs incurred to ship and install the BLU-U® in physicians offices			598,000				619,000				(21,000	)
Subtotal BLU-U® cost of product revenues		$	1,325,000			$	1,282,000			$	43,000
TOTAL PDT COST OF REVENUES AND ROYALTIES		$	4,472,000			$	4,348,000			$	124,000
Non-PDT drug cost of product revenues and royalties		$	419,000			$	880,000			$	(461,000	)
TOTAL COST OF REVENUES AND ROYALTIES		$	4,891,000			$	5,228,000			$	(337,000	)

Margins — Total gross margins for the three- and nine-month periods ended September 30, 2011 were $7,911,000 and $25,402,000, respectively, as compared to $6,388,000 and $20,202,000 for the comparable 2010 periods, as shown below:

						THREE-MONTHS ENDED SEPTEMBER 30,
																		INCREASE/
		2011								2010								(DECREASE)
Levulan® Kerastick® gross margin		$	7,984,000				90	%		$	6,554,000				87	%		$	1,430,000
BLU-U® gross margin			(8,000	)			(2	)%			(22,000	)			(7	)%			14,000
Total PDT product gross margin		$	7,976,000				85	%		$	6,532,000				83	%		$	1,444,000
Total Non-PDT drug gross margin			(65,000	)			(87	)%			(144,000	)			(81	)%		$	79,000
TOTAL GROSS MARGIN		$	7,911,000				84	%		$	6,388,000				80	%		$	1,523,000