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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
DUSA Pharmaceuticals, Inc.
(Exact name of registrant as specified in its charter)
NEW JERSEY 22-3103129
State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
25 Upton Drive
Wilmington, Massachusetts 01887
(Address of principal executive offices) (Zip Code)
Commission File Number: 0-19777
Registrant's telephone number, including area code: (978) 657-7500
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to section 12(g) of the Act:
Common Stock
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(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 or Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the registrant computed by reference to the closing price of such stock as of
February 29, 2000 was $429,542,072.60.
The number of shares of common stock outstanding of the Registrant as of
February 29, 2000 was 12,008,505.
DOCUMENTS INCORPORATED BY REFERENCE
Document incorporated by reference to this Report is:
(1) NONE
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PART I
This Annual Report on Form 10-K and certain written and oral statements
incorporated herein by reference of DUSA Pharmaceuticals, Inc. (referred to as
"DUSA," "we,"and "us") contain forward-looking statements that have been made
pursuant to the provisions of the Private Securities Litigation Reform Act of
1995. Such forward-looking statements are based on current expectations,
estimates and projections about DUSA's industry, management's beliefs and
certain assumptions made by our management. Words such as "anticipates",
"expects", "intends", "plans", "believes", "seeks", "estimates", or variations
of such words and similar expressions, are intended to identify such
forward-looking statements. These statements are not guarantees of future
performance and are subject to certain risks, uncertainties and assumptions that
are difficult to predict particularly in the highly regulated pharmaceutical
industry in which we operate. Therefore, actual results may differ materially
from those expressed or forecasted in any such forward-looking statements. Such
risks and uncertainties include those set forth herein under "Risk Factors" on
page 23, as well as those noted in the documents incorporated herein by
reference. Unless required by law, we undertake no obligation to update publicly
any forward-looking statements, whether as a result of new information, future
events or otherwise. However, readers should carefully review the statements set
forth in other reports or documents we file from time to time with the
Securities and Exchange Commission, particularly the Quarterly Reports on Form
10-Q and any Current Reports on Form 8-K.
ITEM 1. BUSINESS
GENERAL
We are a pharmaceutical company developing drugs in combination with light
devices to treat or detect a variety of conditions in processes known as
photodynamic therapy or photodetection. We are engaged primarily in the research
and development of our first drug, the Levulan(R) brand of aminolevulinic acid
HCl, or ALA, with light, for use in a broad range of medical conditions. When we
use Levulan(R) and follow it with exposure to light to treat a medical
condition, it is known as Levulan(R) photodynamic therapy or Levulan(R) PDT.
When we use Levulan(R) and follow it with exposure to light to detect medical
conditions it is known as Levulan(R) photodetection or Levulan(R) PD.
On December 3, 1999, the United States Food and Drug Administration
approved our New Drug Application, called an NDA, to market our first product,
the Levulan(R) Kerastick(TM) 20% Topical Solution with PDT for the treatment of
actinic keratoses, or AKs, of the face and scalp. AKs are precancerous skin
lesions caused by chronic sun exposure. AKs can develop over time into a form of
skin cancer called squamous cell carcinoma. We also received approval of our
pre-market approval application, or PMA, of the clinical trial version of our
first light device product, called the BLU-U(TM). The commercial version of the
BLU-U(TM) which we intend to market is a modified version of the unit used in
the clinical studies. We are in the process of preparing a supplement to the PMA
covering these modifications, and intend to file it with the FDA during the
first quarter of 2000.
In November, 1999, we signed a marketing, development and supply agreement
with Schering AG, a German corporation, for dermatology products. We granted to
Schering AG the right to promote, market, sell, and distribute our Levulan(R)
Kerastick(TM) with PDT for AKs of the face and scalp on a worldwide basis (with
the exception of Canada). Schering AG will also promote the BLU-U(TM); however,
we are responsible for leasing or selling the units, as well as for repairs and
maintenance. Schering AG, and its United States affiliate, Berlex Laboratories,
Inc., have advised us that Berlex plans to launch Levulan(R) PDT for AKs in the
United States during the second quarter of 2000, subject to
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approval of the PMA supplement for the BLU-U(TM). We also intend to co-develop
and commercialize additional Levulan(R) products for other dermatology
disorders. Under the agreement, Schering AG has the exclusive right to market,
promote, sell and distribute the products which are developed in the
co-development program. Schering AG has agreed to fund two-thirds of the
co-development program, up to a total of $3.0 million per year, through 2001.
The parties may agree to continue to fund the co-development program beyond this
date. Under the terms of the agreement, we have received $15 million, including
$8.75 million in cash milestone payments and $6.25 million for which a Schering
AG affiliate received 340,458 shares of our common stock. Schering AG is
obligated to pay $8 million for future research and development support to be
used at our discretion and an additional milestone payment of $7 million within
30 days after the first commercial sale of the Levulan(R) Kerastick(TM),
provided that the FDA has approved the commercial model of the BLU-U(TM). See
"Business -- Strategic Partners" below.
We are developing Levulan(R) PDT and PD under an exclusive worldwide
license of patents and technology from PARTEQ Research and Development
Innovations, the licensing arm of Queen's University, Kingston, Ontario, Canada.
We also own or license certain patents relating to methods for using
pharmaceutical formulations which contain our drug and related processes and
improvements. In addition to the Levulan(R) trademark, we also have published
trademark applications for our drug applicator, the Kerastick(TM) and one of our
light devices, the BLU-U(TM).
We have submitted Levulan(R) PDT development proposals to Schering AG for
acne, photodamaged skin, warts, hair removal and onychomycosis, more commonly
known as nail fungus. Together, we expect to finalize the development program
for 2000 to include several of these conditions and to begin new clinical trials
shortly. Also during this year, we expect to begin a new Phase I/II clinical
trial using Levulan(R) for the detection of bladder cancer. We are also
currently supporting independent investigator trials to advance clinical
programs such as the use of Levulan(R) PDT to prevent restenosis, a narrowing of
blood vessels following balloon angioplasty; to treat dysfunctional uterine
bleeding; and to detect and/or treat precancer of the cervix, known as CIN. We
may also consider supporting other independent investigator clinical trials this
year to advance clinical programs such as use of Levulan(R) PDT to treat
Barrett's esophagus, a potentially precancerous condition of the throat.
On February 23, 2000, we signed a definitive agreement with ten mutual
funds or collective trust funds advised by INVESCO Funds Group, Inc. for a
private placement of 1,500,000 shares of our common stock. The purchase price is
$28.50 per share. The closing is scheduled to occur promptly after the
declaration by the SEC that a registration statement covering the shares is
effective. If the shares are not registered by 105 days following the filing of
the registration statement, the funds have the right to terminate the agreement.
We agreed to pay at closing a commission of 4.5% on the gross proceeds plus a
non-accountable expense allowance of $25,000 to the placement agent. See
"Management's Discussion and Analysis Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
We were incorporated on February 21, 1991, under to the laws of the State
of New Jersey. Our principal executive offices are currently located at 25 Upton
Drive, Wilmington, Massachusetts 01887 (telephone: (978) 657-7500). On March 3,
1994, we formed DUSA Pharmaceuticals New York, Inc., a wholly owned subsidiary
located in Valhalla, New York, to coordinate our research and development
efforts. We have financed our development stage operations primarily from sales
of securities in public offerings, and in private and offshore transactions that
are exempt from registration under the Securities Act of 1933, as amended, (the
"Act"). In January 1999, the Company completed a private placement under
Regulation D of the Act and raised $7.5 million in gross proceeds. See
"Management's Discussion and Analysis of Financial Condition -- Overview; --
Results of Operations; and -- Liquidity and Capital Resources" below.
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BUSINESS STRATEGY
The following are the key elements of our strategy:
- Successfully Launch our First Product. We are working with our
dermatology marketing partner, Schering AG, to begin selling, in the
United States, our first PDT system, the Levulan(R) Kerastick(TM) 20%
Topical Solution with our BLU-U(TM) for the treatment of AKs of the
face and scalp.
- Leveraging our Levulan(R) PDT/PD Platform to Develop Additional
Products. In dermatology, we intend, together with Schering AG, to
co-develop and commercialize additional Levulan(R) products for other
skin conditions. Outside dermatology, we intend to develop new drug
formulations and light devices to target large markets with unmet
medical needs, such as bladder cancer detection, prevention of
restenosis and the detection and/or treatment of a number of
gynecological conditions.
- Enter into Additional Strategic Alliances. When we believe that the
development program for a non-dermatology indication may be beyond our
own resources or may be advanced to market more rapidly with the use of
resources of a corporate partner, we may seek opportunities to license,
market or co-promote our products.
- Use the Results of Independent Researchers to Identify New
Applications. We will continue to support independent investigators'
research so that we have the benefit of human data when we evaluate
potential indications for corporate development. We will also continue
to monitor independent research in order to identify potential new
indications.
- Consider the Addition of Complimentary Products. We intend to evaluate
and pursue licensing and acquisition opportunities for complementary
products which may include drugs, devices, technologies or related
businesses.
PDT/PD OVERVIEW
In general, both photodynamic therapy and photodetection are two-step
processes:
- The first step is the application of a drug known as a
"photosensitizer," which collects in specific cells.
- The second step is activation of the photosensitizer by controlled
exposure to a selective light source.
During this process, energy from the light activates the photosensitizer.
In PDT, the activated photosensitizer transfers energy to oxygen molecules found
in cells, converting the oxygen into a highly energized form known as "singlet
oxygen", which destroys or alters the sensitized cells. In PD, the activated
photosensitizer emits energy in the form of light, making the sensitized cells
fluoresce, or "glow".
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The longer the wavelength of visible light, the deeper into tissue it
penetrates. Different wavelengths, or colors, of light, including red and blue
light, may be used to activate photosensitizers. The selection of the
appropriate color of light for a given indication is primarily based on two
criteria:
- the desired depth of penetration of the light into the target tissue,
and
- the efficiency of the light in activating the photosensitizer.
Blue light does not penetrate deeply into tissues and is better suited for
treating superficial lesions. It is generally a potent activator of
photosensitizers. Red light penetrates more deeply into the skin. Therefore, it
is better suited for treating cancers and deeper tissues, but it is generally
not as strong an activator of photosensitizers. Different photosensitizers do
not absorb all colors of visible light in the same manner. For any given
photosensitizer, some colors are more strongly absorbed than others.
Another consideration in selecting a light source is the location of the
target tissue. Lesions on the skin which are easily accessible can generally be
treated with a non-laser light source. Internal indications, which are often
more difficult to access, may require a laser in order to focus the light into a
small fiber optic delivery system which may be passed through an endoscope or
into a hollow organ.
PDT can be a highly selective treatment that targets specific tissue while
minimizing damage to normal surrounding tissue. It allows for a multiple course
of therapy. The photosensitizer and the light separately have no PDT/PD effect.
The most common side effect of photosensitizers that are taken systemically is
temporary skin sensitivity to bright light. Patients undergoing PDT and PD
treatments are usually advised to avoid direct sunlight and/or to wear
protective clothing during this period. Patients' indoor activities are
unrestricted except that they are told to avoid bright lights. The degree of
selectivity and period of skin photosensitivity varies among different
photosensitizers and is also related to the drug dose given.
OUR LEVULAN(R) PDT/PD PLATFORM
OUR LEVULAN(R) BRAND OF ALA
We have a unique approach to PDT and PD, using the human cell's own natural
processes. Levulan(R) PDT takes advantage of the fact that ALA is the first
product in a natural biosynthetic pathway present in virtually all living human
cells. In normal cells, the production of ALA is tightly regulated through a
feedback inhibition process. In our PDT/PD system, excess ALA, as Levulan(R) is
added from outside the cell, bypassing the normal feedback inhibition. The ALA
is then converted through a number of steps into a potent natural
photosensitizer named protoporphyrin IX, or PpIX. This is the compound that is
activated by light during Levulan(R) PDT/PD, especially in fast growing cells.
Any PpIX that remains after treatment is eliminated naturally by the same enzyme
pathway.
We believe that Levulan(R) is unique among PDT/PD agents. It has the
following features:
- Naturally Occurring. ALA is a naturally occurring substance found in
virtually all human cells.
- Small Molecule. Levulan(R) is a small molecule that is easily absorbed
whether delivered topically, orally, or intravenously.
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- Highly Selective. Levulan(R) is not itself a photosensitizer, but is a
pro-drug that is converted through a cell-based process into the
photosensitizer PpIX. The combination of topical application, tissue
specific uptake and conversion into PpIX and targeted light delivery
make this a highly selective process. Therefore, we can achieve
clinical effects in targeted tissue with minimal effects to normal
surrounding and underlying tissue.
- Controlled Activation. Levulan(R) has no PDT effect without exposure to
light at specific wavelengths, so the therapy is easily controlled.
Scientists believe that the accumulation of PpIX following the application of
Levulan(R) is more pronounced in:
- rapidly growing diseased tissues, such as precancerous and cancerous
lesions,
- conditions characterized by rapidly proliferating inflammatory cells,
such as acne and psoriasis, and
- in certain normally fast-growing tissues, such as hair follicles and
the lining of the uterus.
OUR KERASTICK(TM) BRAND APPLICATOR
We designed our proprietary Kerastick(TM) specifically for use with
Levulan(R). It is a single-use, disposable applicator which allows for the rapid
preparation and uniform application of Levulan(R) topical solution in
standardized doses. The Kerastick(TM) has two separate glass ampules, one
containing Levulan(R) powder and one containing a liquid vehicle, enclosed
within a plastic tube and an outer cardboard sleeve. There is a filter and a
metered dosing tip at one end. Prior to application, the doctor or nurse crushes
and shakes the Kerastick(TM) according to directions to mix the contents into a
solution. The Kerastick(TM) tip is then dabbed on to the individual AK lesions,
releasing a predetermined amount of Levulan(R) 20% solution.
OUR LIGHT SOURCES
Customized light sources are critical to successful Levulan(R) PDT/PD
because the effectiveness of Levulan(R) therapy depends on delivering light at
the appropriate wavelengths and intensities. We intend to continue to develop
integrated drug and light device systems, in which the light sources:
- are compact and tailored to fit specific medical needs;
- are pre-programmed and easy to use; and
- provide cost-effective therapy.
Our proprietary BLU-U(TM) is a fluorescent light source that can treat the
entire face or scalp at one time which has been specifically designed for use
with Levulan(R). The light source is compact and easily portable. It can be used
in a physician's office, requires minimal floor space, and plugs into a standard
electrical outlet. The BLU-U(TM) also incorporates a proprietary regulator that
controls the optical power of the light source to within specified limits. It
has a simple control panel consisting of an on-off key switch and digital timer
which turns off the light automatically at the end of the treatment.
We are using non-laser light sources whenever feasible because, compared to
lasers, they are:
- safer;
- simpler to use;
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- more reliable; and
- far less expensive.
For treatment of AKs, our BLU-U(TM) uses blue light which penetrates
superficial skin lesions and is a potent activator of PpIX. Longer red
wavelengths penetrate more deeply into tissue but are not as potent activators
of PpIX. Therefore, for treatment of superficial lesions of the skin, such as
AKs and acne, we are using relatively low intensity, non-laser blue light
sources, which are designed to treat large areas, such as the entire face or
body. For destruction of hair follicles or treatment of diseases which have
lesions which may penetrate several millimeters into the skin or other tissue,
e.g. for most forms of cancer, high-powered red light is preferable. We have
United States and foreign patents and patent applications pending which relate
to devices and methods of using light devices for use in Levulan(R) PDT and PD.
See "Business -- Patents and Trademarks" below.
We also have an agreement with Richard Wolf Medical Instruments Corp. for
the supply of proprietary non-laser light sources and cystoscopes to be used in
our clinical trial for bladder cancer detection. The Wolf light device was
utilized by the investigators in our Phase I/II clinical trial for bladder
cancer detection. See "Business -- Supply Partners" below.
Our Levulan(R) PDT/PD research and development team has experience in the
development and regulatory approval process of both drugs and devices for use in
clinical PDT/PD.
OUR PRODUCTS
The following table outlines our products and product candidates. Our
research and development expenses for the last three years were $4,194,532 in
1999, $4,502,391 in 1998 and $6,252,830 in 1997.
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PRODUCT/INDICATION REGULATORY STATUS MARKETING RIGHTS(1)
DERMATOLOGY
Levulan(R) Kerastick(TM) and BLU-U(TM) for PDT of AKs Approved; Phase IV - Planned Schering AG
Levulan(R) PDT for Acne Phase I/II(2) Schering AG
Levulan(R) PDT for Facial Photodamaged Skin Phase I/II - Proposed(2) Schering AG
Levulan(R) PDT for Recalcitrant Wart Removal Phase I/II - Proposed(2) Schering AG
Levulan(R) PDT for Onychomycosis (Nail Fungus) Phase I/II - Proposed(2) Schering AG
Levulan(R) PDT for Hair Removal Phase I/II - Proposed(2) Schering AG
Levulan(R) PDT for Psoriasis Investigator Study Schering AG
Levulan(R) PDT for Cutaneous T-Cell Lymphoma Investigator Study Schering AG
OTHER INDICATIONS
Levulan(R) for Bladder Cancer Detection Phase I/II DUSA
Levulan(R) PDT for Prevention of Restenosis Investigator Study DUSA
Levulan(R) PDT for Barrett's Esophagus Investigator Study DUSA
Levulan(R) PDT for Dysfunctional Uterine Bleeding Investigator Study DUSA
Levulan(R) PDT/PD for Cervical Intraepitheleal Neoplasia Investigator Study DUSA
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(1) Draxis Health, Inc., our former parent, holds a license to
PARTEQ's ALA patents for Canada.
(2) Under consideration for co-development with Schering AG.
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DERMATOLOGY INDICATIONS
Actinic Keratoses (AKs). AKs are superficial precancerous skin lesions
usually appearing as rough, scaly patches of skin with some underlying redness.
The current preferred methods of treating AKs are cryotherapy, or the freezing
of skin, using liquid nitrogen, and 5-flourouracil cream, or 5-FU. Although both
methods can be effective, each has limitations and can result in significant
side effects. Cryotherapy is non-selective, is usually painful at the site of
freezing and can cause blistering and loss of skin pigmentation, leaving white
spots. In addition, because there is no standardized treatment protocol, results
are not uniform. 5-FU can be highly irritating and requires twice-a-day
application by the patient for approximately two to four weeks, resulting in
inflammation, redness and erosion or rawness of the skin. Following the
treatment an additional one to two weeks of healing is required.
Our approved treatment method involves applying Levulan(R) 20% topical
solution using the Kerastick(TM) to the AK lesions, followed 14-18 hours later
with exposure to our BLU-U(TM) for approximately 17 minutes. In 1998, we
completed two identical Phase III trials to test the safety and efficacy of our
therapy. Over 240 patients were treated at a total of 16 sites across the U.S.
Each patient had at least four and not more than 15 AKs. We treated patients in
the control group with solution without the active drug. The results showed
clearing (no visual or palpable evidence of the AK) in 83% of the AK lesions
after one treatment with Levulan(R). We repeated treatment of any remaining AK
lesions after eight weeks. At 12 weeks, after one or two treatments, 91% of
lesions had cleared as compared to 25% of the lesions in the control group. The
only adverse medical effect of our treatment was a stinging/burning sensation of
the AK lesions during exposure to our BLU-U(TM). This discomfort subsided
shortly after the light treatment ended. During the next several years, we plan
to carry out two Phase IV trials as required by the FDA; one to evaluate the
long-term effects of our therapy, and the second to test for allergic skin
reactions to our therapy.
Acne. Acne is a common skin condition caused by the blockage and/or
inflammation of sebaceous (oil) glands. In our ongoing clinical trials, we are
targeting patients with mild to moderate facial inflammatory acne. Traditional
treatments for this form of acne include over-the-counter topical medications
for mild cases, and prescription topical medications or oral antibiotics for
mild to moderate cases. An oral retinoid drug called Accutane(R)(1) is the
treatment of choice for cystic acne and can be used for mod erate to severe
inflammatory acne. Over-the-counter treatments are often not effective and can
result in side effects, including drying, flaking and redness. Prescription
antibiotics lead to improvement in many cases, but patients must often take them
on a long-term basis. Accutane(R) can have a variety of side effects, from
dryness of the lips and joint pains, to birth defects, elevated levels of
triglycerides, and liver enzymes. With Levulan(R) PDT therapy for acne, we are
seeking to improve or clear patients' acne without the need for long-term oral
therapy, and with fewer side effects than current therapies.
Based on pre-existing knowledge about ALA activity in sebaceous glands, we
carried out a small study in acne patients in 1994. The preliminary results
showed specific localization and conversion of Levulan(R) to PpIX in the acne
lesions, which suggested that we may be able to treat acne with Levulan(R) PDT.
In 1995, we sponsored a Phase I/II human clinical trial which confirmed the
selective accumulation of PpIX in acne lesions after application of Levulan(R)
in a small number of patients. As a next step, we conducted a Phase I/II
dose-ranging clinical trial using topical Levulan(R) and a proprietary non-laser
red light. We designed the study primarily to test safety and to help guide the
design of Phase II clinical trials. The clinical response was encouraging.
Patients tolerated the treatments well, and no adverse events were reported. In
October 1999, we began a new Phase I/II
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(1) Accutane(R) is a registered trademark of Hoffman La-Roche.
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clinical trial designed to test the safety and efficacy of repeated doses of
Levulan(R) 20% topical solution followed by light exposure using the BLU-U(TM).
Facial Photodamaged Skin. Photodamaged skin, which is skin damaged by the
sun, occurs primarily in fair-skinned individuals after many years of sun
exposure. Signs of photodamaged skin include roughness, wrinkles and brown
spots. AKs also tend to occur in areas of photodamaged skin. There are numerous
consumer cosmetic and herbal products which claim to lessen or relieve the
symptoms of photodamaged skin. In most cases, there is little scientific data to
support these claims. The FDA has approved only one prescription drug to treat
this common skin condition, Renova(R)(2). Patients generally use the product for
between six and 24 weeks before improvement may be seen.
As part of our AK clinical trials, we conducted a Phase II safety and
efficacy study, testing 64 patients with three to seven AK lesions of the face
or scalp within an area of photodamaged skin. The physician investigators
applied Levulan(R) 20% solution over the entire area including the photodamaged
skin. After 14-18 hours, the patients were treated with blue light at differing
light doses. Investigators noticed marked improvement in the roughness of skin
and some degree of improvement of wrinkles and brown spots in two-thirds of the
patients. However, ten of the 64 patients found that the burning and stinging of
the PDT therapy was too uncomfortable and as a result the treatment was either
terminated early or the light power was reduced. No one reported a serious
treatment-related adverse event. Based upon these results, we have proposed two
studies on the treatment of photodamaged skin to Schering AG for this year's
development program.
Recalcitrant Hand and Foot Warts. Warts, which are characterized by
abnormal epidermal skin cell growth, are a common skin condition caused by the
human papilloma virus (HPV). Warts are usually treated first with
over-the-counter salicylic acid preparations. Often, these treatments are
successful. However, in cases where the warts do not clear, patients normally
consult a physician. The physician's next line of therapy is usually cryotherapy
with liquid nitrogen which is applied by the doctor for anywhere from weeks to
months to years in rare cases. This treatment is painful and can occasionally
leave scars. Some dermatologists use lasers to treat warts, although this
process can also take many treatments with no guarantee of success. Often, the
warts still persist despite all attempts at treatment and we refer to them as
recalcitrant warts.
In an independent Danish randomized clinical trial using ALA PDT on 30
patients with 250 warts, the investigator reported, in 1999, that one of the
treatment groups showed a 70% elimination of recalcitrant warts through a 12
month period. Based on these results, we have proposed to Schering AG that we
include development of Levulan(R) PDT for warts in the dermatology
co-development program.
Onychomycosis. This condition is more commonly known as nail fungus.
Current topical therapies are only effective in a small percentage of patients.
Oral prescription medications are more effective but must be taken over 12 weeks
or more, and pose risks of systemic side effects such as liver disease and
adverse interactions with other medications. In an unpublished investigator
study, 12 patients received a single treatment of Levulan(R) to their infected
nail, which was then exposed to a non-laser red light source. Three patients
showed a complete response to the Levulan(R) PDT. They lost their nail after one
week and regrew a new nail which was free of nail fungus. Based on this
investigator study, DUSA and Schering AG are considering co-development of a
therapy for this indication.
Hair Removal. Unwanted hair is a common problem that is experienced
by both men and women of all races and skin colors. Currently, permanent hair
removal involves procedures using electrolysis
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(2) Renova(R) is a registered trademark of Johnson & Johnson.
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or lasers. Electrolysis requires insertion of an electrified needle into each
hair follicle. It requires numerous treatments over extended periods of time
that can have varying degrees of success. Laser treatments do not require a
needle but, instead, heat the hairs by absorption of laser light energy. Laser
treatments work best for individuals with light skin and dark hair, but usually
they do not work as well for individuals with darker skin tones.
We believe that due to the selective properties of Levulan(R) PDT for
targeting rapidly growing cells, such as hair follicle cells, we may be able to
achieve biologically targeted permanent hair removal without the need for
heating or burning the individual hairs. In an independent pilot study performed
by researchers from Massachusetts General Hospital-Harvard Medical School using
a Levulan(R) formulation that we supplied and a laser light source, researchers
achieved hair removal in 12 subjects who were followed for up to six months. In
June 1999, we announced the results of our first Phase I/II clinical study
examining the ability of Levulan(R) PDT to permanently remove human hair. Thirty
patients were enrolled in this study at three clinical trial sites in the United
States. Investigators counted the hairs on a portion of each patient's upper leg
(thigh region) to establish a baseline. These areas were then treated with
Levulan(R) 20% topical solution. Patients then received a dose of light from a
non-laser red light source which we developed, or a dose of red laser light. The
patient's other thigh received only placebo treatment. Patients were followed
for six months after the single Levulan(R) PDT treatment. The study results
showed that when the non-laser light source was used, patients who received the
highest intensity and duration of light showed a reduction in hair count from
the baseline of approximately 10-15% as compared with that seen in the
non-treated control site. Levulan(R) plus laser light delivered at high doses
showed the best result, a 20-24% reduction in hair count as compared with
control sites. Because only 25-28% of the hairs on the thigh are actively
growing at any one time, it appears that Levulan(R) with non-laser light was
able to affect a significant portion of the actively growing hair and Levulan(R)
with laser light appeared to affect essentially all of the actively growing
hair. A majority of patients treated with each type of light source experienced
mild to moderate burning and stinging during light exposure. Hyperpigmentation
or freckling of the skin was also observed in the majority of patients treated
using this protocol. In some cases the freckling remained throughout the 6 month
follow-up. Therefore, we have proposed a new protocol to Schering AG seeking to
reduce the freckling and increase the amount of hair removed.
OTHER INDICATIONS
Bladder Cancer Detection. According to the American Cancer Society, there
will be more than 50,000 new cases of bladder cancer diagnosed this year in the
United States. Bladder cancer is most often treated by surgical removal of the
tumor, but in many of these cases tumors recur within two to three years.
Doctors screen high-risk patients regularly for bladder cancer, because of the
risk of recurrence. One of the standard methods for bladder cancer detection
involves using a cystoscope to view the bladder with white light.
We believe that Levulan(R) PD for bladder cancer may complement current
white light cystoscopy methods, giving urologists an additional tool to help
detect bladder cancer. Two independent European studies of bladder cancer in 82
patients showed the selective accumulation of PpIX in human bladder tumors and
precancerous lesions following ALA application. These tumors and lesions showed
fluorescence when exposed to certain wavelengths of light, allowing the
identification of malignant and precancerous lesions, including lesions which
were missed by routine visual examination using white light. Based upon this
early clinical data, we decided to undertake our own Phase I/II multi-center
clinical trial for enhancement of bladder cancer detection using Levulan(R) PD
and an endoscope light source provided by Richard Wolf Medical Instruments Corp.
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The study was completed in December 1999. Based on preliminary analysis of
the data, we found a total of 109 cancers in 73 patients. Levulan(R) plus blue
light detected 12 cancers which were not identified by any other method. In this
study, areas which appeared normal under white light were also biopsied by the
investigator (random biopsy method). An additional 15 cancers were detected
using this random biopsy method, only one of which was also detected using blue
light and Levulan(R). There were no significant side effects reported
attributable to the Levulan(R) PD procedure. These results suggest that for
optimal detection of bladder cancer, it appears that Levulan(R) and blue light
should be used together with white light cystoscopy and random biopsy. However,
biopsies are not normally carried out during office-based cystoscopies due to
the increased risks of this procedure. We believe, based upon a review of the
clinical trial data with a panel of urology experts, that there may be an
opportunity to develop Levulan(R) PD as an adjunct to white light cystoscopies
for office-based surveillance procedures. We are currently planning the design
of clinical trials with the goal of optimizing this technique. We intend to
begin new trials during late 2000.
Prevention of Restenosis Following Balloon Angioplasty. Restenosis is the
re-narrowing of an artery after balloon angioplasty due to the rapid growth of
smooth muscle cells at the site of the angioplasty. Many patients who undergo
balloon angioplasty suffer restenosis within six months of the procedure.
Current forms of treatment for restenosis involve repeated angioplasty
procedures, stenting or by-pass surgery. Animal studies have shown that
Levulan(R) PDT prevents the rapid growth of smooth muscle cells within the
artery after balloon angioplasty. In October 1999, results were published in the
British Journal of Surgery from an investigator study using Levulan(R) PDT to
reduce restenosis after balloon angioplasty. The investigators studied seven
patients with a total of eight blockages of the femoral (leg) artery. Each of
the patients had undergone conventional balloon angioplasty for blockages in the
femoral artery within the previous two to six months, and all of the patients
had developed restenosis and associated symptoms, including leg pains, calf
pains, and muscle cramps while walking. In the study, patients received oral
doses of Levulan(R) and then underwent a second balloon angioplasty procedure.
After the angioplasty procedure, red laser light was delivered to the site
through the transparent angioplasty balloon. There were no reported
complications from the procedure. All of the patients had symptomatic relief
and, during the six month follow-up period, none of the patients had any
recurrence of symptoms. At the end of the six month period, the investigators
examined all the treated arteries, each of which remained open to some degree.
Testing showed no evidence of restenosis at three sites; 25% restenosis at three
sites; and 40% restenosis at two sites. We are currently assisting with the
design of a randomized controlled investigator study to further evaluate the use
of Levulan(R) PDT in the prevention of restenosis following balloon angioplasty.
This study is expected to begin in 2000.
Barrett's Esophagus. Barrett's esophagus is a potentially precancerous
condition of the esophagus which occurs when the lining of the esophagus
converts to stomach-type tissue in response to chronic exposure to stomach acid.
Over time, the area of the esophagus affected can develop precancerous and
eventually cancerous cells. The condition is often undetected until the disease
reaches later stages. According to the American Cancer Society, patients with
this condition have an increased risk of esophageal cancer which is 50 times
higher than that of the overall population. Esophageal cancer is one of the
deadliest forms of cancer, with five-year survival rates of less than one
percent for late-stage patients.
There are no effective treatments for early-stage Barrett's esophagus.
Doctors treat milder forms of the condition with medication, to reduce stomach
acid. A current treatment for more advanced, pre-cancerous, Barrett's esophagus
involves surgery to remove affected areas of the esophagus.
Since European studies have shown that Barrett's esophagus cells have a
high degree of selectivity for Levulan(R), we intend to continue to support
investigator studies involving the use of Levulan(R) PDT for the treatment of
Barrett's esophagus lesions. We believe that potential damage to
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the muscle wall of the esophagus should not occur with Levulan(R) since PpIX
accumulation has not been observed in the underlying muscle tissue.
Dysfunctional Uterine Bleeding. Dysfunctional uterine bleeding occurs when
the lining of the uterus (the endometrium) responds abnormally to the hormonal
changes associated with menstruation. Treatments for dysfunctional uterine
bleeding include hysterectomy, or removal of the uterus by surgery, or
endometrial ablation, the destruction of the lining of the uterus by surgical or
thermal methods. In endometrial ablation treatments where the uterus is not
removed, incomplete ablation and/or damage to the muscle wall of the uterus can
result. Therefore, we propose to use Levulan(R) PDT as a less invasive and less
costly treatment for dysfunctional uterine bleeding. We have supported research
by independent investigators using Levulan(R) to treat this condition in
clinical studies at centers in the United Kingdom and the United States. These
studies have shown that endometrial tissue selectively absorbs Levulan(R) with
no evidence of toxicity. We believe our product system is a good candidate for
clinical trials because Levulan(R) is selectively absorbed by the lining of the
uterus and activated by light sources which can be inserted into the uterus
without the need to anesthetize the patient. We are currently supporting a pilot
human trial for treatment of dysfunctional uterine bleeding which began in
January 2000.
Cervical Intraepitheleal Neoplasia. Cervical intraepitheleal neoplasia, or
CIN, is a common precancerous condition of the cervix. Doctors use the pap smear
(cervical cytology specimens) to screen for cancerous and precancerous
conditions of the cervix. Each year, millions of pap smear procedures are
performed in the United States. Approximately one-third of the test results
reveal some abnormality of the cervical tissue, and in many of these cases the
results are suspicious but not conclusive and therefore cannot be definitively
diagnosed. We believe that Levulan(R) PD could help doctors to locate and biopsy
the abnormal cervical tissue.
In March 1997, an investigator-sponsored study showed the selectivity of
Levulan(R) PDT/PD for CIN tissue. We are considering supporting a new
investigator-sponsored study to examine the use of Levulan(R) as an adjunct to
pap smears to begin sometime in 2000.
OTHER POTENTIAL INDICATIONS
There may be numerous other potential therapeutic and cancer detection uses
for Levulan(R) PDT/PD, and we may support research in several of these areas, as
appropriate, with pilot trials, and/or investigator-sponsored studies, based on
pre-clinical, clinical, regulatory and marketing criteria we have established
through our strategic planning processes. Some of these potential uses in
dermatology include treatment of skin cancers, such as squamous cell carcinomas
and cutaneous T-cell lymphomas, psoriasis, and genital warts; and
non-dermatology indications may include detection and/or treatment of brain
cancer, gastro-intestinal tumors, and oral cavity cancer.
STRATEGIC PARTNERS
In November 1999, we signed a marketing, development and supply agreement
with Schering AG for the use of our Levulan(R) products to treat or detect
dermatology disorders. Schering AG is a large multi-national pharmaceutical
company which has significant dermatology sales outside the United States. Under
the agreement, we granted to Schering AG the exclusive worldwide right, except
for Canada, to promote, market, sell and distribute our Levulan(R) Kerastick(TM)
with PDT for AKs, and any additional dermatology products developed under the
co-development program. The parties have agreed to jointly fund the dermatology
co-development program for at least two years, with Schering AG contributing
two-thirds of the joint committee-approved budget, while we contribute the
remaining one-third. For the years 2000 and 2001, the parties have committed to
a budget of $4.5 million, subject to
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final agreement on the development program. Schering AG also has limited rights
to negotiate with us for rights to non-dermatology products which we intend to
develop with other corporate partners.
We have already received $15 million, including $8.75 million in cash
milestone payments and $6.25 million for which a Schering AG affiliate received
340,458 shares of our common stock. Schering AG is obligated to pay $8 million
for future research and development support to be used at our discretion and an
additional milestone payment of $7 million within 30 days after the first
commercial sale of the Levulan(R) Kerastick(TM), provided that the FDA has
approved the commercial model of our BLU-U(TM).
Schering AG has indicated that it initially plans to target dermatologists
in the United States using dedicated sales representatives. The launch of
Levulan(R) PDT by Schering AG's United States affiliate, Berlex Laboratories,
Inc., represents our partner's entree into the U.S. dermatology marketplace. We
will be responsible for the manufacture and supply of the Kerastick(TM) to
Schering AG. Schering AG will pay a supply price to us for the drug products, as
well as a royalty on drug sales. Schering AG will also promote the BLU-U(TM)
which we expect to lease directly to dermatologists and other physicians. We
have agreed to maintain and repair the BLU-U(TM) units under lease/maintenance
agreements with the end-users. Under the terms of a guaranty, Schering AG has
agreed to guarantee the lease payments by each lessee up to our cost of the
BLU-U(TM) from our third-party manufacturer. The guaranty will expire on the
second anniversary of the first delivery to an end-user of a BLU-U(TM). In
addition, Schering AG has agreed to provide us with an interest-free line of
credit for up to $1 million to finance inventory of BLU-U(TM) units. Our
repayment of amounts borrowed under the line of credit is secured by the
BLU-U(TM) units. Any amounts we draw on the line of credit must be repaid within
12 months.
The marketing, development and supply agreement terminates on a
product-by-product basis in each country in the territory on the later of (a)
12-1/2 years after the first commercial sale of a respective product in such
country, or (b) the expiration of patents pertaining to the manufacture, sale or
use of such product in such country. It terminates in its entirety upon the
expiration of the agreement with respect to all products in all countries
covered by the agreement. Subject to various terms and conditions, the parties
may terminate the agreement earlier.
SUPPLY PARTNERS
National Biological Corporation. In November 1998, we entered into a
purchase and supply agreement with NBC for the manufacture of some of our light
sources, including the BLU-U(TM). We have agreed to order from NBC all of our
supply needs of these light sources for the United States and Canada and NBC has
agreed to supply us with the quantities we order. If an opportunity arises, the
parties have agreed to negotiate the terms under which NBC would supply us with
light sources for sale in countries other than the current territories.
NBC has granted to us a license to manufacture the light sources if NBC
fails to meet our supply needs. Under these circumstances, we would also have a
worldwide license to import, use, sell or dispose of the light sources under
NBC's technology within the field of PDT. Also, NBC has agreed that it will not
supply light sources that may be used to compete with our business. The
agreement has a ten year term, subject to earlier termination for breach or
insolvency or for convenience. However, a termination for convenience requires
12 months' prior written notice which may not be given before the third
anniversary of the date of the agreement.
We have also entered a co-development agreement with NBC to develop light
devices meeting particular specifications for use in PDT. NBC has the exclusive
right to manufacture and supply these light sources to us, subject to the terms
of the purchase and supply agreement between the parties.
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Richard Wolf Medical Instruments Corp. We entered an agreement with Wolf in
May 1997 for the supply to us, at no cost, of proprietary non-laser light
sources and cystoscopes, along with technical and regulatory support, to be used
in our first Phase I/II clinical trial for bladder cancer detection. The Wolf
light device was utilized by the investigators in the clinical trial. We also
have the right under the agreement to qualify other manufacturers' light sources
and/or cystoscopes with the FDA for use in Levulan(R) PD of bladder cancer.
North Safety Products. In September 1999, we entered into a purchase and
supply agreement with North, a unit of Norcross Safety Products, LLC., for the
manufacture and supply of our Kerastick(TM) brand applicator. We have agreed to
purchase from North a significant portion of our total commercial requirements
for supply of the Kerastick(TM) for sale in the United States and Canada. Prices
for the product are based on the quantities of Kerasticks(TM) ordered which are
subject to change depending on various product costs and competitive market
conditions.
The agreement has a five year term which may be extended. North has the
right to terminate the agreement earlier if certain minimum levels of product
orders are not reached. Similarly, we can terminate for stated breaches of the
agreement.
Sochinaz S.A. Under an agreement dated December 24, 1993, Sochinaz
manufactures and supplies all of our requirements of Levulan(R) worldwide from
its FDA approved facility in Switzerland. The agreement remains in effect for
five years from the receipt of our first drug approval, or until December 3,
2004. While we can obtain alternative supply sources in certain circumstances,
any new supplier would have to be inspected and qualified by the FDA.
LICENSES
PARTEQ Research and Development Innovations. We license the patents
underlying our Levulan(R) PDT/PD systems under a license agreement with PARTEQ
Research and Development Innovations, the licensing arm of Queen's University,
Kingston, Ontario. Under the agreement, we have been granted an exclusive
worldwide license, with a right to sublicense, under PARTEQ patent rights, to
make, have made, use and sell products which are precursors of PpIX, including
ALA. The agreement covers certain use patent rights. It also includes any
improvements discovered, developed or acquired by or for PARTEQ, or Queen's
University, to which PARTEQ has the right to grant a license. A non-exclusive
right is reserved to Queen's University to use the subject matter of the
agreement for non-commercial educational and research purposes. A right is
reserved to the Department of National Defense Canada to use the licensed rights
for defense purposes including defense procurement but excluding sales to third
parties.
When we are selling our products directly, we have agreed to pay to PARTEQ
royalties of 6% and 4% on 66% of the net selling price in countries where patent
rights do and do not exist, respectively. In cases where we have a sublicensee,
such as Schering AG, we will pay 6% and 4% when patent rights do and do not
exist, respectively, on our net selling price less the cost of goods for
products sold to the sublicensee, and 6% of royalty payments we receive on sales
of products by the sublicensee. We are also obligated to pay 5% of any lump sum
sublicense fees paid to us, such as milestone payments, excluding amounts
designated by the sublicensee for future research and development efforts. The
agreement is effective for the life of the latest United States patents and
becomes perpetual and royalty-free when no United States patent subsists. See
Note 9a. to the Company's Notes to the Consolidated Financial Statements. We
have the right to terminate the PARTEQ agreement with or without cause upon 90
days notice.
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We paid a minimum royalty of CDN $100,000 to PARTEQ during 1998. Following
the receipt of FDA approval in December 1999, we paid PARTEQ a milestone payment
of CDN $100,000 and, a prorated annual minimum royalty payment on sales of
products which totaled CDN $3,836. From now on, annual minimum royalties to
PARTEQ on sales of products must total at least CDN $100,000. Now that we have
entered into the agreement with Schering AG, we are also obligated to pay to
PARTEQ additional minimum payments in amounts up to CDN $1.1 million of which
CDN $632,056 has been paid, including a credit for the CDN $100,000 paid in
1998, based upon the milestone payments we received from Schering AG. The CDN
$1.1 million is credited in full against our obligation to pay 5% of the lump
sums we received from Schering AG (other than for future research and
development).
Together with PARTEQ and Draxis Health, Inc., our former parent, we entered
into an agreement (the "ALA Assignment Agreement") effective October 7, 1991.
According to the terms of this agreement we assigned to Draxis our rights and
obligations under the license agreement to the extent they relate to Canada. In
addition, we have agreed to disclose to Draxis on an ongoing basis, any
technology which is available to us relating to the subject matter of the
license agreement which would assist Draxis in developing the Canadian market
under the assigned rights. Draxis is responsible for royalties which would
otherwise be payable by us in accordance with the license agreement for net
Canadian sales of products and sublicensing revenues. Draxis has also agreed to
pay us a royalty of two percent of net Canadian sales of products.
Other License. We acquired a license from a British technology firm in
April 1997 to develop and market an incoherent, or non-laser, light source which
is a candidate for use in our dysfunctional uterine bleeding, bladder cancer
detection and/or other clinical programs. On February 24, 2000, we were served
with legal papers relating to a lawsuit filed by Photo Therapeutics Limited in
the British High Court of Justice - Chancery Division, Claim No.: HC 2000 00
777. Photo Therapeutics is the assignee of the license agreement. The agreement
dated April 8, 1997 grants us exclusive rights in North, Central and South
American countries and non-exclusive rights in numerous European countries to
develop, manufacture, market and sell a patented light device and improvements
to the device. We paid a fee of Pound sterling 10,000 ($16,421) upon execution,
and will pay royalties on sales ranging from 1.25% to 5% depending on the patent
status and territory in which sales may occur. The lawsuit alleges that we
breached the agreement by failing to use our best endeavors to develop the
device. Photo Therapeutics is seeking unspecified damages, return of the
technology and information relating to the device and a declaration that the
agreement has been terminated. We are reviewing the complaint and while we
believe we have meritorious defenses, we cannot determine the outcome at this
early stage of the litigation. We do not believe that this matter will have a
material adverse effect on our business, results of operations or financial
condition.
OTHER RELATIONSHIPS
We have entered into various agreements in the ordinary course of business,
described in general below, in order to implement our research and development
program and to investigate potential new uses for Levulan(R) PDT and PD.
Progress of our research and development program could be delayed if the terms
of the agreements are not fulfilled by third parties.
Consultants. We maintain a consulting relationship with Guidelines, Inc.
("Guidelines") for the purpose of carrying out, among other responsibilities,
preclinical and formulations supervision, clinical trial development, and
assistance with the NDA filing and review process. We pay retainer fees to
Guidelines at a rate of $360,000 per year. Also, we pay additional consulting
fees to Guidelines if consulting services to us exceeds 2,600 hours annually.
Guidelines has been granted options to purchase up to 20,000 shares of our
common stock. If for any reason these services are terminated, we believe that
we could contract with other firms to perform the services provided by
Guidelines. However, there
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is no guarantee that we could replace Guidelines without causing a delay to our
clinical programs and without an increase in costs.
In February, 1999 we entered an equipment lease with Lumenetics, Inc., our
former light device consultants, whose principals became DUSA employees during
May, 1998. The equipment lease provides us with an option to acquire the
equipment and to apply the lease payments to the purchase price.
Contemporaneously with the signing of the equipment lease, the parties agreed to
terminate our payment obligations under the parties' consulting and development
agreement dated October 1997. See Note 9f. to the Company's Notes to
Consolidated Financial Statements.
Unrestricted Grants. We have awarded unrestricted grants to various
investigators in the field of Levulan(R) PDT in certain areas in which we have
an interest. These studies range from animal model work to pilot human studies
under "investigator INDs" in various clinical indications. These grants are
awarded and evaluated on an annual basis and, although renewable, are considered
on a case-by-case basis.
Preclinical Research Contracts. We have preclinical research contracts with
several universities to carry out animal studies in areas relevant to the
clinical development of Levulan(R) PDT. Toxicological studies required for drug
development work are carried out using contract research organizations.
Clinical Trials. DUSA-sponsored clinical studies are supported by
contracts with clinical trial sites including universities, hospitals and
private practitioners.
PATENTS AND TRADEMARKS
We actively seek, when appropriate, to protect our products and proprietary
information through United States and foreign patents, trademarks and
contractual arrangements. In addition, we rely on trade secrets and contractual
arrangements to protect certain of our proprietary information and products.
Our ability to compete successfully depends, in part, on our ability to
defend our patents that have issued, obtain new patents, protect trade secrets
and operate without infringing the proprietary rights of others. We have no
product patent protection for the compound ALA itself, as our basic patents are
for methods of detecting and treating various diseased tissues using ALA or
related compounds called precursors, in combination with light. Even where we
have patent protection, there is no guarantee that we will be able to enforce
our patents. Patent litigation is expensive, and we may not be able to afford
the costs. We own or exclusively license patents and patent applications related
to the following:
- unique physical forms of ALA;
- methods of using ALA and its unique physical forms in combination with
light; and
- compositions and apparatus for those methods.
These patents expire no earlier than 2009, and certain patents are entitled
to terms beyond that date.
We entered into a license agreement effective August 27, 1991 with PARTEQ
Research & Development Innovations, the licensing arm of Queen's University at
Kingston, Ontario, and Draxis Health, Inc. Under this agreement, we hold an
exclusive worldwide license to certain patent rights from PARTEQ in the United
States and a limited number of foreign countries.
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All United States patents and patent applications licensed from PARTEQ
relating to ALA are method of treatment patents. Method of treatment patents
limit direct infringement to users of the methods of treatment covered by the
patents. We currently have patents and/or pending patent applications in the
United States and in a number of foreign countries covering unique physical
forms of ALA, compositions containing ALA, as well as ALA applicators, light
sources for use with ALA, and other technology. We cannot guaranty that any
pending patent applications will mature into issued patents.
We have limited patent protection outside the United States which may make
it easier for third-parties to compete there. Our basic method of treatment
patents and applications have counter-parts in only four foreign countries. Even
with the issuance of additional patents, other parties are free to develop other
uses of ALA, including medical uses, and to market ALA for such uses, assuming
that they have obtained appropriate regulatory marketing approvals. Certain
forms of ALA are commercially available chemical products. ALA in the form
commercially supplied for decades is not itself subject to patent protection. In
fact, there are reports of several third-parties conducting clinical studies
with ALA for the treatment of certain conditions in countries outside the United
States of America where PARTEQ may not have patent protection Additionally,
enforcement of a given patent may not be practicable or an economically viable
alternative.
We can give no assurance that a third-party or parties will not claim (with
or without merit) that we have infringed or misappropriated their proprietary
rights. A number of entities have obtained, and are attempting to obtain patent
protection for various uses of ALA. We can give no assurances as to whether any
issued patents, or patents that may later issue to third-parties, may affect the
uses on which we are working or whether such patents can be avoided, invalidated
or licensed if they cannot be avoided or invalidated. If any third-party were to
assert a claim for infringement, we can give no assurances that we would be
successful in the litigation or that such litigation would not have a material
adverse effect on our business, financial condition and results of operation.
Furthermore, we may not be able to afford the expense of defending against such
a claim.
Thermolase Corporation has patents that may affect our ability to
commercialize the use of ALA for hair removal. We are aware that Thermolase has
nine related issued United States patents some of which claim methods for
removing or inhibiting the growth of hair. We do not know whether any of these
patents cover our plans to market hair removal using ALA because we have not
developed a final formulation or method of removing hair with ALA and light. If,
after finalizing our formulation and method, we find that these patents do cover
our planned use of ALA, Thermolase may either prevent us from using our system
or they may require us to obtain a license for a fee.
Except for the opposition of Japanese Patent No. 273032, which we license
from PARTEQ, we are not aware of any formal challenges to the validity of
PARTEQ's or our patents. However, we cannot guarantee that other challenges or
claims will not be asserted in the future. Japanese Patent No. 273032, which
relates to the basic method of using ALA, has recently been opposed and, as a
result, the Japanese Patent Office Board of Appeals issued a "Notice of Reasons
for Cancellation," which we received on February 12, 1999. With PARTEQ's
assistance, we prepared and filed our response to this action. We can at this
time give no assurance of the likelihood of success of such a contest or any
assurance that we will decide to spend the funds required to complete the
contest. If our response does not allay the concerns of the Board, they may
limit our patent protection or finalize the cancellation. Japan is a major
pharmaceutical market and loss of this patent could adversely affect us in at
least two ways. First, if we seek to enter the Japanese market, the lack of a
patent would probably retard or diminish our market share. Second, even if we
did not seek to market in Japan, third-parties might not be interested in
licensing the product in Japan without patent protection, and this might affect
our revenues.
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In addition, we cannot guarantee that our patents, whether owned or
licensed, or any future patents that may issue, will prevent other companies
from developing similar or functionally equivalent products. Further, we cannot
guarantee that we will continue to develop our own patentable technologies or
that our products or methods will not infringe upon the patents of
third-parties. In addition, we cannot guarantee that any of the patents that may
be issued to us will effectively protect our technology or provide a competitive
advantage for our products or will not be challenged, invalidated, or
circumvented in the future.
We also attempt to protect our proprietary information as trade secrets.
Generally agreements with each employee, licensing partner, consultant,
university, pharmaceutical company and agent contain provisions designed to
protect the confidentiality of our proprietary information. However, we can give
no assurances that these agreements will provide effective protection for its
proprietary information in the event of unauthorized use or disclosure of such
information. Furthermore, we can give no assurances that our competitors will
not independently develop substantially equivalent proprietary information or
otherwise gain access to our proprietary information, or that we can
meaningfully protect our rights in unpatentable proprietary information.
Even in the absence of composition of matter patent protection for ALA, we
may receive financial benefits from: (i) patents relating to the use of such
product (like PARTEQ's patents); (ii) patents relating to special compositions
and formulations; and (iii) limited marketing exclusivity that may be available
as a patent term extension under the Hatch/Waxman Act and any counterpart
protection available in foreign countries. See "Business -- Government
Regulation." Effective patent protection also depends on many other factors such
as the nature of the market and the position of the product in it, the growth of
the market, the complexities and economics of the process for manufacture of the
active ingredient of the product and the requirements of the new drug provisions
of the Food, Drug and Cosmetic Act, or similar laws and regulations in other
countries.
We intend to seek registration of trademarks in the United States, and
other countries where we may market our products when it is sufficiently close
to commercialization so that appropriate brand names may be selected in light of
the circumstances then existing. To date, we have been issued four trademark
registrations, and other applications are pending.
MANUFACTURING
We do not currently operate any manufacturing facilities. Our drug,
Levulan(R), the Kerastick(TM) brand applicator and the BLU-U(TM) brand light
source are each manufactured by a single third-party supplier. See "Business --
Supply Partners". Under our agreement with Schering AG, we are obligated to
maintain certain inventory levels of our Levulan(R) products until we qualify a
second source of supply for ALA. We have purchased key pieces of equipment to
prepare for the establishment of a limited production line so that a second
source could manufacture the Kerastick(TM).
MARKETING AND SALES
Under our agreement with Schering AG, marketing and sales of Levulan(R) PDT
products for use in dermatology in the United States will be the responsibility
of Schering AG's affiliate, Berlex Laboratories, Inc. Following receipt of
marketing approval in the United States, Schering AG must select the country,
countries or key territories in which it intends to seek regulatory approval and
to sell our products on a product-by-product basis. If Schering AG elects not to
market a product in a specific territory or country, we regain the right to
market the product. We retain the rights to market and sell all future products
for non-dermatology indications. Subject to Schering AG's limited right to
negotiate,
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we can enter into marketing, co-promotional, distribution or similar type
agreements with corporate partners for our non-dermatology indications.
Draxis has been granted the rights to market Levulan(R) PDT in Canada. See
"Business -- Licenses."
COMPETITION
Commercial development of PDT agents other than Levulan(R) are currently
being pursued by a number of companies. These include: QLT PhotoTherapeutics
Inc. (Canada); Miravant, Inc. (U.S.); Pharmacyclics, Inc. (U.S.); Scotia
Pharmaceuticals (United Kingdom); and Photogen Technologies, Inc. (U.S.). We are
also aware of several overseas companies doing research with ALA, including:
medac GmbH (Germany) which is 25% owned by Schering AG; ESC Medical Systems Ltd.
(Israel); and Photocure (Norway).
Photocure is also conducting late-stage clinical trials using ALA PDT for
dermatological uses. We are aware that medac is developing ALA PDT for bladder
cancer detection in Germany and may receive regulatory approval in Germany prior
to the time that we could receive approval from the FDA. We believe that our
United States patents may be infringed if medac sells its products in the United
States.
We also know from published reports that an Israeli firm, ESC Medical
Systems Ltd., has entered into a worldwide distribution and supply agreement for
a medical grade of ALA (ALA Fine(TM)) for PDT applications. ESC has indicated
that it has used ALA Fine(TM) and its Versalight(R) to treat skin cancer in over
1,000 patients. These products are not available in the United States and we
believe that the PARTEQ patents would be infringed if the ESC products were
made, used or sold in the United States. However, these ESC products could
compete with some of our products, if approved by health regulatory authorities
outside of the United States or other countries covered by PARTEQ patents.
Our position in the PDT field could be adversely affected by product
developments achieved by other companies. The pharmaceutical industry is highly
competitive. Many of our competitors have substantially greater financial and
technical and marketing resources than we have. In addition, several of these
companies have had significantly greater experience than we do in developing
products, conducting preclinical and clinical testing and obtaining regulatory
approvals to market products for health care. Our competitors may succeed in
developing products that are safer or more effective than ours and in obtaining
regulatory marketing approval of future products before we do. Our
competitiveness may also be affected by our ability to manufacture and market
our products.
We believe that comparisons of the properties of various photosensitizing
PDT drugs will also provide important competitive issues. We expect that our
principal methods of competition with other PDT companies will be based upon
such factors as the ease of administration of our photodynamic therapy; the
degree of generalized skin sensitivity to light; the number of required doses;
the selectivity of our drug for the target lesion or tissue of interest; and the
type and cost of our light systems. New drugs or future developments in PDT or
in other drug technologies may provide therapeutic or cost advantages for
competitive products. No assurance can be given that developments by other
parties will not render our products uncompetitive or obsolete.
GOVERNMENT REGULATION
The manufacture and sale of pharmaceuticals and medical devices in the
United States are governed by a variety of statutes and regulations. These laws
require, among other things:
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- approval of manufacturing facilities, including adherence to current
good manufacturing, laboratory and clinical practices during production
and storage known as cGMPs, GLPs and GCPs respectively;
- controlled research and testing of products;
- applications for marketing approval containing manufacturing,
preclinical and clinical data to establish the safety and efficacy of
the product; and
- control of marketing activities, including advertising and labeling.
The marketing of pharmaceutical products requires the approval of the FDA
in the United States, and similar agencies in other countries. The FDA has
established regulations and safety standards, which apply to the preclinical
evaluation, clinical testing, manufacture and marketing of pharmaceutical
products. The process of obtaining marketing approval for a new drug normally
takes several years and often involves significant costs. The steps required
before a new drug can be produced and marketed for human use in the United
States include:
- preclinical studies,
- the filing of an Investigational New Drug, or IND, application;
- human clinical trials; and
- the approval of a New Drug Application, or NDA.
Preclinical studies are conducted in the laboratory and on animals to
obtain preliminary information on a drug's efficacy and safety. The time
required for conducting preclinical studies varies greatly depending on the
nature of the drug, and the nature and outcome of the studies. Such studies can
take many years to complete. The results of these studies are submitted to the
FDA as part of the IND application. Human testing can begin if the FDA does not
object to the IND application.
The human clinical testing program involves three phases. Each clinical
study typically is conducted under the auspices of an Institutional Review Board
or IRB at the institution where the study will be conducted. An IRB will
consider among other things, ethical factors, the safety of human subjects and
the possible liability of the institution. A clinical plan, or "protocol", must
be submitted to the FDA prior to commencement of each clinical trial. All
patients involved in the clinical trial must provide informed consent prior to
their participation. The FDA may order the temporary or permanent discontinuance
of a clinical trial at any time for a variety of reasons, particularly if safety
concerns exist. These clinical studies must be conducted in conformance with the
FDA's bioresearch monitoring regulations.
In Phase I, studies are usually conducted on a small number of healthy
human volunteers to determine the maximum tolerated dose and any product-related
side effects of a product. Phase I studies generally require several months to
complete, but can take longer, depending on the drug and the nature of the
study. Phase II studies are conducted on a small number of patients having a
specific disease to determine the most effective doses and schedules of
administration. Phase II studies generally require from several months to two
years to complete, but can take longer, depending on the drug and the nature of
the study. Phase III involves wide scale studies on patients with the same
disease in order to provide
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comparisons with currently available therapies. Phase III studies generally
require from six months to four years to complete, but can take longer,
depending on the drug and the nature of the study.
Data from Phase I, II and III trials are submitted to the FDA with the NDA.
The NDA involves considerable data collection, verification and analysis, as
well as the preparation of summaries of the manufacturing and testing processes
and preclinical and clinical trials. Submission of an NDA does not assure FDA
approval for marketing. The application review process generally takes one to
three years to complete, although reviews of treatments for AIDS, cancer and
other life-threatening diseases may be accelerated, expedited or subject to fast
track treatment. The process may take substantially longer if, among other
things, the FDA has questions or concerns about the safety and/or efficacy of a
product. In general, the FDA requires properly conducted, adequate and
well-controlled clinical studies demonstrating safety and efficacy with
sufficient levels of statistical assurance. However, additional information may
be required. For example, the FDA also may request long-term toxicity studies or
other studies relating to product safety or efficacy. Even with the submission
of such data, the FDA may decide that the application does not satisfy its
regulatory criteria for approval and may disapprove the NDA. Finally, the FDA
may require additional clinical tests following NDA approval to confirm safety
and efficacy, often referred to as Phase IV clinical trials.
Upon approval, a prescription drug may only be marketed for the approved
indications in the approved dosage forms and at the approved dosage with the
approved labeling. Adverse experiences with the product must be reported to the
FDA. In addition, the FDA may impose restrictions on the use of the drug that
may be difficult and expensive to administer. Product approvals may be withdrawn
if compliance with regulatory requirements is not maintained or if problems
occur or are discovered after the product reaches the market. After a product is
approved for a given indication, subsequent new indications, dosage forms, or
dosage levels for the same product are reviewed by the FDA via the filing and
upon approval of a supplemental NDA. The supplement deals primarily with safety
and effectiveness data related to the new indication or dosage. Finally, the FDA
requires reporting of certain safety and other information, often referred to as
"adverse events" that become known to a manufacturer of an approved drug. If an
active ingredient of a drug product has been previously approved, there may be
other types of drug applications that can be filed that may be less
time-consuming and costly.
On December 3, 1999, the FDA approved the marketing of our Levulan(R)
Kerastick(TM) 20% Topical Solution with PDT for treatment of AKs of the face and
scalp.
We are currently conducting Phase I/II studies on the use of ALA for
bladder cancer detection and treatment of acne. Other than the FDA-approved use
of Levulan(R) Kerastick(TM) with PDT for treatment of AKs, our other products
still require significant development, including additional preclinical and
clinical testing, and regulatory marketing approval prior to commercialization.
The process of obtaining required approvals can be costly and time consuming and
there can be no guarantee that the use of Levulan(R) in any future products will
be successfully developed, prove to be safe and effective in clinical trials, or
receive applicable regulatory marketing approvals. Medical devices, such as our
light source devices, are also subject to the FDA's rules and regulations. These
products are required to be tested, developed, manufactured and distributed in
accordance with FDA regulations, including good manufacturing, laboratory and
clinical practices. Under the Food, Drug & Cosmetic Act, all medical devices are
classified as Class I, II or III devices. The classification of a device affects
the degree and extent of the FDA's regulatory requirements, with Class III
devices subject to the most stringent requirements and FDA review. Generally,
Class I devices are subject to general controls (e.g., labeling and adherence to
the cGMP requirement for medical devices), and Class II devices are subject to
general controls and special controls (e.g., performance standards, postmarket
surveillance, patient registries and FDA guidelines). Class III devices, which
typically are life-sustaining or life-supporting and implantable devices, or new
devices that have been found not to be substantially equivalent to a
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legally marketed Class I or Class II "predicate device", are subject to general
controls and also require clinical testing to assure safety and effectiveness
before FDA approval is obtained. The FDA also has the authority to require
clinical testing of Class I and II devices. The BLU-U(TM) has been classified as
a Class III device. We anticipate that our other devices will also be classified
as Class III and be subject to the highest level of FDA regulation. Approval of
Class III devices require the filing of a PMA application supported by extensive
data, including preclinical and clinical trial data, to demonstrate the safety
and effectiveness of the device. If human clinical trials of a device are
required and the device presents a "significant risk", the manufacturer of the
device must file an investigational device exemption or "IDE" application and
receive FDA approval prior to commencing human clinical trials. At present, our
devices are being studied in preclinical and clinical trials under our INDs.
Following receipt of the PMA application, if the FDA determines that the
application is sufficiently complete to permit a substantive review, the agency
will "file it". Once the submission is filed, the FDA begins a review of the PMA
application. Under the Food, Drug and Cosmetics Act, the FDA has 180 days to
review a PMA application. The review of PMA applications more often occur over a
significantly protracted time period, and the FDA may take up to two years or
more from the date of filing to complete its review.
The PMA process can be expensive, uncertain and lengthy. A number of
devices other companies have sought premarket approval have never been approved
for marketing. The review time is often significantly extended by the FDA, which
may require more information or clarification of information already provided in
the submission. During the review period, an advisory committee likely will be
convened to review and evaluate the PMA application and provide recommendations
to the FDA as to whether the device should be approved for marketing. In
addition, the FDA will inspect the manufacturing facility to ensure compliance
with cGMP requirements for medical devices prior to approval of the PMA
application. If granted, the premarket approval may include significant
limitations on the indicated uses for which the product may be marketed, and the
agency may require post-marketing studies of the device.
Medical products containing a combination of drugs, including biologic
drugs, or devices may be regulated as "combination products" in the United
States. A combination product generally is defined as a product comprised of
components from two or more regulatory categories (drug/device, device/biologic,
drug/biologic, etc.) Each component of a combination product is subject to the
requirements established by the FDA for that type of component, whether a drug,
including a biologic drug, or device. Currently, PDT/PD treatments are defined
as drug/device combination products. The main responsibility for review of PDT
products (drugs and devices) is under the jurisdiction of the FDA's drug center,
the Center for Drug Evaluation and Research, with support from the Center for
Devices and Radiological Health. The FDA has not formally established the degree
and extent of the regulatory requirements for the various components of PDT/PD.
In connection with our NDA for the Levulan(R) Kerastick(TM) with PDT for
AKs, a combination filing (including a PMA for the BLU-U(TM) light source device
and the NDA for the Levulan(R) Kerastick(TM)) was submitted to the Center for
Drug Evaluation and Research. The PMA was then separated from the NDA submission
by the FDA and reviewed by the FDA's Center for Devices and Radiological Health.
Based upon this experience, we anticipate that any future NDAs for Levulan(R)
PDT/PD will be a combination filing accompanied by PMAs. There is no guarantee
that PDT products will continue to be regulated as combination products.
The BLU-U(TM) PMA, which covered the devices used in the AK clinical trials
was approved by the FDA on December 3, 1999. The commercial light device unit we
intend to market is a modified version of the BLU-U(TM) units used in the
clinical studies. We are in the process of preparing a
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supplement to the PMA covering these modifications, and intend to file the
supplement during the first quarter of 2000. The FDA has six months to review
the PMA supplement which must be approved before we can market the commercial
units of the BLU-U(TM). While we believe that the changes to the BLU-U(TM) do
not affect its performance and we expect the FDA to approve the PMA supplement
application, the FDA may request additional information or may decide not to
approve the supplement.
The United States Drug Price Competition and Patent Term Restoration Act of
1984 known as the Hatch-Waxman Act provides for the return of up to five-years
of patent term for a patent that covers a new product or its use, to compensate
for time lost during the regulatory review process. The application for patent
term extension is subject to approval by the U.S. Patent and Trademark Office in
conjunction with the FDA. It takes at least six months to obtain approval of the
application for patent term extension, and there can be no guarantee that the
application will be granted. We believe that the FDA's December 3, 1999 approval
of our NDA for the Levulan(R) Kerastick(TM) with PDT is the first marketing
approval for a medical use of ALA. We therefore believe that this approval may
form the basis for extending the term of one of our patents. However, there can
be no assurance that we will receive a patent term extension.
The Hatch-Waxman Act also establishes a five-year period of marketing
exclusivity from the date of NDA approval for new chemical entities approved
after September 24, 1984. Levulan(R) is a new chemical entity and market
exclusivity will expire on December 3, 2004. During this Hatch-Waxman marketing
exclusivity period, no third-party may submit an "abbreviated NDA" or "paper
NDA" to the FDA.
Finally, any abbreviated or paper NDA applicant will be subject to the
notification provisions of the Hatch-Waxman Act, which should facilitate our
notification about potential infringement of our patent rights. The abbreviated
or paper NDA applicant must notify the NDA holder and the owner of any patent
applicable to the abbreviated or paper NDA product, of the application and
intent to market the drug that is the subject of the NDA.
We also intend market our products marketed outside of the United States.
Prior to marketing a product in other countries, approval by that nation's
regulatory authorities must be obtained. Our marketing partner, Schering AG,
will be responsible for applying for marketing approvals outside the United
States for Levulan(R) PDT for dermatology uses. Generally, we try to design our
protocols for clinical studies so that the results can be used in all the
countries where we hope to market the product. However, countries sometimes
require additional studies to be conducted on patients located in their country.
With the enactment of the Drug Export Amendments Act of the United States
in 1986, products not yet approved in the United States may be exported to
certain foreign markets if the product is approved by the importing nation and
approved for export by the United States government. We can give you no
assurance that we will be able to get approval for any of our potential products
from any importing nations' regulatory authorities or be able to participate in
the foreign pharmaceutical market.
Our research and development activities involve the controlled use of
certain hazardous materials, such as mercury in fluorescent tubes. While we do
not currently manufacture any products, we are subject to various laws and
regulations governing the use, manufacture, storage, handling and disposal of
hazardous materials and certain waste products. We believe that we are in
material compliance with applicable environmental laws and regulations. For the
present, we do not have any plans to make any material capital expenditures for
environmental control facilities. However, we can give you no assurance that we
will not have to make significant expenditures in order to comply with
environmental laws and regulations in the future. Also, we cannot assure you
that our operations, business or assets will
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not be materially adversely effected by current or future environmental laws or
regulations. In addition, although we believe that our safety procedures for the
handling and disposal of such materials comply with the standards prescribed by
current environmental laws and regulations, the risk of accidental contamination
or injury from these materials cannot be completely eliminated. In the event of
such an accident, we could be held liable for any damages that result, and any
such liability could exceed our resources.
PRODUCT LIABILITY AND INSURANCE
We are subject to the inherent business risk of product liability claims in
the event that the use of our technology or any prospective product is alleged
to have resulted in adverse effects during testing or following marketing
approval of any such product for commercial sale. We maintain product liability
insurance for coverage of our clinical trial activities. We are in the process
of obtaining coverage for our commercial supplies. There can be no assurance
that such insurance will continue to be available on commercially reasonable
terms or that it will provide adequate coverage against all potential claims.
EMPLOYEES
We have 24 full-time employees. We have employment agreements with our four
key executive officers. We have purchased, and are the named beneficiary of, a
key man life insurance policy, having a face value of CDN. $2,000,000, on the
life of our President. We also retained numerous independent consultants and the
services of key researchers at leading university centers whose activities are
coordinated by our employees. We intend to hire other employees and consultants
as needed. See "Business -- Other Relationships: Consultants."
RISK FACTORS
This section of our Annual Report on Form 10-K contains forward-looking
statements that involve risks and uncertainties, such as statements of our
plans, objectives, expectations and intentions. We use words such as
"anticipate", "believe", "expect", future" and "intend" and similar expressions
to identify forward-looking statements. Our actual results could differ
materially from those anticipated in these forward-looking statements for many
reasons, including the factors described below and elsewhere in this Annual
Report. You should not place undue reliance on these forward-looking statements,
which apply only as of the date of this Annual Report.
The following are among the risk factors we face related to our business,
assets and operations. They are not the only ones we face. Additional risks and
uncertainties that we are not aware of or that we currently deem immaterial also
may impair our business. If any of the following risks actually occur, our
business, financial condition and operating results could be materially
adversely affected.
RISKS RELATED TO DUSA
WE ARE NOT CURRENTLY PROFITABLE AND MAY NOT BE PROFITABLE IN THE FUTURE UNLESS
WE CAN SUCCESSFULLY MARKET AND SELL OUR FIRST PRODUCT, THE LEVULAN(R)
KERASTICK(TM) WITH PDT FOR THE TREATMENT OF AKS.
WE NEED APPROVAL FROM THE FDA FOR OUR COMMERCIAL LIGHT SOURCE, THE
BLU-U(TM), BEFORE WE CAN BEGIN MARKETING OUR FIRST PRODUCT, THE LEVULAN(R)
KERASTICK(TM), AND WE MAY NOT RECEIVE IT IN TIME FOR OUR PLANNED PRODUCT
LAUNCH IN THE SECOND QUARTER OF 2000.
The FDA has approved our first drug product, Levulan(R) Kerastick(TM) 20%
Topical Solution with PDT for AKs of the face and scalp. The FDA has also
approved the clinical trial version of our light
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device, the BLU-U(TM). The FDA must still approve the commercial version of
our light device, the BLU-U(TM), before we can market it. Without this
additional approval, the Levulan(R) Kerastick(TM) cannot be widely marketed or
used by physicians since the therapy combines use of Levulan(R) with exposure to
the BLU-U(TM). We must file a supplement with the FDA so that the FDA may
examine the differences between our approved clinical version and our proposed
commercial version of the BLU-U(TM). We expect that our pre-market approval, or
PMA, supplement will be filed shortly. While we believe the modifications we are
making to our device do not affect its performance and FDA review should take
approximately two to three months, FDA regulations give the agency up to six
months to review a supplement. The agency also will inspect our Wilmington,
Massachusetts facility before giving its approval. The FDA also may choose to
reinspect our third-party manufacturer. We would incur additional expenses if
either of these facilities fail to pass inspection. The FDA may also request
additional testing information and can extend the time for review of the PMA
supplement. The launch of Levulan(R) Kerastick(TM) with PDT for AKs will be
delayed if we do not receive approval of our PMA supplement from the FDA or if
our facilities do not pass FDA inspection before the planned product launch
during the second quarter of 2000. Schering AG may choose to delay the launch
until the Fall of 2000 if product supplies are not available by the middle of
the second quarter. A delay in the launch will delay our receipt of royalties
and supply prices from sales of our product. We may not receive approval of the
BLU-U(TM).
BECAUSE NEITHER WE NOR SCHERING AG, OUR MARKETING PARTNER FOR DERMATOLOGY
PRODUCTS, HAS ANY EXPERIENCE MARKETING OR SELLING DERMATOLOGY PRODUCTS IN
THE UNITED STATES, OUR REVENUES FROM ROYALTIES AND PRODUCT SALES MAY BE
LIMITED.
The commercial success of Levulan(R) Kerastick(TM) with PDT for AKs of the
face and scalp will partly depend on the scope of the launch into the United
States market through promotional activities, a knowledgeable sales force and
adequate market penetration. The United States market introduction of Levulan(R)
Kerastick(TM) with PDT for AKs will be undertaken by Schering AG through its
affiliate, Berlex Laboratories, Inc. While Schering AG has experience marketing
dermatology products in Europe, neither Schering AG, Berlex nor DUSA has any
experience marketing dermatology products in the United States. Schering AG has
not agreed to hire specific numbers of sales representatives or committed to any
particular budget for the launch. Additionally, our competitors in the AK market
already have experienced, well-funded, marketing and sales operations in the
United States. If Schering AG fails to adequately fund the launch of our product
or fails to adequately develop, train and manage a sales force, the demand for
our product will be limited and our royalties from Schering AG on sales of the
product, our income from light device rentals, and our revenue on supply fees on
the Kerastick(TM) will be adversely affected.
SINCE WE RELY HEAVILY ON OUTSIDE CONTRACTORS AS SOLE SUPPLIERS AND
MANUFACTURERS OF OUR LEVULAN(R) KERASTICK(TM) AND BLU-U(TM), OUR MARKETING
EFFORTS AND SALES MAY SUFFER IF THESE THIRD-PARTIES FAIL IN ANY WAY TO
ADEQUATELY SUPPLY US WITH THE QUALITY AND QUANTITY OF THE PRODUCTS WE NEED.
We do not currently have the capacity to manufacture any of our products on
our own. We rely on third-parties to manufacture our products. We have only one
source for Levulan(R), one source for our Kerastick(TM), and one for the
BLU-U(TM). While we have purchased equipment in order to establish a second
source with a limited production line for the manufacture of our Kerastick(TM),
if it becomes necessary, any new manufacturer would have to pass inspection by
the FDA. None of our manufacturers have produced our products in commercial
quantities. Manufacturers often encounter difficulties when large quantities of
new products are manufactured for the first time, including problems involving:
- product yields;
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- quality control;
- component and service availability;
- compliance with FDA regulations; and
- the need for further FDA approval if manufacturers make material
changes to manufacturing processes and/or facilities.
We cannot guarantee that problems will not arise with production yields,
costs or quality as our manufacturers seek to increase production. Any
manufacturing problems could delay or limit our supplies or prevent
commercialization of our products. If any of these suppliers fail to meet our
needs, our business, financial condition and results of operations would suffer.
If any facility or equipment in the facility of our manufacturers is
damaged or destroyed, we will not be able to quickly or inexpensively replace
it.
Under the terms of our agreement with Schering AG, our continuing failure
to supply Schering AG's requirements of Levulan(R), the Kerastick(TM) and/or the
BLU-U(TM) would release Schering AG from its obligation to purchase supplies
from us. The supply fees Schering AG is required to pay to us would be reduced
by Schering's cost to manufacture and we would continue to receive a royalty
payment on sales. Our business, financial condition and results of operations
would be adversely affected.
IF WE FAIL TO OBTAIN ADEQUATE LEVELS OF REIMBURSEMENT FOR OUR PRODUCTS FROM
THIRD-PARTY PAYORS, OUR REVENUES AND PROFITS COULD BE SIGNIFICANTLY
LIMITED.
Our profitability will depend on the availability of reimbursement to
patients or physicians for the cost of our products from third-party payors such
as governmental programs, private insurance and private health plans. We cannot
predict whether levels of reimbursement for our drug and light combination
therapy will be high enough to allow us to realize a reasonable profit margin.
Third-party payors may deny reimbursement if the payor determines that our
particular new therapy is unnecessary, inappropriate or not cost effective. If
patients or physicians are not entitled to receive reimbursements similar to
reimbursements for competing therapies, patients will have to pay for the
unreimbursed amounts. Some medicare providers may require physicians to
prescribe 5-FU to treat AKs because 5-FU is an inexpensive treatment, or limit
the number of AK treatments in a particular year. These reimbursement factors
could limit our revenues, and our profits, if physicians or patients choose
therapies with higher reimbursements than may be assigned to our therapy, or if
government agencies or other third-party payors mandate a treatment regimen. The
reimbursement status of newly-approved health care products is highly uncertain.
We are relying on Schering AG to obtain reimbursement codes from third-party
payors. If levels of reimbursement are decreased in the future, the demand for
our products could diminish or our ability to sell our products on a profitable
basis could be hurt.
EVEN IF WE RECEIVE REGULATORY APPROVAL FOR OUR BLU-U(TM), ANY FAILURE TO
COMPLY WITH ONGOING GOVERNMENTAL REGULATIONS IN THE UNITED STATES OR TO
OBTAIN FOREIGN REGULATORY APPROVALS WILL LIMIT OUR ABILITY TO MARKET OUR
FIRST PRODUCT.
Our products are subject to continued and comprehensive regulation by the
FDA and by state and local regulations. These laws require, among other things,
- approval of manufacturing facilities, including adherence to "good
manufacturing and laboratory practices" during production and storage;
- controlled research and testing of products even after approval; and
- control of marketing activities, including advertising and labelling.
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Both the manufacture and marketing of our first product, Levulan(R)
Kerastick(TM) with PDT for AKs, are subject to continuing FDA review. Our
manufacturers must continue to comply with the FDA's current Good Manufacturing
Practices, commonly known as cGMP, and foreign regulatory requirements. The cGMP
requirements govern quality control and documentation policies and procedures.
In complying with cGMP and foreign regulatory requirements, our third party
manufacturers will be obligated to expend time, money and effort in production,
record keeping and quality control to assure that our products meet applicable
specifications and other requirements. If our third party manufacturer's fail to
comply with these requirements, we would be subject to possible regulatory
action and may be limited in the jurisdictions in which we are permitted to sell
our products.
As part of our approval from the FDA, we are required to conduct two Phase
IV follow-up studies; one to evaluate the long-term recurrence rate of AKs after
treatment with our new therapy, and the second to test for allergic skin
reactions to the Levulan(R) Kerastick(TM). If we discover a previously unknown
problem with the product, a manufacturer or its facility, changes in product
labeling restrictions or withdrawal of the product from the market may occur.
Manufacturing facilities are subject to ongoing periodic inspection by the FDA,
including unannounced inspections. We cannot give you any assurance that our
third-party sole sources will continue to meet all applicable FDA regulations in
the future. If any of our manufacturers fail to maintain compliance with FDA
regulatory requirements, it would be time consuming and costly to qualify other
sources. These consequences could have an adverse effect on our financial
condition and operations. If we fail to comply with applicable regulatory
approval requirements, a regulatory agency may:
- send us warning letters;
- impose fines and other civil penalties on us;
- suspend our regulatory approvals;
- refuse to approve pending applications or supplements to approved
applications filed by us;
- refuse to permit exports or our products from the United States;
- require us to recall products;
- require us to notify physicians of labelling changes and/or product
related problems;
- impose restrictions on our operations; or
- criminally prosecute us.
As part of our collaboration agreement with Schering AG, we will be jointly
seeking foreign regulatory approvals for Levulan(R) Kerastick(TM) PDT for AKs.
We cannot give you any assurances that we will receive foreign approvals on a
timely basis, or at all, or that problems will not arise that could delay or
prevent the commercialization of our product in foreign countries. The
introduction of our product in foreign markets will subject us to foreign
regulatory clearances, which may be unpredictable and uncertain, and which may
impose substantial additional costs and burdens which we and Schering AG may be
unwilling or unable to pay. At present, applications for foreign marketing
authorizations are made at the national level, although certain registration
procedures are available within the European Union to companies wishing to
market a product in more than one member country. A regulatory authority must be
satisfied that adequate evidence of safety, quality, and efficacy of the product
has been presented before marketing authorization is granted. In addition,
electrical medical devices, such as the BLU-U(TM), must be manufactured in
compliance with the current requirements of ISO 9000. Our third party
manufacturer is not currently qualified under ISO 9000. The foreign regulatory
approval process includes all of the risks associated with obtaining FDA
marketing approval and approval by the FDA does not ensure approval by other
countries. Failure to obtain foreign regulatory approval could adversely affect
our financial condition and operations.
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WE HAVE SIGNIFICANT LOSSES AND MAY NEVER BE PROFITABLE.
We have a history of operating losses. We expect to have continued losses
over the next 12 months as we expand our research and development of new
products and establish ourselves in the marketplace. We may never become
profitable. As of December 31, 1999, our accumulated deficit was approximately
$35,947,000. We cannot predict whether any of our products will achieve market
acceptance or generate sufficient revenues to become profitable. Our commercial
success will depend on whether:
- Our products are more effective therapies that currently available
treatments;
- We receive sufficient reimbursement for our products; and
- We can, either together with a partner or alone, successfully market
our products.
WE HAVE ONLY ONE PRODUCT THAT HAS RECEIVED REGULATORY APPROVAL AND WE CANNOT
PREDICT WHETHER WE WILL EVER DEVELOP OR COMMERCIALIZE ANY OTHER PRODUCTS.
EXCEPT FOR THE LEVULAN(R) KERASTICK(TM) WITH PDT FOR AKS, ALL OF OUR
PRODUCTS ARE IN EARLY STAGES OF DEVELOPMENT AND MAY NEVER RESULT IN ANY
COMMERCIALLY SUCCESSFUL PRODUCTS.
Currently, we are developing a single drug compound for a number of
different medical conditions. To be profitable, we must successfully research,
develop, obtain regulatory approval for, manufacture, introduce, market and
distribute our products. All of our products, except for the Levulan(R)
Kerastick(TM) with PDT for AKs, are at an early stage of development. We cannot
predict how long the development for these products will take or whether they
will be medically effective. We cannot be sure that a successful market will
ever develop for our new drug technology. We do not know if any of our products
will ever be commercially successful.
WE MUST RECEIVE SEPARATE APPROVAL FOR EACH OF OUR POTENTIAL PRODUCTS BEFORE
WE CAN SELL THEM COMMERCIALLY IN THE UNITED STATES OR ABROAD.
Except for the Levulan(R) Kerastick(TM) with PDT for AKs which is already
approved, all of our other potential products, including the commercial version
of the BLU-U(TM), will require the approval of the FDA before they can be
marketed in the United States. If we fail to obtain the required approvals for
other potential products our revenues will be limited. We may not achieve or be
able to sustain a positive cash flow or profits from the sales of our first
product. Before an NDA, which is an application to the FDA seeking approval to
market a new drug, can be filed with the FDA, a product must undergo, among
other things, extensive animal testing and human clinical trials. The process of
obtaining FDA approvals can be lengthy, costly, and time-consuming. Following
the acceptance of an NDA, the time required for regulatory approval can vary and
is usually one to three years or more. The FDA may require additional animal
studies and/or human clinical trials before granting approval. Our Levulan(R)
PDT products are based on new technology. To the best of our knowledge, the FDA
has approved only two drugs for use in photodynamic therapy, including
Levulan(R). This factor may lengthen the approval process. We face much trial
and error and we may fail at numerous stages along the way.
We cannot predict whether we will obtain approval for any of our potential
products. Data obtained from preclinical testing and clinical trials can be
susceptible to varying interpretations which could delay, limit or prevent
regulatory approvals. Future clinical trials may not show that Levulan(R) PDT or
PD is safe and effective for any new use we are studying. In addition, delays or
disapprovals may be encountered based upon additional governmental regulation
resulting from future legislation or
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29
administrative action or changes in FDA policy. We must also obtain foreign
regulatory clearances before we can market our products in foreign markets. The
foreign regulatory approval process includes all of the risks associated with
obtaining FDA marketing approval and may impose substantial additional costs.
BECAUSE WE ARE RELYING ON OUR CORPORATE PARTNER, SCHERING AG, TO ASSIST US
WITH AND TO PROVIDE FUNDS TO DEVELOP OUR POTENTIAL DERMATOLOGY PRODUCTS, WE
COULD EXPERIENCE DELAYS IN OUR DEVELOPMENT IF SCHERING AG FAILS TO PROVIDE
US WITH ADEQUATE SUPPORT.
We are relying on Schering AG to provide funds and co-develop with us our
other potential dermatology products. Under the terms of the agreement, Schering
AG can terminate its funding for the co-development program after two years. We
cannot be certain that Schering AG will continue to fund the co-development
program. If Schering AG's fails to co-develop our products or fails to make
milestone or royalty payments as required, we may not be able to continue our
development program as we have planned.
OUR LACK OF SALES AND MARKETING EXPERIENCE COULD AFFECT OUR ABILITY TO
MARKET OUR NON-DERMATOLOGY PRODUCTS WHICH COULD ADVERSELY AFFECT OUR
REVENUES FROM FUTURE PRODUCT SALES.
We are lacking the experience and capacity to market, sell and distribute
our products. In order to market non-dermatology products and/or if Schering AG
abandons its rights to any dermatology products and if we do not enter an
agreement with a corporate partner who has the experience and resources to
perform these roles for other products, we would be required to hire our own
staff and a sales force. We have no experience in developing, training or
managing a sales force. We will incur substantial additional expenses if we have
to develop, train and manage these business activities. We may be unable to
build a sales force and the costs of establishing a sales force may exceed our
product revenues. Our direct marketing and sales efforts may be unsuccessful. In
addition, we compete with many companies that currently have extensive and
well-funded marketing and sales operations. Any marketing and sales efforts we
make may be unsuccessful against these companies.
IF WE ARE UNABLE TO OBTAIN THE NECESSARY CAPITAL TO FUND OUR OPERATIONS, WE
WILL HAVE TO DELAY OUR DEVELOPMENT PROGRAMS AND MAY NOT BE ABLE TO COMPLETE
OUR CLINICAL TRIALS.
If our sales goals for our first product are not met and/or if Schering AG
terminates funding of the co-development program, then we may need substantial
additional funds to fully develop, manufacture, market and sell all of our other
potential products. We cannot predict exactly when additional funds will be
needed. We may obtain funds through a public or private financing, including
equity financing, and/or through collaborative arrangements. We cannot predict
whether any financing will be available on acceptable terms when we need it
because investors may be unwilling to invest in DUSA if we have setbacks in the
development program or if the public fails to use our products.
If funding is insufficient, we will have to delay, reduce in scope or
eliminate some or all of our research and development programs. We cannot
predict which programs will be affected since it will depend upon the status of
clinical trials at that time. We may license rights to third-parties to
commercialize products or technologies that we would otherwise have attempted to
develop and commercialize on our own.
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30
IF WE ARE UNABLE TO PROTECT OUR PROPRIETARY TECHNOLOGY, TRADE SECRETS OR
KNOW-HOW, WE MAY NOT BE ABLE TO OPERATE OUR BUSINESS PROFITABLY.
WE HAVE LIMITED PATENT PROTECTION AND IF WE ARE UNABLE TO PROTECT OUR
PATENTS AND PROPRIETARY RIGHTS, COMPETITORS MIGHT BE ABLE TO TAKE ADVANTAGE
OF OUR RESEARCH AND DEVELOPMENT EFFORTS TO DEVELOP SIMILAR PRODUCTS TO
COMPETE WITH OURS.
Our ability to compete successfully depends, in part, on our ability to
defend patents that have issued, obtain new patents, protect trade secrets and
operate without infringing the proprietary rights of others. We have no product
patent protection for the compound ALA itself, as our basic patents are for
methods of detecting and treating various diseased tissues using ALA or related
compounds called precursors, in combination with light. Even where we have
patent protection, there is no guarantee that we will be able to enforce our
patents. We own or exclusively license patents and patent applications related
to the following:
- unique physical forms of ALA;
- methods of using ALA and its unique physical forms in combination with
light; and
- compositions and apparatus for those methods.
Some of the indications we are developing may not be covered by the claims
in our existing patents. In addition, a number of third parties are seeking
patents for additional uses of ALA. These additional uses, whether patented or
not, could limit the scope of our future operations because other ALA products
might become available which would not infringe our patents. These products
would compete with ours even though they are marketed for a different use.
We have limited patent protection outside the United States which may make
it easier for third-parties to compete there. Our basic method of treatment
patents and applications have counter-parts in only four foreign countries.
Absent patent protection, third-parties may freely market ALA, subject to
appropriate regulatory approval. There are reports of several third-parties
conducting clinical studies using ALA in countries where DUSA lacks patent
protection. These studies could provide the clinical data necessary to gain
regulatory approval, resulting in competition.
Our patent protection in Japan may be diminished or lost entirely. The
Japanese Patent Office Board of Appeals, acting upon its review of an opposition
to Japanese Patent No. 273032 which we have licensed from PARTEQ Research and
Development Innovation, issued a document titled "Notice of Reasons for
Cancellation" which DUSA received on February 12, 1999. With PARTEQ's
assistance, we prepared and filed our response to this action. If our response
does not allay the concerns of the Board, they may limit our patent protections
or finalize the cancellation. Japan is a major pharmaceutical market and loss of
this patent could adversely affect DUSA in at least two ways. First, should DUSA
seek to enter the Japanese market, the lack of a patent would probably diminish
our market share. Second, even if we did not seek to market in Japan,
third-parties might not be interested in licensing the product in Japan without
patent protection, and this might affect DUSA's revenues.
While we attempt to protect our proprietary information as trade secrets
through agreements with each employee, licensing partner, consultant,
university, pharmaceutical company and agent, we cannot guaranty that these
agreements will provide effective protection for our proprietary information. It
is possible that
- these persons or entities might breach the agreements;
- we might not have adequate remedies for a breach; and/or
- our competitors will independently develop or otherwise discover our
trade secrets.
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31
PATENT LITIGATION IS EXPENSIVE, AND WE MAY NOT BE ABLE TO AFFORD THE COSTS.
The costs of litigation or any proceeding relating to our intellectual
property rights could be substantial even if resolved in our favor. See
"Business -- Licenses: Other License". Some of our competitors have far greater
resources than we do and may be better able to afford the costs of complex
patent litigation. For example, third-party competitors may infringe one or more
of our patents, and we could be required to spend significant resources to
enforce our patent rights. Also, if we were to sue a third-party for
infringement of one or more of our patents, that third-party could challenge the
validity of our patent(s). Defending our patents could also result in the
expenditure of significant resources. We cannot guarantee that a third-party or
parties will not claim, with or without merit, that we have infringed on their
patent(s), or misappropriated their proprietary material. Defending this type of
legal action could also involve considerable expense.
If a third-party were to file a United States patent application, or be
issued a patent claiming technology also claimed by us in a pending United
States application(s), we may be required to participate in interference
proceedings in the United States Patent and Trademark Office to determine the
priority of invention. A third-party also could request the declaration of a
patent interference between one of our issued patents, and a third-party United
States patent application. Any interference proceedings likely would require
participation by us and/or PARTEQ, and could involve substantial legal fees.
Thermolase Corporation has patents that may affect our ability to
commercialize the use of ALA for hair removal. We are aware that Thermolase has
nine related issued United States patents, some of which claim methods for
removing or inhibiting the growth of hair. We do not know whether any of these
patents cover our plans to market hair removal using ALA because we have not
developed a final formulation or method of removing hair with ALA and light. If,
after finalizing our formulation and method, we find that any of these patents
do cover our planned use of ALA, Thermolase may either prevent us from using our
system or they may require us to take a license for a fee.
BECAUSE OF THE NATURE OF OUR BUSINESS, THE LOSS OF OUR REGULATORY CONSULTANT OR
KEY MEMBERS OF OUR MANAGEMENT TEAM COULD DELAY ACHIEVEMENT OF OUR GOALS.
IF ANY OF THE KEY MEMBERS OF OUR MANAGEMENT WERE TO END HIS RELATIONSHIP
WITH US, WE COULD EXPERIENCE SIGNIFICANT DELAYS IN OUR BUSINESS AND
RESEARCH OBJECTIVES.
We are a small company with only 24 employees. We are highly dependent on
several key employees with specialized scientific and technical skills
including: D. Geoffrey Shulman, MD, FRCPC, Chairman of the Board, President,
Chief Executive Officer and Chief Financial Officer of the Company; Ronald L.
Carroll, Executive Vice President and Chief Operating Officer; Stuart L. Marcus,
MD, PhD, Senior Vice President, Scientific Affairs; and Scott Lundahl, Vice
President, Technology. At least one of them receives regular solicitations for
employment from industry competitors. While we have entered employment
agreements with these four executive officers, they may not remain with us. Our
growth and future success will depend, in large part, on the continued
contributions of these key individuals as well as our ability to, motivate and
retain these qualified personnel in our specialty drug and light device areas.
We currently do not employ anyone who could replace them. The photodynamic
therapy industry is still quite small and the number of experts is limited. The
loss of Dr. Shulman, Mr. Carroll, Dr. Marcus or Mr. Lundahl could cause
significant delays in achievement of our business and research goals since very
few people with their expertise could be hired. Our business, financial
condition and results of operations could suffer.
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32
We also must identify, attract and retain additional qualified management
and technical personnel to manage and support our business. Competition for top
management and technical personnel is intense, and we may not be able to recruit
and retain the personnel we need. Our future success depends to a significant
extent on the ability of our executive officers and other members of our
management team to operate effectively, both individually and as a group. We
cannot be certain that we will be able to satisfactorily allocate
responsibilities and that the new members of our executive team will succeed in
their roles.
OUR LEVULAN(R) APPROVAL AND CO-DEVELOPMENT RELATIONSHIP IS ALLOWING RAPID
GROWTH AND IS CREATING ADDITIONAL STRESS FOR OUR ALREADY OVERBURDENED STAFF
WHICH MAY RESULT IN UNANTICIPATED DELAYS IN OUR BUSINESS AND RESEARCH
OBJECTIVES.
We have recently begun an aggressive growth plan that includes substantial
and increased investment in research and development and additional personnel
that we will require to support our growth. This rapid growth and increased
scope of operations presents a number of risks, including:
- an increase in operating expenses,
- the complexities associated with managing a larger and faster growing
organization; and
- unanticipated and substantial costs and time delays.
Our recent FDA approvals, and preparations for the launch of our products,
together with our commitment to accelerate our research and development programs
has placed and, if sustained, will continue to place, a significant strain on
our management and operations. Accordingly, our future operating results will
depend on the ability of our officers and other key employees to continue to
implement and improve our operational, customer service and internal control
systems, and to effectively expand, train and manage our employee base.
Demands placed on our clinical and light device staff have increased and
are expected to continue to increase as result of the numerous investigator
studies and clinical trials in development. There can be no guarantee that we
will be able to effectively oversee and monitor all of these investigator
studies and clinical trials. If we are unable to manage multiple studies and
clinical trials at the same time, we could have increased costs or significant
delays in our development program. In addition, as a result of our recent and
anticipated growth, we will need to recruit and hire additional personnel at all
operating levels. There can be no guaranty that we will be able to identify
suitable candidates to fill these positions.
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BECAUSE WE ARE DEPENDENT UPON OUR INDEPENDENT CONSULTANTS, GUIDELINES,
INC., FOR OUR REGULATORY AFFAIRS EXPERTISE, IF THEY STOPPED PROVIDING
SERVICES, IT COULD BE COSTLY AND TIME-CONSUMING FOR US TO REPLACE THEM.
Our clinical development program is being implemented by our senior
management, with the assistance of consultants, primarily Guidelines, Inc., a
Florida-based company, specializing in drug development and regulatory affairs.
While we have improved our regulatory affairs expertise, we still rely on
Guidelines to act as liaison with the FDA. A loss of Guidelines' services would
force us to expand our regulatory affairs capacity quickly. This could prove to
be costly and time-consuming which could cause a material adverse effect on our
development program.
RISKS RELATED TO OUR INDUSTRY
PRODUCT LIABILITY AND OTHER CLAIMS AGAINST US MAY REDUCE DEMAND FOR OUR PRODUCTS
OR RESULT IN DAMAGES.
IF WE BECOME SUBJECT TO A PRODUCT LIABILITY CLAIM WE MAY NOT HAVE ADEQUATE
INSURANCE COVERAGE AND THE CLAIM COULD ADVERSELY AFFECT OUR BUSINESS.
The development, manufacture and sale of medical products exposes us to the
risk of significant damages from product liability claims. We maintain product
liability insurance for coverage of our clinical trial activities. We intend to
obtain coverage for our products when they enter the marketplace but we do not
know if it will be available at acceptable costs. If the cost is too high, we
will have to self-insure. While we have not experienced any product liability
claims, a successful claim in excess of our clinical trial insurance coverage or
any coverage for commercial use of our products could have a materially adverse
effect on our business, financial condition and results of operations.
OUR BUSINESS INVOLVES ENVIRONMENTAL RISKS AND WE MAY INCUR SIGNIFICANT
COSTS COMPLYING WITH ENVIRONMENTAL LAWS AND REGULATIONS.
We use various hazardous materials, such as mercury in fluorescent tubes in
our research and development activities. Even though we do not currently
manufacture any products, we are subject to federal, state and local laws and
regulations which govern the use, manufacture, storage, handling and disposal of
hazardous materials and specific waste products. We believe that we are in
compliance in all material respects with applicable environmental laws and
regulations and we do not expect to make material capital expenditures for
environmental control facilities in the near-term. However, we cannot guaranty
that we will not incur significant costs to comply with environmental laws and
regulations in the future. We also cannot guaranty that our operations, business
or assets will not be materially adversely effected by current or future
environmental laws or regulations. 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.
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WE MAY NOT BE ABLE TO KEEP UP WITH RAPID CHANGES IN THE BIOTECHNOLOGY AND
PHARMACEUTICAL INDUSTRIES THAT COULD MAKE SOME OR ALL OF OUR PRODUCTS
NON-COMPETITIVE OR OBSOLETE.
COMPETING PRODUCTS AND TECHNOLOGIES MAY MAKE SOME OR ALL OF OUR PROGRAMS OR
POTENTIAL PRODUCTS NONCOMPETITIVE OR OBSOLETE.
Our industry is subject to rapid, unpredictable and significant
technological change. Competition is intense. Well-known pharmaceutical,
biotechnology and chemical companies are marketing well-established therapies
for the treatment of various dermatological conditions including AKs. Doctors
may prefer familiar methods that they are comfortable using rather than try our
products. Many companies are also seeking to develop new products and
technologies for medical conditions for which we are developing treatments. Our
competitors may succeed in developing products that are safer or more effective
than ours and in obtaining regulatory marketing approval of future products
before we do. We anticipate that we will face increased competition as new
companies enter our markets and as the scientific development of PDT/PD
advances.
We expect that our principal methods of competition with other PDT
companies will be based upon such factors as:
- the ease of administration of our photodynamic therapy,
- the degree of generalized skin sensitivity to light,
- the number of required doses,
- the selectivity of our drug for the target lesion or tissue of
interest, and
- the type and cost of our light systems.
We cannot give you any assurance that new drugs or future developments in
PDT or in other drug technologies will not have a material adverse effect on our
business. Increased competition could result in:
- price reductions,
- lower levels of third-party reimbursements,
- failure to achieve market acceptance, and
- loss of market share,
any of which could have an adverse effect on our business. Further, we cannot
give you any assurance that developments by our competitors or future
competitors will not render our technology obsolete.
OUR COMPETITORS IN THE BIOTECHNOLOGY AND PHARMACEUTICAL INDUSTRIES MAY HAVE
BETTER PRODUCTS, MANUFACTURING CAPABILITIES OR MARKETING EXPERTISE.
Several companies are developing PDT agents other than Levulan(R). These
include: QLT PhotoTherapeutics Inc. (Canada); Miravant, Inc. (U.S.);
Pharmacyclics, Inc. (U.S.); Scotia Pharmaceuticals (United Kingdom); and
Photogen Technologies, Inc. (U.S.). We are also aware of several overseas
companies doing research with ALA, including: medac GmbH (Germany) which is 25%
owned by Schering AG; ESC Medical Systems Ltd. (Israel); and Photocure (Norway).
Many of our competitors have substantially greater financial, technical and
marketing resources than we have. In addition, several of these companies have
significantly greater experience than we do in developing products, conducting
preclinical and clinical testing and obtaining regulatory approvals to market
products for health care.
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Photocure is also conducting late-stage clinical trials using a related ALA
compound with PDT for dermatological uses. We are aware that medac is developing
ALA PDT for bladder cancer detection in Germany and may receive regulatory
approval in Germany prior to the time that we could receive approval from the
FDA. We believe that our United States patents may be infringed if medac sells
its products in the United States.
We also know from published reports that an Israeli firm, ESC Medical
Systems Ltd., has entered into a worldwide distribution and supply agreement for
a medical grade of ALA (ALA Fine(TM)) for PDT applications. ESC has indicated
that it has used ALA Fine(TM) and its Versalight(R) to treat skin cancer in over
1,000 patients. These products are not available in the United States and we
believe that the PARTEQ patents would be infringed if the ESC products were
made, used or sold in the United States. However, these ESC products could
compete with some of our products, if approved by health regulatory authorities
outside of the United States or other countries covered by PARTEQ patents.
RISKS RELATED TO OUR STOCK
IF OUTSTANDING OPTIONS AND WARRANTS ARE CONVERTED, THE VALUE OF THOSE SHARES OF
COMMON STOCK OUTSTANDING JUST PRIOR TO THE CONVERSION WILL BE DILUTED.
As of February 15, 2000 there were outstanding options and warrants to
purchase 2,087,500 shares of common stock, with exercise prices ranging from
U.S. $3.25 to $15.875 per share, respectively, and ranging from CDN. $4.69 to
CDN. $12.875 per share, respectively. In addition, there are 32,575 outstanding
underwriter's purchase options from offerings completed in 1995 and 1996 and
7,109 outstanding placement agent warrants from a private placement completed in
1999. If the holders exercise a significant number of these securities at any
one time, the market price of the common stock could fall. The value of the
common stock held by other shareholders will be diluted. The holders of the
options and warrants have the opportunity to profit if the market price for the
common stock exceeds the exercise price of their respective securities, without
assuming the risk of ownership. If the market price of the common stock does not
rise above the exercise price of these securities, then they will expire without
exercise. The holders are likely to exercise their securities when we would
probably be able to raise capital from the public on terms more favorable than
those provided in these securities.
RESULTS OF OUR OPERATIONS AND GENERAL MARKET CONDITIONS FOR BIOTECHNOLOGY STOCK
COULD RESULT IN THE SUDDEN CHANGE IN THE MARKET VALUE OF OUR STOCK.
From time to time and in particular during the last several months, the
price of our common stock has been highly volatile. These fluctuations create a
greater risk of capital losses for our shareholders as compared to less volatile
stocks. From January 1, 1999 to January 31, 2000, our stock price has ranged
from a high of $31.875 to a low of $5.531. Over approximately the past six (6)
months our stock price has ranged from a high of $32.750 to a low of $13.063.
Factors that contributed to the volatility of our stock during the last twelve
(12) months included:
- announcement of "approvability" from the FDA;
- new competitors entering the marketplace;
- execution of a collaboration agreement;
- release by us and our competitors of the results of clinical trials;
and
- receipt of marketing approval from the FDA.
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The significant general market volatility in similar stage pharmaceutical
and biotechnology companies made the market price of our common stock even more
volatile.
EFFECTING A CHANGE OF CONTROL OF DUSA WOULD BE DIFFICULT, WHICH MAY DISCOURAGE
OFFERS FOR SHARES OF OUR COMMON STOCK.
Our certificate of incorporation authorizes the board of directors to issue
up to 100 million shares of stock, 40 million of which are common stock. The
board of directors has the authority to determine the price, rights, preferences
and privileges, including voting rights, of the remaining 60 million shares
without any further vote or action by the shareholders. The rights of the
holders of our common stock will be subject to, and may be adversely affected
by, the rights of the holders of any preferred stock that may be issued in the
future.
We also have a shareholder rights plan. The plan may have the effect of
delaying, deterring, or preventing changes the management or control of DUSA,
which may discourage potential acquirers who otherwise might wish to acquire us
without the consent of the board of directors. Under the plan, if a person or
group acquires 15% or more of our common stock, all holders of rights (other
than the acquiring shareholder) may, upon payment of the purchase price then in
effect, purchase common stock having a value of twice the purchase price. In the
event that we are involved in a merger or other similar transaction where DUSA
is not the surviving corporation, all holders of rights (other than the
acquiring shareholder) shall be entitled, upon payment of the then in effect
purchase price, to purchase common stock of the surviving corporation having a
value of twice the purchase price. The rights will expire on September 26, 2007,
unless previously redeemed.
ITEM 2. PROPERTIES
In May 1999 we entered into a new five year lease for 16,000 sq. ft. plus
an option on an additional 2,000 sq. ft. of office/warehouse space to be used
for offices and manufacturing in Wilmington, Massachusetts. This facility will
accommodate the expansion of operational, technical and marketing personnel for
the scale-up of the manufacturing process. Annual rent on a triple net basis
will total $140,000.00 per year beginning June 1, 1999. Our wholly owned
subsidiary, DUSA Pharmaceuticals New York, Inc., relocated from Tarrytown, New
York, to larger facilities, approximately 4,000 sq. ft., in Valhalla, New York
in October 1997 under the terms of a five year lease at an annual rental in 1999
of approximately $98,500. We have also entered into a new three year lease for
approximately 1,300 sq. ft. of office space in Toronto in the same building DUSA
previously occupied. This facility will accommodate the offices of our
President, Controller and shareholder services personnel. Annual rent payments
will total $31,272 per year beginning August 1, 1999, plus approximately $27,728
for lease operating costs during the first year of the term.
ITEM 3. LEGAL PROCEEDINGS
We are not involved in any material legal proceedings, but see "Business --
Licenses: Other License".
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is traded on the Nasdaq National Market under the symbol
"DUSA." The following are the high and low closing prices for the common stock
reported for the quarterly periods shown.
Price range per common share by quarter, 1998:
First Second Third Fourth
----- ------ ----- ------
Nasdaq
High $16.625 $16.063 $7.125 $8.000
Low 10.625 6.500 2.875 2.250
Price range per common share by quarter, 1999:
First Second Third Fourth
----- ------ ----- ------
Nasdaq
High $8.563 $11.563 $16.000 $31.875
Low 5.531 7.250 10.375 12.938
On February 29, 2000, the closing price of our common stock was $35.813 per
share on the Nasdaq Stock Market. On February 29, 2000, there were approximately
743 holders of record of the common stock.
We have never paid cash dividends on our common stock and have no present
plans to do so in the foreseeable future.
ITEM 6. SELECTED FINANCIAL DATA
The following information is qualified by reference to and should be read
in conjunction with the Company's Consolidated Financial Statements and the
Notes thereto and Management's Discussion and Analysis of Financial Condition
and Results of Operations included elsewhere herein. The selected financial data
for the Company presented below for the years ended December 31, 1999, 1998,
1997, 1996 and 1995, and for the cumulative period from February 21, 1991 (date
of incorporation) to December 31, 1999 have been derived from the Company's
audited financial statements.
CONSOLIDATED STATEMENT OF OPERATING DATA
Cumulative period from
February 21, 1991
(date of incorporation
Year ended December 31, to December 31, 1999
- ----------------------------------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------------
Non-operating revenue $574,098 $515,184 $893,147 $1,073,006 $572,742 $6,274,995
- ----------------------------------------------------------------------------------------------------------------------------------
Research and development costs 4,194,532 4,502,391 6,252,830 5,652,442 3,044,979 30,762,523
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Cumulative period from
February 21, 1991
(date of incorporation
to December 31,
Year ended December 31, 1999
- -----------------------------------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
Other operating expenses 1,818,193 1,729,741 1,760,409 2,220,883 1,175,296 11,431,898
- ------------------------------------------------------------------------------------------------------------------------------------
Income tax expense 90,000 - - - - 90,000
- ------------------------------------------------------------------------------------------------------------------------------------
Net loss (5,528,627) (5,716,948) (7,120,092) (6,800,319) (3,647,533) (35,946,594)
- ------------------------------------------------------------------------------------------------------------------------------------
Basic and diluted net loss per common share $ (0.50) $ (0.61) $ (0.76) $ (0.75) $ (0.65) $ (5.15)
- ------------------------------------------------------------------------------------------------------------------------------------
Weighted average number of shares
outstanding 11,061,016 9,365,950 9,358,038 9,087,823 5,589,486 6,973,176
- -----------------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEET DATA
As of December 31,
- ------------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------
Total Assets $28,156,845 $7,140,675 $13,081,248 $20,129,257 $20,827,578
- ------------------------------------------------------------------------------------------------------------
Cash and investment securities 26,897,580 6,722,132 12,767,142 19,719,496 20,479,592
- ------------------------------------------------------------------------------------------------------------
Shareholders' equity 17,059,928 6,416,146 12,019,351 19,101,790 20,219,240
- ------------------------------------------------------------------------------------------------------------
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
When you read this section of this report, it is important that you also
read the financial statements and related notes included elsewhere herein. This
section contains forward-looking statements that involve risks and
uncertainties. Our actual results could differ materially from those we
anticipate in these forward-looking statements for many reasons, including the
factors described below and in "Risk Factors".
OVERVIEW
We are a development-stage pharmaceutical company focused on the research
and development of our drug, Levulan(R), combined with exposure to light, to
treat and detect various medical conditions. Our first product, Levulan(R) 20%
Topical Solution with photodynamic therapy for actinic keratoses, or AKs, of the
face and scalp, was approved by the FDA on December 3, 1999. The PMA, the
regulatory application for the clinical trial version of our BLU-U(TM), was
approved on the same day. The development of our other dermatology and
non-dermatology potential indications are at exploratory, Phase I or Phase II
stages. See "Business -- Our Products." Since our inception in 1991, we have
primarily devoted our resources to funding research and development and as a
result, we have experienced significant operating losses. As of December 31,
1999, we had an accumulated deficit of $35,946,594.
Our transition from a development-stage company to a profitable
operating company is dependent upon approval by the FDA of a PMA supplement
which we will file shortly covering the commercial version of the BLU-U(TM). Our
Wilmington facilities, and perhaps our BLU-U(TM) manufacturer, must pass
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inspection by the FDA before the supplement is approved. Also, we must develop a
market for our products. To address this need, in November 1999, we entered into
a co-development, marketing and supply agreement with Schering AG. Schering AG's
U.S. affiliate, Berlex Laboratories, Inc., is responsible for the marketing and
selling of Levulan(R) PDT for AK and other dermatology products in the United
States which we and Schering AG may co-develop. We will decide shortly which
clinical programs will be funded this year. Schering AG is obligated to spend
two-thirds of the development budget, up to $3 million, while we are obligated
to spend one-third of the co-development budget up to $1.5 million during 2000.
While Schering AG will market and sell the Levulan(R) Kerastick(TM), and market
the BLU-U(TM), we are responsible for distributing, maintaining and repairing
the BLU-U(TM). At this time, we intend to lease the BLU-U(TM) to doctors. We
expect to build sufficient inventory of the BLU-U(TM) which we will finance
initially through Schering AG and later through equipment financing or our own
cash flow. We have agreed to maintain a year's worth of inventory of ALA, in
bulk, or as finished Kerastick(TM) brand applicators until we obtain a second
source of supply. Also, we have purchased key pieces of equipment to prepare for
the establishment of a limited production line so that a second source could
manufacture the Kerastick(TM).
In 1991, we licensed the primary patents for our drug technology platform
from PARTEQ Research and Development Innovation, the licensing arm of Queen's
University, Kingston, Ontario, Canada. Our exclusive license covers all
countries of the world, except Canada. PARTEQ is entitled to minimum royalties
of up to CDN $1.1 million of which CDN $532,056 has been paid and recorded as
deferred royalties in 1999, based upon the milestone payments we received from
Schering AG. We have expensed the 1998 payment of the CDN $100,000 and are also
entitled to credit this payment against the CDN $1.1 million. We must also pay
PARTEQ royalties on net sales of products, including products marketed and sold
by Schering AG.
To strengthen our cash position and in order to support ongoing operations
during the FDA review process, we completed a private placement of 1,500,000
million shares of our common stock in January 1999 raising gross proceeds of
$7.5 million. In addition, on February 23, 2000, we signed a definitive
agreement with ten mutual funds or collective trust funds advised by INVESCO
Funds Group, Inc. for a private placement of 1,500,000 shares of our common
stock. The purchase price is $28.50 per share. The closing is scheduled to occur
promptly after the declaration by the SEC that a registration statement covering
shares is effective. If the shares are not registered by 105 days following the
filing of the registration statement, the funds have the right to terminate the
agreement. We agreed to pay at closing a commission of 4.5% on the gross
proceeds plus a non-accountable expense allowance of $25,000 to the placement
agent. See "Management's Discussion and Analysis Financial Condition and Results
of Operations -- Liquidity and Capital Resources."
We have not yet derived any commercial revenues from product sales.
However, assuming that the PMA supplement is approved by the FDA and that our
facilities pass FDA inspection, we expect to receive royalties and supply fees
from Schering AG later this year from sales of our first product. Even with
these revenues, we expect to continue to incur operating losses during the next
one to two years depending upon sales levels, as we continue to incur research
and development costs for our dermatology and non-dermatology development
programs. We also expect to incur capital expenditures in the coming months at
the facilities of our Kerastick(TM) brand manufacturer.
At the current time, we are preparing for the commercial launch of our
first products. However, delays in the FDA approval process of our PMA
supplement, or in delivery to Schering AG of sufficient product supplies from
our third-party manufacturers for the launch of the Levulan(R) Kerastick(TM), or
Schering AG's ability to hire and train sufficient sales representatives, would
delay the marketing of our products and would have a significant adverse impact
on our near-term financial results.
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If product sales by Schering AG do not meet our expectations, then
in order to advance our research and development program as now planned beyond
2002, we may need to raise additional funds. For non-dermatology indications, we
may enter into joint development or licensing arrangements, both domestically
and internationally, with pharmaceutical companies, in which we would seek to
have an alliance partner make up-front and/or milestone payments, and assume
some or all of the costs of clinical testing and of obtaining regulatory
marketing approval for the products licensed. To the extent that we do not enter
into such arrangements, we may require separate funding to complete the
regulatory approval process for non-dermatology products and would likely need
additional funds to market these potential products. See "Risk Factors -- We
must receive separate approval for each of our potential products before we can
sell them commercially in the United States or abroad; and -- If we are unable
to obtain the necessary capital to fund our operations, we will have to delay
our development programs and may not be able to complete our clinical trials."
RESULTS OF OPERATIONS
Comparison of Years ended December 31, 1999, 1998 and 1997
Interest Income. Interest income, the only significant source of
income at the current time, was $574,098, $508,256, and $891,088 for the years
ended December 31, 1999, 1998 and 1997, respectively. Interest is earned
primarily on United States government securities. In 1999, interest was higher
than in 1998 as we earned interest on the proceeds from our January 1999 private
placement and on the payments from Schering AG. Interest income decreased for
the year ended 1998 as compared to for the year ended 1997, as we continued to
spend funds for ongoing research and development. Interest income is expected to
increase due to the receipt from Schering AG of $8.75 million in cash proceeds
and $6.25 million for 340,458 shares of our common stock in the fourth quarter
of 1999, and after the $15 million payment due DUSA within 30 days of first
commercial sale in the United States, subject to approval of the commercial
version of the BLU-U(TM). If the recent private placement for $42.75 million
closes, we expect that additional interest income will accrue. However, unless
our PMA supplement is approved and a large market for our first products
develop, interest income will decline as funds are spent for our research and
development programs. See Note 8 to the Notes to the Consolidated Financial
Statements.
Research and Development Expenses. Research and development costs
for the year ended December 31, 1999 were $4,194,532 as compared to $4,502,391
for the year ended December 31, 1998 and $6,252,830 for the year ended December
31, 1997. The decrease in costs following 1997 reflected our efforts to delay
some of our research programs while we were waiting for FDA approval and
completion of a dermatology partnership. The higher costs in 1997 also reflect
the completion of our multi-center Phase III trials for AKs, preparation for the
filing of the AKs NDA, and preparation for initiation of the bladder cancer PD
Phase I/II trial, all of which occurred in 1997. We expect that 2000 research
and development costs will increase above 1999 expenditures, although a portion
of these costs will be reimbursed by Schering AG. Costs and development fees
associated with agreements for research projects and clinical studies commit us
to make payments during 2000 of approximately $786,000. See Note 9h. to the
Notes to the Consolidated Financial Statements.
General and Administration Expenses. General and administration
expenses for the years ended December 31, 1999, 1998, and 1997 were $1,715,298,
$1,662,228, and $1,706,113, respectively. These costs are expected to increase
significantly in the future as we continue to add personnel, including
additional executive officers.
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Income Taxes. As of December 31, 1999, we had net operating loss
carryforwards of approximately $24,255,000 for federal income tax purposes and
tax credit carryforwards of approximately $876,000 for federal reporting
purposes. These amounts expire at various times through 2019. See Note 5 to the
Notes to the Consolidated Financial Statements. A provision for alternative
minimum tax has been made in the amount of $90,000.
We have implemented SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information. This Statement establishes standards for the
way that a public business enterprise reports information about operating
segments in annual financial statements and interim financial reports issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas, and major customers. We have determined
that, at present, we operate in one segment which is the development of emerging
technologies using drugs in combination with light to treat and detect disease.
In June 1998, the FASB issued SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities. This Statement establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities.
It requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. The Statement is effective for the fiscal quarters of our fiscal
year ending December 31, 2001. We are in the process of evaluating the effect of
this Statement on our consolidated financial statements.
LIQUIDITY AND CAPITAL RESOURCES
We have funded our operations primarily from sales of securities in
public and private offerings and recently with milestone payments from Schering
AG. In January 1999, we issued 1,500,000 million shares of our common stock in a
private placement pursuant to Regulation D of the Securities Act of 1933
receiving gross proceeds of $7.5 million. See Note 6 to the Notes to the
Consolidated Financial Statements. Since the closing of the agreement with
Schering AG, Schering AG has paid $8.75 million in cash milestones and $6.25
million for shares of our common stock. The revenue from the milestone payments
has been deferred and amortization will begin following the first commercial
sale of our products. See Note 2f. to the Notes to the Consolidated Financial
Statements. If the INVESCO private placement of 1,500,000 million shares of
common stock closes, gross proceeds of $42.75 million would place us in a strong
financial position.
As of December 31, 1999, our total assets, consisting primarily of
cash and United States government securities available for sale, were
$28,156,845, as compared to $7,140,675 as of December 31, 1998. Our United
States government securities available for sale have an aggregate cost of
$19,951,281 and a current aggregate market value of $19,868,962 as of December
31, 1999, resulting in a net unrealized loss on securities available for sale of
$82,319, provision for which has been recorded as part of shareholders' equity
and as an item of comprehensive income. As of December 31, 1998, the aggregate
cost was $5,502,841 and the market value was $5,508,375, resulting in an
unrealized gain of $5,534. The market value of our government securities
fluctuates with changes in interest rates in the United States from the time
these securities were acquired. Losses can be realized, depending upon the
timing of our need to convert government securities into cash to meet our
working capital requirements. Our government securities currently have yields
ranging from 4.97% to 6.48%, and maturity dates ranging from January 14, 2000 to
November 20, 2001. As of December 31, 1998, these securities had yields ranging
from 4.76% to 6.49% and maturity dates ranging from January 7, 1999 to August
10, 1999. We have invested our funds in liquid investments, so that we will have
ready access to our cash
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reserves as needed for the funding of our development plan on a short-term and
long-term basis. The net proceeds from our January 1999 private placement and
the funds from Schering AG have also been invested in short and medium-term U.S.
government securities.
As of December 31, 1999, we had current liabilities of $1,305,250 as
compared to $724,529 as of December 31, 1998. Since our inception, we have had
no long term debt, nor do we have any plans to enter into any such financial
arrangements. We do have a secured line of credit from Schering AG for up to $1
million to help us finance inventory purchases of our BLU-U(TM) from our
supplier. This line of credit is interest-free but must be re-paid within one
year of our first draw down of funds.
Our management is currently focusing its attention on the
commercialization of Levulan(R) PDT for AKS, the dermatology co-development
program and development of our bladder cancer detection indication. As part of
this effort, we have committed to reimburse the manufacturer of our
Kerastick(TM) applicator in the amount of $265,000 for construction at its
facilities related to our product. Full development and testing of all potential
indications which are currently under development or being consider for
development, may require additional funding. The timing of expenditures will be
dependent on various factors, including
- progress of our research and development programs;
- the results of preclinical and clinical trials;
- the timing of regulatory marketing approvals;
- competitive developments;
- payments under the agreement with Schering AG and any additional
collaborative arrangements, if any, we may enter; and
- the availability of other financing.
There can be no assurance, however, that sufficient funds will be
available to enable us to obtain regulatory marketing approval or to market any
future product for any indications currently under development. There is no way
to predict the timing or magnitude of revenues from the marketing of our
products or whether any such revenues will be realized. While the net proceeds
of the January 1999 offering and the Schering AG payments will enable us to
maintain our current research program as planned and support the
commercialization of Levulan(R) PDT for AKs through at least the next 24 months,
in order to maintain and expand continuing research and development programs,
DUSA will need to close the INVESCO private placement or raise additional funds
through future corporate alliances, financings, or other sources, depending upon
the amount of revenues we receive from our first product.
If sufficient funds are available, we may also use our resources to
acquire by license, purchase or other arrangements, businesses, technologies, or
products that complement, enhance or expand our business. We will be actively
seeking relationships with pharmaceutical or other suitable organizations to
market some of our potential non-dermatology products and technologies, or to
provide funding for research projects.
We have 24 full-time employees. We have employment agreements with
our four key executive officers. We have purchased and are the named beneficiary
of a key man life insurance, having a face value of CDN $2.0 million on the life
of our President. We also have retained numerous independent consultants, and
the services of key researchers at leading university centers, whose activities
are coordinated by our employees. See Note 9h. to the Notes to the Consolidated
Financial Statements. We
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expect that we will hire or retain significantly more employees and consultants
as commercialization of Levulan(R) PDT approaches, particularly in the
operations, financial and regulatory areas.
We have not made any material capital expenditures for environmental
control facilities in the near-term. If we decide, in the future, to establish a
limited production line for the manufacture of the Kerastick(TM), we expect that
our facility will be governed by environmental laws, but we do not expect these
laws to require material capital expenditures. There can be no assurance,
however, that we will not be required to incur significant costs to comply with
environmental laws and regulations in the future, or any assurance that our
operations, business or assets will not be materially adversely affected by
current or future environmental laws or regulations. See "Business -- Government
Regulation."
INFLATION
Although inflation rates have been comparatively low in recent
years, inflation is expected to apply upward pressure on our operating costs. We
have included an inflation factor in our cost estimates. However, the overall
net effect of inflation on our operations is expected to be minimal.
MARKET RISK
We hold fixed income U.S. government securities which are subject to
interest rate market risks. However, we do not believe that the risk is material
as we make our investments in relatively short-term instruments and we strive to
match the maturity dates of these instruments to our cash flow needs. A ten
percent decline in the average yield of these instruments would not have a
material effect on our results of operations or cash flows.
YEAR 2000 COMPLIANCE.
Many currently installed computer systems and software products are
coded to accept only two-digit entries in the date code field. In order to
distinguish 21st century dates from 20th century dates, the date code field
needed to be expanded to 4 digits. As a result, many companies' software and
computer systems were upgraded or replaced in order to comply with these Year
2000 requirements. The use of software and computer systems that are not Year
2000 compliant could have resulted in system failures or miscalculations
resulting in disruptions of operations, including among other things, a
temporary inability to process transactions, send invoices, or engage in normal
business activities.
To date, we have not suffered any disruptions in our computer
systems or software when the expanded date code field was first used on January
1, 2000. In addition, to date, we have not been made aware that any third-party
systems we rely on, the manufacturing systems of our vendors or the systems our
customers use to order our services have suffered disruptions in their systems.
FORWARD-LOOKING STATEMENTS SAFE HARBOR
This report, including the Management's Discussion and Analysis,
contains various "forward- looking statements" within the meaning of Section 27A
of the Securities Act of 1933 which represent our expectations or beliefs
concerning future events, including, but not limited to statements regarding
management's beliefs regarding the PMA supplement for the BLU-U(TM),
expectations regarding the
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commercial launch, potential revenues, inventory levels, and the co-development
program with Schering AG, clinical trial expectations for various conditions,
commencement of new light device and drug development efforts and clinical
trials, expectations of exclusivity under the Hatch/Waxman Act and other patent
laws, intentions to seek foreign regulatory approvals and to market outside the
United States, beliefs regarding environmental compliance, intentions to obtain
product liability insurance, beliefs concerning litigation regarding a license
agreement and patent disputes, the impact of a third-parties regulatory
compliance and fulfillment of contractual obligations, the expectations
regarding the closing of the INVESCO private placement and sufficiency of our
cash resources for our future liquidity, support of independent investigators,
expectations for future strategic opportunities and research and development
programs, further development of our dermatological products, expectations for
continuing operating losses and our capital resource needs. These
forward-looking statements are further qualified by important factors that could
cause actual results to differ materially from those in the forward-looking
statements. These factors include, without limitation, changing market and
regulatory conditions, actual clinical results of our trials, the impact of
competitive products and pricing, the timely development, FDA approval and
market acceptance of our products, reliance on third-parties, the securities
regulatory process, the maintenance of our patent portfolio and levels of
reimbursement by third-party payors, none of which can be assured. Results
actually achieved may differ materially from expected results included in these
statements as a result of these or other factors.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Independent Auditors' Report......................................... F-1
Consolidated Balance Sheets.......................................... F-2
Consolidated Statements of Operations................................ F-3
Consolidated Statements of Shareholders' Equity...................... F-4
Consolidated Statements of Cash Flows................................ F-7
Notes to the Consolidated Financial Statements....................... F-9
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The name, age and position with DUSA of each of our directors and
executive officers is listed below, followed by summaries of their background
and principal occupations. All of the directors were elected to the Board of
Directors at the last Annual Meeting of Shareholders and all are currently
serving as directors. All directors hold office until our Annual Meeting of
Shareholders and until their successors have been elected and qualified.
Executive officers are elected annually, and serve at the discretion of the
Board of Directors.
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NAME AGE TITLE DATE
- ---- --- ----- ELECTED
-------
D. Geoffrey Shulman, MD, FRCPC..................... 45 Chairman of the Board, President,
Chief Executive Officer, Chief
Financial Officer, and Director................. 9/05/91
John H. Abeles, MD ................................ 55 Director........................................ 8/02/94
James P. Doherty, BSc (1)(2)....................... 72 Director........................................ 9/26/91
Jay M. Haft, Esq.(1)............................... 64 Director........................................ 9/16/96
Richard C. Lufkin, SB, MBA (2)..................... 53 Director........................................ 1/27/92
Ronald L. Carroll.................................. 51 Executive Vice President, Chief Operating Office 5/14/98
Stuart L. Marcus, MD, PhD.......................... 53 Senior Vice President of Scientific Affairs..... 10/11/9
Scott L. Lundahl................................... 41 Vice President, Technology...................... 6/23/99
Mark C. Carota..................................... 44 Vice President, Operations ..................... 2/18/00
Nanette W. Mantell, Esq............................ 47 Secretary....................................... 2/19/92
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
Set forth below is certain information, including principal
occupations within the five (5) preceding years, with respect to our directors
and officers.
D. Geoffrey Shulman, MD, FRCPC, is our founder. Dr. Shulman, a
dermatologist, was the President and a director of Draxis Health Inc. from its
founding in October 1987 until May 1990, was Co-Chairman from October 1990 to
April 1993, and Chairman of the Board of Draxis Health Inc. from April 1993
until March 1996. He also participates, on a limited basis, in a private
dermatology practice.
John H. Abeles, MD, is the President and founder of MedVest, Inc.
which, since 1980, has provided consulting services to health care and high
technology companies. Dr. Abeles is a member of the Board of Directors of I-Flow
Corporation, Oryx Technology, Inc., PharmaPrint Corp. and Encore Medical
Corporation.
James P. Doherty, BSc, joined Draxis Health Inc. in May 1990 as its
President & COO following an extensive career in the pharmaceutical industry. He
remains a director of Draxis Health Inc. and was appointed Vice Chairman after
relinquishing his duties as President in 1992. Mr. Doherty was our Vice
President of Corporate Development from May 1993 to May 1995 when he retired
from that position.
Jay M. Haft, Esq., is a strategic and financial consultant. He was
a senior corporate partner of the law firm of Parker, Duryee, Rosoff & Haft from
1989 to 1994, and is currently of counsel to that firm. Mr. Haft is a member of
the Boards of Directors of Robotic Vision Systems, Inc., Noise Cancellation
Technologies Group, Inc., DCAP Group, Inc., Encore Medical Corporation, PC
Service Source, Inc., Oryx Technology, Inc. and Thrift Management, Inc.
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Richard C. Lufkin, SB, MBA, is the principal and founder of
Enterprise Development Associates, a proprietorship formed in 1985 which
provides consulting and venture support services to early stage technology-based
companies.
Ronald L. Carroll, has been employed by DUSA since May 1998. In 1994
Mr. Carroll co-founded and became President of Lumenetics, Inc., a
privately-owned medical device development company, which, prior to May 1998,
provided us with consulting services in the light device technology area. Prior
to forming Lumenetics, Inc., Mr. Carroll had extensive experience as a new
product development executive in the pharmaceutical industry with positions in
manufacturing, regulatory affairs and marketing.
Stuart L. Marcus, MD, PhD, is employed by DUSA. Prior to joining
us, in October 1993, Dr. Marcus was Director of the Hematology/Oncology
Department of Daiichi Pharmaceuticals Inc. in Fort Lee, New Jersey. From April
1987 until October 1992, he was employed by the Medical Research Division of the
American Cyanamid Company in Pearl River, New York. During those years, Dr.
Marcus directed photodynamic therapy clinical development, among other
assignments.
Scott L. Lundahl, has been employed by DUSA since May 1998. In 1994
Mr. Lundahl co-founded and became Vice President of Lumenetics, Inc., a
privately-owned medical device development company, which, prior to May 1998,
provided us with consulting services in the light device technology area.
Mark C. Carota, has been employed by DUSA since October 1999. Prior
to joining DUSA, Mr. Carota was Director of Operations from November 1998 to
October 1999 for Lavelle, Inc., a privately held manufacturer of orthopedic
instrumentation. From July 1998 to November 1998, Mr. Carota was employed as
Director of Quality Assurance by CGI Inc., Prior to joining CGI Inc., Mr. Carota
was employed by Allergan Inc., from February 1997 to July 1998 where he had
responsibility for quality assurance, engineering and facilities. From June 1991
to February 1997, Mr. Carota was employed by Smith & Nephew, where he managed
the quality function.
Nanette W. Mantell, Esq., is our Secretary. She has been a
shareholder with the law firm of Lane and Mantell, a professional corporation,
Somerville, New Jersey since 1989.
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Under the securities laws of the United States, our directors,
executive officers and any person holding more than ten percent (10%) of our
common stock are required to report their ownership of our common stock and any
changes in that ownership to the Securities and Exchange Commission on Forms 3,
4 and 5. Based on our review of the copies of such forms we have received, DUSA
believes that all of our officers and directors complied with all filing
requirements applicable to them with respect to transactions during fiscal 1999.
We are not aware of any person who holds greater than 10% beneficial ownership.
In making these statements, we have relied on the written representations of our
directors and officers and copies of the reports that they have filed with the
SEC.
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ITEM 11. EXECUTIVE COMPENSATION
The following table shows, for the fiscal years ended December 31,
1999, 1998 and 1997, certain compensation we have paid to our executive
officers. As of December 31, 1999, the only officers to receive cash
compensation in excess of $100,000 were our President, Executive Vice President,
Senior Vice President of Scientific Affairs and Vice President, Technology. All
amounts are stated in United States dollars unless otherwise indicated.
SUMMARY COMPENSATION TABLE
Long Term Compensation
---------------------------------------
Actual Compensation Awards Payouts
-------------------------------- -------------------- -------
Other All
Annual Restricted Other
Compen- Stock LTIP Compen-
Name and Principal Salary Bonus sation Award(s) Options Payouts sation
Position Year ($) ($) ($)(1) ($) (#) ($) ($)
- ----------------------------------------------------------------------------------------------------------------------------------
D. Geoffrey Shulman,
MD, FRCPC, Chairman of the Board, 1999 275,000 206,250 -- -- 160,000 -- --
President, Chief Executive Officer 1998 275,000 68,750 -- -- 10,000 -- --
and Chief Financial Officer(2) 1997 250,000 125,000 -- -- 10,000 -- -
Ronald L. Carroll 1999 176,000 53,625 -- -- 30,000 -- --
Executive Vice President, Chief 1998 95,000 40,625 -- -- 60,000 -- --
Operating Officer(3) -- -- -- -- -- -- -- --
Stuart L. Marcus, MD, 1999 210,000 63,000 -- -- 100,000 -- --
PhD, Senior Vice President of 1998 200,000 50,000 -- -- -- -- --
Scientific Affairs(4) 1997 180,000 45,000 -- -- -- -- --
Scott L. Lundahl, Vice 1999 148,923 45,375 -- - 20,000 - --
President, -- -- -- -- - - - --
Technology(5) -- -- -- - - - - --
Mark C. Carota, Vice President, 1999 21,192 -- -- - 20,000) - --
Operations(6) -- -- - -- - - - --
- -- -- - - - - --
(1) No officer had perquisites in excess of $50,000 or 10% of salary and bonus
reported for 1999, 1998, and 1997.
(2) On March 5, 1999, Dr. Shulman was awarded options to purchase 150,000
shares of our common stock pursuant to the 1996 Omnibus Plan. The exercise
price is equal to 10% above the closing price of the common stock on The
Nasdaq Stock Market on the date of the grant (which was $6.375), or
$7.0125 on 3/5/00, and increases by 10% on each subsequent vesting date to
$7.7138 on 3/5/01, $8.4851 on 3/5/02, and $9.333 on 3/5/03. On June 11,
1999, he received an automatic grant of non-qualified stock options to
purchase 10,000 shares of our common stock at an exercise price of $9.688.
Dr Shulman received automatic grants in the same amount on June 6, 1997
and June 12, 1998, at exercise prices of $6.25 and $6.9375, respectively,
being the closing price on the date of the grants.
(3) Mr. Carroll became Executive Vice President and Chief Operating Officer
effective May 14, 1998. Mr. Carroll is the President and a principal
shareholder of Lumenetics, Inc. ("Lumenetics"), our former light device
consultants. During the last fiscal year, we paid a total of $191,962.50
to Lumenetics, in the form of equipment lease payments
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totaling $46,000 and reimbursement for office space and related expenses
totaling $145,962.50. On March 5, 1999, Mr. Carroll was awarded options to
purchase 30,000 shares of our common stock pursuant to the 1996 Omnibus
Plan, as amended. These options have an exercise price equal to 10% above
the closing price of the common stock on The Nasdaq Stock Market on the
date of the grant (which was $6.375), or $7.0125 on 3/5/00, and increases
by 10% on each subsequent vesting date to $7.7138 on 3/5/01, $8.4851 on
3/5/02, and $9.333 on 3/5/03. Mr. Carroll also is an assignee of 60,000
options which were previously granted to Lumenetics, 10,000 of which were
granted at an exercise price of $3.625, the closing price of our common
stock on The Nasdaq Stock Market on the date prior to the date of grant
and 50,000 which have an exercise price of $6.125 per share, the closing
price of our common stock on The Nasdaq Stock Market on the date of the
grant.
(4) On March 5, 1999, Dr. Marcus was awarded options to purchase 100,000
shares of our common stock pursuant to the 1996 Omnibus Plan. These
options have an initial exercise price equal to 10% above the closing
price of the common stock on The Nasdaq Stock Market on the date of the
grant (which was $6.375), or $7.0125 on 3/5/00, and increases by 10% on
each subsequent vesting date to $7.7138 on 3/5/01, $8.4851 on 3/5/02, and
$9.333 on 3/5/03.
(5) Mr. Lundahl became Vice President, Technology effective June 23, 1999. Mr.
Lundahl is Vice President and a principal shareholder of Lumenetics, Inc.
("Lumenetics"), our former light device consultants. During the last
fiscal year, the Company paid a total of $191,962.50 to Lumenetics, in the
form of equipment lease payments totaling $46,000 and reimbursement for
office space and related expenses totaling $145,962.50. On March 5, 1999,
Mr. Lundahl was awarded options to purchase 20,000 shares of our common
stock pursuant to the 1996 Omnibus Plan, as amended. These options have an
initial exercise price equal to 10% above the closing price of the common
stock on The Nasdaq Stock Market on the date of the grant (which was
$6.375), or $7.0125 on 3/5/00, and increases by 10% on each subsequent
vesting date to $7.7138 on 3/5/01, $8.4851 on 3/5/02, and $9.333 on
3/5/03. Mr. Lundahl also is an assignee of 60,000 options which were
previously granted to Lumenetics, 10,000 of which were granted at an
exercise price of $3.625, the closing price of our common stock on The
Nasdaq Stock Market on the date prior to the date of grant and 50,000
which have an exercise price of $6.125 per share, the closing price of our
common stock on The Nasdaq Stock Market on the date of the grant.
(6) Mr. Mark C. Carota became Vice President, Operations on February 18, 2000.
Mr. Carota was employed by DUSA as Director of Quality Assurance on
October 18, 1999. As of December 31, 1999, he had received annual cash
compensation in the form of salary equal to $21,192.30. In connection with
his employment, Mr. Carota was granted options to purchase 20,000 shares
of our common stock, at an exercise price of $15.25, the closing price of
our common stock on The Nasdaq Stock Market on the date of the grant.
OPTION GRANTS IN 1999
The following grants of stock options were made to the named executive
officers during fiscal year 1999.
POTENTIAL REALIZABLE
VALUE OF ASSUMED
ANNUAL RATES OF STOCK PRICE
INDIVIDUAL GRANTS APPRECIATION FOR OPTION TERM(4)
---------------------------------------------------------------- ----------------------------------
Number of % of Total
Securities Options/SARs Exercise or
Underlying Options/SARs Granted to Employees in Base Price Expiration
Name Granted (1) Fiscal Year ($/Share) Date 5%($) 10%($)
- ------------------------- ----------------------- ----------------------- ----------- ---------- -------- ----------
Dr. D. Geoffrey Shulman 150,000(5) 35% $7.0125(6) 03/05/09 $157,680 $1,080,315
10,000(2) 2.3% $9.688(3) 06/11/09 $60,927 $154,400
Ronald L. Carroll (5) 30,000 7% $7.0125(6) 03/05/09 $31,530 $216,063
Dr. Stuart L. Marcus(5) 100,000 24% $7.0125(6) 03/05/09 $105,100 $720,210
Scott L. Lundahl(5) 20,000 5% $7.0125(6) 03/05/09 $21,020 $144,042
Mark C. Carota(5) 20,000 5% $15.25 10/18/09 $191,812 $486,090
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(1) All options in this table have been granted pursuant to the 1996 Omnibus
Plan as amended. The options have exercise prices equal to the fair
market value on the date of the grant.
(2) Dr. Shulman's options were granted automatically and were immediately
vested upon his reelection to the Board of Directors on June 10, 1999.
The option expires ten (10) years from the date of the grant.
(3) Under the 1996 Omnibus Plan, as amended by the shareholders on June 5,
1997, the exercise price of options granted to directors, which include
the 10,000 options granted to Dr. Shulman, may be paid in cash, or at the
discretion of the Compensation Committee, by tender of common stock and
cash or through other such means as the Committee determines are
consistent with the 1996 Omnibus Plan, as amended.
(4) The potential realizable value is calculated based on the fair market
value of our common stock on the date of the grant. These amounts only
represent certain assumed rates of appreciation established by the SEC.
There can be no assurance that the amounts reflected in this table or the
associated rates of appreciation will be achieved.
(5) These options were granted as an incentive for employment with us and will
vest at the rate of 25% each year on the first, second, third and fourth
anniversaries of the date of the grant. The options expire ten (10) years
from the date of grant.
(6) The exercise price is equal to 10% above the closing price of the common
stock on The Nasdaq Stock Market on the date of the grant which was
$6.375, or $7.0125 on 3/5/00, and increases by 10% on each subsequent
vesting date to $7.7138 on 3/5/01, $8.4851 on 3/5/02, and $9.333 on
3/5/03.
AGGREGATED STOCK OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END STOCK OPTION VALUES
The following table provides certain information as to certain stock options
exercisable by the named executive officers for the fiscal year 1999, and the
value of such options held by them at December 31, 1999, measured in terms of
the closing price of our common stock on The Nasdaq Stock Market on December 31,
1999 which was $28.50 per share.
Value of
Number of Unexercised
Unexercised In-the-Money
Options at Options at
December 31, 1999 December 31, 1999
Shares Acquired Exercisable/ Exercisable/
Name on Exercise (#) Value Realized ($) Unexercisable Unexercisable
- -----------------------------------------------------------------------------------------------------------------
Dr. D. Geoffrey Shulman -- - 325,000/ $7,376,558/
215,000 $4,398,083
Ronald L. Carroll(1) -- - 50,000/ $1,063,125/
100,000 $1,935,292
Dr. Stuart L. Marcus - -- 47,500/ $999,375/
112,500 $2,295,765
Scott L. Lundahl(2) -- - 45,000/ $978,125/
75,000 $1,476,653
Mark C. Carota -- - 0/ $0/
20,000 $265,000
NOTES:
(1) Mr. Carroll is the President and principal shareholder of Lumenetics,
Inc. ("Lumenetics"), our former light device consultants. On August 25,
1999, Lumenetics assigned to Mr. Carroll 60,000 options, equal to
one-half of the total options held in its name at that time.
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(2) Mr. Lundahl is the Vice President and principal shareholder of Lumenetics,
Inc. ("Lumenetics"), our former light device consultants. On August 25,
1999, Lumenetics assigned to Mr. Lundahl 60,000 options, equal to one-half
of the total options held in its name at that time.
DIRECTOR COMPENSATION
Directors who are employees of DUSA receive no cash compensation for
their services as directors or as members of committees. As compensation for
their services, outside directors receive $10,000 as an annual retainer for
participation at four (4) quarterly meetings, plus $1,000 for attendance at
additional meetings in person, or $250 for telephone conference meetings.
Outside directors serving on standing committees receive $1,000 for attendance
at committee meetings in person, or $250 for telephone conference meetings.
Directors are paid out-of-pocket expenses related to their attendance. Directors
are awarded options to purchase 15,000 shares of Common Stock upon their initial
election to the Board of Directors and options for 10,000 shares of Common Stock
for each year of reelection.
OTHER COMPENSATION
An employment agreement dated as of March 20, 1997 (the "Shulman
Agreement") between DUSA and D. Geoffrey Shulman, MD, FRCPC which renewed his
original employment agreement dated October 1, 1991 (the "October Agreement")
sets out the remuneration, benefits, and incentive bonuses which Dr. Shulman is
to receive in his capacity as Chairman of the Board, President, Chief Executive
Officer and Chief Financial Officer of DUSA. In the October Agreement, Dr.
Shulman was granted an option to purchase 50,000 shares of Common Stock of DUSA
at CDN. $6.79 per share (equal to $6.00 as of September 30, 1991), on certain
terms and conditions. Upon completion of DUSA's initial public offering on
January 17, 1992, DUSA issued to Dr. Shulman Class B Warrants to purchase
350,000 shares of Common Stock, exercisable at the Canadian dollar equivalent to
$6.00 per share on January 17, 1992. On September 18, 1996, the expiration date
of these warrants was extended by the Board of Directors from January 17, 1997
to January 17, 2002. On March 16, 1993, the Board of Directors granted Dr.
Shulman additional options to purchase 25,000 shares of DUSA's Common Stock at
CDN. $10.75 per share, on certain terms and conditions. Subsequently, Dr.
Shulman relinquished 10,000 of such options due to a ceiling imposed by a policy
of The Toronto Stock Exchange which would have prevented the grant of a further
40,000 options to Dr. Marcus, a new employee. On February 17, 1994, Dr. Shulman
was granted an additional 10,000 options at CDN. $6.50 per share under certain
terms and conditions to replace those options previously relinquished. An
additional 25,000 options at CDN. $4.69 per share were granted to Dr. Shulman on
August 2, 1994. On February 16, 1996, Dr. Shulman was awarded options to
purchase 250,000 shares of our common stock pursuant to the 1996 Omnibus Plan.
These options have an exercise price of $7.75 per share, the closing price of
our common stock on The Nasdaq Stock Market on February 16, 1996. On February
16, 1996 the Board of Directors unanimously passed a resolution extending the
expiration date by five (5) years of all options granted by DUSA prior to the
establishment of DUSA's 1994 Restricted Stock Option Plan. Accordingly, the
expiration date of 50,000 options, granted September 30, 1991 was extended from
September 30, 1996 to September 30, 2001 as a result of the Board action.
Similarly, the expiration date of 15,000 options granted March 16, 1993, was
extended from March 16, 1998 to March 16, 2003 and the expiration date of 10,000
options granted February 17, 1994 was extended from February 17, 1999 to
February 17, 2004. All such extensions were approved by the shareholders at the
1996 Annual Meeting of Shareholders. Automatically under the 1996 Omnibus Plan,
options for 10,000 shares were granted to Dr. Shulman, as a director, on June 7,
1996, the day following the 1996 Annual Meeting of Shareholders at an exercise
price of $7.75 per share. After the 1997 Annual Meeting, he received options for
10,000 shares at an exercise price of $6.25 per share and following the 1998
Annual Meeting Dr. Shulman received options for 10,000 shares at an exercise
price of $6.9375 per share. Dr. Shulman's employment is terminable in accordance
with the terms of the Shulman Agreement. DUSA may terminate the Shulman
Agreement at any time, for cause, without notice. If Dr. Shulman's employment is
terminated without cause, DUSA shall pay Dr. Shulman a severance allowance
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equivalent to one year of his then current base salary, payable in a lump sum,
within sixty (60) days following the date of termination. Dr. Shulman shall also
have the right to exercise, for a period of one year from the date of
termination, all stock options granted to him pursuant to the terms of this
agreement or otherwise, or any stock option plan in effect prior to his
termination as to all or any part of the shares covered by such options,
including shares with respect to which such options would not otherwise be
exercisable, subject to restrictions under U.S. or Canadian law. These payments
referred to above shall not be subject to set-off or deduction as a result of
Dr. Shulman obtaining alternate employment following such termination or
otherwise mitigating any damages arising from such termination. In the event
that Dr. Shulman is terminated upon a "change of control," as defined in the
Shulman Agreement, DUSA shall pay to Dr. Shulman a lump sum payment equal to
three (3) times his base salary for the last fiscal year within five (5) days
after such termination. In the event Dr. Shulman should die, his heirs or
beneficiaries will be entitled to any Company paid death benefits in force at
the time of such death and will also be entitled to exercise any vested but
unexercised stock options which were held by him at the time of his death,
within a period of one (1) year from the date of death.
Effective October 11, 1993, DUSA entered into an employment
agreement with Dr. Stuart L. Marcus, its Senior Vice President of Scientific
Affairs (the "Marcus Agreement"). In connection with the Marcus Agreement, DUSA
granted an option to Dr. Marcus, pursuant to our Incentive Stock Option Plan, to
purchase 40,000 shares of our common stock at $6.375 per share, being the
closing stock market price on The Nasdaq Stock Market on the date of employment.
These options became exercisable at the rate of 25% per year over four years and
have a term of ten years. On February 16, 1996, Dr. Marcus was awarded options
to purchase 100,000 shares of our common stock pursuant to the 1996 Omnibus
Plan. These options have an exercise price of $7.75 per share, the closing price
of our common stock on The Nasdaq Stock Market on February 16, 1996. Dr.
Marcus's employment is terminable in accordance with the terms of the Marcus
Agreement. DUSA may terminate the Marcus Agreement at any time, for cause,
without notice. If Dr. Marcus's employment is terminated without cause, DUSA
shall pay Dr. Marcus a severance allowance equivalent to one week's current base
salary for each year of service (but not less than four (4) weeks of such
salary), payable in a lump sum, within sixty (60) days following the date of
termination. In the event that Dr. Marcus is terminated upon a "change of
control," as defined in the Marcus Agreement, DUSA shall pay to Dr. Marcus a
lump sum payment equal to three (3) times his base salary for the last fiscal
year within five (5) days after such termination. In the event Dr. Marcus should
die, his heirs or beneficiaries will be entitled to any Company paid death
benefits in force at the time of such death and will also be entitled to
exercise any vested but unexercised stock options which were held by him at the
time of his death, subject to the terms and conditions of such options.
Effective May 14, 1998, DUSA entered into an employment agreement
with Ronald L. Carroll, its Executive Vice President and Chief Operating Officer
(the "Carroll Agreement"). In connection with the Carroll Agreement, DUSA
granted to Mr. Carroll options to purchase 60,000 shares of Common Stock
pursuant to the 1996 Omnibus Plan, as amended. These options have an exercise
price of $11.50 per share, the closing price of our common stock on The Nasdaq
Stock Market on May 7, 1998, the date of the grant. Mr. Carroll's employment is
terminable in accordance with the terms of the Carroll Agreement. DUSA may
terminate the Carroll Agreement at any time, for cause, without notice. If Mr.
Carroll's employment is terminated without cause, DUSA shall pay Mr. Carroll a
severance allowance equivalent to twelve (12) months of his then current base
salary, payable in a lump sum, within sixty (60) days following the date of
termination. In the event that Mr. Carroll is terminated upon a "change of
control," as defined in the Carroll Agreement, DUSA shall pay to Mr. Carroll a
lump sum payment equal to three (3) times his base salary for the last fiscal
year within five (5) days after such termination. In the event Mr. Carroll
should die, his heirs or beneficiaries will be entitled to any Company paid
death benefits in force at the time of such death and will also be entitled to
exercise any vested
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but unexercised stock options which were held by him at the time of his death,
subject to the terms and conditions of such options.
Effective June 23, 1999, DUSA entered into an employment agreement
with Scott L. Lundahl, its Vice President, Technology (the "Lundahl Agreement").
Mr. Lundahl's employment is terminable in accordance with the terms of the
Lundahl Agreement. DUSA may terminate the Lundahl Agreement at any time, for
cause, without notice. If Mr. Lundahl's employment is terminated without cause,
DUSA shall pay Mr. Lundahl a severance allowance equivalent to twelve (12)
months of his then current base salary, payable in a lump sum, within sixty (60)
days following the date of termination. In the event that Mr. Lundahl is
terminated upon a "change of control," as defined in the Lundahl Agreement, DUSA
shall pay to Mr. Lundahl a lump sum payment equal to three (3) times his base
salary for the last fiscal year within five (5) days after such termination. In
the event Mr. Lundahl should die, his heirs or beneficiaries will be entitled to
any Company paid death benefits in force at the time of such death and will also
be entitled to exercise any vested but unexercised stock options which were held
by him at the time of his death, subject to the terms and conditions of such
options.
We have granted options to purchase shares of our common stock to
our directors, officers, certain consultants and employees of DUSA and others.
BOARD COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION(3)
The Compensation Committee of the Board of Directors (the
"Committee") is composed of two (2) non-employee directors. The Committee is
responsible for setting and administering the policies which govern annual
executive salaries and cash bonus awards, and recommends participants and
amounts of stock option awards to the Company's Board of Directors. The
Committee evaluates, on a yearly basis, the performance, and determines the
compensation of, the executive officers of DUSA. The Committee evaluates
compensation based upon the achievement by the individual of corporate goals,
and the performance of individual responsibilities. DUSA's President and Chief
Executive Officer, Dr. D. Geoffrey Shulman, is not a member of the Committee,
however, the Committee sought input from Dr. Shulman regarding the performance
of DUSA's three Vice Presidents as well as his recommendations for their
compensation. Dr. Shulman was present, at the invitation of the Committee, at
its meetings.
Our executive compensation programs consist of base salary, cash
bonus incentives, and stock option awards. The goals of our executive officer
compensation policies are to attract, retain, and reward executive officers who
contribute to DUSA's success, to align executive officer compensation with
DUSA's performance and to motivate executive officers to achieve our business
objectives. The executive officers were evaluated by the Committee against
established goals for 1999 within each executive officer's area of
responsibility, including the receipt of approval of our first new drug
application with the Food and Drug Administration, coordinating marketing,
manufacturing and technology development operations for anticipated launch of
products, and securing additional financial resources for DUSA through a
dermatology strategic alliance partner or other means.
- ---------------
(1) The material in this report and under the caption "Performance Graph"
are not "soliciting material," are not deemed filed with the SEC and are
not to be incorporated by reference in any filing of the Company under
the Securities Act of 1933, as amended, or the Securities Exchange Act
of 1934, as amended, whether made before or after the date of this
report and irrespective of any general incorporation language therein.
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With regard to base salary, the Committee believes that our officers
should be compensated at levels comparable to the base salary of executive
officers at similar development stage or small public biotechnology or
pharmaceutical companies. The Committee considered survey data of companies in
these groups in setting the salaries for our top four executive officers which
was prepared by independent consultants.
In determining appropriate levels of cash bonus awards for 1999, the
Committee considered the specific corporate goals of DUSA and personal goals set
for each of the executive officers. Our three Vice Presidents were eligible to
receive up to 30% of their base salary as a cash bonus award. The Committee
concluded that DUSA's operational performance, particularly the consummation of
a strategic alliance relationship with a multi-national pharmaceutical company,
the closing of a private placement to raise additional capital in January, 1999,
and the approval by the FDA of our first new drug application in December, 1999,
justified favorable consideration of our executive officers with regard to bonus
awards. The Committee also considered that our stock performance improved during
1999. Accordingly, DUSA's three Vice Presidents received approximately 30% of
base salary as cash bonus awards. These cash awards were paid in 2000.
The Committee also is using the survey data from independent
consultants to monitor and evaluate the long-term incentive compensation levels
of its officers and directors. The Committee believes that a strong stock
ownership program is essential to the long-term growth of the Company. In 1999,
our four key executive officers received awards of stock options to emphasize
the long-term focus required for success in the pharmaceutical industry. No
additional grants were made to the officers in 1999.
COMPENSATION OF THE PRESIDENT AND CHIEF EXECUTIVE OFFICER
Dr. Shulman's base salary and cash bonus award for 1999 were
determined with reference to the same measures used for all DUSA's executive
officers, but with particular emphasis on the maintenance of our financial
strength, the negotiation and consummation of the strategic alliance with
Schering AG, and the preparation for transition from a development-stage company
to an operating company subsequent to approval by the Food and Drug
Administration of its first product. Dr. Shulman's base salary for 1999 was
$275,000. With regard to a cash bonus award, Dr. Shulman is eligible to receive
up to 50% of base salary plus additional amounts for outstanding performance.
For 1999, Dr. Shulman's bonus award was 75% of base salary. Dr. Shulman's 1999
cash bonus award was paid to him in 2000. The Committee has determined that Dr.
Shulman's 2000 base salary will increase to $340,000. The Compensation Committee
exercised its subjective judgment and discretion in determining the amounts of
Dr. Shulman's base salary, bonus award, and stock option award for 1999.
James P. Doherty
Jay M. Haft
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PERFORMANCE GRAPH
COMPARISON OF FIVE YEAR CUMULATIVE SHAREHOLDER TOTAL RETURN
AMONG DUSA PHARMACEUTICALS, INC.,
NASDAQ MARKET INDEX AND MG GROUP INDEX
EDGAR representation of data points used in printed graphic
12/30/1994 12/30/1995 12/30/1996 12/30/1997 12/30/1998 12/30/1999
DUSA Pharmaceuticals, Inc. 100 135.90 143.59 235.90 151.28 584.62
Drug Manufacturers/Other 100 146.04 162.79 176.88 185.52 244.14
NASDAQ Market Index 100 129.71 161.18 197.16 278.08 490.46
The graph above compares cumulative total shareholder return on our
common stock for the six-year period ended December 31, 1999, with the
cumulative total return on the Nasdaq Market Index and the Media General Drug
Manufacturer Index over the same period. The identity of those corporations
included in the Media General Financial Services Drug Manufacturer Index may be
obtained by contacting us, Ms. Shari Lovell, DUSA Pharmaceuticals, Inc., 181
University Avenue, Suite 1208, Toronto, Ontario M5H 3M7 Canada.
The graph assumes $100 was invested on January 1, 1994, in our
common stock, and each of the indices, and that dividends were reinvested. The
comparisons in the graph are required by the Securities and Exchange Commission
and are not intended to forecast or be indicative of possible future performance
of our common stock.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information with respect to
the beneficial ownership of our common stock as of February 18, 2000 by: (i)
each of our directors; (ii) our named executive officers; (iii) all beneficial
owners of greater than 5% of our outstanding common stock; and (iv) all of our
directors and officers as a group (unless otherwise indicated, all of such
shares of common stock are held beneficially and of record).
NUMBER OF SHARES PERCENTAGE OF
NAME BENEFICIALLY OWNED OUTSTANDING SHARES (1)
- ---- ------------------ ----------------------
D. Geoffrey Shulman, MD, FRCPC 787,449(2) 6.2%
Ronald L. Carroll ................................ 70,490(3) *
Stuart L. Marcus, MD, PhD. ....................... 85,000(4) *
Scott L. Lundahl ................................. 62,707(5) *
Mark C. Carota.................................... 15(6) *
John H. Abeles, MD ............................... 52,500(7) *
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NUMBER OF SHARES PERCENTAGE OF
NAME BENEFICIALLY OWNED OUTSTANDING SHARES (1)
- ---- ------------------ ----------------------
James P. Doherty, BSc ............................ 75,050(8) *
Jay M. Haft, Esq. ................................ 37,500(9) *
Richard C. Lufkin, SB, MBA ....................... 60,100(10) *
All directors and officers as a group
(consisting of 10 persons) ...................... 1,272,311(11) 9.6%
Bulldog Capital Management Ltd. Partnership ...... 603,000(12) 5.4%
Provident Investment Counsel, Inc................. 677,350(13) 6.1%
INVESCO Funds Group, Inc.......................... 638,700(14) 5.3%
*Less than 1%.
Notes:
(1) The percentage of ownership as calculated above includes in the number of
shares outstanding for each individual listed, as well as those shares
that are beneficially, yet not directly, owned.
(2) 350,000 of the shares indicated represent shares with respect to which
Dr. Shulman has the right to acquire through the exercise of his Class B
Warrants which have an exercise price of CDN. $6.79 per Warrant, and
425,000 of such shares represent shares with respect to which Dr.
Shulman has the right to acquire through the exercise of options. Dr.
Shulman's address is 181 University Avenue, Suite 1208, Toronto, ON, M5H
3M7 CANADA.
(3) 70,000 of the shares indicated represent shares with respect to which Mr.
Carroll has the right to acquire these shares through the exercise of
options.
(4) All of the shares indicated represent shares with respect to which Dr.
Marcus has the right to acquire through the exercise of options.
(5) 62,500 of the shares indicated represent shares with respect to which Mr.
Lundahl has the right to acquire through the exercise of options.
(6) Under Rule 13d-3 of the Securities and Exchange Act of 1934, as amended,
Mr. Carota may be deemed to be the beneficial owner of 15 shares of DUSA
common stock that are held by his adult son, who remains a member of Mr.
Carota's household.
(7) All of the shares indicated represent shares with respect to which Dr.
Abeles has the right to acquire through the exercise of options.
(8) 75,000 of the shares indicated represent shares with respect to which Mr.
Doherty has the right to acquire through the exercise of options.
(9) All of the shares indicated represent shares with respect to which Mr.
Haft has the right to acquire through the exercise of options.
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(10) 60,000 of the shares indicated represent shares with respect to which Mr.
Lufkin has the right to acquire through the exercise of options.
(11) All of the shares indicated, Class B Warrants and options, as the case may
be, as discussed in footnotes (2) through (9) above are included, as well
as 38,500 shares beneficially owned by an officer of the Company, 37,500
shares of which the officer has the right to acquire through the exercise
of options.
(12) The number of shares beneficially owned, and the percentage of outstanding
shares reported, are based upon information disclosed by Bulldog Capital
Management Limited Partnership on a Schedule 13G filed with the Securities
and Exchange Commission on February 16, 2000. Bulldog Capital Management
Ltd. Partnership's address is 33 North Garden Avenue, #750, Clearwater,
Florida 33755.
(13) The number of shares beneficially owned, and the percentage of outstanding
shares reported, are based upon information disclosed by Provident
Investment Counsel, Inc. on a Schedule 13G filed with the Securities and
Exchange Commission on February 8, 2000. Provident Investment Counsel,
Inc.'s address is 300 North Lake Avenue, Pasadena, California 91101.
(14) The number of shares beneficially owned, and the percentage of outstanding
shares reported, are based upon information represented to us by INVESCO
Funds Group, Inc. as of the close of business on March 1, 2000. INVESCO
Funds Group's address is 7800 East Union Avenue, Suite 1100, Denver,
Colorado, 80237.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
LANE AND MANTELL
Lane and Mantell, a professional corporation, which serves as our legal
counsel, and in which Ms. Mantell is a principal, received approximately
$395,000 for legal fees and costs during the last fiscal year.
LUMENETICS, INC.
Mr. Ronald L. Carroll, our Executive Vice President and Chief Operating
Officer and Mr. Scott L. Lundahl, our Vice President, Technology, are the
President and Vice President, respectively, and principal shareholders of
Lumenetics, Inc. ("Lumenetics"), our former light device consultants. In May,
1998, both Mr. Carroll and Mr. Lundahl became employees of DUSA. During the last
fiscal year, we paid a total of $146,000.00 to Lumenetics as reimbursement for
office space and related expenses. In February, 1999, we entered an equipment
lease with Lumenetics for an initial term of twelve (12) months at an annual
rental of $48,000.00. The equipment lease also provides us with an option to
acquire the equipment being leased at a purchase price of $100,000.00 with all
lease payments to be applied to the purchase price. Payments under the equipment
lease totalled $46,000 in 1999.
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ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
A. List of Financial Statements and Schedules
Page
Number
------
INCLUDED IN ANNUAL REPORT TO SHAREHOLDERS
INCORPORATED HEREIN BY REFERENCE:
Independent Auditors' Report........................................................................... F-1
Consolidated Balance Sheets.......................................................................... F-2
Consolidated Statements of Operations.................................................................. F-3
Consolidated Statements of Shareholders' Equity........................................................ F-4
Consolidated Statements of Cash Flows.................................................................. F-7
Notes to the Consolidated Financial Statements......................................................... F-9
Schedules other than those referred to above are omitted because they are
not required or the information is included in Notes to the Consolidated
Financial Statements.
B. Reports on Form 8-K
1.(i) Form 8-K filed on October 13, 1999 which announced that the
FDA had rescheduled its advisory panel meeting and that the Company had executed
a Purchase and Supply Agreement with the manufacturer of its Kerastick(TM) brand
applicator;
(ii) Form 8-K filed on November 23, 1999 which reported the
completion of a marketing, development and supply agreement with Schering AG for
the Company's dermatology products;
(iii) Form 8-K filed on December 6, 1999 which announced that the
FDA had approved the Company's Levulan(R) Kerastick(TM) 20% Topical Solution
with PDT for AKs.
C. Exhibits filed as part of this Report
3(a) Certificate of Incorporation, as amended filed as Exhibit
3(a) to the Registrant's Form 10-K for the fiscal year
ended December 31, 1998 and is incorporated herein by
reference;
3(b) By-laws of the Registrant, filed as Exhibit 3(ii) to the
Registrant's Quarterly Report on Form 10-Q for the fiscal
quarter ended September 30, 1997, filed November 12, 1997
and are incorporated herein by reference;
4(a) Common Stock specimen, filed as Exhibit 4.1 to the
Registrant's Quarterly Report on Form 10-Q for the fiscal
quarter ended September 30, 1997 filed November 12, 1997,
and is incorporated herein by reference;
4(b) Class B Warrant, filed as Exhibit 4.3 to the Registrant's
Registration Statement on Form S-1, No. 33-43282, and is
incorporated herein by reference;
56
58
10(a) License Agreement between the Company, PARTEQ and Draxis
Health Inc. dated August 27, 1991, filed as Exhibit 10.1 to
the Registrant's Registration Statement on Form S-1, No.
33-43282, and is incorporated herein by reference;
10(b) ALA Assignment Agreement between the Company, PARTEQ, and
Draxis Health Inc. dated October 7, 1991, filed as Exhibit
10.2 to the Registrant's Registration Statement on Form
S-1, No. 33-43282, and is incorporated herein by reference;
10(b.1)Amended and Restated Assignment Agreement between the
Company and Draxis Health, Inc. dated April 16, 1999;
10(c) Employment Agreement of D. Geoffrey Shulman, MD, FRCPC
dated October 1, 1991, filed as Exhibit 10.4 to the
Registrant's Registration Statement on Form S-1, No.
33-43282, and is incorporated herein by reference;
10(d) Amendment to Employment Agreement of D. Geoffrey Shulman,
MD, FRCPC dated April 14, 1994, filed as Exhibit 10.4 to
the Registrant's Registration Statement on Form S-2, No.
33-98030, and is incorporated hereby by reference;
10(e) Amended and Restated License Agreement between the Company
and PARTEQ dated March 11, 1998, filed as Exhibit 10(e) to
Registrants Form 10-K/A on June 18, 1999 and is
incorporated herein by reference, portions of Exhibit A
have been omitted pursuant to a request for confidential
treatment pursuant to Rule 24b-2 of the Securities Exchange
Act of 1934 and Rule 406 of the Securities Act of 1933;
10(f) Incentive Stock Option Plan, filed as Exhibit 10.11 of
Registrant's Registration Statement on Form S-1, No.
33-43282, and is incorporated herein by reference;
10(g) 1994 Restricted Stock Option Plan, filed as Exhibit 1 to
Registrant's Schedule 14A definitive Proxy Statement dated
April 26, 1995, and is incorporated herein by reference;
10(h) 1996 Omnibus Plan, as amended, filed as Exhibit 1 to
Registrant's Schedule 14A Definitive Proxy Statement dated
April 27, 1998, and is incorporated herein by reference;
10(i) Purchase and Supply Agreement between the Company and
National Biological Corporation dated November 5, 1998
filed as Exhibit 10(i) to Registrant's Form 10-K/A on June
18, 1999 and is incorporated herein by reference, portions
of which have been omitted pursuant to a request for
confidential treatment pursuant to Rule 24b-2 of the
Securities Exchange Act of 1934 and Rule 406 of the
Securities Act of 1933;
10(j) Marketing Development and Supply Agreement between the
Company and Schering AG dated November 22, 1999, filed as
Exhibit 10.1 to the Registrant's Current Report on Form 8-K
dated November 22, 1999, and incorporated herein by
reference, portions of which have been omitted pursuant to
a request for confidential treatment pursuant to Rule 24b-2
of the Securities Exchange Act of 1934;
10(k) Common Stock Purchase Agreement between the Company and
Schering Berlin Venture Corporation dated as of November
22, 1999, filed as Exhibit 10.2 to the Registrant's Current
Report on Form 8-K dated November 22, 1999, and
incorporated herein by reference, portions of which have
been
57
59
omitted pursuant to a request for confidential treatment
pursuant to Rule 24b of the Securities Exchange Act of
1934;
10(l) Light Source Agreement between the Company and Schering AG
dated as of November 22, 1999, filed as Exhibit 10.3 to the
Registrant's Current Report on Form 8-K dated November 22,
1999, and incorporated herein by reference portions of
which have been omitted pursuant to a request for
confidential treatment pursuant to Rule 24b of the
Securities Exchange Act of 1934;
10(m) Guaranty dated as of November 22, 1999 by Schering AG in
favor of the Company, filed as Exhibit 10.4 to the
Registrant's Current Report on Form 8-K dated November 22,
1999, and incorporated herein by reference portions of
which have been omitted pursuant to a request for
confidential treatment pursuant to Rule 24b of the
Securities Exchange Act of 1934;
10(n) Secured Line of Credit Promissory Note dated November 22,
1999 with the Company as payee and Schering AG as Holder
filed as Exhibit 10.5 to the Registrant's Current Report on
Form 8-K dated November 22, 1999, and incorporated herein
by reference portions of which have been omitted pursuant
to a request for confidential treatment pursuant to Rule
24b of the Securities Exchange Act of 1934;
10(o) Security Agreement dated as of November 22, 1999 between
the Company and Schering AG filed as Exhibit 10.6 to the
Registrant's Current Report on Form 8-K dated November 22,
1999, and incorporated herein by reference portions of
which have been omitted pursuant to a request for
confidential treatment pursuant to Rule 24b of the
Securities Exchange Act of 1934;
10(p) Purchase and Supply Agreement between the Company and North
Safety Products, Inc. dated as of September 13, 1999, filed
as Exhibit 10.1 to the Registrant's Current Report on Form
8-K dated October 13, 1999, and incorporated herein by
reference portions of which have been omitted pursuant to a
request for confidential treatment pursuant to Rule 24b of
the Securities Exchange Act of 1934;
10(q) Supply Agreement between the Company and Sochinaz S.A.,
dated December 24, 1993, portions of which have been
omitted pursuant to a request for confidential treatment
pursuant to Rule 24b-2 of the Securities Exchange Act of
1934;
10(q.1) First Amendment to Supply Agreement between the Company
and Sochinaz S.A., dated July 7, 1994
27 Financial Data Schedule for the Registrant's Form 10-K for
the period ending December 31, 1999.
58
60
INDEX TO FINANCIAL STATEMENTS
Consolidated Financial Statements for the Years Ended December 31, 1999, 1998,
1997 and for the Cumulative Period from February 21, 1991 (Date of
Incorporation) to December 31, 1999:
Independent Auditors' Report.....................................................F-1
Consolidated Balance Sheets as of December 31, 1999 and 1998.....................F-2
Consolidated Statements of Operations for the Years Ended December
31, 1999, 1998 and 1997, and for the Cumulative Period from February
21, 1991 (Date of Incorporation) to December 31, 1999............................F-3
Consolidated Statements of Shareholders' Equity for the Years Ended
December 31, 1999, 1998 and 1997, and for the Cumulative Period from
February 21, 1991 (Date of Incorporation) to December 31, 1999...................F-4
Consolidated Statements of Cash Flows for the Years Ended December
31, 1999, 1998 and 1997, and for the Cumulative Period from February
21, 1991 (Date of Incorporation) to December 31, 1999............................F-7
Notes to the Consolidated Financial Statements...................................F-9
61
INDEPENDENT AUDITORS' REPORT
Board of Directors
DUSA Pharmaceuticals, Inc.
Toronto, Ontario
We have audited the accompanying consolidated balance sheets of DUSA
Pharmaceuticals, Inc. and its wholly-owned subsidiary (the "Company") (a
development stage company) as of December 31, 1999 and 1998 and the related
consolidated statements of operations, shareholders' equity and cash flows for
each of the three years in the period ended December 31, 1999 and for the period
from February 21, 1991 (date of incorporation) to December 31, 1999. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of December 31, 1999
and 1998, and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 1999 and for the period from
February 21, 1991 (date of incorporation) to December 31, 1999 in conformity
with accounting principles generally accepted in the United States.
As discussed in Note 1 to the consolidated financial statements, the Company is
in the development stage.
Deloitte & Touche LLP
Toronto, Ontario
February 4, 2000, except for Note 13, as to which the date is March 2, 2000
F-1
62
DUSA PHARMACEUTICALS, INC.
(a development stage company)
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------------------------------
DECEMBER 31, DECEMBER 31,
1999 1998
ASSETS
CURRENT ASSETS
Cash (interest bearing) $ 7,028,618 $ 1,213,757
U.S. government securities available for sale, at market
(cost - $19,951,281 and $5,502,841, respectively)
(Note 3) 19,868,962 5,508,375
Accrued interest receivable 266,621 19,529
Other current assets 132,833 107,993
--------------------------------
TOTAL CURRENT ASSETS 27,297,034 6,849,654
FIXED ASSETS, NET (NOTE 4) 428,350 168,466
DEPOSITS ON EQUIPMENT 27,631 122,555
DEFERRED ROYALTY (NOTE 9a) 403,830 -
--------------------------------
$ 28,156,845 $ 7,140,675
================================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 117,109 $ 266,737
Accrued payroll 428,212 410,164
Other accrued charges 299,929 47,628
Due to PARTEQ (Note 9a) 370,000 -
Income taxes payable 90,000 -
--------------------------------
TOTAL CURRENT LIABILITIES 1,305,250 724,529
DEFERRED REVENUES (NOTE 8) 9,791,667 -
--------------------------------
11,096,917 724,529
--------------------------------
COMMITMENTS AND CONTINGENCY (NOTE 9)
SHAREHOLDERS' EQUITY (NOTE 6)
Capital Stock
Authorized: 100,000,000 shares; 40,000,000 shares designated as
common stock, no par, and 60,000,000 shares issuable in
series or classes
Issued and outstanding: 11,908,357 (1998: 9,365,950) shares of
common stock, no par 51,749,987 36,746,993
Additional paid-in capital 1,338,854 81,586
Deficit accumulated during the development stage (35,946,594) (30,417,967)
Accumulated other comprehensive income (82,319) 5,534
--------------------------------
17,059,928 6,416,146
--------------------------------
$ 28,156,845 $ 7,140,675
================================
See the accompanying notes to the Consolidated Financial Statements.
F-2
63
DUSA PHARMACEUTICALS, INC.
(a development stage company)
CONSOLIDATED STATEMENTS OF OPERATIONS
- ----------------------------------------------------------------------------------------------------------------------------
CUMULATIVE PERIOD FROM
FEBRUARY 21, 1991
(DATE OF
YEAR ENDED YEAR ENDED YEAR ENDED INCORPORATION) TO
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1999 1998 1997 1999
RESEARCH AND DEVELOPMENT
COSTS $ 4,194,532 $ 4,502,391 $ 6,252,830 $ 30,762,523
-----------------------------------------------------------------------
OPERATING COSTS
General and administration 1,715,298 1,662,228 1,706,113 11,125,461
Depreciation and amortization 102,895 67,513 54,296 306,437
-----------------------------------------------------------------------
TOTAL OPERATING COSTS 1,818,193 1,729,741 1,760,409 11,431,898
-----------------------------------------------------------------------
TOTAL COSTS 6,012,725 6,232,132 8,013,239 42,194,421
NON-OPERATING REVENUE
Interest income 574,098 508,256 891,088 5,987,964
Gain on foreign currency exchange - 6,928 2,059 27,204
Gain on sale of U.S. government securities - - - 322,659
Unrealized loss on U.S. government
securities available for sale - - - (62,832)
-----------------------------------------------------------------------
574,098 515,184 893,147 6,274,995
-----------------------------------------------------------------------
LOSS BEFORE CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE AND INCOME TAX EXPENSE 5,438,627 5,716,948 7,120,092 35,919,426
Income tax expense 90,000 - - 90,000
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE - - - (62,832)
-----------------------------------------------------------------------
NET LOSS $ 5,528,627 $ 5,716,948 $ 7,120,092 $ 35,946,594
OTHER COMPREHENSIVE (INCOME) LOSS
Net unrealized loss (gain) on U.S.
government securities available for
sale 87,853 (32,157) (1,403) 82,319
-----------------------------------------------------------------------
COMPREHENSIVE LOSS $ 5,616,480 $ 5,684,791 $ 7,118,689 $ 36,028,913
=======================================================================
BASIC AND DILUTED NET LOSS PER COMMON SHARE $ 0.50 $ 0.61 $ 0.76 $ 5.15
=======================================================================
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING 11,061,016 9,365,950 9,358,038 6,973,176
=======================================================================
See the accompanying notes to the Consolidated Financial Statements.
F-3
64
DUSA PHARMACEUTICALS, INC.
(a development stage company)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
- -----------------------------------------------------------------------------------------------------------------------------------
DEFICIT
ACCUMULATED ACCUMULATED NOTE
DURING THE OTHER RECEIVABLE
ADDITIONAL DEVELOPMENT COMPREHENSIVE FROM
COMMON STOCK PAID-IN CAPITAL STAGE INCOME DIRECTOR
BALANCE, FEBRUARY 21, 1991
(date of incorporation) $ - $ - $ - $ - $ -
Issuance of 2,200,000 shares of common stock for
note and cash at $0.75 per share (Note 6) 1,650,000 - - - -
Net loss - - (193,292) - -
--------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1991 1,650,000 - (193,292) - -
Issuance of 2,875,000 shares of common stock at
$6.00 per share through a public offering (net of
stock offering costs of $2,464,872) (Note 6) 14,785,128 - - - -
Issuance of Underwriters' Purchase Options for
125,000 Units for cash at $.0008 per unit (Note
7c) 100 - - - -
Receipt of Section 16(b) common stock profits
(Note 6) 17,125 - - - -
Net loss - - (1,151,430) - -
--------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1992 16,452,353 - (1,344,722) - -
Issuance of 1,000 shares of common stock for cash
at $5.39 (CDN. $6.79) per share 5,387 - - - -
Issuance of 12,500 shares of common stock for
cash at $5.44 (CDN. $6.79) per share (Note 6) 68,047 - - - (68,047)
Issuance of 100,000 shares of common stock for
cash at $5.00 per share (Note 6) 500,000 - - - -
Net loss - - (2,248,461) - -
--------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1993 17,025,787 - (3,593,183) - (68,047)
Issuance of 250,000 shares of common stock for
cash at $4.80 per share (Note 6) 1,200,000 - - - -
Net unrealized loss on U.S. government securities
available for sale - - - (891,805) -
Net loss - - (3,539,892) - -
--------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1994 18,225,787 - (7,133,075) (891,805) (68,047)
F-4
65
DUSA PHARMACEUTICALS, INC.
(a development stage company)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (CONTINUED)
- -----------------------------------------------------------------------------------------------------------------------------------
DEFICIT ACCUMULATED
ADDITIONAL ACCUMULATED DURING OTHER NOTE
COMMON PAID-IN THE DEVELOPMENT COMPREHENSIVE RECEIVABLE
STOCK CAPITAL STAGE INCOME FROM DIRECTOR
BALANCE, DECEMBER 31, 1994 $18,225,787 $ - $ (7,133,075) $ (891,805) $ (68,047)
Issuance of 3,000,000 shares of common stock
for cash at $5.50 per share through a
public offering (net of stock offering
costs of $1,946,321) (Note 6) 14,553,679 - - - -
Issuance of Underwriters' Purchase Options for
300,000 shares of common stock
for cash at $.001 per share (Note
7c) 300 - - - -
Issuance of 40,000 shares of common stock for
cash at $4.95 (CDN. $6.79) per share 197,945 - - - -
Issuance of 50,000 shares of common stock for
cash at $4.98 (CDN. $6.79) per share 249,028 - - - -
Net unrealized gain on U.S. government
securities available for sale - - - 929,528 -
Payment received on note receivable from
director (Note 6) - - - - 53,433
Redemption of Draxis Option for 2,000,000
shares of common stock for cash at
$1.125 per option (Note 7c) (2,250,000) - - - -
Net loss - - (3,647,533) - -
----------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1995 30,976,739 - (10,780,608) 37,723 (14,614)
Extension of outstanding stock option terms
(Note 6) 557,260 - - - -
Issuance of 750,000 shares of common stock
for cash at $7.20 per share through
a public offering (net of stock
offering costs of $637,062) (Note 6) 4,762,938 - - - -
Issuance of 56,700 shares of common stock
for cash at $4.97 (CDN. $6.79) per share 281,733 - - - -
Issuance of 8,750 shares of common stock
for cash at $3.43 (CDN. $4.69) per share 30,042 - - - -
Issuance of 7,500 shares of common stock for
cash at $7.96 (CDN. $10.88) per share 59,726 - - - -
Issuance of 4,500 shares of common stock
for cash at $9.39 (CDN. $12.88) per share 42,267 - - - -
Issuance of Underwriters' Purchase Options for
37,500 shares of common stock for cash at
$.001 per share (Note 7c) 38 - - - -
Payment received on note receivable from
director (Note 6) - - - - 14,614
Net unrealized loss on U.S. government securities
available for sale - - - (65,749) -
F-5
66
Net loss - - (6,800,319) - -
-------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1996 36,710,743 - (17,580,927) (28,026) -
Issuance of 10,000 shares of common stock for
cash at $3.625 per share 36,250 - - - -
Net unrealized gain on U.S. government
securities available for sale - - - 1,403 -
Net loss - - (7,120,092) - -
-------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1997 36,746,993 - (24,701,019) (26,623) -
Net unrealized gain on U.S. government
securities available for sale - - - 32,157 -
Vesting of non-employee options (Note 9a) - 81,586 - - -
Net loss - - (5,716,948) - -
-------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1998 36,746,993 81,586 (30,417,967) 5,534 -
Issuance of 1,500,000 shares of common stock
for cash at $5.00 per share through a
private placement (net of stock offering
costs of $2,102,861) (Note 6) 5,397,139 - - - -
Issuance of 130,435 shares of common stock to
placement agent in connection with the private
placement (Note 6) 900,784 - - - -
Issuance of 163,043 warrants to placement
agent in connection with the private placement
(Note 6) - 905,094 - - -
Issuance of additional 15,000 shares of common
stock in connection with the above private
placement (Note 6) 143,445 - - - -
Issuance of additional 1630.43 warrants in
connection with the above private placement
(Note 6) - 9,050 - - -
Issuance of 157,592 shares of common stock
upon exercise of underwriters' warrant at
$5.00 per share (Note 6) 787,960 - - - -
Issuance of 250,493 shares of common stock
upon exercise of underwriters' purchase options
at $7.70 per share (Note 7c) 1,928,796 - - - -
Issuance of 24,600 shares of common stock
upon exercise of underwriters' purchase options
at $7.92 per share (Note 7c) 194,832 - - - -
Issuance of 72,500 shares of common stock
upon exercise of employee stock options 441,705 - - - -
Issuance of 340,458 shares of common stock in
connection with collaborative agreement (Note 8) 5,208,333 - - - -
Issue of options to non-employees (Note 9a) - 343,124 - - -
Net unrealized loss on U.S. government
securities available for sale - - - (87,853) -
Net Loss - - (5,528,627) - -
-------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1999 51,749,987 1,338,854 (35,946,594) (82,319) 0
=========================================================================
See the accompanying notes to the Consolidated Financial Statements.
F-6
67
DUSA PHARMACEUTICALS, INC.
(a development stage company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
- -------------------------------------------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1999 1998
CASH FLOWS USED IN OPERATING ACTIVITIES
Net loss $ (5,528,627) $ (5,716,948)
Adjustments to reconcile net loss to net cash used in
operating activities
Amortization of premiums and accretion of discounts
on U.S. government securities available for sale
and investment securities, net (166,500) 180,074
Depreciation and amortization 102,895 67,513
Loss (gain) on foreign currency exchange - (6,928)
Non-employee options 343,124 81,586
Issue of shares of common stock and warrants 152,495 152,495
Other current assets (24,840) (23,842)
Accounts payable (149,628) (478,337)
Accrued payroll and other accrued charges 270,349 140,969
Due to PARTEQ 370,000 -
Income taxes payable 90,000 -
Loss (gain) on sale of U.S. government securities available
for sale - -
Unrealized loss on U.S. government securities available
for sale - -
Cumulative effect of change in accounting principle - -
Write-off of intangible assets - -
Compensation expense resulting from extension of outstanding stock
option terms - -
Changes in other assets and liabilities impacting cash flows from
operations:
Accrued interest receivable (247,092) 68,263
License agreement obligations - -
-----------------------------------
NET CASH USED IN OPERATING ACTIVITIES (4,787,824) (5,687,650)
-----------------------------------
CASH FLOWS PROVIDED BY (USED IN)
INVESTING ACTIVITIES
Purchases of U.S. government securities available for sale (28,481,940) (12,297,417)
Proceeds from maturing U.S. government securities available for
sale 14,200,000 15,375,000
Proceeds from sale of U.S. government securities available for sale - -
Intangible assets - -
Purchases of fixed assets (362,779) (93,816)
Deposits on equipment 94,924 (122,555)
Advances to former parent company - -
Deferred royalty (403,830) (403,830)
Repayment of advances by former parent company - -
-----------------------------------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES (14,953,625) 2,861,212
-----------------------------------
CUMULATIVE PERIOD
FROM FEBRUARY 21,
1991 (DATE OF
YEAR ENDED INCORPORATION) TO
DECEMBER 31, DECEMBER 31,
1997 1999
CASH FLOWS USED IN OPERATING ACTIVITIES
Net loss $ (7,120,092) $ (35,946,594)
Adjustments to reconcile net loss to net cash used in
operating activities
Amortization of premiums and accretion of discounts
on U.S. government securities available for sale
and investment securities, net (170,072) 16,046
Depreciation and amortization 54,296 306,437
Loss (gain) on foreign currency exchange (2,059) (27,204)
Non-employee options - 424,710
Issue of shares of common stock and warrants
Other current assets (5,784) (132,833)
Accounts payable (121,994) 117,109
Accrued payroll and other accrued charges 156,424 728,141
Due to PARTEQ - 370,000
Income taxes payable - 90,000
Loss (gain) on sale of U.S. government securities available
for sale - (322,659)
Unrealized loss on U.S. government securities available
for sale - 62,832
Cumulative effect of change in accounting principle - (62,832)
Write-off of intangible assets - 307,519
Compensation expense resulting from extension of outstanding stock
option terms - 557,260
Changes in other assets and liabilities impacting cash flows from
operations:
Accrued interest receivable 121,178 (266,621)
License agreement obligations - (12,203)
-----------------------------------
NET CASH USED IN OPERATING ACTIVITIES (7,088,103) (33,638,397)
-----------------------------------
CASH FLOWS PROVIDED BY (USED IN)
INVESTING ACTIVITIES
Purchases of U.S. government securities available for sale (12,563,994) (143,440,786)
Proceeds from maturing U.S. government securities available for
sale 22,035,000 70,020,000
Proceeds from sale of U.S. government securities available for sale - 53,776,118
Intangible assets - (193,022)
Purchases of fixed assets (74,035) (717,866)
Deposits on equipment - (27,631)
Advances to former parent company - (2,867,900)
Deferred royalty
Repayment of advances by former parent company - 2,867,900
-----------------------------------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES 9,396,971 (20,987,017)
-----------------------------------
F-7
68
DUSA PHARMACEUTICALS, INC.
(a development stage company)
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
- -----------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1999 1998
CASH FLOWS PROVIDED BY FINANCING
ACTIVITIES
Stock offering costs $ (296,983) $ -
Issuance of common stock and underwriters' options 16,061,626 -
Deferred revenue 9,791,667 -
Payment received on note receivable from director - -
Redemption of Option - -
Receipt of Section 16(b) common stock profits - -
Payment on license agreement obligations - -
-----------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 25,556,310 -
-----------------------------------------
EFFECT OF EXCHANGE RATES ON CASH - 6,928
-----------------------------------------
NET INCREASE (DECREASE) IN CASH 5,814,861 (2,819,510)
CASH AT BEGINNING OF PERIOD 1,213,757 4,033,267
-----------------------------------------
CASH AT END OF PERIOD $ 7,028,618 $ 1,213,757
=========================================
SUPPLEMENTAL SCHEDULE OF CASH FLOW
INFORMATION
Issuance of common stock for promissory note from former parent
company
License agreement obligations incurred in the acquisition of an
intangible asset
Deferred stock offering costs offset against common stock
Note receivable from director originated upon exercise of options
for common stock
Interest paid
Issuance of common stock and warrants as compensation to placement
agent $ 1,805,878
==================
CUMULATIVE PERIOD
FROM FEBRUARY 21,
1991 (DATE OF
YEAR ENDED INCORPORATION) TO
DECEMBER 31, DECEMBER 31,
1997 1999
CASH FLOWS PROVIDED BY FINANCING
ACTIVITIES
Stock offering costs $ - $(5,345,238)
Issuance of common stock and underwriters' options 36,250 59,464,442
Deferred revenue - 9,791,667
Payment received on note receivable from director - 68,047
Redemption of Option - (2,250,000)
Receipt of Section 16(b) common stock profits - 17,125
Payment on license agreement obligations - (119,215)
--------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 36,250 61,626,828
--------------------------------------------
EFFECT OF EXCHANGE RATES ON CASH 2,059 27,204
--------------------------------------------
NET INCREASE (DECREASE) IN CASH 2,347,177 7,028,618
CASH AT BEGINNING OF PERIOD 1,686,090 -
--------------------------------------------
CASH AT END OF PERIOD $ 4,033,267 $ 7,028,618
============================================
SUPPLEMENTAL SCHEDULE OF CASH FLOW
INFORMATION
Issuance of common stock for promissory note from former parent
company $ 150,000
=============
License agreement obligations incurred in the acquisition of an
intangible asset $ 131,418
=============
Deferred stock offering costs offset against common stock $ 5,345,238
=============
Note receivable from director originated upon exercise of options
for common stock $ 68,047
=============
Interest paid $ 12,594
=============
Issuance of common stock and warrants as compensation to placement
agent $ 1,805,878
=============
There were no income tax payments made during the periods.
See the accompanying notes to the Consolidated Financial Statements.
F-8
69
DUSA PHARMACEUTICALS, INC.
(a development stage company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31,
1999, 1998, AND 1997 AND THE CUMULATIVE PERIOD FROM FEBRUARY 21, 1991 (DATE OF
INCORPORATION) TO DECEMBER 31, 1999
- -------------------------------------------------------------------------------
1. ORGANIZATION
DUSA Pharmaceuticals, Inc. (the "Company") was incorporated under the
laws of the State of New Jersey on February 21, 1991 as a wholly owned
subsidiary of Draxis Health Inc. ("Draxis"). As a result of two private
placements and the Company's public offerings, Draxis held a 12.8%
interest in the Company until March 1996 when Draxis disposed of its
entire holding in the Company. (Note 6). The Company's consolidated
financial statements include the accounts of its wholly-owned subsidiary,
DUSA Pharmaceuticals New York, Inc., which was formed on March 3, 1994 to
be the research and development center for the Company. Significant
intercompany balances and transactions have been eliminated.
The Company was established to develop prescription pharmaceutical
products for all markets, primarily in the field of photodynamic therapy
("PDT") and photodetection ("PD"),which respectively combines the use of
a pharmaceutical product with exposure to light to induce a therapeutic
or detection effect. The Company has been concentrating its initial
efforts upon seeking regulatory approval in the United States for topical
and/or local uses of aminolevulinic acid HCl ("Levulan(R)") PDT/PD.
During 1998, the Company filed a New Drug Application (NDA) with the Food
and Drug Administration (FDA) for use of the Levulan(R) Kerastick(TM) 20%
Topical Solution with photodynamic therapy for actinic keratoses (AKs).
On December 3, 1999, the Company received marketing approval from the FDA
of its NDA. The Company also received approval of its pre-market approval
application, or PMA, for the BLU-U(TM), its light device product used in
the AK clinical trials. The commercial light device the Company intends
to market is a modified version of the BLU-U(TM) units used in the
clinical studies. The Company is in the process of preparing a supplement
to the PMA covering these modifications. The FDA must approve these
changes before the Company may begin marketing the commercial units of
the BLU-U(TM). During 1999, the Company also signed a dermatology
marketing development and supply agreement with Schering AG, a German
corporation.
The Company has been classified as a development stage enterprise since
inception. Once the first commercial products are launched, DUSA will no
longer be classified as a development stage enterprise.
F-9
70
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Basis of Presentation - These financial statements, stated in U.S.
dollars, have been prepared in accordance with accounting principles
generally accepted in the United States. The preparation of financial
statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
b. U.S. Government Securities Available for Sale - The Company follows
the provisions of Statement of Financial Accounting Standards ("SFAS")
No. 115, "Accounting for Certain Investments in Debt and Equity
Securities." The Statement requires the Company to record securities
which management has classified as available for sale at fair market
value and to record unrealized gains and losses on securities available
for sale as a separate component of shareholders' equity until realized.
As the Company's management expects to sell a portion of the U.S.
government securities in the next fiscal year in order to meet its
working capital requirements, it has classified them as current assets.
The premiums paid and discounts allowed on the purchase of the securities
are amortized into interest income over the life of the securities using
the level-yield method.
c. Fixed Assets - Fixed assets are carried at cost less accumulated
depreciation and amortization, which is computed on a straight-line basis
over the estimated lives of the related assets. The carrying value of
fixed assets is periodically reviewed and adjusted appropriately by the
Company, whenever events or changes in circumstances indicate that the
estimated fair value is less than the carrying amount.
d. Intangible Assets - Intangible assets represent organization costs,
which have been fully amortized using the straight-line method over five
years.
Payments made to third parties for the rights to market pharmaceutical
and other products are expensed during the year unless regulatory
approval to market the product has been received prior to the date of
payment.
e. Common Stock - Certain shares of common stock issued, warrants issued
and stock options granted are subject to resale restrictions (Notes 6 and
7).
f. Revenue Recognition - Revenue from collaborative agreements is
deferred and amortized into income over the term of the related
agreement.
g. Research and Development Costs - Costs related to the conceptual
formulation and design of products and processes are expensed as research
and development costs as they are incurred.
h. Income Taxes - The Company follows the provisions of SFAS No. 109,
"Accounting for Income Taxes", which requires the Company to compute
deferred income taxes based on the difference between the financial
statement and tax basis of assets and liabilities using tax rates in
effect in the years in which these differences are expected to reverse
(Note 5).
i. Basic and Diluted Net Loss Per Share - The Company follows the
provisions of SFAS No. 128, "Earnings Per Share". Basic net loss per
common share is based on the weighted average number of shares
outstanding during each period. Stock options are not included in the
computation of the weighted average number of shares outstanding for
dilutive net loss per common share during the period as the effect would
be antidilutive.
F-10
71
j. Stock-based compensation - The Company follows the provisions of APB
Opinion No. which requires compensation cost for stock-based employee
compensation plans to be recognized based on the difference, if any,
between the quoted market price of the stock and the amount an employee
must pay to acquire the stock. As a result of the Company continuing to
apply APB No. 25, SFAS No. 123, "Accounting for Stock-Based Compensation"
requires increased disclosure of compensation expense arising from both
the Company's fixed and performance stock compensation plans. The expense
is measured as the fair value of the award at the date it is granted
using an option-pricing model that takes into account the exercise price
and expected term of the option, the current price of the underlying
stock, its expected volatility, expected dividends on the stock and the
expected risk-free rate of return during the term of the option. The
compensation cost is recognized over the service period, usually the
period from the grant date to the vesting date. The Company has disclosed
the required proforma net loss and loss per share data in Note 7 as if
the Company had applied the SFAS No. 123 method. The Company accounts for
options issued to non-employees in accordance with the provisions of SFAS
123.
k. Comprehensive Income - The Company implemented SFAS No. 130, Reporting
Comprehensive Income as of December 31, 1998. The Statement establishes
standards for the reporting and display of comprehensive income and its
components (revenues, expenses, gains and losses) in a full set of
general-purpose financial statements. The Statement requires all items
that are required to be recognized under accounting standards as
components of comprehensive income be reported separately from the
Company's accumulated deficit balance in a financial statement that is
displayed with the same prominence as other financial statements. The
Company has reported comprehensive loss and its components as part of its
statement of operations. Comprehensive loss is not used in the
calculations of the basic and diluted loss per share.
l. Segment Reporting - The Company implemented SFAS No. 131, Disclosures
about Segments of an Enterprise and Related Information, as of December
31, 1998. The Statement establishes standards for the way that a public
business enterprise reports information about operating segments in
annual financial statements and interim financial reports issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas, and major customers. The Company
has determined that, at present, it operates in one segment which is the
development of emerging technologies which use drugs in combination with
light to treat and detect disease.
m. New Statements of Financial Accounting Standards - In June 1998, the
FASB issued SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities. This Statement establishes accounting and reporting
standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those
instruments at fair value. The Statement is effective for the fiscal
quarters of the Company's fiscal year ending December 31, 2001. The
Company is in the process of evaluating the effect of this Statement on
its consolidated financial statements.
3. U.S. GOVERNMENT SECURITIES AVAILABLE FOR SALE
Securities available for sale consist of United States Treasury Bills and
Notes with yields ranging from 4.97% to 6.48% and maturity dates ranging
from January 14, 2000 to November 20, 2001.
As of December 31, 1999, the Company's securities available for sale have
been recorded at fair market value of $19,868,962 and the unrealized loss
on such securities of $82,319 has been
F-11
72
recorded as part of shareholders' equity and an item of comprehensive
loss in the statement of operations.
4. FIXED ASSETS
USEFUL LIVES
(YEARS) 1999 1998
----------------------------- ------------
Computer Equipment 3 $ 282,009 $ 195,284
Furniture, Fixtures and Equipment 5 144,595 136,327
Manufacturing Equipment 5 267,786 -
Leasehold Improvements Term of lease 8,568 8,568
----------------------------- ------------
702,958 340,179
Accumulated depreciation and amortization (274,608) (171,713)
----------------------------- ------------
$ 428,350 $ 168,466
============================= ============
5. INCOME TAXES
The tax effect of significant temporary differences representing deferred
tax assets is as follows:
1999 1998
------------- -----------------
DEFERRED TAX ASSET
Deferred revenue $ 3,916,667 $ -
Intangible assets 507,515 464,126
Accrued charges - 176,022
Research and development tax credits carryforwards 875,813 702,025
Minimum tax credit carryforward 90,000 -
Operating loss carryforwards 9,702,032 11,279,636
Capital loss carryforwards 162,766 162,766
Fixed assets 10,656 3,387
Other - 15,633
------------- -----------------
Net deferred tax assets 15,265,449 12,803,595
Valuation allowance (15,265,449) (12,803,595)
------------- -----------------
$ - $ -
============= =================
Management cannot assess the likelihood that the future tax benefits will
be realized because the Company is currently in the development stage and
has cumulative net losses. Accordingly, the net tax benefit does not
satisfy the recognition criteria set forth in SFAS No. 109 and,
therefore, a valuation allowance has been provided.
As of December 31, 1999, the Company has net operating loss carryforwards
for tax purposes of approximately $24,255,000 and research and
development tax credits of approximately $876,000 both of which, if not
utilized, will expire for Federal tax purposes as follows:
F-12
73
OPERATING LOSS RESEARCH AND DEVELOPMENT
CARRYFORWARDS TAX CREDITS
------------------------- ---------------------------
2006 $ - $ 7,000
2007 - 57,000
2008 - 66,000
2009 1,618,000 84,000
2010 3,420,000 44,000
2011 6,638,000 102,000
2012 6,841,000 235,000
2018 5,738,000 145,000
2019 - 136,000
------------------------- ---------------------------
$ 24,255,000 $876,000
========================= ===========================
A reconciliation between the effective tax rate and the statutory federal rate
follows:
1999 1998
$ % $ %
---------------------------------------------------------------
Income tax expense (benefit) at statutory rate (1,849,134) (34.0) (1,943,762) (34.0)
State taxes (326,318) (6.0) (343,017) (6.0)
Increase in tax credit carryforwards (263,788) (4.8) (138,249) (2.4)
Increase in valuation allowance 2,461,854 45.3 2,371,450 41.5
Other 67,386 1.2 53,578 .9
---------------------------------------------------------------
90,000 1.7 - -
===============================================================
Income tax expense consists of: 1999 1998
Current 90,000 -
Deferred - -
---------------------------------------------------------------
90,000 -
===============================================================
6. SHAREHOLDERS' EQUITY
In 1991, the Company issued 2,200,000 shares of common stock at $.75 per
share to Draxis. The Company received cash for 2,000,000 shares and a
$150,000 interest-bearing promissory note for 200,000 shares. Cash
payment was received on the promissory note on September 26, 1991.
The Company completed its initial public offering on January 28, 1992,
for the sale of an aggregate of 1,437,500 Units, each Unit consisting of
two shares of common stock and one Class A warrant, at a price of $12 per
Unit. Proceeds of the issue, net of stock offering costs of $2,464,872,
were $14,785,128.
In conjunction with the initial public offering, 112,000 shares of the
Company's common stock held by Draxis were distributed to Draxis'
shareholders on a pro rata basis as a dividend in specie.
F-13
74
During 1992, a former officer of the Company who resided in Canada,
inadvertently engaged in transactions in the Company's securities, which
would have been permitted under Canadian law, which resulted in gains to
the officer. In accordance with Section 16(b) of the Securities Exchange
Act of 1934, during April 1992, the officer was required to and did remit
$17,125 to the Company, which represented certain profits realized upon the
sale of such securities. Such amount is reflected as an increase to common
stock.
On November 23, 1993, the Company issued 100,000 shares of common stock for
cash to a private investor at $5 per share. On March 4, 1994, the Company
issued 250,000 shares of common stock for cash to private investors at
$4.80 per share. The issue prices were determined by the closing stock
market prices on the day prior to the issue.
On March 18, 1993, the Company made a loan to a director in the amount of
$68,047 (CDN.$84,875) in order to enable the purchase of shares when 12,500
options held by the director were exercised for $5.44 (CDN.$6.79) per
share. The loan was fully repaid on March 18, 1996.
On December 14, 1995, the Company completed a public offering for the sale
of 3,000,000 shares of common stock at a price of $5.50 per share. Proceeds
of the issue, net of stock offering costs of $1,946,321, were $14,553,679.
On February 16, 1996, the Company extended the term of the outstanding
restricted stock options issued prior to 1994 from five years to ten years,
in order that the terms for these options would be comparable to the terms
of all the options granted under the Company's existing stock option plans.
The excess of the market value of the common stock over the exercise price
of the extended term stock options of $557,260 has been recorded as an
addition to common stock and the related compensation expense has been
recorded.
The Company filed a registration statement pertaining to all remaining
1,088,001 restricted shares of common stock of the Company owned by Draxis.
In March 1996, Draxis disposed of its entire holding in the Company in a
secondary offering. Draxis no longer owns any shares of common stock or
other securities in the Company. (Note 9).
On May 1, 1996, the Company completed a public offering for the sale of
750,000 shares of common stock at a price of $7.20 per share. Proceeds of
the issue, net of stock offering costs of $637,062, were $4,762,938.
On September 26, 1997 the Company adopted a Shareholders Rights Plan (the
"Plan"). The Plan provides for the distribution of one right as a dividend
for each outstanding share of common stock of the Company to holders of
record as of October 24, 1997. Each right entitles shareholders to purchase
one unit at a purchase price of $50.00. Each unit consists of one-tenth of
a share of common stock of the Company and a note equal to nine-tenths of a
share of common stock based on the fair market price of the Company's
common stock on the date of
F-14
75
exercise. The rights may be exercised only if a person or group either
acquires or announces a tender offer to acquire 15% or more of the
Company's outstanding common stock, or if a person or group is declared an
adverse person, as such term is defined in the Plan. The rights may be
redeemed by the Company at a redemption price of one-tenth of a cent per
right until 10 days following the date a person acquires 15% or more of the
Company, or until such later date as may be determined by the Board.
Under the Plan, if a person or group acquires 15% or more of the Company's
common stock, all holders of rights (other than the acquiring shareholder)
may, upon payment of the purchase price then in effect, purchase shares of
the Company's common stock having a value of twice the purchase price. In
the event that the Company is involved in a merger or other similar
transaction where it is not the surviving corporation, all holders of
rights (other than the acquiring shareholder) shall be entitled, upon
payment of the then in effect purchase price, to purchase common stock of
the surviving corporation having a value of twice the purchase price. The
rights will expire on September 26, 2007, unless previously redeemed.
On June 11, 1998 at the Annual Meeting of the Shareholders, the
shareholders approved an amendment to the Company's Certificate of
Incorporation to increase the number of authorized shares from 20 million
shares without par value, to 100 million shares, 40 million of which are
designated common stock without par value, and 60 million of which may be
further divided into classes or series of shares with rights, preferences
and limitations as may be determined by the Board of Directors.
On January 15, 1999, the Company issued 1,500,000 shares of its common
stock in a private placement pursuant to Regulation D of the Securities Act
of 1933 at $5.00 per share. In connection with the placement, 130,435
shares of common stock were issued as commission and non-accountable
expense allowance to the placement agent. Additional compensation was paid
to the placement agent in the form of 163,043 five-year warrants, each of
which are exercisable into one share of common stock at $5.00 per share.
These shares and warrants have been valued at $1,805,878 and have been
recorded as stock offering costs.
Since the Form S-3 Registration Statement which was filed to register the
shares in the private placement was not effective as of June 1, 1999, the
Company was obligated to issue and did issue 15,000 shares of common stock
to the investors and 1,630.43 additional warrants to the placement agent,
i.e. 1% of the shares issued to the investors and 1% of the warrants issued
to placement agent. These warrants have the same terms and conditions as
the original placement agent warrants. These shares and warrants have been
valued at $152,495 and both have been recorded as part of general and
administration costs in the consolidated statements of operations.
F-15
76
7. STOCK OPTIONS AND WARRANTS
a. Stock compensation plan - The Company has a stock based compensation
plan, which is described below. The Company applies APB Opinion No. 25 and
related interpretations in accounting for its plan. Accordingly, no
compensation cost has been recognized for the plan. Had the compensation
cost for the Company's plan been determined based on the fair value at the
dates of award under the plan consistent with the method of SFAS No. 123,
the Company's net loss, cumulative net loss, and basic and diluted net loss
per common share would have been increased to the proforma amounts
indicated below:
1999 1998 1997
-------------------- ------------------- --------------------
NET LOSS
As reported ($5,528,627) ($5,716,948) ($7,120,092)
Proforma ($8,307,285) ($6,963,522) ($8,184,984)
BASIC AND DILUTED NET LOSS PER COMMON SHARE
As reported ($0.50) ($0.61) ($0.76)
Proforma ($0.75) ($0.74) ($0.88)
CUMULATIVE NET LOSS
As reported ($35,946,594) ($30,417,967) $24,701,019
Proforma ($41,665,631) ($33,358,346) ($26,394,824)
As SFAS No. 123 has not been applied to options granted prior to January 1,
1995, the resulting proforma compensation cost may not be representative of
that to be expected in future years.
The fair value of the options at the date of grant was estimated using the
Black-Scholes model with the following weighted average assumptions:
1999 1998 1997
--------------------- ------------------- --------------------
Expected life (years) 10 10 10
Risk free interest rate 6.22% 5.57% 6.57%
Expected volatility 80.70% 68.94% 62.67%
Dividend yield - - -
b. 1996 Omnibus Plan -- On April 11, 1996, the 1996 Omnibus Plan
("Omnibus Plan") was adopted by the Board of Directors and approved by the
shareholders on June 6, 1996. The Omnibus Plan supercedes the Company's
previously adopted 1994 Restricted Stock Option Plan and the Incentive
Stock Option Plan adopted in 1991. No further grants will be made under the
superceded plans. The Omnibus Plan provides for the granting of awards to
purchase up to a maximum of 15% of the Company's common stock outstanding.
The Omnibus Plan is administered by a committee ("Committee") established
by the Board of Directors. The Omnibus Plan enables the Committee to grant
non-qualified stock options ("NQSO"), incentive stock options ("ISO"),
stock appreciation rights ("SAR"), restricted stock options ("RSO") or
other securities determined by the Company, to directors, employees and
consultants. To date, the Company has made awards only of NQSOs and ISOs
under the Omnibus Plan.
F-16
77
Under the terms of the 1996 Omnibus Plan as amended, each person who is a
continuing director following the Annual Meeting of Shareholders
automatically receives 10,000 non-qualified stock options. The exercise
price of such options is the closing stock market price on the date of the
grant. On June 5, 1997 at the Annual Meeting of Shareholders, the
shareholders approved an amendment to the 1996 Omnibus Plan, providing that
all of the stock options granted automatically to directors of the Company,
after the date of amendment, would immediately vest on the date of the
grant.
Non-qualified stock options - All the non-qualified stock options granted
under the Omnibus Plan have an expiration period not exceeding ten years
and are issued at a price not less than the market value of the common
stock on the grant date. These options become exercisable at a rate of one
quarter of the total granted on each of the first, second, third and fourth
anniversaries of the grant date. The Company has granted each individual
who agrees to become a director 15,000 NQSO to purchase common stock of the
Company. Thereafter, on the day following the Annual Meeting of the
shareholders, each person who is a continuing director on such date will
automatically receive an additional 10,000 NQSO.
Incentive stock options - Incentive stock options granted under the Omnibus
Plan and the superceded 1991 plan have an expiration period not exceeding
ten years (five years for ISOs granted to employees who are also ten
percent shareholders) and are issued at a price not less than the market
value of the common stock on the grant date. These options become
exercisable at a rate of one quarter of the total granted on each of the
first, second, third and fourth anniversaries of the grant date subject to
satisfaction of certain conditions involving continuous periods of service
or engagement.
The Company has entered into an employment agreement with its Chief
Operating Officer effective May 14, 1998. The agreement sets out the
remuneration, benefits and incentive bonuses to which the officer is
entitled. The full term of employment is unlimited in duration unless
terminated in accordance with the terms of the agreement. As partial
consideration for the employment agreement, the Company granted incentive
stock options to purchase up to 60,000 shares of the Company's common stock
at $11.50 per share pursuant to the terms of the 1996 Omnibus Plan as
amended. The exercise price of such options is the closing stock market
price on May 7, 1998, the date of the grant.
Restricted Stock Options -- Prior to August 1994, the Company granted
individual options to purchase shares of common stock to certain directors,
officers, employees, consultants and others. For options issued in 1991,
the exercise price was determined by the public offering price. For options
issued after 1991, the exercise price was determined by the closing stock
market price on the day prior to the grant. All of the options which were
outstanding at February 16, 1996, and which had terms of five years, have
been extended to terms of ten years (Note 6). These options are exercisable
at the rate of one quarter of the total granted on each of the first,
second, third and fourth anniversaries of the day immediately preceding the
date of the grant, subject to satisfaction of certain conditions involving
continuous periods of service or engagement.
F-17
78
c. Other Options - In 1991, in consideration of the efforts made on
behalf of the Company by key employees of Draxis in connection with
negotiating various agreements including the License Agreement (Note 9a),
the Company granted an option to Draxis to purchase 2,000,000 shares of
common stock of the Company (the "Draxis Option") at $9 per share. On
December 21, 1995, the Company purchased the Draxis Option for $2,250,000
or $1.125 per option, based upon an investment banking firm fairness
opinion, with a portion of the proceeds of the December 1995 public
offering (Note 6). Payment for the option was charged against shareholders'
equity at December 31, 1995.
In conjunction with its initial public offering (Note 6), the Company
granted Unit Purchase Options to the underwriters to purchase up to 125,000
Units (250,000 shares of common stock and 125,000 warrants) at an exercise
price of $18 per Unit. The cash consideration for such options was $.0008
per Unit or $100, in the aggregate. As of December 31, 1995, options to
purchase 53,750 Units (107,500 shares of common stock) have expired. The
expiration date on the remaining options to purchase 71,250 Units (142,500
shares of common stock) was extended by the Board of Directors from January
16, 1997 to January 16, 2000. All warrants issued in connection with the
initial public offering expired on April 19, 1993. On May 7, 1998, the
Board of Directors amended the terms of the Unit Purchase Options to allow
the exercise of the options based on a cashless payment provision based
upon the fair market value of the shares during the thirty-day period prior
to the exercise of such options. In consideration, the underwriters agreed
to relinquish 1,250 Units (2,500 shares of common stock). During 1999, the
underwriters elected a cashless exercise of the options, which resulted in
51,329 shares of common stock being issued to them.
In conjunction with its December 1995 public offering (Note 6), the Company
granted Purchase Options to the underwriters to purchase up to 300,000
shares of common stock at an exercise price equal to 140% of the public
offering price of the shares, or $7.70 per share. The options are
exercisable over a period of four years commencing December 8, 1996. The
cash consideration for such options was $.001 per option or $300, in the
aggregate.
In conjunction with its May 1, 1996 public offering (Note 6), the Company
granted Purchase Options to the underwriters to purchase up to 37,500
shares of common stock at an exercise price equal to 110% of the public
offering price of the shares, or $7.92 per share, the cash consideration
for such options was $.001 per option or $37.50, in the aggregate. The
options are exercisable for a period of four years, commencing May 1, 1997.
The options could not be sold, transferred, assigned, or hypothecated prior
to May 1, 1997, unless assigned to any successor, officer or partner of the
underwriters.
On March 13, 1997 the Company granted non-qualified stock options to
Lumenetics, Inc., a consultant to the Company, to purchase 100,000 shares
of common stock at $6.125 per share in connection with a consulting
agreement. These options are exercisable at the rate of 25% on the date of
grant and 25% on the second, third and fourth anniversaries of the date of
grant. In addition, the Company granted non-qualified stock options to a
consultant to the Company to
F-18
79
purchase 15,000 shares of common stock at $6.125 per share as part of a
consulting agreement. These options are exercisable at the rate of 20% on
the date of grant and 20% on June 14, 1998, 1999, 2000 and 2001,
respectively. The exercise price of such options is the closing market
price of the Company's common stock on the date of grant.
Shares issued pursuant to the exercise of all such options are restricted
shares and may not be sold in the United States without registration or
exemption from registration under the 1933 Act.
The following table summarizes information about all stock options
outstanding at December 31, 1999:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------- ------------------------------------------------------------
WEIGHTED AVERAGE
RANGE OF EXERCISE NUMBER OUTSTANDING AT REMAINING CONTRACTUAL WEIGHTED AVERAGE NUMBER EXERCISABLE AT WEIGHTED AVERAGE
PRICE DECEMBER 31, 1999 LIFE EXERCISE PRICE DECEMBER 31, 1999 EXERCISABLE PRICE
- ----------------- --------------------- --------------------- ---------------- --------------------- -----------------
$3.01 to 6.00 349,300 3.41 years $4.79 321,550 $4.92
6.01 to 9.00 1,028,500 7.36 years 6.95 518,750 7.26
9.01 to 20.50 380,000 8.21 years 11.85 167,500 10.55
--------- ---------
1,757,800 6.76 years $7.58 1,007,800 $7.06
========= =========
Changes for the stock option plans during the years ended December 31,
1999, 1998 and 1997 were as follows:
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
1999 EXERCISE PRICE 1998 EXERCISE PRICE 1997 EXERCISE PRICE
-----------------------------------------------------------------------------------------
Options outstanding, beginning of year 1,375,300 $7.27 1,283,300 $7.03 1,002,050 $6.81
Options granted 465,000 8.30 202,000 8.66 321,000 7.67
Options exercised (72,500) 6.66 - - (10,000) 3.63
Options cancelled - - (29,750) 3.95
Options lapsed (10,000) 5.25 (110,000) 7.02 - -
=========================================================================================
Options outstanding, end of year 1,757,800 $7.58 1,375,300 $7.27 1,283,300 $7.03
=========================================================================================
Options exercisable, end of year 1,007,800 $7.06 937,550 $7.09 615,050 $6.32
=========================================================================================
Options which were exercised during these years were exercised at per share
price range from U.S. $3.25 to U.S. $11.25 during 1999, and at per share
prices of U.S. $3.625 during 1997. No options were exercised in fiscal
1998.
Options which were granted during 1999 have exercise prices ranging from
U.S. $6.375 to U.S. $20.50 per share. Those granted during 1998 have
exercise prices ranging from U.S. $3.25 to $11.50 per share. During 1997,
options were granted with exercise prices of U.S. $6.125 to $10.875 per
share.
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d. Warrants - In consideration of efforts related to the negotiation and
execution of various agreements including the License Agreement (Note 9a),
the Company issued warrants to purchase 350,000 and 50,000 shares of common
stock of the Company at CAN.$6.79 per share to the Chairman of the Board,
President, and Chief Executive Officer of the Company, and a former
Co-Chairman of the Board of Draxis, respectively. On December 21, 1995, the
warrants for 50,000 shares were exercised by the former Co-Chairman of
Draxis. The expiration date on the 350,000 remaining warrants was extended
by the Board of Directors from January 28, 1997 to January 28, 2002. On the
date of the extension, August 1, 1996, the market value of the common stock
was lower than the price of the warrants on the issue date.
In connection with an agreement dated October 6, 1993 with its investor
relations firm, the Company issued the investor relations firm a warrant to
purchase up to 50,000 shares of the authorized stock of the Company at $6
per share. The warrant which vested immediately upon issuance, is
noncancellable and was due to expire on October 6, 1998. On July 30, 1998,
the Board of Directors extended the expiration date of the warrant to
October 14, 2001.
In connection with an agreement with its investor relations advisor, the
Company agreed to issue warrants for 20,000 shares of the Company's common
stock, exercisable at a price of $4.00 per share, a premium from the
closing stock market price of the Company's common stock on the day
immediately preceding the date of the grant. The warrants vested on June 1,
1995 and are exercisable for a period up to and including five years from
the date of grant, at which time the warrants expire.
8. COLLABORATION AGREEMENT
In November 1999, DUSA signed a dermatology marketing, development and
supply agreement with Schering AG, a German corporation. DUSA granted to
Schering AG the right to promote, market, sell and distribute the
Levulan(R) Kerastick(TM) 20% Topical Solution with PDT for AKs of the face
and scalp on a worldwide basis (with the exception of Canada). Schering AG
and DUSA intend to co-develop and commercialize additional ALA products for
other dermatology disorders. Under the agreement, Schering AG has the
exclusive right to market, promote and sell the products which are
developed in the co-development program. Schering AG has agreed to fund
two-thirds of the co-development program, up to a total of $3 million per
year, through 2001, subject to the agreement of the Development Committee
on the budget. Under the terms of the agreement, DUSA has received $15
million, including $8,750,000 in cash milestone payments and $6,250,000 for
which a Schering AG affiliate received 340,458 shares of DUSA's common
stock. DUSA will receive $8,000,000 for future research and development
support to be used at its discretion, and an additional milestone payment
of $7,000,000, within thirty days after the first commercial sale of a
Levulan(R) Kerastick(TM), assuming FDA approval of the commercial model of
the BLU-U(TM). The issue of shares to the Schering AG affiliate was made at
a premium of 20%, or $1,041,667, which along with the milestone payment of
$8,750,000, has been recorded as deferred revenue. Revenue
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from the collaborative agreement with Schering AG will be recognized over
the term of the agreement.
The marketing, development and supply agreement terminates on a
product-by-product basis in each country in the territory on the later of
(i) 12-1/2 years after the first commercial sale of a respective product in
such country, or (ii) the expiration of patents pertaining to the
manufacture, sale or use of such product in such country. It terminates in
its entirety upon the expiration of the agreement with respect to all
products in all countries covered by the agreement. Subject to various
terms and conditions, the parties may terminate the agreement earlier.
DUSA will be responsible for the manufacture and supply of the Levulan(R)
Kerastick(TM) to Schering AG for resale to the medical community. Schering
AG will pay DUSA a supply price for products, as well as a royalty on
product sales. Schering AG has also agreed to promote the BLU-U(TM), which
DUSA plans to lease directly to dermatologists and other physicians. DUSA
will maintain and repair the BLU-U(TM) units under lease/maintenance
agreements with the end-users. Under the terms of a Guaranty, Schering AG
has agreed to guarantee the lease payments by each lessee up to the cost to
DUSA of the BLU-U(TM) from the third-party manufacturer. The Guaranty will
expire on the second anniversary of the first delivery to an end-user of a
BLU-U(TM). In addition, Schering AG has agreed to provide DUSA with an
interest-free line of credit for up to $1,000,000 to finance inventory of
BLU-U(TM) units. Under the terms of a Secured Line of Credit Promissory
Note and Security Agreement, repayment is secured by the BLU-U(TM) units.
The maturity date of the Note is twelve months following the date of the
first advance under the Note.
9. COMMITMENTS AND CONTINGENCY
a. PARTEQ License Agreement - The Company licenses the patents underlying
its Levulan(R) PDT/PD systems under a license agreement with PARTEQ
Research and Development Innovations, the licensing arm of Queen's
University, Kingston, Ontario. Under the agreement, the Company has been
granted an exclusive worldwide license, with a right to sublicense, under
PARTEQ patent rights, to make, have made, use and sell products which are
precursors of PpIX, including ALA. The agreement covers certain use patent
rights. It also includes any improvements discovered, developed or acquired
by or for PARTEQ, or Queen's University, to which PARTEQ has the right to
grant a license. A non-exclusive right is reserved to Queen's University to
use the subject matter of the agreement for non-commercial educational and
research purposes. A right is reserved to the Department of National
Defense Canada to use the licensed rights for defense purposes including
defense procurement but excluding sales to third parties.
When the Company is selling its products directly, it has agreed to pay to
PARTEQ royalties of 6% and 4% on 66% of the net selling price in countries
where patent rights do and do not exist,
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respectively. In cases where the Company has a sublicensee, such as
Schering AG, it will pay 6% and 4% when patent rights do and do not exist,
respectively, on its net selling price less the cost of goods for products
sold to the sublicensee, and 6% of royalty payments the Company receives on
sales of products by the sublicensee. The Company is also obligated to pay
5% of any lump sum sublicense fees paid to the Company, such as milestone
payments, excluding amounts designated by the sublicensee for future
research and development efforts. The agreement is effective for the life
of the latest United States patents and becomes perpetual and royalty-free
when no United States patent subsists. The Company has the right to
terminate the PARTEQ agreement with or without cause upon 90 days notice.
The Company paid a minimum royalty of CDN $100,000 to PARTEQ during 1998.
Following the receipt of FDA approval in December 1999, the Company paid
PARTEQ a milestone payment of CDN $100,000 and, a prorated annual minimum
royalty payment on sales of products which totaled CDN $3,836. From now on,
annual minimum royalties to PARTEQ on sales of products must total at least
CDN $100,000. Now that the Company has entered into the agreement with
Schering AG, it is also obligated to pay to PARTEQ additional minimum
payments in amounts up to CDN $1.1 million of which CDN $632,056 has been
paid, including a credit for the CDN $100,000 paid in 1998, based upon the
milestone payments the Company received from Schering AG. The CDN $1.1
million is credited in full against the Company's obligation to pay 5% of
the lump sums it received from Schering AG (other than for future research
and development). The sublicense fee paid and payable to PARTEQ in
connection with the milestone payments received from Schering AG (Note 8)
has been recorded as deferred royalties and will be amortized over the term
of the related agreement with Schering AG.
Together with PARTEQ and Draxis Health, Inc., its former parent, the
Company entered into an agreement (the "ALA Assignment Agreement")
effective October 7, 1991. According to the terms of this agreement the
Company assigned to Draxis its rights and obligations under the license
agreement to the extent they relate to Canada. In addition, the Company has
agreed to disclose to Draxis on an ongoing basis, any technology which is
available to it relating to the subject matter of the license agreement
which would assist Draxis in developing the Canadian market under the
assigned rights. Draxis is responsible for royalties which would otherwise
be payable by the Company in accordance with the license agreement for net
Canadian sales of products and sublicensing revenues. Draxis has also
agreed to pay the Company a royalty of two percent of net Canadian sales of
products.
The Company entered into an extension of Research Agreement effective April
1, 1999 with PARTEQ. As partial consideration, the Company granted options
to PARTEQ to purchase 10,000 shares of common stock of the Company at an
exercise price of $9.25 per share. These options have a term of 10 years
and vest at a rate of 25% each year over four years on the anniversary
dates of the granting of the options. These options have been valued at
$84,000 and have been included in the Consolidated Statements of Operations
as part of research and development costs, along with a cash payment of
$50,000 provided to PARTEQ as funding
F-22
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support. In addition, the Company has also agreed to provide further
funding to PARTEQ in the amount of $29,000 on April 1, 2000.
b. Management Agreement - Effective October 1, 1991 the Company had
entered into a management agreement with Draxis, with a one year term and
renewable annually pursuant to which Draxis provided to the Company
administrative, financial, scientific and marketing support and any other
management services which were required. The Company was charged a per diem
rate for services provided by Draxis employees. The per diem rates were
equal to the annual salary and benefits, expressed as a rate per day, paid
by Draxis to such employees. Services charged by Draxis during the three
years ended December 31, 1996 totaled approximately $149,000. The Company
terminated the management agreement as of February 1, 1997, as per the
provisions of the agreement.
c. Officers' Employment Agreements - The Company has entered into
employment agreements, with its President effective October 1, 1991, with
its Vice President of Scientific Affairs effective October 11, 1993, with
its Chief Operating Officer effective May 14, 1998 and with its Vice
President, Technology effective June 23, 1999. The agreements set out the
remuneration, benefits and incentive bonuses to which the officers are
entitled. The full term of employment is unlimited in duration unless
terminated in accordance with the terms of the employment agreements.
(Notes 7b and 7d.)
d. Lease Agreements --The Company has entered into lease commitments for
rental of its office space in Valhalla, New York, in Wilmington,
Massachusetts and in Toronto, Ontario. Rent paid under operating leases
amounted to $90,000 in 1997, $146,000 in 1998 and $240,000 in 1999. Future
minimum lease payments will total approximately $295,000 in 2000, $301,000
in 2001, $289,000 in 2002, $140,000 in 2003 and $58,000 in 2004.
e. Light Source Agreement - Pursuant to an agreement dated June 7, 1993
with respect to one of the Company's prototype light sources, the developer
has assigned to the Company its rights under a U.S. patent issued in August
1995 regarding the light source, and the Company is committed to pay
royalties of 4% of wholesale cost on all commercial units purchased from
the developer and 8% if purchased from any other manufacturer.
f. Lumenetics Agreement - Effective April 1, 1996, the Company entered
into an agreement with Lumenetics, Inc. ("Lumenetics") with respect to the
evaluation and development of light delivery system components and other
devices for use in ALA PDT. This agreement was amended by the Consulting
and Development Agreement dated October 14, 1997. In lieu of royalties
which could have become due under the April, 1996 Agreement, the Company
granted options for the purchase of 100,000 shares of common stock of the
Company (Note 7c). In addition, Lumenetics has received restricted stock
options for 20,000 shares of common stock of the Company (Note 7b).
On February 25, 1999, the Company entered into a partial termination
agreement with Lumenetics whereby in light of the employment of the
principals of Lumenetics by DUSA, the Company
F-23
84
agreed to terminate certain provisions of the Consulting and Development
Agreement dated October 14, 1997. Under the new agreement, all stock
options previously granted to Lumenetics will remain in force and vest
according to the terms of the original agreement.
g. Light Source Supply - Effective November 5, 1998, the Company entered
into a purchase and supply agreement with National Biological Corporation
(NBC), under which the Company has agreed to order all of its supply of
certain light sources from NBC.
h. Research Agreements - The Company has entered into a series of
agreements for research projects and clinical studies. As of December 31,
1999, future payments to be made pursuant to these agreements, under
certain terms and conditions, totaled approximately $786,000 in 2000.
i. North Safety Products Inc.: In September 1999, DUSA entered in a
purchase and supply agreement with North Safety Products, Inc. (North) for
the manufacture and supply of the Kerastick(TM) brand applicator. The
Company has agreed to purchase from North a certain portion of its total
commercial requirements for supply of the Kerastick(TM) for sale in the
United States and Canada. Prices for the product are based on the
quantities of Kerastick(TM) ordered, which are subject to change depending
on various product costs and competitive market conditions. The agreement
has a five year term which may be extended for additional one year periods.
North has the right to terminate the agreement earlier if certain minimum
levels of product orders are not reached. Similarly, DUSA can terminate the
agreement early for stated breaches of the agreement. The Company has
committed to reimburse North for the construction of certain facilities at
North's manufacturing facilities in the amount of $265,000.
10. FINANCIAL INSTRUMENTS
a) Fair value of financial instruments - The carrying value of the
financial assets and liabilities approximate their fair values.
b) Credit risk - The Company is subject to credit risk through short-term
investments. The Company mitigates this risk by investing in US
government securities.
11. RELATED PARTY TRANSACTIONS
The Executive Vice President and Chief Operating Officer of the Company and
the Vice President, Technology are principal shareholders of Lumenetics,
Inc., the Company's former light device consultants. During 1999, the
Company paid $46,000 for certain equipment leased under operating leases
from Lumenetics and also reimbursed Lumenetics for office space and related
expenses totaling approximately $146,000. The Company also paid legal fees
and expenses of $214,000 in 1997, $183,550 in 1998 and $395,000 in 1999 to
Lane and Mantell, a corporation in which the Company's secretary is a
principal.
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12. COMPARATIVE FIGURES
Certain of the comparative figures have been reclassified for the purposes
of comparison.
13. SUBSEQUENT EVENT
On February 23, 2000, the Company signed a definitive agreement for a
private placement of 1,500,000 million shares of its common stock. The
purchase price is $28.50 per share. The closing is scheduled to occur
promptly after the declaration by the SEC that a registration statement
covering the shares is effective. If the shares are not registered by 105
days following the filing of the registration statement, the purchasers
have the right to terminate the agreement. The Company agreed to pay at
closing a commission of 4.5% on the gross proceeds to the placement agent.
On February 24, 2000, the Company was served with a lawsuit alleging that
the Company breached a licensing agreement by failing to use its best
endeavors to develop the licensed device. The licensor is seeking
unspecified damages, return of the technology and information relating to
the licensed device and a declaration that the agreement has been
terminated. Management does not believe that this matter will have a
material adverse effect on the Company's business, results of operations or
financial condition.
******
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EXHIBIT INDEX
3(a) Certificate of Incorporation, as amended, filed as Exhibit 3(a) to the
Registrant's Form 10-K for the fiscal year ended December 31, 1998
and is incorporated herein by reference...........................
3(b) By-laws of the Registrant, filed as Exhibit 3(ii) to the Registrant's
Quarterly Report on Form 10-Q for the fiscal quarter ended
September 30, 1997, and are incorporated herein by reference......
4(a) Common Stock specimen, filed as Exhibit 4.1 to the Registrant's Quarterly
Report on Form 10-Q for the fiscal quarter ended September 30,
1997, and are incorporated herein by reference....................
4(b) Class B Warrant, filed as Exhibit 4.3 to the Registrant's Registration
Statement on Form S-1, No. 33-43282, and is incorporated herein by
reference.........................................................
10(a) License Agreement between the Company, PARTEQ and Draxis Health Inc.
dated August 27, 1991, filed as Exhibit 10.1 to the Registrant's
Registration Statement on Form S-1, No. 33-43282, and is
incorporated herein by reference..................................
10(b) ALA Assignment Agreement between the Company, PARTEQ, and Draxis Health
Inc. dated October 7, 1991, filed as Exhibit 10.2 to the
Registrant's Registration Statement on Form S-1, No. 33-43282, and
is incorporated herein by reference...............................
10(b.1) Amended and Restated Assignment between the Company and Draxis Health
Inc., dated April 16, 1999........................................
10(c) Employment Agreement of D. Geoffrey Shulman, MD, FRCPC
dated October 1, 1991, filed as Exhibit 10.4 to the Registrant's
Registration Statement on Form S-1, No. 33-43282, and is
incorporated herein by reference..................................
10(d) Amendment to Employment Agreement of D. Geoffrey Shulman, MD, FRCPC dated
April 14, 1994, filed as Exhibit 10.4 to the Registrant's
Registration Statement on Form S-2, No. 33-98030, and is
incorporated hereby by reference..................................
10(e) Amended and Restated License Agreement between the Company and PARTEQ
dated March 11, 1998, filed as Exhibit 10(e) to Registrant's Form
10-K/A on June 18, 1999 and is incorporated herein by reference,
portions of Exhibit A have been omitted pursuant to a request for
confidential treatment pursuant to Rule 24b of the Securities
Exchange Act of 1934 and Rule 406 of the Securities Act of 1933...
87
10(f) Incentive Stock Option Plan, filed as Exhibit 10.11 of Registrant's
Registration Statement on Form S-1, No. 33-43282, and is
incorporated herein by reference..................................
10(g) 1994 Restricted Stock Option Plan, filed as Exhibit 1 to Registrant's
Schedule 14A definitive Proxy Statement dated April 26, 1995, and
is incorporated herein by reference...............................
10(h) 1996 Omnibus Plan, as amended, filed as Exhibit 1 to Registrant's
Schedule 14A definitive Proxy Statement dated April 27, 1998, and
is incorporated herein by reference...............................
10(i) Purchase and Supply Agreement between the Company and National Biological
Corporation dated November 5, 1998, filed as Exhibit 10(i) to
Registrant's Form 10-K/A on June 18, 1999 and is incorporated
herein by reference,portions of which have been omitted pursuant
to a request for confidential treatment pursuant to Rule 24b of
the Securities Exchange Act of 1934 and Rule 406 of the Securities
Act of 1933.......................................................
10(j) Marketing Development and Supply Agreement between the Company and
Schering AG dated November 22, 1999, filed as Exhibit 10.1 to the
Registrant's Current Report on Form 8-K dated November 22, 1999,
and incorporated herein by reference, portions of which have been
omitted pursuant to a request for confidential treatment pursuant
to Rule 24b-2 of the Securities Exchange Act of 1934..............
10(k) Common Stock Purchase Agreement between the Company and Schering Berlin
Venture Corporation dated as of November 22, 1999, filed as
Exhibit 10.2 to the Registrant's Current Report on Form 8-K dated
November 22, 1999, and incorporated herein by reference, portions
of which have been omitted pursuant to a request for confidential
treatment pursuant to Rule 24b of the Securities Exchange Act of
1934..............................................................
10(l) Light Source Agreement between the Company and Schering AG dated as of
November 22, 1999, filed as Exhibit 10.3 to the Registrant's
Current Report on Form 8-K dated November 22, 1999, and
incorporated herein by reference, portions of which have been
omitted pursuant to a request for confidential treatment pursuant
to Rule 24b of the Securities Exchange Act of 1934................
10(m) Guaranty dated as of November 22, 1999 by Schering AG in favor of the
Company, filed as Exhibit 10.4 to the Registrant's Current Report
on Form 8-K dated November 22, 1999, and incorporated herein by
reference, portions of which have been omitted pursuant to a
request for confidential treatment pursuant to Rule 24b of the
Securities Exchange Act of 1934...................................
10(n) Secured Line of Credit Promissory Note dated November 22, 1999 with the
Company as payee and Schering AG as Holder filed as Exhibit 10.5
to the Registrant's Current Report on Form 8-K dated November 22,
1999, and incorporated herein by reference, portions of which
88
have been omitted pursuant to a request for confidential treatment
pursuant to Rule 24b of the Securities Exchange Act of 1934.......
10(o) Security Agreement dated as of November 22, 1999 between the Company and
Schering AG filed as Exhibit 10.6 to the Registrant's Current
Report on Form 8-K dated November 22, 1999, and incorporated
herein by reference portions of which have been omitted pursuant
to a request for confidential treatment pursuant to Rule 24b of
the Securities Exchange Act of 1934...............................
10(p) Purchase and Supply Agreement between the Company and North Safety
Products, Inc. dated as of September 13, 1999, filed as Exhibit
10.1 to the Registrant's Current Report on Form 8-K dated October
13, 1999, and incorporated herein by reference portions of which
have been omitted pursuant to a request for confidential treatment
pursuant to Rule 24b of the Securities Exchange Act of 1934.......
10(q) Supply Agreement between the Company and Sochinaz S.A., dated December
24, 1993, portions of which have been omitted pursuant to a
request for confidential treatment pursuant to Rule 24b-2 of the
Securities Exchange Act of 1934...................................
10(q.1) First Amendment to Supply Agreement between the Company and Sochinaz
S.A. dated July 7, 1994...........................................
27 Financial Data Schedule for the Registrant's Form 10-K for the period
ending December 31, 1999..........................................
89
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
(Registrant) DUSA Pharmaceuticals, Inc.
--------------------------------------------------------
By (Signature and Title) /s/D. Geoffrey Shulman President
--------------------------------------------
Date: March 3, 2000
--------------
/s/D. Geoffrey Shulman Director, Chairman of the Board, President,
- ---------------------------- Chief Executive Officer, and Chief Financial
D. Geoffrey Shulman, MD, Officer (Principal Executive, Financial, and
FRCPC Accounting Officer) March 3, 2000
----------------------------
Date
/s/Ronald L. Carroll Executive Vice President, March 3, 2000
- ---------------------------- Chief Operating Officer ----------------------------
Ronald L. Carroll Date
/s/Stuart L. Marcus Senior Vice President of March 3, 2000
- ---------------------------- Scientific Affairs ----------------------------
Stuart L. Marcus, MD, PhD Date
/s/Scott L. Lundahl Vice President, Technology March 3, 2000
- ---------------------------- ----------------------------
Scott L. Lundahl Date
/s/Mark C. Carota Vice President, Operations March 3, 2000
- ---------------------------- ----------------------------
Mark C. Carota Date
/s/John H. Abeles Director March 3, 2000
- ---------------------------- ----------------------------
John H. Abeles Date
/s/James P. Doherty Director March 3, 2000
- ---------------------------- ----------------------------
James P. Doherty, BSc Date
/s/Jay M. Haft Director March 3, 2000
- ---------------------------- ----------------------------
Jay M. Haft, Esq. Date
/s/Richard C. Lufkin Director March 3, 2000
- ---------------------------- ----------------------------
Richard C. Lufkin Date
/s/Nanette W. Mantell Secretary March 3, 2000
- ---------------------------- ----------------------------
Nanette W. Mantell, Esq. Date