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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, 1997
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.)
181 University Avenue, Suite 1208
Toronto, Ontario, CANADA M5H 3M7
(Address of principal executive offices) (Zip Code)
Commission File Number: 0-19777
Registrant's telephone number, including area code: (416) 363-5059
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
March 10, 1998 was $140,249,265.
The number of shares of common stock outstanding of the registrant as
of March 10, 1998 was 9,365,950.
DOCUMENTS INCORPORATED BY REFERENCE
Documents incorporated by reference to this Report are:
(1) Annual Report to Shareholders for the year ended December 31,
1997
PART II, Item 5;
(2) Proxy Statement for the 1998 Annual Meeting of Shareholders
PART III, Items 10 through 13.
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PART I
This Annual Report on Form 10-K and certain written and oral statements
incorporated herein by reference of DUSA Pharmaceuticals, Inc. (referred to as
the "Company") 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 the Company's industry, management's beliefs and certain
assumptions made by the Company's 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 the Company operates. 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
"Factors Affecting Future Operating Results" on pages 15-16, as well as those
noted in the documents incorporated herein by reference. Unless required by law,
the Company undertakes 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 the Company files 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
The Company was incorporated on February 21, 1991, pursuant to the laws
of the State of New Jersey under the name Deprenyl USA, Inc. In May 1993, the
Company changed its name to DUSA Pharmaceuticals, Inc. The Company's principal
executive offices are currently located at, 181 University Avenue, Suite 1208,
Toronto, Ontario, Canada, M5H 3M7 (telephone: (416) 363-5059). On March 3, 1994,
the Company formed DUSA Pharmaceuticals New York, Inc., a wholly owned
subsidiary, to coordinate the research and development efforts of the Company.
In October 1997, the subsidiary relocated from its original site in Tarrytown to
larger facilities in Valhalla, New York. The Company has financed its
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 (the "Act").
The Company is a pharmaceutical company engaged primarily in the
development of photodynamic therapy ("PDT") and photodetection ("PD"), utilizing
Levulan(R), the Company's brand of 5-aminolevulinic acid ("ALA"), for various
medical indications. The Company is the developer and exclusive worldwide
licensee of certain technology relating to Levulan(R) PDT and PD. See
"Business - PARTEQ License Agreement" below. The Company also owns or is the
licensee of certain patents relating to methods for using pharmaceutical
formulations containing specified active ingredients, including Levulan(R)
for PDT and PD, and related processes and improvements.
In general, PDT is a two-step medical treatment involving the
application of a drug (termed a photosensitizer) that collects preferentially in
target tissue followed by the application of controlled light to the
photosensitized tissue. Energy from the light activates the photosensitizer,
which in PDT destroys or alters the sensitized cells and in PD makes the
sensitized cells fluoresce, or "glow". The appropriate
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combination of drug and light can affect target tissue with relatively minimal
damage to surrounding tissue.
Levulan(R) is unique among PDT/PD agents therapeutically used in that
it is a naturally occurring substance found in virtually all human cells.
Levulan(R) is also unique in that it is not itself a photosensitizer. After
delivery of Levulan(R) to target tissue, it is converted through a cell-based
process into the photosensitizer protoporphyrin IX ("PpIX"). PpIX is also found
in normal cells. Normally, this process is self-regulating, so that the
production of PpIX is limited and no photosensitivity is developed. However,
when additional Levulan(R) is supplied either topically or systemically, the
self-regulatory step is bypassed and PpIX accumulates. This effect is more
pronounced in rapidly growing diseased tissues (such as pre-cancerous and
cancerous lesions), conditions characterized by rapidly proliferating
inflammatory cells (such as acne) and in certain normally fast-growing tissues
(such as hair follicles and the lining of the uterus). Topically applied,
Levulan(R) also penetrates skin affected by certain diseases, such as actinic
keratoses (pre-cancerous skin lesions) ("AKs"), acne and psoriasis, more than it
penetrates the surrounding normal skin. These properties enable Levulan(R) PDT
to preferentially react with targeted cells as compared to surrounding cells.
During 1997, the Company completed its clinical trials for the use of
Levulan(R) PDT to treat multiple AKs and is preparing its New Drug Application
("NDA") for submission to the United States Food and Drug Administration
("FDA"). The Company also continued to advance its clinical program utilizing
Levulan(R) PDT and PD for several indications noted below under the section
entitled "Company's Products and Technology".
COMPANY'S PRODUCTS AND TECHNOLOGY
The Company follows a development strategy of focusing its resources on
selected, priority indications chosen for development based on clinical,
regulatory and marketing criteria set by the Company. Although Levulan(R) PDT
and PD has shown potential in numerous indications, the Company has focused
development primarily on the indications outlined below.
LEAD INDICATIONS
Actinic Keratoses (AKs). The Company's development program is most
advanced for the use of Levulan(R) PDT in the treatment of AKs. AKs are
superficial precancerous skin lesions usually appearing as rough, scaly patches
of skin with some underlying redness. If left untreated, it is estimated that up
to 10% of AKs develop, over time, into squamous cell carcinomas (a form of skin
cancer).
The Company has now completed two parallel Phase III clinical trials
using Levulan(R) PDT for treatment of pre-cancerous AKs of the face and scalp.
The Phase III trials, at a total of 16 sites across the U.S., involved over 240
patients, each with between 4 and 15 AKs. All patients received either 20%
Levulan(R) topical solution, or a placebo vehicle, plus blue light. With the
Phase III now complete, the Company is in the process of preparing its first
NDA. The Company now expects that its NDA will be completed and filed during the
second quarter of 1998. The Company's filing has been somewhat delayed due to
the Company's dependence upon certain third-parties for completion of the GMP
lots required for the manufacturing section of the NDA. See "Business -
Manufacturing" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
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Photodetection of Bladder Cancer. The Company is also developing a
process for detecting bladder cancer using Levulan(R). 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 upon exposure to certain
wavelengths of light, allowing the identification of malignant and precancerous
lesions, including lesions which were missed by routine visual examination. The
ALA PD as used by these investigators, improved detection of bladder cancer by
up to 20% during cytoscopies by urologists, compared to standard white light
examination.
In May 1997, the Company signed an agreement with Richard Wolf Medical
Instruments Corp., to collaborate on the development of the Company's process of
detecting bladder cancer with Levulan(R). Subsequently, the Company filed an
Investigational New Drug ("IND") application to the FDA, and in November 1997,
initiated a Phase I/II multi-center clinical trial using Levulan(R) PD for
bladder cancer. The seven-center study, involving 60 patients, is designed to
assess the ability of Levulan(R) PD to detect bladder cancer in high-risk
patients compared to current methods of detection. The trial is expected to be
completed in 1998. See "Business - Light Technology and Devices."
SECONDARY INDICATIONS
Hair Removal. In an independent pilot study performed by researchers
from Massachusetts General Hospital-Harvard Medical School using a Levulan(R)
formulation supplied by the Company and a laser light source, researchers
achieved hair removal in 12 subjects who were followed for up to six months. In
January 1996, the Company entered into a research agreement with this
institution to support its ongoing studies. In March 1997, the Company initiated
a Phase I/II multicenter clinical study examining the ability of Levulan(R) and
a proprietary non-laser light source to permanently remove human hair. This
trial is expected to be completed in 1998.
Endometrial Ablation. On April 23, 1992, the Company entered into a
research agreement with Queen's University at Kingston, Ontario, which focused
on the development of Levulan(R) PDT as a method of non-surgical endometrial
ablation. Independent experimental application of ALA in test models has shown
selective PpIX accumulation by the endometrium (the inner lining of the uterus,
which is the site of the bleeding), which was then selectively removed (ablated)
by light exposure, sparing muscle tissue and the remainder of the uterus. Since
then, the Company has supported research by independent investigators using
Levulan(R) in human studies at centers in the United Kingdom and the United
States which showed a high degree of selectivity by endometrial tissue with no
evidence of toxicity. The Company is planning to support a pilot human trial for
treatment of endometrial ablation. The development and production of acceptable
light devices units took longer than expected, and this trial is now expected to
commence during 1998. During 1997, the Company also entered into a license
agreement to develop and market an incoherent or non-laser light source for
possible use in this indication or others. See "Business - Light Technology and
Devices."
Acne. Based on pre-existing knowledge about ALA activity in sebaceous
(oil) glands, the Company carried out a small fluorescence study in acne
patients in 1994. The preliminary results showed specific localization and
conversion of ALA to PpIX in the acne lesions, which may indicate that acne
could be successfully treated with Levulan(R) PDT. A Company sponsored Phase
I/II human clinical trial, started in 1995, confirmed the selective accumulation
of PpIX in acne lesions following Levulan(R) application in eight patients. In
1996, the Company carried out a Phase I/II dose-ranging clinical trial using
topical Levulan(R) and a proprietary non-laser red light. The study was designed
primarily to test
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safety, and to help guide the development of Phase II clinical trial design, and
was therefore not statistically sized to demonstrate efficacy. However the
clinical response was encouraging at certain doses, the treatments were well
tolerated, and no adverse events were reported. Due to the Company's focus on
its lead indications during 1997, the next acne study was deferred until 1998.
The Company is now working on a new protocol incorporating multiple treatments
using a non-laser blue light source in preparation for a new Phase I/II clinical
trial scheduled to begin this year.
EXPLORATORY INDICATIONS
Since there are numerous other potential therapeutic and cancer
detection uses for Levulan(R) PDT/PD, the Company supports research in these
areas, as appropriate, with pilot trials, and investigator-sponsored studies,
based on clinical, regulatory and marketing criteria predetermined by the
Company through the strategic planning process. Some of these uses include
topical Levulan(R) for treatment of skin cancers (basal cell carcinoma, squamous
cell carcinomas, and cutaneous T-cell lymphomas), psoriasis, onychomycosis and
genital warts; and systemic Levulan(R) for detection and or treatment of
gastro-intestinal tumors, oral cavity cancer, and prevention of restenosis.
In March 1997, results from a Company supported, investigator-sponsored
study examining the selectivity of Levulan(R) for photodynamic therapy of
cervical intraepitheleal neoplasia (CIN) were presented at the meeting of the
American Society for Gynecological Oncology. The study showed, confirmed by
pathology, that Levulan(R), after 1.5 hours of topical application, demonstrated
excellent selectivity for CIN tissue. CIN is a common disorder which is
identified in approximately 2-3% of all pap smears (cervical cytology
specimens). Although a number of methods of diagnosis and/or treatment are
available, or under development, they generally involve surgical removal of some
parts of the uterine cervix with possible complications such as bleeding, pain,
and infertility. The Company continues to support investigator-sponsored studies
in this area.
In December, 1997, the Company entered an agreement to supply
Levulan(R) to an Illinois firm for feasibility studies involving the
photodetection and diagnosis of cervico-vaginal diseases and pap smear
alternatives technologies. The parties will develop protocols for the studies
which will be concluded by the end of 1998. Should the feasibility studies be
positive, the parties intend to negotiate a joint development agreement for
potential new gynecological products.
The Company also monitors independent research on ALA PDT, in order to
identify new indications for potential development. Encouraging results from
human studies were presented at a number of scientific meetings on the use of
ALA PDT for diagnosis or treatment of lung cancer, brain cancer, oral cancer,
among other cancers. The Company will continue to monitor the progress of these
studies and may sponsor investigations which have potential to become DUSA
products.
The Company also actively evaluates and pursues licensing opportunities
and patent strategies for potential new compounds, light sources and devices, or
improvements to existing Levulan(R) PDT/PD methods and technologies. See
"Business - Light Technology and Devices."
LIPOMELANIN
In August 1993, the Company entered into a worldwide license agreement
with researchers from the University of Toronto for a new group of melanins.
Melanin is a naturally occurring pigment, which may aid in reflecting and
absorbing solar radiation in human skin. A United States compound patent
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issued in July, 1997. These new compounds, which the Company calls Lipomelanins,
chemically bind to the skin and do not wash off easily for extended periods of
time. Research indicates that Lipomelanins may be useful as UVA sunscreen agents
and for certain cosmetic and industrial purposes. A synthetic melanin
specifically designed for use as a black coloring agent for hair has been
developed with the assistance of a third-party manufacturer. Samples have been
supplied to a significant number of companies for testing. In order to maintain
its primary focus on Levulan(R) PDT, the Company is seeking corporate alliances
to develop these compounds as cosmetic or pharmaceutical products. The Company
does not anticipate significant sales of this product in the near future as
further testing and development of scaled-up and commercial size batches will
await the interest of a commercial partner. See Note 8f. to the Notes to the
Consolidated Financial Statements.
LIGHT TECHNOLOGY AND DEVICES
The light required for Levulan(R) PDT/PD activation may be produced by
a variety of sources. The Company has, from its inception, followed the strategy
that Levulan(R) PDT/PD should be developed as integrated drug and light device
systems, in which the light sources are tailored to fit specific medical needs;
be easy to use; and provide cost-effective therapy. Where feasible, the Company
is using non-laser light sources, which appear to be more reliable, and
inexpensive, compared to lasers. See "Business Manufacturing." The Company's
commercial device development group has experience in the development and
regulatory approval process of devices for use in clinical PDT. Together with
the rest of the Company's Levulan(R) PDT/PD research and development team, the
device group has assisted with the design of, as well as assessment of new light
delivery and light measurement devices and technologies. See "Business - Other
Relationships: Consultants."
As mentioned above, the Company signed an agreement in May 1997, with
Richard Wolf Medical Instruments Corp., ("Wolf"), for Wolf to supply at no cost
to the Company, proprietary non-laser light sources and cystoscopes, along with
technical and regulatory support, for the Company's Phase I/II clinical trials
for enhanced detection of bladder cancer. The Wolf light device is being
utilized in the current clinical trial. The Company also has 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.
In addition, the Company entered into a license agreement with a
British technology firm in April, 1997 to develop and market an incoherent or
non-laser light source for possible use in its endometrial ablation clinical
program. The license grants rights in territories on an exclusive and
non-exclusive basis. The Company paid an execution fee of (pound)10,000
($16,421) 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 agreement shall
remain in effect for twelve years, or until the last of the patent rights has
expired, subject to earlier termination for breach or insolvency. The Company is
working on a prototype device but does not anticipate sales of such devices in
the near future, as the device, once developed and tested in clinical trials,
would require FDA approval.
The longer the wavelength of visible light, the deeper into tissue it
penetrates. Short blue wavelengths penetrate only superficially but are potent
activators of Levulan(R) PDT/PD, whereas longer red wavelengths penetrate more
deeply into tissue (although they are not as potent as blue light) and are the
maximum wavelengths which activate Levulan(R) PDT. Therefore, for treatment of
superficial lesions of the skin (epidermal lesions) such as AKs and psoriasis,
the Company is using relatively inexpensive, 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
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millimeters into the skin, e.g. for most forms of cancer, high-powered red light
is preferable. The Company has U.S. and foreign patents and patent applications
relating to methods of using light devices and devices for use in Levulan(R)
PDT. See "Business - Patents and Trademarks."
In order to treat or detect diseases of certain internal organs, the
Company is utilizing existing technology to allow light from non-laser light
sources to be focused into a light guide small enough to be inserted into the
body. This light is "laser-like" in that it is powerful and can be transmitted
internally through a light guide, but is less costly than current lasers. Such
non-laser light sources are also easier to use and maintain. However, for
certain internal indications, and under certain conditions, laser light sources
will still be required.
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, (i) approval of manufacturing facilities, including
adherence to good manufacturing, laboratory and clinical practices (known as
"GMPs", "GLPs" and "GCPs", respectively) during production and storage; (ii)
controlled research and testing of products; (iii) a submission for governmental
review containing manufacturing, preclinical and clinical data in order to
obtain marketing approval based on establishing the safety and efficacy of the
product for each use sought; and (iv) control of marketing activities, including
advertising and labeling. The Company's AK PDT product has been tested in the
required number of clinical trials prior to submitting an NDA, however, the FDA
could request additional testing or data during its review process. The
Company's 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 assurance that the use of
Levulan(R) PDT for the treatment of AKs will be approved or that any future
products will be successfully developed, prove to be safe and effective in
clinical trials, or receive applicable regulatory marketing approvals. See
"Business - Factors Affection Future Operating Results" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Markets outside of the United States have similar restrictions.
The marketing of pharmaceutical products requires the approval of the
FDA in the United States, and comparable 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 the expenditure of substantial resources.
The steps required before such a product can be produced and marketed for human
use include preclinical studies, the filing of an IND application, human
clinical trials and the approval of an NDA in the United States.
Preclinical studies are conducted in the laboratory and on animals to
obtain preliminary information on a drug's efficacy and safety. The results of
these studies are submitted to the FDA as part of the IND application before
approval can be obtained for the commencement of testing on humans. These
preclinical studies may take from one to three years to perform.
The human clinical testing program involves three phases. In Phase I,
studies are usually conducted on 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. Phase II studies are
conducted on a small number of patients having a specific disease to determine
the most effective
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doses and schedules of administration. Phase II studies generally require from
several months to two years to complete. Phase III involves wide scale studies
on patients with the same disease in order to provide comparisons with currently
available therapies. Phase III studies generally require from six months to four
years to complete. The Company is currently conducting Phase I/II studies for
photodetection of bladder cancer and permanent hair removal. See "Business -
Company's Products and Technology." Data from Phase I, II and III trials are
submitted 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. For a
more specific description of the state of Company's development program, see
"Business--Company's Products and Technology" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Levulan(R) for use in PDT/PD is considered by the Company to be a new
chemical entity under the Food, Drug & Cosmetic Act ("FD&C Act") in the sense
that neither ALA, nor any ester or salt of ALA, has been the subject of an
approved NDA. For this reason and because only two similar PDT applications,
which were filed by a third party, have been approved by the FDA, the approval
process for Levulan(R) PDT may be longer than the approval process for a new
drug or device alone.
The Company's medical device products are also subject to the rules and
regulations established by the FDA. These products are required to be tested,
developed, manufactured and distributed in accordance with FDA regulations, such
as GMPs, GLPs and GCPs.
Under the FD&C 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. It is anticipated the Company's devices
may be classified as Class II or Class III medical devices and may, therefore,
be subject to the most stringent FDA regulation. There can be no assurance that
the classification, and extent of regulation, of the Company's medical devices
will not change.
At present, systems used in PDT/PD meet the definition of a drug/device
combination product. The primary 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 degree and extent of the regulatory
requirements for the various components of PDT have not been formally
established by the FDA. At present, the Company's PDT devices are being
investigated in preclinical and clinical trials under the Company's IND's. There
can be no assurance that PDT products will continue to be regulated as
combination products or that separate applications for marketing approval will
not be required for PDT devices.
The United States Drug Price Competition and Patent Term Restoration
Act of 1984 (the "Hatch/Waxman Act") permits restoration of up to five years of
the patent term for new products to compensate for patent term lost during the
regulatory review process. Additionally, under the Hatch/Waxman Act, new
chemical entities approved after September 24, 1984 receive a period of five
years' exclusivity from the date of NDA approval, during which time an
"abbreviated NDA" or "paper NDA" may not be submitted to the FDA by third
parties. Similarly, in the case of NDA's for non-new chemical entities approved
after September 24, 1984, no "abbreviated NDA" or "paper NDA" may become
effective before three years from approval of such non-new chemical entity NDA
which include data of new clinical investigations conducted or sponsored by the
applicant essential to approval of the application. The Company cannot predict
with accuracy whether or not an NDA filed by the Company will be approved for
any indication of Levulan(R) PDT/PD or whether any Company NDA will be the first
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NDA approved for ALA. The Company believes that since ALA has not been approved
for medical use, that the first NDA for ALA which is approved under the
Hatch/Waxman Act, will be entitled to the five years' exclusivity, as well as
any patent term extension that may be available.
Finally, any abbreviated or paper NDA applicant will be subject to the
provisions of the Hatch/Waxman Act with respect to notification of any patents
of the NDA holder and applicable to the abbreviated or paper NDA product. The
Hatch/Waxman Act may afford protection for certain of the Company's proprietary
rights; however, even if the Company obtains exclusivity from "abbreviated NDAs"
or "paper NDAs" under such act with respect to any of its products, such
exclusivity may increase the likelihood of generic competition and of challenges
to patents owned by or licensed to the Company which are listed in any Company
NDA.
The Company also intends to have its product marketed outside of the
United States primarily through corporate partnerships. Prior to marketing a
product in other countries, approval by that nation's regulatory authorities
must be obtained. The approval procedure varies from country to country. When
designing protocols for clinical studies, the Company intends to do so in a
manner that will permit acceptance of the data in the desired countries to
minimize unnecessary duplication. However, some countries may require additional
studies to be conducted on patients located in their country. With the signing
of the Drug Export Amendments Act of the United States in 1986, products not yet
approved in the United States may be exported, upon approval of an application
to export by the United States government, to certain foreign markets as long as
the product is approved by the importing nation. No assurance can be given that
the Company will be able to secure approval by the importing nations' regulatory
authorities or will be able to participate in the foreign pharmaceutical market.
See "Business Patents and Trademarks."
The time required to complete the government regulatory approval
process (i.e., the length of time required by the Company to complete the NDA
prior to filing, together with the FDA review process and any additional
development activities that may be required) will have a direct effect on
whether the Company will maintain its current funding levels for all of the
Levulan(R) PDT/PD indications which it is currently supporting. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
The Company's research and development activities involve the
controlled use of certain hazardous materials, such as mercury in fluorescent
tubes. The Company does not currently manufacture any products on its own;
however, the Company is subject to federal, state and local laws and regulations
governing the use, manufacture, storage, handling and disposal of such materials
and certain waste products. Although the Company believes that it is in
compliance in all material respects with applicable environmental laws and
regulations and currently does not expect to make material capital expenditures
for environmental control facilities in the near-term, there can be no assurance
that the Company will not be required to incur significant costs to comply with
environmental laws and regulations in the future, or any assurance that the
operations, business or assets of the Company will not be materially adversely
affected by current or future environmental laws or regulations. In addition,
although the Company believes that its safety procedures for the handling and
disposal of such materials comply with the standards prescribed by such laws and
regulations, the risk of accidental contamination or injury from these materials
cannot be completely eliminated. In the event of such an accident, the Company
could be held liable for any damages that result, and any such liability could
exceed the Company's resources.
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PARTEQ LICENSE AGREEMENT
The Company entered into the License Agreement effective August 27,
1991 with PARTEQ Research and Development Innovations (the licensing arm of
Queen's University, Kingston, Ontario) ("PARTEQ") and Draxis Health, Inc., the
Company's former parent ("Draxis"). Under the terms of the License Agreement,
the Company has been granted an exclusive worldwide license (with a right to
sublicense) to make, have made, use and sell products which are precursors of
PpIX, including ALA, under PARTEQ patent rights. The License Agreement covers
certain use patent rights. It also includes any improvements discovered,
developed or acquired by or for PARTEQ, or Queen's University, and in respect of
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 License 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.
In late 1997, the Company and PARTEQ agreed to revise the License
Agreement and on March 11, 1998 the parties signed an Amended and Restated
License Agreement (the "Amended and Restated License Agreement"). As partial
consideration for the amended terms, PARTEQ received options to purchase 85,000
shares of common stock of the Company at an exercise price of $10.875 per share
which will vest over four (4) years. The Company has agreed to pay royalties of
6% and 4% on 66% of its or its affiliates' net selling price of products in
countries where patent rights do and do not exist, respectively. The Company
also will pay 6% and 4% when patent rights do and do not exist, respectively, on
the Company's net selling price less cost of goods for products sold to
sublicensees. PARTEQ has reduced the amount of royalties which would have been
due from the Company on sub-license arrangements from 33% of royalties and
sublicensing fees received from sublicensees to 5% of lump sum sublicense fees
paid to the Company, such as milestone payments for important regulatory hurdles
(excluding amounts designated by the sublicense for future research and
development efforts), and 6% of royalty payments the Company receives on sales
of products by sublicensees. The Company has agreed to pay a minimum royalty of
CDN $100,000 on March 31, 1998. Under certain conditions, additional minimum
royalty payments will be made during the term, in amounts up to CDN $1,100,000,
if the Company enters a sublicense arrangement for both the United States and
Europe encompassing substantially all dermatological indications. In addition,
PARTEQ has agreed to eliminate Draxis as a guarantor under the Amended and
Restated License Agreement. Should no United States patent subsist, whether by
virtue of expiry, invalidation or rejection, the Agreement becomes perpetual and
royalty-free. Commencing with the first year of health regulatory approval in
the United States, provision is made for minimum royalty payments to PARTEQ. The
Company has the right to terminate the Amended and Restated License Agreement
with or without cause upon ninety days notice. The Agreement is effective
through the expiration date of the latest United States patent made subject to
the Agreement.
The Company, PARTEQ and Draxis entered into an agreement (the "ALA
Assignment Agreement") effective October 7, 1991, whereby the Company assigned
to Draxis its rights and obligations under the Original License Agreement
insofar as they relate to Canada. In addition, the Company has agreed to
disclose to Draxis on an ongoing basis, any technology relating to the subject
matter of the License Agreement which would assist Draxis in developing the
Canadian market under the assigned rights and which is available to the Company.
In consideration of the assignment, Draxis paid directly to PARTEQ or reimbursed
the Company for five percent of certain lump sums payable under the License
Agreement (i.e., CDN $15,000). Draxis is also responsible for royalties which
would otherwise be payable by the Company in accordance with the License
Agreement for net Canadian sales of products
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11
and sublicensing revenues. Draxis agreed to pay the Company a royalty of two
percent of net Canadian sales of products. PARTEQ and the Company intend to
revise the ALA Assignment Agreement with Draxis to conform the terms of the
assignment to the Amended and Restated License Agreement.
PATENTS AND TRADEMARKS
The Company has rights to certain patents and patent applications that
relate to methods of using ALA and to compositions and apparatus for use in such
methods. The principal patents have expiration dates in 2009 and 2014. The
remaining patents have expiration dates ranging, variously, from 2009 to twenty
years from their respective filing dates. The Company actively seeks, when
appropriate, protection for its products and proprietary information by means of
United States and foreign patents, trademarks and contractual arrangements. In
addition, the Company relies on trade secrets and contractual arrangements to
protect certain of its proprietary information and products.
Under the Amended and Restated License Agreement the Company holds an
exclusive worldwide license to certain patent rights from Queen's University,
four (4) of which have issued in the U.S., one that has issued in New Zealand,
and two of which have issued in Australia. A Japanese patent application has
also been allowed and the registration fee has been paid. All U.S. patents
licensed from PARTEQ relating to ALA are method of treatment patents and as such
limit direct infringement to users for the indications covered by the claims, to
the extent permitted by law. Currently, applications are pending which would
cover certain compositions containing ALA, as well as ALA applicators. While the
Company has no reason to believe that any of the foregoing patent applications
will not issue, there can be no assurance that such patents will issue.
Notwithstanding the issuance of any patents based on the
above-identified patent applications, other manufacturers and other third
parties are free to develop methods of manufacturing and other uses of ALA and
to market ALA for such uses, assuming that such parties have obtained
appropriate regulatory marketing approval. Certain forms of ALA are commercially
available chemical products and ALA is not itself subject to patent protection.
Subject to any other protection that may be available to the Company with
respect to its proprietary technology, any third party would be free to use ALA
in the form now commercially available for any indication not covered by the
patents referred to above, assuming that such third party has obtained
appropriate approval. The Company is aware of one European company, which may be
conducting clinical trials in Europe using ALA PDT to treat dermatological
conditions and one European company working on bladder cancer diagnosis, as well
as one company having a United States patent that claims the transcutaneous
administration of a photosensitizer on target cells in the blood, which refers
to ALA. The Company does not have any issued patents in Europe or Canada, nor is
it eligible to obtain counterparts in these jurisdictions to its basic U.S.
patent covering certain methods for using ALA for PDT. If third parties were to
infringe any of the patents of Queen's University, it may not be practical or
economical for the Company to enforce its proprietary rights unless the size of
the market for ALA products justifies such action.
The Company is aware that a third party has been issued two United
States patents which claim methods for removing hair using, inter alia, "a
contaminant ... having a high [light] absorption..." In addition, this third
party stated in a prospectus that it has five patent applications pending to
extend the coverage of these issued patents. The third party also concludes that
its patents cover "any hair removal system that incorporates a light source in
conjunction with any substance that penetrates the hair duct." The Company has
reviewed the U.S. patents, their foreign counterparts and the prior art cited
therein to determine the impact, if any, that they could have on any commercial
use of ALA for hair removal. Since
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ALA was reported, more than one year prior to the earliest effective filing date
of the third party, by an employee and assignor to Queen's University, to cause
hair loss in mammalian skin following administration and light irradiation, the
Company believes that, in fact, the Queen's University employee was the first
individual to report that ALA PDT resulted in hair removal. Conversely, if the
third party's conclusion is correct, and if the Company's belief is incorrect,
then prior to commercialization of ALA PDT for hair removal the Company could
either seek a license of the relevant patents or seek other solutions to avoid
potential infringement.
There can be no assurance that the Company will be free of claims by a
third party of infringement of such third party's proprietary rights. There can
be no assurance that a license, if necessary, would be available to the Company
on commercially reasonable terms or that such third party would not assert a
claim for infringement. If such a third party were to assert a claim for
infringement, there can be no assurance that the Company would prevail or that
such litigation would not have a material adverse effect on the Company.
Furthermore, the Company may not be able to afford the expense of defending
itself against such a claim. In addition, no assurance can be given that such
challenges or claims will not be asserted in the future.
Although there is a statutory presumption as to a patent's validity,
the issuance of a patent is not conclusive as to such validity, or as to the
enforceable scope of the claims of the patent. There is no assurance that the
patents owned and licensed by the Company or any future patents will prevent
other companies from developing similar or functionally equivalent products.
Furthermore, there is no assurance that any of the Company's future products or
methods will be patentable or that the products or methods will not infringe
upon the patents of third parties. In conjunction with PARTEQ, the Company
requested that the United States Patent and Trademark Office (PTO) reexamine two
of the four PARTEQ patents in order to cite additional references not considered
by the PTO during the original prosecution. As to one of the patents, the PTO
decided no reexamination was necessary. The reexamination of the other patent
was concluded in 1997 with no amendments made to the claims. The Company will
continue to strengthen its patent position whenever feasible.
Even in the absence of composition of matter patent protection for ALA,
commercial benefits to the Company of ALA may continue to be derived from: (i)
patents relating to the use of such product (like PARTEQ's patents); (ii)
patents relating to special compositions and formulations; and (iii) 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 FD&C Act, or similar laws and
regulations in other countries.
The Company intends to seek registration of trademarks in the United
States, and other countries where it may market its product when it is
sufficiently close to commercialization so that appropriate brand names may be
selected in light of the circumstances then existing. To date, two trademark
registrations have been issued to the Company, and other applications are
pending.
OTHER RELATIONSHIPS
The Company has entered into various agreements in the ordinary course
of business, described in general below, in order to implement its research and
development program and to investigate potential
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new uses for Levulan(R) PDT. Progress of the Company's research and development
program could be delayed if the terms of the agreements are not fulfilled by
third parties.
Consultants. The Company maintains 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. The Company
pays retainer fees to Guidelines at a rate of $360,000 per year. Also, the
Company pays additional consulting fees to Guidelines if consulting services to
the Company exceed 2,600 hours annually. Guidelines has been granted options to
purchase up to 20,000 shares of the Company's Common Stock. If for any reason
these services are terminated, the Company believes that it could contract with
other firms to perform the services provided by Guidelines. However, there is no
guarantee that the Company could replace Guidelines without causing a delay to
the Company's clinical programs and without an increase in costs.
The Company has a consulting agreement with Lumenetics, Inc.
("Lumenetics") for services relating to light device technology and development.
For the twelve months ending March 31, 1998 the Company will have paid $372,500
in fees. During 1977 the Company granted to Lumenetics options to purchase
100,000 shares of the Common Stock of the Company at $6.125 per share as partial
consideration for a revised Consulting and Development Agreement dated October
14, 1997. Lumenetics relinquished royalty interests in devices it developed for
the benefit of the Company. Recently, Lumenetics and the Company have agreed
that the employees of Lumenetics will become employees of the Company and the
consulting relationship will terminate. The Company intends to purchase for
approximately $100,000 the assets of Lumenetics which Lumenetics utilized in
order to service the Company. In addition, the Company will lease facilities in
New England for its new employees. The Company expects that its device and
operations group will expand once this transaction is completed. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Unrestricted Grants. The Company has awarded unrestricted grants to
various investigators in the field of Levulan(R) PDT in certain areas of
interest to the Company. 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. The Company has 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
MANUFACTURING
The Company has identified several potential suppliers of ALA, and has
entered an agreement for bulk supply of ALA with a single source. The supplier
has represented to the Company that its facilities conform to "good
manufacturing and laboratory practices" and other applicable distribution, and
quality control procedures set out in the FDA's current regulations. Should any
subcontractor delay supply or fail to meet the relevant FDA regulations,
commercial product and clinical program would be adversely affected.
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The Company subcontracts the manufacturing and packaging of its
clinical Levulan(R) formulations. The Company does not intend at this time to
manufacture commercial supplies of Levulan(R) for the AK indication should it be
approved. In preparation for FDA approval, the Company is currently working with
a third-party manufacturer which has produced commercial quantities of
Levulan(R) applicators at its Illinois facilities. However the manufacturer has
recently consolidated its operations into its Rhode Island facility, and
commercial size batches must be repeated at this facility prior to submission of
the Company's AK NDA. The Company and the manufacturer have agreed to enter into
a commercial supply agreement. The Rhode Island facility will be inspected by
the FDA and the facility must meet all GMP requirements under FDA's current
regulations.
The Company has entered into agreements with two companies for the
manufacture of light sources to be used in the Company's Levulan(R) PDT
development program. In 1995, the Company entered into a co-development
agreement with National Biological Corporation ("NBC") to develop light devices
for use in PDT. NBC has the exclusive right to manufacture a sufficient supply
of these light sources to meet all of the Company's requirements for clinical
and/or commercial distribution. This light device has been used in the
Levulan(R) PDT AK clinical trials. The Company and NBC have agreed to enter into
a supply agreement for commercial supplies of the light device. In June 1993,
the Company entered into an agreement with Sciencetech Inc. to develop light
sources for use in PDT. Under this agreement, the Company has the option to
manufacture products developed under the agreement. See Note 8(e) to the Notes
to the Consolidated Financial Statements. Also see "Business - Light Technology
and Devices."
MARKETING AND SALES
Currently, the Company does not have the capacity to market, sell and
distribute Levulan(R) PDT products on its own. The Company is seeking joint
venture or other collaborative arrangements with third parties related to
specific disease indications or medical specialties such as AK, Lipomelanin
and/or gynecological indications as described above. The Company expects that
appropriate candidates will have experience in the targeted specialty market,
expertise in reimbursement for the therapy, and marketing, sales and
distribution channels for drugs and/or devices. Alternatively, the Company may
choose to market certain products on its own. At present, the Company is
pursuing certain pre-marketing activity in the U.S. and Europe to test patient
and physician acceptance of product concepts. As the products proceed through
the development program, the Company will continue to carry out certain
pre-marketing activities, and evaluate its marketing strategies as permitted by
FDA regulations.
The Company has negotiated a marketing and development agreement, in
principle, with a multi-national pharmaceutical company which will market the
Company's treatment for AK's worldwide, (excluding Canada), as well as other
dermatology products to be developed by the parties. The Company will receive an
initial license fee upon the signing of a definitive agreement. Additional
milestone payments will be made to the Company upon acceptance of the Company's
first dermatology NDA by the FDA, and upon FDA approval to market its first
dermatologic indication. The Company will receive transfer fees, royalties based
upon revenues and will be reimbursed for certain research and development
expenses relating to dermatology indications. Additional milestone payments will
be received upon the United States approval of each of the first three
additional indications. The companies are currently negotiating a definitive
agreement, although there can be no guarantee that such agreement will be
successfully concluded. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Draxis has been granted the rights to market Levulan(R) PDT in Canada.
See "Business - PARTEQ
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License Agreement."
COMPETITION
Commercial development of PDT agents are currently being pursued by a
number of companies, including: QLT Photo Therapeutics Inc. (Canada); Miravant,
Inc. (U.S.); Pharmacyclics, Inc. (U.S.); Nippon Petrochemicals (Japan); Scotia
Pharmaceuticals (United Kingdom); Glaxo Wellcome plc; medac GmbH
(Germany)("Medac"); and Photocure (Norway). Photocure may be working at Phase
I/II equivalent trials using ALA PDT for dermatological uses, including for
certain indications being pursued by the Company. The Company is aware that
Medac is developing ALA PDT for bladder cancer diagnosis in Germany and may
receive regulatory approval in Germany prior to the Company receiving approval
from the FDA. The Company believes that its U.S. patents would be infringed if
Medac sold its product in the United States or Japan. See "Business--Patents and
Trademarks."
The Company is also aware from published reports that an Israeli firm,
ESC Medical Systems Ltd., ("ESC")has entered 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 DUSA believes that the PARTEQ patents would be infringed if the ESC
products were made, used or sold in the United States. However, these ESC
products, if approved by health regulatory authorities outside of the United
States or other countries covered by PARTEQ patents, could compete with certain
of the Company's products.
The Company's position as a competitor in this field may be adversely
affected by product developments in PDT, which may be achieved by these or by
other companies. Many of these companies have substantially greater financial
and technical resources and production and marketing capabilities than the
Company. In addition, certain of these companies have had significantly greater
experience in undertaking preclinical testing and human clinical trials of new
or improved pharmaceutical products and obtaining approval of the FDA, or other
regulatory authorities to market products for health care. Accordingly, the
Company's competitors may succeed in developing products that are safer or more
effective than those of the Company and in obtaining regulatory marketing
approval of such products. If the Company commences commercial sales of
products, it will also be competing with respect to marketing capabilities and
manufacturing efficiency.
The indications under development represent markets in which large
numbers of patients are treated and for which, in the Company's view, the
available standard of care may be improved. For example, the current preferred
methods of treating AKs are 5-FU for multiple lesions, and cryotherapy using
liquid nitrogen for limited numbers of lesions. Although both methods are
effective, 5-FU can be irritating and often requires administration for a number
of consecutive weeks, while cryotherapy is non-selective, is usually painful at
the site of freezing and may cause blistering. However, these treatment
modalities for AKs involve procedures which have been proven safe and effective
and enjoy patient as well as practitioner acceptance and confidence. This may
slow the acceptance and adoption of ALA PDT.
The Company believes that comparisons of the properties of various
photosensitizing PDT drugs will also provide important competitive issues. These
properties include formulations available and ease of administration, degree of
generalized skin photosensitivity, required doses, the selectivity of the
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photosensitizer for the target lesion or tissue of interest, and the type and
cost of 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 the Company's products uncompetitive or obsolete.
PRODUCT LIABILITY AND INSURANCE
The Company is subject to the inherent business risk of product
liability claims in the event that the use of its 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. The
Company maintains product liability insurance for coverage of its clinical trial
activities. The Company intends to obtain coverage for commercial supplies when
products are expected to enter the marketplace. 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
The Company has thirteen full-time employees. The Company has
employment agreements with its President and Vice President of Scientific
Affairs. The Company has purchased key man life insurance, having a face value
of CDN. $1,000,000, on Dr. Shulman's life, for which the Company is the named
beneficiary. The Company has also retained numerous independent consultants such
as Guidelines and the services of key researchers at leading university centers
whose activities are coordinated by the Company's employees. The Company is
conducting a search for a permanent CFO. Other employees and consultants will be
hired by the Company as needed. See "Business - Other Relationships:
Consultants."
The Company had entered into the Draxis Management Agreement pursuant
to which Draxis provided to the Company administrative, financial, scientific
and marketing support and other management services which that were required.
The Company terminated the Management Agreement effective of February 1, 1997.
The Company continues to contract with outside firms and individuals for
services required at this early stage in an effort to maintain overhead expense
at a minimum. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
FACTORS AFFECTING FUTURE OPERATING RESULTS
The provisions of the Private Securities Litigation Reform Act of 1995
(the "PSLRA"), which became law in late December 1995, provide companies with a
"safe harbor" when making forward-looking statements. This "safe harbor"
encourages companies to provide prospective information about their companies
without fear of litigation. The Company wishes to take advantage of the new
"safe harbor" provisions of the PSLRA and is including this section in its
Annual Report on Form 10-K in order to do so. Statements that are not historical
facts, including statements about management's expectations for fiscal year 1998
and beyond, are forward-looking statements and involve various risks and
uncertainties. Factors that could cause the Company's actual results to differ
materially from managements' estimates and expectations include, but are not
limited to, the following:
a) FDA regulatory approval of its Levulan(R) PDT product for AK
and other indications.
b) Reliance on third-parties for manufacturing and marketing of
its drug and light device products.
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c) Changing market conditions and the potential impact of
competitive products and their pricing.
d) Sufficiency of the Company's cash flow and capital funds for
existing operations during the FDA's review of its AK NDA.
e) Results of on-going clinical trials.
f) Timing of development of necessary light sources and devices.
g) Patent status.
h) Entry into a definitive marketing and development agreement
with a major pharmaceutical company.
ITEM 2. PROPERTIES
In November 1996, the Company signed a three-year lease for its new
executive office premises located in Toronto, Ontario, Canada, comprising 1,950
square feet of space. The Company's wholly owned subsidiary, DUSA
Pharmaceuticals New York, Inc., relocated from Tarrytown, New York, to larger
facilities in Valhalla, New York in October 1997 under the terms of a new
five-year lease. Lease payments for 1997 totaled $111,906 and future minimum
lease payments will total approximately $170,000 in 1998, $179,000 in 1999, and
$183,000 in 2000. The Company anticipates that its New York and Toronto, Canada
office facilities will be sufficient during the near future, but would be
modified as required. The Company expects to lease facilities in New England for
the technology employees who were formerly employed by Lumenetics and additional
technology and operations employees expected to be hired in the near future. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any pending legal proceedings and no such
proceedings are known to be contemplated.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The information required by Item 5 is hereby incorporated by reference
from the section entitled "Shareholder Information" of the Registrant's Annual
Report to Shareholders for the year ended December 31, 1997.
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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, 1997, 1996,
1995, 1994, and 1993, and for the cumulative period from February 21, 1991 (date
of incorporation) to December 31, 1997 have been derived from the Company's
audited financial statements.
CONSOLIDATED STATEMENT OF OPERATING DATA
- ------------------------------------------------------------------------------------------------------------------------------
Cumulative
period from
February 21,
1991 (date of
incorporation
to December
Year ended December 31, 31,
- ------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993 1997
- ------------------------------------------------------------------------------------------------------------------------------
Revenue $ 893,147 $ 1,073,006 $ 572,742 $ 305,891 $ 1,420,282 $ 5,185,713
- ------------------------------------------------------------------------------------------------------------------------------
Research and development
costs 6,252,830 5,652,442 3,044,979 2,759,254 2,671,302 22,065,600
- ------------------------------------------------------------------------------------------------------------------------------
Other operating expenses 1,760,409 2,220,883 1,175,296 1,149,361 997,441 7,883,964
- ------------------------------------------------------------------------------------------------------------------------------
Net loss (7,120,092) (6,800,319) (3,647,533) (3,539,892) (2,248,461) (24,701,019)
- ------------------------------------------------------------------------------------------------------------------------------
Basic and diluted net loss per
common share $ (0.76) $ (0.75) $ (0.65) $ (0.66) $ (0.44) $ (4.10)
- ------------------------------------------------------------------------------------------------------------------------------
Weighted average number of
shares out standing 9,358,038 9,087,823 5,589,486 5,395,349 5,096,458 6,029,909
- ------------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEET DATA
- ----------------------------------------------------------------------------------------------------------
As of December 31,
- ----------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------
Total Assets $13,081,248 $20,129,257 $20,827,578 $10,563,779 $13,754,195
- ----------------------------------------------------------------------------------------------------------
Cash and investment securities 12,767,142 19,719,496 20,479,592 10,198,329 13,298,715
- ----------------------------------------------------------------------------------------------------------
Shareholders' equity 12,019,351 19,101,790 20,219,240 10,132,850 13,364,557
- ----------------------------------------------------------------------------------------------------------
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The financial information included herein should be read in conjunction
with the Company's Consolidated Financial Statements and Notes to the
Consolidated Financial Statements contained therein.
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GENERAL
The Company is a development-stage pharmaceutical company engaged
primarily in the development of proprietary methods of photodynamic therapy
(PDT) and photodetection (PD) utilizing Levulan(R). The Company has completed
two parallel Phase III clinical trials using Levulan(R) PDT for treatment of
pre-cancerous AKs, and is in the process of compiling the NDA to be filed with
the FDA. The Company's filing has been delayed as a result of the consolidation
of its third-party manufacturer's facilities. While commercial quantities of
Levulan(R) were produced in one facility, new batches are being made at the new
facility prior to the submission of the Company's NDA. The manufacturer's
facility will be inspected by the FDA and the facility must meet all GMP
requirements under FDA's current regulations. The Company now expects to file
its NDA during the second quarter of 1998 based upon the third-party's ability
to validate its new facility and produce the Company's required GMP batches.
Various other indications are at exploratory, Phase I or Phase II stage. See
"Business - Company's Products and Technology; - Manufacturing." Since its
inception, the Company has primarily devoted its resources to funding research
and development and as a result the Company has experienced significant
operating losses. As of December 31, 1997, the Company had an accumulated
deficit of $24,701,019.
The Company's transition from a development-stage company to a
profitable operating company is dependent upon the filing of its AK NDA and
subsequent marketing approval by the FDA. Although the Company believes its
clinical trials support the product's safety and efficacy, there can be no
assurance that the product will be approved by the FDA. Additionally, the
Company intends to rely on third-parties to market Levulan(R) PDT for AK. There
can be no assurance that a successful market will develop.
The Company has negotiated a marketing and development agreement, in
principle, with a multi-national pharmaceutical company which will market the
Company's treatment for AK's worldwide, (excluding Canada), as well as other
dermatology products to be developed by the parties. The Company will receive an
initial license fee upon the signing of a definitive agreement. Additional
milestone payments will be made to the Company upon acceptance of the Company's
first dermatology NDA by the FDA, and upon FDA approval to market its first
dermatologic indication. The Company will receive transfer fees, royalties based
upon revenues and will be reimbursed for certain research and development
expenses relating to dermatology indications. Additional milestone payments will
be received upon the United States approval of each of the first three
additional indications. The companies are currently negotiating a definitive
agreement, although there can be no guarantee that such an agreement will be
successfully concluded.
Based upon the progress of the Company's research and development
program in the context of the current mergers and acquisition environment and in
order to protect the long term interest of the Company's shareholders, the
Company adopted a Shareholders Rights Plan, on September 26, 1997. See Note 6 to
the Company's Notes to the Consolidated Financial Statements. The Company's
management is not aware of any takeover activity involving the Company. In
addition, the Board of Directors adopted certain amendments to the Company's
By-laws and Certification of Incorporation which are consistent with the goals
of the Plan and which will be submitted to shareholders for approval at the
Company's next Annual Meeting of Shareholders.
In late 1997, the Company and PARTEQ agreed to revise the License
Agreement and on March 11, 1998 the parties signed the Amended and Restated
License Agreement. As partial consideration, PARTEQ received options to purchase
85,000 shares of common stock of the Company at an exercise price of $10.875 per
share which will vest over four (4) years. The Company has agreed to pay
royalties of 6% and 4% on 66% of its or its affiliates' net selling price of
products in countries where patent rights
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do and do not exist, respectively. The Company also will pay 6% and 4% when
patent rights do and do not exist, respectively, on the Company's net selling
price less cost of goods for products sold to sublicensees. PARTEQ has reduced
the amount of royalties which would have been due from the Company on
sub-license arrangements from 33% of royalties and sublicensing fees received
from sublicensees to 5% of lump sum sublicense fees paid to the Company, such as
milestone payments for important regulatory hurdles (excluding amounts
designated by the sublicense for future research and development efforts), and
6% of royalty payments the Company receives on sales of products by
sublicensees. The Company has agreed to pay a minimum royalty of CDN $100,000 on
March 31, 1998. Under certain conditions, additional minimum royalty payments
will be made during the term, in amounts up to CDN $1,100,000, if the Company
enters a sublicense arrangement for both the United States and Europe
encompassing substantially all dermatological indications. In addition, PARTEQ
has agreed to eliminate Draxis as a guarantor under the Amended and Restated
License Agreement. Should no United States patent subsist, whether by virtue of
expiry, invalidation or rejection, the Agreement becomes perpetual and
royalty-free. Commencing with the first year of health regulatory approval in
the United States, provision is made for minimum royalty payments to PARTEQ. The
Company has the right to terminate the Amended and Restated License Agreement,
with or without cause, upon ninety days notice. The Agreement is effective
through the expiration date of the latest United States patent made subject to
the Agreement.
PARTEQ and the Company have also agreed to amend the ALA Assignment
Agreement with Draxis dated October 7, 1991, so that the terms (which assign the
Canadian rights from PARTEQ to Draxis) will be consistent with the Amended and
Restated License Agreement. See Note 8a. to the Company's Notes to the
Consolidated Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its development stage operations primarily
from sales of securities in public offerings. In May, 1996 the Company completed
a public offering in which 750,000 shares of its Common Stock were sold at $7.20
per share, resulting in the Company receiving $4,762,938, which was net of
offering costs of $637,062. In December 1995, the Company had sold 3,000,000
shares of its Common Stock at $5.50 per share, and received $14,553,679, which
was net of offering costs of $1,946,321. $2,250,000 of the proceeds from the
December 1995 offering were used to repurchase options held by Draxis (see
below).
As of December 31, 1997, the Company's total assets, consisting
primarily of United States government securities available for sale, were
$13,081,248 as compared to $20,129,257 as of December 31, 1996. The Company's
United States government securities available for sale have an aggregate cost of
$8,760,498 and a current aggregate market value of $8,733,875 as of December 31,
1997, resulting in a net unrealized loss on securities available for sale of
$26,623 provision for which has been charged to shareholders' equity. At
December 31, 1996, the aggregate cost was $18,061,432 and had a market value of
$18,033,406 resulting in an unrealized loss of $28,026. The market value of the
Company's government securities fluctuates, with changes in interest rates in
the United States from the time these securities were acquired. Some losses
could be realized, depending upon the timing of the Company's need to convert
government securities into cash to meet its working capital requirements. The
Company's U.S. government securities currently have yields ranging from 4.73% to
6.31%, and maturity dates ranging from January 27, 1998 to August 10, 1999. As
of December 31, 1996 the Company's U.S. government securities had yields ranging
from 4.52% to 6.85% and maturity dates ranging from January 15, 1997 to August
10, 1999. The Company has invested its funds in liquid investments, so that it
will have ready
19
21
access to its cash reserves as needed for the funding of its development plan on
a short-term and long-term basis.
As of December 31, 1997, the Company had current liabilities of
$1,061,897 as compared to $1,027,467 as of December 31, 1996, an increase of
$34,430. Since its inception, the Company has had no long term debt, nor does it
have any plans to enter into any such financial arrangements.
Management is currently focusing its attention and its funds on
preparation of the AK NDA, clinical trials of its bladder cancer detection
indication and securing additional funds for the Company, preferably through a
strategic alliance, or other financing activity. See reference above under
"General" to marketing and development agreement. Full development and testing
of all potential indications which are currently under development would require
additional funding. The timing of the expenditures will be dependent on various
factors, including the filing of its AK NDA, progress of the Company's research
and development programs, the results of preclinical and clinical trials, the
timing of regulatory marketing approvals, competitive developments, payments
under any collaborative arrangements, if any, entered into by the Company and
the availability of alternate financing. There can be no assurance, however,
that such funds will be sufficient to enable the Company to obtain regulatory
marketing approval or to market any product for any indications currently under
development. Therefore, there is no way to predict the timing or magnitude of
the revenues from the marketing of the Company's product or whether any such
revenues will be realized. Consequently, in order to maintain continuing
research and development programs, it will be necessary to raise additional
funds through future corporate alliances, financings, or other sources.
If sufficient funds are available, the Company may also use its
resources to acquire by license, purchase or other arrangements, businesses,
technologies, or products that enhance or expand the Company's business. In
April 1997, the Company entered into a license agreement for exclusive and
non-exclusive territories to develop and market an incoherent or non-laser light
source for possible use in its endometrial ablation clinical program . See
"Business - Light Devices and Technology." The Company will be actively seeking
relationships with pharmaceutical or other suitable organizations to market the
Company's products and technologies, or provide funding for research projects.
The Company has thirteen full-time employees. The Company has
employment agreements with its President and Vice President of Scientific
Affairs. The Company has purchased key man life insurance, having a face value
of CDN. $1,000,000, on Dr. Shulman's life, for which the Company is the named
beneficiary. The Company has also retained numerous independent consultants such
as Guidelines and Lumenetics and the services of key researchers at leading
university centers whose activities are coordinated by the Company's employees.
The Company is conducting a search for a permanent CFO. Recently, Lumenetics and
the Company have agreed that the employees of Lumenetics will become employees
of the Company and the consulting relationship will terminate. See Note 8g. to
the Company's Notes to the Consolidated Financial Statements. The Company
intends to purchase for approximately $100,000 the assets of Lumenetics which
Lumenetics utilized in order to service the Company. In addition, the Company
will lease facilities in New England for its new employees. The Company expects
that its device and operations group will expand once this transaction is
completed. Other employees and consultants will be hired by the Company as
needed. See "Business - Other Relationships: Consultants."
The Company has not made and does not expect to make material capital
expenditures for environmental control facilities in the near-term. There can be
no assurance, however, that the Company will not be required to incur
significant costs to comply with environmental laws and regulations in the
future, or any assurance that the operations, business or assets of the Company
will not be materially
20
22
adversely affected by current or future environmental laws or regulations. See
"Business - Government Regulation."
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997 VERSUS YEAR ENDED DECEMBER 31, 1996
The Company has had no sales to date. At the current time, the
Company's most advanced clinical program in Levulan(R) PDT/PD is for actinic
keratoses (AKs). The Company has completed two parallel Phase III clinical
trials using Levulan(R) PDT for treatment of pre-cancerous AKs of the face and
scalp. With the Phase III now complete, the Company is in the process of
preparing its first NDA. The Company anticipates that the NDA will be filed with
the FDA during the second quarter of 1998, but the timing is dependent upon a
third-party who is not within the Company's control. Delays in this process
would delay potential FDA marketing approval and could have a significant impact
on the financial strength of the Company.
In March 1997, the Company initiated a Phase I/II multicenter clinical
study examining the use of Levulan(R) and a proprietary non-laser light source
for human hair removal. The trials are expected to be completed in 1998.
In May 1997, the Company signed an agreement with Richard Wolf Medical
Instruments Corp., to collaborate on the development of the Company's Levulan(R)
PD process for enhanced detection of bladder cancer. Under the agreement, Wolf
will provide, at no cost to the Company, proprietary non-laser light sources and
cystoscopes, along with technical and regulatory support, for the Company's
clinical trials for this indication. The Company and Wolf intend to co-operate
in the marketing of the Levulan(R) PD system for bladder cancer detection, once
the appropriate approval has been received from the FDA. The Company also has
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. In
November 1997, the Company commenced a multicenter Phase I/II clinical trial
Levulan(R) PD for bladder cancer in the U.S.
Also during the year the Company entered into a license agreement to
develop and market an incoherent or non-laser light source for possible use in
its endometrial ablation clinical program. The Company paid an execution fee of
(pound)10,000 ($16,421), and has agreed to pay royalties on sales ranging from
1.25% to 5%.
The Company has been developing plans for further clinical trials in
acne and hair removal. In addition, the Company continued its pilot work on
endometrial ablation, by supporting plans for a Phase I/II investigator IND
clinical trial. See "Business - Company's Products and Technology." See Note 8h.
to the Company's Notes to the Consolidated Financial Statements.
The time required to complete the government regulatory approval
process (i.e., the length of time required by the Company to complete the NDA
prior to filing, together with the FDA review process and any additional
development activities that may be required) will have a direct effect on
whether the Company will maintain its current funding levels for all of the
Levulan(R) PDT/PD indications which it is currently supporting. In order to
maintain the research and development program as now planned through 1998 and
beyond, the Company will need to raise additional funds. It may enter into joint
development or licensing arrangements, both domestically and internationally,
with pharmaceutical companies, in which it will seek to have an alliance partner
make upfront and/or milestone payments, and assume certain of the
21
23
costs of clinical testing and of obtaining regulatory marketing approval for the
products licensed. As stated above, the Company is currently engaged in serious
negotiations with a multi-national pharmaceutical company for such an
arrangement. However, there is no assurance at this time that a transaction will
be consummated. To the extent that the Company is unable to enter into such
arrangements, it will require separate funding to complete the regulatory
approval process for bladder cancer detection. There can be no assurance that
the Company will have sufficient funds to obtain approval of any product, that
any product will be successfully developed, proven to be safe and effective in
necessary pivotal clinical trials, or receive applicable regulatory marketing
approvals. Therefore, there is no way to predict the timing or magnitude of the
revenues from the marketing of the Company's product or whether any such
revenues will be realized. In the absence of additional funding in the first
half of 1998, the Company intends to allocate research and development funds
primarily to its bladder cancer photodetection trials but would likely delay
further development of other secondary indications.
Interest income, earned primarily on United States government
securities, decreased to $891,088 for the year ended December 31, 1997, as
compared to $1,074,902 for the year ended December 31, 1996, as the Company
continues to expend funds for ongoing research and development. Interest income,
the only significant source of income at the current time, is expected to
decline as funds are expended for research and development programs. Interest
income for the cumulative period from February 21, 1991 (date of incorporation)
to December 31, 1997 was $4,905,610.
Research and development costs for the year ended December 31, 1997
were $6,252,830 as compared to $5,652,442 for the year ended December 31, 1996,
an increase of 10.6%. The increase in costs reflects the completion of multiple
multi-center Phase III trials for AK, preparation for the filing of the AK NDA,
and preparation for a initiation of the bladder cancer PD Phase I/II trial.
Should the Company complete a strategic alliance in the near term, the Company
would utilize additional funds received to accelerate its clinical program.
Research and development costs could increase up to approximately 20% above 1997
expenditures. Should additional funds not be available, research and development
expenditures for 1998 would be significantly reduced from 1997 levels. Total
research and development costs for the cumulative period from February 21, 1991
(date of incorporation) to December 31, 1997 were $22,065,600. Costs and
development fees associated with agreements for research projects and clinical
studies commit the Company to make payments during 1998 of $1,611,441 and
$125,800 in 1999. See Note 8h. to the Company's Notes to the Consolidated
Financial Statements. See also "Business - Other Contractual Relationships."
Operating expenses were $1,760,409 for the year ended December 31,
1997, compared to $2,220,883 for the year ended December 31, 1996. In the year
ending December 31, 1996, the Company recorded a compensation expense of
$557,260, as result of extending the expiration period on stock options from
five years to ten years. See "Results of Operations - Year ended December 31,
1996 versus Year ended December 31, 1995." Net of the compensation costs in
1996, operating expenses continue to increase as a result of hiring of
additional personnel, investor relations expenditures, and activities related to
identifying and examining potential strategic alliances for its business.
Operating costs are expected to increase in the future as the Company continues
to add personnel, including additional executive officers in expectation of FDA
approval of its AK NDA.
The Company incurred a net loss of, $7,120,092, or $0.76 per share for
the year ended December 31, 1997, as compared to a net loss of $6,800,319, or
$0.75 per share, for the year ended December 31, 1996. Net losses for the
cumulative period from February 21, 1991 (date of incorporation) to December 31,
1997 were $24,701,019, or $4.10 per share. Such losses are consistent with the
Company's
22
24
expectations and the Company anticipates that losses will continue throughout
the development stage. The Company expects to incur additional operating losses,
as it continues to progress with its research and development program and
clinical trials, until it can develop sufficient revenues from sales of its
products to cover all costs and expenses. The Company's revenues to date have
been limited and substantially all of the Company's revenues have consisted of
interest income. To achieve profitable operations, the Company, alone or with
others, must successfully develop, manufacture and market proprietary products.
There is no way to accurately predict the timing or magnitude of revenues from
the marketing of Levulan(R) PDT for any indication or whether any revenues will
ever be realized.
YEAR 2000 COMPLIANCE. The financial impact to the Company of Year 2000
compliance has not been and is not anticipated to be material to the Company's
financial position or results of operations in any given year. The Company has
recently purchased and installed information systems, consisting of hardware and
software supplied by third parties, which are Year 2000 compliant. However,
because most computer systems are, by their very nature, interdependent, it is
possible that non-compliant third party computers could "reinfect" the Company's
computer systems. The Company could be adversely affected by the Year 2000
problem if it or unrelated parties fail to successfully address this problem.
The Company intends to develop a plan to communicate with the unrelated parties,
including its regulatory consultants with whom it deals, to coordinate Year 2000
compliance. The costs incurred in addressing Year 2000 compliance will be
expensed as incurred, in compliance with GAAP.
YEAR ENDED DECEMBER 31, 1996 VERSUS YEAR ENDED DECEMBER 31, 1995
Interest income of $1,074,902 for the year ended December 31, 1996,
earned primarily on United States government securities, increased from $579,092
for the year ended December 31, 1995, primarily due to the interest earned on
the net proceeds of the Company's stock offerings in December 1995, and May
1996.
Research and development costs for the year ended December 31, 1996
were $5,652,442 as compared to $3,044,979 for the year ended December 31, 1995,
an increase of 85%. The increase in costs reflects the completion of multiple
multi-center Phase II trials for AK, development of protocols for bladder
indication trials and preparation of Phase III clinical trials for AK.
Operating expenses were $2,220,883 for the year ended December 31,
1996, compared to $1,175,296 for the year ended December 31, 1995. Operating
expenses increased as a result of hiring of additional personnel, investor
relations expenditures, and activities related to identifying and examining
potential strategic alliances for its business. On February 16, 1996 the
Company's Board of Directors, subject to shareholder and regulatory approval,
extended the term of certain restricted stock options granted prior to August
1994 from five years to ten years. The action was taken to make these prior
grants comparable to terms of all the options granted under the Company's
existing 1996 Omnibus Plan. The excess of the market value of the Common Stock
over the exercise price of the options at the date of the extension of $557,260
has been recorded as an addition to Common Stock and the related compensation
expense has been recorded. This transaction did not have a cash impact on the
Company but increased the net loss for the year ended December 31, 1996 by
approximately $.06 per share.
The Company incurred a net loss of $6,800,319, or $0.75 per share, for
the year ended December 31, 1996, as compared to a net loss of $3,647,533, or
$.65 per share, for the year ended December 31, 1995.
23
25
Prior to the Company's public offering in December, 1995, Draxis owned
approximately 1 million shares of the Company's Common Stock and held options to
purchase 2 million shares of the Company at an exercise price of $9.00 per
share, expiring in September 2000. As previously reported, the Company
repurchased the options held by Draxis on December 21, 1995 at a price of $1.125
per option. In March, 1996, Draxis sold its remaining interest in the Company,
being approximately 1 million shares, in a secondary offering. Only one director
of the Company remains on the boards of directors of both Draxis and the
Company. For the remainder of 1996, the Company continued to utilize services of
several Draxis personnel under the terms of the Draxis Management Agreement
while the Company increased its own staff. The Company did not use any services
from Draxis after 1996 and the Draxis Management Agreement was terminated
effective February 1, 1997 as provided by the agreement.
During 1996, the Company filed for and obtained approval to be
de-listed from the Toronto Stock Exchange ("TSE"). The Company had concluded
that the volume of trading on the TSE, and the change in relationship with
Draxis did not justify the expense of being listed on the TSE.
YEAR ENDED DECEMBER 31, 1995 VERSUS YEAR ENDED DECEMBER 31, 1994
Interest income of $579,092 for the year ended December 31, 1995,
earned primarily on United States government securities, declined from $709,375
for the year ended December 31, 1994, as fewer funds were available for
investment prior to the consummation of the December 1995 offering.
Research and development costs for the year ended December 31, 1995
were $3,044,979, as compared to $2,759,254 for the year ended December 31, 1994.
The increase in expense reflected the expansion of controlled clinical trials
for Levulan(R) PDT. During 1995, the Company advanced its development program
for the same indications being researched in 1994. Operating expenses were
$1,175,296 for the year ended December 31, 1995, consistent with operating
expenses of $1,149,361 for the year ended December 31, 1994.
The Company incurred a net loss of $3,647,533, or $.65 per share, for
the year ended December 31, 1995, as compared to a net loss of $3,539,892, or
$.66 per share, for the year ended December 31, 1994.
INFLATION
Although inflation rates have been comparatively low in recent years,
inflation is expected to apply upward pressure on the operating costs of the
Company. The Company has included an inflation factor in its cost estimates;
however the overall net effect of inflation on the operations of the Company
should be minimal.
EFFECT OF UNITED STATES STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 130, 131
New Statements of Financial Accounting Standards - In June 1997, the
FASB issued SFAS No. 130, Reporting Comprehensive Income. 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 Statement is effective for the
Company's financial statements as of
24
26
December 31, 1998. The Company does not anticipate that the implementation of
this Statement will have a material impact on the consolidated financial
statements.
In June 1997, the FASB issued SFAS No. 131, Disclosures about Segments
of an Enterprise and Related Information. The Statements establishes standards
for the way that a public business enterprise reports information about
operating segments in interim financial reports issued to shareholders. It also
establishes standards for related disclosures about products and services,
geographic areas, and major customers. The Statement is effective for the
Company's financial statements as of December 31, 1998. The Company does not
anticipate that the implementation of this Statement will have a material impact
on the consolidated financial statements.
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 the Company's expectations or
beliefs concerning future events, including, but not limited to statements
regarding management's expectations of regulatory approval and the commencement
of sales, the sufficiency of the Company's cash resources for the Company's
future liquidity, the completion of a definitive agreement for the marketing and
further development of its dermatological products and its 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 conditions, clinical results of its trials, the impact of competitive
products and pricing, the timely development, FDA approval and market acceptance
of the Company's products, and the maintenance of the Company's patent
portfolio, 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.
25
27
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 information required by Item 10 is hereby incorporated by reference
to the sections entitled "Nominees", "Executive Officers Who are not Directors",
and "Compliance with Section 16(a) of the Exchange Act" of the Registrant's 1998
Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is hereby incorporated by reference
to the sections entitled "Director Compensation", "Executive Compensation",
"Board Compensation Committee Report on Executive Compensation", "Performance
Graph", "Option Grants in 1997", "Aggregate Option Exercises in 1997 and Option
Values at December 31, 1997", and "Other Compensation" of the Registrant's 1998
Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 is hereby incorporated by reference
to the section entitled "Security Ownership of Certain Beneficial Owners and
Management" of the Registrant's 1998 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is hereby incorporated by reference
to the section entitled "Certain Transactions" of the Registrant's 1998 Proxy
Statement.
26
28
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
None.
C. Exhibits filed as part of this Report
3(a) Certificate of Incorporation, as amended, filed as
Exhibits 3, 3.1, 3.2, 3.3 and 3.5 to the Registrant's
Registration Statement on Form S-1, No. 33-43282, and
is incorporated herein by reference;
3(b) By-laws of the Registrant, filed as Exhibit 3.4 to
the Registrant's Registration Statement on Form S-1,
No. 33-43282, and are incorporated herein by
reference;
4(a) Common Stock specimen, filed as Exhibit 4.1 to the
Registrant's Registration Statement on Form S-1, No.
33-43282, and is incorporated herein by reference;
4(b) Class B Warrant, filed as Exhibit 4.3 to the
Registrant's Registration Statement on Form S-1, No.
33-43282, and is incorporated herein by reference;
10(a) License Agreement between the Company, PARTEQ and
Draxis Health Inc. dated August 27, 1991, filed as
Exhibit 10.1 to the Registrant's Registration
Statement on Form S-1, No. 33-43282, and is
incorporated herein by reference;
10(b) ALA Assignment Agreement between the Company, PARTEQ,
and Draxis Health Inc. 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(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;
27
29
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.
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 28, 1997, and is incorporated herein by
reference;
13 1997 Annual Report to Shareholders (only those
portions which are incorporated herein by reference)
to be filed with the Registrant's 1998 Proxy
Statement.
27 Financial Data Schedule for the Registrant's Form
10-K for the period ending December 31, 1997.
28
30
INDEX TO FINANCIAL STATEMENTS
Consolidated Financial Statements for the Years Ended December 31, 1997, 1996,
1995 and for the Cumulative Period from February 21, 1991 (Date of
Incorporation) to December 31, 1997:
Independent Auditors' Report................................................... F-1
Consolidated Balance Sheets as of December 31, 1997 and 1996................... F-2
Consolidated Statements of Operations for the Years Ended December 31,
1997, 1996 and 1995, and for the Cumulative Period from February 21,
1991 (Date of Incorporation) to December 31, 1997.............................. F-3
Consolidated Statements of Shareholders' Equity for the Years Ended
December 31, 1997, 1996 and 1995, and for the Cumulative Period from
February 21, 1991 (Date of Incorporation) to December 31, 1997................. F-4
Consolidated Statements of Cash Flows for the Years Ended December 31,
1997, 1996 and 1995, and for the Cumulative Period from February 21,
1991 (Date of Incorporation) to December 31, 1997.............................. F-6
Notes to the Consolidated Financial Statements................................. F-8
29
31
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, 1997 and 1996 and the related
consolidated statements of operations, shareholders' equity and cash flows for
each of the three years in the period ended December 31, 1997 and for the period
from February 21, 1991 (date of incorporation) to December 31, 1997. 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 generally accepted auditing
standards. 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, 1997
and 1996, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 1997 and for the period from
February 21, 1991 (date of incorporation) to December 31, 1997 in conformity
with generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, the Company is
in the development stage.
Deloitte & Touche LLP
Kansas City, Missouri
February 12, 1998, except for Note 8a,
as to which the date is March 11, 1998
F-1
32
DUSA PHARMACEUTICALS, INC.
(a development stage company)
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, DECEMBER 31,
1997 1996
---- ----
ASSETS
CURRENT ASSETS
Cash (interest bearing) $ 4,033,267 $ 1,686,090
U.S. government securities available for sale, at market
(cost - $8,760,498 and $18,061,432, respectively)
(Note 3) 8,733,875 18,033,406
Accrued interest receivable 87,792 208,970
Other current assets 84,151 78,367
------------ ------------
12,939,085 20,006,833
FIXED ASSETS (NOTE 4) 142,163 122,424
------------ ------------
$ 13,081,248 $ 20,129,257
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 745,074 $ 867,068
Accrued charges 316,823 160,399
------------ ------------
1,061,897 1,027,467
------------ ------------
COMMITMENTS AND CONTINGENCY (NOTE 8)
SHAREHOLDERS' EQUITY (NOTE 6)
Common stock, no par, 20,000,000 shares authorized,
9,365,950 and 9,355,950 issued and outstanding,
respectively 36,746,993 36,710,743
Deficit accumulated during the development stage (24,701,019) (17,580,927)
Net unrealized loss on U.S. government securities available
for sale (Note 3) (26,623) (28,026)
------------ ------------
12,019,351 19,101,790
------------ ------------
$ 13,081,248 $ 20,129,257
============ ============
See the accompanying notes to the Consolidated Financial Statements.
F-2
33
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)
DECEMBER 31, DECEMBER 31, DECEMBER 31, TO DECEMBER 31,
1997 1996 1995 1997
---- ---- ---- ----
REVENUE
Interest income $ 891,088 $ 1,074,902 $ 579,092 $ 4,905,610
Gain (loss) on foreign currency
exchange 2,059 (1,834) (4,779) 20,276
Gain on sale of U.S. government
securities -- (62) (1,571) 322,659
Unrealized loss on U.S. government
securities available for sale -- -- -- (62,832)
----------- ----------- ----------- ------------
893,147 1,073,006 572,742 5,185,713
----------- ----------- ----------- ------------
RESEARCH AND DEVELOPMENT
COSTS 6,252,830 5,652,442 3,044,979 22,065,600
----------- ----------- ----------- ------------
OPERATING COSTS
General and administration 1,706,113 2,193,560 1,150,833 7,747,935
Depreciation and amortization 54,296 27,323 24,463 136,029
----------- ----------- ----------- ------------
1,760,409 2,220,883 1,175,296 7,883,964
----------- ----------- ----------- ------------
LOSS BEFORE CUMULATIVE
EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE (7,120,092) (6,800,319) (3,647,533) (24,763,851)
CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING PRINCIPLE -- -- -- 62,832
----------- ----------- ----------- ------------
NET LOSS $(7,120,092) $(6,800,319) $(3,647,533) $(24,701,019)
=========== =========== =========== ============
BASIC AND DILUTED NET LOSS PER
COMMON SHARE $ (0.76) $ (0.75) $ (0.65) $ (4.10)
=========== =========== =========== ============
WEIGHTED AVERAGE NUMBER OF 9,358,038 9,087,823 5,589,486 6,029,909
COMMON SHARES OUTSTANDING =========== =========== =========== ============
See the accompanying notes to the Consolidated Financial Statements.
F-3
34
DUSA PHARMACEUTICALS, INC.
(a development stage company)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
NET
UNREALIZED
GAIN (LOSS) ON
DEFICIT U.S.
ACCUMULATED GOVERNMENT
DURING THE SECURITIES NOTE
COMMON DEVELOPMENT AVAILABLE FOR RECEIVABLE
STOCK STAGE SALE FROM 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 (Note 7b) 5,387 - - -
Issuance of 12,500 shares of common stock for cash at
$5.44 (CDN. $6.79) per share (Note 7b) 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
35
DUSA PHARMACEUTICALS, INC.
(a development stage company)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (CONTINUED)
NET
UNREALIZED
GAIN (LOSS) ON
DEFICIT U.S.
ACCUMULATED GOVERNMENT
DURING THE SECURITIES NOTE
COMMON DEVELOPMENT AVAILABLE FOR RECEIVABLE
STOCK STAGE SALE 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 (Note 7b) 197,945 - - -
Issuance of 50,000 shares of common stock for cash at
$4.98 (CDN. $6.79) per share (Note 7d) 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 (Note 7b) 281,733 - - -
Issuance of 8,750 shares of common stock for cash at
$3.43 (CDN. $4.69) per share (Note 7b) 30,042 - - -
Issuance of 7,500 shares of common stock for cash at
$7.96 (CDN. $10.88) per share (Note 7b) 59,726 - - -
Issuance of 4,500 shares of common stock for cash at
$9.39 (CDN. $12.88) per share (Note 7b) 42,267 - - -
Issuance of Underwriters' Purchase Options for 37,500
shares of common stock for cash at $.001 per share
(Note 7d) 38 - - -
Payment received on note receivable from director (Note 6) - - - 14,614
Net unrealized loss on U.S. government securities for sale - - (65,749) -
Net loss - (6,800,319) - -
----------- ------------ --------- ---------
BALANCE, DECEMBER 31, 1996 36,710,743 (17,580,927) (28,026) -
F-5
36
DUSA PHARMACEUTICALS, INC.
(a development stage company)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (CONTINUED)
NET
UNREALIZED
GAIN (LOSS) ON
DEFICIT U.S.
ACCUMULATED GOVERNMENT
DURING THE SECURITIES NOTE
COMMON DEVELOPMENT AVAILABLE FOR RECEIVABLE
STOCK STAGE SALE FROM DIRECTOR
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 (Note 7b) 36,250 - - -
Net unrealized gain on U.S. government securities for sale - - 1,403 -
Net loss - (7,120,092) - -
----------- ------------ -------- ------
BALANCE, DECEMBER 31, 1997 $36,746,993 $(24,701,019) $(26,623) $ -
=========== ============ ======== =======
See the accompanying notes to the Consolidated Financial Statements.
F-6
37
DUSA PHARMACEUTICALS, INC.
(a development stage company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
CUMULATIVE
PERIOD FROM
FEBRUARY 21,
1991 (DATE OF
INCORPORATION)
YEAR ENDED YEAR ENDED YEAR ENDED TO
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1996 1995 1997
CASH FLOWS USED IN OPERATING
ACTIVITIES
Net Loss $ (7,120,092) $ (6,800,319) $ (3,647,533) $ (24,701,019)
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) (11,574) (4,789) 2,472
Depreciation and amortization 54,296 27,323 24,463 136,029
Loss (gain) on foreign currency exchange (2,059) 1,834 4,779 (20,276)
Loss (gain) on sale of U.S. government securities
available for sale - 62 1,571 (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 options terms - 557,260 - 557,260
Changes in other assets and liabilities impacting
cash flows from operations:
Accrued interest receivable 121,178 (27,120) 67,342 (87,792)
Other current assets (5,784) 36,033 (47,153) (84,151)
Accounts payable (121,994) 437,278 131,917 745,074
Accrued charges 156,424 (18,149) 45,502 316,823
License agreement obligations - - - (12,203)
------------ ------------ ------------ -------------
NET CASH USED IN OPERATING ACTIVITIES (7,088,103) (5,797,372) (3,423,901) (23,162,923)
------------ ------------ ------------ -------------
CASH FLOWS PROVIDED BY (USED IN)
INVESTING ACTIVITIES
Purchases of U.S. government securities available
for sale and investment securities (12,563,994) (14,405,081) (22,145,662) (102,661,429)
Proceeds from maturing U.S. government
securities available for sale and investment
security 22,035,000 15,600,000 1,950,000 40,445,000
Proceeds from sale of U.S. government securities
available for sale - - 11,839,009 53,776,118
Intangible assets - - - (193,022)
Purchases of fixed assets (74,035) (98,011) (27,188) (261,271)
Advances by Draxis Health Inc. - - - (2,867,900)
Repayment of advances by Draxis Health Inc. - - - 2,867,900
------------ ------------ ------------ -------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 9,396,971 1,096,908 (8,383,841) (8,894,604)
------------ ------------ ------------ -------------
F-7
38
DUSA PHARMACEUTICALS, INC.
(a development stage company)
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
CUMULATIVE
PERIOD FROM
FEBRUARY 21,
1991 (DATE OF
INCORPORATION)
YEAR ENDED YEAR ENDED YEAR ENDED TO
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1996 1995 1997
CASH FLOWS PROVIDED BY FINANCING
ACTIVITIES
Stock offering costs $ - $ (637,062) $(1,946,321) $(5,048,255)
Issuance of common stock and underwriters'
options 36,250 5,813,806 16,947,273 43,402,816
Payment received on note receivable from director - 14,614 53,433 68,047
Redemption of Draxis Option - - (2,250,000) (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 5,191,358 12,804,385 36,070,518
---------- ---------- ----------- -----------
EFFECT OF EXCHANGE RATES ON CASH 2,059 (1,834) (4,779) 20,276
---------- ---------- ----------- -----------
NET INCREASE IN CASH 2,347,177 489,060 991,864 4,033,267
CASH AT BEGINNING OF PERIOD 1,686,090 1,197,030 205,166 -
---------- ---------- ----------- -----------
CASH AT END OF PERIOD $4,033,267 $1,686,090 $ 1,197,030 $ 4,033,267
========== ========== =========== ===========
SUPPLEMENTAL SCHEDULE OF CASH FLOW
INFORMATION
Issuance of common stock for promissory note
from Draxis Health Inc. $ 150,000
===========
License agreement obligations incurred in the
acquisition of an intangible asset $ 131,418
===========
Deferred stock offering costs offset against
common stock $ 637,062 $ 1,946,321 $ 5,048,255
========== =========== ===========
Note receivable from director originated upon
exercise of options for common stock $ 68,047
===========
Interest paid $ 12,594
===========
There were no income tax payments made during the periods.
See the accompanying notes to the Consolidated Financial Statements.
F-8
39
DUSA PHARMACEUTICALS, INC.
(a development stage company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
AND THE CUMULATIVE PERIOD FROM FEBRUARY 21, 1991
(DATE OF INCORPORATION) TO DECEMBER 31, 1997
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"); formerly Deprenyl Research
Limited, which was incorporated under the Canada Business Corporations
Act in 1987. 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, including the United States and Canadian
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 5- aminolevulinic acid ("Levulan(R)")
PDT/PD.
The Company has been in the development stage since its inception. The
Company's successful completion of its development program and its
transition, ultimately, to the attainment of profitable operations is
dependent upon the Company's ability to complete marketing approval of
Levulan(R) PDT/PD from the various regulatory agencies and the
achievement of a level of sales adequate to support the Company's cost
structure. Obtaining marketing approval will be directly dependent on
the Company's ability to implement the necessary regulatory steps
required to obtain marketing approval in the United States and other
markets for the use of Levulan(R) PDT/PD in topical and/or local
applications and to complete the Company's marketing and promotion
programs. It is not possible at this time to predict with assurance the
outcome of these activities.
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.
F-9
40
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.
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. 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.
g. 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).
h. Basic and Diluted Net Loss Per Share - The Company implemented the
provisions of SFAS No. 128, "Earnings Per Share" as of December 31,
1997. The Statement replaced the Company's presentation of primary net
loss per common share with a presentation of basic and diluted net loss
per common share for all years presented. Basic net loss per common
share is based on the weighted average number of shares outstanding
during each period. Certain common stock issuances (2,200,000) were
made at prices less than the initial public offering price.
Accordingly, the associated shares are included in the calculation of
basic net loss per share as if they were outstanding for the entire
1991 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.
i. Stock-based compensation - The Company follows the provisions of APB
Opinion No. 25, 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
F-10
41
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.
j. New Statements of Financial Accounting Standards - In June 1997, the
FASB issued SFAS No. 130, Reporting Comprehensive Income. 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 Statement is effective for the Company's financial
statements as of December 31, 1998. The Company does not anticipate
that the implementation of this Statement will have a material impact
on the consolidated financial statements.
In June 1997, the FASB issued SFAS No. 131, Disclosures about Segments
of an Enterprise and Related Information. The Statements establishes
standards for the way that a public business enterprise reports
information about operating segments in interim financial reports
issued to shareholders. It also establishes standards for related
disclosures about products and services, geographic areas, and major
customers. The Statement is effective for the Company's financial
statements as of December 31, 1998. The Company does not anticipate
that the implementation of this Statement will have a material impact
on the 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 4.73% to 6.31% and maturity dates
ranging from January 27, 1998 to August 10, 1999.
As of December 31, 1997, the Company's securities available for sale
have been recorded at fair market value of $8,733,875 and the
unrealized loss on such securities of $26,623 has been recorded as part
of shareholders' equity (Note 2b).
4. FIXED ASSETS
1997 1996
--------- --------
Computer Equipment $ 160,864 $119,207
Furniture, Fixtures and Equipment 81,522 58,905
Leasehold Improvements 8,332 -
--------- --------
250,718 178,112
Accumulated depreciation and amortization (108,555) (55,688)
--------- --------
$ 142,163 $122,424
========= ========
F-11
42
5. INCOME TAXES
The tax effect of significant temporary differences representing
deferred tax assets is as follows:
1997 1996
------------ -----------
DEFERRED TAX ASSET
Intangible assets $ 429,546 $ 329,268
Accrued charges 69,036 64,160
Research and development tax credits carryforwards 563,776 307,227
Operating loss carryforwards 9,186,800 6,208,750
Capital loss carryforwards 162,766 162,790
Fixed assets 4,588 -
Other 15,633 5,992
------------ -----------
10,432,145 7,078,187
------------ -----------
DEFERRED TAX LIABILITIES
Fixed assets - 4,638
Other - 15,089
------------ -----------
- 19,727
------------ -----------
Net deferred tax assets 10,432,145 7,058,460
Valuation allowance (10,432,145) (7,058,460)
------------ -----------
$ - $ -
============ ===========
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, 1997, the Company has net operating loss
carryforwards for tax purposes of approximately $22,967,000 and
research and development tax credits of approximately $564,000 both of
which, if not utilized, will expire for Federal tax purposes as
follows:
RESEARCH AND
OPERATING LOSS DEVELOPMENT
CARRYFORWARDS TAX CREDITS
------------- ----------
2006 $ 193,000 $ 7,000
2007 1,155,000 57,000
2008 1,664,000 66,000
2009 3,027,000 84,000
2010 3,420,000 44,000
2011 6,638,000 102,000
2012 6,870,000 204,000
----------- --------
$22,967,000 $564,000
=========== ========
For state tax purposes, net operating loss carryforwards will expire
in years 1998-2004.
F-12
43
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.
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. Certain relationships
between the Company and Draxis have changed as a result of Draxis' sale
of its ownership interest (Note 8b).
F-13
44
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
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.
F-14
45
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 rates of award under the plan consistent with the
method of SFAS No. 123, the Company's net loss, cumulative net loss,
and basic net loss per common share would have been increased to the
proforma amounts indicated below:
1997 1996
---- ----
NET LOSS
As reported ($7,120,092) ($6,800,319)
Proforma ($8,367,581)
BASIC AND DILUTED NET LOSS PER COMMON SHARE
As reported ($0.76) ($0.75)
Proforma ($0.89) ($0.82)
CUMULATIVE NET LOSS
As reported ($24,701,019) ($17,580,927)
Proforma ($26,577,421) ($18,209,841)
CUMULATIVE BASIC AND DILUTED NET LOSS PER
COMMON SHARE
As reported ($4.10) ($3.22)
Proforma ($4.41) ($3.33)
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:
1997 1996
------ ------
Expected life (years) 10 10
Risk free interest rate 6.57% 6.66%
Expected volatility 62.67% 62.28%
Dividend yield - -
b.(1) 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 10% of the Company's
common stock outstanding. The Omnibus Plan is
F-15
46
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.
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. 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.
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.
b.(2) 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.
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
8a), 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.
F-16
47
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 (Note
6). All warrants issued in connection with the initial public offering
expired on April 19, 1993.
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 of $.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 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.
F-17
48
The following table summarizes information about all stock options
outstanding at December 31, 1997:
OPTIONS OUTSTANDING OPTIONS EXERCISED
NUMBER WEIGHTED WEIGHTED NUMBER WEIGHTED
RANGE OF OUTSTANDING AT AVERAGE AVERAGE EXERCISABLE AT AVERAGE
EXERCISE DECEMBER 31, REMAINING EXERCISE DECEMBER 31, EXERCISE
PRICE 1997 CONTRACTUAL LIFE PRICE 1997 PRICE
----- ---- ---------------- ----- ---- -----
$3.01 to 377,800 4.9 years $4.97 329,050 $5.14
6.00
6.01 to 745,000 8.3 years 7.28 248,000 7.14
9.00
9.01 to 160,500 8.5 years 10.71 38,000 11.17
14.00
--------- -------
1,283,300 7.3 years $7.03 615,050 $6.32
========= =======
Changes for the stock option plans during the years ended December 31, 1997,
1996 and 1995 were as follows:
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
1997 PRICE 1996 PRICE 1995 PRICE
----------------------------------------------------------------------------------
Options outstanding, beginning of year 1,002,050 $6.81 589,500 $5.69 644,000 $5.77
Options granted 321,000 7.67 490,000 7.93 25,000 4.75
Options exercised (10,000) 3.63 (77,450) 5.34 (40,000) 4.95
Options cancelled (29,750) 3.95 - - - -
Options lapsed - - - - (39,500) 7.20
----------------------------------------------------------------------------------
Options outstanding, end of year 1,283,300 $7.03 1,002,050 $6.81 589,500 $5.69
==================================================================================
Shares exercisable, end of year 615,050 $6.32 368,300 $5.96 365,750 $6.16
==================================================================================
Options which were exercised during these years were exercised at per share
prices of U.S. $3.625 during 1997, at a range of CDN $4.69 to CDN $12.875 during
1996, and at CDN $6.79 during 1995.
Options which were granted during 1997 have exercise prices ranging from U.S.
$6.125 to U.S. $10.875 per share. Those granted during 1996 have exercise prices
ranging from U.S. $7.75 to $9.875 per share. During 1995, options were granted
with exercise prices of CDN $6.51 and U.S. $4.75 per share.
d. Warrants - In consideration of efforts related to the negotiation and
execution of various agreements including the License Agreement (Note 8a), the
Company issued warrants to purchase 350,000 and 50,000 shares of common stock of
the Company at CDN.$6.79 per share to the Chairman of the Board, President,
Chief Executive Officer and Chief Operating Officer of the Company, and a former
Co-Chairman of the Board of Draxis, respectively. On December 21, 1995, 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
F-18
49
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 vested immediately upon issuance, is noncancellable and
expires October 6, 1998.
In connection with an agreement with its international 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. COMMITMENTS AND CONTINGENCY
a. PARTEQ License Agreement - Effective August 27, 1991, the Company entered
into a license agreement (the "License Agreement") with Parteq Research and
Development Innovations ("PARTEQ"), the licensing arm of Queen's University at
Kingston, Kingston, Ontario ("Queen's") and Draxis. Pursuant to the License
Agreement, the Company has been granted an exclusive worldwide license (with a
right to sublicense) to make, have made, use and sell products capable of
producing protoporphyrin IX precursors, including ALA, for administration with
subsequent exposure to photoactivating light in the case of primary or secondary
malignant and non-malignant tissue abnormalities and lesions of the skin;
conjunctiva; respiratory, digestive and vaginal mucosa; and endometrium and
urothelium.
As of March 11, 1998, the Company and PARTEQ have entered into an Amended and
Restated License Agreement. PARTEQ received options to purchase 85,000 shares of
common stock of the Company at an exercise price of $10.875 per share which will
vest over four (4) years. The Company has agreed to pay royalties of 6% and 4%
on 66% of its or its affiliates' net selling price of products in countries
where patent rights do and do not exist, respectively. The Company also will pay
6% and 4% when patent rights do and do not exist, respectively, on the Company's
net selling price less cost of goods for products sold to sublicensees. PARTEQ
has reduced the amount of royalties which would have been due from the Company
on sub-license arrangements from 33% of royalties and sublicensing fees received
from sublicensees to 5% of lump sum sublicense fees paid to the Company, such as
milestone payments for important regulatory hurdles (excluding amounts
designated by the sublicense for future research and development efforts), and
6% of royalty payments the Company receives on sales of products by
sublicensees. The Company has agreed to pay a minimum royalty of CDN $100,000 on
March 31, 1998. Under certain conditions, additional minimum royalty payments
will be made during the term, in amounts up to CDN $1,100,000, if the Company
enters a sublicense arrangement for both the United States and Europe
encompassing substantially all dermatological indications. In addition, PARTEQ
has agreed to eliminate Draxis as a guarantor under the Amended and Restated
License Agreement. Should no United States patent subsist, whether by virtue of
expiry, invalidation or rejection, the Agreement becomes perpetual and
royalty-free. Commencing with the first year of health regulatory approval in
the United States, provision is made for minimum royalty payments to PARTEQ. The
Company has the right to terminate the Amended and Restated License Agreement
with or without cause upon ninety days notice. The Agreement is effective
through the expiration date of the latest United States patent made subject to
the Agreement.
F-19
50
Effective October 7, 1991, pursuant to an agreement between the Company, PARTEQ
and Draxis, the Company assigned its rights and obligations under the License
Agreement to Draxis insofar as they relate to Canada. In consideration of the
foregoing, Draxis has agreed to pay directly to PARTEQ, 5% of all future lump
sums payable under the License Agreement together with royalties which would
otherwise be payable by the Company in accordance with the License Agreement
with respect to net Canadian sales of products. In further consideration, Draxis
agreed to reimburse to the Company, 5% of all lump sums previously paid by the
Company to PARTEQ under the License Agreement and to pay to the Company a
royalty of 2% of net Canadian sales of products. PARTEQ and the Company intend
to revise the assignment agreement with Draxis to conform its terms to the
Amended and Restated License Agreement.
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 for the years ended December 31, 1996,
1995 and 1994 totaled $28,784, $56,709, and $63,861 respectively. 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 and with its
Vice President of Scientific Affairs effective October 11, 1993. 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.(1), 7b(2) and 7d.)
d. Lease Agreement -The Company has entered into lease commitments for
rental of its office space in Valhalla, New York and in Toronto, Ontario. Future
minimum lease payments will total approximately $170,000 in 1998, $179,000 in
1999 and $183,000 in 2000.
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. Melanin License Agreement - Effective August 27, 1993, the Company
entered into a license agreement (the "License Agreement") for the exclusive
worldwide rights to a new form of melanin. Pursuant to the terms of the License
Agreement, the Company paid an execution fee of $15,541 (CDN.$20,000) and agreed
to pay CDN.$25,000 upon allowance of the patents in the United States and
CDN.$25,000 on the issuance of a Notice of Compliance in Canada or a New Drug
Approval in the United States or upon launching of such drug products for
commercial sale in North America, whichever occurs first. In countries where
patent rights exist, the Company has agreed to pay royalties of 4% on its net
sales of prescription products and 2% on over the counter products. In countries
where patent rights do not exist, the Company has agreed to pay 2% and 1%,
respectively.
F-20
51
g. 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 a 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.(2)).
h. Research agreements - The Company has entered into a series of
agreements for research projects and clinical studies. As of December 31, 1997,
future payments to be made pursuant to these agreements, under certain terms and
conditions, totaled approximately $1,611,400 in 1998, and $125,800 in 1999.
* * * * *
F-21
52
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 12, 1998
Director, Chairman of the
Board, President, Chief
Executive Officer, Chief
Operating Officer, and Chief
Financial Officer (Principal
/s/D. Geoffrey Shulman Executive, Financial, and March 12, 1998
D. Geoffrey Shulman, MD, FRCPC Accounting Officer) Date
/s/Stuart L. Marcus Vice President of March 12, 1998
Stuart L. Marcus, MD, PhD Scientific Affairs Date
/s/Anthony Schincariol Vice President of March 12, 1998
Anthony Schincariol, MBA, PhD Corporate Development Date
/s/John H. Abeles March 12, 1998
John H. Abeles, MD Director Date
/s/James P. Doherty March 12, 1998
James P. Doherty, BSc Director Date
/s/Jay M. Haft March 12, 1998
Jay M. Haft, Esq. Director Date
/s/Richard C. Lufkin March 12, 1998
Richard C. Lufkin Director Date
/s/Nanette W. Mantell March 12, 1998
Nanette W. Mantell, Esq. Secretary Date
53
EXHIBIT INDEX
Page
3(a) Certificate of Incorporation, as amended, filed as Exhibits 3, 3.1, 3.2, 3.3 and 3.5 to the
Registrant's Registration Statement on Form S-1, No. 33-43282, and is incorporated
herein by reference......................................................................................
3(b) By-laws of the Registrant, filed as Exhibit 3.4 to the Registrant's Registration Statement on
Form S-1, No. 33-43282, and are incorporated herein by reference.........................................
4(a) Common Stock specimen, filed as Exhibit 4.1 to the Registrant's Registration Statement on
Form S-1, No. 33-43282, and is incorporated herein by reference..........................................
4(b) Class B Warrant, filed as Exhibit 4.3 to the Registrant's Registration Statement on
Form S-1, No. 33-43282, and is incorporated herein by reference..........................................
10(a) License Agreement between the Company, PARTEQ and Draxis Health Inc. dated
August 27, 1991, filed as Exhibit 10.1 to the Registrant's Registration Statement
on Form S-1, No. 33-43282, and is incorporated herein by reference.......................................
10(b) ALA Assignment Agreement between the Company, PARTEQ, and Draxis
Health Inc. 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(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.....................................................................................
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 28, 1997, and is
incorporated herein by reference.........................................................................
13 1997 Annual Report to Shareholders (only those portions which are incorporated
herein by reference) to be filed with the Registrant's 1998 Proxy Statement..............................
27 Financial Data Schedule for the Registrant's Form 10-K for the period ending
December 31, 1997........................................................................................
30