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UNITED STATES
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, 2003
DUSA Pharmaceuticals, Inc.
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(Exact Name of Registrant as Specified in Its Charter)
NEW JERSEY 22-3103129
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(State or Other Jurisdiction of (I.R.S. Employer)
Incorporation or Organization)
25 Upton Drive
Wilmington, Massachusetts 01887
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(Address of Principal Executive Offices) (Zip Code)
Commission File Number: 0-19777
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Registrant's telephone number, including area code: (978) 657-7500
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Securities registered pursuant to Section 12(b) of the Act: None
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Securities registered pursuant to section 12(g) of the Act:
Common Stock, no par value
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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. [ ]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes |_| No |X|
The aggregate market value of the voting and non-voting common equity
stock held by non-affiliates computed by reference to the price at which the
common equity was last sold, or the average bid and asked price of such common
equity, as of the last business day of the Registrant's most recently completed
second fiscal quarter was $20,809,257.
The number of shares of common stock outstanding of the Registrant as of
March 10, 2004 was 16,391,372.
DOCUMENTS INCORPORATED BY REFERENCE
None.
PART I
This Annual Report on Form 10-K and certain written and oral statements
incorporated herein by reference of DUSA Pharmaceuticals, Inc. (referred to as
"DUSA," "we," and "us") contain forward-looking statements that have been made
pursuant to the provisions of the Private Securities Litigation Reform Act of
1995. Such forward-looking statements are based on current expectations,
estimates and projections about DUSA's industry, management's beliefs and
certain assumptions made by our management. Words such as "anticipates,"
"expects," "intends," "plans," "believes," "seeks," "estimates," or variations
of such words and similar expressions, are intended to identify such
forward-looking statements. These statements are not guarantees of future
performance and are subject to certain risks, uncertainties and assumptions that
are difficult to predict particularly in the highly regulated pharmaceutical
industry in which we operate. Therefore, actual results may differ materially
from those expressed or forecasted in any such forward-looking statements. Such
risks and uncertainties include those set forth herein under "Risk Factors" on
pages 28 through 41, as well as those noted in the documents incorporated herein
by reference. Unless required by law, we undertake no obligation to update
publicly any forward-looking statements, whether as a result of new information,
future events or otherwise. However, readers should carefully review the
statements set forth in other reports or documents we file from time to time
with the Securities and Exchange Commission, particularly the Quarterly Reports
on Form 10-Q and any Current Reports on Form 8-K.
ITEM 1. BUSINESS
GENERAL
DUSA is a pharmaceutical company developing drugs in combination with
light devices to treat or detect a variety of conditions in processes known as
photodynamic therapy or photodetection. We are engaged primarily in the
research, development and marketing of our first drug, Levulan(R) brand of
aminolevulinic acid HCl, or ALA, with light, for use in a broad range of medical
conditions. When we use Levulan(R) and follow it with exposure to light to treat
a medical condition, it is known as Levulan(R) photodynamic therapy, or
Levulan(R) PDT. When we use Levulan(R) and follow it with exposure to light to
detect medical conditions it is known as Levulan(R) photodetection, or
Levulan(R) PD.
Our products, the Levulan(R) Kerastick(R) 20% Topical Solution with PDT
and the BLU-U(R) brand light source were launched in the United States in
September 2000 for the treatment of actinic keratoses, or AKs, of the face or
scalp under a marketing, development and supply agreement with Schering AG, our
former marketing collaborator. AKs are precancerous skin lesions caused by
chronic sun exposure that can develop over time into a form of skin cancer
called squamous cell carcinoma. In addition, in September 2003 we received
clearance from the FDA to market the BLU-U(R) without Levulan(R) PDT for the
treatment of moderate inflammatory acne vulgaris.
2
In September 2002, DUSA reacquired all marketing and product rights from
Schering AG when the parties terminated their marketing, development and supply
agreement. Consequently, DUSA commenced marketing its products directly in
January 2003, and is wholly responsible for all regulatory, sales, marketing,
customer service, and other related product activities.
As a result of reacquiring our product rights, we evaluated our expenses
and increased the level of marketing and sales activities, while minimizing
expenditures that were not directly related to our core objectives for 2003. We
have incurred significant marketing and sales expenses in 2003, including the
costs associated with the launching of our initial sales force and other related
marketing activities. See section entitled "Business-Marketing and Sales". At
this time, our objectives include focusing on increasing the sales of our
approved products in the United States, conducting clinical trials which, if
successful, could lead to additional dermatology indications, and seeking a
partner to help develop and market Levulan(R) PDT for the treatment of
high-grade dysplasia in patients with Barrett's esophagus. In addition, we
continue to support independent investigator trials to advance research in the
use and applicability of Levulan(R) PDT for indications in dermatology, as well
as for ablation of low-grade and high-grade dysplasia in patients with Barrett's
esophagus, among others. See section entitled "Business - Internal Indications".
We are developing Levulan(R) PDT and PD under an exclusive worldwide
license of patents and technology from PARTEQ Research and Development
Innovations, the licensing arm of Queen's University, Kingston, Ontario, Canada.
We also own or license certain other patents relating to methods for using
pharmaceutical formulations which contain our drug and related processes and
improvements. In the United States, DUSA(R), DUSA Pharmaceuticals, Inc.(R),
Levulan(R), Kerastick(R) and BLU-U(R) are registered trademarks. Several of
these trademarks are also registered in Europe, Australia, Canada, and in other
parts of the world. See sections entitled "Business - Licenses; and - Patents
and Trademarks".
We were incorporated on February 21, 1991, under the laws of the State of
New Jersey. Our principal executive offices are located at 25 Upton Drive,
Wilmington, Massachusetts 01887 (telephone: (978) 657-7500). On March 3, 1994,
we formed DUSA Pharmaceuticals New York, Inc., a wholly owned subsidiary located
in Valhalla, New York, to coordinate our research and development efforts. We
have financed our operations to date, primarily from sales of securities in
public offerings, private and offshore transactions that are exempt from
registration under the Securities Act of 1933, as amended, (the "Act"),
including a private placement under Regulation D of the Act which was
consummated on February 27, 2004, and from payments received as part of the
agreement with our former marketing collaborator. See sections entitled
"Management's Discussion and Analysis of Financial Condition - Overview; -
Results of Operations; and - Liquidity and Capital Resources".
3
BUSINESS STRATEGY
The key elements of our strategy include the following:
o Support the Marketing and Sales of our Products. In October 2003,
DUSA launched its own small sales force comprised of direct sales
representatives and various independent sales organizations. Due to
the initial success of these activities, DUSA plans to expand its
sales capacity in 2004.
o Physician Education Support. Commencing with the reacquisition of
our product rights, we began to implement a new medical education
plan. Efforts to support these activities include financial support
of medical education, participation in dermatology conferences, and
improvement of third party reimbursement.
o Leveraging our Levulan(R)PDT/PD Platform to Develop Additional
Products. Based on market research completed in 2003, we are
planning Phase II clinical studies related to the treatment of
photodamaged skin and moderate to severe acne vulgaris that, if
successful, could lead to significant market opportunities for our
products. These studies are expected to commence in mid 2004. In
2003, we received clearance from the FDA to market the
BLU-U(R)without Levulan(R), to treat moderate inflammatory acne
vulgaris, which supports a multi-use capability of our BLU-U(R), in
addition to its use in our approved AK therapy. Outside of
dermatology, we are developing a product that targets a large
market, for the treatment of high-grade dysplasia in patients with
Barrett's esophagus.
o Enter into Additional Strategic Alliances. If we determine that the
development program for a given indication may be beyond our own
resources or may be advanced to market more rapidly by collaborating
with a corporate partner, we may seek opportunities to license,
market or co-promote our products. We are currently seeking a
strategic partner to join in the development, marketing, and
distribution of our treatment for Barrett's esophagus dysplasia. We
may also consider acquiring additional dermatology products that
complement our Levulan(R)PDT technology.
o Use the Results of Independent Researchers to Identify New
Applications. We continue to support research by independent
investigators so that we have the benefit of the resulting
'anecdotal' human data for use in evaluating potential indications
for corporate development. Such independent investigator studies may
lead to additional Levulan(R)products for other skin conditions such
as psoriasis, onychomycosis, warts, molluscum contagiosum, oily
skin, and acne rosacea. We also continue to monitor independent
research in order to identify other potential new indications.
PDT/PD OVERVIEW
In general, both photodynamic therapy and photodetection are two-step
processes:
o The first step is the application of a drug known as a
"photosensitizer," or a pre-cursor of this type of drug, which tends
to collect in specific cells.
4
o The second step is activation of the photosensitizer by controlled
exposure to a selective light source.
During this process, energy from the light activates the photosensitizer.
In PDT, the activated photosensitizer transfers energy to oxygen molecules found
in cells, converting the oxygen into a highly energized form known as "singlet
oxygen," which destroys or alters the sensitized cells. In PD, the activated
photosensitizer emits energy in the form of light, making the sensitized cells
fluoresce, or "glow".
The longer the wavelength of visible light, the deeper into tissue it
penetrates. Different wavelengths, or colors of light, including red and blue
light, may be used to activate photosensitizers. The selection of the
appropriate color of light for a given indication is primarily based on two
criteria:
o the desired depth of penetration of the light into the target
tissue, and
o the efficiency of the light in activating the photosensitizer.
Blue light does not penetrate deeply into tissues, and is better suited
for treating superficial lesions. It is also generally a potent activator of
photosensitizers. Red light penetrates more deeply into tissues, and is better
suited for treating cancers and deeper tissues. However, it is generally not as
strong an activator of photosensitizers. Different photosensitizers do not
absorb all colors of visible light in the same manner. For any given
photosensitizer, some colors are more strongly absorbed than others.
Another consideration in selecting a light source is the location of the
target tissue. Lesions on the skin which are easily accessible can be treated
with either laser or non-laser light sources. Internal indications, which are
often more difficult to access, usually require lasers in order to focus light
into small fiber optic delivery systems that can be passed through an endoscope
or into hollow organs.
PDT can be a highly selective treatment that targets specific tissue while
minimizing damage to normal surrounding tissue. It also can allow for multiple
courses of therapy. The most common side effect of photosensitizers that are
taken systemically is temporary skin sensitivity to bright light. Patients
undergoing PDT and PD treatments are usually advised to avoid direct sunlight
and/or to wear protective clothing during this period. Patients' indoor
activities are generally unrestricted except that they are told to avoid bright
lights. The degree of selectivity and period of skin photosensitivity varies
among different photosensitizers and is also related to the drug dose given.
Photosensitizers without activation by light have no PDT/PD effects.
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OUR LEVULAN(R) PDT/PD PLATFORM
OUR LEVULAN(R) BRAND OF ALA
We have a unique approach to PDT and PD, using the human cell's own
natural processes. Levulan(R) PDT takes advantage of the fact that ALA is the
first product in a natural biosynthetic pathway present in virtually all living
human cells. In normal cells, the production of ALA is tightly regulated through
a feedback inhibition process. In our PDT/PD system, excess ALA (as Levulan(R))
is added from outside the cell, bypassing this normal feedback inhibition. The
ALA is then converted through a number of steps into a potent natural
photosensitizer named protoporphyrin IX, or PpIX. This is the compound that is
activated by light during Levulan(R) PDT/PD, especially in fast growing cells.
Any PpIX that remains after treatment is eliminated naturally by the same
biosynthetic pathway.
We believe that Levulan(R) is unique among PDT/PD agents. It has the
following features:
o Naturally Occurring. ALA is a naturally occurring substance found in
virtually all living human cells.
o Small Molecule. Levulan(R)is a small molecule that is easily
absorbed whether delivered topically, orally, or intravenously.
o Highly Selective. Levulan(R) is not itself a photosensitizer, but is
a pro-drug that is converted through a cell-based process into the
photosensitizer PpIX. The combination of topical application, tissue
specific uptake, conversion into PpIX and targeted light delivery
make this a highly selective process. Therefore, under appropriate
conditions, we can achieve selective clinical effects in targeted
tissues with minimal effects to normal surrounding and underlying
tissues.
o Controlled Activation. Levulan(R)has no PDT effect without exposure
to light at specific wavelengths, so the therapy is easily
controlled.
Scientists believe that the accumulation of PpIX following the application
of Levulan(R) is more pronounced in:
o rapidly growing diseased tissues, such as precancerous and cancerous
lesions,
o conditions characterized by rapidly proliferating cells such as
those found in psoriasis and certain microbes, and
o in certain normally fast-growing tissues, such as hair follicles,
sebaceous glands, esophageal mucosa and the lining of the uterus.
6
OUR KERASTICK(R) BRAND APPLICATOR
We designed our proprietary Kerastick(R) specifically for use with
Levulan(R). It is a single-use, disposable applicator, which allows for the
rapid preparation and uniform application of Levulan(R) topical solution in
standardized doses. The Kerastick(R) has two separate glass ampoules, one
containing Levulan(R) powder and one containing a liquid vehicle, both enclosed
within a single plastic tube and an outer cardboard sleeve. There is a filter
and a metered dosing tip at one end. Prior to application, the doctor or nurse
crushes the ampoules and shakes the Kerastick(R) according to directions to mix
the contents into a solution. The Kerastick(R) tip is then dabbed on the
individual AK lesions, releasing a predetermined amount of Levulan(R) 20%
topical solution.
OUR LIGHT SOURCES
Customized light sources are critical to successful Levulan(R) PDT/PD
because the effectiveness of Levulan(R) therapy depends on delivering light at
an appropriate wavelength and intensity. We intend to continue to develop
combination drug and light device systems, in which the light sources:
o are compact and tailored to fit specific medical needs,
o are pre-programmed and easy to use, and
o provide cost-effective therapy.
Our proprietary BLU-U(R) is a fluorescent light source that can treat the
entire face or scalp at one time. The light source is reasonably compact and
portable. It can be used in a physician's office, requires only a moderate
amount of floor space, and plugs into a standard electrical outlet. The BLU-U(R)
also incorporates a proprietary regulator that controls the optical power of the
light source to within specified limits. It has a simple control panel
consisting of an on-off key switch and digital timer which turns off the light
automatically at the end of the treatment. The BLU-U(R) is also compliant with
CE marking and ISO 9001 requirements.
We are using non-laser light sources whenever feasible because, compared
to lasers, they are:
o safer,
o simpler to use,
o more reliable, and
o far less expensive.
7
For treatment of AKs, our BLU-U(R) uses blue light which penetrates
superficial skin lesions and is a potent activator of PpIX. Longer red
wavelengths penetrate more deeply into tissue but are not as potent activators
of PpIX. Therefore, for treatment of superficial lesions of the skin, such as
AKs, we are using relatively low intensity, non-laser blue light sources, which
are designed to treat large areas, such as the entire face or body. For
treatment of diseases that may extend several millimeters into the skin or other
tissues, including many forms of cancer; high-powered red light is usually
preferable. In addition, DUSA received clearance from the FDA in September 2003
to market the BLU-U(R) without Levulan(R) for the treatment of moderate
inflammatory acne vulgaris.
In 2004, DUSA will test its new proprietary endoscopic light delivery
system in a small Phase II single-center clinical study of the efficacy and
safety of Levulan(R) PDT for the treatment of high grade dysplasia in patients
with Barrett's esophagus. Our new system is designed to ease the process by
which physicians place fiber optics used for endoscopic light delivery within
hollow target organs such as the esophagus. Currently, for the treatment of
Barrett's esophagus dysplasia, insertion of a fiber optic is done by placement
of a balloon catheter system, which requires approximately three insertions into
the patient's esophagus, with blind light treatment by the physician (the
endoscope is removed before light treatment and then replaced afterwards).
DUSA's proprietary endoscopic light delivery allows fiber optic placement and
light treatment to the esophagus to be performed under direct visualization, in
a single insertion. Our device thus allows the endoscopic light treatment to be
performed more rapidly, under direct visualization, and at greater comfort to
the patient.
8
OUR PRODUCTS
The following table outlines our products and currently planned product
candidates. Our research and development expenses for the last three years were
$5,403,961 in 2003, $12,121,606 in 2002, and $10,789,906 in 2001.
INDICATION/PRODUCT STATUS OF REGULATORY STUDIES
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DERMATOLOGY
Levulan(R)Kerastick(R)and BLU-U(R)for PDT of Aks Approved; Phase IV(1)
Levulan(R)PDT for Photodamaged Skin Phase II (2)
Levulan(R)PDT for Moderate to Severe Acne Vulgaris Phase II (3)
BLU-U(R)Treatment of Moderate Inflammatory Acne Vulgaris Without Levulan(R) Market Clearance (4)
OTHER INDICATIONS
Levulan(R)PDT for Barrett's Esophagus Dysplasia Phase I/II
Levulan(R)Induced Fluorescence Guided Resection for Brain Cancer European Phase III (5)(6)
DUSA(R)Endoscopic Light Delivery System Phase II (7)
1. Phase IV final study report was filed with the FDA in January 2004.
2. Phase II IND was filed with the FDA in February 2004.
3. Phase II study planned to be proposed to the FDA by mid 2004.
4. In September 2003, the FDA provided market clearance for the use of
the BLU-U(R) for the light alone treatment of moderate inflammatory
acne vulgaris.
5. Licensed from Photonamic GmbH & Co. KG.
6. European Phase III trial results may not be acceptable to the FDA in
the United States.
7. Phase II pilot clinical trial planned to commence by mid 2004.
DERMATOLOGY INDICATIONS
In September 2002, DUSA assumed all responsibility for its dermatology
research and development program as a result of the termination of our former
marketing, development and supply agreement with Schering AG. Our former
dermatology marketing partner had contributed nearly $3 million per year to the
program during 2000, 2001, and 2002. Since reacquiring our product rights, we
have focused on formulating our own development program. We have decided to
develop Phase II clinical programs for photodamaged skin and moderate to severe
acne vulgaris which, if successful, could lead to additional dermatological
indications and significant market opportunities. These trials are expected to
be initiated in mid 2004. DUSA also continues to support a wide range of
independent investigator studies using the Levulan(R) Kerastick(R) that could
lead to additional new indications for future development.
9
Actinic Keratoses (AKs). AKs are superficial precancerous skin lesions
usually appearing as rough, scaly patches of skin with some underlying redness.
The traditional methods of treating AKs are cryotherapy, or the freezing of
skin, using liquid nitrogen; and 5-fluorouracil cream, or 5-FU. Although both
methods can be effective, each has limitations and can result in significant
side effects. Cryotherapy is non-selective, is usually painful at the site of
freezing and can cause blistering and loss of skin pigmentation, leaving white
spots. In addition, because there is no standardized treatment protocol, results
are not uniform. 5-FU can be highly irritating and requires twice-a-day
application by the patient for approximately 2 to 4 weeks, resulting in
inflammation, redness and erosion or rawness of the skin. Following the
treatment, an additional 1 to 2 weeks of healing is required. Our approved
treatment method involves applying Levulan(R) 20% topical solution using the
Kerastick(R) to the AK lesions, followed 14 to 18 hours later with exposure to
our BLU-U(R) for approximately 17 minutes. In 2001, we successfully completed
the first of two Phase IV trials required by the Food and Drug Administration,
or FDA, testing for allergic skin reactions to our therapy. The second trial,
which began in 2002 to evaluate the long-term effects of our therapy, was
completed in late 2003 and the final report was submitted to the FDA in January
2004.
During 2003, we continued to support efforts to improve reimbursement
levels to physicians. Such efforts included working with the Centers for
Medicare and Medicaid Services (CMS) to reverse the bundling of the drug cost
with the procedure fee, which had occurred effective March 1, 2003. In November
2003, CMS agreed to reinstate the code for physicians to bill the drug cost
separate from the procedure fee. As a result, effective January 1, 2004, there
is a revised national reimbursement code for Medicare for the BLU-U(R)
application procedure and the cost of the Levulan(R) Kerastick(R). Doctors can
also bill for any applicable visit fees. However, some physicians have suggested
that even the new reimbursement levels still do not fully reflect the required
efforts to routinely execute our therapy in their practices. We believe that the
issues related to reimbursement have affected the economic competitiveness of
our therapy with other AK therapies and have hindered its adoption in many
cases.
In addition, we continue to work to educate private insurance carriers so
that they will approve our therapy for coverage. As of December 31, 2003,
several of the major private insurers have approved coverage for our AK therapy.
We believe that due to these efforts, plus future improvements, along with our
education and marketing programs, a more widespread adoption of our therapy
should occur over time.
10
Facial Photodamaged Skin. Photodamaged skin, which is skin damaged by the
sun, occurs primarily in fair-skinned individuals after many years of sun
exposure. Signs of photodamaged skin include roughness, wrinkles and brown
spots. AKs also occur frequently in areas of photodamaged skin. There are
numerous consumer cosmetic and herbal products which claim to lessen or relieve
the symptoms of photodamaged skin. In most cases, there is little scientific
data to support these claims. The FDA has approved only one prescription drug,
Renova(R)(1), to treat this common skin condition. Patients generally use the
product for between 6 and 24 weeks before improvement may be observed. There are
also a number of FDA approved laser and light-based treatments being used in the
treatment of photodamaged skin.
As part of our AK clinical trials, we conducted a Phase II safety and
efficacy study, testing 64 patients with 3 to 7 AK lesions of the face or scalp
within an area of photodamaged skin. The physician investigators applied
Levulan(R) 20% topical solution over the entire area including the photodamaged
skin. After 14 to 18 hours, the patients were treated with blue light at
differing light doses. Investigators noted marked improvement in skin roughness
in the treated areas in two-thirds of the patients after treatment with
Levulan(R) PDT as well as some degree of improvement of wrinkles and brown
spots. However, 10 of the 64 patients found that the burning and stinging of the
PDT therapy was too uncomfortable and as a result the treatment was either
terminated early or the light power was reduced. No patients reported a serious
treatment-related adverse event. During 2003, DUSA-supported independent
investigator studies for photodamaged skin were completed including a
short-incubation study using different light sources: a BLU-U(R), pulsed dye
lasers, and intense pulsed light sources. Certain of the independent
investigator studies focused on providing evidence which may be used to help
optimize the method of treatment for future studies. According to recent
peer-reviewed publications, these studies have shown that, when Levulan(R) is
applied to the entire face for as little as one hour followed by treatment with
the BLU-U(R), or pulsed light sources, efficacy in removing AKs is similar to
that of our Phase III trials, which used spot application on each AK and
overnight incubation. Additionally, these studies report that patients' skin
have shown improvements in various photodamaged skin parameters, including skin
quality, sallowness, roughness, fine wrinkling, and Griffiths score, a
photonumeric scale for the assessment of skin photodamage. Accordingly, based on
the results of our previous Phase II safety and efficacy study, the results of
independent investigator studies, and other anecdotal reports, we are planning
to initiate a DUSA-sponsored Phase II study in mid 2004.
Acne. Acne is a common skin condition caused by the blockage and/or
inflammation of sebaceous (oil) glands. Traditional treatments for mild to
moderate facial inflammatory acne include over-the-counter topical medications
for mild cases, and prescription topical medications or oral antibiotics for
mild to moderate cases. For cystic acne, an oral retinoid drug called
Accutane(R)(2) is the most commonly prescribed treatment. It is also commonly
used for moderate to severe inflammatory acne. Over-the-counter treatments are
not effective for many patients and can result in side effects including drying,
flaking and redness of the skin. Prescription antibiotics lead to improvement in
many cases, but patients must often take them on a long-term basis, with the
associated risks of increased antibiotic resistance. Accutane(R) can have a
variety of side effects, from dryness of the lips and joint pains, to birth
defects, and elevated levels of triglycerides and/or liver enzymes. With
Levulan(R) PDT therapy for moderate to severe acne vulgaris we would be seeking
to improve or clear patients' acne without the need for long-term oral therapy
and with fewer side effects than current therapies.
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(1) Renova(R)is a registered trademark of Johnson & Johnson.
(2) Accutane(R)is a registered trademark of Hoffmann-La Roche.
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As part of the co-development program with our former partner, a
dose-ranging clinical trial was completed in 2001. The specific low drug dose
protocol tested was not able to replicate the positive clinical results seen in
previous independent research using higher drug doses but which also was
associated with significant side effects. However, based on results of
independent investigator studies that were completed during 2003, we believe
that this is a potential significant indication for Levulan(R) PDT. A protocol
for this indication is under development as we plan to initiate a DUSA-sponsored
Phase II study during 2004. The study will utilize the BLU-U(R) and
short-incubation, broad-area application of the Levulan(R) Kerastick(R). This
combination has been reported in published independent investigator studies as
being effective, while having minimal treatment-related side effects.
In addition, DUSA received clearance from the FDA in September 2003 to
market the BLU-U(R) without Levulan(R) PDT for the treatment of moderate
inflammatory acne vulgaris.
OTHER POTENTIAL DERMATOLOGY INDICATIONS
There are numerous other potential uses for Levulan(R) PDT/PD in
dermatology, and we are currently supporting, or may in the future support
research in several of these areas, with corporate-sponsored Phase I-III trials,
pilot trials, and/or investigator-sponsored studies, based on pre-clinical,
clinical, regulatory and marketing criteria we have established through our
strategic planning processes. Some of the additional potential uses for
Levulan(R) in dermatology include treatment of skin conditions such as
psoriasis, onychomycosis, warts, molluscum contagiosum, oily skin, acne rosacea,
and cancers, such as squamous cell carcinomas and cutaneous T-cell lymphomas.
INTERNAL INDICATIONS
Barrett's Esophagus Dysplasia. Barrett's esophagus is an acquired
condition in which the normal tissue lining of the esophagus is replaced by
abnormal tissue in response to chronic exposure to stomach acid. Over time, the
area of the esophagus affected can develop dysplastic (precancerous) cells. As
the dysplasia progresses from low-grade to high-grade, the risk of esophageal
cancer increases significantly, such that, patients with confirmed high-grade
dysplasia often undergo major surgery to remove the affected portion of the
esophagus. The condition is often undetected until the disease reaches later
stages.
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Medical treatment of the condition has commonly included lifelong
anti-reflux therapy with drugs called proton pump inhibitors to reduce stomach
acid, while treatment for more advanced, precancerous, Barrett's esophagus
dysplasia involves surgery to remove affected areas of the esophagus. The role
of anti-reflux surgery, and/or medical devices is also being evaluated by the
medical community. In August 2003, a competitor received approval for its PDT
therapy for Barrett's esophagus. See section entitled "Business - Competition ".
Independent European studies have reported that in late-stage Barrett's
esophagus the high-grade dysplasia can be destroyed by ALA PDT. In a randomized,
controlled European investigator study supported by DUSA, Levulan(R) PDT has
been shown to allow the conversion of early-stage Barrett's esophagus with
low-grade dysplasia and portions of Barrett's esophageal lining back to normal
esophageal lining.
During the second half of 2001, we started two Phase I/II studies for the
treatment of early and late-stage Barrett's esophagus, respectively, using
systemic Levulan(R) followed by red laser light in varying light doses. Patients
were randomized to receive various light doses, with retreatment if required,
and follow-up for 24 months after the initial treatment. In our clinical trial
in which the primary efficacy goal was the ablation of high-grade dysplasia, or
HGD, in Barrett's esophagus (late stage Barrett's esophagus), six patients with
HGD were treated with Levulan(R) PDT. Of the six patients treated, five had
complete clearing of their areas of high-grade dysplasia, and four of those
patients have now been followed for a period greater than 1 year, which
indicates a durable response for complete HGD ablation. One patient dropped from
follow-up at the 2-month visit. No esophageal scarring or ruptures were noted in
the course of this study. HGD ablation continues in the patients followed. In
our low-grade dysplasia (early stage) clinical trial in which the primary
efficacy goal was the conversion of Barrett's esophagus to normal esophagus, 10
of the 11 patients that were treated with Levulan(R) PDT are still being
followed. Complete Barrett's esophagus mucosal ablation after a single
Levulan(R) PDT treatment remained stable in 3/10 (30%) patients. Two-year
follow-up data for most patients is being collected. There was 1 patient in this
study that had mild esophageal scarring without symptoms. The most common
adverse events in both studies were mild to moderate nausea and vomiting. In
order to control ongoing research and development costs during 2003, we chose
not to enroll any additional patients to these studies, but will continue to
follow the patients that have already been treated.
In preparation for a Phase II clinical trial, we are planning to initiate
a small single-center pilot Phase II clinical trial in 2004 using DUSA's new
proprietary endoscopic light delivery device for the treatment of HGD.
Brain Cancer. Despite standard therapies that include surgical tumor
removal, radiation therapy, and chemotherapy, adult patients with the most
aggressive high-grade malignant brain tumor type, glioblastoma multiforme,
generally survive only 1 year. Independent European investigators have reported
that systemic ALA dosing before surgical resection of tumors resulted in
selective fluorescence of only the tumors. The normal white matter of the brain
showed no fluorescence. These investigators used ALA-induced fluorescence in a
study involving 52 patients with glioblastoma multiforme as a guide for the more
complete removal of tumors than would be possible using white light alone. This
technique is called fluorescence-guided resection.
13
In December 2002, we entered into a License and Development Agreement with
Photonamic GmbH & Co. KG, a subsidiary of medac GmbH, a German pharmaceutical
company. This agreement provides for the licensing to us of Photonamic's
proprietary technology related to ALA for systemic dosing in the field of brain
cancer. The technology provides DUSA with access to a systemic formulation of
ALA, and a significant amount of pre-clinical data, both of which could also be
useful and are also licensed to DUSA for certain other indications, including
Barrett's esophagus dysplasia. Photonamic is currently conducting a European
Phase III clinical trial in which ALA-induced fluorescence is used to guide
surgical tumor resection in patients suffering from glioblastoma multiforme.
European Phase III trial results may not be acceptable by the FDA in the United
States and we do not intend, at this time, to repeat this study in the United
States. These clinical trials are expected to continue through late 2004 at a
minimum, so safety and efficacy for the brain cancer indication is still to be
determined. See section entitled "Business - Licenses".
OTHER POTENTIAL INTERNAL INDICATIONS
There may be numerous other potential therapeutic and cancer detection
uses for Levulan(R) PDT/PD, and we are currently supporting, or may in the
future support, research in several of these areas, as appropriate, with
corporate-sponsored clinical trials, and/or investigator-sponsored studies,
based on pre-clinical, clinical, regulatory and marketing criteria we have
established through our strategic planning processes. Some of the potential
non-dermatology indications include detection and/or treatment of
gastro-intestinal tumors, bladder cancer, pre-cancer and cancer of the oral
cavity, and pre-cancer and cancer of the larynx.
SUPPLY PARTNERS
National Biological Corporation. In November 1998, we entered into a
purchase and supply agreement with National Biological Corporation ("NBC") for
the manufacture of some of our light sources, including the BLU-U(R). We have
agreed to order from NBC all of our supply needs of these light sources for the
United States and Canada, and NBC has agreed to supply us with the quantities we
order. If an opportunity arises, the parties have agreed to negotiate the terms
under which NBC would supply us with light sources for sale in countries other
than the current territories.
14
NBC has granted to us a license to manufacture the light sources if it
fails to meet our supply needs. Under these circumstances, we would also have a
worldwide license to import, use, sell or dispose of the light sources under
NBC's technology within the field of PDT. In addition, NBC has agreed that it
will not supply light sources that may be used to compete with our business. The
agreement has a 10-year term, subject to earlier termination for breach or
insolvency or for convenience. However, a termination for convenience requires
12 months' prior written notice.
Sochinaz SA. Under an agreement dated December 24, 1993, Sochinaz SA
("Sochinaz") manufactures and supplies substantially all of our requirements of
Levulan(R) worldwide from its FDA approved facility in Switzerland. In June
2000, we amended the agreement to include an option to allow us to extend the
term for an additional 3 years until December 3, 2007. While we can obtain
alternative supply sources in certain circumstances, any new supplier would have
to be inspected and qualified by the FDA.
medac GmbH. In December 2002, we entered into a supply agreement with
medac GmbH in connection with the Photonamic license agreement mentioned above.
We have a license to market and sell the formulation exclusively in the United
States and in several other countries and non-exclusively in the rest of the
world subject to certain field limitations. The supply agreement covers medac's
current systemic dosage formulation for use in brain cancer, Barrett's
esophagus, as well as for other mutually agreed upon indications. The agreement
provides for minimum purchase requirements following our first commercial sale.
In addition, the agreement has a term of 10 years from the date of our first
commercial sale, subject to earlier termination rights, as well as successive
one-year renewal terms.
LICENSES
PARTEQ Research and Development Innovations. We license the patents
underlying our Levulan(R) PDT/PD systems under a license agreement with PARTEQ
Research and Development Innovations ("PARTEQ"), the licensing arm of Queen's
University, Kingston, Ontario. Under the agreement, which became effective
August 27, 1991, we have been granted an exclusive worldwide license, with a
right to sublicense, under PARTEQ's patent rights, to make, have made, use and
sell products which are precursors of PpIX, including ALA. The agreement also
covers any improvements discovered, developed or acquired by or for PARTEQ, or
Queen's University, to which PARTEQ has the right to grant a license. A
non-exclusive right is reserved to Queen's University to use the subject matter
of the agreement for non-commercial educational and research purposes. A right
is reserved to the Department of National Defense Canada to use the licensed
rights for defense purposes including defense procurement but excluding sales to
third-parties.
15
When we are selling our products directly, we have agreed to pay to PARTEQ
royalties of 6% and 4% on 66% of the net selling price in countries where patent
rights do and do not exist, respectively. In cases where we have a sublicensee,
we will pay 6% and 4% when patent rights do and do not exist, respectively, on
our net selling price less the cost of goods for products sold to the
sublicensee, and 6% of royalty payments we receive on sales of products by the
sublicensee. We are also obligated to pay 5% of any lump sum sublicense fees
paid to us, such as milestone payments, excluding amounts designated by the
sublicensee for future research and development efforts. The agreement is
effective for the life of the latest United States patents and becomes perpetual
and royalty-free when no United States patent subsists. Annual minimum royalties
to PARTEQ must total at least CDN $100,000 (U.S. $77,000 as of December 31,
2003) in order to retain the license. We have the right to terminate the PARTEQ
agreement with or without cause upon 90 days notice. See "Note 15(a) to the
Company's Notes to the Consolidated Financial Statements ".
Together with PARTEQ and Draxis Health, Inc., our former parent, we
entered into an agreement (the "ALA Assignment Agreement") effective October 7,
1991. According to the terms of this agreement we assigned to Draxis our rights
and obligations under the PARTEQ license agreement to the extent they relate to
Canada. On February 24, 2004, we reacquired these rights and agreed to pay an
upfront fee and a royalty on sales of the Levulan(R) Kerastick(R) in Canada over
a five-year term following the first commercial sale in Canada. We will now be
responsible for any royalties which would be due to PARTEQ for Canadian sales.
Draxis also agreed to assign to us the Canadian regulatory approvals for the
Levulan(R) Kerastick(R) with PDT for AKs. We also hold Canadian regulatory
approval for the BLU-U(R). We expect to launch our Levulan(R) Kerastick(R) and
BLU-U(R) in Canada in 2004.
Photonamic GmbH & Co. KG. In December 2002, we entered into a license and
development agreement with Photonamic GmbH & Co. KG, a recently formed
subsidiary of medac GmbH, a German pharmaceutical company. This agreement
provides for the licensing to us of Photonamic's proprietary technology related
to aminolevulinic acid (ALA), the compound we use in our Levulan(R) Photodynamic
Therapy (PDT) and Photodetection (PD).
Under the terms of the agreement, we received a license for the United
States and several other countries, to use Photonamic's technology, including
pre-clinical and clinical data, related to ALA for systemic dosing in the field
of brain cancer, and for indications which the parties may jointly develop
during the term of their collaboration. Additionally, we are entitled to use the
pre-clinical data for indications which we may develop on our own. Photonamic is
currently conducting a European Phase III clinical trial in which ALA-induced
fluorescence is used to guide surgical tumor resection in patients suffering
from the most aggressive form of adult brain tumor, glioblastoma multiforme.
This clinical trial is expected to continue through late 2004, at a minimum. We
paid a $500,000 up-front license fee, and will be obligated to pay certain
regulatory milestones of $1,250,000 upon FDA acceptance of a registration
application for a brain cancer product in the United States, an additional
$1,250,000 upon registration of the product, and royalties of 12.5% on net sales
under the terms of the License and Development Agreement and royalties on net
sales of any brain cancer product which utilizes the Photonamic technology.
Should Photonamic's clinical study be successful, we will be obligated to
proceed with development of the product in the United States in order to retain
the license for the use of the technology in the treatment of brain cancer. The
agreement has a term of 10 years from the date of first approval of a product
using Photonamic's technology, subject to earlier termination rights, as well as
one-year renewal terms.
16
PATENTS AND TRADEMARKS
We actively seek, when appropriate, to protect our products and
proprietary information through United States and foreign patents, trademarks
and contractual arrangements. In addition, we rely on trade secrets and
contractual arrangements to protect certain aspects of our proprietary
information and products.
Our ability to compete successfully depends, in part, on our ability to
defend our patents that have issued, obtain new patents, protect trade secrets
and operate without infringing the proprietary rights of others. We have no
product patent protection for the compound ALA itself, as our basic patents are
for methods of detecting and treating various diseased tissues using ALA or
related compounds called precursors, in combination with light. Even where we
have patent protection, there is no guarantee that we will be able to enforce
our patents. Patent litigation is expensive, and we may not be able to afford
the costs. We own or exclusively license patents and patent applications related
to the following:
o methods of using ALA and its unique physical forms in combination
with light,
o compositions and apparatus for those methods, and
o unique physical forms of ALA.
These patents expire no earlier than 2009, and certain patents are
entitled to terms beyond that date. Effective September 29, 2003, the United
States Patent and Trademark Office extended the term of U.S Patent No.
5,079,262, with respect to our approved AK indication for Levulan(R), until
September 29, 2013.
Under the license agreement with PARTEQ, we hold an exclusive worldwide
license to certain patent rights in the United States and a limited number of
foreign countries. See section entitled "Business - Licenses." All United States
patents and patent applications licensed from PARTEQ relating to ALA are method
of treatment patents. Method of treatment patents limit direct infringement to
users of the methods of treatment covered by the patents. We currently have
patents and/or pending patent applications in the United States and in a number
of foreign countries covering unique physical forms of ALA, compositions
containing ALA, as well as ALA applicators, light sources for use with ALA, and
other technology. We cannot guarantee that any pending patent applications will
mature into issued patents.
17
We have limited patent protection outside the United States, which may
make it easier for third-parties to compete there. Our basic method of treatment
patents and applications have counterparts in only four foreign countries, one
of which is the subject of legal action. See sections entitled "Risk Factors -
Risks Related to DUSA"; and "Legal Proceedings".
We can provide no assurance that a third-party or parties will not claim,
with or without merit, that we have infringed or misappropriated their
proprietary rights. A number of entities have obtained, and are attempting to
obtain patent protection for various uses of ALA. We can provide no assurance as
to whether any issued patents, or patents that may later issue to third-parties,
may affect the uses on which we are working or whether such patents can be
avoided, invalidated or licensed if they cannot be avoided or invalidated. If
any third-party were to assert a claim for infringement, we can provide no
assurance that we would be successful in the litigation or that such litigation
would not have a material adverse effect on our business, financial condition
and results of operation. Furthermore, we may not be able to afford the expense
of defending against such a claim.
In addition, we cannot guarantee that our patents, whether owned or
licensed, or any future patents that may issue, will prevent other companies
from developing similar or functionally equivalent products. Further, we cannot
guarantee that we will continue to develop our own patentable technologies or
that our products or methods will not infringe upon the patents of
third-parties. In addition, we cannot guarantee that any of the patents that may
be issued to us will effectively protect our technology or provide a competitive
advantage for our products or will not be challenged, invalidated, or
circumvented in the future.
We also attempt to protect our proprietary information as trade secrets.
Generally agreements with employees, licensing partners, consultants,
universities, pharmaceutical companies and agents contain provisions designed to
protect the confidentiality of our proprietary information. However, we can
provide no assurance that these agreements will provide effective protection for
our proprietary information in the event of unauthorized use or disclosure of
such information. Furthermore, we can provide no assurance that our competitors
will not independently develop substantially equivalent proprietary information
or otherwise gain access to our proprietary information, or that we can
meaningfully protect our rights in unpatentable proprietary information.
Even in the absence of composition of matter patent protection for ALA, we
may receive financial benefits from: (i) patents relating to the use of such
products (like PARTEQ's patents); (ii) patents relating to special compositions
and formulations; (iii) limited marketing exclusivity that may be available
under the Hatch-Waxman Act and any counterpart protection available in foreign
countries and (iv) patent term extension under the Hatch-Waxman Act. See section
entitled "Business - Government Regulation". Effective patent protection also
depends on many other factors such as the nature of the market and the position
of the product in it, the growth of the market, the complexities and economics
of the process for manufacture of the active ingredient of the product and the
requirements of the new drug provisions of the Food, Drug and Cosmetic Act, or
similar laws and regulations in other countries.
18
We seek registration of trademarks in the United States, and other
countries where we may market our products. To date, we have been issued 22
trademark registrations, and other applications are pending.
MANUFACTURING
Historically, our drug, Levulan(R), the Kerastick(R) brand applicator and
the BLU-U(R) brand light source were each manufactured by single third-party
suppliers. In December 2002, we terminated our agreement with North Safety
Products, Inc., a unit of Norcross Safety Products, LLC, for the manufacture and
supply of our Kerastick(R), in light of our decision to build a Kerastick(R)
manufacturing line at our Wilmington facility. We believe that the development
of our own manufacturing capabilities will enable us to better manage and
control the costs of production; however, until product sales increase
significantly our unit cost per Kerastick(R) at our new facility will be higher.
On July 14, 2003, we received FDA approval to manufacture the Levulan(R)
Kerastick(R) at our facility, and in February 2004 we commenced manufacturing in
support of our plan to maintain a reasonable level of Kerastick(R) inventory
based on sales projections. This facility will also be utilized to produce
clinical supplies for our own studies in addition to investigator studies which
we plan to support.
DISTRIBUTION
Effective December 10, 2003, DUSA signed an amended agreement with Moore
Medical Corporation ("Moore"), a national distributor and marketer of medical
and surgical supplies, to remove Moore's exclusivity rights and allow DUSA to
use other third-party distributors to sell its products. Since then, we have
appointed two additional distributors. Third-party distributors have also been
authorized to sell the BLU-U(R) on the Company's behalf. All distributors have
the right for a period of time following termination of their respective
agreement, to return their inventory of product.
MARKETING AND SALES
Under the agreement with our former dermatology marketing partner,
marketing and sales of Levulan(R) PDT products were the responsibility of the
partner. As a result of the termination of that relationship in September 2002,
we commenced implementing our own marketing and sales strategy.
19
In August 2003, we hired an Associate Vice President of Sales, and in
October 2003 we hired, trained, and deployed a sales force, which was initially
comprised of six direct representatives, various independent representatives,
and an independent sales distributor, designed to focus on most of our key
geographic markets in the United States. At the end of December 2003 we hired
our seventh direct representative in a key target market, and in January 2004 we
continued to expand our sales capacity by adding one more direct representative
and an independent representative in another key target market. Due to the
success of our initial sales launch, we plan to continue to expand our sales
capacity during 2004.
The Health Protection Branch - Canada has granted marketing approval for
the Levulan(R) Kerastick(R) with PDT using the BLU-U(R) for AKs of the face or
scalp. Pursuant to an agreement dated February 24, 2004 Draxis agreed to assign
to us the rights to market the product in Canada. See section entitled "Business
- - Licenses". We expect to launch our products in Canada in 2004.
COMPETITION
Commercial development of PDT agents other than Levulan(R) is currently
being pursued by a number of companies. These include: QLT PhotoTherapeutics
Inc. (Canada); Axcan Pharma Inc. (U.S.); Miravant, Inc. (U.S.); Pharmacyclics,
Inc. (U.S.); medac GmbH and Photonamic GmbH & Co. KG (Germany); and PhotoCure
ASA (Norway) who entered into a marketing agreement with Galderma S.A. for
countries outside of Nordic countries for certain dermatology indications.
Several of these companies are also commercializing and/or conducting research
with ALA or ALA-related compounds.
PhotoCure has received marketing approval of its ALA precursor (ALA
methyl-ester) compound for PDT treatment of AK and basal cell carcinoma, called
BCC, in the European Union, New Zealand, Australia, and countries in
Scandinavia. PhotoCure has also filed for regulatory approval in the United
States for these indications. PhotoCure has received a notice of approvability
from the FDA for its AK therapy and has stated that it expects the FDA to
approve its product in the first half of 2004. If PhotoCure receives FDA
approval to market its product in the United States, and if it enters into the
marketplace, its product will directly compete with our products. In April 2002,
we received a copy of a notice issued by PhotoCure ASA to Queen's University at
Kingston, Ontario, alleging that one of the patents covered by our agreement
with PARTEQ, Australian Patent No. 624985, relating to ALA, is invalid. As a
consequence of this action, Queen's University has assigned the Australian
patent to us so that we may participate directly in this litigation. We filed an
answer setting forth our defenses and a related countersuit alleging that
certain activities of PhotoCure and its marketing partner, Galderma S.A.,
infringe the patent. The case is ongoing and we are unable to predict the
outcome at this time. DUSA believes that the final hearing in the Federal Court
of Australia will occur in April 2004. See section entitled "Legal Proceedings".
20
In August 2003, Axcan Pharma Inc. received FDA approval for the use of its
product, PHOTOFRIN(R)(3), for photodynamic therapy in the treatment of high
grade dysplasia associated with Barrett's esophagus. This approval enabled Axcan
to be the first company to market a PDT therapy for this indication, which we
are also pursuing.
There are also non-PDT products for the treatment of AKs, including
cryotherapy with liquid nitrogen, 5-fluorouracil, and imiquimod, which was
approved on or about March 3, 2004. The pharmaceutical industry is highly
competitive, and many of our competitors have substantially greater financial,
technical and marketing resources than we have. In addition, several of these
companies have significantly greater experience than we do in developing
products, conducting preclinical and clinical testing and obtaining regulatory
approvals to market products for health care. Our competitors may succeed in
developing products that are safer or more effective than ours and in obtaining
regulatory marketing approval of future products before we do. Our
competitiveness may also be affected by our ability to manufacture and market
our products and by the level of reimbursement for the cost of our drug and
treatment by third-party payors, such as insurance companies, health maintenance
organizations and government agencies.
We believe that comparisons of the properties of various photosensitizing
PDT drugs will also highlight important competitive issues. We expect that our
principal methods of competition with other PDT companies will be based upon
such factors as the ease of administration of our photodynamic therapy; the
degree of generalized skin sensitivity to light; the number of required doses;
the selectivity of our drug for the target lesion or tissue of interest; and the
type and cost of our light systems. New drugs or future developments in PDT,
laser products or in other drug technologies may provide therapeutic or cost
advantages for competitive products. No assurance can be given that developments
by other parties will not render our products uncompetitive or obsolete.
In September 2003 we received FDA clearance to market the BLU-U(R) without
Levulan(R) for the treatment of moderate inflammatory acne vulgaris. Numerous
laser or non-laser light sources provide direct competition to our BLU-U(R).
Our current primary competitors for our products are the existing
therapies for treatment of AKs and moderate inflammatory acne vulgaris. See
section entitled "Business - Dermatology Indications, Actinic Keratoses; Acne."
Our principal method of competition with these therapies is patient benefits,
including rapid healing and excellent cosmetic results.
- -----------------
(3) PHOTOFRIN(R)is a registered trademark of Axcan Pharma Inc.
21
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:
o approval of manufacturing facilities, including adherence to current
good manufacturing, laboratory and clinical practices during
production and storage known as cGMP, GLP and GCP, respectively,
o controlled research and testing of products,
o applications for marketing approval containing manufacturing,
preclinical and clinical data to establish the safety and efficacy
of the product, and
o control of marketing activities, including advertising and labeling.
The marketing of pharmaceutical products requires the approval of the FDA
in the United States, and similar agencies in other countries. The FDA has
established regulations and safety standards, which apply to the preclinical
evaluation, clinical testing, manufacture and marketing of pharmaceutical
products. The process of obtaining marketing approval for a new drug normally
takes several years and often involves significant costs. The steps required
before a new drug can be produced and marketed for human use in the United
States include:
o preclinical studies
o the filing of an Investigational New Drug, or IND, application,
o human clinical trials, and
o the approval of a New Drug Application, or NDA.
Preclinical studies are conducted in the laboratory and on animals to
obtain preliminary information on a drug's efficacy and safety. The time
required for conducting preclinical studies varies greatly depending on the
nature of the drug, and the nature and outcome of the studies. Such studies can
take many years to complete. The results of these studies are submitted to the
FDA as part of the IND application. Human testing can begin if the FDA does not
object to the IND application.
The human clinical testing program involves three phases. Each clinical
study typically is conducted under the auspices of an Institutional Review
Board, or IRB, at the institution where the study will be conducted. An IRB will
consider among other things, ethical factors, the safety of human subjects, and
the possible liability of the institution. A clinical plan, or "protocol," must
be submitted to the FDA prior to commencement of each clinical trial. All
patients involved in the clinical trial must provide informed consent prior to
their participation. The FDA may order the temporary or permanent discontinuance
of a clinical trial at any time for a variety of reasons, particularly if safety
concerns exist. These clinical studies must be conducted in conformance with the
FDA's bioresearch monitoring regulations.
22
In Phase I, studies are usually conducted on a small number of healthy
human volunteers to determine the maximum tolerated dose and any product-related
side effects of a product. Phase I studies generally require several months to
complete, but can take longer, depending on the drug and the nature of the
study. Phase II studies are conducted on a small number of patients having a
specific disease to determine the most effective doses and schedules of
administration. Phase II studies generally require from several months to 2
years to complete, but can take longer, depending on the drug and the nature of
the study. Phase III involves wide scale studies on patients with the same
disease in order to provide comparisons with currently available therapies.
Phase III studies generally require from 6 months to 4 years to complete, but
can take longer, depending on the drug and the nature of the study.
Data from Phase I, II and III trials are submitted to the FDA with the
NDA. The NDA involves considerable data collection, verification and analysis,
as well as the preparation of summaries of the manufacturing and testing
processes and preclinical and clinical trials. Submission of an NDA does not
assure FDA approval for marketing. The application review process generally
takes 1 to 4 years to complete, although reviews of treatments for AIDS, cancer
and other life-threatening diseases may be accelerated, expedited or subject to
fast track treatment. The process may take substantially longer if, among other
things, the FDA has questions or concerns about the safety and/or efficacy of a
product. In general, the FDA requires properly conducted, adequate and
well-controlled clinical studies demonstrating safety and efficacy with
sufficient levels of statistical assurance. However, additional information may
be required. For example, the FDA also may request long-term toxicity studies or
other studies relating to product safety or efficacy. Even with the submission
of such data, the FDA may decide that the application does not satisfy its
regulatory criteria for approval and may disapprove the NDA. Finally, the FDA
may require additional clinical tests following NDA approval to confirm safety
and efficacy, often referred to as Phase IV clinical trials.
Upon approval, a prescription drug may only be marketed for the approved
indications in the approved dosage forms and at the approved dosage with the
approved labeling. Adverse experiences with the product must be reported to the
FDA. In addition, the FDA may impose restrictions on the use of the drug that
may be difficult and expensive to administer. Product approvals may be withdrawn
if compliance with regulatory requirements is not maintained or if problems
occur or are discovered after the product reaches the market. After a product is
approved for a given indication, subsequent new indications, dosage forms, or
dosage levels for the same product are reviewed by the FDA after the filing and
upon approval of a supplemental NDA. The supplement deals primarily with safety
and effectiveness data related to the new indication or dosage. Finally, the FDA
requires reporting of certain safety and other information, often referred to as
"adverse events" that become known to a manufacturer of an approved drug. If an
active ingredient of a drug product has been previously approved, drug
applications can be filed that may be less time-consuming and costly.
23
On December 3, 1999, the FDA approved the marketing of our Levulan(R)
Kerastick(R) 20% Topical Solution with PDT for treatment of AKs of the face or
scalp. The commercial version of our BLU-U(R), used together with the
Kerastick(R) to provide PDT for the treatment of non-hyperkeratotic actinic
keratoses, or AKs, of the face or scalp, was approved on September 26, 2000. We
also received clearance from the FDA in September 2003 to market the BLU-U(R)
without Levulan(R) PDT for the treatment of moderate inflammatory acne vulgaris.
We are following patients who completed our Phase I/II studies to examine
the use of Levulan(R) for the treatment of Barrett's esophagus with areas of
high-grade dysplasia. Other than the FDA-approved use of the Levulan(R)
Kerastick(R) with PDT for treatment of AKs, our other potential products still
require significant development, including additional preclinical and/or
clinical testing, and regulatory marketing approval prior to commercialization.
The process of obtaining required approvals can be costly and time consuming and
there can be no guarantee that the use of Levulan(R) in any future products will
be successfully developed, prove to be safe and effective in clinical trials, or
receive applicable regulatory marketing approvals.
Medical devices, such as our light source device, are also subject to the
FDA's rules and regulations. These products are required to be tested,
developed, manufactured and distributed in accordance with FDA regulations,
including good manufacturing, laboratory and clinical practices. Under the Food,
Drug & Cosmetic Act, all medical devices are classified as Class I, II or III
devices. The classification of a device affects the degree and extent of the
FDA's regulatory requirements, with Class III devices subject to the most
stringent requirements and FDA review. Generally, Class I devices are subject to
general controls (for example, labeling and adherence to the cGMP requirement
for medical devices), and Class II devices are subject to general controls and
special controls (for example, performance standards, postmarket surveillance,
patient registries and FDA guidelines). Class III devices, which typically are
life-sustaining or life-supporting and implantable devices, or new devices that
have been found not to be substantially equivalent to a legally marketed Class I
or Class II "predicate device," are subject to general controls and also require
clinical testing to assure safety and effectiveness before FDA approval is
obtained. The FDA also has the authority to require clinical testing of Class I
and II devices. The BLU-U(R) is part of a combination product as defined by FDA
and therefore has been classified as a Class III device. We are developing an
endoscopic device for the Barrett's esophagus indication which we believe will
also be classified as Class III and be subject to the highest level of FDA
regulation. Approval of Class III devices require the filing of a premarket
approval, or PMA, application supported by extensive data, including preclinical
and clinical trial data, to demonstrate the safety and effectiveness of the
device. If human clinical trials of a device are required and the device
presents a "significant risk," the manufacturer of the device must file an
investigational device exemption or "IDE" application and receive FDA approval
prior to commencing human clinical trials. At present, our devices are being
studied in preclinical and clinical trials under our INDs.
24
Following receipt of the PMA application, if the FDA determines that the
application is sufficiently complete to permit a substantive review, the agency
will accept it for filing and further review. Once the submission is filed, the
FDA begins a review of the PMA application. Under the Food, Drug and Cosmetics
Act, the FDA has 180 days to review a PMA application. The review of PMA
applications more often occur over a significantly protracted time period, and
the FDA may take up to 2 years or more from the date of filing to complete its
review. In addition, a PMA for a device which forms part of a combination
product will not be approved unless and until the NDA for the corresponding drug
is also approved.
The PMA process can be expensive, uncertain and lengthy. A number of other
companies have sought premarket approval for devices that have never been
approved for marketing. The review time is often significantly extended by the
FDA, which may require more information or clarification of information already
provided in the submission. During the review period, an advisory committee
likely will be convened to review and evaluate the PMA application and provide
recommendations to the FDA as to whether the device should be approved for
marketing. In addition, the FDA will inspect the manufacturing facility to
ensure compliance with cGMP requirements for medical devices prior to approval
of the PMA application. If granted, the premarket approval may include
significant limitations on the indicated uses for which the product may be
marketed, and the agency may require post-marketing studies of the device.
Medical products containing a combination of drugs, including biologic
drugs, or devices may be regulated as "combination products" in the United
States. A combination product generally is defined as a product comprised of
components from 2 or more regulatory categories (drug/device, device/biologic,
drug/biologic, etc.). In December 2002, the FDA established the Office of
Combination Products, or OCP, whose responsibilities, according to the FDA, will
cover the entire regulatory life cycle of combination products, including
jurisdiction decisions as well as the timeliness and effectiveness of pre-market
review, and the consistency and appropriateness of post-market regulation.
In connection with our NDA for the Levulan(R) Kerastick(R) with PDT for
AKs, a combination filing (including a PMA for the BLU-U(R) light source device
and the NDA for the Levulan(R) Kerastick(R)) was submitted to the Center for
Drug Evaluation and Research. The PMA was then separated from the NDA submission
by the FDA and reviewed by the FDA's Center for Devices and Radiological Health.
Based upon this experience, we anticipate that any future NDAs for Levulan(R)
PDT/PD will be a combination filing accompanied by PMAs. There is no guarantee
that PDT products will continue to be regulated as combination products.
25
The United States Drug Price Competition and Patent Term Restoration Act
of 1984 known as the Hatch-Waxman Act establishes a 5 year period of marketing
exclusivity from the date of NDA approval for new chemical entities approved
after September 24, 1984. Levulan(R) is a new chemical entity and market
exclusivity under this law will expire on December 3, 2004. During this
Hatch-Waxman marketing exclusivity period, no third-party may submit an
"abbreviated NDA" or "paper NDA" to the FDA.
Finally, any abbreviated or paper NDA applicant will be subject to the
notification provisions of the Hatch-Waxman Act, which should facilitate our
notification about potential infringement of our patent rights. The abbreviated
or paper NDA applicant must notify the NDA holder and the owner of any patent
applicable to the abbreviated or paper NDA product, of the application and
intent to market the drug that is the subject of the NDA.
We also intend to market our products outside of the United States
beginning with Canada later this year. Generally, we try to design our protocols
for clinical studies so that the results can be used in all the countries where
we hope to market the product. However, countries sometimes require additional
studies to be conducted on patients located in their country. Prior to marketing
a product in other countries, approval by that nation's regulatory authorities
must be obtained. Our former marketing partner had been responsible for applying
for marketing approvals outside the United States for Levulan(R) PDT for
dermatology uses and did file applications for approval in Austria, Australia,
South Africa and Brazil. However, as we have determined that we should
concentrate solely on the United States market at this time, we authorized our
former partner to withdraw the application for regulatory approval of Levulan(R)
PDT in Australia, and have now followed the same course for the applications in
Austria and South Africa. In 2003, we also advised our former partner to
withdraw the applications for the Levulan(R) Kerastick(R) and BLU-U(R) in Brazil
as it was determined that such rights cannot be transferred to us. We are in the
process of determining the requirements to reapply in Brazil, and have not
determined if we will reapply in any of the other countries at this time. We
also are investigating whether we can resubmit our application in Australia with
additional clinical results we have obtained since withdrawing that application
in order to satisfy the Australian regulatory requirements for approval.
With the enactment of the Drug Export Amendments Act of the United States
in 1986, products not yet approved in the United States may be exported to
certain foreign markets if the product is approved by the importing nation and
approved for export by the United States government. We can provide no assurance
that we will be able to get approval for any of our potential products from any
importing nations' regulatory authorities or be able to participate in the
foreign pharmaceutical market.
26
Our research and development activities have involved the controlled use
of certain hazardous materials, such as mercury in fluorescent tubes. We are
subject to various laws and regulations governing the use, manufacture, storage,
handling and disposal of hazardous materials and certain waste products. During
the design, construction and validation phases of our new Kerastick(R) facility,
we have taken steps to ensure that appropriate environmental controls associated
with the facility comply with environmental laws and standards. We can provide
no assurance that we will not have to make significant additional expenditures
in order to comply with environmental laws and regulations in the future. Also,
we cannot assure that current or future environmental laws or regulations will
not materially adversely effect our operations, business or assets. In addition,
although we believe that our safety procedures for the handling and disposal of
such materials comply with the standards prescribed by current environmental
laws and regulations, the risk of accidental contamination or injury from these
materials cannot be completely eliminated. In the event of such an accident, we
could be held liable for any damages that result, and any such liability could
exceed our resources.
PRODUCT LIABILITY AND INSURANCE
We are subject to the inherent business risk of product liability claims
in the event that the use of our technology or any prospective product is
alleged to have resulted in adverse effects during testing or following
marketing approval of any such product for commercial sale. We maintain product
liability insurance for coverage of our clinical trial activities and for our
commercial supplies. There can be no assurance that such insurance will continue
to be available on commercially reasonable terms or that it will provide
adequate coverage against all potential claims. See section entitled "Legal
Proceedings".
EMPLOYEES
At the end of 2003, we had 50 full-time employees and 1 part-time
employee. Our 2002 staffing levels for key management personnel in
administrative, financial, technical and operations functions had been
established to support the initial expected sales levels of Levulan(R) PDT that
did not materialize. Therefore, following the reacquisition of our product
rights in September 2002, we downsized our staffing levels by approximately 20%.
Since that time, we have been gradually adding employees as needed, including
our direct sales force.
We have employment agreements with all of our key executive officers. We
have purchased, and are the named beneficiary of, a key man life insurance
policy having a face value of CDN $2,000,000 on the life of our President. We
also retain numerous independent consultants and the services of key researchers
at leading university centers whose activities are coordinated by our employees.
We intend to hire other employees and consultants as needed.
27
INTERNET INFORMATION
Our internet site is located at www.dusapharma.com. Copies of our reports
filed pursuant to Section 13(a) or 15(d) of the Exchange Act, including Annual
Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form
8-K may be accessed from our website, free of charge, as soon as reasonably
practicable after we electronically file such reports with, or furnish such
reports to, the Securities and Exchange Commission.
RISK FACTORS
You should carefully consider and evaluate all of the information in, or
incorporated by reference in, this prospectus. The following are among the risks
we face related to our business, assets and operations. They are not the only
ones we face. Any of these risks could materially and adversely affect our
business, results of operations and financial condition, which in turn could
materially and adversely affect the value of the securities being offered by
this prospectus.
This section of the prospectus contains forward-looking statements of our plans,
objectives, expectations and intentions. We use words such as "anticipate,"
"believe," "expect," future" and "intend" and similar expressions to identify
forward-looking statements. Our actual results could differ materially from
those anticipated in these forward-looking statements for many reasons,
including the risks factors described below and elsewhere in this prospectus.
You should not place undue reliance on these forward-looking statements, which
apply only as of the date of this prospectus.
RISKS RELATED TO DUSA
WE ARE NOT CURRENTLY PROFITABLE AND MAY NOT BE PROFITABLE IN THE FUTURE UNLESS
WE CAN SUCCESSFULLY MARKET AND SELL OUR APPROVED PRODUCTS, THE LEVULAN(R)
KERASTICK(R) WITH THE BLU-U(R) BRAND LIGHT SOURCE FOR THE TREATMENT OF AKS OF
THE FACE OR SCALP, AND THE BLU-U(R) WITHOUT LEVULAN(R) FOR THE TREATMENT OF
MODERATE INFLAMMATORY ACNE.
WE HAVE ONLY LIMITED EXPERIENCE MARKETING AND SELLING PHARMACEUTICAL
PRODUCTS AND, AS A RESULT, OUR REVENUES FROM PRODUCT SALES MAY SUFFER.
If we are unable to successfully market and sell our approved products,
revenues from product sales will be lower than anticipated and our financial
condition may be adversely affected. As of September 1, 2002, DUSA and our
former marketing partner for dermatology products terminated the parties'
marketing, development and supply agreement. As a result of this termination,
DUSA is solely responsible for marketing its approved dermatology products in
the United States and the rest of the world. We will be doing so without the
experience of having marketed pharmaceutical products in the past. In October
2003, DUSA began hiring a small direct sales force and has engaged a small
number of independent sales representatives to market our products. Acquiring
and retaining marketing and sales force capabilities involves significant
expense, and current sales levels are not offsetting the expenses related to
these efforts. We may need to hire additional sales people to penetrate the
market. If our sales and marketing efforts fail, then sales of the Kerastick(R)
and the BLU-U(R) will be adversely affected.
28
IF WE CANNOT IMPROVE PHYSICIAN REIMBURSEMENT AND/OR CONVINCE MORE PRIVATE
INSURANCE CARRIERS TO ADEQUATELY REIMBURSE PHYSICIANS FOR OUR THERAPY,
SALES OF OUR LEVULAN(R) KERASTICK(R) FOR AKS PRODUCT MAY SUFFER.
Without adequate levels of reimbursement by government health care
programs and private health insurers, the market for our Levulan(R) Kerastick(R)
for AKs therapy will be limited. While we continue to support efforts to improve
reimbursement levels TO physicians and are working with the major private
insurance carriers to improve coverage for our therapy, if our efforts are not
successful, adoption of our therapy and sales of our products could be
negatively impacted. As of January 1, 2004, a new national reimbursement code
for Medicare and other third-party payors for the BLU-U(R) PDT application
procedure and for the costs of thE Levulan(R) Kerastick(R) became effective.
Doctors can also bill for any applicable visit fees. However, some physicians
have suggesTED that even the new reimbursement levels still do not fully reflect
the required efforts to routinely execute our PDT therapy in their practices.
SINCE WE NOW OPERATE THE ONLY FDA APPROVED MANUFACTURING FACILITY FOR THE
KERASTICK(R) AND CONTINUE TO RELY HEAVILY ON SOLE SUPPLIERS FOR THE
MANUFACTURE OF LEVULAN(R) AND THE BLU-U(R), ANY SUPPLY OR MANUFACTURING
PROBLEMS COULD NEGATIVELY IMPACT OUR SALES.
If we experience problems producing Kerastick(R) units in our new
facility, or either of our contract suppliers fail tO supply DUSA's requirements
of Levulan(R) or the BLU-U(R), our business, financial condition and results of
operations would suffer. WE are not currently approved to manufacture the
BLU-U(R) on our own and have not ordered any new BLU-U(R) units since 2001. In
additiON, while we have received FDA approval to manufacture the Kerastick(R) in
our own manufacturing facility, we have not yet produceD commercial quantities
of Kerastick(R) units in the facility on a regular basis.
Manufacturers and their subcontractors often encounter difficulties when
commercial quantities of products are manufactured for the first time, or
re-starting production after a long lay-off, or large quantities of new products
are manufactured, including problems involving:
o product yields,
o quality control,
o component and service availability,
o compliance with FDA regulations, and
o the need for further FDA approval if manufacturers make material
changes to manufacturing processes and/or facilities.
29
We cannot guarantee that problems will not arise with production yields,
costs or quality as we and our suppliers seek to commence, re-start and increase
production. Any manufacturing problems could delay or limit our supplies which
would hinder our marketing and sales efforts.
If our facility, any facility of our contract manufacturers, or any
equipment in those facilities, is damaged or destroyed, we may not be able to
quickly or inexpensively replace it. Likewise, if there are any quality or
supply problems with any components or materials needed to manufacturer our
products, we may not be able to quickly remedy the problem(s).
ANY FAILURE TO COMPLY WITH ONGOING GOVERNMENTAL REGULATIONS IN THE UNITED
STATES AND ELSEWHERE WILL LIMIT OUR ABILITY TO MARKET OUR PRODUCTS.
Both the manufacture and marketing of our products, the Levulan(R)
Kerastick(R) with the BLU-U(R) for AKs and the BLU-U(R) WITHOUT Levulan(R) to
treat moderate inflammatory acne are subject to continuing FDA review as well as
comprehensive regulation by the FDA anD by state and local regulatory
authorities. These laws require, among other things,
o approval of manufacturing facilities, including adherence to good
manufacturing and laboratory practices during production and
storage,
o controlled research and testing of products even after approval, and
o control of marketing activities, including advertising and labeling.
If we, or any of our contract manufacturers, fail to comply with these
requirements, DUSA may be limited in the jurisdictions in which we are permitted
to sell our products. Additionally, if we or our manufacturers fail to comply
with applicable regulatory approval requirements, a regulatory agency may also:
o send us warning letters,
o impose fines and other civil penalties on us,
o seize our products,
o suspend our regulatory approvals,
o refuse to approve pending applications or supplements to approved
applications filed by us,
o refuse to permit exports of our products from the United States,
o require us to recall products,
o require us to notify physicians of labeling changes and/or product
related problems,
o impose restrictions on our operations, and/or
o criminally prosecute us.
30
We and our manufacturers must continue to comply with the FDA's current
Good Manufacturing Practice, commonly known as cGMP, and equivalent foreign
regulatory requirements. The cGMP requirements govern quality control and
documentation policies and procedures. In complying with cGMP and foreign
regulatory requirements, we and our third-party manufacturers will be obligated
to expend time, money and effort in production, record keeping and quality
control to assure that our products meet applicable specifications and other
requirements.
As part of our FDA approval for the Levulan(R) Kerastick(R) for AK, we
were required to conduct two Phase IV follow-UP studies. We have successfully
completed the first study; and submitted our final report on the second study to
the FDA in January 2004. While we believe this second study was also a success,
the FDA may request additional information and/or studies. Additionally, if
previously unknown problems with the product, a manufacturer or its facility are
discovered in the future, changes in product labeling restrictions or withdrawal
of the product from the market may occur.
Manufacturing facilities are subject to ongoing periodic inspection by the
FDA, including unannounced inspections. We cannot guarantee that our third-party
supply sources, or our own new Kerastick(R) facility, will continue to meet all
applicable FDA regulations in the future. If we, or any of our manufacturers,
fail to maintain compliance with FDA regulatory requirements, it would be time
consuming and costly to remedy the problem(s) or to qualify other sources. These
consequences could have an adverse effect on our financial condition and
operations.
IF PRODUCT SALES DO NOT INCREASE SIGNIFICANTLY WE MAY NOT BE ABLE TO
ADVANCE DEVELOPMENT OF OUR OTHER POTENTIAL PRODUCTS AS QUICKLY AS WE WOULD
LIKE TO, WHICH WOULD DELAY THE APPROVAL PROCESS AND MARKETING OF NEW
POTENTIAL PRODUCTS.
If we do not generate sufficient revenues from our approved products, we
may be forced to delay or abandon some or all of DUSA's product development
programs. The pharmaceutical development and commercialization process is time
consuming and costly, and any delays might result in higher costs which could
adversely affect our financial condition. Without sufficient product sales, DUSA
might be required to seek additional funding. There is no guarantee that
adequate funding sources could be found to continue the development of all our
potential products. DUSA might be required to commit substantially greater
capital than we have to research and development of such products and we may not
have sufficient funds to complete all or any of our development programs.
31
WE HAVE SIGNIFICANT LOSSES AND ANTICIPATE CONTINUED LOSSES FOR THE
FORESEEABLE FUTURE.
We have a history of operating losses. We expect to have continued losses
through at least 2004 as we attempt to increase sales of our approved products
in the marketplace and continue research and development of potential new
products. As of December 31, 2003, our accumulated deficit was $58,909,781.
Although sales of the Kerastick(R) have increased with the addition of our saleS
force and our ongoing medical education activities, we cannot predict whether
any of our products will achieve significant market acceptance or generate
sufficient revenues to enable us to become profitable.
IF WE ARE UNABLE TO PROTECT OUR PROPRIETARY TECHNOLOGY, TRADE SECRETS OR
KNOW-HOW, WE MAY NOT BE ABLE TO OPERATE OUR BUSINESS PROFITABLY.
WE HAVE LIMITED PATENT PROTECTION AND IF WE ARE UNABLE TO PROTECT OUR
PROPRIETARY RIGHTS, COMPETITORS MIGHT BE ABLE TO DEVELOP SIMILAR PRODUCTS
TO COMPETE WITH OUR PRODUCTS AND TECHNOLOGY.
Our ability to compete successfully depends, in part, on our ability to
defend patents that have issued, obtain new patents, protect trade secrets and
operate without infringing the proprietary rights of others. We have no product
patent protection for our Levulan(R) brand of the compound ALA. Our basic
patents are for methods of detecting and treating various diseased tissues using
ALA (or related compounds called precursors), in combination with light. We own
or exclusively license patents and patent applications related to the following:
o methods of using ALA and its unique physical forms in combination
with light, and
o compositions and apparatus for those methods, and
o unique physical forms of ALA,
We have limited patent protection outside the United States, which may
make it easier for third-parties to compete there. Our basic method of treatment
patents and applications have counter-parts in only four foreign countries. Even
where we have patent protection, there is no guarantee that we will be able to
enforce our patents. Additionally, enforcement of a given patent may not be
practicable or an economically viable alternative.
Our patent protection in Australia may be diminished or lost entirely. In
2002, we received notice of a lawsuit filed in Australia by PhotoCure ASA
alleging that Australian Patent No. 624985, which is one of the patents licensed
by PARTEQ Research & Development Innovations, the technology transfer arm of
Queen's University at Kingston, Ontario, to us, relating to our ALA technology,
is invalid. As a consequence of this action, Queen's University assigned the
Australian patent to DUSA so that we can participate directly in the litigation.
We have filed a response to the allegations of invalidity in court and have also
filed a counter suit alleging that PhotoCure's activities in Australia infringe
our patent. We cannot predict the outcome of PhotoCure's action alleging
invalidity. Australia is a significant pharmaceutical market for AK therapies,
and loss of this patent could negatively impact us in at least two ways. First,
if we are able to enter the Australia market, the lack of a patent would
probably retard or diminish our market share. Second, third-parties might not be
interested in licensing the product in Australia without patent protection which
would limit potential revenues from this market.
32
Some of the indications for which we are developing therapies may not be
covered by the claims in any of our existing patents. Even with the issuance of
additional patents to DUSA, other parties are free to develop other uses of ALA,
including medical uses, and to market ALA for such uses, assuming that they have
obtained appropriate regulatory marketing approvals. ALA in the chemical form
has been commercially supplied for decades, and is not itself subject to patent
protection. There are reports of third-parties conducting clinical studies with
ALA in countries outside the United States where PARTEQ does not have patent
protection. In addition, a number of third-parties are seeking patents for uses
of ALA not covered by our patents. These other uses, whether patented or not,
and the commercial availability of ALA, could limit the scope of our future
operations because ALA products could come on the market which would not
infringe our patents but would compete with our Levulan(R) products even though
they arE marketed for different uses.
While we attempt to protect our proprietary information as trade secrets
through agreements with each employee, licensing partner, consultant,
university, pharmaceutical company and agent, we cannot guarantee that these
agreements will provide effective protection for our proprietary information. It
is possible that:
o these persons or entities might breach the agreements,
o we might not have adequate remedies for a breach, and/or
o our competitors will independently develop or otherwise discover our
trade secrets.
PATENT LITIGATION IS EXPENSIVE, AND WE MAY NOT BE ABLE TO AFFORD THE
COSTS.
The costs of litigation or any proceeding relating to our intellectual
property rights could be substantial even if resolved in our favor. Some of our
competitors have far greater resources than we do and may be better able to
afford the costs of complex patent litigation. For example, third-party
competitors may infringe one or more of our patents, and we could be required to
spend significant resources to enforce our patent rights. Also, if we were to
sue a third-party for infringement of our patents in the United States, that
third-party could challenge the validity of our patent(s). We cannot guarantee
that a third-party will not claim, with or without merit, that we have infringed
their patent(s) or misappropriated their proprietary material. Defending this
type of legal action involves considerable expense and could negatively affect
our financial results.
33
Additionally, if a third-party were to file a United States patent
application, or be issued a patent claiming technology also claimed by us in a
pending United States application(s), we may be required to participate in
interference proceedings in the United States Patent and Trademark Office to
determine the priority of invention. A third-party could also request the
declaration of a patent interference between one of our issued U.S. patents and
one of its patent applications. Any interference proceedings likely would
require participation by us and/or PARTEQ, could involve substantial legal fees
and result in a loss or lessening of our patent protection.
WE HAVE ONLY TWO THERAPIES THAT HAVE RECEIVED REGULATORY APPROVAL OR CLEARANCE
AND WE CANNOT PREDICT WHETHER WE WILL EVER DEVELOP OR COMMERCIALIZE ANY OTHER
PRODUCTS.
EXCEPT FOR THE LEVULAN(R) KERASTICK(R) WITH THE BLU-U(R) TO TREAT AKS, AND
THE USE OF THE BLU-U(R) ALONE TO TREAT MODERATE INFLAMMATORY ACNE, ALL OF
OUR POTENTIAL PRODUCTS ARE IN EARLY STAGES OF DEVELOPMENT AND MAY NEVER
RESULT IN ANY COMMERCIALLY SUCCESSFUL PRODUCTS.
We do not know if any of our products will ever be commercially
successful. Currently, we are developing a single drug compound, ALA, under the
trademark Levulan(R), with light for a number of different medical conditions
using photodynamic therapy, oR PDT. To be profitable, we must successfully
research, develop, obtain regulatory approval for, manufacture, introduce,
market and distribute our products. Except for DUSA's two approved therapies,
all of our other potential products are at an early stage of development and
subject to the risks of failure inherent in the development of new
pharmaceutical products and products based on new technologies. These risks
include:
o delays in product development, clinical testing or manufacturing,
o unplanned expenditures in product development, clinical testing or
manufacturing,
o failure in clinical trials or failure to receive regulatory
approvals,
o emergence of superior or equivalent products,
o inability to market products due to third-party proprietary rights,
and
o failure to achieve market acceptance.
We cannot predict how long the development for our early stage products
will take or whether they will be medically effective. We cannot be sure that a
successful market will ever develop for our drug technology.
34
WE MUST RECEIVE SEPARATE APPROVAL FOR EACH OF OUR POTENTIAL PRODUCTS
BEFORE WE CAN SELL THEM COMMERCIALLY IN THE UNITED STATES OR ABROAD.
All of our potential Levulan(R) products will require the approval of the
FDA before they can be marketed in the UniteD States. If we fail to obtain the
required approvals for these products our revenues will be limited. Before an
application to the FDA seeking approval to market a new drug, called an NDA, can
be filed, a product must undergo, among other things, extensive animal testing
and human clinical trials. The process of obtaining FDA approvals can be
lengthy, costly, and time-consuming. Following the acceptance of an NDA, the
time required for regulatory approval can vary and is usually 1 to 3 years or
more. The FDA may require additional animal studies and/or human clinical trials
before granting approval. Our Levulan(R) PDT products are based on neW
technology. To the best of our knowledge, the FDA has approved only 3 drugs for
use in photodynamic therapy, including Levulan(R). This factor may lengthen the
approval process. We face much trial and error and we may fail at numerous
stages along the way.
We cannot predict whether we will obtain approval for any of our potential
products. Data obtained from preclinical testing and clinical trials can be
susceptible to varying interpretations which could delay, limit or prevent
regulatory approvals. Future clinical trials may not show that Levulan(R) PDT or
photodetection, known as PD, is safe and effective for any new use we are
studying. In addition, delays or disapprovals may be encountered based upon
additional governmental regulation resulting from future legislation or
administrative action or changes in FDA policy. We must also obtain foreign
regulatory clearances before we can market any potential products in foreign
markets. The foreign regulatory approval process includes all of the risks
associated with obtaining FDA marketing approval and may impose substantial
additional costs.
IF WE ARE UNABLE TO OBTAIN THE NECESSARY CAPITAL TO FUND OUR OPERATIONS,
WE WILL HAVE TO DELAY OUR DEVELOPMENT PROGRAMS AND MAY NOT BE ABLE TO
COMPLETE OUR CLINICAL TRIALS.
Since our sales goals for our products have not been met, and may not be
met in the future, we may need substantial additional funds to fully develop,
manufacture, market and sell our other potential products. In addition to the
funds we recently received in connection with a private placement in February
2004, we may obtain funds through other public or private financings, including
equity financing, and/or through collaborative arrangements. We cannot predict
whether any financing will be available on acceptable terms.
Dependent on the extent of available funding, we may continue to delay,
reduce in scope or eliminate some of our research and development programs as we
did in 2003. We may also choose to license rights to third parties to
commercialize products or technologies that we would otherwise have attempted to
develop and commercialize on our own which could reduce our potential revenues.
35
BECAUSE OF THE NATURE OF OUR BUSINESS, THE LOSS OF KEY MEMBERS OF OUR MANAGEMENT
TEAM COULD DELAY ACHIEVEMENT OF OUR GOALS.
We are a small company with only 51 employees. We are highly dependent on
several key officer/employees with specialized scientific and technical skills
without whom our business, financial condition and results of operations would
suffer. The photodynamic therapy industry is still quite small and the number of
experts is limited. The loss of these key employees could cause significant
delays in achievement of our business and research goals since very few people
with their expertise could be hired. Our growth and future success will depend,
in large part, on the continued contributions of these key individuals as well
as our ability to motivate and retain other qualified personnel in our specialty
drug and light device areas.
RISKS RELATED TO OUR INDUSTRY
PRODUCT LIABILITY AND OTHER CLAIMS AGAINST US MAY REDUCE DEMAND FOR OUR PRODUCTS
OR RESULT IN DAMAGES.
WE HAVE HAD A LAWSUIT FILED AGAINST US BASED ON A PRODUCT LIABILITY CLAIM
WHICH, REGARDLESS OF MERIT, COULD RESULT IN A DAMAGE AWARD FOR WHICH WE
MAY NOT HAVE ADEQUATE INSURANCE COVERAGE.
The development, manufacture and sale of medical products exposes us to
product liability claims related to the use or misuse of our products. Product
liability claims can be expensive to defend and may result in significant
judgments against us. On January 29, 2004, we were served with a complaint filed
in the State of Michigan Circuit Court for the County of Oakland. The case has
been removed to the U.S. District Court, Eastern District of Michigan, Southern
Division. The complaint alleges unspecified damages suffered by the plaintiff
arising from recurrence of epileptic or similar seizures following exposure to
the BLU-U(R). We are unable to predict the outcome of this litigation. Although
we currently maintain product liability insurance for coverage of our products
in amounts we believe to be commercially reasonable we cannot be certain that
the coverage amounts are adequate. A successful claim in excess of our insurance
coverage could materially harm our business, financial condition and results of
operations. Additionally, we cannot guarantee that continued product liability
insurance coverage will be available in the future at acceptable costs. If the
cost is too high, we may have to self-insure.
36
OUR BUSINESS INVOLVES ENVIRONMENTAL RISKS AND WE MAY INCUR SIGNIFICANT
COSTS COMPLYING WITH ENVIRONMENTAL LAWS AND REGULATIONS.
We have used various hazardous materials, such as mercury in fluorescent
tubes in our research and development activities. We are subject to federal,
state and local laws and regulations which govern the use, manufacture, storage,
handling and disposal of hazardous materials and specific waste products. Now
that we have established our own production line for the manufacture of the
Kerastick(R), we are subject to additional environmental laws and regulations.
We believe that we are in compliance in all material respects with currently
applicable environmental laws and regulations. However, we cannot guarantee that
we will not incur significant costs to comply with environmental laws and
regulations in the future. We also cannot guarantee that current or future
environmental laws or regulations will not materially adversely affect our
operations, business or assets. In addition, although we believe our safety
procedures for handling and disposing of these materials comply with federal,
state and local laws and regulations, we cannot completely eliminate the risk of
accidental contamination or injury from these materials. In the event of such an
accident, we could be held liable for any resulting damages, and this liability
could exceed our resources.
WE MAY NOT BE ABLE TO COMPETE AGAINST TRADITIONAL TREATMENT METHODS OR KEEP UP
WITH RAPID CHANGES IN THE BIOTECHNOLOGY AND PHARMACEUTICAL INDUSTRIES THAT COULD
MAKE SOME OR ALL OF OUR PRODUCTS NON-COMPETITIVE OR OBSOLETE.
COMPETING PRODUCTS AND TECHNOLOGIES BASED ON TRADITIONAL TREATMENT METHODS
MAY MAKE SOME OR ALL OF OUR PROGRAMS OR POTENTIAL PRODUCTS NONCOMPETITIVE
OR OBSOLETE.
Well-known pharmaceutical, biotechnology and chemical companies are
marketing well-established therapies for the treatment of many of the same
conditions we are seeking to treat including AKs, acne, photodamaged skin and
Barrett's esophagus. Doctors may prefer to use familiar methods, rather than
trying our products. Reimbursement issues may affect the economic
competitiveness of our products as compared to other more traditional therapies.
Many companies are also seeking to develop new products and technologies,
and receiving approval for medical conditions for which we are developing
treatments. Our industry is subject to rapid, unpredictable and significant
technological change. Competition is intense. Our competitors may succeed in
developing products that are safer or more effective than ours. Many of our
competitors have substantially greater financial, technical and marketing
resources than we have. In addition, several of these companies have
significantly greater experience than we do in developing products, conducting
preclinical and clinical testing and obtaining regulatory approvals to market
products for health care.
37
We cannot guarantee that new drugs or future developments in drug
technologies will not have a material adverse effect on our business. Increased
competition could result in:
o price reductions,
o lower levels of third-party reimbursements,
o failure to achieve market acceptance, and
o loss of market share,
any of which could adversely affect our business. Further, we cannot give any
assurance that developments by our competitors or future competitors will not
render our technology obsolete.
OUR PDT / PD COMPETITORS IN THE BIOTECHNOLOGY AND PHARMACEUTICAL
INDUSTRIES MAY HAVE BETTER PRODUCTS, MANUFACTURING CAPABILITIES OR
MARKETING EXPERTISE.
We anticipate that we will face increased competition as the scientific
development of PDT/PD advances and new companies enter our markets. Several
companies are developing PDT agents other than Levulan(R). These include: QLT
PhotoTherapeutics Inc. (Canada); Axcan Pharma Inc. (U.S.); Miravant, Inc.
(U.S.); and Pharmacyclics, Inc. (U.S.). We are also aware of several companies
commercializing and/or conducting research with ALA or ALA-related compounds,
including: medac GmbH and Photonamic GmbH & Co. KG (Germany); and PhotoCure ASA
(Norway) which entered into a marketing agreement with Galderma S.A. for
countries outside of Nordic countries for certain dermatology indications.
PhotoCure has received marketing approval of its ALA precursor (ALA
methyl-ester) compound for PDT treatment of AKs and basal cell carcinoma in the
European Union, New Zealand, Australia and countries in Scandinavia. PhotoCure
has also filed for regulatory approvals in the United States, and has received a
notice of approvability from the FDA for its AK product. If PhotoCure receives
FDA product approval in the United States and successfully enters the United
States marketplace, its product will represent direct competition for our
products.
Axcan Pharma Inc. has announced that it has received FDA approval for the
use of its product, PHOTOFRIN(R), for PDT in the treatment of high grade
dysplasia associated with Barrett's esophagus. Axcan is the first company to
market a PDT therapy for this indication, which we are also pursuing.
We expect that our principal methods of competition with other PDT
companies will be based upon such factors as:
o the ease of administration of our method of PDT,
o the degree of generalized skin sensitivity to light,
38
o the number of required doses,
o the selectivity of our drug for the target lesion or tissue of
interest, and
o the type and cost of our light systems.
RISKS RELATED TO OUR STOCK
IF OUTSTANDING OPTIONS, WARRANTS AND RIGHTS ARE CONVERTED, THE VALUE OF THOSE
SHARES OF COMMON STOCK OUTSTANDING JUST PRIOR TO THE CONVERSION WILL BE DILUTED.
As of March 1, 2004 there were outstanding options and warrants to
purchase 2,709,825 shares of common stock, with exercise prices ranging from
U.S. $1.60 to $31.00 per share, and ranging from CDN $4.69 to CDN $10.875 per
share, respectively. In addition, DUSA granted investors of a private placement
rights to purchase up to an aggregate of an additional 337,500 shares of common
stock at $11.00 per share. These additional investment rights expire April 14,
2004, or 30 trading days from the closing of the private placement, which
occurred on March 2, 2004. If the holders exercise a significant number of these
securities at any one time, the market price of the common stock could fall, and
the value of the common stock held by other shareholders would be diluted. The
holders of the options, warrants and rights have the opportunity to profit if
the market price for the common stock exceeds the exercise price of their
respective securities, without assuming the risk of ownership. The holders are
likely to exercise their securities when we would probably be able to raise
capital from the public on terms more favorable than those provided in these
securities.
RESULTS OF OUR OPERATIONS AND GENERAL MARKET CONDITIONS FOR BIOTECHNOLOGY STOCK
COULD RESULT IN THE SUDDEN CHANGE IN THE MARKET VALUE OF OUR STOCK.
The price of our common stock has been highly volatile. These fluctuations
create a greater risk of capital losses for our shareholders as compared to less
volatile stocks. From January 1, 2003 to March 10, 2004, the price of our stock
has ranged from a low of $1.40 to a high of $14.87. Factors that contributed to
the volatility of our stock during the last 12 months included:
o levels of product sales,
o general market conditions,
o increased marketing activities,
o changes in third-party payor reimbursement for our therapy, and
o failure to close a strategic partnership for Barrett's esophagus.
39
The significant general market volatility in similar stage pharmaceutical
and biotechnology companies made the market price of our common stock even more
volatile.
IF OUR MARKET CAPITALIZATION FALLS BACK TO A LEVEL SIGNIFICANTLY BELOW OUR CASH
VALUE, WE COULD BE SUBJECT TO A TENDER OFFER THAT DOES NOT REFLECT THE POTENTIAL
VALUE OF OUR BUSINESS AND COULD MINIMIZE THE RETURN TO OUR SHAREHOLDERS ON THEIR
INVESTMENTS.
The price of our common stock has been negatively impacted by
disappointing product sales, the termination of our dermatology marketing,
development and supply agreement in late 2002, general market conditions, and
the limited acceptance of the value of our therapy. Based on this, our share
price traded at a level below our cash value during much of 2003. If our share
price again falls below our cash value, there may be a risk of companies
offering to acquire us at reduced values which do not reflect the business
potential of our assets.
EFFECTING A CHANGE OF CONTROL OF DUSA WOULD BE DIFFICULT, WHICH MAY DISCOURAGE
OFFERS FOR SHARES OF OUR COMMON STOCK.
Our certificate of incorporation authorizes the board of directors to
issue up to 100,000,000 shares of stock, 40,000,000 of which are common stock.
The board of directors has the authority to determine the price, rights,
preferences and privileges, including voting rights, of the remaining 60,000,000
shares without any further vote or action by the shareholders. The rights of the
holders of our common stock will be subject to, and may be adversely affected
by, the rights of the holders of any preferred stock that may be issued in the
future.
On September 27, 2002, we adopted a shareholder rights plan at a special
meeting of DUSA's board of directors. The rights plan could discourage, delay or
prevent a person or group from acquiring 15% or more (or 20% or more in the case
of certain parties) of our common stock, thereby limiting, perhaps, the ability
of our shareholders to benefit from such a transaction.
The rights plan provides for the distribution of one right as a dividend
for each outstanding share of our common stock to holders of record as of
October 10, 2002. Each right entitles the registered holder to purchase one
one-thousandths of a share of preferred stock at an exercise price of $37.00 per
right. The rights will be exercisable subsequent to the date that a person or
group either has acquired, obtained the right to acquire, or commences or
discloses an intention to commence a tender offer to acquire, 15% or more of our
outstanding common stock (or 20% of the outstanding common stock in the case of
a shareholder or group who beneficially held in excess of 15% at the record
date), or if a person or group is declared an "Adverse Person", as such term is
defined in the rights plan. The rights may be redeemed by DUSA at a redemption
price of one one-hundredth of a cent per right until ten days following the date
the person or group acquires, or discloses an intention to acquire, 15% or 20%
or more, as the case may be, of DUSA, or until such later date as may be
determined by the our board of directors.
40
Under the rights plan, if a person or group acquires the threshold amount
of common stock, all holders of rights (other than the acquiring person or
group) may, upon payment of the purchase price then in effect, purchase shares
of common stock of DUSA having a value of twice the purchase price. In the event
that we are involved in a merger or other similar transaction where DUSA is not
the surviving corporation, all holders of rights (other than the acquiring
person or group) shall be entitled, upon payment of the purchase price then in
effect, to purchase common stock of the surviving corporation having a value of
twice the purchase price. The rights will expire on October 10, 2012, unless
previously redeemed. Our board of directors has also adopted certain amendments
to DUSA's certificate of incorporation consistent with the terms of the rights
plan.
ITEM 2. PROPERTIES
In May 1999 we entered into a five year lease for 16,000 sq. ft. of
office/warehouse space to be used for offices and manufacturing in Wilmington,
Massachusetts. On February 1, 2001, we entered into a five year lease for an
additional 24,000 square feet of space at our Wilmington facility. As part of
our planned build-out of the facility, in December 2001 we replaced the two 5
year leases with a new 15 year lease covering the entire building through
November 2016. We have the ability to terminate the Wilmington lease after the
10th year (2011) of the lease by providing the landlord with notice at least 7
and one-half months prior to the date on which the termination would be
effective. In October 2002, we entered into a five year lease commitment for
approximately 2,000 square feet, for our wholly-owned subsidiary, DUSA
Pharmaceuticals New York, Inc., replacing the space DUSA previously occupied.
Commencing in August 2002, we entered into a five year lease for different
office space for our Toronto location. This facility accommodates the Toronto
office of our President and shareholder services representative. See "Note 15(b)
to the Company's Notes to the Consolidated Financial Statements".
ITEM 3. LEGAL PROCEEDINGS
In April 2002, we received a copy of a notice issued by PhotoCure ASA to
Queen's University at Kingston, Ontario, alleging that Australian Patent No.
624985 is invalid. Australian Patent No. 624985 is one of the patents covered by
our agreement with PARTEQ Research & Development Innovations, the technology
transfer arm of Queen's University, relating to 5-aminolevulinic acid
technology. PhotoCure instituted this proceeding on April 12, 2002 in the
Federal Court of Australia, Victoria District Registry. As a consequence of this
action, Queen's University has assigned the Australian patent to us so that we
may participate directly in this litigation. We filed an answer setting forth
our defenses and a related countersuit alleging that PhotoCure's activities
infringe the patent. The case is ongoing and we are unable to predict the
outcome at this time. DUSA believes that the final hearing in the Federal Court
of Australia will occur in April 2004.
41
In March 2003, we received notice that our Netherlands patent was being
formally challenged by an anonymous agent, and we filed a formal response to the
opposition. The Netherlands Patent Office has issued a notice that the patent
was upheld and granted in amended form on February 10, 2004. The opponent's
right to appeal has expired. See section entitled "Business - Patents and
Trademarks; and - Competition ". For other patent matters, see section entitled
"Risk Factors - If we are unable to protect our proprietary technology, trade
secrets or know-how, we may not be able to operate our business profitably".
In December 2003, DUSA was served with a complaint filed in the State of
Michigan Circuit Court for the County of Oakland alleging, among other things,
that DUSA's BLU-U(R) caused the plaintiff to suffer a seizure during the
performance of her duties as an office assistant. The complaint names Berlex
Laboratories, Inc., a subsidiary of our former marketing partner, as another
defendant. The damages are unspecified. The case has been removed to the U.S.
District Court, Eastern District of Michigan, Southern Division. While it is not
possible to predict or determine the outcome of this action, we believe that the
costs associated with all such matters will not have a material adverse effect
on our consolidated financial position or liquidity but could possibly be
material to the consolidated results of operations in any one period to the
extent costs are not covered by our insurance.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
42
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is traded on the NASDAQ National Market under the symbol
"DUSA." The following are the high and low closing prices for the common stock
reported for the quarterly periods shown.
Price range per common share by quarter, 2002:
First Second Third Fourth
----- ------ ----- ------
NASDAQ
High $ 7.83 $ 4.55 $ 2.69 $ 1.89
Low 3.79 1.84 1.40 1.32
Price range per common share by quarter, 2003:
First Second Third Fourth
----- ------ ----- ------
NASDAQ
High $ 1.77 $ 3.16 $ 6.45 $ 6.44
Low 1.45 1.75 2.50 4.50
On March 10, 2004, the closing price of our common stock was $10.02 per
share on the NASDAQ National Market. On March 10, 2004, there were 678 holders
of record of our common stock.
We have never paid cash dividends on our common stock and have no present
plans to do so in the foreseeable future.
43
ITEM 6. SELECTED FINANCIAL DATA
The following information 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 in this report. The selected financial data set forth below
has been derived from the Company's audited consolidated financial statements.
CONSOLIDATED STATEMENTS OF OPERATIONS DATA
Year ended December 31,
---------------------------------------------------------------------------
2003 2002 (1) 2001 2000 1999
------------ ------------ ------------ ------------ ------------
Revenues (1) $ 970,109 $ 25,483,238 $ 5,390,736 $ 2,120,557 $ --
Cost of product sales and royalties (1) 3,481,248 5,253,424 2,148,994 1,104,664 --
Research and development costs (1) 5,403,961 12,121,606 10,789,906 8,163,419 4,194,532
Marketing and sales costs 2,494,405 -- -- -- --
General and administrative costs 6,343,680 5,591,039 3,654,792 2,615,502 1,818,193
Income (loss) from operations (16,753,185) 2,517,169 (11,202,956) (9,763,028) (6,012,725)
Other income, net 1,926,331 3,245,349 3,844,860 3,222,273 574,098
Income tax expense -- -- -- -- 90,000
Net income (loss) (14,826,854) 5,762,518 (7,358,096) (6,540,755) (5,528,627)
Basic and diluted net income (loss) per common
share $ (1.06) $ 0.42 $ (0.53) $ (0.49) $ (0.50)
Weighted average number of shares outstanding 13,936,482 13,877,566 13,791,735 13,285,472 11,061,016
CONSOLIDATED BALANCE SHEETS DATA
As of December 31,
---------------------------------------------------------------------------
2003 2002 2001 2000 1999
----------- ----------- ----------- ----------- -----------
Total assets $44,697,488 $60,949,973 $75,864,221 $82,442,388 $28,156,845
Cash and investment securities (2) 37,969,476 52,879,543 64,709,625 74,496,577 26,897,580
Deferred revenue (1) 129,900 5,100 22,585,856 24,805,041 9,791,667
Long-term debt (3) 1,247,500 1,517,500 -- -- --
Shareholders' equity 40,232,049 56,057,730 49,834,537 55,309,796 17,059,928
(1) 2002 includes the recognition of approximately $20,990,000 in revenues,
$2,638,000 in cost of product sales and $639,000 in research and
development costs as a result of the termination of our former dermatology
collaboration arrangement. See section entitled "Results of Operations,
2002 Dermatology Collaboration Termination". These amounts were previously
deferred and were being amortized into operations over periods ranging
from 1 to 12.5 years.
(2) Includes restricted cash and investment securities classified as long-term
assets.
(3) Excludes current portion of long-term debt.
44
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
When you read this section of this report, it is important that you also
read the financial statements and related notes included elsewhere in this
report. This section contains forward-looking statements that involve risks and
uncertainties. Our actual results could differ materially from those we
anticipate in these forward-looking statements for many reasons, including the
factors described below and in "Risk Factors".
OVERVIEW
DUSA is a pharmaceutical company engaged primarily in the research,
development, and marketing of a drug named 5-aminolevulinic acid, or ALA, used
in combination with appropriate light devices in order to detect or treat a
variety of medical conditions. The trademark for our brand of ALA is Levulan(R).
When Levulan(R) is used and followed with exposure to light to produce a
therapeutic effect, the technology is called photodynamic therapy, or PDT. When
Levulan(R) is used and followed with exposure to light to detect medical
conditions, the technology is called photodetection, or PD. Our products, which
were launched in September 2000 in the United States, are Levulan(R) 20% topical
solution using our Kerastick(R) brand applicator, and our BLU-U(R) brand light
unit. Our products are used together to provide PDT for the treatment of
non-hyperkeratotic actinic keratoses, or AKs, of the face or scalp. In addition,
we received market clearance from the FDA in September 2003 to market the
BLU-U(R) without Levulan(R) for the treatment of moderate inflammatory acne
vulgaris.
We have primarily devoted our resources to fund research and development
in order to advance the Levulan(R) PDT/PD technology platform and, as a result,
we have experienced significant operating losses. As of December 31, 2003, we
had an accumulated deficit of approximately $58,910,000. Achieving our goal of
becoming a profitable operating company is dependent upon acceptance of our
therapy by the medical and consumer constituencies, and our ability to develop
new products.
During 2003, we implemented our new sales, marketing, physician education,
and development strategies following the reacquisition of our rights from our
former marketing partner in September 2002. The October 1, 2003 launch of DUSA's
initial sales force and related marketing and sales activities has resulted in
significant additional expenses. However, the impact on sales was positive.
Kerastick(R) unit sales to end-users were 11,172 for 2003, as compared to 7,116
for 2002, with fourth quarter 2003 sales totaling 5,478 as compared to 1,722 in
the fourth quarter 2002. Although the costs related to the addition of our sales
force and related marketing activities are currently greater than the gross
profit generated from the increased sales, we are encouraged with the initial
increase in sales, and will continue our efforts to penetrate the market. We
expect to continue to incur operating losses until sales of our products
increase substantially. See section entitled "Results of Operations - Marketing
and Sales Costs". At this time, our core objectives include focusing on
increasing sales in the United States, conducting clinical trials which, if
successful, could lead to additional dermatology indications, and seeking a
partner to help develop and market Levulan(R) PDT for the treatment of dysplasia
in patients with Barrett's esophagus. In addition, we continue to support
independent investigator trials to advance research in the use and applicability
of Levulan(R) PDT for other indications in dermatology.
45
We have continued to support efforts to improve reimbursement levels to
physicians. Such efforts included working with the Centers for Medicare and
Medicaid Services (CMS) to reverse the bundling of the drug cost with the
procedure fee, which had occurred effective March 1, 2003. In November 2003, CMS
agreed to reinstate the code for physicians to bill the drug cost separate from
the procedure fee. As a result, effective January 1, 2004, there is a separate
code for the costs of the Levulan(R) Kerastick(R), and a revised reimbursement
code for the BLU-U(R) application procedure. Doctors can also bill for any
applicable visit fees. However, some physicians have suggested that even the new
reimbursement levels do not fully reflect the required efforts to routinely
employ our therapy in their practices. These issues have affected the economic
competitiveness of our products with other AK therapies and hence have hindered
the adoption of our therapy. In addition, we continue to work to educate the
major private insurance carriers such that they will approve our therapy for
coverage. As of December 31, 2003, several major private insurers have approved
coverage for our AK therapy. We believe that due to these efforts, along with
our education and marketing programs, more widespread adoption by the medical
community should occur over time. In addition, we are aware that some physicians
have been using Levulan(R) with light devices manufactured by other companies
and for uses other than our FDA-approved use. While we are not permitted to
market our products for so-called "off-label" uses, these activities could also
positively affect the use of our products.
We have been encouraged by the positive response from many physicians and
patients who have used our therapy, but recognize that we have to demonstrate
the clinical value of our unique therapy, and the related product benefits as
compared to other well-established conventional therapies, in order for the
medical community to accept our products on a large scale. We also recognize
that market acceptance has taken longer than we originally anticipated, and that
product sales have not reached the levels that were originally expected. While
our financial position is strong, we cannot predict when product sales may
offset the costs associated with these efforts.
As of December 31, 2003, we had a staff of 50 full-time employees and 1
part-time employee, as compared to 43 full-time employees at the end of 2002,
including marketing and sales, production, maintenance, customer support, and
financial operations personnel, as well as those who support research and
development programs for dermatology and internal indications.
RECENT EVENTS
FEBRUARY 2004 PRIVATE PLACEMENT - On February 27, 2004, DUSA entered into
definitive agreements with certain new and existing institutional and other
accredited investors for the private placement of 2,250,000 shares of our common
stock at a purchase price of $11.00 per share resulting in gross proceeds to
DUSA of $24,750,000. DUSA has granted the investors the right to purchase up to
an aggregate of an additional 337,500 shares of common stock at $11.00 per
share. These additional investment rights expire April 14, 2004, or 30 trading
days from closing, which occurred on March 2, 2004. The placement agent's
commission and non-refundable retainer was paid in 135,000 shares of common
stock calculated at the offering price.
46
DUSA will use the proceeds from the sale of the securities to expand our
sales force and for general working capital purposes, including research and
development activities.
RE-ACQUISITION OF CANADIAN PRODUCT RIGHTS - On February 24, 2004, DUSA
reacquired the rights to the aminolevulinic acid (Levulan(R)) technology for
Canada held by Draxis Health Inc. ("Draxis"). These rights were initially
assigned to Draxis in 1991 at the time of the original licensing of the patents
underlying our Levulan(R) PDT platform from PARTEQ Research and Development
Innovations, the licensing arm of Queen's University, Kingston, Ontario. DUSA
and Draxis terminated the assignment and DUSA agreed to pay to Draxis an upfront
fee and a royalty on sales of the Levulan(R) Kerastick(R) in Canada over a five
year term. The commercial launch of our products in Canada is expected to occur
in 2004.
MANUFACTURING FACILITY APPROVAL - On July 14, 2003, DUSA received FDA
approval to manufacture the Levulan(R) Kerastick(R) at our Wilmington facility,
and in February 2004 we commenced manufacturing Kerastick(R) units in support of
our plan to maintain an adequate supply of inventory to meet market demand for
our products based on sales projections. As of December 31, 2003, we had 30,144
Kerastick(R) units in inventory. This inventory was produced in 2002 by our
former third-party manufacturer to meet product demand during the execution of
our project to complete construction and gain FDA approval of our new
manufacturing facility. The facility will also be utilized in 2004 to produce
clinical supplies for our planned DUSA-sponsored studies in addition to
investigator studies which DUSA plans to support.
THIRD-PARTY DISTRIBUTION AGREEMENT - Effective December 10, 2003, DUSA
amended its agreement with Moore Medical Corporation ("Moore"), a national
distributor and marketer of medical and surgical supplies, to eliminate Moore's
exclusivity rights and allow DUSA to use other third-party distributors of the
Kerastick(R) in the United States. Since that time, two additional distributors
have been appointed. In addition, distributors have also been authorized to sell
the BLU-U(R) on DUSA's behalf. Distributors have the right to return their
inventory of Kerastick(R) units for full credit for a period of time prior to
and after the expiration date of their respective agreements.
510(K) FDA FILING - On September 9, 2003, DUSA received market clearance
from the FDA to market the BLU-U(R) without Levulan(R) for the treatment of
moderate inflammatory acne vulgaris. We initiated the marketing of the BLU-U(R)
for this indication in the fourth quarter of 2003. Although direct sales of
BLU-U(R) commenced in November 2003, the overall impact that selling the
BLU-U(R) for the treatment of acne will have on product sales is uncertain at
this time.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Critical accounting policies are those that require application of
management's most difficult, subjective or complex judgments, often as a result
of the need to make estimates about the effect of matters that are inherently
uncertain and may change in subsequent periods and that can significantly affect
our financial position and results of operations. Our accounting policies are
disclosed in Note 2 to the Notes to the Consolidated Financial Statements. We
have discussed these policies and the underlying estimates used in applying
these accounting policies with our Audit Committee. Since not all of these
accounting policies require management to make difficult, subjective or complex
judgments or estimates, they are not all considered critical accounting
policies. We consider the following policies and estimates to be critical to our
financial statements.
47
REVENUE RECOGNITION - Revenues on product sales are recognized when
persuasive evidence of an arrangement exists, the price is fixed and final,
delivery has occurred, and there is reasonableness of collection. Research
revenue previously earned under our collaborative agreement consisted of
non-refundable research and development funding from our former dermatology
collaboration partner. Research revenue generally compensated us for a portion
of our agreed-upon research and development expenses and was recognized as
revenue at the time the research and development activities were performed under
the terms of the related agreements and when no future performance obligations
existed. Milestone or other up-front payments are typically recorded as deferred
revenue upon receipt and recognized as earned, generally on a straight-line
basis over the term of an agreement. Under the terms of our former dermatology
collaboration agreement, we initially estimated a 12 1/2 year life, the term of
the agreement. As a result of the termination of that agreement in 2002, the
estimated period over which we were recognizing revenue ceased and the
unamortized deferred revenue of $20,990,000 was accelerated. Since the
termination of the former collaboration agreement, we have been selling our
products through distributors who have a general right of return of product and,
accordingly, we have deferred such revenue until the product is sold by our
distributors to the end user. Although we make every effort to assure the
reasonableness of our estimates, significant unanticipated changes in our
estimates due to business, economic, or industry events could have a material
impact on our results of operations.
In December 2003, the Securities and Exchange Commission released Staff
Accounting Bulletin No. 104 ("SAB 104"), Revenue Recognition. SAB 104 clarifies
existing guidance regarding revenues for contracts which contain multiple
deliverables to make it consistent with Emerging Issues Task Force ("EITF") No.
00-21. The adoption of SAB 104 did not have a material impact on the Company's
financial position or results of operations.
INVENTORY - Inventories are stated at the lower of cost or market value.
Cost is determined using the first-in, first-out method. Inventories are
continually reviewed for slow moving, obsolete and excess items. Inventory items
identified as slow-moving are evaluated to determine if an adjustment is
required. Additionally, our industry is characterized by regular technological
developments that could result in obsolete inventory. Although we make every
effort to assure the reasonableness of our estimates, any significant
unanticipated changes in demand, technological development, or significant
changes to our business model could have a significant impact on the value of
our inventory and our results of operations. For example, as a result of the
termination of the former dermatology collaboration agreement in 2002, we
recorded lower of cost or market adjustments of $2,095,000 for excess inventory
and commercial light units at that time. We use sales projections to estimate
the appropriate level of inventory that should remain on the Consolidated
Balance Sheet. Management believes that the recorded inventory value is
reasonable in light of our current sales forecasts. Should we be unable to
achieve the forecasted sales, additional adjustments may be recorded to cost of
goods sold.
48
VALUATION OF LONG-LIVED AND INTANGIBLE ASSETS - We review long-lived
assets for impairment whenever events or changes in business circumstances
indicate that the carrying amount of assets may not be fully recoverable or that
the useful lives of these assets are no longer appropriate. Factors considered
important which could trigger an impairment review include significant changes
relative to: (i) projected future operating results; (ii) the use of the assets
or the strategy for the overall business; (iii) business collaborations; and
(iv) industry, business, or economic trends and developments. Each impairment
test is based on a comparison of the undiscounted cash flow to the recorded
value of the asset. If it is determined that the carrying value of long-lived or
intangible assets may not be recoverable based upon the existence of one or more
of the above indicators of impairment, the asset is written down to its
estimated fair value on a discounted cash flow basis. In 2002 and again in 2003,
we concluded that the termination of our former dermatology collaboration
agreement in September 2002 and current business events have not caused any
impairment to our manufacturing facility. At December 31, 2003, total property,
plant and equipment had a carrying value of $4,251,000, including our
manufacturing facility which received FDA approval on July 14, 2003. In
September 2002, as a result of the termination of our former dermatology
collaboration agreement, we recorded impairment adjustments of $1,182,000
related to certain intangibles assets previously recorded in our financial
statements. We had no intangible assets recorded as of December 31, 2003 or
2002.
STOCK-BASED COMPENSATION - We have elected to continue to use the
intrinsic value-based method to account for employee stock option awards under
the provisions of Accounting Principles Board Opinion No. 25, and to provide
disclosures based on the fair value method in the Notes to the Consolidated
Financial Statements as permitted by Statement of Financial Accounting Standards
("SFAS") No. 123, as amended by SFAS No. 148, "Accounting for Stock-Based
Compensation, Transition and Disclosure". Stock or other equity-based
compensation for non-employees is accounted for under the fair value-based
method as required by SFAS No. 123 and Emerging Issues Task Force ("EITF") No.
96-18, "Accounting for Equity Instruments That Are Issued to Other Than
Employees for Acquiring, or in Conjunction with Selling, Goods or Services" and
other related interpretations. Under this method, the equity-based instrument is
valued at either the fair value of the consideration received or the equity
instrument issued on the date of grant. The resulting compensation cost is
recognized and charged to operations over the service period which, in the case
of stock options, is generally the vesting period. As we utilize stock and stock
options as one means of compensating employees, consultants, and others, a
change in accounting for stock-based compensation could, under certain
circumstances, result in an adverse material effect on our results of
operations, but would not affect cash flows.
RESULTS OF OPERATIONS
2002 DERMATOLOGY COLLABORATION TERMINATION
On September 1, 2002, DUSA and Schering AG, the Company's former marketing
and development partner for Levulan(R) PDT in the field of dermatology,
terminated the parties' Marketing Development and Supply Agreement, dated
November 22, 1999. As a result of this termination, DUSA reacquired all rights
it granted to Schering AG under the agreement, and evaluated certain items on
its Consolidated Balance Sheet for the timing of revenue recognition and
potential impairment. These items included unamortized deferred revenue related
to non-refundable milestone payments previously received under the agreement
with Schering AG, and assets including our manufacturing facility, raw material
and finished goods inventories, commercial light units, and deferred charges and
royalties. As a result of this analysis, in addition to normal amortization
recorded prior to the termination of the Schering AG agreement, DUSA recorded
the following items in its Consolidated Statements of Operations during
September 2002:
49
REVENUE
RECOGNITION/
STATEMENT OF OPERATIONS ITEM BALANCE SHEET ITEM ASSET IMPAIRMENT
------------------------------------------------- ------------------------------------------ ---------------------
Revenues:
---------
Research grant and milestone revenue Deferred revenue (1) $20,990,000
---------------------
Operating Costs:
----------------
Cost of product sales Deferred charges (2) $543,000
Inventory (3) 1,705,000
Commercial light sources under lease
or rental (4) 390,000
---------------------
Total cost of product sales $2,638,000
Research and development costs Deferred royalty (2) 639,000
---------------------
Total operating cost charges $3,277,000
---------------------
1) In 2002, DUSA accelerated the recognition of $20,990,000 of
unamortized research grant and milestone revenue, which was
previously recorded as deferred revenue.
2) In 2002, DUSA charged (i) $509,000 to cost of product sales and
royalties for deferred charges associated with its amended Supply
Agreement with Sochinaz SA, the manufacturer of the bulk drug
ingredient used in Levulan(R), (ii) $34,000 to cost of product sales
and royalties for deferred charges associated with underutilization
costs paid to National Biological Corporation ("NBC"), the
manufacturer of our BLU-U(R), and (iii) $639,000 to research and
development costs for deferred royalties associated with payments to
PARTEQ, the Company's licensor. These amounts represented the
unamortized balances of previously deferred costs which were being
amortized over periods ranging from 1 to 12 1/2 years.
3) In 2002, DUSA recorded lower of cost or market adjustments for
estimated excess BLU-U(R) inventory of $1,594,000, and $111,000 for
bulk Levulan(R) based on (i) the termination of the Company's former
dermatology collaboration arrangement, (ii) limited product sales
since the September 2000 product launch, and (iii) the Company's
expectations at that time of no significant near-term increases in
Kerastick(R) sales levels and/or BLU-U(R) placements.
4) In 2002, DUSA recorded an additional $390,000 of depreciation
expense reflecting a shortened useful life of our BLU-U(R) units
under lease, rental, or trial arrangements to reflect a three-year
asset life. This accelerated depreciation policy was attributable to
the low level of BLU-U(R) placements at the date of the termination
of the collaboration arrangement, and management's expectations at
that time that near-term placements would be limited.
50
YEAR ENDING DECEMBER 31, 2003 AS COMPARED TO 2002
REVENUES - Total revenues for the year ended December 31, 2003 were
$970,000, as compared to $25,483,000 in 2002. Revenues for 2002 included
research grant and milestone revenues of $22,312,000, comprised of the one-time
recognition in September 2002 of unamortized up-front milestone and unrestricted
grant payments previously received from Schering AG totaling $20,990,000 due to
the termination of this relationship, and normal amortization of $1,322,000
earned prior to the termination. See section entitled "Results of
Operations-2002 Dermatology Collaboration Termination". Revenues for 2002 also
included $2,851,000 of research and development reimbursement which we earned
from our former marketing partner. Due to the termination of this agreement, we
have not received any co-development revenue from Schering AG subsequent to
2002.
Total product sales and rental income for the years ended December 31,
2003 and 2002 were $970,000 and $319,000, respectively, and comprised of the
following:
YEAR ENDED DECEMBER 31,
-------------------------------------
INCREASE
2003 2002 (DECREASE)
--------- --------- ---------
Kerastick(R)product sales $ 901,000 $ 209,000 $ 692,000
BLU-U(R)product sales 69,000 -- 69,000
BLU-U(R)rental and other sales -- 33,000 (33,000)
Royalty revenues (1) -- 77,000 (77,000)
--------- --------- ---------
Total product sales and rental income $ 970,000 $ 319,000 $ 651,000
========= ========= =========
(1) Product sales for 2002 included royalty revenues of $77,000 which we
previously earned for Kerastick(R) sales by Berlex, the subsidiary
of our former marketing partner, to its distributor.
The increase in 2003 Kerastick(R) product sales revenue is due in part to
DUSA's receipt of 100% of revenues on units sold to end-users, primarily through
its distributors, as compared to approximately 30% of the net sales that we
received as a royalty under our former collaboration agreement during 2002.
Revenues for 2003 also included BLU-U(R) product sales of $69,000 after
receiving FDA clearance to market the BLU-U(R) as a stand alone device for the
treatment of moderate inflammatory acne vulgaris.
As of December 31, 2003, 406 BLU-U(R) units were in place in physicians
offices, up from 329 units at December 31, 2002. This increase in BLU-U(R)
placements included the sale of 21 units following receipt of market clearance
from the FDA in September 2003 for acne. Kerastick(R) sales to end-users were
11,172 for 2003, as compared to 7,116 for 2002. Although the level of
Kerastick(R) sales to end-users for 2003 is higher than those in the prior year,
Kerastick(R) sales must continue to increase significantly to offset the
increased costs incurred for marketing and sales activities. See "Results of
Operations-Marketing and Sales Costs".
51
COST OF PRODUCT SALES AND ROYALTIES - Cost of product sales and royalties
for the year ended December 31, 2003 were $3,481,000, as compared to $5,253,000
in 2002. The components of cost of product sales and royalties for the years
ended December 31, 2003 and 2002, including direct and indirect costs to support
our product is provided below:
YEAR ENDED DECEMBER 31,
-------------------------------------------
INCREASE
2003 2002 (DECREASE)
----------- ----------- -----------
COST OF PRODUCT SALES AND ROYALTIES
Product costs including internal costs (e.g. customer service, quality
assurance, purchasing, depreciation, amortization and other product
support operations) assigned to support products (1) $ 2,297,000 $ 1,189,000 $ 1,108,000
Direct Kerastick(R)product costs 381,000 44,000 337,000
Costs incurred to ship, install and service the BLU-U(R)in physicians
offices (2) 729,000 834,000 (105,000)
Royalty and supply fees (3) 74,000 64,000 10,000
Net underutilization costs (4) -0- 333,000 (333,000)
Deferred charges amortization (5) -0- 151,000 (151,000)
Inventory and deferred charge adjustments resulting from collaboration
termination (6) -0- 2,638,000 (2,638,000)
----------- ----------- -----------
Total cost of product sales and royalties $ 3,481,000 $ 5,253,000 ($1,772,000)
=========== =========== ===========
1) The increase in product costs for 2003 is primarily attributable to
increased costs to support the preparation to manufacture the
Kerastick(R), including the submission of an NDA supplement to the
FDA for our manufacturing facility, facility depreciation and
overhead allocations.
2) Although there were direct BLU-U(R) product sales in 2003, there
were no related direct BLU-U(R) product costs in 2003 as these had a
zero book value due to inventory impairment charges recorded during
2002 based on (i) the termination of the Company's former
dermatology collaboration arrangement, (ii) limited product sales
since the September 2000 product launch, and (iii) the Company's
expectation at that time of no significant near-term increases in
Kerastick(R)sales levels and/or BLU-U(R) placements.
3) Royalty and supply fees are paid to our licensor, PARTEQ Research
and Development Innovations, the licensing arm of Queen's
University, Kingston, Ontario.
4) Underutilization costs commenced in 2001 and were fully amortized as
of December 31, 2002 based on agreements with our third-party
manufacturers due to orders falling below certain previously
anticipated levels.
5) Deferred charges amortization reflects consideration paid by us in
2000 to amend our Supply Agreement with Sochinaz SA, the
manufacturer of the bulk drug ingredient used in Levulan(R). Such
deferred charges were fully amortized in 2002.
6) See section entitled "Results of Operations-2002 Dermatology
Collaboration Termination".
RESEARCH AND DEVELOPMENT COSTS - Research and development costs for the
year ended December 31, 2003 were $5,404,000 as compared to $12,122,000 for
2002. The overall lower level of research and development costs in 2003 is
attributable, in part, to the absence of co-sponsored project costs that were
agreed to under the collaboration termination in 2002, of which approximately
two-thirds, or $2,851,000, were previously reimbursed to us by our former
marketing partner. Co-sponsored projects included Phase I/II studies using
Levulan(R) PDT in the treatment of persistent plantar warts and onychomycosis
(nail fungus). These projects have been put on hold as we concentrate on
increasing sales, and implementing a new dermatology development program focused
on indications that use our approved Kerastick(R). Based on market research that
was completed earlier in 2003, we decided to move forward with Phase II studies
for use of Levulan(R) PDT in photodamaged skin and acne rather than pursuing a
broad area actinic keratoses treatment, as we do not believe the former
indication would have a major impact on sales.
52
In 2003, we also received market clearance from the FDA on a Section
510(k) premarket notification application for use of the BLU-U(R) without
Levulan(R) to treat moderate inflammatory acne. This year's development program
included the completion of an FDA-mandated Phase IV long-term AK tracking study,
which was completed at the end of 2003, with the final report submitted to the
FDA in January 2004. DUSA is also funding various investigator studies involving
ALA and/or the Kerastick(R).
The decrease in research and development costs in 2003 is also
attributable to the assignment of personnel and related costs to marketing and
sales functions as of January 1, 2003 that were previously functioning in
research and development roles, which totaled $1,310,000 in 2002. In addition,
costs incurred in 2002 included the write-off of $639,000 of previously deferred
royalties associated with payments to PARTEQ, our licensor, and a $500,000
milestone payment under our license agreement signed in December 2002 between
DUSA and Photonamic GmbH & Co. KG, a subsidiary of medac GmbH, a German
pharmaceutical company. In addition, we may also be obligated to pay certain
regulatory milestones of $1,250,000 upon FDA acceptance of a registration
application for a brain cancer product in the United States, and an additional
$1,250,000 upon registration of the product and royalties of 12.5% on net sales
under the terms of the License and Development Agreement. This agreement also
grants a license of Photonamic's proprietary technology related to ALA in the
field of brain cancer.
Research and development costs for 2002 also included higher third-party
expenditures in support of our FDA mandated Phase IV clinical study of the
long-term efficacy of our marketed product, clinical feasibility studies in
other dermatological indications, and our Phase I/II clinical studies on the
safety and efficacy of Levulan(R) PDT treatment of Barrett's esophagus with and
without dysplasia.
We have also been conducting Phase I/II studies in the treatment of
high-grade and low-grade dysplasia associated with Barrett's esophagus. Results
of the high-grade dysplasia (HGD) study as of January 2003, with twelve months
of follow-up data in four patients, and six months in one patient, showed a
continued complete ablation of HGD. The treatment has been well tolerated, with
no occurrence of strictures (circumferential scarring), and no signs of mucosal
overgrowth. In addition, in preparation for a Phase II clinical trial, we are
planning to carry out a small single-center pilot Phase II clinical trial using
DUSA's new proprietary endoscopic light delivery device for the treatment of
HGD. However, currently, we do not plan to fund other Phase II or III clinical
trials for this indication on our own. Therefore, we are seeking a strategic
partner to join in the development, marketing, and distribution of our treatment
for Barrett's esophagus dysplasia. While our original goal had been to complete
a partnership agreement during 2003, we did not have a partnership in place at
the end of 2003. There can be no assurance that we will be able to consummate
any collaboration on terms acceptable to us.
53
We expect research and development costs to increase to approximately
$6,500,000 to $7,500,000 during 2004 due primarily to initiating our planned
Phase II clinical studies relating to photodamaged skin and moderate to severe
acne. Final cost estimates on these Phase II studies are in process as we are
working with the FDA to determine the necessary protocols.
MARKETING AND SALES COSTS - Marketing and sales costs for 2003 were
$2,494,000, comprised of $924,000 in payroll related costs, including direct and
indirect commissions, with the remaining balance in support of such efforts. In
the prior year, there were no marketing and sales expenses incurred directly by
us as all rights and activities associated with marketing and sales of our
products were the sole responsibility of our former partner. In late 2002,
following the termination of our collaboration with our former marketing
partner, we commenced marketing initiatives associated with having full rights
and responsibilities for our products. In addition, as of January 1, 2003, we
reassigned resources that were functioning in research and development roles to
our marketing and sales function. In August 2003, DUSA hired an Associate Vice
President of Sales, and in October 2003 we hired, trained, and deployed a
regional sales force, which was initially comprised of six direct
representatives, various independent representatives, and an independent sales
distributor, to focus on most of our key geographic markets in the United
States. At the end of December 2003, we hired our seventh direct representative
in a key target market, and in January 2004, we continued to expand our sales
capacity by adding one more direct representative and an independent
representative in another key target market. We anticipate that the level of
marketing and sales expenses and related support functions will continue to
increase in 2004 as we seek to expand our sales capacity as a result of the
initial success of our sales initiatives.
GENERAL AND ADMINISTRATIVE COSTS - General and administrative expenses for
the year ended December 31, 2003 increased to $6,344,000 as compared to
$5,591,000 for 2002. This increase is mainly attributable to higher legal
expenses incurred in 2003 of $3,253,000 as compared to $1,970,000 in 2002, due
primarily to patent defense costs. It is expected that legal expenses will
remain at elevated levels as long as the patent dispute continues. These
increased legal expenses were offset, in part, by lower staffing related costs
of approximately $458,000 in 2003, due primarily to employee separations during
2002.
In April 2002, we received a copy of a notice issued by PhotoCure ASA to
Queen's University at Kingston, Ontario, alleging that Australian Patent No.
624985, which is one of the patents licensed by PARTEQ to us, relating to ALA
technology, is invalid. As a consequence of this action, Queen's University has
assigned the Australian patent to us so that we may participate directly in this
litigation. We have filed an answer setting forth our defenses and a related
countersuit alleging that certain activities of PhotoCure and its marketing
partner, Galderma S.A, infringe the patent. The case is ongoing and we are
unable to predict the outcome at this time. DUSA believes that the final hearing
in the Federal Court of Australia will occur in April 2004.
54
In December 2003, the Company was served with a complaint filed in the
State of Michigan Circuit Court for the County of Oakland alleging that DUSA's
BLU-U(R) caused the plaintiff to suffer a seizure during the performance of her
duties as an office assistant. The complaint names Berlex Laboratories, Inc., a
subsidiary of our former marketing partner, as another defendant. The damages
are unspecified. The case has been removed to the U.S. District Court, Eastern
District of Michigan, Southern Division. While it is not possible to predict or
determine the outcome of this action, the Company believes that the costs
associated with all such matters will not have a material adverse effect on its
consolidated financial position or liquidity but could possibly be material to
the consolidated results of operations in any one period to the extent costs are
not covered by DUSA's insurance.
OTHER INCOME, NET - Other income for the year ended December 31, 2003
decreased to $1,926,000, as compared to $3,245,000 in 2002. This decrease
reflects lower levels of investable cash balances as we used cash to support our
operating activities, and a decline in yields. With the addition of the proceeds
from the private placement in March 2004, interest income will initially
increase and then may decline, dependent on interest rates, as our investable
cash balances are used to support our operating activities. In addition, other
income in 2002 included $500,000 of gains on the sale of securities to meet
planned cash operating requirements. There were no such sales of securities in
2003. During 2003 and 2002, we incurred interest expense of $56,000 and $47,000,
respectively, on borrowings associated with the construction of our new
Kerastick(R) manufacturing facility. Of these amounts, $36,000 and $47,000 has
been currently capitalized in property and equipment in the Consolidated Balance
Sheet in 2003 and 2002, respectively.
INCOME TAXES - There is no provision for income taxes due to ongoing
operating losses. As of December 31, 2003, we had net operating loss
carryforwards of approximately $59,531,000 and tax credit carryforwards of
approximately $1,791,000 for Federal reporting purposes. These amounts expire at
various times through 2023. See Note 11 to the Notes to the Consolidated
Financial Statements. In addition, although we had net income for 2002, there
was no income tax expense because the majority of the revenue we recognized in
connection with the termination of the Schering AG agreement had been taxable in
prior years for income tax purposes. The Company has provided a full valuation
allowance against the net deferred tax assets at December 31, 2003 and 2002.
NET INCOME (LOSS) - For the year ended December 31, 2003, we recognized a
net loss of ($14,827,000), or ($1.06) per share, as compared to net income of
$5,763,000, or $0.42 per share, for the year ended 2002. As a result of the
termination of our former dermatology collaboration arrangement, net income for
2002 included a one-time increase of approximately $17,713,000, excluding normal
amortization recorded prior to termination, based on the acceleration of
previously deferred revenue and costs, and other related adjustments for
impairment. See section entitled "Results of Operations-2002 Dermatology
Collaboration Termination". This one-time recognition resulted in an increase to
earnings per share of $1.28 for the 2002 period. Net losses are expected to be
incurred until the successful market penetration of our products occurs. Such
losses are expected to continue until end-user sales offset the cost of
launching our sales force, marketing initiatives, and costs for other business
support functions.
55
YEAR ENDING DECEMBER 31, 2002 AS COMPARED TO 2001
REVENUES - Total revenues for the year ended December 31, 2002 were
$25,483,000, as compared to $5,391,000 in 2001. Research grant and milestone
revenues were $22,312,000 in 2002, as compared to $1,983,000 in 2001, and
included the one-time recognition in 2002 of unamortized up-front milestone and
unrestricted grant payments previously received from Schering AG totaling
$20,990,000 due to the termination of this relationship in September 2002, and
normal amortization of $1,322,000 received prior to the termination. In 2001,
research grant and milestone revenue included normal amortization of $1,983,000.
See section entitled "Results of Operations-2002 Dermatology Collaboration
Termination". In addition, revenues for 2002 included $2,851,000 of research and
development reimbursement which we earned from our former marketing partner, as
compared to $2,893,000 in 2001.
Revenues for 2002 also included product sales and rental income of
$319,000, as compared to $515,000 in 2001. This decrease reflected direct
Kerastick(R) sales of $209,000 in 2002 from our distributor to physicians
subsequent to reacquiring our product rights in September 2002, as compared to
$358,000 in 2001 for direct Kerastick(R) sales to Berlex, a subsidiary of our
former marketing partner. During 2002, we had no direct Kerastick(R) sales to
Berlex as the distribution channel to physicians was filled in late 2001. Also
included in 2002 product sales and rental income were royalty revenues of
$77,000 which we previously earned for Kerastick(R) sales by Berlex to its
distributor, and BLU-U(R) rental and other product sales of $33,000, as compared
to royalty revenues of $55,000, and BLU-U(R) rental and other product sales of
$102,000 in 2001.
As of December 31, 2002, excluding BLU-U(R) units installed at clinical
trial sites or sold to our former partner, 329 BLU-U(R) units were in place, up
from the 282 units at December 31, 2001. Kerastick(R) units sold to end-users
were 7,116 in 2002 as compared to 7,071 in 2001.
COST OF PRODUCT SALES AND ROYALTIES - Cost of product sales and royalties
for the year ended December 31, 2002 were $5,253,000, as compared to $2,149,000
in 2001. This increase was mainly attributable to the recognition of $2,638,000
for lower of cost or market inventory adjustments, increased depreciation taken
on BLU-U(R) units, and deferred charges associated with our amended Supply
Agreement with Sochinaz SA. The components of cost of product sales and
royalties for the years ended December 31, 2002 and 2001, including direct and
indirect costs for supporting our product is provided below:
56
YEAR ENDED DECEMBER 31,
------------------------------------------------
INCREASE
2002 2001 (DECREASE)
---------- ---------- ----------
COST OF PRODUCT SALES AND ROYALTIES
Recognition for lower of cost or market inventory adjustments, increased
depreciation taken on BLU-U(R) units, and deferred charges as a result of
the termination of our collaboration agreement with
Schering AG $2,638,000 $ -0- $2,638,000
Internal manufacturing costs (e.g. customer service, quality
assurance, purchasing, and other product support operations)
assigned to products 1,189,000 691,000 498,000
Costs incurred to ship, install and service the BLU-U(R)in physicians
offices including depreciation 834,000 266,000 568,000
Royalty and supply fees (1) 64,000 63,000 1,000
Net underutilization costs (2) 333,000 534,000 (201,000)
Amortization of deferred charges (3) 151,000 226,000 (75,000)
Direct Kerastick(R)product costs including related testing 44,000 369,000 (325,000)
---------- ---------- ----------
Total cost of product sales and royalties $5,253,000 $2,149,000 $3,104,000
========== ========== ===========
1) Royalty and supply fees are paid to our licensor, PARTEQ Research
and Development Innovations, the licensing arm of Queen's
University, Kingston, Ontario.
2) Underutilization costs commenced in 2001 and were fully amortized as
of December 31, 2002 based on agreements with our third-party
manufacturers due to orders falling below certain previously
anticipated levels.
3) Deferred charges amortization reflects consideration paid by us in
2000 to amend our Supply Agreement with Sochinaz SA, the
manufacturer of the bulk drug ingredient used in Levulan(R). Such
deferred charges were fully amortized in 2002.
RESEARCH AND DEVELOPMENT COSTS - Research and development costs for the
year ended December 31, 2002 were $12,122,000 as compared to $10,790,000 for
2001. This increase in research and development costs is attributable to the
write-off of $639,000 of previously deferred royalties associated with payments
to PARTEQ, our licensor, and a $500,000 milestone payment under our license
agreement signed in December 2002 between DUSA and Photonamic GmbH & Co. KG, a
subsidiary of medac GmbH, a German pharmaceutical company. Research and
development costs for 2002 also included higher third-party expenditures in
support of our FDA mandated Phase IV clinical study of the long-term efficacy of
our marketed product, clinical feasibility studies in other dermatological
indications, and our Phase I/II clinical studies on the safety and efficacy of
Levulan(R) PDT treatment of Barrett's esophagus with and without dysplasia. In
addition, under our former agreement with Schering AG, $2,851,000 of the agreed
upon dermatology research and development expenses were reimbursed to us by
Schering AG for 2002 as compared to $2,893,000 for 2001.
57
GENERAL AND ADMINISTRATIVE COSTS - General and administrative expenses for
the year ended December 31, 2002 increased to $5,591,000 as compared to
$3,655,000 for 2001. This increase is mainly attributable to higher legal
expenses incurred in 2002 of $1,970,000 as compared to $490,000 in 2001, due
primarily to patent defense costs, the termination of our former dermatology
collaboration arrangement, and strategic initiatives. We also incurred employee
separation costs of approximately $395,000 during 2002. There were no employee
separation costs in 2001.
OTHER INCOME, NET - Other income for the year ended December 31, 2002
decreased to $3,245,000, as compared to $3,845,000 in 2001. This decrease was
attributable to lower interest income of $2,745,000 in 2002 as compared to
$3,753,000 in 2001 reflecting a decrease in investable cash balances as we used
cash to support our operating activities, and lower yields. Gains on the sale of
securities of $500,000 in 2002 in order to meet cash operating requirements, as
compared to $92,000 in 2001, partly offset this decline in interest income.
During 2002, we incurred interest expense of $47,000 on borrowings associated
with the construction of our new Kerastick(R) manufacturing facility, which was
capitalized in property and equipment in the Consolidated Balance Sheet as of
December 31, 2002.
INCOME TAXES - Although we had net income for 2002, there was no income
tax expense. The majority of the revenue we recognized in connection with the
termination of the Schering AG agreement had been taxable in prior years for
income tax purposes.
NET INCOME (LOSS) - For the year ended December 31, 2002, we earned net
income of $5,763,000, or $0.42 per share, as compared to a net loss of
($7,358,000), or ($0.53) per share, for the year ended 2001. As a result of the
termination of our former dermatology collaboration arrangement, net income for
2002 included a one-time increase of approximately $17,713,000, excluding normal
amortization recorded prior to termination, based on the acceleration of
previously deferred revenue and costs, and other related adjustments for
impairment. See section entitled "Results of Operations-2002 Dermatology
Collaboration Termination".
58
QUARTERLY RESULTS OF OPERATIONS
The following is a summary of the quarterly results of operations for the
years ended December 31, 2003 and 2002, respectively:
QUARTERLY RESULTS FOR YEAR ENDED DECEMBER 31, 2003
-------------------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
----------- ----------- ------------ -----------
Total revenues $ 143,370 $ 147,275 $ 163,155 $ 516,309
Loss from operations (4,132,108) (4,338,080) (4,088,789) (4,194,208)
Net loss (3,565,973) (3,811,116) (3,679,858) (3,769,907)
Basic and diluted loss per share (0.26) (0.27) (0.26) (0.27)
QUARTERLY RESULTS FOR YEAR ENDED DECEMBER 31, 2002
-------------------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
----------- ----------- ------------ -----------
Total revenues $ 1,325,498 $ 1,429,978 $22,565,754 $ 162,008
Income (loss) from operations (3,641,970) (4,222,468) 15,065,172 (4,683,565)
Net income (loss) (2,867,551) (3,437,566) 15,760,873 (3,693,238)
Basic and diluted income (loss) per
share (0.21) (0.25) 1.13 (0.27)
LIQUIDITY AND CAPITAL RESOURCES
We are in a strong cash position to continue to increase Levulan(R) PDT
marketing expenses and to fund our current research and development activities
for our Levulan(R) PDT/PD platform. Our primary sources of working capital have
been public and private equity financings, as well as research milestone and
grant payments from our former marketing and development partner. At December
31, 2003, we had approximately $37,969,000 of cash resources comprised of
$4,294,000 of cash and cash equivalents, United States government securities of
$33,536,000, and restricted cash of $139,000. All of our United States
government securities are classified as available for sale. As of December 31,
2003, these securities had yields ranging from 3.65% to 7.36% and maturity dates
ranging from January 15, 2004 to September 24, 2007.
On February 27, 2004, DUSA completed a private placement of 2,250,000
shares of our common stock at a purchase price of $11.00 per share resulting in
gross proceeds of $24,750,000. DUSA also granted the investors the right to
purchase up to an aggregate of an additional 337,500 shares of common stock at
$11.00 per share. These additional investment rights expire 30 trading days from
closing, which occurred on March 2, 2004.
As of December 31, 2003, our working capital (total current assets minus
total current liabilities) was $33,838,000 as compared to $48,891,000 as of
December 31, 2002. Total current assets decreased $15,210,000 in 2003 due
primarily to a decline in cash, cash equivalents, and United States government
securities of $14,846,000 as we use cash to support our operating activities.
Total current liabilities decreased $157,000 in 2003 due primarily to a decline
in other accrued expenses of $908,000 as higher 2002 accruals for research and
development costs, product related costs and license milestone were paid in
2003, offset, in part, by an increase in accounts payable, accrued payroll, and
deferred revenue on Kerastick(R) units due to growth in operations and sales,
including an increase in personnel.
59
During 2003, we used $12,762,000 of cash for operating activities,
incurred property, plant, and equipment additions of $633,000, and received
$11,000,000 of net proceeds from maturations of United States government
securities. During 2003, we also made payments on long-term debt of $270,000,
while receiving $33,000 in proceeds from stock option exercises. During the
comparable 2002 period, we used $11,786,000 of cash for operating activities,
purchased $2,622,000 of property and equipment primarily attributable to the
construction of our manufacturing facility, and received net proceeds of
$12,115,000 from maturations and purchases of United States government
securities. During 2004, we expect to incur capital expenditures of
approximately $700,000, which includes upgrades to our computer systems and
website, and marketing fixtures, as well as other purchases to support the
growth in our business.
In May 2002, we also received $1,900,000 under a secured term loan
promissory note ("Note") with Citizens Bank of Massachusetts to fund the
construction of our manufacturing facility and made payments on the Note of
$113,000 during 2002. As of December 31, 2003, the total outstanding loan
balance was $1,518,000, of which $270,000 is current. Approximately $3,000,000
of the Company's United States government securities are pledged as collateral
to secure the loan. Prior to expiration of the 360-day LIBOR-based rate for each
year of the loan, we can either continue to choose a LIBOR-based rate at that
time, execute a one-time conversion to a fixed rate loan, or repay the loan
balance. The current interest rate on the Note is 2.755% based on the annual
renewal on June 30, 2003. As this rate was lower than the yield being generated
by each of our United States government securities at that time, we decided not
to repay the loan.
We believe that we have sufficient capital resources to proceed with our
current programs for Levulan(R) PDT, and to fund operations and capital
expenditures for the foreseeable future. We have invested our funds in liquid
investments, so that we have ready access to these cash reserves, as needed, for
the funding of development plans on a short-term and long-term basis.
As a result of the termination of our former dermatology collaboration
arrangement, we evaluated our operations during 2003 and minimized research and
development and related general and administrative expenditures while we
concentrated on implementing new sales, marketing, physician education, and
development strategies. Such strategies included the hiring of an Associate Vice
President of Sales in August 2003 followed by the October 2003 launch of DUSA's
initial sales force, and participation in various medical education events. We
anticipate that the level of marketing and sales expenses and related support
functions will increase in 2004 as we seek to expand our sales capacity as a
result of the initial success of our sales initiatives. We may also seek to
expand or enhance our business by using resources to acquire by license,
purchase or other arrangements, businesses, new technologies, or products,
especially in PDT-related areas. For 2004, we are focusing primarily on
increasing the sales of the Levulan(R) Kerastick(R) and the BLU-U(R), initiating
Phase II studies for use of Levulan(R) PDT in photodamaged skin and acne using
our Kerastick(R), and on seeking a partner to help develop and market Levulan(R)
PDT for the treatment of dysplasia in patients with Barrett's esophagus. Full
development and testing of all potential indications would require additional
funding. The timing of expenditures will be dependent on various factors,
including:
60
o the level of sales of our products including the success of our
marketing programs since reacquiring the rights to the
dermatological uses of Levulan(R)PDT,
o progress of our research and development programs,
o the results of preclinical and clinical trials,
o the timing of regulatory marketing approvals,
o competitive developments,
o the results of patent disputes,
o any new additional collaborative arrangements, if any, we may enter,
and
o the availability of other financing.
We cannot accurately predict the level of revenues from sales of our
products. In order to maintain and continue to expand our sales and marketing
endeavors, and to initiate our planned research and development programs, we may
need to raise additional funds through future corporate alliances, financings,
or other sources, depending upon the amount of sales we receive.
The total capital costs used to develop our manufacturing facility, which
was approved to manufacture the Levulan(R) Kerastick(R) by the FDA in July 2003,
was approximately $2,665,000, including equipment. We have also incurred certain
environmental control costs as part of our development of a production line for
Kerastick(R) manufacturing to ensure that our facility complies with
environmental standards. However, there can be no assurance that we will not be
required to incur significant additional costs to comply with environmental laws
and regulations in the future, or any assurance that our operations, business or
assets will not be materially adversely affected by current or future
environmental laws or regulations. See section entitled "Business - Government
Regulation".
DUSA has no off-sheet balance sheet financing arrangements other than its
operating leases.
61
CONTRACTUAL OBLIGATIONS AND OTHER COMMERCIAL COMMITMENTS
Our contractual obligations and other commercial commitments to make
future payments under contracts, including lease agreements, research and
development contracts, manufacturing contracts, or other related agreements, are
as follows at December 31, 2003:
OBLIGATIONS DUE BY PERIOD
----------------------------------------------------------------------
1 YEAR OR AFTER 5
TOTAL LESS 2-3 YEARS 4-5 YEARS YEARS
---------- ---------- ---------- ---------- ----------
Operating lease obligations $3,712,000 $ 417,000 $ 865,000 $ 828,000 $1,602,000
Research and development projects (1, 2) $1,822,000 $1,822,000 -- -- --
Secured term loan promissory note $1,517,500 $ 270,000 $ 540,000 $ 540,000 $ 167,500
1) Research and development projects include various commitments
including initial obligations for our planned Phase II clinical
studies for photodamaged skin and moderate to severe acne. Final
cost estimates on these Phase II studies are in process as we are
working with the FDA to determine the necessary protocols.
2) In addition to the obligations disclosed above, we have contracted
with Therapeutics, Inc., a clinical research organization, to manage
the clinical development of our products in the field of
dermatology. This organization has the opportunity for additional
stock grants, bonuses, and other incentives for each product
indication ranging from $250,000 to $1,250,000, depending on the
regulatory phase of development of products under Therapeutics'
management.
RECENTLY ISSUED ACCOUNTING GUIDANCE
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities, an interpretation of ARB No. 51" ("FIN 46"), which
was amended by FIN 46R issued in December 2003. This interpretation of
Accounting Research Bulletin No. 51, "Consolidated Financial Statements,"
addresses consolidation by business enterprises of variable interest entities
(VIEs) that either: (1) do not have sufficient equity investment at risk to
permit the entity to finance its activities without additional subordinated
financial support, or (2) for which the equity investors lack an essential
characteristic of a controlling financial interest. This Interpretation applies
immediately to VIEs created after January 31, 2003. It also applies in the first
fiscal year or interim period ending after March 15, 2004, to VIEs created
before February 1, 2003 in which an enterprise holds a variable interest. FIN 46
requires disclosure of VIEs in financial statements issued after January 31,
2003, if it is reasonably possible that as of the transition date: (1) the
company will be the primary beneficiary of an existing VIE that will require
consolidation or, (2) the company will hold a significant variable interest in,
or have significant involvement with, an existing VIE. DUSA has adopted this
statement which had no effect on our financial position or results of
operations.
INFLATION
Although inflation rates have been comparatively low in recent years,
inflation is expected to apply upward pressure on our operating costs. We have
included an inflation factor in our cost estimates. However, the overall net
effect of inflation on our operations is expected to be minimal.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We hold fixed income United States government securities that are subject
to interest rate market risks. However, we do not believe that the risk is
material as we make our investments in relatively short-term instruments and we
strive to match the maturity dates of these instruments to our cash flow needs.
A 10% decline in the average yield of these instruments would reduce interest
income by approximately $189,000 based on our December 31, 2003 balance in U.S.
government securities.
62
We currently have exposure to interest rate risk under a secured term loan
promissory note which we issued to fund the construction of our manufacturing
facility. Interest on this loan is at a LIBOR-based rate, and calls for an
annual renewal on June 30th of each year through June 30, 2009 to either the
applicable LIBOR-based rate or a one-time conversion to a fixed rate loan. The
current loan rate of 2.755% is based on a LIBOR-based rate plus 175 basis points
at the time of renewal (LIBOR is 1.46% at December 31, 2003). Our exposure to
interest rate risk due to changes in LIBOR is not expected to be material.
FORWARD-LOOKING STATEMENTS SAFE HARBOR
This report, including the Management's Discussion and Analysis, contains
various "forward-looking statements" within the meaning of Section 27A of the
Securities Act of 1933 which represent our expectations or beliefs concerning
future events, including, but not limited to statements regarding our core
objectives for 2004, management's beliefs regarding the unique nature of
Levulan(R) and its use and potential use, expectations regarding the timing of
results of clinical trials and future development of warts, onychomycosis,
psoriasis, molluscum contagioscum, oily skin and acne rosacea, facial
photodamaged skin, acne, Barrett's esophagus dysplasia and other potential
indications, intention to pursue licensing, marketing, copromotion or
acquisition opportunities, status of clinical programs for all other indications
and beliefs regarding potential efficacy and marketing, our intention to develop
combination drug and light device systems, our intention to test a new
proprietary endoscopic light delivery system, our intention to expand our sales
force, hope that our products will be an AK therapy of choice and barriers to
achieving that status, beliefs regarding revenues from approved and potential
products and Levulan's(R) competitive properties, intention to postpone or
commence clinical trials and investigator studies in 2004, expectations of
exclusivity under the Hatch-Waxman Act and other patent laws, intentions to seek
additional United States and foreign regulatory approvals, trademarks, and to
market outside the United States, beliefs regarding environmental compliance,
beliefs concerning patent disputes, the impact of a third-party's regulatory
compliance and fulfillment of contractual obligations, plans to monitor cost of
product sales, expectations of increases in cost of product sales, expected use
of cash resources in 2004, requirements of cash resources for our future
liquidity, anticipation of hiring additional personnel, effect of reimbursement
policies on revenues, expectations for future strategic opportunities and
research and development programs, expectations for continuing operating losses,
expectations regarding the adequacy and availability of insurance, stable
administrative costs, status of research and development costs, levels of
interest income and our capital resource needs, intention to sell securities to
meet capital requirements, our manufacturing facilities and its related costs,
and potential for additional inspection and testing, beliefs regarding the
adequacy of our inventory of Kerastick(R) units, belief regarding interest rate
risks to our investments and effects of inflation and new accounting standards,
dependence on key personnel, beliefs concerning product liability insurance,
intention to continue to develop integrated drug and light device systems,
belief that our new facility will help control costs and our principal methods
of competition. These forward-looking statements are further qualified by
important factors that could cause actual results to differ materially from
those in the forward-looking statements. These factors include, without
limitation, changing market and regulatory conditions, actual clinical results
of our trials, the reimbursement by third-parties for our treatments, the impact
of competitive products and pricing, the timely development, FDA and foreign
regulatory approval, and market acceptance of our products, environmental risks
relating to our products reliance on third-parties for the production,
manufacture, sales and marketing of our products, the securities regulatory
process, the maintenance of our patent portfolio and ability to obtain
competitive levels of reimbursement by third-party payors, none of which can be
assured. Results actually achieved may differ materially from expected results
included in these statements as a result of these or other factors.
63
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-5
Notes to the Consolidated Financial Statements............................ F-6
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
We carried out an evaluation, under the direction of our Chief Executive
Officer and Chief Financial Officer, of the effectiveness of the design and
operation of our disclosure controls and procedures (as defined in Exchange Act
Rules 13a-15(e) and 15d-15(e)). Based upon that evaluation, the Chief Executive
Officer and Chief Financial Officer concluded that our disclosure controls and
procedures were effective as of December 31, 2003. There have been no changes in
our internal control over financial reporting that occurred during the quarter
ended December 31, 2003 that have materially affected, or are reasonably likely
to materially affect, DUSA's internal control over financial reporting.
64
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
BOARD OF DIRECTORS
The name, age and current position with the Company of each director is
listed below, followed by summaries of their backgrounds and principal
occupations.
NAME AGE POSITION DATE ELECTED
- ---- --- -------- ------------
President, Chief Executive Officer,
D. Geoffrey Shulman, MD, FRCPC......... 49 and Director (principal executive officer)....... 9/05/91
John H. Abeles, MD (1) (3)............. 59 Director......................................... 8/02/94
David M. Bartash(1)(2)................. 61 Director......................................... 11/16/01
Chairman of the Board
Jay M. Haft, Esq(1)(2)(3).............. 68 and Director..................................... 9/16/96
Richard C. Lufkin (1) (3).............. 57 Director......................................... 1/27/92
Magnus Moliteus (2).................... 65 Director......................................... 7/25/03
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
(3) Member of the Nominating and Corporate Governance Committee.
D. Geoffrey Shulman, MD, FRCPC, is the Company's founder, President and
CEO and formerly served as our Chairman. Dr. Shulman, a dermatologist, was the
President and a director of Draxis Health Inc. from its founding in October 1987
until May 1990, was Co-Chairman from October 1990 to April 1993, and Chairman of
the Board from April 1993 until March 1996. Dr. Shulman also participates, on a
limited basis, in a private dermatology practice.
John H. Abeles, MD, is the President and founder of MedVest, Inc. which,
since 1980, has provided consulting services to health care and high technology
companies. He is also the Chief Executive Officer of UniMedica, Inc., a provider
of medical educational services and materials. Dr. Abeles is a member of the
Boards of Directors of I-Flow Corporation, Oryx Technology, Inc., Molecular
Diagnostics Inc. and Encore Medical Corporation.
David M. Bartash, is the President and founder of Bartash and Company, a
consulting company which, since 1990, has been providing consulting services for
the healthcare industry, including research for the healthcare investment
community and support services for venture start-ups.
Jay M. Haft, Esq., is a strategic and financial consultant for
growth-stage companies. He was a senior corporate partner of the law firm of
Parker, Duryee, Rosoff & Haft from 1989 to 1994 and was of counsel to Parker,
Duryee, Rosoff & Haft and Reed Smith LLP until 2002. Mr. Haft is a member of the
Boards of Directors of DCAP Group Inc., Oryx Technology Corporation and Encore
Medical Corporation.
65
Richard C. Lufkin is the principal of Enterprise Development Associates, a
proprietorship formed in 1985 which provides consulting and venture support
services to early stage technology-based companies, principally in the life
sciences. He is also a co-founder, consultant to, and former Chief Financial
Officer of Linguagen Corp., a development-stage, privately-held, biotechnology
firm.
Magnus Moliteus is a consultant to the healthcare industry and Chairman of
COM Consulting Inc., a privately held firm, which enhances Swedish-American
relations particularly between health care companies. From 1995 to 2001, when he
became a full-time consultant, Mr. Moliteus served as Executive Director of
Invest in Sweden Agency, U.S., a Swedish government agency. From 1977 to 1990,
he was Chief Executive Officer of Pharmacia, Inc. (now owned by Pfizer, Inc.)
EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS
The name, age and position with the Company of each executive officer who
is not a director of the Company is listed below, followed by summaries of their
backgrounds and principal occupations. Executive officers are elected annually,
and serve at the discretion of the Board of Directors.
NAME AGE TITLE DATE ELECTED
- ---- --- ----- ------------
Mark C. Carota......................... 48 Vice President, Operations..................... 2/18/00
Peter M. Chakoutis..................... 38 Vice President and Chief Financial Officer 1/1/04
(principal financial and accounting officer)...
Richard C. Christopher................. 34 Vice President, Financial Planning and
Business Analysis.............................. 1/1/04
Scott L. Lundahl....................... 45 Vice President, Intellectual Property and
Regulatory Affairs............................. 6/23/99
Stuart L. Marcus, MD, Ph.D............. 57 Vice President, Scientific Affairs; Chief
Medical Officer................................ 10/11/93
David Page............................. 44 Associate Vice President, Sales................ 8/11/03
Paul A. Sowyrda........................ 42 Vice President, Marketing and Sales............ 8/01/00
Mark C. Carota has been employed by the Company since October 1999. Prior
to joining the Company, Mr. Carota was Director of Operations from November 1998
to October 1999 for Lavelle, Inc., a privately held manufacturer of orthopedic
instrumentation. From July 1998 to November 1998, Mr. Carota was employed as
Director of Quality Assurance by CGI Inc. Prior to joining CGI Inc., Mr. Carota
was employed by Allergan Inc., from February 1997 to July 1998 where he had
responsibility for quality assurance, engineering and facilities.
66
Peter M. Chakoutis has been employed by the Company since December 2000.
Prior to his promotion to his current position on January 1, 2004, he held the
position of controller. Prior to joining the Company, Mr. Chakoutis was
Financial Reporting Manager from December 1996 to December 2000 for State Street
Corporation, a publicly traded financial holding company that provides a full
range of products and services for sophisticated global investors.
Richard C. Christopher has been employed by the Company since December
2000. Prior to his promotion to his current position on January 1, 2004, he held
the position of Director, Financial Analysis. Prior to joining the Company, he
was the North American Cost Accounting Manager for Grace Construction Products,
a unit of W.R. Grace & Co. from April 1999 to December 2000. Prior to joining
Grace Construction Products, Mr. Christopher was employed by the Boston Edison
Company from March 1996 until April 1999.
Scott L. Lundahl has been employed by the Company since May 1998. In 1994,
Mr. Lundahl co-founded and became Vice President of Lumenetics, Inc., a
privately-owned medical device development company, which, prior to May 1998,
provided the Company with consulting services in the light device technology
area.
Stuart L. Marcus, MD, Ph.D. has been employed by the Company since October
1993. Prior to joining the Company, he was Director of the Hematology/Oncology
Department of Daiichi Pharmaceuticals Inc., and prior thereto he held positions
in the Medical Research Division of the American Cyanamid Company, directing
photodynamic therapy clinical development, among other assignments.
David Page has been employed by the Company since August 2003. Prior to
joining the Company, Mr. Page was Vice President of Sales, Aesthetic Division
from July 2001 to August 2003 for Lumenis, Inc. From July 1999 to July 2001, Mr.
Page was Vice President of Sales for ESC Medical Systems responsible for
Aesthetic, Surgical and Veterinary US Markets.
Paul A. Sowyrda, has been employed by the Company since April 2000. From
April 1998 to April 2000, Mr. Sowyrda was employed by Aurora Tech, a Division of
Carlo Gavazzi, where at the time of his departure he was serving as President
and Chief Executive Officer. From October 1997 to February 1998, Mr. Sowyrda was
Vice President, Operations of UroMed Corp, Urovation Division.
AUDIT COMMITTEE FINANCIAL EXPERT
Our Board of Directors has determined that Richard Lufkin, the Chairman of
our Audit Committee, is an audit committee financial expert, as that term is
defined under Regulation S-K, Item 401(h), and that he is independent, as that
term is used in Item 7(d)(3)(iv) of Schedule 14A under the Exchange Act.
67
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Under the securities laws of the United States, the Company's directors,
officers and any person holding more than ten percent (10%) of our common stock
are required to report their ownership of securities and any changes in that
ownership to the Securities and Exchange Commission on Forms 3, 4 and 5. Based
on our review of the copies of such forms we have received, DUSA believes that
all of our officers, directors and shareholders holding ten percent (10%) or
more of our common stock complied with all filing requirements applicable to
them with respect to their reporting obligations except for a single untimely
filing by Peter M. Chakoutis reporting his initial holdings of the Company's
securities and one filing by Jay Haft reporting his indirect acquisition of
shares through his spouse in three transactions that occurred in 2002. In making
these statements, we have relied on the written representations of our directors
and officers and copies of the reports that they have filed with the Securities
and Exchange Commission.
CODE OF ETHICS
We have adopted a Code of Ethics within the meaning of Item 406(b) of
Regulation S-K. This Code of Ethics applies to all our executive officers
including our principal executive officer and principal financial officer. If we
make substantive amendments to this Code of Ethics or grant any waiver,
including any implicit waiver, we will disclose the nature of such amendment in
a report on Form 8-K within five days of such amendment or waiver.
ITEM 11. EXECUTIVE COMPENSATION
DIRECTOR COMPENSATION
Directors who are employees of the Company receive no cash compensation
for their services as directors or as members of committees. Outside directors
receive $25,000 per year, as annual compensation, regardless of the number of
Board or Committee meetings they attend. Directors serving on the Audit
Committee receive an additional $5,000 per year. Also, directors are paid
out-of-pocket expenses related to their attendance. Directors are awarded
options to purchase 15,000 shares of common stock on the earlier of thirty (30)
days following their date of election or June 30th of their first year of
service as a member of the Board of Directors, and options for 10,000 shares of
common stock on June 30th of each year following their reelection.
68
EXECUTIVE COMPENSATION
The following table shows, for the fiscal years ended December 31, 2003,
2002 and 2001, certain compensation paid by DUSA to its executive officers. All
amounts are stated in United States dollars unless otherwise indicated.
SUMMARY COMPENSATION TABLE
- ------------------------------------------------------------------------------------------------------------------------------------
ACTUAL COMPENSATION LONG-TERM COMPENSATION
---------------------------------------- ---------------------------------------------------
AWARDS PAYOUTS
-------------------------- ------------------------
OTHER ALL
ANNUAL RESTRICTED OTHER
COMPEN- STOCK LTIP COMPEN-
SALARY BONUS SATION1 AWARD(S) OPTIONS PAYOUTS SATION
NAME AND PRINCIPAL POSITION YEAR ($) ($) ($) ($) (#) ($) ($)
- -------------------------------------- ------ ---------- ----------- ----------- -------------- ----------- ------------ -----------
D. Geoffrey Shulman, MD, FRCPC, 2003 340,000 170,000 -- -- 110,000 -- --
President, Chief Executive Officer 2002 340,000 64,600 -- -- 60,000 -- --
2001 340,000 84,460 -- -- 25,000 -- --
- -------------------------------------- ------ ---------- ----------- ----------- -------------- ----------- ------------ -----------
Mark C. Carota, Vice President, 2003 175,000 38,900 -- -- 17,500 -- --
Operations 2002 157,000 20,300 -- -- 17,500 -- --
2001 150,731 26,860 -- -- 7,500 -- --
- -------------------------------------- ------ ---------- ----------- ----------- -------------- ----------- ------------ -----------
Scott Lundahl, Vice President, 2003 182,000 40,400 -- -- 17,500 -- --
Intellectual Property and Regulatory 2002 168,000 21,700 -- -- 17,500 -- --
Affairs 2001 134,462 27,060 -- -- 7,500 -- --
- -------------------------------------- ------ ---------- ----------- ----------- -------------- ----------- ------------ -----------
Stuart L. Marcus, MD, Ph.D., Vice 2003 250,000 55,500 -- -- 17,500 -- --
President, Scientific Affairs and 2002 247,520 17,100 -- -- 12,500 -- --
Chief Medical Officer 2001 246,055 34,910 -- -- 7,500 -- --
- -------------------------------------- ------ ---------- ----------- ----------- -------------- ----------- ------------ -----------
Paul A. Sowyrda, Vice President, 2003 180,000 43,200 -- -- 17,500 -- --
Marketing and Sales 2002 164,800 21,300 -- -- 17,500 -- --
2001 154,350 26,550 -- -- 7,500 -- --
- -------------------------------------- ------ ---------- ----------- ----------- -------------- ----------- ------------ -----------
Notes:
(1) No officer had perquisites in excess of $50,000 or 10% of salary and
bonus reported for 2003, 2002 or 2001.
69
BOARD COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Compensation Committee of the Board of Directors (the "Committee") is
composed of three (3) non-employee directors. The Committee is responsible for
setting and administering the policies which govern annual executive salaries
and cash bonus awards, and recommends participants and amounts of stock option
awards to the Company's Board of Directors. The Committee evaluates, on a yearly
basis, the performance, and determines the compensation of, the executive
officers of DUSA. The Committee evaluates compensation based upon the
achievement by the individual of corporate goals, and the performance of
individual responsibilities. DUSA's President and Chief Executive Officer, Dr.
D. Geoffrey Shulman, is not a member of the Committee, however, the Committee
seeks input from Dr. Shulman regarding the performance of DUSA's Vice
Presidents, as well as his recommendations for their compensation. Dr. Shulman
is present, at the invitation of the Committee, at its meetings, other than
during consideration of his own compensation.
DUSA's executive compensation programs consist of base salary, cash bonus
incentives, stock option and stock grant awards. The goals of the Company's
executive officer compensation policies are to attract, retain, and reward
executive officers who contribute to DUSA's success, to align executive officer
compensation with DUSA's performance and to motivate executive officers to
achieve the Company's business objectives. The executive officers were evaluated
by the Committee against established goals for 2003, including corporate goals,
the Company's stock performance and individual goals within each executive
officer's area of responsibility.
With regard to base salary, the Committee believes that DUSA's officers
should be compensated at levels comparable to the base salary of executive
officers at similar small public biotechnology or pharmaceutical companies.
During 2000, the Committee received survey data reporting the salaries for
executives of companies in these groups which was prepared by independent
consultants. The Committee intends to obtain an updated report regarding
executive compensation for similarly situated companies before the end of 2004
in order to stay apprised of current compensation practices at such companies.
Generally, DUSA's Vice Presidents are eligible to receive up to 30% of
their base salary as a cash bonus award. The Committee recognized that these
individuals largely achieved their personal goals and corporate goals which had
a positive influence on shareholder value for 2003. Therefore, the Committee
concluded that DUSA's overall operational performance, particularly with regard
to marketing and sales functions, consolidation of regulatory functions,
enhanced medical information functions, and approval of DUSA's manufacturing
facility, justified favorable consideration of bonuses for its Vice Presidents.
Accordingly, DUSA's Vice Presidents received cash bonus awards ranging from
approximately 22% to 24% of their base salaries. These cash awards were paid in
March 2004.
70
The Committee also is using the 2000 survey data from independent
consultants to monitor and evaluate the long-term incentive compensation levels
of its officers and directors. The Committee believes that a strong stock
ownership program is essential to the long-term growth of the Company. In 2004,
the Committee granted to DUSA's key executive officers awards of stock options
to emphasize the long-term focus required for success in the pharmaceutical
industry.
COMPENSATION OF THE PRESIDENT AND CHIEF EXECUTIVE OFFICER
The Committee exercised its subjective judgment and discretion in
determining the amounts of Dr. Shulman's base salary, bonus award, and stock
option awards for 2003. Dr. Shulman's base salary and cash bonus award for 2003
were determined with reference to the same measures used for all DUSA's
executive officers, but with particular emphasis on the maintenance of our
financial strength and meeting marketing and sales expectations. Dr. Shulman's
base salary for 2003 was $340,000. With regard to a cash bonus award, Dr.
Shulman is eligible to receive up to 50% of base salary plus additional amounts
for outstanding performance. For 2003, Dr. Shulman's bonus award was 50% of his
base salary. Dr. Shulman's bonus award was paid to him in 2004. For 2004, Dr.
Shulman proposed that his base salary remain unchanged from that of 2002 and
2003, which proposal was accepted by the Committee.
Jay M. Haft, Esq.
David M. Bartash
Magnus Moliteus
71
PERFORMANCE GRAPH
COMPARISON OF FIVE YEAR CUMULATIVE SHAREHOLDER TOTAL RETURN
AMONG DUSA PHARMACEUTICALS, INC.,
NASDAQ MARKET INDEX AND MG GROUP INDEX
[GRAPH APPEARS HERE]
1/1/1999 12/31/1999 12/29/2000 12/31/2001 12/31/2002 12/31/2003
-------- ---------- ---------- ---------- ---------- ----------
DUSA Pharmaceuticals, Inc. $ 100.00 $ 386.44 $ 227.97 $ 109.15 $ 22.12 $ 68.47
Drug Manufacturers/Other 100.00 131.60 213.31 189.85 134.88 187.46
NASDAQ Market Index 100.00 176.37 110.86 88.37 61.64 92.68
The graph above compares cumulative total shareholder return on our common
stock for the five-year period ended December 31, 2003, with the cumulative
total return on the Nasdaq Market Index and the Media General Drug Manufacturer
Index over the same period. The identity of those corporations included in the
Media General Financial Services Drug Manufacturer Index may be obtained by
contacting Ms. Shari Lovell, Director of Shareholder Services, DUSA
Pharmaceuticals, Inc., 555 Richmond Street West, Suite 300, Toronto, Ontario M5V
3B1 Canada.
The graph assumes $100 was invested in DUSA's common stock on January 1,
1999, and in each of the indices, and that dividends were reinvested. The
comparisons in the graph are required by the Securities and Exchange Commission
and are not intended to forecast or be indicative of possible future performance
of DUSA's common stock.
72
OPTION GRANTS IN 2003
The following grants of stock options were made to the named executive
officers during fiscal year 2003.
- ------------------------------------------------------------------------------------------------------------------------------------
POTENTIAL REALIZABLE
VALUE OF ASSUMED
ANNUAL RATES OF STOCK PRICE
INDIVIDUAL GRANTS APPRECIATION FOR OPTION TERM(2)
- ------------------------- ------------------------------------------------------------------------- --------------------------------
NUMBER OF PERCENT OF TOTAL
SECURITIES OPTIONS/SARS
UNDERLYING GRANTED TO EXERCISE OF
OPTIONS/SARS EMPLOYEES IN BASE PRICE
NAME GRANTED(1) FISCAL YEAR ($/SHARE) EXPIRATION DATE 5% 10%
- ------------------------- ------------------- -------------------- --------------- ---------------- --------------- ----------------
Dr. D. Geoffrey Shulman 100,000 25.5% $1.60 3/13/13 $100,600 $255,000
10,000 2.6% $2.51 6/30/13 $ 15,800 $ 40,000
- ------------------------- ------------------- -------------------- --------------- ---------------- --------------- ----------------
Mr. Mark C. Carota 17,500 4.5% $1.60 3/13/13 $ 17,600 $ 44,600
- ------------------------- ------------------- -------------------- --------------- ---------------- --------------- ----------------
Mr. Scott Lundahl 17,500 4.5% $1.60 3/13/13 $ 17,600 $ 44,600
- ------------------------- ------------------- -------------------- --------------- ---------------- --------------- ----------------
Dr. Stuart L. Marcus 17,500 4.5% $1.60 3/13/13 $ 17,600 $ 44,600
- ------------------------- ------------------- -------------------- --------------- ---------------- --------------- ----------------
Mr. Paul A. Sowyrda 17,500 4.5% $1.60 3/13/13 $ 17,600 $ 44,600
- ------------------------- ------------------- -------------------- --------------- ---------------- --------------- ----------------
Notes:
(1) All options in this table have been granted pursuant to the 1996 Omnibus
Plan, as amended. The options have exercise prices equal to the fair
market value on the date of the grant.
(2) The potential realizable value is calculated based on the fair market
value of DUSA's common stock on the date of the grant. These amounts only
represent certain assumed rates of appreciation established by the SEC.
There can be no assurance that the amounts reflected in this table or the
associated rates of appreciation will be achieved.
73
AGGREGATED STOCK OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END STOCK
OPTION VALUES
The following table provides certain information as to certain stock
options exercisable by the named executive officers for the fiscal year 2003,
and the value of such options held by them at December 31, 2003, measured in
terms of the closing price of the Company's common stock on The Nasdaq Stock
Market on December 31, 2003 which was $5.05 per share.
- ----------------------------------------------------------------------------------------------------------------------------------
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT DECEMBER 31, IN-THE-MONEY OPTIONS AT
SHARES ACQUIRED 2003 EXERCISABLE/ DECEMBER 31, 2003
NAME ON EXERCISE (#) VALUE REALIZED ($) UNEXERCISABLE EXERCISABLE/ UNEXERCISABLE
- ----------------------------------------------------------------------------------------------------------------------------------
Dr. D. Geoffrey Shulman -- -- 671,250/ $110,275/
193,750 $249,250
- ----------------------------------------------------------------------------------------------------------------------------------
Mr. Mark C. Carota -- -- 35,625/ $5,163/
36,875 $75,863
- ----------------------------------------------------------------------------------------------------------------------------------
Mr. Scott L. Lundahl -- -- 109,375/ $19,413/
38,125 $75,863
- ----------------------------------------------------------------------------------------------------------------------------------
Dr. Stuart L. Marcus -- -- 175,625/ $3,688/
36,875 $71,438
- ----------------------------------------------------------------------------------------------------------------------------------
Mr. Paul A. Sowyrda -- -- 30,625/ $5,163/
41,875 $75,863
- ----------------------------------------------------------------------------------------------------------------------------------
OTHER COMPENSATION
The Company has employment agreements with each of the executive officers
named in the Summary Compensation Table. Pursuant to these agreements, the
executive officers are entitled to receive compensation as determined by the
Board of Directors and are eligible to receive the benefits generally made
available to employees of the Company. DUSA may terminate any of these
agreements at any time, with or without cause on sixty (60) days prior written
notice. If employment is terminated without cause, DUSA has agreed to pay a
severance allowance equivalent to one year of the executive officer's
then-current base salary payable in a lump sum, within sixty (60) days following
the date of termination. In addition to the foregoing, Dr. Shulman's employment
agreement also provides that he shall have the right to exercise, for a period
of one year from the date of termination, all stock options granted to him prior
to his termination as to all or any part of the shares covered by such options,
including shares with respect to which such options would not otherwise be
exercisable, subject to restrictions under U.S. or Canadian law.
In the event an executive officer should die while employed by DUSA, his
heirs or beneficiaries will be entitled to any Company paid death benefits in
force at the time of such death and will also be entitled to exercise any vested
but unexercised stock options which were held by him at the time of his death,
within a period of one (1) year from the date of death.
74
These employment agreements also provide for certain severance benefits
following a change in control of the Company and termination of employment. Upon
any "change of control," as defined in the agreements, DUSA shall pay to the
executive officer a lump sum payment equal to three (3) times his base salary
for the last fiscal year within five (5) days after such termination.
Under the Company's 1996 Omnibus Plan, as amended, any and all outstanding
options not fully vested shall automatically vest in full and shall be
immediately exercisable upon a "change of control," as defined in the grant
agreements. The date on which such accelerated vesting and immediate
exercisability shall occur, shall be the date of the occurrence of the change of
control.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The following table sets forth certain information with respect to the
beneficial ownership of DUSA's common stock as of March 1, 2004 by: (i) each of
our directors; (ii) our named executive officers; (iii) all beneficial owners of
greater than 5% of our outstanding common stock; and (iv) all of our directors
and executive officers as a group.
NUMBER OF SHARES PERCENTAGE OF
NAME(1) BENEFICIALLY OWNED(2) OUTSTANDING SHARES (3)
------- --------------------- ----------------------
John H. Abeles, MD .......................................... 89,500 (4) *
David M. Bartash ............................................ 50,500 (5) *
Mark C. Carota .............................................. 48,815 (6) *
Jay M. Haft, Esq. ........................................... 103,250 (7) *
Richard C. Lufkin ............................................ 97,100 (8) *
Scott L. Lundahl ............................................ 118,957 (9) *
Stuart L. Marcus, MD, Ph.D. ................................. 191,250 (10) 1.15%
Magnus Moliteus ............................................. 15,000 (11) *
D. Geoffrey Shulman, MD, FRCPC .............................. 1,107,668 (12) 6.46%
Paul A. Sowyrda ............................................. 46,250 (13) *
All directors and executive officers as a group
(consisting of 14 persons) .................................. 1,938,603 (14) 10.67%
Dimensional Fund Advisors, Inc. ............................. 885,800 (15) 6.34%
Royce & Associates, Inc. .................................... 1,225,600 (16) 8.78%
Mr. Jeffrey Casdin and affiliated entities .................. 2,167,300 (17) 15.5%
Investors Group Inc. and its affiliated entities 1,120,800 (18) 8.0%
* Less than 1%.
Notes:
(1) Unless indicated otherwise, the individuals listed herein have a business
mailing address of c/o DUSA Pharmaceuticals, Inc., 25 Upton Drive,
Wilmington, Massachusetts, 01887.
75
(2) Unless indicated otherwise, the individuals and entities listed herein
have the sole power to both vote and dispose of all securities that they
beneficially own.
(3) The percentage of ownership as calculated above includes in the number of
shares outstanding for each individual listed those shares that are
beneficially, yet not directly, owned. Applicable percentage of ownership
is based on 16,391,372 shares of common stock outstanding on March 10,
2004 unless noted as otherwise.
(4) 65,000 of the shares indicated represent shares with respect to which Dr.
Abeles has the right to acquire through the exercise of options. Of the
shares indicated, Dr. Abeles shares investment and voting power with
regard 24,500 shares.
(5) 35,000 of the shares indicated represent shares with respect to which Mr.
Bartash has the right to acquire through the exercise of options.
(6) 48,750 of the shares indicated represent shares with respect to which Mr.
Carota has the right to acquire through the exercise of options. Under
Rule 13d-3 of the Securities and Exchange Act of 1934, as amended, Mr.
Carota disclaims, but may be deemed to be the beneficial owner of, 15
shares of common stock that are held by his adult son and 50 shares held
by his daughter, both of whom are members of Mr. Carota's household.
(7) 68,750 of the shares indicated represent shares with respect to which Mr.
Haft has the right to acquire through the exercise of options. Under Rule
13d-3 of the Securities and Exchange Act of 1934, as amended, Mr. Haft
disclaims, but may be deemed to be the beneficial owner of, 34,500 shares
that are held by his spouse.
(8) 95,000 of the shares indicated represent shares with respect to which Mr.
Lufkin has the right to acquire through the exercise of options.
(9) 113,750 of the shares indicated represent shares with respect to which Mr.
Lundahl has the right to acquire through the exercise of options.
(10) All of the shares indicated represent shares with respect to which Dr.
Marcus has the right to acquire through the exercise of options. Dr.
Marcus' address is 400 Columbus Avenue, Valhalla, New York, NY 10595.
(11) All of the shares indicated represent shares with respect to which Mr.
Moliteus has the right to acquire through the exercise of options.
(12) 300,000 of the shares indicated represent shares with respect to which Dr.
Shulman has the right to acquire through the exercise of his Class B
Warrants which have an exercise price of CDN $6.79 per Warrant, and
750,000 of such shares represent shares with respect to which Dr. Shulman
has the right to acquire through the exercise of options. Dr. Shulman's
address is 555 Richmond Street West, Suite 300, Toronto, Ontario M5V 3B1
Canada.
(13) All of the shares indicated represent shares with respect to which Mr.
Sowyrda has the right to acquire through the exercise of options.
(14) All of the shares indicated, Class B Warrants and options, as the case may
be, as discussed in footnotes (4) through (13) above are included, as well
as 1,478,000 shares which may be acquired through the exercise of options.
(15) The number of shares beneficially owned is based upon information
disclosed by Dimensional Fund Advisors Inc. on a Schedule 13G/A filed with
the Securities and Exchange Commission on February 6, 2004. Dimensional
Fund Advisors Inc.'s address is 1299 Ocean Avenue, 11th Floor, Santa
Monica, CA 90401.
(16) The number of shares beneficially owned is based upon information
disclosed by Royce & Associates, Inc. on a Schedule 13G/A filed with the
Securities and Exchange Commission on February 2, 2004. Royce &
Associates, Inc.'s address is 1414 Avenue of the Americas, New York, New
York 10019.
(17) The number of shares beneficially owned is based upon information
disclosed by Jeffrey Casdin and his affiliated entities on a Schedule
13G/A filed with the Securities and Exchange Commission on February 17,
2004. The number of shares includes 567,400 shares beneficially owned by
CLSP, L.P., 768,500 shares beneficially owned by CLSP II, L.P., 223,600
shares beneficially owned by CLSP/SBS I, L.P., 65,300 shares beneficially
owned by CLSP/SBS II, L.P., 542,500 shares beneficially owned by Cooper
Hill Partners, L.P., 1,624,800 shares beneficially owned by Cooper Hill
Partners, LLC, 2,167,300 shares beneficially owned by Casdin Capital,
L.L.C. and 2,167,300 shares beneficially owned by Jeffrey Casdin. Cooper
Hill Partners, LLC is the sole general partner of each entity and has the
power to vote and dispose of the securities owned by each entity. Jeffrey
Casdin is the managing member of Cooper Hill Partners, LLC. Mr. Casdin is
the managing member of Casdin Capital, LLC, the general partner of Cooper
Hill Partners, L.P. Mr. Casdin's address is 230 Park Avenue, New York, New
York 10169.
76
(18) The number of shares beneficially owned is based upon information
disclosed by Investors Group Inc. and its affiliated entities on a
Schedule 13G/A filed with the Securities and Exchange Commission on
February 17, 2004. The number of shares listed includes 582,700 shares
beneficially owned by Investors Canadian Small Cap Fund, 529,800 shares
beneficially owned by Investors Canadian Small Cap Growth Fund, 6,000
shares beneficially owned by Investors Canadian Small Cap Class, 2,300
shares beneficially owned by Investors Canadian Small Cap Growth Class,
1,120,800 beneficially owned by I.G. Investment Management, Ltd.,
1,112,500 shares beneficially owned by Investors Group Trust Co. Ltd.,
1,112,500 shares beneficially owned by Investors Group Inc., 1,112,500
shares beneficially owned by Investors Group Trustco Inc. and 8,300 shares
beneficially owned by Investors Group Corporate Class Inc. Investors Group
Inc. owns 100% of the issued and outstanding Class A Common Shares of
Investors Group Trustco Inc. Investors Group Trustco Inc. owns 100% of the
issued and outstanding Class A Common Shares of the Investors Group
Management Ltd. Investors Group Trustco Inc. also owns, directly or
indirectly, 100% of the issued and outstanding Common Shares of the
Investors Group Trust Co. Ltd. Investors Group Trustco Inc., Investors
Group Management Ltd., Investors Group Trust Co. Ltd., Investors Canadian
Small Cap Fund and Investors Canadian Small Cap Growth Fund are ultimately
controlled by Investors Group Inc. through its ownership of 100% of the
issued and outstanding Class A Common Shares of Investors Group Trustco
Inc. Power Financial Corporation owns 56.1% of the common stock of
Investors Group Inc. Power Corporation of Canada, of which Mr. Paul
Desmarais controls 64.7% of the voting power, owns 67.4% of the common
stock of Power Financial Corporation. Investors Group Inc.'s address is
One Canada Centre, 447 Portage Avenue, Winnipeg, Manitoba R3C 3B6 Canada.
EQUITY COMPENSATION PLAN INFORMATION
The following table provides information as of December 31, 2003 with
respect to shares of DUSA's common stock that may be issued under our
outstanding options, warrants and other rights.
- --------------------------------------- --------------------------- --------------------------- ------------------------------------
(A) (B) (C)
--------------------------- --------------------------- ------------------------------------
NUMBER OF SECURITIES TO BE WEIGHTED-AVERAGE EXERCISE NUMBER OF SECURITIES REMAINING
ISSUED UPON EXERCISE OF PRICE OF OUTSTANDING AVAILABLE FOR FUTURE ISSUANCE UNDER
OUTSTANDING OPTIONS, OPTIONS, WARRANTS AND EQUITY COMPENSATION PLANS (EXCLUDING
PLAN CATEGORY WARRANTS OR RIGHTS RIGHTS SECURITIES REFLECTED IN COLUMN (A))
- --------------------------------------- --------------------------- --------------------------- ------------------------------------
Equity compensation plans approved by
security holders 2,319,950 $11.656 506,8561
- --------------------------------------- --------------------------- --------------------------- ------------------------------------
Equity compensation plans not
approved by security holders 425,000(2) $6.987 N/A
- --------------------------------------- --------------------------- --------------------------- ------------------------------------
Total 2,744,950 $10.933 506,856(1)
- --------------------------------------- --------------------------- --------------------------- ------------------------------------
Note:
(1) The 1996 Omnibus Plan, as amended, provides that the maximum number of
shares with respect to which awards may be granted shall not exceed 20% of
the Company's common stock outstanding or a maximum of 2,753,328 shares.
(2) This number includes shares that may be issued upon the exercise of the
following: (i) A Class B warrant granted to Dr. Shulman, our President,
CEO and CFO, for the issuance of 300,000 shares of common stock. The
exercise price of the warrant is $6.00 per share. This warrant is
exercisable and has an expiration date of January 29, 2007; (ii) Options
to purchase a total of 85,000 shares of common stock with an exercise
price of $10.875 per share. This option was granted to PARTEQ Research and
Development Innovations, the licensor of certain patents underlying our
Levulan(R) PDT/PD systems, on October 21, 1997. PARTEQ has subsequently
assigned the right to acquire 26,911 shares under this option to certain
individuals. These options have ten (10) year terms and vested at the rate
of 25% per year beginning on the first anniversary of the date of the
original grant; (iii) Options to purchase 15,000 shares of our common
stock issued to Therapeutics, Inc., a consultant to the Company, which
were granted on March 13, 1997. These options have an exercise price of
$6.125 per share, ten (10) year terms and vested 20% per year. These
options have been subsequently assigned by Therapeutics, Inc. to its
principal; and (iv) Options to purchase 25,000 shares of our common stock
with an exercise price of $6.125 per share. These options were granted to
Lumenetics, Inc., our former light device consultant, on March 13, 1997.
They have been subsequently assigned by Lumenetics, Inc. to its
principals. These options have ten (10) year terms and vested at the rate
of 25% per year beginning on the date of the original grant.
77
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
AUDIT FEES
The aggregate fees billed by Deloitte & Touche LLP for professional
services rendered for the audit of the Company's annual financial statements for
the fiscal years ended December 31, 2003 and 2002, and for the reviews of the
financial statements included in the Company's Quarterly Reports on Form 10-Q
for fiscal years 2003 and 2002 were $92,000 and $114,000, respectively.
AUDIT RELATED FEES
Other than the fees described under the caption "Audit Fees" above,
Deloitte & Touche LLP did not bill any fees for services rendered to us during
fiscal years 2003 and 2002 for assurance and related services in connection with
the audit or review of our consolidated financial statements.
TAX FEES
The aggregate fees billed by Deloitte & Touche LLP for services rendered
to the Company, for tax services for the fiscal years ended December 31, 2003
and 2002, were $20,000 and $14,000, respectively.
ALL OTHER FEES
There were no fees billed by Deloitte & Touche LLP for professional
services rendered for the fiscal year ended December 31, 2003 and 2002.
POLICY ON AUDIT COMMITTEE PRE-APPROVAL OF AUDIT AND PERMISSIBLE NON-AUDIT
SERVICES OF INDEPENDENT AUDITORS
In considering the nature of the services provided by the independent
auditor, which were pre-approved in accordance with procedures required by the
Audit Committee Charter, the Audit Committee determined that such services are
compatible with the provision of independent audit services. The Audit Committee
discussed these services with the independent auditor and Company management to
determine that they are permitted under the rules and regulations concerning
auditor independence promulgated by the SEC to implement the Sarbanes-Oxley Act
of 2002, as well as the American Institute of Certified Public Accountants.
78
ITEM 15. 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-5
Notes to the Consolidated Financial Statements..................F-6
Schedules 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
a) Form 8-K, filed on October 27, 2003, announcing that it had
hired, trained and deployed an initial sales force.
C. Exhibits filed as part of this Report
3(a.1) Certificate of Incorporation, as amended, filed as Exhibit
3(a) to the Registrant's Form 10-K for the fiscal year
ended December 31, 1998, and is incorporated herein by
reference;
3(a.2) Certificate of Amendment to the Certificate of
Incorporation, as amended, dated October 28, 2002 and
filed as Exhibit 99.3 to the Registrant's Quarterly Report
on Form 10-Q for the fiscal quarter ended September 30,
2002, filed November 12, 2002 and incorporated herein by
reference; and
3(b) By-laws of the Registrant.
4(a) Common Stock specimen, filed as Exhibit 4(a) to the
Registrant's Form 10-K for the fiscal year ended December
31, 2002, 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;
79
4(c) Rights Agreement filed as Exhibit 4.0 to Registrant's
Current Report on Form 8-K dated September 27, 2002, filed
October 11, 2002, and is incorporated herein by reference;
and
4(d) Rights Certificate relating to the rights granted to
holders of common stock under the Rights Agreement filed
as Exhibit 4.0 to Registrant's Current Report on Form 8-K,
dated September 27, 2002, filed October 11, 2002, and is
incorporated herein by reference.
10(a) License Agreement between the Company, PARTEQ and Draxis
Health Inc. dated August 27, 1991, filed as Exhibit 10.1
to the Registrant's Registration Statement on Form S-1,
No. 33-43282, and is incorporated herein by reference;
10(b) ALA Assignment Agreement between the Company, PARTEQ, and
Draxis Health Inc. dated October 7, 1991, filed as Exhibit
10.2 to the Registrant's Registration Statement on Form
S-1, No. 33-43282, and is incorporated herein by
reference;
10(b.1) Amended and Restated Assignment Agreement between the
Company and Draxis Health, Inc. dated April 16, 1999,
filed as Exhibit 10(b.1) to the Registrant's Form 10-K for
the fiscal year ended December 31, 1999, and is
incorporated herein by reference;
10(b.2) Termination and Transfer Agreement between the Company and
Draxis Health Inc. dated as of February 24, 2004, portions
of which have been omitted pursuant to a request for
confidential treatment pursuant to Rule 24b-2 of the
Securities Exchange Act of 1934, as amended;
10(c) Employment Agreement of D. Geoffrey Shulman, MD, FRCPC
dated October 1, 1991, filed as Exhibit 10.4 to the
Registrant's Registration Statement on Form S-1, No.
33-43282, and is incorporated herein by reference;
10(d) Amendment to Employment Agreement of D. Geoffrey Shulman,
MD, FRCPC dated April 14, 1994, filed as Exhibit 10.4 to
the Registrant's Registration Statement on Form S-2, No.
33-98030, and is incorporated hereby by reference;
10(e) Amended and Restated License Agreement between the Company
and PARTEQ dated March 11, 1998, filed as Exhibit 10(e) to
the Registrant's Form 10-K/A filed on June 18, 1999,
portions of Exhibit A have been omitted pursuant to a
request for confidential treatment pursuant to Rule 24b-2
of the Securities Exchange Act of 1934, as amended, and is
incorporated herein by reference;
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;
80
10(h) 1996 Omnibus Plan, as amended, filed as Appendix A to
Registrant's Schedule 14A Definitive Proxy Statement dated
April 26, 2001, and is incorporated herein by reference;
10(h.1) 1996 Omnibus Plan, as amended on May 1, 2003
10(i) Purchase and Supply Agreement between the Company and
National Biological Corporation dated November 5, 1998,
filed as Exhibit 10(i) to the Registrant's Form 10-K/A
filed on June 18, 1999, portions of which have been
omitted pursuant to a request for confidential treatment
pursuant to Rule 24b-2 of the Securities Exchange Act of
1934, as amended, and is incorporated herein by reference;
10(j) Supply Agreement between the Company and Sochinaz SA dated
December 24, 1993, filed as Exhibit 10(q) to Registrant's
Form 10-K/A filed on March 21, 2000, portions of which
have been omitted pursuant to a request for confidential
treatment pursuant to Rule 24b-2 of the Securities
Exchange Act of 1934, as amended, and is incorporated
herein by reference;
10(j.1) First Amendment to Supply Agreement between the Company
and Sochinaz SA dated July 7, 1994, filed as Exhibit
10(q.1) to Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1999, and is incorporated
herein by reference;
10(j.2) Second Amendment to Supply Agreement between the Company
and Sochinaz SA dated as of June 20, 2000, filed as
Exhibit 10.1 to Registrant's Current Report on Form 8-K
dated June 28, 2000, and is incorporated herein by
reference;
10(k) Master Service Agreement between the Company and
Therapeutics, Inc. dated as of October 4, 2001, filed as
Exhibit 10(b) to the Registrant's Quarterly Report on Form
10-Q for the fiscal quarter ended September 30, 2001,
filed November 8, 2001, portions of which have been
omitted pursuant to a request for confidential treatment
under Rule 24b-2 of the Securities Exchange Act of 1934,
as amended and is incorporated herein by reference;
10(l) Commercial Loan Agreement, Secured Term Loan Promissory
Note and Pledge and Security Agreement between the Company
and Citizens Bank of Massachusetts dated May 13, 2002
filed as Exhibit 99.1 to the Registrant's Quarterly Report
on Form 10-Q for the fiscal quarter ended March 31, 2002,
filed May 14, 2002, and is incorporated herein;
10(m) Collaboration Termination Agreement, effective September
1, 2002, between the Company and Schering AG, the
Company's former marketing partner, filed as Exhibit 10 to
Registrant's Current Report on Form 8-K dated August 27,
2002, and is incorporated herein by reference;
10(n) License and Development Agreement between the Company and
Photonamic GmbH & Co. KG dated as of December 30, 2002,
filed as Exhibit 10(r) to Registrant's Annual Report on
Form 10-K for the fiscal year ended December 31, 2002,
portions of which have been omitted pursuant to a request
for confidential treatment under Rule 24(b)-2 of the
Securities Exchange Act of 1934, as amended and is
incorporated herein by reference; and
81
10(o) Supply Agreement between the Company and medac GmbH dated
as of December 30, 2002, filed as Exhibit 10(r) to
Registrant's Annual Report on Form 10-K for the fiscal
year ended December 31, 2002, portions of which have been
omitted pursuant to a request for confidential treatment
under Rule 24(b)-2 of the Securities Exchange Act of 1934,
as amended and is incorporated herein by reference.
10(p) Securities Purchase Agreement dated as of February 27,
2004, by and among the Company and certain investors,
filed as Exhibit 10.1 to the Registrant's current report
on Form 8-K, filed on March 2, 2004, portions of which
have been omitted pursuant to a request for confidential
treatment under Rule 24(b) of the Securities Exchange Act
of 1934, as amended, and is incorporated herein by
reference;
10(q) Registration Rights Agreement dated as of February 27,
2004 by and among the Company and certain investors, filed
as Exhibit 10.2 to the Registrant's current report on Form
8-K, filed on March 2, 2004, and is incorporated herein by
reference;
10(r) Form of Additional Investment Right dated as of February
27, 2004, filed as Exhibit 10.3 to the Registrant's
current report on Form 8-K, filed on March 2, 2004, and is
incorporated herein by reference; and
10(s) Investment Banking Agreement between the Company and
Sunrise Securities Corp. entered into February 27, 2004.
14(a) Form of DUSA Pharmaceuticals, Inc. Code of Ethics
Applicable to Senior Officers.
21(a) Subsidiary of Registrant.
23(a) Independent Auditors' Consent of Deloitte & Touche LLP.
31(a) Rule 13a-14(a)/15d-14(a) Certification of the Chief
Executive Officer; and
31(b) Rule 13a-14(a)/15d-14(a) Certification of the Chief
Financial Officer.
32(a) Certification of the Chief Executive Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002; and
32(b) Certification of the Chief Financial Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
99(a) Press Release dated March 16, 2004.
82
INDEPENDENT AUDITORS' REPORT
Board of Directors
DUSA Pharmaceuticals, Inc.
Wilmington, Massachusetts
We have audited the accompanying consolidated balance sheets of DUSA
Pharmaceuticals, Inc. and its subsidiary (the "Company") as of December 31, 2003
and 2002, and the related consolidated statements of operations, shareholders'
equity and cash flows for each of the three years in the period ended December
31, 2003. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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, 2003
and 2002, and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 2003, in conformity with accounting
principles generally accepted in the United States of America.
/s/ DELOITTE & TOUCHE LLP
Boston, Massachusetts
March 11, 2004
F-1
DUSA PHARMACEUTICALS, INC.
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
DECEMBER 31,
--------------------------------
2003 2002
------------ ------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 4,294,482 $ 6,926,713
United States government securities 30,284,841 42,498,617
Accrued interest receivable 533,796 699,664
Accounts receivable 229,483 36,720
Inventory 712,831 1,188,659
Prepaids and other current assets 1,000,413 915,704
------------ ------------
TOTAL CURRENT ASSETS 37,055,846 52,266,077
Restricted cash 139,213 137,883
United States government securities 3,250,940 3,316,330
Property, plant and equipment, net 4,251,489 5,229,683
------------ ------------
TOTAL ASSETS 44,697,488 $ 60,949,973
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 859,282 $ 552,891
Accrued payroll 796,618 476,602
Other accrued expenses 1,162,139 2,070,150
Current maturities of long-term debt 270,000 270,000
Deferred revenue 129,900 5,100
------------ ------------
TOTAL CURRENT LIABILITIES 3,217,939 3,374,743
Long-term debt, net of current 1,247,500 1,517,500
------------ ------------
TOTAL LIABILITIES 4,465,439 4,892,243
------------ ------------
Commitments and Contingencies (Note 15)
SHAREHOLDERS' EQUITY
Capital Stock
Authorized: 100,000,000 shares; 40,000,000
shares designated as common stock, no par,
60,000,000 shares issuable in series or
classes; and 40,000 junior Series A preferred
shares. Issued and outstanding: 13,966,247
(2002: 13,887,612) shares of common stock, no par 95,670,554 95,490,561
Additional paid-in capital 2,015,586 2,015,586
Accumulated deficit (58,909,781) (44,082,927)
Accumulated other comprehensive income 1,455,690 2,634,510
------------ ------------
TOTAL SHAREHOLDERS' EQUITY 40,232,049 56,057,730
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 44,697,488 $ 60,949,973
============ ============
See the accompanying Notes to the Consolidated Financial Statements.
F-2
DUSA PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
---------------------------------------------------
2003 2002 2001
------------ ------------ ------------
REVENUES
Product sales and rental income $ 970,109 $ 319,378 $ 514,584
Research grant and milestone revenue -- 22,312,498 1,983,336
Research revenue earned under collaborative agreement -- 2,851,362 2,892,816
------------ ------------ ------------
TOTAL REVENUES 970,109 25,483,238 5,390,736
------------ ------------ ------------
OPERATING COSTS
Cost of product sales and royalties 3,481,248 5,253,424 2,148,994
Research and development 5,403,961 12,121,606 10,789,906
Marketing and sales 2,494,405 -- --
General and administrative 6,343,680 5,591,039 3,654,792
------------ ------------ ------------
TOTAL OPERATING COSTS 17,723,294 22,966,069 16,593,692
------------ ------------ ------------
INCOME (LOSS) FROM OPERATIONS (16,753,185) 2,517,169 (11,202,956)
------------ ------------ ------------
OTHER INCOME, NET
Interest income, net 1,926,331 2,745,143 3,753,019
Realized gains on sales of United States government securities -- 500,206 91,841
------------ ------------ ------------
TOTAL OTHER INCOME 1,926,331 3,245,349 3,844,860
------------ ------------ ------------
NET INCOME (LOSS) $(14,826,854) $ 5,762,518 $ (7,358,096)
============ ============ ============
BASIC AND DILUTED NET INCOME (LOSS) PER COMMON SHARE $ (1.06) $ 0.42 $ (0.53)
============ ============ ============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 13,936,482 13,877,566 13,791,735
============ ============ ============
See the accompanying Notes to the Consolidated Financial Statements.
F-3
DUSA PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
- --------------------------------------------------------------------------------
COMMON STOCK
-------------------------------- ADDITIONAL
NUMBER OF PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT
--------------- --------------- -------------- ------------------
BALANCE, JANUARY 1, 2001 13,730,890 $94,757,532 $1,860,519 $(42,487,349)
--------------- --------------- -------------- ------------------
Comprehensive loss:
Net loss for period (7,358,096)
Net unrealized gain on United States
government securities available for sale
(net of realized gains of $91,841)
Total comprehensive loss
Issuance of common stock to consultants 5,000 54,750
Exercises of options 104,500 478,279
Exercises of warrants 25,000 150,000
Stock based compensation 155,067
--------------- --------------- -------------- ------------------
BALANCE, DECEMBER 31, 2001 13,865,390 $95,440,561 $2,015,586 $(49,845,445)
--------------- --------------- -------------- ------------------
Comprehensive income:
Net income for period 5,762,518
Net unrealized gain on United States
government securities available for sale
(net of realized gains of $500,206)
Total comprehensive income
Issuance of common stock to consultants 22,222 50,000
--------------- --------------- -------------- ------------------
BALANCE, DECEMBER 31, 2002 13,887,612 $95,490,561 $2,015,586 $(44,082,927)
--------------- --------------- -------------- ------------------
Comprehensive income:
Net loss for period (14,826,854)
Net unrealized loss on United States
government securities available for sale
Total comprehensive loss
Issuance of common stock to consultants 44,416 110,000
Exercises of options 11,000 32,870
Issuance of common stock to employee 23,219 37,123
--------------- --------------- -------------- ------------------
BALANCE, DECEMBER 31, 2003 13,966,247 $95,670,554 $2,015,586 $(58,909,781)
=============== =============== ============== ==================
ACCUMULATED
OTHER
COMPREHENSIVE
INCOME TOTAL
------------------- -----------------
BALANCE, JANUARY 1, 2001 $1,179,094 $55,309,796
------------------- -----------------
Comprehensive loss:
Net loss for period (7,358,096)
Net unrealized gain on United States
government securities available for sale
(net of realized gains of $91,841) 1,044,741 1,044,741
-----------------
Total comprehensive loss (6,313,355)
Issuance of common stock to consultants 54,750
Exercises of options 478,279
Exercises of warrants 150,000
Stock based compensation 155,067
------------------- -----------------
BALANCE, DECEMBER 31, 2001 $2,223,835 $49,834,537
------------------- -----------------
Comprehensive income:
Net income for period 5,762,518
Net unrealized gain on United States
government securities available for sale
(net of realized gains of $500,206) 410,675 410,675
-----------------
Total comprehensive income 6,173,193
Issuance of common stock to consultants 50,000
------------------- -----------------
BALANCE, DECEMBER 31, 2002 $2,634,510 $56,057,730
------------------- -----------------
Comprehensive income:
Net loss for period (14,826,854)
Net unrealized loss on United States
government securities available for sale (1,178,820) (1,178,820)
-----------------
Total comprehensive loss (16,005,674)
Issuance of common stock to consultants 110,000
Exercises of options 32,870
Issuance of common stock to employee 37,123
------------------- -----------------
BALANCE, DECEMBER 31, 2003 $1,455,690 $40,232,049
=================== =================
See the accompanying Notes to the Consolidated Financial Statements.
F-4
DUSA PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
----------------------------------------------
2003 2002 2001
------------ ------------ ------------
CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES
Net income (loss) $(14,826,854) $ 5,762,518 $ (7,358,096)
Adjustments to reconcile net income (loss) to net cash used
in operating activities
Amortization of premiums and accretion of discounts on
United States government securities available for sale
and investment securities, net 100,346 (378,089) 738,699
Depreciation and amortization 1,610,848 3,247,129 1,066,915
Amortization of deferred revenue -- (22,312,498) (1,983,336)
Stock based compensation -- -- 155,067
Issuance of common stock to consultants 110,000 50,000 54,750
Changes in other assets and liabilities impacting cash
flows from operations:
Accrued interest receivable 165,868 223,795 66,624
Accounts receivable (192,763) 84,560 793,679
Receivable under co-development program -- 864,534 (141,964)
Inventory 475,828 1,144,421 (1,001,114)
Prepaids and other current assets (84,709) (424,779) (190,608)
Deferred charges -- (100,000) (400,000)
Accounts payable 306,391 238,002 214,389
Accrued payroll and other accrued expenses (550,872) 84,477 585,224
Deferred revenue 124,800 (268,258) (235,849)
Restricted cash (1,330) (1,865) (136,018)
------------ ------------ ------------
NET CASH USED IN OPERATING ACTIVITIES (12,762,447) (11,786,053) (7,771,638)
------------ ------------ ------------
CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES
Purchases of United States government securities (4,000,000) (6,131,356) (23,282,378)
Proceeds from maturing and sales of United States
government securities 15,000,000 18,246,298 24,502,758
Additions of property, plant and equipment (632,654) (2,622,158) (2,833,653)
Deposits on equipment -- -- 98,000
Payments to licensor -- -- (350,000)
------------ ------------ ------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 10,367,346 9,492,784 (1,865,273)
------------ ------------ ------------
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES
Proceeds from long-term debt -- 1,900,000 --
Payment of long-term debt (270,000) (112,500) --
Proceeds from exercise of options 32,870 -- 628,279
------------ ------------ ------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (237,130) 1,787,500 628,279
------------ ------------ ------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (2,632,231) (505,769) (9,008,632)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 6,926,713 7,432,482 16,441,114
------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 4,294,482 $ 6,926,713 $ 7,432,482
============ ============ ============
------------ ------------ ------------
Cash paid for interest $ 58,623 $ 41,066 $ --
============ ============ ============
During 2003, the Company issued 23,219 shares of restricted common stock at a
closing price of $1.599 per share to its Chief Executive Officer, reflecting
payment of the after-tax portion of his 2002 bonus compensation, which was
accrued at December 31, 2002.
See the accompanying Notes to the Consolidated Financial Statements.
F-5
1) NATURE OF BUSINESS
DUSA Pharmaceuticals, Inc. (the "Company" or "DUSA") was established to
develop prescription pharmaceutical products for all markets, primarily in
the field of photodynamic therapy ("PDT") and photodetection ("PD"), which
combines the use of a pharmaceutical product with exposure to light to
induce a therapeutic or detection effect. The Company has concentrated its
initial efforts on topical and/or local uses of aminolevulinic acid HCl
("Levulan(R)") PDT/PD. The Company's currently marketed products include
the Levulan(R) Kerastick(R) 20% Topical Solution and the BLU-U(R) brand
light source for the treatment of actinic keratoses (AKs) of the face or
scalp. The Company also markets the BLU-U(R) without Levulan for the
treatment of moderate inflammatory acne vulgaris.
2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A) PRINCIPLES OF CONSOLIDATION - The Company's consolidated financial
statements include the accounts of the Company and 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. All
intercompany balances and transactions have been eliminated.
B) BASIS OF PRESENTATION AND USE OF ESTIMATES - These financial statements
have been prepared in conformity with accounting principles generally
accepted in the United States of America. Such principles require
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.
C) RECLASSIFICATIONS - Certain prior year amounts have been reclassified
to conform to the current year presentation. Such reclassifications had no
impact on the net income (loss) or shareholders' equity for any period
presented.
D) CASH AND CASH EQUIVALENTS - Cash equivalents include short-term highly
liquid investments purchased with original maturities of 90 days or less.
In December 2001, the Company executed a short-term, renewable,
irrevocable and unconditional letter of credit for $136,018 in lieu of a
security deposit for the construction of the Company's Kerastick(R)
manufacturing facility at its Wilmington, Massachusetts location. The cash
is held in a separate bank account and is recorded in restricted cash in
the Consolidated Balance Sheets. This letter of credit was renewed in
December 2003 and has a balance, including interest earned, of $139,213 at
December 31, 2003.
E) UNITED STATES GOVERNMENT SECURITIES - The Company classifies all
securities as available for sale and records such investments at fair
market value and records unrealized gains and losses on available for sale
securities as a separate component of shareholders' equity, until
realized. The premiums and discounts recorded on the purchase of the
securities are amortized into interest income over the life of the
securities.
F-6
As the Company's United States government securities are available for
sale, and as management expects to sell a portion of its United States
government securities in the next fiscal year in order to meet its working
capital requirements, it has classified securities as current assets,
except for those pledged as collateral on the secured term loan promissory
note.
F) INVENTORY - Inventory is stated at the lower of cost (first-in,
first-out method) or market. Inventory consisting of BLU-U(R) commercial
light sources is reclassified to property, plant and equipment when the
BLU-U(R) is shipped to physicians for use under demonstration programs,
and depreciated over their estimated useful lives. Inventory identified
for research and development activities is expensed in the period in which
that inventory is designated for such use.
G) PROPERTY, PLANT AND EQUIPMENT - Property, plant and equipment are
carried at cost less accumulated depreciation. Depreciation is computed on
a straight-line basis over the estimated lives of the related assets.
Leasehold improvements are amortized over the lesser of their useful lives
or the lease terms.
H) IMPAIRMENT OF LONG-LIVED ASSETS - The Company reviews its long-lived
assets for impairment whenever events or changes in circumstances indicate
that the carrying amount of a long-lived asset may not be recoverable.
Recoverability of assets to be held and used is measured by a comparison
of the carrying amount of an asset to future net cash flows expected to be
generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceeds the fair value of the assets. When
it is determined that the carrying value of long-lived or intangibles
assets may not be recoverable based upon the existence of one or more of
the above indicators of impairment, the asset is written down to its
estimated fair value on a discounted cash flow basis.
I) REVENUE RECOGNITION - Revenues on product sales are recognized when
persuasive evidence of an arrangement exists, the price is fixed and
final, delivery has occurred to end-users, and there is reasonable
assurance of collection. Research revenue earned under collaborative
agreements consisted of non-refundable research and development funding
from a corporate partner. Research revenue generally compensated the
Company for a portion of agreed-upon research and development expenses and
was recognized as revenue at the time the research and development
activities were performed under the terms of the related agreements and
when no future performance obligations existed. Milestone or other
up-front payments are recorded as deferred revenue upon receipt and are
recognized as income on a straight-line basis over the term of the
agreement.
In December 2002, the EITF reached conclusion on EITF Issue No. 00-21,
"Accounting for Revenue Arrangements with Multiple Deliverables." This
consensus provides guidance in determining when a revenue arrangement with
multiple deliverables should be divided into separate units of accounting,
and, if separation is appropriate, how the arrangement consideration
should be allocated to the identified accounting units. The provisions of
EITF No. 00-21 are effective for revenue arrangements entered into in
fiscal periods beginning after June 15, 2003. The Company adopted EITF
00-21 on June 1, 2003 and the adoption had no impact on the Company's
financial position or results of operations. In December 2003, the SEC
released Staff Accounting Bulletin No. 104, Revenue Recognition ("SAB
104"). SAB 104 clarifies existing guidance regarding revenues for
contracts which contain multiple deliverables to make it consistent with
EITF No. 00-21. The adoption of SAB 104 did not have a material effect on
the Company's financial position or results of operations.
F-7
J) 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. Purchased technology,
including the costs of licensed technology for a particular research
project that do not have alternative future uses, are expensed at the time
the costs are incurred.
K) INCOME TAXES - The Company recognizes deferred income tax assets and
liabilities for the expected future tax consequences for events that have
been included in the Company's financial statements or tax returns.
Deferred tax assets and liabilities are based on the difference between
the financial statement and tax bases of assets and liabilities using tax
rates expected to be in effect in the years in which these differences are
expected to reverse. A valuation allowance is provided to reduce the
deferred tax assets to the amount that will more likely than not be
realized.
L) BASIC AND DILUTED NET INCOME (LOSS) PER SHARE - Basic net income (loss)
per common share is based on the weighted average number of shares
outstanding during each period. Stock options and warrants are not
included in the computation of the weighted average number of shares
outstanding for dilutive net income (loss) per common share during each of
the periods presented in the Statement of Operations, as the effect would
be antidilutive. For the years ended December 31, 2003, 2002, and 2001,
stock options and warrants totaling approximately 2,745,000, 2,553,000,
and 2,548,000 shares, respectively, have been excluded from the
computation of diluted net income (loss) per share.
M) STOCK-BASED COMPENSATION - SFAS No. 123, "Accounting for Stock-Based
Compensation," as amended by SFAS No. 148, "Accounting for Stock-Based
Compensation, Transition and Disclosure," addresses the financial
accounting and reporting standards for stock or other equity-based
compensation arrangements. The Company has elected to continue to use the
intrinsic value-based method to account for employee stock option awards
under the provisions of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and to provide disclosures
based on the fair value method in the Notes to the Consolidated Financial
Statements as permitted by SFAS No. 123, as amended by SFAS No. 148. Under
the intrinsic value method, compensation expense, if any, is recognized
for the difference between the strike price of the option and the fair
value of the underlying common stock as of a measurement date. The
measurement date is the time when both the number of shares and the strike
price is known. Stock or other equity-based compensation for non-employees
must be accounted for under the fair value-based method as required by
SFAS No. 123, as amended by SFAS No. 148, and Emerging Issues Task Force
("EITF") No. 96-18, "Accounting for Equity Instruments That Are Issued to
Other Than Employees for Acquiring, or in Conjunction with Selling, Goods
or Services" and other related interpretations. Under this method, the
equity-based instrument is valued at either the fair value of the
consideration received or the equity instrument issued on the measurement
date, which is generally the grant date. The resulting compensation cost
is recognized and charged to operations over the service period, which is
generally the vesting period.
F-8
As described above, the Company uses the intrinsic value method to measure
compensation expense associated with grants of stock options to employees.
Had the Company used the fair value method to measure compensation, the
net income (loss) and net income (loss) per share would have been reported
as follows:
2003 2002 2001
-------------- -------------- --------------
NET INCOME (LOSS)
As reported ($ 14,826,854) $ 5,762,518 ($ 7,358,096)
Effect on net income (loss) if fair value
method had been used (3,445,951) (3,880,231) (5,635,208)
-------------- -------------- --------------
Proforma ($ 18,272,805) $ 1,882,287 ($ 12,993,304)
============== ============== ==============
BASIC AND DILUTED NET INCOME (LOSS) PER COMMON SHARE
As reported ($ 1.06) $ 0.42 ($ 0.53)
Effect on net income (loss) per common share
if fair value method had been used (0.25) (0.28) (0.41)
-------------- -------------- --------------
Proforma ($ 1.31) $ 0.14 ($ 0.94)
============== ============== ==============
The fair value of the options at the date of grant was estimated using the
Black-Scholes model with the following weighted average assumptions:
2003 2002 2001
---- ---- ----
Expected life (years) 5 7 7
Risk free interest rate 3.02% 4.89% 4.88%
Expected volatility 80.85% 72.84% 70.87%
Dividend yield -- -- --
Using these assumptions, the weighted-average fair value per option for
the years ended December 31, 2003, 2002, and 2001, was $1.57, $2.53, and
$10.29, respectively.
N) COMPREHENSIVE INCOME - The Company has reported comprehensive income
(loss) and its components as part of its Consolidated Statement of
Shareholders' Equity. Comprehensive income, apart from net income (loss),
relates to net unrealized gains or losses on United States government
securities.
F-9
O) SEGMENT REPORTING - The Company presently operates in one segment,
which is the development and commercialization of emerging technologies
that use drugs in combination with light to treat and detect disease.
P) FAIR VALUE OF FINANCIAL INSTRUMENTS - The carrying value of the
Company's financial assets and liabilities approximate their fair values
due to their short-term nature. Marketable securities classified as
available for sale are carried at fair market value. The fair market value
of the Company's long-term debt is currently based on a floating rate
based on LIBOR and, accordingly, the carrying value approximates its fair
market value.
Q) CONCENTRATION OF CREDIT RISK - The Company invests cash in accordance
with a policy objective that seeks to preserve both liquidity and safety
of principal. The Company is subject to credit risk through short-term
investments and mitigates this risk by investing in United States
government securities. The Company is exposed to concentration risk
related to accounts receivable that is primarily generated from its
distributors.
R) RECENTLY ISSUED ACCOUNTING GUIDANCE - In January 2003, the FASB issued
Interpretation No. 46, "Consolidation of Variable Interest Entities, an
interpretation of ARB No. 51" ("FIN 46"), which was amended by FIN 46R
issued in December 2003. This interpretation of Accounting Research
Bulletin No. 51, "Consolidated Financial Statements, " addresses
consolidation by business enterprises of variable interest entities (VIEs)
that either: (1) do not have sufficient equity investment at risk to
permit the entity to finance its activities without additional
subordinated financial support, or (2) for which the equity investors lack
an essential characteristic of a controlling financial interest. This
Interpretation applies immediately to VIEs created after January 31, 2003.
It also applies in the first fiscal year or interim period ending after
March 15, 2004, to VIEs created before February 1, 2003 in which an
enterprise holds a variable interest. FIN 46 requires disclosure of VIEs
in financial statements issued after January 31, 2003, if it is reasonably
possible that as of the transition date: (1) the company will be the
primary beneficiary of an existing VIE that will require consolidation or,
(2) the company will hold a significant variable interest in, or have
significant involvement with, an existing VIE. The Company has adopted
this statement which had no effect on its financial position or results of
operations.
3) 2002 DERMATOLOGY COLLABORATION TERMINATION
On September 1, 2002, DUSA and Schering AG, the Company's former marketing
and development partner for Levulan(R) PDT in the field of dermatology,
terminated the parties' Marketing Development and Supply Agreement, dated
November 22, 1999. As a result of this termination, DUSA reacquired all
rights it granted to Schering AG under the agreement, and evaluated
certain items on its Consolidated Balance Sheet for the timing of revenue
recognition and potential impairment. These items included unamortized
deferred revenue related to non-refundable milestone payments previously
received under the agreement with Schering AG, and assets including the
Company's manufacturing facility, raw material and finished goods
inventories, commercial light units, and deferred charges and royalties.
As a result of this analysis, in addition to normal amortization recorded
prior to the termination of the Schering AG agreement, the Company
recorded the following items in its financial statements for the year
ended December 31, 2002:
F-10
REVENUE
RECOGNITION/
STATEMENT OF OPERATIONS ITEM BALANCE SHEET ITEM ASSET IMPAIRMENT
-------------------------------------------- ------------------------------------- ---------------------
Revenues:
---------
Research grant and milestone revenue Deferred revenue (1) $20,990,000
---------------------
Operating Costs:
----------------
Cost of product sales Deferred charges (2) $543,000
Inventory (3) 1,705,000
Commercial light sources under
lease or rental (4) 390,000
---------------------
Total cost of product sales $2,638,000
Research and development costs Deferred royalty (2) 639,000
---------------------
Total operating cost charges $3,277,000
---------------------
1) In 2002, the Company accelerated the recognition of $20,990,000 of
previously unamortized research grant and milestone revenue received
from Schering AG, which were previously recorded as deferred
revenue.
2) In 2002, the Company charged (i) $509,000 to cost of product sales
and royalties for deferred charges associated with its amended
Supply Agreement with Sochinaz SA, the manufacturer of the bulk drug
ingredient used in Levulan(R), (ii) $34,000 to cost of product sales
and royalties for deferred charges associated with underutilization
costs paid to National Biological Corporation ("NBC"), the
manufacturer of the Company's BLU-U(R), and (iii) $639,000 to
research and development costs for deferred royalties associated
with payments to PARTEQ, the Company's licensor. These amounts
represented the unamortized balances of previously deferred costs
which were being amortized over periods ranging from 1 to
12 1/2 years.
3) In 2002, the Company recorded lower of cost or market adjustments
for estimated excess BLU-U(R) inventory of $1,594,000, and $111,000
for bulk Levulan(R) based on (i) the termination of the Company's
former dermatology collaboration arrangement, (ii) limited product
sales since the September 2000 product launch, and (iii) the
Company's expectation of no significant near-term increases in
Kerastick(R) sales levels and/or BLU-U(R) placements.
4) In 2002, the Company recorded an additional $390,000 of depreciation
expense reflecting a shortened useful life of its BLU-U(R) units
under lease, rental, or trial arrangements to reflect a three-year
asset life. This accelerated depreciation policy was attributable to
the low level of BLU-U(R) placements to date, the termination of the
collaboration arrangement, and management's expectations that
near-term placements would be limited.
4) UNITED STATES GOVERNMENT SECURITIES
Securities available for sale consist of United States Treasury Bills,
Notes, and other United States government securities with yields ranging
from 3.65% to 7.36% and maturity dates ranging from January 15, 2004 to
September 24, 2007. Securities pledged as collateral on the secured term
loan promissory note have been classified as non-current assets. The fair
market value and cost basis of such securities were as follows as of
December 31:
F-11
2003 2002
----------- -----------
Fair market value $33,535,781 $45,814,947
Cost basis 32,080,091 43,180,437
----------- -----------
Gross unrealized gains $ 1,455,690 $ 2,634,510
=========== ===========
The change in net unrealized gains on such securities for the years ended
December 31, 2003, 2002 and 2001 was ($1,178,820), $410,675 and
$1,044,741, respectively, and has been recorded in accumulated other
comprehensive income, which is reported as part of shareholders' equity in
the Consolidated Balance Sheets.
5) INVENTORY
Inventory consisted of the following at December 31:
2003 2002
---------- ----------
Finished goods $ 582,382 $1,047,941
Raw materials 130,449 140,718
---------- ----------
$ 712,831 $1,188,659
========== ==========
6) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, at cost, consisted of the following at
December 31:
USEFUL LIVES
(YEARS) 2003 2002
-------------- ---------- ----------
Computer equipment and software 3 $1,971,114 $1,856,540
BLU-U(R)units in physicians' offices 3 1,187,875 945,436
Furniture, fixtures and equipment 5 542,496 523,831
Manufacturing equipment 5 2,096,433 1,447,087
Manufacturing facility Term of lease 2,204,122 -
Leasehold improvements Term of lease 666,344 666,344
Construction work-in-progress -- -- 2,596,492
---------- ----------
8,668,384 8,035,730
Accumulated depreciation and amortization (4,416,895) (2,806,047)
---------- ----------
$4,251,489 $5,229,683
========== ==========
In July 2003, the Company received FDA approval to manufacture the
Levulan(R) Kerastick(R) at its manufacturing facility and accordingly, the
Company began to depreciate the facility and related manufacturing
equipment over their estimated useful lives. The Company's lease
commitment for office space and the manufacturing facility in Wilmington,
MA extends through November 2016.
F-12
Depreciation and amortization totaled $1,611,000, $1,541,000, and $716,000
for 2003, 2002, and 2001, respectively. Accumulated depreciation and
amortization includes $1,016,000 and $473,000 of accumulated depreciation
at December 31, 2003 and 2002, respectively, associated with BLU-U(R)
units in physicians' offices, which have been transferred to property,
plant and equipment from inventory as these units were provided to
physicians through former marketing trial programs.
During 2003 and 2002, the Company incurred interest expense of $56,000 and
$47,000, respectively, on borrowings associated with the construction of
our new Kerastick(R) manufacturing facility. Of these amounts, $36,000 and
$47,000 has been currently capitalized in property and equipment in the
Consolidated Balance Sheet in 2003 and in 2002, respectively.
7) OTHER ACCRUED EXPENSES
Other accrued expenses consisted of the following at December 31:
2003 2002
---------- ----------
Accrued research and development costs $ 184,912 $ 473,543
Accrued marketing and sales costs 113,020 --
Accrued product related costs 144,826 463,340
Accrued license milestone (1) -- 500,000
Accrued legal and other professional fees 359,747 297,966
Accrued employee benefits 189,051 207,833
Other accrued expenses 170,583 127,468
---------- ----------
$1,162,139 $2,070,150
========== ==========
(1) Accrued license milestone at December 31, 2002 represents a one-time
$500,000 milestone payment under the Company's license agreement with
Photonamic GmbH & Co. KG, which provided the Company with a license to
certain proprietary technology related to ALA for use in the field of
brain cancer (see Note 15(e)).
8) LONG-TERM DEBT
Long-term debt consisted of the following at December 31:
2003 2002
----------- -----------
Secured term loan promissory note $ 1,517,500 $ 1,787,500
Less: Current maturities (270,000) (270,000)
----------- -----------
$ 1,247,500 $ 1,517,500
=========== ===========
In May 2002, DUSA entered into a secured term loan promissory note
("Note") with Citizens Bank of Massachusetts to fund the construction of
its manufacturing facility and borrowed $1,900,000. The Note currently
bears interest at a 360-day LIBOR-based rate of 2.755% through June 30,
2004. Based on the terms of the Note, at June 30th of each year DUSA can
either continue to choose a LIBOR-based rate at that time, execute a
one-time conversion to a fixed rate loan, or repay the loan balance.
Approximately $3,000,000 of the Company's United States government
securities are pledged as collateral to secure the loan. The terms of the
Note require monthly principal and interest payments through its maturity
in June 2009, unless the Company repays the loan balance at the annual
renewal date. Annual principal payments due under the Note are as follows:
F-13
PRINCIPAL PAYMENTS
------------------
2004 $270,000
2005 270,000
2006 270,000
2007 270,000
2008 270,000
Beyond 2008 167,500
-------------------
$1,517,500
===================
9) DEFERRED REVENUE
DUSA engages national distributors and marketers of medical and surgical
supplies to act as third-party distributors of the Levulan(R) Kerastick(R)
in the United States. The Company has recorded deferred revenue for
Kerastick(R) units that have been sold to the distributors but not yet
sold to end-users as the price was not fixed and final, since the
distributors have a right of return on Kerastick(R) units. Deferred
revenue at December 31, 2003 and 2002 was $129,900 and $5,100,
respectively.
10) MARKETING AND SALES
As a result of the termination of the Company's marketing and development
collaboration with its former marketing partner in September 2002, the
Company commenced certain marketing and sales initiatives in 2003
associated with having full rights and responsibilities for its product.
In addition, the Company has reassigned personnel and related costs that
were previously functioning in research and development roles to its
marketing and sales function. Prior to the Company's termination of its
marketing and development collaboration, all rights and activities
associated with marketing and sales of its approved products were solely
the responsibility of its former partner. Activities included in marketing
and sales expense for 2003 consist of trade show expenses, advertising,
personnel and other resources assigned to marketing and sales activities,
and other marketing and promotional activities. All such costs are
expensed as incurred.
F-14
11) INCOME TAXES
The tax effect of significant temporary differences representing deferred
tax assets and liabilities at December 31:
2003 2002
------------ ------------
DEFERRED TAX ASSETS
Deferred revenue $ 52,000 $ 2,000
Intangible assets 592,000 588,000
Accrued charges 41,000 46,000
Research and development tax credits carryforwards 2,354,000 2,144,000
Operating loss carryforwards 23,321,000 18,253,000
Capital loss and charitable contribution carryforwards 5,000 5,000
Deferred charges -- 405,000
License fee 181,000 202,000
Reserves 944,000 823,000
------------ ------------
Total deferred tax assets 27,490,000 22,468,000
------------ ------------
DEFERRED TAX LIABILITIES
Fixed assets (8,000) (8,000)
------------ ------------
Total deferred tax liabilities (8,000) (8,000)
------------ ------------
Net deferred tax assets before allowance 27,482,000 22,460,000
Valuation allowance (27,482,000) (22,460,000)
------------ ------------
Total deferred tax asset $ -- $ --
============ ============
During the years ended December 31, 2003, 2002, and 2001, the valuation
allowance was increased by approximately $5,022,000, $191,000, and
$4,372,000, respectively, due to the uncertainty of future realization of
the net deferred tax assets.
Included in deferred tax assets at December 31, 2003 and 2002 is
$1,600,000 in both years of future benefits which, if realized, will be
credited to additional paid in capital rather than results of operations.
F-15
As of December 31, 2003, the Company has Federal net operating loss
carryforwards for tax purposes of approximately $59,531,000 and research
and development tax credits of approximately $1,791,000, both of which, if
not utilized, will expire for Federal tax purposes as follows:
RESEARCH AND
OPERATING LOSS CREDITS
CARRYFORWARDS DEVELOPMENT TAX
-------------- ---------------
2006 $ -- $ 7,000
2007 -- 57,000
2008 -- 66,000
2009 -- 84,000
2010 -- 44,000
2011 2,325,000 102,000
2012 6,638,000 235,000
2013 6,841,000 --
2018 5,738,000 145,000
2019 1,000 81,000
2020 28,000 159,000
2021 8,934,000 284,000
2022 14,620,000 341,000
2023 14,406,000 186,000
----------- -----------
$59,531,000 $ 1,791,000
=========== ===========
A reconciliation between the effective tax rate and the statutory Federal
rate is as follows:
2003 2002 2001
---------------------- --------------------- ---------------------
$ % $ % $ %
---------------------- --------------------- ---------------------
Income tax expense (benefit) at statutory rates (5,041,000) (34.0) 1,959,000 34.0 (2,502,000) (34.0)
State taxes (930,000) (6.3) 371,000 6.4 (500,000) (6.8)
Tax credit carryforwards (329,000) (2.2) (603,000) (10.5) (335,000) (4.6)
Change in valuation allowance including
revisions of prior year estimates 6,268,000 42.3 (1,737,000) (30.1) 3,265,000 44.4
Other 32,000 0.2 10,000 0.2 72,000 1.0
---------- ---- ---------- ----- ---------- ----
-- -- -- -- -- --
========== ==== ========== ===== ========== ====
12) SHAREHOLDERS' EQUITY
COMMON STOCK ISSUANCES - On June 15, 2003, the Company granted
compensation of $50,000 to Therapeutics, Inc. ("Therapeutics"), a clinical
research organization, pursuant to an agreement for services. This
compensation was issued in July 2003 and was comprised of 11,666 shares of
common stock valued at $35,000 and $15,000 of cash. On June 15, 2002, the
Company granted 22,222 shares of unregistered common stock pursuant to an
agreement for services, to Therapeutics. These shares were valued at
$50,000 at the time of grant. On October 4, 2001, the Company granted
5,000 shares of unregistered common stock to Therapeutics for services.
These shares were valued at approximately $55,000 at the time of grant.
Each of these transactions was recorded in research and development
expense in the Consolidated Statements of Operations.
F-16
On May 2, 2003, the Company granted a total of 32,750 shares of
unregistered common stock to two outside consultants as compensation for
services rendered. These shares were valued at approximately $75,000 and
recorded as part of research and development costs in the Consolidated
Statements of Operations.
On March 13, 2003, the Company issued 23,219 shares of restricted common
stock at a closing price of $1.599 per share to its Chief Executive
Officer, reflecting payment of the after-tax portion of his 2002 bonus
compensation. This amount had been accrued in the December 31, 2002
financial statements.
SHAREHOLDER RIGHTS PLAN - On September 27, 2002, the Company adopted a
shareholder rights plan (the "Rights Plan") at a special meeting of the
Board of Directors. The Rights 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 10, 2002. Each right entitles
the registered holder to purchase one one-thousandths of a share of
preferred stock at an exercise price of $37.00 per right. The rights will
be exercisable subsequent to the date that a person or group either has
acquired, obtained the right to acquire, or commences or discloses an
intention to commence a tender offer to acquire, 15% or more of the
Company's outstanding common stock (or 20% of the outstanding common stock
in the case of a shareholder or group who beneficially held in excess of
15% at the record date), or if a person or group is declared an Adverse
Person, as such term is defined in the Rights Plan. The rights may be
redeemed by the Company at a redemption price of one one-hundredth of a
cent per right until ten days following the date the person or group
acquires, or discloses an intention to acquire, 15% or 20% or more, as the
case may be, of the Company, or until such later date as may be determined
by the Board.
Under the Rights Plan, if a person or group acquires the threshold amount
of common stock, all holders of rights (other than the acquiring
shareholder) may, upon payment of the purchase price then in effect,
purchase shares of common stock of the Company 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 purchase price then in effect, to purchase
common stock of the surviving corporation having a value of twice the
purchase price. The rights will expire on October 10, 2012, unless
previously redeemed. The Board has adopted certain amendments to the
Company's Certificate of Incorporation consistent with the terms of the
Rights Plan.
F-17
13) STOCK OPTIONS AND WARRANTS
A) 1996 OMNIBUS PLAN - The 1996 Omnibus Plan ("Omnibus Plan"), as amended,
provides for the granting of awards to purchase up to a maximum of 20% of
the Company's common stock outstanding or a maximum of 2,753,328. The
Omnibus Plan is administered by a committee ("Committee") established by
the Board of Directors. The Omnibus Plan enables the Committee to grant
non-qualified stock options ("NQSO"), incentive stock options ("ISO"),
stock appreciation rights, restricted stock, or other securities
determined by the Company, to directors, employees and consultants.
NON-QUALIFIED STOCK OPTIONS - All the NQSOs 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. NQSO grants to employees 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. In addition, the
Company initially grants each individual who agrees to become a director
15,000 NQSO to purchase common stock of the Company. Thereafter, each
director reelected at an Annual Meeting of Shareholders will automatically
receive an additional 10,000 NQSO on June 30 of each year except for 2001,
for which each director received 5,000 NQSO based on an agreement at the
June 14, 2001 shareholder meeting. Grants to directors immediately vest on
the date of the grant.
INCENTIVE STOCK OPTIONS - ISOs granted under the Omnibus 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.
F-18
The following table summarizes information about all stock options
outstanding at December 31, 2003:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------------------------------------------------------
WEIGHTED
NUMBER AVERAGE WEIGHTED NUMBER
OUTSTANDING AT REMAINING AVERAGE EXERCISABLE AT WEIGHTED AVERAGE
DECEMBER CONTRACTUAL EXERCISE DECEMBER EXERCISE
RANGE OF EXERCISE PRICE 31, 2003 LIFE PRICE 31, 2003 PRICE
----------------------- -------------- ----------- -------- -------------- ----------------
$1.60 to 3.63 489,700 7.94 years $2.51 196,700 $2.98
3.87 to 7.71 537,250 6.27 years 5.75 338,375 6.56
7.75 to 9.33 495,000 3.03 years 8.10 495,000 8.10
9.69 to 26.19 499,500 5.57 years 14.24 423,625 14.12
27.19 to 31.00 423,500 6.34 years 29.95 317,625 29.95
--------- -------- --------- ----------------
2,444,950 5.82 years $11.50 1,771,325 12.59
========= ======== ========= ================
Activity under stock option plans during the years ended December 31,
2003, 2002 and 2001 was as follows:
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
2003 PRICE 2002 PRICE 2001 PRICE
--------- ---------- --------- ---------- --------- ----------
Options outstanding, beginning of year 2,253,075 $ 12.95 2,197,450 $ 14.30 2,140,450 $ 13.54
Options granted 447,000 2.76 275,000 3.65 215,500 14.53
Options exercised (11,000) 2.99 -- -- (104,500) 5.95
Options cancelled (244,125) 11.21 (219,375) 14.67 (54,000) 7.66
--------- ---------- --------- ---------- --------- ----------
Options outstanding, end of year 2,444,950 $ 11.50 2,253,075 $ 12.95 2,197,450 $ 14.30
========= ========= ========== ========= ==========
Options exercisable, end of year 1,771,325 $ 12.59 1,666,826 $ 11.75 1,364,700 $ 10.97
========= ========= ========== ========= ==========
Options that were granted during 2003, 2002 and 2001 have exercise prices
ranging from $1.60 to $5.20 per share, $2.90 to $4.01 per share, and $8.05
to $17.63 per share, respectively.
Options which were exercised during 2003 and 2001 were exercised at per
share prices ranging from $2.90 to $3.87, and $3.25 to $7.25,
respectively. There were no option exercises in 2002.
On October 21, 1997, the Company issued 85,000 options to PARTEQ. In
accordance with EITF 96-18, the Company recorded an expense of
approximately $155,000 in 2001 as part of research and development costs
in the Consolidated Statements of Operations. PARTEQ has subsequently
assigned the right to acquire 26,911 shares under this option to certain
individuals. In addition, on June 23, 1999, the Company issued 10,000
options to PARTEQ. As of December 31, 2003, all 95,000 of these options
remained outstanding.
F-19
B) WARRANTS - On January 17, 2002, the Company extended the term of
300,000 Class B warrants, which were previously issued to the Chief
Executive Officer of the Company, from January 29, 2002 to January 29,
2007. No compensation expense resulted from the extension of these
warrants as the intrinsic value of these warrants at the date of extension
was zero. As of December 31, 2003, 300,000 of the remaining warrants were
outstanding. The exercise price of the warrants is CDN $6.79 (U.S. $5.24
at December 31, 2003).
In connection with an agreement dated October 6, 1993, the Company issued
its investor relations firm a warrant to purchase up to 50,000 shares of
the authorized stock of the Company at $6.00 per share. During 2001 and
2000, the investor relations firm exercised 25,000 shares in each year.
In 1999 the Company issued 163,043 warrants as commission to a placement
agent with an exercise price of $5.00 per share. As of December 31, 2003,
2002 and 2001, 449 of the warrants were outstanding. These warrants
expired on January 14, 2004.
14) RETIREMENT PLAN
Effective January 1, 1996, the Company adopted a tax-qualified employee
savings and retirement 401(k) Profit Sharing Plan (the "401(k) Plan"),
covering all qualified employees. Participants may elect a salary deferral
of at least 1% as a contribution to the 401(k) Plan, up to the statutorily
prescribed annual limit for tax-deferred contributions. Effective February
1, 2003, DUSA matches a participant's contribution up to 1.25% of a
participant's salary (the "Match"), subject to certain limitations of the
401(k) Plan. Participants will vest in the Match at a rate of 25% for each
year of service to DUSA. The Company's matching contribution in 2003 was
$33,000.
15) COMMITMENTS AND CONTINGENCIES
A) PARTEQ AGREEMENTS - The Company licenses certain patents underlying its
Levulan(R) PDT/PD systems under a license agreement with PARTEQ Research
and Development Innovations, the licensing arm of Queen's University,
Kingston, Ontario. Under the agreement, the Company has been granted an
exclusive worldwide license, with a right to sublicense, under PARTEQ
patent rights, to make, have made, use and sell certain products,
including ALA. The agreement covers certain use patent rights.
When the Company is selling its products directly, it has agreed to pay to
PARTEQ royalties of 6% and 4% on 66% of the net selling price in countries
where patent rights do and do not exist, respectively. In cases where the
Company has a sublicensee, it will pay 6% and 4% when patent rights do and
do not exist, respectively, on its net selling price less the cost of
goods for products sold to the sublicensee, and 6% of payments the Company
receives on sales of products by the sublicensee.
For the years ended December 31, 2003, 2002 and 2001, actual royalties
based on product sales were approximately $36,000, $12,000, and $3,000,
respectively, however, based on the annual minimum royalty requirements,
the Company incurred total royalty expense of $74,000, $64,000 and $63,000
in 2003, 2002, and 2001, respectively, which has been recorded in cost of
product sales and royalties. Commencing with the initial product launch,
annual minimum royalties to PARTEQ must total at least CDN $100,000 (U.S.
$77,000 as of December 31, 2003).
F-20
The Company is also obligated to pay 5% of any lump sum sublicense fees
paid to the Company, such as milestone payments, excluding amounts
designated by the sublicensee for future research and development efforts.
B) LEASE AGREEMENTS - The Company has entered into lease commitments for
office space in Wilmington, Massachusetts, Valhalla, New York, and
Toronto, Ontario. The Company has the ability to terminate its Wilmington
lease after the 10th year (2011) of the lease by providing the landlord
with notice at least seven and one-half months prior to the date on which
the termination would be effective. The minimum lease payments disclosed
below include the non-cancelable terms of the leases. Future minimum lease
payments related to these agreements for years subsequent to December 31,
2003 are as follows:
MINIMUM LEASE PAYMENTS
----------------------
2004 $ 417,000
2005 465,000
2006 400,000
2007 410,000
2008 418,000
Beyond 2008 1,602,000
----------
$3,712,000
==========
Rent expense incurred under these operating leases was approximately
$471,000, $458,000, and $461,000 for the years ended December 31, 2003,
2002, and 2001, respectively.
C) RESEARCH AGREEMENTS - The Company has entered into a series of
agreements for research projects and clinical studies. As of December 31,
2003, future payments to be made pursuant to these agreements, under
certain terms and conditions, totaled approximately $1,822,000 for 2004.
On October 4, 2001, the Company executed a master service agreement,
effective June 15, 2001, with Therapeutics, Inc. for an initial term of
two years, with annual renewal periods thereafter, to engage Therapeutics
to manage the clinical development of the Company's products in the field
of dermatology. The agreement was renewed on June 15, 2003 for a one year
period. Minimum payments under this agreement have been included in the
total future payments as noted above. Upon execution of this agreement in
2001, Therapeutics received 5,000 shares of the Company's common stock
valued at $55,000, and is entitled to receive a bonus, in cash or stock at
the Company's discretion, upon each anniversary of the effective date.
Therapeutics has the opportunity for additional stock grants, bonuses, and
other incentives for each product indication ranging from $250,000 to
$1,250,000 depending on the regulatory phase of development of products
during Therapeutics' management.
F-21
D) LEGAL MATTERS - On April 12, 2002, the Company received notice that one
of the patents licensed to the Company by PARTEQ Research & Development
Innovations, the technology transfer arm of Queen's University at
Kingston, Ontario was challenged by PhotoCure ASA. PhotoCure ASA has filed
a lawsuit in Australia alleging that Australian Patent No. 624985, which
is one of the patents relating to the Company's 5-aminolevulinic acid
technology, is invalid. As a consequence of this action, Queen's
University has assigned the Australian patent to the Company so that DUSA
may participate directly in this litigation. The Company has filed a
response setting forth its defenses, in addition to a related countersuit
alleging that certain activities of PhotoCure and its marketing partner,
Galderma S.A., infringe the patent. The case is ongoing and the Company is
unable to predict the outcome at this time. The Company believes that the
final hearing in the Federal Court of Australia will occur in April 2004.
In March 2003, the Company received notice that its Netherlands patent was
being formally challenged by an anonymous agent, and DUSA filed a formal
response to the opposition. The Netherlands Patent Office.
In December 2003, the Company was served with a complaint filed in the
State of Michigan Circuit Court for the County of Oakland alleging that
DUSA's BLU-U(R) caused the plaintiff to suffer a seizure during the
performance of her duties as an office assistant. The complaint names
Berlex Laboratories, Inc., a subsidiary of our former marketing partner,
as another defendant. The case has been removed to the U.S. District Court
for the Eastern District of Michigan Southern Division. The damages are
unspecified. The Company is reviewing the complaint with counsel and
investigating the matter at this time. While it is not possible to predict
or determine the outcome of this action, the Company believes that the
costs associated with all such matters will not have a material adverse
effect on its consolidated financial position or liquidity but could
possibly be material to the consolidated results of operations in any one
accounting period to the extent costs are not covered by DUSA's insurance.
The Company has not accrued any amounts for settlement at December 31,
2003.
E) LICENSE AND SUPPLY AGREEMENTS - In December 2002, DUSA entered into a
License and Development Agreement with Photonamic GmbH & Co. KG, a
subsidiary of medac GmbH, a German pharmaceutical company, and a supply
agreement with medac. These agreements provide for the licensing to DUSA
of Photonamic's proprietary technology related to ALA for systemic dosing
in the field of brain cancer. Based on the license agreement, DUSA made a
non-refundable $500,000 milestone payment to Photonamic in 2003. This
liability was charged to research and development costs in the
Consolidated Statement of Operations in 2002, and was included in other
accrued expenses in the Consolidated Balance Sheet at December 31, 2002.
The Company may also be obligated to pay certain regulatory milestones of
$1,250,000 upon FDA acceptance of a registration application for a brain
cancer product in the United States, and an additional $1,250,000 upon
registration of the product and royalties of 12.5% on net sales under the
terms of the License and Development Agreement. The Company will purchase
product under the supply agreement for mutually agreed upon indications.
Should Photonamic's clinical study be successful, DUSA will be obligated
to proceed with development of the product in the United States in order
to retain the license for the use of the technology to treat brain cancer.
Such additional obligations are undeterminable at this time.
F-22
16) SUBSEQUENT EVENTS
A) PRIVATE PLACEMENT - On March 2, 2004, the Company issued 2,250,000
shares of its common stock in a private placement pursuant to Regulation D
of the Securities Act of 1933 at $11.00 per share. The Company received
gross proceeds of $24,750,000. The Company has also granted the investors
the right to purchase up to an aggregate of 337,500 additional shares of
common stock at $11.00 per share. These additional investment rights
expire April 14, 2004, or 30 trading days from closing, which occurred on
March 2, 2004. In addition, 135,000 shares of common stock were issued as
commission and non-refundable retainer to the placement agent.
B) REACQUISITION OF CANADIAN RIGHTS - On February 24, 2004, the Company
reacquired the rights to the aminolevulinic acid (Levulan(R)) technology
for Canada held by Draxis Health Inc. These rights were initially assigned
to Draxis in 1991 at the time of the original licensing of the patents
underlying our Levulan(R) PDT platform from PARTEQ Research and
Development Innovations, the licensing arm of Queen's University,
Kingston, Ontario. The Company and Draxis terminated the assignment and
DUSA agreed to pay an upfront fee and a royalty on sales of the Levulan(R)
Kerastick(R) in Canada over a five year term from the date of the first
commercial sale. The commercial launch of the Company's products in Canada
is expected to occur in 2004.
F-23
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 and Chief Executive Officer
-----------------------------------------------
Date: March 16, 2004
--------------
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/s/ D. Geoffrey Shulman Director, President and Chief Executive March 16, 2004
- -------------------------- Officer (principal executive officer) ----------------
D. Geoffrey Shulman, MD, Date
FRCPC
/s/Mark C. Carota Vice President, Operations March 16, 2004
- -------------------------- ----------------
Mark C. Carota
/s/Peter M. Chakoutis Vice President and Chief Financial Officer March 16, 2004
- -------------------------- (principal financial and accounting officer) ----------------
Peter M. Chakoutis
/s/Richard C. Christopher Vice President, Financial Planning and March 16, 2004
- -------------------------- Business Analysis ----------------
Richard C. Christopher
/s/Scott L. Lundahl Vice President, Intellectual Property and March 16, 2004
- -------------------------- Regulatory Affairs ----------------
Scott L. Lundahl
/s/Stuart L. Marcus Vice President, Scientific Affairs March 16, 2004
- -------------------------- ----------------
Stuart L. Marcus, MD, PhD
/s/David Page Associate Vice President, Sales March 16, 2004
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David Page
/s/Paul A. Sowyrda Vice President, Product March 16, 2004
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Paul A. Sowyrda Marketing and Sales
/s/John H. Abeles Director March 16, 2004
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John H. Abeles
/s/David Bartash Director March 16, 2004
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David Bartash
/s/Jay M. Haft Chairman of the Board and Director March 16, 2004
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Jay M. Haft, Esq.
/s/Richard C. Lufkin Director March 16, 2004
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Richard C. Lufkin
/s/Magnus Moliteus Director March 16, 2004
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Magnus Moliteus
EXHIBIT INDEX
3(a.1) Certificate of Incorporation, as amended, filed as Exhibit 3(a) to
the Registrant's Form 10-K for the fiscal year ended December 31,
1998, and is incorporated herein by reference;
3(a.2) Certificate of Amendment to the Certificate of Incorporation, as
amended, dated October 28, 2002 and filed as Exhibit 99.3 to the
Registrant's Quarterly Report on Form 10-Q for the fiscal quarter
ended September 30, 2002, filed November 12, 2002 and incorporated
herein by reference; and
3(b) By-laws of the Registrant.
4(a) Common Stock specimen, filed as Exhibit 4(a) to the Registrant's Form
10-K for the fiscal year ended December 31, 2002, 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;
4(c) Rights Agreement filed as Exhibit 4.0 to Registrant's Current Report
on Form 8-K dated September 27, 2002, filed October 11, 2002, and is
incorporated herein by reference; and
4(d) Rights Certificate relating to the rights granted to holders of
common stock under the Rights Agreement filed as Exhibit 4.0 to
Registrant's Current Report on Form 8-K, dated September 27, 2002,
filed October 11, 2002, and is incorporated herein by reference.
10(a) License Agreement between the Company, PARTEQ and Draxis Health Inc.
dated August 27, 1991, filed as Exhibit 10.1 to the Registrant's
Registration Statement on Form S-1, No. 33-43282, and is incorporated
herein by reference;
10(b) ALA Assignment Agreement between the Company, PARTEQ, and Draxis
Health Inc. dated October 7, 1991, filed as Exhibit 10.2 to the
Registrant's Registration Statement on Form S-1, No. 33-43282, and is
incorporated herein by reference;
10(b.1) Amended and Restated Assignment between the Company and Draxis Health
Inc., dated April 16, 1999, filed as Exhibit 10(b.1) to the
Registrant's Form 10-K for the fiscal year ended December 31, 1999,
and is incorporated herein by reference;
10(b.2) Termination and Transfer Agreement between the Company and Draxis
Health Inc., dated as of February 24, 2004, portions of which have
been omitted pursuant to a request for confidential treatment
pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as
amended;
10(c) Employment Agreement of D. Geoffrey Shulman, MD, FRCPC dated October
1, 1991, filed as Exhibit 10.4 to the Registrant's Registration
Statement on Form S-1, No. 33-43282, and is incorporated herein by
reference;
10(d) Amendment to Employment Agreement of D. Geoffrey Shulman, MD, FRCPC
dated April 14, 1994, filed as Exhibit 10.4 to the Registrant's
Registration Statement on Form S-2, No. 33-98030, and is incorporated
hereby by reference;
10(e) Amended and Restated License Agreement between the Company and PARTEQ
dated March 11, 1998, filed as Exhibit 10(e) to the Registrant's Form
10-K/A filed on June 18, 1999, portions of Exhibit A have been
omitted pursuant to a request for confidential treatment pursuant to
Rule 24b-2 of the Securities Exchange Act of 1934 and Rule 406 of the
Securities Act of 1933, and is incorporated herein by reference;
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 Appendix A to Registrant's
Schedule 14A Definitive Proxy Statement dated April 26, 2001, and is
incorporated herein by reference;
10(h.1) 1996 Omnibus Plan, as amended on May 1, 2003;
10(i) Purchase and Supply Agreement between the Company and National
Biological Corporation dated November 5, 1998, filed as Exhibit 10(i)
to the Registrant's Form 10-K/A filed on June 18, 1999, portions of
which have been omitted pursuant to a request for confidential
treatment pursuant to Rule 24b-2 of the Securities Exchange Act of
1934 and Rule 406 of the Securities Act of 1933, and is incorporated
herein by reference;
10(j) Supply Agreement between the Company and Sochinaz SA dated December
dated December 24, 1993, filed as Exhibit 10(q) to Registrants Form
10-K/Afiled on March 21, 2000, portions of which have been omitted
pursuant to a request for confidential treatment pursuant to Rule
24b-2 of the Securities Exchange Act of 1934, and is incorporated
herein by reference;
10(j.1) First Amendment to Supply Agreement between the Company and Sochinaz
SA dated July 7, 1994 filed as Exhibit 10(q.1) to Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31, 1999, and
is incorporated herein by reference;
10(j.2) Second amendment to Supply Agreement between the Company and Sochinaz
SA dated as of June 20, 2000, filed as Exhibit 10.1 to Registrant's
Current Report on Form 8-K dated June 28, 2000, and is incorporated
herein by reference;
10(k) Master Service Agreement between the Company and Therapeutics, Inc.
dated as of October 4, 2001, filed as Exhibit 10(b) to the
Registrant's quarterly report on Form 10-Q for the fiscal quarter
ended September 30, 2001, filed November 8, 2001, portions of which
have been omitted pursuant to a request for confidential treatment
under Rule 24b-2 of the Securities Exchange Act of 1934, as amended
and is incorporated herein by reference;
10(l) Commercial Loan Agreement, Secured Term Loan Promissory Note and
Pledge and Security Agreement between the Company and Citizens Bank
of Massachusetts dated May 13, 2002 filed as Exhibit 99.1 to the
Registrant's Quarterly Report on Form 10-Q for the fiscal quarter
ended March 31, 2002, filed May 14, 2002, and is incorporated herein
by reference;
10(m) Collaboration Termination Agreement, effective September 1, 2002,
between the Company and Schering AG, the Company's former marketing
partner, filed as Exhibit 10 to Registrant's Current Report on Form
8-K dated August 27, 2002, and is incorporated herein by reference;
10(n) License and Development Agreement between the Company and Photonamic
GmbH & Co. KG dated as of December 30, 2002, filed as Exhibit 10(r)
to Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 2002, portions of which have been omitted pursuant to a
request for confidential treatment under Rule 24(b)-2 of the
Securities Exchange Act of 1934, as amended, and is incorporated
herein by reference;
10(o) Supply Agreement between the Company and medac GmbH dated as of
December 30, 2002, filed as Exhibit 10(s) to Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31, 2002,
portions of which have been omitted pursuant to a request for
confidential treatment under Rule 24(b)-2 of the Securities Exchange
Act of 1934, as amended, and is incorporated herein by reference.
10(p) Securities Purchase Agreement dated as of February 27, 2004, by and
among the Company and certain investors, filed as Exhibit 10.1 to the
Registrant's current report on Form 8-K, filed on March 2, 2004,
portions of which have been omitted pursuant to a request for
confidential treatment under Rule 24(b) of the Securities Exchange
Act of 1934, as amended, and is incorporated herein by reference;
10(q) Registration Rights Agreement dated as of February 27, 2004 by and
among the Company and certain investors, filed as Exhibit 10.2 to the
Registrant's current report on Form 8-K, filed on March 2, 2004, and
is incorporated herein by reference;
10(r) Form of Additional Investment Right dated as of February 27, 2004,
filed as Exhibit 10.3 to the Registrant's current report on Form 8-K,
filed on March 2, 2004, and is incorporated herein by reference; and
10(s) Investment Banking Agreement between the Company and Sunrise
Securities Corp. entered into February 27, 2004.
14(a) Form of DUSA Pharmaceuticals, Inc. Code of Ethics Applicable to
Senior Officers.
21(a) Subsidiary of Registrant
23(a) Independent Auditors' Consent of Deloitte & Touche LLP.
31(a) Rule 13a-14(a)/15d-14(a) Certification of the Chief Executive
Officer; and
31(b) Rule 13a-14(a)/15d-14(a) Certification of the Chief Financial
Officer.
32(a) Certification of the Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002; and
32(b) Certification of the Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
99(a) Press Release dated March 16, 2004.