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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-K
(MARK ONE)
| þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2009
| o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 001-31533
DUSA PHARMACEUTICALS, INC.
(Exact name of registrant as specified in its charter)
| NEW JERSEY | 22-3103129 | |
| (State or other jurisdiction of Incorporation or organization) |
(I.R.S. Employer Identification No.) |
| 25 Upton Drive, Wilmington, MA (Address of principal executive offices) |
01887 (Zip Code) |
REGISTRANT’S TELEPHONE NUMBER, INCLUDING AREA CODE:
(978) 657-7500
(978) 657-7500
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
(TITLE OF CLASS)
(TITLE OF CLASS)
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
(TITLE OF CLASS)
(TITLE OF CLASS)
COMMON STOCK, NO PAR VALUE
Indicate by check mark if the Registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes o No þ
Indicate by check mark if Registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes o No þ
Indicate by check mark whether the Registrant: (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and
posted on its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such
files). Yes o No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of
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 þ
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See the
definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting
company” in Rule 12b-2 of the Exchange Act. (Check one):
| Large accelerated filer o | Accelerated filer o | Non-accelerated filer þ (Do not check if a smaller reporting company) | Smaller reporting company o |
Indicate by check mark whether the Registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes o No þ
As of March 2, 2010, the Registrant had 24,108,908 shares of Common Stock, no par
value, outstanding.
Based on the last reported sale price of the Company’s common stock on the NASDAQ
Global Market on June 30, 2009 ($1.10) (the last business day of the Registrant’s most
recently completed second fiscal quarter), the aggregate market value of the voting stock
held by non-affiliates of the Registrant was approximately $22,741,353.
DOCUMENTS INCORPORATED BY REFERENCE
| Document | ||
| Description | 10-K Part III | |
Portions of the Registrant’s proxy statement to be filed pursuant to Regulation
14A within 120 days after Registrant’s fiscal year end of December 31, 2009 are
incorporated by reference into Part III of this report.
|
Items 10, 11, 12, 13 and 14 |
TABLE OF CONTENTS TO FORM 10-K
| BUSINESS | 4 | |||||||
| RISK FACTORS | 20 | |||||||
| UNRESOLVED STAFF COMMENTS | 30 | |||||||
| PROPERTIES | 30 | |||||||
| LEGAL PROCEEDINGS | 30 | |||||||
| RESERVED | 30 | |||||||
| EX-21.A | ||||||||
| EX-23.A | ||||||||
| EX-31.A | ||||||||
| EX-31.B | ||||||||
| EX-32.A | ||||||||
| EX-32.B | ||||||||
| EX-99.1 | ||||||||
Exhibit Index |
EX-21.A: SUBSIDIARIES OF THE REGISTRANT |
EX-23.A: CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM |
EX-31.A: CERTIFICATION |
EX-31.B: CERTIFICATION |
EX-32.A: CERTIFICATION |
EX-32.B: CERTIFICATION |
EX-99.1: PRESS RELEASE |
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PART I
This Annual Report on Form 10-K and certain written and oral statements
incorporated herein by reference of DUSA Pharmaceuticals, Inc. and subsidiaries (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 20 through 30, 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 vertically integrated dermatology company that is developing and
marketing Levulan® photodynamic therapy, or
Levulan® PDT, and other products for common skin conditions. Our
marketed products include Levulan® Kerastick® 20%
Topical Solution with PDT, the BLU-U® brand light source, and
ClindaReach®.
We devote most of our resources to advancing the development and marketing of our
Levulan® PDT technology platform. In addition to our marketed products,
our drug, Levulan® brand of aminolevulinic acid HCl, or ALA, in
combination with light, has been studied in a broad range of medical conditions. When
Levulan® is used and followed with exposure to light to treat a medical
condition, it is known as Levulan® PDT. The
Kerastick® is our proprietary applicator that delivers
Levulan®. The BLU-U® is our patented light
device.
The Levulan® Kerastick® 20% Topical
Solution with PDT and the BLU-U® were launched in the United States, or
U.S., in September 2000 for the treatment of non-hyperkeratotic actinic keratoses, or AKs, of
the face or scalp under a former dermatology collaboration. AKs are precancerous skin lesions
caused by chronic sun exposure that can develop over time into a form of skin cancer called
squamous cell carcinoma. In addition, in September 2003 we received clearance from the United
States Food and Drug Administration, or FDA, to market the BLU-U®
without Levulan® PDT for the treatment of moderate inflammatory acne
vulgaris and general dermatological conditions.
Sirius Laboratories, Inc., or Sirius, a dermatology specialty pharmaceuticals
company, was founded in 2000 with a primary focus on the treatment of acne vulgaris and acne
rosacea. Nicomide® was its key product, a vitamin-mineral product
prescribed by dermatologists. We merged with Sirius in March 2006. In April 2008, we were
notified by Actavis Totowa, LLC, the manufacturer of Nicomide®, that Actavis would
cease manufacturing several prescription vitamins, including Nicomide®, due to
continuing discussions with the FDA. As we previously disclosed, Actavis Totowa had received
notice that the FDA considers prescription dietary supplements to be unapproved new drugs.
In response to this notification and subsequent discussions with the FDA, we stopped the sale
and distribution of Nicomide® in June 2008.
On August 12, 2008, we entered into a worldwide non-exclusive patent license
agreement with respect to our patent covering Nicomide®, or License
Agreement, with River’s Edge Pharmaceuticals, LLC, or River’s Edge, and an amendment to our
settlement agreement with River’s Edge regarding earlier litigation. The amendment to the
settlement agreement allowed River’s Edge to manufacture and market a prescription product
that could be substitutable for Nicomide® pursuant to the terms of the
License Agreement and changed certain payment obligations of River’s Edge for sales of its
substitutable product. In consideration for granting the license, we were paid a share of the
net revenues, as defined in the License Agreement, of River’s Edge’s licensed product sales.
In April 2009, we and River’s Edge entered into an Amendment to the License Agreement, or
License Amendment. The License Amendment grants River’s Edge an exclusive license to U.S.
Patent, No. 6,979,468, and a license to use all know-how and the trademark associated
with the licensed products worldwide. Under the License Amendment, we are required to
transfer all of our rights, title and interest in and to DUSA’s patent, know-how and
trademark relating to the licensed products (but not the copyright registration relating to
product labeling) to River’s Edge upon our receipt of $5,000,000. Of the $5,000,000, River’s
Edge is required to make payment to us of $2,600,000, in thirteen monthly installments of
$200,000, subject to reduction under certain conditions, and pay additional consideration of
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$2,400,000 payable over time based on a share of River’s Edge’s net revenues as defined in
the License Amendment. The License Agreement, as amended, has a term of 30 months, subject to
a further extension under certain circumstances to 48 months, and may be terminated early by
River’s Edge on 30 days’ prior written notice. Under the License Agreement, River’s Edge has
assumed all regulatory responsibilities for the licensed products. If the License Agreement
is terminated prior to the payment of the $5,000,000, all of the rights and licenses granted
by us to River’s Edge will revert to us. We are recording the revenue under the License
Amendment on a cash basis. We received the first $200,000 installment payment under the
License Amendment during the second quarter of 2009, which is included in Product Revenues in
the accompanying Consolidated Statements of Operations, but have not received any further
payments. We are considering our options relative to the collection of amounts due from
River’s Edge and termination of the License Agreement, which we have the right to do for
non-payment. Two other companies have launched substitutable niacinamide products. The
validity of the Nicomide® patent is being tested again as a request for exparte
reexamination of this patent was filed by a third party with the U.S. Patent and Trademark
Office, or USPTO, on August 19, 2009. An order issued by the USPTO on October 16, 2009
accepted the request for reexamination and we have received the first office action. At this
time we are unable to assess the possible outcome of the reexamination.
We manufacture our Levulan® Kerastick®.
We are also responsible for the regulatory, sales, marketing, customer service and other
related activities for all of our products, including our Levulan®
Kerastick®. We are developing Levulan® PDT 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. In January
2009, we filed a request for reexamination with the United States Patent and Trademark
Office, or USPTO, of one of the patents licensed from Queens University covering certain
methods of using our product, Levulan®, for our FDA-approved
indication. The USPTO accepted our request for reexamination during the first quarter of 2009
and we have responded to the first office action. There is no guarantee that the process will
be successful since the USPTO reviews the entire prosecution history of a patent during a
reexamination and could determine that some or all of the patent claims are invalid.
Typically, a reexamination takes approximately 18 months to complete. The patent is due to
expire in 2013. If the USPTO finds that the patent is invalid, generic competitors could
enter the market earlier than otherwise anticipated and revenues could be adversely affected.
This would adversely affect our financial condition and results of operations and possibly
prevent us from becoming profitable on an annual basis. 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®, DUSA
Pharmaceuticals, Inc.®, Levulan®,
Kerastick®, BLU-U®,
Nicomide®, Nicomide-T®,
ClindaReach®, Meted®, and
Psoriacap® are registered trademarks. Several of these trademarks are
also registered in Europe, Australia, Canada, and in other parts of the world. Numerous other
trademark applications are pending.
As of December 31, 2009, we had an accumulated deficit of approximately
$144,359,000. We cannot predict whether any of our products will achieve significant enough
market acceptance or generate sufficient revenues to enable us to become profitable on an
annual basis. We must increase sales from current levels in order for us to reach
profitability on an annual basis. We cannot provide any assurance that we will be able to
increase sales sufficiently from these levels, nor can we provide assurance that an increase
in sales will cause us to be profitable on an annual basis.
Unless the context otherwise requires, the terms “we,” “our,” “us,” “the Company”
and “DUSA” refer to DUSA Pharmaceuticals, Inc., a New Jersey corporation.
We were incorporated on February 21, 1991, under the laws of the State of New Jersey.
Our principal executive office is located at 25 Upton Drive, Wilmington, Massachusetts 01887
(telephone: (978) 657-7500) (web address: www.dusapharma.com). On February 29, 1994, we
formed DUSA Pharmaceuticals New York, Inc., a wholly owned subsidiary, to coordinate our
research and development efforts. DUSA Acquisition Corp., now known as Sirius Laboratories,
Inc., also a wholly-owned subsidiary of DUSA, was formed on January 26, 2006, in connection
with the Sirius merger. We have financed our operations to date, primarily from sales of our
products, sales of securities in public offerings, private and offshore transactions that are
exempt from registration under the Securities Act of 1933, as amended, or the Act, including
private placements under Regulation D of the Act, and from payments received from marketing
collaborators. See the sections entitled “Management’s Discussion and Analysis of Financial
Condition — Overview; — Results of Operations; and — Liquidity and Capital Resources”.
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Business Strategy
The key elements of our strategy include the following:
| • | Expand the Marketing and Sales of Our Products. Continue to drive PDT growth domestically through a focused effort to increase sales of our PDT products to both new and existing medical dermatology customers, and internationally through continued support of our partners. Increase the return on our Non-PDT products through establishing and growing the market for ClindaReach®. | ||
| • | Conduct Selected Research Programs. In May 2009, we initiated a Phase II clinical trial at seven clinical trial sites across the United States for the treatment of broad area actinic keratoses and reduction in the incidence of non-melanoma skin cancers in immunosuppressed solid organ transplant recipients, or SOTR, who have demonstrated that they are at risk of developing multiple squamous cell carcinomas. We expect to enroll up to 36 patients, which could take at least one year. We expect that we would receive preliminary results from the study in approximately 15 months and full results in approximately two years. | ||
| • | Enter into 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 product opportunities. | ||
| • | Improve Third-party Reimbursement for Our Products. We plan to continue to support activities to improve and/or pursue third-party reimbursement for our products. | ||
| • | 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 Levulan® indications for corporate development. |
PDT Overview
In general, photodynamic therapy, or PDT, is a two-step process:
| • | 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. | ||
| • | The second step is activation of the photosensitizer by controlled exposure to a selective light source in the presence of oxygen. |
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.
The longer the wavelength of visible light, the deeper into tissue it penetrates.
Different wavelengths, or colors of light, including red and blue light, may be used to
activate photosensitizers. The selection of the appropriate color of light for a given
indication is primarily based on two criteria:
| • | the desired depth of penetration of the light into the target tissue, and | ||
| • | the efficiency of the light in activating the photosensitizer. |
Blue light does not penetrate deeply into tissues, so it is generally better suited
for treating superficial lesions. However, it is also a potent activator of some
photosensitizers, including ours. Red light penetrates more deeply into tissues, and is
therefore generally better suited for treating cancers and deeper tissues. However, it is
generally not as strong an activator of photosensitizers, including ours. Different
photosensitizers do not absorb all wavelengths (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.
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PDT can be a highly selective treatment that targets specific tissues while
minimizing damage to normal surrounding tissues. It also can allow for multiple courses of
therapy. The most common side effect of photosensitizers that are applied topically or taken
systemically is temporary skin sensitivity to bright light. Patients undergoing PDT
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. Unless activated by light, photosensitizers have no direct PDT effects.
Our Levulan® PDT Platform
Our Levulan® Brand of ALA
We have a unique approach to PDT using the human cell’s own natural processes.
Levulan® 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 system, excess ALA (as Levulan®) 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®
PDT, especially in fast growing cells. Any PpIX that remains after treatment is eliminated
naturally by the same biosynthetic pathway.
We believe that Levulan® is unique among PDT agents. It has the
following features:
| • | Naturally Occurring. ALA is a naturally occurring substance found in virtually all living human cells. | ||
| • | Small Molecule. Levulan® is a small molecule that is easily absorbed whether delivered topically, orally, or intravenously. | ||
| • | Highly Selective. Levulan® 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 in normal surrounding and underlying tissues. | ||
| • | Controlled Activation. Levulan® 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® is more pronounced in:
| • | rapidly growing diseased tissues, such as precancerous and cancerous lesions. | ||
| • | conditions characterized by rapidly proliferating cells such as those found in psoriasis and certain microbes, and | ||
| • | in certain normally fast-growing tissues, such as hair follicles, sebaceous glands, esophageal mucosa and the lining of the uterus. |
Our Kerastick® Brand Applicator
We designed our proprietary Kerastick® specifically for use
with Levulan® and refer to it as the Levulan®
Kerastick®. It is a single-use, disposable applicator, which allows for
uniform application of Levulan® topical solution in standardized doses.
The Kerastick® has two separate glass ampoules, one containing
Levulan® 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 physician, nurse or other qualified
healthcare practitioner crushes the ampoules and shakes the Kerastick®
according to directions to mix the contents into a solution. The
Kerastick® tip is then dabbed onto the individual AK lesions, releasing
a predetermined amount of Levulan® 20% topical solution.
Our Light Sources
Customized light sources are critical to successful Levulan®
PDT because the effectiveness of Levulan® 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:
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| • | are compact and tailored to fit specific medical needs, | ||
| • | are pre-programmed and easy to use, and | ||
| • | provide cost-effective therapy. |
Our proprietary BLU-U® is a continuous-wave (non-pulsed)
fluorescent light source that can treat the entire face or scalp at one time. The light
source is reasonably sized and can be moved from room to room if necessary. 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® 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® is
also compliant with CE marking requirements.
We believe non-laser, non-pulsed light sources in comparison to lasers and
high-intensity pulsed light sources, are:
| • | safer, | ||
| • | simpler to use, | ||
| • | more reliable, and | ||
| • | less expensive. |
For treatment of AKs, our BLU-U® uses blue light which is a
potent activator of PpIX and does not penetrate deeply into the skin. 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, our therapy uses relatively low
intensity, non-laser, non-pulsed BLU-U®, which is designed to treat
areas such as the face or scalp. 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. We have also received clearance from the FDA to market the
BLU-U® without Levulan® for the treatment of
moderate inflammatory acne vulgaris and general dermatological conditions.
Our Products
The following table outlines the development status of our key products and planned
product candidate. Our research and development expenses for the last
three years were $4,313,000 in 2009, $6,643,000 in 2008 and
$5,977,000 in 2007.
| Indication/Product | Regulatory status | |
Levulan® Kerastick® and BLU-U® for PDT of AKs
|
Approved | |
BLU-U® Treatment of Moderate Inflammatory Acne Vulgaris and general dermatological conditions
Without Levulan®
|
Market Clearance(1) | |
ClindaReach® Levulan® PDT for SOTR |
ANDA(2) Phase II Clinical Trial(3) |
| (1) | In September 2003, the FDA provided market clearance | |
| (2) | ANDA owned by L. Perrigo Company. | |
| (3) | We initiated this Phase II clinical trial in 2009. |
Dermatology Indications
Actinic Keratoses.
AKs are superficial precancerous skin lesions usually appearing in sun-exposed
areas as rough, scaly patches of skin with some underlying redness. The traditional methods
of treating AKs are cryotherapy, or the deep freezing of skin, using liquid nitrogen;
5-fluorouracil cream, or 5-FU; and surgery, for especially thick or suspicious lesions. In
recent years, imiquimod and diclofenac have also been used for the treatment of AKs. Although
any of these methods can be effective, each has limitations and can result in significant
side effects. Cryotherapy is non-selective, can be painful at the site of freezing and can
cause blistering and loss of skin pigmentation, leaving temporary or permanent 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
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the
skin. Following the treatment, an additional 1 to 2 weeks of healing is required. Surgery is
generally most useful for one or a few individual lesions, but not large numbers of lesions,
and leaves permanent scars. Imiquimod or diclofenac require extended applications of cream,
lasting up to 3 or 4 months, during which the skin is often very red and inflamed. Our
approved treatment method involves applying Levulan® 20% topical
solution using the Kerastick® to individual AK lesions, followed 14 to
18 hours later with exposure to our BLU-U® for approximately 17
minutes. In our Phase III trials, using this overnight drug application, our treatment
produced varying degrees of pain during light treatment, but the therapy was generally well
tolerated. The resulting redness and/or inflammation generally resolved within days without
any change in pigmentation.
Acne.
Acne is a common skin condition caused in part 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 nodulo-cystic acne, an oral
retinoid drug called Accutane®1 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 including increased antibiotic resistance. Blue light alone has been
shown to improve mild to moderate inflammatory acne, in part, by targeting the bacterium
Propionibacterium acnes (P. acnes), which accumulates its own photosensitizer much like that
produced by Levulan® in the skin, and possibly by other
anti-inflammatory actions.
DUSA has clearance from the FDA to market the BLU-U® without
Levulan® PDT for the treatment of moderate inflammatory acne vulgaris
and general dermatological conditions.
Solid Organ Transplant Recipients (SOTR).
We have initiated a DUSA-sponsored Phase II clinical trial for the treatment of
actinic keratoses and reduction in the incidence of non-melanoma skin cancers in
immunosuppressed solid organ transplant recipients, or SOTRs, who have demonstrated that they
are at risk of developing multiple squamous cell carcinomas. We expect to enroll up to 36
patients at seven clinical trial sites across the United States which could take at least one
year. We expect that we could receive preliminary results from the study in approximately 15
months and full results in approximately two years. To date, the pace of enrollment in the
study has been slower than we anticipated at the outset of the trial. In May 2008, we filed
an Orphan Drug Designation Application with the FDA for the prevention of cancer occurrence
in these patients. We received initial correspondence that the application was not granted
on the basis that the agency believed that the prevalence of the target population with the
disease state is greater than 200,000, which is the maximum number of patients allowed under
the Orphan Drug legislation. We met with the FDA during the third quarter of 2009 to clarify
and explain further our application and, based on that meeting, the agency invited us to
submit an amendment to our application for further evaluation. We submitted a draft amendment
in January 2010 along with a request for a follow-on meeting
with the agency. In February 2010, the
FDA indicated that a meeting was not necessary and suggested that we formally submit the
amended application. We expect to make the formal submission in March
2010.
Other Potential Levulan® Indications
We believe that there may be numerous other potential uses for
Levulan® PDT in dermatology, and we intend to continue to support,
research in several of these areas, with corporate-sponsored 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® in dermatology may include treatment of
skin conditions such as psoriasis, onychomycosis, warts, molluscum contagiosum, oily skin,
acne rosacea, cystic acne, inflamed or infected sweat glands (hidradenitis suppurativa), and
cancers, such as squamous cell carcinomas and cutaneous T-cell lymphomas. Of these potential
indications, we are supporting investigator-sponsored studies for hidradenitis suppurativa,
acne vulgaris, non-melanoma skin cancer, warts, and inflammatory acne. There are other
potential indications outside of dermatology that we could pursue with sufficient resources,
including, but not limited to, treatment of brain cancer.
| 1 | Accutane ® is a registered trademark of Hoffmann-La Roche, Inc. |
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Internal Indications
Oral Cavity Dysplasia.
Since November 2004 we have been supporting a clinical trial under the terms of an
agreement with the National Cancer Institute (NCI) Division of Cancer Prevention (DCP) for
the treatment of oral cavity dysplasia. The NCI DCP used its resources to file its own
investigational new drug application with the FDA. DUSA and the NCI DCP worked together to
prepare the overall clinical development plan for Levulan® PDT in this
indication, starting with Phase I/II trials. A Phase I clinical trial was launched in April
2008, which continues to accrue patients. Our costs related to this study are limited to
providing Levulan®, leasing lasers and providing the necessary training
for the investigators involved. All other costs of this study are the responsibility of the
NCI DCP. We have options on any new intellectual property which may arise from this study.
Depending on the results of the study, NCI may choose to move forward with a Phase II trial.
Supply Partners
National Biological Corporation.
On June 21, 2004, we signed an amended and restated purchase and supply agreement
with National Biological Corporation, or NBC, the principal manufacturer of our
BLU-U® brand light source. This agreement permits us to order on a
purchase order basis without minimums, and includes other modifications of the original
agreement providing both parties greater flexibility related to the development and
manufacture of light sources and the associated technology within the field of PDT. On June
29, 2009, we extended the term of this agreement with NBC until June 30, 2011. We have an
option to further extend the term for an additional two (2) years if we purchase a certain
number of units. The parties agreed upon a tiered price schedule based on the volume of
purchases and updated certain quality control provisions. All other terms and conditions of
the 2004 agreement remain in effect.
Sochinaz SA.
Under an agreement dated December 24, 1993, Sochinaz SA manufactures and supplies
our requirements of Levulan® from its FDA approved facility in
Switzerland. In 2009, the parties renewed the agreement until December 31, 2015 on
substantially the same terms, albeit with a revised pricing schedule to cover the new term.
Sochinaz is our sole source for Levulan® and while we can obtain
alternative supply sources in certain circumstances, any new supplier would have to be
inspected and qualified by the FDA.
L. Perrigo Company.
On October 21, 2005, the former Sirius entered into a supply agreement with L.
Perrigo Company, or Perrigo, for the exclusive manufacture and supply of a proprietary
device/drug kit designed by Sirius pursuant to an approved ANDA owned by Perrigo. The
agreement was assigned to us as part of the Sirius merger. We were responsible for all
development costs and for obtaining all necessary regulatory approvals and launched the
product, ClindaReach®, in March 2007. Perrigo is entitled to royalties
on net sales of the product, including certain minimum annual royalties, which commenced May
1, 2006, in the amount of $250,000. The initial term of the agreement expires in October 2010
and may be renewed based on certain minimum purchase levels and other terms and conditions.
Medac/photonamic GMBH & Co. KG.
On August 7, 2007, we entered into a license and supply agreement among DUSA, photonamic
GmbH & Co, a subsidiary of medac GmbH, a German pharmaceutical company, and medac confirming
our rights to use certain pre-clinical data and licensed technology on a non-exclusive basis
in the U.S. and other territories and providing for a supply of medac’s oral and intravenous
formulation of ALA on terms to be mutually agreed upon. The term of the agreement is five
years, subject to rights to earlier termination and automatic renewals. No additional
royalties or payments for the license are due to photonamic.
Licenses
PARTEQ
We license (or, in the case of the patents in Australia, were assigned) the patents
underlying our Levulan® PDT system under a license agreement with
PARTEQ Research and Development Innovations, or 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
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or acquired by or for PARTEQ, or Queen’s University, to which PARTEQ has the right to grant a
license. A non-exclusive right is reserved to Queen’s University to use the subject matter of
the agreement for non-commercial educational and research purposes. A right is reserved to
the Department of National Defense Canada to use the licensed rights for defense purposes
including defense procurement but excluding sales to third parties.
When we are selling our products directly, we have agreed to pay to PARTEQ
royalties of 6% and 4% on 66% of the net selling price in countries where patent rights do
and do not exist, respectively. In cases where we have a sublicensee, 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. In January 2009, we filed a request for reexamination of one of the Queen’s
patents with the USPTO. The USPTO accepted our request for reexamination during the first
quarter of 2009 and we have responded to the first office action. There is no guarantee that
the process will be successful since the USPTO reviews the entire prosecution history of a
patent during a reexamination and could determine that some or all of the patent claims are
invalid. Typically, a reexamination takes approximately 18 months to complete. The patent is
due to expire in 2013. If the USPTO finds that the patent is invalid, generic competitors
could enter the market earlier than otherwise anticipated and our revenues could be adversely
affected. This would adversely affect our financial condition and results of operations and
possibly prevent us from becoming profitable on an annual basis. Annual minimum royalties to
PARTEQ must total at least CDN $100,000 (U.S. $95,000 as of December 31, 2009) in order to
retain the license. For 2009, royalties exceeded this minimum. We have the right to terminate
the PARTEQ agreement with or without cause upon 90 days notice.
Together with PARTEQ and Draxis Health, Inc., our former parent, we entered into an
agreement, known as 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 10% royalty on sales of the
Levulan® Kerastick® in Canada over a five-year
term following the first commercial sale in Canada, which ended in the second quarter of
2009. Draxis also agreed to assign to us the Canadian regulatory approvals for the
Levulan® Kerastick® with PDT for AKs. We also
hold Canadian regulatory approval for the BLU-U®. In 2004, we appointed
a Canadian distributor who launched our Levulan®
Kerastick® and BLU-U® in Canada. See the section
entitled “Distribution.”
Winston Laboratories Arbitration Settlement
In
October 2008, we were notified that Winston Laboratories, Inc. had filed a
demand for arbitration against us. The demand for arbitration arose out of two
agreements known as the 2006 Micanol License Agreement and the 2006 Micanol Transition
License Agreement, and claimed that the Company breached the agreements. Winston Laboratories
claimed damages in excess of $2.0 million. The matter was settled on April 28, 2009 for cash
consideration of $75,000, and a mutual release.
PhotoCure ASA
On May 30, 2006, we entered into a patent license agreement with PhotoCure ASA
whereby we granted a non-exclusive license to PhotoCure under the patents we license from
PARTEQ for esters of ALA. Furthermore, we granted a non-exclusive license to PhotoCure for
its existing formulations of its Hexvix® and
Metvix® (known in the United States as Metvixia®)
products for any DUSA patents that may issue or be licensed by us in the future.
PhotoCure received FDA approval to market Metvixia® for treatment
of AKs in July 2004, and this product, which is directly competitive with our
Levulan® Kerastick® product, is now commercially
available. On October 1, 2009, PhotoCure announced that it had sold Metvix/Metvixia to
Galderma, S.A., a large dermatology company, and on January 11, 2010, Galderma announced a
co-promotion agreement with PhotoMedex for Metvixia under which Galderma will provide
marketing support and distribution. PhotoMedex’s sales force will promote Metvixia and
Galderma’s Aktilite lamp to healthcare professionals throughout the United States. While we
are entitled to royalties on net sales of Metvixia, Galderma and PhotoMedex together have
considerably more resources than we have, which could adversely affect our ability to
maintain or increase our market share.
River’s Edge
On August 12, 2008, we entered into a worldwide non-exclusive patent license
agreement to our patent covering Nicomide®, with River’s Edge and an
amendment to our settlement agreement with River’s Edge regarding earlier litigation. The
amendment to the settlement agreement allowed River’s Edge to manufacture and market a
prescription product that could be substitutable for Nicomide® pursuant
to the terms of the license agreement, or License Agreement, and changed
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certain payment
obligations of River’s Edge for sales of its substitutable product. In consideration for
granting the license, we were paid a share of the net revenues, as defined in the License
Agreement, of River’s Edge’s licensed product sales. In April 2009, we and River’s Edge
entered into an amendment to the License Agreement, or License Amendment. The License
Amendment grants River’s Edge an exclusive license to U.S. Patent, No. 6,979,468, and a
license to use all know-how and the trademark associated with the licensed products
worldwide. Under the License Amendment, we are required to transfer all of our rights, title
and interest in and to DUSA’s patent, know-how and trademark relating to the Licensed
Products (but not the copyright registration relating to product labeling) to River’s Edge
upon our receipt of $5,000,000. Of the $5,000,000, River’s Edge is required to make payment
to us of $2,600,000, in thirteen monthly installments of $200,000, subject to reduction under
certain conditions, and pay additional consideration of $2,400,000 payable over time based on
a share of River’s Edge’s net revenues as defined in the License Amendment. The License
Agreement, as amended, has a term of 30 months, subject to a further extension under certain
circumstances to 48 months, and may be terminated early by River’s Edge on 30 days’ prior
written notice. Under the License Agreement, River’s Edge has assumed all regulatory
responsibilities for the licensed products. If the License Agreement is terminated prior to
the payment of the $5,000,000, all of the rights and licenses granted by us to River’s Edge
will revert to us. We are recording the revenue under the License Amendment on a cash basis.
We received the first $200,000 installment payment under the License Amendment during the
second quarter of 2009, which is included in Product Revenues in the accompanying
Consolidated Statements of Operations, but have not received any further payments. We are
considering our options relative to the collection of amounts due from River’s Edge and
termination of the License Agreement, which we have the right to do for non-payment. Two
other companies have launched substitutable niacinamide products. The validity of the
Nicomide® patent is being tested again as a request for exparte reexamination of
this patent was filed by a third party with the U.S. Patent and Trademark Office, or USPTO,
on August 19, 2009. An order issued by the USPTO on October 16, 2009 accepted the request for
reexamination and we have received the first office action. It is too early in the
reexamination process to assess the possible outcome.
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. 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 cannot assure you that we will defend or successfully defend our patents.
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. We own or exclusively license patents
and patent applications related to the following:
| • | methods of using ALA and its unique physical forms in combination with light to treat conditions such as AKs and acne, | ||
| • | compositions and apparatus for those methods, and | ||
| • | unique physical forms of ALA. |
The patents relating to methods of using ALA for detecting or treating disease,
other than for acne and our approved indication for AKs of the face or scalp, started to
expire in July 2009. The patents covering our AK product do not start to expire until 2013.
In January, 2009 we filed a request for reexamination with the USPTO of one of the patents
covering certain methods of using Levulan® for our FDA-approved
indication. While we believe that the reexamination will strengthen the patent, there is no
guarantee that the process will be successful since the USPTO reviews the entire prosecution
history of a patent during a reexamination and could determine that some or all of the patent
claims are invalid. Typically, a reexamination takes approximately 18 months to complete.
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 the
section entitled “Business — Licenses”. The 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 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, including our
BLU-U® brand light device, and other technology. We cannot guarantee
that any pending patent applications will mature into issued patents.
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We also own patents covering Nicomide® and the
AVAR® products which we have licensed, and have patent applications
pending that will cover other products, if those applications issue as patents, including an
application on the design of the applicator wand for ClindaReach®
pledgets. The Nicomide® patent expires in 2025 and the
AVAR® patent expires in 2021. The validity of the Nicomide patent is
being tested again as a request for ex parte reexamination of this patent was filed by an
unknown third party with the U.S. Patent and Trademark Office, or USPTO, on August 19, 2009.
The USPTO accepted the reexamination on October 16, 2009 and has issued its first office
action. Also, other new products have been launched that are competing with
Nicomide®.
We have limited patent protection outside the United States, which may make it
easier for third parties to compete there. Our basic ALA method of treatment patents and
applications have counterparts in only six foreign countries and under the European Patent
Convention. See the section entitled “Risk Factors — Risks Related to DUSA”.
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, as one party has already done, 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 any
such additional claim.
In addition, we know that our patents, whether owned or licensed, or any future
patents that may issue, have not prevented 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 (like the
Nicomide® and AVAR® patents); (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 the 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.
We seek registration of trademarks in the United States, and other countries where
we may market our products. To date, we have been issued more than 130 trademark
registrations, including trademarks for DUSA ®, DUSA Pharmaceuticals,
Inc.®, Levulan®,
Kerastick®, BLU-U®,
Nicomide®, Nicomide-T®,
ClindaReach®, Meted®, and
Psoriacap®, and other applications are pending.
Manufacturing
We manufacture our Levulan® Kerastick®
at our Wilmington, Massachusetts facility and we maintain a reasonable level of
Kerastick® inventory based on our internal sales projections. In 2005,
we received FDA approval to manufacture our BLU-U® brand light source
in our Wilmington, Massachusetts facility. However, at this time, we expect to utilize our
own facility only as a back-up to our current third-party manufacturer, or for repairs. Our
drug, Levulan®, and the BLU-U® brand light source
are each manufactured by single source suppliers. We intend to continue to use third-party
manufacturers for our Non-PDT Drug Products under agreements we assumed as part of the merger with
Sirius. See the section entitled “Business — Supply Partners.”
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Distribution
We have been a direct distributor of the BLU-U® since its
launch. Effective January 1, 2006, we increased our own distribution capacity and have become
the sole distributor for our Levulan® Kerastick®
in the United States. In March 2004, we signed an exclusive Canadian marketing and
distribution agreement for the Levulan®
Kerastick® and BLU-U® with Clarion Medical
Technologies, Inc., or Clarion (formerly known as Coherent-AMT), a leading Canadian medical
device and laser distribution company. Clarion began marketing the
BLU-U® in April 2004 and the Kerastick® in June
2004, following receipt of the applicable regulatory approval from Health Protection Branch
— Canada. The agreement is automatically renewed for one-year terms, unless either party
notifies the other party prior to a term expiration that it does not intend to renew the
agreement. Clarion has the right for a period of time following termination of its agreement
to return inventory of product.
In January 2006, as amended in September 2007, we entered into an exclusive
marketing, distribution and supply agreement with Stiefel Laboratories, Inc., or Stiefel,
covering current and future uses of our proprietary Levulan®
Kerastick® for PDT in dermatology. The agreement grants Stiefel an
exclusive right to distribute, promote and sell the Levulan®
Kerastick® in the western hemisphere south of and including Mexico, and
all other countries in the Caribbean, excluding
United States territories. We manufacture and supply to Stiefel on an exclusive basis in
the territory all of Stiefel’s reasonable requirements for the product. The agreement has an
initial term of ten years. In September 2007, we amended certain terms of the original
Stiefel agreement to reflect our plans to launch in other Latin American countries prior to
Brazil. Pursuant to the amendment, Stiefel is scheduled to make aggregate milestone payments to us of up
to $2,250,000, as follows: (i) $375,000 upon launch of the product in either Mexico or
Argentina which has been paid; (ii) $375,000 upon receipt of acceptable pricing approval in
Brazil which has been paid; (iii) two installments of $375,000 each for cumulative end-user
sales in Brazil totaling 150,000 units and 300,000 units, and (iv) two installments of
$375,000 each for cumulative sales in countries excluding Brazil totaling 150,000 units and
300,000 units. In addition, the transfer price for the product was amended to set a fixed
price plus a royalty on net sales, rather than a revenue-sharing arrangement as under the
Agreement. The agreement with Stiefel also establishes minimum purchase quantities over the
first five years following regulatory approval. The first contract year for all countries
other than Brazil began in October 2007, and for Brazil began in April 2008. For the contract
years ended in October 2008 and 2009 and April 2009 Stiefel did not meet its minimum purchase
obligations under the agreement. The agreement provides that within 60 days of the year end,
Stiefel is required to pay us the difference between its actual purchases and the contractual
minimums (a “gross-up” payment). To date, Stiefel has failed to make the gross-up payments,
and accordingly, we are considering our remedies, which include, without limitation,
appointing one or more other distributors in the territory or terminating the agreement.
Also, since Stiefel’s sales to third parties during the contract years ended October 2008 and
2009 and April 2009 were below its minimum purchase obligations, Stiefel has the unilateral
right to terminate the contract. Stiefel has not exercised this right.
On January 4, 2007, we entered into an exclusive marketing, distribution and supply
agreement with Daewoong Pharmaceutical Co., Ltd. and Daewoong’s wholly owned subsidiary, DNC
Daewoong Derma & Plastic Surgery Network Company, together referred to as Daewoong, covering
current and future uses of the Levulan®
Kerastick® for PDT in dermatology. The agreement grants Daewoong
exclusive rights to distribute, promote and sell the Levulan®
Kerastick® in Korea, Taiwan, China, including without limitation Hong
Kong, India, Indonesia, Malaysia, Philippines, Singapore, Thailand and Vietnam. We
manufacture and supply the product to Daewoong on certain terms and conditions. The agreement
has an initial term of ten years (subject to earlier termination and extension provisions).
Daewoong will complete final integration and submission on our behalf of all registrations
and regulatory filings for the product in the territory. Under the terms of the agreement,
Daewoong will make up to $3,500,000 in milestone payments to us, $1,000,000 of which was paid
on signing, and $1,000,000 of which was paid upon receipt of Korean regulatory approval of
the product. The remaining milestones consist of two installments of $750,000 each for
cumulative end-user sales totaling 200,000 units and 500,000 units. In order to maintain its
exclusive rights, Daewoong is obligated to purchase a certain number of units of the product
over the first five years following regulatory approval in Korea. We receive a minimum
transfer price per unit plus a percentage of Daewoong’s end-user price if it exceeds a
certain level. In 2007, the product was launched Korea, and we began recognizing revenue
under the agreement in the fourth quarter of 2007. In the third quarter of 2008, we amended
this agreement to allow Daewoong to distribute our product in Japan on a named-patient basis
only in order to test this market. This amendment has a term of two years.
Our
Non-PDT Drug Products are distributed through several major wholesalers in the
United States pursuant to customary industry arrangements.
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Marketing and Sales
DUSA markets its products in the United States. We have appointed Clarion as our
marketing partner for our PDT products in Canada, Stiefel for our
Levulan® Kerastick® in Mexico, Central and South
America and Daewoong for our Levulan® Kerastick®
in several Asian countries. See the section entitled “Business — Distribution.”
As of December 31, 2009 and 2008, we had 39 and 40, respectively, sales
representatives and management deployed nationally.
Competition
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.
A number of companies are pursuing commercial development of PDT agents other than
Levulan®. These include: Galderma S.A./PhotoMedex; QLT Inc. (Canada);
Axcan Pharma Inc. (United States); Miravant, Inc. (United States); and Pharmacyclics, Inc.
(United States). Several companies are also commercializing and/or conducting research with
ALA or ALA-related compounds. These include: medac GmbH and photonamic GmbH & Co. KG
(Germany); Biofrontera PhotoTherapeutics, Inc. (U.K.), and PhotoCure ASA (Norway). There are
many pharmaceutical companies that compete with us in the field of dermatology, particularly
in the acne market.
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 received FDA approval to
market Metvixia® for treatment of AKs in July 2004, and this product,
which is directly competitive with our Levulan®
Kerastick® product, is now commercially available. On October 1, 2009,
PhotoCure announced that it had sold Metvix/Metvixia to Galderma, S.A., a large dermatology
company, and on January 11, 2010, Galderma announced a co-promotion agreement with PhotoMedex
for Metvixia under which Galderma will provide marketing support and distribution.
PhotoMedex’s sales force will promote Metvixia and Galderma’s Aktilite lamp to healthcare
professionals throughout the United States. While we are entitled to royalties on net sales
of Metvixia under the patent license to PhotoCure described below, Galderma and PhotoMedex
together have considerably more resources than we have, which could adversely affect our
ability to maintain or increase our market share.
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, was invalid. As a consequence of
this action, Queen’s University assigned the Australian patent to us so that we could
participate directly in this litigation. In April 2005, the Federal Court of Australia ruled
that the Australian patent assigned to DUSA by Queen’s University which relates to DUSA’s
aminolevulinic acid photodynamic therapy is valid and remains in full force and effect.
However, the Court also ruled that PhotoCure’s product, Metvix, does not infringe the claims
in the Australian patent. On May 30, 2006, we entered into a patent license agreement under
which we granted PhotoCure ASA a non-exclusive license under the patents we license from
PARTEQ for ALA esters. In addition, we granted a non-exclusive license to PhotoCure for its
existing formulations of Hexvix® and Metvix®
(known in the U.S. as Metvixia®) for any patent we own now or in the
future. PhotoCure is obligated to pay us royalties on sales of its ester products to the
extent they are covered by our patents in the U.S. and certain other territories. As part of
the agreement, PhotoCure paid us a prepaid royalty in the amount of $1 million.
There are also non-PDT products for the treatment of AKs, including cryotherapy
with liquid nitrogen, 5-fluorouracil (Efudex®)2, diclofenac
sodium (Solaraze®)3, and imiquimod
(ALDARA®)4. Other AK therapies are also known to
be under development by companies such as Medigene GmbH, Leo Pharmaceuticals (Australia) and
others.
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
| 2 | Efudex® is a registered trademark of Valeant Pharmaceuticals International. | |
| 3 | Solaraze® is a registered trademark of SkyePharma PLC. | |
| 4 | ALDARA® is a registered trademark of Graceway Pharmaceuticals, LLC |
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therapeutic or
cost advantages for competitive products. We believe that with increased reimbursement for
our PDT-related procedure fee, including a 6% increase effective January 2009, our treatment
is increasingly financially viable for practitioners, and more competitive with alternative
AK therapies from a practice management perspective. However, no assurance can be given that
developments by other parties will not render our products uncompetitive or obsolete.
DUSA also markets the BLU-U® without
Levulan® for the treatment of moderate inflammatory acne vulgaris and
general dermatological conditions. Our competition for the BLU-U®
without Levulan® for moderate inflammatory acne vulgaris is primarily
oral antibiotics, topical antibiotics and other topical prescription drugs, as well as
various laser and non-laser light
sources. As blue light alone for acne is still a relatively new therapy compared to
existing therapies and reimbursement has not been established by private insurance companies,
which may also affect our competitive position versus traditional therapies which are
reimbursed.
Our principal method of competition with existing therapies of AKs and moderate
inflammatory acne vulgaris is patient benefits, including rapid healing and excellent
cosmetic results. See the section entitled “Business — Dermatology Indications, Actinic
Keratoses; Acne”.
Government Regulation
The manufacture and sale of pharmaceuticals and medical devices in the United
States and other countries are governed by a variety of statutes and regulations. These laws require, among other
things:
| • | registration and inspection of manufacturing facilities, including adherence to current good manufacturing practice regulations, or cGMPs, quality system regulations, or QSRs, and good laboratory and good clinical practices or GLPs and GCPs; | ||
| • | adequate and well-controlled clinical studies and preclinical testing of products; | ||
| • | the submission of applications for marketing approval containing manufacturing, preclinical and clinical data and information to establish the safety and efficacy of the product for its intended use; | ||
| • | post-approval recordkeeping and reporting, including safety surveillance and reporting of adverse events to regulatory authorities; and | ||
| • | compliance with requirements and restrictions for marketing activities, including advertising and labeling. |
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 or medical device can be produced and marketed for human use in the
United States include:
| • | preclinical testing; | ||
| • | the filing of an Investigational New Drug application, or IND, for new drugs, and an Investigational Device Exemption application, or IDE, for medical devices; | ||
| • | human clinical trials, including the analysis of data collected from those trials; and | ||
| • | the preparation, submission, and approval of a New Drug Application, or NDA, for new drugs, or a Premarket Approval Application, or PMA, for medical devices. |
Preclinical
testing is conducted in the laboratory and on animals to obtain
preliminary information primarily on the safety of a new drug or
device, although preclinical data may provide some information
relevant to the potential efficacy of the product. The time required for conducting
preclinical testing varies greatly depending on the nature of the
product and the nature and
design of the testing. The collection and analysis of preclinical
data can take many years to complete. Such data are submitted to the
FDA as part of the IND or IDE. Human studies can begin if
the FDA does not object to the IND application.
The human clinical testing program involves three phases, Phase I, Phase II, and Phase III. Each clinical study is
typically 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 potential risks to study 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 subjects 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 before or after a study begins for a variety of reasons, particularly if safety concerns exist.
These clinical studies must be conducted in conformance with the FDA’s human subject protection and IND regulations.
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In Phase I studies are usually conducted on a small number of healthy human
volunteers to determine the maximum tolerated dose and any product-related side effects of a
product. Phase I studies generally require several months to complete, but can take longer,
depending on the drug and the nature of the study. Phase II studies are conducted on a small
number of patients having a specific disease to determine the most effective doses and
schedules of administration. Phase II studies
generally require from several months to two years to complete, but can take longer,
depending on the drug and the nature of the study. Phase III involves
significant numbers of patients with the targeted disease or
condition to provide comparisons against placebo or, in some cases, currently available
therapies. Phase III studies generally require from six months to four years to complete, but
can take longer, depending on the drug and the nature of the study.
Data from Phase I, II and III trials are submitted to the FDA with the NDA. The NDA
involves considerable data collection from preclinical testing and
clinical studies, verification and analysis of data, as well as the preparation
of summaries of the chemistry, manufacturing, and control processes.
Submission of an NDA does not assure FDA approval for marketing. The application review
process may take 180 days but more often it takes one to four years to complete, although reviews of treatments for AIDS,
cancer and other serious and life-threatening diseases and conditions 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
for the product’s intended use
with sufficient levels of statistical
significance. However, additional
information or data may be required. For example, the FDA may also
request long-term toxicity studies, one or more additional pivotal or
Phase III 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 studies
following NDA approval, often referred to as Phase IV clinical
trials, to confirm safety and efficacy for the intended use.
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, the addition of
new indications any changes to the dosage form,
or dosage levels, and certain other labeling changes for the same
product may only be made after a supplemental NDA, or sNDA, is
submitted to FDA support the safety and efficacy of the proposed
changes and approved by the FDA.
The
FDA regulations also require extensive recordkeeping and reporting
of certain manufacturing deviations and certain safety and other
information, often referred to as “adverse events” that become known to the manufacturer of an
approved drug. Safety information collected through this process can result in changes to a
product’s labeling or withdrawal of a product from the market.
Usually the preparation and review of a sNDA takes less time than the
original NDA because the sNDA may rely upon the data and information
from the NDA to support the safety and efficacy of the proposed
change.
On
December 3, 1999, the FDA approved the NDA we submitted for
Levulan® Kerastick® 20% Topical Solution with PDT
for treatment of non-hyperkeratotic actinic keratoses, or AKs, of the face or scalp. The commercial version of our
BLU-U®, used together with the Kerastick® to
provide PDT for the treatment of non-hyperkeratotic AKs of the face or
scalp, was approved on September 26, 2000. In
September 2003, we received approval from the
FDA to market the BLU-U® without Levulan® PDT for
the treatment of moderate inflammatory acne vulgaris and general dermatological conditions.
We
may develop other potential PDT products for other uses, including
treatment of SOTR, which would require
significant development, including approval and completion of preclinical and/or clinical testing and
PMA approval prior to commercialization. The process of obtaining PMA
approvals can be costly and time consuming and there can be no guarantee that the use of
Levulan®
with 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-enforced laws and regulations. These products are required to be tested, developed, manufactured and
distributed in accordance with FDA regulations, including cGMP, set
forth under QSRs, and good laboratory and
clinical practices. Under the Food, Drug and Cosmetic Act, all medical devices are classified
as Class I, II or III devices. The classification of a device
reflects the level of risk to a patient, with Class III devices
having the highest risk and subject to the most stringent
requirements and FDA review. Class I devices are generally the
lowest risk devices and are subject only to general controls (for
example, labeling and adherence to QSRs. Class II
devices are generally moderate risk devices and are subject to general controls and special controls
(for example, performance
standards, postmarket surveillance, FDA guidelines specific to the
type of product). 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® is part of a combination product as defined by FDA and therefore
has been classified as a Class III device. Approval of Class III devices require the filing
of a PMA with extensive data, including
preclinical and
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clinical
trial data, to demonstrate the safety and effectiveness of the device
for its intended use. If human
clinical trials of a device are required and the device presents a “significant risk,” the
manufacturer of the device must file an IDE
and receive FDA approval prior to commencing human clinical trials.
Following
receipt of the PMA, the FDA will determine whether the
application is sufficiently complete to permit a substantive review,
and if so, the agency will accept
the PMA for filing and further review. Once the PMA is filed, the FDA begins a review of
the PMA application. Under the Medical Device User Fee and Modernization Act, the FDA has 180
days to review a PMA and respond to the applicant. The review of PMAs
more often occurs over a significantly protracted time period, and
the FDA may take up to two
years or more from the date of filing to complete its review. In addition, a PMA for a device
which forms part of a combination product with a new drug will not be approved unless and until the NDA 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 may be convened to review and
evaluate the data in a PMA
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 QSR requirements prior to approval of the PMA.
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. The Medical Device Reporting regulations require that
we provide information to the FDA whenever there is evidence to reasonably suggest that one
of our devices may have caused or contributed to a death or serious injury or, if a
malfunction were to recur, could cause or contribute to a death or serious injury. Under FDA
regulations, we are required to submit reports of certain voluntary recalls and corrections
to the FDA. If the FDA believes that a company is not in compliance with applicable
regulations, the Agency may issue a notice of noncompliance in the
form of inspectional observations on Form FDA-483, general
correspondence, or a Warning Letter. If the noncompliance is not
corrected to the satisfaction of the FDA, the agency may take any or all of
the following legal actions: detain or seize the products, order a recall, impose operating
restrictions, temporarily stop the manufacture of the product, seek
injunctive relief to enjoin future violations,
assess civil penalties against that company, its officers or its employees, and recommend
criminal prosecution to the Department of Justice.
When
a drug must be used with a specific medical device to be safe and
effective for a specific indication, the drug and the device may be
regulated as “combination products.” A combination product generally is
defined as a product comprised of components from two or more regulatory categories
(drug/device, device/biologic, drug/biologic, etc.). 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 jurisdictional
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®
Kerastick® with PDT for AKs, a combination filing (including a PMA for
the BLU-U® light source device and the NDA for the
Levulan® Kerastick® 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® PDT will be
a combination filing accompanied by PMAs. There is no guarantee that PDT products will
continue to be regulated as combination products.
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®
is a new chemical entity and we received 5 years of market
exclusivity, which expired on December 3, 2004. After the expiration of the Hatch-Waxman exclusivity period, any
third-party who submits an application for approval for a drug product containing ALA must
provide a certification for each patent that claims the drug and is
listed in the FDA’s Orange Book for Approved Drug Products with
Therapeutic Equivalence Evaluations that: (i) no such patent
information has been listed (ii) the patent has expired;
(iii) marketing will not commence until the patent has expired; or (iv) the patent is invalid or will not be infringed by the manufacture, use, or sale of the
product that is the subject of the new application.
If
any person submits an abbreviated NDA, or ANDA, or an NDA that
intends to rely on some or all of the data in our Levulan NDA (also
referred to as a “505(b)(2)” application), the applicant
also must notify us as the NDA holder and the owner of a patent that
claims the drug. Such notice will enable us to determine whether to
bring a patent infringement lawsuit to protect our patent rights.
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. For Levulan® PDT, we
have received such approval in Canada, and together with Stiefel under our agreement for
Latin America, we have received regulatory approval in Argentina, Brazil, Chile, Colombia and
Mexico. Also, together with Daewoong, we have received approval in Korea. We expect to apply
for approvals in additional territories.
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Medical device regulations also are in effect in many of the countries outside the
United States in which we do business. These laws range from comprehensive device approval
and quality system requirements for some or all of our medical device products to simpler
requests for product data or certifications. The number and scope of these requirements are
increasing. Under the European Union Medical Device Directive, all medical devices must meet
the Medical Device Directive standards and receive CE Mark certification. CE Mark
certification requires a comprehensive quality system program and submission of data on a
product to a “Notified Body” in Europe. The Medical Device Directive, ISO 9000 series and ISO
13485 are recognized international quality standards that are designed to ensure that we
develop and manufacture quality medical devices. A recognized Notified Body (an organization
designated by the national governments of the European Union member states to make
independent judgments about whether or not a product complies with the protection
requirements established by each CE marking directive) audits our facilities annually to
verify our compliance with these standards. We will be required to meet these standards
should we decide to sell our devices outside of the United States.
We are subject to laws and regulations that regulate the means by which companies
in the health care industry may market their products to hospitals and health care
professionals and may compete by discounting the prices of their products. This requires that
we exercise care in structuring our sales and marketing practices and customer discount
arrangements.
Our
international operations are subject to laws and regulations
regarding customs, import-export business transactions, and other
local laws specific to each country. Among other things, laws in
certain countries restrict, and in some cases prohibit, United States
companies from directly or indirectly selling goods, technology or services to people or
entities in those countries.
Our research, development and manufacturing processes involve the controlled use of
certain hazardous materials. We are subject to federal, state and local laws and regulations
governing the use, manufacture, storage, handling and disposal of these materials and certain
waste products. Although we believe that our safety procedures for handling and disposing of
these materials comply with the standards prescribed by the controlling laws and regulations,
the risk of accidental contamination or injury from these materials cannot be eliminated. In
the event of this type of an accident, we could be held liable for any damages that result
and any liability could exceed our resources. Although we believe that we are in compliance
in all material respects with applicable environmental laws and regulations, we could incur
significant costs to comply with environmental laws and regulations in the future, and our
operations, business or assets could be materially adversely affected by current or future
environmental laws or regulations.
In addition to the above regulations, we are and may be subject to regulation under
federal and state laws, including, but not limited to, requirements regarding occupational
health and safety, laboratory practices, state pharmacy and wholesale drug distribution laws,
and the maintenance of personal health information. As a public company, we are subject to
securities laws and regulations, including the Sarbanes-Oxley Act of 2002. We may also be
subject to other present and possible future local, state, federal and foreign regulations.
With the enactment of the Drug Export Amendments Act of the United States in 1986,
products not yet approved by the FDA may be exported to certain foreign markets if the
product is approved by the importing nation and meets applicable FDA
criteria for export. We can provide no assurance that we will be able to get additional approvals for
any of our products from any importing nations’ regulatory authorities or be able to
participate in additional foreign pharmaceutical markets.
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 Kerastick® manufacturing 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. Furthermore, we cannot assure that current or future environmental
laws or regulations will not materially adversely affect our operations, business or assets.
Although we believe that our safety procedures for the handling and disposal of such
hazardous 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 event, 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.
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Segment Reporting
We operate in two segments, Photodynamic Therapy, or PDT, Drug and Device Products
and Non-Photodynamic Therapy, or Non-PDT, Drug Products. Our Levulan®
Kerastick® and BLU-U® products comprise our PDT
segment, while Nicomide®, ClindaReach® and the
other products acquired in the acquisition of Sirius comprise our Non-PDT segment. For more
information about our segments, including financial results of each segment, see Note 11 of
the Notes to Consolidated Financial Statements.
Information About Geographic Sources of Revenue
For information about the geographic sources of our revenue, see “Management’s
Discussion and Analysis of Financial Condition and Results of Operations — Results of
Operations”.
Employees
At the end of 2009, we had 86 employees, including 2 part-time employees. We also
retain numerous independent consultants and temporary employees to support our business
needs. We have employment agreements with all of our key executive officers.
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 Securities Exchange Act of 1934, as amended, or 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 SEC. Please note that our Internet address is being provided for reference
only and no information contained therein is incorporated by reference into our Exchange Act
filings. The public may read or copy any materials we file with the SEC at the SEC’s Public
Reference Room at 100 F Street, NE, Room 1580, Washington DC 20549. The public may obtain
information on the operation of the Public Reference Room by calling the SEC at
1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy and
information statements, and other information regarding issuers, including DUSA, that file
electronically with the SEC. The address of that site is www.sec.gov.
ITEM 1A. RISK FACTORS
Investing in our common stock is very speculative and involves a high degree of risk.
You should carefully consider and evaluate all of the information in, or incorporated by
reference in, this report. The following are among the risks we face related to our business,
assets and operations. They are not the only ones we face. Any of these risks could
materially and adversely affect our business, results of operations and financial condition,
which in turn could materially and adversely affect the trading price of our common stock and
you might lose all or part of our investment.
This report contains forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995 that involve risks and uncertainties, such as
statements of our plans, objectives, expectations and intentions. We use words such as
“anticipate”, “believe”, “expect”, “future” and “intend” and similar expressions to identify
forward-looking statements. Our actual business, financial condition and results of
operations could differ materially from those anticipated in
these forward-looking statements for many reasons, including the factors described below
and elsewhere in this report. You should not place undue reliance on these forward-looking
statements, which apply only as of the date of this report.
Risks Related To DUSA
We Are Not Currently Profitable On An Annual Basis And May Not Be Profitable In The Future
Unless We Can Successfully Market And Sell Significantly Higher Quantities Of Our Products.
If We Do Not Become Profitable, We May Need More Capital
We have approximately $16,669,000 in cash, cash equivalents and marketable securities as
of December 31, 2009. Our cash, cash equivalents and marketable securities should be
sufficient for current operations for at least the next 12 months. If we are unable to become
profitable on an ongoing basis in the near term, we may have to reduce our headcount, curtail
certain variable expenses, or raise funds through financing transactions. We cannot predict
whether financing will be available at all or on reasonable terms.
If A Competitive Product Is Successful Our Revenues Could Decline, and Our Ability To Become
Profitable Could Be Delayed
On May 30, 2006, we entered into a patent license agreement with PhotoCure ASA whereby
we granted a non-exclusive license to PhotoCure under the patents we license from PARTEQ, for
esters of ALA. Furthermore, we granted a non-exclusive license to PhotoCure for its existing
formulations of its Hexvix® and Metvix® (known in
the United States as
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Metvixia®) products for any of our patents that
may issue or be licensed by us in the future. PhotoCure received FDA approval to market
Metvixia® for treatment of AKs in July 2004, and this product, which is
directly competitive with our Levulan® Kerastick®
product, is now commercially available. On October 1, 2009, PhotoCure announced that it had
sold Metvix/Metvixia to Galderma, S.A., a large dermatology company, and on January 11, 2010,
Galderma announced a co-promotion agreement with PhotoMedex for Metvixia under which Galderma
will provide marketing support and distribution. PhotoMedex’s sales force will promote
Metvixia and Galderma’s Aktilite lamp to healthcare professionals throughout the United
States. While we are entitled to royalties on net sales of Metvixia, Galderma and PhotoMedex
together have considerably more resources than we have, which could
adversely affect our ability to maintain or increase our market share
and make it more difficult for us to be
profitable on an ongoing basis.
If We Are Not Successful With The Reexamination Of Our Levulan® Patent, Our Revenues Could Decline.
In January 2009, we filed a request for reexamination with the United States Patent and
Trademark Office, or USPTO, of one of the patents licensed from Queens University covering
certain methods of using our product, Levulan®, for our FDA-approved
indication. The USPTO accepted our request for reexamination during the first quarter of 2009
and we have responded to the first office action. There is no guarantee that the process will
be successful since the USPTO reviews the entire prosecution history of a patent during a
reexamination and could determine that some or all of the patent claims are invalid.
Typically, a reexamination takes approximately 18 months to complete. The patent is due to
expire in 2013. If the USPTO finds that the patent is invalid, generic competitors could
enter the market earlier than otherwise anticipated and we could lose revenues. This would
adversely affect our financial condition and results of operations and possibly prevent us
from becoming profitable on an on-going basis.
Any Failure To Comply With Ongoing Governmental Regulations In The United States And
Elsewhere Will Limit Our Ability To Market Our Products And Become Profitable.
The manufacture and marketing of our products are subject to continuing FDA review as
well as comprehensive regulation by the FDA and by state and local regulatory authorities.
These laws require, among other things:
| • | approval of manufacturing facilities, including adherence to good manufacturing and laboratory practices during production and storage, | ||
| • | controlled research and testing of some of these products even after approval, | ||
| • | control of marketing activities, including advertising and labeling, and | ||
| • | state permits for the sale and distribution of products manufactured out-of-state. |
If we, or any of our contract manufacturers, fail to comply with these requirements, we
may be limited in the jurisdictions in which we are permitted to sell our products.
Additionally, if we or our manufacturers fail to comply with applicable regulatory approval
requirements, a regulatory agency may:
| • | send warning letters, | ||
| • | impose fines and other civil penalties on us, | ||
| • | seize our products, | ||
| • | suspend our regulatory approvals, | ||
| • | cease the manufacture of our products, | ||
| • | refuse to approve pending applications or supplements to approved applications filed by us, | ||
| • | refuse to permit exports of our products from the United States, | ||
| • | require us to recall products, | ||
| • | require us to notify physicians of labeling changes and/or product related problems, | ||
| • | impose restrictions on our operations, and/or | ||
| • | criminally prosecute us. |
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We and our manufacturers must continue to comply with current Good Manufacturing
Practice regulations, or cGMP, and Quality System Regulation, or QSR, and equivalent foreign
regulatory requirements. The cGMP and QSR requirements govern quality control and
documentation policies and procedures. In complying with cGMP, QSR and foreign regulatory
requirements, we and our third-party manufacturers will be obligated to expend time, money
and effort in production, record keeping and quality control to assure that our products meet
applicable specifications and other requirements.
Manufacturing facilities are subject to ongoing periodic inspection by the FDA,
including unannounced inspections. We cannot guarantee that our third-party supply sources,
including our sole source supplier for the active ingredients in
Levulan® and the BLU-U® or our own
Kerastick® facility, will continue to meet all applicable FDA
regulations. If we, or any of our manufacturers, including without limitation, the
manufacturer of the BLU-U®, who has received warning letters from the
FDA, fail to maintain compliance with FDA regulatory requirements, it would be time-consuming
and costly to remedy the problem(s) or to qualify other sources. These consequences could
have a significant adverse effect on our financial condition and operations. As part of our
FDA approval for the Levulan® Kerastick® for AK,
we were required to conduct two Phase IV follow-up studies. We successfully completed the
first study; and submitted our final report on the second study to the FDA in January 2004.
The FDA has requested additional information, which was provided to them in June 2008. We are
awaiting their response. Additionally, if previously unknown problems with the product, a
manufacturer or its facility are discovered in the future, changes in product labeling
restrictions or withdrawal of the product from the market may occur. Any such problems could
affect our ability to become profitable on an ongoing basis.
If Product Sales Do Not Continue to Increase, 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 approved.
If we do not generate sufficient revenues from our approved products, we may be forced
to delay or abandon our development program for solid organ transplant recipients or other
programs we may wish to initiate. The pharmaceutical development and commercialization
process is time consuming and costly, and any delays might result in higher costs which could
adversely affect our financial condition and results of operations. Without sufficient
product sales, we would need alternative sources of funding. There is no guarantee that
adequate funding sources could be found to continue the development of our technology.
The Current Global Credit And Financial Market Conditions May Affect Our Business.
Sales of our products are dependent, in large part, on reimbursement from government
health and administration authorities, private health insurers, distribution partners and
other organizations. As a result of the current global credit and financial market
conditions, government authorities and private insurers may not satisfy their reimbursement
obligations or may delay payment. In addition, federal and state health authorities may
reduce Medicare and Medicaid reimbursements, and private insurers may increase their scrutiny
of claims. A reduction in the availability or extent of reimbursement could negatively affect
our product sales and revenues.
Due to the tightening of global credit, there may be disruption or delay in the
performance by our third-party contractors, suppliers or collaborators. We rely on third
parties for several important aspects of our business, including the active ingredient in
Levulan® and key portion of the BLU-U®, portions
of our product manufacturing, royalty revenues, conduct of clinical trials and the supply of
raw materials. If such third parties are unable to satisfy their commitments to us, our
business would be adversely affected.
If
The Economic Slowdown Adversely Affects Our Customer’s Ability
To Meet Our Payment Terms, Our
Cash Flow Would Be Adversely Affected And Our Ability To Achieve Profitability On An Annual
Basis Could Be Delayed.
If any of our large customers were to fail to pay us or fail to pay us on a timely basis
for their purchases of our products, our ability to maintain profitability on a sustainable
on-going basis could be delayed, and our financial position, results of operations and cash
flows could be negatively affected.
We Have Had Significant Losses And May Have Losses In The Future.
We have had a history of operating losses. We may continue to incur losses on an annual
basis unless sales of our products increase from present levels. We incurred net losses of
$2,508,000, $6,250,000 and $14,714,000 for the years ended December 31, 2009, 2008 and 2007,
respectively. As of December 31, 2009, our accumulated deficit was approximately
$144,000,000. We cannot predict whether any of our products will achieve significant enough
market acceptance or generate sufficient revenues to enable us to become profitable on an
annual basis, and to sustain profitability if it is achieved.
Our Ability To Use Net Operating Loss Carryforwards and Tax Credit Carryforwards To Offset
Future Taxable Income May Be Further Limited As A Result Of Past Or Future Transactions
Involving Our Common Stock.
Under Internal Revenue Code (IRC) Section 382 the amount of our net operating loss
carryforwards and other tax attributes that we may utilize to offset future taxable income,
when earned, may be subject to certain limitations, based upon changes in the ownership of
our common stock. In general, under IRC Section 382, a corporation that undergoes an
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“ownership change” is subject to limitations on its ability to utilize its pre-change net
operating losses and certain other tax assets to offset future taxable income. An ownership
change occurs if the aggregate stock ownership of certain shareholders increases by more than
50 percentage points over such stockholders’ lowest percentage ownership during the testing
period, which is generally three years. We currently estimate that our utilization of our net
operating loss carryforwards and other tax attributes may be limited due to prior changes in
our ownership. We further believe that it is reasonably possible that a future ownership
change, which could be the result of transactions involving our common stock that are outside
of our control (such as sales by existing stockholders), could occur. Future ownership
changes could further restrict the utilization of our net operating losses and tax credits,
reducing or eliminating the benefit of such net operating losses and tax credits.
If We Are Unable To Obtain The Necessary Capital To Fund Our Operations, We Will Have To
Delay Our Development Program And May Not Be Able To Complete Our Clinical Trials.
We may need substantial additional funds to fully develop, manufacture, market and sell
other potential products. We may obtain funds through other public or private financings,
including equity financing, and/or through collaborative arrangements. Depending on the
extent of available funding, we may delay, reduce in scope or eliminate our solid organ
transplant recipient, or SOTR, research and development program. We may also choose to
license rights to third parties to commercialize products or technologies that we would
otherwise have attempted to develop and commercialize on our own which could reduce our
potential revenues.
The availability of additional capital to us is uncertain. There can be no assurance
that additional funding will be available to us on favorable terms, if at all. Any equity
financing, if needed, would likely result in dilution to our existing shareholders, and debt
financing, if available, would likely involve significant cash payment obligations and could
include restrictive covenants that would adversely affect the operation of our business.
Failure to raise capital if needed could materially adversely affect our business, our
financial condition, results of operations and cash flows.
We Have Limited Patent Protection, And If We Are Unable To Protect Our Proprietary Rights,
Competitors Might Be Able To Develop Similar Products To Compete With Our Products And
Technology.
Our ability to compete successfully depends, in part, on our ability to defend patents
that have issued, obtain new patents, protect trade secrets and operate without infringing
the proprietary rights of others. We have no compound patent protection for our
Levulan® brand of the compound ALA. Our basic ALA patents are for
methods of detecting and treating various diseased tissues using ALA (or related compounds
called precursors), in combination with light. We own or exclusively license ALA patents and
patent applications related to the following:
| • | methods of using ALA and its unique physical forms in combination with light to treat conditions such as AKs and acne, | ||
| • | compositions and apparatus for those methods, and | ||
| • | unique physical forms of ALA. |
We also own patents covering our BLU-U® and our
Kerastick®. However, other third parties may have blue light devices or
drug delivery devices that do not infringe our patents.
The patents relating to methods of using ALA for detecting or treating disease, other
than for acne and our approved indication for AKs of the face or scalp, started to expire in
July 2009. The patents covering our AK product do not start to expire until 2013. In January
2009, we filed an application with the USPTO for reexamination of one of our patents that
cover our approved product. The USPTO accepted our request for reexamination during the first
quarter of 2009 and we have responded to the first office action. If the USPTO determines
that the patent is invalid, generic competitors could enter the market earlier than otherwise
anticipated.
We have limited ALA patent protection outside the United States, which may make it
easier for third parties to compete there. Our basic methods of treatment patents and
applications have counterparts in only six foreign countries, and certain countries under the
European Patent Convention. Even where we have patent protection, there is no guarantee that
we will be able to enforce our patents. Additionally, enforcement of a given patent may not
be practicable or an economically viable alternative.
Some of the indications for which we may develop PDT therapies may not be covered by the
claims in any of our existing patents. Even with the issuance of additional patents to us,
other parties are free to develop other uses of ALA, including medical uses, and to market
ALA for such uses, assuming that they have obtained appropriate regulatory marketing
approvals. ALA in the chemical form has been commercially supplied for decades, and is not
itself subject to patent protection. There are reports of third parties conducting clinical
studies with ALA in countries outside the United States where PARTEQ, the licensor of our ALA
patents, does not have patent protection. In addition, a number of third parties are
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seeking
patents for uses of ALA not covered by our patents. These other uses, whether patented or
not, and the commercial availability of ALA, could limit the scope of our future operations
because ALA products could come on the market which would not infringe our patents but would
compete with our Levulan® product even though they are marketed for
different uses.
On August 12, 2008, we entered into a worldwide non-exclusive patent license agreement
to our patent covering Nicomide® with River’s Edge and an amendment to
our settlement agreement with River’s Edge. The amendment to the settlement agreement allows
River’s Edge to manufacture and market a prescription product that could be substitutable for
Nicomide® pursuant to the terms of the license agreement and changes
certain payment obligations of River’s Edge for sales of its substitutable product. In April
2009, we and River’s Edge entered into an amendment to the license agreement, or License
Amendment. The License Amendment grants River’s Edge an exclusive license to U.S. Patent, No.
6,979,468, and a license to use all know-how and the trademark associated with the licensed
products worldwide. Under the License Amendment, DUSA is required to transfer all of its
rights, title and interest in and to DUSA’s patent know-how and trademark relating to the
licensed products (but not the copyright registration relating to product labeling) to
River’s Edge upon our receipt of $5,000,000. Of the $5,000,000, River’s Edge is required to
make payment to us of $2,600,000, in thirteen monthly installments of $200,000, subject to
reduction under certain conditions, and pay additional consideration of $2,400,000 payable
over time based on a share of River’s Edge’s net revenues as defined in the License
Amendment. We received the first $200,000 installment payment under the License Amendment in
the second quarter of 2009, which is included in Product Revenues in the accompanying
Consolidated Statements of Operations but have not received any further payments. We are
considering our options relative to the collection of amounts due from River’s Edge and
termination of the license agreement, which we have the right to do for non-payment. The
validity of the Nicomide® patent is being tested again as a request for
exparte reexamination of this patent was filed by an unknown third party with the U.S. Patent
and Trademark Office, or USPTO, on August 19, 2009. An order issued by the USPTO on October
16, 2009 accepted the request for reexamination and we have received the first office action.
It is too early in the reexamination process to assess the possible outcome. These events
could negatively impact our revenues and delay our ability to be profitable.
Furthermore, PhotoCure received FDA approval to market Metvixia®
for treatment of AKs in July 2004, and this product, which is directly competitive with our
Levulan® Kerastick® product, is now commercially
available. On October 1, 2009, PhotoCure announced that it had sold Metvix/Metvixia to
Galderma, S.A., a large dermatology company. On January 11, 2010, Galderma announced a
co-promotion agreement with PhotoMedex for Metvixia under which Galderma will provide
marketing support and distribution. PhotoMedex’s sales force will promote Metvixia and
Galderma’s Aktilite lamp to healthcare professionals throughout the United States. While we
are entitled to royalties on net sales of Metvixia, Galderma and PhotoMedex together have
considerably more resources than we have, which could adversely affect our ability to
maintain or increase our market share.
While we attempt to protect our proprietary information as trade secrets through
agreements with each employee, licensing partner, consultant, university, pharmaceutical
company and agent, we cannot guarantee that these agreements will provide effective
protection for our proprietary information. It is possible that all of the following issues
could negatively impact our ability to be profitable:
| • | these persons or entities might breach the agreements, | ||
| • | we might not have adequate remedies for a breach, and/or, | ||
| • | our competitors will independently develop or otherwise discover our trade secrets. |
Litigation Is Expensive And We May Not Be Able To Afford The Costs.
The costs of litigation or any proceeding relating to our intellectual property or
contractual rights could be substantial even if resolved in our favor. Some of our
competitors have far greater resources than we do and may be better able to afford the costs
of complex litigation. Also, in a lawsuit against a third-party for infringement of our
patents in the United States, that third-party may challenge the validity of our patent(s) as
has happened with the patent covering Nicomide. We cannot guarantee that a third-party will
not claim, with or without merit, that our patents are not valid or that we have infringed
their patent(s) or misappropriated their proprietary material. We could get drawn into or
decide to join, litigation as the holder of the patent. Defending these types of legal
actions involve considerable expense and could negatively affect our financial results.
Additionally, if a third-party were to file a United States patent application, or be
issued a patent claiming technology also claimed by us in a pending United States
application(s), we may be required to participate in interference proceedings in the USPTO to
determine the priority of the invention. A third-party could also request the declaration of
a patent interference between one of our issued United States patents and one of its patent
applications. Any interference proceedings likely would require participation by us and/or
PARTEQ, which could involve substantial legal fees and result in a loss or lessening of our
patent protection.
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Since We Now Operate The Only FDA Approved Manufacturing Facility For The
Kerastick® And Continue To Rely Heavily On Sole Suppliers For The
Manufacture Of Levulan®, The BLU-U®,
ClindaReach®, And Meted®, Any Supply Or
Manufacturing Problems Could Negatively Impact Our Sales.
If we experience problems producing Levulan®
Kerastick® units in our facility, or if any of our contract suppliers
fail to supply our requirements for products, our business, financial condition and results
of operations would suffer. Although we have received approval by the FDA to manufacture the
BLU-U® and the Levulan®
Kerastick® in our Wilmington, Massachusetts facility, at this time,
with respect to the BLU-U®, we expect to utilize our own facility only
as a back-up to our current third party manufacturer or for repairs.
Manufacturers and their subcontractors often encounter difficulties when commercial
quantities of products are manufactured for the first time, or large quantities of products
are manufactured, including problems involving:
| • | product yields, | ||
| • | quality control, | ||
| • | component and service availability, | ||
| • | compliance with FDA regulations, and | ||
| • | the need for further FDA approval if manufacturers make material changes to manufacturing processes and/or facilities. |
We cannot guarantee that problems will not arise with production yields, costs or
quality as we and our suppliers manufacture our products. Any manufacturing problems could
delay or limit our supplies which would hinder our marketing and sales efforts. If our
facility, any facility of our contract manufacturers, or any equipment in those facilities is
damaged or destroyed, we may not be able to quickly or inexpensively replace it. Likewise, if
there is quality or supply problems with any components or materials needed to manufacturer
our products, we may not be able to quickly remedy the problem(s). Any of these problems
could cause our sales to suffer and could increase costs.
We Have Only Limited Experience Marketing And Selling Pharmaceutical Products Outside of the
United States And As A Result, Our Revenues From Product Sales May Suffer.
If we are unable to successfully market and sell sufficient quantities of our products,
revenues from product sales will be lower than anticipated and our financial condition may be
adversely affected. We are responsible for marketing our products in the United States and
the rest of the world, except Canada, Latin America and parts of Asia, where we have
distributors. We are in negotiations with Stiefel, our distributor in Latin America, because
they did not purchase the required minimum number of Kerastick® units
under our agreement. Both parties have the right to terminate the contract. In July 2009,
GlaxoSmithKline, or GSK, completed its acquisition of Stiefel, and we do not know
whether GSK wants Stiefel to continue to distribute the Levulan®
Kerastick®. If our sales and marketing efforts fail, then sales of the
Levulan® Kerastick®, the
BLU-U®, and other products will be adversely affected, which would
adversely affect our results of operations and financial condition.
The Commercial Success Of Any Product That We May Develop Will Depend Upon The Degree Of
Market Acceptance Of Our Products Among Physicians, Patients, Health Care Payors, Private
Health Insurers And The Medical Community.
Our ability to commercialize any product that we may develop will be highly dependent
upon the extent to which the product gains market acceptance among physicians, patients,
health care payors, such as Medicare and Medicaid, private health insurers, including managed
care organizations and group purchasing organizations, and the medical community. If a
product does not achieve an adequate level of acceptance, we may not generate material
product revenues, and we may not become profitable. The degree of market acceptance of our
currently marketed products and our SOTR product candidate, if approved for commercial sale,
will depend on a number of factors, including:
| • | the effectiveness, or perceived effectiveness, of our product in comparison to competing products, | ||
| • | the existence of any significant side effects, as well as their severity in comparison to any competing products, | ||
| • | potential advantages over alternative treatments, | ||
| • | the ability to offer our product for sale at competitive prices, |
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| • | relative convenience and ease of administration, | ||
| • | the strength of marketing and distribution support, and | ||
| • | sufficient third-party coverage or reimbursement. |
If We Cannot Improve Physician Reimbursement And/Or Convince More Private Insurance Carriers
To Adequately Reimburse Physicians For Our Product, Sales May Suffer.
Without adequate levels of reimbursement by government health care programs and private
health insurers, the market for our Levulan®
Kerastick® for AK therapy will be limited. While we continue to support
efforts to improve reimbursement levels to physicians and are working with the major private
insurance carriers to improve coverage for our therapy, if our efforts are not successful,
broader adoption of our therapy and sales of our products could be negatively impacted.
Although positive reimbursement changes related to AK were made over the last five years,
some physicians still believe that reimbursement levels do not fully reflect the required
efforts to routinely execute our therapy in their practices.
If insurance companies do not cover our products, reduce the amounts of coverage or stop
covering our products which are covered, our sales could be dramatically reduced.
We Have Only Three Therapies That Have Received Regulatory Approval Or Clearance, And We
Cannot Predict Whether We Will Ever Develop Or Commercialize Any Other
Levulan® Products.
Our Potential Products Are In Early Stages Of Development And May Never Result In Any
Additional Commercially Successful Products.
Except for Levulan® PDT for AKs, the BLU-U®
for acne, the ClindaReach® pledget and several other products we
acquired in our merger with Sirius, all of our other potential product candidates 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:
| • | delays in product development, clinical testing or manufacturing, | ||
| • | unplanned expenditures in product development, clinical testing or manufacturing, | ||
| • | failure in clinical trials or failure to receive regulatory approvals, | ||
| • | emergence of superior or equivalent products, | ||
| • | inability to market products due to third-party proprietary rights, and | ||
| • | failure to achieve market acceptance. |
We cannot predict how long the development of our investigational stage products will
take or whether they will be medically effective. We cannot be sure that a successful market
will continue to develop for our Levulan® drug technology.
We Must Receive Separate Approval For Any Drug or Medical Device Products Before We Can Sell
Them Commercially In The United States Or Abroad.
Any potential Levulan® product will require the approval of the
FDA before it can be marketed in the United States. Before an application to the FDA seeking
approval to market a new drug, called an NDA, can be filed, a product must undergo, among
other things, extensive animal testing and human clinical trials. The process of obtaining
FDA approvals can be lengthy, costly, and time-consuming. Following the acceptance of an NDA,
the time required for regulatory approval can vary and is usually one to three years or more.
The FDA may require additional animal studies and/or human clinical trials before granting
approval. Our Levulan® PDT products are based on relatively new
technology. To the best of our knowledge, the FDA has approved only three drugs for use in
photodynamic therapy, including Levulan®. This factor may lengthen the
approval process. We face much trial and error and we may fail at numerous stages along the
way.
We cannot predict whether we will obtain any other regulatory approvals. Data obtained
from preclinical testing and clinical trials can be susceptible to varying interpretations
which could delay, limit or prevent regulatory approvals. Future clinical trials may not show
that Levulan® PDT is safe and effective
for any new use we may study. In addition, delays or disapprovals may be encountered based
upon additional governmental regulation resulting from future legislation or administrative
action or changes in FDA policy. We have been informed by FDA that the agency
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does not
believe that our application for Orphan Drug designation of use of
Levulan® in immunosuppressed solid organ transplant recipients should
be granted. We met with the FDA during the third quarter of 2009 to clarify and explain
further our application and, based on that meeting, the agency has invited us to submit an
amendment to our application for further evaluation. If we cannot obtain this designation, we
may not continue to develop this indication. We submitted a draft amendment in January 2010
along with a request for a follow-on meeting with the agency. In
February 2010, the FDA indicated
that a meeting was not necessary and suggested that we formally submit the amended
application. We expect to make the formal submission in March 2010.
We have been informed by FDA that our 510(k) application for clearance of our
BLU-U® to treat severe acne requires additional clinical data. Based on
this information and the anticipated costs of additional clinical trials, we have decided
that we will not pursue the 510(k) application for an expansion of our
BLU-U® claims at this time.
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 86 employees, including 2 part-time employees, as of
December 31, 2009. We are highly dependent on several key officer/employees with specialized
scientific and technical skills without whom our business, financial condition and results of
operations would suffer, especially in the photodynamic therapy portion of our business. The
photodynamic therapy industry is still quite small and the number of experts is limited. The
loss of these key employees could cause significant delays in achievement of our business and
research goals since very few people with their expertise could be hired. Our growth and
future success will depend, in large part, on the continued contributions of these key
individuals as well as our ability to motivate and retain other qualified personnel in our
specialty drug and light device areas.
Collaborations With Outside Scientists May Be Subject To Restriction And Change.
We work with scientific and clinical advisors and collaborators at academic and other
institutions that assist us in our research and development efforts. These scientists and
advisors are not our employees and may have other commitments that limit their availability
to us. Although our advisors and collaborators generally agree not to do competing work, if a
conflict of interest between their work for us and their work for another entity arises, we
may lose their services. In addition, although our advisors and collaborators sign agreements
not to disclose our confidential information, it is possible that valuable proprietary
knowledge may become publicly known through them.
Risks Related To Our Industry
Product Liability And Other Claims Against Us May Reduce Demand For Our Products Or Result In
Damages.
We Are Subject To Risk From Potential Product Liability Lawsuits Which Could Negatively
Affect Our Business.
The development, manufacture and sale of medical products expose us to product liability
claims related to the use or misuse of our products. Product liability claims can be
expensive to defend and may result in significant judgments against us. A successful claim
could materially harm our business, financial condition and results of operations.
Additionally, we
cannot guarantee that continued product liability insurance coverage will be available
in the future at acceptable costs. If we believe the cost of coverage is too high, we may
self-insure.
Our Business Involves Environmental Risks And We May Incur Significant Costs Complying With
Environmental Laws And Regulations.
We have used various hazardous materials, such as mercury in fluorescent tubes in our
research and development activities. We are subject to federal, state and local laws and
regulations which govern the use, manufacture, storage, handling and disposal of hazardous
materials and specific waste products. We believe that we are in compliance in all material
respects with currently applicable environmental laws and regulations. However, we cannot
guarantee that we will not incur significant costs to comply with environmental laws and
regulations in the future. We also cannot guarantee that current or future environmental laws
or regulations will not materially adversely affect our operations, business or financial
condition. In addition, although we believe our safety procedures for handling and disposing
of these materials comply with federal, state and local laws and regulations, we cannot
completely eliminate the risk of accidental contamination or injury from these materials. In
the event of such an accident, we could be held liable for any resulting damages, and this
liability could exceed our resources.
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We May Not Be Able To Compete Against Traditional Treatment Methods Or Keep Up With Rapid
Changes In The Biotechnology And Pharmaceutical Industries That Could Make Some Or All Of Our
Products Non-Competitive Or Obsolete.
Competing Products And Technologies Based On Traditional Treatment Methods May Make Our
Products Or Potential Products Noncompetitive Or Obsolete.
Well-known pharmaceutical, biotechnology and medical device companies are marketing
well-established therapies for the treatment of AKs and acne. Doctors may prefer to use
familiar methods, rather than trying our products. Reimbursement issues affect the economic
competitiveness of our products as compared to other more traditional therapies.
Many companies are also seeking to develop new products and technologies, and receiving
approval for treatment of AKs and acne. Our industry is subject to rapid, unpredictable and
significant technological change. Competition is intense. Our competitors may succeed in
developing products that are safer, more effective or more desirable than ours. Many of our
competitors have substantially greater financial, technical and marketing resources than we
have. In addition, several of these companies have significantly greater experience than we
do in developing products, conducting preclinical and clinical testing and obtaining
regulatory approvals to market products for health care.
We cannot guarantee that new drugs or future developments in drug technologies will not
have a material adverse effect on our business. Increased competition could result in:
| • | price reductions, | ||
| • | lower levels of third-party reimbursements, | ||
| • | failure to achieve market acceptance, and | ||
| • | loss of market share, |
any of which could adversely affect our business, results of operations and financial
condition.
Further, we cannot give any assurance that developments by our competitors or future
competitors will not render our technology obsolete or less advantageous.
On May 30, 2006, we entered into a patent license agreement with PhotoCure ASA whereby
we granted a non-exclusive license to PhotoCure under the patents we license from PARTEQ, for
esters of ALA. Furthermore, we granted a non-exclusive license to PhotoCure for its existing
formulations of its Hexvix® and Metvix® (known in
the United States as Metvixia®) products for any of our patents that
may issue or be licensed by us in the future. PhotoCure received FDA approval to market
Metvixia® for treatment of AKs in July 2004, and this product, which is
directly competitive with our Levulan® Kerastick®
product, is now commercially available and its price is comparable to the price of
Levulan®. On October 1, 2009, PhotoCure announced that it had sold
Metvix/Metvixia to Galderma, S.A., a large dermatology company. On
January 11, 2010, Galderma announced a co-promotion agreement with PhotoMedex for
Metvixia under which Galderma will provide marketing support and
distribution. PhotoMedex’s sales force will promote Metvixia and Galderma’s Aktilite lamp to healthcare professionals
throughout the United States. While we are entitled to royalties on net sales of Metvixia,
Galderma and PhotoMedex together have considerably more resources than we have, which could
significantly hamper our ability to maintain or increase our market share.
Our Competitors In The Biotechnology And Pharmaceutical Industries May Have Better Products,
Manufacturing Capabilities Or Marketing Expertise.
We are aware of several companies commercializing and/or conducting research with ALA or
ALA-related compounds, including: Galderma/PhotoMedex, medac GmbH and photonamic GmbH & Co.
KG (Germany); Biofrontera, PhotoTherapeutics, Inc. (U.K.), and PhotoCure ASA (Norway). We
also anticipate that we will face increased competition as the scientific development of PDT
advances and new companies enter our markets. Several companies are developing PDT agents
other than Levulan®. These include: QLT Inc. (Canada); Axcan Pharma
Inc. (U.S.); Miravant, Inc. (U.S.); and Pharmacyclics, Inc. (U.S.). There are many
pharmaceutical companies that compete with us in the field of dermatology, particularly in
the acne and rosacea markets.
We expect that our principal methods of competition with other PDT products will be
based upon such factors as:
| • | the ease of administration of our method of PDT, | ||
| • | the degree of generalized skin sensitivity to light, | ||
| • | the number of required doses, |
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| • | the selectivity of our drug for the target lesion or tissue of interest, and | ||
| • | the type and cost of our light systems. |
Our primary competition in the acne market includes oral and topical antibiotics, other
topical prescription and over-the-counter products, as well as various laser and non-laser
light treatments. The market is highly competitive and other large and small companies have
more experience than we do which could make it difficult for us to penetrate the market. The
entry of new products from time to time would likely cause us to lose market share.
Risks Related To Our Stock
Our Common Stock May Not Continue To Trade On The Nasdaq Global Market, Which Could Reduce
The Value Of Your Investment And Make Your Shares More Difficult To Sell.
In order for our common stock to trade on the Nasdaq Global Market, we must continue to
meet the listing standards of that market. Among other things, those standards require that
our common stock maintain a minimum closing bid price of at least $1.00 per share. During
2009, our common stock has traded at prices near and below $1.00. If we do not continue to
meet Nasdaq’s applicable minimum listing standards, Nasdaq could delist us from the Nasdaq
Global Market. If our common stock is delisted from the Nasdaq Global Market, we could seek
to have our common stock listed on the Nasdaq Capital Market or other Nasdaq markets.
However, delisting of our common stock from the Nasdaq Global Market could hinder your
ability to sell, or obtain an accurate quotation for the price of, your shares of our common
stock. Delisting could also adversely affect the perception among investors of DUSA and its
prospects, which could lead to further declines in the market price of our common stock.
Delisting may also make it more difficult and expensive for us to raise capital. In addition,
delisting might subject us to a Securities and Exchange Commission rule that could adversely
affect the ability of broker-dealers to sell or make a market in our common stock, thus
hindering your ability to sell your shares.
Our Stock Price Is Highly Volatile And Sudden Changes In The Market Value Of Our Stock Occur Making An Investment Risky.
The price of our common stock has been highly volatile, which may create an increase in
the risk of capital losses for our shareholders. From January 1, 2008 to March 2, 2010, the
price of our stock has ranged from a low of $0.87 to a high of $2.58. The significant general
market volatility in similar stage pharmaceutical and biotechnology companies also made the
market price of our stock volatile.
Significant Fluctuations In Orders For Our Products, On A Monthly And Quarterly Basis, Are
Common Based On External Factors And Sales Promotion Activities. These Fluctuations Could
Increase The Volatility Of Our Stock Price.
The price of our common stock may be affected by the amount of quarterly shipments of
our products to end-users. Since our PDT products are still in relatively early stages of
adoption, and sales volumes are still low, a number of factors could affect product sales
levels and growth rates in any period. These could include the level of penetration of new
markets outside of the United States, the timing of medical conferences, sales promotion
activities, and large volume purchases by our higher usage customers. In addition, seasonal
fluctuations in the number of patients seeking treatment at various times during the year
could impact sales volumes. These factors could, in turn, affect the volatility of our stock
price.
Future Sales Of Securities May Cause Our Stock Price To Decline.
As of March 2, 2010, there were outstanding options and warrants to purchase 4,059,000
shares of common stock, with exercise prices ranging from $1.08 to $31.00 per share for
options, and exercise prices ranging from $2.85 to $6.00 per share for warrants. In addition,
there are 393,000 shares of unvested common stock. The holders of the options and warrants
have the opportunity to profit if the market price for the common stock exceeds the exercise
price of their respective securities, without assuming the risk of ownership. Also, if some
or all of such shares are sold into the public market over a short period of time, the value
of all publicly traded shares could decline, as the market may not be able to absorb those shares at then-current market prices. Additionally, such sales may make it more difficult for
us to sell equity securities or equity-related securities in the future at a time and price
that our management deems acceptable, or at all. The holders may exercise their securities
during a time when we would likely be able to raise capital from the public on terms more
favorable than those provided in these securities.
Effecting A Change Of Control Of DUSA Would Be Difficult, Which May Discourage Offers For
Shares Of Our Common Stock.
Our certificate of incorporation authorizes the board of directors to issue up to
100,000,000 shares of stock, 40,000,000 of which are common stock. The board of directors has
the authority to determine the price, rights, preferences and privileges, including voting
rights, of the remaining 60,000,000 shares without any further vote or action by the
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shareholders. The rights of the holders of our common stock will be subject to, and may be
adversely affected by, the rights of the holders of any preferred stock that may be issued in
the future.
On September 27, 2002, we adopted a shareholder rights plan at a special meeting of our
board of directors. The rights plan could discourage, delay or prevent a person or group from
acquiring 15% or more of our common stock, thereby limiting, perhaps, the ability of certain
of our shareholders to benefit from such a transaction.
The rights plan provides for the distribution of one right as a dividend for each
outstanding share of our common stock to holders of record as of October 10, 2002. Each right
entitles the registered holder to purchase one one-thousandths of a share of preferred stock
at an exercise price of $37.00 per right. The rights will be exercisable subsequent to the
date that a person or group either has acquired, obtained the right to acquire, or commences
or discloses an intention to commence a tender offer to acquire, 15% or more of our
outstanding common stock or if a person or group is declared an “Adverse Person”, as such
term is defined in the rights plan. The rights may be redeemed by us at a redemption price of
one one-hundredth of a cent per right until ten days following the date the person or group
acquires, or discloses an intention to acquire, 15% or more, as the case may be, of DUSA, or
until such later date as may be determined by our board of directors.
Under the rights plan, if a person or group acquires the threshold amount of common
stock, all holders of rights (other than the acquiring person or group) may, upon payment of
the purchase price then in effect, purchase shares of common stock of DUSA having a value of
twice the purchase price. In the event that we are involved in a merger or other similar
transaction where we are not the surviving corporation, all holders of rights (other than the
acquiring person or group) shall be entitled, upon payment of the purchase price then in
effect, to purchase common stock of the surviving corporation having a value of twice the
purchase price. The rights will expire on October 10, 2012, unless previously redeemed. Our
board of directors has also adopted certain amendments to our certificate of incorporation
consistent with the terms of the rights plan.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
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. In December 2001
we entered into a 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 seven and one-half months prior to the date on
which the termination would be
effective. Commencing in August 2002, we entered into a five year lease for office space
for our Toronto location which had accommodated the Toronto office of our former Chairman of
the Board and shareholder services representative. In December 2006, we extended the Toronto
lease for an additional five year term through August 2012. In the fourth quarter of 2008, we
vacated the Toronto, Ontario office and have subleased the space through June 30, 2010. We
are presently in discussions with the subtenant regarding extending the sublease beyond June
30, 2010.
ITEM 3. LEGAL PROCEEDINGS
Winston Laboratories Arbitration Settlement
In October 2008, we were notified that Winston Laboratories, Inc. had filed a
demand for arbitration against us. The demand for arbitration arose out of two
agreements, the 2006 Micanol License Agreement and 2006 Micanol Transition License
Agreement, and claimed that we breached the agreements. Winston Laboratories claimed
damages in excess of $2.0 million. The matter was settled on April 28, 2009 for cash
consideration of $75,000, and a mutual release.
ITEM 4. RESERVED
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PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock is traded on the NASDAQ Global Market under the symbol
“DUSA.” The following are the high and low sales prices for the common stock reported
for the quarterly periods shown.
Price range per common share by quarter, 2009:
| First | Second | Third | Fourth | |||||||||||||
NASDAQ |
||||||||||||||||
High |
$ | 1.39 | $ | 1.49 | $ | 1.29 | $ | 1.87 | ||||||||
Low |
$ | 0.88 | $ | 0.88 | $ | 1.00 | $ | 1.05 | ||||||||
Price range per common share by quarter, 2008:
| First | Second | Third | Fourth | |||||||||||||
NASDAQ |
||||||||||||||||
High |
$ | 2.58 | $ | 2.57 | $ | 2.15 | $ | 1.69 | ||||||||
Low |
$ | 1.75 | $ | 1.95 | $ | 1.13 | $ | 0.87 | ||||||||
On March 2, 2010, the closing price of our common stock was $1.60 per share on the
NASDAQ Global Market. On March 2, 2010, there were 701 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.
RELATIVE STOCK PERFORMANCE
The graph below compares DUSA Pharmaceuticals, Inc.’s cumulative 5-year total
stockholder return on common stock with the cumulative total returns of the NASDAQ Market
index and the Hemscott Group index. The graph tracks the performance of a $100 investment in
our common stock and in each of the indexes (with the reinvestment of all dividends) from
December 31, 2004 to December 31, 2009. The comparisons in this graph are required by the SEC
and are not intended to forecast or be indicative of possible future performance of our
common stock.
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ASSUMES $100 INVESTED ON DEC. 31, 2004
ASSUMES DIVIDEND REINVESTED
FISCAL YEAR ENDING DEC. 31, 2009
ASSUMES DIVIDEND REINVESTED
FISCAL YEAR ENDING DEC. 31, 2009
| Cumulative Return Total | ||||||||||||||||||||||||
| 12/31/04 | 12/31/05 | 12/31/06 | 12/31/07 | 12/31/08 | 12/31/09 | |||||||||||||||||||
DUSA
PHARMACEUTICALS,
INC. |
$ | 100.00 | $ | 75.31 | $ | 30.07 | $ | 14.48 | $ | 7.34 | $ | 10.84 | ||||||||||||
HEMSCOTT GROUP
INDEX |
$ | 100.00 | $ | 110.97 | $ | 123.94 | $ | 140.77 | $ | 112.14 | $ | 147.15 | ||||||||||||
NASDAQ MARKET
INDEX |
$ | 100.00 | $ | 102.20 | $ | 112.68 | $ | 124.57 | $ | 74.71 | $ | 108.56 | ||||||||||||
The list of companies in the Hemscott Group Index includes: Access Pharmaceuticals,
Inc., Acusphere, Inc., Adolor Corporation, Advanced Viral Research Corporation, Aeolus
Pharmaceuticals, Inc., Akesis Pharmaceuticals, Inc., Alexion Pharmaceuticals, Inc., Alexza
Pharmaceuticals Inc., Allergan, Inc., Allos Therapeutics, Inc., Altana AG, Amarin Corporation
PLC, Angiotech Pharmaceuticals, Inc., Ardea Biosciences, Inc., Arena Pharmaceuticals, Inc.,
Arqule, Inc., ARYx Therapeutics, Inc., Astralis, Ltd., AVANIR Pharmaceuticals, AVI BioPharma,
Inc., Bayer AG, Benda Pharmaceutical, Incorporated, Biodel, Inc., BioTransplant, Inc.,
Cardiome Pharma Corporation, Cephalon, Inc., China YCT International Group, Inc., Cortex
Pharmaceuticals, Inc., Cubist Pharmaceuticals, Inc., Cumberland Pharmaceuticals, Inc.,
DelSite, Inc., DepoMed, Inc., DOV Pharmaceutical, Inc., Dr Reddy Laboratories, Ltd., Dragon
Pharmaceuticals, Inc., Durect Corporation, DUSA Pharmaceuticals Inc., Dynavax Technologies
Corporation, Elite Pharmaceuticals, Inc., Endo Pharmaceutical Holdings, Inc., Entropin, Inc.,
eXegenics, Inc., Forest Laboratories, Inc., Gamma Pharmaceuticals, Incorporated, Genova
Biotherapeutics, Inc., Gentium SpA., Geron Corporation, Inspire Pharmaceuticals, Inc., Isis
Pharmaceuticals Inc., Ista Pharmaceuticals, Inc., Kendle International, Inc., Kent
International Holdings, Inc., King Pharmaceuticals, Inc., Lannett Company, Inc., Lescarden,
Inc., MAP Pharmaceuticals, Inc., Marshall Edwards, Inc., Med Gen, Inc., Medicines,
MiddleBrook Pharmaceuticals, Inc., Millenia Hope, Inc., Miravant Medical Technologies,
Naturade, Inc., Neurogen Corporation, NeurogesX, Inc., Neuro-Hitech, Inc., NexMed, Inc.,
NovaBay Pharmaceuticals, Inc., Novo Nordisk A/S, Orexigen Therapeutics, Inc., Oxis
International, Pain Therapeutics, Inc., Paladin Labs, Inc., Pharmacyclics, Inc., Pharmasset,
Inc., Pharmaxis Ltd., POZEN, Inc., Prana Biotechnology Limited, Prescient Neuopharma, Inc.,
Protalex, Inc., Puramed Bioscience Incorporated, Regenerx Biopharmaceuticals, Inc., Reliv’,
International, Santarus, Inc., SciClone Pharmaceuticals, Shire PLC, Siga Technologies, Inc.,
Simcere Pharmaceutical Group, Sinobiopharma, Inc., Somaxon Pharmaceuticals, Inc., Sucampo
Pharmaceuticals, Inc., SuperGen, Inc., Synergy Pharmaceuticals,, Incorporated, Synvista
Therapeutics, Inc., Tapestry Pharmaceuticals, Inc., Taro Pharmaceutical Industries, Telik,
Inc., Teva Pharmaceutical Industries, Ltd., Tian’an Pharma Co Ltd, Tianyin Pharmaceutical
Co., Inc., Unigene Laboratories, Inc., United Therapeutics Corporation, Valeant
Pharmaceuticals International, Vaso Active Pharmaceuticals, Inc., VaxGen., Inc., Vertex
Pharmaceuticals Inc., Viral Genetics, Inc., Vital Living, Inc., Warner Chilcott Limited, and
YM Biosciences, Inc.
ITEM 6. SELECTED FINANCIAL DATA
The following information should be read in conjunction with our 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 our audited consolidated financial
statements.
CONSOLIDATED STATEMENTS OF OPERATIONS DATA
| Year Ended December 31, | ||||||||||||||||||||
| 2009 | 2008 | 2007 | 2006(5) | 2005 | ||||||||||||||||
Product revenues |
$ | 29,807,829 | $ | 29,545,406 | $ | 27,662,598 | $ | 25,582,986 | $ | 11,337,461 | ||||||||||
Net loss |
(2,508,292 | ) | (6,250,441 | )(1) | (14,713,507 | )(2) | (31,349,507 | )(3) | (14,998,709 | ) | ||||||||||
Basic and diluted
net loss per common
share |
$ | (0.10 | ) | $ | (0.26 | ) | $ | (0.73 | ) | $ | (1.65 | ) | $ | (0.89 | ) | |||||
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CONSOLIDATED BALANCE SHEET DATA
| Year Ended December 31, | ||||||||||||||||||||
| 2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||
Total assets |
$ | 24,933,377 | $ | 28,210,454 | $ | 32,892,240 | $ | 33,755,813 | $ | 42,330,631 | ||||||||||
Long-term obligations(4) |
3,841,941 | 4,838,436 | 4,501,186 | 1,199,086 | — | |||||||||||||||
Shareholders’ equity |
$ | 15,841,474 | $ | 17,712,199 | $ | 22,106,522 | $ | 26,333,573 | $ | 38,028,728 | ||||||||||
| (1) | Includes an impairment charge of $1,500,000 resulting from our review of the carrying amount of our goodwill resulting from a contingent payout to the former shareholders of Sirius Laboratories, Inc. | |
| (2) | Includes an impairment charge of $6,773,000 resulting from our review of the carrying amount of our goodwill. | |
| (3) | Includes an impairment charge of $15,746,000 resulting from our review of the carrying amount of our intangible assets. | |
| (4) | Primarily comprised of deferred revenues related to milestone payments received under distribution agreements and the fair value of the warrants issued in connection with our October 29, 2007 private placement. | |
| (5) | The results of operations include operations of Sirius Laboratories, Inc. from the date of acquisition, March 10, 2006. |
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 the section entitled “Risk
Factors”.
We are a vertically integrated dermatology company that is developing and marketing
Levulan® PDT and other products for common skin conditions. Our
marketed products include Levulan® Kerastick® 20%
Topical Solution with PDT, the BLU-U® brand light source, and
ClindaReach®.
We devote most of our resources to advancing the development and marketing of our
Levulan® PDT technology platform. In addition to our marketed products,
our drug, Levulan® brand of aminolevulinic acid HCl, or ALA, in
combination with light, has been studied in a broad range of medical conditions. When
Levulan® is used and followed with exposure to light to treat a medical
condition, it is known as Levulan® PDT. The
Kerastick® is our proprietary applicator that delivers
Levulan®. The BLU-U® is our patented light
device.
The Levulan® Kerastick® 20% Topical Solution
with PDT and the BLU-U® were launched in the United States, or U.S., in
September 2000 for the treatment of non-hyperkeratotic actinic keratoses, or AKs, of the face
or scalp under a former dermatology collaboration. AKs are precancerous skin lesions caused
by chronic sun exposure that can develop over time into a form of skin cancer called squamous
cell carcinoma. In addition, in September 2003 we received clearance from the United States
Food and Drug Administration, or FDA, to market the BLU-U® without
Levulan® PDT for the treatment of moderate inflammatory acne vulgaris
and general dermatological conditions.
Sirius Laboratories, Inc., or Sirius, a dermatology specialty pharmaceuticals company,
was founded in 2000 with a primary focus on the treatment of acne vulgaris and acne rosacea.
Nicomide® was its key product, a vitamin-mineral product prescribed by
dermatologists. We merged with Sirius in March 2006.
We are marketing Levulan® PDT under an exclusive worldwide license
of patents and technology from PARTEQ Research and Development Innovations, the licensing arm
of Queen’s University, Kingston, Ontario, Canada. In January, 2009, we filed a request for
reexamination with the USPTO of one of the Queen’s patents that cover our approved indication
for AK. We responded to the first office action on October 27, 2009. We also own or license
certain other patents relating to our BLU-U® device and methods for
using pharmaceutical formulations which contain our drug and related processes and
improvements. In the United States, DUSA®, DUSA Pharmaceuticals,
Inc.®, Levulan®,
Kerastick®, BLU-U®,
Nicomide®, Nicomide-T®,
ClindaReach®, Meted®, and
Psoriacap® are registered trademarks. Several of these trademarks are
also registered in Europe, Australia, Canada, and in other parts of the world. Numerous other
trademark applications are pending.
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We are responsible for manufacturing our Levulan®
Kerastick® and for the regulatory, sales, marketing, and customer
service and other related activities for all of our products, including our
Levulan® Kerastick®.
In
February 2010, we incurred a loss on the purchase of one of our
Non-PDT Drug Products that
was in-transit having an approximate cost of $300,000. We have not yet determined the
financial statement impact as we are evaluating our insurance coverage.
2009 TRANSACTIONS
The following significant transactions occurred during 2009:
River’s Edge Litigation Settlement
In April 2009, we and River’s Edge entered into an amendment to a license agreement, or
License Amendment. The License Amendment grants River’s Edge an exclusive license to U.S.
Patent, No. 6,979,468, and a license to use all know-how and the trademark associated with
the licensed products worldwide. Under the License Amendment, we are required to transfer all
of our rights, title and interest in and to DUSA’s patent, know-how and trademark relating to
the licensed products (but not the copyright registration relating to product labeling) to
River’s Edge upon our receipt of $5,000,000. Of the $5,000,000, River’s Edge is required to
make payment to us of $2,600,000, in thirteen monthly installments of $200,000, subject to
reduction under certain conditions, and pay additional consideration of $2,400,000 payable
over time based on a share of River’s Edge’s net revenues as defined in the License
Amendment. The original license agreement, entered into in August 2008, or License Agreement,
as now amended, has a term of 30 months, subject to a further extension under certain
circumstances to 48 months, and may be terminated early by River’s Edge on 30 days’ prior
written notice. Under the License Agreement, River’s Edge has assumed all regulatory
responsibilities for the licensed products. If the License Agreement is terminated prior to
the payment of the $5,000,000, all of the rights and licenses granted by us to River’s Edge
will revert to us. We are recording the revenue under the License Amendment on a cash basis.
We received the first $200,000 installment payment under the License Amendment during the
second quarter of 2009, which is included in Product Revenues in the accompanying
Consolidated Statements of Operations, but have not received any further payments. We are
considering our options relative to the collection of amounts due from River’s Edge and
termination of the License Agreement, which we have the right to do for non-payment.
Winston Laboratories Arbitration Settlement
In October 2008, we were notified that Winston Laboratories, Inc. had filed a demand for
arbitration against us. The demand for arbitration arose out of the 2006 Micanol License
Agreement and subsequent 2006 Micanol Transition License Agreement and claimed that we had
breached the agreements. Winston Laboratories claimed damages in excess of $2.0 million. The
matter was settled on April 28, 2009 for cash consideration of $75,000, and a mutual release.
Third Amendment to the Sirius Merger Agreement
In
April 2009, we and the former shareholders of Sirius entered into a letter
agreement providing for the consent of the former Sirius shareholders to the License
Amendment with River’s Edge mentioned above, a release, and a third amendment to the merger
agreement, dated as of December 30, 2005, by and among the DUSA Pharmaceuticals, Inc., Sirius
and the shareholders of Sirius. Pursuant to the merger agreement prior to this amendment, we
agreed to pay additional consideration after the closing of the merger to the former
shareholders of Sirius based upon the attainment of pre-determined total cumulative sales
milestones for the products acquired from Sirius over the period ending 50 months from the
date of the March 2006 closing of the merger. Pursuant to the agreements entered into in
April 2009, we agreed to extend the milestone termination date from 50 months from the date
of the closing of the merger until December 31, 2011 and to include in the definition of net
sales in the merger agreement payments which we may receive from the divestiture of Sirius
products. The
third amendment to the merger agreement also removes our obligation to market the Sirius
products according to certain previously required standards and allows us to manage all
business activities relating to the products acquired from Sirius without further approval
from the former Sirius shareholders.
In April 2009, we paid to the former Sirius shareholders, on a pro rata basis, $100,000. In
addition, in the event that the $1,000,000 milestone payment that would become due to the
former Sirius shareholders under the merger agreement if cumulative net sales of the Sirius
products reach $35,000,000 is not, in fact, triggered by the new milestone termination date,
then we have agreed to pay $250,000 to the former Sirius shareholders on a pro rata basis on
or before January 6, 2012.
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National Biological Corporation Amended and Restated Purchase and Supply Agreement
On June 21, 2004, we signed an Amended and Restated Purchase and Supply Agreement
with National Biological Corporation, or NBC, the principal manufacturer of our
BLU-U® light source. This agreement permits us to order on a purchase
order basis without minimums, and includes other modifications of the original agreement
providing both parties greater flexibility related to the development and manufacture of
light sources and the associated technology within the field of PDT. On June 29, 2009, we
extended the term of the agreement with NBC until June 30, 2011. We have an option to further
extend the term for an additional two (2) years if we purchase a certain number of units. The
parties agreed upon a tiered price schedule based on the volume of purchases and updated
certain quality control provisions. All other terms and conditions of the 2004 agreement
remain in effect.
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 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.
Revenue Recognition— Accounting for revenue transactions relies on certain
estimates that require difficult, subjective and complex judgments on the part of management.
PDT Revenue
Revenues on Kerastick® and BLU-U® product sales in the U.S. and
Canada are recognized when persuasive evidence of an arrangement exists, the price is fixed
and determinable, delivery has occurred, and collection is reasonably assured. We offer
programs that allow physicians access to our BLU-U® device for a trial period. No
revenue is recognized on these units until the physician elects to purchase the equipment and
all other revenue recognition criteria are met. Our terms with customers do not provide for
the right of return for sales of Kerastick® and BLU-U®, unless the
product does not comply with the technical specifications.
For revenues associated with contractual agreements with multiple elements, the Company
applies the revenue recognition criteria outlined in Securities and Exchange Commission
(“SEC”) Staff Accounting Bulletin Topic 13, Revenue Recognition (“SAB Topic 13”) and ASC
605-25, Multiple Element Arrangements. We analyze each contract in order to separate each
deliverable into separate units of accounting, if applicable, and then recognize revenue for
those separated units as earned. Significant judgment is required in determining the units
of accounting and the attribution method for such arrangements.
We have entered into exclusive marketing, distribution and supply agreements with
distributors in Latin America and Korea that contain multiple deliverables. The deliverables
are treated as a single unit of accounting. We have determined the attribution method for
each of the separate payment streams. Under the terms of these agreements, we receive
non-refundable milestone payments, a fixed price per unit sold and royalties based on a
percentage of the net sales price to end-users. We defer and recognize the approval and
sales milestones as license revenues on a straight-line basis, beginning on the date the
milestone is achieved through term of the agreement. We record royalty revenue when
earned, which is upon sell through to the end user. We record the fixed price per unit sold
once the price is fixed and determinable, which is upon sell through to the end user.
Additionally, we do not have sufficient data to determine product acceptance in the
marketplace. The agreements require the distributors to make minimum purchases. If minimum
purchase obligations are not fulfilled, the distributors are required to pay the difference
between its actual purchases and the contractual minimums (a “gross-up” payment). We record
revenue for the gross-up payment upon cash receipt. To date, Stiefel, the distributor in
Latin America, has failed to meet its contractual obligations and is required to make the
gross-up payment; we have not received payment to date. For Daewoong, the distributor in
Asia Pacific, the minimum purchase commitment is measured over a five-year period, which has
not yet ended.
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Non-PDT Revenue
We recognize revenue for sales of Non-PDT Drug Products when substantially all the risks
and rewards of ownership have transferred to the customer, which generally occurs on the date
of shipment to wholesale customers. Revenue is recognized net of revenue reserves, which
consist of allowances for discounts, returns, rebates, chargebacks and fees paid to
wholesalers under distribution service agreements.
We evaluate inventory levels at our wholesaler customers through an analysis that
considers, among other things, wholesaler purchases, wholesaler shipments to retailers,
available end-user prescription data obtained from third parties and on-hand inventory data
received directly from our three largest wholesaler customers. We believe that this
evaluation of wholesaler inventory levels, allows us to make reasonable estimates for our
applicable revenue related reserves. Additionally, our products are sold to wholesalers with
a product shelf life that allows sufficient time for our wholesaler customers to sell the
products in their inventory through to retailers and, ultimately, to end-user consumers prior
to product expiration. For new product launches where we do not have the ability to reliably
estimate returns, revenue is recognized based on end-user demand, which is typically based on
dispensed subscription data, or ship-through data as reported by our international
distribution partners. When inventories have been reduced to targeted stocking levels at
wholesalers or distribution partners, and we have sufficient data to determine product
acceptance in the marketplace which allows us to estimate product returns, we recognize
revenue upon shipment, net of discounts and allowances.
We account for sales returns by establishing an accrual in an amount equal to
our estimate of sales recorded for which the related products are expected to be returned. We
determine the estimate of the sales return accrual primarily based on historical experience
regarding sales and related returns and incorporating other factors that could impact sales
returns in the future. These other factors include levels of inventory in the distribution
channel, estimated shelf life, product recalls, product discontinuances, price changes of
competitive products, introductions of generic products and introductions of competitive new
products. Our policy is to accept returns when product is within six months of expiration. We
consider all of these factors and adjust the accrual periodically to reflect actual
experience. Our reserve for sales returns has declined as revenues
from Non-PDT Drug Products
have declined.
Chargebacks typically occur when suppliers enter into contractual pricing arrangements
with end-user customers, including certain federally mandated programs, who then purchase
from wholesalers at prices below what the supplier charges the wholesaler. Since we only
offer “preferred pricing” to end-user customers under federally mandated programs,
chargebacks have not been significant. Our rebate programs can generally be categorized into
the following two types: Medicaid rebates and consumer rebates. Medicaid rebates are amounts
owed based on legal requirements with public sector benefit providers after the final
dispensing of the product by a pharmacy to a benefit plan participant. Consumer rebates are
amounts owed as a result of mail-in coupons that are distributed by health care providers to
consumers at the time a prescription is written.
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. We use sales projections to estimate the appropriate level of inventory
reserves, if any, that are necessary at each balance sheet date.
Valuation Of Long-lived and Intangible Assets and Goodwill— 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, the asset is written down to its estimated fair value on a discounted
cash flow basis. At December 31, 2009 and 2008, respectively, total property, plant and
equipment had a net carrying value of $1,661,000 and $1,938,000, including $1,150,000 at
December 31, 2009 associated with our manufacturing facility.
In 2008 we made a cash payment of $1.5 million to former Sirius shareholders as
additional consideration for a cumulative sales milestone. As this payment was deemed
additional consideration related to the acquisition, we recorded goodwill in the amount of
$1.5 million and immediately recorded an impairment charge to the statement of operations for
the same amount. In 2007 we recorded an impairment charge to goodwill of $6.8 million, which
represented the entire goodwill
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balance related to the Sirius acquisition and was all
associated with the Non-PDT Drug Products reporting unit. While we do not have any goodwill
on the balance sheet at December 31, 2009, we may incur future goodwill impairment charges if
we are required to make additional payments to former Sirius shareholders. The
pre-determined cumulative sales milestones for the Sirius products and the related milestone
payments which may be paid in cash or shares, as we may determine, are as follows:
| Additional | ||||
| Cumulative Sales Milestone: | Consideration: | |||
$35.0 million |
$1.0 million | |||
$45.0 million |
$1.0 million | |||
Total |
$2.0 million | |||
In April 2009, we entered into the Third Amendment to the Merger Agreement, or Third
Amendment, as described in Note 13 to the Notes to the Consolidated Financial Statements. As
consideration for the Third Amendment and related documents, we paid the former Sirius
shareholders $100,000 on a pro rata basis and have guaranteed a payment of $250,000 in
January 2012 if the $35,000,000 sales milestone is not triggered.
Share-Based Compensation — We measure all employee share-based compensation awards
using a fair value based method and record share-based compensation expense in our financial
statements if the requisite service to earn the award is provided. We recognize the expense
attributable to stock awards as the awards vest in the Consolidated Statements of Operations.
We issue stock options and unvested shares. The fair value of stock options is determined
using the Black-Scholes option valuation model, which incorporates assumptions as to stock
volatility, the expected life of the options, a risk-free interest rate and dividend yield.
The fair value of unvested shares is normally the price per share of our common stock on the
date of grant. Share-based compensation expense is not recorded if the awards do not vest.
Accordingly we estimate the forfeitures in determining the share-based compensation expense
to record for the period. If our actual forfeiture experience differs from our estimate,
share-based compensation expense will be adjusted.
Financial Instruments —Financial instruments recorded at fair value on the
consolidated balance sheets include cash equivalents, marketable securities and the common
stock purchase warrant liability.
Fair value is based on the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants at the measurement
date. We follow the fair value disclosure hierarchy, that prioritizes observable and
unobservable inputs used to measure fair value into three broad levels, which are described
below:
Level 1: Quoted market prices in active markets for identical assets or liabilities.
Level 1 primarily consists of financial instruments whose value is based on quoted
market prices such as exchange-traded instruments and listed equities.
Level 2: Observable market based inputs or unobservable inputs that are
corroborated by market data. Level 2 includes financial instruments that are valued
using models or other valuation methodologies.
Level 3: Unobservable inputs that are not corroborated by market data. Level 3 is
comprised of financial instruments whose fair value is estimated based on internally
developed models or methodologies utilizing significant inputs that are generally less
readily observable.
Our cash equivalents are Level 1 instruments. The fair value is based on transacted
prices in an active market. In determining the fair value of our marketable securities, we
consider the level of market activity and the availability of prices for the specific
securities that we hold. For our Level 2 financial instruments, comprising our corporate debt
and United States government-backed securities, we use quoted market prices, broker or dealer
quotations, or alternative pricing sources with reasonable levels of price transparency in
the determination of value. We also access publicly available market activity from third
party databases and credit ratings of the issuers of the securities we hold to corroborate
the data used in the fair value calculations obtained from our primary source. We take into
account credit rating changes, if any, of the securities or recent marketplace activity. We
do not have any Level 3 marketable securities.
The warrant liability is a Level 3 instrument. We initially recorded the warrant
liability at its fair value using the Black-Scholes option-pricing model and revalue it at
each reporting date until the warrants are exercised or expire. Changes in the fair value of
the warrants are reported in our Statements of Operations as non-operating income or expense
under the caption “(Loss) gain on change in fair value of warrants”. The fair value of the
warrants is subject to significant fluctuation based on changes in our stock price, expected
volatility, remaining contractual life and the risk-free interest rate. The market price for
our common stock has been and may continue to be volatile. Consequently, future fluctuations
in the price of our common stock may cause significant increases or decreases in the fair
value of the warrants.
37
Table of Contents
Results of Operations
Year Ended December 31, 2009 As Compared to the Year Ended December 31, 2008
Revenues — Total revenues for 2009 were $29,808,000, as compared to
$29,545,000 in 2008 and were comprised of the following:
| Year Ended December 31, | ||||||||||||
| Increase/ | ||||||||||||
| 2009 | 2008 | (Decrease) | ||||||||||
PDT PRODUCT REVENUES |
||||||||||||
LEVULAN® KERASTICK® PRODUCT REVENUES |
||||||||||||
United States |
$ | 24,756,000 | $ | 20,206,000 | $ | 4,550,000 | ||||||
Canada |
543,000 | 699,000 | (156,000 | ) | ||||||||
Korea |
646,000 | 820,000 | (174,000 | ) | ||||||||
Rest of world |
434,000 | 345,000 | 89,000 | |||||||||
Subtotal Levulan® Kerastick® product revenues |
26,379,000 | 22,070,000 | 4,309,000 | |||||||||
BLU-U® PRODUCT REVENUES |
||||||||||||
United States |
1,943,000 | 1,810,000 | 133,000 | |||||||||
Canada |
16,000 | — | 16,000 | |||||||||
Korea |
— | 50,000 | (50,000 | ) | ||||||||
Subtotal BLU-U® product revenues |
1,959,000 | 1,860,000 | 99,000 | |||||||||
TOTAL PDT PRODUCT REVENUES |
28,338,000 | 23,930,000 | 4,408,000 | |||||||||
TOTAL NON-PDT DRUG PRODUCT REVENUES |
1,470,000 | 5,615,000 | (4,145,000 | ) | ||||||||
TOTAL PRODUCT REVENUES |
$ | 29,808,000 | $ | 29,545,000 | $ | 263,000 | ||||||
For the year ended December 31, 2009, total PDT Drug and Device Products revenues,
comprised of revenues from our Kerastick® and
BLU-U® products, were $28,338,000. This represents an increase of
$4,408,000 or 18%, over the comparable 2008 total of $23,930,000. The incremental revenue was
driven primarily by increased Kerastick® revenues and BLU-U®
revenues in the United States.
For the year ended December 31, 2009, Kerastick® revenues
were $26,379,000, representing an increase of $4,309,000 or 20%, over the comparable 2008
totals of $22,070,000. Kerastick® unit sales to end-users for the year
ended December 31, 2009 were 220,288, including 6,000 sold in Canada and 8,472 sold in Korea.
This represents an increase from 207,516 Kerastick® units sold in the
year ended December 31, 2008, including 8,700 sold in Canada and 11,826 sold in Korea. Our
average net selling price for the Kerastick® increased to $117.73 for
the year ended December 31, 2009 from $104.80 in 2008. Our average net selling price for the
Kerastick® includes sales made directly to our end-user customers, as
well as sales made to our distributors, in Canada, Korea and the rest of the world. The
increase in 2009 Kerastick® revenues was driven mainly by increased
sales volumes in the United States along with an increase in our overall average unit selling
price.
For the year ended December 31, 2009, BLU-U® revenues were
$1,959,000, an increase of 99,000, or 5%, over 2008 BLU-U® revenues of
$1,860,000. The slight increase in 2009 BLU-U® revenues was driven by
increased sales volumes which were offset by a decrease in our average selling price. In the
year ended December 31, 2009, there were 252 units sold, as compared to 229 units in 2008.
The 2009 total consists of 251 sold in the United States and one sold in Canada. The 2008
total consists of 224 units sold in the United States and 5 in Korea by Daewoong. Our
average net selling price for the BLU-U® decreased to $7,418 for the
year ended December 31, 2009 from $7,861 for 2008. Our BLU-U®
evaluation program allows customers to take delivery for a limited number of
BLU-U® units for a period of up to four months for private
practitioners and up to one year for hospital clinics, before we require a purchase decision.
At December 31, 2009, there were approximately 12 units in the field pursuant to this
evaluation program, compared to 58 units in the field at December 31, 2008. The units are
classified as inventory in the financial statements and are being amortized during the
evaluation period to cost of goods sold using an estimated life for the equipment of three
years.
We have to continue to demonstrate the clinical value of our unique therapy, and the
related product benefits as compared to other well-established conventional therapies, in
order for the medical community to accept our products on a large scale. We are aware that
physicians are using Levulan® with the BLU-U®
using short incubation times, and with light devices manufactured by other companies, and for
uses other than our FDA-approved use. While we are not permitted to market our products for
so-called “off-label” uses, we believe that these activities are positively affecting the
sales of our products.
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Non-PDT Drug Product revenues reflect the revenues generated by the products
acquired as part of our acquisition of Sirius. Total Non-PDT drug product revenues for the
year ended December 31, 2009 were $1,470,000, compared to $5,615,000 for the year ended
December 31, 2008. The substantial majority of the Non-PDT Drug Product revenues were from
Nicomide® related royalties from River’s Edge, and sales of
ClindaReach®. During 2010, royalties from our license of the
AVAR® product line will cease under the terms of our license agreement
with River’s Edge relating to these products. In April 2008, we were notified by Actavis
Totowa, LLC, the manufacturer of Nicomide®, that Actavis would cease
manufacturing several prescription vitamins, including Nicomide®, due
to continuing discussions with the FDA. In response to this notification and subsequent
discussions with the FDA, we stopped the sale and distribution of Nicomide®
in June 2008.
The increase in our total revenues in 2009 compared with 2008 results primarily from
increased PDT segment revenues in the United States, partially offset by decreases in
international PDT revenues and Non-PDT revenues. We must continue to increase sales from
these levels in order for us to become profitable on an annual basis. We cannot provide any
assurance that we will be able to increase sales sufficiently to become profitable on an
annual basis, and we cannot provide assurance that a material increase in sales will
necessarily cause us to be profitable on an annual basis. PhotoCure received FDA approval to
market Metvixia® for treatment of AKs in July 2004, and this PDT
product, which is directly competitive with our Levulan®
Kerastick® product, is now commercially available. On October 1, 2009,
PhotoCure announced that it had sold Metvix/Metvixia to Galderma, S.A., a large dermatology
company. On January 11, 2010, Galderma announced a co-promotion agreement with PhotoMedex for
Metvixia under which Galderma will provide marketing support and
distribution. PhotoMedex’s
sales force will promote Metvixia and Galderma’s Aktilite lamp to healthcare professionals
throughout the United States. While we are entitled to royalties on net sales of Metvixia,
Galderma and PhotoMedex together have considerably more resources than we have, which could
adversely affect our ability to maintain or increase our market share. During 2009, our PDT
segment revenues in the United States grew, due in part to the 6% increase in Medicare
reimbursement of our PDT-related procedure fee, which became effective January 1, 2009, as
well as our pricing strategies. Although we expect growth in our PDT segment revenues, we are
susceptible to the uncertain economic conditions, particularly with our customer base in the
U.S. and internationally where our product lacks reimbursement, and to increased competition
particularly from Metvixia. Reduced sales on non-reimbursed procedures and softness in the
international markets could be expected until the economy recovers. We expect our Non-PDT
revenues for 2010 to be reduced from 2009 levels since we are experiencing difficulty
collecting payments due under the License Agreement with River’s Edge. Also see the section
entitled “Risk Factors — Any Failure to Comply with Government Regulations in the
United States and Elsewhere Will Limit Our Ability to Market Our Products And Become
Profitable.”
Cost Of Product Revenues and Royalties — Cost of product revenues and royalties for the
year ended December 31, 2009 were $6,675,000 as compared to $7,125,000 for the year ended
December 31, 2008. A summary of the components of cost of product revenues and royalties is
provided below:
| Year Ended December 31, | ||||||||||||
| Increase/ | ||||||||||||
| 2009 | 2008 | (Decrease) | ||||||||||
Levulan® Kerastick® Cost of Product
Revenues and Royalties |
||||||||||||
Direct Levulan® Kerastick® Product costs |
$ | 2,437,000 | $ | 2,541,000 | $ | (104,000 | ) | |||||
Other Levulan® Kerastick® production
costs including internal costs assigned to support products, net |
630,000 | 229,000 | 401,000 | |||||||||
Royalty and supply fees(1) |
1,042,000 | 966,000 | 76,000 | |||||||||
Subtotal Levulan® Kerastick®
Cost of Product Revenues and Royalties |
4,109,000 | 3,736,000 | 373,000 | |||||||||
BLU-U® Cost of Product Revenues |
||||||||||||
Direct BLU-U® Product Costs |
907,000 | 822,000 | 85,000 | |||||||||
Other BLU-U® Product Costs including internal costs assigned
to support products; as well as, costs incurred to ship, install and service the
BLU-U® in physicians’ offices |
719,000 | 794,000 | (75,000 | ) | ||||||||
Subtotal BLU-U® Cost of Product Revenues |
1,626,000 | 1,616,000 | 10,000 | |||||||||
TOTAL PDT DRUG & DEVICE COST OF PRODUCT REVENUES AND ROYALTIES |
5,735,000 | 5,352,000 | 383,000 | |||||||||
Non-PDT Drug Cost of Product Revenues and Royalties |
940,000 | 1,773,000 | (833,000 | ) | ||||||||
TOTAL NON-PDT DRUG COST OF PRODUCT REVENUES AND ROYALTIES |
940,000 | 1,773,000 | (833,000 | ) | ||||||||
TOTAL COST OF PRODUCT REVENUES AND ROYALTIES |
$ | 6,675,000 | $ | 7,125,000 | $ | (450,000 | ) | |||||
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| 1) | Royalty and supply fees reflect amounts paid to our licensor, PARTEQ, and amortization of an upfront fee and royalties paid to Draxis Health, Inc. on sales of the Levulan® Kerastick® in Canada . |
Margins — Total product margins for 2009 were $23,133,000, or 78%, as
compared to $22,420,000, or 76% for 2008, as shown below:
| Year Ended December 31, | ||||||||||||||||||||
| Increase/ | ||||||||||||||||||||
| 2009 | 2008 | (Decrease) | ||||||||||||||||||
Levulan® Kerastick® Gross Margin |
$ | 22,270,000 | 84 | % | $ | 18,334,000 | 83 | % | $ | 3,936,000 | ||||||||||
BLU-U® Gross Margin |
333,000 | 17 | % | 244,000 | 13 | % | 89,000 | |||||||||||||
Total PDT Drug & Device Gross Margin |
$ | 22,603,000 | 80 | % | $ | 18,578,000 | 78 | % | $ | 4,025,000 | ||||||||||
Total Non-PDT Gross Margin |
530,000 | 36 | % | 3,842,000 | 68 | % | (3,312,000 | ) | ||||||||||||
TOTAL GROSS MARGIN |
$ | 23,133,000 | 78 | % | $ | 22,420,000 | 76 | % | $ | 713,000 | ||||||||||
Kerastick® gross margins for the year ended December 31, 2009
were 84%, as compared to 83% for the year ended December 31, 2008. The margin improvement for
2009 is attributable to increased U.S. sales volumes and an increased overall average selling
price. Our long-term goal is to achieve higher gross margins on
Kerastick® sales which will be significantly dependent on increased
volume. We believe that we could achieve improved gross margins on our
Kerastick® from further volume growth and price increases in the U.S.
BLU-U® margins for the year ended December 31, 2009 were 17%,
as compared to 13% for the year ended December 31, 2008. The increase in gross margin is a
result of increased sales volumes, partially offset by a decrease in our average selling
price. It is important for us to sell BLU-U® units in an effort to
drive Kerastick® sales volumes and accordingly, we may sell BLU-U’s at
low profit margins.
Non-PDT gross margins reflect the gross margin generated by the products acquired
as part of our merger with Sirius. Total Non-PDT gross margin for the year ended December 31,
2009 was 36% compared to 68% for the year ended December 31, 2008. Non-PDT margins in 2009
were negatively impacted by our discontinuance of sales of Nicomide®.
Research and Development Costs — Research and development costs for 2009 were
$4,313,000 as compared to $6,643,000 in 2008. The decrease in 2009 compared to 2008 was due
was due primarily to the absence of spending related to our Phase IIb clinical trial on acne,
which concluded in October 2008, and a one-time $600,000 Prescription Drug User Fee Act, or
PDUFA charge, which occurred in the first quarter of 2008, related to our approved AK
indication.
Based on the results of the Phase IIb clinical trial, which were previously
announced, we will not pursue further clinical development of Levulan®
PDT with BLU-U® for moderate to severe acne. However, we do expect to
continue to support investigator initiated studies in moderate to severe acne with
Levulan® and various light sources. In May 2009, we filed a 510(k)
application with the FDA for an expansion of our BLU-U® label to
include severe acne. We previously had filed a patent application to cover an invention
arising from the study. We received a response to our 510(k) application from the FDA in June
2009. The agency requested additional information in order to complete its review of our
application, which included supplementary clinical data in support of our claims. Based on
the FDA’s requests and the anticipated costs of additional clinical trials, we have decided
that we will not pursue the 510(k) application for an expansion of our
BLU-U® claims at this time.
We have initiated a DUSA-sponsored Phase II clinical trial, for the treatment of actinic
keratoses and reduction in the incidence of non-melanoma skin cancers in immunosuppressed
solid organ transplant recipients, or SOTRs, who have demonstrated that they are at risk of
developing multiple squamous cell carcinomas. We expect to enroll up to 36 patients at seven
clinical trial sites across the United States. We expect enrollment of these patients to
take at least one year, to receive preliminary results from the study in approximately 15
months and full results in approximately two years. To date, the pace of enrollment in the
study has been slower than we anticipated at the outset of the trial. In May 2008, we filed
an Orphan Drug Designation Application with the FDA for the prevention of cancer occurrence
in these patients. We received initial correspondence that the application was not granted on
the basis that the agency believed that the prevalence of the target population with the
disease state is greater than 200,000, which is the maximum number of patients allowed under
the Orphan Drug legislation. We met with the FDA during the third quarter of 2009 to clarify
and explain further our application and, based on that meeting, the agency invited us to
submit an amendment to our application for further evaluation. We submitted a draft amendment
in January 2010 along with a request for a follow-on meeting
with the agency. In February 2010, the
FDA
40
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indicated that a meeting was not necessary and suggested that we formally submit the
amended application. We expect to make the formal submission in March
2010. We expect that our
overall research and development costs for 2010 will be slightly increased from 2009 levels
due to increased spending on the SOTR clinical study and potential other initiatives not yet
determined.
Marketing and sales costs —Marketing and sales costs for the year ended December 31,
2009 were $12,897,000 as compared to $13,112,000 for the year ended December 31, 2008. These
costs consisted primarily of expenses such as salaries and benefits for the marketing and
sales staff, commissions, and related support expenses such as travel, and telephone,
totaling $9,389,000 in 2009, compared to $9,458,000 in 2008. The decrease in spending in 2009
in this category is due primarily to lower commissions and fringe benefit costs, offset in
part by additional salaries expense resulting from increased headcount. The remaining
expenses consisted of tradeshows, miscellaneous marketing and outside consultants totaling
$3,508,000 in 2009, compared to $3,654,000 in 2008. The decrease in this category is due
primarily to a decrease in tradeshow and other promotional spending in 2009. We expect
marketing and sales costs for 2010 to increase compared to 2009 levels, but to decrease as a
percentage of revenues.
General and administrative costs — General and administrative costs for the year
ended December 31, 2009 were $8,270,000 as compared to $9,188,000 for the year ended December
31, 2008. The decrease is mainly attributable to a decrease in compensation-related costs,
which in 2008 included severance and stock-compensation costs related to the departure of an
officer, offset in part by the payment of $100,000 and accrual of $214,000 related to the
Third Amendment to the Merger Agreement and related documents between us and the former
Sirius shareholders entered into in April 2009. General and administrative expenses are
highly dependent on our legal and other professional fees, which can vary significantly from
period to period. We expect general and administrative costs to remain relatively flat in
2010 compared with 2009, but to decrease as a percentage of revenues.
Impairment of goodwill — In the third quarter of 2008 we made a contingent payment
to the former shareholders of Sirius Laboratories in the amount of $1.5 million and in the
same period deemed the resulting goodwill to be impaired. During the fourth quarter of 2007,
we performed our annual test for goodwill impairment, and based on that review, we recorded
an impairment charge to goodwill of $6.8 million. The impairment charges were primarily
related to our revised estimates of cash flows associated with
Nicomide® and the other Sirius products, including the lack of a
product pipeline.
Settlements, net — During the second quarter of 2009, we settled the arbitration
proceeding initiated by Winston Laboratories, Inc., for a payment of $75,000, and a mutual
release and other customary terms. Winston alleged, in October 2008, that we breached the
2006 Micanol License Agreement and 2006 Micanol Transition License Agreement.
During the fourth quarter of 2007, we entered into a settlement agreement and mutual
release relating to litigation with River’s Edge. Under the terms of the settlement
agreement, River’s Edge made a lump-sum payment to us in the amount of $425,000 for damages
and paid to us $25.00 for every prescription of its product, NIC 750 above 5,000
prescriptions that were substituted for Nicomide® from September 30,
2007 through June 30, 2008. During the years ended December 31, 2008 and 2007 the net gain
from settlement of the litigation was $283,000 and $583,000, respectively. The payments under
the settlement agreement ceased in 2008 when the parties entered into an amendment to the
settlement, which the parties entered into effective as of July 3, 2008.
(Loss) gain on change in fair value of warrants — The warrants issued to investors
in connection with the October 29, 2007 private placement were recorded initially at fair
value and are marked to market each reporting period. The (increase) decrease in the
liability during 2009 and 2008 was $(376,000) and $826,000, respectively, which resulted in
non-cash (losses) gains in the respective periods. The increases or decreases in fair value
of the warrants are primarily due to changes in our stock price and the length of time
remaining prior to expiration.
Other Income, Net — Other income for the year ended December 31, 2009 decreased to
$291,000, as compared to $663,000 in 2008. This decrease reflects a decrease in our average
investable cash balances during 2009 as compared to 2008 along with a general decrease in
interest rates over the same timeframe.
Income Taxes — There is no provision for income taxes due to ongoing operating
losses. As of December 31, 2009, we had net operating loss carryforwards of approximately
$94,465,000 and tax credit carryforwards of approximately $1,556,000 for Federal tax
purposes. These amounts expire at various times through 2029. We have provided a full
valuation allowance against the net deferred tax assets at December 31, 2009 and 2008.
The amount of the net operating loss carryforwards and other tax attributes that we may
utilize to offset our future taxable income, when earned, may be subject to certain
limitations, based upon changes in the ownership of our common stock under IRC Section 382.
We currently believe that prior ownership changes have occurred as defined under IRC Section
382. We currently estimate that our utilization of our net operating loss carryforwards and
other tax attributes may be limited to an annual limitation between approximately $1.5
million and $2.4 million per year. The final determination of the annual limitation is
dependent upon certain technical rules that potentially could reduce the pre-change value
utilized to calculate the annual limitation. Further, additional rules could result in an
enhancement of the aforementioned annual
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limitation for the first five years after the
ownership change. Based on these additional factors, we estimate that we will be able to
utilize approximately $37.0 million to $57.0 million of our current net operating losses,
provided that sufficient income is generated and no further ownership changes were to occur.
The analysis has not been finalized. As we finalize the analysis, these amounts may change.
Net Loss — For 2009, we incurred a net loss of $2,508,000, or $0.10 per share, as
compared to $6,250,000, or $0.26 per share, for 2008. The decrease in net loss is
attributable to the reasons discussed above.
Year Ended December 31, 2008 As Compared to the Year Ended December 31, 2007
Revenues — Total revenues for 2008 were $29,545,000, as compared to $27,663,000 in
2007 and were comprised of the following:
| Year Ended December 31, | ||||||||||||
| Increase/ | ||||||||||||
| 2008 | 2007 | (Decrease) | ||||||||||
PDT PRODUCT REVENUES |
||||||||||||
LEVULAN® KERASTICK® PRODUCT REVENUES |
||||||||||||
United States |
$ | 20,206,000 | $ | 15,139,000 | $ | 5,067,000 | ||||||
Canada |
699,000 | 740,000 | (41,000 | ) | ||||||||
Korea |
820,000 | 436,000 | 384,000 | |||||||||
Rest of world |
345,000 | 92,000 | 253,000 | |||||||||
Subtotal Levulan ® Kerastick® product revenues |
22,070,000 | 16,407,000 | 5,663,000 | |||||||||
BLU-U® PRODUCT REVENUES |
||||||||||||
United States |
1,810,000 | 1,724,000 | 86,000 | |||||||||
Canada |
— | 94,000 | (94,000 | ) | ||||||||
Korea |
50,000 | 50,000 | ||||||||||
Subtotal BLU-U® product revenues |
1,860,000 | 1,868,000 | (8,000 | ) | ||||||||
TOTAL PDT PRODUCT REVENUES |
23,930,000 | 18,275,000 | 5,655,000 | |||||||||
TOTAL NON-PDT DRUG PRODUCT REVENUES |
5,615,000 | 9,388,000 | (3,773,000 | ) | ||||||||
TOTAL PRODUCT REVENUES |
$ | 29,545,000 | $ | 27,663,000 | $ | 1,882,000 | ||||||
For the year ended December 31, 2008, total PDT Drug and Device Products revenues,
comprised of revenues from our Kerastick® and
BLU-U® products, were $23,930,000. This represented an increase of
$5,655,000 or 31%, over the comparable 2007 total of $18,275,000. The incremental revenue was
driven primarily by increased Kerastick® revenues.
For the year ended December 31, 2008, Kerastick® revenues
were $22,070,000, representing an increase of $5,663,000 or 35%, over the comparable 2007
totals of $16,407,000. Kerastick® unit sales to end-users for the year
ended December 31, 2008 were 207,516, including 8,700 sold in Canada and 11,826 sold in
Korea. This represented an increase from 164,944 Kerastick® units sold
in the year ended December 31, 2007, including 9,798 sold in Canada and 7,392 sold in Korea.
Our average net selling price for the Kerastick® increased to $104.80
for the year ended December 31, 2008 from $98.99 in 2007. Our average net selling price for
the Kerastick® included sales made directly to our end-user customers,
as well as sales made to our distributors, in Canada, Korea and the rest of the world. The
increase in 2008 Kerastick® revenues was driven mainly by increased
sales volumes in the United States, due in part to our continued focus on the medical
dermatology market, and internationally, through our distribution agreements with Stiefel and
Daewoong, and an increase in our average unit selling price.
For the year ended December 31, 2008, BLU-U® revenues were
$1,860,000, essentially flat in comparison with 2007 BLU-U® revenues of
$1,868,000. The slight decrease in 2008 BLU-U® revenues were driven by
slightly lower sales volumes which were offset by an increase in our average selling price.
In the year ended December 31, 2008, there were 229 units sold, as compared to 232 units in
2007. The 2008 total consisted of 224 units sold in the United States and 5 in Korea by
Daewoong. The 2007 total consisted of 206 sold in the United States, 16 sold in Canada and 10
in Korea. Our average net selling price for the BLU-U® increased to
$7,861 for the year ended December 31, 2008 from $7,595 for 2007. At December 31, 2008, there
were approximately 58 units in the field pursuant to the BLU-U®
evaluation program, compared to 31 units in the field at December 31, 2007. The units are
classified as inventory in the financial statements and are being amortized during the
evaluation period to cost of goods sold using an estimated life for the equipment of three
years.
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Total Non-PDT Drug Product revenues for the year ended December 31, 2008 were
$5,615,000, compared to $9,388,000 for the year ended December 31, 2007. The substantial
majority of the Non-PDT Drug Product revenues were from sales of Nicomide®
and Nicomide® related royalties. In April 2008, we were notified by
Actavis Totowa, LLC, the manufacturer of Nicomide®, that Actavis would
cease manufacturing several prescription vitamins, including Nicomide®,
due to continuing discussions with the FDA. As we had previously disclosed, Actavis Totowa
had received notice that the FDA considers prescription dietary supplements to be unapproved
new drugs. In response to this notification and subsequent discussions with the FDA, we
stopped the sale and distribution of Nicomide® as a prescription
product in June 2008.
On August 12, 2008, we entered into a worldwide non-exclusive patent license
agreement to our patent covering Nicomide® with River’s Edge
Pharmaceuticals, LLC and an amendment to our settlement agreement with River’s Edge. The
amendment to the settlement agreement allowed River’s Edge to manufacture and market a
prescription product that could be substitutable for Nicomide® pursuant
to the terms of the License Agreement and changed certain payment obligations of River’s Edge
for sales of its substitutable product. In consideration for granting the license, we were
paid a share of the net revenues, as defined in the license agreement, of River’s Edge’s
licensed product sales under the license agreement. Nicomide® sales in
2008 were negatively impacted by residual levels of NIC 750, that were substituted for
Nicomide®, remaining in the distribution channel subsequent to the
settlement with River’s Edge.
The increase in our total revenues in 2008 resulted from increased PDT segment
revenues in the United States, as well as our PDT product launches in Korea and the rest of
the world.
Cost Of Product Revenues and Royalties — Cost of product revenues and royalties for the
year ended December 31, 2008 were $7,125,000 as compared to $7,829,000 for the year ended
December 31, 2007. A summary of the components of cost of product revenues and royalties is
provided below:
| Year Ended December 31, | ||||||||||||
| Increase/ | ||||||||||||
| 2008 | 2007 | (Decrease) | ||||||||||
Levulan ® Kerastick ® Cost of Product
Revenues and Royalties |
||||||||||||
Direct Levulan® Kerastick® Product costs |
$ | 2,541,000 | $ | 2,384,000 | $ | 157,000 | ||||||
Other Levulan® Kerastick® production
costs including internal costs assigned to support products, net |
229,000 | 280,000 | (51,000 | ) | ||||||||
Royalty and supply fees(1) |
966,000 | 717,000 | 249,000 | |||||||||
Subtotal Levulan® Kerastick®
Cost of Product Revenues and Royalties |
3,736,000 | 3,381,000 | 355,000 | |||||||||
BLU-U ® Cost of Product Revenues |
||||||||||||
Direct BLU-U® Product Costs |
822,000 | 733,000 | 89,000 | |||||||||
Other BLU-U® Product Costs including internal costs assigned
to support products; as well as, costs incurred to ship, install and service the
BLU-U® in physicians’ offices |
794,000 | 836,000 | (42,000 | ) | ||||||||
Subtotal BLU-U ® Cost of Product Revenues |
1,616,000 | 1,569,000 | 47,000 | |||||||||
TOTAL PDT DRUG & DEVICE COST OF PRODUCT REVENUES AND ROYALTIES |
5,352,000 | 4,950,000 | 402,000 | |||||||||
Non-PDT Drug Cost of Product Revenues and Royalties |
1,773,000 | 2,879,000 | (1,106,000 | ) | ||||||||
TOTAL NON-PDT DRUG COST OF PRODUCT REVENUES AND ROYALTIES |
1,773,000 | 2,879,000 | (1,106,000 | ) | ||||||||
TOTAL COST OF PRODUCT REVENUES AND ROYALTIES |
$ | 7,125,000 | $ | 7,829,000 | $ | (704,000 | ) | |||||
| 1) | Royalty and supply fees reflect amounts paid to our licensor, PARTEQ and amortization of an upfront fee and ongoing royalties paid to Draxis Health, Inc. on sales of the Levulan® Kerastick® in Canada. |
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Margins — Total product margins for 2008 were $22,420,000, or 76%, as compared to
$19,833,000, or 72% for 2007, as shown below:
| Year Ended December 31, | ||||||||||||||||||||
| Increase/ | ||||||||||||||||||||
| 2008 | 2007 | (Decrease) | ||||||||||||||||||
Levulan ® Kerastick ® Gross Margin |
$ | 18,334,000 | 83 | % | $ | 13,025,000 | 79 | % | $ | 5,309,000 | ||||||||||
BLU-U ® Gross Margin |
244,000 | 13 | % | 299,000 | 16 | % | (55,000 | ) | ||||||||||||
Total PDT Drug & Device Gross Margin |
$ | 18,578,000 | 78 | % | $ | 13,324,000 | 73 | % | $ | 5,254,000 | ||||||||||
Total Non-PDT Drug Gross Margin |
3,842,000 | 68 | % | 6,509,000 | 69 | % | (2,667,000 | ) | ||||||||||||
TOTAL GROSS MARGIN |
$ | 22,420,000 | 76 | % | $ | 19,833,000 | 72 | % | $ | 2,587,000 | ||||||||||
Kerastick® gross margins for the year ended December 31, 2008
were 83%, as compared to 79% for the year ended December 31, 2007. The increase in margin was
mainly attributable to an increase in our average unit selling price and lower overall
manufacturing costs due to increased production volumes.
BLU-U® margins for the year ended December 31, 2008 were 13%,
as compared to 16% for the year ended December 31, 2007. The decrease in gross margin was a
result of an increase in our direct BLU-U® product costs, offset in
part by an increase in our average selling price per unit.
Non-PDT Drug Product Margins reflect the gross margin generated by the products
acquired as part of our merger with Sirius. Total margin for the year ended December 31, 2008
was 68% compared with 69% for the year ended December 31, 2007. During 2008, Non-PDT Product
margins were negatively impacted by our discontinuance of sales of
Nicomide®.
Research and Development Costs — Research and development costs for 2008 were
$6,643,000 as compared to $5,977,000 in 2007. The increase in 2008 compared to 2007 was due
primarily to increased spending on our Phase IIb clinical trial on acne and a $0.6 million
Prescription Drug User Fee Act (PDUFA) charge related to our approved AK indication.
Marketing and Sales Costs — Marketing and sales costs for the year ended December
31, 2008 were $13,112,000 as compared to $13,311,000 for the year ended December 31, 2007.
These costs consisted primarily of expenses such as salaries and benefits for the marketing
and sales staff, commissions, and related support expenses such as travel, and telephone,
totaling $9,458,000 for the year ended December 31, 2008, compared to $8,626,000 in the year
ended December 31, 2007. The increase in this category was due mainly to increased salaries
and commissions earned in 2008 in comparison to 2007 due to improved performance against
internal corporate goals during 2008. The remaining expenses consisted of tradeshows,
miscellaneous marketing and outside consultants totaling $3,654,000 for the year ended
December 31, 2008, compared to $4,685,000 for the year ended December 31, 2007. The decrease
in this category in 2008 is due primarily to absence in 2008 of expenses incurred in 2007
related to the launch of ClindaReach®.
General and Administrative Costs — General and administrative costs for the year
ended December 31, 2008 were $9,188,000 as compared to $10,311,000 for the year ended
December 31, 2007. The decrease is mainly attributable to a decrease in legal expenses, which
were incurred in 2007 due to litigation with River’s Edge, offset in part by increased
compensation costs, which included the severance and stock compensation costs related to the
departure of an officer during the year.
Impairment of Goodwill — In the third quarter of 2008 we made a contingent payment
to the former shareholders of Sirius Laboratories in the amount of $1.5 million and in the
same period deemed the resulting goodwill to be impaired. During the fourth quarter of 2007,
we performed our annual test for goodwill impairment, and based on the review, we recorded an
impairment charge to goodwill of $6.8 million. The impairment charges were primarily related
to our revised estimate of cash flows associated with Nicomide® and the
other Sirius products, including the lack of a product pipeline.
Gain on change in fair value of warrants — The warrants issued to investors in
connection with the October 29, 2007 private placement were recorded initially at fair value
and are marked to market each reporting period. The decrease in the liability during 2008 and
2007 was $826,000 and $687,000, respectively, which resulted in a non-cash gain in both
periods. The decrease in fair value was due primarily to decreases in our stock price.
Other Income, Net — Other income for the year ended December 31, 2008 increased to
$663,000, as compared to $555,000 in 2007. The increase in 2008 reflected an increase in our
average invested cash balances during 2008 as compared to 2007 as a result of the October
2007 private placement.
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Income Taxes — There is no provision for income taxes due to ongoing operating
losses. We provided a full valuation allowance against the net deferred tax assets at
December 31, 2008 and 2007.
Net Loss — For 2008, we recognized a net loss of $6,250,000, or $0.26 per share, as
compared to $14,714,000, or $0.73 per share, for 2007. The decrease in net loss is
attributable to the reasons discussed above.
Quarterly Results of Operations
The following is a summary of the unaudited quarterly results of operations for the
years ended December 31, 2009 and 2008, respectively:
| Quarterly Results for Year Ended December 31, 2009 | ||||||||||||||||
| March 31 | June 30 | Sept 30 | Dec 31 | |||||||||||||
Product revenues |
$ | 7,138,269 | $ | 6,965,541 | $ | 6,930,110 | $ | 8,773,909 | ||||||||
Gross margin |
5,200,043 | 5,524,677 | 5,335,418 | 7,073,345 | ||||||||||||
Net loss |
(1,606,931 | ) | (852,709 | ) | (415,240 | ) | 366,588 | |||||||||
Basic and diluted loss per common share |
$ | (0.07 | ) | $ | (0.04 | ) | $ | (0.02 | ) | $ | 0.02 | |||||
| Quarterly Results for Year Ended December 31, 2008 | ||||||||||||||||
| March 31 | June 30 | Sept 30(1) | Dec 31 | |||||||||||||
Product revenues |
$ | 7,929,500 | $ | 8,112,239 | $ | 5,726,071 | $ | 7,777,596 | ||||||||
Gross margin |
6,229,183 | 6,324,545 | 4,264,043 | 5,602,540 | ||||||||||||
Net loss |
(1,284,141 | ) | (138,791 | ) | (2,836,855 | ) | (1,990,654 | ) | ||||||||
Basic and diluted loss per common share |
$ | (0.05 | ) | $ | (0.01 | ) | $ | (0.12 | ) | $ | (0.08 | ) | ||||
| (1) | In the third quarter of 2008, we recorded an impairment charge to our goodwill balance of $1.5 million. |
Liquidity and Capital Resources
At December 31, 2009, we had approximately $16,669,000 of total liquid assets,
comprised of $7,613,000 of cash and cash equivalents and marketable securities
available-for-sale totaling $9,056,000. We believe that our liquidity will be sufficient to
meet our cash requirements for at least the next twelve months. As of December 31, 2009, our
marketable securities had a weighted average yield to maturity of 3.15% and maturity dates
ranging from April 2010 to January 2013. Our net cash used in operations in 2009 was
$1,782,000 versus $2,303,000 in 2008. The year-over-year decrease in cash used in operations
is primarily attributable to a decrease in our net loss, offset in part by a one-time payment
of a significant PDUFA fee, a bonus paid to our employees in 2009 that related to 2008 (i.e.
there was no bonus paid in 2008 related to 2007), and a year-over-year decrease in payments
received from our international distributor partners. Our net cash provided by investing
activities was $5,516,000 in 2009 versus $1,466,000 in 2008. Net cash provided by investing
activities is primarily from net proceeds from maturities and sales of marketable securities.
Our net cash from financing activities was not material for 2009 or 2008. As of December 31,
2009 working capital (total current assets minus total current liabilities) was $17,780,000,
as compared to $20,278,000 as of December 31, 2008. Total current assets decreased by
$2,908,000 during 2009, due primarily to decreases in our marketable securities, inventory and
prepaid and other current assets, offset in part by increases in our cash and cash equivalents
and accounts receivable. Total current liabilities decreased by $410,000 during 2009 due
primarily to a decrease in accrued compensation and other accrued expenses, offset in part by
an increase in accounts payable and the current portion of deferred revenues. In response to
the instability in the financial markets, we regularly review our marketable securities
holdings, and have invested primarily in securities of the U.S. government and its agencies.
Since our inception, we have generated significant losses while we have conducted
preclinical and clinical trials, engaged in research and development and dedicated resources
to the commercialization of our products. We have also incurred significant losses from the
impairment of assets acquired in the acquisition of Sirius. We have funded our operations
primarily through public offerings, private placements of equity securities and payments
received under our collaboration agreements. We expect to incur additional research and
development and other costs including costs related to preclinical studies and clinical
trials. Our costs, including research and development costs for our product candidates and
sales, marketing and promotion expenses for any of our existing or future products to be
marketed by us or our collaborators may exceed revenues in the future, which may result in
continued losses from operations.
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We may expand or enhance our business in the future by using our resources to acquire by
license, purchase or other arrangements, additional businesses, new technologies, or products
in the field of dermatology. In 2009, we focused primarily on increasing the sales of the
Levulan® Kerastick® and the
BLU-U®, as well as the Non-PDT Drug Products and advancing our Phase II study
for use of Levulan® PDT in SOTR.
If we continue to be unprofitable and do not become cash flow positive from operations on
a full-year basis within a reasonable timeframe, we may reduce our headcount or reduce
spending in other areas. We may also seek to raise funds through financing transactions. We
cannot predict whether financing will be available at all or on reasonable terms.
As part of our merger with Sirius, as amended, we agreed to pay additional consideration
to the former shareholders of Sirius in future periods, based upon the attainment of
pre-determined total cumulative sales milestones for the Sirius products over the period
ending December 31, 2011. The pre-determined cumulative sales milestones for the Sirius
products and the related milestone payments which may be paid in cash or shares, as we may
determine, are as follows:
| Additional | ||||
| Cumulative Sales Milestone: | Consideration: | |||
$35.0 million |
$1.0 million | |||
$45.0 million |
$1.0 million | |||
Total |
$2.0 million | |||
The first cumulative sales milestone at $25.0 million was achieved during the third
quarter of 2008, and a cash payment in the amount of $1.5 million was paid to the former
Sirius shareholders during that period. The payment was recorded initially as goodwill and
then subsequently deemed impaired and expensed during the same period. In April 2009, we
entered into the Third Amendment to the Merger Agreement, or Third Amendment. As consideration
for the Third Amendment and related documents, we paid the former Sirius shareholders $100,000
on a pro rata basis and have guaranteed a payment of $250,000 in January 2012 to the former
Sirius shareholders if the $35,000,000 sales milestone is not triggered.
We have no off-balance sheet financing arrangements.
Contractual Obligations and Other Commercial Commitments
L. Perrigo Company
On October 21, 2005, the former Sirius entered into a supply agreement with L.
Perrigo Company, or Perrigo, for the exclusive manufacture and supply of a proprietary
device/drug kit designed by Sirius pursuant to an approved ANDA owned by Perrigo. The
agreement was assigned to us as part of the Sirius merger. We were responsible for all
development costs and for obtaining all necessary regulatory approvals and launched the
product, ClindaReach®, in March 2007. Perrigo is entitled to royalties
on net sales of the product, including certain minimum annual royalties, which commenced May
1, 2006, in the amount of $250,000. The initial term of the agreement expires in October 2010
and may be renewed based on certain minimum purchase levels and other terms and
conditions.
Merger With Sirius Laboratories, Inc.
In March 2006, we closed our merger to acquire all of the common stock of Sirius
Laboratories Inc. in exchange for cash and common stock worth up to $30,000,000. Of the up to
$30,000,000, up to $5,000,000, ($1,500,000 of which would be paid in cash, and $3,500,000 of
which would be paid in cash or common stock) may be paid based on a combination of new
product approvals or launches, and achievement of certain pre-determined total cumulative
sales milestones for Sirius products. With the launch of ClindaReach®,
one of the new Sirius products, we were obligated to make a cash payment of $500,000 to the
former shareholders of Sirius. Also, as a consequence of the decision not to launch the
product under development with another third party and pursuant to the terms of the merger
agreement with Sirius, we paid $250,000 on a pro rata basis to the former Sirius
shareholders. Similarly, with our decision in early 2008 not to develop a third product from
a list of product candidates acquired as part of the merger, another $250,000 was paid on a
pro rata basis to the former Sirius shareholders. The payments for
ClindaReach® and the other two product decisions satisfy our
obligations for the $1,500,000 portion of the purchase price mentioned above. In the third
quarter of 2008, the first of the pre-determined total cumulative sales milestones for Sirius
products was achieved, and accordingly, we made a cash payment of $1,500,000 to the former
Sirius shareholders in consideration of the milestone achievement.
Third Amendment To The Merger Agreement
In April 2009, we and the former shareholders of Sirius entered into a letter agreement
providing for the consent of the former Sirius shareholders to the amendment to the license
agreement with River’s Edge, a release, and the third amendment to the merger agreement,
dated as of December 30, 2005, by and among us, Sirius and the shareholders of Sirius.
Pursuant to the merger agreement prior to this amendment, we agreed to pay additional
consideration after the closing of the merger to the former shareholders of Sirius based upon
the attainment of pre-determined total cumulative sales milestones for the
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products acquired
from Sirius over the period ending 50 months from the date of the March 2006 closing of the
merger. Pursuant to the agreements entered into in April 2009, we have agreed to extend the
milestone termination date from 50 months from the date of the closing of the merger until
December 31, 2011 and to include in the definition of net sales in the merger agreement
payments which we may receive from the divestiture of Sirius products. The third amendment to
the merger agreement also removes our obligation to market the Sirius products according to
certain previously required standards and allows us to manage all business activities
relating to the products acquired from Sirius without further approval from the former Sirius
shareholders.
In April 2009 we paid to the former Sirius shareholders, on a pro rata basis, $100,000.
In addition, in the event that the $1,000,000 milestone payment that would become due to the
former Sirius shareholders under the merger agreement if cumulative net sales of the Sirius
products reach $35,000,000 is not, in fact, triggered by the new milestone termination date,
then we have agreed to pay $250,000 to the former Sirius shareholders on a pro rata basis on
or before January 6, 2012. The $100,000 payment to Sirius shareholders, along with the
present value of the guaranteed $250,000 milestone payment, or $214,000, have been included
in general and administrative expense for 2009 in the accompanying Consolidated Statement of
Operations.
PARTEQ Agreement
We license certain patents underlying our Levulan® PDT
systems under a license agreement with PARTEQ Research and Development Innovations, or
PARTEQ. Under the agreement, we have been granted an exclusive worldwide license, with a
right to sublicense, under PARTEQ patent rights, to make, have made, use and sell certain
products, including ALA. The agreement covers certain use patent rights. When we sell our
products directly, we have agreed to pay to PARTEQ royalties of 6% and 4% on 66% of the net
selling price in countries where patent rights do and do not exist, respectively. In cases
where we have a sublicensee, we will pay 6% and 4% when patent rights do and do not exist,
respectively, on our net
selling price less the cost of goods for products sold to the sublicensee, and 6% of
payments we receive on sales of products by the sublicensee. We are also obligated to pay to
PARTEQ 5% of any lump sum sublicense fees received, such as milestone payments, excluding
amounts designated by the sublicensee for future research and development efforts.
For the years ended December 31, 2009, 2008 and 2007, actual royalties based on
product sales were approximately $1,019,000, $873,000, and $620,000, respectively. Annual
minimum royalties to PARTEQ must total at least CDN $100,000 (U.S. $95,000 as of December 31,
2009).
National Biological Corporation Amended And Restated Purchase And Supply Agreement
On June 29, 2009, we extended the term of the 2004 Amended and Restated Purchase
and Supply Agreement with National Biological Corporation, or NBC, one of the manufacturers
of our BLU-U® light source, until June 30, 2011. We have an option to
further extend the term for an additional two (2) years if we purchase a certain number of
units. The parties agreed upon a tiered price schedule based on the volume of purchases and
updated certain quality control provisions. All other terms and conditions of the 2004
agreement remain in effect.
Sochinaz SA
Under an agreement dated December 24, 1993, Sochinaz SA manufactures and supplies
our requirements of Levulan® from its FDA approved facility in
Switzerland. In 2009, our agreement was renewed until December 31, 2015 on substantially the
same terms, albeit with a revised pricing schedule to cover the new term. While we can obtain
alternative supply sources in certain circumstances, any new supplier would have to be
inspected and qualified by the FDA.
Lease Agreements
We have entered into lease commitments for office space in Wilmington,
Massachusetts, and Toronto, Ontario. The minimum lease payments disclosed below include the
non-cancelable terms of the leases. We have vacated the Toronto, Ontario office and have
subleased the space through June 30, 2010. We are presently in discussions with the
subtenant regarding extending the sublease beyond June 30, 2010.
Research Agreements
We have entered into various agreements for research projects and clinical studies.
As of December 31, 2009, future payments to be made pursuant to these agreements, under
certain terms and conditions, totaled approximately $1,342,000. Included in this future
payment is 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 our products in the field of dermatology. The agreement
was renewed on June 15, 2009 for a one year period. Therapeutics is entitled to receive a
bonus valued at $50,000, in cash or stock at our discretion, upon each anniversary of the
effective date.
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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, 2009:
| Total | 1 Year or less | 2-3 Years | 4-5 Years | After 5 Years | ||||||||||||||||
Operating lease obligations |
$ | 1,227,000 | $ | 464,000 | $ | 763,000 | $ | — | $ | — | ||||||||||
Purchase obligations (1, 2) |
4,547,000 | 4,184,000 | 363,000 | — | — | |||||||||||||||
Minimum royalty obligations (3) |
606,000 | 345,000 | 190,000 | 71,000 | — | |||||||||||||||
Total obligations |
$ | 6,380,000 | $ | 4,993,000 | $ | 1,316,000 | $ | 71,000 | $ | — | ||||||||||
| 1) | Research and development projects include various commitments including obligations for our study on the treatment of actinic keratoses and reduction of non-melanoma skin cancers in immunosuppressed solid organ transplant recipients, or SOTR, who have demonstrated that they are at risk of developing multiple squamous cell carcinomas. | |
| 2) | In addition to the obligations disclosed above, we have contracted with Therapeutics, Inc., a clinical research organization, to manage the clinical development of our products in the field of dermatology. This organization has the opportunity for additional stock grants, bonuses, and other incentives for each product indication ranging from $250,000 to $1,250,000, depending on the regulatory phase of development of products under Therapeutics’ management. | |
| 3) | Minimum royalty obligations relate to our agreements with PARTEQ and Perrigo described above. |
Rent expense incurred under these operating leases was approximately $398,000,
$447,000, and $476,000 for the years ended December 31, 2009, 2008, and 2007, respectively.
Recently Issued Accounting Guidance for Future Adoption
In October 2009, the FASB issued Accounting Standards Update (ASU) No. 2009-13,
Multiple-Deliverable Revenue Arrangements (ASU No. 2009-13). ASU No. 2009-13, which amends
existing revenue recognition accounting pronouncements and provides accounting principles and
application guidance on whether multiple deliverables exist, how the arrangement should be
separated, and the consideration allocated. This guidance eliminates the requirement to
establish the fair value of undelivered products and services and instead provides for
separate revenue recognition based upon our estimate of the selling price for an undelivered
item when there is no other means to determine the fair value of that undelivered item.
Previous accounting principles required that the fair value of the undelivered item be the
price of the item either sold in a separate transaction between unrelated third parties or the
price charged for each item when the item is sold separately by the vendor. This was difficult
to determine when the product was not individually sold because of its unique features. If the
fair value of all of the elements in the arrangement was not determinable, then revenue was
deferred until all of the items were delivered or fair value was determined. This new approach
is effective prospectively for revenue arrangements entered into or materially modified in
fiscal years beginning on or after June 15, 2010, which for us means no later than January 1,
2011. Early adoption is permitted; however, adoption of this guidance as of a date other than
January 1, 2011, will require us to apply this guidance retrospectively effective as of
January 1, 2010 and will require us to disclose the effect of this guidance as applied to all
previously reported interim periods in the fiscal year of adoption. The potential impact of
this standard is being evaluated.
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
Interest Rates
Our exposure to market risk for changes in interest rates relates primarily to our
investment portfolio. We do not use derivative financial instruments in our investment
portfolio. Our investment policy specifies credit quality standards for our investments and
limits the amount of credit exposure to any non-U.S. government single issue, issuer or type
of investment.
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Our investments consist of United States government securities and high grade
corporate bonds. All investments are carried at fair value.
As of December 31, 2009, the weighted average yield to maturity on our investments
was 3.15%. If market interest rates were to increase immediately and uniformly by 100 basis
points from levels as of December 31, 2009, the fair market value of the portfolio would
decline by $91,000. Declines in interest rates could, over time, reduce our interest income.
Derivative Financial Instruments
The warrants that we issued on October 29, 2007 in connection with the private
placement of our common stock were determined to be derivative financial instruments and
accounted for as a liability. These warrants are revalued on a quarterly basis with the
change in value reflected in our earnings. We value these warrants using various assumptions,
including the Company’s stock price as of the end of each reporting period, the historical
volatility of the Company’s stock price, and risk-free interest rates commensurate with the
remaining contractual term of the warrants. Changes in the Company’s stock price or in
interest rates would result in a change in the value of the warrants and impact the
consolidated statement of operations. A 10% increase in our stock price would cause the fair
value of the warrants and our warrant liability to increase by approximately $126,000.
Currency Exchange Rates
The royalties we earn each quarter under our agreement with Stiefel Laboratories
are based on a percentage of the net sales to end-users. These royalties are calculated in
local currencies and converted to and paid in United States dollars each reporting period.
Under our agreement with Daewoong, revenues we earn under the excess purchase price
provision of the agreement, if any, are calculated based on end-user pricing in local
currencies and converted to United States dollars before a determination is made whether any
payments are due us. These payments, if any, are made in United States dollars each reporting
period.
Other exchange rates that we are subject to, such as the Canadian dollar, are not
material to our operations.
Forward-Looking Statements Safe Harbor
This report, including the Management’s Discussion and Analysis of Financial Condition
and Results of Operations, contains various “forward-looking statements” within the meaning
of Section 27A of the Securities Act of 1933 and 21E of the Securities Exchange Act of 1934
which represent our expectations or beliefs concerning future events, including, but not
limited to our expectations concerning the introduction of generic substitutes for
Nicomide® and such products’ impact on sales of
Nicomide®, our use of estimates and assumptions in the preparation of
our financial statements and policies and impact on us of the adoption of certain accounting
standards, potential reduction of headcount, management’s beliefs regarding the unique
nature of Levulan® and its use and potential uses, expectations
regarding the enrollment of patients into and timing of results of clinical trials, future
development of Levulan® and other potential indications, expectations
concerning manufacture of the BLU-U® in our facility, intention to
pursue licensing, marketing, co-promotion, other arrangements, additional business or new
technologies, status of clinical programs and beliefs regarding potential efficacy, our
beliefs regarding the safety, simplicity, reliability and cost-effectiveness of light
sources, our expectations regarding product launches in other countries, expectations
regarding additional market expansion, the impact on our market share of PhotoMedex’s
promotion of Metvixia, expectations regarding the marketing and distribution of
Levulan® Kerastick® by Stiefel Laboratories,
Inc., beliefs regarding the suitability of clinical data, expectations regarding the
confidentiality of our proprietary information, expectations to apply for foreign regulatory
approvals, beliefs regarding regulatory classifications, filings,
timelines, off-label use, and
environmental compliance, beliefs concerning patent disputes, the impact of litigation and
ability to afford the costs, ability and intentions to defend and enforce our patents,
beliefs regarding the reexamination process of our patents, the impact of a third-party’s
regulatory compliance status and fulfillment of contractual obligations, expectations of
increases or decreases in the prices we charge for our products, our beliefs regarding the
size of the market for our products and our product candidate, expected use of cash
resources, beliefs regarding requirements of cash resources for our future liquidity, and
research and development programs, beliefs regarding investments and economic conditions
including the impact of our customer’s failure to meet our payment terms, expectations
regarding outstanding options and warrants and our dividend policy, anticipation of
increases or decreases in personnel, beliefs regarding the effect of reimbursement policies
on revenues and acceptance of our therapies, expectations for future strategic opportunities
and research and development programs and expenses, expectations for continuing operating
losses and competition, expectations regarding the adequacy and availability of insurance,
expectations regarding general and administrative costs, expectations regarding sales and
marketing costs and research and development costs, levels of interest income and our
capital resource needs, impact of raising additional funds to meet capital requirements and
the potential dilution, potential for additional inspection and testing of our manufacturing
facilities or additional FDA actions, beliefs regarding the adequacy of our inventory of
Kerastick®, our manufacturing capabilities and the impact of
inventories on revenues, beliefs regarding interest rate risks to our investments and
effects of inflation, beliefs regarding the impact of any current or future legal
proceedings, dependence on key personnel, and beliefs concerning product liability
insurance, beliefs regarding the enforceability of our patents, beliefs regarding the entry
into the market and impact of generic products on revenues, financial condition, results of
operations and profitability, our beliefs regarding our sales and marketing efforts, beliefs
regarding competition with other companies and effect of increased reimbursement, beliefs
regarding the adoption of our products, beliefs regarding our beliefs regarding the use of
our products and technologies by third parties, our beliefs regarding our compliance with
applicable laws, rules and regulations, our beliefs regarding available reimbursement for
our products, our beliefs regarding the current and future clinical development and testing
of our potential products and technologies and the costs thereof, beliefs regarding the
volatility of our stock price, beliefs regarding the impact of our rights plan, beliefs
regarding the impact of future sales of securities, beliefs regarding future
development plans with respect to the NCI clinical trials, expectations related to the
change in revenues of our PDT and Non-PDT products, expectations regarding the payment of
remaining milestones to former Sirius shareholders, beliefs regarding market share, beliefs
regarding profitability, beliefs regarding the change in growth in our PDT Drug and Device
Products segment, expectations regarding our manufacturing facility, beliefs regarding our
SOTR research and development program, beliefs regarding s Nasdaq listing, beliefs regarding
Section 382 on our current and future NOLs ,beliefs regarding
evaluation of wholesaler inventory levels and our applicable revenue
related reserves, beliefs regarding factors which
49
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could trigger an impairment review, beliefs regarding our ability to
use net operating loss carryforwards and tax credit carryforwards to offset future taxable
income, beliefs regarding a future ownership change, beliefs regarding the outcome if some
or all of our shares are sold into the public market over a short period of time, beliefs
regarding our ability to sell equity securities or equity-related securities in the future,
expectations regarding the financial statement impact regarding the loss of a product in
transport, beliefs regarding the impact that any manufacturing or supply problems could have
on our sales, expectations for filing an amendment to the Orphan Drug application,
intentions to support research, intentions to use third-party manufacturers for Non-PDT
products, anticipation of future NDAs for Levulan® PDT as combination
products, requirements to meet CE marking standards and beliefs concerning safety procedures
for hazardous materials, our compliance and risks of liability. These forward-looking
statements are further qualified by important factors that could cause actual results to
differ materially from those in the forward-looking statements. These factors include,
without limitation, changing market and regulatory conditions, actual clinical results of
our trials, the impact of competitive products and pricing, the timely development, FDA and
foreign regulatory approval, and market acceptance of our products, environmental risks
relating to our products, reliance on third-parties for the production, manufacture, sales
and marketing of our products, the availability of products for acquisition and/or license
on terms agreeable to us, sufficient sources of funds, the securities regulatory process,
the maintenance of our patent portfolio and ability to obtain competitive levels of
reimbursement by third-party payors, none of which can be assured. Results actually achieved
may differ materially from expected results included in these statements as a result of
these or other factors.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following financial statements required to be filed pursuant to this Item 8 are
appended to this Annual Report on Form 10-K:
Report of Independent Registered Public Accounting Firm |
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
Evaluation of Disclosure 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)). Disclosure
controls and procedures include, without limitation, controls and procedures designed
to ensure that information required to be disclosed by an issuer in the reports that
it files or submits under the Exchange Act is recorded, processed, summarized and
reported, within the time periods specified in the SEC’s rules and forms and that
such information is accumulated and communicated to the issuer’s management,
including its principal executive and principal financial officers or persons
performing similar functions, as appropriate to allow timely decisions regarding
required disclosure. Based upon that evaluation, the Chief Executive Officer and
Chief Financial Officer concluded that our disclosure controls and procedures were
effective as of the end of the period covered by this report.
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Changes In Internal Control Over Financial Reporting. The Chief Executive
Officer and Chief Financial Officer have concluded that there have been no changes in
the Company’s internal control over financial reporting during the quarter ended
December 31, 2009 that have materially affected, or are reasonably likely to
materially affect, the Company’s internal control over financial reporting.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate
internal control over financial reporting, as such term is defined in Exchange Act
Rules 13a-15(f). Under the supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial Officer, we conducted an
evaluation of the effectiveness of our internal control over financial reporting
based on the framework in Internal Control — Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission. Based on our
evaluation under the framework in Internal Control — Integrated Framework, our
management concluded that our internal control over financial reporting was effective
as of December 31, 2009.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by Item 10 is hereby incorporated by reference to
the sections entitled “Nominees,” “Executive Officers who are not Directors,”
“Compliance with Section 16(a) of the Exchange Act”, “Meetings and Committees of the
Board”, and “Code of Ethics Applicable to Senior Officers” of the Registrant’s 2010
Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is hereby incorporated by reference to
the sections entitled “Director Compensation,” “Executive Compensation,” “Summary
Compensation Table,” “Grants of Plan-Based Awards,” “Outstanding Equity Awards at
Fiscal Year-End,” “Option Exercises and Stock Vested,” “NonQualified Deferred
Compensation,” “Compensation Discussion and Analysis,” and “Board Compensation
Committee Report” of Registrant’s 2010 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required by Item 12 is hereby incorporated by reference to
the section entitled “Security Ownership of Certain Beneficial Owners and Management”
and “Equity Compensation Plan Information” of the Registrant’s 2010 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by Item 13 is hereby incorporated by reference to
the section entitled “Certain Relationships and Related Transactions” and “Meetings
and Committees of the Board” of the Registrant’s 2010 Proxy Statement.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by Item 14 is hereby incorporated by reference to
the section entitled “Ratification of the Selection of Independent Registered Public
Accounting Firm” of the Registrant’s 2010 Proxy Statement.
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ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
A. List of Financial Statements
| F-1 | ||
| F-2 | ||
| F-3 | ||
| F-4 | ||
| F-5 | ||
| F-6 |
B. Exhibits filed as part of this Report
| 2 | (a.1)* | Merger Agreement by and among the Registrant, Sirius Laboratories, Inc., and the
shareholders of Sirius dated as of December 30, 2005 filed as Exhibit 2(a.1) to the
Registrant’s Form 10-K for the fiscal year ended December 31, 2006, and is incorporated
herein by reference; and |
||
| 2 | (a.2) | First Amendment to Merger Agreement by and among the Registrant, Sirius Laboratories,
Inc. and the shareholders of Sirius, dated as of February 6, 2006 filed as Exhibit
2(a.2) to the Registrant’s Form 10-K for the fiscal year ended December 31, 2006, and
is incorporated herein by reference; and |
||
| 2 | (a.3) | Third Amendment to Merger Agreement by and among the Registrant, Sirius Laboratories,
Inc. and the shareholders of Sirius, dated as of April 21, 2009; filed as Exhibit
2(a.3) to the Registrant’s Quarterly Report on Form 10-Q for the fiscal quarter ended
March 31,2009, and is incorporated herein by reference. |
||
| 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 is
incorporated herein by reference; and |
||
| 3 | (b) | By-laws of the Registrant, filed as Exhibit 3.1 to the Registrant’s current report on
Form 8-K, filed on November 2, 2007, and is incorporated herein by reference. |
||
| 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) | Form of D. Geoffrey Shulman’s Class B Warrant, filed as Exhibit 4(b) to the
Registrant’s Form 10-K for the fiscal year ended December 31, 2007, and is incorporated
herein by reference; |
||
| 4 | (c) | Rights Agreement filed as Exhibit 4.0 to Registrant’s Current Report on Form 8-K filed
October 11, 2002, and is incorporated herein by reference; |
||
| 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 filed
October 11, 2002, and is incorporated herein by reference; |
||
| 4 | (e) | Form of Common Stock Purchase Warrant, dated October 29, 2007 filed as Exhibit 4.2 to
the Registrant’s Registration Statement on Form S-3, No. 333-147614, and is
incorporated herein by reference; and |
||
| 4 | (f) | Registration Rights Agreement, dated October 29, 2007, by and between the Registrant
and each of the respective selling shareholders named therein filed as Exhibit 4.3 to
the Registrant’s Registration Statement on Form S-3, No. 333-147614, and is
incorporated herein by reference. |
||
| 10 | (a) | License Agreement between the Registrant, 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 Registrant, 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 Registrant 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 Registrant and Draxis Health Inc. dated
as of February 24, 2004, filed as Exhibit 10(b.2) to the Registrant’s Form 10-K for the
fiscal year ended December 31, 2003, 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; |
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| 10 | (c) | Consulting Agreement and General Release of D. Geoffrey Shulman, MD, FRCPC dated
as of December 1, 2008, filed as Exhibit 10(d.3) to the Registrant’s Form 10-K for the
fiscal year ended December 31, 2008, and is incorporated herein by
reference, + |
||
| 10 | (d) | Amended and Restated License Agreement between the Registrant 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 | (e) | 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 | (f) | 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 | (g) | 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 | (g.1) | 1996 Omnibus Plan, as amended on May 1, 2003, filed as Exhibit 10(h.1) to the
Registrant’s Form 10-K for the fiscal year ended December 31, 2003, and is incorporated
herein by reference; + |
||
| 10 | (g.2) | 1996 Omnibus Plan, as amended April 23, 2004, filed as Appendix A to Registrant’s
Schedule 14A definitive Proxy Statement dated April 28, 2004, and is incorporated
herein by reference; + |
||
| 10 | (h) | Purchase and Supply Agreement between the Registrant 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 | (h.1) | Amended and Restated Purchase and Supply Agreement between the Registrant and National
Biological Corporation dated as of June 21, 2004 filed as Exhibit 10(a) to the
Registrant’s Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 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, filed August
11, 2004, and is incorporated herein by reference; |
||
| 10 | (i) | Supply Agreement between the Registrant 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 | (i.1) | First Amendment to Supply Agreement between the Registrant 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 | (i.2) | Second Amendment to Supply Agreement between the Registrant 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 | (i.3) | Third Amendment to Supply Agreement between the Registrant and Sochinaz SA dated July
29, 2005, filed as Exhibit 10.1 to the Registrant’s Form 10-Q filed on August 3, 2005,
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 | (i.4) | Fifth Amendment to Supply Agreement between the Registrant and Sochinaz SA dated
September 10, 2009, filed as Exhibit 10 to the Registrant’s Quarterly Report on Form 10-Q
for the fiscal quarter ended September 30, 2009, 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) | Master Service Agreement between the Registrant 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 | (k) | License and Development Agreement between the Registrant 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 24b-2 of the
Securities Exchange Act of 1934, as amended, and is incorporated herein by reference; |
||
| 10 | (l) | Supply Agreement between the Registrant 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 24b-2 of the Securities Exchange Act of 1934, as
amended, and is incorporated herein by reference; |
||
| 10 | (m) | License and Supply Agreement dated August 7, 2007 among the Registrant, photonamic GmbH
& Co. KG and medac, GmbH, 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, filed as Exhibit 10 to the |
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Registrant’s Quarterly Report on Form 10-Q for
the fiscal quarter ended June 30, 2007 and is incorporated herein by reference. |
||||
| 10 | (n) | Securities Purchase Agreement dated as of February 27, 2004, by and among the
Registrant 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 24b-2 of the Securities
Exchange Act of 1934, as amended, and is incorporated herein by reference; |
||
| 10 | (o) | Registration Rights Agreement dated as of February 27, 2004 by and among the Registrant
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 | (p) | 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; |
||
| 10 | (q) | License, Promotion, Distribution and Supply Agreement between the Registrant and
Coherent-AMT dated as of March 31, 2004 filed as Exhibit 10(a) to the Registrant’s
Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2004, filed May 4,
2004, and is incorporated herein by reference; |
||
| 10 | (r) | Employment Agreement of Scott L. Lundahl dated as of June 23, 1999 filed as Exhibit
10(u) to the Registrant’s Form 10-K for the fiscal year ended December 31, 2004, and is
incorporated herein by reference; + |
||
| 10 | (r.1) | Amendment No. 1 to Employment Agreement of Scott Lundahl dated as of April 10,
2008, filed as Exhibit 10(s.1) to the Registrant’s Form 10-K for the fiscal year ended
December 31, 2008, and is incorporated herein by reference, + |
||
| 10 | (s) | Amended Employment Agreement of Stuart L. Marcus, MD, PhD dated December 9, 1999 filed
as Exhibit 10(v) to the Registrant’s Form 10-K for the fiscal year ended December 31,
2004, and is incorporated herein by reference; + |
||
| 10 | (s.1) | Amendment No. 2 to Employment Agreement of Stuart L. Marcus, MD, PhD dated as of
April 10, 2008, filed as Exhibit 10(t.1) to the Registrant’s Form 10-K for the fiscal
year ended December 31, 2008, and is incorporated herein by reference, + |
||
| 10 | (t) | Employment Agreement of Mark C. Carota dated as of February 14, 2000 filed as Exhibit
10(w.1) to the Registrant’s Form 10-K for the fiscal year ended December 31, 2004, and
is incorporated herein by reference; + |
||
| 10 | (t.1) | First Amendment to Employment Agreement of Mark C. Carota dated October 31, 2001 filed
as Exhibit 10(w.2) to the Registrant’s Form 10-K for the fiscal year ended December 31,
2004, and is incorporated herein by reference; + |
||
| 10 | (t.2) | Amendment No. 2 to Employment Agreement of Mark C. Carota dated as of April 10,
2008, filed as Exhibit 10(u.2) to the Registrant’s Form 10-K for the fiscal year ended
December 31, 2008, and is incorporated herein by reference, + |
||
| 10 | (u) | Amendment to Employment Agreement of Richard Christopher dated as of October 18, 2006
filed as Exhibit 10.A to the Registrant’s Form 10-Q for the fiscal quarter ended
September 30, 2004, and is incorporated herein by reference; |
||
| 10 | (v) | Employment Agreement of Richard Christopher dated as of January 1, 2004 filed as
Exhibit 10(y) to the Registrant’s Form 10-K for the fiscal year ended December 31,
2004, and is incorporated herein by reference; + |
||
| 10 | (v.1) | Amendment to Employment Agreement of Richard Christopher dated as of April 10,
2008, filed as Exhibit 10(w.1) to the Registrant’s Form 10-K for the fiscal year ended
December 31, 2008, and is incorporated herein by reference, + |
||
| 10 | (w) | Employment Agreement of Robert F. Doman dated as of March 15, 2005 filed as Exhibit
10(z) to the Registrant’s Form 10-K for the fiscal year ended December 31, 2004, and is
incorporated herein by reference; + |
||
| 10 | (x) | First Amendment to Employment Agreement of Robert F. Doman dated November 26,
2008, filed as Exhibit 10(x.1) to the Registrant’s Form 10-K for the fiscal year ended
December 31, 2008, and is incorporated herein by reference, + |
||
| 10(aa) | Compensation Policy Applicable to the Registrant’s Non-Employee Directors filed as
Exhibit 10(cc) to the Registrant’s Form 10-K for the fiscal year ended December 31,
2004, and is incorporated herein by reference; and + |
|||
| 10(bb) | Supply Agreement between Sirius Laboratories, Inc. and Amide Pharmaceuticals, Inc.
dated May 18, 2001, 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(cc) | Amendment and Extension of the Supply Agreement between Sirius Laboratories, Inc. and
Amide Pharmaceuticals, Inc. dated February 8, 2006, 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(dd) | Supply and Development Agreement between Sirius Laboratories, Inc. and Harmony
Laboratories dated September 18, 2001, 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(ee) | Amendment and Extension of the Supply and Development Agreement between Sirius
Laboratories, Inc. and Harmony Laboratories dated February 16, 2006, 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, as filed as Exhibit 10.D to
the Registrant’s Form 10-Q for the fiscal quarter ended March 31, 2006, and is
incorporated herein by reference; |
|||
| 10(ff) | Second Amendment of the Supply and Development Agreement between Sirius Laboratories,
Inc. and Harmony Laboratories dated March 10, 2006, 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, as filed |
|||
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as Exhibit 10.E to the
Registrant’s Form 10-Q for the fiscal quarter ended March 31, 2006, and is incorporated
herein by reference; |
||||
| 10(gg) | Supply Agreement between Sirius Laboratories, Inc. and L. Perrigo Registrant dated
October 21, 2005, 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, as filed as Exhibit 10.F to the Registrant’s Form 10-Q for the fiscal
quarter ended March 31, 2006, and is incorporated herein by reference; |
|||
| 10(hh) | Employment Agreement of William O’Dell dated as of April 4, 2006 filed as Exhibit
10(ii) to the Registrant’s Form 10-K for the fiscal year ended December 31, 2006, and
is incorporated herein by reference; |
|||
| 10(hh.1) | Amendment No. 1 to Employment Agreement of William O’Dell dated as of
April 10, 2008, filed as Exhibit 10(jj.1) to the Registrant’s Form 10-K for the fiscal
year ended December 31, 2008, and is incorporated herein by reference,
+ |
|||
| 10(ii) | Patent License Agreement between the Registrant and PhotoCure ASA, dated as of May 30,
2006, 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, filed as
Exhibit 10.A to the Registrant’s Form 10-Q for the fiscal quarter ended June 30, 2006,
and is incorporated herein by reference; |
|||
| 10(jj) | Separation Agreement between the Registrant and Paul Sowyrda, dated as of August 31,
2006 filed as Exhibit 10(kk) to the Registrant’s Form 10-K for the fiscal year ended
December 31, 2006, and is incorporated herein by reference; |
|||
| 10(kk) | Employment Agreement of Michael Todisco dated as of September 20, 2006 filed as Exhibit
10(11) to the Registrant’s Form 10-K for the fiscal year ended December 31, 2006, and
is incorporated herein by reference; |
|||
| 10(kk.1) | Amendment No. 1 to Employment Agreement of Michael Todisco dated as of
April 10, 2008, filed as Exhibit 10(mm.1) to the Registrant’s Form 10-K for the fiscal
year ended December 31, 2008, and is incorporated herein by reference,
+ |
|||
| 10(ll) | Marketing, Distribution and Supply Agreement between the Registrant, Daewoong
Pharmaceutical Co., Ltd. and DNC Daewoong Derma & Plastic Surgery Network Registrant
dated January 4, 2007, 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, filed as Exhibit 10(mm) to the Registrant’s Form 10-K for the fiscal year
ended December 31, 2006, and is incorporated herein by reference; |
|||
| 10(ll.1) | First Amendment to Marketing, Distribution and Supply Agreement between the Registrant,
Daewoong Pharmaceutical Co., Ltd. and DNC Daewoong Derma & Plastic Surgery Network
Registrant dated January 10, 2007, 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, filed as Exhibit 10(nn) to the Registrant’s Form 10-K for the fiscal
year ended December 31, 2006, and is incorporated herein by reference; |
|||
| 10(mm) | DUSA Pharmaceuticals, Inc. 2006 Equity Compensation Plan, filed as Appendix A to
Registrants’s Schedule 14A definitive Proxy Statement dated April 24, 2006, and is
incorporated herein by reference; + |
|||
| 10(nn) | DUSA Pharmaceuticals, Inc. 2006 Equity Compensation Plan, as amended October 18, 2006
filed as Exhibit 10(pp) to the Registrant’s Form 10-K for the fiscal year ended
December 31, 2006, and is incorporated herein by reference; + |
|||
| 10(oo) | DUSA Pharmaceuticals, Inc. 2006 Deferred Compensation Plan, October 18, 2006 filed as
Exhibit 10(qq) to the Registrant’s Form 10-K for the fiscal year ended December 31,
2006, and is incorporated herein by reference; + |
|||
| 10(pp) | Marketing, Distribution and Supply Agreement between the Registrant and Stiefel
Laboratories, Inc., dated as of January 12, 2006, 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, filed as Exhibit 10(aa) to the Registrant’s Form 10-K
for the fiscal year ended December 31, 2005, and is incorporated herein by reference; |
|||
| 10(pp.1) | Amendment to the Marketing, Distribution and Supply Agreement dated September 26, 2007,
between the Registrant and Stiefel Laboratories, Inc. 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, filed as Exhibit 10(a) to the Registrant’s
Form 10-Q for the fiscal quarter ended September 30, 2007, and is incorporated herein
by reference; |
|||
| 10(qq) | Securities Purchase Agreement, dated October 29, 2007, by and among the Registrant and
each of the selling shareholders named therein 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, filed as Exhibit 10.1 to the Registrant’s
Registration Statement on Form S-3, No. 333-147614, and is incorporated herein by
reference; |
|||
| 10(rr) | Settlement Agreement and Mutual Release, including License Agreement dated October 28,
2007 between Registrant and River’s Edge Pharmaceuticals LLC, filed as Exhibit 10(tt)
to the Registrant’s Form 10-K for the fiscal year ended December 31, 2007, and is
incorporated herein by reference. |
|||
| 10(ss) | Letter Agreement between Registrant and the representatives of Sirius Laboratories,
Inc. dated April 3, 2009, filed as Exhibit 10(a) to the Registrant’s Quarterly Report
on Form 10-Q for the fiscal quarter ended March 31,2009, and is incorporated herein by
reference; |
|||
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| 10(ss.1) | Letter Agreement between Registrant and the representatives of Sirius Laboratories,
Inc. dated April 21, 2009, filed as Exhibit 10(b) to the Registrant’s Quarterly Report
on Form 10-Q for the fiscal quarter ended March 31,2009, and is incorporated herein by
reference; |
|||
| 10(tt) | License Agreement between the Registrant and River’s Edge Pharmaceuticals LLC entered into August 12, 2008 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,
filed as Exhibit 10(a) to the Registrant’s Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2008, and is
incorporated herein by reference; and |
|||
| 10(uu) | Amendment to License Agreement between Registrant and River’s Edge Pharmaceuticals, LLC entered into April 21, 2009, filed as
Exhibit 10(c) to the Registrant’s Quarterly Report on Form 10-Q for the fiscal quarter ended March 31,2009, and is incorporated
herein by reference. |
|||
| 14 | (a) | Form of DUSA Pharmaceuticals, Inc. Code of Ethics Applicable to Senior Officers, filed as Exhibit 14(a) to the Registrant’s Form
10-K for the fiscal year ended December 31, 2004, and is incorporated herein by reference. |
||
| 21 | (a) | Subsidiaries of the Registrant. |
||
| 23 | (a) | Consent of Independent Registered Public Accounting Firm. |
||
| 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. |
||
| 99.1 | Press Release dated March 3, 2010. |
|||
| + | Management contract or compensatory plan or arrangement. | |
| * | Schedules and exhibits omitted pursuant to Item 601(b)(2) of Regulation S-K. The Registrant agrees to furnish supplementally a copy of any omitted schedule or exhibit to the Commission upon request. |
56
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
DUSA Pharmaceuticals, Inc.
Wilmington, Massachusetts
DUSA Pharmaceuticals, Inc.
Wilmington, Massachusetts
We have audited the accompanying consolidated balance sheets of DUSA Pharmaceuticals, Inc. and
subsidiaries (the “Company”) as of December 31, 2009 and 2008, and the related consolidated
statements of operations, shareholders’ equity, and cash flows for each of the three years in
the period ended December 31, 2009. 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 the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material
misstatement. The Company is not required to have, nor were we engaged to perform, an audit of
its internal control over financial reporting. Our audits included consideration of internal
control over financial reporting as a basis for designing audit procedures that are appropriate
in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of
the Company’s internal control over financial reporting. Accordingly, we express no such
opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, 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 DUSA Pharmaceuticals, Inc. and subsidiaries of December 31,
2009 and 2008, and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 2009, in conformity with accounting principles generally
accepted in the United States of America.
/s/ Deloitte & Touche LLP
Boston, Massachusetts
March 4, 2010
March 4, 2010
F-1
Table of Contents
DUSA PHARMACEUTICALS, INC.
CONSOLIDATED BALANCE SHEETS
| December 31, | ||||||||
| 2009 | 2008 | |||||||
ASSETS |
||||||||
CURRENT ASSETS |
||||||||
Cash and cash equivalents |
$ | 7,613,378 | $ | 3,880,673 | ||||
Marketable securities |
9,055,959 | 15,002,830 | ||||||
Accounts receivable, net of allowance for
doubtful accounts of $86,000 and $98,000 in
2009 and 2008, respectively |
2,629,189 | 2,367,803 | ||||||
Inventory |
2,170,275 | 2,812,825 | ||||||
Prepaid and other current assets |
1,561,467 | 1,873,801 | ||||||
TOTAL CURRENT ASSETS |
23,030,268 | 25,937,932 | ||||||
Restricted cash |
174,255 | 173,844 | ||||||
Property, plant and equipment, net |
1,660,755 | 1,937,978 | ||||||
Deferred charges and other assets |
68,099 | 160,700 | ||||||
TOTAL ASSETS |
$ | 24,933,377 | $ | 28,210,454 | ||||
LIABILITIES AND SHAREHOLDERS’ EQUITY |
||||||||
CURRENT LIABILITIES |
||||||||
Accounts payable |
$ | 630,144 | $ | 305,734 | ||||
Accrued compensation |
1,260,609 | 1,515,912 | ||||||
Other accrued expenses |
2,456,612 | 3,226,571 | ||||||
Deferred revenue |
902,597 | 611,602 | ||||||
TOTAL CURRENT LIABILITIES |
5,249,962 | 5,659,819 | ||||||
Deferred revenues |
2,906,020 | 4,157,305 | ||||||
Warrant liability |
812,905 | 436,458 | ||||||
Other liabilities |
123,016 | 244,673 | ||||||
TOTAL LIABILITIES |
9,091,903 | 10,498,255 | ||||||
COMMITMENTS AND CONTINGENCIES (NOTE 13) |
||||||||
SHAREHOLDERS’ EQUITY |
||||||||
Capital stock authorized: 100,000,000 shares;
40,000,000 shares designated as common stock,
no par, and 60,000,000 shares issuable in
series or classes; and 40,000 junior Series A
preferred shares. Issued and
outstanding: 24,108,908 and 24,089,452 shares
of common
stock, no par, at December 31, 2009 and
December 31, 2008, respectively |
151,683,399 | 151,663,943 | ||||||
Additional paid-in capital |
8,291,805 | 7,514,900 | ||||||
Accumulated deficit |
(144,359,217 | ) | (141,850,925 | ) | ||||
Accumulated other comprehensive income |
225,487 | 384,281 | ||||||
TOTAL SHAREHOLDERS’ EQUITY |
15,841,474 | 17,712,199 | ||||||
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY |
$ | 24,933,377 | $ | 28,210,454 | ||||
See the accompanying Notes to the Consolidated Financial Statements.
F-2
Table of Contents
DUSA PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
| Year Ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
Product revenues |
$ | 29,807,829 | $ | 29,545,406 | $ | 27,662,598 | ||||||
Cost of product revenues and royalties |
6,674,346 | 7,125,095 | 7,829,284 | |||||||||
GROSS MARGIN |
23,133,483 | 22,420,311 | 19,833,314 | |||||||||
Operating costs |
||||||||||||
Research and development |
4,313,313 | 6,643,207 | 5,976,728 | |||||||||
Marketing and sales |
12,897,286 | 13,111,652 | 13,311,314 | |||||||||
General and administrative |
8,270,410 | 9,187,826 | 10,311,290 | |||||||||
Impairment of goodwill |
— | 1,500,000 | 6,772,505 | |||||||||
Settlements, net |
75,000 | (282,775 | ) | (582,866 | ) | |||||||
TOTAL OPERATING COSTS |
25,556,009 | 30,159,910 | 35,788,971 | |||||||||
LOSS FROM OPERATIONS |
(2,422,526 | ) | (7,739,599 | ) | (15,955,657 | ) | ||||||
(Loss) gain on change in fair value of warrants |
(376,447 | ) | 826,142 | 687,300 | ||||||||
Other income, net |
290,681 | 663,016 | 554,850 | |||||||||
NET LOSS |
$ | (2,508,292 | ) | $ | (6,250,441 | ) | $ | (14,713,507 | ) | |||
BASIC AND DILUTED NET LOSS PER COMMON
SHARE |
$ | (0.10 | ) | $ | (0.26 | ) | $ | (0.73 | ) | |||
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING, BASIC AND DILUTED |
24,102,085 | 24,079,414 | 20,292,729 | |||||||||
See the accompanying Notes to the Consolidated Financial Statements.
F-3
Table of Contents
DUSA PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
| Common Stock | Additional | Accum. Other | ||||||||||||||||||||||
| Number of | Paid-in | Accumulated | Comprehensive | |||||||||||||||||||||
| Shares | Amount | Capital | Deficit | Income (Loss) | Total | |||||||||||||||||||
Balance, January 1, 2007 |
19,480,067 | $ | 142,959,298 | $ | 4,320,625 | $ | (120,886,977 | ) | $ | (59,373 | ) | $ | 26,333,573 | |||||||||||
Comprehensive loss: |
||||||||||||||||||||||||
Net loss |
(14,713,507 | ) | (14,713,507 | ) | ||||||||||||||||||||
Net unrealized gain on
marketable securities
available-for-sale |
232,083 | 232,083 | ||||||||||||||||||||||
Total comprehensive loss |
(14,481,424 | ) | ||||||||||||||||||||||
Adjustment to equity issuance
costs for the acquisition of
Sirius Laboratories, Inc. |
250,590 | 250,590 | ||||||||||||||||||||||
Share-based compensation
expense |
1,564,728 | 1,564,728 | ||||||||||||||||||||||
Exercises of options |
15,000 | 40,651 | 40,651 | |||||||||||||||||||||
Issuance of common stock in
private placement, net of
issuance costs and fair value
of warrants at issuance |
4,581,043 | 8,398,404 | 8,398,404 | |||||||||||||||||||||
Balance, December 31, 2007 |
24,076,110 | $ | 151,648,943 | $ | 5,885,353 | $ | (135,600,484 | ) | $ | 172,710 | $ | 22,106,522 | ||||||||||||
Comprehensive loss: |
||||||||||||||||||||||||
Net loss |
(6,250,441 | ) | (6,250,441 | ) | ||||||||||||||||||||
Net unrealized gain on
marketable securities
available-for-sale |
211,571 | 211,571 | ||||||||||||||||||||||
Total comprehensive loss |
(6,038,870 | ) | ||||||||||||||||||||||
Share-based compensation
expense |
1,640,547 | 1,640,547 | ||||||||||||||||||||||
Exercises of options |
2,500 | 4,000 | 4,000 | |||||||||||||||||||||
Vesting of common stock grants |
11,000 | 11,000 | (11,000 | ) | ||||||||||||||||||||
Retirement of shares from
liability escrow account |
(158 | ) | ||||||||||||||||||||||
Balance, December 31, 2008 |
24,089,452 | $ | 151,663,943 | $ | 7,514,900 | $ | (141,850,925 | ) | $ | 384,281 | $ | 17,712,199 | ||||||||||||
Comprehensive loss: |
||||||||||||||||||||||||
Net loss |
(2,508,292 | ) | (2,508,292 | ) | ||||||||||||||||||||
Net unrealized loss on
marketable securities
available-for-sale |
(158,794 | ) | (158,794 | ) | ||||||||||||||||||||
Total comprehensive loss |
(2,667,086 | ) | ||||||||||||||||||||||
Share-based compensation
expense |
800,774 | 800,774 | ||||||||||||||||||||||
Vesting of common stock grants |
22,750 | 22,750 | (22,750 | ) | ||||||||||||||||||||
Settlements of restricted
stock for tax withholding
obligations |
(3,294 | ) | (3,294 | ) | (1,119 | ) | (4,413 | ) | ||||||||||||||||
Balance, December 31, 2009 |
24,108,908 | $ | 151,683,399 | $ | 8,291,805 | $ | (144,359,217 | ) | $ | 225,487 | $ | 15,841,474 | ||||||||||||
See the accompanying Notes to the Consolidated Financial Statements.
F-4
Table of Contents
DUSA PHARMACEUTICALS, INC.
DUSA PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
| Year Ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
CASH FLOWS USED IN OPERATING ACTIVITIES |
||||||||||||
Net loss |
$ | (2,508,292 | ) | $ | (6,250,441 | ) | $ | (14,713,507 | ) | |||
Adjustments to reconcile net loss to net cash used in
operating activities: |
||||||||||||
Accretion (amortization) of premiums and discounts on
marketable securities |
46,145 | (114,995 | ) | (199,164 | ) | |||||||
Realized loss on sales of marketable securities |
43,678 | 50,338 | 14,617 | |||||||||
Share-based compensation |
800,774 | 1,640,547 | 1,564,728 | |||||||||
Depreciation and amortization |
455,528 | 570,098 | 671,387 | |||||||||
Loss (gain) on change in fair value of warrants |
376,447 | (826,142 | ) | (687,300 | ) | |||||||
Deferred revenues recognized |
(978,090 | ) | (1,064,362 | ) | (1,576,091 | ) | ||||||
Impairment of goodwill |
— | 1,500,000 | 6,772,505 | |||||||||
Changes in other assets and liabilities impacting cash flows
from operations: |
||||||||||||
Accounts receivable |
(261,386 | ) | 299,375 | (606,613 | ) | |||||||
Inventory |
642,550 | (140,720 | ) | (328,633 | ) | |||||||
Prepaid and other current assets |
312,334 | 67,315 | (246,923 | ) | ||||||||
Deferred charges and other assets |
92,601 | 112,704 | 671,316 | |||||||||
Accounts payable |
324,412 | (908,133 | ) | 564,344 | ||||||||
Accrued compensation and other accrued expenses |
(1,025,262 | ) | 1,178,312 | (1,701,599 | ) | |||||||
Deferred revenues |
17,800 | 1,657,925 | 4,701,080 | |||||||||
Other liabilities |
(121,656 | ) | (75,064 | ) | 113,735 | |||||||
NET CASH USED IN OPERATING ACTIVITIES |
(1,782,417 | ) | (2,303,243 | ) | (4,986,118 | ) | ||||||
CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES |
||||||||||||
Cash paid for contingent consideration |
— | (1,750,000 | ) | (750,000 | ) | |||||||
Purchases of marketable securities |
(12,049,905 | ) | (27,093,757 | ) | (23,740,590 | ) | ||||||
Proceeds from maturities and sales of marketable securities |
17,748,159 | 30,678,809 | 20,788,766 | |||||||||
Restricted cash |
(411 | ) | (3,334 | ) | (7,705 | ) | ||||||
Purchases of property, plant and equipment |
(178,308 | ) | (365,421 | ) | (246,760 | ) | ||||||
NET CASH PROVIDED BY(USED IN) INVESTING ACTIVITIES |
5,519,535 | 1,466,297 | (3,956,289 | ) | ||||||||
CASH FLOWS (USED IN) PROVIDED BY FINANCING ACTIVITIES |
||||||||||||
Issuance of common stock in private placement, net of costs |
— | — | 10,348,304 | |||||||||
Proceeds from exercise of options |
— | 4,000 | 40,651 | |||||||||
Settlements of restricted stock for tax withholding obligations |
(4,413 | ) | — | — | ||||||||
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES |
(4,413 | ) | 4,000 | 10,388,955 | ||||||||
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS |
3,732,705 | (832,946 | ) | 1,446,548 | ||||||||
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD |
$ | 3,880,673 | $ | 4,713,619 | $ | 3,267,071 | ||||||
CASH AND CASH EQUIVALENTS AT END OF PERIOD |
$ | 7,613,378 | $ | 3,880,673 | $ | 4,713,619 | ||||||
See the accompanying Notes to the Consolidated Financial Statements.
F-5
Table of Contents
DUSA PHARMACEUTICALS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1) NATURE OF BUSINESS
DUSA Pharmaceuticals, Inc. (“DUSA” or the “Company”) is a vertically-integrated
dermatology company that is developing and marketing Levulan®
photodynamic therapy (“PDT”) and other products for common skin conditions. The Company’s
marketed products include among others Levulan®
Kerastick® 20% Topical Solution with PDT, the
BLU-U® brand light source, and certain products acquired in the March
10, 2006 merger with Sirius Laboratories, Inc.
The Levulan® Kerastick® 20% Topical
Solution with PDT and the BLU-U® brand light source were launched in
the United States of America (“U.S.”) in September 2000 for the treatment of
non-hyperkeratotic actinic keratoses, or AKs, of the face or scalp under a former dermatology
collaboration. 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, the Company received clearance from the U.S. Food and Drug Administration,
(“FDA”), to market the BLU-U® without Levulan®
PDT for the treatment of moderate inflammatory acne vulgaris and general dermatological
conditions.
The Company operates in two segments, Photodynamic Therapy (“PDT”) Drug and Device
Products and Non-Photodynamic Therapy (“Non-PDT”) Drug Products. The Company’s
Levulan® Kerastick® and
BLU-U® products comprise its PDT segment, while
Nicomide®, ClindaReach® and the other products
acquired in the acquisition of Sirius Laboratories, Inc. (“Sirius”) comprise its Non-PDT
segment.
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 subsidiaries, DUSA Pharmaceuticals
New York, Inc. and Sirius Laboratories, Inc. All intercompany balances and transactions have
been eliminated in consolidation.
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 (“GAAP”). 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) Cash and Cash Equivalents — Cash equivalents include short-term highly liquid
money market funds. All other investments are classified as marketable securities. The
Company maintained cash of $174,000 at December 31, 2009 and 2008 in a separate bank account
in support of a letter of credit of $172,000 that was issued in lieu of a security deposit on
the lease for its manufacturing facility in Wilmington, Massachusetts. The cash is presented
in restricted cash as a non-current asset in the Consolidated Balance Sheets.
d) Marketable Securities— The Company records marketable securities at fair value as
available-for-sale with unrealized holding gains (losses) recorded in accumulated other
comprehensive income (loss). The Company records other-than-temporary impairment charges in
the Consolidated Statements of Operations for investments that are in an unrealized loss
position at the end of the period since the Company’s portfolio is managed by a third-party
investment advisor that has discretionary authority to sell the investments. The Company
amortizes or accretes the premiums and discounts paid for the securities into interest income
over the period to maturity of the securities. As the Company’s marketable securities are
available to fund operations and as management may sell a portion of its marketable
securities in the next fiscal year in order to meet its working capital requirements, all
marketable securities are classified as current assets.
e) Inventory — Inventory is stated at the lower of cost (first-in, first-out method) or
market. Inventory identified for research and development activities is expensed in the
period in which such inventory is designated for such use. BLU-U®
commercial light sources placed in physicians’ offices for an initial evaluation period are
included in inventory in the accompanying Consolidated Balance Sheets and amortized over a
three year period or until sold to the physician’s office evidenced by the fact that all
revenue recognition criteria have been met. Inventories are continually reviewed for slow
moving, obsolete and excess items. Sales projections are used to estimate the appropriate
level of inventory reserves, if any, that are necessary at each balance sheet date.
f) Property, Plant and Equipment — Property, plant and equipment is carried at
cost less accumulated depreciation and amortization. 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.
F-6
Table of Contents
g) Valuation 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 or that the useful lives of these assets
are no longer appropriate. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future undiscounted net cash flows expected
to be generated by the asset. When it is determined that the carrying value of a long-lived
asset is not recoverable, the asset is written down to its estimated fair value on a
discounted cash flow basis. There have been no impairment charges recorded for long-lived
assets in the Consolidated Statements of Operations in 2009, 2008, or 2007.
h) Goodwill and Other Intangible Assets — Goodwill and intangible assets with
indefinite lives are not amortized but are reviewed annually for impairment or more
frequently if impairment indicators arise. Separable intangible assets that are not deemed to
have indefinite lives will continue to be amortized over their useful lives. At December 31,
2009, the Company has no goodwill or intangible assets. In 2007 and 2008, goodwill
impairment charges of approximately $6,773,000 and $1,500,000, respectively, were recorded
related to the goodwill originally recorded in the Company’s 2006 acquisition of Sirius
Laboratories, Inc.
i) Revenue Recognition — PDT Revenue. Revenues on Kerastick® and
BLU-U® product sales in the U.S. and Canada are recognized when persuasive
evidence of an arrangement exists, the price is fixed and determinable, delivery has
occurred, and collection is reasonably assured. DUSA offers programs that allow physicians
access to our BLU-U® device for a trial period. No revenue is recognized on these
units until the physician elects to purchase the equipment and all other revenue recognition
criteria are met. DUSA’s terms with customers do not provide for the right of return for
sales of Kerastick® and BLU-U®, unless the product does not comply with
the technical specifications.
For revenues associated with contractual agreements with multiple elements, the Company
applies the revenue recognition criteria outlined in Securities and Exchange Commission
(“SEC”) Staff Accounting Bulletin Topic 13, Revenue Recognition (“SAB Topic 13”) and ASC
605-25, Multiple Element Arrangements. Each contract is analyzed in order to separate each
deliverable into separate units of accounting, if applicable, and then recognize revenue for
those separated units as earned. Significant judgment is required in determining the units
of accounting and the attribution method for such arrangements.
The Company has entered into exclusive marketing, distribution and supply agreements
with distributors in Latin America and Korea that contain multiple deliverables. The Company
is obligated under these agreements to provide multiple deliverables; the primary
deliverables being license/product distribution rights and commercial product supply. The
deliverables are treated as a single unit of accounting. The Company has determined the
attribution method for each of the separate payment streams. Under the terms of these
agreements, the Company receives non-refundable milestone payments, a fixed price per unit
sold and royalties based on a percentage of the net sales price to end-users. Milestones are
deferred and recognized as license revenues on a straight-line basis, beginning on the date
the milestone is achieved through term of the agreement, which is 10 years for these
agreements. Royalties are recorded when earned, which is upon sell through to the end
user. The fixed price per unit sold is recognized once the price is fixed and
determinable, which is upon sell through to the end user. Additionally, the Company does not
have sufficient data to determine product acceptance in the marketplace. The agreements
require the distributors to make minimum purchases. If minimum purchase obligations are not
fulfilled, the distributors are required to pay the difference between its actual purchases
and the contractual minimums (a “gross-up” payment). Revenue for the gross-up payment is
recorded upon cash receipt. To date, one of the Company’s distributors has failed to meet
its contractual obligations and is required to make the gross-up payment; the payment has not
been received to date. The other distributor’s minimum purchase commitment is measured over
a five year period, which has not yet ended.
Non-PDT Revenue. The Company recognizes revenue for sales of Non-PDT Drug
Products when substantially all the risks and rewards of ownership have transferred to the
customer, which generally occurs on the date of shipment to wholesale customers. Revenue is
recognized net of revenue reserves, which consist of allowances for discounts, returns,
rebates, chargebacks and fees paid to wholesalers under distribution service agreements.
The Company evaluates inventory levels at its wholesaler customers, which account for
the vast majority of its sales in the Non-PDT Drug Products segment, through an analysis that
considers, among other things, wholesaler purchases, wholesaler shipments to retailers,
available end-user prescription data obtained from third parties and on-hand inventory data
received directly from our three largest wholesaler customers. The Company believes that this
evaluation of wholesaler inventory levels, allows it to make reasonable estimates for its
applicable revenue related reserves. Additionally, the Company’s products are sold to
wholesalers with a product shelf life that allows sufficient time for its wholesaler
customers to sell its products in their inventory through to retailers and, ultimately, to
end-user consumers prior to product expiration.
For new product launches where the Company does not have the ability to reliably
estimate returns, revenue is recognized based on end-user demand, which is typically based on
dispensed subscription data, or ship-through data as reported by the Company’s international
distribution partners. When inventories have been reduced to targeted stocking levels at
wholesalers or distribution partners, and the Company has sufficient data to determine
product acceptance in the marketplace which allows the Company to estimate product returns,
the Company recognizes revenue upon shipment, net of discounts and allowances.
F-7
Table of Contents
The Company establishes an accrual in an amount equal to its estimate of sales
recorded for which the related products are expected to be returned. The Company determines
the estimate of the sales return accrual primarily based on historical experience regarding
sales and related returns and incorporating other factors that could impact sales returns in
the future. These other factors include levels of inventory in the distribution channel,
estimated shelf life, product recalls, product discontinuances, price changes of competitive
products, introductions of generic products and introductions of competitive new products.
The Company’s policy is to accept returns when product is within six months of expiration.
The Company considers all of these factors and adjusts the accrual periodically to reflect
actual experience.
A summary of activity in the Company’s valuation accounts are as follows:
| Balance at | Balance at | |||||||||||||||
| January 1, | Actual Returns | December 31, | ||||||||||||||
| 2009 | Provision | or Credits | 2009 | |||||||||||||
Accrued Expenses: |
||||||||||||||||
Sales returns and allowances |
$ | 500,000 | $ | 290,000 | $ | (565,000 | ) | $ | 225,000 | |||||||
Chargebacks and rebates |
$ | 30,000 | $ | 4,000 | $ | (32,000 | ) | $ | 2,000 | |||||||
| Balance at | Balance at | |||||||||||||||
| January 1, | Actual Returns | December 31, | ||||||||||||||
| 2008 | Provision | or Credits | 2008 | |||||||||||||
Accrued Expenses: |
||||||||||||||||
Sales returns and allowances |
$ | 546,000 | $ | 916,000 | $ | (962,000 | ) | $ | 500,000 | |||||||
Chargebacks and rebates |
$ | 200,000 | $ | 408,000 | $ | (578,000 | ) | $ | 30,000 | |||||||
| Balance at | Balance at | |||||||||||||||
| January 1, | Actual Returns | December 31, | ||||||||||||||
| 2007 | Provision | or Credits | 2007 | |||||||||||||
Accrued Expenses: |
||||||||||||||||
Sales returns and allowances |
$ | 632,000 | $ | 708,000 | $ | (794,000) | $ | 546,000 | ||||||||
Chargebacks and rebates |
$ | 26,000 | $ | 675,000 | $ | (501,000) | $ | 200,000 | ||||||||
j) Warranty costs — The Company accrues for estimated future warranty costs on its
BLU-U® sales at the time of sale. The Company’s products are subject to
rigorous regulation and quality standards. Warranty costs, which are included in cost of
product revenues, were $79,000, $89,000 and $73,000 for the years ended December 31, 2009,
2008 and 2007, respectively.
k) Research and Development Costs — Costs related to the conceptual formulation
and design of products and processes are expensed as research and development costs as
incurred. Purchased technology, including the costs of licensed technology for a particular
research project that do not have alternative future uses, is expensed as incurred.
l) Marketing and Sales Costs — Costs included in marketing and sales consist
mainly of overhead expenses such as salaries and benefits for the marketing and sales staff,
commissions, and related support expenses such as travel, and telephone, as well as costs
related to trade shows costs, miscellaneous marketing and outside consultants. All such costs
are expensed as incurred.
m) 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.
The Company determines whether it is more likely than not that a tax position will
be sustained upon examination. If it is not more likely than not that a position will be
sustained, no amount of the benefit attributable to the position is recognized. The tax
benefit to be recognized of any tax position that meets the more likely than not recognition
threshold is calculated as the largest amount that is more than 50% likely of being realized
upon resolution of the contingency.
F-8
Table of Contents
As of December 31, 2009 and 2008 the total amount of unrecognized tax benefits was
$1,399,000 and $1,483,000, respectively, all of which, if recognized, would affect
the effective tax rate prior to the adjustment for the Company’s
valuation allowance. The Company has not recognized an increase in tax
liability for the unrecognized tax benefits because the Company has recorded a tax net
operating loss carryforward that would offset this liability.
The Company recognizes interest and penalties related to unrecognized tax benefits
in operating expenses. Since a full valuation allowance was recorded against the Company’s
net deferred tax assets and the unrecognized tax benefits would
not result in a tax liability, the Company has not accrued for any interest and penalties
relating to these unrecognized tax benefits.
n) Basic and Diluted Net Loss Per Common Share — Basic net loss per common share
is based upon the weighted average number of common shares outstanding during each period.
Stock options, unvested common stock grants and warrants are not included in the computation
of the weighted average number of common shares outstanding for dilutive net loss per common
share during each of the periods presented in the Consolidated Statements of Operations, as
the effect would be antidilutive. For the years ended December 31, 2009, 2008, and 2007,
stock options, unvested common stock grants, warrants and rights totaling approximately
4,453,000, 4,497,000, and 4,250,000 shares, respectively, have been excluded from the
computation of diluted net loss per share.
o) Share-Based Compensation — The Company’s stock-based compensation cost is
measured at the grant date based on the fair value of the award and is recognized as expense
over the requisite service period, which generally represents the vesting period, and
includes an estimate of the awards that will be forfeited. The Company uses the Black-Scholes
valuation model for estimating the fair value on the date of grant of stock options. The fair
value of stock option awards is affected by the Company’s stock price as well as valuation
assumptions, including the volatility of Company’s stock price, expected term
of the option, risk-free interest rate and expected dividends. The fair value on the
date of grant for unvested common shares is typically the Company’s common share price on
that date.
p) Comprehensive Loss — The Company has reported accumulated comprehensive income
(loss) and its components as part of its Consolidated Statements of Shareholders’ Equity.
Comprehensive loss, apart from net loss, relates to net unrealized gains and losses on
marketable securities.
q) Segment Reporting — The Company has two reportable segments, Photodynamic
Therapy (PDT) Drug and Device Products and Non-Photodynamic Therapy (Non-PDT) Drug Products.
Operating segments are defined as components of the Company for which separate financial
information is available to manage resources and evaluate performance regularly by the chief
operating decision maker. The Company does not allocate research and development, selling and
marketing and general and administrative expenses or long-lived assets to its reportable
segments, because these activities are managed at a corporate level.
r) Concentrations — The Company invests cash in accordance with a policy objective
that seeks to preserve both liquidity and safety of principal. The Company manages the credit
risk associated with its investments in marketable securities by investing in U.S. government
securities and investment grade corporate bonds. The Company is also exposed to concentration
of credit risk related to accounts receivable that are generated from its distributors and
customers. To manage credit risk, the Company performs regular credit evaluations of its
customers and provides allowances for potential credit losses, when applicable.
Concentrations in the Company’s total revenues for 2009, 2008, and 2007, and accounts
receivable as of December 31, 2009 and December 31, 2008 were as follows:
| % of Revenue for Year Ended | % of Accounts Receivable as of | |||||||||||||||||||
| December 31, | December 31, | |||||||||||||||||||
| 2009 | 2008 | 2007 | 2009 | 2008 | ||||||||||||||||
Customer A |
2 | % | 2 | % | 4 | % | 4 | % | 11 | % | ||||||||||
Customer B |
1 | % | 7 | % | 11 | % | 1 | % | — | |||||||||||
Customer C |
1 | % | 6 | % | 15 | % | — | — | ||||||||||||
Customer D |
— | 3 | % | 6 | % | — | — | |||||||||||||
Customer E |
3 | % | 2 | % | — | 4 | % | 9 | % | |||||||||||
Customer F |
2 | % | — | — | 5 | % | — | |||||||||||||
Other customers |
91 | % | 80 | % | 64 | % | 86 | % | 80 | % | ||||||||||
Total |
100 | % | 100 | % | 100 | % | 100 | % | 100 | % | ||||||||||
F-9
Table of Contents
The Company is dependent upon sole-source suppliers for a number of its
products. There can be no assurance that these suppliers will be able to meet the
Company’s future requirements for such products or parts or that they will be
available at favorable terms. Any extended interruption in the supply of any such
products or parts or any significant price increase could have a material adverse
effect on the Company’s operating results in any given period.
s) Derivative Financial Instruments — The Company has issued common
stock warrants in connection with the October 2007 private placement (See Note 8).
The warrants are accounted for as derivative liabilities at fair value. Changes in
fair value of derivative liabilities are recorded in the Consolidated Statements of
Operations under the caption “(Loss) gain on change in fair value of warrants.” The
fair value of the warrant liability is determined using the Black-Scholes
option-pricing model. The fair value of the warrants is subject to significant
fluctuation based on changes in the Company’s stock price, expected volatility,
remaining contractual life and the risk-free interest rate.
In connection with the October 2007 private placement, the Company filed a
registration statement with the SEC, which was declared effective by the SEC on
January 24, 2008, for the registration of the total number of shares sold to the
investors and shares issuable upon the exercise of warrants. The Company is required
under the agreement to use commercially reasonable efforts to cause the registration
to remain continuously effective until such time when all of the registered shares
are sold. In the event the Company fails to meet the requirements in regards to the
registration statement, it will be obligated to pay the investors, as partial
liquidated damages and not as a penalty, an amount in cash equal to 1% of the
aggregate purchase price paid by investors for each monthly
period that the registration statement is not effective, up to 12%. If the
Company determines a payment under this registration rights arrangement is probable
and can be reasonably estimated, a liability will be recorded. As of December 31,
2009, the Company concluded the likelihood of having to make any payments under the
arrangements was remote, and therefore did not record any related contingent
liability as of December 31, 2009.
t) Recently Issued Accounting Standards To Be Adopted — In October 2009,
the FASB issued Accounting Standards Update (ASU) No. 2009-13, Multiple-Deliverable
Revenue Arrangements (ASU No. 2009-13). ASU No. 2009-13, which amends existing
revenue recognition accounting pronouncements and provides accounting principles and
application guidance on whether multiple deliverables exist, how the arrangement
should be separated, and the consideration allocated. This guidance eliminates the
requirement to establish the fair value of undelivered products and services and
instead provides for separate revenue recognition based upon management’s estimate of
the selling price for an undelivered item when there is no other means to determine
the fair value of that undelivered item. Previous accounting principles required that
the fair value of the undelivered item be the price of the item either sold in a
separate transaction between unrelated third parties or the price charged for each
item when the item is sold separately by the vendor. This was difficult to determine
when the product was not individually sold because of its unique features. If the
fair value of all of the elements in the arrangement was not determinable, then
revenue was deferred until all of the items were delivered or fair value was
determined. This new approach is effective prospectively for revenue arrangements
entered into or materially modified in fiscal years beginning on or after June 15,
2010, which for the Company means no later than January 1, 2011. Early adoption is
permitted; however, adoption of this guidance as of a date other than January 1,
2011, will require the Company to apply this guidance retrospectively effective as of
January 1, 2010 and will require disclosure of the effect of this guidance as applied
to all previously reported interim periods in the fiscal year of adoption. The
potential impact of this standard is being evaluated.
3) FINANCIAL INSTRUMENTS
Fair Value Measurements
Fair value is defined as the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants at the measurement
date. In order to increase consistency and comparability in fair value measurements,
financial instruments are categorized based on a hierarchy that prioritizes observable and
unobservable inputs used to measure fair value into three broad levels, which are described
below:
Level 1: Quoted market prices in active markets for identical assets or
liabilities. Level 1 primarily consists of financial instruments whose value is
based on quoted market prices such as exchange-traded instruments and listed
equities.
Level 2: Observable market based inputs or unobservable inputs that are
corroborated by market data. Level 2 consists of financial instruments that are
valued using quoted market prices, broker or dealer quotations, or alternative
pricing sources with reasonable levels of price transparency in the determination of
value. The Company accesses publicly available market activity from third party
databases and credit ratings of the issuers of the securities it holds to
F-10
Table of Contents
corroborate the data used in the fair value calculations obtained from its primary
pricing source. The Company also takes into account credit rating changes, if any,
of the securities or recent marketplace activity.
Level 3: Unobservable inputs that are not corroborated by market data. Level
3 is comprised of financial instruments whose fair value is estimated based on
internally developed models or methodologies utilizing significant inputs that are
generally less readily observable. We initially recorded the warrant liability at
its fair value using the Black-Scholes option-pricing model and revalue it at each
reporting date until the warrants are exercised or expire. The fair value of the
warrants is subject to significant fluctuation based on changes in our stock price,
expected volatility, remaining contractual life and the risk-free interest rate.
The following table presents the Company’s financial instruments recorded at fair
value in the Consolidated Balance Sheet, classified according to the three categories
described above:
| Fair Value Measurements at December 31, 2009 | ||||||||||||||||
| Quoted Prices in | ||||||||||||||||
| Active Markets for | Significant Other | Significant | ||||||||||||||
| Identical Assets | Observable Inputs | Unobservable Inputs | ||||||||||||||
| Carrying Value | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
Assets |
||||||||||||||||
Cash and cash equivalents |
$ | 7,613,000 | $ | 7,613,000 | — | — | ||||||||||
United States government-backed
securities |
8,150,000 | — | $ | 8,150,000 | — | |||||||||||
Corporate securities |
906,000 | 906,000 | ||||||||||||||
Total assets at fair value |
16,669,000 | 7,613,000 | 9,056,000 | — | ||||||||||||
Liabilities |
||||||||||||||||
Warrant liability |
813,000 | — | — | $ | 813,000 | |||||||||||
Total liabilities at fair value |
$ | 813,000 | $ | — | $ | — | $ | 813,000 | ||||||||
| Fair Value Measurements at December 31, 2008 | ||||||||||||||||
| Quoted Prices in | ||||||||||||||||
| Active Markets for | Significant Other | Significant | ||||||||||||||
| Identical Assets | Observable Inputs | Unobservable Inputs | ||||||||||||||
| Carrying Value | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
Assets |
||||||||||||||||
Cash and cash equivalents |
$ | 3,880,000 | $ | 3,880,000 | — | — | ||||||||||
United States government-backed
securities |
12,313,000 | — | $ | 12,313,000 | — | |||||||||||
Corporate securities |
2,690,000 | 2,690,000 | ||||||||||||||
Total assets at fair value |
18,883,000 | 3,880,000 | 15,003,000 | — | ||||||||||||
Liabilities |
||||||||||||||||
Warrant liability |
436,000 | — | — | $ | 436,000 | |||||||||||
Total liabilities at fair value |
$ | 436,000 | $ | — | $ | — | $ | 436,000 | ||||||||
The table below includes a rollforward of the balance sheet amounts for the year
ended December 31, 2009 for the warrant liability, which is classified as Level 3. When a
determination is made to classify a financial instrument within Level 3, the determination is
based upon the significance of the unobservable parameters to the overall fair value
measurement. However, Level 3 financial instruments typically include, in addition to the
unobservable components, observable components (that is, components that are actively quoted
and can be validated to external sources). Accordingly, the gains and losses in the table
below include changes in fair value due in part to observable factors that are part of the
methodology.
F-11
Table of Contents
| Fair Value Measurements Using Significant Unobservable Inputs (Level 3) | ||||||||||||||||||||||||
| Year Ended December 31, 2009 | ||||||||||||||||||||||||
| Change in | ||||||||||||||||||||||||
| Unrealized Gains | ||||||||||||||||||||||||
| Related to | ||||||||||||||||||||||||
| Purchases, | Financial | |||||||||||||||||||||||
| Sales, | Transfers | Instruments | ||||||||||||||||||||||
| Fair Value at | Total | Issuances, | In and/or | Fair Value at | Held at | |||||||||||||||||||
| January 1, | Unrealized | Settlements, | Out of | December 31, | December 31, | |||||||||||||||||||
| 2009 | Loss | net | Level 3 | 2009 | 2009 | |||||||||||||||||||
Warrant Liability |
$ | 436,000 | $ | 377,000 | $ | — | $ | — | $ | 813,000 | $ | (377,000) | ||||||||||||
| Fair Value Measurements Using Significant Unobservable Inputs (Level 3) | ||||||||||||||||||||||||
| Year Ended December 31, 2008 | ||||||||||||||||||||||||
| Change in | ||||||||||||||||||||||||
| Unrealized Gains | ||||||||||||||||||||||||
| Related to | ||||||||||||||||||||||||
| Purchases, | Financial | |||||||||||||||||||||||
| Sales, | Transfers | Instruments | ||||||||||||||||||||||
| Fair Value at | Total | Issuances, | In and/or | Fair Value at | Held at | |||||||||||||||||||
| January 1, | Unrealized | Settlements, | Out of | December 31, | December 31, | |||||||||||||||||||
| 2008 | Loss | net | Level 3 | 2008 | 2008 | |||||||||||||||||||
Warrant Liability |
$ | 1,262,000 | $ | 826,000 | $ | — | $ | — | $ | 436,000 | $ | 826,000 | ||||||||||||
Marketable Securities
The Company’s marketable securities consist of the following:
| December 31, 2009 | ||||||||||||||||
| Gross | Gross | |||||||||||||||
| Amortized | Unrealized | Unrealized | Fair | |||||||||||||
| Cost | Gains | Losses | Value | |||||||||||||
United States government-backed securities |
$ | 8,005,000 | $ | 145,000 | $ | — | $ | 8,150,000 | ||||||||
Corporate securities |
825,000 | 81,000 | — | 906,000 | ||||||||||||
Total marketable securities |
$ | 8,830,000 | $ | 226,000 | $ | — | $ | 9,056,000 | ||||||||
| December 31, 2008 | ||||||||||||||||
| Gross | Gross | |||||||||||||||
| Amortized | Unrealized | Unrealized | Fair | |||||||||||||
| Cost | Gains | Losses | Value | |||||||||||||
United States government-backed securities |
$ | 11,956,000 | $ | 357,000 | $ | — | $ | 12,313,000 | ||||||||
Corporate securities |
2,662,000 | 28,000 | — | 2,690,000 | ||||||||||||
Total marketable securities |
$ | 14,618,000 | $ | 385,000 | $ | — | $ | 15,003,000 | ||||||||
The Company records other-than-temporary impairment charges for investments that are
in an unrealized loss position at the end of the period since the Company’s portfolio is
managed by a third-party investment advisor that has discretionary
authority to sell the investments. The other-than-temporary impairment charge was
$47,000, $78,000, and $16,000 for the years ended December 31, 2009, 2008 and 2007,
respectively, and is included in other income, net in the accompanying Consolidated Statements
of Operations. The Company amortizes or accretes the premiums and discounts paid for the
securities into interest income over the period to maturity of the securities. The (decrease)
increase in net unrealized gains on such securities for the years ended December 31, 2009,
2008 and 2007 was $(159,000), $212,000 and $232,000, respectively, which has been recorded in
accumulated other comprehensive income and is reported as part of shareholders’ equity in the
Consolidated Balance Sheets. Realized losses on sales of marketable securities were $44,000,
$50,000 and $15,000 in 2009, 2008 and 2007, respectively. As of December 31, 2009, current
yields range from 0.76% to 5.99% and maturity dates range from April 2010 to January 2013.
F-12
Table of Contents
Common Stock Warrants
Upon issuance of the warrants on October 29, 2007, the Company recorded the warrant
liability at its initial fair value of $1,950,000. Warrants that are classified as a
liability are revalued at each reporting date until the warrants are exercised or expire with
changes in the fair value reported in the Company’s Consolidated Statements of Operations as
gain or loss on fair value of warrants. At December 31, 2009 and 2008, the aggregate fair
value of these warrants was $813,000 and $437,000, respectively, resulting in non-cash
(losses) gains of $(376,000), $826,000 and $687,000 in 2009, 2008 and 2007, respectively.
Assumptions used for the Black-Scholes option-pricing models in determining the fair value as
of December 31, 2009 and 2008 are as follows:
| December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
Expected volatility |
88 | % | 75 | % | 67 | % | ||||||
Remaining contractual
term (years) |
3.3 | 4.3 | 5.3 | |||||||||
Risk-free interest rate |
1.9 | % | 1.6 | % | 3.5 | % | ||||||
Expected dividend yield |
0 | % | 0 | % | 0 | % | ||||||
Common stock price |
$ | 1.6 | $ | 1.1 | $ | 2.1 | ||||||
4) INVENTORY
Inventory consisted of the following at December 31:
| 2009 | 2008 | |||||||
Finished goods |
$ | 974,000 | $ | 1,348,000 | ||||
BLU-U® evaluation units |
58,000 | 166,000 | ||||||
Work in process |
398,000 | 698,000 | ||||||
Raw materials |
740,000 | 601,000 | ||||||
| $ | 2,170,000 | $ | 2,813,000 | |||||
BLU-U® commercial light sources placed in physicians’ offices
for an initial evaluation period are included in inventory until all revenue recognition
criteria are met. The Company amortizes the cost of the evaluation units during the
evaluation period of three years to cost of product revenues to approximate its net
realizable value.
5) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, at cost, consisted of the following at
December 31:
| Useful Life | 2009 | 2008 | ||||||||
| (In years) | ||||||||||
Computer equipment and software |
3 | $ | 2,877,000 | $ | 2,815,000 | |||||
Furniture, fixtures and equipment |
5 | 1,171,000 | 1,154,000 | |||||||
Manufacturing facility |
Term of lease | 2,204,000 | 2,204,000 | |||||||
Manufacturing equipment |
5 | 2,432,000 | 2,332,000 | |||||||
Leasehold improvements |
Lesser of useful life or term of lease |
845,000 | 845,000 | |||||||
| 9,529,000 | 9,350,000 | |||||||||
Accumulated depreciation and amortization |
(7,868,000 | ) | (7,412,000 | ) | ||||||
| $ | 1,661,000 | $ | 1,938,000 | |||||||
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Table of Contents
Depreciation and amortization related to property, plant and equipment was
$456,000, $570,000, and $671,000 for 2009, 2008 and 2007, respectively.
6) OTHER ACCRUED EXPENSES
Other accrued expenses consisted of the following at December 31:
| 2009 | 2008 | |||||||
Research and development costs |
$ | 92,000 | $ | 190,000 | ||||
Marketing and sales costs |
418,000 | 191,000 | ||||||
Reserve for sales returns and allowances |
225,000 | 500,000 | ||||||
Other product related costs |
849,000 | 824,000 | ||||||
Legal and other professional fees |
334,000 | 467,000 | ||||||
Due to former Sirius shareholders |
214,000 | — | ||||||
Employee benefits |
271,000 | 278,000 | ||||||
Accrued FDA fees |
— | 589,000 | ||||||
Other expenses |
54,000 | 188,000 | ||||||
| $ | 2,457,000 | $ | 3,227,000 | |||||
7) INCOME TAXES
The tax effect of significant temporary differences representing deferred
tax assets and liabilities at December 31, 2009 and 2008 are as follows:
| 2009 | 2008 | |||||||
DEFERRED TAX ASSETS |
||||||||
Current |
||||||||
Reserves |
$ | 102,000 | $ | 230,000 | ||||
Accrued Charges |
104,000 | 356,000 | ||||||
Total current deferred tax assets |
206,000 | 586,000 | ||||||
Non-current |
||||||||
Operating loss carryforwards |
33,945,000 | 32,176,000 | ||||||
Capitalized R&D |
6,911,000 | 8,224,000 | ||||||
Research and development tax credit carryforwards |
1,641,000 | 1,582,000 | ||||||
Deferred revenue |
1,498,000 | 1,221,000 | ||||||
Intangible assets |
191,000 | 226,000 | ||||||
Accrued charges |
157,000 | 263,000 | ||||||
Stock-based compensation |
1,674,000 | 1,753,000 | ||||||
Fixed assets |
758,000 | 773,000 | ||||||
Total noncurrent deferred tax assets |
46,775,000 | 46,218,000 | ||||||
Net deferred tax assets before allowance |
46,981,000 | 46,804,000 | ||||||
Valuation allowance |
(46,981,000 | ) | (46,804,000 | ) | ||||
Total |
$ | — | $ | — | ||||
During the years ended December 31, 2009, 2008 and 2007, the valuation allowance
was increased by approximately $177,000, $1,923,000, and $861,000, respectively, due to the
uncertainty of future realization of the net deferred tax assets, which increased in 2009,
2008 and 2007. The current year increase in the valuation allowance of $177,000 is primarily
comprised of a decrease due to the current year change in temporary differences of
$1,651,000, an increase in R&D credit carryforwards of $59,000 and an increase in the net
operating loss carryforwards $1,769,000.
Future releases of valuation allowances related to stock option deductions in the
amount of $2,194,000 will be credited to additional paid-in-capital.
As of December 31, 2009, the Company has Federal net operating loss carryforwards
for tax purposes of approximately $94,465,000 and research and development tax credits of
approximately $1,556,000, both of which, if not utilized, will expire on various dates
through 2029 as follows:
F-14
Table of Contents
| Research and | ||||||||
| Operating Loss | Development Tax | |||||||
| Carryforwards | Credits | |||||||
2010 |
$ | 2,325,000 | $ | — | ||||
2011 |
6,638,000 | — | ||||||
2012 |
6,841,000 | — | ||||||
2013 |
— | |||||||
2014 |
— | — | ||||||
2015 |
— | — | ||||||
2016 |
— | — | ||||||
2017 |
— | — | ||||||
2018 |
5,738,000 | — | ||||||
2019 |
— | — | ||||||
2020 |
— | 110,000 | ||||||
2021 |
3,143,000 | 288,000 | ||||||
2022 |
16,018,000 | 309,000 | ||||||
2023 |
12,872,000 | 148,000 | ||||||
2024 |
10,498,000 | 196,000 | ||||||
2025 |
13,425,000 | 182,000 | ||||||
2026 |
5,923,000 | 164,000 | ||||||
2027 |
5,321,000 | 25,000 | ||||||
2028 |
1,024,000 | 73,000 | ||||||
2029 |
4,699,000 | 61,000 | ||||||
| $ | 94,465,000 | $ | 1,556,000 | |||||
The amount of the net operating loss carryforwards and other tax attributes
that may be utilized to offset future taxable income, when earned, may be subject to
certain limitations, based upon changes in the ownership of the Company’s common
stock under IRC Section 382. The Company currently believes that prior ownership
changes have occurred as defined under IRC Section 382. The Company currently
estimates that its utilization of the net operating loss carryforwards and other tax
attributes may be limited to an annual limitation between approximately $1.5 million
and $2.4 million per year. The final determination of the annual limitation is
dependent upon certain technical rules that potentially could reduce the pre-change
value utilized to calculate the annual limitation. Further, additional rules could
result in an enhancement of the aforementioned annual limitation for the first five
years after the ownership change. Based on these additional factors, the Company
estimates that it will be able to utilize approximately $37.0 million to $57.0
million of its current net operating losses, provided that sufficient income is
generated and no further ownership changes were to occur. The analysis has not been
finalized. As the Company finalizes the analysis, these amounts may change.
A reconciliation between the effective tax rate and the statutory Federal rate
is as follows:
| 2009 | % | 2008 | % | 2007 | % | |||||||||||||||||||
Income tax benefit
at statutory rate |
$ | (853,000 | ) | (34.0 | ) | $ | (2,125,000 | ) | (34.0 | ) | $ | (5,003,000 | ) | (34.0 | ) | |||||||||
State taxes |
(61,000 | ) | (2.4 | ) | (113,000 | ) | (1.8 | ) | 59,000 | 0.4 | ||||||||||||||
Tax credit carryforwards |
(61,000 | ) | (2.4 | ) | (73,000 | ) | (1.2 | ) | — | — | ||||||||||||||
Goodwill impairment |
— | — | 510,000 | 8.2 | 2,303,000 | 15.6 | ||||||||||||||||||
Warrant valuation
adjustment |
128,000 | 5.1 | (281,000 | ) | (4.5 | ) | (234,000 | ) | (1.6 | ) | ||||||||||||||
Change in valuation
allowance including
revisions of prior year
estimates |
265,000 | 10.6 | 1,923,000 | 30.8 | 2,831,000 | 19.2 | ||||||||||||||||||
Expiration of vested,
non-qualified stock
options |
303,000 | 12.1 | — | — | — | — | ||||||||||||||||||
Other |
279,000 | 11.0 | 159,000 | 2.5 | 44,000 | 0.4 | ||||||||||||||||||
Effective tax rate |
$ | — | — | $ | — | — | $ | — | — | |||||||||||||||
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Table of Contents
As of December 31, 2009 and 2008, the Company’s total amount of unrecognized tax
benefits was $1,399,000 and $1,483,000, respectively, which, if recognized, would affect the
effective tax rate prior to the adjustment for the Company’s valuation allowance. The Company
has not recognized a tax liability for the unrecognized tax benefits because the Company has
recorded a tax net operating loss carryforward that would offset this liability.
The change in unrecognized tax benefits for each of the years ended
December 31, 2009, 2008 and 2007 is as follows:
| 2009 | 2008 | 2007 | ||||||||||
Balance at January 1, |
$ | 1,483,000 | $ | 1,739,000 | 1,803,000 | |||||||
Decrease for tax positions related to prior years |
— | (190,000 | ) | — | ||||||||
Reductions for expiration of statute of limitations |
(84,000 | ) | (66,000 | ) | (64,000 | ) | ||||||
Balance at December 31, |
$ | 1,399,000 | $ | 1,483,000 | 1,739,000 | |||||||
The Company does not expect substantial changes in its unrecognized tax benefits or
positions over the next twelve months.
Tax years ended December 31, 2006, 2007, 2008 and 2009 remain subject to
examination by major tax jurisdictions, which are Federal and the Commonwealth of
Massachusetts. However, since the Company has net operating loss and tax credit carryforwards
which may be utilized in future years to offset taxable income, the years in which such
losses originated may also be subject to review by relevant taxing authorities if utilized.
8) STOCK OPTIONS AND WARRANTS
Common Stock Warrants
On October 29, 2007, the Company sold, through a private placement, 4,581,043
shares of our common stock and warrants to purchase 1,145,259 shares of common stock with an
exercise price of $2.85. The warrants have a 5.5 year term and became exercisable on April
30, 2008. As described in Note 3, the warrants are recorded as a derivative liability at fair
value.
On October 18, 2006 the Company’s Board of Directors extended the term of 250,000 Class
B warrants, originally issued to the Company’s Chairman of the Board of Directors and Chief
Executive Officer at the time of DUSA’s initial public offering, for an additional four years
to January 29, 2011. An additional 50,000 of the 300,000 Class B warrants lapsed on January
29, 2007. The warrants have an exercise price of $6.00 per share. No other terms of the
warrants were amended. There are no other holders of the Class B warrants.
Share-based Awards
Under the Company’s 2006 Equity Compensation Plan (the “2006 Plan”), the Company
may grant stock-based awards in amounts not to exceed the lesser of: (i) 20% of the total
number of shares of the Company’s common stock issued and outstanding at any given time less
the number of shares issued and outstanding under any other equity compensation plan of the
Company at such time; or (ii) 4,815,690 shares less the number of shares issued and
outstanding under any other equity compensation plan of the Company from time to time. The
maximum number of shares of common stock that may be granted to any individual during any
calendar year is 300,000.
The 2006 Plan is administered by the Compensation Committee of the Board of
Directors (the “Committee”). The 2006 Plan provides for the grant of incentive stock options
(“ISO”), nonqualified stock options (“NSO”), stock awards, and stock appreciation rights to
(i) employees, consultants, and advisors; (ii) the employees, consultants, and advisors of
the Company’s parents, subsidiaries, and affiliates; and (iii) and the Company’s non-employee
directors.
Non-Qualified Stock Options — All the NSOs granted under the 2006 Plan have an
expiration period not exceeding seven years and are issued at a price not less than the
market value of the common stock on the grant date. The Committee may establish such vesting
and other conditions with respect to options as it deems appropriate. In addition, the
Company initially grants each individual who agrees to become a director 15,000 NSO to
purchase common stock of the Company. Thereafter, each director reelected at an Annual
Meeting of Shareholders will automatically receive an additional 10,000 NSOs on June 30 of
each year. Grants to directors immediately vest on the date of the grant.
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Table of Contents
Incentive Stock Options — ISOs granted under the 2006 Plan have an expiration
period not exceeding seven 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. The Committee may establish such vesting and other conditions with
respect to options as it deems appropriate.
The 2006 Plan replaced the Company’s 1996 Omnibus Plan (the “1996 Plan”). A summary
of stock option activity in both the 1996 Plan and the 2006 Plan, for 2009 follows:
| Weighted | ||||||||||||||||
| Average | ||||||||||||||||
| Weighted | Remaining | |||||||||||||||
| Average | Contractual | Aggregate | ||||||||||||||
| Exercise | Term | Intrinsic | ||||||||||||||
| Price | (Years) | Value | ||||||||||||||
Outstanding, beginning of year |
3,011,063 | $ | 9.91 | |||||||||||||
Options granted |
801,650 | $ | 1.22 | |||||||||||||
Options forfeited |
(44,500 | ) | $ | 2.51 | ||||||||||||
Options expired |
(1,104,213 | ) | $ | 11.62 | ||||||||||||
Options exercised |
— | $ | — | |||||||||||||
Outstanding, end of year |
2,664,000 | $ | 6.71 | 4.68 | $ | 264,000 | ||||||||||
Exercisable, end of year |
1,619,525 | $ | 9.79 | 3.93 | $ | 38,000 | ||||||||||
Options vested and expected to vest, end of year |
2,539,644 | $ | 6.97 | 4.61 | $ | 231,000 | ||||||||||
A summary of stock options outstanding at December 31, 2009 follows:
| Weighted | Weighted | Weighted | ||||||||||||||||||
| Outstanding as of | Average | Average | Exercisable as of | Average | ||||||||||||||||
| December 31, | Remaining | Exercise | December 31, | Exercise | ||||||||||||||||
| Range of Exercise Prices | 2009 | Contractual Life | Price | 2009 | Price | |||||||||||||||
$1.08-$1.10 |
77,500 | 6.48 | $ | 1.10 | 75,625 | $ | 1.10 | |||||||||||||
$1.22 |
671,150 | 6.21 | $ | 1.22 | — | $ | — | |||||||||||||
$1.27-3.37 |
764,600 | 4.51 | $ | 2.54 | 452,900 | $ | 2.52 | |||||||||||||
$3.87-9.92 |
569,750 | 4.82 | $ | 7.57 | 511,250 | $ | 7.67 | |||||||||||||
$10.00-31.00 |
581,000 | 2.75 | $ | 18.46 | 579,750 | $ | 18.48 | |||||||||||||
| 2,664,000 | 4.68 | $ | 6.71 | 1,619,525 | $ | 9.79 | ||||||||||||||
The total intrinsic value for stock options exercised in 2009, 2008 and 2007 was
approximately $0, $1,000 and $31,000, respectively. At December 31, 2009, total unrecognized
estimated compensation cost related to non-vested stock options was $826,000, which is
expected to be recognized over a weighted average period of 2.7 years.
The amount of cash received from the exercise of stock options in 2009, 2008 and
2007 was approximately $0, $4,000 and $41,000, respectively. No tax benefits were realized
during this period due to the existence of tax net operating loss carryforwards.
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Table of Contents
Unvested Shares of Common Stock —
During 2009 and 2008, respectively, the Company issued unvested shares of common stock,
which vest over 4 years at a rate of 25% per year:
| 2009 | 2008 | |||||||
Outstanding, beginning of year |
91,000 | — | ||||||
Shares granted |
325,000 | 102,000 | ||||||
Shares vested |
(22,750 | ) | (11,000 | ) | ||||
Outstanding, end of year |
393,250 | 91,000 | ||||||
Weighted average grant date fair value of shares vested during year |
$ | 2.20 | $ | 2.20 | ||||
Weighted average grant date fair value of shares granted during year |
$ | 1.20 | $ | 2.20 | ||||
Weighted average grant date fair value of unvested shares, end of
year |
$ | 1.39 | $ | 2.20 | ||||
Weighted average remaining years to vest |
2.9 | 3.4 | ||||||
At December 31, 2009 total unrecognized estimated compensation cost related to
non-vested common shares was $391,000, which is expected to be recognized over a weighted
average period of 2.9 years.
Share-based Compensation
Total share-based compensation expense, related to all of the Company’s share-based
awards, recognized for the years ended December 31, 2009, 2008 and 2007 is included in the
following line items:
| Year Ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
Cost of product revenues |
$ | 60,000 | $ | 77,000 | $ | 99,000 | ||||||
Research and development |
140,000 | 457,000 | 373,000 | |||||||||
Selling and marketing |
110,000 | 131,000 | 241,000 | |||||||||
General and administrative |
491,000 | 976,000 | 852,000 | |||||||||
Share-based compensation expense |
$ | 801,000 | $ | 1,641,000 | $ | 1,565,000 | ||||||
As a result of the departure of one of the Company’s officers during the fourth
quarter of 2008, the Company accelerated the vesting on all of the former officer’s stock
options and grants of unvested common stock. As a result of the acceleration of vesting the
Company recorded share-based compensation expense of $286,000.
The weighted-average estimated fair value of employee stock options granted during the
years ended December 31, 2009, 2008 and 2007 was $0.81, $1.41 and $1.97 per share,
respectively, using the Black-Scholes option valuation model with the following
weighted-average assumptions (annualized percentages):
| Year Ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
Volatility |
73.6 | % | 70.4 | % | 62.2 | % | ||||||
Risk-free interest rate |
1.87-2.54 | % | 2.98 - 3.6 | % | 4.01% - 4.92 | % | ||||||
Expected dividend yield |
0 | % | 0 | % | 0 | % | ||||||
Expected life-directors and officers |
6.0 years | 6.3 years | 5.9 years | |||||||||
Expected life-non-officer employees |
5.8 years | 5.9 years | 5.5 years | |||||||||
The Company used historical volatility in the Company’s stock for the expected
volatility assumption input to the Black-Scholes model measured over a look back period
commensurate with the expected life of the options. The decision to use historical volatility
data to estimate expected volatility was based upon the lack of actively traded options in
the Company’s stock, and the Company’s assessment that historical volatility is the most
representative measure of future stock price trends.
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Table of Contents
The risk-free interest rate assumption is based upon observed interest rates
appropriate for the term of the Company’s employee stock options. The expected life is based
on the Company’s historical option cancellation and employee exercise information. The
expected life of employee stock options includes the weighted-average period the stock
options are expected to remain outstanding post-vesting. In calculating the expected life of
the options, the Company classified its grantee population into two groups, directors and
officers and non-officer employees. As share-based compensation expense recognized in the
Consolidated Statements of Operations is based on awards ultimately expected to vest, it is
reduced for estimated forfeitures. Forfeitures are estimated at the time of grant and
revised, if necessary, in subsequent periods if actual forfeitures differ from those
estimates. In 2009 and 2008, forfeiture rates were estimated to be approximately 4.2% and
2.71%, respectively, for officers and directors and 9.35% for non-officer employees.
9) SIGNIFICANT PRODUCT AGREEMENTS
Stiefel Agreement
In January 2006, as amended in September 2007, the Company licensed to Stiefel
Laboratories, Inc. the exclusive Latin American rights to market
Levulan® PDT for payments by Stiefel of up to $2,250,000. The Company
also manufactures and supplies finished product for Stiefel, which the Company began shipping
in September 2007. In consideration for the transaction, Stiefel agreed to pay the Company as
follows: (i) $375,000 upon launch of the product in either Mexico or Argentina; (ii) $375,000
upon receipt of acceptable pricing approval in Brazil; (iii) two installments of $375,000
each for cumulative end-user sales in Brazil totaling 150,000 units and 300,000 units, and
(iv) two installments of $375,000 each for cumulative sales in countries excluding Brazil
totaling 150,000 units and 300,000 units. Stiefel launched the product in October 2007 in
Mexico and Argentina and in April 2008 in Brazil. The Company is deferring and recognizing
approval and sales milestones as license revenues on a straight-line basis, beginning on the
date the milestone is achieved through the fourth quarter of 2015, which is the term of the
Stiefel Agreement. Stiefel pays a fixed price per unit for the inventory as well as a royalty
based on a percentage of the net sales price to end-users. During 2009 and 2008 the Company’s
sales of Levulan® Kerastick® to Stiefel were
$18,000 and $303,000, respectively. At December 31, 2009 and December 31, 2008 the total
revenues deferred associated with shipments to Stiefel were $193,000 and $389,000,
respectively, in accordance with the Company’s policy of deferring revenues during a
product’s launch phase and recognizing revenues based on end-user demand. Deferred revenues
at December 31, 2009 and December 31, 2008 associated with milestone payments received from
Stiefel were $534,000 and $621,000, respectively.
The agreement with Stiefel also establishes minimum purchase quantities over the first
five years following regulatory approval. The first contract year for all countries other
than Brazil began in October 2007, and for Brazil began in April 2008. For the contract years
ended in October 2008 and 2009 and April 2009 Stiefel did not meet its minimum purchase
obligations under the agreement. The agreement provides that within 60 days of the year end,
Stiefel is required to pay the Company the difference between its actual purchases and the
contractual minimums (a “gross-up” payment). To date, Stiefel has failed to make the gross-up
payments, and accordingly, the Company is considering its remedies, which include, without
limitation, appointing one or more other distributors in the territory or terminating the
agreement. Also, since Stiefel’s sales to third parties during the contract years ended
October 2008 and 2009 and April 2009 were below its minimum purchase obligations, Stiefel has
the unilateral right to terminate the contract. Stiefel has not exercised this right.
Daewoong Agreement
In January 2007 the Company licensed to Daewoong Pharmaceutical Co., LTD. and its
wholly-owned subsidiary DNC Daewoong Derma & Plastic Surgery Network Company, the exclusive
rights to market Levulan® PDT in Korea and other Asia Pacific countries
for payments by Daewoong of up to $3,500,000. The Company also manufactures and supplies
finished product for Daewoong, which the Company began shipping in October 2007. In
consideration for the transaction Daewoong agreed to pay the Company as follows: (i)
$1,000,000 upon contract signing; (ii) $1,000,000 upon achieving regulatory approval in
Korea; and (iii) two installments of $750,000 each for cumulative end-user sales totaling
200,000 units and 500,000 units. Daewoong launched the product in November 2007 in Korea. The
Company is deferring and recognizing the up-front and regulatory approval milestones as
license revenues on a straight-line basis, beginning with product launch in the territory
through the fourth quarter of 2016, which is the term of the Daewoong Agreement. Daewoong
pays a fixed price per unit for the inventory and an Excess Purchase Price, as defined in the
Agreement, if the Average Selling Price to end-users during any calendar quarter exceeds a
certain threshold. During the years ended December 31, 2009 and 2008, the Company’s sales of
Levulan® Kerastick® to Daewoong were $0 and
$998,000, respectively. At December 31, 2009 and December 31, 2008 the total revenues
deferred associated with shipments to Daewoong were $704,000 and $1,144,000, respectively, in
accordance with the Company’s policy of deferring revenues during a product’s launch phase
and recognizing revenues based on end-user demand. Deferred revenues at December 31, 2009 and
December 31, 2008 associated with milestone payments received from Daewoong were $1,438,000
and $1,643,000, respectively. The agreement with Daewoong also establishes a cumulative
minimum purchase quantity over the first five years following regulatory approval. If
Daewoong fails to meet its minimum purchase quantities, the Company may, in addition to other
remedies, at its sole discretion, appoint one or more other distributors in the covered
territories, or terminate the agreement.
F-19
Table of Contents
PhotoCure Agreement
On May 30, 2006, the Company entered into a patent license agreement under which the
Company granted PhotoCure ASA a non-exclusive license under the patents the Company licenses
from PARTEQ for ALA esters. In addition, the Company granted a non-exclusive license to
PhotoCure for its existing formulations of Hexvix® and
Metvix® (known in the U.S. as Metvixia®) for any
patent the Company owns now or in the future. On October 1, 2009, PhotoCure announced that
it had sold Metvix/Metvixia to Galderma, S.A. (Galderma), a large dermatology company. On
January 11, 2010, Galderma announced a co-promotion agreement with PhotoMedex for Galderma’s
PDT application for the treatment of AKs, under which Galderma will provide marketing support
and distribution and PhotoMedex’s sales force will promote Metvixia and Galderma’s Aktilite
lamp to healthcare professionals throughout the United States.
Photocure is obligated to pay the Company royalties on sales of its ester products
to the extent they are covered by its patents in the U.S. and certain other territories. As
part of the agreement, PhotoCure paid the Company a prepaid royalty in the amount of
$1,000,000 in 2006. Revenues recognized pursuant to the Photocure Agreement have not
been material to date. The balance of the prepaid royalty under the Photocure Agreement is
included in deferred revenues in the accompanying Consolidated Balance Sheets.
10) RETIREMENT PLAN
The Company has 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, the
Company 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 the Company. The Company’s matching
contributions in 2009, 2008 and 2007 were $63,000, $64,000 and $59,000, respectively.
11) SEGMENT REPORTING
The Company has two reportable operating segments: Photodynamic Therapy (PDT) Drug
and Device Products and Non-Photodynamic Therapy (Non-PDT) Drug Products. Operating segments
are defined as components of the Company for which separate financial information is
available to manage resources and evaluate performance regularly by the chief operating
decision maker. The table below presents the revenues, costs of revenues and gross margins
attributable to these reportable segments for the periods presented. The Company does not
allocate research and development, selling and marketing and general and administrative
expenses to its reportable segments, because these activities are managed at a corporate
level.
| Year Ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
| (In thousands) | ||||||||||||
REVENUES |
||||||||||||
PDT drug & device product revenues |
$ | 28,338,000 | $ | 23,930,000 | $ | 18,275,000 | ||||||
Non-PDT drug product revenues |
1,470,000 | 5,615,000 | 9,388,000 | |||||||||
Total revenues |
29,808,000 | 29,545,000 | 27,663,000 | |||||||||
COSTS OF REVENUES |
||||||||||||
PDT drug & device cost of product revenues and royalties |
5,735,000 | 5,352,000 | 4,950,000 | |||||||||
Non-PDT drug cost of product revenues and royalties |
940,000 | 1,773,000 | 2,880,000 | |||||||||
Total costs of revenues |
6,675,000 | 7,125,000 | 7,830,000 | |||||||||
GROSS MARGINS |
||||||||||||
PDT drug and device product gross margin |
22,603,000 | 18,578,000 | 13,325,000 | |||||||||
Non-PDT drug product gross margin |
530,000 | 3,842,000 | 6,508,000 | |||||||||
Total gross margins |
$ | 23,133,000 | $ | 22,420,000 | $ | 19,833,000 | ||||||
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Table of Contents
During the years ended December 31, 2009, 2008 and 2007, the Company derived
revenues from the following geographies based on the location of the customer (as a
percentage of product revenues):
| Year Ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
United States |
95 | % | 94 | % | 95 | % | ||||||
Canada |
2 | % | 2 | % | 3 | % | ||||||
Korea |
2 | % | 3 | % | 2 | % | ||||||
Rest-of-world |
1 | % | 1 | % | — | % | ||||||
Total |
100 | % | 100 | % | 100 | % | ||||||
12) SETTLEMENTS, NET
River’s Edge Litigation Settlement
As part of the settlement of litigation between DUSA and River’s Edge Pharmaceuticals,
LLC in October 2007, the parties entered into a Settlement Agreement and Mutual Release (the
“Settlement Agreement”) to dismiss the lawsuit brought by DUSA against River’s Edge asserting
a number of claims arising out of River’s Edge’s alleged infringement of the Company’s
Nicomide® patent, U.S. Patent No. 6,979,468, under which DUSA formerly
marketed, distributed and sold Nicomide®. As part of the terms of this
agreement, River’s Edge agreed to pay to DUSA $25.00 for every bottle of River’s Edge product
above 5,000 bottles that was substituted for Nicomide® after September
30, 2007. The net (loss) gain from settlement of the River’s Edge litigation in 2008 and,
2007 was $283,000 and $583,000, respectively, and is recorded in the accompanying Condensed
Consolidated Statement of Operations in Settlements, net. There were no related gains or
losses recorded in 2009.
On August 12, 2008, the Company entered into a worldwide non-exclusive patent License
Agreement to its patent covering Nicomide® with River’s Edge
Pharmaceuticals, LLC and an amendment to its Settlement Agreement with River’s
Edge. The amendment to the Settlement Agreement, which has been further amended in April
2009 as described in the following paragraph, had allowed River’s Edge to manufacture and
market a prescription product that could be substitutable for Nicomide®
pursuant to the terms of the License Agreement and changed certain payment obligations of
River’s Edge for sales of its substitutable product. In consideration for granting the
license, the Company was being paid a share of the net revenues, as defined in the License
Agreement, of River’s Edge’s licensed product sales under the License Agreement. Royalty
revenues recorded pursuant to the License Agreement are recorded in Product Revenues in the
accompanying Consolidated Statements of Operations.
In April 2009, the Company and River’s Edge entered into an Amendment to their License
Agreement (the “License Amendment”). The License Amendment granted River’s Edge an exclusive
license to U.S. Patent, No. 6,979,468, and a license to use all know-how and the trademark
associated with the Licensed Products worldwide. Under the License Amendment, DUSA is
required to transfer all of its rights, title and interest in and to the DUSA’s patent,
know-how and trademark relating to the Licensed Products (but not the copyright registration
relating to product labeling) to River’s Edge upon the Company’s receipt of $5,000,000. Of
the $5,000,000, River’s Edge was required to payment to the Company of $2,600,000, in
thirteen monthly installments of $200,000, subject to reduction under certain conditions, and
pay additional consideration of $2,400,000 payable over time based on a share of River’s
Edge’s net revenues as defined in the License Amendment. The License Agreement, as amended,
has a term of 30 months, subject to a further extension under certain circumstances to 48
months, and may be terminated early by River’s Edge on 30 days’ prior written notice to the
Company. Under the License Agreement, River’s Edge has assumed all regulatory
responsibilities for the Licensed Products. If the License Agreement is terminated prior to
the payment of the $5,000,000, all of the rights and licenses granted by the Company to
River’s Edge will revert to the Company. The Company is recording the revenue from the
License Amendment on a cash basis. The Company received the first $200,000 installment
payment under the License Amendment during the second quarter of 2009, which is included in
Product Revenues in the accompanying Consolidated Statements of Operations, but has not
received any further payments. We are considering our options relative to the collection of
amounts due from River’s Edge and termination of the License Agreement, which we have the
right to do for non-payment. The validity of the Nicomide patent is being tested again as a
request for ex parte reexamination of this patent was filed by an unknown third party with
the U.S. Patent and Trademark Office, or USPTO, on August 19, 2009. The USPTO accepted the
reexamination on October 16, 2009 and the Company has received the first office action.
Also, other new products have been launched that are competing with
Nicomide®.
F-21
Table of Contents
Winston Laboratories Arbitration Settlement
In October 2008, the Company was notified that Winston Laboratories, Inc. had
filed a demand for arbitration against the Company. The demand for arbitration arose
out of the 2006 Micanol License Agreement and subsequent 2006 Micanol Transition
License Agreement (together “the Agreement”), and claimed that the Company breached
the Agreement. Winston Laboratories claimed damages in excess of $2.0 million. The
matter was settled on April 28, 2009 for cash consideration of $75,000, and a mutual
release.
13) COMMITMENTS AND CONTINGENCIES
Business Acquisition
On March 10, 2006, the Company acquired all of the outstanding common stock of Sirius
Laboratories, Inc (“Sirius”). The Company agreed to pay additional consideration in future
periods to the former Sirius shareholders based upon the achievement of total cumulative
sales milestones for the Sirius products over the period beginning with the closing of the
acquisition and ending December 31, 2011. The first cumulative sales milestone was achieved
during 2008, and accordingly a cash payment in the amount of $1.5 million was paid to the
former Sirius shareholders in that year. The payment made during 2008 was recorded initially
as goodwill and then subsequently deemed impaired and expensed during the same period.
If the remaining sales milestones are attained, they will be paid in either common stock
or cash, at the Company’s sole discretion. The remaining cumulative sales milestones and
related consideration are, as follows:
| Additional | ||||
| Cumulative Sales Milestone: | Consideration: | |||
$35.0 million |
$1.0 million | |||
$45.0 million |
$1.0 million | |||
Total |
$2.0 million | |||
Third Amendment to Merger Agreement
In April 2009, the Company and the former shareholders of Sirius entered into a letter
agreement providing for the consent of the former Sirius shareholders to the Amendment to the
License Agreement with River’s Edge mentioned above in Note 12 Settlements, Net, a release,
and the Third Amendment to the Merger Agreement, dated as of December 30, 2005, by and among
the DUSA Pharmaceuticals, Inc., Sirius and the shareholders of Sirius. Pursuant to the Merger
Agreement prior to this amendment, the Company agreed to pay additional consideration after
the closing of the merger to the former shareholders of Sirius based upon the attainment of
pre-determined total cumulative sales milestones for the products acquired from Sirius over
the period ending 50 months from the date of the March 2006 closing of the original Merger
Agreement. Pursuant to the agreements entered into in April 2009, the Company has agreed to
extend the Milestone Termination Date from 50 months from the date of the closing of the
original Merger Agreement until December 31, 2011 and to include in the definition of Net
Sales in the Merger Agreement payments which the Company may receive from the divestiture of
Sirius products. The Third Amendment to the Merger Agreement also removes the Company’s
obligation to market the Sirius products according to certain previously required standards
and allows the Company to manage all business activities relating to the products acquired
from Sirius without further approval from the former Sirius shareholders.
In April 2009 the Company paid to the former Sirius shareholders, on a pro rata basis,
$100,000. In addition, in the event that the $1,000,000 milestone payment that would become
due to the former Sirius shareholders under the Merger Agreement if cumulative Net Sales of
the Sirius products reach $35,000,000 is not, in fact, triggered by the new Milestone
Termination Date, then the Company has agreed to pay $250,000 to the former Sirius
shareholders on a pro rata basis on or before January 6, 2012. The $100,000 payment to Sirius
shareholders, along with the present value of the guaranteed $250,000 milestone payment, or
$214,000, have been included in general and administrative expense for 2009 in the
accompanying Consolidated Statement of Operations.
The Company has not accrued amounts for any other potential contingencies as of December
31, 2009.
F-22
Table of Contents
Lease Arrangements
The Company leases its facilities under operating leases. The Company’s
lease arrangements have terms which expire through 2012. Total rent expense under
operating leases was approximately $398,000, $447,000 and $476,000 for the years
ended December 31, 2009, 2008 and 2007, respectively. Future minimum payments under
lease arrangements at December 31, 2009 are as follows:
| Operating | ||||
| Years Ending December 31, | Lease Obligations | |||
2010 |
$ | 464,000 | ||
2011 |
480,000 | |||
2012 |
283,000 | |||
2013 |
— | |||
Thereafter |
— | |||
Total |
$ | 1,227,000 | ||
14) SUBSEQUENT EVENT
In February 2010, the Company incurred a loss on the purchase of one its Non-PDT Drug Products
that was in-transit having an approximate cost of $300,000. The Company has not yet
determined the financial statement impact as it is evaluating its
insurance coverage.
15) SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
| Quarterly Results for Year Ended December 31, 2009 | ||||||||||||||||
| March 31 | June 30 | Sept 30 | Dec 31 | |||||||||||||
Product revenues |
$ | 7,138,269 | $ | 6,965,541 | $ | 6,930,110 | $ | 8,773,909 | ||||||||
Gross margin |
5,200,043 | 5,524,677 | 5,335,418 | 7,073,345 | ||||||||||||
Net (loss) income |
(1,606,931 | ) | (852,709 | ) | (415,240 | ) | 366,588 | |||||||||
Basic and diluted
(loss) earnings per
common share |
$ | (0.07 | ) | $ | (0.04 | ) | $ | (0.02 | ) | $ | 0.02 | |||||
| Quarterly Results for Year Ended December 31, 2008 | ||||||||||||||||
| March 31 | June 30 | Sept 30 (1) | Dec 31 | |||||||||||||
Product revenues |
$ | 7,929,500 | $ | 8,112,239 | $ | 5,726,071 | $ | 7,777,596 | ||||||||
Gross margin |
6,229,183 | 6,324,545 | 4,264,043 | 5,602,540 | ||||||||||||
Net loss |
(1,284,141 | ) | (138,791 | ) | (2,836,855 | ) | (1,990,654 | ) | ||||||||
Basic and diluted loss per common share |
$ | (0.05 | ) | $ | (0.01 | ) | $ | (0.12 | ) | $ | (0.08 | ) | ||||
| (1) | In the third quarter of 2008, the Company recorded a goodwill impairment charge of $1,500,000. |
F-23
Table of Contents
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/ Robert F. Doman | ||||
| President and Chief Executive Officer | ||||
Date: March 4, 2010
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/ Robert F. Doman
|
Director, President and Chief | March 4, 2010 | ||
Robert F. Doman
|
Executive Officer (principal executive officer) | Date | ||
/s/ Richard C. Christopher
|
Vice President, Finance and Chief | March 4, 2010 | ||
Richard C. Christopher
|
Financial Officer (principal financial officer and principal accounting officer) |
Date | ||
/s/ John H. Abeles
|
Director | March 4, 2010 | ||
John H. Abeles
|
Date | |||
/s/ David Bartash
|
Vice Chairman of the Board and Lead Director | March 4, 2010 | ||
David Bartash
|
Date | |||
/s/ Alexander W. Casdin
|
Director | March 4, 2010 | ||
Alexander W. Casdin
|
Date | |||
/s/ Jay M. Haft, Esq.
|
Chairman of the Board and Director | March 4, 2010 | ||
Jay M. Haft, Esq.
|
Date | |||
/s/ Marvin E. Lesser
|
Director | March 4, 2010 | ||
Marvin E. Lesser
|
Date | |||
/s/ Richard C. Lufkin
|
Director | March 4, 2010 | ||
Richard C. Lufkin
|
Date | |||
/s/ Magnus Moliteus
|
Director | March 4, 2010 | ||
Magnus Moliteus
|
Date |
Table of Contents
EXHIBIT INDEX
2(a.1)*
|
Merger Agreement by and among the Registrant, Sirius Laboratories, Inc., and the shareholders of Sirius dated as of December 30, 2005 filed as Exhibit 2(a.1) to the Registrant’s Form 10-K for the fiscal year ended December 31, 2006, and is incorporated herein by reference; and | |
2(a.2)
|
First Amendment to Merger Agreement by and among the Registrant, Sirius Laboratories, Inc. and the shareholders of Sirius, dated as of February 6, 2006 filed as Exhibit 2(a.2) to the Registrant’s Form 10-K for the fiscal year ended December 31, 2006, and is incorporated herein by reference. | |
2(a.3)
|
Third Amendment to Merger Agreement by and among the Registrant, Sirius Laboratories, Inc. and the shareholders of Sirius, dated as of April 21, 2009; filed as Exhibit 2(a.3) to the Registrant’s Quarterly Report on Form 10-Q for the fiscal quarter ended March 31,2009, and is incorporated herein by reference. | |
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 is incorporated herein by reference; and | |
3(b)
|
By-laws of the Registrant, filed as Exhibit 3.1 to the Registrant’s current report on Form 8-K, filed on November 2, 2007, and is incorporated herein by reference. | |
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)
|
Form of D. Geoffrey Shulman’s Class B Warrant, filed as Exhibit 4(b) to the Registrant’s Form 10-K for the fiscal year ended December 31, 2007, and is incorporated herein by reference; | |
4(c)
|
Rights Agreement filed as Exhibit 4.0 to Registrant’s Current Report on Form 8-K filed October 11, 2002, and is incorporated herein by reference; | |
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 filed October 11, 2002, and is incorporated herein by reference; | |
4(e)
|
Form of Common Stock Purchase Warrant, dated October 29, 2007 filed as Exhibit 4.2 to the Registrant’s Registration Statement on Form S-3, No. 333-147614, and is incorporated herein by reference; and | |
4(f)
|
Registration Rights Agreement, dated October 29, 2007, by and between the Registrant and each of the respective selling shareholders named therein filed as Exhibit 4.3 to the Registrant’s Registration Statement on Form S-3, No. 333-147614, and is incorporated herein by reference. | |
10(a)
|
License Agreement between the Registrant, 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 Registrant, 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 Registrant 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 Registrant and Draxis Health Inc. dated as of February 24, 2004, filed as Exhibit 10(b.2) to the Registrant’s Form 10-K for the fiscal year ended December 31, 2003, 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(c)
|
Consulting Agreement and General Release of D. Geoffrey Shulman, MD, FRCPC dated as of December 1, 2008, filed as Exhibit 10(d.3) to the Registrant’s Form 10-K for the fiscal year ended December 31, 2008, and is incorporated herein by reference,+ | |
10(d)
|
Amended and Restated License Agreement between the Registrant 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(e)
|
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(f)
|
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(g)
|
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(g.1)
|
1996 Omnibus Plan, as amended on May 1, 2003, filed as Exhibit 10(h.1) to the Registrant’s Form 10-K for the fiscal year ended December 31, 2003, and is incorporated herein by reference; + |
Table of Contents
10(g.2)
|
1996 Omnibus Plan, as amended April 23, 2004, filed as Appendix A to Registrant’s Schedule 14A definitive Proxy Statement dated April 28, 2004, and is incorporated herein by reference; + | |
10(h)
|
Purchase and Supply Agreement between the Registrant 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(h.1)
|
Amended and Restated Purchase and Supply Agreement between the Registrant and National Biological Corporation dated as of June 21, 2004 filed as Exhibit 10(a) to the Registrant’s Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 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, filed August 11, 2004, and is incorporated herein by reference; | |
10(i)
|
Supply Agreement between the Registrant 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(i.1)
|
First Amendment to Supply Agreement between the Registrant 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(i.2)
|
Second Amendment to Supply Agreement between the Registrant 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(i.3)
|
Third Amendment to Supply Agreement between the Registrant and Sochinaz SA dated July 29, 2005, filed as Exhibit 10.1 to the Registrant’s Form 10-Q filed on August 3, 2005, 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(i.4)
|
Fifth Amendment to Supply Agreement between the Registrant and Sochinaz SA dated September 10, 2009, filed as Exhibit 10 to the Registrant’s Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2009, 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)
|
Master Service Agreement between the Registrant 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(k)
|
License and Development Agreement between the Registrant 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 24b-2 of the Securities Exchange Act of 1934, as amended, and is incorporated herein by reference; | |
10(l)
|
Supply Agreement between the Registrant 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 24b-2 of the Securities Exchange Act of 1934, as amended, and is incorporated herein by reference; | |
10(m)
|
License and Supply Agreement dated August 7, 2007 among the Registrant, photonamic GmbH & Co. KG and medac, GmbH, 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, filed as Exhibit 10 to the Registrant’s Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2007 and is incorporated herein by reference | |
10(n)
|
Securities Purchase Agreement dated as of February 27, 2004, by and among the Registrant 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 24b-2 of the Securities Exchange Act of 1934, as amended, and is incorporated herein by reference; | |
10(o)
|
Registration Rights Agreement dated as of February 27, 2004 by and among the Registrant 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(p)
|
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; | |
10(q)
|
License, Promotion, Distribution and Supply Agreement between the Registrant and Coherent-AMT dated as of March 31, 2004 filed as Exhibit 10(a) to the Registrant’s Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2004, filed May 4, 2004, and is incorporated herein by reference; |
Table of Contents
10(r)
|
Employment Agreement of Scott L. Lundahl dated as of June 23, 1999 filed as Exhibit 10(u) to the Registrant’s Form 10-K for the fiscal year ended December 31, 2004, and is incorporated herein by reference; + | |
10(r.1)
|
Amendment No. 1 to Employment Agreement of Scott Lundahl dated as of April 10, 2008, filed as Exhibit 10(s.1) to the Registrant’s Form 10-K for the fiscal year ended December 31, 2008, and is incorporated herein by reference, + | |
10(s)
|
Amended Employment Agreement of Stuart L. Marcus, MD, PhD dated December 9, 1999 filed as Exhibit 10(v) to the Registrant’s Form 10-K for the fiscal year ended December 31, 2004, and incorporated herein by reference; + | |
10(s.1)
|
Amendment No. 2 to Employment Agreement of Stuart L. Marcus, MD, PhD dated as of April 10, 2008, filed as Exhibit 10(t.1) to the Registrant’s Form 10-K for the fiscal year ended December 31, 2008, and is incorporated herein by reference, + | |
10(t)
|
Employment Agreement of Mark C. Carota dated as of February 14, 2000 filed as Exhibit 10(w.1) to the Registrant’s Form 10-K for the fiscal year ended December 31, 2004, and is incorporated herein by reference; + | |
10(t.1)
|
First Amendment to Employment Agreement of Mark C. Carota dated October 31, 2001 filed as Exhibit 10(w.2) to the Registrant’s Form 10-K for the fiscal year ended December 31, 2004, and is incorporated herein by reference; + | |
10(t.2)
|
Amendment No. 2 to Employment Agreement of Mark C. Carota dated as of April 10, 2008, filed as Exhibit 10(u.2) to the Registrant’s Form 10-K for the fiscal year ended December 31, 2008, and is incorporated herein by reference, + | |
10(u)
|
Amendment to Employment Agreement of Richard Christopher dated as of October 18, 2006 filed as Exhibit 10.A to the Registrant’s Form 10-Q for the fiscal quarter ended September 30, 2004, and is incorporated herein by reference; | |
10(v)
|
Employment Agreement of Richard Christopher dated as of January 1, 2004 filed as Exhibit 10(y) to the Registrant’s Form 10-K for the fiscal year ended December 31, 2004, and is incorporated herein by reference; + | |
10(v.1)
|
Amendment to Employment Agreement of Richard Christopher dated as of April 10, 2008, filed as Exhibit 10(w.1) to the Registrant’s Form 10-K for the fiscal year ended December 31, 2008, and is incorporated herein by reference, + | |
10(w)
|
Employment Agreement of Robert F. Doman dated as of March 15, 2005 filed as Exhibit 10(z) to the Registrant’s Form 10-K for the fiscal year ended December 31, 2004, and is incorporated herein by reference; + | |
10(x)
|
First Amendment to Employment Agreement of Robert F. Doman dated November 26, 2008, filed as Exhibit 10(x.1) to the Registrant’s Form 10-K for the fiscal year ended December 31, 2008, and is incorporated herein by reference, + | |
10(aa)
|
Compensation Policy Applicable to the Registrant’s Non-Employee Directors filed as Exhibit 10(cc) to the Registrant’s Form 10-K for the fiscal year ended December 31, 2004, and is incorporated herein by reference; and+ | |
10(bb)
|
Supply Agreement between Sirius Laboratories, Inc. and Amide Pharmaceuticals, Inc. dated May 18, 2001, 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(cc)
|
Amendment and Extension of the Supply Agreement between Sirius Laboratories, Inc. and Amide Pharmaceuticals, Inc. dated February 8, 2006, 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(dd)
|
Supply and Development Agreement between Sirius Laboratories, Inc. and Harmony Laboratories dated September 18, 2001, 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(ee)
|
Amendment and Extension of the Supply and Development Agreement between Sirius Laboratories, Inc. and Harmony Laboratories dated February 16, 2006, 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, as filed as Exhibit 10.D to the Registrant’s Form 10-Q for the fiscal quarter ended March 31, 2006, and is incorporated herein by reference; | |
10(ff)
|
Second Amendment of the Supply and Development Agreement between Sirius Laboratories, Inc. and Harmony Laboratories dated March 10, 2006, 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, as filed as Exhibit 10.E to the Registrant’s Form 10-Q for the fiscal quarter ended March 31, 2006, and is incorporated herein by reference; | |
10(gg)
|
Supply Agreement between Sirius Laboratories, Inc. and L. Perrigo Registrant dated October 21, 2005, 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, as filed as Exhibit 10.F to the Registrant’s Form 10-Q for the fiscal quarter ended March 31, 2006, and is incorporated herein by reference; | |
10(hh)
|
Amendment No. 1 to Employment Agreement of William O’Dell dated as of April 10, 2008, filed as Exhibit 10(jj.1) to the Registrant’s Form 10-K for the fiscal year ended December 31, 2008, and is incorporated herein by reference, + | |
10(hh.1)
|
Amendment No. 1 to Employment Agreement of William O’Dell dated as of April 10, 2008; + |
Table of Contents
10(ii)
|
Patent License Agreement between the Registrant and PhotoCure ASA, dated as of May 30, 2006, 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, filed as Exhibit 10.A to the Registrant’s Form 10-Q for the fiscal quarter ended June 30, 2006, and is incorporated herein by reference; | |
10(jj)
|
Separation Agreement between the Registrant and Paul Sowyrda, dated as of August 31, 2006 filed as Exhibit 10(kk) to the Registrant’s Form 10-K for the fiscal year ended December 31, 2006, and is incorporated herein by reference; | |
10(kk)
|
Employment Agreement of Michael Todisco dated as of September 20, 2006 filed as Exhibit 10(11) to the Registrant’s Form 10-K for the fiscal year ended December 31, 2006, and is incorporated herein by reference; | |
10(kk.1)
|
Amendment No. 1 to Employment Agreement of Michael Todisco dated as of April 10, 2008, filed as Exhibit 10(mm.1) to the Registrant’s Form 10-K for the fiscal year ended December 31, 2008, and is incorporated herein by reference, + | |
10(ll)
|
Marketing, Distribution and Supply Agreement between the Registrant, Daewoong Pharmaceutical Co., Ltd. and DNC Daewoong Derma & Plastic Surgery Network Registrant dated January 4, 2007, 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, filed as Exhibit 10(mm) to the Registrant’s Form 10-K for the fiscal year ended December 31, 2006, and is incorporated herein by reference; | |
10(ll.1)
|
First Amendment to Marketing, Distribution and Supply Agreement between the Registrant, Daewoong Pharmaceutical Co., Ltd. and DNC Daewoong Derma & Plastic Surgery Network Registrant dated January 10, 2007, 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, filed as Exhibit 10(nn) to the Registrant’s Form 10-K for the fiscal year ended December 31, 2006, and is incorporated herein by reference; | |
10(mm)
|
DUSA Pharmaceuticals, Inc. 2006 Equity Compensation Plan, filed as Appendix A to Registrants’s Schedule 14A definitive Proxy Statement dated April 24, 2006, and is incorporated herein by reference; + | |
10(nn)
|
DUSA Pharmaceuticals, Inc. 2006 Equity Compensation Plan, as amended October 18, 2006 filed as Exhibit 10(pp) to the Registrant’s Form 10-K for the fiscal year ended December 31, 2006, and is incorporated herein by reference; + | |
10(oo)
|
DUSA Pharmaceuticals, Inc. 2006 Deferred Compensation Plan, October 18, 2006 filed as Exhibit 10(qq) to the Registrant’s Form 10-K for the fiscal year ended December 31, 2006, and is incorporated herein by reference; + | |
10(pp)
|
Marketing, Distribution and Supply Agreement between the Registrant and Stiefel Laboratories, Inc., dated as of January 12, 2006, 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, filed as Exhibit 10(aa) to the Registrant’s Form 10-K for the fiscal year ended December 31, 2005, and is incorporated herein by reference; | |
10(pp.1)
|
Amendment to the Marketing, Distribution and Supply Agreement dated September 26, 2007, between the Registrant and Stiefel Laboratories, Inc. 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, filed as Exhibit 10(a) to the Registrant’s Form 10-Q for the fiscal quarter ended September 30, 2007, and is incorporated herein by reference; | |
10(qq)
|
Securities Purchase Agreement, dated October 29, 2007, by and among the Registrant and each of the selling shareholders named therein 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, filed as Exhibit 10.1 to the Registrant’s Registration Statement on Form S-3, No. 333-147614, and is incorporated herein by reference; | |
10(rr)
|
Settlement Agreement and Mutual Release, including License Agreement dated October 28, 2007 between Registrant and River’s Edge Pharmaceuticals LLC, filed as Exhibit 10(tt) to the Registrant’s Form 10-K for the fiscal year ended December 31, 2007, and is incorporated herein by reference. | |
10(ss)
|
Letter Agreement between Registrant and the representatives of Sirius Laboratories, Inc. dated April 3, 2009, filed as Exhibit 10(a) to the Registrant’s Quarterly Report on Form 10-Q for the fiscal quarter ended March 31,2009, and is incorporated herein by reference; | |
10(ss.1)
|
Letter Agreement between Registrant and the representatives of Sirius Laboratories, Inc. dated April 21, 2009, filed as Exhibit 10(b) to the Registrant’s Quarterly Report on Form 10-Q for the fiscal quarter ended March 31,2009, and is incorporated herein by reference; | |
10(tt)
|
License Agreement between the Registrant and River’s Edge Pharmaceuticals LLC entered into August 12, 2008 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, filed as Exhibit 10(a) to the Registrant’s Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2008, and is incorporated herein by reference; and | |
10(uu)
|
Amendment to License Agreement between Registrant and River’s Edge Pharmaceuticals, LLC entered into April 21, 2009, filed as Exhibit 10(c) to the Registrant’s Quarterly Report on Form 10-Q for the fiscal quarter ended March 31,2009, and is incorporated herein by reference. |
Table of Contents
14(a)
|
Form of DUSA Pharmaceuticals, Inc. Code of Ethics Applicable to Senior Officers, filed as Exhibit 14(a) to the Registrant’s Form 10-K for the fiscal year ended December 31, 2004, and is incorporated herein by reference. | |
21(a)
|
Subsidiaries of the Registrant. | |
23(a)
|
Consent of Independent Registered Public Accounting Firm. | |
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. | |
99.1
|
Press Release dated March 3, 2010. |
| + | Management contract or compensatory plan or arrangement. | |
| * | Schedules and exhibits omitted pursuant to Item 601(b)(2) of Regulation S-K. The Registrant agrees to furnish supplementally a copy of any omitted schedule or exhibit to the Commission upon request. |