10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended: June 30, 2008
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o |
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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)
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New Jersey
(State or Other Jurisdiction of
Incorporation or Organization)
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22-3103129
(I.R.S. Employer Identification No.) |
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25 Upton Drive, Wilmington, MA
(Address of Principal Executive Offices)
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01887
(Zip Code) |
(978) 657-7500
(Registrants Telephone Number, Including Area Code)
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes þ No o
Indicate by check mark whether the registrant 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 þ | Non-accelerated filer o (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 August 7, 2008, the registrant had 24,078,610 shares of Common Stock, no par value per share,
outstanding.
DUSA PHARMACEUTICALS, INC.
TABLE OF CONTENTS TO FORM 10-Q
-2-
PART I.
ITEM 1. FINANCIAL STATEMENTS
DUSA PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
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June 30, |
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December 31, |
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2008 |
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2007 |
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ASSETS |
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CURRENT ASSETS |
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Cash and cash equivalents |
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$ |
2,978,722 |
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$ |
4,713,619 |
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Marketable securities |
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19,721,895 |
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18,311,650 |
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Accrued interest receivable |
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175,535 |
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97,243 |
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Accounts receivable, net of allowance for
doubtful accounts of $152,000 and
$158,000 in 2008 and 2007, respectively |
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2,205,451 |
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2,667,178 |
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Inventory |
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2,831,488 |
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2,672,105 |
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Prepaid and other current assets |
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1,669,375 |
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1,843,873 |
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TOTAL CURRENT ASSETS |
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29,582,466 |
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30,305,668 |
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Restricted cash |
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172,418 |
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170,510 |
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Property, plant and equipment, net |
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2,123,288 |
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2,142,658 |
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Deferred charges and other assets |
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215,861 |
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273,404 |
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TOTAL ASSETS |
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$ |
32,094,033 |
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$ |
32,892,240 |
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LIABILITIES AND SHAREHOLDERS EQUITY |
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CURRENT LIABILITIES |
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Accounts payable |
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$ |
104,872 |
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$ |
1,213,867 |
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Accrued compensation |
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677,587 |
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491,529 |
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Other accrued expenses |
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3,343,535 |
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3,322,642 |
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Deferred revenue |
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937,269 |
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1,256,494 |
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TOTAL CURRENT LIABILITIES |
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5,063,263 |
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6,284,532 |
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Deferred revenues |
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4,241,844 |
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2,918,850 |
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Warrant liability |
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1,138,733 |
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1,262,600 |
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Other liabilities |
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285,729 |
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319,736 |
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TOTAL LIABILITIES |
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10,729,569 |
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10,785,718 |
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COMMITMENTS AND CONTINGENCIES (NOTE 17) |
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SHAREHOLDERS EQUITY |
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Capital Stock |
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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: 24,078,610 and
24,076,110 shares of common stock, no
par, at June 30, 2008 and December 31,
2007, respectively |
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151,652,943 |
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151,648,943 |
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Additional paid-in capital |
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6,574,903 |
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5,885,353 |
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-3-
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June 30, |
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December 31, |
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2008 |
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2007 |
Accumulated deficit |
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(137,023,416 |
) |
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(135,600,484 |
) |
Accumulated other comprehensive income |
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160,034 |
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172,710 |
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TOTAL SHAREHOLDERS EQUITY |
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21,364,464 |
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22,106,522 |
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TOTAL LIABILITIES AND SHAREHOLDERS EQUITY |
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$ |
32,094,033 |
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$ |
32,892,240 |
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See the accompanying Notes to the Condensed Consolidated Financial Statements.
-4-
DUSA
PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
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Three-months ended |
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Six-months ended |
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June 30, |
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June 30, |
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2008 |
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2007 |
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2008 |
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2007 |
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Product revenues |
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$ |
8,112,239 |
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$ |
6,862,198 |
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$ |
16,041,739 |
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$ |
13,539,038 |
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Cost of product revenues
and royalties |
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1,787,694 |
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1,776,491 |
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3,488,011 |
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3,932,643 |
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GROSS MARGIN |
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6,324,545 |
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5,085,707 |
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12,553,728 |
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9,606,395 |
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Operating costs: |
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Research and development |
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1,375,302 |
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1,576,909 |
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3,561,511 |
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3,103,013 |
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Marketing and sales |
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3,496,233 |
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3,309,583 |
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6,553,434 |
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6,840,290 |
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General and administrative |
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2,325,137 |
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2,832,576 |
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4,692,961 |
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5,856,025 |
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Net gain from settlement
of litigation |
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(47,825 |
) |
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(283,425 |
) |
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TOTAL OPERATING COSTS |
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7,148,847 |
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7,719,068 |
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14,524,481 |
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15,799,328 |
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LOSS FROM OPERATIONS |
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(824,302 |
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(2,633,361 |
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(1,970,753 |
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(6,192,933 |
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Other income, net |
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217,100 |
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155,954 |
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423,952 |
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344,598 |
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Gain on change in fair
value of warrants |
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468,411 |
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123,869 |
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NET LOSS |
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$ |
(138,791 |
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$ |
(2,477,407 |
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$ |
(1,422,932 |
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$ |
(5,848,335 |
) |
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BASIC AND DILUTED NET
LOSS PER
COMMON SHARE |
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$ |
(0.01 |
) |
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$ |
(0.13 |
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$ |
(0.06 |
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$ |
(0.30 |
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WEIGHTED AVERAGE NUMBER
OF COMMON SHARES
OUTSTANDING, BASIC AND
DILUTED |
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24,078,610 |
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19,487,485 |
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24,078,514 |
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19,483,796 |
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See the accompanying Notes to the Condensed Consolidated Financial Statements.
-5-
DUSA
PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
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Six-months ended |
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June 30, |
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2008 |
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2007 |
CASH FLOWS FROM OPERATING ACTIVITIES |
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Net loss |
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$ |
(1,422,932 |
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$ |
(5,848,335 |
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Adjustments to reconcile net loss to net cash used in
operating activities: |
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Amortization of premiums and discounts on marketable securities |
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(108,441 |
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(98,092 |
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Realized loss/(gain) on sales of marketable securities |
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13,488 |
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(7,113 |
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Share-based compensation |
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689,550 |
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717,698 |
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Inventory reserve |
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(3,000 |
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4,000 |
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Depreciation and amortization |
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311,191 |
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349,667 |
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Gain on change in fair value of warrants |
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(123,869 |
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Deferred revenues recognized |
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(640,168 |
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(203,300 |
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Changes in other assets and liabilities impacting cash flows
used in operations |
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Accrued interest receivable |
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(78,292 |
) |
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81,534 |
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Accounts receivable |
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461,727 |
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202,295 |
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Inventory |
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(156,383 |
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(572,694 |
) |
Prepaid and other current assets |
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174,498 |
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457,410 |
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Deferred charges and other assets |
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57,543 |
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(81,552 |
) |
Accounts payable |
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(1,108,995 |
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517,955 |
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Accrued compensation and other accrued expenses |
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456,951 |
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(1,732,859 |
) |
Deferred revenues |
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1,643,937 |
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1,504,586 |
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Other liabilities |
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(34,005 |
) |
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98,504 |
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NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES |
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132,800 |
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(4,610,296 |
) |
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CASH FLOWS FROM INVESTING ACTIVITIES |
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Cash paid for business acquisition |
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(250,000 |
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(500,000 |
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Purchases of marketable securities |
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(19,406,775 |
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(11,399,203 |
) |
Proceeds from maturing and sales of marketable securities |
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18,078,809 |
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16,438,627 |
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Restricted cash |
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(1,908 |
) |
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(4,008 |
) |
Purchases of property, plant and equipment |
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(291,823 |
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(203,909 |
) |
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NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES |
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(1,871,697 |
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4,331,507 |
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CASH FLOWS FROM FINANCING ACTIVITIES |
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Proceeds from exercise of options |
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4,000 |
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40,650 |
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NET CASH PROVIDED BY FINANCING ACTIVITIES |
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4,000 |
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40,650 |
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NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS |
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(1,734,897 |
) |
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(238,139 |
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CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD |
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4,713,619 |
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3,267,071 |
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CASH AND CASH EQUIVALENTS AT END OF PERIOD |
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$ |
2,978,722 |
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$ |
3,028,932 |
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See the accompanying Notes to the Condensed Consolidated Financial Statements.
-6-
DUSA PHARMACEUTICALS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1) BASIS OF PRESENTATION
The Condensed Consolidated Balance Sheet as of June 30, 2008, and the Condensed Consolidated
Statements of Operations and Cash Flows for the three and six months ended June 30, 2008 and 2007
of DUSA Pharmaceuticals, Inc. (the Company or DUSA) have been prepared in accordance with
accounting principles generally accepted in the United States of America (U.S. GAAP). These
condensed consolidated financial statements are unaudited but include all normal recurring
adjustments, which management of the Company believes to be necessary for fair presentation of the
periods presented. The results of the Companys operations for any interim period are not
necessarily indicative of the results of the Companys operations for any other interim period or
for a full year.
Certain information and footnote disclosures normally included in financial statements prepared in
accordance with U.S. GAAP have been condensed or omitted. These condensed consolidated financial
statements should be read in conjunction with the Consolidated Financial Statements and Notes to
the Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended
December 31, 2007 filed with the Securities and Exchange Commission. The balance sheet as of
December 31, 2007 has been derived from the audited financial statements at that date but does not
include all of the information and footnotes required by U.S. GAAP for complete financial
statements.
2) NEW ACCOUNTING PRONOUNCEMENTS
In 2007, the Financial Accounting Standards Board (FASB) issued Statement No. 141(R), Business
Combinations (SFAS 141(R)). SFAS 141(R) amends FASB Statement No. 141 and provides revised
guidance for recognizing and measuring assets acquired and liabilities assumed in a business
combination. SFAS 141(R) also requires that transaction costs in a business combination be expensed
as incurred. SFAS 141(R) applies prospectively to business combinations for which the acquisition
date is on or after the beginning of the first annual reporting period beginning on or after
December 15, 2008. SFAS 141(R) will impact the Companys accounting for business combinations, if
any, completed beginning January 1, 2009.
In 2007, the FASB also issued Statement No. 160, Noncontrolling Interests in Consolidated Financial
Statements, an amendment of ARB No. 51 (SFAS 160). SFAS 160 will change the accounting and
reporting for minority interests, which will be recharacterized as noncontrolling interests and
classified as a component of equity. This new consolidation method will significantly change the
accounting for transactions with minority interest holders. The provisions of this standard are
effective beginning January 1, 2009. The adoption of this standard is not expected to have an
effect on the Companys consolidated financial position and results of operations.
In March 2008, the FASB issued SFAS No. 161 (SFAS 161), Disclosures about Derivative Instruments
and Hedging Activities, as an amendment to SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities. SFAS 161 requires that objectives for using derivative instruments be disclosed
in terms of underlying risk and accounting designation. The fair value of derivative instruments
and their gains and losses will need to be presented in tabular format in order to present a more
complete picture of the effects of using derivative instruments. SFAS 161 is effective for
financial statements issued for periods beginning after November 15, 2008. The Company is currently
evaluating the impact of adopting this pronouncement.
In November 2007, the Emerging Issues Task Force (EITF or Task Force) of the FASB issued a
consensus on Issue No. 07-1 (EITF 07-1), Accounting for Collaborative Arrangements. The scope of
EITF 07-1 is limited to collaborative arrangements where no separate legal entity exists and in
which the parties are active participants and are exposed to significant risks and rewards that
depend on the success of the activity. The Task Force concluded that revenue transactions with
third parties and associated costs incurred should be reported in the appropriate line item in each
companys financial statements pursuant to the guidance in EITF 99-19, Reporting Revenue Gross as a
Principal versus Net as an Agent. The Company is currently evaluating the impact of the adoption of
EITF 07-1 on its Condensed Consolidated Financial Statements.
-7-
3) FAIR VALUE MEASUREMENTS
Effective January 1, 2008, we implemented Statement of Financial Accounting Standard No. 157, Fair
Value Measurement (SFAS 157), for our financial assets and liabilities that are re-measured and
reported at fair value at each reporting period, and non-financial assets and liabilities that are
re-measured and reported at fair value at least annually. The adoption of SFAS 157 did not have an
impact on our financial results. As defined in SFAS 157, fair value is 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. Financial assets and liabilities carried at fair value will
be classified and disclosed in one of the following three categories:
Level 1: Quoted market prices in active markets for identical assets or liabilities.
Level 2: Observable market based inputs or unobservable inputs that are corroborated by
market data.
Level 3: Unobservable inputs that are not corroborated by market data.
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 includes financial instruments that are valued using models or other valuation
methodologies. These models are primarily industry-standard models that consider various
assumptions, including time value, yield curve, volatility factors, prepayment speeds, default
rates, loss severity, current market and contractual prices for the underlying financial
instruments, as well as other relevant economic measures. Substantially all of these assumptions
are observable in the marketplace, can be derived from observable data or are supported by
observable levels at which transactions are executed in the marketplace. Financial instruments in
this category include corporate debt securities and the warrant liability. This category also
includes financial instruments that are valued using alternative approaches but for which the
Company typically receives independent external valuation information including U.S. Treasuries and
other U.S. Government and agency securities.
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.
The following table presents information about our assets and liabilities that are measured at fair
value on a recurring basis as of June 30, 2008, and indicates the fair value hierarchy of the
valuation techniques we utilized to determine such fair value:
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Level 2 |
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Assets: |
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United States government-backed securities |
|
$ |
14,675,000 |
|
Corporate debt securities |
|
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5,047,000 |
|
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Total assets |
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$ |
19,722,000 |
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Liabilities: |
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|
Warrant liability |
|
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1,139,000 |
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Total liabilities |
|
$ |
1,139,000 |
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4) WARRANTS
On October 29, 2007, the Company sold, through a private placement, 4,581,043 shares of its 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. The warrants are
recorded as a derivative liability at fair value. Upon issuance of the warrants on October 29,
2007, the Company recorded the warrant liability at its initial fair value of $2.0 million.
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 Condensed Consolidated
Statements of Operations as gain or loss on fair value of warrants. At June 30, 2008 the aggregate
fair value of these warrants decreased to $1.1 million from $1.3 million at December 31, 2007. The non-cash gain during the
three and six-month periods ended June 30, 2008 were $0.5 million and $0.1 million, respectively.
-8-
Assumptions used for the Black-Scholes option-pricing models as of June 30, 2008 and December 31,
2007 are as follows:
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|
|
June 30, |
|
December 31, |
|
|
2008 |
|
2007 |
Expected volatility |
|
|
67.1 |
% |
|
|
67.3 |
% |
Remaining contractual term (years) |
|
|
4.83 |
|
|
|
5.33 |
|
Risk-free interest rate |
|
|
3.34 |
% |
|
|
3.45 |
% |
Expected dividend yield |
|
|
0 |
% |
|
|
0 |
% |
Common stock price |
|
$ |
2.01 |
|
|
$ |
2.07 |
|
5) MARKETABLE SECURITIES
The Companys investment securities consist of securities of the U.S. government and its agencies
and investment-grade corporate bonds. The Company has classified all investment securities as
available-for-sale and recorded such investments at fair market value. Since the Companys
investments are managed by a third-party investment advisor pursuant to a discretionary
arrangement, for securities with unrealized losses at June 30, 2008 and December 31, 2007, which
totaled $36,000 and $16,000, respectively, an other-than-temporary impairment was considered to
have occurred and the cost basis of such securities were written down to their fair values with the
amount of the write-down included in earnings as unrealized losses. As of June 30, 2008, current
yields range from 2.25% to 6.38% and maturity dates range from July 2008 to January 2013. The
estimated fair value and cost of marketable securities at June 30, 2008 and December 31, 2007 are
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2008 |
|
|
Amortized |
|
Unrealized |
|
Fair |
|
|
Cost |
|
Gains |
|
Value |
|
|
|
United States government-backed securities |
|
$ |
14,528,220 |
|
|
$ |
146,440 |
|
|
$ |
14,674,660 |
|
Corporate securities |
|
|
5,033,641 |
|
|
|
13,594 |
|
|
|
5,047,235 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total marketable securities available-for-sale |
|
$ |
19,561,861 |
|
|
$ |
160,034 |
|
|
$ |
19,721,895 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007 |
|
|
Amortized |
|
Unrealized |
|
Fair |
|
|
Cost |
|
Gains |
|
Value |
|
|
|
United States government-backed securities |
|
$ |
16,429,249 |
|
|
$ |
162,619 |
|
|
$ |
16,591,868 |
|
Corporate securities |
|
|
1,709,691 |
|
|
|
10,091 |
|
|
|
1,719,782 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total marketable securities available-for-sale |
|
$ |
18,138,940 |
|
|
$ |
172,710 |
|
|
$ |
18,311,650 |
|
|
|
|
The change in net unrealized gains and losses on such securities for the three and six-month
periods ended June 30, 2008 were ($179,939) and ($12,676), respectively, as compared to ($8,675)
and $12,004 for the three and six-month periods ended June 30, 2007, and have been recorded in
accumulated other comprehensive income, which is reported as part of shareholders equity in the
Condensed Consolidated Balance Sheets.
6) BUSINESS ACQUISITION
On March 10, 2006, the Company acquired all of the outstanding common stock of Sirius Laboratories,
Inc. The Company has 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 ending 50 months from the date of close. The pre-determined cumulative
sales milestones for the Sirius products and the related milestone payments are, as follows:
-9-
|
|
|
|
|
|
|
Additional |
|
Cumulative Sales Milestone: |
|
Consideration: |
|
|
$25.0 million |
|
$1.5 million |
35.0 million |
|
$1.0 million |
45.0 million |
|
$1.0 million |
|
|
|
|
|
|
|
|
|
Total |
|
$3.5 million |
|
|
|
|
If attained, the sales milestones will be paid in either common stock or cash, at the Companys
sole discretion. Any such payments will be expensed as incurred since all goodwill and intangible
assets resulting from the acquisition have previously been written down to zero. In January 2008,
the Company made its last milestone payment related to new product approvals and/or launches. The
payment, in the amount of $250,000, relieved the Company of all of its obligations with respect to
such new product approval and/or launch milestones.
7) 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-backed 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 Companys total
revenues for the three and six-months ended June 30, 2008 and 2007, and accounts receivable as of
June 30, 2008 and December 31, 2007 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of revenue |
|
% of revenue |
|
|
|
|
three months ended |
|
six months ended |
|
% of accounts receivable |
|
|
June 30, |
|
June 30, |
|
June 30, |
|
June 30, |
|
June 30, |
|
December 31, |
|
|
2008 |
|
2007 |
|
2008 |
|
2007 |
|
2008 |
|
2007 |
|
|
|
Customer A |
|
|
3 |
% |
|
|
7 |
% |
|
|
2 |
% |
|
|
6 |
% |
|
|
7 |
% |
|
|
5 |
% |
Customer B |
|
|
12 |
% |
|
|
12 |
% |
|
|
12 |
% |
|
|
11 |
% |
|
|
19 |
% |
|
|
10 |
% |
Customer C |
|
|
15 |
% |
|
|
20 |
% |
|
|
11 |
% |
|
|
18 |
% |
|
|
24 |
% |
|
|
12 |
% |
Customer D |
|
|
5 |
% |
|
|
7 |
% |
|
|
5 |
% |
|
|
5 |
% |
|
|
6 |
% |
|
|
7 |
% |
Customer E |
|
|
2 |
% |
|
|
|
|
|
|
3 |
% |
|
|
|
|
|
|
|
|
|
|
26 |
% |
Other customers |
|
|
63 |
% |
|
|
54 |
% |
|
|
67 |
% |
|
|
60 |
% |
|
|
44 |
% |
|
|
40 |
% |
|
Total |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
|
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 Companys 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 Companys operating results in any given period.
In April 2008, the Company was notified by its contract manufacturer of Nicomide® that it ceased
manufacturing Nicomide. In July 2008, the Company announced that Nicomide® will no longer be
manufactured and marketed as a prescription product. The Company has placed a voluntary hold on
existing inventory in response to discussions with the FDA. The Company is relabeling a supply of
product as a non-prescription dietary supplement in compliance with the Dietary Supplement Health
and Education Act (DSHEA) for re-launch and is in discussions with the FDA about the Companys
actions taken to date relating to the regulatory status of Nicomide®, which includes ceasing all
manufacturing and marketing activities related to the prescription version of the product, the
disposition of its remaining prescription-labeled Nicomide® inventory, and its DSHEA strategy and
related new labeling, including use of the trademark. At the same time, the Company is also
considering the possible sale or license of the product. See Note 18 Subsequent Events.
-10-
8) INVENTORY
Inventory consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
December 31, |
|
|
2008 |
|
2007 |
|
|
|
Finished goods |
|
$ |
1,449,000 |
|
|
$ |
1,625,000 |
|
BLU-U® evaluation units |
|
|
166,000 |
|
|
|
131,000 |
|
Work in process |
|
|
655,000 |
|
|
|
409,000 |
|
Raw materials |
|
|
561,000 |
|
|
|
507,000 |
|
|
|
|
Total |
|
$ |
2,831,000 |
|
|
$ |
2,672,000 |
|
|
|
|
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.
During the three-month period ended June 30, 2008, the Company recorded a full reserve for the
remaining Nicomide® inventory, which totaled $154,000.
9) OTHER ACCRUED EXPENSES
Other accrued expenses consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
December 31, |
|
|
2008 |
|
2007 |
|
|
|
Research and development costs |
|
$ |
122,000 |
|
|
$ |
293,000 |
|
Marketing and sales costs |
|
|
363,000 |
|
|
|
334,000 |
|
Reserve for sales returns and allowances |
|
|
630,000 |
|
|
|
546,000 |
|
Accrued FDA fees |
|
|
589,000 |
|
|
|
|
|
Reserve for chargebacks and rebates |
|
|
150,000 |
|
|
|
200,000 |
|
Other product related costs |
|
|
723,000 |
|
|
|
873,000 |
|
Legal and other professional fees |
|
|
435,000 |
|
|
|
484,000 |
|
Employee benefits |
|
|
277,000 |
|
|
|
236,000 |
|
Other expenses |
|
|
55,000 |
|
|
|
357,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
3,344,000 |
|
|
$ |
3,323,000 |
|
|
|
|
10) SHARE-BASED COMPENSATION
Total share-based compensation expense, related to all of the Companys share-based awards,
recognized for the three and six-month periods ended June 30, 2008 and 2007 included the following
line items:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-months ended |
|
Six-months ended |
|
|
June 30, 2008 |
|
June 30, 2007 |
|
June 30, 2008 |
|
June 30, 2007 |
|
|
|
Cost of product revenues |
|
$ |
17,000 |
|
|
$ |
24,000 |
|
|
$ |
41,000 |
|
|
$ |
50,000 |
|
Research and development |
|
|
69,000 |
|
|
|
92,000 |
|
|
|
190,000 |
|
|
|
186,000 |
|
Marketing and sales |
|
|
34,000 |
|
|
|
75,000 |
|
|
|
(27,000 |
) |
|
|
18,000 |
|
General & administrative |
|
|
238,000 |
|
|
|
285,000 |
|
|
|
486,000 |
|
|
|
464,000 |
|
|
|
|
Share-based compensation expense |
|
$ |
358,000 |
|
|
$ |
476,000 |
|
|
$ |
690,000 |
|
|
$ |
718,000 |
|
|
|
|
The weighted-average estimated fair values of employee stock options granted during the three and
six-month periods ended June 30, 2008 and 2007 were $1.42 and $2.01 per share, respectively, using
the Black-Scholes option valuation model with the following weighted-average assumptions
(annualized percentages):
-11-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-months ended |
|
Six-months ended |
|
|
June 30, 2008 |
|
June 30, 2007 |
|
June 30, 2008 |
|
June 30, 2007 |
|
|
|
Volatility-directors and officers |
|
|
70.2 |
% |
|
|
62.2 |
% |
|
|
70.2 |
% |
|
|
62.2 |
% |
Volatility-non-officer employees |
|
|
70.8 |
% |
|
|
62.2 |
% |
|
|
70.8 |
% |
|
|
|
% |
Risk-free interest rate |
|
|
2.98-3.61 |
% |
|
|
4.92 |
% |
|
|
2.98-3.61 |
% |
|
|
4.53 |
% |
Expected dividend yield |
|
|
0 |
% |
|
|
0 |
% |
|
|
0 |
% |
|
|
0 |
% |
Expected life-directors and officers |
|
6.3 years |
|
5.9 years |
|
6.3 years |
|
5.9 years |
Expected life-non-officer employees |
|
5.9 years |
|
5.5 years |
|
5.9 years |
|
5.5 years |
A summary of stock option activity is as follows:
|
|
|
|
|
|
|
|
|
|
|
Six-month period |
|
Weighted average |
|
|
ended June 30, 2008 |
|
exercise price |
|
|
|
Outstanding, beginning of period |
|
|
2,855,125 |
|
|
$ |
10.76 |
|
Options-granted |
|
|
309,500 |
|
|
|
2.17 |
|
Options-forfeited |
|
|
(5,000 |
) |
|
|
10.34 |
|
Options expired |
|
|
(112,625 |
) |
|
|
11.73 |
|
Options exercised |
|
|
(2,500 |
) |
|
|
1.60 |
|
|
|
|
|
Outstanding, end of period |
|
|
3,044,500 |
|
|
|
9.86 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, end of period |
|
|
2,274,189 |
|
|
$ |
11.66 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Options vested and expected to vest, end of period |
|
|
2,942,941 |
|
|
$ |
10.07 |
|
|
|
|
The weighted average remaining contractual term was approximately 4.79 years for stock options
outstanding and approximately 4.17 years for stock options exercisable as of June 30, 2008.
The total intrinsic value (the excess of the market price over the exercise price) was
approximately $36,000 and $36,000 for stock options outstanding and exercisable, respectively, as
of June 30, 2008. The total intrinsic value for stock options exercised in 2008 was $1,000. The
total intrinsic value for stock options vested/expected to vest was approximately $36,000 as of
June 30, 2008.
During the second quarter of 2008, the Company issued 102,000 shares of restricted stock to its
officers. The shares of restricted stock vest over 4 years at a rate of 25% per year. The stock
was valued at $2.20 on the date of grant.
11) BASIC AND DILUTED NET LOSS PER SHARE
Basic net loss per common share is based on the weighted-average number of shares outstanding
during each period. For the three and six-month periods ended June 30, 2008, and 2007, stock
options, non-vested restricted stock, warrants and rights totaling approximately 4,542,000 and
3,276,000 shares, respectively, have been excluded from the computation of diluted net loss per
share as the effect would be antidilutive.
12) SEGMENT REPORTING
The Company has two reportable operating segments: Photodynamic Therapy (PDT) Drug and Device
Products and Non-Photodynamic Therapy (Non-PDT) Products. Operating segments are defined as
components of the Company for which separate financial information is available to manage resources
and evaluate performance regularly by the chief operating decision maker. The table below presents
the revenues, costs of revenues and gross margins attributable to these reportable segments for the
periods presented. The Company does not allocate research and development, selling and marketing
and general and administrative expenses to its reportable segments, because these activities are
managed at a corporate level.
-12-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-month period ended |
|
Six-month period ended |
|
|
|
|
|
June 30, |
|
June 30, |
|
June 30, |
|
June 30, |
|
|
2008 |
|
2007 |
|
2008 |
|
2007 |
|
|
|
REVENUES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PDT drug and device product revenues |
|
$ |
5,429,000 |
|
|
$ |
4,062,000 |
|
|
$ |
11,259,000 |
|
|
$ |
8,618,000 |
|
Non-PDT product revenues |
|
|
2,683,000 |
|
|
|
2,800,000 |
|
|
|
4,783,000 |
|
|
|
4,921,000 |
|
|
|
|
Total revenues |
|
|
8,112,000 |
|
|
|
6,862,000 |
|
|
|
16,042,000 |
|
|
|
13,539,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COSTS OF REVENUES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PDT drug and device cost of product
revenues |
|
|
1,169,000 |
|
|
|
1,144,000 |
|
|
|
2,443,000 |
|
|
|
2,453,000 |
|
Non-PDT cost of product revenues |
|
|
618,000 |
|
|
|
632,000 |
|
|
|
1,045,000 |
|
|
|
1,480,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs of product revenues |
|
|
1,787,000 |
|
|
|
1,776,000 |
|
|
|
3,488,000 |
|
|
|
3,933,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GROSS MARGIN |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PDT drug and device product gross margin |
|
|
4,260,000 |
|
|
|
2,918,000 |
|
|
|
8,816,000 |
|
|
|
6,165,000 |
|
Non-PDT product gross margin |
|
|
2,065,000 |
|
|
|
2,168,000 |
|
|
|
3,738,000 |
|
|
|
3,441,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross margin |
|
$ |
6,325,000 |
|
|
$ |
5,086,000 |
|
|
$ |
12,554,000 |
|
|
$ |
9,606,000 |
|
|
|
|
During the three-month periods ended June 30, 2008 and 2007, the Company derived revenues from the
following geographies based on the location of the customer (as a percentage of product revenues):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-months ended |
|
Six-months ended |
|
|
|
|
|
June 30, |
|
June 30, |
|
June 30, |
|
June 30, |
|
|
2008 |
|
2007 |
|
2008 |
|
2007 |
|
|
|
United States |
|
|
93 |
% |
|
|
97 |
% |
|
|
94 |
% |
|
|
96 |
% |
Canada |
|
|
3 |
% |
|
|
3 |
% |
|
|
2 |
% |
|
|
4 |
% |
Korea |
|
|
2 |
% |
|
|
|
|
|
|
3 |
% |
|
|
|
|
Other |
|
|
2 |
% |
|
|
|
|
|
|
1 |
% |
|
|
|
|
|
|
|
Total |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
|
Asset information by reportable segment is not reported to or reviewed by the chief operating
decision maker and, therefore, the Company has not disclosed asset information for each reportable
segment.
13) COMPREHENSIVE LOSS
For the three and six-month periods ended June 30, 2008 and 2007, comprehensive loss consisted of
the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-months ended |
|
Six-months ended |
|
|
June 30, |
|
June 30, |
|
|
2008 |
|
2007 |
|
2008 |
|
2007 |
|
|
|
NET LOSS |
|
$ |
(138,791 |
) |
|
$ |
(2,477,407 |
) |
|
$ |
(1,422,932 |
) |
|
$ |
(5,848,335 |
) |
Change in net
unrealized gains on
marketable
securities
available-for-sale |
|
|
(179,938 |
) |
|
|
(8,675 |
) |
|
|
(12,676 |
) |
|
|
12,004 |
|
|
|
|
COMPREHENSIVE LOSS |
|
$ |
(318,729 |
) |
|
$ |
(2,486,082 |
) |
|
$ |
(1,435,608 |
) |
|
$ |
(5,836,331 |
) |
|
|
|
14) STIEFEL AGREEMENT
In January 2006, as amended in September 2007, DUSA licensed to Stiefel the exclusive Latin
American rights to market Levulan® PDT. The Company 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
-13-
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 product 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 the launch phase, the Companys policy is to
defer revenues upon shipment and recognize revenues based on end-user demand. At June 30, 2008,
the total revenues deferred associated with shipments to Stiefel were $438,000. Deferred revenues
at June 30, 2008 and December 31, 2007 associated with milestone payments received from Stiefel are
$665,000 and $345,000, respectively. The agreement with Stiefel also establishes minimum purchase
quantities over the first five years following regulatory approval.
15) DAEWOONG AGREEMENT
In January 2007 the Company licensed to Daewoong the exclusive rights to market Levulan® PDT in
certain Asian countries. The Company 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) $1.0 million upon contract signing; (ii) $1.0 million 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 product 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 launch phase, the Companys policy is to defer revenues upon shipment and
recognize revenues based on end-user demand. At June 30, 2008 the total revenues deferred
associated with shipments to Daewoong were $1,338,000. Deferred revenues at June 30, 2008 and
December 31, 2007 associated with milestone payments received from Daewoong are $1,746,000 and
$1,848,000. The agreement with Daewoong also establishes minimum purchase quantities over the first
five years following regulatory approval.
16) DEFERRED COMPENSATION PLAN
In October 2006, the Company adopted the DUSA Pharmaceuticals, Inc. Non-Qualified Deferred
Compensation Plan (the Plan), a non-qualified supplemental retirement plan maintained primarily
for the purpose of providing deferred compensation for a select group of management or highly
compensated employees and members of the Board of Directors of the Company (the Participants).
Participants may defer up to 80% of their compensation. A Participant will be 100% vested in all of
the amounts he or she defers as well as in the earnings attributable to a Participants deferred
account. A Participant may elect to receive distributions from the deferred account at various
times, either in a lump sum or in up to ten annual installments. Included in other liabilities at
June 30, 2008 and December 31, 2007 is $107,000 and $127,000, respectively, representing the
Companys obligation under the Plan. DUSAs obligation to pay the Participant an amount from his or
her deferred account is an unsecured promise and benefits shall be paid out of the general assets
of the Company. The Company has purchased corporate owned life insurance to serve as the funding
vehicle for the Plan. The cash surrender value of the life insurance policy is
recorded in deferred charges and other assets and totaled $107,000 and $124,000 at June 30, 2008
and December 31, 2007, respectively.
17) COMMITMENTS AND CONTINGENCIES
LEGAL MATTERS:
RIVERS EDGE LITIGATION SETTLEMENT
As part of the settlement of litigation between, DUSA and Rivers 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 Rivers Edge asserting a number of
claims arising out of Rivers Edges alleged infringement of the Companys Nicomide® patent, U.S.
Patent No. 6,979,468, under which DUSA has marketed, distributed and sold Nicomide®. As part of
the terms of this agreement, Rivers Edge agreed to pay to DUSA $25.00 for every bottle of NIC 750
above 5,000 bottles that is substituted for Nicomide® after September 30, 2007.
-14-
The net gain from settlement of litigation is for the three and six-month periods ended June 30,
2008 are comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
Three-months ended |
|
Six-months ended |
|
|
June 30, 2008 |
|
June 30, 2008 |
|
|
|
Excess prescriptions of NIC 750
filled |
|
$ |
47,825 |
|
|
$ |
283,425 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net gain from settlement of
litigation |
|
$ |
47,825 |
|
|
$ |
283,425 |
|
|
|
|
In the accompanying Consolidated Statement of Operations, the net gain on settlement of litigation
is recorded as a separate component of operating expenses.
The Company has not accrued any amounts for potential contingencies as of June 30, 2008.
18) SUBSEQUENT EVENTS
On July 18, 2008, the Company announced that Nicomide® will no longer be manufactured and marketed
as a prescription product. The Company has placed a voluntary hold on existing inventory in
response to discussions with the FDA. The Company is relabeling a supply of product as a
non-prescription dietary supplement in compliance with Dietary Supplement Health and Education Act
(DSHEA) for re-launch and is in discussions with FDA about appropriate DSHEA labeling, including
use of the trademark. At the same time, the Company is also considering the possible sale or
license of the product.
-15-
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
We are a vertically integrated dermatology company that is developing and marketing Levulan PDT and
other products for common skin conditions. Our currently marketed products include among others
Levulan® Kerastick® 20% Topical Solution with photodynamic therapy, the BLU-U® brand light source,
certain products acquired in the March 10, 2006 merger with Sirius Laboratories, Inc., including
ClindaReach.
Historically, we devoted most of our resources to advancing the development and marketing of our
Levulan® PDT/PD 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® photodynamic therapy, or PDT. When Levulan® is used and followed with exposure to light
to detect medical conditions, it is known as Levulan® photodetection, or Levulan® PD. Our
Kerastick® is the proprietary applicator that delivers Levulan®.
The Levulan® Kerastick® 20% Topical Solution with PDT and the BLU-U® brand light source 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®, its key
product, is a vitamin-mineral product currently prescribed by dermatologists. In April 2008, we were
notified by Actavis Totowa, LLC, the manufacturer of Nicomide®, that Actavis will cease
manufacturing several prescription vitamins, including Nicomide, due to continuing discussions with
the U.S. Food and Drug Administration. As we previously disclosed, Actavis Totowa had received
notice that the FDA considers prescription dietary supplements to be unapproved new drugs. In July
2008, we announced that we will no longer manufacture and market Nicomide® as a prescription
product. We have placed a voluntary hold on existing inventory in response to discussions with the
FDA. We are relabeling a supply of product as a non-prescription dietary supplement in compliance
with the Dietary Supplement Health and Education Act, or DSHEA, for re-launch and are in
discussions with the FDA about our actions taken to date relating to the regulatory status of
Nicomide®, which includes ceasing all manufacturing and marketing activities related to the
prescription version of the product, the disposition of our remaining prescription-labeled
Nicomide® inventory, and our DSHEA strategy and related new labeling, including use of the
trademark. We are actively searching for a source of supply for the DSHEA product. At the same
time, we are also considering the possible sale or license of the product. We expect both the
price and volume of the Nicomide® DSHEA labeled product to be considerably less than historic
Nicomide® levels. We expect the price per bottle of the DSHEA labeled Nicomide® product to be in
the $40 to $50 range.
We are responsible for manufacturing our Levulan® Kerastick® and for the regulatory, sales,
marketing, and customer service of our Levulan® Kerastick®, and other related activities for all of
our products. Our current objectives include increasing the sales of our products in the United
States, Canada, Latin America, and Korea, launching Levulan® with our partners in additional Latin
American countries and Asia, continuing our efforts of exploring partnership opportunities for
Levulan® PDT for dermatology in Europe and Japan, and continuing our Levulan® PDT clinical
development program for the moderate to severe acne indication.
To further these objectives, we entered into a marketing and distribution agreement with Stiefel
Laboratories, Inc. in January 2006 granting Stiefel an exclusive right to distribute the Levulan®
Kerastick® in Mexico, Central and South America. On March 5, 2008, Stiefel notified us that the
Brazilian authorities had published the final pricing for the product which is acceptable to
Stiefel and to us. Stiefel launched the product in Brazil in April 2008. In light of the unexpected
delay in receiving acceptable final pricing in Brazil, in 2007 we amended certain terms of the
original Stiefel agreement to reflect our plans to launch in other Latin American countries prior
to Brazil. The product was launched in Argentina, Chile, Colombia and Mexico during the fourth
quarter of 2007. Similarly, in January 2007, we entered into a marketing and distribution agreement
with Daewoong Pharmaceutical Co., Ltd. and Daewoongs wholly owned subsidiary, DNC Daewoong Derma &
Plastic Surgery Network Company, together referred to as Daewoong, granting Daewoong exclusive
rights to distribute the Levulan® Kerastick® in certain
-16-
Asian countries. In the fourth quarter of 2007, the Korean Food and Drug Administration, or KFDA,
approved Levulan® Kerastick® for PDT for the treatment of actinic keratosis, and Daewoong launched
our product in Korea.
We believe that issues related to reimbursement negatively impacted the economic competitiveness of
our therapy with other AK therapies and hindered its adoption in the past. Though we believe that
current Centers for Medicare and Medicaid Services, or CMS, reimbursement levels allow us to be
competitive, we continue to support efforts to improve reimbursement levels to physicians. Most
major private insurers have approved coverage for our AK therapy, however some private insurers
still do not provide adequate coverage. When we learn of these issues, we educate the insurers and
are often able to facilitate a change in their coverage policy. We believe that with potential
future improvements, along with our education and marketing programs, a more widespread adoption of
our therapy should occur over time.
We are developing Levulan® PDT and PD under an exclusive worldwide license of patents and
technology from PARTEQ Research and Development Innovations, the licensing arm of Queens
University, Kingston, Ontario, Canada. We also own or license certain other patents relating to
methods for using pharmaceutical formulations which contain our drug and related processes and
improvements. In the United States, DUSA®, DUSA Pharmaceuticals, Inc®, Levulan®, Kerastick®,
BLU-U®, Nicomide®, Nicomide-T®, Meted®, Psoriacap® and Psoriatec® 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 June 30, 2008, we had an accumulated deficit of approximately $137,000,000. 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 a sustainable basis. We expect to continue
to incur operating losses until sales of our products increase substantially. Achieving our goal of
becoming a profitable operating company is dependent upon greater acceptance of our PDT therapy by
the medical and consumer constituencies.
CRITICAL ACCOUNTING POLICIES
Our accounting policies are disclosed in Note 2 to the Notes to the Consolidated Financial
Statements in our Annual Report on Form 10-K for the year ended December 31, 2007. Since all of
these accounting policies do not require management to make difficult, subjective or complex
judgments or estimates, they are not all considered critical accounting policies. We have discussed
these policies and the underlying estimates used in applying these accounting policies with our
Audit Committee. There have been no changes to our critical accounting policies in the three or
six-month periods ended June 30, 2008.
RESULTS OF OPERATIONS THREE AND SIX-MONTH PERIODS ENDED JUNE 30, 2008 VERSUS THREE AND SIX-MONTH
PERIODS ENDED JUNE 30, 2007
REVENUES Total revenues for the three and six-month periods ended June 30, 2008 were $8,112,000
and $16,042,000, respectively, as compared to $6,862,000 and $13,539,000 in 2007, and were
comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
|
|
Six months ended |
|
|
|
|
June 30, |
|
|
|
|
|
June 30, |
|
|
|
|
|
|
|
|
|
|
|
|
INCREASE/ |
|
|
|
|
|
|
|
|
|
INCREASE/ |
|
|
2008 |
|
2007 |
|
(DECREASE) |
|
2008 |
|
2007 |
|
(DECREASE) |
PDT PRODUCT REVENUES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LEVULAN® KERASTICK®
PRODUCT REVENUES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States |
|
$ |
4,572,000 |
|
|
$ |
3,461,000 |
|
|
$ |
1,111,000 |
|
|
$ |
9,346,000 |
|
|
$ |
7,185,000 |
|
|
$ |
2,161,000 |
|
Canada |
|
|
218,000 |
|
|
|
192,000 |
|
|
|
26,000 |
|
|
|
377,000 |
|
|
|
393,000 |
|
|
|
(16,000 |
) |
Korea |
|
|
159,000 |
|
|
|
|
|
|
|
159,000 |
|
|
|
524,000 |
|
|
|
|
|
|
|
524,000 |
|
Rest of World |
|
|
133,000 |
|
|
|
|
|
|
|
133,000 |
|
|
|
190,000 |
|
|
|
|
|
|
|
190,000 |
|
|
|
|
Subtotal Levulan®
Kerastick® product
revenues |
|
|
5,082,000 |
|
|
|
3,653,000 |
|
|
|
1,429,000 |
|
|
|
10,437,000 |
|
|
|
7,578,000 |
|
|
|
2,859,000 |
|
|
|
|
-17-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
|
|
Six months ended |
|
|
|
|
June 30, |
|
|
|
|
|
June 30, |
|
|
|
|
|
|
|
|
|
|
|
|
INCREASE/ |
|
|
|
|
|
|
|
|
|
INCREASE/ |
|
|
2008 |
|
2007 |
|
(DECREASE) |
|
2008 |
|
2007 |
|
(DECREASE) |
BLU-U® PRODUCT
REVENUES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States |
|
|
347,000 |
|
|
|
380,000 |
|
|
|
(33,000 |
) |
|
|
822,000 |
|
|
|
946,000 |
|
|
|
(124,000 |
) |
Canada |
|
|
|
|
|
|
29,000 |
|
|
|
(29,000 |
) |
|
|
|
|
|
|
94,000 |
|
|
|
(94,000 |
) |
|
|
|
Subtotal BLU-U®
product revenues |
|
|
347,000 |
|
|
|
409,000 |
|
|
|
(62,000 |
) |
|
|
822,000 |
|
|
|
1,040,000 |
|
|
|
(218,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL PDT PRODUCT
REVENUES |
|
|
5,429,000 |
|
|
|
4,062,000 |
|
|
|
1,367,000 |
|
|
|
11,259,000 |
|
|
|
8,618,000 |
|
|
|
2,641,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL NON-PDT
PRODUCT REVENUES |
|
|
2,683,000 |
|
|
|
2,800,000 |
|
|
|
(117,000 |
) |
|
|
4,783,000 |
|
|
|
4,921,000 |
|
|
|
(138,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL PRODUCT
REVENUES |
|
$ |
8,112,000 |
|
|
$ |
6,862,000 |
|
|
$ |
1,250,000 |
|
|
$ |
16,042,000 |
|
|
$ |
13,539,000 |
|
|
$ |
2,503,000 |
|
|
|
|
For the three and six-month periods ended June 30, 2008, total PDT Drug and Device Products
revenues, comprised of revenues from our Kerastick® and BLU-U® products, were $5,429,000 and
$11,259,000, respectively. This represents an increase of $1,367,000 or 34%, and $2,641,000, or
31%, over the comparable 2007 totals of $4,062,000 and $8,618,000, respectively. The incremental
revenue was driven primarily by increased Kerastick® revenues. We believe that our strategy to
focus our sales and marketing resources on medical dermatologists and hospitals has been a key
factor in the year-over-year growth in our PDT Drug and Device Products segment.
For the three and six-month periods ended June 30, 2008, Kerastick® revenues were $5,082,000, and
$10,437,000, respectively, representing a $1,429,000, or 39%, and $2,859,000 or 38% increase over
the comparable 2007 totals of $3,653,000 and $7,578,000, respectively. Kerastick® unit sales to
end-users were 48,478 and 100,588, for the three and six-month periods ended June 30, 2008,
respectively, including on a year-to date basis 4,800 sold in Canada and 8,100 sold in Korea. This
represents an increase from 35,886 and 74,256 Levulan® Kerastick® units sold in the three and
six-month periods ended June 30, 2007, respectively, including on a year-to date basis 5,208 sold
in Canada and 0 sold in Korea since the product was not yet approved. Our average net selling price
for the Kerastick® increased to $102.21 per unit for the first six months of 2008 from $101.99 per
unit for the first six months of 2007. Our average net selling price for the Kerastick® in the
United States increased to $110.16 per unit in 2008 from $103.99 per unit in 2007. This increase
was almost fully offset by the averaging of the lower sales prices we receive under our
international distribution agreements with Daewoong and Stiefel. The increase in 2008 Kerastick®
revenues was driven mainly by increased sales volumes in the United States and internationally,
through our distribution agreements with Stiefel and Daewoong, along with the slight increase in
our average unit selling price.
For the three and six-month periods ended June 30, 2008, BLU-U® revenues were $347,000 and
$822,000, respectively, representing a $62,000, or a 15% decrease, and $218,000, or a 21% decrease
over the comparable 2007 totals of $409,000 and $1,040,000, respectively. The decrease in
year-to-date 2008 BLU-U® revenues was driven by decreased overall sales volumes, offset in part by
an increase in our average selling price. In the three and six-month periods ended June 30, 2008,
there were 41 and 97 units sold, respectively, versus 46 and 121 units sold, respectively, in the
comparable 2007 periods. All of the units sold in 2008 were sold in the United States. The 2007
total consists of 105 sold in the United States and 16 sold in Canada. In 2008 on a year-to-date
basis, our average net selling price for the BLU-U® increased to $8,134 from $8,034 in 2007. 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 a purchase decision is required. At June 30, 2008, there were approximately 40
units in the field pursuant to this evaluation program, compared to 31 units in the field at
December 31, 2007. Since a significant majority of the units placed in the field under our
evaluation program result in sales, we expect to continue this program. 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. At current sales
volumes, we have approximately 1 year of finished BLU-U® units in inventory. Our third party
manufacturer of the BLU-U® recently received a warning letter from the U.S. Food and Drug
Administration concerning certain observations at its facility. While we do not believe that these
observations directly relate to the BLU-U®, we may be required to use our Wilmington, Massachusetts
facility which was approved for the manufacture of BLU-U® units in 2005 to manufacture the BLU-U®
if our third-party manufacturer does not rectify the issues stated in the warning letter in time to
satisfy our needs.
-18-
Total Non-PDT Product revenues for the three and six-month periods ended June 30, 2008 were
$2,683,000 and $4,783,000, respectively, compared to $2,800,000 and $4,921,000, respectively for
the comparable 2007 periods. The substantial majority of the Non-PDT product revenues were from
sales of Nicomide®. Nicomide® sales in 2008 were negatively impacted by residual levels of NIC 750,
a niacinamide product sold by Rivers Edge Pharmaceuticals, LLC that was substituted for Nicomide®,
remaining in the channel subsequent to the settlement with Rivers Edge. The settlement agreement
is described further in Note 17 to the Condensed Consolidated Financial Statements. In April 2008,
we were notified by Actavis Totowa, LLC, the manufacturer of Nicomide®, that Actavis will cease
manufacturing several prescription vitamins, including Nicomide, due to continuing discussions with
the U.S. Food and Drug Administration. As we previously disclosed, Actavis Totowa had received
notice that the FDA considers prescription dietary supplements to be unapproved new drugs. In July
2008, we announced that we will no longer manufacture and market Nicomide® as a prescription
product. We have placed a voluntary hold on existing inventory in response to discussions with the
FDA. We are relabeling a supply of product as a non-prescription dietary supplement in compliance
with DSHEA for re-launch and are in discussions with the FDA about our actions taken to date
relating to the regulatory status of Nicomide®, which includes ceasing all manufacturing and
marketing activities related to the prescription version of the product, the disposition of our
remaining prescription-labeled Nicomide® inventory, and our DSHEA strategy and related new
labeling, including use of the trademark. We are actively searching for a source of supply for the
DSHEA product. At the same time, we are considering the possible sale or license of the product.
We expect both the price and volume of the Nicomide® DSHEA labeled product to be considerably less
than historic Nicomide® levels. We expect the price per bottle of the DSHEA labeled Nicomide®
product to be in the $40 to $50 range. We are also aware of two manufacturers that have listed a
niacinamide product in various drug databases as substitutes for Nicomide®. These two products
were launched in July.
The increase in our total revenues results from increased PDT segment revenues in the United
States, as well as our PDT product launches in Korea and the rest of the world. However, we must
increase sales significantly from these levels in order for us to become profitable. We remain
confident that sales should continue to increase through increased consumption of our PDT segment
products by our existing customers, as well as the addition of new customers. We expect to be able
to grow our PDT segment revenues in the United States during 2008, due in part to the 18% percent
increase in reimbursement of our PDT-related procedure fee, which became effective January 1, 2008,
and the anticipated increase of an additional 16% effective January 1, 2009. We also expect our PDT
revenues in Canada to remain flat in 2008 largely due to the level of reimbursement to physicians
in that country. We expect our Non-PDT revenues for at least the remainder of 2008 will be
significantly negatively impacted since we will no longer manufacture and market Nicomide® as a prescription
product. We are evaluating alternative manufacturing, labeling and distribution strategies in
order to maintain Nicomide® on the market. 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 Cost of product revenues for the three and six-month periods ended June
30, 2008 were $1,787,000 and $3,488,000 as compared to $1,776,000 and $3,933,000 in the comparable
periods in 2007. A summary of the components of cost of product revenues and royalties is provided
below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
THREE MONTHS ENDED JUNE 30, |
|
|
|
|
|
|
|
|
|
|
INCREASE/ |
|
|
2008 |
|
2007 |
|
(DECREASE) |
|
|
|
Levulan® Kerastick® cost of product
revenues and royalties |
|
|
|
|
|
|
|
|
|
|
|
|
Direct Levulan® Kerastick® product costs |
|
$ |
594,000 |
|
|
$ |
519,000 |
|
|
$ |
75,000 |
|
Other Levulan® Kerastick® production
costs
including internal costs assigned to
support products, net |
|
|
(8,000 |
) |
|
|
97,000 |
|
|
|
(105,000 |
) |
Royalty and supply fees (1) |
|
|
223,000 |
|
|
|
168,000 |
|
|
|
55,000 |
|
|
|
|
Subtotal Levulan® Kerastick® cost of
product revenues and royalties |
|
$ |
809,000 |
|
|
$ |
784,000 |
|
|
$ |
25,000 |
|
-19-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
THREE MONTHS ENDED JUNE 30, |
|
|
|
|
|
|
|
|
|
|
INCREASE/ |
|
|
2008 |
|
2007 |
|
(DECREASE) |
|
|
|
BLU-U® cost of product revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct BLU-U® product costs |
|
$ |
147,000 |
|
|
$ |
160,000 |
|
|
$ |
(13,000 |
) |
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 |
|
|
213,000 |
|
|
|
200,000 |
|
|
|
13,000 |
|
|
|
|
Subtotal BLU-U® cost of product revenues |
|
$ |
360,000 |
|
|
$ |
360,000 |
|
|
$ |
|
|
|
|
|
TOTAL PDT DRUG AND DEVICE COST OF
PRODUCT REVENUES AND ROYALTIES |
|
$ |
1,169,000 |
|
|
$ |
1,144,000 |
|
|
$ |
25,000 |
|
|
|
|
Non-PDT cost of product revenues and
royalties |
|
$ |
618,000 |
|
|
$ |
632,000 |
|
|
$ |
(14,000 |
) |
|
|
|
TOTAL COST OF PRODUCT REVENUES AND
ROYALTIES |
|
$ |
1,787,000 |
|
|
$ |
1,776,000 |
|
|
$ |
11,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SIX MONTHS ENDED JUNE 30, |
|
|
|
|
|
|
|
|
|
|
INCREASE/ |
|
|
2008 |
|
2007 |
|
(DECREASE) |
|
|
|
Levulan® Kerastick® cost of product
revenues and royalties |
|
|
|
|
|
|
|
|
|
|
|
|
Direct Levulan® Kerastick® product costs |
|
$ |
1,232,000 |
|
|
$ |
1,075,000 |
|
|
$ |
157,000 |
|
Other Levulan® Kerastick® production
costs
including internal costs assigned to
support products, net |
|
|
2,000 |
|
|
|
155,000 |
|
|
|
(153,000 |
) |
Royalty and supply fees (1) |
|
|
471,000 |
|
|
|
348,000 |
|
|
|
123,000 |
|
|
|
|
Subtotal Levulan® Kerastick® cost of
product revenues and royalties |
|
$ |
1,705,000 |
|
|
$ |
1,578,000 |
|
|
$ |
127,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BLU-U® cost of product revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct BLU-U® product costs |
|
$ |
348,000 |
|
|
$ |
422,000 |
|
|
$ |
(74,000 |
) |
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 |
|
|
390,000 |
|
|
|
454,000 |
|
|
|
(64,000 |
) |
|
|
|
Subtotal BLU-U® cost of product revenues |
|
$ |
738,000 |
|
|
$ |
876,000 |
|
|
$ |
(138,000 |
) |
|
|
|
TOTAL PDT DRUG AND DEVICE COST OF
PRODUCT REVENUES AND ROYALTIES |
|
$ |
2,443,000 |
|
|
$ |
2,454,000 |
|
|
$ |
(11,000 |
) |
|
|
|
Non-PDT Cost of Product Revenues and
Royalties |
|
$ |
1,045,000 |
|
|
$ |
1,479,000 |
|
|
$ |
(434,000 |
) |
|
|
|
TOTAL COST OF PRODUCT REVENUES AND
ROYALTIES |
|
$ |
3,488,000 |
|
|
$ |
3,933,000 |
|
|
$ |
(445,000 |
) |
|
|
|
|
|
|
1) |
|
Royalty and supply fees reflect amounts paid to our licensor, PARTEQ
Research and Development Innovations, the licensing arm of Queens
University, Kingston, Ontario, and amortization of an upfront fee and
ongoing royalties paid to Draxis Health, Inc., on sales of the
Levulan® Kerastick® in Canada. |
-20-
MARGINS Total product margins for the three and six-month periods ended June 30, 2008 were
$6,325,000 and $12,554,000, respectively, as compared to $5,086,000 and $9,606,000 for the
comparable 2007 periods, as shown below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
THREE MONTHS ENDED JUNE 30, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCREASE/ |
|
|
|
2008 |
|
|
|
|
|
|
2007 |
|
|
|
|
|
|
(DECREASE) |
|
|
|
|
Levulan® Kerastick® gross margin |
|
$ |
4,273,000 |
|
|
|
84 |
% |
|
$ |
2,869,000 |
|
|
|
79 |
% |
|
$ |
1,404,000 |
|
BLU-U® gross margin |
|
|
(13,000 |
) |
|
|
(4 |
)% |
|
|
49,000 |
|
|
|
12 |
% |
|
|
(62,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total PDT drug & device gross margin |
|
$ |
4,260,000 |
|
|
|
78 |
% |
|
$ |
2,918,000 |
|
|
|
72 |
% |
|
$ |
1,342,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Non-PDT gross margin |
|
|
2,065,000 |
|
|
|
77 |
% |
|
|
2,168,000 |
|
|
|
77 |
% |
|
$ |
(103,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL GROSS MARGIN |
|
$ |
6,325,000 |
|
|
|
78 |
% |
|
$ |
5,086,000 |
|
|
|
74 |
% |
|
$ |
1,239,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SIX MONTHS ENDED JUNE 30, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCREASE/ |
|
|
|
2008 |
|
|
|
|
|
|
2007 |
|
|
|
|
|
|
(DECREASE) |
|
|
|
|
Levulan® Kerastick® gross margin |
|
$ |
8,731,000 |
|
|
|
84 |
% |
|
$ |
6,001,000 |
|
|
|
79 |
% |
|
$ |
2,730,000 |
|
BLU-U® gross margin |
|
|
85,000 |
|
|
|
10 |
% |
|
|
164,000 |
|
|
|
16 |
% |
|
|
(79,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total PDT drug & device gross margin |
|
$ |
8,816,000 |
|
|
|
78 |
% |
|
$ |
6,165,000 |
|
|
|
72 |
% |
|
$ |
2,651,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Non-PDT gross margin |
|
|
3,738,000 |
|
|
|
78 |
% |
|
|
3,441,000 |
|
|
|
70 |
% |
|
$ |
297,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL GROSS MARGIN |
|
$ |
12,554,000 |
|
|
|
78 |
% |
|
$ |
9,606,000 |
|
|
|
71 |
% |
|
$ |
2,948,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three and six-month periods ended June 30, 2008, total PDT Drug and Device Product Margins
were 78% for both periods versus 72% for both periods in 2007. The incremental margin was driven
by positive margin gains on both the Levulan® Kerastick® and BLU-U®.
Kerastick® gross margins for the three and six-month periods ended June 30, 2008 were 84% for both
periods versus 79% for both periods in 2007. The margin improvement in 2008 is mainly attributable
to an increased average selling price in the U.S., overall lower cost of production due to
increased manufacturing volumes, as well as amortization of milestone payments received. Our
long-term goal is to achieve higher gross margins on Kerastick® sales which will be significantly
dependent on increased volume.
BLU-U® margins for the three and six-month periods ended June 30, 2008 were (4)% and 10%,
respectively, versus 12% and 16% for the comparable 2007 periods. The decrease in gross margin is a
result of lower sales volumes. The negative gross margin for the second quarter of 2008 was due to
the fact that the revenues generated were not enough to offset the overall costs incurred to
support the product line. Our strategy is to at a minimum breakeven on device sales in an effort to
drive Kerastick® sales volumes.
Non-PDT Product margins reflect the gross margin generated by the products acquired as part of our
acquisition of Sirius. Gross margins for the three and six-month periods ended June 30, 2008 were
77% and 78%, respectively, compared to 77% and 70%, respectively, in the comparable prior year
periods. During the three and six-month periods ended June 30, 2008, Non-PDT Product margins were
negatively impacted by the continued presence of NIC 750.
In April 2008, we were notified by Actavis Totowa, LLC, the manufacturer of Nicomide®, that Actavis
will cease manufacturing several prescription vitamins, including Nicomide, due to continuing
discussions with the FDA. As previously disclosed by DUSA, Actavis Totowa had received notice that
the FDA considers prescription dietary supplements to be unapproved new drugs. In July 2008, we
announced that we will no longer manufacture and market
Nicomide® as a prescription product. We
have placed a voluntary hold on existing inventory in response to discussions with the FDA. We are
relabeling a supply of product as a non-prescription dietary supplement in compliance with DSHEA
for re-launch and are in discussions with the FDA about our actions taken to date relating to the
regulatory status of Nicomide®, which includes ceasing all manufacturing and marketing activities
related to the prescription version of the product, the disposition of our remaining
prescription-labeled Nicomide® inventory, and our DSHEA strategy and related new labeling,
including use of the trademark. We are actively searching for a source of supply for the DSHEA
product. At the same time, we are also considering the possible sale or license of the product.
We expect both the price and volume of the Nicomide® DSHEA labeled
-21-
product to be considerably less than historic Nicomide® levels, which will have a negative impact
on our gross margins going forward. We expect the price per bottle of the DSHEA labeled Nicomide®
product to be in the $40 to $50 range.
RESEARCH AND DEVELOPMENT COSTS Research and development costs for the three and six-month
periods ended June 30, 2008 were $1,375,000 and $3,561,000 as compared to $1,577,000 and $3,103,000
in the comparable 2007 periods.
On a year-to-date basis, the increase in 2008 compared to 2007 was due primarily to increased
spending on our Phase IIb clinical trial on acne and a one-time $0.6 million Prescription Drug User
Fee Act (PDUFA) charge related to our approved AK indication. Research and development expenses
reflect the costs of our Phase IIb clinical trial for acne, which commenced in March 2007. We
expect our research and development costs to increase to an even greater extent at such time as we
may commence Phase III trials, or potentially a larger Phase IIb trial. The current Phase IIb trial
is being conducted at 14 sites and involves approximately 260 patients. Enrollment in the trial was
completed in March 2008. All patients have now completed
treatment and we expect to report top-line results in the Fall of
2008. In November 2004, we signed a clinical trial 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/II protocol has been
developed, and a Phase I clinical trial was launched in April 2008. Our costs related to this study
will be limited to providing Levulan®, leasing lasers and 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. Researchers
anticipate that the study will be completed within 12-24 months and based on results, we believe
that NCI would plan to move forward with a Phase II trial.
We are planning to initiate, in 2008, a DUSA-sponsored clinical trial, which we expect will include
30 to 40 patients, for the treatment of actinic keratoses and chemoprevention of non-melanoma skin
cancers in immunosuppressed solid organ transplant patients who are at risk of developing multiple
skin cancers annually. A clinical protocol has been finalized. An Orphan Drug Designation
Application with respect to the chemoprevention indication is pending with the FDA.
We have entered into a series of agreements for our research projects and clinical studies. As of
June 30, 2008 future payments to be made pursuant to these agreements, under certain terms and
conditions, total approximately $1,000,000 for the remainder of 2008.
MARKETING AND SALES COSTS Marketing and sales costs for the three and six-month periods ended
June 30, 2008 were $3,496,000 and $6,553,000, respectively, as compared to $3,310,000 and
$6,840,000 for the comparable 2007 periods. 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 $2,290,000 and $4,375,000 for the three and six-month
periods ended June 30, 2008, compared to $2,005,000 and $4,247,000 in the comparable periods in
2007. The remaining expenses consisted of tradeshows, miscellaneous marketing and outside
consultants totaling $1,206,000 and $2,178,000 for the three and six-month periods ended June 30,
2008, compared to $1,304,000 and $2,593,000 for the comparable 2007 periods. The decrease in this
category is due primarily to absence in 2008 of expenses incurred in 2007 related to the launch of
ClindaReach. We expect marketing and sales costs to increase in 2008, compared with 2007, but to
decrease as a percentage of revenues.
GENERAL AND ADMINISTRATIVE COSTS General and administrative costs for the three and six-month
periods ended June 30, 2008 were $2,325,000 and $4,692,000, respectively, as compared to $2,833,000
and $5,856,000 for the comparable 2007 periods. The decrease is mainly attributable to decreases in
legal expenses, which were incurred in 2007 due to the Rivers Edge litigation. 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 at
lower levels in 2008 compared to 2007 since patent litigation costs related to the Rivers Edge
litigation have diminished.
NET GAIN FROM SETTLEMENT OF LITIGATION During the fourth quarter of 2007 we entered into a
Settlement Agreement and Mutual Release with Rivers Edge Pharmaceuticals, LLC. Under the terms of
the Settlement Agreement, Rivers Edge made a lump-sum settlement payment to DUSA in the amount of
$425,000 for damages and pays to DUSA $25.00 for every prescription of NIC 750 above 5,000
prescriptions that are substituted for Nicomide® after September 30, 2007. During the three and
six-month periods ended June 30, 2008 damages for NIC 750 substituted for Nicomide® resulted in a
net gain from settlement of litigation of $48,000 and 283,000, respectively. We do not expect this
gain to be significant for the remainder of 2008.
-22-
OTHER INCOME, NET Other income for the three and six-month periods ended June 30, 2008,
increased to $217,000 and $424,000, respectively, from $156,000 and $345,000 during the comparable
2007 periods. This increase reflects an increase in our average investable cash balances during
2008 as compared to 2007 as a result of the October 2007 private placement in the fourth quarter of
2007.
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 the three and six-month periods ended
June 30, 2008 were $468,000 and $124,000, respectively, which resulted in a non-cash gain in both
periods. The decrease in fair value was due primarily to a decrease in our stock price from
December 31, 2007 to June 30, 2008.
NET LOSS For the three and six-month periods ended June 30, 2008, we incurred net losses of
$139,000, or $0.01 per share, and $1,423,000, or $0.06 per share, respectively, as compared to net
losses $2,477,000, or $0.13 per share, and $5,848,000, or $0.30 per share for the comparable 2007
periods. Net losses are expected to increase, at least in the short-term, due to the fact that we
are no longer manufacturing or marketing Nicomide® as a prescription product. Net losses are
expected to continue until such time as our PDT revenues increase to levels which offset the cost
of our sales force, marketing initiatives, and other business support functions.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2008, we had approximately $22,701,000 of total liquid assets, comprised of $2,979,000
of cash and cash equivalents and marketable securities available-for-sale totaling $19,722,000. We
believe that our liquidity will be sufficient to meet our cash requirements for at least the next
twelve months. We have invested our funds in liquid investments, so that we will have ready access
to these assets, as needed, for the funding of development plans on a short-term and long-term
basis. As of June 30, 2008, these securities had a weighted average yield of 3.1% and maturity
dates ranging from July 2008 to January 2013. Our net cash provided by operations for the six-month
period ended June 30, 2008 was $133,000 versus $4,610,000 cash used in operations the comparable
prior year period. The year-over-year improvement is primarily attributable to growth in revenues
and gross margins in our PDT operating segment. As of June 30, 2008 working capital (total current
assets minus total current liabilities) was $24,519,000, as compared to $24,021,000 as of December
31, 2007. Total current assets decreased by $0.7 million during the six-month period ended June 30,
2008, due primarily to decreases in cash and cash equivalents, accounts receivable and prepaid and
other current assets, offset by increases in inventory and marketable securities. Total current
liabilities decreased by $1.2 million during the same period due primarily to a decrease in
accounts payable and deferred revenue, offset by increases in accrued compensation and other
accrued expenses.
Since our inception, we have generated significant losses while we have advanced our product
candidates into preclinical and clinical trials, development and commercialization. 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 significant 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.
We have 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. The pre-determined cumulative sales milestones for the Sirius products and the
related milestone payments which may be paid in cash or DUSA shares, as DUSA may determine, are, as
follows:
|
|
|
|
|
|
|
Additional |
|
Cumulative Sales Milestone: |
|
Consideration: |
|
$25.0 million |
|
$1.5 million |
35.0 million |
|
$1.0 million |
45.0 million |
|
$1.0 million |
|
|
|
|
Total |
|
$3.5 million |
|
|
|
|
As of June 30, 2008, none of these milestones had been achieved. However, we expect that the first
of these milestones will be achieved during the third quarter of 2008.
-23-
We may seek to further expand or enhance our business by using our resources to acquire by license,
purchase or other arrangements, additional businesses, new technologies, or products in the field
of dermatology. For 2008, we are focusing primarily on increasing the sales of the Levulan®
Kerastick® and the BLU-U®, and advancing our Phase II study for use of Levulan® PDT in acne. DUSA
has no off-balance sheet financing arrangements.
CONTRACTUAL OBLIGATIONS AND OTHER COMMERCIAL COMMITMENTS
ACTAVIS TOTOWA, LLC
Under an agreement dated May 18, 2001, and amended on February 8, 2006, the former Sirius entered
into an arrangement for the supply of Nicomide® with Amide Pharmaceuticals, Inc., now known as
Actavis Totowa, LLC. The agreement was assigned to us as part of the Sirius merger. The agreement
expires on February 8, 2009. Actavis Totowa has received several warning letters from the FDA
regarding certain regulatory observations. In April 2008, we were notified by Actavis that they
will 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 July 2008, we
announced that we will no longer manufacture and market Nicomide® as a prescription product. We
are relabeling a supply of product as a non-prescription dietary supplement in compliance with
DSHEA for re-launch and are in discussions with the FDA about our actions taken to date relating to
the regulatory status of Nicomide®, which includes ceasing all manufacturing and marketing
activities related to the prescription version of the product, the disposition of our remaining
prescription-labeled Nicomide® inventory, and our DSHEA strategy and related new labeling,
including use of the trademark. We are actively searching for a source of supply for the DSHEA
product. At the same time, we are also considering the possible sale or license of the product.
We expect both the price and volume of the Nicomide® DSHEA labeled product to be considerably less
than historic Nicomide® levels. We expect the price per bottle of the DSHEA labeled Nicomide®
product to be in the $40 to $50 range.
L. PERRIGO COMPANY
On October 25, 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 abbreviated new drug application, or 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 July 2011 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) was contingent on a combination of new product approvals or launches, and
achievement of certain pre-determined total cumulative sales milestones for Sirius products. The
portion of the contingent amounts related to product approvals or launch (i.e., up to $1,500,000)
has been satisfied according to the terms of the merger with payments totaling $1,000,000. The
sales milestones have not yet been triggered.
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 for esters of aminolevulinic acid, or ALA, under the patents we
license from PARTEQ. ALA is the active ingredient in DUSAs Levulan® products. 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 Metvixia® would be directly competitive with our Levulan® Kerastick®
product should PhotoCure decide to begin marketing this product. While we are entitled to royalties
from PhotoCure on its net sales of Metvixia®, this product may adversely affect our ability to
maintain or increase our market.
-24-
WINSTON LABORATORIES, INC.
On or about January 30, 2006 Winston Laboratories, Inc., or Winston, and the former Sirius entered
into a license agreement relating to a Sirius product, Psoriatec® (known by Winston as Micanol)
revising a former agreement. The original 2006 Micanol License Agreement granted an exclusive
license, with limitation on rights to sublicense, to all property rights, including all
intellectual property and improvements, owned or controlled by Winston to manufacture, sell and
distribute products containing anthralin, in the United States. On January 29, 2008, our
wholly-owned subsidiary, Sirius, entered into the 2006 Micanol Transition License Agreement with
Winston. The Transition License Agreement amends the original 2006 Micanol License Agreement which
was due to expire pursuant to its terms on January 31, 2008. The parties entered into the
Transition License Agreement to extend the term of the 2006 Micanol License Agreement to September
30, 2008 in order to allow DUSA to sell its last batch of product, to reduce the period of time
that Sirius is required to maintain product liability insurance with respect to its distribution
and sale of products containing anthralin after the termination of the Transition License Agreement
and to confirm the allocation of certain costs and expenses relating to the product during and
after the transition period. We pay royalties on net sales of Psoriatec®, but we are no longer
required to pay Winston a minimum royalty to maintain the license. Psoriatec is a product that is
regulated under the FDAs marketed unapproved drug policy guide. As a result of discussions with
the FDA, DUSA placed its Psoriatec® inventory on hold and notified the FDA (in July 2008) that DUSA
will cease marketing Psoriatec® at the termination of its license agreement.
PARTEQ AGREEMENT
We license certain patents underlying our Levulan® PDT/PD 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.
Annual minimum royalties to PARTEQ must total at least CDN $100,000 (U.S. $98,000 as of June 30,
2008).
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 (NBC), the manufacturer of our BLU-U® light source. This agreement
provides for the elimination of certain exclusivity clauses, 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. We paid $110,000 to NBC upon execution of the
agreement which is being amortized over the remaining term of the agreement, expiring November 5,
2008.
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. The agreement expires on December 31,
2009. 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, Valhalla, New
York, and Toronto, Ontario. The minimum lease payments disclosed below include the non-cancelable
terms of the leases. We intend to sublease the offices in Toronto as we are closing that office as
of October 31, 2008. The Valhalla lease expires on December 31, 2008 and will not be renewed as
all functions are being consolidated in our Wilmington, Massachusetts facilities.
-25-
RESEARCH AGREEMENTS
We have entered into various agreements for research projects and clinical studies. As of June 30,
2008, future payments to be made pursuant to these agreements, under certain terms and conditions,
totaled approximately $1,288,000. Included in this future payment is a master service agreement,
effective June 15, 2001, with Therapeutics, Inc., which is renewable on an annual basis, to engage
Therapeutics to manage the clinical development of our products in the field of dermatology. The
agreement was renewed on June 15, 2008 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.
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 June 30, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 Year or |
|
|
|
|
|
|
|
|
|
|
After 5 |
|
|
|
Total |
|
|
less |
|
|
2-3 Years |
|
|
4-5 Years |
|
|
Years |
|
Operating lease obligations (1) |
|
$ |
1,897,000 |
|
|
$ |
459,000 |
|
|
$ |
929,000 |
|
|
$ |
509,000 |
|
|
$ |
0 |
|
Purchase obligations (2, 3) |
|
|
3,014,000 |
|
|
|
2,813,000 |
|
|
|
201,000 |
|
|
|
|
|
|
|
|
|
Minimum royalty obligations
(4) |
|
|
1,140,000 |
|
|
|
348,000 |
|
|
|
571,000 |
|
|
|
196,000 |
|
|
|
25,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total obligations |
|
$ |
6,051,000 |
|
|
$ |
3,620,000 |
|
|
$ |
1,701,000 |
|
|
$ |
705,000 |
|
|
$ |
25,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1) |
|
Approximately $85,000 of future operating lease commitments relate to
the Toronto and Valhalla offices, which will be closed during 2008. |
|
2) |
|
Research and development projects include various commitments
including obligations for our Phase II clinical study for moderate to
severe acne. |
|
3) |
|
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. |
|
4) |
|
Minimum royalty obligations relate to our agreements with PARTEQ,
Winston and Perrigo described above. |
Rent expense incurred under operating leases was approximately $111,000 and $221,000 for the three
and six-month periods ended June 30, 2008, respectively, compared to $120,000 and $240,000 for the
comparable 2007 periods.
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, we expect the overall net effect of inflation on our operations to be minimal.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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 single issue, issuer or type of investment. Our investments consist of
United States government securities and high grade corporate bonds. All investments are carried at
market value, which approximates cost.
-26-
As of June 30, 2008, the weighted average rate of return on our investments was 3.14%. If market
interest rates were to increase immediately and uniformly by 100 basis points from levels as of
June 30, 2008, the fair market value of the portfolio would decline by $203,000. Declines in
interest rates could, over time, reduce our interest income.
ITEM 4. 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 the Securities Exchange Act of 1934, Rules 13a-15(e) and 15d-15(e)).
Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that
our disclosure controls and procedures were effective as of June 30, 2008.
There have been no changes in our internal control over financial reporting that occurred during
the quarter ended June 30, 2008 that have materially affected, or are reasonably likely to
materially affect, DUSAs internal control over financial reporting.
Forward-Looking Statements Safe Harbor
This report, including the Managements 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 managements
statements regarding our strategies and core objectives for 2008, the results of our integration of
Sirius Laboratories, Inc. with our business and matters relating thereto, 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, the impact of
compounding pharmacies, beliefs regarding estimates, managements beliefs regarding the unique
nature of Levulan® and its use and potential use, expectations regarding the timing of results of
clinical trials, future development of Levulan® and our other products and other potential
indications, statements regarding the manufacture of Nicomide® in the future, beliefs concerning
manufacture of the BLU-U® , intention to pursue licensing, marketing, co-promotion, collaboration
or acquisition opportunities, status of clinical programs for all other indications and beliefs
regarding potential efficacy and marketing, our beliefs regarding the safety, simplicity,
reliability and cost-effectiveness of certain light sources, our expectations regarding other
product launches in Brazil and other territories, expectations regarding additional market
expansion, expectations for commercialization of Levulan® Kerastick® in Asian countries and a
distribution agreement for Japan, expectations regarding the marketing and distribution of Levulan®
Kerastick® by Daewoong Pharmaceutical Co., Ltd. and Stiefel Laboratories, Inc., beliefs regarding
the clinical benefit of Levulan® PDT for acne and other indications, beliefs regarding the
suitability of clinical data, expectations regarding the confidentiality of our proprietary
information, statements of our intentions to seek additional U.S. and foreign regulatory approvals,
and to market and increase sales outside the U.S., beliefs regarding regulatory classifications,
filings, timelines, off-label use and environmental compliance, beliefs concerning patent disputes
and litigation, intentions to defend our patent estate, the impact of a third-partys regulatory
compliance and fulfillment of contractual obligations, and our anticipation that third parties will
launch products upon receipt of regulatory approval, expectations of increases or decreases in cost
of product sales, expected use of cash resources, requirements of cash resources for our future
liquidity, beliefs regarding investments and economic conditions, 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, including from
Metvixia, expectations regarding the adequacy and availability of insurance, expectations regarding
general and administrative costs, expectations regarding increased sales and marketing costs and
research and development costs, levels of interest income and our capital resource needs, intention
to raise additional funds to meet capital requirements and the potential dilution and impact on our
business, potential for additional inspection and testing of our manufacturing facilities or
additional FDA actions, beliefs regarding the adequacy of our inventory of Kerastick® and BLU-U®
units and of
Nicomide®, 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, the enforceability of our patents, the impact of
generic products, our beliefs regarding our sales and marketing efforts, competition with other
companies, the adoption of our products, and the outcome of such efforts, our beliefs regarding our
sales and marketing efforts, 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, the volatility of our stock price, the impact of our rights plan, the possibility
that the holders of options and warrants will purchase
-27-
our common stock by exercising these
securities, timing and future development plans with respect to the NCI
clinical trials, beliefs regarding legal strategies or regulatory authorities actions to stop
compounding pharmacies, expectations of price and volume of Nicomide® as a DSHEA-labeled product,
expectations related to the change in revenues of our PDT and Non-PDT products, expectations
regarding the payment of milestones to former Sirius shareholders, intention to sublease the
Toronto offices, plans to re-launch Nicomide® under DSHEA compliant labeling, beliefs regarding
market share, beliefs regarding profitability, beliefs regarding the change in growth in our PDT
Drug and Device Products segment, expectations regarding the BLU-U® evaluation program,
expectations
regarding the development time-table for a DSHEA version of Nicomide® and beliefs regarding the
quantities of re-labeled Nicomide®. 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.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None.
ITEM 1A. RISK FACTORS
A description of the risk factors associated with our business is set forth below. This description
includes any material changes to and supersedes the description of the risk factors associated with
our business previously disclosed in Item 1A of our 2007 Annual Report on Form 10-K for the year
ended December 31, 2007 and in Item 1A of our Quarterly Report on Form 10-Q for the quarter ended
March 31, 2008.
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 your
investment.
This section of the Quarterly Report on Form 10-Q contains forward-looking statements of our plans,
objectives, expectations and intentions. We use words such as anticipate, believe, expect,
future and intend and similar expressions to identify forward-looking statements. Our actual
results could differ materially from those anticipated in these forward-looking statements for many
reasons, including the risks factors described below and elsewhere in this 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 And May Not Be Profitable In The Future Unless We Can Successfully
Market And Sell Significantly Higher Quantities Of Our Products.
If Product Sales Do Not Increase Significantly, We May Not Be Able To Advance Development Of Our
Other Potential Products As Quickly As We Would Like To, Which Would Delay The Approval Process And
Marketing Of New Potential Products.
If we do not generate sufficient revenues from our approved products, we may be forced to
delay or abandon some or all of our product development programs. The pharmaceutical development
and commercialization process is time consuming and costly, and any delays might result in higher
costs which could adversely affect our financial condition. Without sufficient product sales, we
would need alternative sources of funding. There is no guarantee that adequate funding sources
could be found to continue the development of our potential products. We
-28-
might be required to
commit substantially greater capital than we have available to research and development of such
products and we may not have sufficient funds to complete all or any of our development programs,
including our acne program.
Our Ability To Become Profitable Will Be Delayed Since We Will No Longer Promote Nicomide® As A
Prescription Product, And Since Other Generic Products Entered the Market.
In March 2006, we acquired Nicomide® in connection with our merger with Sirius Laboratories,
Inc. Our revenues from sales of Nicomide® will decrease significantly with our decision to cease
marketing Nicomide® as a prescription product in response to discussions with the FDA. Assuming we
launch Nicomide® as a dietary supplement which is compliant with current FDA regulations, our
ability to become profitable will be more difficult.
In addition, we are aware that several manufacturers have listed a niacinamide product in
various drug databases as a substitute for Nicomide® and at least two have launched substitutable
niacinamide products. These products will also negatively impact our market share reducing our
revenues which will make our ability to become profitable more difficult.
In April 2008, we were notified by Actavis Totowa, LLC, the manufacturer of Nicomide®, that
Actavis will cease manufacturing several prescription vitamins, including Nicomide, due to
continuing discussions with the U.S. Food and Drug Administration. As we previously disclosed,
Actavis Totowa had received notice that the FDA considers prescription dietary supplements to be
unapproved new drugs. In July 2008, we announced that we will no longer manufacture and market
Nicomide® as a prescription product. We have placed a voluntary hold on existing inventory in
response to discussions with the FDA. We are relabeling a supply of product as a non-prescription
dietary supplement in compliance with DSHEA for re-launch and are in discussions with the FDA about
our actions taken to date relating to the regulatory status of Nicomide®, which includes ceasing
all manufacturing and marketing activities related to the prescription version of the product, the
disposition of our remaining prescription-labeled Nicomide® inventory, and our DSHEA strategy and
related new labeling, including use of the trademark. We are actively searching for a source of
supply for the DSHEA product. At the same time, we are also considering the possible sale or
license of the product. We expect both the price and volume of the Nicomide® DSHEA labeled product
to be considerably less than historic Nicomide® levels. We expect the price per bottle of the
DSHEA labeled Nicomide® product to be in the $40 to $50 range.
We Have Not Yet Secured A Manufacturer for a DSHEA Nicomide Product, And, As A Result, Our Revenues
From Nicomide® Sales May Suffer.
In April 2008, we were notified by the manufacturer of Nicomide that they were ceasing the
manufacturing of several prescription vitamins, including Nicomide. We are actively searching for
a source of supply to manufacture a DSHEA-labeled version of Nicomide. Since Actavis, the former
manufacturer, owns certain proprietary assays and manufacturing processes relating to Nicomide, it
could take several months to develop the DSHEA version of Nicomide. Although we believe we will
have sufficient quantities of re-labeled Nicomide product to meet the DSHEA market demand in the
short-term, it is possible that we could go into a back-order situation and could lose market share
while we redevelop the DSHEA product. We may not be able to locate a manufacturer on terms that
are acceptable to us.
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, and |
|
|
|
|
control of marketing activities, including advertising and labeling. |
-29-
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 also:
|
|
|
send warning letters, as recently received by the manufacturer of our BLU-U®, |
|
|
|
|
impose fines and other civil penalties on us, |
|
|
|
|
seize our products, |
|
|
|
|
suspend our regulatory approvals, |
|
|
|
|
cease the manufacture of our products, as Actavis Totowa is doing with Nicomide®, |
|
|
|
|
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. |
We and our manufacturers must continue to comply with cGMP and Quality System Regulation, or
QSR, and equivalent foreign regulatory requirements. The cGMP requirements govern quality control
and documentation policies and procedures. In complying with cGMP and foreign regulatory
requirements, we and our third-party manufacturers will be obligated to expend time, money and
effort in production, record keeping and quality control to assure that our products meet
applicable specifications and other requirements.
Certain of the products acquired or licensed in connection with the Sirius merger including
Nicomide® and Psoriatec®, are regulated by FDA under its marketed unapproved drugs compliance
policy guide entitled, Marketed New Drugs without Approved NDAs or ANDAs. Under this policy, the
FDA recognizes that certain unapproved products, based on the introduction date of their active
ingredients and the lack of safety concerns, have been marketed for many years and, at this time,
will not be the subject of any enforcement action. The FDA has recently taken a more proactive role
and is strongly encouraging manufacturers of such products to submit applications to obtain
marketing approval and/or bring these products into compliance with current FDA regulations. We are
in discussions with the FDA and have agreed to cease manufacturing and promoting Nicomide® as a
prescription product. We are relabeling a supply of product as a non-prescription dietary
supplement in compliance with DSHEA for re-launch and are in discussions with FDA about appropriate
DSHEA labeling, including use of the trademark. We are actively searching for a source of supply
for the DSHEA product. Label changes eliminating references to medicinal benefits will limit the
marketing claims we can make for Nicomide® and a change of product name, if required, could
negatively affect our revenues and profits. We could experience a back-order situation if a
manufacturer is not available in time to meet our supply needs which could also affect our revenues
and profits.
Manufacturing facilities are subject to ongoing periodic inspection by the FDA, including
unannounced inspections. We cannot guarantee that our third-party supply sources, or our own
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.
-30-
Patent Litigation Is Expensive And We May Not Be Able To Afford The Costs.
The costs of litigation or any proceeding relating to our intellectual property rights could
be substantial even if resolved in our favor. Some of our competitors have far greater resources
than we do and may be better able to afford the costs of complex patent litigation. For example,
third-parties such as companies that have launched niacinamide products, may infringe one or more
of our patents, and cause us to spend significant resources to enforce our patent rights. 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). 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. 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 in the United
States, or be issued a patent claiming technology also claimed by us in a pending United States
application(s), we may be required to participate in interference proceedings in the United States
Patent and Trademark Office to determine the priority of 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, could involve substantial legal fees and result in a loss or lessening of our
patent protection.
If We Are Unable To Obtain The Necessary Capital To Fund Our Operations, We Will Have To Delay Our
Development Programs And May Not Be Able To Complete Our Clinical Trials.
While we recently completed a private placement raising net proceeds of approximately $10.3
million in October 2007, we may need substantial additional funds to fully develop, manufacture,
market and sell our potential products. We may obtain funds through other public or private
financings, including equity financing, and/or through collaborative arrangements. We cannot
predict whether any additional financing will be available at all or on acceptable terms. Depending
on the extent of available funding, we may delay, reduce in scope or eliminate some of our research
and development programs. 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 include restrictive
covenants that restrict our ability to operate our business. Failure to raise capital if needed
could materially adversely impact our business, our financial condition, results of operations and
cash flows.
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®, And Meted®, Any
Supply Or Manufacturing Problems Could Negatively Impact Our Sales As With Nicomide®.
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 unless we decide to manufacture in light of
FDAs warning letter to our BLU-U® manufacturer.
In April 2008, we were notified by Actavis Totowa, LLC, the manufacturer of Nicomide®, that Actavis
will cease manufacturing several prescription vitamins, including Nicomide, due to continuing
discussions with the U.S. Food and Drug Administration. As we previously disclosed, Actavis Totowa
had received notice that the FDA considers prescription dietary supplements to be unapproved new
drugs. In July 2008, we announced that we will no longer manufacture and market Nicomide® as a
prescription product. We have placed a voluntary hold on existing inventory in response to
discussions with the FDA. We are relabeling a supply of product as a non-prescription dietary
supplement in compliance with DSHEA for re-launch and are in discussions with the FDA about our
actions taken to date relating to the regulatory status of Nicomide®, which includes ceasing all
manufacturing and marketing activities related to the prescription version of the product, the
disposition of our remaining prescription-labeled Nicomide® inventory, and our DSHEA strategy and
related new labeling, including use of the trademark. We are actively searching for a source of
supply for the DSHEA product. At the same time, we are also considering the possible sale or
license of the product. We expect both the price and volume of the Nicomide® DSHEA labeled
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product
to be considerably less than historic Nicomide® levels. We expect the price per bottle of the
DSHEA labeled Nicomide® product to be in the $40 to $50 range.
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:
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product yields, |
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quality control, |
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component and service availability, |
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compliance with FDA regulations, and |
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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 are any quality or supply problems
with any components or materials needed to manufacturer our products, we may not be able to quickly
remedy the problem(s). Any of these problems could cause our sales to suffer.
We Have Only Limited Experience Marketing And Selling Pharmaceutical Products And No Experience
Marketing Dietary Supplements, 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
doing so without the experience of having marketed pharmaceutical products prior to 2000. In
October 2003, DUSA began hiring a small direct sales force and we increased the size of our sales
force to market our products in the United States. We do not have experience marketing dietary
supplement products like Nicomide®. If our sales and marketing efforts fail, then sales of the
Levulan® Kerastick®, the BLU-U®, Nicomide® and other products will be adversely affected.
The Commercial Success Of Any Products 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 products that we may develop will be highly dependent upon
the extent to which these products gain 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 these products do
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 product candidates, if approved
for commercial sale, will depend on a number of factors, including:
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the effectiveness, or perceived effectiveness, of our products in comparison to competing products; |
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the existence of any significant side effects, as well as their severity in comparison to
any competing products; |
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potential advantages over alternative treatments; |
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the ability to offer our products for sale at competitive prices; |
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relative convenience and ease of administration; |
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the strength of marketing and distribution support; and |
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sufficient third-party coverage or reimbursement. |
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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,
a broader adoption of our therapy and sales of our
products could be negatively impacted. Although positive reimbursement changes related to AK
were made in 2005, 2007 and again in 2008, 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, or stop covering products which are covered, including
Nicomide®, our sales could be dramatically reduced.
We Have Significant Losses And Anticipate Continued Losses
We have a history of operating losses. We expect to have continued losses until sales of our
products increase substantially. We incurred net losses of $139,000 and $2,477,000 for the three
month periods ended June 30, 2008 and 2007, respectively, and $14,714,000 and $31,350,000 for the
years ended December 31, 2007 and 2006, respectively. As of June 30, 2008, our accumulated deficit
was approximately $137,000,000. 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 a sustainable basis.
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:
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methods of using ALA and its unique physical forms in combination with light, |
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compositions and apparatus for those methods, and |
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unique physical forms of ALA. |
We have limited ALA patent protection outside the United States, which may make it easier for
third-parties to compete there. Our basic method of treatment patents and applications have
counterparts in only 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 DUSA, other
parties are free to develop other uses of ALA, including medical uses, and to market ALA for such
uses, assuming that they have obtained appropriate regulatory marketing approvals. ALA in the
chemical form has been commercially supplied for decades, and is not itself subject to patent
protection. There are reports of third-parties conducting clinical studies with ALA in countries
outside the United States where PARTEQ, the licensor of our ALA patents, does not have patent
protection. In addition, a number of third-parties are seeking patents for uses of ALA not covered
by our patents. These other uses, whether patented or not, and the commercial availability of ALA,
could limit the scope of our future operations because ALA products could come on the market which
would not infringe our patents but would compete with our Levulan ® products even though they are
marketed for different uses.
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Nicomide® is covered by a United States patent which issued in December 2005. Rivers Edge
Pharmaceuticals, LLC filed an application with the USPTO for the reexamination of the patent which
was vacated by the USPTO on March 6, 2008. On October 28, 2007, we entered into a settlement
agreement and mutual release to dismiss the lawsuit brought by DUSA against Rivers Edge, asserting
a number of claims arising out of Rivers Edges alleged infringement of U.S. Patent No. 6,979,468
under which DUSA has marketed, distributed and sold Nicomide®. Under the terms of the settlement
agreement, Rivers Edge unconditionally acknowledges the validity and enforceability of the
Nicomide® patent. At least two other companies have recently launched substitutable niacinamide
products, which may cause us to again consider litigation and the validity of the Nicomide® patent
could be tested again. Also, new products have been launched that are competing with Nicomide®.
These events, together with our decision regarding the marketing of Nicomide will 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 would be directly competitive with our Levulan® Kerastick® product,
could be launched at any time. While we are entitled to royalties from PhotoCure on its net sales
of Metvixia®, this product which will be marketed in the U.S. by a large dermatology company, may
adversely affect our ability to maintain or increase our Levulan® market.
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:
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these persons or entities might breach the agreements, |
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we might not have adequate remedies for a breach, and/or |
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our competitors will independently develop or otherwise discover our trade secrets; |
All of which could negatively impact our ability to be profitable.
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 Commercially
Successful Products.
To be profitable, we must successfully research, develop, obtain regulatory approval for,
manufacture, introduce, market and distribute our products. Except for Levulan® PDT for AKs, the
BLU-U® for acne, the ClindaReach pledget and the currently marketed products we acquired in our
merger with Sirius, all of our other potential Levulan® and 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:
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delays in product development, clinical testing or manufacturing, |
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unplanned expenditures in product development, clinical testing or manufacturing, |
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failure in clinical trials or failure to receive regulatory approvals, |
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emergence of superior or equivalent products, |
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inability to market products due to third-party proprietary rights, and |
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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.
-34-
We Must Receive Separate Approval For Each Of Our Potential Products Before We Can Sell Them
Commercially In The United States Or Abroad.
All of our potential Levulan® products will require the approval of the FDA before they can be
marketed in the United States. If we fail to obtain the required approvals (as we did for the
product we were developing with Altana) for these products our revenues will be limited. Before an
application to the FDA seeking approval to market a new drug, called an NDA, can be filed, a
product must undergo, among other things, extensive animal testing and human clinical trials. The
process of obtaining FDA approvals can be lengthy, costly, and time-consuming. Following the
acceptance of an NDA, the time required for regulatory approval can vary and is usually 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 approval for any of our potential products. Data
obtained from preclinical testing and clinical trials can be susceptible to varying interpretations
which could delay, limit or prevent regulatory approvals. Future clinical trials may not show that
Levulan® PDT or photodetection, known as PD, is safe and effective for any new use we are studying,
including our ongoing Phase II acne 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. During September 2005, the FDA issued guidance for the
pharmaceutical industry regarding the development of new drugs for acne vulgaris treatment. We have
received comments on our acne development program from the FDA statistical reviewer assigned to our
investigational new drug application or IND. In this letter, the reviewer stated concern about
whether we will have sufficient data to select an appropriate dosing regimen for Phase III trials.
We believe that we have the data to indicate that sufficient drug dose ranging has been done;
however, if the FDA does not accept our rationale, additional clinical trials and/or formulation
development work may be required for the acne development program, which may extend the expected
development time lines for such program. The FDA may issue additional guidance in the future, which
may result on additional costs and delays. We must also obtain foreign regulatory clearances before
we can market any potential products in foreign markets. The foreign regulatory approval process
includes all of the risks associated with obtaining FDA marketing approval and may impose
substantial additional costs.
In April 2008, we were notified by Actavis Totowa, LLC, the manufacturer of Nicomide®, that Actavis
will cease manufacturing several prescription vitamins, including Nicomide, due to continuing
discussions with the U.S. Food and Drug Administration. As we previously disclosed, Actavis Totowa
had received notice that the FDA considers prescription dietary supplements to be unapproved new
drugs. In July 2008, we announced that we will no longer manufacture and market Nicomide® as a
prescription product. We have placed a voluntary hold on existing inventory in response to
discussions with the FDA. We are relabeling a supply of product as a non-prescription dietary
supplement in compliance with DSHEA for re-launch and are in discussions with the FDA about our
actions taken to date relating to the regulatory status of Nicomide®, which includes ceasing all
manufacturing and marketing activities related to the prescription version of the product, the
disposition of our remaining prescription-labeled Nicomide® inventory, and our DSHEA strategy and
related new labeling, including use of the trademark. We are actively searching for a source of
supply for the DSHEA product. At the same time, we are also considering the possible sale or
license of the product. We expect both the price and volume of the Nicomide® DSHEA labeled product
to be considerably less than historic Nicomide® levels. We expect the price per bottle of the
DSHEA labeled Nicomide® product to be in the $40 to $50 range.
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 91 employees, including 4 part-time employees, as of June 30,
2008. 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.
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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 in excess of our
insurance coverage could materially harm our business, financial condition and results of
operations. Additionally, we cannot guarantee that continued product liability insurance coverage
will be available in the future at acceptable costs. If the cost is too high, we may have to
self-insure.
Our Business Involves Environmental Risks And We May Incur Significant Costs Complying With
Environmental Laws And Regulations.
We have used various hazardous materials, such as mercury in fluorescent tubes in our research
and development activities. We are subject to federal, state and local laws and regulations which
govern the use, manufacture, storage, handling and disposal of hazardous materials and specific
waste products. Now that we have established our own production line for the manufacture of the
Kerastick®, we are subject to additional environmental laws and regulations. We believe that we are
in compliance in all material respects with currently applicable environmental laws and
regulations. However, we cannot guarantee that we will not incur significant costs to comply with
environmental laws and regulations in the future. We also cannot guarantee that current or future
environmental laws or regulations will not materially adversely affect our operations, business or
assets. In addition, although we believe our safety procedures for handling and disposing of these
materials comply with federal, state and local laws and regulations, we cannot completely eliminate
the risk of accidental contamination or injury from these materials. In the event of such an
accident, we could be held liable for any resulting damages, and this liability could exceed our
resources.
We May Not Be Able To Compete Against Traditional Treatment Methods Or Keep Up With Rapid Changes
In The Biotechnology And Pharmaceutical Industries That Could Make Some Or All Of Our Products
Non-Competitive Or Obsolete.
Competing Products And Technologies Based On Traditional Treatment Methods May Make Some Or All Of
Our Programs Or Potential Products Noncompetitive Or Obsolete.
Well-known pharmaceutical, biotechnology and medical device companies are marketing
well-established therapies for the treatment of many of the same conditions that we are seeking to
treat, including AKs, acne and rosacea. 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 medical conditions for which we are developing treatments. Our industry is subject to
rapid, unpredictable and significant technological change. Competition is intense. Our competitors
may succeed in developing products that are safer or more effective than ours. Many of our
competitors have substantially greater financial, technical and marketing resources than we have.
In addition, several of these companies have significantly greater experience than we do in
developing products, conducting preclinical and clinical testing and obtaining regulatory approvals
to market products for health care.
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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:
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price reductions, |
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lower levels of third-party reimbursements, |
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failure to achieve market acceptance, and |
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loss of market share, any of which could adversely affect our business. Further, we cannot
give any assurance that developments by our competitors or future competitors will
not render our technology obsolete. |
On May 30, 2006, we entered into a patent license agreement with PhotoCure ASA whereby DUSA granted
a non-exclusive license to PhotoCure under the patents DUSA licenses from PARTEQ, for esters of
ALA. Furthermore, DUSA 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 DUSA in the future. PhotoCure received FDA approval to market
Metvixia for treatment of AKs in July 2004 and it would be directly competitive with our Levulan®
Kerastick® product should PhotoCure decide to begin marketing this product. While we are entitled
to royalties from PhotoCure on its net sales of Metvixia, this product, which will be marketed in
the U.S. by a large dermatology company which may start to market Metvixia at any time, would
adversely affect our ability to maintain or increase our market.
We Have Learned That Some Compounding Pharmacies Are Producing A Form Of Aminolevulinic Acid HCl
And Are Marketing It To The Medical Community.
We are aware that there are compounding pharmacies that market compounded versions of
aminolevulinic acid HCl as an alternative to our Levulan® product. Since December 2004, we have
filed lawsuits against compounding pharmacies, chemical suppliers and a light device company and
several physicians alleging violations of the Lanham Act for false advertising and trademark
infringement, and of United States patent law. All of the lawsuits have been settled or ended
favorably to us. While we believe that certain actions of compounding pharmacies and others go
beyond the activities which are permitted under the Food, Drug and Cosmetic Act and have advised
the FDA and local health authorities of our concerns, we cannot be certain that our legal strategy
will be successful in curbing the practices of these companies or that regulatory authorities will
intervene to stop their activities. In addition, there may be other compounding pharmacies which
are following FDA guidelines, or others conducting illegal activities of which we are not aware,
which may be negatively impacting our sales revenues.
Generic Manufacturers May Launch Products at Risk of Patent Infringement.
We are aware that several manufacturers have listed a niacinamide product in various drug
databases and at least two companies have launched their products. We have been informed that
other companies are making plans to launch a substitutable niacinamide product to compete with
Nicomide® in spite of our patent position. These manufacturers will likely erode our market share
and negatively impact our sales revenues, liquidity and operations.
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: medac GmbH and photonamic GmbH & Co. KG (Germany); Biofrontera,
PhotoTherapeutics, Inc. (U.K.) and PhotoCure ASA (Norway) which entered into a marketing agreement
with Galderma S.A. for countries outside of Nordic countries for certain dermatology indications.
We also anticipate that we will face increased competition as the scientific development of PDT and
PD 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.
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PhotoCure has received marketing approval of its ALA precursor (ALA methyl-ester) compound for
PDT treatment of AKs and basal cell carcinoma in the European Union, New Zealand, Australia and
countries in Scandinavia. PhotoCures marketing partner, a large dermatology company, could begin to market
its product in direct competition with Levulan® in the U.S., at any time, under the terms of our
patent license agreement and we may lose market share.
Axcan Pharma Inc. has received FDA approval for the use of its product, PHOTOFRIN®, for PDT in
the treatment of high grade dysplasia associated with Barretts Esophagus. Axcan is the first
company to market a PDT therapy for this indication for which we designed our proprietary sheath
device and have conducted pilot clinical trials.
We expect that our principal methods of competition with other PDT products will be based upon
such factors as:
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the ease of administration of our method of PDT, |
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the degree of generalized skin sensitivity to light, |
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the number of required doses, |
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the selectivity of our drug for the target lesion or tissue of interest, and |
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the type and cost of our light systems. |
Our primary competition in the acne and rosacea markets 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. We are also
aware of new products that were launched recently which will compete with Nicomide® which could
negatively impact our market share. The entry of new products from time to time would likely cause
us to lose market share.
Risks Related To Our Stock
If Outstanding Options, Warrants And Rights Are Converted, The Value Of Those Shares Of Common
Stock Outstanding Just Prior To The Conversion Will Be Diluted.
As of August 5, 2008, there were outstanding options and warrants to purchase 4,440,000 shares
of common stock, with exercise prices ranging from $1.60 to $31.00 per share, and from $2.85 to
$6.00 per share, respectively. In addition, there are 102,000 shares of restricted stock that have
not yet vested. 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. The holders are likely to exercise their securities when we
would probably be able to raise capital from the public on terms more favorable than those provided
in these securities.
Our Results Of Operations And General Market Conditions For Specialty Pharmaceutical And
Biotechnology Stocks Could Result In Sudden Changes In The Market Value Of Our Stock.
The price of our common stock has been highly volatile. These fluctuations create a greater
risk of capital losses for our shareholders as compared to less volatile stocks. From January 1,
2007 to August 5, 2008, the price of our stock has ranged from a low of $1.32 to a high of $5.00.
Factors that contributed to the volatility of our stock during this period included:
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clinical trial results; |
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general market conditions; |
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patent litigation; |
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increased marketing activities or press releases; and |
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changes in third-party payor reimbursement for our therapy. |
The significant general market volatility in similar stage pharmaceutical and biotechnology
companies made the market price of our common stock even more 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 the 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.
Effecting A Change Of Control Of DUSA Would Be Difficult, Which May Discourage Offers For Shares Of
Our Common Stock.
Our certificate of incorporation authorizes the board of directors to issue up to 100,000,000
shares of stock, 40,000,000 of which are common stock. The board of directors has the authority to
determine the price, rights, preferences and privileges, including voting rights, of the remaining
60,000,000 shares without any further vote or action by the shareholders. The rights of the holders
of our common stock will be subject to, and may be adversely affected by, the rights of the holders
of any preferred stock that may be issued in the future.
On September 27, 2002, we adopted a shareholder rights plan at a special meeting of DUSAs
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 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 DUSA at a redemption price of one one-hundredth of a cent per right until ten days
following the date the person or group acquires, or discloses an intention to acquire, 15% or more,
as the case may be, of DUSA, or until such later date as may be determined by the 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 DUSA is not
the surviving corporation, all holders of rights (other than the acquiring person or group) shall
be entitled, upon payment of the purchase price then in effect, to purchase common stock of the
surviving corporation having a value of twice the purchase price. The rights will expire on October
10, 2012, unless previously redeemed. Our board of directors has also adopted certain amendments to
DUSAs certificate of incorporation consistent with the terms of the rights plan.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
None.
-39-
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Matters submitted to a vote of security holders of DUSA at the Annual Meeting of Shareholders held
June 12, 2008 included the election of seven (7) directors, an amendment to the 2006 Equity
Compensation Plan, and the ratification of the selection of Deloitte & Touche LLP as the
independent registered public accounting firm for DUSA for 2008.
a) The following persons were elected to serve as directors of the Corporation:
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Votes |
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Broker |
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Votes Cast For |
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Withheld |
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Abstained |
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Non-votes |
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John H. Abeles |
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14,041,654 |
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4,730,919 |
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-0- |
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-0- |
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David M. Bartash |
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14,083,933 |
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4,688,640 |
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-0- |
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-0- |
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Robert F. Doman |
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17,478,005 |
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1,294,568 |
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-0- |
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-0- |
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Jay M. Haft |
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14,059,822 |
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4,712,751 |
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-0- |
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-0- |
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Richard C. Lufkin |
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14,083,970 |
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4,688,603 |
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-0- |
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-0- |
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Magnus Moliteus |
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14,082,913 |
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4,689,660 |
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-0- |
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-0- |
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D. Geoffrey Shulman |
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17,244,442 |
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1,528,131 |
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-0- |
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-0- |
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b) The shareholders approved the amendment to the 2006 Equity Compensation Plan to increase the
number of shares of common stock reserved for issuance pursuant to the Plan as follows:
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Votes Cast |
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Broker |
Votes Cast For |
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Against |
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Abstained |
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Non-votes |
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8,950,044
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5,322,226
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397,534
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4,102,769 |
c) The shareholders ratified the selection of Deloitte & Touche LLP as the independent registered
public accounting firm for DUSA for 2008 as follows:
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Votes Cast |
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Broker |
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Votes Cast For |
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Against |
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Abstained |
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Non-votes |
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Deloitte & Touche LLP |
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18,600,040 |
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160,663 |
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11,869 |
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-0- |
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ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS.
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EXHIBIT NO. |
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DESCRIPTION OF EXHIBIT |
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3(a.1)
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Certificate of Incorporation, as amended, filed as Exhibit 3(a) to the Registrants Form
10-K for the fiscal year ended December 31, 1998, and is incorporated herein by
reference. |
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3(a.2)
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Certificate of Amendment to the Certificate of Incorporation, as amended, dated October
28, 2002 and filed as Exhibit 99.3 to the Registrants Quarterly Report on Form 10-Q for
the fiscal quarter ended September 30, 2002, filed November 12, 2002, and is incorporated
herein by reference |
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3(b)
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By-laws of the Registrant, filed as Exhibit 3.1 to the Registrants current report on
Form 8-K, filed on November 2, 2007, and is incorporated herein by reference. |
-40-
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EXHIBIT NO. |
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DESCRIPTION OF EXHIBIT |
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31(a)
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Certification pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934. |
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31(b)
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Certification pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934. |
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32(a)
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Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002. |
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32(b)
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Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002. |
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99.1
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Press Release dated August 8, 2008 |
-41-
SIGNATURES
Pursuant to the requirements 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.
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DUSA Pharmaceuticals, Inc.
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By: |
/s/ Robert F. Doman
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Robert Doman |
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President and Chief Executive Officer (principal executive officer) |
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Dated August 8, 2008
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By: |
/s/ Richard C. Christopher
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Richard C. Christopher |
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Vice President, Finance and Chief Financial Officer (principal financial officer) |
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Dated August 8, 2008
-42-
EXHIBIT INDEX
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3(a.1)
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Certificate of Incorporation, as amended, filed as Exhibit 3(a) to the Registrants Form
10-K for the fiscal year ended December 31, 1998, and is incorporated herein by
reference. |
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3(a.2)
|
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Certificate of Amendment to the Certificate of Incorporation, as amended, dated October
28, 2002 and filed as Exhibit 99.3 to the Registrants Quarterly Report on Form 10-Q for
the fiscal quarter ended September 30, 2002, filed November 12, 2002, and is incorporated
herein by reference. |
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3(b)
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By-laws of the Registrant, filed as Exhibit 3.1 to the Registrants current report on
Form 8-K, filed on November 2, 2007, and is incorporated herein by reference. |
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31(a)
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Certification pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934. |
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31(b)
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Certification pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934. |
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32(a)
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Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002. |
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32(b)
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Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002. |
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99.1
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Press Release dated August 8, 2008. |
-43-