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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
DUSA Pharmaceuticals, Inc.
(Exact name of registrant as specified in its charter)
NEW JERSEY 22-3103129
State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
25 Upton Drive
Wilmington, Massachusetts 01887
(Address of principal executive offices) (Zip Code)
Commission File Number: 0-19777
Registrant's telephone number, including area code: (978) 657-7500
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to section 12(g) of the Act:
Common Stock
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(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 or Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the registrant computed by reference to the closing price of such stock as of
February 29, 2000 was $429,542,072.60.
The number of shares of common stock outstanding of the Registrant as of
February 29, 2000 was 12,008,505.
DOCUMENTS INCORPORATED BY REFERENCE
Document incorporated by reference to this Report is:
(1) NONE
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PART I
This Annual Report on Form 10-K and certain written and oral statements
incorporated herein by reference of DUSA Pharmaceuticals, Inc. (referred to as
"DUSA," "we,"and "us") contain forward-looking statements that have been made
pursuant to the provisions of the Private Securities Litigation Reform Act of
1995. Such forward-looking statements are based on current expectations,
estimates and projections about DUSA's industry, management's beliefs and
certain assumptions made by our management. Words such as "anticipates",
"expects", "intends", "plans", "believes", "seeks", "estimates", or variations
of such words and similar expressions, are intended to identify such
forward-looking statements. These statements are not guarantees of future
performance and are subject to certain risks, uncertainties and assumptions that
are difficult to predict particularly in the highly regulated pharmaceutical
industry in which we operate. Therefore, actual results may differ materially
from those expressed or forecasted in any such forward-looking statements. Such
risks and uncertainties include those set forth herein under "Risk Factors" on
page 23, as well as those noted in the documents incorporated herein by
reference. Unless required by law, we undertake no obligation to update publicly
any forward-looking statements, whether as a result of new information, future
events or otherwise. However, readers should carefully review the statements set
forth in other reports or documents we file from time to time with the
Securities and Exchange Commission, particularly the Quarterly Reports on Form
10-Q and any Current Reports on Form 8-K.
ITEM 1. BUSINESS
GENERAL
We are a pharmaceutical company developing drugs in combination with light
devices to treat or detect a variety of conditions in processes known as
photodynamic therapy or photodetection. We are engaged primarily in the research
and development of our first drug, the Levulan(R) brand of aminolevulinic acid
HCl, or ALA, with light, for use in a broad range of medical conditions. When we
use Levulan(R) and follow it with exposure to light to treat a medical
condition, it is known as Levulan(R) photodynamic therapy or Levulan(R) PDT.
When we use Levulan(R) and follow it with exposure to light to detect medical
conditions it is known as Levulan(R) photodetection or Levulan(R) PD.
On December 3, 1999, the United States Food and Drug Administration
approved our New Drug Application, called an NDA, to market our first product,
the Levulan(R) Kerastick(TM) 20% Topical Solution with PDT for the treatment of
actinic keratoses, or AKs, of the face and scalp. AKs are precancerous skin
lesions caused by chronic sun exposure. AKs can develop over time into a form of
skin cancer called squamous cell carcinoma. We also received approval of our
pre-market approval application, or PMA, of the clinical trial version of our
first light device product, called the BLU-U(TM). The commercial version of the
BLU-U(TM) which we intend to market is a modified version of the unit used in
the clinical studies. We are in the process of preparing a supplement to the PMA
covering these modifications, and intend to file it with the FDA during the
first quarter of 2000.
In November, 1999, we signed a marketing, development and supply agreement
with Schering AG, a German corporation, for dermatology products. We granted to
Schering AG the right to promote, market, sell, and distribute our Levulan(R)
Kerastick(TM) with PDT for AKs of the face and scalp on a worldwide basis (with
the exception of Canada). Schering AG will also promote the BLU-U(TM); however,
we are responsible for leasing or selling the units, as well as for repairs and
maintenance. Schering AG, and its United States affiliate, Berlex Laboratories,
Inc., have advised us that Berlex plans to launch Levulan(R) PDT for AKs in the
United States during the second quarter of 2000, subject to
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approval of the PMA supplement for the BLU-U(TM). We also intend to co-develop
and commercialize additional Levulan(R) products for other dermatology
disorders. Under the agreement, Schering AG has the exclusive right to market,
promote, sell and distribute the products which are developed in the
co-development program. Schering AG has agreed to fund two-thirds of the
co-development program, up to a total of $3.0 million per year, through 2001.
The parties may agree to continue to fund the co-development program beyond this
date. Under the terms of the agreement, we have received $15 million, including
$8.75 million in cash milestone payments and $6.25 million for which a Schering
AG affiliate received 340,458 shares of our common stock. Schering AG is
obligated to pay $8 million for future research and development support to be
used at our discretion and an additional milestone payment of $7 million within
30 days after the first commercial sale of the Levulan(R) Kerastick(TM),
provided that the FDA has approved the commercial model of the BLU-U(TM). See
"Business -- Strategic Partners" below.
We are developing Levulan(R) PDT and PD under an exclusive worldwide
license of patents and technology from PARTEQ Research and Development
Innovations, the licensing arm of Queen's University, Kingston, Ontario, Canada.
We also own or license certain patents relating to methods for using
pharmaceutical formulations which contain our drug and related processes and
improvements. In addition to the Levulan(R) trademark, we also have published
trademark applications for our drug applicator, the Kerastick(TM) and one of our
light devices, the BLU-U(TM).
We have submitted Levulan(R) PDT development proposals to Schering AG for
acne, photodamaged skin, warts, hair removal and onychomycosis, more commonly
known as nail fungus. Together, we expect to finalize the development program
for 2000 to include several of these conditions and to begin new clinical trials
shortly. Also during this year, we expect to begin a new Phase I/II clinical
trial using Levulan(R) for the detection of bladder cancer. We are also
currently supporting independent investigator trials to advance clinical
programs such as the use of Levulan(R) PDT to prevent restenosis, a narrowing of
blood vessels following balloon angioplasty; to treat dysfunctional uterine
bleeding; and to detect and/or treat precancer of the cervix, known as CIN. We
may also consider supporting other independent investigator clinical trials this
year to advance clinical programs such as use of Levulan(R) PDT to treat
Barrett's esophagus, a potentially precancerous condition of the throat.
On February 23, 2000, we signed a definitive agreement with ten mutual
funds or collective trust funds advised by INVESCO Funds Group, Inc. for a
private placement of 1,500,000 shares of our common stock. The purchase price is
$28.50 per share. The closing is scheduled to occur promptly after the
declaration by the SEC that a registration statement covering the shares is
effective. If the shares are not registered by 105 days following the filing of
the registration statement, the funds have the right to terminate the agreement.
We agreed to pay at closing a commission of 4.5% on the gross proceeds plus a
non-accountable expense allowance of $25,000 to the placement agent. See
"Management's Discussion and Analysis Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
We were incorporated on February 21, 1991, under to the laws of the State
of New Jersey. Our principal executive offices are currently located at 25 Upton
Drive, Wilmington, Massachusetts 01887 (telephone: (978) 657-7500). On March 3,
1994, we formed DUSA Pharmaceuticals New York, Inc., a wholly owned subsidiary
located in Valhalla, New York, to coordinate our research and development
efforts. We have financed our development stage operations primarily from sales
of securities in public offerings, and in private and offshore transactions that
are exempt from registration under the Securities Act of 1933, as amended, (the
"Act"). In January 1999, the Company completed a private placement under
Regulation D of the Act and raised $7.5 million in gross proceeds. See
"Management's Discussion and Analysis of Financial Condition -- Overview; --
Results of Operations; and -- Liquidity and Capital Resources" below.
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BUSINESS STRATEGY
The following are the key elements of our strategy:
- Successfully Launch our First Product. We are working with our
dermatology marketing partner, Schering AG, to begin selling, in the
United States, our first PDT system, the Levulan(R) Kerastick(TM) 20%
Topical Solution with our BLU-U(TM) for the treatment of AKs of the
face and scalp.
- Leveraging our Levulan(R) PDT/PD Platform to Develop Additional
Products. In dermatology, we intend, together with Schering AG, to
co-develop and commercialize additional Levulan(R) products for other
skin conditions. Outside dermatology, we intend to develop new drug
formulations and light devices to target large markets with unmet
medical needs, such as bladder cancer detection, prevention of
restenosis and the detection and/or treatment of a number of
gynecological conditions.
- Enter into Additional Strategic Alliances. When we believe that the
development program for a non-dermatology indication may be beyond our
own resources or may be advanced to market more rapidly with the use of
resources of a corporate partner, we may seek opportunities to license,
market or co-promote our products.
- Use the Results of Independent Researchers to Identify New
Applications. We will continue to support independent investigators'
research so that we have the benefit of human data when we evaluate
potential indications for corporate development. We will also continue
to monitor independent research in order to identify potential new
indications.
- Consider the Addition of Complimentary Products. We intend to evaluate
and pursue licensing and acquisition opportunities for complementary
products which may include drugs, devices, technologies or related
businesses.
PDT/PD OVERVIEW
In general, both photodynamic therapy and photodetection are two-step
processes:
- The first step is the application of a drug known as a
"photosensitizer," which collects in specific cells.
- The second step is activation of the photosensitizer by controlled
exposure to a selective light source.
During this process, energy from the light activates the photosensitizer.
In PDT, the activated photosensitizer transfers energy to oxygen molecules found
in cells, converting the oxygen into a highly energized form known as "singlet
oxygen", which destroys or alters the sensitized cells. In PD, the activated
photosensitizer emits energy in the form of light, making the sensitized cells
fluoresce, or "glow".
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The longer the wavelength of visible light, the deeper into tissue it
penetrates. Different wavelengths, or colors, of light, including red and blue
light, may be used to activate photosensitizers. The selection of the
appropriate color of light for a given indication is primarily based on two
criteria:
- the desired depth of penetration of the light into the target tissue,
and
- the efficiency of the light in activating the photosensitizer.
Blue light does not penetrate deeply into tissues and is better suited for
treating superficial lesions. It is generally a potent activator of
photosensitizers. Red light penetrates more deeply into the skin. Therefore, it
is better suited for treating cancers and deeper tissues, but it is generally
not as strong an activator of photosensitizers. Different photosensitizers do
not absorb all colors of visible light in the same manner. For any given
photosensitizer, some colors are more strongly absorbed than others.
Another consideration in selecting a light source is the location of the
target tissue. Lesions on the skin which are easily accessible can generally be
treated with a non-laser light source. Internal indications, which are often
more difficult to access, may require a laser in order to focus the light into a
small fiber optic delivery system which may be passed through an endoscope or
into a hollow organ.
PDT can be a highly selective treatment that targets specific tissue while
minimizing damage to normal surrounding tissue. It allows for a multiple course
of therapy. The photosensitizer and the light separately have no PDT/PD effect.
The most common side effect of photosensitizers that are taken systemically is
temporary skin sensitivity to bright light. Patients undergoing PDT and PD
treatments are usually advised to avoid direct sunlight and/or to wear
protective clothing during this period. Patients' indoor activities are
unrestricted except that they are told to avoid bright lights. The degree of
selectivity and period of skin photosensitivity varies among different
photosensitizers and is also related to the drug dose given.
OUR LEVULAN(R) PDT/PD PLATFORM
OUR LEVULAN(R) BRAND OF ALA
We have a unique approach to PDT and PD, using the human cell's own natural
processes. Levulan(R) PDT takes advantage of the fact that ALA is the first
product in a natural biosynthetic pathway present in virtually all living human
cells. In normal cells, the production of ALA is tightly regulated through a
feedback inhibition process. In our PDT/PD system, excess ALA, as Levulan(R) is
added from outside the cell, bypassing the normal feedback inhibition. The ALA
is then converted through a number of steps into a potent natural
photosensitizer named protoporphyrin IX, or PpIX. This is the compound that is
activated by light during Levulan(R) PDT/PD, especially in fast growing cells.
Any PpIX that remains after treatment is eliminated naturally by the same enzyme
pathway.
We believe that Levulan(R) is unique among PDT/PD agents. It has the
following features:
- Naturally Occurring. ALA is a naturally occurring substance found in
virtually all human cells.
- Small Molecule. Levulan(R) is a small molecule that is easily absorbed
whether delivered topically, orally, or intravenously.
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- Highly Selective. Levulan(R) is not itself a photosensitizer, but is a
pro-drug that is converted through a cell-based process into the
photosensitizer PpIX. The combination of topical application, tissue
specific uptake and conversion into PpIX and targeted light delivery
make this a highly selective process. Therefore, we can achieve
clinical effects in targeted tissue with minimal effects to normal
surrounding and underlying tissue.
- Controlled Activation. Levulan(R) has no PDT effect without exposure to
light at specific wavelengths, so the therapy is easily controlled.
Scientists believe that the accumulation of PpIX following the application of
Levulan(R) is more pronounced in:
- rapidly growing diseased tissues, such as precancerous and cancerous
lesions,
- conditions characterized by rapidly proliferating inflammatory cells,
such as acne and psoriasis, and
- in certain normally fast-growing tissues, such as hair follicles and
the lining of the uterus.
OUR KERASTICK(TM) BRAND APPLICATOR
We designed our proprietary Kerastick(TM) specifically for use with
Levulan(R). It is a single-use, disposable applicator which allows for the rapid
preparation and uniform application of Levulan(R) topical solution in
standardized doses. The Kerastick(TM) has two separate glass ampules, one
containing Levulan(R) powder and one containing a liquid vehicle, enclosed
within a plastic tube and an outer cardboard sleeve. There is a filter and a
metered dosing tip at one end. Prior to application, the doctor or nurse crushes
and shakes the Kerastick(TM) according to directions to mix the contents into a
solution. The Kerastick(TM) tip is then dabbed on to the individual AK lesions,
releasing a predetermined amount of Levulan(R) 20% solution.
OUR LIGHT SOURCES
Customized light sources are critical to successful Levulan(R) PDT/PD
because the effectiveness of Levulan(R) therapy depends on delivering light at
the appropriate wavelengths and intensities. We intend to continue to develop
integrated drug and light device systems, in which the light sources:
- are compact and tailored to fit specific medical needs;
- are pre-programmed and easy to use; and
- provide cost-effective therapy.
Our proprietary BLU-U(TM) is a fluorescent light source that can treat the
entire face or scalp at one time which has been specifically designed for use
with Levulan(R). The light source is compact and easily portable. It can be used
in a physician's office, requires minimal floor space, and plugs into a standard
electrical outlet. The BLU-U(TM) also incorporates a proprietary regulator that
controls the optical power of the light source to within specified limits. It
has a simple control panel consisting of an on-off key switch and digital timer
which turns off the light automatically at the end of the treatment.
We are using non-laser light sources whenever feasible because, compared to
lasers, they are:
- safer;
- simpler to use;
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- more reliable; and
- far less expensive.
For treatment of AKs, our BLU-U(TM) uses blue light which penetrates
superficial skin lesions and is a potent activator of PpIX. Longer red
wavelengths penetrate more deeply into tissue but are not as potent activators
of PpIX. Therefore, for treatment of superficial lesions of the skin, such as
AKs and acne, we are using relatively low intensity, non-laser blue light
sources, which are designed to treat large areas, such as the entire face or
body. For destruction of hair follicles or treatment of diseases which have
lesions which may penetrate several millimeters into the skin or other tissue,
e.g. for most forms of cancer, high-powered red light is preferable. We have
United States and foreign patents and patent applications pending which relate
to devices and methods of using light devices for use in Levulan(R) PDT and PD.
See "Business -- Patents and Trademarks" below.
We also have an agreement with Richard Wolf Medical Instruments Corp. for
the supply of proprietary non-laser light sources and cystoscopes to be used in
our clinical trial for bladder cancer detection. The Wolf light device was
utilized by the investigators in our Phase I/II clinical trial for bladder
cancer detection. See "Business -- Supply Partners" below.
Our Levulan(R) PDT/PD research and development team has experience in the
development and regulatory approval process of both drugs and devices for use in
clinical PDT/PD.
OUR PRODUCTS
The following table outlines our products and product candidates. Our
research and development expenses for the last three years were $4,194,532 in
1999, $4,502,391 in 1998 and $6,252,830 in 1997.
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PRODUCT/INDICATION REGULATORY STATUS MARKETING RIGHTS(1)
DERMATOLOGY
Levulan(R) Kerastick(TM) and BLU-U(TM) for PDT of AKs Approved; Phase IV - Planned Schering AG
Levulan(R) PDT for Acne Phase I/II(2) Schering AG
Levulan(R) PDT for Facial Photodamaged Skin Phase I/II - Proposed(2) Schering AG
Levulan(R) PDT for Recalcitrant Wart Removal Phase I/II - Proposed(2) Schering AG
Levulan(R) PDT for Onychomycosis (Nail Fungus) Phase I/II - Proposed(2) Schering AG
Levulan(R) PDT for Hair Removal Phase I/II - Proposed(2) Schering AG
Levulan(R) PDT for Psoriasis Investigator Study Schering AG
Levulan(R) PDT for Cutaneous T-Cell Lymphoma Investigator Study Schering AG
OTHER INDICATIONS
Levulan(R) for Bladder Cancer Detection Phase I/II DUSA
Levulan(R) PDT for Prevention of Restenosis Investigator Study DUSA
Levulan(R) PDT for Barrett's Esophagus Investigator Study DUSA
Levulan(R) PDT for Dysfunctional Uterine Bleeding Investigator Study DUSA
Levulan(R) PDT/PD for Cervical Intraepitheleal Neoplasia Investigator Study DUSA
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(1) Draxis Health, Inc., our former parent, holds a license to
PARTEQ's ALA patents for Canada.
(2) Under consideration for co-development with Schering AG.
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DERMATOLOGY INDICATIONS
Actinic Keratoses (AKs). AKs are superficial precancerous skin lesions
usually appearing as rough, scaly patches of skin with some underlying redness.
The current preferred methods of treating AKs are cryotherapy, or the freezing
of skin, using liquid nitrogen, and 5-flourouracil cream, or 5-FU. Although both
methods can be effective, each has limitations and can result in significant
side effects. Cryotherapy is non-selective, is usually painful at the site of
freezing and can cause blistering and loss of skin pigmentation, leaving white
spots. In addition, because there is no standardized treatment protocol, results
are not uniform. 5-FU can be highly irritating and requires twice-a-day
application by the patient for approximately two to four weeks, resulting in
inflammation, redness and erosion or rawness of the skin. Following the
treatment an additional one to two weeks of healing is required.
Our approved treatment method involves applying Levulan(R) 20% topical
solution using the Kerastick(TM) to the AK lesions, followed 14-18 hours later
with exposure to our BLU-U(TM) for approximately 17 minutes. In 1998, we
completed two identical Phase III trials to test the safety and efficacy of our
therapy. Over 240 patients were treated at a total of 16 sites across the U.S.
Each patient had at least four and not more than 15 AKs. We treated patients in
the control group with solution without the active drug. The results showed
clearing (no visual or palpable evidence of the AK) in 83% of the AK lesions
after one treatment with Levulan(R). We repeated treatment of any remaining AK
lesions after eight weeks. At 12 weeks, after one or two treatments, 91% of
lesions had cleared as compared to 25% of the lesions in the control group. The
only adverse medical effect of our treatment was a stinging/burning sensation of
the AK lesions during exposure to our BLU-U(TM). This discomfort subsided
shortly after the light treatment ended. During the next several years, we plan
to carry out two Phase IV trials as required by the FDA; one to evaluate the
long-term effects of our therapy, and the second to test for allergic skin
reactions to our therapy.
Acne. Acne is a common skin condition caused by the blockage and/or
inflammation of sebaceous (oil) glands. In our ongoing clinical trials, we are
targeting patients with mild to moderate facial inflammatory acne. Traditional
treatments for this form of acne include over-the-counter topical medications
for mild cases, and prescription topical medications or oral antibiotics for
mild to moderate cases. An oral retinoid drug called Accutane(R)(1) is the
treatment of choice for cystic acne and can be used for mod erate to severe
inflammatory acne. Over-the-counter treatments are often not effective and can
result in side effects, including drying, flaking and redness. Prescription
antibiotics lead to improvement in many cases, but patients must often take them
on a long-term basis. Accutane(R) can have a variety of side effects, from
dryness of the lips and joint pains, to birth defects, elevated levels of
triglycerides, and liver enzymes. With Levulan(R) PDT therapy for acne, we are
seeking to improve or clear patients' acne without the need for long-term oral
therapy, and with fewer side effects than current therapies.
Based on pre-existing knowledge about ALA activity in sebaceous glands, we
carried out a small study in acne patients in 1994. The preliminary results
showed specific localization and conversion of Levulan(R) to PpIX in the acne
lesions, which suggested that we may be able to treat acne with Levulan(R) PDT.
In 1995, we sponsored a Phase I/II human clinical trial which confirmed the
selective accumulation of PpIX in acne lesions after application of Levulan(R)
in a small number of patients. As a next step, we conducted a Phase I/II
dose-ranging clinical trial using topical Levulan(R) and a proprietary non-laser
red light. We designed the study primarily to test safety and to help guide the
design of Phase II clinical trials. The clinical response was encouraging.
Patients tolerated the treatments well, and no adverse events were reported. In
October 1999, we began a new Phase I/II
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(1) Accutane(R) is a registered trademark of Hoffman La-Roche.
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clinical trial designed to test the safety and efficacy of repeated doses of
Levulan(R) 20% topical solution followed by light exposure using the BLU-U(TM).
Facial Photodamaged Skin. Photodamaged skin, which is skin damaged by the
sun, occurs primarily in fair-skinned individuals after many years of sun
exposure. Signs of photodamaged skin include roughness, wrinkles and brown
spots. AKs also tend to occur in areas of photodamaged skin. There are numerous
consumer cosmetic and herbal products which claim to lessen or relieve the
symptoms of photodamaged skin. In most cases, there is little scientific data to
support these claims. The FDA has approved only one prescription drug to treat
this common skin condition, Renova(R)(2). Patients generally use the product for
between six and 24 weeks before improvement may be seen.
As part of our AK clinical trials, we conducted a Phase II safety and
efficacy study, testing 64 patients with three to seven AK lesions of the face
or scalp within an area of photodamaged skin. The physician investigators
applied Levulan(R) 20% solution over the entire area including the photodamaged
skin. After 14-18 hours, the patients were treated with blue light at differing
light doses. Investigators noticed marked improvement in the roughness of skin
and some degree of improvement of wrinkles and brown spots in two-thirds of the
patients. However, ten of the 64 patients found that the burning and stinging of
the PDT therapy was too uncomfortable and as a result the treatment was either
terminated early or the light power was reduced. No one reported a serious
treatment-related adverse event. Based upon these results, we have proposed two
studies on the treatment of photodamaged skin to Schering AG for this year's
development program.
Recalcitrant Hand and Foot Warts. Warts, which are characterized by
abnormal epidermal skin cell growth, are a common skin condition caused by the
human papilloma virus (HPV). Warts are usually treated first with
over-the-counter salicylic acid preparations. Often, these treatments are
successful. However, in cases where the warts do not clear, patients normally
consult a physician. The physician's next line of therapy is usually cryotherapy
with liquid nitrogen which is applied by the doctor for anywhere from weeks to
months to years in rare cases. This treatment is painful and can occasionally
leave scars. Some dermatologists use lasers to treat warts, although this
process can also take many treatments with no guarantee of success. Often, the
warts still persist despite all attempts at treatment and we refer to them as
recalcitrant warts.
In an independent Danish randomized clinical trial using ALA PDT on 30
patients with 250 warts, the investigator reported, in 1999, that one of the
treatment groups showed a 70% elimination of recalcitrant warts through a 12
month period. Based on these results, we have proposed to Schering AG that we
include development of Levulan(R) PDT for warts in the dermatology
co-development program.
Onychomycosis. This condition is more commonly known as nail fungus.
Current topical therapies are only effective in a small percentage of patients.
Oral prescription medications are more effective but must be taken over 12 weeks
or more, and pose risks of systemic side effects such as liver disease and
adverse interactions with other medications. In an unpublished investigator
study, 12 patients received a single treatment of Levulan(R) to their infected
nail, which was then exposed to a non-laser red light source. Three patients
showed a complete response to the Levulan(R) PDT. They lost their nail after one
week and regrew a new nail which was free of nail fungus. Based on this
investigator study, DUSA and Schering AG are considering co-development of a
therapy for this indication.
Hair Removal. Unwanted hair is a common problem that is experienced
by both men and women of all races and skin colors. Currently, permanent hair
removal involves procedures using electrolysis
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(2) Renova(R) is a registered trademark of Johnson & Johnson.
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or lasers. Electrolysis requires insertion of an electrified needle into each
hair follicle. It requires numerous treatments over extended periods of time
that can have varying degrees of success. Laser treatments do not require a
needle but, instead, heat the hairs by absorption of laser light energy. Laser
treatments work best for individuals with light skin and dark hair, but usually
they do not work as well for individuals with darker skin tones.
We believe that due to the selective properties of Levulan(R) PDT for
targeting rapidly growing cells, such as hair follicle cells, we may be able to
achieve biologically targeted permanent hair removal without the need for
heating or burning the individual hairs. In an independent pilot study performed
by researchers from Massachusetts General Hospital-Harvard Medical School using
a Levulan(R) formulation that we supplied and a laser light source, researchers
achieved hair removal in 12 subjects who were followed for up to six months. In
June 1999, we announced the results of our first Phase I/II clinical study
examining the ability of Levulan(R) PDT to permanently remove human hair. Thirty
patients were enrolled in this study at three clinical trial sites in the United
States. Investigators counted the hairs on a portion of each patient's upper leg
(thigh region) to establish a baseline. These areas were then treated with
Levulan(R) 20% topical solution. Patients then received a dose of light from a
non-laser red light source which we developed, or a dose of red laser light. The
patient's other thigh received only placebo treatment. Patients were followed
for six months after the single Levulan(R) PDT treatment. The study results
showed that when the non-laser light source was used, patients who received the
highest intensity and duration of light showed a reduction in hair count from
the baseline of approximately 10-15% as compared with that seen in the
non-treated control site. Levulan(R) plus laser light delivered at high doses
showed the best result, a 20-24% reduction in hair count as compared with
control sites. Because only 25-28% of the hairs on the thigh are actively
growing at any one time, it appears that Levulan(R) with non-laser light was
able to affect a significant portion of the actively growing hair and Levulan(R)
with laser light appeared to affect essentially all of the actively growing
hair. A majority of patients treated with each type of light source experienced
mild to moderate burning and stinging during light exposure. Hyperpigmentation
or freckling of the skin was also observed in the majority of patients treated
using this protocol. In some cases the freckling remained throughout the 6 month
follow-up. Therefore, we have proposed a new protocol to Schering AG seeking to
reduce the freckling and increase the amount of hair removed.
OTHER INDICATIONS
Bladder Cancer Detection. According to the American Cancer Society, there
will be more than 50,000 new cases of bladder cancer diagnosed this year in the
United States. Bladder cancer is most often treated by surgical removal of the
tumor, but in many of these cases tumors recur within two to three years.
Doctors screen high-risk patients regularly for bladder cancer, because of the
risk of recurrence. One of the standard methods for bladder cancer detection
involves using a cystoscope to view the bladder with white light.
We believe that Levulan(R) PD for bladder cancer may complement current
white light cystoscopy methods, giving urologists an additional tool to help
detect bladder cancer. Two independent European studies of bladder cancer in 82
patients showed the selective accumulation of PpIX in human bladder tumors and
precancerous lesions following ALA application. These tumors and lesions showed
fluorescence when exposed to certain wavelengths of light, allowing the
identification of malignant and precancerous lesions, including lesions which
were missed by routine visual examination using white light. Based upon this
early clinical data, we decided to undertake our own Phase I/II multi-center
clinical trial for enhancement of bladder cancer detection using Levulan(R) PD
and an endoscope light source provided by Richard Wolf Medical Instruments Corp.
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The study was completed in December 1999. Based on preliminary analysis of
the data, we found a total of 109 cancers in 73 patients. Levulan(R) plus blue
light detected 12 cancers which were not identified by any other method. In this
study, areas which appeared normal under white light were also biopsied by the
investigator (random biopsy method). An additional 15 cancers were detected
using this random biopsy method, only one of which was also detected using blue
light and Levulan(R). There were no significant side effects reported
attributable to the Levulan(R) PD procedure. These results suggest that for
optimal detection of bladder cancer, it appears that Levulan(R) and blue light
should be used together with white light cystoscopy and random biopsy. However,
biopsies are not normally carried out during office-based cystoscopies due to
the increased risks of this procedure. We believe, based upon a review of the
clinical trial data with a panel of urology experts, that there may be an
opportunity to develop Levulan(R) PD as an adjunct to white light cystoscopies
for office-based surveillance procedures. We are currently planning the design
of clinical trials with the goal of optimizing this technique. We intend to
begin new trials during late 2000.
Prevention of Restenosis Following Balloon Angioplasty. Restenosis is the
re-narrowing of an artery after balloon angioplasty due to the rapid growth of
smooth muscle cells at the site of the angioplasty. Many patients who undergo
balloon angioplasty suffer restenosis within six months of the procedure.
Current forms of treatment for restenosis involve repeated angioplasty
procedures, stenting or by-pass surgery. Animal studies have shown that
Levulan(R) PDT prevents the rapid growth of smooth muscle cells within the
artery after balloon angioplasty. In October 1999, results were published in the
British Journal of Surgery from an investigator study using Levulan(R) PDT to
reduce restenosis after balloon angioplasty. The investigators studied seven
patients with a total of eight blockages of the femoral (leg) artery. Each of
the patients had undergone conventional balloon angioplasty for blockages in the
femoral artery within the previous two to six months, and all of the patients
had developed restenosis and associated symptoms, including leg pains, calf
pains, and muscle cramps while walking. In the study, patients received oral
doses of Levulan(R) and then underwent a second balloon angioplasty procedure.
After the angioplasty procedure, red laser light was delivered to the site
through the transparent angioplasty balloon. There were no reported
complications from the procedure. All of the patients had symptomatic relief
and, during the six month follow-up period, none of the patients had any
recurrence of symptoms. At the end of the six month period, the investigators
examined all the treated arteries, each of which remained open to some degree.
Testing showed no evidence of restenosis at three sites; 25% restenosis at three
sites; and 40% restenosis at two sites. We are currently assisting with the
design of a randomized controlled investigator study to further evaluate the use
of Levulan(R) PDT in the prevention of restenosis following balloon angioplasty.
This study is expected to begin in 2000.
Barrett's Esophagus. Barrett's esophagus is a potentially precancerous
condition of the esophagus which occurs when the lining of the esophagus
converts to stomach-type tissue in response to chronic exposure to stomach acid.
Over time, the area of the esophagus affected can develop precancerous and
eventually cancerous cells. The condition is often undetected until the disease
reaches later stages. According to the American Cancer Society, patients with
this condition have an increased risk of esophageal cancer which is 50 times
higher than that of the overall population. Esophageal cancer is one of the
deadliest forms of cancer, with five-year survival rates of less than one
percent for late-stage patients.
There are no effective treatments for early-stage Barrett's esophagus.
Doctors treat milder forms of the condition with medication, to reduce stomach
acid. A current treatment for more advanced, pre-cancerous, Barrett's esophagus
involves surgery to remove affected areas of the esophagus.
Since European studies have shown that Barrett's esophagus cells have a
high degree of selectivity for Levulan(R), we intend to continue to support
investigator studies involving the use of Levulan(R) PDT for the treatment of
Barrett's esophagus lesions. We believe that potential damage to
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the muscle wall of the esophagus should not occur with Levulan(R) since PpIX
accumulation has not been observed in the underlying muscle tissue.
Dysfunctional Uterine Bleeding. Dysfunctional uterine bleeding occurs when
the lining of the uterus (the endometrium) responds abnormally to the hormonal
changes associated with menstruation. Treatments for dysfunctional uterine
bleeding include hysterectomy, or removal of the uterus by surgery, or
endometrial ablation, the destruction of the lining of the uterus by surgical or
thermal methods. In endometrial ablation treatments where the uterus is not
removed, incomplete ablation and/or damage to the muscle wall of the uterus can
result. Therefore, we propose to use Levulan(R) PDT as a less invasive and less
costly treatment for dysfunctional uterine bleeding. We have supported research
by independent investigators using Levulan(R) to treat this condition in
clinical studies at centers in the United Kingdom and the United States. These
studies have shown that endometrial tissue selectively absorbs Levulan(R) with
no evidence of toxicity. We believe our product system is a good candidate for
clinical trials because Levulan(R) is selectively absorbed by the lining of the
uterus and activated by light sources which can be inserted into the uterus
without the need to anesthetize the patient. We are currently supporting a pilot
human trial for treatment of dysfunctional uterine bleeding which began in
January 2000.
Cervical Intraepitheleal Neoplasia. Cervical intraepitheleal neoplasia, or
CIN, is a common precancerous condition of the cervix. Doctors use the pap smear
(cervical cytology specimens) to screen for cancerous and precancerous
conditions of the cervix. Each year, millions of pap smear procedures are
performed in the United States. Approximately one-third of the test results
reveal some abnormality of the cervical tissue, and in many of these cases the
results are suspicious but not conclusive and therefore cannot be definitively
diagnosed. We believe that Levulan(R) PD could help doctors to locate and biopsy
the abnormal cervical tissue.
In March 1997, an investigator-sponsored study showed the selectivity of
Levulan(R) PDT/PD for CIN tissue. We are considering supporting a new
investigator-sponsored study to examine the use of Levulan(R) as an adjunct to
pap smears to begin sometime in 2000.
OTHER POTENTIAL INDICATIONS
There may be numerous other potential therapeutic and cancer detection uses
for Levulan(R) PDT/PD, and we may support research in several of these areas, as
appropriate, with pilot trials, and/or investigator-sponsored studies, based on
pre-clinical, clinical, regulatory and marketing criteria we have established
through our strategic planning processes. Some of these potential uses in
dermatology include treatment of skin cancers, such as squamous cell carcinomas
and cutaneous T-cell lymphomas, psoriasis, and genital warts; and
non-dermatology indications may include detection and/or treatment of brain
cancer, gastro-intestinal tumors, and oral cavity cancer.
STRATEGIC PARTNERS
In November 1999, we signed a marketing, development and supply agreement
with Schering AG for the use of our Levulan(R) products to treat or detect
dermatology disorders. Schering AG is a large multi-national pharmaceutical
company which has significant dermatology sales outside the United States. Under
the agreement, we granted to Schering AG the exclusive worldwide right, except
for Canada, to promote, market, sell and distribute our Levulan(R) Kerastick(TM)
with PDT for AKs, and any additional dermatology products developed under the
co-development program. The parties have agreed to jointly fund the dermatology
co-development program for at least two years, with Schering AG contributing
two-thirds of the joint committee-approved budget, while we contribute the
remaining one-third. For the years 2000 and 2001, the parties have committed to
a budget of $4.5 million, subject to
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final agreement on the development program. Schering AG also has limited rights
to negotiate with us for rights to non-dermatology products which we intend to
develop with other corporate partners.
We have already received $15 million, including $8.75 million in cash
milestone payments and $6.25 million for which a Schering AG affiliate received
340,458 shares of our common stock. Schering AG is obligated to pay $8 million
for future research and development support to be used at our discretion and an
additional milestone payment of $7 million within 30 days after the first
commercial sale of the Levulan(R) Kerastick(TM), provided that the FDA has
approved the commercial model of our BLU-U(TM).
Schering AG has indicated that it initially plans to target dermatologists
in the United States using dedicated sales representatives. The launch of
Levulan(R) PDT by Schering AG's United States affiliate, Berlex Laboratories,
Inc., represents our partner's entree into the U.S. dermatology marketplace. We
will be responsible for the manufacture and supply of the Kerastick(TM) to
Schering AG. Schering AG will pay a supply price to us for the drug products, as
well as a royalty on drug sales. Schering AG will also promote the BLU-U(TM)
which we expect to lease directly to dermatologists and other physicians. We
have agreed to maintain and repair the BLU-U(TM) units under lease/maintenance
agreements with the end-users. Under the terms of a guaranty, Schering AG has
agreed to guarantee the lease payments by each lessee up to our cost of the
BLU-U(TM) from our third-party manufacturer. The guaranty will expire on the
second anniversary of the first delivery to an end-user of a BLU-U(TM). In
addition, Schering AG has agreed to provide us with an interest-free line of
credit for up to $1 million to finance inventory of BLU-U(TM) units. Our
repayment of amounts borrowed under the line of credit is secured by the
BLU-U(TM) units. Any amounts we draw on the line of credit must be repaid within
12 months.
The marketing, development and supply agreement terminates on a
product-by-product basis in each country in the territory on the later of (a)
12-1/2 years after the first commercial sale of a respective product in such
country, or (b) the expiration of patents pertaining to the manufacture, sale or
use of such product in such country. It terminates in its entirety upon the
expiration of the agreement with respect to all products in all countries
covered by the agreement. Subject to various terms and conditions, the parties
may terminate the agreement earlier.
SUPPLY PARTNERS
National Biological Corporation. In November 1998, we entered into a
purchase and supply agreement with NBC for the manufacture of some of our light
sources, including the BLU-U(TM). We have agreed to order from NBC all of our
supply needs of these light sources for the United States and Canada and NBC has
agreed to supply us with the quantities we order. If an opportunity arises, the
parties have agreed to negotiate the terms under which NBC would supply us with
light sources for sale in countries other than the current territories.
NBC has granted to us a license to manufacture the light sources if NBC
fails to meet our supply needs. Under these circumstances, we would also have a
worldwide license to import, use, sell or dispose of the light sources under
NBC's technology within the field of PDT. Also, NBC has agreed that it will not
supply light sources that may be used to compete with our business. The
agreement has a ten year term, subject to earlier termination for breach or
insolvency or for convenience. However, a termination for convenience requires
12 months' prior written notice which may not be given before the third
anniversary of the date of the agreement.
We have also entered a co-development agreement with NBC to develop light
devices meeting particular specifications for use in PDT. NBC has the exclusive
right to manufacture and supply these light sources to us, subject to the terms
of the purchase and supply agreement between the parties.
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Richard Wolf Medical Instruments Corp. We entered an agreement with Wolf in
May 1997 for the supply to us, at no cost, of proprietary non-laser light
sources and cystoscopes, along with technical and regulatory support, to be used
in our first Phase I/II clinical trial for bladder cancer detection. The Wolf
light device was utilized by the investigators in the clinical trial. We also
have the right under the agreement to qualify other manufacturers' light sources
and/or cystoscopes with the FDA for use in Levulan(R) PD of bladder cancer.
North Safety Products. In September 1999, we entered into a purchase and
supply agreement with North, a unit of Norcross Safety Products, LLC., for the
manufacture and supply of our Kerastick(TM) brand applicator. We have agreed to
purchase from North a significant portion of our total commercial requirements
for supply of the Kerastick(TM) for sale in the United States and Canada. Prices
for the product are based on the quantities of Kerasticks(TM) ordered which are
subject to change depending on various product costs and competitive market
conditions.
The agreement has a five year term which may be extended. North has the
right to terminate the agreement earlier if certain minimum levels of product
orders are not reached. Similarly, we can terminate for stated breaches of the
agreement.
Sochinaz S.A. Under an agreement dated December 24, 1993, Sochinaz
manufactures and supplies all of our requirements of Levulan(R) worldwide from
its FDA approved facility in Switzerland. The agreement remains in effect for
five years from the receipt of our first drug approval, or until December 3,
2004. While we can obtain alternative supply sources in certain circumstances,
any new supplier would have to be inspected and qualified by the FDA.
LICENSES
PARTEQ Research and Development Innovations. We license the patents
underlying our Levulan(R) PDT/PD systems under a license agreement with PARTEQ
Research and Development Innovations, the licensing arm of Queen's University,
Kingston, Ontario. Under the agreement, we have been granted an exclusive
worldwide license, with a right to sublicense, under PARTEQ patent rights, to
make, have made, use and sell products which are precursors of PpIX, including
ALA. The agreement covers certain use patent rights. It also includes any
improvements discovered, developed or acquired by or for PARTEQ, or Queen's
University, to which PARTEQ has the right to grant a license. A non-exclusive
right is reserved to Queen's University to use the subject matter of the
agreement for non-commercial educational and research purposes. A right is
reserved to the Department of National Defense Canada to use the licensed rights
for defense purposes including defense procurement but excluding sales to third
parties.
When we are selling our products directly, we have agreed to pay to PARTEQ
royalties of 6% and 4% on 66% of the net selling price in countries where patent
rights do and do not exist, respectively. In cases where we have a sublicensee,
such as Schering AG, we will pay 6% and 4% when patent rights do and do not
exist, respectively, on our net selling price less the cost of goods for
products sold to the sublicensee, and 6% of royalty payments we receive on sales
of products by the sublicensee. We are also obligated to pay 5% of any lump sum
sublicense fees paid to us, such as milestone payments, excluding amounts
designated by the sublicensee for future research and development efforts. The
agreement is effective for the life of the latest United States patents and
becomes perpetual and royalty-free when no United States patent subsists. See
Note 9a. to the Company's Notes to the Consolidated Financial Statements. We
have the right to terminate the PARTEQ agreement with or without cause upon 90
days notice.
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We paid a minimum royalty of CDN $100,000 to PARTEQ during 1998. Following
the receipt of FDA approval in December 1999, we paid PARTEQ a milestone payment
of CDN $100,000 and, a prorated annual minimum royalty payment on sales of
products which totaled CDN $3,836. From now on, annual minimum royalties to
PARTEQ on sales of products must total at least CDN $100,000. Now that we have
entered into the agreement with Schering AG, we are also obligated to pay to
PARTEQ additional minimum payments in amounts up to CDN $1.1 million of which
CDN $632,056 has been paid, including a credit for the CDN $100,000 paid in
1998, based upon the milestone payments we received from Schering AG. The CDN
$1.1 million is credited in full against our obligation to pay 5% of the lump
sums we received from Schering AG (other than for future research and
development).
Together with PARTEQ and Draxis Health, Inc., our former parent, we entered
into an agreement (the "ALA Assignment Agreement") effective October 7, 1991.
According to the terms of this agreement we assigned to Draxis our rights and
obligations under the license agreement to the extent they relate to Canada. In
addition, we have agreed to disclose to Draxis on an ongoing basis, any
technology which is available to us relating to the subject matter of the
license agreement which would assist Draxis in developing the Canadian market
under the assigned rights. Draxis is responsible for royalties which would
otherwise be payable by us in accordance with the license agreement for net
Canadian sales of products and sublicensing revenues. Draxis has also agreed to
pay us a royalty of two percent of net Canadian sales of products.
Other License. We acquired a license from a British technology firm in
April 1997 to develop and market an incoherent, or non-laser, light source which
is a candidate for use in our dysfunctional uterine bleeding, bladder cancer
detection and/or other clinical programs. On February 24, 2000, we were served
with legal papers relating to a lawsuit filed by Photo Therapeutics Limited in
the British High Court of Justice - Chancery Division, Claim No.: HC 2000 00
777. Photo Therapeutics is the assignee of the license agreement. The agreement
dated April 8, 1997 grants us exclusive rights in North, Central and South
American countries and non-exclusive rights in numerous European countries to
develop, manufacture, market and sell a patented light device and improvements
to the device. We paid a fee of Pound sterling 10,000 ($16,421) upon execution,
and will pay royalties on sales ranging from 1.25% to 5% depending on the patent
status and territory in which sales may occur. The lawsuit alleges that we
breached the agreement by failing to use our best endeavors to develop the
device. Photo Therapeutics is seeking unspecified damages, return of the
technology and information relating to the device and a declaration that the
agreement has been terminated. We are reviewing the complaint and while we
believe we have meritorious defenses, we cannot determine the outcome at this
early stage of the litigation. We do not believe that this matter will have a
material adverse effect on our business, results of operations or financial
condition.
OTHER RELATIONSHIPS
We have entered into various agreements in the ordinary course of business,
described in general below, in order to implement our research and development
program and to investigate potential new uses for Levulan(R) PDT and PD.
Progress of our research and development program could be delayed if the terms
of the agreements are not fulfilled by third parties.
Consultants. We maintain a consulting relationship with Guidelines, Inc.
("Guidelines") for the purpose of carrying out, among other responsibilities,
preclinical and formulations supervision, clinical trial development, and
assistance with the NDA filing and review process. We pay retainer fees to
Guidelines at a rate of $360,000 per year. Also, we pay additional consulting
fees to Guidelines if consulting services to us exceeds 2,600 hours annually.
Guidelines has been granted options to purchase up to 20,000 shares of our
common stock. If for any reason these services are terminated, we believe that
we could contract with other firms to perform the services provided by
Guidelines. However, there
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is no guarantee that we could replace Guidelines without causing a delay to our
clinical programs and without an increase in costs.
In February, 1999 we entered an equipment lease with Lumenetics, Inc., our
former light device consultants, whose principals became DUSA employees during
May, 1998. The equipment lease provides us with an option to acquire the
equipment and to apply the lease payments to the purchase price.
Contemporaneously with the signing of the equipment lease, the parties agreed to
terminate our payment obligations under the parties' consulting and development
agreement dated October 1997. See Note 9f. to the Company's Notes to
Consolidated Financial Statements.
Unrestricted Grants. We have awarded unrestricted grants to various
investigators in the field of Levulan(R) PDT in certain areas in which we have
an interest. These studies range from animal model work to pilot human studies
under "investigator INDs" in various clinical indications. These grants are
awarded and evaluated on an annual basis and, although renewable, are considered
on a case-by-case basis.
Preclinical Research Contracts. We have preclinical research contracts with
several universities to carry out animal studies in areas relevant to the
clinical development of Levulan(R) PDT. Toxicological studies required for drug
development work are carried out using contract research organizations.
Clinical Trials. DUSA-sponsored clinical studies are supported by
contracts with clinical trial sites including universities, hospitals and
private practitioners.
PATENTS AND TRADEMARKS
We actively seek, when appropriate, to protect our products and proprietary
information through United States and foreign patents, trademarks and
contractual arrangements. In addition, we rely on trade secrets and contractual
arrangements to protect certain of our proprietary information and products.
Our ability to compete successfully depends, in part, on our ability to
defend our patents that have issued, obtain new patents, protect trade secrets
and operate without infringing the proprietary rights of others. We have no
product patent protection for the compound ALA itself, as our basic patents are
for methods of detecting and treating various diseased tissues using ALA or
related compounds called precursors, in combination with light. Even where we
have patent protection, there is no guarantee that we will be able to enforce
our patents. Patent litigation is expensive, and we may not be able to afford
the costs. We own or exclusively license patents and patent applications related
to the following:
- unique physical forms of ALA;
- methods of using ALA and its unique physical forms in combination with
light; and
- compositions and apparatus for those methods.
These patents expire no earlier than 2009, and certain patents are entitled
to terms beyond that date.
We entered into a license agreement effective August 27, 1991 with PARTEQ
Research & Development Innovations, the licensing arm of Queen's University at
Kingston, Ontario, and Draxis Health, Inc. Under this agreement, we hold an
exclusive worldwide license to certain patent rights from PARTEQ in the United
States and a limited number of foreign countries.
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All United States patents and patent applications licensed from PARTEQ
relating to ALA are method of treatment patents. Method of treatment patents
limit direct infringement to users of the methods of treatment covered by the
patents. We currently have patents and/or pending patent applications in the
United States and in a number of foreign countries covering unique physical
forms of ALA, compositions containing ALA, as well as ALA applicators, light
sources for use with ALA, and other technology. We cannot guaranty that any
pending patent applications will mature into issued patents.
We have limited patent protection outside the United States which may make
it easier for third-parties to compete there. Our basic method of treatment
patents and applications have counter-parts in only four foreign countries. Even
with the issuance of additional patents, other parties are free to develop other
uses of ALA, including medical uses, and to market ALA for such uses, assuming
that they have obtained appropriate regulatory marketing approvals. Certain
forms of ALA are commercially available chemical products. ALA in the form
commercially supplied for decades is not itself subject to patent protection. In
fact, there are reports of several third-parties conducting clinical studies
with ALA for the treatment of certain conditions in countries outside the United
States of America where PARTEQ may not have patent protection Additionally,
enforcement of a given patent may not be practicable or an economically viable
alternative.
We can give no assurance that a third-party or parties will not claim (with
or without merit) that we have infringed or misappropriated their proprietary
rights. A number of entities have obtained, and are attempting to obtain patent
protection for various uses of ALA. We can give no assurances as to whether any
issued patents, or patents that may later issue to third-parties, may affect the
uses on which we are working or whether such patents can be avoided, invalidated
or licensed if they cannot be avoided or invalidated. If any third-party were to
assert a claim for infringement, we can give no assurances that we would be
successful in the litigation or that such litigation would not have a material
adverse effect on our business, financial condition and results of operation.
Furthermore, we may not be able to afford the expense of defending against such
a claim.
Thermolase Corporation has patents that may affect our ability to
commercialize the use of ALA for hair removal. We are aware that Thermolase has
nine related issued United States patents some of which claim methods for
removing or inhibiting the growth of hair. We do not know whether any of these
patents cover our plans to market hair removal using ALA because we have not
developed a final formulation or method of removing hair with ALA and light. If,
after finalizing our formulation and method, we find that these patents do cover
our planned use of ALA, Thermolase may either prevent us from using our system
or they may require us to obtain a license for a fee.
Except for the opposition of Japanese Patent No. 273032, which we license
from PARTEQ, we are not aware of any formal challenges to the validity of
PARTEQ's or our patents. However, we cannot guarantee that other challenges or
claims will not be asserted in the future. Japanese Patent No. 273032, which
relates to the basic method of using ALA, has recently been opposed and, as a
result, the Japanese Patent Office Board of Appeals issued a "Notice of Reasons
for Cancellation," which we received on February 12, 1999. With PARTEQ's
assistance, we prepared and filed our response to this action. We can at this
time give no assurance of the likelihood of success of such a contest or any
assurance that we will decide to spend the funds required to complete the
contest. If our response does not allay the concerns of the Board, they may
limit our patent protection or finalize the cancellation. Japan is a major
pharmaceutical market and loss of this patent could adversely affect us in at
least two ways. First, if we seek to enter the Japanese market, the lack of a
patent would probably retard or diminish our market share. Second, even if we
did not seek to market in Japan, third-parties might not be interested in
licensing the product in Japan without patent protection, and this might affect
our revenues.
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In addition, we cannot guarantee that our patents, whether owned or
licensed, or any future patents that may issue, will prevent other companies
from developing similar or functionally equivalent products. Further, we cannot
guarantee that we will continue to develop our own patentable technologies or
that our products or methods will not infringe upon the patents of
third-parties. In addition, we cannot guarantee that any of the patents that may
be issued to us will effectively protect our technology or provide a competitive
advantage for our products or will not be challenged, invalidated, or
circumvented in the future.
We also attempt to protect our proprietary information as trade secrets.
Generally agreements with each employee, licensing partner, consultant,
university, pharmaceutical company and agent contain provisions designed to
protect the confidentiality of our proprietary information. However, we can give
no assurances that these agreements will provide effective protection for its
proprietary information in the event of unauthorized use or disclosure of such
information. Furthermore, we can give no assurances that our competitors will
not independently develop substantially equivalent proprietary information or
otherwise gain access to our proprietary information, or that we can
meaningfully protect our rights in unpatentable proprietary information.
Even in the absence of composition of matter patent protection for ALA, we
may receive financial benefits from: (i) patents relating to the use of such
product (like PARTEQ's patents); (ii) patents relating to special compositions
and formulations; and (iii) limited marketing exclusivity that may be available
as a patent term extension under the Hatch/Waxman Act and any counterpart
protection available in foreign countries. See "Business -- Government
Regulation." Effective patent protection also depends on many other factors such
as the nature of the market and the position of the product in it, the growth of
the market, the complexities and economics of the process for manufacture of the
active ingredient of the product and the requirements of the new drug provisions
of the Food, Drug and Cosmetic Act, or similar laws and regulations in other
countries.
We intend to seek registration of trademarks in the United States, and
other countries where we may market our products when it is sufficiently close
to commercialization so that appropriate brand names may be selected in light of
the circumstances then existing. To date, we have been issued four trademark
registrations, and other applications are pending.
MANUFACTURING
We do not currently operate any manufacturing facilities. Our drug,
Levulan(R), the Kerastick(TM) brand applicator and the BLU-U(TM) brand light
source are each manufactured by a single third-party supplier. See "Business --
Supply Partners". Under our agreement with Schering AG, we are obligated to
maintain certain inventory levels of our Levulan(R) products until we qualify a
second source of supply for ALA. We have purchased key pieces of equipment to
prepare for the establishment of a limited production line so that a second
source could manufacture the Kerastick(TM).
MARKETING AND SALES
Under our agreement with Schering AG, marketing and sales of Levulan(R) PDT
products for use in dermatology in the United States will be the responsibility
of Schering AG's affiliate, Berlex Laboratories, Inc. Following receipt of
marketing approval in the United States, Schering AG must select the country,
countries or key territories in which it intends to seek regulatory approval and
to sell our products on a product-by-product basis. If Schering AG elects not to
market a product in a specific territory or country, we regain the right to
market the product. We retain the rights to market and sell all future products
for non-dermatology indications. Subject to Schering AG's limited right to
negotiate,
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we can enter into marketing, co-promotional, distribution or similar type
agreements with corporate partners for our non-dermatology indications.
Draxis has been granted the rights to market Levulan(R) PDT in Canada. See
"Business -- Licenses."
COMPETITION
Commercial development of PDT agents other than Levulan(R) are currently
being pursued by a number of companies. These include: QLT PhotoTherapeutics
Inc. (Canada); Miravant, Inc. (U.S.); Pharmacyclics, Inc. (U.S.); Scotia
Pharmaceuticals (United Kingdom); and Photogen Technologies, Inc. (U.S.). We are
also aware of several overseas companies doing research with ALA, including:
medac GmbH (Germany) which is 25% owned by Schering AG; ESC Medical Systems Ltd.
(Israel); and Photocure (Norway).
Photocure is also conducting late-stage clinical trials using ALA PDT for
dermatological uses. We are aware that medac is developing ALA PDT for bladder
cancer detection in Germany and may receive regulatory approval in Germany prior
to the time that we could receive approval from the FDA. We believe that our
United States patents may be infringed if medac sells its products in the United
States.
We also know from published reports that an Israeli firm, ESC Medical
Systems Ltd., has entered into a worldwide distribution and supply agreement for
a medical grade of ALA (ALA Fine(TM)) for PDT applications. ESC has indicated
that it has used ALA Fine(TM) and its Versalight(R) to treat skin cancer in over
1,000 patients. These products are not available in the United States and we
believe that the PARTEQ patents would be infringed if the ESC products were
made, used or sold in the United States. However, these ESC products could
compete with some of our products, if approved by health regulatory authorities
outside of the United States or other countries covered by PARTEQ patents.
Our position in the PDT field could be adversely affected by product
developments achieved by other companies. The pharmaceutical industry is highly
competitive. Many of our competitors have substantially greater financial and
technical and marketing resources than we have. In addition, several of these
companies have had significantly greater experience than we do in developing
products, conducting preclinical and clinical testing and obtaining regulatory
approvals to market products for health care. Our competitors may succeed in
developing products that are safer or more effective than ours and in obtaining
regulatory marketing approval of future products before we do. Our
competitiveness may also be affected by our ability to manufacture and market
our products.
We believe that comparisons of the properties of various photosensitizing
PDT drugs will also provide important competitive issues. We expect that our
principal methods of competition with other PDT companies will be based upon
such factors as the ease of administration of our photodynamic therapy; the
degree of generalized skin sensitivity to light; the number of required doses;
the selectivity of our drug for the target lesion or tissue of interest; and the
type and cost of our light systems. New drugs or future developments in PDT or
in other drug technologies may provide therapeutic or cost advantages for
competitive products. No assurance can be given that developments by other
parties will not render our products uncompetitive or obsolete.
GOVERNMENT REGULATION
The manufacture and sale of pharmaceuticals and medical devices in the
United States are governed by a variety of statutes and regulations. These laws
require, among other things:
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- approval of manufacturing facilities, including adherence to current
good manufacturing, laboratory and clinical practices during production
and storage known as cGMPs, GLPs and GCPs respectively;
- controlled research and testing of products;
- applications for marketing approval containing manufacturing,
preclinical and clinical data to establish the safety and efficacy of
the product; and
- control of marketing activities, including advertising and labeling.
The marketing of pharmaceutical products requires the approval of the FDA
in the United States, and similar agencies in other countries. The FDA has
established regulations and safety standards, which apply to the preclinical
evaluation, clinical testing, manufacture and marketing of pharmaceutical
products. The process of obtaining marketing approval for a new drug normally
takes several years and often involves significant costs. The steps required
before a new drug can be produced and marketed for human use in the United
States include:
- preclinical studies,
- the filing of an Investigational New Drug, or IND, application;
- human clinical trials; and
- the approval of a New Drug Application, or NDA.
Preclinical studies are conducted in the laboratory and on animals to
obtain preliminary information on a drug's efficacy and safety. The time
required for conducting preclinical studies varies greatly depending on the
nature of the drug, and the nature and outcome of the studies. Such studies can
take many years to complete. The results of these studies are submitted to the
FDA as part of the IND application. Human testing can begin if the FDA does not
object to the IND application.
The human clinical testing program involves three phases. Each clinical
study typically is conducted under the auspices of an Institutional Review Board
or IRB at the institution where the study will be conducted. An IRB will
consider among other things, ethical factors, the safety of human subjects and
the possible liability of the institution. A clinical plan, or "protocol", must
be submitted to the FDA prior to commencement of each clinical trial. All
patients involved in the clinical trial must provide informed consent prior to
their participation. The FDA may order the temporary or permanent discontinuance
of a clinical trial at any time for a variety of reasons, particularly if safety
concerns exist. These clinical studies must be conducted in conformance with the
FDA's bioresearch monitoring regulations.
In Phase I, studies are usually conducted on a small number of healthy
human volunteers to determine the maximum tolerated dose and any product-related
side effects of a product. Phase I studies generally require several months to
complete, but can take longer, depending on the drug and the nature of the
study. Phase II studies are conducted on a small number of patients having a
specific disease to determine the most effective doses and schedules of
administration. Phase II studies generally require from several months to two
years to complete, but can take longer, depending on the drug and the nature of
the study. Phase III involves wide scale studies on patients with the same
disease in order to provide
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comparisons with currently available therapies. Phase III studies generally
require from six months to four years to complete, but can take longer,
depending on the drug and the nature of the study.
Data from Phase I, II and III trials are submitted to the FDA with the NDA.
The NDA involves considerable data collection, verification and analysis, as
well as the preparation of summaries of the manufacturing and testing processes
and preclinical and clinical trials. Submission of an NDA does not assure FDA
approval for marketing. The application review process generally takes one to
three years to complete, although reviews of treatments for AIDS, cancer and
other life-threatening diseases may be accelerated, expedited or subject to fast
track treatment. The process may take substantially longer if, among other
things, the FDA has questions or concerns about the safety and/or efficacy of a
product. In general, the FDA requires properly conducted, adequate and
well-controlled clinical studies demonstrating safety and efficacy with
sufficient levels of statistical assurance. However, additional information may
be required. For example, the FDA also may request long-term toxicity studies or
other studies relating to product safety or efficacy. Even with the submission
of such data, the FDA may decide that the application does not satisfy its
regulatory criteria for approval and may disapprove the NDA. Finally, the FDA
may require additional clinical tests following NDA approval to confirm safety
and efficacy, often referred to as Phase IV clinical trials.
Upon approval, a prescription drug may only be marketed for the approved
indications in the approved dosage forms and at the approved dosage with the
approved labeling. Adverse experiences with the product must be reported to the
FDA. In addition, the FDA may impose restrictions on the use of the drug that
may be difficult and expensive to administer. Product approvals may be withdrawn
if compliance with regulatory requirements is not maintained or if problems
occur or are discovered after the product reaches the market. After a product is
approved for a given indication, subsequent new indications, dosage forms, or
dosage levels for the same product are reviewed by the FDA via the filing and
upon approval of a supplemental NDA. The supplement deals primarily with safety
and effectiveness data related to the new indication or dosage. Finally, the FDA
requires reporting of certain safety and other information, often referred to as
"adverse events" that become known to a manufacturer of an approved drug. If an
active ingredient of a drug product has been previously approved, there may be
other types of drug applications that can be filed that may be less
time-consuming and costly.
On December 3, 1999, the FDA approved the marketing of our Levulan(R)
Kerastick(TM) 20% Topical Solution with PDT for treatment of AKs of the face and
scalp.
We are currently conducting Phase I/II studies on the use of ALA for
bladder cancer detection and treatment of acne. Other than the FDA-approved use
of Levulan(R) Kerastick(TM) with PDT for treatment of AKs, our other products
still require significant development, including additional preclinical and
clinical testing, and regulatory marketing approval prior to commercialization.
The process of obtaining required approvals can be costly and time consuming and
there can be no guarantee that the use of Levulan(R) in any future products will
be successfully developed, prove to be safe and effective in clinical trials, or
receive applicable regulatory marketing approvals. Medical devices, such as our
light source devices, are also subject to the FDA's rules and regulations. These
products are required to be tested, developed, manufactured and distributed in
accordance with FDA regulations, including good manufacturing, laboratory and
clinical practices. Under the Food, Drug & Cosmetic Act, all medical devices are
classified as Class I, II or III devices. The classification of a device affects
the degree and extent of the FDA's regulatory requirements, with Class III
devices subject to the most stringent requirements and FDA review. Generally,
Class I devices are subject to general controls (e.g., labeling and adherence to
the cGMP requirement for medical devices), and Class II devices are subject to
general controls and special controls (e.g., performance standards, postmarket
surveillance, patient registries and FDA guidelines). Class III devices, which
typically are life-sustaining or life-supporting and implantable devices, or new
devices that have been found not to be substantially equivalent to a
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legally marketed Class I or Class II "predicate device", are subject to general
controls and also require clinical testing to assure safety and effectiveness
before FDA approval is obtained. The FDA also has the authority to require
clinical testing of Class I and II devices. The BLU-U(TM) has been classified as
a Class III device. We anticipate that our other devices will also be classified
as Class III and be subject to the highest level of FDA regulation. Approval of
Class III devices require the filing of a PMA application supported by extensive
data, including preclinical and clinical trial data, to demonstrate the safety
and effectiveness of the device. If human clinical trials of a device are
required and the device presents a "significant risk", the manufacturer of the
device must file an investigational device exemption or "IDE" application and
receive FDA approval prior to commencing human clinical trials. At present, our
devices are being studied in preclinical and clinical trials under our INDs.
Following receipt of the PMA application, if the FDA determines that the
application is sufficiently complete to permit a substantive review, the agency
will "file it". Once the submission is filed, the FDA begins a review of the PMA
application. Under the Food, Drug and Cosmetics Act, the FDA has 180 days to
review a PMA application. The review of PMA applications more often occur over a
significantly protracted time period, and the FDA may take up to two years or
more from the date of filing to complete its review.
The PMA process can be expensive, uncertain and lengthy. A number of
devices other companies have sought premarket approval have never been approved
for marketing. The review time is often significantly extended by the FDA, which
may require more information or clarification of information already provided in
the submission. During the review period, an advisory committee likely will be
convened to review and evaluate the PMA application and provide recommendations
to the FDA as to whether the device should be approved for marketing. In
addition, the FDA will inspect the manufacturing facility to ensure compliance
with cGMP requirements for medical devices prior to approval of the PMA
application. If granted, the premarket approval may include significant
limitations on the indicated uses for which the product may be marketed, and the
agency may require post-marketing studies of the device.
Medical products containing a combination of drugs, including biologic
drugs, or devices may be regulated as "combination products" in the United
States. A combination product generally is defined as a product comprised of
components from two or more regulatory categories (drug/device, device/biologic,
drug/biologic, etc.) Each component of a combination product is subject to the
requirements established by the FDA for that type of component, whether a drug,
including a biologic drug, or device. Currently, PDT/PD treatments are defined
as drug/device combination products. The main responsibility for review of PDT
products (drugs and devices) is under the jurisdiction of the FDA's drug center,
the Center for Drug Evaluation and Research, with support from the Center for
Devices and Radiological Health. The FDA has not formally established the degree
and extent of the regulatory requirements for the various components of PDT/PD.
In connection with our NDA for the Levulan(R) Kerastick(TM) with PDT for
AKs, a combination filing (including a PMA for the BLU-U(TM) light source device
and the NDA for the Levulan(R) Kerastick(TM)) was submitted to the Center for
Drug Evaluation and Research. The PMA was then separated from the NDA submission
by the FDA and reviewed by the FDA's Center for Devices and Radiological Health.
Based upon this experience, we anticipate that any future NDAs for Levulan(R)
PDT/PD will be a combination filing accompanied by PMAs. There is no guarantee
that PDT products will continue to be regulated as combination products.
The BLU-U(TM) PMA, which covered the devices used in the AK clinical trials
was approved by the FDA on December 3, 1999. The commercial light device unit we
intend to market is a modified version of the BLU-U(TM) units used in the
clinical studies. We are in the process of preparing a
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supplement to the PMA covering these modifications, and intend to file the
supplement during the first quarter of 2000. The FDA has six months to review
the PMA supplement which must be approved before we can market the commercial
units of the BLU-U(TM). While we believe that the changes to the BLU-U(TM) do
not affect its performance and we expect the FDA to approve the PMA supplement
application, the FDA may request additional information or may decide not to
approve the supplement.
The United States Drug Price Competition and Patent Term Restoration Act of
1984 known as the Hatch-Waxman Act provides for the return of up to five-years
of patent term for a patent that covers a new product or its use, to compensate
for time lost during the regulatory review process. The application for patent
term extension is subject to approval by the U.S. Patent and Trademark Office in
conjunction with the FDA. It takes at least six months to obtain approval of the
application for patent term extension, and there can be no guarantee that the
application will be granted. We believe that the FDA's December 3, 1999 approval
of our NDA for the Levulan(R) Kerastick(TM) with PDT is the first marketing
approval for a medical use of ALA. We therefore believe that this approval may
form the basis for extending the term of one of our patents. However, there can
be no assurance that we will receive a patent term extension.
The Hatch-Waxman Act also establishes a five-year period of marketing
exclusivity from the date of NDA approval for new chemical entities approved
after September 24, 1984. Levulan(R) is a new chemical entity and market
exclusivity will expire on December 3, 2004. During this Hatch-Waxman marketing
exclusivity period, no third-party may submit an "abbreviated NDA" or "paper
NDA" to the FDA.
Finally, any abbreviated or paper NDA applicant will be subject to the
notification provisions of the Hatch-Waxman Act, which should facilitate our
notification about potential infringement of our patent rights. The abbreviated
or paper NDA applicant must notify the NDA holder and the owner of any patent
applicable to the abbreviated or paper NDA product, of the application and
intent to market the drug that is the subject of the NDA.
We also intend market our products marketed outside of the United States.
Prior to marketing a product in other countries, approval by that nation's
regulatory authorities must be obtained. Our marketing partner, Schering AG,
will be responsible for applying for marketing approvals outside the United
States for Levulan(R) PDT for dermatology uses. Generally, we try to design our
protocols for clinical studies so that the results can be used in all the
countries where we hope to market the product. However, countries sometimes
require additional studies to be conducted on patients located in their country.
With the enactment of the Drug Export Amendments Act of the United States
in 1986, products not yet approved in the United States may be exported to
certain foreign markets if the product is approved by the importing nation and
approved for export by the United States government. We can give you no
assurance that we will be able to get approval for any of our potential products
from any importing nations' regulatory authorities or be able to participate in
the foreign pharmaceutical market.
Our research and development activities involve the controlled use of
certain hazardous materials, such as mercury in fluorescent tubes. While we do
not currently manufacture any products, we are subject to various laws and
regulations governing the use, manufacture, storage, handling and disposal of
hazardous materials and certain waste products. We believe that we are in
material compliance with applicable environmental laws and regulations. For the
present, we do not have any plans to make any material capital expenditures for
environmental control facilities. However, we can give you no assurance that we
will not have to make significant expenditures in order to comply with
environmental laws and regulations in the future. Also, we cannot assure you
that our operations, business or assets will
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not be materially adversely effected by current or future environmental laws or
regulations. In addition, although we believe that our safety procedures for the
handling and disposal of such materials comply with the standards prescribed by
current environmental laws and regulations, the risk of accidental contamination
or injury from these materials cannot be completely eliminated. In the event of
such an accident, we could be held liable for any damages that result, and any
such liability could exceed our resources.
PRODUCT LIABILITY AND INSURANCE
We are subject to the inherent business risk of product liability claims in
the event that the use of our technology or any prospective product is alleged
to have resulted in adverse effects during testing or following marketing
approval of any such product for commercial sale. We maintain product liability
insurance for coverage of our clinical trial activities. We are in the process
of obtaining coverage for our commercial supplies. There can be no assurance
that such insurance will continue to be available on commercially reasonable
terms or that it will provide adequate coverage against all potential claims.
EMPLOYEES
We have 24 full-time employees. We have employment agreements with our four
key executive officers. We have purchased, and are the named beneficiary of, a
key man life insurance policy, having a face value of CDN. $2,000,000, on the
life of our President. We also retained numerous independent consultants and the
services of key researchers at leading university centers whose activities are
coordinated by our employees. We intend to hire other employees and consultants
as needed. See "Business -- Other Relationships: Consultants."
RISK FACTORS
This section of our Annual Report on Form 10-K contains forward-looking
statements that involve risks and uncertainties, such as statements of our
plans, objectives, expectations and intentions. We use words such as
"anticipate", "believe", "expect", future" and "intend" and similar expressions
to identify forward-looking statements. Our actual results could differ
materially from those anticipated in these forward-looking statements for many
reasons, including the factors described below and elsewhere in this Annual
Report. You should not place undue reliance on these forward-looking statements,
which apply only as of the date of this Annual Report.
The following are among the risk factors we face related to our business,
assets and operations. They are not the only ones we face. Additional risks and
uncertainties that we are not aware of or that we currently deem immaterial also
may impair our business. If any of the following risks actually occur, our
business, financial condition and operating results could be materially
adversely affected.
RISKS RELATED TO DUSA
WE ARE NOT CURRENTLY PROFITABLE AND MAY NOT BE PROFITABLE IN THE FUTURE UNLESS
WE CAN SUCCESSFULLY MARKET AND SELL OUR FIRST PRODUCT, THE LEVULAN(R)
KERASTICK(TM) WITH PDT FOR THE TREATMENT OF AKS.
WE NEED APPROVAL FROM THE FDA FOR OUR COMMERCIAL LIGHT SOURCE, THE
BLU-U(TM), BEFORE WE CAN BEGIN MARKETING OUR FIRST PRODUCT, THE LEVULAN(R)
KERASTICK(TM), AND WE MAY NOT RECEIVE IT IN TIME FOR OUR PLANNED PRODUCT
LAUNCH IN THE SECOND QUARTER OF 2000.
The FDA has approved our first drug product, Levulan(R) Kerastick(TM) 20%
Topical Solution with PDT for AKs of the face and scalp. The FDA has also
approved the clinical trial version of our light
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device, the BLU-U(TM). The FDA must still approve the commercial version of
our light device, the BLU-U(TM), before we can market it. Without this
additional approval, the Levulan(R) Kerastick(TM) cannot be widely marketed or
used by physicians since the therapy combines use of Levulan(R) with exposure to
the BLU-U(TM). We must file a supplement with the FDA so that the FDA may
examine the differences between our approved clinical version and our proposed
commercial version of the BLU-U(TM). We expect that our pre-market approval, or
PMA, supplement will be filed shortly. While we believe the modifications we are
making to our device do not affect its performance and FDA review should take
approximately two to three months, FDA regulations give the agency up to six
months to review a supplement. The agency also will inspect our Wilmington,
Massachusetts facility before giving its approval. The FDA also may choose to
reinspect our third-party manufacturer. We would incur additional expenses if
either of these facilities fail to pass inspection. The FDA may also request
additional testing information and can extend the time for review of the PMA
supplement. The launch of Levulan(R) Kerastick(TM) with PDT for AKs will be
delayed if we do not receive approval of our PMA supplement from the FDA or if
our facilities do not pass FDA inspection before the planned product launch
during the second quarter of 2000. Schering AG may choose to delay the launch
until the Fall of 2000 if product supplies are not available by the middle of
the second quarter. A delay in the launch will delay our receipt of royalties
and supply prices from sales of our product. We may not receive approval of the
BLU-U(TM).
BECAUSE NEITHER WE NOR SCHERING AG, OUR MARKETING PARTNER FOR DERMATOLOGY
PRODUCTS, HAS ANY EXPERIENCE MARKETING OR SELLING DERMATOLOGY PRODUCTS IN
THE UNITED STATES, OUR REVENUES FROM ROYALTIES AND PRODUCT SALES MAY BE
LIMITED.
The commercial success of Levulan(R) Kerastick(TM) with PDT for AKs of the
face and scalp will partly depend on the scope of the launch into the United
States market through promotional activities, a knowledgeable sales force and
adequate market penetration. The United States market introduction of Levulan(R)
Kerastick(TM) with PDT for AKs will be undertaken by Schering AG through its
affiliate, Berlex Laboratories, Inc. While Schering AG has experience marketing
dermatology products in Europe, neither Schering AG, Berlex nor DUSA has any
experience marketing dermatology products in the United States. Schering AG has
not agreed to hire specific numbers of sales representatives or committed to any
particular budget for the launch. Additionally, our competitors in the AK market
already have experienced, well-funded, marketing and sales operations in the
United States. If Schering AG fails to adequately fund the launch of our product
or fails to adequately develop, train and manage a sales force, the demand for
our product will be limited and our royalties from Schering AG on sales of the
product, our income from light device rentals, and our revenue on supply fees on
the Kerastick(TM) will be adversely affected.
SINCE WE RELY HEAVILY ON OUTSIDE CONTRACTORS AS SOLE SUPPLIERS AND
MANUFACTURERS OF OUR LEVULAN(R) KERASTICK(TM) AND BLU-U(TM), OUR MARKETING
EFFORTS AND SALES MAY SUFFER IF THESE THIRD-PARTIES FAIL IN ANY WAY TO
ADEQUATELY SUPPLY US WITH THE QUALITY AND QUANTITY OF THE PRODUCTS WE NEED.
We do not currently have the capacity to manufacture any of our products on
our own. We rely on third-parties to manufacture our products. We have only one
source for Levulan(R), one source for our Kerastick(TM), and one for the
BLU-U(TM). While we have purchased equipment in order to establish a second
source with a limited production line for the manufacture of our Kerastick(TM),
if it becomes necessary, any new manufacturer would have to pass inspection by
the FDA. None of our manufacturers have produced our products in commercial
quantities. Manufacturers often encounter difficulties when large quantities of
new products are manufactured for the first time, including problems involving:
- product yields;
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- quality control;
- component and service availability;
- compliance with FDA regulations; and
- the need for further FDA approval if manufacturers make material
changes to manufacturing processes and/or facilities.
We cannot guarantee that problems will not arise with production yields,
costs or quality as our manufacturers seek to increase production. Any
manufacturing problems could delay or limit our supplies or prevent
commercialization of our products. If any of these suppliers fail to meet our
needs, our business, financial condition and results of operations would suffer.
If any facility or equipment in the facility of our manufacturers is
damaged or destroyed, we will not be able to quickly or inexpensively replace
it.
Under the terms of our agreement with Schering AG, our continuing failure
to supply Schering AG's requirements of Levulan(R), the Kerastick(TM) and/or the
BLU-U(TM) would release Schering AG from its obligation to purchase supplies
from us. The supply fees Schering AG is required to pay to us would be reduced
by Schering's cost to manufacture and we would continue to receive a royalty
payment on sales. Our business, financial condition and results of operations
would be adversely affected.
IF WE FAIL TO OBTAIN ADEQUATE LEVELS OF REIMBURSEMENT FOR OUR PRODUCTS FROM
THIRD-PARTY PAYORS, OUR REVENUES AND PROFITS COULD BE SIGNIFICANTLY
LIMITED.
Our profitability will depend on the availability of reimbursement to
patients or physicians for the cost of our products from third-party payors such
as governmental programs, private insurance and private health plans. We cannot
predict whether levels of reimbursement for our drug and light combination
therapy will be high enough to allow us to realize a reasonable profit margin.
Third-party payors may deny reimbursement if the payor determines that our
particular new therapy is unnecessary, inappropriate or not cost effective. If
patients or physicians are not entitled to receive reimbursements similar to
reimbursements for competing therapies, patients will have to pay for the
unreimbursed amounts. Some medicare providers may require physicians to
prescribe 5-FU to treat AKs because 5-FU is an inexpensive treatment, or limit
the number of AK treatments in a particular year. These reimbursement factors
could limit our revenues, and our profits, if physicians or patients choose
therapies with higher reimbursements than may be assigned to our therapy, or if
government agencies or other third-party payors mandate a treatment regimen. The
reimbursement status of newly-approved health care products is highly uncertain.
We are relying on Schering AG to obtain reimbursement codes from third-party
payors. If levels of reimbursement are decreased in the future, the demand for
our products could diminish or our ability to sell our products on a profitable
basis could be hurt.
EVEN IF WE RECEIVE REGULATORY APPROVAL FOR OUR BLU-U(TM), ANY FAILURE TO
COMPLY WITH ONGOING GOVERNMENTAL REGULATIONS IN THE UNITED STATES OR TO
OBTAIN FOREIGN REGULATORY APPROVALS WILL LIMIT OUR ABILITY TO MARKET OUR
FIRST PRODUCT.
Our products are subject to continued and comprehensive regulation by the
FDA and by state and local regulations. These laws require, among other things,
- approval of manufacturing facilities, including adherence to "good
manufacturing and laboratory practices" during production and storage;
- controlled research and testing of products even after approval; and
- control of marketing activities, including advertising and labelling.
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Both the manufacture and marketing of our first product, Levulan(R)
Kerastick(TM) with PDT for AKs, are subject to continuing FDA review. Our
manufacturers must continue to comply with the FDA's current Good Manufacturing
Practices, commonly known as cGMP, and foreign regulatory requirements. The cGMP
requirements govern quality control and documentation policies and procedures.
In complying with cGMP and foreign regulatory requirements, our third party
manufacturers will be obligated to expend time, money and effort in production,
record keeping and quality control to assure that our products meet applicable
specifications and other requirements. If our third party manufacturer's fail to
comply with these requirements, we would be subject to possible regulatory
action and may be limited in the jurisdictions in which we are permitted to sell
our products.
As part of our approval from the FDA, we are required to conduct two Phase
IV follow-up studies; one to evaluate the long-term recurrence rate of AKs after
treatment with our new therapy, and the second to test for allergic skin
reactions to the Levulan(R) Kerastick(TM). If we discover a previously unknown
problem with the product, a manufacturer or its facility, changes in product
labeling restrictions or withdrawal of the product from the market may occur.
Manufacturing facilities are subject to ongoing periodic inspection by the FDA,
including unannounced inspections. We cannot give you any assurance that our
third-party sole sources will continue to meet all applicable FDA regulations in
the future. If any of our manufacturers fail to maintain compliance with FDA
regulatory requirements, it would be time consuming and costly to qualify other
sources. These consequences could have an adverse effect on our financial
condition and operations. If we fail to comply with applicable regulatory
approval requirements, a regulatory agency may:
- send us warning letters;
- impose fines and other civil penalties on us;
- suspend our regulatory approvals;
- refuse to approve pending applications or supplements to approved
applications filed by us;
- refuse to permit exports or our products from the United States;
- require us to recall products;
- require us to notify physicians of labelling changes and/or product
related problems;
- impose restrictions on our operations; or
- criminally prosecute us.
As part of our collaboration agreement with Schering AG, we will be jointly
seeking foreign regulatory approvals for Levulan(R) Kerastick(TM) PDT for AKs.
We cannot give you any assurances that we will receive foreign approvals on a
timely basis, or at all, or that problems will not arise that could delay or
prevent the commercialization of our product in foreign countries. The
introduction of our product in foreign markets will subject us to foreign
regulatory clearances, which may be unpredictable and uncertain, and which may
impose substantial additional costs and burdens which we and Schering AG may be
unwilling or unable to pay. At present, applications for foreign marketing
authorizations are made at the national level, although certain registration
procedures are available within the European Union to companies wishing to
market a product in more than one member country. A regulatory authority must be
satisfied that adequate evidence of safety, quality, and efficacy of the product
has been presented before marketing authorization is granted. In addition,
electrical medical devices, such as the BLU-U(TM), must be manufactured in
compliance with the current requirements of ISO 9000. Our third party
manufacturer is not currently qualified under ISO 9000. The foreign regulatory
approval process includes all of the risks associated with obtaining FDA
marketing approval and approval by the FDA does not ensure approval by other
countries. Failure to obtain foreign regulatory approval could adversely affect
our financial condition and operations.
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WE HAVE SIGNIFICANT LOSSES AND MAY NEVER BE PROFITABLE.
We have a history of operating losses. We expect to have continued losses
over the next 12 months as we expand our research and development of new
products and establish ourselves in the marketplace. We may never become
profitable. As of December 31, 1999, our accumulated deficit was approximately
$35,947,000. We cannot predict whether any of our products will achieve market
acceptance or generate sufficient revenues to become profitable. Our commercial
success will depend on whether:
- Our products are more effective therapies that currently available
treatments;
- We receive sufficient reimbursement for our products; and
- We can, either together with a partner or alone, successfully market
our products.
WE HAVE ONLY ONE PRODUCT THAT HAS RECEIVED REGULATORY APPROVAL AND WE CANNOT
PREDICT WHETHER WE WILL EVER DEVELOP OR COMMERCIALIZE ANY OTHER PRODUCTS.
EXCEPT FOR THE LEVULAN(R) KERASTICK(TM) WITH PDT FOR AKS, ALL OF OUR
PRODUCTS ARE IN EARLY STAGES OF DEVELOPMENT AND MAY NEVER RESULT IN ANY
COMMERCIALLY SUCCESSFUL PRODUCTS.
Currently, we are developing a single drug compound for a number of
different medical conditions. To be profitable, we must successfully research,
develop, obtain regulatory approval for, manufacture, introduce, market and
distribute our products. All of our products, except for the Levulan(R)
Kerastick(TM) with PDT for AKs, are at an early stage of development. We cannot
predict how long the development for these products will take or whether they
will be medically effective. We cannot be sure that a successful market will
ever develop for our new drug technology. We do not know if any of our products
will ever be commercially successful.
WE MUST RECEIVE SEPARATE APPROVAL FOR EACH OF OUR POTENTIAL PRODUCTS BEFORE
WE CAN SELL THEM COMMERCIALLY IN THE UNITED STATES OR ABROAD.
Except for the Levulan(R) Kerastick(TM) with PDT for AKs which is already
approved, all of our other potential products, including the commercial version
of the BLU-U(TM), will require the approval of the FDA before they can be
marketed in the United States. If we fail to obtain the required approvals for
other potential products our revenues will be limited. We may not achieve or be
able to sustain a positive cash flow or profits from the sales of our first
product. Before an NDA, which is an application to the FDA seeking approval to
market a new drug, can be filed with the FDA, a product must undergo, among
other things, extensive animal testing and human clinical trials. The process of
obtaining FDA approvals can be lengthy, costly, and time-consuming. Following
the acceptance of an NDA, the time required for regulatory approval can vary and
is usually one to three years or more. The FDA may require additional animal
studies and/or human clinical trials before granting approval. Our Levulan(R)
PDT products are based on new technology. To the best of our knowledge, the FDA
has approved only two drugs for use in photodynamic therapy, including
Levulan(R). This factor may lengthen the approval process. We face much trial
and error and we may fail at numerous stages along the way.
We cannot predict whether we will obtain approval for any of our potential
products. Data obtained from preclinical testing and clinical trials can be
susceptible to varying interpretations which could delay, limit or prevent
regulatory approvals. Future clinical trials may not show that Levulan(R) PDT or
PD is safe and effective for any new use we are studying. In addition, delays or
disapprovals may be encountered based upon additional governmental regulation
resulting from future legislation or
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administrative action or changes in FDA policy. We must also obtain foreign
regulatory clearances before we can market our products in foreign markets. The
foreign regulatory approval process includes all of the risks associated with
obtaining FDA marketing approval and may impose substantial additional costs.
BECAUSE WE ARE RELYING ON OUR CORPORATE PARTNER, SCHERING AG, TO ASSIST US
WITH AND TO PROVIDE FUNDS TO DEVELOP OUR POTENTIAL DERMATOLOGY PRODUCTS, WE
COULD EXPERIENCE DELAYS IN OUR DEVELOPMENT IF SCHERING AG FAILS TO PROVIDE
US WITH ADEQUATE SUPPORT.
We are relying on Schering AG to provide funds and co-develop with us our
other potential dermatology products. Under the terms of the agreement, Schering
AG can terminate its funding for the co-development program after two years. We
cannot be certain that Schering AG will continue to fund the co-development
program. If Schering AG's fails to co-develop our products or fails to make
milestone or royalty payments as required, we may not be able to continue our
development program as we have planned.
OUR LACK OF SALES AND MARKETING EXPERIENCE COULD AFFECT OUR ABILITY TO
MARKET OUR NON-DERMATOLOGY PRODUCTS WHICH COULD ADVERSELY AFFECT OUR
REVENUES FROM FUTURE PRODUCT SALES.
We are lacking the experience and capacity to market, sell and distribute
our products. In order to market non-dermatology products and/or if Schering AG
abandons its rights to any dermatology products and if we do not enter an
agreement with a corporate partner who has the experience and resources to
perform these roles for other products, we would be required to hire our own
staff and a sales force. We have no experience in developing, training or
managing a sales force. We will incur substantial additional expenses if we have
to develop, train and manage these business activities. We may be unable to
build a sales force and the costs of establishing a sales force may exceed our
product revenues. Our direct marketing and sales efforts may be unsuccessful. In
addition, we compete with many companies that currently have extensive and
well-funded marketing and sales operations. Any marketing and sales efforts we
make may be unsuccessful against these companies.
IF WE ARE UNABLE TO OBTAIN THE NECESSARY CAPITAL TO FUND OUR OPERATIONS, WE
WILL HAVE TO DELAY OUR DEVELOPMENT PROGRAMS AND MAY NOT BE ABLE TO COMPLETE
OUR CLINICAL TRIALS.
If our sales goals for our first product are not met and/or if Schering AG
terminates funding of the co-development program, then we may need substantial
additional funds to fully develop, manufacture, market and sell all of our other
potential products. We cannot predict exactly when additional funds will be
needed. We may obtain funds through a public or private financing, including
equity financing, and/or through collaborative arrangements. We cannot predict
whether any financing will be available on acceptable terms when we need it
because investors may be unwilling to invest in DUSA if we have setbacks in the
development program or if the public fails to use our products.
If funding is insufficient, we will have to delay, reduce in scope or
eliminate some or all of our research and development programs. We cannot
predict which programs will be affected since it will depend upon the status of
clinical trials at that time. We may license rights to third-parties to
commercialize products or technologies that we would otherwise have attempted to
develop and commercialize on our own.
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IF WE ARE UNABLE TO PROTECT OUR PROPRIETARY TECHNOLOGY, TRADE SECRETS OR
KNOW-HOW, WE MAY NOT BE ABLE TO OPERATE OUR BUSINESS PROFITABLY.
WE HAVE LIMITED PATENT PROTECTION AND IF WE ARE UNABLE TO PROTECT OUR
PATENTS AND PROPRIETARY RIGHTS, COMPETITORS MIGHT BE ABLE TO TAKE ADVANTAGE
OF OUR RESEARCH AND DEVELOPMENT EFFORTS TO DEVELOP SIMILAR PRODUCTS TO
COMPETE WITH OURS.
Our ability to compete successfully depends, in part, on our ability to
defend patents that have issued, obtain new patents, protect trade secrets and
operate without infringing the proprietary rights of others. We have no product
patent protection for the compound ALA itself, as our basic patents are for
methods of detecting and treating various diseased tissues using ALA or related
compounds called precursors, in combination with light. Even where we have
patent protection, there is no guarantee that we will be able to enforce our
patents. We own or exclusively license patents and patent applications related
to the following:
- unique physical forms of ALA;
- methods of using ALA and its unique physical forms in combination with
light; and
- compositions and apparatus for those methods.
Some of the indications we are developing may not be covered by the claims
in our existing patents. In addition, a number of third parties are seeking
patents for additional uses of ALA. These additional uses, whether patented or
not, could limit the scope of our future operations because other ALA products
might become available which would not infringe our patents. These products
would compete with ours even though they are marketed for a different use.
We have limited patent protection outside the United States which may make
it easier for third-parties to compete there. Our basic method of treatment
patents and applications have counter-parts in only four foreign countries.
Absent patent protection, third-parties may freely market ALA, subject to
appropriate regulatory approval. There are reports of several third-parties
conducting clinical studies using ALA in countries where DUSA lacks patent
protection. These studies could provide the clinical data necessary to gain
regulatory approval, resulting in competition.
Our patent protection in Japan may be diminished or lost entirely. The
Japanese Patent Office Board of Appeals, acting upon its review of an opposition
to Japanese Patent No. 273032 which we have licensed from PARTEQ Research and
Development Innovation, issued a document titled "Notice of Reasons for
Cancellation" which DUSA received on February 12, 1999. With PARTEQ's
assistance, we prepared and filed our response to this action. If our response
does not allay the concerns of the Board, they may limit our patent protections
or finalize the cancellation. Japan is a major pharmaceutical market and loss of
this patent could adversely affect DUSA in at least two ways. First, should DUSA
seek to enter the Japanese market, the lack of a patent would probably diminish
our market share. Second, even if we did not seek to market in Japan,
third-parties might not be interested in licensing the product in Japan without
patent protection, and this might affect DUSA's revenues.
While we attempt to protect our proprietary information as trade secrets
through agreements with each employee, licensing partner, consultant,
university, pharmaceutical company and agent, we cannot guaranty that these
agreements will provide effective protection for our proprietary information. It
is possible that
- these persons or entities might breach the agreements;
- we might not have adequate remedies for a breach; and/or
- our competitors will independently develop or otherwise discover our
trade secrets.
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PATENT LITIGATION IS EXPENSIVE, AND WE MAY NOT BE ABLE TO AFFORD THE COSTS.
The costs of litigation or any proceeding relating to our intellectual
property rights could be substantial even if resolved in our favor. See
"Business -- Licenses: Other License". Some of our competitors have far greater
resources than we do and may be better able to afford the costs of complex
patent litigation. For example, third-party competitors may infringe one or more
of our patents, and we could be required to spend significant resources to
enforce our patent rights. Also, if we were to sue a third-party for
infringement of one or more of our patents, that third-party could challenge the
validity of our patent(s). Defending our patents could also result in the
expenditure of significant resources. We cannot guarantee that a third-party or
parties will not claim, with or without merit, that we have infringed on their
patent(s), or misappropriated their proprietary material. Defending this type of
legal action could also involve considerable expense.
If a third-party were to file a United States patent application, or be
issued a patent claiming technology also claimed by us in a pending United
States application(s), we may be required to participate in in