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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, 2001
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)
25 Upton Drive 01887
Wilmington, Massachusetts (Zip Code)
(Address of principal executive offices)
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
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 or Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates
of the registrant computed by reference to the closing price of such stock as of
March 11, 2002 was $43,292,825.
The number of shares of common stock outstanding of the Registrant as
of March 11, 2002 was 13,865,390.
DOCUMENTS INCORPORATED BY REFERENCE
Document incorporated by reference to this Report is:
(1) Proxy Statement for the 2002 Annual Meeting of Shareholders.
Part III, Items 10 through 13.
PART I
This Annual Report on Form 10-K and certain written and oral statements
incorporated herein by reference of DUSA Pharmaceuticals, Inc. (referred to as
"DUSA," "we," and "us") contain forward-looking statements that have been made
pursuant to the provisions of the Private Securities Litigation Reform Act of
1995. Such forward-looking statements are based on current expectations,
estimates and projections about DUSA's industry, management's beliefs and
certain assumptions made by our management. Words such as "anticipates,"
"expects," "intends," "plans," "believes," "seeks," "estimates," or variations
of such words and similar expressions, are intended to identify such
forward-looking statements. These statements are not guarantees of future
performance and are subject to certain risks, uncertainties and assumptions that
are difficult to predict particularly in the highly regulated pharmaceutical
industry in which we operate. Therefore, actual results may differ materially
from those expressed or forecasted in any such forward-looking statements. Such
risks and uncertainties include those set forth herein under "Risk Factors" on
pages 24 through 35, 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.
Our first products, the Levulan(R) Kerastick(R) 20% Topical Solution
with PDT and the BLU-U(R) brand light source were launched in the United States
in September 2000 for the treatment of actinic keratoses, or AKs, of the face or
scalp. AKs are precancerous skin lesions caused by chronic sun exposure that can
develop over time into a form of skin cancer called squamous cell carcinoma.
Schering AG, our worldwide dermatology marketing partner (except Canada), has
made regulatory filings for approval of our therapy outside of the United States
including filings in Austria, Australia, and Brazil. We have brought the
BLU-U(R) into compliance with CE marking and ISO 9001 requirements in order to
be ready to supply these markets upon regulatory approval. The Levulan(R)
Kerastick(R) with PDT for AKs of the face or scalp has also been approved by the
Health Protection Branch - Canada. Our former Canadian affiliate, Draxis Health,
Inc., retained the marketing rights
1
for Canada, and we are working to establish a supply arrangement with Draxis for
the Canadian market. We will also be entitled to royalties on any sales in that
country.
In November 1999, we signed a marketing, development and supply
agreement with Schering AG, a German corporation, for our dermatology products.
We granted to Schering AG the right to promote, market, sell, and distribute our
Levulan(R) Kerastick(R) with PDT for AKs of the face or scalp on a worldwide
basis (with the exception of Canada). In the United States, Schering AG's United
States affiliate, Berlex Laboratories, Inc., is marketing these products.
Schering AG also promotes the BLU-U(R); however, we are responsible for
distributing the units, as well as for repairs and maintenance. We lease or rent
the BLU-U(R) to physicians, medical institutions and academic centers throughout
the country. We are also co-developing and will commercialize with Schering AG
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 our co-development program for
dermatology in an amount up to $3,000,000 in 2002, subject to the results of
dermatology feasibility studies currently ongoing and further decisions by the
development committee, which meets quarterly. The parties may agree to continue
to fund the co-development program beyond this date. Under the terms of the
agreement, we have also received $30,000,000, including $23,750,000 in cash
milestones and unrestricted research payments and $6,250,000 for which a
Schering AG affiliate received 340,458 shares of our common stock. See "Business
- -- Strategic Partners."
For 2002, we have decided, in co-operation with Schering AG, to
continue funding development of Levulan(R) PDT to treat warts and onychomycosis,
more commonly known as nail fungus, and have begun development on broader
labeling for the AK indication. In 2001, we started trials in warts and
onychomycosis and had completed patient enrollment in both trials at the end of
the year. We also completed an acne trial during 2001 but have decided not to
fund further trials in acne during 2002. See "Business -- Dermatology
Indications."
We are also carrying out two trials for the treatment of Barrett's
esophagus dysplasia, a precancerous condition of the esophagus. In addition, we
continue to support independent investigator trials to advance research in the
use of Levulan(R) PDT in indications such as colorectal cancers,
gastrointestinal tumors, prevention of restenosis and other internal disorders.
We are developing Levulan(R) PDT and PD under an exclusive worldwide
license of patents and technology from PARTEQ Research and Development
Innovations, the licensing arm of Queen's University, Kingston, Ontario, Canada.
We also own or license certain other patents relating to methods for using
pharmaceutical formulations which contain our drug and related processes and
improvements. In the United States, Levulan(R), Kerastick(R) and BLU-U(R) are
registered trademarks. These trademarks are also registered in Europe and
applications are pending in other parts of the world. See "Business -- Licenses;
and -- Patents and Trademarks."
We were incorporated on February 21, 1991, under the laws of the State
of New Jersey. Our principal executive offices are 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
2
and development efforts. We financed our development stage operations, prior to
the market launch of our first products, 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"). See
"Management's Discussion and Analysis of Financial Condition -- Overview; --
Results of Operations; and -- Liquidity and Capital Resources."
BUSINESS STRATEGY
The following are the key elements of our strategy:
- Support the Marketing of our First Products. We are working
with our dermatology marketing partner, Schering AG, to
optimize the marketing efforts of the Berlex team in the
United States for our first PDT system, the Levulan(R)
Kerastick(R) 20% Topical Solution with our BLU-U(R) for the
treatment of AKs of the face or scalp. We are also working on
plans for the future launch of our products in Europe,
Australia, Canada and elsewhere.
- 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 (i) develop new drug formulations
and light devices to target large markets with unmet medical
needs, such as the treatment of Barrett's esophagus dysplasia,
(ii) explore collaborations relating to the detection of brain
cancer and bladder cancer, and (iii) explore cost-effective
approaches to 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. We have already decided to seek a marketing partner
for Barrett's esophagus dysplasia, commencing later this year,
after we have data from our current clinical trials.
- 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.
- Pursue the Addition of Complimentary Products and/or
Businesses. We have been evaluating and pursuing various
licensing and acquisition opportunities for complementary
products and/or businesses which may include drugs, devices,
technologies or related businesses.
3
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."
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 multiple
courses of therapy. Generally, 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.
4
OUR LEVULAN(R) PDT/PD PLATFORM
OUR LEVULAN(R) BRAND OF ALA
We have a unique approach to PDT and PD, using the human cell's own
natural processes. Levulan(R) PDT takes advantage of the fact that ALA is the
first product in a natural biosynthetic pathway present in virtually all living
human cells. In normal cells, the production of ALA is tightly regulated through
a feedback inhibition process. In our PDT/PD system, excess ALA, as Levulan(R),
is added from outside the cell, bypassing this normal feedback inhibition. The
ALA is then converted through a number of steps into a potent natural
photosensitizer named protoporphyrin IX, or PpIX. This is the compound that is
activated by light during Levulan(R) PDT/PD, especially in fast growing cells.
Any PpIX that remains after treatment is eliminated naturally by the same
biosynthetic pathway.
We believe that Levulan(R) is unique among PDT/PD agents. It has the
following features:
- 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.
- 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 cells and
certain microbes (i.e., fungus), such as onychomycosis and
psoriasis, and
- in certain normally fast-growing tissues, such as esophageal
mucosa and the lining of the uterus.
OUR KERASTICK(R) BRAND APPLICATOR
We designed our proprietary Kerastick(R) specifically for use with
Levulan(R). It is a single-use, disposable applicator, which allows for the
rapid preparation and uniform application of Levulan(R) topical solution in
standardized doses. The Kerastick(R) has two separate glass ampules,
5
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(R) according to directions to mix the contents into a
solution. The Kerastick(R) tip is then dabbed on to the individual AK lesions,
releasing a predetermined amount of Levulan(R) 20% topical solution.
OUR LIGHT SOURCES
Customized light sources are critical to successful Levulan(R) PDT/PD
because the effectiveness of Levulan(R) therapy depends on delivering light at
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(R) 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 portable. It can be used in
a physician's office, requires minimal floor space, and plugs into a standard
electrical outlet. The BLU-U(R) also incorporates a proprietary regulator that
controls the optical power of the light source to within specified limits. It
has a simple control panel consisting of an on-off key switch and digital timer
which turns off the light automatically at the end of the treatment. The
BLU-U(R) is also compliant with CE marking and ISO 9001 requirements.
We are using non-laser light sources whenever feasible because,
compared to lasers, they are:
- safer,
- simpler to use,
- more reliable, and
- far less expensive.
For treatment of AKs, our BLU-U(R) uses blue light which penetrates
superficial skin lesions and is a potent activator of PpIX. Longer red
wavelengths penetrate more deeply into tissue but are not as potent activators
of PpIX. Therefore, for treatment of superficial lesions of the skin, such as
AKs, we are using relatively low intensity, non-laser blue light sources, which
are designed to treat large areas, such as the entire face or body. For
treatment of diseases 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 often 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."
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.
6
OUR PRODUCTS
The following table outlines our products and product candidates. Our
research and development expenses for the last three years were $10,789,906 in
2001, $8,163,419 in 2000 and $4,194,532 in 1999.
PRODUCT/INDICATION REGULATORY STATUS MARKETING RIGHTS(1)
- -------------------------------------------------------------------------------------------------------------------------
DERMATOLOGY
- -------------------------------------------------------------------------------------------------------------------------
Levulan(R) Kerastick(R) and BLU-U(R) for PDT of AKs Approved; Phase IV Schering AG
- -------------------------------------------------------------------------------------------------------------------------
Levulan(R) PDT for Onychomycosis (Nail Fungus) Phase I/II Schering AG
- -------------------------------------------------------------------------------------------------------------------------
Levulan(R) PDT for Persistent Hand and Foot Wart Removal Phase I/II Schering AG
- -------------------------------------------------------------------------------------------------------------------------
Levulan(R) PDT for Broader Labeling of AK Indication Phase II2 Schering AG
- -------------------------------------------------------------------------------------------------------------------------
Levulan(R) PDT for Acne Investigator Study Schering AG
- -------------------------------------------------------------------------------------------------------------------------
OTHER INDICATIONS
- -------------------------------------------------------------------------------------------------------------------------
Levulan(R) PDT for Barrett's Esophagus Dysplasia Phase I/II DUSA
- -------------------------------------------------------------------------------------------------------------------------
Levulan(R)-induced Fluorescence-guided Resection for Brain Cancer Investigator Study(2) DUSA
- -------------------------------------------------------------------------------------------------------------------------
Levulan(R) PDT for Prevention of Restenosis Investigator Study DUSA
- -------------------------------------------------------------------------------------------------------------------------
- ---------
1 Draxis Health, Inc., our former parent, holds a license to PARTEQ's
ALA patents for Canada.
2 To commence in 2002.
DERMATOLOGY INDICATIONS
Actinic Keratoses (AKs). AKs are superficial precancerous skin lesions
usually appearing as rough, scaly patches of skin with some underlying redness.
The traditional methods of treating AKs are cryotherapy, or the freezing of
skin, using liquid nitrogen, and 5-fluorouracil cream, or 5-FU. Although both
methods can be effective, each has limitations and can result in significant
side effects. Cryotherapy is non-selective, is usually painful at the site of
freezing and can cause blistering and loss of skin pigmentation, leaving white
spots. In addition, because there is no standardized treatment protocol, results
are not uniform. 5-FU can be highly irritating and requires twice-a-day
application by the patient for approximately 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(R) to the AK lesions, followed 14 to 18 hours later with exposure to
our BLU-U(R) for approximately 17 minutes. In 2001, we successfully completed
the first of two Phase IV trials required by the Food and Drug Administrations,
or FDA, testing for allergic skin reactions to our therapy. We expect to start
the second trial, to evaluate the long-term effects of our therapy, shortly.
Together with Schering AG, we have also started development activities to
broaden the labeling for the AK indication to enhance the Levulan(R) product
line.
7
As of January 1, 2002, the national reimbursement code for the BLU-U(R)
application procedure, along with a "J-code" that reimburses physicians for the
costs of the Levulan(R) Kerastick(R), became effective. Doctors can also bill
for any applicable visit fees. The codes will also facilitate electronic billing
for our therapy, eliminating paperwork involved with the previous manual billing
method. We believe that these changes, along with Berlex's ongoing education and
marketing programs, will help make Levulan(R) PDT a common therapy for AKs.
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. DUSA and Schering AG
commenced a vehicle-controlled, randomized, multicenter clinical feasibility
trial for this indication in 2001. Levulan(R) 20% topical solution or vehicle
was applied to infected toenails, followed in three to six hours by exposure to
broadband red light. Infected toenails are being evaluated for efficacy, and
will be retreated with Levulan(R) PDT, if necessary, at follow-up visits for up
to three months. Aggressive recruitment for the Phase I/II trial led to
completion of patient enrollment by year-end, with initial results expected in
the third quarter of this year.
Persistent 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. 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. Sometimes warts still persist
despite all attempts at treatment. Warts that have been present for a year or
more, despite therapy, are termed recalcitrant warts.
In a 1999 independent Danish randomized clinical trial using ALA PDT on
30 patients with 250 recalcitrant warts, the investigator reported that one of
the treatment groups showed a 70% elimination of recalcitrant warts through a
12-month period. In 2001, together with Schering AG, we began a
vehicle-controlled, randomized, multicenter clinical feasibility trial, to
enroll 64 patients with plantar warts persisting after a single standard
treatment. The trial involves applying Levulan(R) to the warts followed either
three to six or 16 to 24 hours later by light treatment using a broadband red
light. Patients receive up to three retreatments of partially responding and
non-responding warts at two-week intervals. Patient enrollment in the study was
completed at the end of 2001 and initial results are expected in the first half
of this year.
Acne. Acne is a common skin condition caused by the blockage and/or
inflammation of sebaceous (oil) glands. Traditional treatments for mild to
moderate facial inflammatory acne include over-the-counter topical medications
for mild cases, and prescription topical medications or oral
8
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
moderate 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, and
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.
As part of the co-development program with Schering AG, a dose-ranging
clinical trial was completed in 2001. The specific low dose protocol tested was
not able to replicate the clinical results seen in previous independent research
using higher drug doses but which caused significant side effects. Further
development activity to better optimize the therapy is under consideration.
INTERNAL INDICATIONS
Barrett's Esophagus Dysplasia. Barrett's esophagus is an acquired
condition in which the normal tissue lining of the esophagus is replaced by
abnormal tissue in response to chronic exposure to stomach acid. Over time, the
area of the esophagus affected can develop dysplastic (precancerous) cells. As
the dysplasia progresses from low-grade to high-grade, the risk of esophageal
cancer increases significantly such that patients with confirmed high-grade
dysplasia often undergo major surgery to remove the affected portion of the
esophagus. The condition is often undetected until the disease reaches later
stages.
There is currently no approved therapy to halt or reverse Barrett's
esophagus dysplasia, or to slow its progression to esophageal cancer. Current
medical treatment of the condition commonly includes lifelong anti-reflux
therapy with drugs called proton pump inhibitors to reduce stomach acid. A
current treatment for more advanced, precancerous, Barrett's esophagus involves
surgery to remove affected areas of the esophagus. At least one company has
filed an NDA seeking approval of a PDT therapy for Barrett's esophagus. The role
of anti-reflux surgery is also being evaluated by the medical community.
Independent European studies have reported that in late-stage Barrett's
esophagus the high-grade dysplasia can be destroyed by ALA PDT. In a randomized,
controlled European investigator study supported by DUSA, Levulan(R) PDT has
been shown to allow the conversion of early-stage Barrett's esophagus with
low-grade dysplasia and portions of Barrett's esophageal lining back to normal
esophageal lining. During 2001, patient accrual was completed in a
DUSA-supported randomized investigator study of the effects of differing
Levulan(R) doses with red laser light for the treatment of early-stage Barrett's
esophagus. Also, during the second half of 2001, we started two Phase I/II
studies using systemic Levulan(R) and red laser light in varying light doses for
the treatment of early and late-stage Barrett's esophagus dysplasia,
respectively. Patients are randomized to receive various light doses, may be
retreated, and will be followed for 24 months after the initial treatment. We
plan to do a preliminary analysis of the data after treating approximately 10
patients in each study.
- ---------
1 Accutane(R)is a registered trademark of Hoffmann La-Roche.
9
Bladder Cancer Detection. 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 concluded our own Phase I/II multi-center clinical trial for
enhancement of bladder cancer detection during 1999 using Levulan(R) PD and an
endoscope light source provided by Richard Wolf Medical Instruments Corp.
The results suggested that significant further study would be necessary
to develop a commercially viable product to optimize bladder cancer detection
using Levulan(R) PD. We are currently exploring possible collaborations for the
development of Levulan(R)-induced fluorescence-guided resection for the
detection of bladder cancer.
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 seven patients studied had been
selected because they each had developed restenosis within two to six months
following angioplasty in the past. After treatment with balloon angioplasty
followed by Levulan(R) PDT, all of the patients had symptomatic relief and,
during the six-month follow-up period, none of the patients had any recurrence
of symptoms. In June 2001, the investigators reported the long-term follow-up
results on these same seven patients. After following the treated patients for
over two years, six of the seven remained asymptomatic and only one had to
undergo another angioplasty procedure.
In 2001, we began supporting a randomized controlled investigator study
for this indication. However, based on recent reports of significant progress in
the prevention of restenosis following balloon angioplasty using drug-coated
stents, we have reduced our support of the study. We intend to continue to
monitor the progress of the patients in the investigator study but we have
decided not to begin our own development program for this indication at this
time. We intend to follow the results of the drug-coated stent clinical trials
and reassess the market potential for the use of Levulan(R) PDT in the
prevention of restenosis following balloon angioplasty in the non-stentable
patient population after those results are available.
OTHER POTENTIAL DERMATOLOGY INDICATIONS
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
10
the symptoms of photodamaged skin. In most cases, there is little scientific
data to support these claims. The FDA has approved only one prescription drug,
Renova(R)(2), to treat this common skin condition. 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% topical solution over the entire area including the
photodamaged skin. After 14 to 18 hours, the patients were treated with blue
light at differing light doses. Investigators noted marked improvement in skin
roughness in two-thirds of the patients after treatment with Levulan(R) PDT as
well as some degree of improvement of wrinkles and brown spots. 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 patients reported a serious treatment-related
adverse event. Based on this data, we believe that this is a future potential
indication for Levulan(R) PDT.
OTHER POTENTIAL INTERNAL INDICATIONS
Cervical Intraepitheleal Neoplasia. Cervical intraepitheleal neoplasia,
or CIN, is a common precancerous condition of the cervix. The pap smear
(cervical cytology specimens) is the test commonly used to screen for this and
other 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.
A DUSA supported investigator study using topical application of
Levulan(R) to the cervix showed that Levulan(R)-induced fluorescence could be
highly selective for detecting CIN tissue. We have delayed support of any new
investigator-sponsored studies while we consider the cost-effectiveness of
developing various approaches to the use of Levulan(R) PD for CIN, including an
in vivo topical or systemic use of Levulan(R) for the fluorescence detection of
CIN visually on the cervix and/or an ex vivo use of Levulan(R) as an adjunct to
pap smears for microscopic examination.
Brain Cancer. Despite standard therapies which include surgical tumor
removal, radiation therapy, and chemotherapy, adult patients with the most
aggressive high-grade malignant brain tumor type (glioblastoma multiforme)
generally survive only one year. Independent European investigators have
reported that systemic ALA dosing before surgical resection of tumors resulted
in selective fluorescence of only the tumors. The normal white matter of the
brain showed no fluorescence. These investigators have used ALA-induced
fluorescence in a study involving 52 patients with glioblastoma multiforme as a
guide for the more complete removal of tumors than would be possible using white
light alone. During 2002, we intend to support an investigator study to confirm
the European investigators' results and will also be examining the possibility
of collaborating with other companies on development of this indication.
- --------
2 Renova(R)is a registered trademark of Johnson & Johnson.
11
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 include detection and/or treatment 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(R) 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 through 2002, with Schering
AG contributing two-thirds of the joint committee-approved budget, up to
$3,000,000, while we contribute the remaining one-third, up to $1,500,000,
subject to the results of dermatology feasibility studies currently ongoing and
further decisions by development committee, which meets quarterly. Schering AG
also has limited rights to negotiate with us for rights to any non-dermatology
products that we intend to develop with corporate partners.
We have received $30,000,000 from Schering AG, including $23,750,000 in
cash milestones and unrestricted research payments and $6,250,000 for which a
Schering AG affiliate received 340,458 shares of our common stock. No further
milestone payments are due for this first indication.
We are responsible for the manufacture and supply of the Kerastick(R)
to Schering AG. Schering AG pays a supply price to us for the drug products, as
well as a royalty on drug sales. Schering AG also promotes the BLU-U(R), while
we have agreed to distribute, maintain and repair the BLU-U(R) units under
rental or lease/maintenance agreements. Initially, we leased the BLU-U(R) units
to dermatologists and other physicians, medical institutions and academic
centers throughout the United States and engaged a leasing company to complete
the leasing transactions. In September 2001, DUSA and Berlex began a new program
to rent the BLU-Us(R) to physicians for 36 months, with costs deferred for the
first six months, while Berlex provides physicians with a supply of Kerastick(R)
units at its cost. We are negotiating with a new leasing company to have them
manage the rental program. DUSA, Berlex and the current leasing company will
continue to support customers that remain on the initial program; however, the
majority of such customers have converted to the new rental program. Under the
initial program, customers have the right to cancel their leases after periods
of up to one year. Under the new program, customers may terminate the BLU-U(R)
rental at any time.
On September 26, 2001, we reached agreement with Schering AG to amend
the marketing, development and supply agreement. With the execution of this
amendment, Schering and its United
12
States affiliate, Berlex Laboratories, Inc., agreed to reimburse DUSA $1,000,000
for costs DUSA incurred to modify its manufacturing agreement with North Safety
Products, Inc. ("North"). See "Business -- Supply Partners." In consideration
for this amendment, we agreed to be responsible for certain additional
liabilities in the event of our failure to supply Schering AG's requirements of
finished product as defined in the original agreement. In addition, we agreed to
use our best efforts to qualify DUSA as the primary manufacturer and supplier of
the Kerastick(R) within six months following the date that North ceases
production. The amendment also terminated the guaranty by Schering AG to us of
BLU-U(R) lease payments by physicians, and the secured line of credit promissory
note from Schering to DUSA for up to $1,000,000 to finance inventory of BLU-U(R)
units.
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 National Biological Corporation ("NBC") for
the manufacture of some of our light sources, including the BLU-U(R). We have
agreed to order from NBC all of our supply needs of these light sources for the
United States and Canada and NBC has agreed to supply us with the quantities we
order. If an opportunity arises, the parties have agreed to negotiate the terms
under which NBC would supply us with light sources for sale in countries other
than the current territories.
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. In early
2001, we prepaid NBC for raw material costs in the amount of $400,000 associated
with our then current order. This amount will be credited against the final
purchase price which will be due on delivery of finished units at a rate of
$1,000 per unit. In addition, we agreed that if we did not order a certain
number of BLU-U(R) brand units by January 2, 2002 for delivery in 2002, we would
pay NBC $100,000 to cover certain overhead costs. In consideration for this
payment, NBC agreed to maintain its BLU-U(R) manufacturing capabilities in a
state of readiness during 2002 with the capability of producing BLU-U(R) units
in accordance with established procedures. The payment was made in January 2002.
The agreement has a 10-year term, subject to earlier termination for
breach or insolvency or for convenience. However, a termination for convenience
requires 12 months' prior written notice.
North Safety Products. In September 1999, we entered into a purchase
and supply agreement with North Safety Products, Inc. ("North"), a unit of
Norcross Safety Products, LLC, for
13
the manufacture and supply of our Kerastick(R) brand applicator. We have agreed
to purchase from North a significant portion of our total commercial
requirements for supply of the Kerastick(R) for sale in the United States and
Canada. Prices for the product are based on the quantities of Kerastick(R)
ordered which are subject to change depending on various product costs and
competitive market conditions.
In February 2001, we agreed to compensate North for certain overhead
expenses associated with the manufacture of the Kerastick(R) to cover
underutilization of North's facilities in accordance with an amendment to the
purchase and supply agreement, since actual orders were below certain previously
anticipated levels. In July 2001, we revised this agreement with North and paid
$1,000,000 in up-front underutilization fees and agreed to make additional
payments totaling $400,000 covering the period through December 31, 2002. Of
these amounts, $1,000,000 of the underutilized fees were reimbursed through an
amendment to DUSA's agreement with Schering AG. See "Business -- Strategic
Partners." In consideration for the underutilization fees, North has agreed to
maintain its Kerastick(R) manufacturing capabilities in a state of readiness,
with the capability of producing at least 25,000 Kerastick(R) units per month in
accordance with established procedures. In addition, North is obligated to
provide us with manufacturing records, personnel support, and a list of
consultants and suppliers that have supported the development and manufacturing
of the Kerastick(R).
The term of the purchase and supply agreement was also amended and will
end on December 31, 2002 unless DUSA exercises an option to extend the term
through June 30, 2003. If DUSA should decide to extend the term, North will be
entitled to payment of additional underutilization fees of up to $500,000,
prorated based on the level of Kerastick(R) units produced from July 1, 2001
through June 30, 2003. We also continue to have the right to terminate for
stated breaches of the agreement. Also see "Business -- Manufacturing."
Sochinaz SA. Under an agreement dated December 24, 1993, Sochinaz SA
("Sochinaz") manufactures and supplies all of our requirements of Levulan(R)
worldwide from its FDA approved facility in Switzerland. In June 2000, we
amended the agreement to include an option to allow us to extend the term for an
additional three (3) years until December 3, 2007. As consideration for the
amendment, we agreed to reimburse Sochinaz for a portion of its costs to bring
its manufacturing facilities into compliance with the FDA current good
manufacturing practices, or cGMPs. We paid $250,000 in cash and issued 26,666.66
shares of our common stock having a fair market value of $750,000. 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 ("PARTEQ"), the licensing arm of Queen's
University, Kingston, Ontario. Under the agreement, which became effective
August 27, 1991, we have been granted an exclusive worldwide license, with a
right to sublicense, under PARTEQ's method patent rights, to make, have made,
use and sell products which are precursors of PpIX, including ALA. The agreement
also covers any improvements discovered, developed or acquired by or for PARTEQ,
or Queen's
14
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 11a 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.
For 2000 and going forward, annual minimum royalties to PARTEQ on sales
of products must total at least CDN $100,000. See Note 11a to the Company's
Notes to the Consolidated Financial Statements.
Together with PARTEQ and Draxis Health, Inc., our former parent, we
entered into an agreement (the "ALA Assignment Agreement") effective October 7,
1991. According to the terms of this agreement we assigned to Draxis our rights
and obligations under the 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 2% of net Canadian sales of products.
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
15
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.
Under the license agreement with PARTEQ and Draxis, we hold an
exclusive worldwide license to certain patent rights in the United States and a
limited number of foreign countries. See "Business - Licenses." All United
States patents and patent applications licensed from PARTEQ relating to ALA are
method of treatment patents. Method of treatment patents limit direct
infringement to users of the methods of treatment covered by the patents. We
currently have patents and/or pending patent applications in the United States
and in a number of foreign countries covering unique physical forms of ALA,
compositions containing ALA, as well as ALA applicators, light sources for use
with ALA, and other technology. We cannot guarantee that any pending patent
applications will mature into issued patents.
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 three 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
chemical 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 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.
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. In 1999, Japanese Patent No.
273032, which relates to the basic method of using ALA, was opposed and, as
16
a result, the Japanese Patent Office Board of Appeals revoked the patent. With
PARTEQ's assistance, we have been simultaneously pursuing an appeal at the Tokyo
High Court and an amendment trial before the Japanese Patent Office. We can at
this time give no assurance of the likelihood of success of either contest or
any assurance that we will decide to spend the funds required to complete the
contests. 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 limit
our potential revenues from this market.
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 our
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 10 trademark
registrations, and other applications are pending.
17
MANUFACTURING
We do not currently operate any manufacturing facilities. Our drug,
Levulan(R), the Kerastick(R) brand applicator and the BLU-U(R) 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.
Contemporaneously with the amendment of our agreement with North, which
provides for earlier termination of the current Kerastick(R) manufacturing
arrangement, we decided to build a Kerastick(R) manufacturing line at our
Wilmington facility. We believe that the development of our own manufacturing
capabilities should enable us to better manage and control the costs of
production; however, our unit cost per Kerastick(R) will increase, until product
sales increase significantly. We have begun the construction process, with the
initial build-out expected to take approximately six months, followed by the
facility and drug stability testing required for FDA approval of the site. FDA
inspection is expected to occur within approximately six months following the
construction and testing stages.
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. To date, Schering AG has filed for regulatory
approval of our first products in Austria (the initial step in obtaining
approval throughout the European Union), Australia, and Brazil. We retain the
rights to market and sell all future products for non-dermatology indications.
Subject to Schering AG's limited right to negotiate, 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." The Health Protection Branch - Canada has granted
marketing approval for the Levulan(R) Kerastick(R) with PDT using the BLU-U(R)
for AKs of the face or scalp and we are working with Draxis to establish a
supply arrangement for the Canadian market.
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); Axcan, Inc. (U.S.); Miravant, Inc. (U.S.);
Pharmacyclics, Inc. (U.S.); QuantaNova Canada Ltd. (formerly Scotia
Pharmaceuticals) (United Kingdom); and Photogen Technologies, Inc. (U.S.). We
are also aware of several overseas companies doing research with ALA or
ALA-related compounds, including: Medac GmbH (Germany) which is 25% owned by
Schering AG; and Photocure ASA (Norway).
18
Photocure has received marketing approval of its ALA precursor (ALA
methylester) compound with PDT for the treatment of AK's in the European Union,
New Zealand, and countries in Scandinavia. Photocure has also filed for
regulatory approvals in Australia and the United States. If Photocure receives
approval from the FDA to market its ALA AK product in the U.S., its entry into
the marketplace will represent direct competition for our products. We are also
aware that Medac is developing ALA PD for fluorescence-guided resection of brain
cancer and bladder cancer in Germany.
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 and by the level of reimbursement for the cost of our drug and
treatment by third-party payors, such as insurance companies, health maintenance
organizations and government agencies.
We believe that comparisons of the properties of various
photosensitizing PDT drugs will also highlight important competitive issues. We
expect that our principal methods of competition with other PDT companies will
be based upon such factors as the ease of administration of our photodynamic
therapy; the degree of generalized skin sensitivity to light; the number of
required doses; the selectivity of our drug for the target lesion or tissue of
interest; and the type and cost of our light systems. New drugs or future
developments in PDT 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.
Our current primary competitors for our first products are the existing
therapies for treatment of AKs. See "Business -- Dermatology Indications,
Actinic Keratoses." We expect that our principal methods of competition with
these therapies will be cost and patient benefits including cosmetic results.
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:
- 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.
19
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 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
20
may take substantially longer if, among other things, the FDA has questions or
concerns about the safety and/or efficacy of a product. In general, the FDA
requires properly conducted, adequate and well-controlled clinical studies
demonstrating safety and efficacy with sufficient levels of statistical
assurance. However, additional information may be required. For example, the FDA
also may request long-term toxicity studies or other studies relating to product
safety or efficacy. Even with the submission of such data, the FDA may decide
that the application does not satisfy its regulatory criteria for approval and
may disapprove the NDA. Finally, the FDA may require additional clinical tests
following NDA approval to confirm safety and efficacy, often referred to as
Phase IV clinical trials.
Upon approval, a prescription drug may only be marketed for the
approved indications in the approved dosage forms and at the approved dosage
with the approved labeling. Adverse experiences with the product must be
reported to the FDA. In addition, the FDA may impose restrictions on the use of
the drug that may be difficult and expensive to administer. Product approvals
may be withdrawn if compliance with regulatory requirements is not maintained or
if problems occur or are discovered after the product reaches the market. After
a product is approved for a given indication, subsequent new indications, dosage
forms, or dosage levels for the same product are reviewed by the FDA after the
filing and upon approval of a supplemental NDA. The supplement deals primarily
with safety and effectiveness data related to the new indication or dosage.
Finally, the FDA requires reporting of certain safety and other information,
often referred to as "adverse events" that become known to a manufacturer of an
approved drug. If an active ingredient of a drug product has been previously
approved, drug applications can be filed that may be less time-consuming and
costly.
On December 3, 1999, the FDA approved the marketing of our Levulan(R)
Kerastick(R) 20% Topical Solution with PDT for treatment of AKs of the face or
scalp. The commercial version of our BLU-U(R) was approved on September 26,
2000.
We are currently conducting Phase I/II studies on the use of ALA for
the treatment of warts, onychomycosis, and Barrett's esophagus dysplasia. Other
than the FDA-approved use of the Levulan(R) Kerastick(R) 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 device, are also
subject to the FDA's rules and regulations. These products are required to be
tested, developed, manufactured and distributed in accordance with FDA
regulations, including good manufacturing, laboratory and clinical practices.
Under the Food, Drug & Cosmetic Act, all medical devices are classified as Class
I, II or III devices. The classification of a device affects the degree and
extent of the FDA's regulatory requirements, with Class III devices subject to
the most stringent requirements and FDA review. Generally, Class I devices are
subject to general controls (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 legally
marketed Class I or Class II "predicate device," are subject
21
to general controls and also require clinical testing to assure safety and
effectiveness before FDA approval is obtained. The FDA also has the authority to
require clinical testing of Class I and II devices. The BLU-U(R) 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 accept it for filing and further review. Once the submission is
filed, the FDA begins a review of the PMA application. Under the Food, Drug and
Cosmetics Act, the FDA has 180 days to review a PMA application. The review of
PMA applications more often occur over a significantly protracted time period,
and the FDA may take up to 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
other companies have sought premarket approval for devices that have never been
approved for marketing. The review time is often significantly extended by the
FDA, which may require more information or clarification of information already
provided in the submission. During the review period, an advisory committee
likely will be convened to review and evaluate the PMA application and provide
recommendations to the FDA as to whether the device should be approved for
marketing. In addition, the FDA will inspect the manufacturing facility to
ensure compliance with cGMP requirements for medical devices prior to approval
of the PMA application. If granted, the premarket approval may include
significant limitations on the indicated uses for which the product may be
marketed, and the agency may require post-marketing studies of the device.
Medical products containing a combination of drugs, including biologic
drugs, or devices may be regulated as "combination products" in the United
States. A combination product generally is defined as a product comprised of
components from 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(R) with PDT for
AKs, a combination filing (including a PMA for the BLU-U(R) light source device
and the NDA for the Levulan(R) Kerastick(R)) was submitted to the Center for
Drug Evaluation and Research. The PMA was then separated from the NDA submission
by the FDA and reviewed by the FDA's Center for Devices and Radiological Health.
Based upon this experience, we anticipate that any future NDAs for Levulan(R)
22
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 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(R) 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 to market our products 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 and has, to date, filed
applications for approval in Austria, Australia and Brazil. 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 have involved 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
23
we are in material compliance with applicable environmental laws and
regulations. For the present, we have not made any material capital expenditures
for environmental control facilities. However, once we establish our own
production line for the manufacture of the Kerastick(R), we expect that
environmental laws will govern our facility. 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 current or future environmental laws or regulations will not materially
adversely effect our operations, business or assets. In addition, although we
believe that our safety procedures for the handling and disposal of such
materials comply with the standards prescribed by current environmental laws and
regulations, the risk of accidental contamination or injury from these materials
cannot be completely eliminated. In the event of such an accident, we could be
held liable for any damages that result, and any such liability could exceed our
resources.
PRODUCT LIABILITY AND INSURANCE
We are subject to the inherent business risk of product liability
claims in the event that the use of our technology or any prospective product is
alleged to have resulted in adverse effects during testing or following
marketing approval of any such product for commercial sale. We maintain product
liability insurance for coverage of our clinical trial activities and for our
commercial supplies. There can be no assurance that such insurance will continue
to be available on commercially reasonable terms or that it will provide
adequate coverage against all potential claims.
EMPLOYEES
At the end of 2001, we had 55 full-time employees. We have employment
agreements with our key executive officers. We have purchased, and are the named
beneficiary of, a key man life insurance policy having a face value of CDN
$2,000,000 on the life of our President. We also retain numerous independent
consultants and the services of key researchers at leading university centers
whose activities are coordinated by our employees. For example, in October 2001
the Company executed a master service agreement, effective June 15, 2001, with
Therapeutics, Inc. to manage the clinical development of DUSA's products in the
field of dermatology. We intend to hire other employees and consultants as
needed.
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.
24
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(R) WITH PDT FOR THE TREATMENT OF AKS OF THE FACE OR SCALP.
BECAUSE WE AND SCHERING AG, OUR MARKETING PARTNER FOR DERMATOLOGY
PRODUCTS, HAVE ONLY LIMITED EXPERIENCE MARKETING OR SELLING DERMATOLOGY
PRODUCTS IN THE UNITED STATES, OUR REVENUES FROM ROYALTIES AND PRODUCT
SALES MAY SUFFER.
The commercial success of Levulan(R) Kerastick(R) with PDT for AKs of
the face or scalp will partly depend on the effective marketing of our products
in the United States by Schering AG through its affiliate, Berlex Laboratories,
Inc. While Schering AG has experience marketing dermatology products in Europe,
prior to the September 2000 launch of our first products, neither Schering AG,
Berlex nor DUSA had any experience marketing dermatology products in the United
States. Schering AG has 39 sales representatives and area managers who are
dedicated to the marketing of the Levulan(R) PDT system. If Schering AG ceases
to fund or fails to adequately fund marketing efforts or develop, train and
manage a sufficiently large sales force, the demand for our product will be
limited and our royalties from Schering AG on sales of the product, our income
from our light device, and our revenue on supply fees on the Kerastick(R) will
be adversely affected. Additionally, Schering AG has the right to terminate our
agreement on 12-months written notice. If Schering AG were to decide to
terminate our agreement early, we would have to establish a marketing capability
at significant expense.
IF SCHERING AG DECIDES TO DISCONTINUE FUNDING THE DERMATOLOGY
DEVELOPMENT PROGRAM, WE MAY NOT BE ABLE TO ADVANCE THE VARIOUS PROGRAMS
AS QUICKLY WHICH WOULD DELAY THE APPROVAL PROCESS AND MARKETING OF NEW
POTENTIAL PRODUCTS.
The development and commercialization process is costly and delays
and/or unanticipated costs could adversely affect our financial condition. There
can be no guarantee that Schering AG will continue to fund the dermatology
co-development program beyond its current commitment for 2002. If Schering
decides, for any reason, to cease funding the co-development program, continued
development of our potential dermatology products would require DUSA to commit
substantially greater capital to research and development of such dermatology
products and we may not have sufficient funds to complete all of our programs.
SINCE WE RELY HEAVILY ON OUTSIDE CONTRACTORS AS SOLE SUPPLIERS AND
MANUFACTURERS OF OUR LEVULAN(R) KERASTICK(R) AND BLU-U(R), 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 and rely on third-parties to manufacture our products. We
have only one source for Levulan(R), one source for our Kerastick(R), and one
for the BLU-U(R). So far, our manufacturers have not been
25
required to produce our products in large commercial quantities. Manufacturers
often encounter difficulties when large quantities of new products are
manufactured for the first time, including problems involving:
o product yields,
o quality control,
o component and service availability,
o compliance with FDA regulations, and
o the need for further FDA approval if manufacturers make
material changes to manufacturing processes and/or facilities.
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. If there are any quality or supply problems with any components supplied to
our manufacturers for our products, we may not be able to quickly replace them.
Under the terms of our agreement with Schering AG, our continuing
failure to supply Schering AG's requirements of Levulan(R), the Kerastick(R)
and/or the BLU-U(R) 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 AG's cost to manufacture and we would receive only a royalty
payment on sales. Our business, financial condition and results of operations
would be adversely affected.
IF WE ARE UNABLE TO COMPLETE THE CONSTRUCTION OF OUR MANUFACTURING SITE
IN A TIMELY MANNER, ANY RESULTING INTERRUPTION IN THE SUPPLY OF
KERASTICKS(R) COULD HAVE AN ADVERSE EFFECT ON OUR REVENUE.
Recently, we decided to build our own, commercial-scale, Kerastick(R)
manufacturing capabilities at our Wilmington facility in order to replace our
current third-party manufacturer. Our current supply agreement with North Safety
Products, Inc. shall terminate, at our option, on the later of December 31, 2002
or June 30, 2003. We have begun the construction process, with the initial
build-out expected to take approximately six months, followed by the facility
and drug stability testing required for FDA approval of the site. FDA
inspection is expected to occur within approximately six months following
the construction and testing stages. If we encounter difficulties or delays in
completing our manufacturing facility, obtaining FDA approval of the facility,
or in manufacturing commercial quantities of the Kerastick(R), such difficulties
or delays could adversely affect our business, financial condition or results of
operations. Also, the cost to build and complete testing of such manufacturing
capabilities, including equipment, will be approximately $2,700,000. If we do
not have sufficient sales, the financing and other costs associated with the
construction could have an adverse effect on our liquidity and financial
situation.
26
ANY FAILURE TO COMPLY WITH ONGOING GOVERNMENTAL REGULATIONS IN THE
UNITED STATES WILL LIMIT OUR ABILITY TO MARKET OUR FIRST PRODUCTS.
Our products are subject to continued and comprehensive regulation by
the FDA and by state and local regulations. These laws require, among other
things,
o approval of manufacturing facilities, including adherence to
"good manufacturing and laboratory practices" during
production and storage,
o controlled research and testing of products even after
approval, and
o control of marketing activities, including advertising and
labeling.
Both the manufacture and marketing of our first products, the
Levulan(R) Kerastick(R) and the BLU-U(R) 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 manufacturers 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 were required to conduct two
Phase IV follow-up studies. We have successfully completed the first study; the
second study, to evaluate the long-term recurrence rate of AKs after treatment
with our new therapy, is scheduled to begin shortly. 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:
o send us warning letters,
o impose fines and other civil penalties on us,
o suspend our regulatory approvals,
o refuse to approve pending applications or supplements to
approved applications filed by us,
o refuse to permit exports or our products from the United
States,
o require us to recall products,
o require us to notify physicians of labeling changes and/or
product related problems,
o impose restrictions on our operations, or
o criminally prosecute us.
27
ANY FAILURE TO FILE FOR OR OBTAIN FOREIGN REGULATORY APPROVALS COULD
ADVERSELY AFFECT OUR REVENUES FROM FUTURE PRODUCT SALES.
As part of our collaboration agreement with Schering AG, we will be
jointly seeking foreign regulatory approvals for Levulan(R) Kerastick(R) PDT for
AKs. To date, we have filed applications in Austria, Australia and Brazil. 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 products in foreign countries. The
introduction of our products in foreign markets will subject us to foreign
regulatory clearances, and reimbursement reviews, which may be unpredictable and
uncertain, and which may impose substantial additional costs and burdens which
Schering AG and/or DUSA 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(R), must be manufactured in compliance with the current requirements of
ISO 9000. Our third-party manufacturer has brought the BLU-U(R) into compliance
with CE marking and ISO 9001 requirements, but we can give you no assurance as
to continued compliance with future requirements. 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 file for and/or obtain foreign regulatory approvals could
adversely affect our financial condition and operations.
WE HAVE SIGNIFICANT LOSSES AND ANTICIPATE CONTINUED LOSSES FOR THE
FORESEEABLE FUTURE.
We have a history of operating losses. We expect to have continued
losses through 2002 as we expand research and development of new products and
establish ourselves in the marketplace. As of December 31, 2001, our accumulated
deficit was $49,845,445. We cannot predict whether any of our products will
achieve significant market acceptance or generate sufficient revenues to become
profitable. Our commercial success will depend on whether:
o our products are more effective therapies than currently
available treatments,
o physicians receive sufficient reimbursement for our products,
and
o we can, either together with partners or alone, successfully
market our products.
WE HAVE ONLY ONE THERAPY 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(R) WITH THE BLU-U(R) FOR PDT TO
TREAT 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
28
Levulan(R) Kerastick(R) with the BLU-U(R) for PDT to treat 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.
All of our other potential products will require the approval of the
FDA before they can be marketed in the United States. If we fail to obtain the
required approvals for other potential products our revenues will be limited.
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
three 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 administrative
action or changes in FDA policy. We must also obtain foreign regulatory
clearances before we can market any potential products in foreign markets. The
foreign regulatory approval process includes all of the risks associated with
obtaining FDA marketing approval and may impose substantial additional costs.
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, or terminates our
agreement, and if we do not enter an agreement with a corporate partner who has
the experience and resources to perform these roles, 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. In addition, companies that may compete with us
currently have extensive and well-funded marketing and sales operations. Any
marketing and sales efforts we make may be unsuccessful.
29
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, we may need
substantial additional funds to fully develop, manufacture, market and sell all
of our other potential products. We cannot predict exactly if or 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.
IF WE ARE UNABLE TO PROTECT OUR PROPRIETARY TECHNOLOGY, TRADE SECRETS OR
KNOW-HOW, WE MAY NOT BE ABLE TO OPERATE OUR BUSINESS PROFITABLY.
WE HAVE LIMITED PATENT PROTECTION AND IF WE ARE UNABLE TO PROTECT OUR
PROPRIETARY RIGHTS, COMPETITORS MIGHT BE ABLE TO DEVELOP SIMILAR
PRODUCTS TO COMPETE WITH OUR PRODUCTS AND TECHNOLOGY.
Our ability to compete successfully depends, in part, on our ability to
defend patents that have issued, obtain new patents, protect trade secrets and
operate without infringing the proprietary rights of others. We have no product
patent protection for 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:
o unique physical forms of ALA,
o methods of using ALA and its unique physical forms in
combination with light, and
o 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-
30
parts in only three 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, or ALA
precursors, 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.
Japanese Patent No. 273032, which we have licensed from PARTEQ, has been opposed
and the Japanese Patent Office Board of Appeals revoked this patent. With
PARTEQ's assistance, we are simultaneously pursuing an appeal of the revocation
before the Tokyo High Court and an amendment trial before the Japanese Patent
Office. 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 guarantee that these
agreements will provide effective protection for our proprietary information. It
is possible that:
o these persons or entities might breach the agreements,
o we might not have adequate remedies for a breach, and/or
o our competitors will independently develop or otherwise
discover our trade secrets.
PATENT LITIGATION IS EXPENSIVE, AND WE MAY NOT BE ABLE TO AFFORD THE
COSTS.
The costs of litigation or any proceeding relating to our intellectual
property rights could be substantial even if resolved in our favor. Some of our
competitors have far greater resources than we do and may be better able to
afford the costs of complex patent litigation. For example, third-party
competitors may infringe one or more of our patents, and we could be required to
spend significant resources to enforce our patent rights. Also, if we were to
sue a third-party for infringement of 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 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 interference
proceedings in the United States Patent and Trademark Office to determine the
priority of invention. A third-party also could request the declaration of a
patent interference between one of our issued patents, and a third-party United
States patent application. Any interference proceedings likely would require
participation by us and/or PARTEQ, and could involve substantial legal fees.
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BECAUSE OF THE NATURE OF OUR BUSINESS, THE LOSS OF OUR KEY MEMBERS OF OUR
MANAGEMENT TEAM COULD DELAY ACHIEVEMENT OF OUR GOALS.
IF ANY OF THE KEY MEMBERS OF OUR MANAGEMENT WERE TO END HIS
RELATIONSHIP WITH US, WE COULD EXPERIENCE SIGNIFICANT DELAYS IN OUR
BUSINESS AND RESEARCH OBJECTIVES.
We are a small company with only approximately 55 employees. We are
highly dependent on several key officer/employees with specialized scientific
and technical skills. Our growth and future success will depend, in large part,
on the continued contributions of these key individuals as well as our ability
to motivate and retain these qualified personnel in our specialty drug and light
device areas. The photodynamic therapy industry is still quite small and the
number of experts is limited. The loss of these key employees could cause
significant delays in achievement of our business and research goals since very
few people with their expertise could be hired. Our business, financial
condition and results of operations could suffer.
RISKS RELATED TO OUR INDUSTRY
PRODUCT LIABILITY AND OTHER CLAIMS AGAINST US MAY REDUCE DEMAND FOR OUR PRODUCTS
OR RESULT IN DAMAGES.
IF WE BECOME SUBJECT TO A PRODUCT LIABILITY CLAIM WE MAY NOT HAVE
ADEQUATE INSURANCE COVERAGE AND THE CLAIM COULD ADVERSELY AFFECT OUR
BUSINESS.
The development, manufacture and sale of medical products exposes us to
the risk of significant damages from product liability claims. Although we
currently maintain product liability insurance for coverage of our products in
amounts we believe to be commercially reasonable we cannot be certain that the
coverage amounts are adequate or that continued coverage will be available at
acceptable costs. If the cost is too high, we will have to self-insure. A
successful claim in excess of our insurance coverage could have a materially
adverse effect on our business, financial condition and results of operations.
OUR BUSINESS INVOLVES ENVIRONMENTAL RISKS AND WE MAY INCUR SIGNIFICANT
COSTS COMPLYING WITH ENVIRONMENTAL LAWS AND REGULATIONS.
We have used various hazardous materials, such as mercury in
fluorescent tubes in our research and development activities. Even though we do
not currently manufacture any products, we are subject to federal, state and
local laws and regulations which govern the use, manufacture, storage, handling
and disposal of hazardous materials and specific waste products. When we
establish our own production line for the manufacture of the Kerastick(R), we
expect that additional environmental laws and regulations will apply to our
facility. We believe that we are in compliance in all material respects with
currently applicable environmental laws and regulations and we have not made any
material capital expenditures for environmental control facilities to date.
However, we cannot guarantee that we will not incur significant costs to comply
with environmental laws and
32
regulations in the future. We also cannot guarantee that current or future
environmental laws or regulations will not materially adversely effect our
operations, business or assets. In addition, although we believe our safety
procedures for handling and disposing of these materials comply with federal,
state and local laws and regulations, we cannot completely eliminate the risk of
accidental contamination or injury from these materials. In the event of such an
accident, we could be held liable for any resulting damages, and this liability
could exceed our resources.
WE MAY NOT BE ABLE TO KEEP UP WITH RAPID CHANGES IN THE BIOTECHNOLOGY AND
PHARMACEUTICAL INDUSTRIES THAT COULD MAKE SOME OR ALL OF OUR PRODUCTS
NON-COMPETITIVE OR OBSOLETE.
COMPETING PRODUCTS AND TECHNOLOGIES MAY MAKE SOME OR ALL OF OUR
PROGRAMS OR POTENTIAL PRODUCTS NONCOMPETITIVE OR OBSOLETE.
Our industry is subject to rapid, unpredictable and significant
technological change. Competition is intense. Well-known pharmaceutical,
biotechnology and chemical companies are marketing well-established therapies
for the treatment of various dermatological conditions including AKs. Doctors
may prefer familiar methods that they are comfortable using rather than try our
products. Many companies are also seeking to develop new products and
technologies for medical conditions for which we are developing treatments. 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. We anticipate that we will face increased competition as new
companies enter our markets and as the scientific development of PDT/PD
advances.
We expect that our principal methods of competition with other PDT
companies will be based upon such factors as:
o the ease of administration of our photodynamic therapy,
o the degree of generalized skin sensitivity to light,
o the number of required doses,
o the selectivity of our drug for the target lesion or tissue of
interest, and
o the type and cost of our light systems.
We cannot give you any assurance that new drugs or future developments
in PDT or in other drug technologies will not have a material adverse effect on
our business. Increased competition could result in:
o price reductions,
o lower levels of third-party reimbursements,
o failure to achieve market acceptance, and
o loss of market share,
any of which could have an adverse effect on our business. Further, we cannot
give you any assurance that developments by our competitors or future
competitors will not render our technology obsolete.
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OUR COMPETITORS IN THE BIOTECHNOLOGY AND PHARMACEUTICAL INDUSTRIES MAY
HAVE BETTER PRODUCTS, MANUFACTURING CAPABILITIES OR MARKETING
EXPERTISE.
Several companies are developing PDT agents other than Levulan(R).
These include: QLT PhotoTherapeutics Inc. (Canada); Axcan, Inc. (U.S.);
Miravant, Inc. (U.S.); Pharmacyclics, Inc. (U.S.); QuantaNova Canada Ltd.
(formerly 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; and
Photocure ASA (Norway).
Many of our competitors have substantially greater financial, technical
and marketing resources than we have. In addition, several of these companies
have significantly greater experience than we do in developing products,
conducting preclinical and clinical testing and obtaining regulatory approvals
to market products for health care.
Photocure has received marketing approval of its ALA precursor (ALA
methylester) compound with PDT for the treatment of AKs in the European Union,
New Zealand and countries in Scandinavia and has applications pending for
approval in Australia and the United States. If Photocure receives approval from
the FDA to market its ALA AK product in the U.S., its entry into the marketplace
will represent direct competition fo