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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2003
DUSA Pharmaceuticals, Inc.
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(Exact Name of Registrant as Specified in Its Charter)
NEW JERSEY 22-3103129
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(State or Other Jurisdiction of (I.R.S. Employer)
Incorporation or Organization)
25 Upton Drive
Wilmington, Massachusetts 01887
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(Address of Principal Executive Offices) (Zip Code)
Commission File Number: 0-19777
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Registrant's telephone number, including area code: (978) 657-7500
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Securities registered pursuant to Section 12(b) of the Act: None
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Securities registered pursuant to section 12(g) of the Act:
Common Stock, no par value
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(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 or Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes |_| No |X|
The aggregate market value of the voting and non-voting common equity
stock held by non-affiliates computed by reference to the price at which the
common equity was last sold, or the average bid and asked price of such common
equity, as of the last business day of the Registrant's most recently completed
second fiscal quarter was $20,809,257.
The number of shares of common stock outstanding of the Registrant as of
March 10, 2004 was 16,391,372.
DOCUMENTS INCORPORATED BY REFERENCE
None.
PART I
This Annual Report on Form 10-K and certain written and oral statements
incorporated herein by reference of DUSA Pharmaceuticals, Inc. (referred to as
"DUSA," "we," and "us") contain forward-looking statements that have been made
pursuant to the provisions of the Private Securities Litigation Reform Act of
1995. Such forward-looking statements are based on current expectations,
estimates and projections about DUSA's industry, management's beliefs and
certain assumptions made by our management. Words such as "anticipates,"
"expects," "intends," "plans," "believes," "seeks," "estimates," or variations
of such words and similar expressions, are intended to identify such
forward-looking statements. These statements are not guarantees of future
performance and are subject to certain risks, uncertainties and assumptions that
are difficult to predict particularly in the highly regulated pharmaceutical
industry in which we operate. Therefore, actual results may differ materially
from those expressed or forecasted in any such forward-looking statements. Such
risks and uncertainties include those set forth herein under "Risk Factors" on
pages 28 through 41, as well as those noted in the documents incorporated herein
by reference. Unless required by law, we undertake no obligation to update
publicly any forward-looking statements, whether as a result of new information,
future events or otherwise. However, readers should carefully review the
statements set forth in other reports or documents we file from time to time
with the Securities and Exchange Commission, particularly the Quarterly Reports
on Form 10-Q and any Current Reports on Form 8-K.
ITEM 1. BUSINESS
GENERAL
DUSA is a pharmaceutical company developing drugs in combination with
light devices to treat or detect a variety of conditions in processes known as
photodynamic therapy or photodetection. We are engaged primarily in the
research, development and marketing of our first drug, Levulan(R) brand of
aminolevulinic acid HCl, or ALA, with light, for use in a broad range of medical
conditions. When we use Levulan(R) and follow it with exposure to light to treat
a medical condition, it is known as Levulan(R) photodynamic therapy, or
Levulan(R) PDT. When we use Levulan(R) and follow it with exposure to light to
detect medical conditions it is known as Levulan(R) photodetection, or
Levulan(R) PD.
Our products, the Levulan(R) Kerastick(R) 20% Topical Solution with PDT
and the BLU-U(R) brand light source were launched in the United States in
September 2000 for the treatment of actinic keratoses, or AKs, of the face or
scalp under a marketing, development and supply agreement with Schering AG, our
former marketing collaborator. AKs are precancerous skin lesions caused by
chronic sun exposure that can develop over time into a form of skin cancer
called squamous cell carcinoma. In addition, in September 2003 we received
clearance from the FDA to market the BLU-U(R) without Levulan(R) PDT for the
treatment of moderate inflammatory acne vulgaris.
2
In September 2002, DUSA reacquired all marketing and product rights from
Schering AG when the parties terminated their marketing, development and supply
agreement. Consequently, DUSA commenced marketing its products directly in
January 2003, and is wholly responsible for all regulatory, sales, marketing,
customer service, and other related product activities.
As a result of reacquiring our product rights, we evaluated our expenses
and increased the level of marketing and sales activities, while minimizing
expenditures that were not directly related to our core objectives for 2003. We
have incurred significant marketing and sales expenses in 2003, including the
costs associated with the launching of our initial sales force and other related
marketing activities. See section entitled "Business-Marketing and Sales". At
this time, our objectives include focusing on increasing the sales of our
approved products in the United States, conducting clinical trials which, if
successful, could lead to additional dermatology indications, and seeking a
partner to help develop and market Levulan(R) PDT for the treatment of
high-grade dysplasia in patients with Barrett's esophagus. In addition, we
continue to support independent investigator trials to advance research in the
use and applicability of Levulan(R) PDT for indications in dermatology, as well
as for ablation of low-grade and high-grade dysplasia in patients with Barrett's
esophagus, among others. See section entitled "Business - Internal Indications".
We are developing Levulan(R) PDT and PD under an exclusive worldwide
license of patents and technology from PARTEQ Research and Development
Innovations, the licensing arm of Queen's University, Kingston, Ontario, Canada.
We also own or license certain other patents relating to methods for using
pharmaceutical formulations which contain our drug and related processes and
improvements. In the United States, DUSA(R), DUSA Pharmaceuticals, Inc.(R),
Levulan(R), Kerastick(R) and BLU-U(R) are registered trademarks. Several of
these trademarks are also registered in Europe, Australia, Canada, and in other
parts of the world. See sections entitled "Business - Licenses; and - Patents
and Trademarks".
We were incorporated on February 21, 1991, under the laws of the State of
New Jersey. Our principal executive offices are located at 25 Upton Drive,
Wilmington, Massachusetts 01887 (telephone: (978) 657-7500). On March 3, 1994,
we formed DUSA Pharmaceuticals New York, Inc., a wholly owned subsidiary located
in Valhalla, New York, to coordinate our research and development efforts. We
have financed our operations to date, primarily from sales of securities in
public offerings, private and offshore transactions that are exempt from
registration under the Securities Act of 1933, as amended, (the "Act"),
including a private placement under Regulation D of the Act which was
consummated on February 27, 2004, and from payments received as part of the
agreement with our former marketing collaborator. See sections entitled
"Management's Discussion and Analysis of Financial Condition - Overview; -
Results of Operations; and - Liquidity and Capital Resources".
3
BUSINESS STRATEGY
The key elements of our strategy include the following:
o Support the Marketing and Sales of our Products. In October 2003,
DUSA launched its own small sales force comprised of direct sales
representatives and various independent sales organizations. Due to
the initial success of these activities, DUSA plans to expand its
sales capacity in 2004.
o Physician Education Support. Commencing with the reacquisition of
our product rights, we began to implement a new medical education
plan. Efforts to support these activities include financial support
of medical education, participation in dermatology conferences, and
improvement of third party reimbursement.
o Leveraging our Levulan(R)PDT/PD Platform to Develop Additional
Products. Based on market research completed in 2003, we are
planning Phase II clinical studies related to the treatment of
photodamaged skin and moderate to severe acne vulgaris that, if
successful, could lead to significant market opportunities for our
products. These studies are expected to commence in mid 2004. In
2003, we received clearance from the FDA to market the
BLU-U(R)without Levulan(R), to treat moderate inflammatory acne
vulgaris, which supports a multi-use capability of our BLU-U(R), in
addition to its use in our approved AK therapy. Outside of
dermatology, we are developing a product that targets a large
market, for the treatment of high-grade dysplasia in patients with
Barrett's esophagus.
o Enter into Additional Strategic Alliances. If we determine that the
development program for a given indication may be beyond our own
resources or may be advanced to market more rapidly by collaborating
with a corporate partner, we may seek opportunities to license,
market or co-promote our products. We are currently seeking a
strategic partner to join in the development, marketing, and
distribution of our treatment for Barrett's esophagus dysplasia. We
may also consider acquiring additional dermatology products that
complement our Levulan(R)PDT technology.
o Use the Results of Independent Researchers to Identify New
Applications. We continue to support research by independent
investigators so that we have the benefit of the resulting
'anecdotal' human data for use in evaluating potential indications
for corporate development. Such independent investigator studies may
lead to additional Levulan(R)products for other skin conditions such
as psoriasis, onychomycosis, warts, molluscum contagiosum, oily
skin, and acne rosacea. We also continue to monitor independent
research in order to identify other potential new indications.
PDT/PD OVERVIEW
In general, both photodynamic therapy and photodetection are two-step
processes:
o The first step is the application of a drug known as a
"photosensitizer," or a pre-cursor of this type of drug, which tends
to collect in specific cells.
4
o The second step is activation of the photosensitizer by controlled
exposure to a selective light source.
During this process, energy from the light activates the photosensitizer.
In PDT, the activated photosensitizer transfers energy to oxygen molecules found
in cells, converting the oxygen into a highly energized form known as "singlet
oxygen," which destroys or alters the sensitized cells. In PD, the activated
photosensitizer emits energy in the form of light, making the sensitized cells
fluoresce, or "glow".
The longer the wavelength of visible light, the deeper into tissue it
penetrates. Different wavelengths, or colors of light, including red and blue
light, may be used to activate photosensitizers. The selection of the
appropriate color of light for a given indication is primarily based on two
criteria:
o the desired depth of penetration of the light into the target
tissue, and
o the efficiency of the light in activating the photosensitizer.
Blue light does not penetrate deeply into tissues, and is better suited
for treating superficial lesions. It is also generally a potent activator of
photosensitizers. Red light penetrates more deeply into tissues, and is better
suited for treating cancers and deeper tissues. However, it is generally not as
strong an activator of photosensitizers. Different photosensitizers do not
absorb all colors of visible light in the same manner. For any given
photosensitizer, some colors are more strongly absorbed than others.
Another consideration in selecting a light source is the location of the
target tissue. Lesions on the skin which are easily accessible can be treated
with either laser or non-laser light sources. Internal indications, which are
often more difficult to access, usually require lasers in order to focus light
into small fiber optic delivery systems that can be passed through an endoscope
or into hollow organs.
PDT can be a highly selective treatment that targets specific tissue while
minimizing damage to normal surrounding tissue. It also can allow for multiple
courses of therapy. The most common side effect of photosensitizers that are
taken systemically is temporary skin sensitivity to bright light. Patients
undergoing PDT and PD treatments are usually advised to avoid direct sunlight
and/or to wear protective clothing during this period. Patients' indoor
activities are generally unrestricted except that they are told to avoid bright
lights. The degree of selectivity and period of skin photosensitivity varies
among different photosensitizers and is also related to the drug dose given.
Photosensitizers without activation by light have no PDT/PD effects.
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OUR LEVULAN(R) PDT/PD PLATFORM
OUR LEVULAN(R) BRAND OF ALA
We have a unique approach to PDT and PD, using the human cell's own
natural processes. Levulan(R) PDT takes advantage of the fact that ALA is the
first product in a natural biosynthetic pathway present in virtually all living
human cells. In normal cells, the production of ALA is tightly regulated through
a feedback inhibition process. In our PDT/PD system, excess ALA (as Levulan(R))
is added from outside the cell, bypassing this normal feedback inhibition. The
ALA is then converted through a number of steps into a potent natural
photosensitizer named protoporphyrin IX, or PpIX. This is the compound that is
activated by light during Levulan(R) PDT/PD, especially in fast growing cells.
Any PpIX that remains after treatment is eliminated naturally by the same
biosynthetic pathway.
We believe that Levulan(R) is unique among PDT/PD agents. It has the
following features:
o Naturally Occurring. ALA is a naturally occurring substance found in
virtually all living human cells.
o Small Molecule. Levulan(R)is a small molecule that is easily
absorbed whether delivered topically, orally, or intravenously.
o Highly Selective. Levulan(R) is not itself a photosensitizer, but is
a pro-drug that is converted through a cell-based process into the
photosensitizer PpIX. The combination of topical application, tissue
specific uptake, conversion into PpIX and targeted light delivery
make this a highly selective process. Therefore, under appropriate
conditions, we can achieve selective clinical effects in targeted
tissues with minimal effects to normal surrounding and underlying
tissues.
o Controlled Activation. Levulan(R)has no PDT effect without exposure
to light at specific wavelengths, so the therapy is easily
controlled.
Scientists believe that the accumulation of PpIX following the application
of Levulan(R) is more pronounced in:
o rapidly growing diseased tissues, such as precancerous and cancerous
lesions,
o conditions characterized by rapidly proliferating cells such as
those found in psoriasis and certain microbes, and
o in certain normally fast-growing tissues, such as hair follicles,
sebaceous glands, esophageal mucosa and the lining of the uterus.
6
OUR KERASTICK(R) BRAND APPLICATOR
We designed our proprietary Kerastick(R) specifically for use with
Levulan(R). It is a single-use, disposable applicator, which allows for the
rapid preparation and uniform application of Levulan(R) topical solution in
standardized doses. The Kerastick(R) has two separate glass ampoules, one
containing Levulan(R) powder and one containing a liquid vehicle, both enclosed
within a single plastic tube and an outer cardboard sleeve. There is a filter
and a metered dosing tip at one end. Prior to application, the doctor or nurse
crushes the ampoules and shakes the Kerastick(R) according to directions to mix
the contents into a solution. The Kerastick(R) tip is then dabbed on the
individual AK lesions, releasing a predetermined amount of Levulan(R) 20%
topical solution.
OUR LIGHT SOURCES
Customized light sources are critical to successful Levulan(R) PDT/PD
because the effectiveness of Levulan(R) therapy depends on delivering light at
an appropriate wavelength and intensity. We intend to continue to develop
combination drug and light device systems, in which the light sources:
o are compact and tailored to fit specific medical needs,
o are pre-programmed and easy to use, and
o provide cost-effective therapy.
Our proprietary BLU-U(R) is a fluorescent light source that can treat the
entire face or scalp at one time. The light source is reasonably compact and
portable. It can be used in a physician's office, requires only a moderate
amount of floor space, and plugs into a standard electrical outlet. The BLU-U(R)
also incorporates a proprietary regulator that controls the optical power of the
light source to within specified limits. It has a simple control panel
consisting of an on-off key switch and digital timer which turns off the light
automatically at the end of the treatment. The BLU-U(R) is also compliant with
CE marking and ISO 9001 requirements.
We are using non-laser light sources whenever feasible because, compared
to lasers, they are:
o safer,
o simpler to use,
o more reliable, and
o far less expensive.
7
For treatment of AKs, our BLU-U(R) uses blue light which penetrates
superficial skin lesions and is a potent activator of PpIX. Longer red
wavelengths penetrate more deeply into tissue but are not as potent activators
of PpIX. Therefore, for treatment of superficial lesions of the skin, such as
AKs, we are using relatively low intensity, non-laser blue light sources, which
are designed to treat large areas, such as the entire face or body. For
treatment of diseases that may extend several millimeters into the skin or other
tissues, including many forms of cancer; high-powered red light is usually
preferable. In addition, DUSA received clearance from the FDA in September 2003
to market the BLU-U(R) without Levulan(R) for the treatment of moderate
inflammatory acne vulgaris.
In 2004, DUSA will test its new proprietary endoscopic light delivery
system in a small Phase II single-center clinical study of the efficacy and
safety of Levulan(R) PDT for the treatment of high grade dysplasia in patients
with Barrett's esophagus. Our new system is designed to ease the process by
which physicians place fiber optics used for endoscopic light delivery within
hollow target organs such as the esophagus. Currently, for the treatment of
Barrett's esophagus dysplasia, insertion of a fiber optic is done by placement
of a balloon catheter system, which requires approximately three insertions into
the patient's esophagus, with blind light treatment by the physician (the
endoscope is removed before light treatment and then replaced afterwards).
DUSA's proprietary endoscopic light delivery allows fiber optic placement and
light treatment to the esophagus to be performed under direct visualization, in
a single insertion. Our device thus allows the endoscopic light treatment to be
performed more rapidly, under direct visualization, and at greater comfort to
the patient.
8
OUR PRODUCTS
The following table outlines our products and currently planned product
candidates. Our research and development expenses for the last three years were
$5,403,961 in 2003, $12,121,606 in 2002, and $10,789,906 in 2001.
INDICATION/PRODUCT STATUS OF REGULATORY STUDIES
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DERMATOLOGY
Levulan(R)Kerastick(R)and BLU-U(R)for PDT of Aks Approved; Phase IV(1)
Levulan(R)PDT for Photodamaged Skin Phase II (2)
Levulan(R)PDT for Moderate to Severe Acne Vulgaris Phase II (3)
BLU-U(R)Treatment of Moderate Inflammatory Acne Vulgaris Without Levulan(R) Market Clearance (4)
OTHER INDICATIONS
Levulan(R)PDT for Barrett's Esophagus Dysplasia Phase I/II
Levulan(R)Induced Fluorescence Guided Resection for Brain Cancer European Phase III (5)(6)
DUSA(R)Endoscopic Light Delivery System Phase II (7)
1. Phase IV final study report was filed with the FDA in January 2004.
2. Phase II IND was filed with the FDA in February 2004.
3. Phase II study planned to be proposed to the FDA by mid 2004.
4. In September 2003, the FDA provided market clearance for the use of
the BLU-U(R) for the light alone treatment of moderate inflammatory
acne vulgaris.
5. Licensed from Photonamic GmbH & Co. KG.
6. European Phase III trial results may not be acceptable to the FDA in
the United States.
7. Phase II pilot clinical trial planned to commence by mid 2004.
DERMATOLOGY INDICATIONS
In September 2002, DUSA assumed all responsibility for its dermatology
research and development program as a result of the termination of our former
marketing, development and supply agreement with Schering AG. Our former
dermatology marketing partner had contributed nearly $3 million per year to the
program during 2000, 2001, and 2002. Since reacquiring our product rights, we
have focused on formulating our own development program. We have decided to
develop Phase II clinical programs for photodamaged skin and moderate to severe
acne vulgaris which, if successful, could lead to additional dermatological
indications and significant market opportunities. These trials are expected to
be initiated in mid 2004. DUSA also continues to support a wide range of
independent investigator studies using the Levulan(R) Kerastick(R) that could
lead to additional new indications for future development.
9
Actinic Keratoses (AKs). AKs are superficial precancerous skin lesions
usually appearing as rough, scaly patches of skin with some underlying redness.
The traditional methods of treating AKs are cryotherapy, or the freezing of
skin, using liquid nitrogen; and 5-fluorouracil cream, or 5-FU. Although both
methods can be effective, each has limitations and can result in significant
side effects. Cryotherapy is non-selective, is usually painful at the site of
freezing and can cause blistering and loss of skin pigmentation, leaving white
spots. In addition, because there is no standardized treatment protocol, results
are not uniform. 5-FU can be highly irritating and requires twice-a-day
application by the patient for approximately 2 to 4 weeks, resulting in
inflammation, redness and erosion or rawness of the skin. Following the
treatment, an additional 1 to 2 weeks of healing is required. Our approved
treatment method involves applying Levulan(R) 20% topical solution using the
Kerastick(R) to the AK lesions, followed 14 to 18 hours later with exposure to
our BLU-U(R) for approximately 17 minutes. In 2001, we successfully completed
the first of two Phase IV trials required by the Food and Drug Administration,
or FDA, testing for allergic skin reactions to our therapy. The second trial,
which began in 2002 to evaluate the long-term effects of our therapy, was
completed in late 2003 and the final report was submitted to the FDA in January
2004.
During 2003, we continued to support efforts to improve reimbursement
levels to physicians. Such efforts included working with the Centers for
Medicare and Medicaid Services (CMS) to reverse the bundling of the drug cost
with the procedure fee, which had occurred effective March 1, 2003. In November
2003, CMS agreed to reinstate the code for physicians to bill the drug cost
separate from the procedure fee. As a result, effective January 1, 2004, there
is a revised national reimbursement code for Medicare for the BLU-U(R)
application procedure and the cost of the Levulan(R) Kerastick(R). Doctors can
also bill for any applicable visit fees. However, some physicians have suggested
that even the new reimbursement levels still do not fully reflect the required
efforts to routinely execute our therapy in their practices. We believe that the
issues related to reimbursement have affected the economic competitiveness of
our therapy with other AK therapies and have hindered its adoption in many
cases.
In addition, we continue to work to educate private insurance carriers so
that they will approve our therapy for coverage. As of December 31, 2003,
several of the major private insurers have approved coverage for our AK therapy.
We believe that due to these efforts, plus future improvements, along with our
education and marketing programs, a more widespread adoption of our therapy
should occur over time.
10
Facial Photodamaged Skin. Photodamaged skin, which is skin damaged by the
sun, occurs primarily in fair-skinned individuals after many years of sun
exposure. Signs of photodamaged skin include roughness, wrinkles and brown
spots. AKs also occur frequently in areas of photodamaged skin. There are
numerous consumer cosmetic and herbal products which claim to lessen or relieve
the symptoms of photodamaged skin. In most cases, there is little scientific
data to support these claims. The FDA has approved only one prescription drug,
Renova(R)(1), to treat this common skin condition. Patients generally use the
product for between 6 and 24 weeks before improvement may be observed. There are
also a number of FDA approved laser and light-based treatments being used in the
treatment of photodamaged skin.
As part of our AK clinical trials, we conducted a Phase II safety and
efficacy study, testing 64 patients with 3 to 7 AK lesions of the face or scalp
within an area of photodamaged skin. The physician investigators applied
Levulan(R) 20% topical solution over the entire area including the photodamaged
skin. After 14 to 18 hours, the patients were treated with blue light at
differing light doses. Investigators noted marked improvement in skin roughness
in the treated areas in two-thirds of the patients after treatment with
Levulan(R) PDT as well as some degree of improvement of wrinkles and brown
spots. However, 10 of the 64 patients found that the burning and stinging of the
PDT therapy was too uncomfortable and as a result the treatment was either
terminated early or the light power was reduced. No patients reported a serious
treatment-related adverse event. During 2003, DUSA-supported independent
investigator studies for photodamaged skin were completed including a
short-incubation study using different light sources: a BLU-U(R), pulsed dye
lasers, and intense pulsed light sources. Certain of the independent
investigator studies focused on providing evidence which may be used to help
optimize the method of treatment for future studies. According to recent
peer-reviewed publications, these studies have shown that, when Levulan(R) is
applied to the entire face for as little as one hour followed by treatment with
the BLU-U(R), or pulsed light sources, efficacy in removing AKs is similar to
that of our Phase III trials, which used spot application on each AK and
overnight incubation. Additionally, these studies report that patients' skin
have shown improvements in various photodamaged skin parameters, including skin
quality, sallowness, roughness, fine wrinkling, and Griffiths score, a
photonumeric scale for the assessment of skin photodamage. Accordingly, based on
the results of our previous Phase II safety and efficacy study, the results of
independent investigator studies, and other anecdotal reports, we are planning
to initiate a DUSA-sponsored Phase II study in mid 2004.
Acne. Acne is a common skin condition caused by the blockage and/or
inflammation of sebaceous (oil) glands. Traditional treatments for mild to
moderate facial inflammatory acne include over-the-counter topical medications
for mild cases, and prescription topical medications or oral antibiotics for
mild to moderate cases. For cystic acne, an oral retinoid drug called
Accutane(R)(2) is the most commonly prescribed treatment. It is also commonly
used for moderate to severe inflammatory acne. Over-the-counter treatments are
not effective for many patients and can result in side effects including drying,
flaking and redness of the skin. Prescription antibiotics lead to improvement in
many cases, but patients must often take them on a long-term basis, with the
associated risks of increased antibiotic resistance. Accutane(R) can have a
variety of side effects, from dryness of the lips and joint pains, to birth
defects, and elevated levels of triglycerides and/or liver enzymes. With
Levulan(R) PDT therapy for moderate to severe acne vulgaris we would be seeking
to improve or clear patients' acne without the need for long-term oral therapy
and with fewer side effects than current therapies.
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(1) Renova(R)is a registered trademark of Johnson & Johnson.
(2) Accutane(R)is a registered trademark of Hoffmann-La Roche.
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As part of the co-development program with our former partner, a
dose-ranging clinical trial was completed in 2001. The specific low drug dose
protocol tested was not able to replicate the positive clinical results seen in
previous independent research using higher drug doses but which also was
associated with significant side effects. However, based on results of
independent investigator studies that were completed during 2003, we believe
that this is a potential significant indication for Levulan(R) PDT. A protocol
for this indication is under development as we plan to initiate a DUSA-sponsored
Phase II study during 2004. The study will utilize the BLU-U(R) and
short-incubation, broad-area application of the Levulan(R) Kerastick(R). This
combination has been reported in published independent investigator studies as
being effective, while having minimal treatment-related side effects.
In addition, DUSA received clearance from the FDA in September 2003 to
market the BLU-U(R) without Levulan(R) PDT for the treatment of moderate
inflammatory acne vulgaris.
OTHER POTENTIAL DERMATOLOGY INDICATIONS
There are numerous other potential uses for Levulan(R) PDT/PD in
dermatology, and we are currently supporting, or may in the future support
research in several of these areas, with corporate-sponsored Phase I-III trials,
pilot trials, and/or investigator-sponsored studies, based on pre-clinical,
clinical, regulatory and marketing criteria we have established through our
strategic planning processes. Some of the additional potential uses for
Levulan(R) in dermatology include treatment of skin conditions such as
psoriasis, onychomycosis, warts, molluscum contagiosum, oily skin, acne rosacea,
and cancers, such as squamous cell carcinomas and cutaneous T-cell lymphomas.
INTERNAL INDICATIONS
Barrett's Esophagus Dysplasia. Barrett's esophagus is an acquired
condition in which the normal tissue lining of the esophagus is replaced by
abnormal tissue in response to chronic exposure to stomach acid. Over time, the
area of the esophagus affected can develop dysplastic (precancerous) cells. As
the dysplasia progresses from low-grade to high-grade, the risk of esophageal
cancer increases significantly, such that, patients with confirmed high-grade
dysplasia often undergo major surgery to remove the affected portion of the
esophagus. The condition is often undetected until the disease reaches later
stages.
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Medical treatment of the condition has commonly included lifelong
anti-reflux therapy with drugs called proton pump inhibitors to reduce stomach
acid, while treatment for more advanced, precancerous, Barrett's esophagus
dysplasia involves surgery to remove affected areas of the esophagus. The role
of anti-reflux surgery, and/or medical devices is also being evaluated by the
medical community. In August 2003, a competitor received approval for its PDT
therapy for Barrett's esophagus. See section entitled "Business - Competition ".
Independent European studies have reported that in late-stage Barrett's
esophagus the high-grade dysplasia can be destroyed by ALA PDT. In a randomized,
controlled European investigator study supported by DUSA, Levulan(R) PDT has
been shown to allow the conversion of early-stage Barrett's esophagus with
low-grade dysplasia and portions of Barrett's esophageal lining back to normal
esophageal lining.
During the second half of 2001, we started two Phase I/II studies for the
treatment of early and late-stage Barrett's esophagus, respectively, using
systemic Levulan(R) followed by red laser light in varying light doses. Patients
were randomized to receive various light doses, with retreatment if required,
and follow-up for 24 months after the initial treatment. In our clinical trial
in which the primary efficacy goal was the ablation of high-grade dysplasia, or
HGD, in Barrett's esophagus (late stage Barrett's esophagus), six patients with
HGD were treated with Levulan(R) PDT. Of the six patients treated, five had
complete clearing of their areas of high-grade dysplasia, and four of those
patients have now been followed for a period greater than 1 year, which
indicates a durable response for complete HGD ablation. One patient dropped from
follow-up at the 2-month visit. No esophageal scarring or ruptures were noted in
the course of this study. HGD ablation continues in the patients followed. In
our low-grade dysplasia (early stage) clinical trial in which the primary
efficacy goal was the conversion of Barrett's esophagus to normal esophagus, 10
of the 11 patients that were treated with Levulan(R) PDT are still being
followed. Complete Barrett's esophagus mucosal ablation after a single
Levulan(R) PDT treatment remained stable in 3/10 (30%) patients. Two-year
follow-up data for most patients is being collected. There was 1 patient in this
study that had mild esophageal scarring without symptoms. The most common
adverse events in both studies were mild to moderate nausea and vomiting. In
order to control ongoing research and development costs during 2003, we chose
not to enroll any additional patients to these studies, but will continue to
follow the patients that have already been treated.
In preparation for a Phase II clinical trial, we are planning to initiate
a small single-center pilot Phase II clinical trial in 2004 using DUSA's new
proprietary endoscopic light delivery device for the treatment of HGD.
Brain Cancer. Despite standard therapies that include surgical tumor
removal, radiation therapy, and chemotherapy, adult patients with the most
aggressive high-grade malignant brain tumor type, glioblastoma multiforme,
generally survive only 1 year. Independent European investigators have reported
that systemic ALA dosing before surgical resection of tumors resulted in
selective fluorescence of only the tumors. The normal white matter of the brain
showed no fluorescence. These investigators used ALA-induced fluorescence in a
study involving 52 patients with glioblastoma multiforme as a guide for the more
complete removal of tumors than would be possible using white light alone. This
technique is called fluorescence-guided resection.
13
In December 2002, we entered into a License and Development Agreement with
Photonamic GmbH & Co. KG, a subsidiary of medac GmbH, a German pharmaceutical
company. This agreement provides for the licensing to us of Photonamic's
proprietary technology related to ALA for systemic dosing in the field of brain
cancer. The technology provides DUSA with access to a systemic formulation of
ALA, and a significant amount of pre-clinical data, both of which could also be
useful and are also licensed to DUSA for certain other indications, including
Barrett's esophagus dysplasia. Photonamic is currently conducting a European
Phase III clinical trial in which ALA-induced fluorescence is used to guide
surgical tumor resection in patients suffering from glioblastoma multiforme.
European Phase III trial results may not be acceptable by the FDA in the United
States and we do not intend, at this time, to repeat this study in the United
States. These clinical trials are expected to continue through late 2004 at a
minimum, so safety and efficacy for the brain cancer indication is still to be
determined. See section entitled "Business - Licenses".
OTHER POTENTIAL INTERNAL INDICATIONS
There may be numerous other potential therapeutic and cancer detection
uses for Levulan(R) PDT/PD, and we are currently supporting, or may in the
future support, research in several of these areas, as appropriate, with
corporate-sponsored clinical trials, and/or investigator-sponsored studies,
based on pre-clinical, clinical, regulatory and marketing criteria we have
established through our strategic planning processes. Some of the potential
non-dermatology indications include detection and/or treatment of
gastro-intestinal tumors, bladder cancer, pre-cancer and cancer of the oral
cavity, and pre-cancer and cancer of the larynx.
SUPPLY PARTNERS
National Biological Corporation. In November 1998, we entered into a
purchase and supply agreement with National Biological Corporation ("NBC") for
the manufacture of some of our light sources, including the BLU-U(R). We have
agreed to order from NBC all of our supply needs of these light sources for the
United States and Canada, and NBC has agreed to supply us with the quantities we
order. If an opportunity arises, the parties have agreed to negotiate the terms
under which NBC would supply us with light sources for sale in countries other
than the current territories.
14
NBC has granted to us a license to manufacture the light sources if it
fails to meet our supply needs. Under these circumstances, we would also have a
worldwide license to import, use, sell or dispose of the light sources under
NBC's technology within the field of PDT. In addition, NBC has agreed that it
will not supply light sources that may be used to compete with our business. The
agreement has a 10-year term, subject to earlier termination for breach or
insolvency or for convenience. However, a termination for convenience requires
12 months' prior written notice.
Sochinaz SA. Under an agreement dated December 24, 1993, Sochinaz SA
("Sochinaz") manufactures and supplies substantially all of our requirements of
Levulan(R) worldwide from its FDA approved facility in Switzerland. In June
2000, we amended the agreement to include an option to allow us to extend the
term for an additional 3 years until December 3, 2007. While we can obtain
alternative supply sources in certain circumstances, any new supplier would have
to be inspected and qualified by the FDA.
medac GmbH. In December 2002, we entered into a supply agreement with
medac GmbH in connection with the Photonamic license agreement mentioned above.
We have a license to market and sell the formulation exclusively in the United
States and in several other countries and non-exclusively in the rest of the
world subject to certain field limitations. The supply agreement covers medac's
current systemic dosage formulation for use in brain cancer, Barrett's
esophagus, as well as for other mutually agreed upon indications. The agreement
provides for minimum purchase requirements following our first commercial sale.
In addition, the agreement has a term of 10 years from the date of our first
commercial sale, subject to earlier termination rights, as well as successive
one-year renewal terms.
LICENSES
PARTEQ Research and Development Innovations. We license the patents
underlying our Levulan(R) PDT/PD systems under a license agreement with PARTEQ
Research and Development Innovations ("PARTEQ"), the licensing arm of Queen's
University, Kingston, Ontario. Under the agreement, which became effective
August 27, 1991, we have been granted an exclusive worldwide license, with a
right to sublicense, under PARTEQ's patent rights, to make, have made, use and
sell products which are precursors of PpIX, including ALA. The agreement also
covers any improvements discovered, developed or acquired by or for PARTEQ, or
Queen's University, to which PARTEQ has the right to grant a license. A
non-exclusive right is reserved to Queen's University to use the subject matter
of the agreement for non-commercial educational and research purposes. A right
is reserved to the Department of National Defense Canada to use the licensed
rights for defense purposes including defense procurement but excluding sales to
third-parties.
15
When we are selling our products directly, we have agreed to pay to PARTEQ
royalties of 6% and 4% on 66% of the net selling price in countries where patent
rights do and do not exist, respectively. In cases where we have a sublicensee,
we will pay 6% and 4% when patent rights do and do not exist, respectively, on
our net selling price less the cost of goods for products sold to the
sublicensee, and 6% of royalty payments we receive on sales of products by the
sublicensee. We are also obligated to pay 5% of any lump sum sublicense fees
paid to us, such as milestone payments, excluding amounts designated by the
sublicensee for future research and development efforts. The agreement is
effective for the life of the latest United States patents and becomes perpetual
and royalty-free when no United States patent subsists. Annual minimum royalties
to PARTEQ must total at least CDN $100,000 (U.S. $77,000 as of December 31,
2003) in order to retain the license. We have the right to terminate the PARTEQ
agreement with or without cause upon 90 days notice. See "Note 15(a) to the
Company's Notes to the Consolidated Financial Statements ".
Together with PARTEQ and Draxis Health, Inc., our former parent, we
entered into an agreement (the "ALA Assignment Agreement") effective October 7,
1991. According to the terms of this agreement we assigned to Draxis our rights
and obligations under the PARTEQ license agreement to the extent they relate to
Canada. On February 24, 2004, we reacquired these rights and agreed to pay an
upfront fee and a royalty on sales of the Levulan(R) Kerastick(R) in Canada over
a five-year term following the first commercial sale in Canada. We will now be
responsible for any royalties which would be due to PARTEQ for Canadian sales.
Draxis also agreed to assign to us the Canadian regulatory approvals for the
Levulan(R) Kerastick(R) with PDT for AKs. We also hold Canadian regulatory
approval for the BLU-U(R). We expect to launch our Levulan(R) Kerastick(R) and
BLU-U(R) in Canada in 2004.
Photonamic GmbH & Co. KG. In December 2002, we entered into a license and
development agreement with Photonamic GmbH & Co. KG, a recently formed
subsidiary of medac GmbH, a German pharmaceutical company. This agreement
provides for the licensing to us of Photonamic's proprietary technology related
to aminolevulinic acid (ALA), the compound we use in our Levulan(R) Photodynamic
Therapy (PDT) and Photodetection (PD).
Under the terms of the agreement, we received a license for the United
States and several other countries, to use Photonamic's technology, including
pre-clinical and clinical data, related to ALA for systemic dosing in the field
of brain cancer, and for indications which the parties may jointly develop
during the term of their collaboration. Additionally, we are entitled to use the
pre-clinical data for indications which we may develop on our own. Photonamic is
currently conducting a European Phase III clinical trial in which ALA-induced
fluorescence is used to guide surgical tumor resection in patients suffering
from the most aggressive form of adult brain tumor, glioblastoma multiforme.
This clinical trial is expected to continue through late 2004, at a minimum. We
paid a $500,000 up-front license fee, and will be obligated to pay certain
regulatory milestones of $1,250,000 upon FDA acceptance of a registration
application for a brain cancer product in the United States, an additional
$1,250,000 upon registration of the product, and royalties of 12.5% on net sales
under the terms of the License and Development Agreement and royalties on net
sales of any brain cancer product which utilizes the Photonamic technology.
Should Photonamic's clinical study be successful, we will be obligated to
proceed with development of the product in the United States in order to retain
the license for the use of the technology in the treatment of brain cancer. The
agreement has a term of 10 years from the date of first approval of a product
using Photonamic's technology, subject to earlier termination rights, as well as
one-year renewal terms.
16
PATENTS AND TRADEMARKS
We actively seek, when appropriate, to protect our products and
proprietary information through United States and foreign patents, trademarks
and contractual arrangements. In addition, we rely on trade secrets and
contractual arrangements to protect certain aspects of our proprietary
information and products.
Our ability to compete successfully depends, in part, on our ability to
defend our patents that have issued, obtain new patents, protect trade secrets
and operate without infringing the proprietary rights of others. We have no
product patent protection for the compound ALA itself, as our basic patents are
for methods of detecting and treating various diseased tissues using ALA or
related compounds called precursors, in combination with light. Even where we
have patent protection, there is no guarantee that we will be able to enforce
our patents. Patent litigation is expensive, and we may not be able to afford
the costs. We own or exclusively license patents and patent applications related
to the following:
o methods of using ALA and its unique physical forms in combination
with light,
o compositions and apparatus for those methods, and
o unique physical forms of ALA.
These patents expire no earlier than 2009, and certain patents are
entitled to terms beyond that date. Effective September 29, 2003, the United
States Patent and Trademark Office extended the term of U.S Patent No.
5,079,262, with respect to our approved AK indication for Levulan(R), until
September 29, 2013.
Under the license agreement with PARTEQ, we hold an exclusive worldwide
license to certain patent rights in the United States and a limited number of
foreign countries. See section entitled "Business - Licenses." All United States
patents and patent applications licensed from PARTEQ relating to ALA are method
of treatment patents. Method of treatment patents limit direct infringement to
users of the methods of treatment covered by the patents. We currently have
patents and/or pending patent applications in the United States and in a number
of foreign countries covering unique physical forms of ALA, compositions
containing ALA, as well as ALA applicators, light sources for use with ALA, and
other technology. We cannot guarantee that any pending patent applications will
mature into issued patents.
17
We have limited patent protection outside the United States, which may
make it easier for third-parties to compete there. Our basic method of treatment
patents and applications have counterparts in only four foreign countries, one
of which is the subject of legal action. See sections entitled "Risk Factors -
Risks Related to DUSA"; and "Legal Proceedings".
We can provide no assurance that a third-party or parties will not claim,
with or without merit, that we have infringed or misappropriated their
proprietary rights. A number of entities have obtained, and are attempting to
obtain patent protection for various uses of ALA. We can provide no assurance as
to whether any issued patents, or patents that may later issue to third-parties,
may affect the uses on which we are working or whether such patents can be
avoided, invalidated or licensed if they cannot be avoided or invalidated. If
any third-party were to assert a claim for infringement, we can provide no
assurance that we would be successful in the litigation or that such litigation
would not have a material adverse effect on our business, financial condition
and results of operation. Furthermore, we may not be able to afford the expense
of defending against such a claim.
In addition, we cannot guarantee that our patents, whether owned or
licensed, or any future patents that may issue, will prevent other companies
from developing similar or functionally equivalent products. Further, we cannot
guarantee that we will continue to develop our own patentable technologies or
that our products or methods will not infringe upon the patents of
third-parties. In addition, we cannot guarantee that any of the patents that may
be issued to us will effectively protect our technology or provide a competitive
advantage for our products or will not be challenged, invalidated, or
circumvented in the future.
We also attempt to protect our proprietary information as trade secrets.
Generally agreements with employees, licensing partners, consultants,
universities, pharmaceutical companies and agents contain provisions designed to
protect the confidentiality of our proprietary information. However, we can
provide no assurance that these agreements will provide effective protection for
our proprietary information in the event of unauthorized use or disclosure of
such information. Furthermore, we can provide no assurance that our competitors
will not independently develop substantially equivalent proprietary information
or otherwise gain access to our proprietary information, or that we can
meaningfully protect our rights in unpatentable proprietary information.
Even in the absence of composition of matter patent protection for ALA, we
may receive financial benefits from: (i) patents relating to the use of such
products (like PARTEQ's patents); (ii) patents relating to special compositions
and formulations; (iii) limited marketing exclusivity that may be available
under the Hatch-Waxman Act and any counterpart protection available in foreign
countries and (iv) patent term extension under the Hatch-Waxman Act. See section
entitled "Business - Government Regulation". Effective patent protection also
depends on many other factors such as the nature of the market and the position
of the product in it, the growth of the market, the complexities and economics
of the process for manufacture of the active ingredient of the product and the
requirements of the new drug provisions of the Food, Drug and Cosmetic Act, or
similar laws and regulations in other countries.
18
We seek registration of trademarks in the United States, and other
countries where we may market our products. To date, we have been issued 22
trademark registrations, and other applications are pending.
MANUFACTURING
Historically, our drug, Levulan(R), the Kerastick(R) brand applicator and
the BLU-U(R) brand light source were each manufactured by single third-party
suppliers. In December 2002, we terminated our agreement with North Safety
Products, Inc., a unit of Norcross Safety Products, LLC, for the manufacture and
supply of our Kerastick(R), in light of our decision to build a Kerastick(R)
manufacturing line at our Wilmington facility. We believe that the development
of our own manufacturing capabilities will enable us to better manage and
control the costs of production; however, until product sales increase
significantly our unit cost per Kerastick(R) at our new facility will be higher.
On July 14, 2003, we received FDA approval to manufacture the Levulan(R)
Kerastick(R) at our facility, and in February 2004 we commenced manufacturing in
support of our plan to maintain a reasonable level of Kerastick(R) inventory
based on sales projections. This facility will also be utilized to produce
clinical supplies for our own studies in addition to investigator studies which
we plan to support.
DISTRIBUTION
Effective December 10, 2003, DUSA signed an amended agreement with Moore
Medical Corporation ("Moore"), a national distributor and marketer of medical
and surgical supplies, to remove Moore's exclusivity rights and allow DUSA to
use other third-party distributors to sell its products. Since then, we have
appointed two additional distributors. Third-party distributors have also been
authorized to sell the BLU-U(R) on the Company's behalf. All distributors have
the right for a period of time following termination of their respective
agreement, to return their inventory of product.
MARKETING AND SALES
Under the agreement with our former dermatology marketing partner,
marketing and sales of Levulan(R) PDT products were the responsibility of the
partner. As a result of the termination of that relationship in September 2002,
we commenced implementing our own marketing and sales strategy.
19
In August 2003, we hired an Associate Vice President of Sales, and in
October 2003 we hired, trained, and deployed a sales force, which was initially
comprised of six direct representatives, various independent representatives,
and an independent sales distributor, designed to focus on most of our key
geographic markets in the United States. At the end of December 2003 we hired
our seventh direct representative in a key target market, and in January 2004 we
continued to expand our sales capacity by adding one more direct representative
and an independent representative in another key target market. Due to the
success of our initial sales launch, we plan to continue to expand our sales
capacity during 2004.
The Health Protection Branch - Canada has granted marketing approval for
the Levulan(R) Kerastick(R) with PDT using the BLU-U(R) for AKs of the face or
scalp. Pursuant to an agreement dated February 24, 2004 Draxis agreed to assign
to us the rights to market the product in Canada. See section entitled "Business
- - Licenses". We expect to launch our products in Canada in 2004.
COMPETITION
Commercial development of PDT agents other than Levulan(R) is currently
being pursued by a number of companies. These include: QLT PhotoTherapeutics
Inc. (Canada); Axcan Pharma Inc. (U.S.); Miravant, Inc. (U.S.); Pharmacyclics,
Inc. (U.S.); medac GmbH and Photonamic GmbH & Co. KG (Germany); and PhotoCure
ASA (Norway) who entered into a marketing agreement with Galderma S.A. for
countries outside of Nordic countries for certain dermatology indications.
Several of these companies are also commercializing and/or conducting research
with ALA or ALA-related compounds.
PhotoCure has received marketing approval of its ALA precursor (ALA
methyl-ester) compound for PDT treatment of AK and basal cell carcinoma, called
BCC, in the European Union, New Zealand, Australia, and countries in
Scandinavia. PhotoCure has also filed for regulatory approval in the United
States for these indications. PhotoCure has received a notice of approvability
from the FDA for its AK therapy and has stated that it expects the FDA to
approve its product in the first half of 2004. If PhotoCure receives FDA
approval to market its product in the United States, and if it enters into the
marketplace, its product will directly compete with our products. In April 2002,
we received a copy of a notice issued by PhotoCure ASA to Queen's University at
Kingston, Ontario, alleging that one of the patents covered by our agreement
with PARTEQ, Australian Patent No. 624985, relating to ALA, is invalid. As a
consequence of this action, Queen's University has assigned the Australian
patent to us so that we may participate directly in this litigation. We filed an
answer setting forth our defenses and a related countersuit alleging that
certain activities of PhotoCure and its marketing partner, Galderma S.A.,
infringe the patent. The case is ongoing and we are unable to predict the
outcome at this time. DUSA believes that the final hearing in the Federal Court
of Australia will occur in April 2004. See section entitled "Legal Proceedings".
20
In August 2003, Axcan Pharma Inc. received FDA approval for the use of its
product, PHOTOFRIN(R)(3), for photodynamic therapy in the treatment of high
grade dysplasia associated with Barrett's esophagus. This approval enabled Axcan
to be the first company to market a PDT therapy for this indication, which we
are also pursuing.
There are also non-PDT products for the treatment of AKs, including
cryotherapy with liquid nitrogen, 5-fluorouracil, and imiquimod, which was
approved on or about March 3, 2004. The pharmaceutical industry is highly
competitive, and many of our competitors have substantially greater financial,
technical and marketing resources than we have. In addition, several of these
companies have significantly greater experience than we do in developing
products, conducting preclinical and clinical testing and obtaining regulatory
approvals to market products for health care. Our competitors may succeed in
developing products that are safer or more effective than ours and in obtaining
regulatory marketing approval of future products before we do. Our
competitiveness may also be affected by our ability to manufacture and market
our products and by the level of reimbursement for the cost of our drug and
treatment by third-party payors, such as insurance companies, health maintenance
organizations and government agencies.
We believe that comparisons of the properties of various photosensitizing
PDT drugs will also highlight important competitive issues. We expect that our
principal methods of competition with other PDT companies will be based upon
such factors as the ease of administration of our photodynamic therapy; the
degree of generalized skin sensitivity to light; the number of required doses;
the selectivity of our drug for the target lesion or tissue of interest; and the
type and cost of our light systems. New drugs or future developments in PDT,
laser products or in other drug technologies may provide therapeutic or cost
advantages for competitive products. No assurance can be given that developments
by other parties will not render our products uncompetitive or obsolete.
In September 2003 we received FDA clearance to market the BLU-U(R) without
Levulan(R) for the treatment of moderate inflammatory acne vulgaris. Numerous
laser or non-laser light sources provide direct competition to our BLU-U(R).
Our current primary competitors for our products are the existing
therapies for treatment of AKs and moderate inflammatory acne vulgaris. See
section entitled "Business - Dermatology Indications, Actinic Keratoses; Acne."
Our principal method of competition with these therapies is patient benefits,
including rapid healing and excellent cosmetic results.
- -----------------
(3) PHOTOFRIN(R)is a registered trademark of Axcan Pharma Inc.
21
GOVERNMENT REGULATION
The manufacture and sale of pharmaceuticals and medical devices in the
United States are governed by a variety of statutes and regulations. These laws
require, among other things:
o approval of manufacturing facilities, including adherence to current
good manufacturing, laboratory and clinical practices during
production and storage known as cGMP, GLP and GCP, respectively,
o controlled research and testing of products,
o applications for marketing approval containing manufacturing,
preclinical and clinical data to establish the safety and efficacy
of the product, and
o control of marketing activities, including advertising and labeling.
The marketing of pharmaceutical products requires the approval of the FDA
in the United States, and similar agencies in other countries. The FDA has
established regulations and safety standards, which apply to the preclinical
evaluation, clinical testing, manufacture and marketing of pharmaceutical
products. The process of obtaining marketing approval for a new drug normally
takes several years and often involves significant costs. The steps required
before a new drug can be produced and marketed for human use in the United
States include:
o preclinical studies
o the filing of an Investigational New Drug, or IND, application,
o human clinical trials, and
o the approval of a New Drug Application, or NDA.
Preclinical studies are conducted in the laboratory and on animals to
obtain preliminary information on a drug's efficacy and safety. The time
required for conducting preclinical studies varies greatly depending on the
nature of the drug, and the nature and outcome of the studies. Such studies can
take many years to complete. The results of these studies are submitted to the
FDA as part of the IND application. Human testing can begin if the FDA does not
object to the IND application.
The human clinical testing program involves three phases. Each clinical
study typically is conducted under the auspices of an Institutional Review
Board, or IRB, at the institution where the study will be conducted. An IRB will
consider among other things, ethical factors, the safety of human subjects, and
the possible liability of the institution. A clinical plan, or "protocol," must
be submitted to the FDA prior to commencement of each clinical trial. All
patients involved in the clinical trial must provide informed consent prior to
their participation. The FDA may order the temporary or permanent discontinuance
of a clinical trial at any time for a variety of reasons, particularly if safety
concerns exist. These clinical studies must be conducted in conformance with the
FDA's bioresearch monitoring regulations.
22
In Phase I, studies are usually conducted on a small number of healthy
human volunteers to determine the maximum tolerated dose and any product-related
side effects of a product. Phase I studies generally require several months to
complete, but can take longer, depending on the drug and the nature of the
study. Phase II studies are conducted on a small number of patients having a
specific disease to determine the most effective doses and schedules of
administration. Phase II studies generally require from several months to 2
years to complete, but can take longer, depending on the drug and the nature of
the study. Phase III involves wide scale studies on patients with the same
disease in order to provide comparisons with currently available therapies.
Phase III studies generally require from 6 months to 4 years to complete, but
can take longer, depending on the drug and the nature of the study.
Data from Phase I, II and III trials are submitted to the FDA with the
NDA. The NDA involves considerable data collection, verification and analysis,
as well as the preparation of summaries of the manufacturing and testing
processes and preclinical and clinical trials. Submission of an NDA does not
assure FDA approval for marketing. The application review process generally
takes 1 to 4 years to complete, although reviews of treatments for AIDS, cancer
and other life-threatening diseases may be accelerated, expedited or subject to
fast track treatment. The process may take substantially longer if, among other
things, the FDA has questions or concerns about the safety and/or efficacy of a
product. In general, the FDA requires properly conducted, adequate and
well-controlled clinical studies demonstrating safety and efficacy with
sufficient levels of statistical assurance. However, additional information may
be required. For example, the FDA also may request long-term toxicity studies or
other studies relating to product safety or efficacy. Even with the submission
of such data, the FDA may decide that the application does not satisfy its
regulatory criteria for approval and may disapprove the NDA. Finally, the FDA
may require additional clinical tests following NDA approval to confirm safety
and efficacy, often referred to as Phase IV clinical trials.
Upon approval, a prescription drug may only be marketed for the approved
indications in the approved dosage forms and at the approved dosage with the
approved labeling. Adverse experiences with the product must be reported to the
FDA. In addition, the FDA may impose restrictions on the use of the drug that
may be difficult and expensive to administer. Product approvals may be withdrawn
if compliance with regulatory requirements is not maintained or if problems
occur or are discovered after the product reaches the market. After a product is
approved for a given indication, subsequent new indications, dosage forms, or
dosage levels for the same product are reviewed by the FDA after the filing and
upon approval of a supplemental NDA. The supplement deals primarily with safety
and effectiveness data related to the new indication or dosage. Finally, the FDA
requires reporting of certain safety and other information, often referred to as
"adverse events" that become known to a manufacturer of an approved drug. If an
active ingredient of a drug product has been previously approved, drug
applications can be filed that may be less time-consuming and costly.
23
On December 3, 1999, the FDA approved the marketing of our Levulan(R)
Kerastick(R) 20% Topical Solution with PDT for treatment of AKs of the face or
scalp. The commercial version of our BLU-U(R), used together with the
Kerastick(R) to provide PDT for the treatment of non-hyperkeratotic actinic
keratoses, or AKs, of the face or scalp, was approved on September 26, 2000. We
also received clearance from the FDA in September 2003 to market the BLU-U(R)
without Levulan(R) PDT for the treatment of moderate inflammatory acne vulgaris.
We are following patients who completed our Phase I/II studies to examine
the use of Levulan(R) for the treatment of Barrett's esophagus with areas of
high-grade dysplasia. Other than the FDA-approved use of the Levulan(R)
Kerastick(R) with PDT for treatment of AKs, our other potential products still
require significant development, including additional preclinical and/or
clinical testing, and regulatory marketing approval prior to commercialization.
The process of obtaining required approvals can be costly and time consuming and
there can be no guarantee that the use of Levulan(R) in any future products will
be successfully developed, prove to be safe and effective in clinical trials, or
receive applicable regulatory marketing approvals.
Medical devices, such as our light source device, are also subject to the
FDA's rules and regulations. These products are required to be tested,
developed, manufactured and distributed in accordance with FDA regulations,
including good manufacturing, laboratory and clinical practices. Under the Food,
Drug & Cosmetic Act, all medical devices are classified as Class I, II or III
devices. The classification of a device affects the degree and extent of the
FDA's regulatory requirements, with Class III devices subject to the most
stringent requirements and FDA review. Generally, Class I devices are subject to
general controls (for example, labeling and adherence to the cGMP requirement
for medical devices), and Class II devices are subject to general controls and
special controls (for example, performance standards, postmarket surveillance,
patient registries and FDA guidelines). Class III devices, which typically are
life-sustaining or life-supporting and implantable devices, or new devices that
have been found not to be substantially equivalent to a legally marketed Class I
or Class II "predicate device," are subject to general controls and also require
clinical testing to assure safety and effectiveness before FDA approval is
obtained. The FDA also has the authority to require clinical testing of Class I
and II devices. The BLU-U(R) is part of a combination product as defined by FDA
and therefore has been classified as a Class III device. We are developing an
endoscopic device for the Barrett's esophagus indication which we believe will
also be classified as Class III and be subject to the highest level of FDA
regulation. Approval of Class III devices require the filing of a premarket
approval, or PMA, application supported by extensive data, including preclinical
and clinical trial data, to demonstrate the safety and effectiveness of the
device. If human clinical trials of a device are required and the device
presents a "significant risk," the manufacturer of the device must file an
investigational device exemption or "IDE" application and receive FDA approval
prior to commencing human clinical trials. At present, our devices are being
studied in preclinical and clinical trials under our INDs.
24
Following receipt of the PMA application, if the FDA determines that the
application is sufficiently complete to permit a substantive review, the agency
will accept it for filing and further review. Once the submission is filed, the
FDA begins a review of the PMA application. Under the Food, Drug and Cosmetics
Act, the FDA has 180 days to review a PMA application. The review of PMA
applications more often occur over a significantly protracted time period, and
the FDA may take up to 2 years or more from the date of filing to complete its
review. In addition, a PMA for a device which forms part of a combination
product will not be approved unless and until the NDA for the corresponding drug
is also approved.
The PMA process can be expensive, uncertain and lengthy. A number of other
companies have sought premarket approval for devices that have never been
approved for marketing. The review time is often significantly extended by the
FDA, which may require more information or clarification of information already
provided in the submission. During the review period, an advisory committee
likely will be convened to review and evaluate the PMA application and provide
recommendations to the FDA as to whether the device should be approved for
marketing. In addition, the FDA will inspect the manufacturing facility to
ensure compliance with cGMP requirements for medical devices prior to approval
of the PMA application. If granted, the premarket approval may include
significant limitations on the indicated uses for which the product may be
marketed, and the agency may require post-marketing studies of the device.
Medical products containing a combination of drugs, including biologic
drugs, or devices may be regulated as "combination products" in the United
States. A combination product generally is defined as a product comprised of
components from 2 or more regulatory categories (drug/device, device/biologic,
drug/biologic, etc.). In December 2002, the FDA established the Office of
Combination Products, or OCP, whose responsibilities, according to the FDA, will
cover the entire regulatory life cycle of combination products, including
jurisdiction decisions as well as the timeliness and effectiveness of pre-market
review, and the consistency and appropriateness of post-market regulation.
In connection with our NDA for the Levulan(R) Kerastick(R) with PDT for
AKs, a combination filing (including a PMA for the BLU-U(R) light source device
and the NDA for the Levulan(R) Kerastick(R)) was submitted to the Center for
Drug Evaluation and Research. The PMA was then separated from the NDA submission
by the FDA and reviewed by the FDA's Center for Devices and Radiological Health.
Based upon this experience, we anticipate that any future NDAs for Levulan(R)
PDT/PD will be a combination filing accompanied by PMAs. There is no guarantee
that PDT products will continue to be regulated as combination products.
25
The United States Drug Price Competition and Patent Term Restoration Act
of 1984 known as the Hatch-Waxman Act establishes a 5 year period of marketing
exclusivity from the date of NDA approval for new chemical entities approved
after September 24, 1984. Levulan(R) is a new chemical entity and market
exclusivity under this law will expire on December 3, 2004. During this
Hatch-Waxman marketing exclusivity period, no third-party may submit an
"abbreviated NDA" or "paper NDA" to the FDA.
Finally, any abbreviated or paper NDA applicant will be subject to the
notification provisions of the Hatch-Waxman Act, which should facilitate our
notification about potential infringement of our patent rights. The abbreviated
or paper NDA applicant must notify the NDA holder and the owner of any patent
applicable to the abbreviated or paper NDA product, of the application and
intent to market the drug that is the subject of the NDA.
We also intend to market our products outside of the United States
beginning with Canada later this year. Generally, we try to design our protocols
for clinical studies so that the results can be used in all the countries where
we hope to market the product. However, countries sometimes require additional
studies to be conducted on patients located in their country. Prior to marketing
a product in other countries, approval by that nation's regulatory authorities
must be obtained. Our former marketing partner had been responsible for applying
for marketing approvals outside the United States for Levulan(R) PDT for
dermatology uses and did file applications for approval in Austria, Australia,
South Africa and Brazil. However, as we have determined that we should
concentrate solely on the United States market at this time, we authorized our
former partner to withdraw the application for regulatory approval of Levulan(R)
PDT in Australia, and have now followed the same course for the applications in
Austria and South Africa. In 2003, we also advised our former partner to
withdraw the applications for the Levulan(R) Kerastick(R) and BLU-U(R) in Brazil
as it was determined that such rights cannot be transferred to us. We are in the
process of determining the requirements to reapply in Brazil, and have not
determined if we will reapply in any of the other countries at this time. We
also are investigating whether we can resubmit our application in Australia with
additional clinical results we have obtained since withdrawing that application
in order to satisfy the Australian regulatory requirements for approval.
With the enactment of the Drug Export Amendments Act of the United States
in 1986, products not yet approved in the United States may be exported to
certain foreign markets if the product is approved by the importing nation and
approved for export by the United States government. We can provide no assurance
that we will be able to get approval for any of our potential products from any
importing nations' regulatory authorities or be able to participate in the
foreign pharmaceutical market.
26
Our research and development activities have involved the controlled use
of certain hazardous materials, such as mercury in fluorescent tubes. We are
subject to various laws and regulations governing the use, manufacture, storage,
handling and disposal of hazardous materials and certain waste products. During
the design, construction and validation phases of our new Kerastick(R) facility,
we have taken steps to ensure that appropriate environmental controls associated
with the facility comply with environmental laws and standards. We can provide
no assurance that we will not have to make significant additional expenditures
in order to comply with environmental laws and regulations in the future. Also,
we cannot assure that current or future environmental laws or regulations will
not materially adversely effect our operations, business or assets. In addition,
although we believe that our safety procedures for the handling and disposal of
such materials comply with the standards prescribed by current environmental
laws and regulations, the risk of accidental contamination or injury from these
materials cannot be completely eliminated. In the event of such an accident, we
could be held liable for any damages that result, and any such liability could
exceed our resources.
PRODUCT LIABILITY AND INSURANCE
We are subject to the inherent business risk of product liability claims
in the event that the use of our technology or any prospective product is
alleged to have resulted in adverse effects during testing or following
marketing approval of any such product for commercial sale. We maintain product
liability insurance for coverage of our clinical trial activities and for our
commercial supplies. There can be no assurance that such insurance will continue
to be available on commercially reasonable terms or that it will provide
adequate coverage against all potential claims. See section entitled "Legal
Proceedings".
EMPLOYEES
At the end of 2003, we had 50 full-time employees and 1 part-time
employee. Our 2002 staffing levels for key management personnel in
administrative, financial, technical and operations functions had been
established to support the initial expected sales levels of Levulan(R) PDT that
did not materialize. Therefore, following the reacquisition of our product
rights in September 2002, we downsized our staffing levels by approximately 20%.
Since that time, we have been gradually adding employees as needed, including
our direct sales force.
We have employment agreements with all of our key executive officers. We
have purchased, and are the named beneficiary of, a key man life insurance
policy having a face value of CDN $2,000,000 on the life of our President. We
also retain numerous independent consultants and the services of key researchers
at leading university centers whose activities are coordinated by our employees.
We intend to hire other employees and consultants as needed.
27
INTERNET INFORMATION
Our internet site is located at www.dusapharma.com. Copies of our reports
filed pursuant to Section 13(a) or 15(d) of the Exchange Act, including Annual
Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form
8-K may be accessed from our website, free of charge, as soon as reasonably
practicable after we electronically file such reports with, or furnish such
reports to, the Securities and Exchange Commission.
RISK FACTORS
You should carefully consider and evaluate all of the information in, or
incorporated by reference in, this prospectus. The following are among the risks
we face related to our business, assets and operations. They are not the only
ones we face. Any of these risks could materially and adversely affect our
business, results of operations and financial condition, which in turn could
materially and adversely affect the value of the securities being offered by
this prospectus.
This section of the prospectus contains forward-looking statements of our plans,
objectives, expectations and intentions. We use words such as "anticipate,"
"believe," "expect," future" and "intend" and similar expressions to identify
forward-looking statements. Our actual results could differ materially from
those anticipated in these forward-looking statements for many reasons,
including the risks factors described below and elsewhere in this prospectus.
You should not place undue reliance on these forward-looking statements, which
apply only as of the date of this prospectus.
RISKS RELATED TO DUSA
WE ARE NOT CURRENTLY PROFITABLE AND MAY NOT BE PROFITABLE IN THE FUTURE UNLESS
WE CAN SUCCESSFULLY MARKET AND SELL OUR APPROVED PRODUCTS, THE LEVULAN(R)
KERASTICK(R) WITH THE BLU-U(R) BRAND LIGHT SOURCE FOR THE TREATMENT OF AKS OF
THE FACE OR SCALP, AND THE BLU-U(R) WITHOUT LEVULAN(R) FOR THE TREATMENT OF
MODERATE INFLAMMATORY ACNE.
WE HAVE ONLY LIMITED EXPERIENCE MARKETING AND SELLING PHARMACEUTICAL
PRODUCTS AND, AS A RESULT, OUR REVENUES FROM PRODUCT SALES MAY SUFFER.
If we are unable to successfully market and sell our approved products,
revenues from product sales will be lower than anticipated and our financial
condition may be adversely affected. As of September 1, 2002, DUSA and our
former marketing partner for dermatology products terminated the parties'
marketing, development and supply agreement. As a result of this termination,
DUSA is solely responsible for marketing its approved dermatology products in
the United States and the rest of the world. We will be doing so without the
experience of having marketed pharmaceutical products in the past. In October
2003, DUSA began hiring a small direct sales force and has engaged a small
number of independent sales representatives to market our products. Acquiring
and retaining marketing and sales force capabilities involves significant
expense, and current sales levels are not offsetting the expenses related to
these efforts. We may need to hire additional sales people to penetrate the
market. If our sales and marketing efforts fail, then sales of the Kerastick(R)
and the BLU-U(R) will be adversely affected.
28
IF WE CANNOT IMPROVE PHYSICIAN REIMBURSEMENT AND/OR CONVINCE MORE PRIVATE
INSURANCE CARRIERS TO ADEQUATELY REIMBURSE PHYSICIANS FOR OUR THERAPY,
SALES OF OUR LEVULAN(R) KERASTICK(R) FOR AKS PRODUCT MAY SUFFER.
Without adequate levels of reimbursement by government health care
programs and private health insurers, the market for our Levulan(R) Kerastick(R)
for AKs therapy will be limited. While we continue to support efforts to improve
reimbursement levels TO physicians and are working with the major private
insurance carriers to improve coverage for our therapy, if our efforts are not
successful, adoption of our therapy and sales of our products could be
negatively impacted. As of January 1, 2004, a new national reimbursement code
for Medicare and other third-party payors for the BLU-U(R) PDT application
procedure and for the costs of thE Levulan(R) Kerastick(R) became effective.
Doctors can also bill for any applicable visit fees. However, some physicians
have suggesTED that even the new reimbursement levels still do not fully reflect
the required efforts to routinely execute our PDT therapy in their practices.
SINCE WE NOW OPERATE THE ONLY FDA APPROVED MANUFACTURING FACILITY FOR THE
KERASTICK(R) AND CONTINUE TO RELY HEAVILY ON SOLE SUPPLIERS FOR THE
MANUFACTURE OF LEVULAN(R) AND THE BLU-U(R), ANY SUPPLY OR MANUFACTURING
PROBLEMS COULD NEGATIVELY IMPACT OUR SALES.
If we experience problems producing Kerastick(R) units in our new
facility, or either of our contract suppliers fail tO supply DUSA's requirements
of Levulan(R) or the BLU-U(R), our business, financial condition and results of
operations would suffer. WE are not currently approved to manufacture the
BLU-U(R) on our own and have not ordered any new BLU-U(R) units since 2001. In
additiON, while we have received FDA approval to manufacture the Kerastick(R) in
our own manufacturing facility, we have not yet produceD commercial quantities
of Kerastick(R) units in the facility on a regular basis.
Manufacturers and their subcontractors often encounter difficulties when
commercial quantities of products are manufactured for the first time, or
re-starting production after a long lay-off, or large quantities of new products
are manufactured, including problems involving:
o product yields,
o quality control,
o component and service availability,
o compliance with FDA regulations, and
o the need for further FDA approval if manufacturers make material
changes to manufacturing processes and/or facilities.
29
We cannot guarantee that problems will not arise with production yields,
costs or quality as we and our suppliers seek to commence, re-start and increase
production. Any manufacturing problems could delay or limit our supplies which
would hinder our marketing and sales efforts.
If our facility, any facility of our contract manufacturers, or any
equipment in those facilities, is damaged or destroyed, we may not be able to
quickly or inexpensively replace it. Likewise, if there are any quality or
supply problems with any components or materials needed to manufacturer our
products, we may not be able to quickly remedy the problem(s).
ANY FAILURE TO COMPLY WITH ONGOING GOVERNMENTAL REGULATIONS IN THE UNITED
STATES AND ELSEWHERE WILL LIMIT OUR ABILITY TO MARKET OUR PRODUCTS.
Both the manufacture and marketing of our products, the Levulan(R)
Kerastick(R) with the BLU-U(R) for AKs and the BLU-U(R) WITHOUT Levulan(R) to
treat moderate inflammatory acne are subject to continuing FDA review as well as
comprehensive regulation by the FDA anD by state and local regulatory
authorities. These laws require, among other things,
o approval of manufacturing facilities, including adherence to good
manufacturing and laboratory practices during production and
storage,
o controlled research and testing of products even after approval, and
o control of marketing activities, including advertising and labeling.
If we, or any of our contract manufacturers, fail to comply with these
requirements, DUSA may be limited in the jurisdictions in which we are permitted
to sell our products. Additionally, if we or our manufacturers fail to comply
with applicable regulatory approval requirements, a regulatory agency may also:
o send us warning letters,
o impose fines and other civil penalties on us,
o seize our products,
o suspend our regulatory approvals,
o refuse to approve pending applications or supplements to approved
applications filed by us,
o refuse to permit exports of our products from the United States,
o require us to recall products,
o require us to notify physicians of labeling changes and/or product
related problems,
o impose restrictions on our operations, and/or
o criminally prosecute us.
30
We and our manufacturers must continue to comply with the FDA's current
Good Manufacturing Practice, commonly known as cGMP, and equivalent foreign
regulatory requirements. The cGMP requirements govern quality control and
documentation policies and procedures. In complying with cGMP and foreign
regulatory requirements, we and our third-party manufacturers will be obligated
to expend time, money and effort in production, record keeping and quality
control to assure that our products meet applicable specifications and other
requirements.
As part of our FDA approval for the Levulan(R) Kerastick(R) for AK, we
were required to conduct two Phase IV follow-UP studies. We have successfully
completed the first study; and submitted our final report on the second study to
the FDA in January 2004. While we believe this second study was also a success,
the FDA may request additional information and/or studies. Additionally, if
previously unknown problems with the product, a manufacturer or its facility are
discovered in the future, changes in product labeling restrictions or withdrawal
of the product from the market may occur.
Manufacturing facilities are subject to ongoing periodic inspection by the
FDA, including unannounced inspections. We cannot guarantee that our third-party
supply sources, or our own new Kerastick(R) facility, will continue to meet all
applicable FDA regulations in the future. If we, or any of our manufacturers,
fail to maintain compliance with FDA regulatory requirements, it would be time
consuming and costly to remedy the problem(s) or to qualify other sources. These
consequences could have an adverse effect on our financial condition and
operations.
IF PRODUCT SALES DO NOT INCREASE SIGNIFICANTLY WE MAY NOT BE ABLE TO
ADVANCE DEVELOPMENT OF OUR OTHER POTENTIAL PRODUCTS AS QUICKLY AS WE WOULD
LIKE TO, WHICH WOULD DELAY THE APPROVAL PROCESS AND MARKETING OF NEW
POTENTIAL PRODUCTS.
If we do not generate sufficient revenues from our approved products, we
may be forced to delay or abandon some or all of DUSA's product development
programs. The pharmaceutical development and commercialization process is time
consuming and costly, and any delays might result in higher costs which could
adversely affect our financial condition. Without sufficient product sales, DUSA
might be required to seek additional funding. There is no guarantee that
adequate funding sources could be found to continue the development of all our
potential products. DUSA might be required to commit substantially greater
capital than we have to research and development of such products and we may not
have sufficient funds to complete all or any of our development programs.
31
WE HAVE SIGNIFICANT LOSSES AND ANTICIPATE CONTINUED LOSSES FOR THE
FORESEEABLE FUTURE.
We have a history of operating losses. We expect to have continued losses
through at least 2004 as we attempt to increase sales of our approved products
in the marketplace and continue research and development of potential new
products. As of December 31, 2003, our accumulated deficit was $58,909,781.
Although sales of the Kerastick(R) have increased with the addition of our saleS
force and our ongoing medical education activities, we cannot predict whether
any of our products will achieve significant market acceptance or generate
sufficient revenues to enable us to become profitable.
IF WE ARE UNABLE TO PROTECT OUR PROPRIETARY TECHNOLOGY, TRADE SECRETS OR
KNOW-HOW, WE MAY NOT BE ABLE TO OPERATE OUR BUSINESS PROFITABLY.
WE HAVE LIMITED PATENT PROTECTION AND IF WE ARE UNABLE TO PROTECT OUR
PROPRIETARY RIGHTS, COMPETITORS MIGHT BE ABLE TO DEVELOP SIMILAR PRODUCTS
TO COMPETE WITH OUR PRODUCTS AND TECHNOLOGY.
Our ability to compete successfully depends, in part, on our ability to
defend patents that have issued, obtain new patents, protect trade secrets and
operate without infringing the proprietary rights of others. We have no product
patent protection for our Levulan(R) brand of the compound ALA. Our basic
patents are for methods of detecting and treating various diseased tissues using
ALA (or related compounds called precursors), in combination with light. We own
or exclusively license patents and patent applications related to the following:
o methods of using ALA and its unique physical forms in combination
with light, and
o compositions and apparatus for those methods, and
o unique physical forms of ALA,
We have limited patent protection outside the United States, which may
make it easier for third-parties to compete there. Our basic method of treatment
patents and applications have counter-parts in only four foreign countries. Even
where we have patent protection, there is no guarantee that we will be able to
enforce our patents. Additionally, enforcement of a given patent may not be
practicable or an economically viable alternative.
Our patent protection in Australia may be diminished or lost entirely. In
2002, we received notice of a lawsuit filed in Australia by PhotoCure ASA
alleging that Australian Patent No. 624985, which is one of the patents licensed
by PARTEQ Research & Development Innovations, the technology transfer arm of
Queen's University at Kingston, Ontario, to us, relating to our ALA technology,
is invalid. As a consequence of this action, Queen's University assigned the
Australian patent to DUSA so that we can participate directly in the litigation.
We have filed a response to the allegations of invalidity in court and have also
filed a counter suit alleging that PhotoCure's activities in Australia infringe
our patent. We cannot predict the outcome of PhotoCure's action alleging
invalidity. Australia is a significant pharmaceutical market for AK therapies,
and loss of this patent could negatively impact us in at least two ways. First,
if we are able to enter the Australia market, the lack of a patent would
probably retard or diminish our market share. Second, third-parties might not be
interested in licensing the product in Australia without patent protection which
would limit potential revenues from this market.
32
Some of the indications for which we are developing therapies may not be
covered by the claims in any of our existing patents. Even with the issuance of
additional patents to DUSA, other parties are free to develop other uses of ALA,
including medical uses, and to market ALA for such uses, assuming that they have
obtained appropriate regulatory marketing approvals. ALA in the chemical form
has been commercially supplied for decades, and is not itself subject to patent
protection. There are reports of third-parties conducting clinical studies with
ALA in countries outside the United States where PARTEQ does not have patent
protection. In addition, a number of third-parties are seeking patents for uses
of ALA not covered by our patents. These other uses, whether patented or not,
and the commercial availability of ALA, could limit the scope of our future
operations because ALA products could come on the market which would not
infringe our patents but would compete with our Levulan(R) products even though
they arE marketed for different uses.
While we attempt to protect our proprietary information as trade secrets
through agreements with each employee, licensing partner, consultant,
university, pharmaceutical company and agent, we cannot guarantee that these
agreements will provide effective protection for our proprietary information. It
is possible that:
o these persons or entities might breach the agreements,
o we might not have adequate remedies for a breach, and/or
o our competitors will independently develop or otherwise discover our
trade secrets.
PATENT LITIGATION IS EXPENSIVE, AND WE MAY NOT BE ABLE TO AFFORD THE
COSTS.
The costs of litigation or any proceeding relating to our intellectual
property rights could be substantial even if resolved in our favor. Some of our
competitors have far greater resources than we do and may be better able to
afford the costs of complex patent litigation. For example, third-party
competitors may infringe one or more of our patents, and we could be required to
spend significant resources to enforce our patent rights. Also, if we were to
sue a third-party for infringement of our patents in the United States, that
third-party could challenge the validity of our patent(s). We cannot guarantee
that a third-party will not claim, with or without merit, that we have infringed
their patent(s) or misappropriated their proprietary material. Defending this
type of legal action involves considerable expense and could negatively affect
our financial results.
33
Additionally, if a third-party were to file a United States patent
application, or be issued a patent claiming technology also claimed by us in a
pending United States application(s), we may be required to participate in
interference proceedings in the United States Patent and Trademark Office to
determine the priority of invention. A third-party could also request the
declaration of a patent interference between one of our issued U.S. patents and
one of its patent applications. Any interference proceedings likely would
require participation by us and/or PARTEQ, could involve substantial legal fees
and result in a loss or lessening of our patent protection.
WE HAVE ONLY TWO THERAPIES THAT HAVE RECEIVED REGULATORY APPROVAL OR CLEARANCE
AND WE CANNOT PREDICT WHETHER WE WILL EVER DEVELOP OR COMMERCIALIZE ANY OTHER
PRODUCTS.
EXCEPT FOR THE LEVULAN(R) KERASTICK(R) WITH THE BLU-U(R) TO TREAT AKS, AND
THE USE OF THE BLU-U(R) ALONE TO TREAT MODERATE INFLAMMATORY ACNE, ALL OF
OUR POTENTIAL PRODUCTS ARE IN EARLY STAGES OF DEVELOPMENT AND MAY NEVER
RESULT IN ANY COMMERCIALLY SUCCESSFUL PRODUCTS.
We do not know if any of our products will ever be commercially
successful. Currently, we are developing a single drug compound, ALA, under the
trademark Levulan(R), with light for a number of different medical conditions
using photodynamic therapy, oR PDT. To be profitable, we must successfully
research, develop, obtain regulatory approval for, manufacture, introduce,
market and distribute our products. Except for DUSA's two approved therapies,
all of our other potential products are at an early stage of development and
subject to the risks of failure inherent in the development of new
pharmaceutical products and products based on new technologies. These risks
include:
o delays in product development, clinical testing or manufacturing,
o unplanned expenditures in product development, clinical testing or
manufacturing,
o failure in clinical trials or failure to receive regulatory
approvals,
o emergence of superior or equivalent products,
o inability to market products due to third-party proprietary rights,
and
o failure to achieve market acceptance.
We cannot predict how long the development for our early stage products
will take or whether they will be medically effective. We cannot be sure that a
successful market will ever develop for our drug technology.
34
WE MUST RECEIVE SEPARATE APPROVAL FOR EACH OF OUR POTENTIAL PRODUCTS
BEFORE WE CAN SELL THEM COMMERCIALLY IN THE UNITED STATES OR ABROAD.
All of our potential Levulan(R) products will require the approval of the
FDA before they can be marketed in the UniteD States. If we fail to obtain the
required approvals for these products our revenues will be limited. Before an
application to the FDA seeking approval to market a new drug, called an NDA, can
be filed, a product must undergo, among other things, extensive animal testing
and human clinical trials. The process of obtaining FDA approvals can be
lengthy, costly, and time-consuming. Following the acceptance of an NDA, the
time required for regulatory approval can vary and is usually 1 to 3 years or
more. The FDA may require additional animal studies and/or human clinical trials
before granting approval. Our Levulan(R) PDT products are based on neW
technology. To the best of our knowledge, the FDA has approved only 3 drugs for
use in photodynamic therapy, including Levulan(R). This factor may lengthen the
approval process. We face much trial and error and we may fail at numerous
stages along the way.
We cannot predict whether we will obtain approval for any of our potential
products. Data obtained from preclinical testing and clinical trials can be
susceptible to varying interpretations which could delay, limit or prevent
regulatory approvals. Future clinical trials may not show that Levulan(R) PDT or
photodetection, known as PD, is safe and effective for any new use we are
studying. In addition, delays or disapprovals may be encountered based upon
additional governmental regulation resulting from future legislation or
administrative action or changes in FDA policy. We must also obtain foreign
regulatory clearances before we can market any potential products in foreign
markets. The foreign regulatory approval process includes all of the risks
associated with obtaining FDA marketing approval and may impose substantial
additional costs.
IF WE ARE UNABLE TO OBTAIN THE NECESSARY CAPITAL TO FUND OUR OPERATIONS,
WE WILL HAVE TO DELAY OUR DEVELOPMENT PROGRAMS AND MAY NOT BE ABLE TO
COMPLETE OUR CLINICAL TRIALS.
Since our sales goals for our products have not been met, and may not be
met in the future, we may need substantial additional funds to fully develop,
manufacture, market and sell our other potential products. In addition to the
funds we recently received in connection with a private placement in February
2004, we may obtain funds through other public or private financings, including
equity financing, and/or through collaborative arrangements. We cannot predict
whether any financing will be available on acceptable terms.
Dependent on the extent of available funding, we may continue to delay,
reduce in scope or eliminate some of our research and development programs as we
did in 2003. We may also choose to license rights to third parties to
commercialize products or technologies that we would otherwise have attempted to
develop and commercialize on our own which could reduce our potential revenues.
35
BECAUSE OF THE NATURE OF OUR BUSINESS, THE LOSS OF KEY MEMBERS OF OUR MANAGEMENT
TEAM COULD DELAY ACHIEVEMENT OF OUR GOALS.
We are a small company with only 51 employees. We are highly dependent on
several key officer/employees with specialized scientific and technical skills
without whom our business, financial condition and results of operations would
suffer. The photodynamic therapy industry is still quite small and the number of
experts is limited. The loss of these key employees could cause significant
delays in achievement of our business and research goals since very few people
with their expertise could be hired. Our growth and future success will depend,
in large part, on the continued contributions of these key individuals as well
as our ability to motivate and retain other qualified personnel in our specialty
drug and light device areas.
RISKS RELATED TO OUR INDUSTRY
PRODUCT LIABILITY AND OTHER CLAIMS AGAINST US MAY REDUCE DEMAND FOR OUR PRODUCTS
OR RESULT IN DAMAGES.
WE HAVE HAD A LAWSUIT FILED AGAINST US BASED ON A PRODUCT LIABILITY CLAIM
WHICH, REGARDLESS OF MERIT, COULD RESULT IN A DAMAGE AWARD FOR WHICH WE
MAY NOT HAVE ADEQUATE INSURANCE COVERAGE.
The development, manufacture and sale of medical products exposes us to
product liability claims related to the use or misuse of our products. Product
liability claims can be expensive to defend and may result in significant
judgments against us. On January 29, 2004, we were served with a complaint filed
in the State of Michigan Circuit Court for the County of Oakland. The case has
been removed to the U.S. District Court, Eastern District of Michigan, Southern
Division. The complaint alleges unspecified damages suffered by the plaintiff
arising from recurrence of epileptic or similar seizures following exposure to
the BLU-U(R). We are unable to predict the outcome of this litigation. Although
we currently maintain product liability insurance for coverage of our products
in amounts we believe to be commercially reasonable we cannot be certain that
the coverage amounts are adequate. A successful claim in excess of our insurance
coverage could materially harm our business, financial condition and results of
operations. Additionally, we cannot guarantee that continued product liability
insurance coverage will be available in the future at acceptable costs. If the
cost is too high, we may have to self-insure.
36
OUR BUSINESS INVOLVES ENVIRONMENTAL RISKS AND WE MAY INCUR SIGNIFICANT
COSTS COMPLYING WITH ENVIRONMENTAL LAWS AND REGULATIONS.
We have used various hazardous materials, such as mercury in fluorescent
tubes in our research and development activities. We are subject to federal,
state and local laws and regulations which govern the use, manufacture, storage,
handling and disposal of hazardous materials and specific waste products. Now
that we have established our own production line for the manufacture of the
Kerastick(R), we are subject to additional environmental laws and regulations.
We believe that we are in compliance in all material respects with currently
applicable environmental laws and regulations. However, we cannot guarantee that
we will not incur significant costs to comply with environmental laws and
regulations in the future. We also cannot guarantee that current or future
environmental laws or regulations will not materially adversely affect our
operations, business or assets. In addition, although we believe our safety
procedures for handling and disposing of these materials comply with federal,
state and local laws and regulations, we cannot completely eliminate the risk of
accidental contamination or injury from these materials. In the event of such an
accident, we could be held liable for any resulting damages, and this liability
could exceed our resources.
WE MAY NOT BE ABLE TO COMPETE AGAINST TRADITIONAL TREATMENT METHODS OR KEEP UP
WITH RAPID CHANGES IN THE BIOTECHNOLOGY AND PHARMACEUTICAL INDUSTRIES THAT COULD
MAKE SOME OR ALL OF OUR PRODUCTS NON-COMPETITIVE OR OBSOLETE.
COMPETING PRODUCTS AND TECHNOLOGIES BASED ON TRADITIONAL TREATMENT METHODS
MAY MAKE SOME OR ALL OF OUR PROGRAMS OR POTENTIAL PRODUCTS NONCOMPETITIVE
OR OBSOLETE.
Well-known pharmaceutical, biotechnology and chemical companies are
marketing well-established therapies for the treatment of many of the same
conditions we are seeking to treat including AKs, acne, photodamaged skin and
Barrett's esophagus. Doctors may prefer to use familiar methods, rather than
trying our products. Reimbursement issues may affect the economic
competitiveness of our products as compared to other more traditional therapies.
Many companies are also seeking to develop new products and technologies,
and receiving approval for medical conditions for which we are developing
treatments. Our industry is subject to rapid, unpredictable and significant
technological change. Competition is intense. Our competitors may succeed in
developing products that are safer or more effective than ours. Many of our
competitors have substantially greater financial, technical and marketing
resources than we have. In addition, several of these companies have
significantly greater experience than we do in developing products, conducting
preclinical and clinical testing and obtaining regulatory approvals to market
products for health care.
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We cannot guarantee that new drugs or future developments in drug
technologies will not have a material adverse effect on our business. Increased
competition could result in:
o price reductions,
o lower levels of third-party reimbursements,
o failure to achieve market acceptance, and
o loss of market share,
any of which could adversely affect our business. Further, we cannot give any
assurance that developments by our competitors or future competitors will not
render our technology obsolete.
OUR PDT / PD COMPETITORS IN THE BIOTECHNOLOGY AND PHARMACEUTICAL
INDUSTRIES MAY HAVE BETTER PRODUCTS, MANUFACTURING CAPABILITIES OR
MARKETING EXPERTISE.
We anticipate that we will face increased competition as the scientific
development of PDT/PD advances and new companies enter our markets. Several
companies are developing PDT agents other than Levulan(R). These include: QLT
PhotoTherapeutics Inc. (Canada); Axcan Pharma Inc. (U.S.); Miravant, Inc.
(U.S.); and Pharmacyclics, Inc. (U.S.). We are also aware of several companies
commercializing and/or conducting research with ALA or ALA-related compounds,
including: medac GmbH and Photonamic GmbH & Co. KG (Germany); and PhotoCure ASA
(Norway) which entered into a marketing agreement with Galderma S.A. for
countries outside of Nordic countries for certain dermatology indications.
PhotoCure has received marketing approval of its ALA precursor (ALA
methyl-ester) compound for PDT treatment of AKs and basal cell carcinoma in the
European Union, New Zealand, Australia and countries in Scandinavia. PhotoCure
has also filed for regulatory approvals in the United States, and has received a
notice of approvability from the FDA for its AK product. If PhotoCure receives
FDA product approval in the United States and successfully enters the United
States marketplace, its product will represent direct competition for our
products.
Axcan Pharma Inc. has announced that it has received FDA approval for the
use of its product, PHOTOFRIN(R), for PDT in the treatment of high grade
dysplasia associated with Barrett's esophagus. Axcan is the first company to
market a PDT therapy for this indication, which we are also pursuing.
We expect that our principal methods of competition with other PDT
companies will be based upon such factors as:
o the ease of administration of our method of PDT,
o the degree of generalized skin sensitivity to light,
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o the number of required doses,
o the selectivity of our drug for the target lesion or tissue of
interest, and
o the type and cost of our light systems.
RISKS RELATED TO OUR STOCK
IF OUTSTANDING OPTIONS, WARRANTS AND RIGHTS ARE CONVERTED, THE VALUE OF THOSE
SHARES OF COMMON STOCK OUTSTANDING JUST PRIOR TO THE CONVERSION WILL BE DILUTED.
As of March 1, 2004 there were outstanding options and warrants to
purchase 2,709,825 shares of common stock, with exercise prices ranging from
U.S. $1.60 to $31.00 per share, and ranging from CDN $4.69 to CDN $10.875 per
share, respectively. In addition, DUSA granted investors of a private placement
rights to purchase up to an aggregate of an additional 337,500 shares of common
stock at $11.00 per share. These additional investment rights expire April 14,
2004, or 30 trading days from the closing of the private placement, which
occurred on March 2, 2004. If the holders exercise a significant number of these
securities at any one time, the market price of the common stock could fall, and
the value of the common stock held by other shareholders would be diluted. The
holders of the options, warrants and rights have the opportunity to profit if
the market price for the common stock exceeds the exercise price of their
respective securities, without assuming the risk of ownership. The holders are
likely to exercise their securities when we would probably be able to raise
capital from the public on terms more favorable than those provided in these
sec