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| DUSA > SEC Filings for DUSA > Form 10-K on 11-Mar-2008 | All Recent SEC Filings |
11-Mar-2008
Annual Report
associated with the Sirius products and product pipeline. Decisions related to
the product pipeline were based on a number of factors, most importantly, DUSA's
development partner's, Altana, Inc.'s, recent receipt of a non-approvable letter
from the FDA with respect to its ANDA supplement covering one of the potential
products we acquired from Sirius. We no longer expect to launch this product.
We manufacture our Levulan® Kerastick® in our own facility, while our other
products are manufactured by third parties. We are responsible for the
regulatory, sales, marketing, and customer service and other related product
activities for our Levulan®Kerastick® and for all of our products. Our current
objectives include increasing the sales of our products in the United States,
Canada, Latin America, and Korea, launching Levulan® with our partners in Brazil
and other Latin American countries and Asia, continuing to explore partnership
opportunities for Levulan® PDT for dermatology in Europe and Japan, continuing
our Levulan® PDT clinical development program for the moderate to severe acne
indication. We are working toward having a distribution agreement in place for
Japan by the end of the second quarter of 2008.
To further these objectives, we entered into a marketing and distribution
agreement with Stiefel Laboratories, Inc. in January 2006 granting Stiefel an
exclusive right to distribute the Levulan® Kerastick® in Mexico, Central and
South America. We have been actively working with Stiefel to obtain acceptable
final pricing from the Brazilian regulatory authorities. In light of the
unexpected delay in receiving acceptable final pricing in Brazil, in 2007 we
amended certain terms of the original Stiefel agreement to reflect our plans to
launch in other Latin American countries prior to Brazil. The product was
launched in Argentina, Chile, Colombia, and Mexico during the fourth quarter of
2007. On March 5, 2008 Stiefel notified us that the Brazilian authorities had
published the final pricing for the product which is acceptable to Stiefel and
to us. We expect Stiefel to launch the product in Brazil shortly. Similarly, we
entered into a marketing and distribution agreement with Daewoong Pharmaceutical
Co., Ltd. and DNC Daewoong Derma & Plastic Surgery Network Company, or together,
Daewoong, granting Daewoong exclusive rights to distribute the Levulan®
Kerastick® in certain Asian countries. In the fourth quarter of 2007 the Korean
Food and Drug Administration, or KFDA, approved Levulan® Kerastick® for PDT for
the treatment of actinic keratosis and Daewoong launched our product.
We are developing Levulan® PDT and PD under an exclusive worldwide license of
patents and technology from PARTEQ Research and Development Innovations, the
licensing arm of 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®, DUSA Pharmaceuticals, Inc.®, Levulan®, Kerastick®,
BLU-U®Nicomide®, Nicomide-T®, Meted®, Psoriacap®, Psoriatec®, AVAR®, AVAR
Green®, AVAR-e®, AVAR-e Green®, and AVAR Cleanser® are registered trademarks we
own or license. Several of these trademarks are also registered in Europe,
Australia, Canada, and in other parts of the world. Numerous other trademark
applications are pending.
As of December 31, 2007, we had an accumulated deficit of approximately
$135,600,000. We believe that if operations continue as planned, we may be able
to achieve profitability and be cash-flow positive on a quarterly basis by the
fourth quarter of 2008. Achieving profitability in 2008 is dependent on our
ability to continue to grow our PDT segment revenues, both internationally and
domestically, our ability to regain the level of Nicomide® revenues we had
attained without generic competition beginning in the second quarter of 2008,
and our ability to sustain that level of revenues for the remainder of the year.
We operate in a highly regulated and competitive environment. Our competitors
include larger fully integrated pharmaceutical companies and biotechnology
companies. Many of the organizations competing with us have substantially
greater capital resources, larger research and development staffs and
facilities, greater experience in drug development and in obtaining regulatory
approvals, and greater manufacturing and sales and marketing capabilities than
we do.
Net revenues generated by the products acquired as part of our acquisition of
Sirius totaled $9,388,000 for the twelve-month period ended December 31, 2007
and $9,486,000 for the period from March 10, 2006 (date of acquisition) through
December 31, 2006. The substantial majority of these revenues were from sales of
Nicomide®. With the settlement of the River's Edge litigation in 2007, we expect
moderate growth in our Non-PDT Drug Products revenues in 2008, primarily due to
the belief that existing quantities of NIC 750 in the distribution channel
should be substantially depleted by the end of March 2008 and we should regain
our market share beginning in the second quarter of 2008. Our expectations for
growth assume that there are no other products successfully introduced into the
marketplace which would be substitutable for Nicomide®and that the FDA does not
take enforcement action against Nicomide® as a marketed unapproved drug. We are
pursuing an alternative labeling and distribution strategy that we believe we
could deploy if the FDA takes such action.
We have continued our efforts to penetrate the market by expanding our sales
coverage in key geographic locations. See the section entitled "Management's
Discussion and Analysis - Results of Operations, Marketing and Sales Costs." We
are encouraged with the year-over-year increase in PDT sales, as well as the
positive feedback we continue to receive from physicians across the country that
believe Levulan PDT should become a routine part of standard dermatological
practice. We are continuing to explore opportunities to develop, market, and
distribute our Levulan® PDT platform in Europe and expect that our distribution
partners, Stiefel for Latin America and Daewoong for Asia will give the product
increased visibility in the market and thereby advance our international
strategy. We are also continuing to seek to acquire and/or license additional
dermatology products that complement our current product portfolio that would
provide our sales force with additional complementary products to sell in the
near term.
Certain of the products acquired in connection with the Sirius merger must
meet certain minimum manufacturing and labeling standards established by the FDA
and applicable to products marketed without approved marketing applications
including Nicomide®. The FDA regulates such products under its marketed
unapproved drugs compliance policy guide entitled, "Marketed New Drugs without
Approved NDAs or ANDAs." Under this policy, the FDA recognizes that certain
unapproved products, based on the introduction date of their active ingredients
and the lack of safety concerns, have been marketed for many years and, at this
time, will not be the subject of any enforcement action. The FDA has recently
taken a more proactive role and is strongly encouraging manufacturers of such
products to submit applications to obtain marketing approval and we have begun
discussions with the FDA to begin that process. The FDA's enforcement discretion
policy does not apply to drugs or firms that may be in violation of regulatory
requirements other than preapproval submission requirements and the FDA may
bring an action against a drug or a firm when the FDA concludes that such other
violations exist. The contract manufacturer of Nicomide® has received notice
that the FDA considers prescription dietary supplements to be unapproved new
drugs that are misbranded and that cannot be legally marketed, and has received
notice that the FDA believes Nicomide® could not be marketed as a dietary
supplement with its current labeling. If the FDA were to take further action, we
may be required to make certain labeling changes and market Nicomide® as an
over-the-counter product or as a dietary supplement under applicable
legislation, or withdraw the product from the market, unless and until we submit
a marketing application and obtain FDA marketing approval. Any such action by
the FDA would have a material impact on our Non-PDT Drug Product revenues.
Label changes eliminating claims of certain medicinal benefits could make it
more difficult to market Nicomide® and could therefore, negatively affect our
revenues and profits.
Shortly after the closing of the merger with Sirius, we became engaged in
patent litigation with River's Edge Pharmaceuticals LLC, or River's Edge, a
company that launched a niacinamide-based product. River's Edge also requested
that the United States Patent and Trademark Office, or USPTO, reexamine the
Nicomide® patent claiming that it is invalid. The USPTO accepted the application
for reexamination of the patent and the parties submitted their responses to the
first office action. Although the court issued a preliminary injunction against
sales of River's Edge's product in May 2006, the injunction was lifted on
March 7, 2007, due, in part, to the court's determination that the reexamination
process by the USPTO presented sufficient changed circumstances to warrant the
dissolution of the injunction. On October 28, 2007, we entered into a settlement
agreement and mutual release, or Settlement Agreement, and a license agreement
with River's Edge ending the litigation. On March 6, 2008, the USPTO vacated the
reexamination. See the section entitled "Legal Proceedings-River's Edge."
Nicomide® sales were adversely impacted throughout the litigation process and
had a material negative impact on our revenues, results of operations and
liquidity. With the settlement of the River's Edge litigation in 2007, we expect
moderate growth in our Non-PDT Drug Products revenues in 2008.
We believe that issues related to reimbursement negatively impacted the
economic competitiveness of our therapy with other AK therapies and hindered its
adoption in the past. We have continued to support efforts to improve
reimbursement levels to physicians. Such efforts included working with the
Centers for Medicare and Medicaid Services and the American Academy of
Dermatology Association on matters related to PDT-related procedures fee and the
separate drug reimbursement. In addition, in many cases, physicians can also
bill for any applicable office visit reimbursements. We continue to support
ongoing efforts that might lead to further increases in reimbursement in the
future, and intend to continue supporting efforts to seek reimbursement for our
FDA-cleared use of the BLU-U® alone in the treatment of mild to moderate
inflammatory acne of the face. Effective in January 2008, the national Medicare
average reimbursement amount for our PDT-related procedure fee increased by
approximately 18%. We believe that with increased reimbursement for our
PDT-related procedure fee, including the 18% increase in January 2008, our
treatment is increasingly financially viable for practitioners, and more
competitive with alternative AK therapies from a practice management
perspective. Most major private insurers have approved coverage for our AK
therapy. We believe that due to these efforts, plus potential future
improvements, along with our education and marketing programs, a more widespread
adoption of our therapy should occur over time.
We recognize that we have to continue to demonstrate the clinical value of
our unique therapy, and the related product benefits as compared to other
well-established conventional therapies, in order for the medical community to
accept our products on a large scale. Since we cannot predict when product sales
may offset the costs associated with these efforts, we expect that we will
continue to generate operating losses through 2008. We are aware that physicians
have been using Levulan® with the BLU-U® using short incubation times, and with
light devices manufactured by other companies, and for uses other than our
FDA-approved use. While we are not permitted to market our products for
so-called 'off-label' uses, we believe that these activities are positively
affecting the sales of our products.
As of December 31, 2007, we had a staff of 83 employees, including 4
part-time employees, as compared to 85 full-time employees, including 2
part-time employees, at the end of 2006, including marketing and sales,
production, maintenance, customer support, and financial operations personnel,
as well as those who support research and development programs for dermatology
and internal indications. At December 31, 2007, our sales force was comprised
of 35 employees. During 2006, with the addition of the sales force from Sirius
we increased the size of our sales force to 37 from 26 at the end of 2005. We
may add and/or replace employees during 2008 as business circumstances deem
necessary.
2007 TRANSACTIONS
During 2007, DUSA entered into a number of transactions:
Winston Laboratories, Inc.
On or about January 30, 2006, Winston Laboratories, Inc., or Winston, and the
former Sirius entered into a license agreement relating to a Sirius product,
Psoriatec® (known by Winston as Micanol) revising a former agreement. The
original 2006 Micanol License Agreement granted an exclusive license, with
limitation on rights to sublicense, to all property rights, including all
intellectual property and improvements, owned or controlled by Winston to
manufacture, sell and distribute products containing anthralin, in the United
States. On January 29, 2008, our wholly-owned subsidiary, Sirius, entered into
the 2006 Micanol Transition License Agreement with Winston. The Transition
License Agreement amends the original 2006 Micanol License Agreement which was
due to expire pursuant to its terms on January 31, 2008. The parties entered
into the Transition License Agreement to extend the term of the 2006 Micanol
License Agreement to September 30, 2008 in order to allow DUSA to sell its last
batch of product, to reduce the period of time that we are required to maintain
product liability insurance with respect to its distribution and sale of
products containing anthralin after the termination of the Transition License
Agreement and to confirm the allocation of certain costs and expenses relating
to the product during and after the transition period. We will pay royalties on
net sales of Psoriatec®, but we are no longer required to pay Winston a minimum
royalty to maintain the license.
Private Placement
On October 29, 2007, we entered into a securities purchase agreement, common
stock purchase warrants, and a registration rights agreement with several
investors for the private placement of 4,581,043 shares of our common stock at a
purchase price of $2.40 per share which resulted in gross proceeds to us of
$11,000,000, and warrants to purchase an additional 1,145,259 shares of common
stock. The warrants become exercisable on April 30, 2008, have a term of five
years from the initial exercise date, and have an exercise price of $2.85 per
share. On November 26, 2007, we registered the shares of common stock issued in
the transaction and the shares underlying the warrants with the Securities and
Exchange Commission for resale on a registration statement on Form S-3. On
January 22, 2008, we filed an amended registration statement on Form S-3/A. This
registration statement was declared effective by the Securities and Exchange
Commission on January 24, 2008. The warrants are accounted for as a derivative
liability at fair value on the Consolidated Balance Sheet.
River's Edge
On March 28, 2006, a lawsuit was filed in the United States District Court
for the Northern District of Georgia, Gainesville Division by River's Edge
Pharmaceuticals, LLC, or River's Edge, against us alleging, among other things,
that, prior to the merger with DUSA, Sirius agreed to authorize River's Edge to
market a generic version of Nicomide®, and that the United States patent
covering Nicomide® issued to Sirius in December 2005 is invalid. Nicomide® is
the key product DUSA acquired from Sirius in its merger. River's Edge also filed
an application with the U.S. Patent and Trademark Office requesting
reexamination of the Nicomide® patent. On April 20, 2006, we filed a patent
infringement suit in the United States
District Court in Trenton, New Jersey alleging that the River's Edge niacinamide
product infringes U.S. Patent No. 6,979,468.
On October 28, 2007, we entered into a Settlement Agreement and Mutual
Release to resolve all claims arising out of the litigation. Under the terms of
the Settlement Agreement, River's Edge unconditionally acknowledged the validity
and enforceability of the Nicomide® patent, made a lump-sum settlement payment
to DUSA in the amount of $425,000 for damages and agreed to pay to DUSA $25.00
for every bottle of NIC 750 above 5,000 bottles that is substituted for
Nicomide® after September 30, 2007. River's Edge is responsible for all returns
of NIC 750 from the distribution chain and/or order its destruction and will
immediately cease the manufacture, distribution and sale of NIC 750. River's
Edge withdrew from and ceased participating in the re-examination of our
Nicomide® patent and consented to the return to us of the $750,000 bond, which
was received by us during the fourth quarter of 2007. On March 6, 2008, the
U.S. Patent and Trademark Office vacated the reexamination of the Nicomide®
patent.
As part of the settlement, DUSA and River's Edge have also entered into a
license agreement, dated October 28, 2007, whereby DUSA granted a perpetual,
exclusive license to River's Edge to manufacture and sell four of products from
the AVAR® line, including AVAR cleanser, AVAR gel, AVAR E-emollient cream and
AVAR E-green in exchange for a royalty on net sales of these products, including
a guaranteed minimum royalty of $300,000, payable in equal annual installments
of $100,000 for three years. DUSA provided its on-hand inventory of these
products to River's Edge for no cost. We recorded a gain of $583,000 shown as
"Net gain from settlement of litigation," and will record royalties, as earned,
in "Product revenues" in the Consolidated Statements of Operations.
Stiefel Laboratories, Inc.
In January, 2006, we entered into an exclusive marketing, distribution and
supply agreement with Stiefel Laboratories, Inc., or Stiefel, covering current
and future uses of our proprietary Levulan® Kerastick® for PDT in dermatology.
The agreement, grants Stiefel an exclusive right to distribute, promote and sell
the Levulan® Kerastick® in the western hemisphere from and including Mexico
south, and all other countries in the Caribbean, excluding United States
territories. We will manufacture and supply to Stiefel on an exclusive basis in
the territory all of Stiefel's reasonable requirements for the product. The
agreement has an initial term of ten years. The Mexican, Argentinean, Colombian,
and on March 5, 2008 the Brazilian regulatory authorities have granted their
respective approvals to market the product. In September 2007, in light of the
unexpected delay in receiving acceptable final pricing in Brazil, we amended
certain terms of the original Stiefel agreement to reflect our plans to launch
in other Latin American countries prior to Brazil. During the third quarter of
2007, our first shipments were released to Argentina and Mexico. Pursuant to the
amendment, Stiefel will make aggregate milestone payments to us of up to
$2,250,000, rather than up to $3,000,000 under the Agreement based upon:
(i) launch of the product in either Mexico or Argentina which has been paid;
(ii) upon receipt of acceptable pricing approval in Brazil; and
(iii) achievement of pre-determined minimum purchase levels in the territory. In
addition, the transfer price for the product was amended to set a fixed price
plus a royalty on net sales, rather than a revenue-sharing arrangement as under
the agreement. We believe that the amended transfer price reduces some of the
risk related to currency and market price fluctuations during the ten-year term
of the agreement. The parties have certain rights to terminate the agreement
prior to the end of the initial term, and Stiefel has an option to extend the
term for an additional ten years on mutually agreeable terms and conditions.
Revenues associated with this agreement are recorded in accordance with Emerging
Issues Task Force (EITF) Issue No. 00-21, Revenue arrangements with Multiple
Deliverables (EITF 00-21).
Daewoong Pharmaceutical Co., Ltd.
On January 4, 2007, we entered into an exclusive marketing, distribution and
supply agreement with Daewoong covering current and future uses of the Levulan®
Kerastick® for PDT
in dermatology. The agreement grants Daewoong exclusive rights to distribute,
promote and sell the Levulan® Kerastick® in Korea, Taiwan, China, including
without limitation Hong Kong, India, Indonesia, Malaysia, Philippines,
Singapore, Thailand and Vietnam. We will manufacture and supply the product to
Daewoong on certain terms and conditions.
The agreement has an initial term of ten years (subject to earlier
termination and extension provisions). Daewoong will complete final integration
and submission on our behalf of all registrations and regulatory filings for the
product in the territory.
Under the terms of the agreement, Daewoong will make up to $3,500,000 in
milestone payments to us, $1,000,000 of which was paid on signing, and $1,00,000
of which was paid upon receipt of Korean regulatory approval of the product. The
remaining milestones are based upon achievement of pre-determined cumulative
sales targets in the territory subject to certain terms and conditions. In order
to maintain its exclusive rights, Daewoong is obligated to purchase a certain
number of units of the product and meet certain regulatory timelines. We will
manufacture the product in our facility in Wilmington, Massachusetts. We will
also receive a minimum transfer price per unit plus a percentage of Daewoong's
end-user price above a certain level. Revenues associated with this agreement
are recorded in accordance with EITF 00-21.
Levulan® Lawsuits Filed
Since December 2004, we have filed lawsuits against physicians in several
states to prevent their unlicensed use of versions of our Levulan® brand of ALA
produced, by third-parties for use in our patented PDT treatment for actinic
keratosis, basal cell carcinoma, or acne. The suits alleged that these
physicians performed patient treatments that are covered under patents
exclusively licensed by DUSA, resulting in direct infringement of these
patent(s). Additionally, some physicians were sued for infringement of DUSA's
trademarks and for violations of the Lanham Act for using the Levulan® brand
name on their web sites and promotional materials, but performing patient
treatments with ALA obtained from other sources. As of the end of 2007, all of
the lawsuits against physicians have settled favorably to us and DUSA has the
right to review the physician's books and records to verify ongoing compliance.
We have also sued two compounding pharmacies which we believed were inducing
physicians to infringe our patents on the photodynamic treatment of acne or
actinic keratosis. These compounding pharmacies were selling ALA to those
physicians. Both of the suits against the compounding pharmacies have been
resolved in DUSA's favor, and DUSA has the right to review their books and
records to verify ongoing compliance.
During 2006, we sued chemical suppliers in United States District Court for
the District of Arizona and the District of Utah, and a light device
manufacturer, a distributor, and a sales representative in United States
District Court for the Southern District of Ohio, Eastern Division, alleging
that these defendants induced physicians to infringe patents licensed to us,
among other things. During 2007, these cases have been resolved in DUSA's favor,
with DUSA having the right to review their books and records to verify ongoing
compliance.
While we believe that certain actions of compounding pharmacies and others go
beyond the activities which are permitted under the Food, Drug and Cosmetic Act
and have advised the FDA and local health authorities of our concerns, we cannot
be certain that our lawsuits will be successful in curbing the practices of
these companies or that regulatory authorities will intervene to stop their
activities. In addition, there may be other compounding pharmacies which are
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