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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
DUSA Pharmaceuticals, Inc.
(Exact name of registrant as specified in its charter)
NEW JERSEY 22-3103129
State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
181 University Avenue, Suite 1208
Toronto, Ontario, CANADA M5H 3M7
(Address of principal executive offices) (Zip Code)
Commission File Number: 0-19777
Registrant's telephone number, including area code: (416) 363-5059
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to section 12(g) of the Act:
Common Stock
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(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No /_/
-
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 or Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. /_/
The aggregate market value of the voting stock held by non-affiliates of
the registrant computed by reference to the closing price of such stock as of
March 14, 1997 was $58,375,318.75.
The number of shares of common stock outstanding of the registrant as of
March 14, 1997 was 9,355,950.
DOCUMENTS INCORPORATED BY REFERENCE
Documents incorporated by reference to this Report are:
(1) Annual Report to Shareholders for the year ended December 31, 1996
PART II, Item 5;
(2) Proxy Statement for the 1997 Annual Meeting of Shareholders PART
III, Items 10 through 13.
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PART I
ITEM 1. BUSINESS
General
The Company was incorporated on February 21, 1991, pursuant to the laws of
the State of New Jersey under the name Deprenyl USA, Inc. In May 1993, the
Company changed its name to DUSA Pharmaceuticals, Inc. The Company's principal
executive offices are currently located at, 181 University Avenue, Suite 1208,
Toronto, Ontario, Canada, M5H 3M7 (telephone: (416) 363-5059). On March 3, 1994,
the Company formed DUSA Pharmaceuticals New York, Inc., a wholly owned
subsidiary, located in Tarrytown, New York, to coordinate the research and
development efforts of the Company. The Company has financed its development
stage operations primarily from sales of securities in public offerings, and in
private and offshore transactions that are exempt from registration under the
Securities Act of 1933 (the "Act").
The Company is a pharmaceutical company engaged primarily in the
development of photodynamic therapy ("PDT") and photodiagnosis ("PD") utilizing
5-aminolevulinic acid ("ALA") for various medical indications. The Company is
the developer and exclusive worldwide licensee of certain technology relating to
ALA PDT (see License Agreement below). The Company also owns or is the licensee
of certain patents relating to methods for using pharmaceutical formulations
containing specified active ingredients, including ALA for PDT, and related
processes and improvements.
In general, PDT is a two-step medical treatment involving the application
of a drug (termed a photosensitizer) that collects preferentially in target
tissue followed by the application of controlled light to the photosensitized
tissue. Energy from the light activates the photosensitizer, which destroys or
alters the sensitized cells. The appropriate combination of drug and light can
affect target tissue with relatively minimal damage to surrounding tissue.ALA is
unique among PDT agents therapeutically used in that it is a naturally occurring
substance found in virtually all human cells.
ALA is unique among PDT agents therapeutically used in that it is a
naturally occurring substance found in virtually all human cells. ALA is also
unique in that it is not itself a photosensitizer. After delivery of ALA to
target tissue, it is converted through a cell-based process into the
photosensitizer protoporphyrin IX ("PpIX"). PpIX is also found in normal cells.
Normally, this process is self-regulating, so that the production of PpIX is
limited and no photosensitivity is developed. However, when additional ALA is
supplied either topically or systemically, the self-regulatory step is bypassed
and PpIX accumulates. This effect is more pronounced in rapidly growing diseased
tissues (such as pre-cancerous and cancerous lesions), conditions characterized
by rapidly proliferating inflammatory cells (such as acne) and in certain
normally fast-growing tissues (such as hair follicles and the lining of the
uterus). Topically applied, ALA penetrates skin affected by certain diseases,
such as actinic keratoses (pre-cancerous skin lesions) ("AKs"), acne and
psoriasis, more than it penetrates the surrounding normal skin. These properties
enable ALA PDT to preferentially react with targeted cells as compared to
surrounding cells. Prior to September 30, 1991, the Company was a wholly-owned
subsidiary of Draxis Health Inc. ("Draxis"), formerly Deprenyl Research Limited.
In January 1992, the Company completed a public offering of 2,875,000 shares
issued at $6 per share resulting in net proceeds to the Company of $14,785,128.
In December 1995, the Company received net proceeds of $14,553,679 as a result
of sale of 3,000,000 shares of the Company's common stock in a public offering.
Part of the proceeds were used to repurchase two million options held by Draxis
at $1.125 per option. See "Management Discussion and Analysis of Financial
Condition and Results of Operations."
In February 1996, on a request by Draxis, the Company filed a registration
statement to enable Draxis to dispose of its entire holding of 1,088,001 shares
of common stock of the Company. In March 1996, Draxis disposed of its interest
in the shares of the Company in a secondary offering at $7.20 per share. The
Company did
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not participate in the offering. As a result of this transaction certain
relationships between the Company and Draxis were changed. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
The Company completed a public offering of 750,000 shares of common stock
in May 1996, for net proceeds of $4,762,938 after offering expenses of $637,062.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Company's Products and Technology
The Company follows a development strategy of focusing its resources on
selected, priority indications chosen for development based on clinical,
regulatory and marketing criteria set by the Company. Although ALA PDT has shown
potential in numerous indications, the Company has focused development primarily
on the indications outlined below.
Lead Indications
Actinic Keratoses (AKs). The Company's development program is most
advanced for the use of ALA PDT in the treatment of AKs. Phase II of the program
has been completed and the Company has commenced two Phase III clinical pivotal
trials. AKs are superficial precancerous skin lesions usually appearing as
rough, scaly patches of skin with some underlying redness. If left untreated, it
is estimated that up to 10% of AKs develop, over time, into squamous cell
carcinomas (a form of skin cancer).
In February 1993, the Company began its first clinical trial regarding the
use of ALA PDT in the treatment of AKs. In December 1993, the investigators
reported positive results from this initial clinical trial. They concluded that
topical ALA PDT appeared to be an effective treatment, generally with tolerable
levels of patient discomfort. These results led to a new AK clinical study in
1994, incorporating improvements in formulations and light sources from the
initial study. In this Phase II clinical trial involving a topical formulation
of ALA and an inexpensive, non-laser blue light source, response rates in AKs
were promising. Therefore, during the third quarter of 1995 the Company
commenced two additional Phase II studies for this indication with a planned
maximum enrollment of approximately 100 patients at three United States sites.
The Company completed all required Phase II studies, and subsequent to a
meeting with the FDA, commenced its required Phase III clinical trials in
December 1996. The two multi-center trials are being conducted at 13 leading
dermatology research centers across the United States. Depending on a
satisfactory rate of enrollment, the Company estimates that Phase III trials
will be completed by late summer of 1997 and the New Drug Application ("NDA")
will be filed with the Food and Drug Administration as soon as feasible
thereafter. The Company believes, based upon information available at this time,
that ALA PDT will be able to achieve significant clearance of AKs with better
cosmetic results and tolerable patient discomfort compared to other current
therapies.
Diagnostic for Bladder Cancer. The Company is also developing a process
for diagnosing bladder cancer using ALA. Two independent European studies of
bladder cancer in 82 patients showed the selective accumulation of PpIX in human
bladder tumors and precancerous lesions following ALA application. These tumors
and lesions showed fluorescence upon exposure to certain wavelengths of light,
allowing the identification of malignant and precancerous lesions, including
lesions, which were missed by routine visual examination. In January 1996, the
Company entered into a research agreement with Massachusetts General Hospital to
sponsor an investigator IND ("Investigational New Drug") program in this
indication. During 1996, the Company also initiated preclinical tests, developed
two drug formulations for clinical trials, designed the clinical trial protocol
and engaged a clinical research organization to manage conduct of the trial. The
Company plans to develop a system in which ALA is delivered to the bladder,
followed by visual examination with an endoscopic device attached to a
specialized light
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source. The Company is currently in negotiations to secure appropriate light
devices. Once these negotiations are completed, the Company will be in a
position to submit an IND to the FDA for Phase I/II clinical trials, anticipated
to begin in the first half of 1997.
Secondary Indications.
Hair Removal. In an independent pilot study performed by researchers from
Massachusetts General Hospital-Harvard Medical School using an ALA formulation
supplied by the Company and a laser light source, researchers achieved hair
removal with minimal side effects in 12 subjects who were followed for up to six
months. In January 1996, the Company entered into a research agreement with this
institution to support its ongoing studies. The Company plans to commence its
own multi-center clinical trial in the first half of 1997 using ALA PDT with a
non-laser red light source for hair removal.
Endometrial Ablation. On April 23, 1992, the Company entered into a
research agreement with Queen's University at Kingston, Ontario, which focused
on the development of ALA PDT as a method of non-surgical endometrial ablation.
Independent experimental application of ALA in test models has shown selective
PpIX accumulation by the endometrium (the inner lining of the uterus, which is
the site of the bleeding), which was then selectively removed (ablated) by light
exposure, sparing muscle tissue and the remainder of the uterus. Independent
pilot human safety studies in 31 patients have confirmed the selective
accumulation of PpIX in the human endometrium after ALA application. The Company
is also supporting research by independent investigators using ALA PDT for
endometrial ablation at centers in the United Kingdom and the United States.
During 1994 and 1995, pilot human safety studies were carried out at these
centers, which showed a high degree of selectivity and with no evidence of
toxicity. The Company has developed a proprietary light delivery technology in
preparation for an investigator sponsored human treatment trial expected to
commence during the first half of 1997.
Acne. Based on pre-existing knowledge about ALA activity in sebaceous
(oil) glands, the Company carried out a small fluorescence study in acne
patients in 1994. The preliminary results showed specific localization and
conversion of ALA to PpIX in the acne lesions, which may indicate that acne
could be successfully treated with ALA PDT. A Company sponsored Phase I/II human
clinical trial, started in 1995, confirmed the selective accumulation of PpIX in
acne lesions following ALA application in eight patients. In 1996, the Company
carried out a Phase I/II dose-ranging clinical trial using topical ALA and a
proprietary non-laser red light. Although the study was designed primarily to
test safety, and to help guide the development of Phase II clinical trial
design, and was therefore not statistically sized to demonstrate efficacy, the
results were encouraging. The treatments were well tolerated, with no adverse
events reported. The Company is now working on a new protocol incorporating
multiple treatments using a non-laser blue light source in preparation for a
Phase II clinical trial scheduled to begin in 1997.
Exploratory Indications.
Since there are numerous other potential therapeutic and diagnostic uses
for ALA PDT, the Company supports research in these areas, as appropriate, with
pilot trials, and investigator-sponsored studies, based on clinical, regulatory
and marketing criteria predetermined by the Company through the strategic
planning process. Some of these uses include, psoriasis, cervical cancer,
cutaneous T-cell lymphomas, gastro-intestinal carcinomas and dysplasias,
alopecia areta, squamous cell carcinomas (erythroplasia of Queyrat and Bowen's
Disease), and others. The Company also monitors independent research on ALA PDT,
in order to identify new indications for potential development (see "Diagnostic
for Bladder Cancer" above). In 1996, encouraging human data were presented at a
number of scientific meetings on the use of ALA PDT for diagnosis or treatment
of lung cancer, brain cancer, oral cancer, among other cancers. The Company will
continue to monitor the progress of these studies and may sponsor investigations
which have the potential to qualify for an NDA.
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The Company also actively evaluates and pursues licensing opportunities
and patents for potential new compounds, or improvements to existing ALA PDT
methods and technologies. As part of this effort, effective September 1994, the
Company entered into a research agreement with Queen's University, which focuses
on the development of new clinical applications of ALA induced PpIX.
In 1994-1995, the Company carried out a Phase II study on the treatment of
superficial basal cell carcinomas ("BCCs") at Veterans Administration Hospitals
in Miami, Florida and Long Beach, California. The results showed that using a
3-hour drug application time, the cure rate was not high enough to justify
developing BCC as a lead indication at this time, primarily because of
regulatory and marketing considerations. Therefore, in keeping with the
Company's strategic plan of carrying out full development only on priority
indications, DUSA BCC studies have been suspended, although investigator
studies, using longer drug application times, will continue.
In August 1993, the Company entered into a worldwide license agreement
with researchers from the University of Toronto for a new group of melanins.
Melanin is a naturally occurring pigment, which may aid in reflecting and
absorbing solar radiation in human skin. These new compounds, which the Company
calls Lipomelanins, chemically bind to the skin and do not wash off easily for
extended periods of time. Research indicates that Lipomelanins may be useful as
UVA sunscreen agents and for certain cosmetic and industrial purposes. A patent
application covering Lipomelanin was filed in the United States on April 30,
1993, followed by international applications in 1995. A Notice of Allowance has
been received from the United States Patent and Trademark Office. Lipomelanin is
being developed with the assistance of MeL-Co (of California, a melanin
specialty company). In May 1996, MeL-Co, launched Lipomelanin-LQ (patent
pending), a synthetic melanin specifically designed for use as a black coloring
agent for hair. Lipomelanin-LQ and a Lipomelanin product are currently
undergoing testing by a number of small and large European companies. In order
to maintain its primary focus on ALA PDT, the Company expects to seek corporate
alliances and/or separate funding if it decides to develop these compounds as
pharmaceutical products.
Light Technology and Devices
The light required for ALA PDT activation may be produced by a variety of
sources. The Company has, from its inception, followed the strategy that ALA PDT
should be developed as integrated drug and light device systems, in which the
light sources are tailored to fit specific medical needs; be easy to use; and
provide cost-effective therapy. Where feasible the Company is using non-laser
light sources, which appear to be more reliable, and inexpensive, compared to
lasers. The Company's commercial device development consultant, Lumenetics, Inc.
("Lumenetics") has experience in the development and regulatory approval process
of devices for use in clinical PDT. Together with the rest of the Company's ALA
PDT research and development team, they have assisted with the design of, as
well as assessment of new light delivery and light measurement devices and
technologies. See "Business--Other Contractual Relationships: Consultants."
The longer the wavelength of visible light, the deeper into tissue it
penetrates. Short blue wavelengths penetrate only superficially but are potent
activators of ALA PDT, whereas longer red wavelengths penetrate more deeply into
tissue (although they are not as potent as blue light) and are the maximum
wavelengths which activate ALA PDT. Therefore, for treatment of superficial
lesions of the skin (epidermal lesions) such as AKs and psoriasis, the Company
is using relatively inexpensive, non-laser blue light sources, which are
designed to treat large areas, such as the entire face or body. For destruction
of hair follicles or treatment of diseases which have lesions which may
penetrate several millimeters into the skin, e.g. for most forms of cancer,
high-powered red light is preferable. The Company has U.S. and foreign patents
and patent applications relating to methods of using light devices and devices
for use in ALA PDT.
In order to treat diseases of internal organs, the Company is utilizing
existing technology to allow light from non-laser light sources to be focused
into a light guide small enough to be inserted into the body. This light is
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"laser-like" in that it is powerful and can be transmitted internally through a
light guide, but is less costly than current lasers. Such non-laser light
sources are also easier to use and maintain. However, for certain internal
indications, and under certain conditions, laser light sources may still be
required.
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, (i) approval of manufacturing facilities, including
adherence to good manufacturing, laboratory and clinical practices (known as
"GMPs", "GLPs" and "GCPs", respectively) during production and storage; (ii)
controlled research and testing of products; (iii) a submission for governmental
review containing manufacturing, preclinical and clinical data in order to
obtain marketing approval based on establishing the safety and efficacy of the
product for each use sought; and (iv) control of marketing activities, including
advertising and labeling. The Company's products still require significant
development, including additional preclinical and clinical testing, and
regulatory marketing approval prior to commercialization. The process of
obtaining required approvals can be costly and time consuming and there can be
no assurance that the products or any future products will be successfully
developed, prove to be safe and effective in clinical trials, or receive
applicable regulatory marketing approvals. Markets outside of the United States
have similar restrictions.
The marketing of pharmaceutical products requires the approval of the FDA
in the United States, and comparable 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 the expenditure of substantial resources.
The steps required before such a product can be produced and marketed for human
use include preclinical studies, the filing of an IND application, human
clinical trials and the approval of an NDA in the United States.
Preclinical studies are conducted in the laboratory and on animals to
obtain preliminary information on a drug's efficacy and safety. The results of
these studies are submitted to the FDA as part of the IND application before
approval can be obtained for the commencement of testing on humans. These
preclinical studies may take from one to three years to perform.
The human clinical testing program involves three phases. In Phase I,
studies are usually conducted on 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. Phase II studies are
conducted on a small number of patients having a specific disease to determine
the most effective doses and schedules of administration. Phase II studies
generally require from several months to two years to complete. Phase III
involves wide scale studies on patients with the same disease in order to
provide comparisons with currently available therapies. Phase III studies
generally require from six months to four years to complete. The Company is
currently conducting Phase III studies for treatment of AK's. See "Business -
Company's Products and Technology." Data from Phase I, II and III trials are
submitted 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. For a
more specific description of the state of Company's development program, see
"Business-- Company's Products and Technology".
ALA for use in PDT is considered by the Company to be a new chemical
entity under the Food, Drug & Cosmetic Act ("FD&C Act") in the sense that
neither ALA, nor any ester or salt of ALA, has been the subject of an approved
NDA. Because ALA is a new chemical entity, and because only one similar PDT
application, which was filed by a third party, has been approved by the FDA, the
approval process for ALA PDT may be longer than the approval process for a new
drug or device alone.
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The Company's medical device products are also subject to the rules and
regulations established by the FDA. These products are required to be tested,
developed, manufactured and distributed in accordance with FDA regulations, such
as GMPs, GLPs and GCPs.
Under the FD&C 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. It is anticipated the Company's devices
may be classified as Class II or Class III medical devices and may, therefore,
be subject to the most stringent FDA regulation. There can be no assurance that
the classification, and extent of regulation, of the Company's medical devices
will not change.
At present, systems used in PDT meet the definition of a drug/device
combination product. The primary responsibility for review of PDT products
(drugs and devices) is under the jurisdiction of the FDA's drug center, the
Center for Drug Evaluation and Research, with support from the Center for
Devices and Radiological Health. The degree and extent of the regulatory
requirements for the various components of PDT have not been formally
established by the FDA. At present, the Company's PDT devices are being
investigated in preclinical and clinical trials under the Company's IND. There
can be no assurance that PDT products will continue to be regulated as
combination products or that separate applications for marketing approval will
not be required for PDT devices.
The United States Drug Price Competition and Patent Term Restoration Act
of 1984 (the "Hatch/Waxman Act") permits restoration of up to five years of the
patent term for new products to compensate for patent term lost during the
regulatory review process. Additionally, under the Hatch/Waxman Act new chemical
entities approved after September 24, 1984 receive a period of five years'
exclusivity from the date of NDA approval, during which time an "abbreviated
NDA" or "paper NDA" may not be submitted to the FDA by third parties. Similarly,
in the case of NDA's for non-new chemical entities approved after September 24,
1984, no "abbreviated NDA" or "paper NDA" may become effective before three
years from approval of such non-new chemical entity NDA which include data of
new clinical investigations conducted or sponsored by the applicant essential to
approval of the application. The Company cannot predict with accuracy whether or
not an NDA filed by the Company will be approved for any indication of ALA or
whether any Company NDA will be the first NDA approved for ALA. The Company
believes that since ALA has not been approved for medical use, that the first
NDA for ALA which is approved under the Hatch/Waxman Act, will be entitled to
the five years' exclusivity, as well as any patent term extension that may be
available.
Finally, any abbreviated or paper NDA applicant will be subject to the
provisions of the Hatch/Waxman Act with respect to notification of any patents
of the NDA holder and applicable to the abbreviated or paper NDA product. The
Hatch/Waxman Act may afford protection for certain of the Company's proprietary
rights; however, even if the Company obtains exclusivity from "abbreviated NDAs"
or "paper NDAs" under such act with respect to any of its products, such
exclusivity may increase the likelihood of generic competition and of challenges
to patents owned by or licensed to the Company which are listed in any Company
NDA.
The Company also intends to have its product marketed outside of the
United States primarily through corporate partnerships. Prior to marketing a
product in other countries, approval by that nation's regulatory authorities
must be obtained. The approval procedure varies from country to country. When
designing protocols for clinical studies, the Company intends to do so in a
manner that will permit acceptance of the data in the desired countries to
minimize unnecessary duplication. However, some countries may require additional
studies to be conducted on patients located in their country. With the signing
of the Drug Export Amendments Act of the United States in 1986, products not yet
approved in the United States may be exported, upon approval of an application
to export by the United States government, to certain foreign markets as long as
the product is approved by the importing nation. No assurance can be given that
the Company will be able
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to secure approval by the importing nations' regulatory authorities or will be
able to participate in the foreign pharmaceutical market.
The Company currently believes it has sufficient funds to develop its two
lead indications for ALA PDT through the NDA filing process and to continue
development of its secondary indications as planned. The Company may, however,
enter into joint development or licensing arrangements, both domestically and
internationally, with pharmaceutical companies, in which it will seek to have
the other companies assume certain of the costs of clinical testing and of
obtaining regulatory marketing approval for the products licensed. To the extent
that the Company is unable to enter into such arrangements, it may require
separate funding to complete the regulatory approval process. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
The Company's research and development activities involve the controlled
use of certain hazardous materials, such as mercury in fluorescent tubes. The
Company does not currently manufacture any products on its own; however, the
Company is subject to federal, state and local laws and regulations governing
the use, manufacture, storage, handling and disposal of such materials and
certain waste products. Although the Company believes that it is in compliance
in all material respects with applicable environmental laws and regulations and
currently does not expect to make material capital expenditures for
environmental control facilities in the near-term, there can be no assurance
that the Company will not be required to incur significant costs to comply with
environmental laws and regulations in the future, or any assurance that the
operations, business or assets of the Company will not be materially adversely
affected by current or future environmental laws or regulations. In addition,
although the Company believes that its safety procedures for the handling and
disposal of such materials comply with the standards prescribed by such laws and
regulations, the risk of accidental contamination or injury from these materials
cannot be completely eliminated. In the event of such an accident, the Company
could be held liable for any damages that result, and any such liability could
exceed the Company's resources.
License Agreement
The Company entered into the License Agreement effective August 27, 1991
with PARTEQ and Draxis. Pursuant to the License Agreement, the Company has been
granted an exclusive worldwide license (with a right to sublicense) to make,
have made, use and sell products which are precursors of PpIX, including ALA,
under PARTEQ patent rights. The License Agreement covers certain use patent
rights and includes any improvements discovered, developed or acquired by or for
PARTEQ, or Queen's University at Kingston, Ontario, and in respect of which
PARTEQ has the right to grant a license. The License Agreement has been made
subject to a non-exclusive right reserved to Queen's University to use the
subject matter of the License Agreement for non-commercial educational and
research purposes and a right 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. Subject to certain rights of
termination, the term of the exclusive License Agreement is automatically
renewed annually.
Pursuant to the terms of the License Agreement, the Company has paid to
PARTEQ on August 27, 1991 a lump sum execution fee of CDN. $150,000 and has paid
CDN. $50,000 on each of the first three anniversaries of the License Agreement
for a total of CDN. $300,000. The Company has agreed to pay a further lump sum
success fee of CDN. $50,000 upon receipt of regulatory marketing approval in the
United States. The payment of the lump sum execution fee was made from funds
advanced to the Company by Draxis. The annual fees are deductible against
royalties payable under the License Agreement. The Company has agreed to pay
royalties of six percent and four percent, respectively, on its or its
affiliates' net sales of products in certain countries dependent on the
existence of patent protection, as well as 33% of royalties and sublicensing
fees received from non-affiliated sublicenses. Commencing with the first year of
regulatory
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marketing approval in the United States, provision is made for minimum royalty
payments to PARTEQ. Should no United States patent subsist, whether by virtue of
expiry, invalidation or rejection, the License Agreement becomes perpetual and
royalty free. Among other rights of termination, the Company has the right to
terminate the License Agreement with or without cause at any time upon 90 days'
notice to PARTEQ. Draxis has guaranteed all obligations of the Company to PARTEQ
under the License Agreement.
The Company, PARTEQ and Draxis entered into an agreement (the "ALA
Assignment Agreement") effective October 7, 1991, whereby the Company assigned
to Draxis its rights and obligations under the License Agreement insofar as they
relate to Canada. In addition, the Company has agreed to disclose to Draxis on
an ongoing basis, any technology relating to the subject matter of the License
Agreement which would assist Draxis in developing the Canadian market under the
assigned rights and which is available to the Company. In consideration of the
foregoing, Draxis has agreed to pay directly to PARTEQ five percent of all
future lump sums payable under the License Agreement together with royalties
which would otherwise be payable by the Company in accordance with the License
Agreement in respect of net Canadian sales of products and sublicensing
revenues. In further consideration, Draxis agreed to reimburse to the Company by
way of offset against amounts owing, five percent of all lump sums previously
paid by the Company to PARTEQ under the License Agreement and to pay to the
Company a royalty of two percent of net Canadian sales of products. To date,
CDN. $15,000 has been paid by Draxis in respect of lump sum payments made by the
Company to PARTEQ.
Patents and Trademarks
The Company has rights to certain patents and patent applications that
relate to methods of using ALA and to compositions and apparatus for use in such
methods. The principal patents have expiration dates in 2009 and 2014. The
remaining patents have expiration dates ranging, variously, from 2009 to twenty
years from their respective filing dates. The Company actively seeks, when
appropriate, protection for its products and proprietary information by means of
United States and foreign patents, trademarks and contractual arrangements. In
addition, the Company relies on trade secrets and contractual arrangements to
protect certain of its proprietary information and products.
The Company entered into the License Agreement effective August 27, 1991
with PARTEQ and Draxis pursuant to which the Company holds an exclusive
worldwide license to certain patent rights from Queen's University, four (4) of
which have issued in the U.S. and one which has issued in Australia. All U.S.
patents and patent applications licensed from PARTEQ relating to ALA are method
of treatment patents and as such limit direct infringement to users for the
indications covered by the claims, to the extent permitted by law. Currently, no
patents of the Company cover ALA per se or related drugs in PDT.
The license is subject to reservation of a non-exclusive, non-transferable
right of Queen's University to use the invention for educational and research
purposes. The license also reserves a non-exclusive, irrevocable, royalty-free
right to Her Majesty, the Queen of England, in the right of Canada, as
represented by the Minister of National Defense, to use the invention and
improvements for defense purposes within the Ministry of National Defense, its
educational institutions and other establishments in Canada and overseas,
without the right to sublicense for commercial use. The term "defense purposes"
does not include sales to any third party, but does include DND procurement. In
addition, the Company is the assignee from third parties of a number of
additional U.S. and foreign patents and patent applications related to ALA PDT.
While the Company has no reason to believe that any of the foregoing
patent applications will not issue, there can be no assurance that such patents
will issue. Notwithstanding the issuance of any patents based on the
above-identified patent applications, other manufacturers and other third
parties are free to develop methods of manufacturing and other uses of ALA and
to market ALA for such uses, assuming that such parties
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have obtained appropriate regulatory marketing approval. ALA is a commercially
available product and is not itself subject to patent protection. Subject to any
other protection that may be available to the Company with respect to its
proprietary technology, any third party would be free to use ALA for any
indication not covered by the patents referred to above, assuming that such
third party has obtained appropriate approval. The Company is aware of one
European company, which may be conducting clinical trials in Europe using ALA
PDT to treat dermatological conditions and one European company working on
bladder cancer diagnosis and one company having a United States patent that
claims the transcutaneous administration of a photosensitizer on target cells in
the blood, which refers to ALA. The Company does not have any issued patents in
Europe or Canada, nor is it eligible to file counterparts in these jurisdictions
to its basic U.S. patent covering certain methods for using ALA for PDT. If
third parties were to infringe any of the patents of Queen's University, it may
not be practical or economical for the Company to enforce its proprietary
rights.
In addition, the Company is aware that a third party has been issued a
United States patent that claims the transcutaneous administration of a
photosensitizer on target cells in the blood, which patent refers to ALA.
Nevertheless, the Company has no present intention to use transcutaneous
administration of ALA, if in fact, such patent covers ALA, if such patent is
valid and if the patentee is the first inventor.
There can be no assurance that the Company will be free of claims by a
third party of infringement of such third party's proprietary rights. The
Company is aware that a third party has been issued two United States patents
which claim methods for removing hair using, inter alia, "a contaminant ...
having a high [light] absorption..." In addition, this third party stated in a
prospectus that it has five patent applications pending to extend the coverage
of these issued patents. The third party also concludes that its patents cover
"any hair removal system that incorporates a light source in conjunction with
any substance that penetrates the hair duct." The Company has reviewed these
patents, their foreign counterparts and the prior art to determine the impact,
if any, that they could have on any commercial use of ALA for hair removal.
Since ALA was reported, more than one year prior to the effective filing date of
the third party, by an employee and assignor of Queen's University, to cause
hair loss in mammalian skin following administration and light irradiation, the
Company believes that, in fact, the Queen's University employee was the first
individual to report that ALA PDT resulted in hair removal. Conversely, if the
third party's conclusion is correct, and if the Company's belief is incorrect,
then prior to commercialization of ALA PDT for hair removal the Company could
either seek a license of the relevant patents or seek other solutions to avoid
potential infringement.
There can be no assurance that a license, if necessary, would be available
to the Company on commercially reasonable terms or that such third party would
not assert a claim for infringement. If such a third party were to assert a
claim for infringement, there can be no assurance that the Company would prevail
or that such litigation would not have a material adverse effect on the Company.
Furthermore, the Company may not be able to afford the expense of defending
itself against such a claim.
The Company is unaware of the existence of any other challenges to the
validity of its patents or of any claim made by a third party of patent
infringement with respect to ALA PDT. However, no assurance can be given that
such challenges or claims will not be asserted in the future. Although there is
a statutory presumption as to a patent's validity, the issuance of a patent is
not conclusive as to such validity, or as to the enforceable scope of the claims
of the patent. There is no assurance that the patents owned and licensed by the
Company or any future patents will prevent other companies from developing
similar or functionally equivalent products. Furthermore, there is no assurance
that any of the Company's future products or methods will be patentable or that
the products or methods will not infringe upon the patents of third parties. In
conjunction with PARTEQ, the Company recently requested that the United States
Patent and Trademark Office (PTO) reexamine two of the four PARTEQ patents in
order to incorporate additional references. As to one of the patents, the PTO
agreed to incorporate the references without reexamination. The reexamination
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11
of the other patent is proceeding, but the Company believes that the process can
be brought to a close without significant changes to the claims. In any
reexamination proceeding, however, there is a risk that the claims under
consideration will be narrowed or canceled.
Even in the absence of composition of matter patent protection for ALA,
commercial benefits to the Company of ALA may continue to be derived from: (i)
patents relating to the use of such product (like PARTEQ's patents); (ii) later
granted patents on process and intermediates related to the most economical
method of manufacture of the active ingredient; (iii) patents relating to
special compositions and formulations; and (iv) marketing exclusivity that may
be available under the Hatch/Waxman Act and any counterpart protection available
in foreign countries. See "Business - Government Regulation." Effective patent
protection also depends on many other factors such as the nature of the market
and the position of the product in it, the growth of the market, the
complexities and economics of the process for manufacture of the active
ingredient of the product and the requirements of the new drug provisions of the
FD&C Act, or similar laws and regulations in other countries.
The Company intends to seek registration of trademarks in the United
States, and other countries where it may market its product when it is
sufficiently close to commercialization so that appropriate brand names may be
selected in light of the circumstances then existing. To date, one trademark has
been issued to the Company, and other applications are pending.
Other Contractual Relationships
The Company has entered into various agreements in the ordinary course of
business, described in general below, in order to implement its research and
development program and to investigate potential new uses for ALA PDT. Progress
of the Company's research and development program could be delayed if the terms
of the agreements are not fulfilled by third parties.
Consultants. The Company has entered agreements with Guidelines, Inc.
("Guidelines") and Lumenetics for the purpose of carrying out, among other
responsibilities, preclinical and formulations supervision and clinical trial
development (Guidelines) and commercial device development (Lumenetics). The
Company pays retainer fees to Guidelines at a rate of $360,000 per year. Also,
the Company pays additional consulting fees to Guidelines if consulting services
to the Company exceed approximately 2,600 hours annually. Guidelines has been
granted options to purchase up to 20,000 shares of the Company's Common Stock.
The current agreement expired on December 31, 1996, and the parties are in the
process of negotiating a new contract. However, the parties are currently
continuing to abide by the same terms as the expired agreement.
The Company pays consulting fees to Lumenetics at a rate of $250,000 per
year. Also, the Company has agreed to pay Lumenetics a percentage of the
cumulative net sales of certain light delivery systems ranging from .25% to
three percent, depending upon whether the system is patented and upon whether
the system was developed by Lumenetics or by some other third party. In
addition, the Company granted to Lumenetics options to purchase 20,000 shares of
the Common Stock of the Company. The agreement, which expires in April 1998,
contains options for renewal on mutually agreeable conditions.
Unrestricted Grants. The Company has awarded unrestricted grants to
various investigators in the field of ALA PDT in certain areas of interest to
the Company. These studies range from animal model work to pilot human studies
("investigator INDs") in various clinical indications. These grants are awarded
and evaluated on an annual basis and, although renewable, are considered on a
case-by-case basis.
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12
Preclinical Research Contracts. The Company has preclinical research
contracts with several universities to carry out animal studies in areas
relevant to the clinical development of ALA PDT. Toxicological studies required
for drug development work are carried out using contract research organizations.
Clinical Trials. DUSA-sponsored clinical studies are supported by
contracts with clinical trial sites including universities, hospitals and
private practitioners.
Manufacturing
The Company subcontracts the manufacturing and packaging of its clinical
ALA formulations. The Company has identified several potential suppliers of ALA,
and has entered an agreement for supply of ALA with a supplier. The supplier has
represented to the Company that its facilities conform to "good manufacturing
and laboratory practices" and other applicable distribution, and quality control
procedures set out in the FDA's current regulations. Should any subcontractor
delay supply or fail to meet the relevant FDA regulations, DUSA's clinical
program could be adversely affected.
The Company is currently working with a New Jersey company who has
produced the Phase III clinical supplies. The manufacturer is currently going
through a process, which will establish it as a GMP manufacturer as set out in
the FDA's current regulations.
Furthermore, the Company has entered into agreements with two companies
for the manufacture of light sources to be used in the Company's ALA PDT
development program. In June 1993, the Company entered into an agreement with
Sciencetech Inc. to develop light sources for use in PDT. Under this agreement,
the Company has the option to manufacture products developed under the
agreement. See Note 9(e) to the Notes to the Consolidated Financial Statements.
In 1995 the Company entered into a co-development agreement with National
Biological Corporation ("NBC") to develop light devices for use in PDT. NBC has
the exclusive right to manufacture a sufficient supply of these light sources to
meet all of the Company's requirements for clinical and/or commercial
distribution, subject to completion of a supply agreement between the parties.
Marketing and Sales
Currently, the Company does not have the capacity to market, sell and
distribute ALA PDT products on its own. The Company may seek joint venture or
other collaborative arrangements with third parties related to specific disease
indications or medical specialties. The Company expects that appropriate
candidates will have experience in the targeted specialty market, expertise in
reimbursement for the therapy, and marketing, sales and distribution channels
for drugs or devices. Alternatively, the Company may choose to market certain
products on its own. At present, the Company is pursuing certain pre-marketing
activity in the U.S. and Europe to test patient and physician acceptance of
product concepts. As the products proceed through the development program, the
Company will continue to carry out certain pre-marketing activities, and
evaluate its marketing strategies as permitted by FDA regulations.
Draxis has been granted the rights to market ALA PDT in Canada. See
"Business - License Agreement". In Europe and other markets, the Company is
pursuing joint ventures or sub-licenses with pharmaceutical and device companies
for market development.
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Competition
Commercial development of PDT agents are currently being pursued by a
number of companies, including: QLT PhotoTherapeutics Inc. (Canada); PDT, Inc.
(U.S.); Pharmacyclics, Inc. (U.S.); Nippon Petrochemicals (Japan); Scotia
Pharmaceuticals (United Kingdom); Glaxo Wellcome plc; medac GmbH
(Germany)("Medac"); and Photocure (Norway). Photocure may be working at Phase
I/II equivalent trials using ALA PDT for dermatological uses, including for
certain indications being pursued by the Company. The Company is aware that
Medac is developing ALA PDT for bladder cancer diagnosis in Germany and may
receive regulatory approval in Germany prior to the Company receiving approval
from the FDA. The Company believes that its U.S. patents would be infringed if
Medac sold its product in the United States. See "Business--Patents and
Trademarks".
The Company's position as a competitor in this field may be adversely
affected by product developments in PDT, which may be achieved by these or by
other companies. Many of these companies have substantially greater financial
and technical resources and production and marketing capabilities than the
Company. In addition, certain of these companies have had significantly greater
experience in undertaking preclinical testing and human clinical trials of new
or improved pharmaceutical products and obtaining approval of the FDA, or other
regulatory authorities to market products for health care. Accordingly, the
Company's competitors may succeed in developing products that are safer or more
effective than those of the Company and in obtaining regulatory marketing
approval of such products. If the Company commences commercial sales of
products, it will also be competing with respect to marketing capabilities and
manufacturing efficiency.
The indications under development represent markets in which large numbers
of patients are treated and for which, in the Company's view, the available
standard of care may be improved. For example, the current preferred methods of
treating AKs are 5-FU for multiple lesions, and cryotherapy using liquid
nitrogen for limited numbers of lesions. Although both methods are effective,
5-FU can be irritating and often requires administration for a number of
consecutive weeks, while cryotherapy is non selective, is usually painful at the
site of freezing and may cause blistering. However, these treatment modalities
for AKs involve procedures, which have been proven safe and effective and enjoy
patient as well as practitioner acceptance and confidence.
This may slow the acceptance and adoption of ALA PDT.
The Company believes that comparisons of the properties of various
photosensitizing PDT drugs will also provide important competitive issues. These
properties include formulations available and ease of administration, degree of
generalized skin photosensitivity, required doses, the selectivity of the
photosensitizer for the target lesion or tissue of interest and the type and
cost of light systems. New drugs or future developments in PDT or in other drug
technologies may provide therapeutic or cost advantages for competitive
products. No assurance can be given that developments by others will not render
the Company's products uncompetitive or obsolete.
Product Liability and Insurance
The Company is subject to the inherent business risk of product liability
claims in the event that the use of its 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. The Company
maintains product liability insurance for coverage of its clinical trial
activities. 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.
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14
Employees
The Company has ten full-time employees and one part-time employee. The
Company has employment agreements with its President and Vice President of
Scientific Affairs. The Company has purchased key man life insurance, having a
face value of CDN. $1,000,000, on Dr. Shulman's life, for which the Company is
the named beneficiary. The Company has also retained numerous independent
consultants such as Guidelines and Lumenetics, and the services of key
researchers at leading university centers whose activities are coordinated by
the Company's employees.
As a result of Draxis's disposal of its holding in the Company in March
1996, certain relationships between the Company and Draxis changed. Draxis'
Chief Financial Officer (CFO), who had also served as CFO for DUSA, resigned.
The Company's President assumed the CFO responsibilities. The Company retained a
senior financial consultant to assist the Company with certain financial
management responsibilities. The Company is conducting a search for a permanent
CFO. Other employees and consultants will be hired by the Company as needed.
The Company had entered into the Draxis Management Agreement pursuant to
which Draxis provided to the Company administrative, financial, scientific and
marketing support and other management services which that were required. On
December 3, 1996 the Company notified Draxis that it was terminating the
Management Agreement effective of February 1, 1997. The Company continues to
contract with outside firms and individuals for services required at this early
stage in an effort to maintain overhead expense at a minimum. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
ITEM 2. PROPERTIES
In November 1996, the Company signed a three-year lease for its new
executive office premises located in Toronto, Ontario, Canada, comprising 1,950
square feet of space. Prior to November 1996, the Company had rented, on a
month-to-month basis, approximately 1,000 square feet from Draxis in
Mississauga, Ontario. Pursuant to a lease, which expires in August, 1997, the
Company's subsidiary, DUSA Pharmaceuticals New York, Inc., leases 2,062 square
feet of office space in Tarrytown, New York. Lease payments for 1996 totaled
$55,000 and future minimum lease payments (not including any increase which may
be incurred as the Company negotiates a new lease for its New York offices) will
total approximately $74,000 in 1997, $55,600 in 1998, and $58,000 in 1999. The
Company anticipates that its New York and Toronto, Canada office facilities will
be sufficient during the near future, but would be modified as required. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any pending legal proceedings and no such
proceedings are known to be contemplated.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The information required by Item 5 is hereby incorporated by reference
from the section entitled "Shareholder Information" of the Registrant's Annual
Report to Shareholders for the year ended December 31, 1996.
ITEM 6. SELECTED FINANCIAL DATA
The following information is qualified by reference to and should be read
in conjunction with the Company's Consolidated Financial Statements and the
Notes thereto and Management's Discussion and Analysis of Financial Condition
and Results of Operations included elsewhere herein. The selected financial data
for the Company presented below for the years ended December 31, 1996, 1995,
1994, 1993 and 1992, and for the cumulative period from February 21, 1991 (date
of incorporation) to December 31, 1996 have been derived from the Company's
audited financial statements.
Consolidated Statement of Operating Data
Cumulative period
from February
21, 1991 (date of
incorporation) to
Year ended December 31, December 31,
----------------------- ------------
1996 1995 1994 1993 1992 1996
---- ---- ---- ---- ---- ----
Revenue $ 1,073,006 $ 572,742 $ 305,891 $ 1,420,282 $ 887,954 $ 4,292,566
Research and development 5,652,442 3,044,979 2,759,254 2,671,302 1,496,491 15,812,770
costs
Other operating expenses 2,220,883 1,175,296 1,149,361 997,441 542,893 6,123,555
Net loss $(6,800,319) $(3,647,533) $(3,539,892) $(2,248,461) $(1,151,430) $(17,580,927)
Net loss per common share $ (0.75) $ (0.65) $ (0.66) $ (0.44) $ (0.23) $ (3.22)
Weighted average number of 9,087,823 5,589,486 5,395,349 5,096,458 4,949,317 5,462,262
shares outstanding
Consolidated Balance Sheet Data
As of December 31,
------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Total Assets $20,129,257 $20,827,578 $10,563,779 $13,764,195 $15,450,958
Cash and U.S. Government
Securities Available for Sale 19,719,496 20,479,592 10,198,329 13,298,715 14,973,561
Shareholders' Equity 19,101,790 20,219,240 10,132,860 13,364,557 15,107,631
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The financial information included herein should be read in conjunction
with the Company's Consolidated Financial Statements and Notes to the
Consolidated Financial Statements contained therein.
General
The Company is a development-stage pharmaceutical company engaged
primarily in the development of proprietary methods of photodynamic therapy
(PDT) and photodiagnosis (PD) utilizing ALA. The development program for actinic
keratosis is at the Phase III stage and at the Phase I or Phase II stage for
various other indications. See "Business - Company's Products and Technology".
Since its inception, the Company has primarily devoted its resources to funding
research and development and as a result the Company has experienced significant
operating losses. As of December 31, 1996, the Company had an accumulated
deficit of $17,580,927.
The Company's development program is being implemented by its management
with the assistance of consultants, primarily Guidelines and Lumenetics. The
current agreement with Guidelines expired December 31, 1996 and the Company is
in the process of negotiating a new contract. The Company continues to use the
services of Guidelines under the same terms as the expired agreement. If for any
reason the parties are unable to come to mutually agreeable terms, the Company
believes that it could contract with other firms to perform the services
provided by Guidelines. However, there is no guarantee that the Company could
replace Guidelines without causing a delay to the Company's clinical programs
and without an increase in costs. The Company has an agreement with Lumenetics
expiring April 15, 1998. See Notes 9(g) to the Consolidated Financial
Statements.
During the year the Company filed for and obtained approval to be
de-listed from the Toronto Stock Exchange ("TSE"). The Company concluded that
the volume of trading on the TSE, and the change in relationship with Draxis
(see below) did not justify the expense of being listed on the TSE.
Liquidity and Capital Resources
The Company has financed its development stage operations primarily from
sales of securities in public offerings. In May, 1996 the Company completed a
public offering in which 750,000 shares of its Common Stock were sold at $7.20
per share, resulting in the Company receiving $4,762,938, which was net of
offering costs of $637,062. In December 1995, the Company had sold 3,000,000
shares of its Common Stock at $5.50 per share, and received $14,553,679, which
was net of offering costs of $1,946,321. $2,250,000 of the proceeds from the
December 1995 offering were used to repurchase options held by Draxis (see
"Repurchase of Options" below).
As of December 31, 1996, the Company's total assets, consisting primarily
of United States government securities available for sale, were $20,129,257 as
compared to $20,827,578 as of December 31, 1995. The Company's United States
government securities available for sale have an aggregate cost of $18,061,432
and a current aggregate market value of $18,033,406 as of December 31, 1996,
resulting in a net unrealized loss on securities available for sale of $28,026,
provision for which has been charged to shareholders' equity. At December 31,
1995, the aggregate cost was $19,244,839 and had a market value of $19,282,562
resulting in an unrealized gain of $37,723. The market value of the Company's
government securities fluctuates, with changes in interest rates in the United
States from the time these securities were
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acquired. Some losses could be realized, depending upon the timing of the
Company's need to convert government securities into cash to meet its working
capital requirements. The Company's U.S. government securities currently have
yields ranging from 4.52% to 6.85%, and maturity dates ranging from January 15,
1997 to August 10, 1999. As of December 31, 1995 the Company's U.S. government
securities had yields ranging from 4.6% to 7.5% and maturity dates ranging from
January 4, 1996 to March 31, 1998. The Company has invested its funds in liquid
investments, so that it will have ready access to its cash reserves as needed
for the funding of its development plan on a short-term and long-term basis.
As of December 31, 1996, the Company had current liabilities of $1,027,467
as compared to $608,338 as of December 31, 1995; an increase of $419,129, due
primarily to an increase in research and development activities, more
specifically, due to the commencement of Phase III trials on actinic keratosis.
Since its inception, the Company has had no long term debt, nor does it have any
plans to enter into any such financial arrangements.
In conjunction with PARTEQ, the Company recently requested that the United
States Patent and Trademark Office (PTO) reexamine two of the four PARTEQ
patents in order to incorporate additional references. As to one of the patents,
the PTO agreed to incorporate the references without reexamination. The
reexamination of the other patent is proceeding, but the Company believes that
the process can be brought to a close without significant changes to the claims.
In any reexamination proceeding, however, there is a risk that the claims under
consideration will be narrowed or canceled. Any such narrowing or cancellation
of patent rights could have a significant adverse effect on the Company's
anticipated competitive positive in the marketplace.
The Company believes it has sufficient capital resources to proceed with
its current development program for ALA PDT/PD. Management is currently focusing
initial clinical trials on a limited number of indications to enhance the
Company's ability to complete the regulatory process for AK's and bladder cancer
diagnosis, but full development and testing of all potential indications which
are currently under development would require additional funding. As the
development of ALA PDT continues, the Company may adjust its priorities on how
the funds are allocated to research and development of indications for ALA PDT
under consideration. The timing of the expenditures will be dependent on various
factors, including the progress of the Company's research and development
programs, the results of preclinical and clinical trials, the timing of
regulatory marketing approvals, competitive developments, payments under any
collaborative arrangements, if any, entered into by the Company and the
availability of alternate financing. There can be no assurance, however, that
such funds will be sufficient to enable the Company to obtain regulatory
marketing approval or to market any product for any indications currently under
development. Therefore, there is no way to predict the timing or magnitude of
the revenues from the marketing of the Company's product or whether any such
revenues will be realized. Consequently, in order to maintain continuing
research and development programs, it may be desirable or necessary to raise
additional funds through future financings, corporate alliances or other
sources.
The Company may also use its resources to acquire by license, purchase or
other arrangements, businesses, technologies, or products that enhance or expand
the Company's business. During 1996, the Company was engaged in discussions
related to certain such opportunities. While the Company concluded that certain
of the transactions were not in the Company's best interest, other negotiations
are on-going. The Company will be actively seeking relationships with
pharmaceutical or other suitable organizations to market the Company's products
and technologies, or provide funding for research projects. To date, the Company
has not made any acquisition or arrangement of such nature.
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Relationship with Draxis
Prior to the Company's public offering in December 1995, Draxis owned
approximately 1 million shares of the Company's Common Stock and held options
("Draxis Options") to purchase 2 million shares of the Company at an exercise
price of $9 per share, expiring in September 2000. The underwriter of the
offering believed that the Draxis Options might adversely impact the possible
appreciation of the Company's Common Stock. Accordingly, Draxis offered to sell
the Draxis Options at an aggregate price of $2,250,000, or $1.125 per option.
The Company had appointed an Independent Monitoring Committee ("Committee"),
consisting of two directors of the Company to evaluate the offer to repurchase
the Draxis Options. The Committee retained an investment-banking firm to provide
an opinion as to the fairness of the offer to the shareholders of the Company
(other than Draxis) and legal counsel to advise the Committee. The
investment-banking firm rendered its opinion to the Committee that repurchasing
the Draxis Option at the price of $1.125 per option would be fair to the
shareholders of the Company (other than Draxis) from a financial point of view.
Based upon this opinion, the Committee concluded that the offer was fair, and
presented it to the Company's Board of Directors. The Company's Board of
Directors, after assessing the risks and benefits associated with the proposed
transaction, unanimously authorized the acceptance of the offer to purchase the
Draxis Option, contingent upon the Company's sale of the maximum shares of
Common Stock in the Offering. Two members of the Board, who were present but who
also served at that time as members of the Board of Directors of Draxis,
abstained from voting on this action. The Company repurchased the Draxis Options
on December 21, 1995.
In February 1996, at the request of Draxis, the Company filed a
registration statement to dispose of all of the 1,088,001 shares of Common Stock
of the Company owned by Draxis. In March 1996, Draxis disposed of its entire
interest in the shares of the Company. Draxis no longer owns any shares of
Common Stock or other securities in the Company. The Company did not participate
in the offering. As a result of this transaction, certain relationships between
the Company and Draxis were changed during 1996 in order to disentangle the two
companies. Prior to the closing of the March offering, three directors of
Draxis, including Draxis' and the Company's Presidents, served on the Company's
Board of Directors. In addition, the Company's President served as the Chairman
of the Board of Draxis, and the Company's Chief Financial Officer served as Vice
President and Chief Financial officer of Draxis. Upon the completion of the
offering, the President of Draxis resigned from the Company's Board of Directors
and the Chief Financial Officer of the Company resigned. In addition, the
President of the Company resigned as director and Chairman of the Board of
Draxis upon the appointment of a successor to this position by the Draxis Board
of Directors on March 13, 1996. Only one director, Mr. James Doherty, who is a
former officer of Draxis and the Company, remains on the board of directors of
both Draxis and the Company. The Company's President has assumed the duties of
the Chief Financial Officer until the Company has recruited a qualified person
for this position. The Company expects that it will be able to hire a qualified
replacement as Chief Financial Officer, but not at the same rate to that
previously paid to Draxis for the services provided by its Chief Financial
Officer.
Since the Company's initial public offering, prior to which it was a
wholly-owned subsidiary of Draxis, the Company had utilized the services of
certain Draxis employees pursuant to the Draxis Management Agreement whereby
Draxis employees provided administrative, financial, scientific and marketing
support, and other management services which were required by the Company. The
Company was charged a per diem rate for services provided by Draxis employees,
plus out pocket expenses. The per diem rates for 1996 and 1995 ranged from CDN.
$198 to CDN. $1,292. The rates depended upon the person providing the services
and were equal to the annual salary and benefits, expressed as a rate per day,
paid by Draxis to such employees. Charges related to the Draxis Management
Agreement for these services were $28,784 for the year
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ended December 31, 1996 as compared to $56,709 for the year ended December 31,
1995. On December 3, 1996 the Company notified Draxis that it was terminating
the management agreement effective as of February 1, 1997. The change in
relationship with Draxis will result in increase operating costs for the Company
as it recruits personnel for services which had previously been provided by
Draxis.
On November 30, 1996 the Company relocated its Canadian office from space
rented from Draxis in Mississauga, Ontario to Toronto, Ontario. The Company had
rented approximately 1,000 square feet of office space from Draxis at a rate of
CDN $1,350 per month. The new office premises comprises 1,950 square feet at a
rental of CDN. $4,628 per month. The lease for the new premises expires in
November 1999. Pursuant to a lease, which expires in August, 1997, the Company's
subsidiary, DUSA Pharmaceuticals New York, Inc., leases 2,062 square feet of
office space in Tarrytown, New York. Lease payments for 1996 for both locations
totaled $55,000, and future minimum lease payments will total approximately
$74,000 in 1997, and $55,600 in 1998 which do not include rent for DUSA
Pharmaceuticals New York, Inc. subsequent to September, 1997. The Company
anticipates that it has sufficient office facilities for the near future, which
could be modified as required.
The Company has ten full-time employees and one part-time employee. The
Company has retained a senior financial consultant as of August 1996 to assist
the Company with certain financial management responsibilities. The Company is
conducting a search for a new permanent CFO. The Company has also retained
numerous independent consultants such as Guidelines and Lumenetics, and the
services of key researchers at leading university centers whose activities are
coordinated by the Company's employees. At least six persons employed at
Guidelines and Lumenetics devote a significant amount of their time to the
Company's projects. Other employees and consultants will be hired by the Company
as needed.
The Company has not made and does not expect to make material capital
expenditures for environmental control facilities in the near-term. There can be
no assurance, however, that the Company will not be required to incur
significant costs to comply with environmental laws and regulations in the
future, or any assurance that the operations, business or assets of the Company
will not be materially adversely affected by current or future environmental
laws or regulations. See "Business - Government Regulation."
Results of Operations
Year ended December 31, 1996 versus Year ended December 31, 1995
The Company has had no sales to date. At the current time, the Company's
most advanced clinical program in ALA PDT is for actinic keratoses. The Company
completed the necessary Phase II studies in 1996, and subsequent to meeting with
the FDA, commenced two Phase III clinical pivotal trials in December 1996.
Depending on a satisfactory rate of enrollment, the Company estimates that Phase
III will be completed by late summer and the NDA will be filed as soon as
feasible thereafter. However, delays at any stage of the clinical program could
cause a detrimental effect on the Company's financial condition as operating
expenses continue to accrue during the clinical trial process prior to any
approval to market a product.
The Company also intends to begin its own multi-center trial for the
photodiagnosis of bladder cancer. The Company plans to develop a system in which
ALA is delivered to the bladder, followed by visual examination with an
endoscopic device attached to a specialized light source. The Company is
currently in negotiations to secure appropriate light devices. Once these
negotiations are completed, the Company will be in a position to submit an IND
to the FDA for Phase I/II clinical trials, anticipated to begin in the first
half of 1997. The Company has been developing plans for further clinical trials
in acne and hair removal. In
18
20
addition, the Company continued its pilot work on endometrial ablation, by
supporting an investigator IND. See "Business - Company's Products and
Technology."
The Company currently believes it has sufficient funds to develop its two
lead indications for ALA PDT through the NDA filing process and to continue
development of its secondary indications as planned. The Company may, however,
enter into joint development or licensing arrangements, both domestically and
internationally, with pharmaceutical companies, in which it will seek to have
the other companies assume certain of the costs of clinical testing and of
obtaining regulatory marketing approval for the products licensed. To the extent
that the Company is unable to enter into such arrangements, it may require
separate funding to complete the regulatory approval process. There can be no
assurance that the Company will have sufficient funds to obtain approval of any
product, that any product will be successfully developed, proven to be safe and
effective in necessary pivotal clinical trials, or receive applicable regulatory
marketing approvals. Therefore, there is no way to predict the timing or
magnitude of the revenues from the marketing of the Company's product or whether
any such revenues will be realized. In order to maintain various current and
future research and development programs, it may be desirable or necessary in
the future to raise additional funds through financings, corporate alliances or
other sources.
Interest income of $1,074,902 for the year ended December 31, 1996, earned
primarily on United States government securities, increased from $579,092 for
the year ended December 31, 1995, primarily due to the interest earned on the
net proceeds of the Company's stock offerings in December 1995, and May 1996.
Interest income for the cumulative period from February 21, 1991 (date of
incorporation) to December 31, 1996 was $4,014,522. Interest income, the only
significant source of income at the current time, is expected to decline as
funds are expended for research and development programs.
Research and development costs for the year ended December 31, 1996 were
$5,652,442 as compared to $3,044,979 for the year ended December 31, 1995, an
increase of 85%. The increase in costs reflects the completion of multiple
multi-center Phase II trials for AK, development of protocols for bladder
indication trials and preparation of Phase III clinical trials for AK. As the
Company continues to develop its indications for regulatory approval, research
and development costs are expected to increase approximately 20% above 1996
expenditures. Total research and development costs for the cumulative period
from February 21, 1991 (date of incorporation) to December 31, 1996 were
$15,812,770. Costs and development fees associated with agreements for research
projects and clinical studies commit the Company to make payments during 1997 of
$1,661,821. (See "Business - Other Contractual Relationships.")
Draxis had performed certain research and development functions for the
Company in respect of which Draxis has applied for Canadian tax incentives.
Draxis has informed the Company that, for the years ended December 31, 1996,
1995 and 1994, these incentives totaled approximately CDN. $6,800, CDN. $77,000,
and CDN. $106,000, respectively.
Effective October 7, 1991, the Company assigned its rights and obligations
under the License Agreement with PARTEQ to Draxis, insofar as they relate to
Canada. Draxis has agreed to pay directly to PARTEQ 5% of all future lump sums
payable under the License Agreement together with royalties which would
otherwise be payable to the Company in accordance with the License Agreement
with respect to net Canadian sales of products. In addition, Draxis agreed to
reimburse the Company 5% of all lump sums previously paid by the Company to
PARTEQ under the License Agreement and to pay to the Company a royalty of 2% of
net Canadian sales of products. At this time, no changes to the Assignment
Agreement between the Company and Draxis are contemplated.
19
21
Operating expenses were $2,220,883 for the year ended December 31, 1996,
compared to $1,175,296 for the year ended December 31, 1995. Operating expenses
increased as a result of hiring of additional personnel, investor relations
expenditures, and activities related to identifying and examining potential
strategic alliances for its business. Operating costs are expected to increase
in the future as the Company continues to add personnel including the hiring of
a chief financial officer and other persons to replace services previously
provided by Draxis. On February 16, 1996 the Company's Board of Directors,
subject to shareholder and regulatory approval, extended the term of certain
restricted stock options granted prior to August 1994 from five years to ten
years. The ten-year term is now comparable to the term of all the options
granted under the Company's existing 1996 Omnibus Plan. The excess of the market
value of the Common Stock over the exercise price of the extended term stock
options of $557,260 has been recorded as an addition to Common Stock and the
related compensation expense has been recorded. This transaction does not have a
cash impact on the Company but has increased the net loss for the year ended
December 31, 1996 by approximately $.06 per share.
The Company incurred a net loss of $6,800,319, or $0.75 per share, for the
year ended December 31, 1996, as compared to a net loss of $3,647,533, or $.65
per share, for the year ended December 31, 1995. Net losses for the cumulative
period from February 21, 1991 (date of incorporation) to December 31, 1996 were
$17,580,927, or $3.22 per share. Such losses are consistent with the Company's
expectations and the Company anticipates that losses will continue throughout
the development stage. The Company expects to incur additional operating losses
over the next several years and expects cumulative losses to increase as the
Company's research and development and clinical trial efforts expand. The
Company's revenues to date have been limited and substantially all of the
Company's revenues have consisted of interest income. To achieve profitable
operations, the Company, alone or with others, must successfully develop,
manufacture and market proprietary products. There is no way to accurately
predict the timing or magnitude of revenues from the marketing of ALA PDT for
any indication or whether any revenues will ever be realized.
Effective January 1996 the Company adopted the provisions of Financial
Accounting Standards Board Statement of Financial Accounting Standards ("SFAS")
No. 123 "Accounting for Stock-Based Compensation." SFAS No.123 requires
increased disclosure of compensation expense arising from both fixed and
performance stock compensation plans. Such expense is measured as the fair value
of the award at the date it is granted using an option-pricing model that takes
into account the exercise price and expected term of the option, the current
price of the underlying stock, its expected volatility, expected dividends on
the stock and the expected risk-free rate of return during the term of the
option. The compensation cost is recognized over the service period, usually the
period from the grant date to the vesting date.
SFAS No. 123 encourages rather than requires, companies to adopt a new
method that accounts for stock compensation awards based on their estimated fair
value at the date they are granted. Companies are permitted, however, to
continue accounting under APB Opinion No. 25, which requires compensation cost
for stock-based employee compensation plans to be recognized based on the
difference, if any, between the quoted market price of the stock and the amount
an employee must pay to acquire the stock. The Company continues to apply APB
Opinion No. 25 in its financial statements and has disclosed proforma net loss
and loss per share in Note 8 to the Consolidated Financial Statements for the
year ending December 31, 1996, determined as if the Company had applied the new
method.
Year Ended December 31, 1995 versus Year Ended December 31, 1994
Interest income of $579,092 for the year ended December 31, 1995, earned
primarily on United States government securities, declined from $709,375 for the
year ended December 31, 1994, as fewer funds were available for investment prior
to the consummation of the December 1995 offering.
20
22
Research and development costs for the year ended December 31, 1995 were
$3,044,979, as compared to $2,759,254 for the year ended December 31, 1994. The
increase in expense reflected the expansion of controlled clinical trials for
ALA PDT. During 1995, the Company advanced its development program for the same
indications being researched in 1994. Operating expenses were $1,175,296 for the
year ended December 31, 1995, consistent with operating expenses of $1,149,361
for the year ended December 31, 1994.
The Company incurred a net loss of $3,647,533, or $.65 per share, for the
year ended December 31, 1995, as compared to a net loss of $3,539,892, or $.66
per share, for the year ended December 31, 1994.
Year Ended December 31, 1994 versus Year Ended December 31, 1993
For the year ended December 31, 1994 interest income earned on the
Company's portfolio of United States government securities was $709,375, as
compared to $754,308 for the year ended December 31, 1993. Interest income
declined as these securities were converted to cash to meet working capital
requirements.
During the third quarter of 1993 the Company reviewed its portfolio of
United States government securities and, believing that over the longer term the
yield to the Company of a professionally managed portfolio would outperform the
yield that would be obtained with an internally managed portfolio, the Company
engaged the services of U.S. Trust of California ("U.S. Trust"). U.S. Trust
immediately sold the existing portfolio and reinvested the proceeds in other
United States government securities, which more closely reflected its then
current investment strategies, incurring a gain of $750,499 in the process.
Shortly thereafter, the bond market started to decline, which continued during
1994. As a result, the market value of the Company's United States government
securities portfolio was continuously below book value throughout 1994. Thus,
when portions of the portfolio were liquidated during the year to meet the
Company's cash requirements, certain losses were incurred which, in 1994,
amounted to $405,280.
On December 31, 1993, the market value of the Company's portfolio of
United States government securities was $62,832 below book value. As a result,
the Company recorded a provision for unrealized losses of this amount in its
Consolidated Statements of Operations.
On January 1, 1994, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and
Equity Securities." The Statement requires the Company to record securities
which management has classified as available for sale at fair market value and
to record unrealized gains and losses on securities available for sale as a
separate component of shareholders' equity until realized. The cumulative effect
of the initial adoption of SFAS No. 115 resulted in the reversal of the
unrealized losses of $62,832 which had been previously recorded through
operations for the year ended December 31, 1993 as reflected in the Company's
Consolidated Statements of Operations for the year ended December 31, 1994 under
the caption "Cumulative Effect of Change in Accounting Principle." As of
December 31, 1994, the Company's securities available for sale were recorded at
fair market value of $9,993,163 and the unrealized loss on such securities of
$891,805 was recorded as a reduction of shareholders' equity.
During 1994, the Company continued to invest in its research and
development program, including its programs for AKs and psoriasis, spending
$2,759,254 for research and development for the year ended December 31, 1994, as
compared to $2,671,302 for the year ended December 31, 1993. Based on the
Company's initial studies at the time, as well as regulatory and marketing
considerations, the Company believed that its funds should be focused primarily
on development of AKs and psoriasis, with development of BCCs as finances allow.
The Company proceeded with pilot studies using ALA PDT in acne, and for hair
removal, each being dermatology applications with large market potential. In
addition, the Company continued its pilot work on endometrial ablation.
21
23
As the research and development program expanded, the Company's operating
expenses increased to $1,149,361 for the year ended December 31, 1994, as
compared to $997,441 for the year ended December 31, 1993. The increase of
approximately 15% from 1993 to 1994 reflected a full year of U.S. Trust
management fees, investor relations fees and increased personnel. These
increases were consistent with management's expectations.
On a per share basis, the net loss for the year ended December 31, 1994
was $.66 per share, as compared to $.44 per share for the year ended December
31, 1993.
Inflation
Although inflation rates have been comparatively low in recent years,
inflation is expected to apply upward pressure on the operating costs of the
Company. The Company has included an inflation factor in its cost estimates;
however the overall net effect of inflation on the operations of the Company
should be minimal.
Effect of United States Statement of Financial Accounting Standards No. 125.
In December 1996, the FASB issued SFAS No. 127, deferring the effective
date of certain provisions of SFAS No. 125 "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." The
Statements provide accounting and reporting for transfers and servicing of
financial assets and extinguishment of liabilities occurring after December 31,
1996 and 1997. The Company does not anticipate that the implementation of these
Statements will have a material impact on the consolidated financial statements.
Forward-Looking Statements Safe Harbor
This report, including the Management's Discussion and Analysis, contains
various "forward looking statements" within the meaning of Section 27A of the
Securities Act of 1933 which represent the Company's expectations or beliefs
concerning future events, including, but not limited to statements regarding
management's expectations of regulatory approval and the commencement of sales,
and the sufficiency of the Company's cash flow for the Company's future
liquidity and capital resource needs. These forward looking statements are
further qualified by important factors that could cause actual results to differ
materially from those in the forward looking statements. These factors include,
without limitation, changing market conditions, clinical results of its trials,
the impact of competitive products and pricing, and the timely development, FDA
approval and market acceptance of the Company's products, none of which can be
assured. Results actually achieved may differ materially from expected results
included in these statements as a result of these or other factors.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Accountants, Deloitte & Touche LLP........... F-1
Consolidated Balance Sheets........................................ F-2
Consolidated Statements of Operations.............................. F-3
Consolidated Statements of Shareholders' Equity.................... F-4
Consolidated Statements of Cash Flows.............................. F-6
Notes to the Consolidated Financial Statements..................... F-8
22
24
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
23
25
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by Item 10 is hereby incorporated by reference to
the sections entitled "Nominees", "Executive Officers Who are not Directors",
and "Compliance with Section 16(a) of the Exchange Act" of the Registrant's 1997
Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is hereby incorporated by reference to
the sections entitled "Director Compensation", "Executive Compensation", "Board
Compensation Committee Report on Executive Compensation", "Performance Graph",
"Option Grants in 1996", "Aggregate Option Exercises in 1996 and Option Values
at December 31, 1996", and "Other Compensation" of the Registrant's 1997 Proxy
Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information required by Item 12 is hereby incorporated by reference to
the section entitled "Security Ownership of Certain Beneficial Owners and
Management" of the Registrant's 1997 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is hereby incorporated by reference to
the section entitled "Certain Transactions" of the Registrant's 1997 Proxy
Statement.
24
26
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
A. List of Financial Statements and Schedules
Page
Number
------
INCLUDED IN ANNUAL REPORT TO SHAREHOLDERS
INCORPORATED HEREIN BY REFERENCE:
Independent Auditors' Report....................................... F-1
Consolidated Balance Sheets...................................... F-2
Consolidated Statements of Operations.............................. F-3
Consolidated Statements of Shareholders' Equity.................... F-4
Consolidated Statements of Cash Flows.............................. F-6
Notes to the Consolidated Financial Statements..................... F-8
Schedules other than those referred to above are omitted because they are
not required or the information is included in Notes to the Consolidated
Financial Statements.
B. Reports on Form 8-K
None.
C. Exhibits filed as part of this Report
3(a) Certificate of Incorporation, as amended, filed as Exhibits 3,
3.1, 3.2, 3.3 and 3.5 to the Registrant's Registration
Statement on Form S-1, No. 33-43282, and is incorporated
herein by reference;
3(b) By-laws of the Registrant, filed as Exhibit 3.4 to the
Registrant's Registration Statement on Form S-1, No. 33-43282,
and are incorporated herein by reference;
4(a) Common Stock specimen, filed as Exhibit 4.1 to the
Registrant's Registration Statement on Form S-1, No. 33-43282,
and is incorporated herein by reference;
4(b) Class B Warrant, filed as Exhibit 4.3 to the Registrant's
Registration Statement on Form S-1, No. 33-43282, and is
incorporated herein by reference;
10(a) License Agreement between the Company, PARTEQ and Draxis
Health Inc. dated August 27, 1991, filed as Exhibit 10.1 to
the Registrant's Registration Statement on Form S-1, No.
33-43282, and is incorporated herein by reference;
10(b) ALA Assignment Agreement between the Company, PARTEQ, and
Draxis Health Inc. October 7, 1991, filed as Exhibit 10.2 to
the Registrant's Registration Statement on Form S-1, No.
33-43282, and is incorporated herein by reference;
25
27
10(c) Employment Agreement of D. Geoffrey Shulman, MD, FRCPC dated
October 1, 1991, filed as Exhibit 10.4 to the Registrant's
Registration Statement on Form S-1, No. 33- 43282, and is
incorporated herein by reference;
10(d) Amendment to Employment Agreement of D. Geoffrey Shulman, MD,
FRCPC dated April 14, 1994, filed as Exhibit 10.4 to the
Registrant's Registration Statement on Form S-2, No. 33-98030,
and is incorporated hereby by reference;
10(e) Management Agreement between the Company and Draxis Health
Inc. dated October 1, 1991, filed as Exhibit 10.5 to the
Registrant's Registration Statement on Form S-1, No. 33-43282,
and is incorporated herein by reference;
10(f) Incentive Stock Option Plan, filed as Exhibit 10.11 of
Registrant's Registration Statement on Form S-1, No. 33-43282,
and is incorporated herein by reference;
10(g) 1994 Restricted Stock Option Plan, filed as Exhibit 1 to
Registrant's Schedule 14A definitive Proxy Statement dated
April 26, 1995, and is incorporated herein by reference;
10(h) 1996 Omnibus Plan, filed as Exhibit 1 to Registrant's Schedule
14A definitive Proxy Statement dated April 25, 1996, and is
incorporated herein by reference;
13 1996 Annual Report to Shareholders (only those portions which
are incorporated herein by reference) to be filed with the
Registrant's 1997 Proxy Statement.
27 Financial Data Schedule for the Registrant's Form 10-K for the
period ending December 31, 1996.
26
28
INDEX TO FINANCIAL STATEMENTS
Consolidated Financial Statements for the Years Ended December 31, 1996, 1995,
1994 and for the Cumulative Period from February 21, 1991 (Date of
Incorporation) to December 31, 1996:
Independent Auditors' Report............................................F-1
Consolidated Balance Sheets as of December 31, 1996 and 1995............F-2
Consolidated Statements of Operations for the Years Ended
December 31, 1996, 1995 and 1994, and for the Cumulative Period from
February 21, 1991 (Date of Incorporation) to
December 31, 1996.......................................................F-3
Consolidated Statements of Shareholders' Equity for the
Years Ended December 31, 1996, 1995 and 1994, and for the
Cumulative Period from February 21, 1991 (Date of
Incorporation) to December 31, 1996.....................................F-4
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1996, 1995 and 1994, and for the Cumulative Period from
February 21, 1991 (Date of Incorporation) to
December 31, 1996.......................................................F-6
Notes to the Consolidated Financial Statements..........................F-8
27
29
INDEPENDENT AUDITORS' REPORT
Board of Directors
DUSA Pharmaceuticals, Inc.
Toronto, Ontario
We have audited the accompanying consolidated balance sheets of DUSA
Pharmaceuticals, Inc. and its wholly-owned subsidiary (the "Company") (a
development stage company) as of December 31, 1996 and 1995 and the related
consolidated statements of operations, shareholders' equity and cash flows for
each of the three years in the period ended December 31, 1996 and for the period
from February 21, 1991 (date of incorporation) to December 31, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of December 31, 1996
and 1995, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 1996 and for the period from
February 21, 1991 (date of incorporation) to December 31, 1996 in conformity
with generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, the Company is
in the development stage.
Deloitte & Touche LLP
Kansas City, Missouri
February 6, 1997
F-1
30
DUSA PHARMACEUTICALS, INC.
(a development stage company)
CONSOLIDATED BALANCE SHEETS
- ----------------------------------------------------------------------------------------------------------------------------------
December 31, December 31,
1996 1995
ASSETS
Current Assets
Cash (interest bearing) $ 1,686,090 $ 1,197,030
U.S. government securities available for sale, at market 18,033,406
(cost - $18,061,432 and $19,244,839, respectively) (Note 19,282,562
3)
Accrued interest receivable 208,970 181,850
Other current assets 78,367 114,400
-----------------------------------------
20,006,833 20,775,842
Fixed Assets (Note 4) 122,424 49,079
Intangible Assets (Note 5) - 2,657
-----------------------------------------
$ 20,129,257 $ 20,827,578
=========================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 867,068 $ 429,790
Accrued charges 160,399 178,548
-----------------------------------------
1,027,467 608,338
-----------------------------------------
Commitments and Contingency (Note 9)
Shareholders' Equity (Note 7)
Common stock, no par, 20,000,000 shares authorized, 36,710,743 30,976,739
9,355,950 and 8,528,500 shares issued and outstanding
respectively
Deficit accumulated during the development stage (17,580,927) (10,780,608)
Net unrealized (loss) gain on U.S. government securities (28,026) 37,723
available for sale (Note 3)
Note receivable from director - (14,614)
-----------------------------------------
19,101,790 20,219,240
-----------------------------------------
$ 20,129,257 $ 20,827,578
=========================================
See the accompanying notes to the Consolidated Financial Statements
F-2
31
DUSA PHARMACEUTICALS, INC.
(a development stage company)
CONSOLIDATED STATEMENTS OF OPERATIONS
- ----------------------------------------------------------------------------------------------------------------------------------
Cumulative
period from
February 21,
1991 (date of
incorporation)
Year Ended Year Ended Year ended to
December 31, December 31, December 31, December 31,
1996 1995 1994 1996
REVENUE
Interest income $ 1,074,902 $ 579,092 $ 709,375 $ 4,014,522
Gain (loss) on foreign currency exchange (1,834) (4,779) 1,796 18,217
Gain (loss) on sale of U.S. government (62) (1,571) (405,280) 322,659
securities available for sale
Unrealized loss on U.S. government - - - (62,832)
securities available for sale
-----------------------------------------------------------------------------
1,073,006 572,742 305,891 4,292,566
-----------------------------------------------------------------------------
RESEARCH AND DEVELOPMENT COSTS 5,652,442 3,044,979 2,759,254 15,812,770
-----------------------------------------------------------------------------
OPERATING EXPENSES
General and administration 2,193,560 1,150,833 1,135,304 6,041,822
Depreciation and amortization 27,323 24,463 14,057 81,733
-----------------------------------------------------------------------------
2,220,883 1,175,296 1,149,361 6,123,555
-----------------------------------------------------------------------------
LOSS BEFORE CUMULATIVE EFFECT OF CHANGE IN (6,800,319) (3,647,533) (3,602,724) (17,643,759)
ACCOUNTING PRINCIPLE
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING - - 62,832 62,832
PRINCIPLE (Note 2b)
-----------------------------------------------------------------------------
NET LOSS $ (6,800,319) $ (3,647,533) $ (3,539,892) $ (17,580,927)
=============================================================================
NET LOSS PER COMMON SHARE $ (0.75) $ (0.65) $ (0.66) $ (3.22)
================= ================= ================= =================
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING 9,087,823 5,589,486 5,395,349 5,462,262
================= ================= ================= =================
See the accompanying notes to the Consolidated Financial Statements
F-3
32
DUSA PHARMACEUTICALS, INC.
(a development stage company)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
- ----------------------------------------------------------------------------------------------------------------------------------
Net unrealized
gain (loss) on
Deficit U.S.
accumulated government
during the securities Note
development available for receivable
Common stock stage sale from director
BALANCE, FEBRUARY 21, 1991
(date of incorporation) $ - $ - $ - $ -
Issuance of 2,200,000 shares of common 1,650,000 - - -
stock for note and cash at $.75 per
share (Note 7)
Net loss - (193,292) - -
--------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1991 1,650,000 (193,292) - -
Issuance of 2,875,000 shares of common 14,785,128 - - -
stock at $6.00 per share through a public
offering (net of stock offering
costs of $2,464,872) (Note 7)
Issuance of Underwriters' Unit Purchase 100 - - -
Options for 125,000 Units for cash at
$.0008 per unit (Notes 8c)
Receipt of Section 16(b) common stock 17,125 - - -
profits
(Note 7)
Net loss - (1,151,430) - -
--------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1992 16,452,353 (1,344,722) - -
Issuance of 1,000 shares of common stock 5,387 - - -
for cash at $5.39 (CDN.$6.79) per
share (Note 8b)
Issuance of 12,500 shares of common stock 68,047 - - (68,047)
for a promissory note at $5.44
(CDN.$6.79) per share (Note 8b)
Issuance of 100,000 shares of common 500,000 - - -
stock for cash at $5.00 per share
(Note 7)
Net loss - (2,248,461) - -
--------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1993 17,025,787 (3,593,183) - (68,047)
Issuance of 250,000 shares of common stock
for cash at $4.80 per share (Note 7) 1,200,000 - - -
Net unrealized loss on U.S. - - -
government securities (891,805)
available for sale
Net loss - (3,539,892) - -
--------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1994 18,225,787 (7,133,075) (891,805) (68,047)
F-4
33
DUSA PHARMACEUTICALS, INC.
(a development stage company)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (continued)
- ----------------------------------------------------------------------------------------------------------------------------------
Net unrealized
Deficit gain (loss) on
accumulated U.S. government
during the securities Note
development available for receivable
Common stock stage sale from director
BALANCE, DECEMBER 31, 1994 18,225,787 (7,133,075) (891,805) (68,047)
Issuance of 3,000,000 shares of common stock at 14,553,679 - - -
$5.50 per share through a public offering
(net of stock offering costs of $1,946,321)
(Note 7)
Issuance of Underwriters' Purchase Options for 300 - - -
300,000 shares of common stock for cash at
$.001 per share (Note 8c)
Issuance of 40,000 shares of common stock for 197,945 - - -
cash at $4.95 (CDN.$6.79) per share (Note 8b)
Issuance of 50,000 shares of common stock for 249,028 - - -
cash at $4.98 (CDN.$6.79) per share (Note 8d)
Net unrealized gain on U.S. government - - 929,528 -
securities available for sale
Payment received on note receivable from - - - 53,433
director (Note 7)
Redemption of Draxis Option for 2,000,000 shares (2,250,000) - - -
of common stock for cash at $1.125 per
option (Note 8c)
Net loss - (3,647,533) - -
------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1995 30,976,739 (10,780,608) 37,723 (14,614)
Extension of outstanding stock options terms 557,260 - - -
(Note 7)
Issuance of 750,000 shares of common stock at 4,762,938 - - -
$7.20 per share through a public offering (net
of stock offering costs of $637,062) (Note 7)
Issuance of 56,700 shares of common stock for 281,733 - - -
cash at $4.97 (CDN.$6.79) per share (Note 8b)
Issuance of 8,750 shares of common stock for 30,042 - - -
cash at $3.43 (CDN.$4.69) per share (Note 8b)
Issuance of 7,500 shares of common stock for 59,726 - - -
cash at $7.96 (CDN.$10.88) per share (Note 8b)
Issuance of 4,500 shares of common stock for 42,267 - - -
cash at $9.39 (CDN.$12.88) per share (Note 8b)
Issuance of Underwriters' Purchase Options for 38 - - -
37,500 shares of common stock for cash at
$.001 per share
(Notes 8d)
Payment received on note receivable from - - - 14,614
director (Note 7)
Net unrealized loss on U.S. government - - (65,749) -
securities for sale
Net loss - (6,800,319) - -
------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1996 $ 36,710,743 $ (17,580,927) $ (28,026) $ -
========================================================================
See the accompanying notes to the Consolidated Financial Statements
F-5
34
DUSA PHARMACEUTICALS, INC.
(a development stage company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
- ----------------------------------------------------------------------------------------------------------------------------------
Cumulative period
from February
21, 1991 (date
Year ended Year ended Year ended of incorporation)
December 31, December 31, December 31, to December 31,
1996 1995 1994 1996
CASH FLOWS USED IN
OPERATING ACTIVITIES
Net loss $ (6,800,319) $ (3,647,533) $ (3,539,892) $ (17,580,927)
Adjustments to reconcile net loss to net cash
used in operating activities
Amortization of premiums and accretion of (4,789) 86,836 172,544
discounts on U.S. government securities (11,574)
available for sale and investment
securities, net
Depreciation and amortization 27,323 24,463 14,057 81,733
Loss (gain) on foreign currency exchange 1,834 4,779 (1,796) (18,217)
Loss (gain) on sale of U.S. government 1,571 405,280 (322,659)
securities available for sale 62
Unrealized loss on U.S. government - - - 62,832
securities available for sale
Cumulative effect of change in accounting - - (62,832) (62,832)
principle
Write-off of intangible assets - - - 307,519
Compensation expense resulting from 557,260 - - 557,260
extension of outstanding stock options
terms
Changes in other assets and liabilities impacting
cash flows from operations:
Accrued interest receivable (27,120) 67,342 65,054 (208,970)
Other current assets 36,033 (47,153) 30,496 (78,367)
Other asset - - 18,750 -
Accounts payable 437,278 131,917 74,078 867,068
Accrued charges (18,149) 45,502 (5,070) 160,399
License agreement obligations - - - (12,203)
-----------------------------------------------------------------------------
Net cash used in operating activities (5,797,372) (3,423,901) (2,915,039) (16,074,820)
-----------------------------------------------------------------------------
CASH FLOWS PROVIDED BY (USED IN)
INVESTING ACTIVITIES
Advances by Draxis Health Inc. - - - (2,867,900)
Repayment of advances by Draxis Health Inc. - - - 2,867,900
Purchases of U.S. government securities (14,405,081) (22,145,662) (14,256,395) (90,097,435)
available for sale and investment
securities
Proceeds from maturing U.S. government 15,600,000 1,950,000 - 18,410,000
securities available for sale and
investment security
Proceeds from sale of U.S. government - 11,839,009 15,970,531 53,776,118
securities available for sale
Intangible assets - - - (193,022)
Purchases of fixed assets (98,011) (27,188) (28,327) (187,236)
-----------------------------------------------------------------------------
Net cash provided by (used in) investing 1,096,908 (8,383,841) 1,685,809 (18,291,575)
activities
-----------------------------------------------------------------------------
F-6
35
DUSA PHARMACEUTICALS, INC.
(a development stage company)
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
- ----------------------------------------------------------------------------------------------------------------------------------
Cumulative period
from February 21,
1991 (date of
Year ended Year ended Year ended incorporation) to
December 31, December 31, December 31, December 31,
1996 1995 1994 1996
CASH FLOWS PROVIDED BY
FINANCING ACTIVITIES
Stock offering costs $ (637,062) $ (1,946,321) $ - $ (5,048,255)
Issuance of common stock and underwriters' 5,813,806 16,947,273 1,200,000 43,366,566
options
Redemption of Draxis Option - (2,250,000) - (2,250,000)
Receipt of Section 16(b) common stock - - - 17,125
profits
Payment on license agreement obligations - - (37,727) (119,215)
Payment received on note receivable from 14,614 53,433 - 68,047
director
------------------------------------------------------------------------------
Net cash provided by financing activities 5,191,358 12,804,385 1,162,273 36,034,268
------------------------------------------------------------------------------
EFFECT OF EXCHANGE RATES ON CASH (1,834) (4,779) 1,796 18,217
------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH 489,060 991,864 (65,161) 1,686,090
CASH AT BEGINNING OF PERIOD 1,197,030 205,166 270,327 -
------------------------------------------------------------------------------
CASH AT END OF PERIOD $ 1,686,090 $ 1,197,030 $ 205,166 $ 1,686,090
==============================================================================
SUPPLEMENTAL SCHEDULE OF
CASH FLOW INFORMATION
Issuance of common stock for promissory note $ 150,000
from Draxis Health Inc.
====================
License agreement obligations incurred in the acquisition $ 131,418
of an intangible asset
====================
Deferred stock offering costs offset against $ 637,062 $ 1,946,321 $ 5,048,255
common stock
================== ================= ====================
Note receivable from director originated upon exercise $ 68,047
of options for common stock
====================
Interest paid $ 12,594
====================
There were no income tax payments made during the periods.
See the accompanying notes to the Consolidated Financial Statements
F-7
36
DUSA PHARMACEUTICALS, INC.
(a development stage company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
AND THE CUMULATIVE PERIOD FROM FEBRUARY 21, 1991
(DATE OF INCORPORATION) TO DECEMBER 31, 1996
- --------------------------------------------------------------------------------
1. ORGANIZATION
DUSA Pharmaceuticals, Inc. (the "Company") was incorporated under the
laws of the State of New Jersey on February 21, 1991 as a wholly owned
subsidiary of Draxis Health Inc. ("Draxis"); formerly Deprenyl Research
Limited, which was incorporated under the Canada Business Corporations
Act in 1987. As a result of two private placements and the Company's
public offerings, Draxis held a 12.8% interest in the Company until
March 1996 when Draxis disposed of its entire holding in the Company.
(Note 7). The Company's consolidated financial statements include the
accounts of the its wholly-owned subsidiary, DUSA Pharmaceuticals New
York Inc., which was formed on March 3, 1994 to be the research and
development center for the Company. Significant intercompany balances
and transactions have been eliminated.
The Company was established to develop prescription pharmaceutical
products for all markets, including the United States and Canadian
markets, primarily in the field of photodynamic therapy ("PDT"), which
combines the use of a pharmaceutical product with exposure to light to
induce a therapeutic effect. The Company has been concentrating its
initial efforts upon seeking regulatory approval in the United States
for topical dermatological uses of 5-aminolevulinic acid ("ALA") PDT.
The Company has been in the development stage since its inception. The
Company's successful completion of its development program and its
transition, ultimately, to the attainment of profitable operations is
dependent upon the Company's ability to complete marketing approval of
ALA PDT from the various regulatory agencies and the achievement of a
level of sales adequate to support the Company's cost structure.
Obtaining marketing approval will be directly dependent on the Company's
ability to implement the necessary regulatory steps required to obtain
marketing approval in the United States and other markets for the use of
ALA PDT in dermatological applications and to complete the Company's
marketing and promotion programs. It is not possible at this time to
predict with assurance the outcome of these activities.
F-8
37
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Basis of Presentation - These financial statements, stated
in U.S. dollars, have been prepared in accordance with accounting
principles generally accepted in the United States. The
preparation of financial statements in conformity with generally
accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
b. U.S. Government Securities Available for Sale - The Company
follows the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 115, "Accounting for Certain Investments
in Debt and Equity Securities." The Statement requires the
Company to record securities which management has classified as
available for sale at fair market value and to record unrealized
gains and losses on securities available for sale as a separate
component of shareholders' equity until realized.
As the Company's management expects to sell a portion of the U.S.
government securities in the next fiscal year in order to meet
its working capital requirements, it has classified them as
current assets. The premiums paid and discounts allowed on the
purchase of the securities are amortized into interest income
over the life of the securities using a method that approximates
level-yield.
c. Fixed Assets - Fixed assets are carried at cost less
accumulated depreciation and amortization, which is computed on a
straight-line basis over the estimated lives of the related
assets.
d. Intangible Assets -Intangible assets represent organization
costs, which have been fully amortized using the straight-line
method over five years.
Payments made to third parties for the rights to market
pharmaceutical products are expensed during the year unless
regulatory approval to market the pharmaceutical product has been
received prior to the date of payment.
e. Common Stock - Certain shares of common stock issued,
warrants issued and stock options granted are subject to resale
restrictions (Notes 7 and 8).
f. Research and Development Costs - Costs related to the
conceptual formulation and design of products and processes are
expensed as research and development as they are incurred.
F-9
38
g. Income Taxes - The Company follows the provisions of SFAS
No. 109, "Accounting for Income Taxes", which requires the
Company to compute deferred income taxes based on the difference
between the financial statement and tax basis of assets and
liabilities using tax rates in effect in the years in which these
differences are expected to reverse (Note 6).
h. Net Loss Per Share - Net loss per common share is based on
the weighted average number of shares outstanding during each
period. Certain common stock issuances (2,200,000) were made at
prices less than the initial public offering price. Accordingly,
the associated shares are included in the calculation of net loss
per share as if they were outstanding for the entire 1991 period.
Stock options are not included in the computation of the weighted
average number of shares outstanding during the period as the
effect would be antidilutive.
i. Stock based compensation - The Company follows the
provisions of APB Opinion No. 25, which requires compensation
cost for stock based employee compensation plans be recognized
based on the difference, if any, between the quoted market price
of the stock and the amount an employee must pay to acquire the
stock. As a result of the Company continuing to apply APB No. 25,
SFAS No. 123, "Accounting for Stock-Based Compensation" requires
increased disclosure of compensation expense arising from both
the Company's fixed and performance stock compensation plans. The
expense is measured as the fair value of the award at the date it
is granted using an option-pricing model that takes into account
the exercise price and expected term of the option, the current
price of the underlying stock, its expected volatility, expected
dividends on the stock and the expected risk-free rate of return
during the term of the option. The compensation cost is
recognized over the service period, usually the period from the
grant date to the vesting date. The Company has disclosed the
required proforma net loss and loss per share data in Note 8 as
if the Company had applied the SFAS No. 123 method.
j. New Statements of Financial Accounting Standards- In
December 1996, the FASB issued SFAS No.127, deferring the
effective date of certain provisions of SFAS No. 125 "Accounting
for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities." The Statements provide
accounting and reporting for transfers and servicing of financial
assets and extinguishment of liabilities occurring after December
31, 1996 and 1997. The Company does not anticipate that the
implementation of these Statements will have a material impact on
the consolidated financial statements.
F-10
39
3. U.S. GOVERNMENT SECURITIES AVAILABLE FOR SALE
Securities available for sale consist of United States Treasury
Bills and Notes with yields ranging from 4.52% to 6.85% and
maturity dates ranging from January 15, 1997 to August 10, 1999.
As of December 31, 1996, the Company's securities available for
sale have been recorded at fair market value of $18,033,406 and
the unrealized loss on such securities of $28,026 has been
recorded as part of shareholders' equity (Note 2b).
4. FIXED ASSETS
1996 1995
------------- -------------
Furniture and Fixtures $ 58,905 $ 40,436
Computer Equipment 119,207 39,699
------------- -------------
178,112 80,135
Accumulated depreciation and amortization (55,688) (31,056)
============= =============
$ 122,424 $ 49,079
============= =============
5. INTANGIBLE ASSETS
1996 1995
------------- -------------
Organization costs $ 16,921 $ 16,921
Accumulated amortization (16,921) (14,264)
-------------
=============
$ - $ 2,657
============= =============
F-11
40
6. INCOME TAXES
The tax effect of significant temporary differences representing
deferred tax assets is as follows:
1996 1995
----------------- -----------------
Deferred Tax Assets
Intangible assets $ 329,268 $ 260,083
Accrued charges 64,160 28,000
Research and development tax credits carryforwards 307,227 303,656
Operating loss carryforwards 6,208,750 3,812,800
Capital loss carryforwards 162,790 -
Other 5,992 2,384
----------------- -----------------
7,078,187 4,406,923
----------------- -----------------
Deferred Tax Liabilities
Fixed assets 4,638 1,932
Unrealized gains on U.S. government securities for sale 15,089 15,089
----------------- -----------------
19,727 17,021
----------------- -----------------
Net deferred tax assets 7,058,460 4,389,902
Valuation allowance (7,058,460) (4,389,902)
----------------- -----------------
$ - $ -
================= =================
Management cannot assess the likelihood that the future tax benefits
will be realized because the Company is currently in the development
stage and has cumulative net losses. Accordingly, the net tax benefit
does not satisfy the recognition criteria set forth in SFAS No. 109 and,
therefore, a valuation allowance has been provided.
As of December 31, 1996, the Company has net operating loss
carryforwards for tax purposes of approximately $15,521,000 and research
and development tax credits of approximately $307,000 both of which, if
not utilized, will expire as follows:
Operating Research and
Loss carryforwards development tax
credits
-------------------- ---------------------
2006 $ 193,000 $ 7,000
2007 1,155,000 57,000
2008 1,664,000 66,000
2009 3,027,000 84,000
2010 3,417,000 44,000
2011 6,065,000 49,000
--------------------
=====================
$ 15,521,000 $ 307,000
==================== =====================
F-12
41
7. SHAREHOLDERS' EQUITY
In 1991, the Company issued 2,200,000 shares of common stock at $.75 per
share to Draxis. The Company received cash for 2,000,000 shares and a
$150,000 interest-bearing promissory note for 200,000 shares. Cash
payment was received on the promissory note on September 26, 1991.
The Company completed its initial public offering on January 28, 1992,
for the sale of an aggregate of 1,437,500 Units, each Unit consisting of
two shares of common stock and one Class A warrant, at a price of $12
per Unit. Proceeds of the issue, net of stock offering costs of
$2,464,872, were $14,785,128.
In conjunction with the initial public offering, 112,000 shares of the
Company's common stock held by Draxis were distributed to Draxis's
shareholders on a pro rata basis as a dividend in specie.
During 1992, a former officer of the Company who resides in Canada
inadvertently engaged in transactions in the Company's securities, which
would have been permitted under Canadian law, which resulted in gains to
the officer. In accordance with Section 16(b) of the Securities Exchange
Act of 1934, during April 1992, the officer was required to and did
remit $17,125 to the Company, which represented certain profits realized
upon the sale of such securities. Such amount is reflected as an
increase to common stock.
On November 23, 1993, the Company issued 100,000 shares of common stock
for cash to a private investor at $5.00 per share. On March 4, 1994, the
Company issued 250,000 shares of common stock for cash to private
investors at $4.80 per share. The issue prices were determined by the
closing stock market prices on the day prior to the issue.
On March 18, 1993, the Company made a loan to a director in the amount
of $68,047 (CDN.$84,875) in order to enable the purchase of shares when
12,500 options held by the director were exercised for $5.44 (CDN.$6.79)
per share. The loan was fully repaid on March 18, 1996.
On December 14, 1995, the Company completed a public offering for the
sale of 3,000,000 shares of common stock at a price of $5.50 per share.
Proceeds of the issue, net of stock offering costs of $1,946,321, were
$14,553,679.
On February 16, 1996, the Company extended the term of the outstanding
restricted stock options issued prior to August 1994 from five years to
ten years, in order that the terms for these options would be comparable
to the terms of all the options granted under the Company's existing
stock option plans. The excess of the market value of the common stock
over the exercise price of the extended term stock options of $557,260
has been recorded as an addition to common stock and the related
compensation expense has been recorded.
F-13
42
The Company filed a registration statement pertaining to all remaining
1,088,001 restricted shares of common stock of the Company owned by
Draxis. In March 1996, Draxis disposed of its entire holding in the
Company in a secondary offering. Draxis no longer owns any shares of
common stock or other securities in the Company. Certain relationships
between the Company and Draxis have changed as a result of Draxis's sale
of its ownership interest (Note 9b).
On May 1, 1996, the Company completed a public offering for the sale of
750,000 shares of common stock at a price of $7.20 per share. Proceeds
of the issue, net of stock offering costs of $637,062, were $4,762,938.
8. STOCK OPTIONS AND WARRANTS
a. Stock compensation plan-The Company has a stock based
compensation plan, which is described below. The Company applies
APB Opinion No. 25 and related interpretations in accounting for
its plan. Accordingly, no compensation cost has been recognized
for the plan. Had the compensation cost for the Company's plan
been determined based on the fair value at the rates of award
under the plan consistent with the method of SFAS No. 123, the
Company's net loss, cumulative loss, and loss per share would
have been increased to the proforma amounts indicated below:
1996 1995
-----------------------------------------
Net Loss
As reported ($6,800,319) ($3,647,533)
Proforma ($7,410,466) ($3,666,299)
Loss per common share:
As reported ($0.75) ($0.65)
Proforma ($0.82) ($0.66)
Cumulative loss
As reported ($17,580,927)
Proforma ($18,209,841)
Cumulative loss per common share
As reported ($3.22)
Proforma ($3.33)
As SFAS No. 123 has not been applied to options granted prior to
January 1, 1995, the resulting proforma compensation cost may not
be representative of that to be expected in future years.
F-14
43
The fair value of options at date of grant was estimated using the
Black-Scholes model with the following weighted average
assumptions:
1996 1995
----------------------------------------
Expected life (years) 10 10
Risk free interest rate 6.66% 6.46%
Expected Volatility 62.28% 65.90%
Dividend yield - -
b. 1996 Omnibus Plan - On April 11, 1996, the 1996 Omnibus
Plan ("Omnibus Plan") was adopted by the Board of Directors and
approved by the shareholders on June 6, 1996. No further grants
will be issued under the 1994 Restricted Stock Option Plan and
the Incentive Stock Option Plan (adopted in 1991). The Omnibus
Plan provides for the granting of awards to purchase up to a
maximum of 10% of the Company's common stock outstanding. The
Omnibus Plan is administered by a committee ("Committee")
established by the Board of Directors. The Omnibus Plan enables
the Committee to grant non-qualified stock options ("NQSO"),
incentive stock options ("ISO"), stock appreciation rights
("SAR"), restricted stock ("RSO") or other securities determined
by the Company, to directors, employees and consultants.
Non-qualified stock options- All the non-qualified stock options
granted under the plan have an expiration period not exceeding
ten years and are issued at a price not less than the market
value of the common stock on the grant date. These options become
exercisable at a rate of one quarter of the total granted on each
of the first, second, third and fourth anniversaries of the grant
date. The Company has granted each individual who agrees to
become a director 15,000 NQSO to purchase common stock of the
Company. Thereafter, on the day following the Annual Meeting of
the shareholders, each person who is a continuing director on
such date will automatically receive an additional 10,000 NQSO.
The Company issued non-qualified stock options, which were
granted on February 16, 1996, subject to the approval of the 1996
Omnibus Plan.
Incentive stock options- Options granted under the plan have an
expiration period not exceeding ten years (five years for ISOs
granted to employees who are also ten percent shareholders) and
are issued at a price not less than the market value of the common
stock on the grant date. These options become exercisable at a
rate of one quarter of the total granted on each of the first,
second, third and fourth anniversaries of the grant date subject
to satisfaction of certain conditions involving continuous periods
of service or engagement.
F-15
44
1994 Restricted Stock Options - Prior to August 1994, the Company
granted individual options to purchase shares of common stock to
certain directors, officers, employees, consultants and others.
Options granted from August 1994 through to December 31, 1994 were
granted under the 1994 Restricted Stock Option Plan. For options
issued in 1991, the exercise price was determined by the public
offering price. For options issued after 1991, the exercise price
was determined by the closing stock market price on the day prior
to the grant. All of the options, which were outstanding at
February 16, 1996, which had terms of five years, have been
extended to terms of ten years (Note 7). These options are
exercisable at the rate of one quarter of the total granted on each
of the first, second, third and fourth anniversaries of the day
immediately preceding the date of the grant, subject to
satisfaction of certain conditions involving continuous periods of
service or engagement.
1991 Incentive Stock Option Plan - Under the Company's former
Incentive Stock Option Plan, established in 1991, the Company's
Board of Directors granted options to selected employees to
purchase common stock of the Company. All the options were granted
at the market value of the options on the date of the grant, had
terms of ten years and became exercisable at the rate of one
quarter of the total granted on each of the first, second, third
and fourth anniversaries of the date of the grant, subject to
satisfaction of certain conditions involving continuous periods of
service.
Changes for the stock option plans during the years ended December
31, 1996, 1995 and 1994 were as follows:
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
1996 Price 1995 Price 1994 Price
----------------- ------------- --------------- ------------- ------------ ------------
Options outstanding, beginning of
year 589,500 $5.69 644,000 $5.77 454,000 $6.72
Options granted 490,000 7.93 25,000 4.75 190,000 3.51
Options exercised (77,450) 5.34 (40,000) 4.95 - -
Options lapsed - - (39,500) 7.20 - -
----------------- ------------- --------------- ------------- ------------ ------------
Options outstanding, end of year 1,002,050 $6.81 589,500 $5.69 644,000 $5.77
================= ============= =============== ============= ============ ============
Shares exercisable, end of year 368,300 $5.96 365,750 $6.16 280,875 $6.37
================= ============= =============== ============= ============ ============
Option prices per share:
Exercised during the year:
Canadian residents CDN.$4.69 to CDN.$12.875 CDN.$6.79 -
Granted during the year:
U.S. residents $7.75 to $9.875 $4.75 $3.375
Canadian residents $7.75 CDN.$6.51 CDN.$4.69 to
CDN.$6.50
F-16
45
The following table summarizes information about the stock
options outstanding at December 1996:
Options Outstanding Options Exercisable
-----------------------------------------------------------------------------
Range of Number Weighted Weighted Number Weighted
Exercise Price Outstanding at Average Average Exercisable at Average
December 31, 1996 Remaining Exercise December 31, Exercise
Contractual Price 1996 Price
Life
$ 3.01 to 5.00 380,300 6.5 years $ 4.70 265,300 $ 5.14
5.01 to 8.00 538,750 8.6 7.49 72,500 6.40
8.01 to14.00 83,000 7.9 10.04 30,500 10.45
------------------ ----------------
1,002,050 7.7 $ 6.46 368,300 $ 5.83
================== ================
Sharesissued pursuant to the exercise of such options are
restricted shares and may not be sold in the United States
without registration or exemption from registration under the
1933 Act.
c. Other Options - In 1991, in consideration of the efforts
made on behalf of the Company by key employees of Draxis in
connection with negotiating various agreements including the
License Agreement (Note 9a), the Company granted an option to
Draxis to purchase 2,000,000 shares of common stock of the
Company (the "Draxis Option") at $9.00 per share. On December 21,
1995, the Company purchased the Draxis Option for $2,250,000 or
$1.125 per option, based upon an investment banking firm fairness
opinion, with a portion of the proceeds of the December 1995
public offering (Note 7). Payment for the option was charged
against shareholders' equity at December 31, 1995.
In conjunction with its initial public offering (Note 7), the
Company granted Unit Purchase Options to the underwriters to
purchase up to 125,000 Units (250,000 shares of common stock and
125,000 warrants) at an exercise price of $18.00 per Unit. The
cash consideration for such options was $.0008 per Unit or $100,
in the aggregate. As of December 31, 1995, options to purchase
53,750 Units (107,500 shares of common stock) have expired. The
expiration date on the remaining options to purchase 71,250 Units
(142,500 shares of common stock) was extended by the Board of
Directors from January 16, 1997 to January 16, 2000 (Note 7). On
the date of the extension, October 31, 1996, the market value of
the common stock was lower than the exercise price of the options
on the issue date. All warrants issued in connection with the
initial public offering expired on April 19, 1993.
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46
In conjunction with its December 1995 public offering (Note 7),
the Company granted Purchase Options to the underwriters to
purchase up to 300,000 shares of common stock at an exercise
price equal to 140% of the public offering price of the shares,
or $7.70 per share. The options are exercisable over a period of
four years commencing December 8, 1996. The cash consideration
for such options was $.001 per option or $300, in the aggregate.
In conjunction with its May 1, 1996 public offering (Note 7), the
Company granted Purchase Options to the underwriters to purchase
up to 37,500 shares of common stock at an exercise price equal to
110% of the public offering price of the shares, or $7.92 per
share, the cash consideration for such options was of $.001 per
option or $37.50, in the aggregate. The options are exercisable
for a period of four years, commencing May 1, 1997. The options
cannot be sold, transferred, assigned, or hypothecated prior to
May 1, 1997, except that they may be assigned, in whole or in
part, to any successor, or officer or partner of the
underwriters.
d. Warrants - In consideration of efforts related to the
negotiation and execution of various agreements including the
License Agreement (Note 9a), the Company issued warrants to
purchase 350,000 and 50,000 shares of common stock of the Company
at CDN. $6.79 per share to the Chairman of the Board, President,
Chief Executive Officer and Chief Operating Officer of the
Company, and a former Co-Chairman of the Board of Draxis,
respectively. On December 21, 1995, the warrants for 50,000
shares were exercised. The expiration date on the 350,000
remaining warrants was extended by the Board of Directors from
January 28, 1997 to January 28, 2002. On the date of the
extension, August 1, 1996, the market value of the common stock
was lower than the exercise price of the warrants on the issue
date.
In connection with an agreement dated October 6, 1993 with its
investor relations firm, the Company issued the investor
relations firm a warrant to purchase up to 50,000 shares of the
authorized stock of the Company at $6.00 per share. The warrant
vested immediately upon issuance, is non-cancelable and expires
October 6, 1998.
In connection with an agreement with its investment advisor, the
Company agreed to issue warrants for 20,000 shares of the
Company's common stock, exercisable at a price of $4.00 per
share, a premium from the closing stock market price of the
Company's common stock on the day immediately preceding the date
of the grant. The warrants vested on June 1, 1995 and are
exercisable for a period up to and including five years from the
date of grant, at which time the warrants expire.
Under the terms of a financial services advisory agreement
entered into on August 30, 1996, the Company conditionally
granted 50,000 warrants exercisable for a period of five years at
$6.75, the closing market price of the Company's common stock on
August 30, 1996. These warrants are subject to certain terms and
conditions, including expiration on December 9, 1996, if the
agreement is not extended by the Company. The Company has
extended the expiration date to August 27, 1997.
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9. COMMITMENTS AND CONTINGENCY
a. PARTEQ License Agreement - Effective August 27, 1991, the
Company entered into a license agreement (the "License
Agreement") with Parteq Research and Development Innovations
("PARTEQ"), the licensing arm of Queen's University at Kingston,
Kingston, Ontario ("Queen's") and Draxis. Pursuant to the License
Agreement, the Company has been granted an exclusive worldwide
license (with a right to sublicense) to make, have made, use and
sell products capable of producing protoporphyrin IX precursors,
including ALA, for administration with subsequent exposure to
photoactivating light in the case of primary or secondary
malignant and non-malignant tissue abnormalities and lesions of
the skin; conjunctiva; respiratory, digestive and vaginal mucosa;
and endometrium and urothelium. Subject to certain rights of
termination, the terms of the License Agreement is automatically
renewed annually.
Pursuant to the terms of the License Agreement, the Company has
paid fees totaling CDN. $300,000 and has agreed to pay an
additional CDN. $50,000 upon the receipt of health regulatory
approval to market products in the United States. Lump sum
amounts paid or to be paid, with the exception of the execution
fee and fee paid upon the receipt of health regulatory approval,
are deductible against royalties otherwise payable under the
License Agreement. The Company has agreed to pay royalties of 6%
and 4% on its or its affiliates' net sales of products in
countries where patent rights do and do not exist, respectively,
as well as royalties of 33% of royalties and sublicensing fees
received from sublicensees who are not affiliates. Should no
United States patent subsist, whether by virtue of expiry,
invalidation or rejection, the License Agreement becomes
perpetual and royalty-free. Commencing with the first year of
health regulatory approval in the United States, provision is
made for minimum royalty payments to PARTEQ. The Company has,
however, the right to terminate the License Agreement with or
without cause upon ninety days notice. In the event the Company
exercises this right without cause within three years of the
effective date of the License Agreement, the Company must pay a
termination fee of CDN. $50,000. Draxis has guaranteed all
obligations of the Company to PARTEQ under the License Agreement.
Effective October 7, 1991, pursuant to an agreement between the
Company, PARTEQ and Draxis, the Company assigned its rights and
obligations under the License Agreement to Draxis insofar as they
relate to Canada. In consideration of the foregoing, Draxis has
agreed to pay directly to PARTEQ, 5% of all future lump sums
payable under the License Agreement together with royalties which
would otherwise be payable by the Company in accordance with the
License Agreement with respect to net Canadian sales of products.
In further consideration, Draxis agreed to reimburse to the
Company, 5% of all lump sums previously paid by the Company to
PARTEQ under the License Agreement and to pay to the Company a
royalty of 2% of net Canadian sales of products.
F-19
48
b. Management Agreement -Effective October 1, 1991 the Company
had entered into a management agreement with Draxis, with a one
year term and renewable annually pursuant to which Draxis
provided to the Company administrative, financial, scientific and
marketing support and any other management services which were
required. The Company was charged a per diem rate for services
provided by Draxis employees. The per diem rates were equal to
the annual salary and benefits, expressed as a rate per day, paid
by Draxis to such employees. Services charged by Draxis for the
years ended December 31, 1996, 1995 and 1994 totaled $28,784,
$56,709, and $63,861 respectively. As of December 3, 1996 the
Company notified Draxis that it was terminating the management
agreement effective as of February 1, 1997, as per the provisions
of the agreement.
c. Officers' Employment Agreements - The Company entered into
an employment agreement, effective October 1, 1991 with D.
Geoffrey Shulman, MD, FRCPC. The employment agreement sets out
the remuneration, benefits and incentive bonuses which Dr.
Geoffrey Shulman is to receive in his capacity as President of
the Company. In addition, Dr. Geoffrey Shulman was granted an
option to purchase 50,000 shares of common stock of the Company
at CDN. $6.79 per share and warrants to purchase 350,000 shares
of common stock at CDN. $6.79 per share (Note 8d). Dr. Geoffrey
Shulman's full term of employment is unlimited in duration unless
terminated in accordance with the terms of the employment
agreement.
Effective October 11, 1993, the Company entered into an
employment agreement with its Vice President of Scientific
Affairs. In connection with the agreement, the Company granted,
pursuant to the Company's Incentive Stock Option Plan, options to
purchase 40,000 shares of common stock at $6.375, being the
closing stock market price on the date of employment.
d. Lease Agreement -The Company has entered into lease
commitments for rental of its office space in Tarrytown, New York
and in Toronto, Ontario. Future minimum lease payments will total
approximately $74,000 in 1997, $55,600 in 1998 and $58,000 in
1999.
e. Light Source Agreement - Pursuant to an agreement dated June
7, 1993 with respect to one of the Company's prototype light
sources, the developer has assigned to the Company its rights
under a U.S. patent issued in August 1995 regarding the light
source, and the Company is committed to pay royalties of 4% of
wholesale cost on all commercial units purchased from the
developer and 8% if purchased from any other manufacturer.
F-20
49
f. Melanin License Agreement - Effective August 27, 1993, the
Company entered into a license agreement (the "License
Agreement") for the exclusive worldwide rights to a new form of
melanin. Pursuant to the terms of the License Agreement, the
Company paid an execution fee of $15,541 (CDN.$20,000) and has
agreed to pay CDN.$25,000 upon allowance of the patents in the
United States and CDN.$25,000 on the issuance of a Notice of
Compliance in Canada or a New Drug Approval in the United States
or upon launching of such drug products for commercial sale in
North America, whichever occurs first. In countries where patent
rights exist, the Company has agreed to pay royalties of 4% on
its net sales of prescription products and 2% on over the counter
products. In countries where patent rights do not exist, the
Company has agreed to pay 2% and 1%, respectively.
g. Lumenetics License Agreement - Effective April 1, 1996, the
Company entered into an agreement with Lumenetics, Inc.
("Lumenetics") with respect to the evaluation and development of
light delivery system components and other devices for use in ALA
PDT. Pursuant to the terms of the agreement, in the event a light
delivery system is developed, the Company has agreed to pay
Lumenetics a percentage of cumulative net sales of such delivery
system as follows: (a) on cumulative sales up to and including
$10,000,000, the Company has agreed to pay a 3% royalty if the
system is invented by Lumenetics and patented by the Company, a
2.5% royalty if the system is unpatented but Lumenetics adds
significant technology, and a 1% royalty in all other cases, (b)
on cumulative sales from $10,000,001 to $50,000,000, the Company
has agreed to pay royalties of 2%, 1% and 0.5%, respectively and
(c) on cumulative sales in excess of $50,000,000, the Company has
agreed to pay royalties of 1%, 0.5% and 0.25%, respectively. In
addition, Lumenetics has received restricted stock options for
20,000 shares of common stock of the Company (Note 8c).
h. Research agreements - The Company has entered into a series
of agreements for research projects and clinical studies. As of
December 31, 1996, future payments to be made pursuant to these
agreements, under certain terms and conditions, totaled
approximately $1,661,821 in 1997, and $143,125 in 1998.
10. FAIR VALUES OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial
instruments is made in accordance with the requirements of SFAS
No.107, "Disclosures About Fair Value of Financial Instruments."
The estimated fair value amounts have been determined by the
Company using available market information and appropriate
valuation methodologies. However, considerable judgement is
necessarily required in interpreting market data to develop the
estimates of fair value. Accordingly, the estimates presented
herein are not necessarily indicative of the amounts that the
Company could realize in a current market exchange. The use of
different market assumptions and/or estimation methodologies may
have a material effect on the estimated fair value amounts.
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50
Cash, Accrued Interest Receivable, Account Payable, and Accrued
Charges - The carrying amounts of these items are a reasonable
estimate of their fair value.
U.S. Government Securities Available for Sale - The fair values
of U.S. Government Securities were determined based on quoted
market prices.
* * * *
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
(Registrant) DUSA Pharmaceuticals, Inc.
-------------------------------------------------------------
By (Signature and Title) /s/D. Geoffrey Shulman President
--------------------------------------------------
Date March 24, 1997
------------------------
Director, Chairman of the
Board, President, Chief
Executive Officer, Chief
Operating Officer, and Chief
Financial Officer (Principal
Executive, Financial, and
/s/D. Geoffrey Shulman Accounting Officer) March 24, 1997
- ------------------------------- --------------
D. Geoffrey Shulman, MD, FRCPC Date
Vice President of
/s/Stuart L. Marcus Scientific Affairs March 24, 1997
- ------------------------------- --------------
Stuart L. Marcus, MD, PhD Date
Vice President of
/s/Anthony Schincariol Corporate Development March 24, 1997
- ------------------------------- --------------
Anthony Schincariol, MBA, PhD Date
/s/John H. Abeles Director March 24, 1997
- ------------------------------- --------------
John H. Abeles, MD Date
/s/James P. Doherty Director March 24, 1997
- ------------------------------- --------------
James P. Doherty, BSc Date
/s/Jay M. Haft Director March 24, 1997
- ------------------------------- --------------
Jay M. Haft, Esq. Date
/s/Richard C. Lufkin Director March 24, 1997
- ------------------------------- --------------
Richard C. Lufkin Date
/s/Nanette W. Mantell Secretary March 24, 1997
- ------------------------------- --------------
Nanette W. Mantell, Esq. Date