| DUSA PHARMACEUTICALS INC ITEM 1A RISK FACTORS You should carefully consider and evaluate all of the information in, or incorporated by reference in, this annual report on Form 10-K The following are among the risks we face related to our business, assets and operations |
| Any of these risks could materially and adversely affect our business, results of operations and financial condition, which in turn could materially and adversely affect the value of the securities being offered by this report |
| This section of the annual report on Form 10-K contains forward-looking statements of our plans, objectives, expectations and intentions |
| We use words such as "e anticipate, "e "e believe, "e "e expect, "e future "e and "e intend "e and similar expressions to identify forward-looking statements |
| Our actual results could differ materially from those anticipated in these forward-looking statements for many reasons, including the risks factors described below and elsewhere in this report |
| You should not place undue reliance on these forward-looking statements, which apply only as of the date of this report |
| RISKS RELATED TO DUSA WE ARE NOT CURRENTLY PROFITABLE AND MAY NOT BE PROFITABLE IN THE FUTURE UNLESS WE CAN SUCCESSFULLY MARKET AND SELL SIGNIFICANTLY HIGHER QUANTITIES OF OUR APPROVED PRODUCTS, THE LEVULAN(R) KERASTICK(R) WITH THE BLU-U(R) BRAND LIGHT SOURCE FOR THE TREATMENT OF AKS OF THE FACE OR SCALP, AND THE BLU-U(R) WITHOUT LEVULAN(R) FOR THE TREATMENT OF MODERATE INFLAMMATORY ACNE WE HAVE ONLY LIMITED EXPERIENCE MARKETING AND SELLING PHARMACEUTICAL PRODUCTS AND, AS A RESULT, OUR REVENUES FROM PRODUCT SALES MAY SUFFER If we are unable to successfully market and sell sufficient quantities of our products, revenues from product sales will be lower than anticipated and our financial condition may be adversely affected |
| We are responsible for marketing our approved dermatology products in the United States and the rest of the world, except Canada, and Mexico and Central and South America, where we have distributors |
| We are doing so without the experience of having marketed pharmaceutical products prior to 2000 |
| In October 2003, DUSA began hiring a small direct sales force and we increased the size of our sales force to market our products in the United States |
| Acquiring and retaining marketing and sales force capabilities involves significant expense, and current sales levels are not offsetting the expenses related to these efforts |
| If our sales and marketing efforts fail, then sales of the Kerastick(R) and the BLU-U(R) will be adversely affected |
| 26 IF WE CANNOT IMPROVE PHYSICIAN REIMBURSEMENT AND/OR CONVINCE MORE PRIVATE INSURANCE CARRIERS TO ADEQUATELY REIMBURSE PHYSICIANS FOR OUR THERAPY, SALES OF OUR LEVULAN(R) KERASTICK(R) FOR AKS MAY SUFFER Without adequate levels of reimbursement by government health care programs and private health insurers, the market for our Levulan(R) Kerastick(R) for AK therapy will be limited |
| While we continue to support efforts to improve reimbursement levels to physicians and are working with the major private insurance carriers to improve coverage for our therapy, if our efforts are not successful, adoption of our therapy and sales of our products could be negatively impacted |
| Although 2005 reimbursement changes related to AK were made, some physicians still believe that reimbursement levels do not fully reflect the required efforts to routinely execute our therapy in their practices |
| SINCE WE NOW OPERATE THE ONLY FDA APPROVED MANUFACTURING FACILITY FOR THE KERASTICK(R) AND CONTINUE TO RELY HEAVILY ON SOLE SUPPLIERS FOR THE MANUFACTURE OF LEVULAN(R) AND THE BLU-U(R), ANY SUPPLY OR MANUFACTURING PROBLEMS COULD NEGATIVELY IMPACT OUR SALES If we experience problems producing Kerastick(R) units in our facility, or if either of our contract suppliers fail to supply DUSAapstas requirements of Levulan(R) or the BLU-U(R), our business, financial condition and results of operations would suffer |
| Although we have received approval by the FDA to manufacture the BLU-U(R) in our Wilmington, Massachusetts facility, at this time we expect to utilize our own facility only as a back-up to our current third party manufacturer or for repairs |
| Manufacturers and their subcontractors often encounter difficulties when commercial quantities of products are manufactured for the first time, or large quantities of new products are manufactured, including problems involving: o product yields, o quality control, o component and service availability, o compliance with FDA regulations, and o the need for further FDA approval if manufacturers make material changes to manufacturing processes and/or facilities |
| We cannot guarantee that problems will not arise with production yields, costs or quality as we and our suppliers seek to increase production |
| Any manufacturing problems could delay or limit our supplies which would hinder our marketing and sales efforts |
| If our facility, any facility of our contract manufacturers, or any equipment in those facilities is damaged or destroyed, we may not be able to quickly or inexpensively replace it |
| Likewise, if there are any quality or supply problems with any components or materials needed to manufacturer our products, we may not be able to quickly remedy the problem(s) |
| 27 ANY FAILURE TO COMPLY WITH ONGOING GOVERNMENTAL REGULATIONS IN THE UNITED STATES AND ELSEWHERE WILL LIMIT OUR ABILITY TO MARKET OUR PRODUCTS Both the manufacture and marketing of our products, the Levulan(R) Kerastick(R) with the BLU-U(R) for AKs and the BLU-U(R) without Levulan(R) to treat moderate inflammatory acne, are subject to continuing FDA review as well as comprehensive regulation by the FDA and by state and local regulatory authorities |
| These laws require, among other things: o approval of manufacturing facilities, including adherence to good manufacturing and laboratory practices during production and storage, o controlled research and testing of products even after approval, and o control of marketing activities, including advertising and labeling |
| If we, or any of our contract manufacturers, fail to comply with these requirements, we may be limited in the jurisdictions in which we are permitted to sell our products |
| Additionally, if we or our manufacturers fail to comply with applicable regulatory approval requirements, a regulatory agency may also: o send us warning letters, o impose fines and other civil penalties on us, o seize our products, o suspend our regulatory approvals, o refuse to approve pending applications or supplements to approved applications filed by us, o refuse to permit exports of our products from the United States, o require us to recall products, o require us to notify physicians of labeling changes and/or product related problems, o impose restrictions on our operations, and/or o criminally prosecute us |
| We and our manufacturers must continue to comply with the FDAapstas Good Manufacturing Practice, commonly known as cGMP, and Quality System Regulation, or QSR, and equivalent foreign regulatory requirements |
| The cGMP requirements govern quality control and documentation policies and procedures |
| In complying with cGMP and foreign regulatory requirements, we and our third-party manufacturers will be obligated to expend time, money and effort in production, record keeping and quality control to assure that our products meet applicable specifications and other requirements |
| As part of our FDA approval for the Levulan(R) Kerastick(R) for AK, we were required to conduct two Phase IV follow-up studies |
| We successfully completed the first study; and submitted our final report on the second study to the FDA in January 2004 |
| The FDA could request additional information and/or studies |
| Additionally, if previously unknown problems with the product, a manufacturer or its facility are 28 discovered in the future, changes in product labeling restrictions or withdrawal of the product from the market may occur |
| Manufacturing facilities are subject to ongoing periodic inspection by the FDA, including unannounced inspections |
| We cannot guarantee that our third-party supply sources, or our own Kerastick(R) facility, will continue to meet all applicable FDA regulations |
| If we, or any of our manufacturers, fail to maintain compliance with FDA regulatory requirements, it would be time consuming and costly to remedy the problem(s) or to qualify other sources |
| These consequences could have an adverse effect on our financial condition and operations |
| IF PRODUCT SALES DO NOT INCREASE SIGNIFICANTLY WE MAY NOT BE ABLE TO ADVANCE DEVELOPMENT OF OUR OTHER POTENTIAL PRODUCTS AS QUICKLY AS WE WOULD LIKE TO, WHICH WOULD DELAY THE APPROVAL PROCESS AND MARKETING OF NEW POTENTIAL PRODUCTS If we do not generate sufficient revenues from our approved products, we may be forced to delay or abandon some or all of our product development programs |
| The pharmaceutical development and commercialization process is time consuming and costly, and any delays might result in higher costs which could adversely affect our financial condition |
| Without sufficient product sales, we might be required to seek additional funding |
| There is no guarantee that adequate funding sources could be found to continue the development of all our potential products |
| We might be required to commit substantially greater capital than we have available to research and development of such products and we may not have sufficient funds to complete all or any of our development programs |
| THE COMMERCIAL SUCCESS OF ANY PRODUCTS THAT WE MAY DEVELOP WILL DEPEND UPON THE DEGREE OF MARKET ACCEPTANCE OF OUR PRODUCTS AMONG PHYSICIANS, PATIENTS, HEALTH CARE PAYORS, PRIVATE HEALTH INSURERS AND THE MEDICAL COMMUNITY Our ability to commercialize any products that we may develop will be highly dependent upon the extent to which these products gain market acceptance among physicians, patients, health care payors, such as Medicare and Medicaid, private health insurers, including managed care organizations and group purchasing organizations, and the medical community |
| If these products do not achieve an adequate level of acceptance, we may not generate material product revenues, and we may not become profitable |
| The degree of market acceptance of our product candidates, if approved for commercial sale, will depend on a number of factors, including: o the effectiveness, or perceived effectiveness, of our products in comparison to competing products; o the existence of any significant side effects, as well as their severity in comparison to any competing products; o potential advantages over alternative treatments; o the ability to offer our products for sale at competitive prices; o relative convenience and ease of administration; o the strength of marketing and distribution support; and o sufficient third-party coverage or reimbursement |
| We expect to have continued losses through at least 2006 as we attempt to increase sales of our approved products in the marketplace and continue research and development of potential new products |
| We incurred net losses of dlra15cmam628cmam980 for the year ended December 31, 2004 and net losses of dlra14cmam998cmam709 for the year ended December 31, 2005 |
| As of December 31, 2005, our accumulated deficit was approximately dlra89cmam537cmam000 |
| We cannot predict whether any of our products will achieve significant enough market acceptance or generate sufficient revenues to enable us to become profitable |
| IF WE ARE UNABLE TO PROTECT OUR PROPRIETARY TECHNOLOGY, TRADE SECRETS OR KNOW-HOW, WE MAY NOT BE ABLE TO OPERATE OUR BUSINESS PROFITABLY WE HAVE LIMITED PATENT PROTECTION AND IF WE ARE UNABLE TO PROTECT OUR PROPRIETARY RIGHTS, COMPETITORS MIGHT BE ABLE TO DEVELOP SIMILAR PRODUCTS TO COMPETE WITH OUR PRODUCTS AND TECHNOLOGY Our ability to compete successfully depends, in part, on our ability to defend patents that have issued, obtain new patents, protect trade secrets and operate without infringing the proprietary rights of others |
| We have no compound patent protection for our Levulan(R) brand of the compound ALA Our basic patents are for methods of detecting and treating various diseased tissues using ALA (or related compounds called precursors), in combination with light |
| We own or exclusively license patents and patent applications related to the following: o methods of using ALA and its unique physical forms in combination with light, o compositions and apparatus for those methods, and o unique physical forms of ALA We have limited patent protection outside the United States, which may make it easier for third-parties to compete there |
| Our basic method of treatment patents and applications have counterparts in only six foreign countries, and certain countries under the European Patent Convention |
| Even where we have patent protection, there is no guarantee that we will be able to enforce our patents |
| Additionally, enforcement of a given patent may not be practicable or an economically viable alternative |
| In 2002, we received notice of a lawsuit filed in Australia by PhotoCure ASA alleging that Australian Patent Nodtta 624985, which is one of the patents licensed to us by PARTEQ Research & Development Innovations, the technology transfer arm of Queenapstas University at Kingston, Ontario, relating to our ALA technology, is invalid |
| As a consequence of this action, Queenapstas University assigned the Australian patent to DUSA so that we could participate directly in the litigation |
| On April 6, 2005, the Federal Court of Australia ruled that the patent is valid and remains in full force and effect |
| However, the Court also ruled that PhotoCureapstas product does not infringe the claims in the Australian patent |
| The parties signed a Mediation Agreement in August 2004 to attempt to settle their disputes and those discussions are ongoing |
| If the parties are unable to amicably resolve matters, patent litigation could ensue in the United States and there can be no guarantee that we would prevail |
| Some of the indications for which we are developing therapies may not be covered by the claims in any of our existing patents |
| Even with the issuance of additional patents to DUSA, other parties are free to develop other uses of ALA, including medical uses, and to market ALA for such uses, assuming that 30 they have obtained appropriate regulatory marketing approvals |
| ALA in the chemical form has been commercially supplied for decades, and is not itself subject to patent protection |
| There are reports of third-parties conducting clinical studies with ALA in countries outside the United States where PARTEQ does not have patent protection |
| In addition, a number of third-parties are seeking patents for uses of ALA not covered by our patents |
| These other uses, whether patented or not, and the commercial availability of ALA, could limit the scope of our future operations because ALA products could come on the market which would not infringe our patents but would compete with our Levulan(R) products even though they are marketed for different uses |
| While we attempt to protect our proprietary information as trade secrets through agreements with each employee, licensing partner, consultant, university, pharmaceutical company and agent, we cannot guarantee that these agreements will provide effective protection for our proprietary information |
| It is possible that: o these persons or entities might breach the agreements, o we might not have adequate remedies for a breach, and/or o our competitors will independently develop or otherwise discover our trade secrets |
| PATENT LITIGATION IS EXPENSIVE, AND WE MAY NOT BE ABLE TO AFFORD THE COSTS The costs of litigation or any proceeding relating to our intellectual property rights could be substantial even if resolved in our favor |
| Some of our competitors have far greater resources than we do and may be better able to afford the costs of complex patent litigation |
| For example, third-party competitors may infringe one or more of our patents, and we could be required to spend significant resources to enforce our patent rights |
| Also, if we were to sue a third-party for infringement of our patents in the United States, that third-party could challenge the validity of our patent(s) |
| We cannot guarantee that a third-party will not claim, with or without merit, that we have infringed their patent(s) or misappropriated their proprietary material |
| Defending this type of legal action involves considerable expense and could negatively affect our financial results |
| Additionally, if a third-party were to file a United States patent application in the United States, or be issued a patent claiming technology also claimed by us in a pending United States application(s), we may be required to participate in interference proceedings in the United States Patent and Trademark Office to determine the priority of the invention |
| A third-party could also request the declaration of a patent interference between one of our issued United States patents and one of its patent applications |
| Any interference proceedings likely would require participation by us and/or PARTEQ, could involve substantial legal fees and result in a loss or lessening of our patent protection |
| During 2005 and into 2006, we filed several lawsuits against compounding pharmacies and physicians alleging violations of patent law |
| While we have been successful in obtaining a default judgment against one compounding pharmacy and have obtained consent judgments from several physicians, we do not know whether these lawsuits will prevent others from infringing our patents or whether we will be successful in stopping these activities which we believe are negatively affecting our revenues |
| 31 WE HAVE ONLY TWO THERAPIES THAT HAVE RECEIVED REGULATORY APPROVAL OR CLEARANCE AND WE CANNOT PREDICT WHETHER WE WILL EVER DEVELOP OR COMMERCIALIZE ANY OTHER PRODUCTS EXCEPT FOR THE LEVULAN(R) KERASTICK(R) WITH THE BLU-U(R) TO TREAT AKS, AND THE USE OF THE BLU-U(R) ALONE TO TREAT MODERATE INFLAMMATORY ACNE, ALL OF OUR POTENTIAL PRODUCTS ARE IN EARLY STAGES OF DEVELOPMENT AND MAY NEVER RESULT IN ANY COMMERCIALLY SUCCESSFUL PRODUCTS We do not know if the Levulan(R) Kerastick(R) or the BLU-U(R) products will ever be commercially successful |
| To be profitable, we must successfully research, develop, obtain regulatory approval for, manufacture, introduce, market and distribute our products |
| Except for DUSAapstas two approved therapies, all of our other potential Levulan(R) and BLU-U(R) products are at an early stage of development and subject to the risks of failure inherent in the development of new pharmaceutical products and products based on new technologies |
| These risks include: o delays in product development, clinical testing or manufacturing, o unplanned expenditures in product development, clinical testing or manufacturing, o failure in clinical trials or failure to receive regulatory approvals, o emergence of superior or equivalent products, o inability to market products due to third-party proprietary rights, and o failure to achieve market acceptance |
| We cannot predict how long the development of our investigational stage products will take or whether they will be medically effective |
| We cannot be sure that a successful market will continue to develop for our Levulan(R) drug technology |
| WE MUST RECEIVE SEPARATE APPROVAL FOR EACH OF OUR POTENTIAL PRODUCTS BEFORE WE CAN SELL THEM COMMERCIALLY IN THE UNITED STATES OR ABROAD All of our potential Levulan(R) products will require the approval of the FDA before they can be marketed in the United States |
| If we fail to obtain the required approvals for these products our revenues will be limited |
| Before an application to the FDA seeking approval to market a new drug, called an NDA, can be filed, a product must undergo, among other things, extensive animal testing and human clinical trials |
| The process of obtaining FDA approvals can be lengthy, costly, and time-consuming |
| Following the acceptance of an NDA, the time required for regulatory approval can vary and is usually 1 to 3 years or more |
| The FDA may require additional animal studies and/or human clinical trials before granting approval |
| Our Levulan(R) PDT products are based on relatively new technology |
| To the best of our knowledge, the FDA has approved only 3 drugs for use in photodynamic therapy, including Levulan(R) |
| This factor may lengthen the approval process |
| We face much trial and error and we may fail at numerous stages along the way |
| We cannot predict whether we will obtain approval for any of our potential products |
| Data obtained from preclinical testing and clinical trials can be susceptible to varying interpretations which could delay, limit or prevent regulatory approvals |
| Future clinical trials may not show that Levulan(R) PDT or photodetection, known as PD, is safe and effective for any new use we are studying |
| In addition, delays or disapprovals may be encountered based upon additional governmental regulation resulting from future legislation or administrative action or changes in FDA policy |
| During September 2005, the FDA issued 32 guidance for the pharmaceutical industry regarding the development of new drugs for acne vulgaris treatment |
| As a result, it is likely that the costs and time to approval associated with seeking regulatory approval of this indication will be increased |
| The FDA may issue additional guidance in the future, which may result on additional costs and delays |
| We must also obtain foreign regulatory clearances before we can market any potential products in foreign markets |
| The foreign regulatory approval process includes all of the risks associated with obtaining FDA marketing approval and may impose substantial additional costs |
| IF WE ARE UNABLE TO OBTAIN THE NECESSARY CAPITAL TO FUND OUR OPERATIONS, WE WILL HAVE TO DELAY OUR DEVELOPMENT PROGRAMS AND MAY NOT BE ABLE TO COMPLETE OUR CLINICAL TRIALS Since our current sales goals for our products may not be met in the future, we may need substantial additional funds to fully develop, manufacture, market and sell our other potential products |
| We may obtain funds through other public or private financings, including equity financing, and/or through collaborative arrangements |
| We cannot predict whether any financing will be available at all or on acceptable terms |
| Dependent on the extent of available funding, we may delay, reduce in scope or eliminate some of our research and development programs |
| We may also choose to license rights to third parties to commercialize products or technologies that we would otherwise have attempted to develop and commercialize on our own which could reduce our potential revenues |
| WE ARE EXPOSED TO RISKS ASSOCIATED WITH ACQUISITIONS On December 30, 2005 we entered into a Merger Agreement with Sirius Laboratories, Inc |
| The transaction is expected to close during the first quarter of 2006, subject to the terms and conditions in the Merger Agreement |
| We may in the future make other acquisitions of, or significant investments in, businesses with complementary products, services and/or technologies |
| Acquisitions involve numerous risks, including, but not limited to: o difficulties and increased costs in connection with integration of the personnel, operations, technologies and products of acquired companies; o diversion of managementapstas attention from other operational matters; o the potential loss of key employees; o the potential loss of key collaborators; o lack of synergy, or the inability to realize expected synergies, resulting from the acquisition; o acquired intangible assets becoming impaired as a result of technological advancements or worse-than-expected performance of the acquired company; o the potential for unexpected liabilities; and o use of cash which could be difficult to replace on reasonable terms |
| Mergers and acquisitions are inherently risky, and the inability to effectively manage these risks could materially and adversely affect our business, financial condition and results of operations |
| 33 BECAUSE OF THE NATURE OF OUR BUSINESS, THE LOSS OF KEY MEMBERS OF OUR MANAGEMENT TEAM COULD DELAY ACHIEVEMENT OF OUR GOALS We are a small company with only 66 employees, including 2 part-time employees as of December 31, 2005 |
| We are highly dependent on several key officer/employees with specialized scientific and technical skills without whom our business, financial condition and results of operations would suffer |
| The photodynamic therapy industry is still quite small and the number of experts is limited |
| The loss of these key employees could cause significant delays in achievement of our business and research goals since very few people with their expertise could be hired |
| Our growth and future success will depend, in large part, on the continued contributions of these key individuals as well as our ability to motivate and retain other qualified personnel in our specialty drug and light device areas |
| OUR COLLABORATIONS WITH OUTSIDE SCIENTISTS MAY BE SUBJECT TO RESTRICTION AND CHANGE We work with scientific and clinical advisors and collaborators at academic and other institutions that assist us in our research and development efforts |
| These scientists and advisors are not our employees and may have other commitments that limit their availability to us |
| Although our advisors and collaborators generally agree not to do competing work, if a conflict of interest between their work for us and their work for another entity arises, we may lose their services |
| In addition, although our advisors and collaborators sign agreements not to disclose our confidential information, it is possible that valuable proprietary knowledge may become publicly known through them |
| RISKS RELATED TO OUR INDUSTRY PRODUCT LIABILITY AND OTHER CLAIMS AGAINST US MAY REDUCE DEMAND FOR OUR PRODUCTS OR RESULT IN DAMAGES WE ARE SUBJECT TO RISK FROM POTENTIAL PRODUCT LIABILITY LAWSUITS WHICH COULD NEGATIVELY AFFECT OUR BUSINESS The development, manufacture and sale of medical products exposes us to product liability claims related to the use or misuse of our products |
| Product liability claims can be expensive to defend and may result in significant judgments against us |
| A successful claim in excess of our insurance coverage could materially harm our business, financial condition and results of operations |
| Additionally, we cannot guarantee that continued product liability insurance coverage will be available in the future at acceptable costs |
| OUR BUSINESS INVOLVES ENVIRONMENTAL RISKS AND WE MAY INCUR SIGNIFICANT COSTS COMPLYING WITH ENVIRONMENTAL LAWS AND REGULATIONS We have used various hazardous materials, such as mercury in fluorescent tubes in our research and development activities |
| We are subject to federal, state and local laws and regulations which govern the use, manufacture, storage, handling and disposal of hazardous materials and specific waste products |
| Now that we have established our own production line for the manufacture of the Kerastick(R), we are subject to additional environmental laws and regulations |
| We believe that we are in compliance in all material respects with currently applicable environmental laws and regulations |
| However, we cannot guarantee that we will not incur significant costs to comply with environmental laws and regulations in the future |
| We also cannot guarantee that current or future environmental laws or regulations will not materially adversely affect our operations, business or assets |
| In addition, although we believe our safety 34 procedures for handling and disposing of these materials comply with federal, state and local laws and regulations, we cannot completely eliminate the risk of accidental contamination or injury from these materials |
| In the event of such an accident, we could be held liable for any resulting damages, and this liability could exceed our resources |
| WE MAY NOT BE ABLE TO COMPETE AGAINST TRADITIONAL TREATMENT METHODS OR KEEP UP WITH RAPID CHANGES IN THE BIOTECHNOLOGY AND PHARMACEUTICAL INDUSTRIES THAT COULD MAKE SOME OR ALL OF OUR PRODUCTS NON-COMPETITIVE OR OBSOLETE COMPETING PRODUCTS AND TECHNOLOGIES BASED ON TRADITIONAL TREATMENT METHODS MAY MAKE SOME OR ALL OF OUR PROGRAMS OR POTENTIAL PRODUCTS NONCOMPETITIVE OR OBSOLETE Well-known pharmaceutical, biotechnology and medical device companies are marketing well-established therapies for the treatment of many of the same conditions that we are seeking to treat, including AKs, acne, photodamaged skin and Barrettapstas esophagus |
| Doctors may prefer to use familiar methods, rather than trying our products |
| Reimbursement issues affect the economic competitiveness of our products as compared to other more traditional therapies |
| If PhotoCure enters the United States marketplace with its PDT product, our sales revenues may decline |
| Many companies are also seeking to develop new products and technologies, and receiving approval for medical conditions for which we are developing treatments |
| Our industry is subject to rapid, unpredictable and significant technological change |
| Competition is intense |
| Our competitors may succeed in developing products that are safer or more effective than ours |
| Many of our competitors have substantially greater financial, technical and marketing resources than we have |
| In addition, several of these companies have significantly greater experience than we do in developing products, conducting preclinical and clinical testing and obtaining regulatory approvals to market products for health care |
| We cannot guarantee that new drugs or future developments in drug technologies will not have a material adverse effect on our business |
| Increased competition could result in: o price reductions, o lower levels of third-party reimbursements, o failure to achieve market acceptance, and o loss of market share, any of which could adversely affect our business |
| Further, we cannot give any assurance that developments by our competitors or future competitors will not render our technology obsolete |
| OUR PRODUCTS MAY LOSE MARKET SHARE IF NEW MANUFACTURERS BEGIN PRODUCING COMPETING PRODUCTS THAT ARE ABLE TO PENETRATE OUR MARKET WE HAVE LEARNED THAT COMPOUNDING PHARMACIES ARE PRODUCING A FORM OF AMINOLEVULINIC ACID HCL AND ARE MARKETING IT TO THE MEDICAL COMMUNITY We are aware that there are compounding pharmacies that market compounded versions of aminolevulinic acid HCl as an alternative to our Levulan(R) product |
| On January 31, 2005, we filed a 35 lawsuit in the United States District Court for the District of Arizona against The Cosmetic Pharmacy of Tucson, Arizona alleging violations of the Lanham Act for false advertising and trademark infringement and of United States patent law |
| A motion for default judgment was granted on July 25, 2005 in our favor for failure of The Cosmetic Pharmacy of Tucson to appear, together with injunctive relief and attorney fees and costs in the amount of approximately dlra20cmam700 |
| Also, on December 27, 2004, we filed a lawsuit in United States District Court for the District of Massachusetts against New England Compounding Pharmacy, Inc |
| of Framingham, Massachusetts alleging violations of United States patent law |
| New England Compounding Pharmacy has filed an answer, including a defense alleging invalidity of our patents, and several counterclaims against us, and we have filed our response |
| The parties are now in the discovery stage of this litigation and we have been unable to predict the outcome of the lawsuit at this time |
| A tentative trial date has been set by the court for January 2007 |
| We cannot be certain whether we will be successful in defending such counterclaims, however, we have not accrued any amounts for settlement at this time |
| While we believe that certain actions of these pharmacies go beyond the activities which are permitted under the Food, Drug and Cosmetic Act and have advised the FDA and local health authorities of our concerns, we cannot be certain that our lawsuits will be successful in curbing the practices of these pharmacies or that regulatory authorities will intervene to stop their activities |
| In addition, there may be other compounding pharmacies which are following FDA guidelines, or others conducting illegal activities of which we are not aware, which may be negatively impacting our sales revenues |
| OUR PDT/PD COMPETITORS IN THE BIOTECHNOLOGY AND PHARMACEUTICAL INDUSTRIES MAY HAVE BETTER PRODUCTS, MANUFACTURING CAPABILITIES OR MARKETING EXPERTISE We anticipate that we will face increased competition as the scientific development of PDT/PD advances and new companies enter our markets |
| Several companies are developing PDT agents other than Levulan(R) |
| (Canada); Axcan Pharma Inc |
| (US); and Pharmacyclics, Inc |
| We are also aware of several companies commercializing and/or conducting research with ALA or ALA-related compounds, including: medac GmbH and photonamic GmbH & Co |
| (UK) and PhotoCure ASA (Norway) which entered into a marketing agreement with Galderma SA for countries outside of Nordic countries for certain dermatology indications |
| PhotoCure has received marketing approval of its ALA precursor (ALA methyl-ester) compound for PDT treatment of AKs and basal cell carcinoma in the European Union, New Zealand, Australia and countries in Scandinavia |
| In July 2004, PhotoCure received FDA approval in the United States for its AK therapy |
| If PhotoCure enters into the marketplace based on receiving approval, its product will represent direct competition for our products |
| Axcan Pharma Inc |
| has received FDA approval for the use of its product, PHOTOFRIN(R), for PDT in the treatment of high grade dysplasia associated with Barrettapstas esophagus |
| Axcan is the first company to market a PDT therapy for this indication, which we are also pursuing |
| We expect that our principal methods of competition with other PDT companies will be based upon such factors as: o the ease of administration of our method of PDT, o the degree of generalized skin sensitivity to light, o the number of required doses, 36 o the selectivity of our drug for the target lesion or tissue of interest, and o the type and cost of our light systems |
| RISKS RELATED TO OUR STOCK IF OUTSTANDING OPTIONS, WARRANTS AND RIGHTS ARE CONVERTED, THE VALUE OF THOSE SHARES OF COMMON STOCK OUTSTANDING JUST PRIOR TO THE CONVERSION WILL BE DILUTED As of March 1, 2006 there were outstanding options and warrants to purchase 2cmam867cmam875 shares of common stock, with exercise prices ranging from US dlra1dtta60 to dlra31dtta00 per share, and of CDN dlra6dtta79 per share, respectively |
| The holders of the options and warrants have the opportunity to profit if the market price for the common stock exceeds the exercise price of their respective securities, without assuming the risk of ownership |
| The holders are likely to exercise their securities when we would probably be able to raise capital from the public on terms more favorable than those provided in these securities |
| RESULTS OF OUR OPERATIONS AND GENERAL MARKET CONDITIONS FOR SPECIALTY PHARMACEUTICAL AND BIOTECHNOLOGY STOCKS COULD RESULT IN SUDDEN CHANGES IN THE MARKET VALUE OF OUR STOCK The price of our common stock has been highly volatile |
| These fluctuations create a greater risk of capital losses for our shareholders as compared to less volatile stocks |
| From January 1, 2005 to March 1, 2006, the price of our stock has ranged from a low of dlra6dtta57 to a high of dlra16dtta30 |
| Factors that contributed to the volatility of our stock during the last 12 months included: o quarterly levels of product sales; o clinical trial results; o general market conditions; o increased marketing activities; and o changes in third-party payor reimbursement for our therapy |
| The significant general market volatility in similar stage pharmaceutical and biotechnology companies made the market price of our common stock even more volatile |
| SIGNIFICANT FLUCTUATIONS IN ORDERS FOR OUR PRODUCTS, ON A MONTHLY AND QUARTERLY BASIS, ARE COMMON BASED ON EXTERNAL FACTORS AND SALES PROMOTION ACTIVITIES THESE FLUCTUATIONS COULD INCREASE THE VOLATILITY OF OUR STOCK PRICE The price of our common stock may be affected by the amount of quarterly shipments of our products to end-users |
| Since our products are still in the early stages of adoption, and sales volumes are still low, a number of factors could affect product sales levels and growth rates in any period |
| These could include the timing of medical conferences, sales promotion activities, and large volume purchases by our higher usage customers |
| In addition, seasonal fluctuations in the number of patients seeking treatment at various times during the year could impact sales volumes |
| These factors could, in turn, affect the volatility of our stock price |
| 37 EFFECTING A CHANGE OF CONTROL OF DUSA WOULD BE DIFFICULT, WHICH MAY DISCOURAGE OFFERS FOR SHARES OF OUR COMMON STOCK Our certificate of incorporation authorizes the board of directors to issue up to 100cmam000cmam000 shares of stock, 40cmam000cmam000 of which are common stock |
| The board of directors has the authority to determine the price, rights, preferences and privileges, including voting rights, of the remaining 60cmam000cmam000 shares without any further vote or action by the shareholders |
| The rights of the holders of our common stock will be subject to, and may be adversely affected by, the rights of the holders of any preferred stock that may be issued in the future |
| On September 27, 2002, we adopted a shareholder rights plan at a special meeting of DUSAapstas board of directors |
| The rights plan could discourage, delay or prevent a person or group from acquiring 15prca or more (or 20prca or more in the case of certain parties) of our common stock, thereby limiting, perhaps, the ability of our shareholders to benefit from such a transaction |
| The rights plan provides for the distribution of one right as a dividend for each outstanding share of our common stock to holders of record as of October 10, 2002 |
| Each right entitles the registered holder to purchase one one-thousandths of a share of preferred stock at an exercise price of dlra37dtta00 per right |
| The rights will be exercisable subsequent to the date that a person or group either has acquired, obtained the right to acquire, or commences or discloses an intention to commence a tender offer to acquire, 15prca or more of our outstanding common stock (or 20prca of the outstanding common stock in the case of a shareholder or group who beneficially held in excess of 15prca at the record date), or if a person or group is declared an "e Adverse Person "e , as such term is defined in the rights plan |
| The rights may be redeemed by DUSA at a redemption price of one one-hundredth of a cent per right until ten days following the date the person or group acquires, or discloses an intention to acquire, 15prca or 20prca or more, as the case may be, of DUSA, or until such later date as may be determined by the our board of directors |
| Under the rights plan, if a person or group acquires the threshold amount of common stock, all holders of rights (other than the acquiring person or group) may, upon payment of the purchase price then in effect, purchase shares of common stock of DUSA having a value of twice the purchase price |
| In the event that we are involved in a merger or other similar transaction where DUSA is not the surviving corporation, all holders of rights (other than the acquiring person or group) shall be entitled, upon payment of the purchase price then in effect, to purchase common stock of the surviving corporation having a value of twice the purchase price |
| The rights will expire on October 10, 2012, unless previously redeemed |
| Our board of directors has also adopted certain amendments to DUSAapstas certificate of incorporation consistent with the terms of the rights plan |