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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, 1998
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
February 23, 1999 was $67,622,096.
The number of shares of common stock outstanding of the Registrant as of
February 23, 1999 was 11,001,385.
DOCUMENTS INCORPORATED BY REFERENCE
Document incorporated by reference to this Report is:
(1) Proxy Statement for the 1999 Annual Meeting of Shareholders
PART III, Items 10 through 13.
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PART I
This Annual Report on Form 10-K and certain written and oral statements
incorporated herein by reference of DUSA Pharmaceuticals, Inc. (referred to as
the "Company") contain forward-looking statements that have been made pursuant
to the provisions of the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements are based on current expectations, estimates and
projections about the Company's industry, management's beliefs and certain
assumptions made by the Company's management. Words such as "anticipates",
"expects", "intends", "plans", "believes", "seeks", "estimates", or variations
of such words and similar expressions, are intended to identify such
forward-looking statements. These statements are not guarantees of future
performance and are subject to certain risks, uncertainties and assumptions that
are difficult to predict particularly in the highly regulated pharmaceutical
industry in which the Company operates. Therefore, actual results may differ
materially from those expressed or forecasted in any such forward-looking
statements. Such risks and uncertainties include those set forth herein under
"Factors Affecting Future Operating Results" on page 14, as well as those noted
in the documents incorporated herein by reference. Unless required by law, the
Company undertakes no obligation to update publicly any forward-looking
statements, whether as a result of new information, future events or otherwise.
However, readers should carefully review the statements set forth in other
reports or documents the Company files from time to time with the Securities and
Exchange Commission, particularly the Quarterly Reports on Form 10-Q and any
Current Reports on Form 8-K.
ITEM 1. BUSINESS
General
The Company is a pharmaceutical company engaged primarily in the
development of photodynamic therapy ("PDT") and photodetection ("PD"), utilizing
Levulan(R), the Company's brand of 5-amino-levulinic acid ("ALA"), for various
medical indications. During 1998, the Company filed its first New Drug
Application ("NDA") with the U.S. Food and Drug Administration ("FDA") for
Levulan(R) PDT treatment of actinic keratoses. The Company is developing
Levulan(R) PDT and PD under an exclusive worldwide license. See "Business -
PARTEQ 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 Levulan(R) for PDT and PD,
related processes and improvements and light device technologies.
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 Valhalla, New York, to coordinate the research and
development efforts of the Company. Recently, the Company opened an office in
Norwell, Massachusetts to coordinate operations for the commercialization of the
Company's products. 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, as amended, (the "Act"). In January 1999, the Company completed a
private placement under Regulation D of the Act and raised $7,500,000 in gross
proceeds. See "Management's Discussion and Analysis of Financial Condition" and
"Results of Operations -- Liquidity and Capital Resources" below.
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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 in PDT
destroys or alters the sensitized cells and in PD makes the sensitized cells
fluoresce, or "glow". The appropriate combination of drug and light can affect
target tissue with relatively minimal damage to surrounding tissue.
Levulan(R) is unique among PDT/PD agents therapeutically used in that it
is a naturally occurring substance found in virtually all human cells.
Levulan(R) is also unique in that it is not itself a photosensitizer. After
delivery of Levulan(R) 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 Levulan(R) is supplied either topically or systemically, the
self-regulatory step is bypassed and PpIX accumulates. Scientists believe that
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, Levulan(R) also 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 Levulan(R) PDT to preferentially react with targeted cells as compared to
surrounding cells.
While the FDA is reviewing the Company's first NDA for the use of
Levulan(R) PDT to treat multiple AKs, the Company is continuing to advance its
clinical program utilizing Levulan(R) PDT and PD for several indications noted
below under the section entitled "Company's Products and Technology". The
Company is preparing for commercialization and marketing of its first products
upon FDA approval. These products include Levulan(R) solution to be supplied in
the Company's Kerastick(TM) brand applicators and the BLU-U(TM) brand light
source device.
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 Levulan(R) PDT
and PD have shown potential in numerous indications, the Company has focused
development primarily on the indications outlined below.
The research and development expenses for the last three years were
$4,502,391 in 1998, $6,252,830 in 1997 and $5,652,442 in 1996.
Lead Indications
Actinic Keratoses (AKs). The Company's development program is most
advanced for the use of Levulan(R) PDT in the treatment of AKs. 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).
The Company's NDA for treatment of multiple AKs of the face and scalp with
Levulan(R) PDT is under review. In Phase III trials over 240 patients, each with
between 4 and 15 AKs, were treated at a total of 16 sites across the U.S. All
patients received either 20% Levulan(R) topical solution, or a placebo vehicle,
plus blue light (i.e., with the BLU-U(TM) brand light source).
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Photodetection of Bladder Cancer. The Company is also developing a process
for detecting bladder cancer using Levulan(R). 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. Based upon
this early clinical data, the Company decided to undertake its own Phase I/II
multi-center clinical trial using Levulan(R) PD for bladder cancer, and a light
source developed under the Company's agreement with Richard Wolf Medical
Instruments Corp. See "Business - Light Technology and Devices."
In January 1999 the Company reported preliminary results of 59 patients
who had been enrolled and tested. The baseline data showed 72 cancers were
detected when investigators examined the inside of the bladder with white light
cystoscopy alone, or 75.8%, while missing 23 cancers, or 24.2%. For
carcinomas-in-situ, white light cystoscopy detected 14 cancers, or 58% but
missed 12 cancers, or 42%.
When investigators used Levulan(R) and blue light, they detected an
additional 11 cancers, or 13.2%, including 4 carcinomas-in-situ, or 17%. Random
biopsies detected an additional 12 cancers, or 14.3%, including 6
carcinomas-in-situ, or 20%. Only one cancer detected by Levulan(R) PD was also
found by random biopsy. Therefore, management believes that Levulan(R) PD and
random biopsies appear to complement each other. There were no significant side
effects reported. The Company will now be reviewing the clinical trial data with
a panel of urology experts to help guide the design of further clinical trials.
Secondary Indications
Hair Removal. In an independent pilot study performed by researchers from
Massachusetts General Hospital-Harvard Medical School using a Levulan(R)
formulation supplied by the Company and a laser light source, researchers
achieved hair removal 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. In March 1997, the Company initiated
a Phase I/II multicenter clinical study examining the ability of Levulan(R) with
either a proprietary non-laser light source or a laser to permanently remove
human hair. At this stage, with three-month data available, the non-laser light
plus Levulan(R) did not result in more significant hair loss than placebo plus
light. However, Levulan(R) plus laser light appears to prevent approximately 30%
of the hair from regrowing with one treatment. Six-month data is being analyzed.
Significantly more development work is required before this indication could be
commercialized.
Endometrial Ablation. The Company has supported research by independent
investigators using Levulan(R) in clinical studies at centers in the United
Kingdom and the United States which showed a high degree of selectivity by
endometrial tissue with no evidence of toxicity. The Company has agreed to
support a pilot human trial for treatment of endometrial ablation which is
expected to begin during 1999. The investigators have agreed to negotiate a
license to DUSA for use of their patented intrauterine light device. During
1997, the Company also entered into a license agreement to develop and market an
incoherent or non-laser light source for possible use in this indication or
others. See "Business - Light Technology and Devices."
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 suggest that acne could be
a potential indication for treatment with Levulan(R) PDT. A Company sponsored
Phase I/II human
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clinical trial, started in 1995, confirmed the selective accumulation of PpIX in
acne lesions following Levulan(R) application in eight patients. In 1996, the
Company carried out a Phase I/II dose-ranging clinical trial using topical
Levulan(R) and a proprietary non-laser red light. 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.
However, the clinical response was encouraging at certain doses, the treatments
were well tolerated, and no adverse events were reported. The Company is
finalizing a new protocol incorporating multiple treatments using a non-laser
blue light source in preparation for a new Phase I/II clinical trial scheduled
to begin this Spring. A similar study using a red light source is also being
planned.
Exploratory Indications
Since there are numerous other potential therapeutic and cancer detection
uses for Levulan(R) PDT/PD, 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 topical Levulan(R)
for treatment of skin cancers (basal cell carcinoma, squamous cell carcinomas,
and cutaneous T-cell lymphomas), psoriasis, onychomycosis and genital warts; and
systemic Levulan(R) for detection and or treatment of gastro-intestinal tumors,
oral cavity cancer, and prevention of restenosis.
In March 1997, results from a Company supported, investigator-sponsored
study examining the selectivity of Levulan(R) for photodynamic therapy of
cervical intraepitheleal neoplasia (CIN) were presented at the meeting of the
American Society for Gynecological Oncology. The study showed, confirmed by
pathology, that Levulan(R), after 1.5 hours of topical application, demonstrated
excellent selectivity for CIN tissue. CIN is a common disorder which is
identified in approximately 2-3% of all pap smears (cervical cytology
specimens). Although a number of methods of diagnosis and/or treatment are
available, or under development, they generally involve surgical removal of some
parts of the uterine cervix with possible complications such as bleeding, pain,
and infertility. The Company continues to support investigator-sponsored studies
in this area.
The Company monitors independent research on ALA PDT, in order to identify
new indications for potential development. The Company also actively evaluates
and pursues licensing opportunities and patent strategies for potential new
light sources and devices, or improvements to existing Levulan(R) PDT/PD methods
and technologies. See "Business - Light Technology and Devices."
Light Technology and Devices
The light required for Levulan(R) PDT/PD activation may be produced by a
variety of sources. The Company has, from its inception, followed the strategy
that Levulan(R) PDT/PD 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. See "Business - Manufacturing." The Company's
commercial device development group has experience in the development and
regulatory approval process of devices for use in clinical PDT. Together with
the rest of the Company's Levulan(R) PDT/PD research and development team, the
device group has assisted with the design of, as well as assessment of new light
delivery and light measurement devices and technologies. See "Business - Other
Relationships: Consultants."
In November 1998, the Company entered a purchase and supply agreement with
National Biological Corporation ("NBC") for light sources, including the
BLU-U(TM). The Company has agreed to
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order all of its supply of these light sources for certain territories from NBC
and NBC has agreed to supply the Company with the quantities it orders subject
to the terms of the agreement. If an opportunity arises, the parties have agreed
to negotiate the terms under which NBC would supply light sources to the Company
for sale in countries other than the current territories.
NBC has granted a license to the Company to manufacture the light sources
in certain situations if NBC fails to meet the Company's supply needs. The
Company also has a worldwide license to import, use, sell or dispose of the
light sources under NBC's technology within a specific field of use. Also, NBC
has agreed that it will not supply certain light sources which may compete with
the Company's business.
The agreement has a ten-year term, subject to earlier termination for
breach or insolvency, or for convenience. However, a termination for convenience
requires twelve (12) months' prior written notice which may not be given prior
to the third anniversary of the date of the agreement.
As mentioned above, the Company signed an agreement in May 1997, with
Richard Wolf Medical Instruments Corp., ("Wolf"), for Wolf to supply at no cost
to the Company, proprietary non-laser light sources and cystoscopes, along with
technical and regulatory support, for the Company's first Phase I/II clinical
trial for enhanced detection of bladder cancer. The Wolf light device was
utilized by the investigators in the clinical trial. The Company also has the
right under the agreement to qualify other manufacturers' light sources and/or
cystoscopes with the FDA for use in Levulan(R) PD of bladder cancer.
In addition, the Company entered into a license agreement with a British
technology firm in April, 1997 to develop and market an incoherent or non-laser
light source for possible use in its endometrial ablation clinical program. The
license grants rights in territories on an exclusive and non-exclusive basis.
The Company paid an execution fee of (pound)10,000 ($16,421) and will pay
royalties on sales ranging from 1.25% to 5% depending on the patent status and
territory in which sales may occur. The agreement, which is being assigned by
the licensor to a successor firm, shall remain in effect for twelve years, or
until the last of the patent rights has expired, subject to earlier termination
for breach or insolvency. The Company does not anticipate sales of such devices
in the near future, as the device, once developed and tested in clinical trials,
would require FDA approval.
The longer the wavelength of visible light, the deeper into tissue it
penetrates. Short blue wavelengths penetrate only superficially but are potent
activators of Levulan(R) PDT/PD, 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 Levulan(R) 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 Levulan(R) PDT. See "Business - Patents and Trademarks."
In order to treat or detect diseases of certain 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 "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
will still be required.
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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 AKs PDT product has been tested in the
required number of clinical trials prior to submitting an NDA, however, the FDA
could request additional testing or data during its review process. The Company
has recently been informed that the facility of our bulk ALA supplier does not
yet meet FDA's "good manufacturing practices" (GMP) regulations. The Company is
in regular communication with the supplier on these issues. The Company
believes that the supplier is actively working to resolve the deficiencies in
order to be GMP compliant upon re-inspection by the FDA. The Company's other
products still require significant development, including additional
preclinical and clinical testing, and regulatory marketing approval prior to
commercialization. The process of obtaining required approvals can be costly
and time consuming and there can be no assurance that the use of Levulan(R) PDT
for the treatment of AKs will be approved or that any future products will be
successfully developed, prove to be safe and effective in clinical trials, or
receive applicable regulatory marketing approvals. See "Business - Factors
Affecting Future Operating Results" and "Management's Discussion and Analysis
of Financial Condition and Results of Operations." 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 Investigational New Drug
("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 I/II studies for bladder cancer, permanent hair
removal and acne. 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
the Company's development program, see "Business - Company's Products and
Technology" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
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Levulan(R) for use in PDT/PD 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. For this reason and because only two similar PDT applications,
which were filed by a third-party, have been approved by the FDA, the approval
process for Levulan(R) PDT may be longer than the approval process for a new
drug or device alone.
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/PD 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's. 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 marketing
exclusivity for a period of five years 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 any NDA filed by the Company will be
approved for any indication of Levulan(R) PDT/PD 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.
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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 to secure approval by the importing nations' regulatory
authorities or will be able to participate in the foreign pharmaceutical market.
See "Business - Patents and Trademarks."
The time required to complete the government regulatory approval process
(i.e., the length of time required by the Company to complete the NDA prior to
filing, together with the FDA review process and any additional development
activities that may be required) will have a direct effect on whether the
Company will maintain its current funding levels for all of the Levulan(R)
PDT/PD indications which it is currently supporting. 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.
PARTEQ License Agreement
The Company entered into a license agreement effective August 27, 1991
with PARTEQ Research and Development Innovations (the licensing arm of Queen's
University, Kingston, Ontario) ("PARTEQ") and Draxis Health, Inc., the Company's
former parent ("Draxis"). Under the terms of the license agreement as modified
by the parties in October 1997 and formally amended in March 1998, 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 agreement covers certain use patent rights.
It also includes any improvements discovered, developed or acquired by or for
PARTEQ, or Queen's University, and in respect of which PARTEQ has the right to
grant a license. A non-exclusive right is reserved to Queen's University to use
the subject matter of the agreement for non-commercial educational and research
purposes. A right is reserved to the Department of National Defense Canada to
use the licensed rights for defense purposes including defense procurement but
excluding sales to third parties.
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The Company has agreed to pay royalties of 6% and 4% on 66% of its or its
affiliates' net selling price of products in countries where patent rights do
and do not exist, respectively. The Company also will pay 6% and 4% when patent
rights do and do not exist, respectively, on the Company's net selling price
less cost of goods for products sold to sublicensees. The Company is obligated
to pay 5% of any lump sum sublicense fees paid to the Company, such as milestone
payments for important regulatory hurdles (excluding amounts designated by the
sublicense for future research and development efforts), and 6% of royalty
payments the Company receives on sales of products by sublicensees. The Company
paid a minimum royalty of CDN $100,000 during 1998. Under certain conditions,
additional minimum royalty payments will be made during the term, in amounts up
to CDN $1,100,000, if the Company enters a sublicense arrangement for both the
United States and Europe encompassing substantially all dermatological
indications. Should no United States patent subsist, whether by virtue of
expiry, invalidation or rejection, the 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 the right to terminate the agreement with or without cause upon
ninety days notice. The amended license agreement removed Draxis as a guarantor
and a party to the agreement. The agreement is effective through the expiration
date of the latest United States patent made subject to the agreement. See Note
8a. to the Company's Notes to Consolidated Financial Statements.
The Company, PARTEQ and Draxis entered into an agreement (the "ALA
Assignment Agreement") effective October 7, 1991. According to the terms of this
agreement the Company assigned to Draxis its rights and obligations under the
original license agreement to the extent 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 assignment, Draxis paid
directly to PARTEQ or reimbursed the Company for five percent of certain lump
sums payable under the License Agreement (i.e., CDN $15,000). Draxis is also
responsible for royalties which would otherwise be payable by the Company in
accordance with the license agreement for net Canadian sales of products and
sublicensing revenues. Draxis agreed to pay the Company a royalty of two percent
of net Canadian sales of products. PARTEQ and the Company intend to revise the
ALA Assignment Agreement with Draxis to conform the terms of the assignment to
the amended license agreement.
Patents and Trademarks
The Company has the rights to certain patents and patent applications that
relate to unique physical forms of ALA and to methods of using ALA and the
unique physical forms of ALA and to compositions and apparatus for use in such
methods. The principal patents have expiration dates ranging from 2009 to 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 a license agreement effective August 27, 1991
with PARTEQ Research & Development Innovations ("PARTEQ"), the licensing arm of
Queen's University at Kingston, Ontario, and Draxis Health, Inc. The Company
holds an exclusive worldwide license to certain patent rights from Queen's
University in the United States and a limited number of foreign countries.
All United States patents and patent applications licensed from PARTEQ
relating to ALA are method of treatment patents. Method of treatment patents
limit direct infringement to users of the
9
<PAGE> 11
methods of treatment covered by the patents. The Company currently has patents
and/or pending patent applications in the United States and in a number of
foreign countries covering unique physical forms of ALA, compositions containing
ALA, as well as ALA applicators, light sources for use with ALA, and other
technology. The Company can give no assurance that any pending patent
applications will mature into issued patents.
Even with the issuance of additional patents, other parties are free to
develop other uses of ALA, including medical uses, and to market ALA for such
uses, assuming that they have obtained appropriate regulatory marketing
approval. Certain forms of ALA are commercially available chemical products. ALA
in the form commercially supplied for decades is not itself subject to patent
protection. Subject to any other protection that may be available to the Company
regarding its proprietary technology, any third-party is free to use ALA in the
form now commercially available for any indication not covered by the Company's
patents, assuming that such third-party has obtained appropriate approval. In
fact there are reports of several third-parties conducting clinical studies with
ALA for the treatment of certain conditions in countries outside the United
States of America where PARTEQ may not have patent protection. Additionally,
enforcement of a given patent may not be practicable or an economically viable
alternative.
The Company can give no assurance that a third-party or parties will not
claim (with or without merit) that it has infringed or misappropriated their
proprietary rights. A considerable world wide interest is being generated in
uses of ALA based on the work of the PARTEQ and the Company's inventors. A
number of entities are attempting to obtain patent protection for various uses
of ALA. The Company can give no assurances as to whether any such patents that
may issue to third-parties may affect the uses on which the Company is working
or whether such patents can either be avoided, invalidated or licensed if they
cannot be avoided or invalidated. If any third-party were to assert a claim for
infringement, the Company can give no assurances that it would be successful in
the litigation or that such litigation would not have a material adverse effect
on the Company's business, financial condition and results of operation.
Furthermore, the Company may not be able to afford the expense of defending
itself against such a claim.
Except for one instance, the Company is not aware of any challenges to the
validity of PARTEQ's or our patents. However, the Company can give no assurances
that any other challenges or claims will not be asserted in the future. The
PARTEQ Japanese patent on the basic method of use
of ALA has recently been opposed and, as a result thereof, the Japanese Patent
Office Board of Appeals has issued a "Notice of Reasons for Cancellation."
However, the Company is entitled to and intends to contest the bases for the
Board's notice. The Company can at this time give no assurance of the likelihood
of success of such a contest or any assurance that it will decide to spend the
funds required to complete the contest. In addition, the Company can give no
assurances that its patents, whether owned or licensed, or any future
patents that may issue, will prevent other companies from developing similar or
functionally equivalent products. Further, the Company can give no assurances
that it will continue to develop its own patentable technologies or that its
products or methods will not infringe upon the patents of third-parties. In
addition, the Company can give no assurances that any of the patents that may be
issued to it will effectively protect its technology or provide a competitive
advantage for its products or will not be challenged, invalidated, or
circumvented in the future.
The Company also attempts to protect its proprietary information as trade
secrets. Generally agreements with each employee, licensing partner, consultant,
university, pharmaceutical company and agent contain provisions designed to
protect the confidentiality of the Company's proprietary information.
10
<PAGE> 12
However, the Company can give no assurances that these agreements will provide
effective protection for its proprietary information in the event of
unauthorized use or disclosure of such information. Furthermore, the Company can
give no assurances that its competitors will not independently develop
substantially equivalent proprietary information or otherwise gain access to the
Company's proprietary information, or that the Company can meaningfully protect
its rights in unpatentable proprietary information.
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)
patents relating to special compositions and formulations; and (iii) marketing
exclusivity that may be available as a patent term extension under the
Hatch/Waxman Act and any counterpart protection available in foreign countries.
See "Business - Government Regulation." Effective patent protection also depends
on many other factors such as the nature of the market and the position of the
product in it, the growth of the market, the complexities and economics of the
process for manufacture of the active ingredient of the product and the
requirements of the new drug provisions of the 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, four trademark
registrations have been issued to the Company, and other applications are
pending.
Other 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 Levulan(R) 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 maintains a consulting relationship with
Guidelines, Inc. ("Guidelines") for the purpose of carrying out, among other
responsibilities, preclinical and formulations supervision, clinical trial
development, and assistance with the NDA filing and review process. 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 2,600 hours annually. Guidelines has been granted options to
purchase up to 20,000 shares of the Company's Common Stock. If for any reason
these services are terminated, 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.
In February, 1999 the Company entered an equipment lease with Lumenetics,
Inc., its former light device consultants, whose principals became employees of
the Company during May, 1998. The equipment lease provides the Company with an
option to acquire the equipment and to apply the lease payments to the purchase
price. Contemporaneously with the signing of the equipment lease, the Company
agreed to terminate its payment obligations under the parties' Consulting and
Development Agreement dated October 1997. See Note 8g. to the Company's Notes to
Consolidated Financial Statements.
Unrestricted Grants. The Company has awarded unrestricted grants to
various investigators in the field of Levulan(R) PDT in certain areas of
interest to the Company. These studies range from animal model work to pilot
human studies under "investigator INDs" in various clinical indications. These
grants
11
<PAGE> 13
are awarded and evaluated on an annual basis and, although renewable, are
considered on a case-by-case basis.
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 Levulan(R) PDT. Toxicological studies
required for drug development work are carried out using contract research
organizations.
Clinical Trials. The Company-sponsored clinical studies are supported by
contracts with clinical trial sites including universities, hospitals and
private practitioners.
Manufacturing
The Company's products, i.e., its bulk source of ALA, its Kerastick(TM)
applicators and its BLU-U(TM) light source are each manufactured by a single
third-party supplier. The respective facilities must conform to "good
manufacturing and laboratory practices" and other applicable distribution, and
quality control procedures set out in the FDA's current regulations. The
Company's bulk supplier of ALA has been notified that its facilities are not GMP
compliant at this time. The Company is in regular communication with the
supplier on these issues. The Company believes that the supplier is actively
working to resolve the deficiencies. Should any subcontractor delay supply or
fail to meet the relevant FDA regulations, commercial product approvals and
clinical programs would be adversely affected. The Company's NDA approval could
be delayed which would materially adversely affect potential revenues and the
financial condition of the Company. See "Business -- Government Regulation."
The Company has entered supply agreements with two of its three major
suppliers and is negotiating with the third in order to protect its interest in
its products.
Marketing and Sales
Currently, the Company does not have the capacity to market, sell and
distribute Levulan(R) PDT products on its own. At this time the Company is
developing various plans for marketing its first product upon receipt of
regulatory marketing approval. The Company is negotiating potential
collaborative licensing arrangements with pharmaceutical companies with
manufacturing and/or sales and distribution capability to market its products.
The Company is also developing plans to market the products through distribution
or co-promotion arrangements. At present, the Company is pursuing certain
pre-marketing activity in the U.S. and Europe to test patient and physician
acceptance of Levulan(R) PDT for AKs. 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 Levulan(R) PDT in Canada. See
"Business - PARTEQ License Agreement."
Competition
Commercial development of PDT agents are currently being pursued by a
number of companies, including: QLT Photo Therapeutics Inc. (Canada); Miravant,
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
12
<PAGE> 14
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 is also aware from published reports that an Israeli firm, ESC
Medical Systems Ltd., ("ESC") has entered a worldwide distribution and supply
agreement for a medical grade of ALA (ALA Fine(TM)) for PDT applications. ESC
has indicated that it has used ALA Fine(TM) and its Versalight(R) to treat skin
cancer in over 1,000 patients. These products are not available in the United
States and the Company believes that the PARTEQ patents would be infringed if
the ESC products were made, used or sold in the United States. However, these
ESC products, if approved by health regulatory authorities outside of the United
States or other countries covered by PARTEQ patents, could compete with certain
of the Company's products.
The pharmaceutical industry is highly competitive. The Company's position
as a competitor in the PDT field may be adversely affected by product
developments 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 Levulan(R) PDT for AKs. In addition, the Company's
competitors who market these methods of therapy are large, multi-national
companies which have substantially more marketing resources than the Company.
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 other parties 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. The Company intends to obtain coverage for commercial supplies when
products are expected to enter the marketplace. There can be no
13
<PAGE> 15
assurance that such insurance will continue to be available on commercially
reasonable terms or that it will provide adequate coverage against all potential
claims.
Employees
The Company has fifteen full-time employees. The Company has employment
agreements with its three key executive officers. The Company has purchased key
man life insurance, having a face value of CDN. $2,000,000, on the life of the
Company's President, for which the Company is the named beneficiary. The Company
has also retained numerous independent consultants and the services of key
researchers at leading university centers whose activities are coordinated by
the Company's employees. Other employees and consultants will be hired by the
Company as needed. See "Business - Other Relationships: Consultants."
Factors Affecting Future Operating Results
The provisions of the Private Securities Litigation Reform Act of 1995
(the "PSLRA"), which became law in late December 1995, provide companies with a
"safe harbor" when making forward-looking statements. This "safe harbor"
encourages companies to provide prospective information about their companies
without fear of litigation. The Company wishes to take advantage of the new
"safe harbor" provisions of the PSLRA and is including this section in its
Annual Report on Form 10-K in order to do so. Statements that are not historical
facts, including statements about management's expectations for fiscal year 1999
and beyond, are forward-looking statements and involve various risks and
uncertainties. Factors that could cause the Company's actual results to differ
materially from managements' estimates and expectations include, but are not
limited to, the following:
a) FDA regulatory approval of its Levulan(R) PDT product for AKs and
other indications.
b) Reliance on third-parties for regulatory affairs, manufacturing and
marketing of its drug and light device products.
c) Changing market conditions and the potential impact of competitive
products and their pricing.
d) Sufficiency of the Company's cash flow and capital funds for
existing operations during the FDA's review of its AKs NDA for
advancing its research and development program and/or for marketing
its products.
e) Results of on-going clinical trials.
f) Timing of development of necessary light sources and devices.
g) Patent status.
h) Year 2000 Impact.
i) Ability of third-party suppliers to meet FDA's "good manufacturing
practices."
14
<PAGE> 16
ITEM 2. PROPERTIES
In November 1996, the Company signed a three-year lease for its executive
office premises located in Toronto, Ontario, Canada, comprising 1,950 square
feet of space. The Company's wholly owned subsidiary, DUSA Pharmaceuticals New
York, Inc., relocated from Tarrytown, New York, to larger facilities in
Valhalla, New York in October 1997 under the terms of a five-year lease. As of
June 1, 1998, the Company began reimbursing Lumenetics, Inc. for office space
and related expenses under Lumenetics' office lease in Norwell, Massachusetts.
All of Lumenetics' employees have become employees of the Company. The
reimbursements for 1998 totaled $28,029.18. The Company anticipates that its
New York and Toronto, Canada office facilities will be sufficient during the
near future, but will be modified as required. The Company expects to lease
larger facilities in New England for the technology employees who were formerly
employed by Lumenetics and additional technology and operations employees. See
"Business - Other Relationships: Consultants" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
15
<PAGE> 17
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Common Stock is traded on the Nasdaq National Market under the symbol
"DUSA." The following are the high and low closing prices for the Common Stock
reported for the quarterly periods shown.
Price range per common share by quarter, 1997:
<TABLE>
<CAPTION>
First Second Third Fourth
----- ------ ----- ------
<S> <C> <C> <C> <C>
Nasdaq
High $9.500 $7.000 $9.125 $14.500
Low 5.875 4.875 4.875 8.750
</TABLE>
Price range per common share by quarter, 1998:
<TABLE>
<CAPTION>
First Second Third Fourth
----- ------ ----- ------
<S> <C> <C> <C> <C>
Nasdaq
High $16.625 $16.063 $7.125 $8.000
Low 10.625 6.500 2.875 2.250
</TABLE>
On February 23, 1999, the closing price of the Common Stock was $6.156 per
share on the Nasdaq Stock Market. On February 23, 1999, there were approximately
782 holders of record of the Common Stock.
The Company has never paid cash dividends on its Common Stock and has no
present plans to do so in the foreseeable future.
16
<PAGE> 18
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, 1998, 1997,
1996, 1995 and 1994, and for the cumulative period from February 21, 1991 (date
of incorporation) to December 31, 1998 have been derived from the Company's
audited financial statements.
Consolidated Statement of Operating Data
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
Cumulative
period from
February 21,
1991 (date of
incorporation
to December
Year ended December 31, 31,
- -------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994 1998
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Revenue $ 515,184 $ 893,147 $ 1,073,006 $ 572,742 $ 305,891 $ 5,700,897
- -------------------------------------------------------------------------------------------------------------------------------
Research and development
costs 4,502,391 6,252,830 5,652,442 3,044,979 2,759,254 26,567,991
- -------------------------------------------------------------------------------------------------------------------------------
Other operating expenses 1,729,741 1,760,409 2,220,883 1,175,296 1,149,361 9,613,705
- -------------------------------------------------------------------------------------------------------------------------------
Net loss (5,716,948) (7,120,092) (6,800,319) (3,647,533) (3,539,892) (30,480,799)
- -------------------------------------------------------------------------------------------------------------------------------
Basic and diluted net loss per
common share $ (0.61) $ (0.76) $ (0.75) $ (0.65) $ (0.66) $ (4.71)
- -------------------------------------------------------------------------------------------------------------------------------
Weighted average number of
shares outstanding 9,365,950 9,358,038 9,087,823 5,589,486 5,395,349 6,454,179
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Consolidated Balance Sheet Data
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
As of December 31,
- ----------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total Assets $ 7,140,675 $13,081,248 $20,129,257 $20,827,578 $10,563,779
- ----------------------------------------------------------------------------------------------------
Cash and investment securities 6,722,132 12,767,142 19,719,496 20,479,592 10,198,329
- ----------------------------------------------------------------------------------------------------
Shareholders' equity 6,416,146 12,019,351 19,101,790 20,219,240 10,132,860
- ----------------------------------------------------------------------------------------------------
</TABLE>
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
17
<PAGE> 19
The Company is a development-stage pharmaceutical company engaged
primarily in the development of proprietary methods of photodynamic therapy
(PDT) and photodetection (PD) utilizing Levulan(R). The Company has filed its
first NDA with the FDA which is for treatment of multiple AKs with Levulan(R)
PDT. Various other indications are at exploratory, Phase I or Phase II stages.
See "Business - Company's Products and Technology; - Manufacturing." 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. To strengthen its cash position and in order to support
on-going operations during the FDA review process, the Company completed a
private placement of 1,500,000 shares of its common stock (plus 130,435 shares
issued to the placement agent as its commission), in January 1999 raising gross
proceeds of $7,500,000. As of December 31, 1998, the Company had an accumulated
deficit of $30,417,967.
The Company's transition from a development-stage company to a profitable
operating company is dependent upon marketing approval by the FDA and the
ability of the Company to develop a market for its products. Although the
Company believes its clinical trials support the AKs products' safety and
efficacy, there can be no assurance that the products will be approved by the
FDA. Additionally, the Company cannot be sure that a successful market will
develop for its new technology, Levulan(R) PDT for AKs. At this time the Company
is developing various plans for marketing its first product upon receipt of
regulatory marketing approval. The Company is negotiating potential
collaborative licensing arrangements with pharmaceutical companies with
manufacturing and/or sales and distribution capability to market its products.
The Company is also developing plans to market the products through distribution
or co-promotion arrangements.
In November 1998, the Company signed a purchase and supply agreement with
NBC covering the light source, the BLU-U(TM), which is part of the Company's
NDA, as well as other light sources which the parties may develop under their
1995 co-development agreement. While the Company's working relationship with NBC
is strong, the dependence on this unrelated third-party as its sole source of
supply for its first NDA product represents a risk to the Company. Any material
failure by NBC to meet FDA regulatory requirements or the Company's supply needs
could adversely effect the Company's financial condition or results. The Company
believes that the terms of the agreement will help to control these risks. The
Company has agreed to order all of its supply of these light sources for certain
territories from NBC and NBC has agreed to supply the Company with the
quantities it orders subject to the terms of the agreement. If an opportunity
arises, the parties have agreed to negotiate the terms under which NBC would
supply light sources to the Company for sale in countries other than the current
territories.
NBC has granted a license to the Company to manufacture the light sources
in certain situations if NBC fails to meet the Company's supply needs. The
Company also has a worldwide license to import, use, sell or dispose of the
light sources under NBC's technology within a specific field of use. Also, NBC
has agreed that it will not supply certain light sources which may compete with
the Company's business.
The agreement has a ten-year term, subject to earlier termination for
breach or insolvency, or for convenience. However, a termination for convenience
requires twelve (12) months' prior written notice which may not be given prior
to the third anniversary of the date of the agreement.
Similarly, the Company is dependent upon sole suppliers for bulk ALA which
the Company formulates into Levulan(R), and for the manufacture of the
Kerastick(TM) brand applicators. The Company has recently been informed that the
facility of our bulk ALA supplier does not yet meet FDA's "good manufacturing
practices" (GMP) regulations. The Company is in regular communication with the
supplier on these issues. We believe that the supplier is actively working to
resolve the
18
<PAGE> 20
deficiencies in order to be GMP compliant upon re-inspection by the FDA. At this
time the Company is developing various plans for marketing its first product
upon receipt of regulatory marketing approval. The Company is negotiating
potential collaborative licensing arrangements with pharmaceutical companies
with manufacturing and/or sales and distribution capability to market its
products. The Company is also developing plans to market the products through
distribution or co-promotion arrangements. The Company has identified other
suppliers of bulk ALA but the regulatory issues associated with qualifying a
second source as a sole source, if necessary, would likely delay the Company's
FDA approval and the marketing of Levulan(R) PDT. The Company is considering
when it may be desirable and/or necessary and the extent of the financial costs
to reduce risks associated with the third-party manufacture of ALA by
establishing a back-up supplier and of Kerasticks(TM) by establishing its own
limited production line.
As previously reported, the Company and PARTEQ agreed to revised terms in
October 1997 and signed an amended license agreement on March 11, 1998. As
partial consideration, PARTEQ received options to purchase 85,000 shares of
common stock of the Company at an exercise price of $10.875 per share which will
vest over four (4) years from the October 1997 grant date. The Company has
agreed to pay royalties of 6% and 4% on 66% of its or its affiliates' net
selling price of products in countries where patent rights do and do not exist,
respectively. The Company also will pay 6% and 4% when patent rights do and do
not exist, respectively, on the Company's net selling price less cost of goods
for products sold to sublicensees. Also, the Company is obligated to pay 5% of
lump sum sublicense fees paid to the Company, such as milestone payments for
important regulatory hurdles (excluding amounts designated by the sublicense for
future research and development efforts), and 6% of royalty payments the Company
receives on sales of products by sublicensees. During 1998, the Company paid to
PARTEQ a minimum royalty of CDN $100,000. Under certain conditions, additional
minimum royalty payments will be made during the term, in amounts up to CDN
$1,100,000, if the Company enters a sublicense arrangement for both the United
States and Europe encompassing substantially all dermatological indications.
Should no United States patent subsist, whether by virtue of expiry,
invalidation or rejection, the 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 the right to terminate the license agreement, with or without cause, upon
ninety days notice. The agreement is effective through the expiration date of
the latest United States patent made subject to the agreement.
PARTEQ's basic Japanese patent on the method of using ALA which issued in
1998, has recently become the subject of an opposition proceeding. As a result,
the Japanese Board of Appeals issued a "Notice of Reasons for Cancellation." The
Company intends to contest this action. However, the Company cannot at this time
give any assurance of the likelihood of success of such a contest or any
assurance that the Company will decide to spend the funds required to complete
the contest.
PARTEQ and the Company have also agreed to amend the ALA Assignment
Agreement with Draxis dated October 7, 1991, so that the terms (which assign the
Canadian rights from PARTEQ to Draxis) will be consistent with the amended
license agreement. See Note 8a. to the Company's Notes to the Consolidated
Financial Statements.
Liquidity and Capital Resources
The Company has financed its development stage operations primarily from
sales of securities in public and private offerings. In January 1999, the
Company issued 1,500,000 shares of its common stock in a private placement
pursuant to Regulation D of the Securities Act of 1933 at $5.00 per share. The
Company received net proceeds of $7,443,046. An additional 130,435 shares of
common stock were issued as commission and non-accountable expense allowance to
the placement agent. Additional compensation was paid to the placement agent in
163,043 five-year warrants each of which are exercisable
19
<PAGE> 21
into one share of common stock at $5.00 per share. See Note 10 to the Notes to
Consolidated Financial Statements.
As of December 31, 1998, the Company's total assets, consisting primarily
of United States government securities available for sale, were $7,140,675 as
compared to $13,081,248 as of December 31, 1997. The Company's United States
government securities available for sale have an aggregate cost of $5,502,841
and a current aggregate market value of $5,508,375 as of December 31, 1998,
resulting in a net unrealized gain on securities available for sale of $5,534
provision for which has been recorded as part of shareholders' equity and as an
item of comprehensive income. At December 31, 1997, the aggregate cost was
$8,760,498 and had a market value of $8,733,875 resulting in an unrealized loss
of $26,623. 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 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 4.76% to 6.49%, and maturity dates ranging
from January 7, 1999 to August 10, 1999. As of December 31, 1997 the Company's
U.S. government securities had yields ranging from 4.73% to 6.31% and maturity
dates ranging from January 27, 1998 to August 10, 1999. 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. The net proceeds from the Company's recent private placement
have also been invested in short and medium term U.S. government securities.
As of December 31, 1998, the Company had current liabilities of $724,529
as compared to $1,061,897 as of December 31, 1997. Since its inception, the
Company has had no long term debt, nor does it have any plans to enter into any
such financial arrangements.
Management is currently focusing its attention and its funds on
commercialization of Levulan(R) PDT for multiple AKs and development of its
bladder cancer detection indication. Full development and testing of all
potential indications which are currently under development, and/or the market
launch of its products if the Company determines to market the products on its
own, would likely require additional funding. The timing of the expenditures
will be dependent on various factors, including 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 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. While the net proceeds of the recent offering should
enable the Company to maintain its current research program as planned and
prepare to commercialize Levulan(R) PDT for AKs through most of the year 2000,
in order to maintain continuing research and development programs beyond 1999
and to market its first product, it would be necessary to raise additional funds
through future corporate alliances, financings, or other sources.
If sufficient funds are available, 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. See "Business - Light
Devices and Technology." 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.
20
<PAGE> 22
The Company has fifteen full-time employees. The Company has employment
agreements with its three key executive officers. The Company has purchased key
man life insurance, having a face value of CDN. $2,000,000, on the life of the
Company's President, for which the Company is the named beneficiary. The Company
has also retained numerous independent consultants and the services of key
researchers at leading university centers whose activities are coordinated by
the Company's employees. See Note 8g. to the Company's Notes to the Consolidated
Financial Statements. The Company expects that it will hire or retain
significantly more employees and consultants as commercialization of Levulan(R)
PDT approaches, particularly in the operations, financial and regulatory areas.
See "Business - Other Relationships: Consultants."
The Company has not made material capital expenditures for environmental
control facilities in the near-term. If the Company decides, in the future, to
establish a limited production line for the manufacture of Kerasticks(TM), the
Company expects that it will be governed by environmental laws but it does not
expect these laws to require material capital expenditures. 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, 1998 versus Year ended December 31, 1997.
The Company has had no sales to date. At the current time, the FDA is
reviewing the Company's first NDA for Levulan(R) PDT to treat multiple actinic
keratoses (AKs) of the face and scalp. The FDA is required to formally respond
to the Company by July 1999 with comments concerning the approvability of the
NDA for marketing. Delays in this process such as requests for additional data
or clinical trials, or failure of the Company's supplier of ALA to meet FDA
regulations within a reasonable period of time would delay potential FDA
marketing approval and would have a significant adverse impact on the financial
strength of the Company.
The time required to complete the government regulatory approval process
(i.e., the length of time required by the Company to complete the NDA prior to
filing, together with the FDA review process and any additional development
activities that may be required) will have a direct effect on whether the
Company will maintain its current funding levels for all of the Levulan(R)
PDT/PD indications which it is currently supporting. In order to maintain the
research and development program as now planned beyond 2000, the Company may
need to raise additional funds. It may enter into joint development or licensing
arrangements, both domestically and internationally, with pharmaceutical
companies, in which it will seek to have an alliance partner make up-front
and/or milestone payments, and assume certain of the costs of clinical testing
and of obtaining regulatory marketing approval for the products licensed.
However, there is no assurance at this time that a transaction will be
consummated. To the extent that the Company is unable to enter into such
arrangements, it will require separate funding to complete the regulatory
approval process for bladder cancer detection and will likely need additional
funds to market its products. 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 or whether additional funds will be available on reasonable terms.
21
<PAGE> 23
Interest income, earned primarily on United States government securities,
decreased to $508,256 for the year ended December 31, 1998, as compared to
$891,088 for the year ended December 31, 1997, as the Company continued to
expend funds for ongoing research and development. Interest income, the only
significant source of income at the current time, is expected to increase
temporarily due to the receipt of significant proceeds from the recently
completed private placement. However, unless the Company's NDA is approved and a
market develops, interest income would decline as funds are expended for
research and development programs. Interest income for the cumulative period
from February 21, 1991 (date of incorporation) to December 31, 1998 was
$5,413,866.
Research and development costs for the year ended December 31, 1998 were
$4,502,391 as compared to $6,252,830 for the year ended December 31, 1997. The
decrease in costs reflected the completion of the multi-center Phase III trials
for AKs and completion of the filing of the AKs NDA in July 1998. The Company's
research efforts for the remainder of 1998 were directed to the bladder cancer
PD trials, as funding for secondary indications was decreased pending the
Company's consummation of a strategic alliance or financing. The Company expects
that 1999 research and development costs could increase above 1998 expenditures
depending upon whether a marketing alliance is consummated. Total research and
development costs for the cumulative period from February 21, 1991 (date of
incorporation) to December 31, 1998 were $26,567,991. Costs and development fees
associated with agreements for research projects and clinical studies commit the
Company to make payments during 1999 of $892,000. See Note 8i. to the Company's
Notes to the Consolidated Financial Statements. See also "Business - Other
Contractual Relationships."
Operating expenses were $1,729,741 for the year ended December 31, 1998,
compared to $1,760,409 for the year ended December 31, 1997. Operating costs are
expected to increase in the future as the Company continues to add personnel,
including additional executive officers in expectation of FDA approval of its
AKs NDA. The Company has made capital expenditures in the form of deposits for
equipment to establish, if necessary, a back-up, limited production line for the
manufacture of Kerasticks(TM).
The Company incurred a net loss of $5,716,948, or $0.61 per share for the
year ended December 31, 1998, as compared to a net loss of $7,120,092, or $0.76
per share, for the year ended December 31, 1997. 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, as it continues to progress with its research and development
program and clinical trials, until it can develop sufficient revenues from sales
of its products to cover all costs and expenses. 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 Levulan(R) PDT for any indication or whether any revenues will
ever be realized.
In March 1997, the Company initiated a Phase I/II multicenter clinical
study examining the use of Levulan(R) with a proprietary non-laser light source
and a laser for human hair removal. Significantly more research and development
in necessary. However, early clinical trial results are sufficiently positive to
indicate that additional spending would be appropriate. See "Business -
Secondary Indications: Hair Removal."
22
<PAGE> 24
The Company has implemented SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information. The Statements establishes standards for the
way that a public business enterprise reports information about operating
segments in annual financial statements and interim financial reports issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas, and major customers. The Company has
determined that, at present, it does not have any reportable segments.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. This Statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. It requires
that an entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value. The
Statement is effective for the fiscal quarters of the Company's fiscal year
ending December 31, 2000. The Company is in the process of evaluating the effect
of this Statement on its consolidated financial statements.
YEAR 2000 COMPLIANCE. The Year 2000 issue is the result of computer
programs having been written using two digits, rather than four, to define the
applicable year. Any of the Company's computers, computer programs, and
administrative equipment that have date-sensitive software may recognize a date
using "00" as the year 1900 rather than the year 2000. If any of the Company's
systems that have date-sensitive software use only two digits, system failures
or miscalculations may result causing disruptions to operations, including among
other things, a temporary inability to process transactions or send and receive
electronic data with third-parties or engage in similar normal business
activities. The Company's relatively new management information systems, which
were supplied and are maintained by third-parties, have been certified as Year
2000 compliant. However, because most computer systems are, by their very
nature, interdependent, it is possible that non-compliant third-party computers
could have an adverse effect on the Company's computer systems. The Company can
give no assurance that such third-party systems do not contain undetected errors
or defects associated with the year 2000 date functions that may have a material
adverse effect on its business, results of operation or financial condition.
The Company is in the process of contacting its key unrelated
third-parties to certify their Year 2000 compliance. The Company expects to
complete the process of obtaining certifications from unrelated third-parties by
June, 1999. In the event such certifications are not available, the Company is
developing plans to evaluate the potential impact on its operations if such
third-parties are unable to perform their obligations. To the extent that such
third-parties are materially adversely effected by the Year 2000 issue, the
Company could have disruptions in its operations.
The Company believes that it is devoting the necessary resources to
identify and resolve significant Year 2000 issues in a timely manner. The costs
incurred in addressing Year 2000 compliance are not considered at this time to
be material and will be expensed as incurred.
Year ended December 31, 1997 versus Year ended December 31, 1996
The Company had no sales during the year. The Company's most advanced
clinical program remained Levulan(R) PDT/PD for actinic keratoses (AKs). The
Company completed two parallel Phase III clinical trials using Levulan(R) PDT
for treatment of pre-cancerous AKs of the face and scalp which allowed the
Company to begin to prepare its first NDA.
23
<PAGE> 25
In May 1997, the Company signed an agreement with Richard Wolf Medical
Instruments Corp., to collaborate on the development of the Company's Levulan(R)
PD process for enhanced detection of bladder cancer. Under the agreement, Wolf
will provide, at no cost to the Company, proprietary non-laser light sources and
cystoscopes, along with technical and regulatory support, for the Company's
clinical trials for this indication. The Company and Wolf intend to co-operate
in the marketing of the Levulan(R) PD system for bladder cancer detection, once
the appropriate approval has been received from the FDA. The Company also has
the right under the agreement to qualify other manufacturers' light sources
and/or cystoscopes with the FDA for use in Levulan(R) PD of bladder cancer. In
November 1997, the Company commenced a multicenter Phase I/II clinical trial
Levulan(R) PD for bladder cancer in the U.S. The results were announced in
January 1999 and the Company is seeking advice of expert urologists to assist
with development of future trials.
Also during the year the Company entered into a license agreement to
develop and market an incoherent or non-laser light source for possible use in
its endometrial ablation clinical program. The Company paid an execution fee of
(pound)10,000 ($16,421), and has agreed to pay royalties on sales ranging from
1.25% to 5%.
The Company continued plans for further clinical trials in acne and hair
removal. In addition, the Company continued its pilot work on endometrial
ablation, by supporting plans for a Phase I/II investigator IND clinical trial.
See "Business - Company's Products and Technology." See Note 8h. to the
Company's Notes to the Consolidated Financial Statements.
Interest income, earned primarily on United States government securities,
decreased to $891,088 for the year ended December 31, 1997, as compared to
$1,074,902 for the year ended December 31, 1996, as the Company continued to
expend funds for ongoing research and development. 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. Interest income for
the cumulative period from February 21, 1991 (date of incorporation) to December
31, 1997 was $4,905,610.
Research and development costs for the year ended December 31, 1997 were
$6,252,830 as compared to $5,652,442 for the year ended December 31, 1996, an
increase of 10.6%. The increase in costs reflected the completion of multiple
multi-center Phase III trials for AKs, preparation for the filing of the AKs
NDA, and preparation for a initiation of the bladder cancer PD Phase I/II trial.
Total research and development costs for the cumulative period from February 21,
1991 (date of incorporation) to December 31, 1997 were $22,065,600. See also
"Business - Other Contractual Relationships."
Operating expenses were $1,760,409 for the year ended December 31, 1997,
compared to $2,220,883 for the year ended December 31, 1996. In the year ending
December 31, 1996, the Company recorded a compensation expense of $557,260, as
result of extending the expiration period on stock options from five years to
ten years. See "Results of Operations - Year ended December 31, 1996 versus Year
ended December 31, 1995." Net of the compensation costs in 1996, operating
expenses continued to increase 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 additional executive officers in expectation of FDA approval of its
AKs NDA.
The Company incurred a net loss of, $7,120,092, or $0.76 per share for the
year ended December 31, 1997, as compared to a net loss of $6,800,319, or $0.75
per share, for the year ended December 31, 1996. Net losses for the cumulative
period from February 21, 1991 (date of incorporation) to December 31, 1997 were
$24,701,019, or $4.10 per share.
24
<PAGE> 26
Year ended December 31, 1996 versus Year ended December 31, 1995
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.
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 AKs, development of protocols for bladder
indication trials and preparation of Phase III clinical trials for AKs.
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. 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 action was taken to make these prior grants comparable to
terms 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 options at the date of the extension of $557,260 has been recorded as an
addition to Common Stock and the related compensation expense has been recorded.
This transaction did not have a cash impact on the Company but 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.
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 to
purchase 2 million shares of the Company at an exercise price of $9.00 per
share, expiring in September 2000. As previously reported, the Company
repurchased the options held by Draxis on December 21, 1995 at a price of $1.125
per option. In March, 1996, Draxis sold its remaining interest in the Company,
being approximately 1 million shares, in a secondary offering. Only one director
of the Company remains on the boards of directors of both Draxis and the
Company. For the remainder of 1996, the Company continued to utilize services of
several Draxis personnel under the terms of the Draxis Management Agreement
while the Company increased its own staff. The Company did not use any services
from Draxis after 1996 and the Draxis Management Agreement was terminated
effective February 1, 1997 as provided by the agreement.
During 1996, the Company filed for and obtained approval to be de-listed
from the Toronto Stock Exchange ("TSE"). The Company had concluded that the
volume of trading on the TSE, and the change in relationship with Draxis did not
justify the expense of being listed on the TSE.
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
25
<PAGE> 27
in its cost estimates; however the overall net effect of inflation on the
operations of the Company should be minimal.
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 beliefs regarding clinical trial results, commencement of new
trials, expectations of exclusivity under the Hatch/Waxman Act and other patent
laws, intentions to market outside the United States, intentions to obtain
product liability insurance, lease larger facilities in New England,
management's expectations of regulatory approval and the commencement of sales,
the impact of a third-party manufacturer's regulatory compliance, the
sufficiency of the Company's cash resources for the Company's future liquidity,
the completion of an agreement for the marketing and further development of its
dermatological products and its 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, actual clinical
results of its trials, the impact of competitive products and pricing, the
timely development, FDA approval and market acceptance of the Company's
products, reliance on third-parties, the maintenance of the Company's patent
portfolio, and any Year 2000 non-compliance problems, 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
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-7
Notes to the Consolidated Financial Statements.......................... F-9
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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 1999
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
26
<PAGE> 28
Report on Executive Compensation", "Performance Graph", "Option Grants in 1998",
"Aggregate Option Exercises in 1998 and Option Values at December 31, 1998", and
"Other Compensation" of the Registrant's 1999 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 1999 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 1999 Proxy
Statement.
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-7
Notes to the Consolidated Financial Statements.................. F-9
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.
None.
C. Exhibits filed as part of this Report
3(a) Certificate of Incorporation, as amended;
3(b) By-laws of the Registrant, filed as Exhibit 3(ii) to the
Registrant's Quarterly Report on Form 10-Q for the fiscal
quarter ended September 30, 1997, filed November 12, 1997 and
are incorporated herein by reference;
27
<PAGE> 29
4(a) Common Stock specimen, filed as Exhibit 4.1 to the
Registrant's Quarterly Report on Form 10-Q for the fiscal
quarter ended September 30, 1997 filed November 12, 1997, 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;
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) Amended and Restated License Agreement between the Company and
PARTEQ dated March 11, 1998, portions of Exhibit A have been
omitted pursuant to a request for confidential treatment
pursuant to Rule 24b-2 of the Securities Exchange Act of 1934
and Rule 406 of the Securities Act of 1933;
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, as amended, filed as Exhibit 1 to
Registrant's Schedule 14A definitive Proxy Statement dated
April 27, 1998, and is incorporated herein by reference;
10(i) Purchase and Supply Agreement between the Company and National
Biological Corporation dated November 5, 1998 portions of
which have been omitted pursuant to a request for Confidential
treatment pursuant to Rule 24b-2 of the Securities Exchange
Act of 1934 and Rule 406 of the Securities Act of 1933;
27 Financial Data Schedule for the Registrant's Form 10-K for the
period ending December 31, 1998.
28
<PAGE> 30
INDEX TO FINANCIAL STATEMENTS
Consolidated Financial Statements for the Years Ended December 31, 1998, 1997,
1996 and for the Cumulative Period from February 21, 1991 (Date of
Incorporation) to December 31, 1998:
Independent Auditors' Report.............................................F-1
Consolidated Balance Sheets as of December 31, 1998 and 1997.............F-2
Consolidated Statements of Operations for the Years Ended
December 31, 1998, 1997 and 1996, and for the Cumulative Period
from February 21, 1991 (Date of Incorporation) to
December 31, 1998........................................................F-3
Consolidated Statements of Shareholders' Equity for the Years Ended
December 31, 1998, 1997 and 1996, and for the Cumulative Period from
February 21, 1991 (Date of
Incorporation) to December 31, 1998......................................F-4
Consolidated Statements of Cash Flows for the Years Ended December 31,
1998, 1997 and 1996, and for the Cumulative Period from February 21,
1991 (Date of Incorporation) to
December 31, 1998........................................................F-7
Notes to the Consolidated Financial Statements...........................F-9
29
<PAGE> 31
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, 1998 and 1997 and the related
consolidated statements of operations, shareholders' equity and cash flows for
each of the three years in the period ended December 31, 1998 and for the period
from February 21, 1991 (date of incorporation) to December 31, 1998. 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, 1998
and 1997, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 1998 and for the period from
February 21, 1991 (date of incorporation) to December 31, 1998 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
Toronto, Ontario
February 4, 1999
F-1
<PAGE> 32
DUSA PHARMACEUTICALS, INC.
(a development stage company)
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
<S> <C> <C>
ASSETS
Current assets
Cash (interest bearing) $ 1,213,757 $ 4,033,267
U.S. government securities available for sale, at market
(cost - $5,502,841 and $8,760,498, respectively)
(Note 3) 5,508,375 8,733,875
Accrued interest receivable 19,529 87,792
Other current assets 107,993 84,151
-------------- --------------
6,849,654 12,939,085
Fixed Assets, net (Note 4) 168,466 142,163
Deposits on equipment 122,555 -
$ 7,140,675 $ 13,081,248
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 266,737 $ 745,074
Accrued payroll 410,164 240,665
Other accrued charges 47,628 76,158
-------------- --------------
724,529 1,061,897
-------------- --------------
Commitments and Contingency (Note 8)
Shareholders' Equity (Note 6)
Capital Stock
Authorized: 100,000,000 shares; 40,000,000 shares
designated as common stock, no par, and 60,000,000
shares issuable in series or classes.
Issued and outstanding: 9,365,950 shares of common stock,
no par 36,828,579 36,746,993
Deficit accumulated during the development stage (30,417,967) (24,701,019)
Net unrealized gain (loss) on U.S. government securities
available for sale (Note 3) 5,534 (26,623)
6,416,146 12,019,351
-------------- --------------
$ 7,140,675 $ 13,081,248
============== ==============
</TABLE>
See the accompanying notes to the Consolidated Financial Statements.
F-2
<PAGE> 33
DUSA PHARMACEUTICALS, INC.
(a development stage company)
CONSOLIDATED STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Cumulative
period from
February 21,
1991 (date of
Year Ended Year Ended Year Ended incorporation)
December 31, December 31, December 31, to December 31,
1998 1997 1996 1998
<S> <C> <C> <C> <C>
REVENUE
Interest income $ 508,256 $ 891,088 $ 1,074,902 $ 5,413,866
Gain (loss) on foreign currency
exchange 6,928 2,059 (1,834) 27,204
Gain (loss) on sale of U.S.
government securities -- -- (62) 322,659
Unrealized loss on U.S. government
securities available for sale -- -- -- (62,832)
515,184 893,147 1,073,006 5,700,897
------------------------------------------------------------
RESEARCH AND DEVELOPMENT
COSTS 4,502,391 6,252,830 5,652,442 26,567,991
------------------------------------------------------------
OPERATING COSTS
General and administration 1,662,228 1,706,113 2,193,560 9,410,163
Depreciation and amortization 67,513 54,296 27,323 203,542
1,729,741 1,760,409 2,220,883 9,613,705
------------------------------------------------------------
LOSS BEFORE CUMULATIVE
EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE (5,716,948) (7,120,092) (6,800,319) (30,480,799)
CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING PRINCIPLE -- -- -- 62,832
NET LOSS $ (5,716,948) $ (7,120,092) $ (6,800,319) $(30,417,967)
OTHER COMPREHENSIVE INCOME
(LOSS)
Net unrealized gain (loss) on U.S.
government securities available for
sale 32,157 1,403 (65,749) 5,534
------------------------------------------------------------
COMPREHENSIVE LOSS $ (5,684,791) $ (7,118,689) $ (6,866,068) $(30,412,433)
============================================================
BASIC AND DILUTED NET LOSS PER
COMMON SHARE $ (0.61) $ (0.76) $ (0.75) $ (4.71)
============================================================
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 9,365,950 9,358,038 9,087,823 6,454,179
============================================================
</TABLE>
See the accompanying notes to the Consolidated Financial Statements.
F-3
<PAGE> 34
DUSA PHARMACEUTICALS, INC.
(a development stage company)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Deficit
accumulated
during the Accumulated Note
Common development Other receivable
Stock stage Comprehensive from
Income director
<S> <C> <C> <C> <C>
BALANCE, FEBRUARY 21, 1991
(date of incorporation) $ -- $ -- $ -- $ --
Issuance of 2,200,000 shares of common stock for note
and cash at $0.75 per share (Note 6) 1,650,000 -- -- --
Net loss -- (193,292) -- --
----------------------------------------------------
BALANCE, DECEMBER 31, 1991 1,650,000 (193,292) -- --
Issuance of 2,875,000 shares of common stock at $6.00
per share through a public offering (net of stock
offering costs of $2,464,872) (Note 6) 14,785,128 -- -- --
Issuance of Underwriters' Purchase Options for 125,000
Units for cash at $.0008 per unit (Note 7c) 100 -- -- --
Receipt of Section 16(b) common stock profits (Note 6) 17,125 -- -- --
Net loss -- (1,151,430) -- --
----------------------------------------------------
BALANCE, DECEMBER 31, 1992 16,452,353 (1,344,722) -- --
Issuance of 1,000 shares of common stock for cash
at $5.39 (CDN. $6.79) per share (Note 7b) 5,387 -- -- --
Issuance of 12,500 shares of common stock for cash
at $5.44 (CDN. $6.79) per share (Note 6) 68,047 -- -- (68,047)
Issuance of 100,000 shares of common stock for cash
at $5.00 per share (Note 6) 500,000 -- -- --
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 6) 1,200,000 -- -- --
Net unrealized loss on U.S. government securities
available for sale -- -- (891,805) --
Net loss -- (3,539,892) -- --
----------------------------------------------------
BALANCE, DECEMBER 31, 1994 18,225,787 (7,133,075) (891,805) (68,047)
</TABLE>
F-4
<PAGE> 35
DUSA PHARMACEUTICALS, INC.
(a development stage company)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Deficit
accumulated Accumulated Note
during the Other receivable
Common development Comprehensive from
Stock stage Income director
<S> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1994 $ 18,225,787 $ (7,133,075) $ (891,805) $ (68,047)
Issuance of 3,000,000 shares of common stock for cash
at $5.50 per share through a public offering (net of sattock 14,553,679
offering costs of $1,946,321) (Note 6) -- -- --
Issuance of Underwriters' Purchase Options for 300,000
shares of common stock for cash at $.001 per share
(Note 7c) 300 -- -- --
Issuance of 40,000 shares of common stock for cash
at $4.95 (CDN. $6.79) per share (Note 7b) 197,945 -- -- --
Issuance of 50,000 shares of common stock for cash
at $4.98 (CDN. $6.79) per share (Note 7d) 249,028 -- -- --
Net unrealized gain on U.S. government securities
available for sale -- -- 929,528 --
Payment received on note receivable from director (Note 6) -- -- -- 53,433
Redemption of Draxis Option for 2,000,000 shares of
common stock for cash at $1.125 per option (Note 7c) (2,250,000) -- -- --
Net loss -- (3,647,533) -- --
-------------------------------------------------------------
BALANCE, DECEMBER 31, 1995 30,976,739 (10,780,608) 37,723 (14,614)
Extension of outstanding stock option terms (Note 6) 557,260 -- -- --
Issuance of 750,000 shares of common stock for cash
at $7.20 per share through a public offering (net of stock 4,762,938
offering costs of $637,062) (Note 6) -- -- --
Issuance of 56,700 shares of common stock for cash
at $4.97 (CDN. $6.79) per share (Note 7b) 281,733 -- -- --
Issuance of 8,750 shares of common stock for cash at $3.43
(CDN. $4.69) per share (Note 7b) 30,042 -- -- --
Issuance of 7,500 shares of common stock for cash at $7.96
(CDN. $10.88) per share (Note 7b) 59,726 -- -- --
Issuance of 4,500 shares of common stock for cash at $9.39
(CDN. $12.88) per share (Note 7b) 42,267 -- -- --
Issuance of Underwriters' Purchase Options for 37,500
shares of common stock for cash at $.001 per share
(Note 6c) 38 -- -- --
Payment received on note receivable from director (Note 6) -- -- -- 14,614
Net unrealized loss on U.S. government securities available
for sale -- -- (65,749) --
Net loss -- (6,800,319) -- --
-------------------------------------------------------------
BALANCE, DECEMBER 31, 1996 36,710,743 (17,580,927) (28,026) --
</TABLE>
F-5
<PAGE> 36
DUSA PHARMACEUTICALS, INC.
(a development stage company)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Deficit
accumulated Accumulated Note
during the Other receivable
Common development Comprehensive from
Stock stage Income director
<S> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1996 $ 36,710,743 $(17,580,927) $ (28,026) $ --
Issuance of 10,000 shares of common stock for cash at
$3.625 per share (Note 7b) 36,250 -- -- --
Net unrealized gain on U.S. government securities
available for sale -- -- 1,403 --
Net loss -- (7,120,092) -- --
----------------------------------------------------------
BALANCE, DECEMBER 31, 1997 $ 36,746,993 $(24,701,019) $ (26,623) $ --
Net unrealized gain on U.S. government securities
available for sale -- -- 32,157 --
Vesting of non-employee
options (Note 8a) 81,586 -- -- --
Net loss -- (5,716,948) -- --
----------------------------------------------------------
BALANCE, DECEMBER 31, 1998 $ 36,828,579 $(30,417,967) $ 5,534 $ --
==========================================================
</TABLE>
See the accompanying notes to the Consolidated Financial Statements.
F-6
<PAGE> 37
DUSA PHARMACEUTICALS, INC.
(a development stage company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Cumulative
period from
February 21,
1991 (date of
incorporation)
Year ended Year ended Year ended to
December 31, December 31, December 31, December 31,
1998 1997 1996 1998
<S> <C> <C> <C> <C>
CASH FLOWS USED IN OPERATING
ACTIVITIES
Net loss $ (5,716,948) $ (7,120,092) $ (6,800,319) $ (30,480,799)
Adjustments to reconcile net loss to net cash used in
operating activities
Amortization of premiums and accretion of
discounts on U.S. government securities
available for sale and investment securities, net 180,074 (170,072) (11,574) 182,546
Depreciation and amortization 67,513 54,296 27,323 203,542
Loss (gain) on foreign currency exchange (6,928) (2,059) 1,834 (27,204)
Vesting of non-employee options 81,586 -- -- 81,586
Loss (gain) on sale of U.S. government securities
available for sale -- -- 62 (322,659)
Unrealized loss on U.S. government securities
available for sale -- -- -- 62,832
Cumulative effect of change in accounting principle -- -- -- (62,832)
Write-off of intangible assets -- -- -- 307,519
Compensation expense resulting from extension of
outstanding stock option terms -- -- 557,260 557,260
Changes in other assets and liabilities impacting
cash flows from operations:
Accrued interest receivable 68,263 121,178 (27,120) (19,529)
Other current assets (23,842) (5,784) 36,033 (107,993)
Accounts payable (478,337) (121,994) 437,278 266,737
Accrued payroll and other accrued charges 140,969 156,424 (18,149) 457,792
License agreement obligations -- -- -- (12,203)
----------------------------------------------------------------
Net cash used in operating activities (5,687,650) (7,088,103) (5,797,372) (28,850,573)
----------------------------------------------------------------
CASH FLOWS PROVIDED BY (USED IN)
INVESTING ACTIVITIES
Purchases of U.S. government securities available
for sale (12,297,417) (12,563,994) (14,405,081) (114,958,846)
Proceeds from maturing U.S. government
securities available for sale 15,375,000 22,035,000 15,600,000 55,820,000
Proceeds from sale of U.S. government securities
available for sale -- -- -- 53,776,118
Intangible assets -- -- -- (193,022)
Purchases of fixed assets (93,816) (74,035) (98,011) (355,087)
Deposits on equipment (122,555) -- -- (122,555)
Advances to former parent company -- -- -- (2,867,900)
Repayment of advances by former parent company -- -- -- 2,867,900
----------------------------------------------------------------
Net cash provided by (used in) investing activities 2,861,212 9,396,971 1,096,908 (6,033,392)
----------------------------------------------------------------
</TABLE>
F-7
<PAGE> 38
DUSA PHARMACEUTICALS, INC.
(a development stage company)
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Cumulative
period from
February 21,
1991 (date of
incorporation)
Year ended Year ended Year ended to
December 31, December 31, December 31, December 31,
1998 1997 1996 1998
<S> <C> <C> <C> <C>
CASH FLOWS PROVIDED BY FINANCING
ACTIVITIES
Stock offering costs $ -- $ -- $ (637,062) $ (5,048,255)
Issuance of common stock and underwriters'
options -- 36,250 5,813,806 43,402,816
Payment received on note receivable from director -- -- 14,614 68,047
Redemption of Option -- -- -- (2,250,000)
Receipt of Section 16(b) common stock profits -- -- -- 17,125
Payment on license agreement obligations -- -- -- (119,215)
Net cash provided by financing activities -- 36,250 5,191,358 36,070,518
EFFECT OF EXCHANGE RATES ON CASH 6,928 2,059 (1,834) 27,204
------------ ------------ ------------ ------------
NET (DECREASE) INCREASE IN CASH (2,819,510) 2,347,177 489,060 1,213,757
CASH AT BEGINNING OF PERIOD 4,033,267 1,686,090 1,197,030 --
CASH AT END OF PERIOD $ 1,213,757 $ 4,033,267 $ 1,686,090 $ 1,213,757
============ ============ ============ ============
SUPPLEMENTAL SCHEDULE OF CASH FLOW
INFORMATION
Issuance of common stock for promissory note
from former parent company $ 150,000
============
License agreement obligations incurred in the
acquisition of an intangible asset $ 131,418
============
Deferred stock offering costs offset against
common stock $ 637,062 $ 5,048,255
============ ============
Note receivable from director originated upon
exercise of options for common stock $ 68,047
============
Interest paid $ 12,594
============
</TABLE>
There were no income tax payments made during the periods.
See the accompanying notes to the Consolidated Financial Statements.
F-8
<PAGE> 39
DUSA PHARMACEUTICALS, INC.
(a development stage company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
AND THE CUMULATIVE PERIOD FROM FEBRUARY 21, 1991
(DATE OF INCORPORATION) TO DECEMBER 31, 1998
- --------------------------------------------------------------------------------
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"). 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 6). The Company's consolidated
financial statements include the accounts of 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") and
photodetection ("PD"),which respectively combines the use of a
pharmaceutical product with exposure to light to induce a therapeutic or
detection effect. The Company has been concentrating its initial efforts
upon seeking regulatory approval in the United States for topical and/or
local uses of 5-aminolevulinic acid ("Levulan(R)") PDT/PD. During 1998,
the Company filed a New Drug Application (NDA) with the Food and Drug
Administration (FDA) for Levulan(R) Photodynamic Therapy of actinic
keratoses (AKs).
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
Levulan(R) PDT/PD 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
Levulan(R) PDT/PD in topical and/or local 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.
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.
F-9
<PAGE> 40
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 the
level-yield method.
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. The carrying value of
fixed assets is periodically reviewed and adjusted appropriately by the
Company, whenever events or changes in circumstances indicate that the
estimated fair value is less than the carrying amount.
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 and
other products are expensed during the year unless regulatory approval to
market the 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 6 and
7).
f. Research and Development Costs - Costs related to the conceptual
formulation and design of products and processes are expensed as research
and development costs as they are incurred.
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 5).
h. Basic and Diluted Net Loss Per Share - The Company follows the
provisions of SFAS No. 128, "Earnings Per Share". Basic 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 basic 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 for dilutive net loss per common share 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 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. 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
F-10
<PAGE> 41
disclosed the required proforma net loss and loss per share data in Note 7
as if the Company had applied the SFAS No. 123 method.
j. Comprehensive Income - The Company has implemented SFAS No. 130,
Reporting Comprehensive Income as of December 31, 1998. The Statement
establishes standards for the reporting and display of comprehensive
income and its components (revenues, expenses, gains and losses) in a full
set of general-purpose financial statements. The Statement requires all
items that are required to be recognized under accounting standards as
components of comprehensive income be reported separately from the
Company's accumulated deficit balance in a financial statement that is
displayed with the same prominence as other financial statements. The
Company has reported comprehensive loss and its components as part of its
statement of operations. Comprehensive loss is not used in the
calculations of the basic and diluted loss per share.
k. Segment Reporting - The Company has implemented SFAS No. 131,
Disclosures about Segments of an Enterprise and Related Information, as of
December 31, 1998. The Statement establishes standards for the way that a
public business enterprise reports information about operating segments in
annual financial statements and interim financial reports issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas, and major customers. The Company
has determined that, at present, it does not have any reportable segments.
l. Pensions and Other Postretirement Benefits - The Company has
implemented SFAS No. 132, Employers' Disclosures about Pensions and Other
Postretirement Benefits, as of December 31, 1998. The Statement
standardizes the disclosure requirements for pensions and other
postretirement benefits. No additional disclosures were required as a
result of the implementation of this statement.
m. New Statements of Financial Accounting Standards - In June 1998, the
FASB issued SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities. This Statement establishes accounting and reporting
standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those
instruments at fair value. The Statement is effective for the fiscal
quarters of the Company's fiscal year ending December 31, 2000. The
Company is in the process of evaluating the effect of this Statement on
its consolidated financial statements.
3. U.S. GOVERNMENT SECURITIES AVAILABLE FOR SALE
Securities available for sale consist of United States Treasury Bills and
Notes with yields ranging from 4.76% to 6.49% and maturity dates ranging
from January 7, 1999 to August 10, 1999.
As of December 31, 1998, the Company's securities available for sale have
been recorded at fair market value of $5,508,375 and the unrealized gain
on such securities of $5,534 has been recorded as part of shareholders'
equity and an item of comprehensive income in the statement of operations.
F-11
<PAGE> 42
4. FIXED ASSETS
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Computer Equipment $ 195,284 $ 160,864
Furniture, Fixtures and Equipment 136,327 81,522
Leasehold Improvements 8,568 8,332
340,179 250,718
Accumulated depreciation and amortization (171,713) (108,555)
--------- ---------
$ 168,466 $ 142,163
========= =========
</TABLE>
5. INCOME TAXES
The tax effect of significant temporary differences representing deferred
tax assets is as follows:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Deferred Tax Asset
Intangible assets $ 464,126 $ 429,546
Accrued charges 176,022 69,036
Research and development tax credits carryforwards 702,025 563,776
Operating loss carryforwards 11,279,636 9,186,800
Capital loss carryforwards 162,766 162,766
Fixed assets 3,387 4,588
Other 15,633 15,633
------------ ------------
Net deferred tax assets 12,803,595 10,432,145
Valuation allowance (12,803,595) (10,432,145)
$ -- $ --
============ ============
</TABLE>
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, 1998, the Company has net operating loss carryforwards
for tax purposes of approximately $28,170,000 and research and development
tax credits of approximately $702,000 both of which, if not utilized, will
expire for Federal tax purposes as follows:
<TABLE>
<CAPTION>
Research and
Operating loss development
carryforwards tax credits
------------- -----------
<S> <C> <C>
2006 $ 193,000 $ 7,000
2007 1,155,000 57,000
2008 1,664,000 66,000
2009 3,027,000 84,000
2010 3,420,000 44,000
2011 6,638,000 102,000
</TABLE>
F-12
<PAGE> 43
<TABLE>
<CAPTION>
Research and
Operating loss development
carryforwards tax credits
------------- -----------
<S> <C> <C>
2012 6,841,000 235,000
2013 5,232,000 107,000
----------- -----------
$28,170,000 $ 702,000
=========== ===========
</TABLE>
For state tax purposes, net operating loss carryforwards will expire in
years 1999-2005.
6. 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'
shareholders on a pro rata basis as a dividend in specie.
During 1992, a former officer of the Company who resided 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 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 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.
F-13
<PAGE> 44
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.
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' sale of
its ownership interest (Note 8b).
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.
On September 26, 1997 the Company adopted a Shareholders Rights Plan (the
"Plan"). The Plan provides for the distribution of one right as a dividend
for each outstanding share of common stock of the Company to holders of
record as of October 24, 1997. Each right entitles shareholders to
purchase one unit at a purchase price of $50.00. Each unit consists of
one-tenth of a share of common stock of the Company and a note equal to
nine-tenths of a share of common stock based on the fair market price of
the Company's common stock on the date of exercise. The rights may be
exercised only if a person or group either acquires or announces a tender
offer to acquire 15% or more of the Company's outstanding common stock, or
if a person or group is declared an adverse person, as such term is
defined in the Plan. The rights may be redeemed by the Company at a
redemption price of one-tenth of a cent per right until 10 days following
the date a person acquires 15% or more of the Company, or until such later
date as may be determined by the Board.
Under the Plan, if a person or group acquires 15% or more of the Company's
common stock, all holders of rights (other than the acquiring shareholder)
may, upon payment of the purchase price then in effect, purchase shares of
the Company's common stock having a value of twice the purchase price. In
the event that the Company is involved in a merger or other similar
transaction where it is not the surviving corporation, all holders of
rights (other than the acquiring shareholder) shall be entitled, upon
payment of the then in effect purchase price, to purchase common stock of
the surviving corporation having a value of twice the purchase price. The
rights will expire on September 26, 2007, unless previously redeemed.
On June 11, 1998 at the Annual Meeting of the Shareholders, the
shareholders approved an amendment to the Company's Certificate of
Incorporation to increase the number of authorized shares from 20 million
shares without par value, to 100 million shares, 40 million of which are
designated common stock without par value, and 60 million of which may be
further divided into classes or series of shares with rights, preferences
and limitations as may be determined by the Board of Directors.
F-14
<PAGE> 45
7. 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
dates of award under the plan consistent with the method of SFAS No. 123,
the Company's net loss, cumulative net loss, and basic and diluted net
loss per common share would have been increased to the proforma amounts
indicated below:
<TABLE>
<CAPTION>
1998 1997 1996
--------------- --------------- ---------------
<S> <C> <C> <C>
Net loss
As reported ($ 5,716,948) ($ 7,120,092) ($ 6,800,319)
Proforma ($ 6,963,522) ($ 8,184,984) ($ 7,410,466)
Basic and diluted net loss per
common share
As reported ($ 0.61) ($ 0.76) ($ 0.75)
Proforma ($ 0.74) ($ 0.88) ($ 0.82)
Cumulative net loss
As reported ($ 30,336,381) ($ 24,701,019) ($ 17,580,927)
Proforma ($ 33,358,346) ($ 26,394,824) ($ 18,209,840)
Cumulative basic and diluted net
loss per common share
As reported ($ 4.71) ($ 4.10) ($ 3.22)
Proforma ($ 5.17) ($ 4.38) ($ 3.33)
</TABLE>
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.
The fair value of the options at the date of grant was estimated using the
Black-Scholes model with the following weighted average assumptions:
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Expected life (years) 10 10 10
Risk free interest rate 5.57% 6.57% 6.66%
Expected volatility 68.94% 62.67% 62.28%
Dividend yield -- -- --
</TABLE>
b.(1) 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. The Omnibus Plan supercedes the Company's
previously adopted 1994 Restricted Stock Option Plan and the Incentive
Stock Option Plan adopted in 1991. No further grants will be made under
the superceded plans. The Omnibus Plan provides for the granting of awards
to purchase up to a maximum of 15% 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
F-15
<PAGE> 46
rights ("SAR"), restricted stock options ("RSO") or other securities
determined by the Company, to directors, employees and consultants. To
date, the Company has made awards only of NQSOs and ISOs under the Omnibus
Plan.
Under the terms of the 1996 Omnibus Plan as amended, each person who is a
continuing director following the Annual Meeting of Shareholders
automatically receives 10,000 non-qualified stock options. The exercise
price of such options is the closing stock market price on the date of the
grant. On June 5, 1997 at the Annual Meeting of Shareholders, the
shareholders approved an amendment to the 1996 Omnibus Plan, providing
that all of the stock options granted automatically to directors of the
Company, after the date of amendment, would immediately vest on the date
of the grant.
Non-qualified stock options - All the non-qualified stock options granted
under the Omnibus 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.
Incentive stock options - Incentive stock options granted under the
Omnibus Plan and the superceded 1991 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.
The Company has entered into an employment agreement with its Chief
Operating Officer effective May 14, 1998. The agreement sets out the
remuneration, benefits and incentive bonuses to which the officer is
entitled. The full term of employment is unlimited in duration unless
terminated in accordance with the terms of the agreement. As partial
consideration for the employment agreement, the Company granted incentive
stock options to purchase up to 60,000 shares of the Company's common
stock at $11.50 per share pursuant to the terms of the 1996 Omnibus Plan
as amended. The exercise price of such options is the closing stock market
price on May 7, 1998, the date of the grant.
b.(2) 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. 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, and which had terms
of five years, have been extended to terms of ten years (Note 6). 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
F-16
<PAGE> 47
immediately preceding the date of the grant, subject to satisfaction of
certain conditions involving continuous periods of service or engagement.
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 8a), the Company
granted an option to Draxis to purchase 2,000,000 shares of common stock
of the Company (the "Draxis Option") at $9 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 6).
Payment for the option was charged against shareholders' equity at
December 31, 1995.
In conjunction with its initial public offering (Note 6), 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 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. All warrants issued
in connection with the initial public offering expired on April 19, 1993.
On May 7, 1998, the Board of Directors amended the terms of the Unit
Purchase Options to allow the exercise of the options based on a cashless
payment provision based upon the fair market value of the shares during
the thirty-day period prior to the exercise of such options. In
consideration, the underwriters agreed to relinquish 1,250 Units (2,500
shares of common stock).
In conjunction with its December 1995 public offering (Note 6), 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 6), 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 $.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 could not be sold, transferred, assigned, or
hypothecated prior to May 1, 1997, unless assigned to any successor,
officer or partner of the underwriters.
On March 13, 1997 the Company granted non-qualified stock options to
Lumenetics, Inc., a consultant to the Company, to purchase 100,000 shares
of common stock at $6.125 per share in connection with a consulting
agreement. These options are exercisable at the rate of 25% on the date of
grant and 25% on the second, third and fourth anniversaries of the date of
grant. In addition, the Company granted non-qualified stock options to a
consultant to the Company to purchase 15,000
F-17
<PAGE> 48
shares of common stock at $6.125 per share as part of a consulting
agreement. These options are exercisable at the rate of 20% on the date of
grant and 20% on June 14, 1998, 1999, 2000 and 2001, respectively. The
exercise price of such options is the closing market price of the
Company's common stock on the date of grant.
Shares issued pursuant to the exercise of all such options are restricted
shares and may not be sold in the United States without registration or
exemption from registration under the 1933 Act.
The following table summarizes information about all stock options
outstanding at December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------- ------------------------------------
Number Weighted Weighted Number Weighted
Range of outstanding at average average exercisable at average
exercise price December 31, remaining exercise December 31, exercisable
1998 contractual life price 1998 price
- ------------------ ------------------- ------------------- -------------- ------------------- ---------------
<S> <C> <C> <C> <C> <C>
$3.01 to 6.00 389,800 4.44 years $4.85 352,800 $5.01
6.01 to 9.00 800,000 7.58 years 7.28 424,250 7.23
9.01 to 14.00 185,500 2.47 years 11.10 160,500 11.30
--------- -------
1,375,300 6.00 years $7.10 937,550 $7.09
========= =======
</TABLE>
Changes for the stock option plans during the years ended December 31,
1998, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
Weighted Weighted Weighted
average average average
exercise exercise exercise
1998 price 1997 price 1996 price
--------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding, beginning of year 1,283,300 $7.03 1,002,050 $6.81 589,500 $5.69
Options granted 202,000 8.66 321,000 7.67 490,000 7.93
Options exercised -- -- (10,000) 3.63 (77,450) 5.34
Options cancelled -- -- (29,750) 3.95 -- --
Options lapsed (110,000) 7.02 -- -- -- --
--------------------------------------------------------------
Options outstanding, end of year 1,375,300 $7.10 1,283,300 $7.03 1,002,050 $6.81
==============================================================
Options exercisable, end of year 937,550 $7.09 615,050 $6.32 368,300 $5.96
==============================================================
</TABLE>
Options which were exercised during these years were exercised at per
share prices of U.S. $3.625 during 1997, and at a range of CDN $4.69 to
CDN $12.875 during 1996.
Options which were granted during 1998 have exercise prices ranging from
U.S. $3.25 to U.S. $11.50 per share. Those granted during 1997 have
exercise prices ranging from U.S. $6.125 to
F-18
<PAGE> 49
$10.875 per share. During 1996, options were granted with exercise prices
of CDN $7.75 and U.S. $9.875 per share.
d. Warrants - In consideration of efforts related to the negotiation and
execution of various agreements including the License Agreement (Note 8a),
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, warrants for 50,000 shares were
exercised by the former Co-Chairman of Draxis. 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 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 per share. The warrant which vested immediately upon issuance, is
noncancellable and was due to expire on October 6, 1998. On July 30, 1998,
the Board of Directors extended the expiration date of the warrant to
October 14, 2001.
In connection with an agreement with its investor relations 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.
8. 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.
In October 1997, the Company and PARTEQ revised the License Agreement and
the parties signed an Amended and Restated License Agreement on March 11,
1998. PARTEQ received options on October 21, 1997 to purchase 85,000
shares of common stock of the Company at an exercise price of $10.875 per
share which will vest over four (4) years on the anniversary date of the
granting of the
F-19
<PAGE> 50
option. The Company has agreed to pay royalties of 6% and 4% on 66% of its
or its affiliates' net selling price of products in countries where patent
rights do and do not exist, respectively. The Company also will pay 6% and
4% when patent rights do and do not exist, respectively, on the Company's
net selling price less cost of goods for products sold to sublicensees.
PARTEQ has reduced the amount of royalties which would have been due from
the Company on sub-license arrangements from 33% of royalties and
sublicensing fees received from sublicensees to 5% of lump sum sublicense
fees paid to the Company, such as milestone payments for important
regulatory hurdles (excluding amounts designated by the sublicense for
future research and development efforts), and 6% of royalty payments the
Company receives on sales of products by sublicensees. The Company has
paid a minimum royalty of CDN $100,000 on March 31, 1998. Under certain
conditions, additional minimum royalty payments will be made during the
term, in amounts up to CDN $1,100,000, if the Company enters a sublicense
arrangement for both the United States and Europe encompassing
substantially all dermatological indications. In addition, PARTEQ has
agreed to eliminate Draxis as a guarantor under the Amended and Restated
License Agreement. Should no United States patent subsist, whether by
virtue of expiry, invalidation or rejection, the 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 the right to terminate the
Amended and Restated License Agreement with or without cause upon ninety
days notice. The Agreement is effective through the expiration date of the
latest United States patent made subject to the 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. PARTEQ and the Company intend to revise
the assignment agreement with Draxis to conform its terms to the Amended
and Restated License Agreement.
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. The Company terminated the management agreement as
of February 1, 1997, as per the provisions of the agreement.
F-20
<PAGE> 51
c. Officers' Employment Agreements - The Company has entered into
employment agreements, with its President effective October 1, 1991, with
its Vice President of Scientific Affairs effective October 11, 1993 and
with its Chief Operating Officer effective May 14, 1998. The agreements
set out the remuneration, benefits and incentive bonuses to which the
officers are entitled. The full term of employment is unlimited in
duration unless terminated in accordance with the terms of the employment
agreements. (Notes 7b.(1), 7b(2) and 7d.)
d. Lease Agreement -The Company has entered into lease commitments for
rental of its office space in Valhalla, New York and in Toronto, Ontario.
Future minimum lease payments will total approximately $153,000 in 1999
and $157,000 in 2000 and $164,000 in 2001.
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. 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 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 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. This agreement was amended by a Consulting and
Development Agreement dated October 14, 1997. In lieu of royalties which
could have become due under the April, 1996 Agreement, the Company granted
options for the purchase of 100,000 shares of common stock of the Company
(Note 7c). In addition, Lumenetics has received restricted stock options
for 20,000 shares of common stock of the Company (Note 7b.(2)).
h. Light Source Supply - Effective November 5, 1998, the Company entered
into a purchase and supply agreement with National Biological Corporation
(NBC), under which the Company has agreed to order all of its supply of
certain light sources from NBC.
i. Research agreements - The Company has entered into a series of
agreements for research projects and clinical studies. As of December 31,
1998, future payments to be made pursuant to these agreements, under
certain terms and conditions, totaled approximately $892,000 in 1999.
F-21
<PAGE> 52
9. FINANCIAL INSTRUMENTS
a) Fair value of financial instruments - The carrying value of the
financial assets and liabilities approximate their fair values due
to their short-term maturity.
b) Credit risk - The Company is subject to credit risk through
short-term investments. The Company mitigates this risk by investing
in US government securities.
10. SUBSEQUENT EVENT
On January 15, 1999, the Company issued 1,500,000 shares of its common
stock in a private placement pursuant to Regulation D of the Securities
Act of 1933 at $5.00 per share. The Company received net proceeds of
$7,443,046. An additional 130,435 shares of common stock were issued as
commission and non-accountable expense allowance to the placement agent.
Additional compensation was paid to the placement agent in 163,043
five-year warrants each of which are exercisable into one share of common
stock at $5.00 per share.
* * * * *
F-22
<PAGE> 53
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 February 25, 1999
----------------------
Director, Chairman of the
Board, President, Chief
Executive Officer and Chief
Financial Officer (Principal
Executive, Financial, and
/s/ D. Geoffrey Shulman Accounting Officer) February 25, 1999
- ------------------------------ -----------------
D. Geoffrey Shulman, MD, FRCPC Date
/s/ Ronald L. Carroll Executive Vice President, February 25, 1999
- ------------------------------ Chief Operating Officer -----------------
Ronald L. Carroll Date
/s/ Stuart L. Marcus Senior Vice President of February 25, 1999
- ------------------------------ Scientific Affairs -----------------
Stuart L. Marcus, MD, PhD Date
/s/ John H. Abeles Director February 25, 1999
- ------------------------------ -----------------
John H. Abeles Date
/s/ James P. Doherty Director February 25, 1999
- ------------------------------ -----------------
James P. Doherty, BSc Date
/s/ Jay M. Haft Director February 25, 1999
- ------------------------------ -----------------
Jay M. Haft, Esq. Date
/s/ Richard C. Lufkin Director February 25, 1999
- ------------------------------ -----------------
Richard C. Lufkin Date
/s/ Nanette W. Mantell Director February 25, 1999
- ------------------------------ -----------------
Nanette W. Mantell, Esq. Date
<PAGE> 54
EXHIBIT INDEX
3(a) Certificate of Incorporation, as amended...............................
3(b) By-laws of the Registrant, filed as Exhibit 3(ii) to the
Registrant's Quarterly Report on Form 10-Q for the fiscal
quarter ended September 30, 1997, and are incorporated herein
by reference...........................................................
4(a) Common Stock specimen, filed as Exhibit 4.1 to the
Registrant's Quarterly Report on Form 10-Q for the fiscal
quarter ended September 30, 1997, and are 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......................
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) Amended and Restated License Agreement between the Company and
PARTEQ dated March 11, 1998, portions of Exhibit A have been
omitted pursuant to a request for confidential treatment
pursuant to Rule 24b of the Securities Exchange Act of 1934
and Rule 406 of the Securities Act of 1933.............................
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, as amended, filed as Exhibit 1 to
Registrant's Schedule 14A definitive Proxy Statement dated
April 27, 1998, and is incorporated herein by reference................
10(i) Purchase and Supply Agreement between the Company and National
Biological Corporation dated November 5, 1998, portions of
which have been omitted pursuant to a request for confidential
treatment pursuant to Rule 24b of the Securities Exchange Act
of 1934 and Rule 406 of the Securities Act of 1933.....................
27 Financial Data Schedule for the Registrant's Form 10-K for the
period ending December 31, 1998........................................
<PAGE> 1
CERTIFICATE OF INCORPORATION
OF
DUSA PHARMACEUTICALS, INC.
RESTATED WITH AMENDMENTS
THROUGH JUNE 15, 1998
FOR ELECTRONIC PURPOSES
FIRST: The name of the corporation is:
DUSA Pharmaceuticals, Inc.
SECOND: The purpose or purposes for which the Corporation is organized is
to engage in:
(a) any activity within the purposes for which corporations may be
organized under Title 14A, Corporations, General of the New Jersey Statutes.
THIRD: The aggregate number of shares of which the Corporation shall have
authority to issue is 100,000,000 shares; 40 million of which shall be Common
Stock and 60 million of which the Board of Directors of the Corporation shall
have the power, and is hereby authorized, to divide into classes and into series
within any class or classes, to determine the designation and the number of
shares of any class or series, to determine the relative rights, preferences and
limitations of the shares of any class or series, including, but not limited to,
the convertibility of any shares of one class or series into shares of another
class or series, and to change the designation or number of shares, or the
relative rights, preferences, or limitations of the shares, of any theretofore
established class or series, no shares of which have been issued, all to the
fullest extent and in the manner provided by the New Jersey Business Corporation
Act, as heretofore or hereafter amended. Any and all authorized shares of the
Corporation may be issued and sold in such manner, in such amounts and
proportions, and for such consideration, as from time to time may be fixed and
determined by the Board of Directors of the Corporation, and any shares, when so
issued, shall be fully paid and nonassessable.
<PAGE> 2
FOURTH: The address of the Corporation's registered office is 991 Route 22
West, Somerville, New Jersey 08876, and the Corporation's registered agent at
such address is Nanette W. Mantell, Esq.
FIFTH: Any director or officer of the Corporation shall not be personally
liable to the Corporation or its shareholders for damages for breach of any duty
owed to the Corporation or its shareholders, except that this provision shall
not relieve a director or officer from liability for any breach of duty based
upon an act or omission (a) in breach of such person's duty of loyalty to the
Corporation or its shareholders, (b) not in good faith or involving a knowing
violation of law or (c) resulting in receipt by such person of an improper
personal benefit.
SIXTH: The name and address of the incorporator is Susan B. McCrea, Esq.,
207 Omni Drive, Somerville, New Jersey 08876.
SEVENTH: Quorum. The holders of record of at least thirty-three and
one-third percent (33- 1/3%) of the shares of the Common Stock of the Company
issued and outstanding and entitled to vote, present in person or by proxy,
shall, except as otherwise provided by law, constitute a quorum at all meetings
of the shareholders; if there be no such quorum, the holders of a majority of
such shares so present or represented may adjourn the meeting from time to time
until a quorum shall have been obtained.
EIGHTH: Any one or more directors of the Corporation may be removed only
with cause at any time by an affirmative vote of the holders of record of at
least a majority of the shares of stock of the Corporation, issued and
outstanding and entitled to vote thereon, or removed with cause at any time by a
majority of the whole Board, and thereupon the term of the director or directors
who shall have been so removed shall forthwith terminate and there shall be a
vacancy or vacancies in the Board of Directors, to be filled as provided in the
By-Laws of the Corporation.
-2-
<PAGE> 1
AMENDED AND RESTATED
LICENSE AGREEMENT
THIS AMENDED AND RESTATED LICENSE AGREEMENT made effective as of the 11th
day of March, 1998.
BETWEEN:
PARTEQ RESEARCH AND DEVELOPMENT INNOVATIONS, a
non-profit corporation without share capital
incorporated under the laws of the Province of
Ontario and having a principal office and place
of business at Queen's University at Kingston,
Kingston, Ontario, Canada K7L 3N6 (hereinafter
referred to as "PARTEQ")
-and-
DUSA Pharmaceuticals, Inc., a corporation
incorporated under the laws of the State of New
Jersey and having its registered office at 991
Route 22 West, Suite 102, P.O. Box 5369,
Somerville, New Jersey, United States of
America, 08876 (hereinafter referred to as
"DUSA")
WHEREAS, the Invention (as hereinafter defined) was made in the course of
research at Queen's University at Kingston ("Queen's") and Royal Military
College ("RMC"); and
WHEREAS, all right, title and interest in and to the Invention have been
assigned to Queen's, and PARTEQ, as the technology transfer arm of Queen's, has
the exclusive worldwide rights to the Invention and has all right and authority
to enter into this Agreement; and
WHEREAS, Queen's, RMC, PARTEQ, and DUSA are desirous of amending and
restating the License Agreement dated as of August 27, 1991, among them (the
"Original License") to better reflect the current development opportunities for
the Invention pursuant to the terms and conditions set forth below; and
WHEREAS, PARTEQ is desirous of releasing Draxis Health, Inc. (formerly
Deprenyl Research Limited, Inc.) as Guarantor of the obligations of DUSA under
the Original License;
<PAGE> 2
NOW, THEREFORE, for and in consideration of the covenants, conditions and
undertakings hereinafter set forth, it is agreed by and between the parties (as
hereinafter defined) that the Original License is amended and restated as
follows:
1. DEFINITIONS
1.1 "Affiliate", as used herein, shall mean any person, corporation, firm,
partnership or other entity in which DUSA owns or controls more than fifty
percent (50%) of the equity (e.g., a subsidiary); or which owns or controls DUSA
to the extent of more than fifty percent (50%) of its equity (e.g., a parent);
or which is owned or controlled to the extent of more than fifty percent (50%)
by the same corporation, firm, partnership or other entity also owning or
controlling more than fifty percent (50%) of the equity in DUSA (e.g., a sister
corporation); or a person, corporation, firm, partnership or other entity in
which the sister corporation owns or controls more than fifty percent (50%) of
the equity hereof (e.g., a subsidiary of the sister corporation).
1.2 "Cost of Goods", as used herein shall mean all costs to manufacture
Products, including, but not limited to, the cost of raw material supplies,
devices and components, labor and services and manufacturing overhead related to
the Product determined by United States generally accepted accounting
principles, consistently applied by DUSA's independent certified public
accountants.
1.3 "...covered by...", as used herein, shall mean any Products or Method
that when made, used, practiced or sold would, in the context of Queen's Patent
Rights, fall within the scope of any claim of Queen's Patent Rights or, in the
context of Improvements, fall within the scope of any Improvement.
1.4 "Drug Products", as used herein, means pharmaceutical formulations
containing, as active ingredient, one or more precursors to protoporphyrin IX,
including 5-amino levulinic acid,
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<PAGE> 3
whose use is covered by Queen's Patent Rights or Improvements, which are
manufactured, packaged and ready for resale or distribution to the end-user.
1.5 "Execution Date", as used herein, means the date first above written.
1.6 "Improvements", as used herein, shall mean any and all inventions,
developments or discoveries, including trade secrets, not disclosed as of the
Execution Date in the Queen's Patent Rights, whether or not patented or
patentable, relating to the Invention and the development and commercialization
of same, discovered, developed or acquired by or for PARTEQ, Queen's or RMC
prior to or during the term of this Agreement and in respect of which PARTEQ has
the right to grant a license hereunder.
1.7 "Invention" as used herein, means a method for detecting and/or
treating primary or secondary malignant and non-malignant tissue abnormalities
and lesions of the skin; conjunctiva; respiratory, digestive and vaginal mucosa;
endometrium and urothelium in which a precursor to protoporphyrin IX, including
5-amino levulinic acid (ALA), is administered in an amount sufficient to induce
synthesis of protoporphyrin IX in the abnormality or lesion, followed by
exposure of the thus treated tissue to a photoactivating light, as described and
claimed in the applications for patent set forth in Exhibit A hereto.
1.8 "Method", as used herein, means any method, procedure, process or
other subject matter whose manufacture, use, or sale is covered by Queen's
Patent Rights or Improvements.
1.9 "Net Selling Price", as used herein, means gross invoice price less
the sum of the following deductions where applicable: cash discounts, trade or
quantity discounts, government mandated discounts such as Medicaid or Veterans
Administration rebates, sales, use tariff, import/export duties or other excise
taxes imposed upon particular sales; transportation charges and allowances or
credits to customers because of rejections or returns.
3
<PAGE> 4
1.10 "Non-drug Products", as used herein, means any product or component
other than pharmaceuticals whose manufacture, use or sale is covered by Queen's
Patent Rights or Improvements, and other than Drug Products (i.e., devices).
1.11 "Party" or "parties", as used herein, means PARTEQ and/or DUSA, as
the context requires, but shall not include Queen's or RMC.
1.12 "Products", as used herein, means Drug Products and Non-drug
Products.
1.13 "Queen's Patent Rights", as used herein, means the issued patents and
pending patent applications recited in Exhibit A, any continuing or divisional
applications thereof and any patents issuing on said applications or continuing
or divisional applications including reissues thereof.
1.14 "Tangible Research Materials", as used herein, shall mean all notes,
progress reports, computer files, laboratory notebooks, and test results capable
of being reduced to any permanent form, excluding the name of any patient who
has not waived confidentiality.
2. GRANT
2.1 Subject to the terms and conditions herein set out, PARTEQ hereby
grants to DUSA an exclusive, worldwide license under Queen's Patent Rights and
Improvements to make, have made, use and sell Products and Method.
2.2 PARTEQ hereby grants to DUSA the right to sublicense to any third
party or Affiliate any portion or all of the license rights granted by PARTEQ to
DUSA hereunder. In the event DUSA terminates this Agreement, all sublicenses to
Affiliates will automatically terminate and all sublicenses other than those to
Affiliates will revert directly to PARTEQ. DUSA agrees to be responsible for the
performance under any sublicense by its sublicensees and to promptly report to
PARTEQ the granting of any sublicenses.
2.3 PARTEQ expressly reserves:
4
<PAGE> 5
2.3.1 the non-exclusive right to permit Queen's the personal,
non-transferable and non-exclusive right to use the Invention
for educational and research purposes; the rights reserved
under this subsection 2.3.1 expressly exclude any rights for
commercial use of the Invention or to commercialize, including
by license or sale, the results of any such education and
research; and
2.3.2 the non-exclusive right to grant to Her Majesty, the Queen, in
right of Canada, as represented by the Minister of National
Defense (hereinafter referred to as "DND") an irrevocable,
royalty-free, non-exclusive license to use the Invention and
Improvements solely for defense purposes within DND, its
educational institutions and other establishments in Canada
and overseas, without the right to sublicense for any
commercial use; for the purpose of this subsection 2.3.2,
"defense purposes" does not include sales to any third party,
but does include DND procurement.
3. IMPROVEMENTS
3.1 PARTEQ shall promptly disclose to DUSA any patent applications,
Improvements and Tangible Research Materials related thereto which PARTEQ,
Queen's or RMC has discovered, developed or acquired or has had discovered,
developed or acquired on its behalf prior to the Execution Date which has not
been previously disclosed to DUSA. PARTEQ shall promptly disclose to DUSA any
Improvements and Tangible Research Materials related thereto which PARTEQ,
Queen's or RMC may discover, develop or acquire or may have discovered,
developed or acquired on its behalf from time to time during the term of this
Agreement. Improvements shall be included in the license hereunder for no
additional consideration.
3.2 Without limitation to any other provision of this Agreement, PARTEQ
agrees to use
5
<PAGE> 6
its best efforts to obtain and maintain the right to grant a license under any
invention, development or discovery, including any trade secret, relating to the
Invention and the development and commercialization of same discovered,
developed or acquired by or for Queen's or RMC.
4. COMPENSATION AND ROYALTIES
4.1 During the continuance, and in further consideration, of the rights
and licenses granted hereunder, DUSA agrees to pay to PARTEQ a fee of fifty
thousand Canadian dollars (CA$50,000.00), (or one hundred thousand Canadian
dollars (CA $100,000) if by the payment due date hereof DUSA has entered into a
sublicense agreement as defined in Section 4.5.2 below) within thirty (30) days
of the receipt by DUSA or sublicensee hereunder of approval from the United
States Food and Drug Administration to market Products in the United States of
America.
4.2 PARTEQ acknowledges that it has received from DUSA CA$150,000.00 and
that pursuant to Section 4.4 of the Original License, such fees shall be
deducted from any royalties payable pursuant to Sections 4.3 and 4.12 hereof;
provided, however, that the credit shall not exceed CA$75,000 in any year, and
further provided that the credit shall be taken only to the extent that
royalties payable under Section 4.3 exceed the minimum royalties specified in
Section 4.12 (e.g., to obtain a credit of CA$75,000 in year 1, royalties under
Section 4.3 would have to equal or exceed CA$125,000).
4.3 During the continuance, and in further consideration of the rights and
licenses granted hereunder, DUSA shall pay to PARTEQ royalties as follows:
4.3.1 In countries where Queen's Patent Rights are issued,
(a) six percent (6%) of sixty-six percent (66%) of the Net
Selling Price of DUSA or its Affiliates of Products when
first sold to non-Affiliates, other than Products sold
to sublicensees and other than Non-drug Products sold at
or below cost; and
6
<PAGE> 7
(b) six percent (6%) of the Net Selling Price less Cost of
Goods Sold charged by DUSA for Products sold to
sublicensees, other than Non-drug Products sold at or
below cost.
4.3.2 In countries where Queen's Patent Rights have not issued,
(a) four percent (4%) of sixty-six percent (66%) of the Net
Selling Price of DUSA or its Affiliates of Products
first sold to non-Affiliates, other than Products sold
to sublicensees and other than Non-drug Products sold at
or below cost; and
(b) four percent (4%) of the Net Selling Price less Cost of
Goods Sold charged by DUSA for Products sold to
sublicensees other than Non-drug Products sold at or
below cost.
4.3.3 Six percent (6%) of royalty payments received by DUSA from
sublicensees based upon such sublicensees (or their
Affiliates) sales of Drug Products.
4.4 Royalties under Section 4.3 hereof shall accrue, subject to Section
4.14 hereof, until no United States patent or United States patent application
included in Queen's Patent Rights subsists, whether by virtue of expiry,
invalidation or rejection, at which time the rights and licenses granted by
virtue of this Agreement shall become perpetual and royalty-free.
4.5 In the event DUSA grants a sublicense to an unrelated third-party of
the rights and licenses granted to DUSA hereunder, DUSA shall pay to PARTEQ:
4.5.1 five percent (5%) of lump sum sublicense fees paid for the
grant of any such sublicense (i.e., license fees) or right to
market Products; provided, however, no royalties shall be paid
to PARTEQ hereunder with respect to any consideration received
by DUSA which may be designated in the sublicense
7
<PAGE> 8
for future research and development efforts.
4.5.2 The amounts stated in 4.5.1 above shall become due to PARTEQ
as and when lump sum fees are received by DUSA; provided,
however, if the sublicense is granted to an unrelated
third-party for the field of use encompassing substantially
all dermatological indications for Products and for the
territory including both the United States and Europe on or
before March 31, 1998, DUSA shall pay to PARTEQ CA$200,000 on
that date, and if such sublicense agreement is executed on or
before the first anniversary of this Amended and Restated
License Agreement, DUSA shall pay to PARTEQ CA$500,000, in the
aggregate (e.g. an additional CA$300,000 if CA$200,000 has
been paid previously) on such first anniversary date. Further
provided, that if any such sublicense agreement(s) under this
Section 4.5.2 is (are) executed during the term of this
Amended and Restated License Agreement, then DUSA shall pay to
PARTEQ a minimum royalty equal to the difference between all
amounts paid under Section 4.5.1 and this Section 4.5.2, and
CA$1,100,000 (if any). Such minimum royalty shall be due and
payable, if at all, when DUSA has received all lump sum fees
to which it is entitled under any such sublicense agreement(s)
remaining in full force and effect which fees did not equal or
exceed CA$22,000,000 in the aggregate from any and all such
sublicense agreements.
4.6 If DUSA has not entered into a sublicense agreement as described in
Section 4.5.2 above on or before March 31, 1998, DUSA shall pay to PARTEQ a
minimum royalty of Canadian One Hundred Thousand Dollars (CA$100,000).
8
<PAGE> 9
4.7 If DUSA has not entered into a sublicense agreement as described in
Section 4.5.2 by the first anniversary date of this Amended and Restated License
Agreement, and if DUSA's balance sheet for the month ended prior to the first
anniversary date of this Amended and Restated License Agreement states that
"Cash and U.S. Government Securities" plus "Marketable Securities", if any,
exceed U.S. $15,000,000, then DUSA shall pay to PARTEQ an additional minimum
royalty payment of Canadian Two Hundred Thousand Dollars (CA$200,000) on such
first anniversary date.
4.8 All minimum royalties payable under Sections 4.6 and 4.7 shall be
credited in full against royalties payable under Section 4.5.2 above, which in
turn shall be credited in full against royalties payable under Section 4.5.1
above. In addition, if DUSA pays to PARTEQ CA$100,000 under Section 4.1 above,
then CA$50,000 of such CA$100,000 will be credited against royalties due under
Section 4.5.1 above, if and to the extent such royalties exceed CA$1,100,000
(i.e., the CA$50,000 will be credited in full if PARTEQ receives royalties of at
least CA$1,150,000 under Section 4.5.1) during the term of this Amended and
Restated License Agreement.
4.9 As further consideration for this Amended and Restated License
Agreement and subject to its execution hereof, DUSA confirms that it has granted
to PARTEQ options to purchase up to 85,000 shares of Common Stock of DUSA. Such
options shall have an exercise price of $10.875 per share. Options shall vest
over a period of four (4) years and shall have a term of ten (10) years from the
date of grant. Other terms and conditions, consistent with options previously
granted by DUSA shall apply.
4.10 DUSA shall be entitled to deduct from any fees and royalties payable
under this Article 4 any amounts required to be withheld from such fees and
royalties and remitted to any governmental or other taxing authority. Upon
request, DUSA shall provide to PARTEQ evidence of such withholding and remittal.
9
<PAGE> 10
4.11 Royalties under Sections 4.3.1 (a) and 4.3.2(a) hereof shall be paid
to PARTEQ within forty-five (45) days following the end of the calendar quarter
in which the Products were sold. Royalties under Sections 4.3.1(b), 4.3.2(b),
4.3.3, and 4.5.1 hereof shall be paid to PARTEQ within forty-five (45) days
following the end of the calendar quarter in which the royalties or sublicensing
fees were received by DUSA or its Affiliates.
4.12 DUSA shall pay to PARTEQ minimum annual royalties calculated under
Section 4.3 as follows, such minimums to commence when DUSA or an Affiliate or
sublicensee receives approval from the United States Food and Drug
Administration to market Products in the United States of America:
4.12.1 in the first calendar year during which such approval is
received, fifty thousand Canadian dollars (CA$50,000.00)
where such approval is received on January 1 or in the case
of a partial calendar year, that sum obtained by
multiplying the number of days contained in the partial
calendar year by fifty thousand Canadian dollars
(CA$50,000.00) and dividing by three hundred and sixty-five
(365); and
4.12.2 in succeeding calendar years, one hundred thousand Canadian
dollars (CA$100,000.00) or in the case of a partial
succeeding calendar year, that sum obtained by multiplying
the number of days contained in the partial calendar year
by one hundred thousand Canadian dollars (CA$100,000.00)
and dividing by three hundred and sixty-five (365).
In the event that royalties payable pursuant to Section 4.3 hereof for any given
calendar year or partial calendar year total less than the minimum royalties
specified in this Section 4.12 for such year, DUSA shall pay the difference
within forty-five (45) days following the end of such year or
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<PAGE> 11
partial year.
4.13 Fees and royalties due PARTEQ hereunder shall be paid in Canadian
funds collectible at par in Toronto, Ontario, Canada. For sales made and
royalties or sublicensing fees received by DUSA or an Affiliate in a currency
other than Canadian dollars, royalties on such sales and royalties on such
royalties or sublicensing fees shall be calculated in the currency of sale or
payment and converted into Canadian funds at the rate published by the Bank of
Canada on the last business day of the calendar quarter in which the sale is
made or the royalties or sublicensing fees are received. Any royalties or
sublicensing fees in kind received by DUSA or an Affiliate from sublicensees
shall be valued at fair market value.
4.14 Subject to Section 4.4 hereof, in the event that any patent or patent
application or any claim of either included within Queen's Patent Rights shall
be held invalid or rejected in a decision of a tribunal of competent
jurisdiction (including a patent examiner) and from which no appeal can be
taken, or if such appeal can be taken, no appeal has been taken, all obligations
to pay royalties pursuant to Section 4.3.1 hereof based on such patent or patent
application or claim or any claim patentably indistinct therefrom shall cease as
of the date specified in such decision. Furthermore, if any such patent action
occurs, or if a product which competes directly with a DUSA Product is
introduced into the marketplace, and such new product captures at least five
percent (5%) of the marketplace in the territory, then the parties agree to
renegotiate the royalties under Sections 4.3.2 and 4.3.3 hereof.
4.15 All payments to PARTEQ relating to goods and services subject to tax
under the Excise Tax Act (Canada) shall be increased by the amount of tax
payable. PARTEQ shall be responsible for remitting that tax to the Canadian
Government, and shall provide DUSA with receipts in a form suitable for DUSA to
claim an input tax credit under the Excise Tax Act (Canada).
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<PAGE> 12
5. DUE DILIGENCE
5.1 Subject always to the exercise of prudent and justifiable business and
medical judgment, DUSA, upon execution of this Agreement, shall diligently
proceed with the development of Products in order to achieve a first commercial
sale of such Products.
5.2 DUSA agrees to keep PARTEQ informed as to its progress in the
development and testing of all Products and preparing, filing, and obtaining of
the approvals necessary for marketing. Beginning January 1, 1998 and
semi-annually thereafter, DUSA shall submit to PARTEQ a progress report covering
DUSA's activities related to the development of Products and the securing of the
requisite approvals. These reports shall be made until the market introduction
of the first Product.
5.3 During the term of this Agreement, representatives of DUSA and PARTEQ
will meet at times and places mutually agreed upon not less than annually to
discuss progress and results and each party shall bear the expense of its own
representatives attending such meetings. Should DUSA request the attendance of
any representative of Queen's or RMC at any such meeting, DUSA shall reimburse
such representative for reasonable travel and lodging expenses.
5.4 At the request of either party, any controversy or claim arising out
of or relating to the diligence provisions of this Agreement shall be subject to
arbitration conducted in accordance with the then current Arbitration Act of
Ontario. Judgment upon the award rendered by the arbitrator(s) shall be binding
on the parties and may be entered by either party in the court or forum,
provincial or federal, having jurisdiction.
6. MAINTENANCE OF PROPERTY, TRADE SECRET AND KNOW-HOW RIGHTS
6.1 Each of PARTEQ and, except as is necessary for the commercialization
of Products, DUSA (the "receiving party") agrees to maintain as confidential all
information (including Tangible Research Materials) of the other party (the
"disclosing party") received by the receiving party from
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<PAGE> 13
the disclosing party. Except to DUSA, PARTEQ shall not disclose or permit to be
disclosed by Queen's or RMC any information relating to the Invention or
Improvements, except that which is disclosed in patents or published patent
applications and except that which is made the subject of the prior written
consent of DUSA, not to be unreasonably withheld after DUSA having been accorded
a ninety (90) day review period.
6.2 A receiving party shall not be prevented from disclosing to third
parties any information of a disclosing party:
6.2.1 which the receiving party can demonstrate by written records
was previously known to it;
6.2.2 which is now, or becomes in the future, publicly available
other than through acts or omissions of the receiving party;
or
6.2.3 which is lawfully obtained by the receiving party from sources
independent of the disclosing party.
6.3 PARTEQ agrees that it shall use its best efforts to procure and
maintain the prior agreement of each individual at Queen's and RMC who shall be
conducting or otherwise involved in research and development relating to
Improvements in the form attached as Exhibit B, mutatis mutandis.
Notwithstanding the immediately foregoing, PARTEQ shall procure and maintain the
prior agreement of each individual at Queen's and RMC who shall be conducting or
otherwise involved in research and development relating to Improvements funded
by DUSA-sourced funds in the form attached as Exhibit B, mutatis mutandis, and
shall cause Queen's and PARTEQ to preclude the conduct of or involvement in any
such research and development by or of any individual who declines to enter into
such agreement.
7. QUARTERLY REPORTS
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<PAGE> 14
7.1 After the first commercial sale of Products, DUSA shall provide PARTEQ
with written reports made no later than forty-five (45) days following the end
of each calendar quarter showing all sales of Products by DUSA and its
Affiliates and royalties or sublicensing fees received from sublicensees,
hereunder other than Affiliates during such preceding calendar quarter. If no
sales of Products have been made or royalties received during such calendar
quarter, a statement to this effect shall be required.
7.2 DUSA agrees to report to PARTEQ the date of first commercial sale of
Products in each country within thirty (30) days of its occurrence.
8. BOOKS AND RECORDS
8.1 DUSA shall keep books and records accurately showing all Products sold
under the terms of this Agreement by DUSA and its Affiliates and all royalties
received from sublicensees hereunder other than Affiliates. Such books and
records shall be open to inspection by representatives or agents of PARTEQ at
reasonable times for the purpose of verifying the accuracy of the quarterly
reports and the royalties due.
8.2 The fees and expenses of the representatives performing such an
examination shall be borne by PARTEQ, unless such examination reveals an error
of more than fifteen thousand Canadian dollars (CA$15,000.00) in the computation
of royalties due. In such case, the cost of such examination shall be borne by
DUSA.
8.3 The books and records required by paragraph 8.1 herein shall be
preserved for at least five (5) years from the date of the royalty payment to
which they pertain.
9. TERM AND TERMINATION
9.1 Subject to any termination pursuant to the terms hereof, this
Agreement shall remain in full force and effect until expiration of the last to
expire of the United States patents listed in
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Exhibit A.
9.2 DUSA has the right to terminate this Agreement with or without cause
at any time upon ninety (90) days' notice to PARTEQ.
9.3 If either party (the "defaulting party") should commit any breach of
this Agreement, the other party (the "non-defaulting party") shall be entitled
to terminate this Agreement upon ninety (90) days' notice to the defaulting
party particularizing the breach; provided however that, if the defaulting party
cures such breach within the ninety (90) day notice period, this Agreement shall
continue in full force and effect as if the notice from the non-defaulting party
had never been given.
9.4 No termination of this Agreement shall relieve either party of any
obligation or liability of such party accrued hereunder prior to such
termination nor affect the rights of either party arising under this Agreement
prior to such termination.
10. PATENT PROSECUTION AND MAINTENANCE
10.1 PARTEQ shall diligently prosecute and maintain Queen's Patent Rights
and shall diligently make, prosecute and maintain such patent applications and
patents in such jurisdictions for such Improvements as are agreed upon by DUSA
and PARTEQ using counsel of PARTEQ's choice and after due consultation with
DUSA. PARTEQ shall provide DUSA with copies of all relevant documentation so
that DUSA may be informed and apprised of and meaningfully consulted as to the
continuing prosecution. In the event that DUSA does not agree that any given
patent application or patent should be made, prosecuted or maintained
(hereinafter referred to as a "PARTEQ patent"), PARTEQ shall have the right
unilaterally to make, prosecute and maintain such PARTEQ patent, and same shall
be deemed licensed hereunder for no additional consideration.
10.2 PARTEQ shall use its best efforts to amend any patent application to
include claims
15
<PAGE> 16
reasonably requested by DUSA and required to protect the Products contemplated
to be sold under this Agreement.
10.3 PARTEQ agrees to advance all costs and legal fees incurred for the
prosecution, maintenance and taxes for all patent applications referred to in
Section 10.1 and patents issuing therefrom. Subject to the said counsel of
PARTEQ's choice giving reasonably accurate advance quotes of out-of-pocket
expenses for prosecution, maintenance and taxes for all patent applications
referred to in Section 10.1 and patents issuing therefrom, all reasonable
out-of-pocket expenses incurred after the Execution Date for such prosecution,
maintenance and taxes shall be promptly reimbursed to PARTEQ by DUSA, except for
those expenses relating to PARTEQ patents, which shall be borne by PARTEQ.
11. USE OF NAMES, TRADE NAMES, AND TRADEMARKS
11.1 Except as required by law, no party shall have any right to use in
advertising, publicity, or other promotional activities any name, trade name,
trademark, or other designation of the other party (including any contraction,
abbreviation or simulation of any of the foregoing), without the prior written
consent of such other party.
12. WARRANTY BY PARTEQ
12.1 PARTEQ hereby warrants:
12.1.1 that it has the right to grant the rights and licenses
granted hereunder;
12.1.2 that each of James C. Kennedy and Robert L. Reid have, on
or prior to the Execution Date, executed agreements to
assign all Improvements to PARTEQ in the form attached as
Exhibits B and C hereto and that such agreements will be
maintained for as long as each of James C. Kennedy and
Robert L. Reid are conducting or
16
<PAGE> 17
otherwise involved in research and development relating to
Improvements and remain on the faculty of Queen's.
12.1.3 that it is not aware of any present challenge to the
validity of the Queen's Patent Rights in any governmental
proceeding or in any pending or threatened lawsuit.
Further, PARTEQ has no knowledge or reason to know of any
inquiry, claim or threat of infringement or unfair trade
practices of any third party patents, which threaten the
validity of any rights granted to DUSA under this
Agreement.
13. INDEMNITY
13.1 DUSA covenants and agrees to indemnify and save PARTEQ, Queen's and
RMC harmless from and against all actions, claims, damages, lawsuits, losses,
costs or expenses which any of same may sustain, incur, or be liable for by
reason of DUSA's omission, negligence, or wrongful act in the use of the
Invention or any Improvement or in the development, exploitation, or marketing
of the Products or Method.
13.2 Subject to Section 13.3, PARTEQ covenants and agrees to indemnify and
save DUSA harmless from and against all actions, claims, damages, lawsuits,
losses, costs or expenses (other than any action, claim, damage, lawsuit, loss,
cost or expense referred to in Section 13.1 hereof) which DUSA may sustain,
incur or be liable for by reason of DUSA's use of the Invention or any
Improvement or DUSA's development, exploitation or marketing of the Products or
Process and by reason of any breach of representation or warranty made hereunder
by PARTEQ.
13.3 In the event that DUSA, acting reasonably, decides to acquire third
party rights which otherwise constitute a potential infringement threat, or is
required to defend against any assertion by any third party of infringement,
DUSA shall be entitled to deduct fifty percent (50%) of all costs
17
<PAGE> 18
and expenses of such acquisition or defense from royalties payable pursuant to
Sections 4.3, 4.5 and 4.12 hereof as follows:
13.3.1 in respect of any such costs and expenses arising prior to
the commencement of royalty payments under Section 4.3 in
respect of sales following health regulatory approval in
the United States, such fifty percent (50%) of costs and
expenses shall be deducted from all royalties payable
pursuant to Sections 4.3, 4.5 and 4.12 hereof; and
13.3.2 in respect of any such costs and expenses arising after the
commencement of royalty payments under Section 4.3 in
respect of sales following health regulatory approval in
the United States, such fifty percent (50%) of costs and
expenses shall be deducted from fifty percent (50%) of
royalties payable pursuant to Sections 4.3, 4.5 and 4.12
hereof.
13.4 Notwithstanding Section 13.3 hereof, in the event that DUSA makes an
acquisition pursuant to Section 13.3 hereof having a total cost in excess of one
hundred thousand Canadian dollars (CA$100,000.00), DUSA shall be entitled to
deduct from royalties payable only the sum of fifty thousand Canadian dollars
(CA$50,000.00) in respect of acquisition.
14. INFRINGEMENT
14.1 DUSA shall consult with PARTEQ in respect of, but shall have ultimate
and sole control over, all litigation or threatened or anticipated litigation
(including any settlement thereof) arising out of DUSA's performance under this
Agreement including that relating to infringement of third party rights and
infringement by third parties. PARTEQ agrees to cooperate with DUSA in the
prosecution of any such litigation or threatened or anticipated litigation
including any preparations
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<PAGE> 19
therefor and settlement negotiations in respect thereof.
14.2 In the event that PARTEQ learns of the infringement of Queen's Patent
Rights or of any patent rights relating to Improvements or of any confidential
information referred to in Section 6 hereof (hereinafter referred to as
"intellectual property infringement by a third party"), PARTEQ shall immediately
notify DUSA and shall provide DUSA with any evidence of intellectual property
infringement by a third party which PARTEQ may have.
14.3 PARTEQ shall not commence any action or enter into any settlement
negotiation in respect of intellectual property infringement by a third party.
At the request of DUSA, PARTEQ agrees to be joined as a party plaintiff in any
litigation relating to intellectual property infringement by a third party and
PARTEQ shall be represented by counsel of DUSA's choosing.
14.4 The expenses of any litigation or settlement negotiations in respect
of intellectual property infringement by a third party shall be borne by DUSA
and all recovery pursuant thereto shall be for the account of DUSA.
15. WAIVER
15.1 It is agreed that no waiver by either party hereto of any breach or
default of any of the covenants or agreements herein set forth shall be deemed a
waiver as to any subsequent and/or similar breach or default.
16. ASSIGNABILITY
16.1 This Agreement is binding upon and shall inure to the benefit of both
parties and their successors and assigns. DUSA may assign this Agreement to any
Affiliate or, with the written consent of PARTEQ, to any third party, which
consent shall not be unreasonably withheld.
17. FORCE MAJEURE
17.1 In the event of acts of God, action of the elements, war, invasions,
civil commotion, insurrection, labor disturbance, fire, flood, restrictions in
availability of materials or government
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restriction, which render performance under this Agreement impossible, failure
on that account during each period shall be excused; and any minimum royalty
called for shall not be required during each period or periods of inability to
perform.
18. LATE PAYMENTS
18.1 In the event royalty payments or fees are not paid by DUSA when due,
DUSA shall pay to PARTEQ interest charges at the rate of two percent (2%) over
the Bank of Canada rate as set on the day the fees are due per annum on the
unpaid royalties or fees due for the reporting period.
19. NOTICES
19.1 Any payment, notice or other communication required or permitted to
be given to either party hereto, other than routine quarterly reports and
payments, shall be given in writing and shall be effective on the date of
delivery if delivered in person or by registered mail, return receipt requested,
to the respective addresses given below, or to such other address as shall be
designated by notice hereunder:
In the case of DUSA: DUSA Pharmaceuticals, Inc.
181 University Avenue
Suite 1208
Toronto, Ontario M5H 3M7
CANADA
with a copy to:
Nanette W. Mantell, Esq.
LANE and MANTELL
991 Route 22 West, Suite 102
P.O. Box 8539
Somerville, NJ 08876 USA
In the case of PARTEQ: Office of Patents & Licensing
PARTEQ Innovations
Queen's University
Kingston, Ontario
K7L 3N6
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20. FOREIGN LICENSE REGISTRATION
20.1 DUSA agrees to register this Agreement when required by local
national law, to pay all costs and legal fees connected therewith, and to
otherwise insure that the local national laws, regulations and/or ordinances
affecting this Agreement are fully satisfied.
21. GOVERNING LAWS
21.1 This Agreement shall be interpreted and construed in accordance with
the laws of the Province of Ontario and the laws of Canada applicable therein.
22. MISCELLANEOUS
22.1 The headings of sections herein are inserted for convenience of
reference only and are not intended to be a part of or to affect the meaning or
interpretation of this Agreement.
22.2 This Agreement will not be binding upon the parties until it has been
signed hereinbelow by or on behalf of each party, in which event, it shall be
effective as of and from the Execution Date.
22.3 No amendment or modification hereof shall be valid or binding upon
the parties unless made in writing and signed as aforesaid.
22.4 This Agreement embodies the entire understanding of the parties and
shall supersede all previous communications, representations or understandings,
either oral or written, between the parties relating to the subject matter
hereof including the Original License.
22.5 In case any one or more of the provisions contained in this Agreement
shall for any reason be held to be invalid, illegal or unenforceable in any
respect, such invalidity, illegality or unenforceability shall not affect any
other provision hereof, but this Agreement shall be construed as if such invalid
or illegal or unenforceable provisions had never been contained herein.
23. PUBLICITY
23.1 Except as required by law, neither party shall make public the
details or existence of
21
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this Agreement without the prior consent of the other party.
24. RELEASE OF GUARANTEE
24.1 PARTEQ hereby releases and discharges Draxis Health, Inc. from
Draxis' obligation under the Original License to unconditionally and irrevocably
guarantee the obligations of DUSA pursuant to the Original License. PARTEQ and
DUSA agree to notify Draxis of the release stated herein. Furthermore, they
agree to enter a revised ALA Assignment Agreement with Draxis so that the
assignment of rights previously granted to Draxis under the Original License
will be made consistent with the terms of this Amended and Restated License
Agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement, in
triplicate originals, by their respective officers duly authorized.
PARTEQ RESEARCH AND
DEVELOPMENT INNOVATIONS
By: /s/ John P. Molloy
----------------------------------------
John P. Molloy
Executive Director
DUSA PHARMACEUTICALS, INC.
By: /s/ D. Geoffrey Shulman
----------------------------------------
D. Geoffrey Shulman, MD, FRCPC
President and Chief Executive Officer
PARTEQ
By: /s/ Suzanne Fortier
----------------------------------------
Suzanne Fortier
Chair of the Board of Directors
22
<PAGE> 23
EXHIBIT A
Queen's University Patents and Patent Applications
Methods of Diagnosis and/or Treatment Using Photodynamic Therapy Compositions
for Detection or Treatment.
Issued Patents
<TABLE>
<CAPTION>
Country Patent No. Filing Date Issue Date
<S> <C> <C> <C>
U.S.A. 5,079,262 07/28/89 01/07/92
U.S.A. 5,211,938 10/28/91 05/18/93
U.S.A. 5,234,940 04/08/92 08/10/93
U.S.A. 5,422,093 06/28/93 06/06/95
Australia 624985 07/25/90 10/19/92
Australia 674310 04/02/93 04/09/97
New Zealand 251284 04/02/93 11/10/97
</TABLE>
Pending Applications
[c.i.]
23
<PAGE> 24
EXHIBIT B
UNDERTAKING
I, James C. Kennedy of 299 Glen Cairn Terrace, Kingston, Ontario K7M 4A6, being
a named inventor in Applications for Letters Patent of the United States of
America Serial Numbers _________ and ______________ and assigned to Queen's
University at Kingston, for good and valuable consideration the receipt and
sufficiency whereof is hereby acknowledged, do hereby undertake to assign all
and any improvements, continuations, continuations-in-part, divisions and
reissues pertaining thereto for all countries of the world to Queen's University
at Kingston, and to sign all such documents as may be reasonably required by
Queen's University to perfect its title thereto, at any time while I am a member
of faculty at Queen's University, or thereafter, provided that any such
improvement shall have been made while I am a member of the faculty of Queen's
University.
Signed this ____ day of __________, 1998, at Kingston, Ontario.
_______________________________
James C. Kennedy
In the presence of _______________, whose post office address is _______________
___________________.
Witness
24
<PAGE> 25
EXHIBIT C
UNDERTAKING
I, Robert L. Reid of 5 Concord Drive, R.R. #1, Kingston, Ontario K7L 4Y1, being
a named inventor in Application for Letters Patent of the United States of
America Serial Number _____________ and assigned to Queen's University at
Kingston, for good and valuable consideration the receipt and sufficiency
whereof is hereby acknowledged, do hereby undertake to assign all and any
improvements, continuations, continuations-in-part, divisions and reissues
pertaining thereto for all countries of the world to Queen's University at
Kingston, and to sign all such documents as may be reasonably required by
Queen's University to perfect its title thereto, at any time while I am a member
of faculty at Queen's University, or thereafter, provided that any such
improvement shall have been made while I am a member of the faculty of Queen's
University.
Signed this ___day of _________, 1998, at Kingston, Ontario.
_________________________
Robert L. Reid
In the presence of ___________________, whose post office address is ___________
___________________.
__________________________
Witness
25
<PAGE> 26
EXHIBIT D
UNDERTAKING
I, ______________, of ______________________________________, being a named
inventor in Applications for Letters Patent of the United States of America
Serial Numbers _____________ and _________________ and assigned to Queen's
University at Kingston, for good and valuable consideration the receipt and
sufficiency whereof is hereby acknowledged, do hereby undertake to assign all
and any improvements, continuations, continuations-in-part, divisions and
reissues pertaining thereto for all countries of the world to Queen's University
at Kingston, and to sign all such documents as may be reasonably required by
Queen's University to perfect its title thereto, at any time while I am a member
of faculty at Queen's University, or thereafter, provided that any such
improvement shall have been made while I am a member of the faculty of Queen's
University.
Signed this ____ day of __________, 1998, at Kingston, Ontario.
_______________________________
In the presence of _______________, whose post office address is _______________
___________________.
__________________________
Witness
26
<PAGE> 1
Execution Copy
PURCHASE AND SUPPLY AGREEMENT
This Purchase and Supply Agreement (the "Agreement"), effective as of 5
November 1998 (the "Effective Date"), is made by and between DUSA
Pharmaceuticals, Inc., a New Jersey corporation, having executive offices at 181
University Avenue, Suite 1208, Toronto, Ontario M5H 3M7, Canada ("DUSA"), and
National Biological Corporation, an Ohio corporation having offices at 1532
Enterprise Parkway, Twinsburg, OH 44087 ("NBC").
BACKGROUND
A. DUSA and NBC entered into a certain Co-Development Agreement on June 2,
1995, as amended of even date herewith (the "Co-Development Agreement") pursuant
to which the parties developed a certain [c.i.]Light Source (as defined below)
useful in photodynamic therapy.
B. DUSA desires to secure supply of the Light Sources as part of the
commercialization of its Levulan(R) products.
C. NBC has the capability and know-how necessary to supply the Light
Sources, all as set forth herein below.
NOW THEREFORE, for and in consideration of the covenants, conditions, and
undertakings hereinafter set forth, it is agreed by and between the parties as
follows:
ARTICLE 1
DEFINITIONS
1.1 "Approval" shall have the meaning as set forth in Section 7.1 below.
1.2 "Blu-U(R) Trademark" shall mean the "Blu-U" trademark that DUSA has
registered in connection with the Light Sources, or such other trademark that
DUSA registers for use with the Light Sources in jurisdictions in which "Blu-U"
is not selected by DUSA for use.
1.3 "Confidential Information" shall have the meaning as set forth in
Section 11.1 below.
1.4 "Control" shall mean possession by a party hereto of the ability to
grant a license or sublicense to particular subject matter as provided for
herein without violating the terms of any in-license agreement or similar
arrangements with any third party under which such subject matter was acquired
by such party to this Agreement.
1
<PAGE> 2
1.5 "DUSA Technology" shall mean DUSA Patents and DUSA Technical
Information.
1.5.1 "DUSA Technical Information" shall mean [c.i.], including, but
not limited to: [c.i.]; in each case that is possessed by DUSA as of the
Effective Date or [c.i.] during the term of this Agreement, to the extent such
relates to the [c.i.] of the Light Sources and to the extent that DUSA owns or
Controls the same.
1.5.2 "DUSA Patents" shall mean all patents and all reissues,
renewals, re-examinations and extensions thereof, and patent applications
therefor, and any divisions or continuations, in whole or in part, thereof,
which claim the [c.i.] and that are owned or Controlled by DUSA during the term
of this Agreement.
1.6 "FDA" shall mean the United States Food and Drug Administration.
1.7 "Field" shall mean the [c.i.] of medical disorders by light [c.i.]and
includes [c.i.] and the Light Source or [c.i.].
1.8 "Force Majeure Event" shall have the meaning as set forth in Section
14.3 below.
1.9 "HPB" shall mean the Canadian Health Protection Branch.
1.10 "Light Source" shall mean the light sources meeting the
Specifications together with the Stand.
1.11 "NBC Technology" shall mean NBC Patents and NBC Technical
Information.
1.11.1 "NBC Technical Information" shall mean [c.i.], including, but
not limited to: [c.i.]; in each case that is possessed by NBC as of the
Effective Date or [c.i.] during the term of this Agreement, to the extent such
relates to the [c.i.] of the Light Sources and to the extent that NBC owns or
Controls the same.
1.11.2 "NBC Patents" shall mean all patents and all reissues,
renewals, re-examinations and extensions thereof, and patent applications
therefor, and any divisions or continuations, in whole or in part, thereof,
which claim [c.i.] and that are owned or Controlled by NBC during the term of
this Agreement.
1.12 "Output Regulating Circuitry System" shall mean, collectively and
individually, the [c.i.] of a Light Source.
1.13 "Plastic Housing" shall mean that portion of the outer plastic
covering of the Light Source designed by DUSA.
1.14 "QS" shall mean current Quality Systems regulations, policies and
guidance documents promulgated by the FDA for the design, manufacture,
processing or packaging of medical devices, and corresponding regulatory
standards required by other regulatory agencies in the Territory. QS shall also
include those Quality Systems requirements specified by DUSA in the
Specifications.
1.15 "Specifications" shall mean the specifications set forth in Exhibit
A, as may be modified
2
<PAGE> 3
in accordance with Section 3.6 below.
1.16 "Stand" shall mean the stand for the Light Source meeting the
then-current specifications therefor, which specifications are agreed to and
updated by the parties hereto.
1.17 "Territory" shall mean [c.i.].
ARTICLE 2
SUPPLY
2.1 Light Source Supply. Subject to the terms and conditions of this
Agreement, NBC shall supply to DUSA quantities of the Light Source ordered by
DUSA from time to time during the term of this Agreement. Subject to Sections
5.2.2 and 6.2 below, DUSA agrees to order [c.i.] of Light Sources for the Field
for the Territory from NBC. The parties recognize and acknowledge that DUSA's
business may be dependent on the supply of Light Sources to DUSA by NBC as
specified hereunder.
2.2 Forecasts. During the term of this Agreement, [c.i.] prior to the
start of each calendar half year ("H1"), DUSA shall provide NBC with a rolling
written forecast of the quantities of Light Sources estimated to be required
during H1 and the following calendar half year ("H2").
2.3 Orders.
2.3.1 Orders. Together with each forecast provided under Section 2.2
above (the "Current Forecast"), DUSA shall place a firm order with NBC for
delivery in H1 of the quantity of Light Sources equal to the quantity of Light
Sources reflected for H1 in the Current Forecast. For avoidance of doubt, it is
understood that DUSA may order additional quantities of Light Sources for
delivery hereunder in accordance with the lead times therefor. NBC shall accept
such orders from DUSA, subject to the remaining terms and conditions of this
Agreement.
2.3.2 Form of Orders. DUSA's orders shall be made pursuant to a
written purchase order which is in the form attached hereto as Exhibit B, and
shall provide for shipment in accordance with reasonable delivery schedules and
lead times as may be agreed upon from time to time by NBC and DUSA; provided
that the maximum lead time shall not exceed [c.i.] unless otherwise mutually
agreed. ANY ADDITIONAL OR INCONSISTENT TERMS OR CONDITIONS OF ANY PURCHASE
ORDER, ACKNOWLEDGMENT OR SIMILAR STANDARDIZED FORM GIVEN OR RECEIVED PURSUANT TO
THIS AGREEMENT SHALL HAVE NO EFFECT AND SUCH TERMS AND CONDITIONS ARE HEREBY
EXCLUDED.
2.3.3 Delays. DUSA shall be entitled to reschedule deliveries of
Light Sources ordered hereunder, provided that DUSA notifies NBC of such desired
changes, in writing, [c.i.] prior to the scheduled delivery date. Without
limiting the foregoing, if such delay is greater than [c.i.], NBC may [c.i.]
DUSA for the Light Sources so delayed and DUSA will [c.i.] to such Light Sources
[c.i.]; in which case NBC agrees to: (i) maintain a written record identifying
such Light Sources [c.i.], (ii) maintain such Light Sources in good condition
[c.i.], and (iii) [c.i.]. Furthermore, if such rescheduling represents a delay
in shipment of more than [c.i.] from the original delivery date, DUSA shall
[c.i.]on such delayed Light Sources during such extended period and [c.i.]. For
avoidance of doubt, the preceding provisions of this Section 2.3.3 shall not in
anyway limit DUSA's rights of inspection and rejection set forth in
3
<PAGE> 4
Section 3.3 below.
2.3.4 Inventory. Without limiting the provisions of this Section 2.3
above, it is understood that in order to accommodate DUSA's requirements of
Light Sources hereunder, DUSA may request that NBC maintain in its inventory
Light Source units ordered by DUSA under Sections 2.3.1 above. In such case,
upon placement of a particular Light Source unit in inventory NBC may [c.i.] in
accordance with [c.i.] on the later of (a)the date which such Light Source unit
are requested to be placed in inventory and (b) the actual date such Light
Source units are included in DUSA's (or its designee's) inventory and DUSA will
[c.i.]; further NBC agrees to: (i) maintain a written record identifying such
Light Sources as [c.i.], (ii) maintain such Light Sources in good condition
[c.i.], and (iii) [c.i.]. In the event that a particular Light Source unit is
held in inventory in excess of [c.i.], DUSA shall [c.i.] on such delayed Light
Sources during such period and [c.i.]. For avoidance of doubt, the preceding
provisions of this Section 2.3.4 shall not in anyway limit DUSA's rights of
inspection and rejection set forth in Section 3.3 below.
2.4 Price. The price to be paid by DUSA per Light Source unit ordered by
DUSA shall be [c.i.] (the "Price"); the Price [c.i.] shall be [c.i.] and [c.i.]
promptly upon [c.i.] of Light Sources in accordance with the prices set forth on
Exhibit C hereto. After which the Price [c.i.] so established shall be
substituted for Exhibit C. Notwithstanding the foregoing, [c.i.] of the
Effective Date, the Prices set forth on Exhibit C shall be [c.i.] shall [c.i.]
in the then current Price for Light Sources hereunder. Such [c.i.] Price shall
be effective for orders placed in accordance with Section 2.3 above after the
Price [c.i.] becomes effective.
2.5 Packaging. Light Sources shall be shipped packaged in containers in
accordance with the Packaging Specifications established under Section 9.1 below
or as otherwise agreed by the parties hereto in writing. Each such container
shall be individually labeled with a description of its contents, including the
manufacturer name, manufacturer lot number, quantity of Light Sources, and date
of manufacture.
2.6 Delivery. NBC shall deliver quantities of Light Sources ordered by
DUSA on the dates specified in DUSA's purchase orders submitted in accordance
with Section 2.3 above. All Light Sources shall be delivered [c.i.] to the
location specified by DUSA prior to the shipping date therefor. The carrier
shall be selected by agreement between DUSA and NBC, provided that in the event
no such agreement is reached DUSA shall select the carrier. Each shipment shall
be insured for the benefit of DUSA. All [c.i.], as well as any [c.i.], shall be
[c.i.].
2.7 Invoicing; Payment. Unless [c.i.] as set forth in [c.i.], NBC shall
submit an invoice to DUSA [c.i.] of Light Sources ordered by DUSA hereunder. All
invoices shall be sent to the address specified in the purchase order or as
otherwise instructed by DUSA in writing, and each such invoice shall state the
[c.i.] Price for Light Sources in a given shipment, [c.i.] to the purchase or
shipment initially [c.i.]. All payments hereunder shall be made in U.S. dollars,
by [c.i.] designated in NBC's invoice. Payment shall be due to NBC within [c.i.]
from the date of an invoice issued hereunder; provided that payment made within
[c.i.] of the foregoing shall be subject to a [c.i.] percent [c.i.] discount.
Notwithstanding the foregoing, NBC shall invoice [c.i.] separately on a [c.i.]
and DUSA agrees to remit payment therefor within [c.i.]. In addition, such
[c.i.] shall not be subject to the [c.i.] percent [c.i.] discount. [c.i.].
4
<PAGE> 5
ARTICLE 3
QUALITY
3.1 Quality. All Light Sources supplied by NBC shall materially conform
with the current Specifications therefor and shall be manufactured in accordance
with all applicable QS manufacturing and record keeping procedures and Approvals
for the Light Sources in the Territory at NBC's plant located at 1532 Enterprise
Parkway, Twinsburg, Ohio 44087 (the "Facility"). Notwithstanding anything herein
to the contrary and for the avoidance of doubt, all Specifications shall be
deemed to be material.
3.2 Quality Control. Prior to each shipment of Light Sources, NBC shall
perform quality control procedures and inspections to verify that the Light
Sources to be shipped conform materially with the Specifications. Each shipment
of Light Sources shall be accompanied by a certificate of conformance describing
all current requirements of the Specifications, results of test performed
certifying that the Light Sources supplied have been manufactured, controlled
and released according to the Specifications and all relevant QS requirements at
the Facility stipulated under Section 3.1 above. Without limiting the foregoing,
if NBC's performance of the inspection and applicable testing procedures
described in Exhibit D requires [c.i.], then DUSA agrees to either (i) [c.i.] or
(ii) [c.i.]; provided that in either such case the following shall apply: NBC
shall hold such equipment at NBC's risk and shall replace the same if they are
lost, damaged or destroyed. NBC shall maintain such equipment in good condition
(subject to normal wear and tear); and such equipment shall be subject to [c.i.]
DUSA upon expiration or termination of this Agreement. Accordingly, NBC agrees
to cooperate with DUSA in the [c.i.] relating to such equipment as DUSA may deem
necessary or useful. In addition, NBC shall use such equipment solely for the
testing and inspection of Light Sources hereunder, unless otherwise agreed by
DUSA.
3.3 Acceptance.
3.3.1 General. Acceptance by DUSA of Light Sources delivered by NBC
hereunder shall be subject to inspection and applicable testing as generally
described in Exhibit D by DUSA or its designee. The parties hereto acknowledge
that the testing procedures set forth on Exhibit D as of the Effective Date
represent the procedures in effect for clinical prototype Light Sources and that
these procedures will most likely require modifications for commercial
requirements as mutually established by the parties. If on such inspection DUSA
or its designee discovers that any Light Source shipped hereunder fails to
materially conform with the Specifications or otherwise fails to materially
conform to the warranties given by NBC in Section 8.1 below, DUSA or such
designee may reject such Light Sources, which rejection shall be accomplished by
giving written notice to NBC specifying the manner in which such Light Sources
fails to meet the foregoing requirements and request a Return Material
Authorization ("RMA") from NBC. DUSA or its designee shall return the
nonconforming Light Source in accordance with NBC's reasonable instructions with
the RMA attached [c.i.]. Upon receipt of the nonconforming Light Source NBC
shall promptly [c.i.] for such Light Source. NBC shall use its best efforts to
replace the Light Sources returned by DUSA within the shortest possible time.
The replacement of nonconforming Light Sources shall have priority over the
supply of Light Sources ordered for shipment under Section 2.3 within the [c.i.]
period prior to the return or any time after the return of the nonconforming
Light Sources to NBC. The warranties given by NBC in Section 8.1 below shall
survive any failure to reject by DUSA under this Section 3.3.
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3.3.2 Settlement of Claims. In case of a disagreement between the
parties regarding whether a particular Light Source unit materially complies
with the Specifications, the claim shall be [c.i.] or [c.i.] mutually agreed
upon by the parties [c.i.], the appointment of which shall not be unreasonably
withheld or delayed by either party. The determination of [c.i.] with respect to
such dispute shall be final and binding upon the parties. The parties and [c.i.]
shall use their best efforts to [c.i.] as set forth above. The fees and expenses
of [c.i.] shall be paid by the party against which the determination is made.
3.4 Latent Defects. It is recognized that it is possible for a Light
Source to have defects which are not be discovered upon reasonable physical
inspection or testing ("Latent Defects"). As soon as either party becomes aware
of a Latent Defect in any Light Source it shall immediately notify the other
party as to the serial number(s) of the Light Source(s) involved, which at
DUSA's election, shall be deemed rejected as of the date of such notice. NBC
agrees to [c.i.] all Light Sources so involved [c.i.]. For purposes of this
Section 3.4, "defect" shall mean that a Light Source fails to conform to the
warranties given by NBC herein; however, "defect" for purposes of the foregoing,
shall [c.i.].
3.5 Presence At Facility. Upon [c.i.] given by DUSA to NBC, DUSA shall
have the right to assign a reasonable number of employees or consultants of DUSA
to inspect and audit the Facility at which Light Sources are manufactured in
order to verify NBC's compliance with QS and other agreed requirements,
provided, however that (i) such employees or consultants shall not unreasonably
interfere with other activities being carried out at the Facility, (ii) that
such employees or consultants shall observe all rules and regulations applicable
to visitors and to individuals employed at the Facility, and (iii) such
employees or consultants agree to maintain the Confidential Information of NBC
in accordance with Article 11 below.
3.6 Changes. DUSA shall have the right to modify the Specifications from
time to time. All such modifications shall be in writing and shall be signed by
an authorized representative of DUSA and NBC, and shall be effective for orders
of applicable units placed after such notice. If such modifications result in a
material change [c.i.] as shown by [c.i.], the parties shall agree upon [c.i.]
of the Light Sources hereunder; and if such modifications result in a delay in
delivery, the parties shall negotiate a reasonable extension of the affected
lead times.
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ARTICLE 4
SUPPLY OUTSIDE THE TERRITORY
From time to time as DUSA desires to secure supply of Light Sources for
sale in area(s) outside of the Territory (collectively, the "New Area(s)"), DUSA
agrees to provide notice to NBC regarding the possibility of NBC providing some
or all of such supply ("Notice"). Within [c.i.] after receiving the Notice, NBC
shall notify DUSA whether or not NBC so desires to discuss the possibility of
supplying DUSA such Light Sources for any particular New Area(s) designated by
DUSA in the Notice. If NBC desires, the parties shall negotiate in good faith
for a period of [c.i.] the terms and conditions pursuant to which NBC would
supply Light Sources to DUSA for sale for the New Area(s) so designated outside
of the Territory. If NBC does not desire to provide such supply or the parties
are unable to agree on the terms and conditions of such supply, after such
[c.i.] period DUSA shall be free to secure one or more alternate sources for its
requirements of Light Sources for such New Area(s) outside the Territory
(including manufacturing such Light Sources itself), without any further
obligation to NBC with respect to such New Area(s) so designated.
ARTICLE 5
LICENSES
5.1 To NBC. DUSA hereby grants to NBC a license under the DUSA Technology
to manufacture the Light Sources ordered by DUSA hereunder and deliver such
Light Sources to DUSA or its designee as specified in this Agreement. The
foregoing license shall be [c.i.] with the prior written consent of DUSA.
5.2 To DUSA.
5.2.1 General. NBC hereby grants to DUSA a worldwide license under
the NBC Technology to import, use, sell, have sold and otherwise dispose of
Light Sources for purposes of the Field. The foregoing license and other
licenses under this Section 5.2 shall be [c.i.] in accordance with Section 14.5
below.
5.2.2 Manufacturing License. NBC hereby grants to DUSA, and DUSA
hereby accepts a license (the "Manufacturing License") under the NBC Technology
necessary to make, have made, use. sell, have sold and otherwise dispose of
Light Sources for use in applications within the Field. DUSA agrees not to
exercise any of its rights under the Manufacturing License, except as expressly
permitted in this Section 5.2.2 below. In any such event, NBC shall provide to
DUSA or its designee copies of all documentation within NBC's control that is
reasonably necessary for DUSA to exercise the Manufacturing License, and shall
reasonably cooperate with DUSA to establish supply of Light Sources, including
sources of components and other materials. In the event that DUSA has Light
Sources manufactured by a third party, DUSA shall obtain from such third party a
written confidentiality agreement to protect against the unauthorized use and
disclosure of NBC's Confidential Information.
5.2.2.1 Failure to Supply. If for any [c.i.] NBC fails to
supply quantities of Light Sources [c.i.] ordered in accordance with Section 2.3
above, then DUSA may manufacture or have manufactured Light Sources for sale or
other distribution in the Territory for use in applications within the Field
pursuant to the Manufacturing License. Without limiting the foregoing, if [c.i.]
or more of the [c.i.] units of Light Source delivered hereunder or [c.i.] or
more of the Light Sources supplied in [c.i.]
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during any [c.i.] period fail to conform to Specifications, the same shall be
deemed a failure to supply for purposes of this Section 5.2.2.1; provided,
however, where it can be shown that a particular Light Source failure to conform
is a result of damage during shipping rather than a failure to manufacture in
Specification, then such Light Source shall not be deemed to fail to conform to
Specifications for purposes of the foregoing and therefore shall not be
considered a failure to supply under this Section 5.2.2.1. Notwithstanding
anything in this Agreement to the contrary, if NBC's failure to supply hereunder
is as a result of a Force Majeure Event then DUSA's right to manufacture Light
Sources under this Section 5.2.2.1 shall continue until such time as NBC
provides DUSA with [c.i.] written notice of NBC's desire to resume manufacturing
and reasonably demonstrates to DUSA that it is able to adequately supply DUSA's
requirements of Light Sources and there after until (i) to the extent DUSA
contracts with a third party to supply Light Sources, for the remaining
noncancellable period of such contract, or (ii) to the extent DUSA manufactures
Light Sources itself, for a period of [c.i.] after DUSA commenced manufacturing
of such Light Sources, and thereafter, at such time as NBC [c.i.], unless DUSA
is able to redeploy such manufacturing capacity, in which event NBC shall
[c.i.], and (B) DUSA's [c.i.]. For purposes of the foregoing, DUSA's [c.i.]
shall be determined in good faith.
5.2.2.2 Outside the Territory. Except as otherwise agreed,
upon expiration of the sixty [c.i.] period as required in Article 4 above, DUSA
may manufacture or have manufactured Light Sources for sale or other
distribution for the New Area(s) so designated in DUSA's Notice for use in
applications within the Field pursuant to the Manufacturing License.
5.2.2.3 Termination. If NBC terminates this Agreement [c.i.]
or DUSA terminates this Agreement [c.i.], then DUSA may manufacture or have
manufactured Light Sources for sale or other distribution worldwide for use in
applications within the Field pursuant to the Manufacturing License.
To the extent that DUSA elects to exercise its rights under this Section 5.2
with respect to supply within the Territory, (i) DUSA shall be relieved of its
obligations under Sections 2.1, 2.2 and 2.3 and (ii) notwithstanding anything in
this Agreement to the contrary [c.i.].
ARTICLE 6
EXCLUSIVITY/COMPETITIVE PRICING
6.1 Exclusivity. Except as provided in Sections 5.2 above or 6.2 below,
DUSA agrees to purchase all of its requirements for Light Sources for the Field
for sale in the Territory from NBC. In consideration of the foregoing, NBC
agrees that during the term of this Agreement, NBC shall not supply or authorize
a third party to supply: (i) Light Sources for any purposes (other than pursuant
to this Agreement), (ii) light sources [c.i.], or (iii) light sources for
[c.i.]; otherwise, NBC shall have the right to manufacture and/or supply (or
authorize a third party to do so) any light source for any application or
purpose. If NBC supplies, or authorizes a third party to supply, such light
sources to a third party, NBC agrees to restrict in writing such third party's
use thereof to applications outside the Field.
6.2 Competitive Pricing. If after the earlier of (i) [c.i.] or (ii) DUSA's
order of [c.i.] Light Sources in accordance with Section 2.3 above and
notwithstanding anything herein to the contrary, DUSA receives a bona fide
written quote from a non-Affiliate third party for supply of Light Sources
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for sale in the Territory for a price [c.i.] the Price charged by NBC hereunder
for such Light Sources and on substantially similar or better terms and
conditions than those hereunder, then DUSA may thereafter purchase [c.i.] of its
requirements for the Territory from such third party on [c.i.] written notice to
NBC. To the extent that DUSA elects to exercise its rights under this Section
6.2, DUSA shall be relieved of its obligations under Sections 2.1, 2.2 and 2.3
with respect to [c.i.] of its original obligations. Notwithstanding the
foregoing provisions of this Section 6.2, in no event shall DUSA's obligation
order Light Sources [c.i.] of [c.i.] Light Sources for the Field. For purposes
of this Section 6.2 "Affiliate" shall mean any entity which controls, is
controlled by or is under common control with DUSA; an entity shall be regarded
as in control of another entity for purposes of the foregoing if it owns or
controls more than fifty percent (50%) of the shares of the subject entity
entitled to vote in the election of directors (or, in the case of an entity that
is not a corporation, for the election of the corresponding managing authority).
ARTICLE 7
REGULATORY MATTERS
7.1 Regulatory Approvals. The parties understand and agree that DUSA,
itself or through its agents, shall have the sole right to correspond with and
submit regulatory applications and other filings to the FDA, HPB or other
regulatory agencies to obtain approvals to import, export, sell or otherwise
commercialize the Light Sources alone or with other products (collectively,
"Approvals") as DUSA deems useful or necessary. Accordingly, except as otherwise
required by law, NBC shall not correspond directly with the FDA, HPB or any
other regulatory agency relating to the process of obtaining Approvals or any
obtained Approval for the Light Sources, without DUSA's prior written
permission. Notwithstanding the foregoing, NBC agrees to assist DUSA, as
requested by DUSA, in preparing, submitting and maintaining applications for
such Approvals.
7.2 Information. Without limiting the provisions of Section 7.1 above, NBC
shall promptly provide DUSA all written and other information, in NBC's
possession or control, necessary or useful for DUSA to apply for, obtain and
thereafter maintain Approvals for the Light Sources, including without
limitation information relating to [c.i.] of the Light Sources or other such
information required to be submitted to the FDA (or its foreign equivalent) in
the form of a marketing application. Except as otherwise expressly provided
herein, DUSA shall restrict the use of such information solely for the foregoing
purposes. Without limiting the foregoing and subject to Section 7.5 below, NBC
agrees to immediately inform DUSA when any such information is no longer current
and reflective of current manufacturing practices, procedures or the
Specifications and to provide updated information to DUSA.
7.3 Inspections. NBC shall permit the FDA, HPB and other regulatory
agencies to conduct inspections of the Facility as the FDA or such other
regulatory agencies may request, and shall cooperate with the FDA, HPB or such
other regulatory agencies with respect to such inspections and any related
matters. NBC agrees to give DUSA prior notice (when possible) of any such
inspections, and to keep DUSA informed about the results and conclusions of each
such regulatory inspection, including actions taken by NBC to remedy conditions
cited in such inspections. In addition, NBC shall allow DUSA or its
representative to assist in the preparation for and be present at such
inspections. NBC shall provide DUSA with copies of any written inspection
reports issued by such agencies and all correspondence between NBC and the
agency related thereto, including, but not limited to, FDA Form 483, Notice of
Observation, and all correspondence relating thereto. DUSA and its regulatory
consultants, agents, marketing partners or other third parties agreed upon in
advance by NBC, under reasonable
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confidentiality requirements, shall have access, to all quality assurance and QS
audits of NBC for the purposes of assessment of regulatory compliance, to the
buildings, records and areas of the Facility involved in the manufacture,
testing, storage and shipment of the Light Sources.
7.4 DUSA Cooperation. DUSA agrees to keep NBC informed as to the status of
Approvals for Light Sources supplied hereunder.
7.5 Maintenance of Approvals. Notwithstanding anything herein to the
contrary, NBC shall not undertake any modifications to the Light Source design,
manufacturing, processing or packaging that could delay or otherwise impact the
Approvals or other regulatory submissions, including without limitation,
regulatory product reviews, Investigational New Drug applications (INDs), New
Drug Applications (NDAs) or any other compliance status without prior written
agreement of DUSA. NBC shall obtain and maintain all licenses, permits and
registrations other than Approvals (e.g., business licenses and the like)
necessary to manufacture the Light Sources and supply them hereunder.
7.6 Reporting. Pursuant to the FDA's and other applicable regulatory
agency's regulations and policies, DUSA may be required to report to such
regulatory agency information that reasonably suggests that a Light Source may
have caused or contributed to the death or serious injury or has malfunctioned
and that the Light Source would be likely to cause or contribute to a death or
serious injury if the malfunction were to recur. Accordingly, NBC agrees to
inform DUSA of any such information promptly after becoming aware of it so that
DUSA can comply with such reporting requirements. It is understood and agreed
that reporting to DUSA shall be within twenty-four (24) hours to enable DUSA to
comply with applicable reporting requirements.
ARTICLE 8
PRODUCT WARRANTIES/SERVICE
8.1 Product Warranties. NBC warrants and represents that:
8.1.1 Specifications. All Light Sources supplied hereunder shall
upon delivery to DUSA or such other location as specified by DUSA comply with
the Specifications and shall conform with the information shown on the
certificate of conformance provided for the particular shipment according to
Section 3.2 hereof;
8.1.2 QS. The Facility, and all Light Sources supplied hereunder
upon delivery to DUSA or such other location as specified by DUSA, meet all
applicable regulatory requirements (including applicable QS regulations) imposed
by applicable regulatory agencies with respect to any Approval;
8.1.3 Materials and Workmanship. Each Light Source shall be free
from defects in materials, workmanship and design for a period of [c.i.] after
its receipt by the end user (the "Warranty Period"). The foregoing warranty set
forth in this Section 8.1.3 [c.i.] or (ii) [c.i.].
8.1.4 Limitations. For avoidance of doubt, defects in the
manufacture of [c.i.] shall be covered by the warranties in this Section 8.1;
provided, however, that NBC [c.i.] in the [c.i.] in accordance with applicable
industry standards; and
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8.1.5 No Encumbrance. Title to all Light Sources supplied hereunder
shall pass as provided herein free and clear of any security interest, lien, or
other encumbrance.
8.2 Disclaimer. EXCEPT AS EXPRESSLY PROVIDED IN THIS SECTION 8.1, NBC
MAKES NO REPRESENTATION OR WARRANTY, EXPRESS OR IMPLIED, AS TO THE LIGHT
SOURCES, AND NBC HEREBY EXPRESSLY DISCLAIMS ANY AND ALL WARRANTIES OF
MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. NEITHER PARTY SHALL BE
LIABLE TO THE OTHER FOR [c.i.]. EXCEPT FOR LIABILITY ARISING OUT OF 13 BELOW AND
NOTWITHSTANDING ANYTHING HEREIN TO THE CONTRARY, [c.i.].
8.3 Warranty Service. During the Warranty Period, NBC agrees, [c.i.] any
Light Source failing to meet the warranties provided hereunder. Without limiting
the foregoing, NBC shall use best efforts to provide on-site warranty repair
service to end-users within the Territory within [c.i.].
8.4 Extended Warranties. NBC may offer extended warranty service contracts
to end-users of the Light Sources supplied hereunder. Such contracts shall be on
reasonable and customary terms and conditions for services of a similar nature
and shall not be any less favorable to the end-users of the Light Sources
supplied hereunder than other end-users of other products manufactured by NBC.
It is understood and agreed that DUSA may contract with third parties to provide
extended warranty or out-of-warranty service for Light Sources or may provide
such service itself.
8.5 Out-of-Warranty Service; Spare Parts. NBC hereby undertakes to
maintain repair capability for Light Sources during the term of this Agreement
and for [c.i.] thereafter (the "Support Period") subject to its ability to
source applicable components from third parties. In accordance with the
foregoing, NBC shall, if requested by DUSA, provide out-of-warranty service on
reasonable and customary terms and conditions. In addition during the Support
Period, NBC agrees to [c.i.] spare and replacement parts [c.i.] and lead times
therefor as may be required to service and maintain Light Sources. Where there
are no such [c.i.], such spare or replacement parts shall be provided [c.i.] and
lead times, and in any event NBC's prices, terms and conditions for providing
services under this Section 8.5 shall be no less favorable to the customer than
those offered by NBC to a third party for similar services or parts.
Notwithstanding the foregoing, neither DUSA nor its customers shall have any
obligation to order any such service, or spare or replacement parts from NBC.
8.6 Epidemic Failures. In addition to and without limiting the warranties
given above, where a defect in the design [c.i.] of the Light Sources which
effects a minimum of [c.i.] of the total units of any particular Light Source
model (by SKU number) supplied hereunder (an "Epidemic Failure"), NBC shall,
[c.i.], remedy such Epidemic Failure in all units of such Light Source model
(previously supplied or to be supplied hereunder).
8.7 Recalls. In the event that DUSA is required by any regulatory agency
to recall the Light Sources or if DUSA voluntarily initiates a recall of the
Light Sources and in either case such recall is a result of a breach of any of
the warranties under Section 8.1.1 through 8.1.3 above, [c.i.]. In addition, NBC
agrees to cooperate with and assist DUSA in locating and retrieving, if
necessary, Light Sources recalled for any reason. A recall of DUSA's products
(including the Light Sources) for reasons other than those set forth in this
Section 8.7 (including reasons due to force majeure) above [c.i.].
8.8 Documentation. NBC agrees to develop and provide to DUSA documentation
describing
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routine maintenance, service and care of the Light Sources. In addition, upon
DUSA's request, NBC agrees to provide DUSA such other information and
documentation as DUSA may reasonably require in order to fulfill standard
maintenance and support requirements on reasonable and customary terms and
conditions.
ARTICLE 9
TRADEMARKS
9.1 Packaging and Labeling. The trade dress, style of packaging and the
like with respect to the Light Sources will be determined by DUSA in
consultation with NBC so as to be consistent with DUSA's standard trade dress
and style (the "Packaging Specifications"). NBC shall be responsible for
packaging and labeling the Light Sources delivered hereunder in accordance with
the Packaging Specifications and all applicable regulatory requirements.
9.2 Trademarks. Without limiting the provisions of Section 9.1 above,
packaging materials and labels for the Light Sources shall display the Blu-U
Trademark and the DUSA trade name (collectively, the "DUSA Marks"). Accordingly,
DUSA hereby grants to NBC a license to use the DUSA Marks for the term of this
Agreement for the purposes of supplying the Light Sources hereunder. The
ownership and all goodwill from the use of the DUSA Marks shall vest in and
inure to the benefit of DUSA. NBC hereby acknowledges DUSA's ownership rights in
the DUSA Marks, and accordingly agrees that at no time during or after the term
of this Agreement to challenge or assist others to challenge the DUSA Marks or
the registration thereof or attempt to register any trademarks, marks or trade
names confusingly similar to such DUSA Marks.
9.3 Recordation. In those countries of the Territory where a trademark
license must be recorded, DUSA will provide and record a separate trademark
license for the DUSA Marks. NBC shall cooperate in the preparation and execution
of such documents [c.i.].
ARTICLE 10
TERM AND TERMINATION
10.1 Term. The term of this Agreement shall commence on the Effective Date
and continue in full force until the tenth anniversary of the Effective Date,
unless terminated earlier in accordance with this Article 10. This Agreement may
be extended for an additional period by mutual written agreement of NBC and DUSA
[c.i.]; provided, however, that neither NBC nor DUSA shall be obligated to
approve any such extension and shall have no liability whatsoever by reason of
any failure to agree on any such extension.
10.2 Breach. This Agreement may be terminated by either party if the other
party breaches any material term or condition of this Agreement and fails to
remedy the breach within [c.i.] after being given written notice thereof.
Notwithstanding the foregoing, in the event of breach by either party, the other
party's right to terminate shall be stayed if the breaching party proposes a
mutually agreeable plan to remedy such breach within [c.i.] period and remedies
such breach within [c.i.] days after being given written notice thereof. It is
understood and agreed that this Section 10.2 is subject to the provisions of
Section 14.3 below, excusing performance where performance is rendered
impossible due to a Force Majeure Event, including without limitation failure of
suppliers, in each case where such failure is beyond the reasonable control of
the nonperforming party. For avoidance of doubt, among other things a delay
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by NBC of more than [c.i.] of the delivery date of any shipment of Light Sources
ordered in accordance with Section 2.3 shall be deemed material.
10.3 Convenience. Either party may terminate this Agreement upon twelve
(12) months' prior written notice to the other party, provided, however such
notice may not be given prior to the third anniversary of the Effective Date.
10.4 Termination for Insolvency. Either party may terminate this Agreement
if the other becomes the subject of a voluntary or involuntary petition in
bankruptcy or any proceeding relating to insolvency, receivership, liquidation,
or composition or the benefit of creditors, if that petition or proceeding is
not dismissed with prejudice [c.i.] after filing.
10.5 Survival. It is understood that termination or expiration of this
Agreement shall not relieve a party from any liability which, at the time of
such termination or expiration, has already accrued to the other party. The
provisions of Sections 5.2, 8.1, 8.2, 8.3, 8.5, 8.6, 8.7 and 10.5 and Articles
1, 11, 13 and 14 shall survive the termination of this Agreement for any reason.
Except as otherwise expressly provided in this Article 10, all other rights and
obligations of the parties shall terminate upon termination of this Agreement.
ARTICLE 11
CONFIDENTIALITY
11.1 Confidential Information. The parties may from time to time disclose
to each other Confidential Information. "Confidential Information" shall mean
[c.i.]. Notwithstanding the foregoing or anything herein to the contrary,
Confidential Information shall not include any information that, in each case as
demonstrated by written documentation: (i) was already known to the receiving
party, other than under an obligation of confidentiality, at the time of
disclosure; (ii) was generally available to the public or otherwise part of the
public domain at the time of its disclosure to the receiving party; (iii) became
generally available to the public or otherwise part of the public domain after
its disclosure and other than through any act or omission of the receiving party
in breach of this Agreement; (iv) was subsequently lawfully disclosed to the
receiving party by a person other than the disclosing party; or (v) is developed
independently by the receiving party without use of or reliance on the
Confidential Information of the other party.
11.2 Confidentiality. Each party agrees to hold and maintain in strict
confidence all Confidential Information of the other party. Without limiting the
foregoing, neither party shall use or disclose the Confidential Information of
the other party, except as otherwise permitted by this Agreement or as may be
necessary or useful to exercise its rights or perform its obligations under this
Agreement. Nothing contained in this Article 11 shall prevent either party from
disclosing any Confidential Information of the other party to (a) regulatory
agencies for the purpose of obtaining approval to distribute and market the
Light Sources (or products incorporating the Light Sources); provided, however,
that all reasonable steps are taken to maintain the confidentiality of such
Confidential Information to be disclosed; (b) to accountants, lawyers or other
professional advisors or in connection with a merger, acquisition or securities
offering, subject in each case to the recipient entering into an agreement to
protect such Confidential Information from disclosure; or (c) is required by law
or regulation to be disclosed; provided, however, that the party subject to such
disclosure requirement has provided written
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notice to the other party promptly upon receiving notice of such requirement in
order to enable the other party to seek a protective order or otherwise prevent
disclosure of such Confidential Information.
ARTICLE 12
REPRESENTATIONS AND WARRANTIES
12.1 NBC. NBC represents and warrants that: (i) it has full power to enter
into this Agreement and to grant to DUSA the rights granted to DUSA hereunder;
(ii) it has obtained all necessary corporate approvals to enter into and execute
the Agreement; (iii) it has not entered and will not enter into any agreements
with any third party that are inconsistent with this Agreement; (iv) NBC has not
granted any rights to any third parties to subject matter which would otherwise
be included within the definition of NBC Technology; and (v) NBC shall fully
comply with the requirements of any and all applicable federal, state, local and
foreign laws, regulations, rules and orders of any governmental body having
jurisdiction over the activities contemplated by this Agreement.
12.2 DUSA. DUSA represents and warrants that: (i) it has full power to
enter into the Agreement; (ii) it has obtained all necessary corporate approvals
to enter and execute into this Agreement; (iii) it has not entered and will not
enter into any agreements with any third party that are inconsistent with this
Agreement; and (iv) DUSA shall fully comply with the requirements of any and all
applicable federal, state, local and foreign laws, regulations, rules and orders
of any governmental body having jurisdiction over the activities contemplated by
this Agreement and the distribution of the Light Sources.
12.3 Disclaimer. EXCEPT AS PROVIDED IN THIS 12 AND SECTION 8.1 ABOVE,
NEITHER PARTY MAKES ANY WARRANTIES OR CONDITIONS (EXPRESS, IMPLIED, STATUTORY OR
OTHERWISE) WITH RESPECT TO THE SUBJECT MATTER HEREOF AND EACH PARTY EXPRESSLY
DISCLAIMS ANY SUCH ADDITIONAL WARRANTIES.
ARTICLE 13
INDEMNIFICATION
13.1 DUSA. DUSA shall indemnify, defend and hold harmless NBC, its
directors, officers, employees, agents, successors and assigns from and against
[c.i.] against any of them by a third party alleging (i) [c.i.], in each case
subject to the requirements set forth in Section 13.3 below. Notwithstanding the
foregoing, DUSA shall have no obligations under this Article 13 for any
liabilities, expenses or costs arising out of or relating to claims covered
under Section 13.2 below.
13.2 NBC. NBC shall indemnify, defend and hold harmless DUSA, [c.i.], in
each case subject to the requirements set forth in Section 13.3 below.
Notwithstanding the foregoing, NBC shall have no obligations under this Article
13 for any liabilities, expenses or costs arising out of or relating to claims
covered under Section 13.1 above.
13.3 Indemnification Procedure. A party that intends to claim
indemnification (the "Indemnitee") under this Article 13 shall promptly notify
the indemnifying party (the "Indemnitor") in writing of any third party claim,
suit or proceeding included within the indemnification described in this Article
13 above (each a "Claim") with respect to which the Indemnitee intends to claim
such indemnification, and the Indemnitor shall have sole control of the defense
and/or settlement thereof;
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provided that the Indemnitee shall have the right to participate, at its own
expense, with counsel of its own choosing in the defense and/or settlement of
such Claim. The indemnification under this Article 13 shall not apply to amounts
paid in settlement of any Claim if such settlement is effected without the
consent of the Indemnitor. The Indemnitee under this Article 13, and its
employees, at the Indemnitor's request and expense, provide full information and
reasonable assistance to Indemnitor and its legal representatives with respect
to such Claims.
13.4 Insurance. Each party shall secure and maintain in effect during the
term of this Agreement and for a period of [c.i.] thereafter insurance
policy(ies) underwritten by a reputable insurance company and in a form and
having limits of at least [c.i.] in the aggregate for exposures related to the
Light Sources. Additionally, each party shall [c.i.]. Upon request by the other
party hereto, certificates of insurance evidencing the coverage required above
shall be provided to the other party.
ARTICLE 14
GENERAL
14.1 Governing Law. This Agreement shall be governed by, and construed and
interpreted in accordance with, the laws of the United States and the State of
New Jersey without reference to conflict of laws principles and excluding the
1980 U.N. Convention on Contracts for the International Sale of Goods.
14.2 Disputes. If NBC and DUSA, are unable to resolve any dispute between
them, either NBC or DUSA may, by written notice to the other, have such dispute
referred to [c.i.], for attempted resolution by good faith negotiations within
[c.i.] after such notice is received. Unless otherwise mutually agreed, the
negotiations between [c.i.] and at times within the period stated above offered
[c.i.] for consideration. If the parties are unable to resolve such dispute in
accordance with the aforementioned procedure or within [c.i.], either party
shall have the right to pursue any and all other remedies available to such
party.
14.3 Force Majeure. Nonperformance of any party (except for the payment of
money and acceptance by DUSA of Light Sources pursuant to an outstanding
purchase order hereunder) shall be excused to the extent that performance is
rendered impossible by strike, fire, earthquake, flood, governmental acts or
orders or restrictions, failure of suppliers, or any other reason where failure
to perform is beyond the reasonable control of the nonperforming party (each a
"Force Majeure Event"). Notwithstanding the foregoing, NBC's delay of the
delivery date of any shipment of Light Sources ordered in accordance with
Section 2.3 shall not be excused for more than [c.i.] pursuant to this Section
14.3. This Section 14.3 shall not be deemed to limit DUSA's rights under Section
5.2 above.
14.4 Delays. [c.i.] for the performance of the party's obligations under
this Agreement.
14.5 Assignment. The parties agree that their rights and obligations under
this Agreement may not be assigned or otherwise transferred to a third party
without the prior written consent of the other party hereto. Any assignment in
violation of this Section 14.5 shall be null and void. Notwithstanding the
foregoing, either party may transfer or assign its rights and obligations under
this Agreement to a successor to all or substantially all of its business or
assets relating to this Agreement whether by sale, merger, operation of law or
otherwise; provided that such assignee or transferee has agreed to be bound by
the terms and conditions of this Agreement. Subject to the foregoing, this
Agreement shall be binding upon and inure to the benefit of the parties hereto,
their successors and assigns.
15
<PAGE> 16
14.6 Notices. Any notice or report required or permitted to be given or
made under this Agreement by either party shall be in writing and delivered to
the other party at its address indicated below (or to such other address as a
party may specify by notice hereunder) by courier or by registered or certified
airmail, postage prepaid, or by facsimile; provided, however, that all facsimile
notices shall be promptly confirmed, in writing, by registered or certified
airmail, postage prepaid. All notices shall be effective as of the date received
by the addressee.
If to NBC: National Biological Corporation
1532 Enterprise Parkway
Twinsburg, OH 44087
Attn: President
Fax: (330) 425-9614
with a copy to: Buckingham, Doolittle & Burroughs, LLP
50 S. Main Street
P.O. Box 1500
Akron, OH 44309-1500
Attn: David Dreschler, Esq.
Fax: (330) 253-3627
If to DUSA: DUSA Pharmaceuticals, Inc.
181 University Ave.
Suite 1208
Toronto, Ontario M5H 3M7
Attn:
Fax:
with a copy to: Wilson Sonsini Goodrich & Rosati
Professional Corporation
650 Page Mill Road
Palo Alto, California 94304-1050
Attn: Kenneth A. Clark, Esq.
Fax: (650) 493-6811
14.7 Confidential Terms. Except as expressly provided herein, each party
agrees not to disclose any terms of this Agreement to any third party without
the consent of the other party, except to prospective investors and to such
party's accountants, attorneys and other professional advisors or as required by
securities or other applicable laws, in which case the disclosing party shall
seek confidential treatment to the extent available.
14.8 Headings. Headings included herein are for convenience only, do not
form a part of this Agreement and shall not be used in any way to construe or
interpret this Agreement.
14.9 Non-Waiver. Any waiver of the terms and conditions hereof must be
explicitly in writing. The waiver by either of the parties of any breach of any
provision hereof by the other shall not be
16
<PAGE> 17
construed to be a waiver of any succeeding breach of such provision or a waiver
of the provision itself.
14.10 Severability. Should any section, or portion thereof, of this
Agreement be held invalid by reason of any law, statute or regulation existing
now or in the future in any jurisdiction by any court of competent authority or
by a legally enforceable directive of any governmental body, such section or
portion thereof shall be validly reformed so as to approximate the intent of the
parties as nearly as possible and, if unreformable, shall be deemed divisible
and deleted with respect to such jurisdiction, but the Agreement shall not
otherwise be affected.
14.11 Independent Contractors. The relationship of DUSA and NBC
established by this Agreement is that of independent contractors. Nothing in
this Agreement shall be construed to create any other relationship between DUSA
and NBC. Neither party shall have any right, power or authority to assume,
create or incur any expense, liability or obligation, express or implied, on
behalf of the other.
14.12 Entire Agreement. The terms and provisions contained in the
Agreement, including the Exhibits hereto, constitute the entire agreement
between the parties and shall supersede all previous communications,
representations, agreements or understandings, either oral or written, between
the parties. Without limiting the foregoing, the rights and obligations of the
parties under the Co-Development Agreement (except for the payment of amounts
due or to be due thereunder) with respect to the Light Source shall be deemed to
be fulfilled; provided, however, otherwise the Co-Development Agreement shall
remain in full force and effect in accordance with its terms. For avoidance of
doubt, to the extent the terms and conditions of this Agreement and the terms
and conditions of the Co-Development Agreement conflict, the terms and
conditions of this Agreement shall control. No agreement or understanding
varying or extending this Agreement shall be binding upon either party hereto,
unless set forth in a writing which specifically refers to the Agreement signed
by duly authorized officers or representatives of the respective parties, and
the provisions hereof not specifically amended thereby shall remain in full
force and effect.
14.13 Counterparts. This Agreement may be executed in counterparts, each
of which shall be deemed an original, but which together shall constitute one
and the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused their duly authorized
representatives to execute this Agreement.
DUSA PHARMACEUTICALS, INC. NATIONAL BIOLOGICAL CORPORATION
By: /s/ R. Carroll By: /s/ H.J. Drechsler
------------------------ ----------------------------
Name: Ronald L. Carroll Name: Howard J. Drechler
---------------------- --------------------------
Title: Executive V.P. Title: President
--------------------- -------------------------
17
<PAGE> 18
EXHIBIT A
LIGHT SOURCE
[Attached]
[c.i.]
18
<PAGE> 19
EXHIBIT B
FORM OF PURCHASE ORDER
[Attached]
19
<PAGE> 20
DUSA Pharmaceuticals, Inc. PURCHASE
400 Columbus Avenue ORDER
Vahalla, NY 10595; USA
Phone: 914 474 4300 Fax: 914 747 7563 P.O. Number:
The following number must appear on all (Page 1 of __________________)
related correspondence, shipping papers,
and invoices:
To: Via Facsimile: Ship to:
SUBJECT TO TERMS AND CONDITIONS OF THE PURCHASE AND SUPPLY AGREEMENT BETWEEN
DUSA PHARMACEUTICALS, INC. AND NATIONAL BIOLOGICAL CORPORATION
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
P.O. DATE REQUISITIONER TERMS
- --------------------------------------------------------------------------------
<S> <C> <C>
DUSA Pharmaceuticals, Inc. See Below
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
QUANTITY DESCRIPTION UNIT PRICE TOTAL
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SUBTOTAL
- --------------------------------------------------------------------------------
TOTAL $
- --------------------------------------------------------------------------------
</TABLE>
1. Please send two copies of your invoice.
2. Enter this order in accordance with the prices, terms, delivery method and
all specifications listed above
3. Please notify us immediately if you are unable to ship as specified
IMPORTANT NOTATIONS:
1] Payment will be processed on a shipment of merchandise and receipt of an
appropriate invoice
2] This facsimile copy will be the only copy issued
3] Credit references are attached.
_______________________________________________
Authorized for DUSA Pharmaceuticals, Inc. Date
20
<PAGE> 21
EXHIBIT C
PRICE
21
<PAGE> 22
NATIONAL BIOLOGICAL CORPORATION
The Phototherapy Experts!
To: R. Carroll
From: M. Friedman
Subject: Pricing - Blu-U 4170
Date: 9/24/98
Pricing for the Blu-U [c.i.] is listed below. Please note that this pricing is
at best only [c.i.], and, therefore, should not be considered [c.i.]. In
addition, pricing [c.i.] does not include [c.i.], as it is impossible to
establish pricing without a finished good. Also, several items, such as the
[c.i.] DUSA [c.i.], and the item marked [c.i.] in the DUSA provided bill of
materials are not quoted due to lack of sufficient information.
Finally, pricing quoted is based [c.i.] as supplied to National Biological.
Since neither DUSA or NBC is able to validate the accuracy of such bill until
[c.i.], errors of omission, as well as costing errors by DUSA may have occurred
which cannot at this time be accounted for, National Biological cannot therefore
rely on these [c.i.] for any purposes other than [c.i.].
The following is our estimated cost to DUSA and, subject to the language in the
P&S Agreement, may be used in the contract.
Quantity: [c.i.] [c.i.] [c.i.]
DUSA PRICE: [c.i.] [c.i.] [c.i.]
22
<PAGE> 23
EXHIBIT D
ACCEPTANCE TESTING
[c.i.]
23
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Company's audited consolidated balance sheets, consolidated statements of
operations, consolidated statements of cash flows and consolidted statements of
shareholders' equity and is qualified in its entirety by reference to such Form
10-K for the fiscal year ending December 31, 1998.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 1,213,757
<SECURITIES> 5,508,375
<RECEIVABLES> 19,529
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 6,849,654
<PP&E> 168,466
<DEPRECIATION> 0
<TOTAL-ASSETS> 7,140,675
<CURRENT-LIABILITIES> 724,529
<BONDS> 0
0
0
<COMMON> 36,828,579
<OTHER-SE> (30,417,967)
<TOTAL-LIABILITY-AND-EQUITY> 7,140,675
<SALES> 0
<TOTAL-REVENUES> 515,184
<CGS> 0
<TOTAL-COSTS> 4,502,391
<OTHER-EXPENSES> 1,729,741
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (5,716,948)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,716,948)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,716,948)
<EPS-PRIMARY> (0.61)
<EPS-DILUTED> (0.61)
</TABLE>
