##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, DC 20549
 FORM 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended: March 31, 2011
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission file number: 001-31533
 DUSA PHARMACEUTICALS, INC.
  New Jersey
(State of Other Jurisdiction of 
Incorporation or Organization)
    
    22-3103129
(I.R.S. Employer Identification No.)25 Upton Drive, Wilmington, MA
(Address of Principal Executive Offices)
    
    01887
(Zip Code)
 
 
 þ o
 o o
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer þ
    
    Smaller reporting company o(Do not check if a smaller reporting company)
 o þ




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##### 



DUSA PHARMACEUTICALS, INC.
TABLE OF CONTENTS TO FORM 10-Q
 PageNumberPART I. FINANCIAL INFORMATIONItem 1. Financial Statements- Condensed Consolidated Balance Sheets at March 31, 2011 and December 31, 2010 (Unaudited)
    
    
    3- Condensed Consolidated Statements of Operations for the three-month periods ended March
31, 2011 and 2010 (Unaudited)
    
    
    4- Condensed Consolidated Statements of Cash Flows for the three-month periods ended March
31, 2011 and 2010 (Unaudited)
    
    
    5- Notes to the Condensed Consolidated Financial Statements (Unaudited)
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    12Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    19Item 4. Controls and Procedures
    
    
    19PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    20Item 1A. Risk Factors
    
    
    20Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    28Item 3. Defaults Upon Senior Securities
    
    
    28Item 4. [Removed and Reserved.]
    
    
    28Item 5. Other Information
    
    
    28Item 6. Exhibits
    
    
    29SIGNATURES
    
    
    30Exhibit IndexEX-31.AEX-31.BEX-32.AEX-32.BEX-99.1
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PART I.
 
 ITEM 1. FINANCIAL STATEMENTS
 DUSA PHARMACEUTICALS, INC.
 
 CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
 March 31,
    
    
    December 31,2011
    
    
    2010ASSETSCURRENT ASSETSCash and cash equivalents
    
    $
    12,474,249
    
    
    $
    8,884,402Marketable securities
    
    
    8,593,100
    
    
    
    10,762,559Accounts receivable, net of allowance for
doubtful accounts of $75,000 and $60,000 in
2011 and 2010, respectively
    
    
    2,708,462
    
    
    
    3,311,467Inventory
    
    
    2,528,236
    
    
    
    2,165,220Prepaid and other current assets
    
    
    1,123,366
    
    
    
    1,344,062TOTAL CURRENT ASSETS
    
    
    27,427,413
    
    
    
    26,467,710Restricted cash
    
    
    175,028
    
    
    
    174,753Property, plant and equipment, net
    
    
    1,552,104
    
    
    
    1,582,777Deferred charges and other assets
    
    
    132,833
    
    
    
    68,099TOTAL ASSETS
    
    $
    29,287,378
    
    
    $
    28,293,339LIABILITIES AND SHAREHOLDERS EQUITYCURRENT LIABILITIESAccounts payable
    
    $
    1,007,696
    
    
    $
    162,742Accrued compensation
    
    
    401,242
    
    
    
    2,243,997Other accrued expenses
    
    
    2,777,896
    
    
    
    2,348,838Deferred revenue
    
    
    648,006
    
    
    
    712,338TOTAL CURRENT LIABILITIES
    
    
    4,834,840
    
    
    
    5,467,915Deferred revenue
    
    
    1,861,972
    
    
    
    1,917,237Warrant liability
    
    
    3,392,486
    
    
    
    1,203,553Other liabilities
    
    
    170,998
    
    
    
    181,153TOTAL LIABILITIES
    
    
    10,260,296
    
    
    
    8,769,858COMMITMENTS AND CONTINGENCIES (NOTE 12)SHAREHOLDERS EQUITYCapital 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; and 40,000
junior Series A preferred shares. Issued
and outstanding: 24,413,969 and 24,239,365
shares of common shares, no par, at March
31, 2011 and December 31, 2010,
respectively
    
    
    151,638,956
    
    
    
    151,703,468Additional paid-in capital
    
    
    9,596,083
    
    
    
    9,399,434Accumulated deficit
    
    
    (142,261,500
    )
    
    
    (141,656,600
    )Accumulated other comprehensive income
    
    
    53,543
    
    
    
    77,179TOTAL SHAREHOLDERS EQUITY
    
    
    19,027,082
    
    
    
    19,523,481TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    $
    29,287,378
    
    
    $
    28,293,339
  3




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DUSA PHARMACEUTICALS, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
 Three Months EndedMarch 31,2011
    
    
    2010Product revenues
    
    $
    11,082,064
    
    
    $
    8,713,880Cost of product revenues
    
    
    1,760,370
    
    
    
    1,818,185GROSS MARGIN
    
    
    9,321,694
    
    
    
    6,895,695Operating costsResearch and development
    
    
    1,323,644
    
    
    
    1,109,667Marketing and sales
    
    
    3,973,224
    
    
    
    3,613,799General and administrative
    
    
    2,457,247
    
    
    
    2,463,164TOTAL OPERATING COSTS
    
    
    7,754,115
    
    
    
    7,186,630INCOME (LOSS) FROM OPERATIONS
    
    
    1,567,579
    
    
    
    (290,935
    )Loss on change in fair value of warrants
    
    
    (2,188,933
    )
    
    
    (199,275
    )Other income
    
    
    16,454
    
    
    
    65,727NET LOSS
    
    $
    (604,900
    )
    
    $
    (424,483
    )BASIC AND DILUTED NET LOSS PER COMMON SHARE
    
    $
    (0.02
    )
    
    $
    (0.02
    )WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING, BASIC AND DILUTED
    
    
    24,283,398
    
    
    
    24,122,459
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DUSA PHARMACEUTICALS, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
 Three months endedMarch 31,2011
    
    
    2010CASH FLOWS FROM OPERATING ACTIVITIESNet loss
    
    $
    (604,900
    )
    
    $
    (424,483
    )Adjustments to reconcile net loss to net cash provided by operating activities:Accretion of premiums and discounts on marketable securities
    
    
    (4,840
    )
    
    
    2,712Share-based compensation
    
    
    196,649
    
    
    
    211,777Depreciation and amortization
    
    
    106,284
    
    
    
    102,986Loss on change in fair value of warrants
    
    
    2,188,933
    
    
    
    199,275Deferred revenues recognized
    
    
    (119,597
    )
    
    
    (159,032
    )Changes in other assets and liabilities impacting cash flows from operations:Accounts receivable
    
    
    603,005
    
    
    
    570,089Inventory
    
    
    (363,016
    )
    
    
    223,683Prepaid and other assets
    
    
    155,962
    
    
    
    370,387Accounts payable, accrued compensation and other accrued expenses
    
    
    (568,743
    )
    
    
    (95,462
    )Other liabilities
    
    
    (10,155
    )
    
    
    (14,332
    )NET CASH PROVIDED BY OPERATING ACTIVITIES
    
    
    1,579,582
    
    
    
    987,600CASH FLOWS FROM INVESTING ACTIVITIESPurchases of marketable securities
    
    
    (1,499,337
    )
    
    
    Proceeds from maturities and sales of marketable securities
    
    
    3,650,000
    
    
    
    Restricted cash
    
    
    (275
    )
    
    
    (91
    )Purchases of property, plant and equipment
    
    
    (75,611
    )
    
    
    (28,554
    )NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES
    
    
    2,074,777
    
    
    
    (28,645
    )CASH FLOWS FROM FINANCING ACTIVITIESProceeds from exercise of options
    
    
    126,508
    
    
    
    Settlements of restricted stock for tax withholding obligations
    
    
    (191,020
    )
    
    
    (30,368
    )NET CASH USED IN FINANCING ACTIVITIES
    
    
    (64,512
    )
    
    
    (30,368
    )NET INCREASE IN CASH AND CASH EQUIVALENTS
    
    
    3,589,847
    
    
    
    928,587CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
    
    
    8,884,402
    
    
    
    7,613,378CASH AND CASH EQUIVALENTS AT END OF PERIOD
    
    $
    12,474,249
    
    
    $
    8,541,965
  5




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DUSA PHARMACEUTICALS, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 1) BASIS OF PRESENTATION
   2) FINANCIAL INSTRUMENTS
 Fair Value Measurements
  Level 1: Quoted market prices in active markets for identical assets or liabilities. Level 1
primarily consists of financial instruments whose value is based on quoted market prices such as
exchange-traded instruments and listed equities.
 Level 2: Observable market based inputs or unobservable inputs that are corroborated by market
data. Level 2 consists of financial instruments that are valued using quoted market prices,
broker or dealer quotations, or alternative pricing sources with reasonable levels of price
transparency in the determination of value. The Company accesses publicly available market
activity from third party databases and credit ratings of the issuers of the securities it holds
to corroborate the data used in the fair value calculations obtained from its primary pricing
source. The Company also takes into account credit rating changes, if any, of the securities or
recent marketplace activity.
 Level 3: Unobservable inputs that are not corroborated by market data. Level 3 is comprised of
financial instruments whose fair value is estimated based on internally developed models or
methodologies utilizing significant inputs that are generally less readily observable. We
initially recorded the warrant liability at its fair value using the Black-Scholes option-pricing
model and revalue it at each reporting date until the warrants are exercised or expire. The fair
value of the warrants is subject to significant fluctuation based on changes in our stock price,
expected volatility, remaining contractual life and the risk-free interest rate.
   Fair Value Measurements at March 31, 2011Carrying Value
    
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)AssetsCash and cash equivalents
    
    $
    12,474,000
    
    
    $
    12,474,000
    
    
    
    
    
    
    
    United States government-backed securities
    
    
    7,824,000
    
    
    
    
    
    
    $
    7,824,000
    
    
    
    Corporate securities
    
    
    769,000
    
    
    
    
    
    
    
    769,000
    
    
    
    Total assets at fair value
    
    
    21,067,000
    
    
    
    12,474,000
    
    
    
    8,593,000
    
    
    
    LiabilitiesWarrant liability
    
    
    3,392,000
    
    
    
    
    
    
    
    
    
    
    $
    3,392,000Total liabilities at fair value
    
    $
    3,392,000
    
    
    $
    
    
    
    $
    
    
    
    $
    3,392,000
 6




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Fair Value Measurements at December 31, 2010Carrying Value
    
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)AssetsCash and cash equivalents
    
    $
    8,884,000
    
    
    $
    8,884,000
    
    
    
    
    
    
    
    United States government-backed securities
    
    
    9,985,000
    
    
    
    
    
    
    $
    9,985,000
    
    
    
    Corporate securities
    
    
    778,000
    
    
    
    
    
    
    
    778,000Total assets at fair value
    
    
    19,647,000
    
    
    
    8,884,000
    
    
    
    10,763,000
    
    
    
    LiabilitiesWarrant liability
    
    
    1,203,000
    
    
    
    
    
    
    
    
    
    
    $
    1,203,000Total liabilities at fair value
    
    $
    1,203,000
    
    
    $
    
    
    
    $
    
    
    
    $
    1,203,000
   Fair Value Measurements Using Significant Unobservable Inputs (Level 3)Three-Month Period Ended March 31, 2011TotalUnrealized
    
    
    Purchases,Fair Value
    
    
    Loss
    
    
    Sales,
    
    
    Transfersat
    
    
    Recognized in
    
    
    Issuances,
    
    
    In and/or
    
    
    Fair Value at
    
    
    Change inJanuary 1,
    
    
    Statement
    
    
    Settlements,
    
    
    Out of
    
    
    March 31,
    
    
    Unrealized2011
    
    
    Of Operations
    
    
    net
    
    
    Level 3
    
    
    2011
    
    
    Losses in 2011Warrant Liability
    
    $
    1,203,000
    
    
    $
    2,189,000
    
    
    $
    
    
    
    $
    
    
    
    $
    3,392,000
    
    
    $
    (2,189,000
    )
 Fair Value Measurements Using Significant Unobservable Inputs (Level 3)Three-Month Period Ended March 31, 2010TotalUnrealized
    
    
    Purchases,Loss
    
    
    Sales,
    
    
    TransfersFair Value at
    
    
    Recognized in
    
    
    Issuances,
    
    
    In and/or
    
    
    Fair Value at
    
    
    Change inJanuary 1,
    
    
    Statement
    
    
    Settlements,
    
    
    Out of
    
    
    March 31,
    
    
    Unrealized2010
    
    
    Of Operations
    
    
    net
    
    
    Level 3
    
    
    2010
    
    
    Gains in 2010Warrant Liability
    
    $
    813,000
    
    
    $
    199,000
    
    
    $
    
    
    
    $
    
    
    
    $
    1,012,000
    
    
    $
    (199,000
    )
 Marketable Securities
  March 31, 2011Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gains
    
    
    Losses
    
    
    ValueUnited States government-backed securities
    
    $
    7,804,000
    
    
    $
    29,000
    
    
    $
    (9,000
    )
    
    $
    7,824,000Corporate securities
    
    
    735,000
    
    
    
    34,000
    
    
    
    
    
    
    
    769,000Total marketable securities
    
    $
    8,539,000
    
    
    $
    63,000
    
    
    $
    (9,000
    )
    
    $
    8,593,000
 December 31, 2010Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gains
    
    
    Losses
    
    
    ValueUnited States government-backed securities
    
    $
    9,954,000
    
    
    $
    34,000
    
    
    $
    (3,000
    )
    
    $
    9,985,000Corporate securities
    
    
    732,000
    
    
    
    46,000
    
    
    
    
    
    
    
    778,000Total marketable securities
    
    $
    10,686,000
    
    
    $
    80,000
    
    
    $
    (3,000
    )
    
    $
    10,763,000
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Common Stock Warrants
  March 31,
    
    December, 312011
    
    2010Expected volatility
    
    
    68.1
    %
    
    
    81
    %Remaining contractual term (years)
    
    
    2.1
    
    
    
    2.3Risk-free interest rate
    
    
    0.8
    %
    
    
    0.7
    %Expected dividend yield
    
    
    0
    %
    
    
    0
    %Common stock price
    
    $
    5.20
    
    
    $
    2.45
 3) CONCENTRATIONS
  4) INVENTORY
  March 31,
    
    
    December 31,2011
    
    
    2010Finished goods
    
    $
    1,104,000
    
    
    $
    907,000BLU-U® evaluation units
    
    
    102,000
    
    
    
    129,000Work in process
    
    
    281,000
    
    
    
    371,000Raw materials
    
    
    1,041,000
    
    
    
    758,000Total
    
    $
    2,528,000
    
    
    $
    2,165,000
 ®
 5) OTHER ACCRUED EXPENSES
  March 31,
    
    
    December 31,2011
    
    
    2010Research and development costs
    
    $
    240,000
    
    
    $
    231,000Marketing and sales costs
    
    
    238,000
    
    
    
    195,000Reserve for sales returns and allowances
    
    
    158,000
    
    
    
    125,000Other product related costs
    
    
    831,000
    
    
    
    798,000Legal and other professional fees
    
    
    453,000
    
    
    
    308,000Due to former Sirius shareholders
    
    
    237,000
    
    
    
    232,000Employee benefits
    
    
    337,000
    
    
    
    298,000Other expenses
    
    
    284,000
    
    
    
    162,000Total
    
    $
    2,778,000
    
    
    $
    2,349,000
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6) SHARE-BASED COMPENSATION
  Three months ended
    
    
    Three months endedMarch 31, 2011
    
    
    March 31, 2010Cost of product revenues
    
    $
    9,000
    
    
    $
    14,000Research and development
    
    
    27,000
    
    
    
    35,000Selling and marketing
    
    
    54,000
    
    
    
    28,000General and administrative
    
    
    107,000
    
    
    
    135,000Total
    
    $
    197,000
    
    
    $
    212,000
  Three months
    
    
    Three monthsended
    
    
    endedMarch 31, 2011
    
    
    March 31, 2010Volatility
    
    
    77.0
    %
    
    
    75.4
    %Risk-free interest rate
    
    
    2.4
    %
    
    
    2.7
    %Expected dividend yield
    
    
    0
    %
    
    
    0
    %Expected life-directors and officers
    
    5.9 years
    
    6.0 yearsExpected life-non-officer employees
    
    5.6 years
    
    5.8 years
  Weighted AverageWeighted
    
    
    RemainingAverage
    
    
    Contractual
    
    
    AggregateExercise
    
    
    Term
    
    
    IntrinsicPrice
    
    
    (Years)
    
    
    ValueOutstanding, beginning of period
    
    
    3,064,050
    
    
    $
    4.09Options granted
    
    
    119,300
    
    
    $
    4.20Options forfeited
    
    
    (6,425
    )
    
    $
    1.49Options expired
    
    
    (62,500
    )
    
    $
    14.04Options exercised
    
    
    (67,325
    )
    
    $
    1.88Outstanding, end of period
    
    
    3,047,100
    
    
    $
    3.94
    
    
    
    4.51
    
    
    $
    7,212,000Exercisable, end of period
    
    
    2,016,377
    
    
    $
    5.00
    
    
    
    3.99
    
    
    $
    3,776,000Options vested and expected to vest, end of period
    
    
    2,934,208
    
    
    $
    4.01
    
    
    
    4.46
    
    
    $
    6,869,000
 Unvested Shares of Common Stock
  Three months
    
    
    Three monthsended
    
    
    endedMarch 31, 2011
    
    
    March 31, 2010Outstanding unvested shares of common stock, beginning of period
    
    
    586,000
    
    
    
    393,250Shares granted
    
    
    450,000
    
    
    
    308,000Shares vested
    
    
    (154,000
    )
    
    
    (81,250
    )Outstanding, end of period
    
    
    882,000
    
    
    
    620,000Weighted average grant date fair value of shares vested during period
    
    $
    1.43
    
    
    $
    1.22Weighted average grant date fair value of shares granted during period
    
    $
    4.20
    
    
    $
    1.65Weighted average grant date fair value of unvested shares, end of period
    
    $
    2.90
    
    
    $
    1.54Weighted average remaining years to vest
    
    
    3.17
    
    
    
    3.25
  9




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7) BASIC AND DILUTED NET LOSS PER SHARE
  Three-month periods ended March 31,2011
    
    
    2010Stock options
    
    
    3,047,000
    
    
    
    3,143,000Warrants
    
    
    1,145,000
    
    
    
    1,395,000Unvested shares of common
stock
    
    
    882,000
    
    
    
    620,000Total
    
    
    5,074,000
    
    
    
    5,158,000
 8) SEGMENT REPORTING
  Three-month
period ended March 31,2011
    
    
    2010REVENUESPDT drug and device product revenues
    
    $
    10,982,000
    
    
    $
    8,296,000Non-PDT drug product revenues
    
    
    100,000
    
    
    
    418,000Total revenues
    
    
    11,082,000
    
    
    
    8,714,000COSTS OF PRODUCT REVENUESPDT drug and device cost of product revenues
    
    
    1,617,000
    
    
    
    1,581,000Non-PDT drug cost of product revenues
    
    
    143,000
    
    
    
    237,000Total cost of product revenues
    
    
    1,760,000
    
    
    
    1,818,000GROSS MARGINSPDT drug and device product gross margins
    
    
    9,365,000
    
    
    
    6,715,000Non-PDT drug product gross margins
    
    
    (43,000
    )
    
    
    181,000Total gross margins
    
    $
    9,322,000
    
    
    $
    6,896,000
  2011
    
    
    2010United States
    
    
    97
    %
    
    
    97
    %Canada
    
    
    2
    %
    
    
    1
    %Korea
    
    
    1
    %
    
    
    1
    %Other
    
    
    
    
    
    
    1
    %Total
    
    
    100
    %
    
    
    100
    %
 9) COMPREHENSIVE LOSS
  March 31,
    
    
    March 31,2011
    
    
    2010NET LOSS
    
    $
    (605,000
    )
    
    $
    (424,000
    )Change in net unrealized gains on marketable securities available-for-sale
    
    
    (24,000
    )
    
    
    (34,000
    )COMPREHENSIVE LOSS
    
    $
    (629,000
    )
    
    $
    (458,000
    )
 10




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##### Table of Contents



10) SIGNIFICANT PRODUCT AGREEMENTS
 Stiefel Agreement
 ®
 Daewoong Agreement
 ® ® ®
 PhotoCure Agreement
 ® ® ®
  11) INCOME TAXES
  11




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##### Table of Contents



12) COMMITMENTS AND CONTINGENCIES
 Business Acquisition
   AdditionalCumulative Sales Milestone:
    
    Consideration:$35.0 million
    
    $1.0 million$45.0 million
    
    $1.0 millionTotal
    
    $2.0 million
 Third Amendment to Merger Agreement
    Lease Arrangements
  OperatingYears Ending December 31,
    
    Lease Obligations2011
    
    $     286,0002012
    
    389,0002013
    
    396,0002014
    
    366,000Total

    
    $  1,437,000
 
 ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  ® ® ® ® ®
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##### Table of Contents



® ® ® ® ® ® ®
 ® ® ® ® ®
 ®
 ® ® ® ® ® ® ® ® ® ® ® ®
 ® ® ® ®
 CRITICAL ACCOUNTING POLICIES
  RESULTS OF OPERATIONS THREE MONTHS ENDING MARCH 31, 2011 VERSUS MARCH 31, 2010
 Revenues
 2011
    
    
    2010
    
    
    Increase/(Decrease)PDT DRUG AND DEVICE PRODUCT REVENUESLEVULAN® KERASTICK® PRODUCT REVENUESUnited States
    
    $
    10,187,000
    
    
    $
    7,549,000
    
    
    
    $2,638,000Canada
    
    
    183,000
    
    
    
    57,000
    
    
    
    126,000Korea
    
    
    116,000
    
    
    
    109,000
    
    
    
    7,000Rest of world
    
    
    7,000
    
    
    
    87,000
    
    
    
    (80,000
    )Subtotal Levulan® Kerastick® product revenues
    
    
    10,493,000
    
    
    
    7,802,000
    
    
    
    2,691,000BLU-U® PRODUCT REVENUESUnited States
    
    
    489,000
    
    
    
    489,000
    
    
    
    Canada
    
    
    
    
    
    
    5,000
    
    
    
    (5,000
    )Subtotal BLU-U® product revenues
    
    
    489,000
    
    
    
    494,000
    
    
    
    (5,000
    )TOTAL PDT DRUG AND DEVICE PRODUCT REVENUES
    
    
    10,982,000
    
    
    
    8,296,000
    
    
    
    2,686,000TOTAL NON-PDT DRUG PRODUCT REVENUES
    
    
    100,000
    
    
    
    418,000
    
    
    
    (318,000
    )TOTAL PRODUCT REVENUES
    
    $
    11,082,000
    
    
    $
    8,714,000
    
    
    
    $2,368,000
 ® ® ®
 ® ® ® ® ® ®
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® ® ® ® ®
 ® ® ® ® ® ® ®
 ® ® ® ®
 ® ®
 ® ® ® TM
 ®
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##### Table of Contents



Cost Of Product Revenues and Royalties
 Increase/2011
    
    
    2010
    
    
    DecreaseLevulan® Kerastick® Cost of Product Revenues and RoyaltiesDirect Levulan ® Kerastick ® Product costs
    
    $
    768,000
    
    
    $
    665,000
    
    
    $
    103,000Other Levulan® Kerastick® production costs including internal costs
assigned to support products, net
    
    
    14,000
    
    
    
    114,000
    
    
    
    (100,000
    )Royalty and supply fees (1)
    
    
    411,000
    
    
    
    306,000
    
    
    
    105,000Subtotal Levulan® Kerastick® Cost of Product Revenues and Royalties
    
    
    1,193,000
    
    
    
    1,085,000
    
    
    
    108,000BLU-U ® Cost of Product RevenuesDirect BLU-U® Product Costs
    
    
    257,000
    
    
    
    277,000
    
    
    
    (20,000
    )Other BLU-U® Product Costs including internal costs assigned to support products;
as well as, costs incurred to ship, install and service the BLU-U® in physicians
offices
    
    
    167,000
    
    
    
    219,000
    
    
    
    (52,000
    )Subtotal BLU-U® Cost of Product Revenues
    
    
    424,000
    
    
    
    496,000
    
    
    
    (72,000
    )TOTAL PDT DRUG AND DEVICE COST OF PRODUCT REVENUES AND ROYALTIES
    
    
    1,617,000
    
    
    
    1,581,000
    
    
    
    36,000Non-PDT Drug Cost of Product Revenues and Royalties
    
    
    143,000
    
    
    
    237,000
    
    
    
    (94,000
    )TOTAL COST OF PRODUCT REVENUES AND ROYALTIES
    
    $
    1,760,000
    
    
    $
    1,818,000
    
    
    $
    (58,000
    )
 
 (1)
    
    Royalty and Supply fees reflect amounts paid to our licensor,
PARTEQ, and amortization of an upfront fee and royalties paid to
Draxis Health, Inc. on sales of Levulan®
Kerastick® in Canada. Margins
 Increase/2011
    
    
    
    
    
    
    2010
    
    
    
    
    
    
    (Decrease)Levulan ® Kerastick ® gross margin
    
    $
    9,300,000
    
    
    
    89
    %
    
    $
    6,717,000
    
    
    
    86
    %
    
    $
    2,583,000BLU-U ® gross margin
    
    
    65,000
    
    
    
    13
    %
    
    
    (2,000
    )
    
    
    
    
    
    
    67,000Total PDT drug and device gross margin
    
    $
    9,365,000
    
    
    
    85
    %
    
    $
    6,715,000
    
    
    
    81
    %
    
    $
    2,650,000Total Non-PDT gross margin
    
    
    (43,000
    )
    
    
    (43
    )%
    
    $
    181,000
    
    
    
    43
    %
    
    
    (224,000
    )TOTAL GROSS MARGIN
    
    $
    9,322,000
    
    
    
    84
    %
    
    $
    6,896,000
    
    
    
    79
    %
    
    $
    2,426,000
 ® ® ®
 ® ® ® ®
  Research and Development Costs
 ® ® ® ® ®
 Marketing and Sales Costs
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General and Administrative Costs
 Loss on Change in Fair Value of Warrants
 Other Income, Net
 Income Taxes
  Net Loss
 LIQUIDITY AND CAPITAL RESOURCES
 Liquidity and Capital Resources
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® ® ®
  Cumulative Sales Milestone:
    
    Additional 
Consideration:$35.0 million
    
    $1.0 million$45.0 million
    
    $1.0 millionTotal
    
    $2.0 million
   Contractual Obligations and Other Commercial Commitments
 L. Perrigo Company
 ®
 Merger With Sirius Laboratories, Inc.
 ® ®
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##### Table of Contents



PARTEQ Agreement
 ®
  National Biological Corporation Amended And Restated Purchase And Supply Agreement
 ®
 Sochinaz SA
 ®
 Lease Agreements
  Research Agreements
   Total
    
    
    1 Yr or less
    
    
    2-3 Years
    
    
    4-5 Years
    
    

After
5 YearsOperating lease obligations
    
    $
    1,437,000
    
    
    $
    383,000
    
    
    $
    788,000
    
    
    $
    266,000
    
    
    $
    Purchase obligations (1, 2)
    
    
    3,230,000
    
    
    
    3,230,000
    
    
    
    
    
    
    
    
    
    
    
    Minimum royalty obligations (3)
    
    
    508,000
    
    
    
    353,000
    
    
    
    155,000
    
    
    
    
    
    
    
    Total obligations
    
    $
    5,175,000
    
    
    $
    3,966,000
    
    
    $
    943,000
    
    
    $
    266,000
    
    
    $
    
 
 1)
    
    Research and development projects include various commitments including obligations
for our study on a broad area application, short drug incubation method of using the
Levulan® Kerastick®2)
    
    In addition to the obligations disclosed above, we have contracted with Therapeutics, Inc.,
a clinical research organization, to manage the clinical development of our products in the
field of dermatology. This organization has the opportunity for additional stock grants,
bonuses, and other incentives for each product indication ranging from $250,000 to
$1,250,000, depending on the regulatory phase of development of products under Therapeutics
management.3)
    
    Minimum royalty obligations relate to our agreements with PARTEQ and Perrigo described above.  18




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INFLATION
  
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 Interest Rates
   Derivative Financial Instruments
  Currency Exchange Rates
   
 ITEM 4. CONTROLS AND PROCEDURES
   Forward-Looking Statements Safe Harbor
 ® ® ® ®
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PART II  OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS.
  
 ITEM 1A. RISK FACTORS
   Risks Related To DUSA
 Any Failure To Comply With Ongoing Governmental Regulations In The United States And Elsewhere Will
Limit Our Ability To Market Our Products And Achieve Profitability On A Quarterly Basis.
  
    
    approval of manufacturing facilities, including adherence to good manufacturing and
laboratory practices during production and storage,
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
    
    controlled research and testing of some of these products even after approval,
    
    control of marketing activities, including sales promotions, advertising and labeling, and
    
    state permits for the sale and distribution of products manufactured in and out-of-state.
  
    
    send warning letters,
    
    impose fines and other civil penalties on us,
    
    seize our products,
    
    suspend our regulatory approvals,
    
    cease the manufacture of our products,
    
    refuse to approve pending applications or supplements to approved applications filed by us,
    
    refuse to permit exports of our products from the United States,
    
    require us to recall products,
    
    require us to notify physicians of labeling changes and/or product related problems,
    
    impose restrictions on our operations, and/or
    
    criminally prosecute us.
  ® ® ®
  We May Not Achieve Profitability On A Quarterly Basis Unless We Can Successfully Market And Sell
Significantly Higher Quantities Of Our Products.
 If A Competitive Product Is Successful Our Revenues Could Decline, And Our Ability To Achieve
Profitability On A Quarterly Basis Could Be Delayed.
 ® ® ® ® ® ® ® TM
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If We Do Not Continue To Generate Positive Cash Flow, We May Need More Capital.
 ® ®
 We Have Had Significant Cumulative Losses And May Have Losses In The Future.
  If Product Sales Do Not Continue to Increase, We May Not Be Able To Advance Development Of Other
Potential Products As Quickly As We Would Like To, Which Would Delay The Approval Process And
Marketing Of New Potential Products, If Approved.
  If We Are Unable To Obtain The Necessary Capital To Fund Our Operations, We Will Have To Delay Our
Development Program And May Not Be Able To Complete Our Clinical Trials.
   Global Credit And Financial Market Conditions May Affect Our Business.
  ® ®
 If The Economic Slowdown Adversely Affects Our Customers Ability To Meet Our Payment Terms, Our
Cash Flow Would Be Adversely Affected And Our Ability To Continue To Be Profitable Could Be
Jeopardized.
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We Have Only Three Therapies That Have Received Regulatory Approval Or Clearance, And We Cannot
Predict Whether We Will Ever Develop Or Commercialize Any Other Levulan ® Product Or
Indications.
 Potential Products Or PDT Indications Are In Early Stages Of Development And May Never Result In
Any Additional Commercially Successful Products.
 ® ® ®
 
    
    delays in product development, clinical testing or manufacturing,
    
    unplanned expenditures in product development, clinical testing or manufacturing,
    
    failure in clinical trials or failure to receive regulatory approvals,
    
    emergence of superior or equivalent products,
    
    inability to market products due to third-party proprietary rights, and
    
    failure to achieve market acceptance.
 ®
 We Must Receive Separate Approval For Any Drug Or Medical Device Products Before We Can Sell Them
Commercially In The United States Or Abroad.
 ® ® ®
 ®
 We Have Limited Patent Protection, And If We Are Unable To Protect Our Proprietary Rights,
Competitors Might Be Able To Develop Similar Products To Compete With Our Products And Technology.
 ®
 
    
    methods of using ALA and its unique physical forms in combination with light to treat conditions such as AKs and acne,
    
    compositions and apparatus for those methods, and
    
    unique physical forms of ALA.
 ® ®
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®
 ® ® ®
  
    
    these persons or entities might breach the agreements,
    
    we might not have adequate remedies for a breach, and/or,
    
    our competitors will independently develop or otherwise discover our trade secrets.
 Since We Now Operate The Only FDA Approved Manufacturing Facility For The Kerastick ® And
Continue To Rely Heavily On Sole Suppliers For The Manufacture Of Levulan ® The
BLU-U ® ClindaReach ® And Meted ® Any Supply Or Manufacturing
Problems Could Negatively Impact Our Sales
 ® ® ® ® ® ®
  
    
    product yields,
    
    quality control,
    
    component and service availability,
    
    compliance with FDA regulations, and
    
    the need for further FDA approval if manufacturers make material changes to manufacturing processes and/or facilities.
  Our Ability To Use Net Operating Loss Carryforwards and Tax Credit Carryforwards To Offset Future
Taxable Income May Be Further Limited As A Result Of Past Or Future Transactions Involving Our
Common Stock.
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We Have Only Limited Experience Marketing And Selling Pharmaceutical Products Outside Of The United
States And As A Result, Our Revenues From Product Sales May Suffer.
 ® ® ®
 The Commercial Success Of Any Product That We May Develop Will Depend Upon The Degree Of Market
Acceptance Of Our Products Among Physicians, Patients, Health Care Payors, Private Health Insurers
And The Medical Community.
  
    
    the effectiveness, or perceived effectiveness, of our product in comparison to competing products,
    
    the existence of any significant side effects, as well as their severity in comparison to any competing products,
    
    potential advantages over alternative treatments,
    
    the ability to offer our product for sale at competitive prices,
    
    relative convenience and ease of administration,
    
    the strength of marketing and distribution support, and
    
    sufficient third-party coverage or reimbursement.
 If We Cannot Maintain or Improve Physician Reimbursement And/Or Convince More Private Insurance
Carriers To Adequately Reimburse Physicians For Our Product, Sales May Suffer.
 ® ®
  Litigation Is Expensive And We May Not Be Able To Afford The Costs.
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Because Of The Nature Of Our Business, The Loss Of Key Members Of Our Management Team Could Delay
Achievement Of Our Goals.
  Collaborations With Outside Scientists May Be Subject To Restriction And Change.
  Risks Related To Our Industry
 Product Liability And Other Claims Against Us May Reduce Demand For Our Products Or Result In
Damages.
 We Are Subject To Risk From Potential Product Liability Lawsuits Which Could Negatively Affect Our
Business.
  Our Business Involves Environmental Risks And We May Incur Significant Costs Complying With
Environmental Laws And Regulations.
  We May Not Be Able To Compete Against Traditional Treatment Methods Or Keep Up With Rapid Changes
In The Biotechnology And Pharmaceutical Industries That Could Make Some Or All Of Our Products
Non-Competitive Or Obsolete.
 Competing Products And Technologies Based On Traditional Treatment Methods May Make Our Products Or
Potential Products Noncompetitive Or Obsolete.
    
    
    price reductions,
    
    lower levels of third-party reimbursements,
    
    failure to achieve market acceptance, and
    
    loss of market share,
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® ® ® ® ® ® ®
 Our Competitors In The Biotechnology And Pharmaceutical Industries May Have Better Products,
Manufacturing Capabilities Or Marketing Expertise.
 ®
  
    
    the ease of administration of our method of PDT,
    
    the degree of generalized skin sensitivity to light,
    
    the number of required doses,
    
    the selectivity of our drug for the target lesion or tissue of interest, and
    
    the type and cost of our light systems.
  Risks Related To Our Stock
 Our Common Stock May Not Continue To Trade On The Nasdaq Global Market, Which Could Reduce The
Value Of Your Investment And Make Your Shares More Difficult To Sell.
  Our Stock Price Is Highly Volatile And Sudden Changes In The Market Value Of Our Stock Occur Making
An Investment Risky.
  Significant Fluctuations In Orders For Our Products, On A Monthly And Quarterly Basis, Are Common
Based On External Factors And Sales Promotion Activities. These Fluctuations Could Increase The
Volatility Of Our Stock Price.
  27




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Future Sales Of Securities May Cause Our Stock Price To Decline.
  Effecting A Change Of Control Of DUSA Would Be Difficult, Which May Discourage Offers For Shares Of
Our Common Stock.
     
 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
  
 ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
  
 ITEM 4. [REMOVED AND RESERVED].
 
 ITEM 5. OTHER INFORMATION.
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ITEM 6. EXHIBITS
 EXHIBITNO.
    
    DESCRIPTION OF EXHIBIT3(a.1)
    
    Certificate of Incorporation, as amended, filed as Exhibit 3(a) to the Registrants Form 10-K for the fiscal year
ended December 31, 1998, and is incorporated herein by reference.3(a.2)
    
    Certificate of Amendment to the Certificate of Incorporation, as amended, dated October 28, 2002 and filed as Exhibit
99.3 to the Registrants Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2002, filed November
12, 2002, and is incorporated herein by reference.3(b)
    
    By-laws of the Registrant, filed as Exhibit 3.1 to the Registrants current report on Form 8-K, filed on November 2,
2010, and is incorporated herein by reference.31(a)
    
    Certification pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934.31(b)
    
    Certification pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934.32(a)
    
    Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32(b)
    
    Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.99.1
    
    Press Release dated May 5, 2011.
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##### Table of Contents



SIGNATURES
  DUSA Pharmaceuticals, Inc.By:
    /s/ Robert F. DomanRobert DomanPresident and Chief Executive Officer
(principal executive officer)  By:
    /s/ Richard C. ChristopherRichard C. ChristopherVice President, Finance and Chief Financial
Officer (principal financial officer)  30




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EXHIBIT INDEX
 3(a.1)
    
    Certificate of Incorporation, as amended, filed as Exhibit 3(a) to the Registrants Form 10-K for the fiscal year
ended December 31, 1998, and is incorporated herein by reference.3(a.2)
    
    Certificate of Amendment to the Certificate of Incorporation, as amended, dated October 28, 2002 and filed as Exhibit
99.3 to the Registrants Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2002, filed November
12, 2002, and is incorporated herein by reference.3(b)
    
    By-laws of the Registrant, filed as Exhibit 3.1 to the Registrants current report on Form 8-K, filed on November 2,
2009, and is incorporated herein by reference.31(a)
    
    Certification pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934.31(b)
    
    Certification pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934.32(a)
    
    Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32(b)
    
    Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.99.1
    
    Press Release dated May 5, 2011.
 31