BioSpecifics Technologies Corp.
Annual Report 2009

Plain-text annual report

Morningstar® Document Research℠ FORM 10-KBIOSPECIFICS TECHNOLOGIES CORP - BSTCFiled: March 15, 2010 (period: December 31, 2009)Annual report with a comprehensive overview of the companyThe information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The userassumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot belimited or excluded by applicable law. Past financial performance is no guarantee of future results.UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549FORM 10-K(Mark One)[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2009[ ] 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: 001-34236BIOSPECIFICS TECHNOLOGIES CORP.(Exact name of registrant as specified in its charter)Delaware11-3054851(State or other jurisdiction of(I.R.S. Employerincorporation or organization)Identification No.)35 Wilbur Street, Lynbrook, NY11563(Address of principal executive offices)(Zip Code)Registrant’s telephone number, including area code: 516.593.7000 Securities registered under Section 12(b) of the Exchange Act:Title of each class Name of each exchange on which registeredCommon StockThe Nasdaq Global MarketSecurities registered under Section 12(g) of the Exchange Act: NONEIndicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. [ ] Yes [X] NoIndicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. [ ] Yes [X]NoNote – Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Exchange Act fromtheir obligations under those Sections.Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days. [X] Yes [ ]NoIndicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not containedherein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by referencein Part III of this Form 10-K or any amendment to this Form 10-K. [ ]iSource: BIOSPECIFICS TECHNOLOGIES CORP, 10-K, March 15, 2010Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reportingcompany. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.Large accelerated filer [ ]Accelerated filer [X]Non-accelerated filer [ ] (Do not check if a smaller reporting company)Smaller reporting company [ ]Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). [ ] Yes [X] NoThe aggregate market value of voting and non-voting common stock held by non-affiliates of the Registrant as of June 30, 2009, the lastbusiness day of the registrant’s most recently completed second fiscal quarter, was approximately $90,200,000.Note – If a determination as to whether a particular person or entity is an affiliate cannot be made without involving unreasonable effort andexpense, the aggregate market value of the common stock held by non-affiliates may be calculated on the basis of assumptions reasonableunder the circumstances, provided that the assumptions are set forth in this Form.The number of shares outstanding of the registrant’s common stock as of March 2, 2010 is 6,351,818.DOCUMENTS INCORPORATED BY REFERENCEPortions of the registrant’s definitive proxy statement for its 2010 Annual Meeting of Stockholders scheduled to be held on June 17, 2010,which is expected to be filed with the Securities and Exchange Commission not later than 120 days after the end of the registrant’s fiscal yearended December 31, 2009, are incorporated by reference into Part III of this annual report on Form 10-K. With the exception of the portions ofthe registrant’s definitive proxy statement for its 2010 Annual Meeting of Stockholders that are expressly incorporated by reference into thisannual report on Form 10-K, such proxy statement shall not be deemed filed as part of this annual report on Form 10-K.iiSource: BIOSPECIFICS TECHNOLOGIES CORP, 10-K, March 15, 2010Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.TABLE OF CONTENTSPagePART I2 Item 1. DESCRIPTION OF BUSINESS.2 Item 1A. RISK FACTORS14 Item IB. UNRESOLVED STAFF COMMENTS23 Item 2. DESCRIPTION OF PROPERTY.23 Item 3. LEGAL PROCEEDINGS.24 Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS.24PART II 24 Item 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS.24 Item 6. SELECTED FINANCIAL DATA26 Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION26 Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.31 Item 8. FINANCIAL STATEMENTS.31 Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIALDISCLOSURE.31 Item 9A. CONTROLS AND PROCEDURES31 Item 9B. OTHER INFORMATION32PART III 32 Item 10. DIRECTORS AND EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCEWITH SECTION 16(a) OF THE EXCHANGE ACT32 Item 11. EXECUTIVE COMPENSATION.32 Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATEDSTOCKHOLDER MATTERS.32 Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.33 Item 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.33PART IV 33 Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.33iSource: BIOSPECIFICS TECHNOLOGIES CORP, 10-K, March 15, 2010Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Introductory Comments – TerminologyThroughout this annual report on Form 10-K (this “Report”), the terms “BioSpecifics,” “Company,” “we,” “our,” and “us” refer to BioSpecificsTechnologies Corp. and its subsidiary, Advance Biofactures Corporation (“ABC-NY”).Introductory Comments – Forward-Looking StatementsThis Report includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, andSection 21E of the Securities Exchange Act of 1934, as amended. All statements other than statements of historical facts are “forward-lookingstatements” for purposes of these provisions, including any projections of earnings, revenues or other financial items, any statements of theplans and objectives of management for future operations, any statements concerning proposed new products or licensing or collaborativearrangements, any statements regarding future economic conditions or performance, and any statement of assumptions underlying any ofthe foregoing. In some cases, forward-looking statements can be identified by the use of terminology such as “may,” “will,” “expects,” “plans,”“anticipates,” “estimates,” “potential,” or “continue” or the negative thereof or other comparable terminology. Although we believe that theexpectations reflected in the forward-looking statements contained in this Report are reasonable, there can be no assurance that suchexpectations or any of the forward-looking statements will prove to be correct, and actual results could differ materially from those projected orassumed in the forward-looking statements. Our future financial condition and results of operations, as well as any forward-lookingstatements, are subject to inherent risks and uncertainties, including but not limited to the risk factors set forth below, and for the reasonsdescribed elsewhere in this Report. All forward-looking statements and reasons why results may differ included in this Report are made as ofthe date hereof, and we assume no obligation to update these forward-looking statements or reasons why actual results might differ.1Source: BIOSPECIFICS TECHNOLOGIES CORP, 10-K, March 15, 2010Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.PART IItem 1. DESCRIPTION OF BUSINESS.OverviewWe are a biopharmaceutical company involved in the development of an injectable collagenase for multiple indications. We have adevelopment and license agreement with Auxilium Pharmaceuticals, Inc. (“Auxilium”) for injectable collagenase (which Auxilium hasnamed “XIAFLEXTM” (formerly known as “AA4500”)) for clinical indications in Dupuytren’s contracture, Peyronie’s disease and frozenshoulder (adhesive capsulitis), and Auxilium has an option to acquire additional indications that we may pursue, including lipomas andcellulite.FDA Approval for Dupuytren’s ContractureAuxilium announced on February 2, 2010 that it received marketing approval from the United States Food and Drug Administration (“FDA”)for XIAFLEX for the treatment of adult Dupuytren’s contracture patients with a palpable cord as further described in this Item 1 under theheading “Collagenase for Treatment of Dupuytren’s Contracture.” Auxilium plans to launch XIAFLEX, the only drug approved by the FDA forthe treatment of Dupuytren’s contracture, in late March 2010. In its March 2010 presentation materials, Auxilium stated, “We believe thereare at least 450,000 potential patients annually in [the] U.S. and EU for Dupuytren’s & Peyronie’s indications or > $1 Billion opportunity,based on market research and analysis.” Further, Auxilium stated in its Form 10-K filed with the SEC on February 26, 2010 its belief that“XIAFLEX has the potential to become a blockbuster.” Auxilium has also announced the list price to distributors of XIAFLEX. In a February17, 2010 press release, Auxilium stated this list price will be $3,250 and that it anticipates that Dupuytren’s contracture patients treated withXIAFLEX will have 1.5 cords treated, on average, and that each cord will be treated with an average of 1.1 vials of XIAFLEX. As discussed inmore detail below under the section titled “Licensing and Marketing Agreements,” we will be entitled to low double-digit royalties for net salesof XIAFLEX pursuant to our development and licensing agreement with Auxilium.Research and Development of Injectable Collagenase for Multiple IndicationsWe entered into a development and license agreement with Auxilium on June 3, 2004, as amended on May 10, 2005 and December 15,2005, respectively (the “Prior Auxilium Agreement”), pursuant to which we granted to Auxilium an exclusive worldwide license to develop,market and sell products containing our injectable collagenase for the treatment of Dupuytren’s contracture, Peyronie's disease and frozenshoulder, as well as an exclusive option to develop and license the technology for use in additional indications other than dermalformulations labeled for topical administration.On December 11, 2008, the parties amended and restated, in its entirety, the Prior Auxilium Agreement (the “Auxilium Agreement”), whichbecame effective on December 17, 2008 upon the execution and effectiveness of the Development, Commercialization and SupplyAgreement, dated December 17, 2008 (the “Pfizer Agreement”) between Auxilium International Holdings, Inc., a wholly-owned subsidiary ofAuxilium, and Pfizer, Inc. (“Pfizer”). Under the Pfizer Agreement, Pfizer will market XIAFLEX for the treatment of Dupuytren’s contractureand Peyronie’s disease in Europe and various other territories.The Auxilium Agreement and other licensing agreements are discussed more fully in this Item 1, under the section titled “Licensing andMarketing Agreements.”In its Form 10-K filed with the SEC on February 26, 2010, Auxilium stated that it plans “to prioritize our development of additional pipelineindications for XIAFLEX. We have previously taken a license for the development and commercialization of Frozen Shoulder syndrome, butother areas of interest could include cellulite and lipoma.” In the event that Auxilium does license XIAFLEX in other indications, we will beentitled to receive a certain percentage of sublicense income and milestone payments for such indications pursuant to the terms of theAuxilium Agreement.2Source: BIOSPECIFICS TECHNOLOGIES CORP, 10-K, March 15, 2010Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Background on CollagenaseCollagenase is the only protease that can hydrolyze the triple helical region of collagen under physiological conditions. The specific substratecollagen comprises approximately one-third of the total protein in mammalian organisms, and it is the main constituent of skin, tendon, andcartilage, as well as the organic component of teeth and bone. The body relies on endogenous collagenase production to remove dead tissueand collagenase production is an essential biological mechanism, which regulates matrix remodeling and the normal turnover of tissue. TheClostridial collagenase produced by us has a broad specificity towards all types of collagen and is acknowledged as much more efficient thanmammalian collagenases. Clostridial collagenase cleaves the collagen molecule at multiple sites along the triple helix whereas themammalian collagenase is only able to cleave the molecule at a single site along the triple helix.Collagenase is widely used for cell dispersion for tissue disassociation and cell culture because it does not damage the cell membrane. Sincethe main component of scar tissue is collagen, collagenase has been used in a variety of clinical investigations to remove scar tissue withoutsurgery. Histological and biochemical studies have shown that the tissue responsible for the deformities associated with Dupuytren’scontracture and Peyronie’s disease is primarily composed of collagen. Surgical removal of scar tissue has the potential to result incomplications including increased scar formation. Due to the highly specific nature of the Clostridial collagenase enzyme, we consider itsuse to be more desirable for the removal of unwanted tissue than the application of general proteolytic enzymes. Treatment with injectablecollagenase for removal of excessive scar tissue represents a first in class non-invasive approach to this unmet medical need. The leadindications involving our injectable collagenase are Dupuytren’s contracture, Peyronie’s disease and frozen shoulder. New clinical indicationsinvolving the therapeutic application of Clostridial collagenase to supplement the body’s own natural enzymes are continuously beingproposed to us by specialists in the medical community.Collagenase for Treatment of Dupuytren’s ContractureDupuytren’s contracture is a deforming condition of the hand in which one or more fingers contract toward the palm, often resulting inphysical disability. The onset of Dupuytren’s contracture is characterized by the formation of nodules in the palm that are composed primarilyof collagen. As the disease progresses, the collagen nodules begin to form a cord causing the patient’s finger(s) to contract, making itimpossible to open the hand fully. Patients often complain about the inability to wash their hands, wear gloves, or grasp some objects.Dupuytren’s contracture has a genetic basis and it is most prevalent in individuals of northern European ancestry. Well-known individualswith Dupuytren’s contracture include President Ronald Reagan, President George Bush, and Prime Minister Margaret Thatcher.Prior to FDA approval of XIAFLEX, the only proven treatment for Dupuytren’s contracture was surgery. Recurrence rates after surgery can beas high as 30% the first two years after surgery and 55% within ten years of surgery. The post surgical recovery is often associated withsignificant pain, delayed return to work, and extended periods of postoperative physical therapy. Because many of the individuals withDupuytren’s contracture are older than 60, there is considerable resistance from patients to undergo the surgical procedure, which alsoinvolves the risk of general anesthesia. In addition, hand surgeons note that surgery for Dupuytren’s contracture is tedious, lengthy andpoorly reimbursed in the U.S. In a conference on February 8, 2007, Auxilium stated that the average cost of Dupuytren’s contracture surgeryis $5,000 in the U.S. and $3,500 in Europe. Auxilium has reported that U.S. based hand surgeons would recommend the use of collagenaseinjection on 76% of the patients who are candidates for surgery. This figure is consistent with an earlier survey that we conducted, whichfound that U.S. hand surgeons would recommend the use of collagenase injection on 80% of patients considered eligible for Dupuytren’scontracture surgery. Both of these surveys were conducted prior to the results of the Auxilium Phase III trials being available.We anticipate that many of the patients who are now willing to live with the disease given the current treatment options would be receptive toan alternative treatment involving a collagenase injection into the hand that could be performed in doctor’s office. As quoted in Auxilium’sFebruary 2, 2010 press release, “‘With the safety and effectiveness of XIAFLEX demonstrated across multiple clinical trials, physicians cannow use XIAFLEX to treat any symptomatic cords in patients with Dupuytren’s contracture,’” said Larry Hurst, M.D., study investigator andProfessor and Chair, Department of Orthopaedics at SUNY Stony Brook. “‘I believe that XIAFLEX, as a new nonsurgical treatment, couldpotentially become the standard of care for Dupuytren’s contracture.’”3Source: BIOSPECIFICS TECHNOLOGIES CORP, 10-K, March 15, 2010Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Auxilium, in its Form 10-K filed with the SEC on February 26, 2010, cited the following reasons that XIAFLEX will be desired as analternative to surgery, it:“delivers improvement to 0 to 5 degrees of normal joint contracture without surgery for many patients;Safeguards patients from the complications commonly associated with surgery;Simplifies treatment by offering a convenient in-office procedure alternative;Streamlines recovery for a rapid return to daily activities; andSignificantly reduces costly and time-consuming physical therapy associated with surgery.”Commercialization StatusFDA Approval of XIAFLEXIn a February 2, 2010 press release, Auxilium announced that it received marketing approval from the FDA for XIAFLEX for the treatment ofadult Dupuytren's contracture patients with a palpable cord and expects to begin shipping XIAFLEX to its distribution partners in early March2010 for a launch planned later that month. XIAFLEX is the only drug approved by the FDA for the treatment of Dupuytren’s contracture. Theprescribing information for XIAFLEX made available by Auxilium lists “tendon ruptures or other serious injury to the injected extremity” as areported serious adverse reaction to XIAFLEX. The prescribing information for XIAFLEX also states that the most frequently reported adversedrug reactions in XIAFLEX clinical trials included swelling of the injected hand, contusion, injection site reaction, injection site hemorrhage,and pain in the treated extremity. The prescribing information notes that adverse reaction rates observed in clinical trials of a drug may notreflect those observed in practice because such trials “are conducted under widely varying conditions.”According to the February 2, 2010 Auxilium press release, Auxilium plans to market and sell XIAFLEX in the United States through a teamof field sales managers and representatives, reimbursement specialists and managed market account directors to experienced physicianswho have “attested to completion of a training program.” Auxilium will also have a staff of 11 “highly trained medical science liaisons”providing medical support for XIAFLEX. Auxilium also stated in its February 2, 2010 press release that: “The FDA has required a riskevaluation and mitigation strategy (REMS) program for XIAFLEX, which consists of a communication plan and a medication guide. ThisREMS program is designed (1) to evaluate and mitigate known and potential risks and serious adverse events; (2) to inform healthcareproviders about how to properly inject XIAFLEX and perform finger extension procedures; and, (3) to inform patients about the serious risksassociated with XIAFLEX.”Auxilium has announced the pricing for list price to distributors of XIAFLEX. According to a February 17, 2010 Auxilium press release, thislist price will be $3,250, and Auxilium anticipates that Dupuytren’s contracture patients treated with XIAFLEX will have 1.5 cords treated, onaverage, and that each cord will be treated with an average of 1.1 vials of XIAFLEX. As discussed in more detail below under the section titled“Licensing and Marketing Agreements,” we will be entitled to low double-digit royalties for net sales of XIAFLEX pursuant to the AuxiliumAgreement.European Regulatory Review of XIAFLEXOn January 21, 2010, Pfizer and Auxilium announced that the scientific/technical review procedure for the Marketing Authorization Approvalfor XIAFLEX for Dupuytren’s contracture in Europe had begun. Pfizer is responsible for marketing XIAFLEX for Dupuytren’s contracture andPeyronie’s disease in 27 member countries of the European Union and 19 other European and Eurasian countries.Collagenase for Treatment of Peyronie’s DiseasePeyronie’s disease is characterized by the presence of a collagen plaque on the shaft of the penis, which can distort an erection and makeintercourse difficult or impossible in advanced cases. In some mild cases, the plaque can resolve spontaneously without medicalintervention. In severe cases, the penis can be bent at a 90-degree angle during erection. Significant psychological distress has been noted inpatients with Peyronie’s disease who are sexually active. Frequent patient complaints include increased pain, painful erections, palpableplaque, penile deformity, and erectile dysfunction. Patients with Peyronie’s disease have been reported to have an increased likelihood ofhaving Dupuytren’s contracture, frozen shoulder, plantar fibromatosis, knuckle pads, hypertension and diabetes. Peyronie’s disease typicallyaffects males in the range of 40-70 years. The cause of Peyronie’s disease is unknown, although some investigators have proposed that itmay be due to trauma or an autoimmune component. A number of researchers have suggested that the incidence of Peyronie’s disease hasincreased due to the use of erectile dysfunction drugs.4Source: BIOSPECIFICS TECHNOLOGIES CORP, 10-K, March 15, 2010Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Surgery is the only proven treatment for Peyronie’s disease and the results are variable. Surgery often results in shortening of the penis.Auxilium has reported that 33% of Peyronie’s disease patients who undergo surgery are subsequently dissatisfied with the results and theyfrequently require a penile implant. Patients with Peyronie’s disease strongly desire therapeutic alternatives to surgery. Auxilium hasreported that 90% of urologists would use collagenase injection to delay or avoid surgery. This finding is consistent with a survey of urologistsconducted for us.Histological and biochemical studies indicate that the scarring on the penis due to Peyronie’s disease is composed primarily of collagen.Development StatusPhase I and II trials have been conducted and indicate the possible effectiveness of Clostridial collagenase on Peyronie’s disease.Phase IIb TrialOn December 16, 2009, Auxilium announced top-line efficacy and safety results from a Phase IIb trial of XIAFLEX for the treatment ofPeyronie’s disease. Auxilium also announced that it plans to meet with the FDA in the second quarter of 2010 to discuss the Phase IIbresults, as well as a proposed Phase III trial that potentially could be started in the second half of 2010. The Phase IIb study was designed tomeasure efficacy endpoints of improvement in penile curvature and improvement in patients’ sexual quality of life using the Peyronie’sdisease Patient Reported Outcome (PRO) questionnaire. The PRO measured four domains of patients' sexual quality of life (penile pain,Peyronie's disease bother, intercourse discomfort and intercourse constraint) at the end of 36 weeks. As quoted by Auxilium in its pressrelease, “‘XIAFLEX has shown a sustained benefit at 36 weeks versus placebo for patients suffering from Peyronie’s disease,’” saidLaurence A. Levine, MD, FACS, investigator and Professor, Department of Urology, Rush University Medical Center. “‘The drug had astatistically significant reduction in penile curvature and demonstrated statistically significant improved quality of life for patients as measuredby the PRO domain for Peyronie’s disease bother. Getting these efficacy results without the risks of surgical intervention would be anenormous advantage for patients suffering from Peyronie’s disease.’”As reported by Auxilium on December 16, 2009: “Overall, XIAFLEX demonstrated a statistically significant change compared to placebo at36 weeks in both improvement in penile curvature (p=0.001) and the PRO Peyronie's disease bother domain (p=0.046) . There was nostatistically significant change in mean scores between XIAFLEX and placebo in the PRO penile pain, intercourse discomfort or intercourseconstraint domains. XIAFLEX was well-tolerated and the most common treatment related adverse events in the Phase IIb study wereconsistent with adverse events reported in previous Peyronie's disease trials with XIAFLEX, which included injection site bruising, edemaand pain.”A mean improvement of 29.7% in penile curvature from baseline to 36 weeks was seen (54.4 to 38.2) in patients receiving XIAFLEX ascompared with a mean improvement of 11.0% in patients receiving placebo (50.6 to 45.1); (p=0.001) . In patients who received XIAFLEX,60.5% of patients achieved the endpoint of at least a 25% reduction in angle of curvature whereas 25.0% of placebo patients achieved thatsame endpoint. With respect to the PRO domain for Peyronie's disease bother, the overall XIAFLEX treatment arm experienced a benefit inmean change in score from baseline to 36 weeks that was significantly better than the overall placebo arm benefit (p=0.046) .The Phase IIb study was a randomized, double-blind, placebo-controlled trial that was designed to assess the safety and efficacy of XIAFLEXwhen administered two times a week, every six weeks, for up to three treatment cycles (2 x 3). The study was conducted at 12 sitesthroughout the U.S., and 145 patients were monitored for 36 weeks following the first injection, with 109 patients receiving XIAFLEX as aseries of intralesional injections and 36 receiving placebo (3:1 ratio) in the study. The treatment and placebo arms were also randomized totest for a benefit with the addition of penile modeling versus no modeling (1:1). Modeling refers to massaging of the plaque and is intended tomaximize the enzymatic effect of the XIAFLEX injection in the plaque.5Source: BIOSPECIFICS TECHNOLOGIES CORP, 10-K, March 15, 2010Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Collagenase For Treatment of Frozen Shoulder (Adhesive Capsulitis)Frozen shoulder is a clinical syndrome of pain and decreased motion in the shoulder joint. It is estimated to affect 20 to 50 million peopleworldwide with a slightly higher incidence in women. It is estimated that 700,000 patients visit doctors annually in the U.S. in connectionwith frozen shoulder. It typically occurs between the ages of 40-70. Individuals with insulin dependent diabetes have been reported to have a36% higher incidence rate and are more likely to have bilateral symptoms. One common therapy currently available to treat frozen shoulderis manipulation, which is painful and requires general anesthesia.We initiated, monitored and supplied requisite study drug for a Phase II clinical trial using our injectable collagenase in the treatment of frozenshoulder. Three different doses of injectable collagenase were compared to placebo in this double-blind, randomized trial in 60 patients.Results of this Phase II clinical trial were presented at the annual meeting of the American Academy of Orthopaedic Surgeons in March2006. Based on its prior review of the data contained in the oral presentation, Auxilium elected to exercise its option to develop andcommercialize this additional indication for collagenase injection in December 2005. In a press release dated December 20, 2005 and issuedconcurrently with the exercise of its option, Auxilium stated its belief that “the addition of a third indication for this development programenhances the commercial potential of AA4500” (now known as XIAFLEX). Auxilium has reported that it is in Phase II of development for thetreatment of frozen shoulder.Additional Clinical Indications For CollagenaseLipomasLipomas are benign fatty tumors that occur as bulges under the skin and affect humans and canines. It is estimated that lipomas are theprimary diagnosis in 575,000 patients in the U.S. annually. Lipomas are found in 2.3% of dogs, and there may be as many as 1.7 milliondogs affected with skin lipomas in the United States. Based on observations made during preclinical studies that a collagenase injectiondecreased the size of fat pads in animals, we initiated, monitored and supplied the requisite study drug for a Phase I open label clinical trialfor the treatment of human lipomas with a single injection of collagenase. Favorable initial results (10 out of 12 patients had a 50-90%reduction in the size of the lipomas) from this trial for the treatment of lipomas were presented at a meeting of the American Society of PlasticSurgeons.We have been developing clinical protocols for the treatment of lipomas in humans, and this is an area that we are interested in exploring.We have also been developing clinical protocols for dogs and have been working closely with veterinarians concerning possible developmentplans in this area.CelluliteCellulite is a condition characterized by dimpling of the skin and a mattress phenomenon typically affecting the thighs and buttocks. It is dueto irregular and discontinuous subcutaneous connective tissue. An open label study has been completed to assess whether injectablecollagenase can restore the cellulite-affected areas to a more cosmetically acceptable appearance. An abstract of an article titled “CollagenaseInjection in the Treatment of Cellulite” by A. Dagum and M.Badalamente, describing the promising results of this study was published inPlastic and Reconstructive Surgery on September 15, 2006. BioSpecifics has not announced plans for any new studies in cellulite.6Source: BIOSPECIFICS TECHNOLOGIES CORP, 10-K, March 15, 2010Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Other Clinical IndicationsOther clinical indications for which our collagenase injection has been tested include keloids, hypertrophic scars, scarred tendons, glaucoma,herniated intervertebral discs, and adjunct to vitrectomy.We continue to review selectively new technologies and products in the areas of wound healing, tissue remodeling and anti fibrotic therapyfor possible acquisition or in-licensing.Total Patient Exposure to Injectable CollagenaseAs discussed above, clinical investigations with our collagenase injection have been conducted in the treatment of Dupuytren’s contracture,Peyronie’s disease, frozen shoulder, lipomas, cellulite, keloids, hypertrophic scars, scarred tendons, glaucoma, herniated intervertebraldiscs, and adjunct to vitrectomy. We have treated over 1,200 patients in our own clinical studies. According to the prescribing information forXIAFLEX made available by Auxilium, 1,082 patients received in excess of 2,600 injections for the treatment of Dupuytren’s contracture intrials sponsored by Auxilium. Auxilium reported in a December 16, 2009 press release that its Phase IIb trial for Peyronie’s disease included109 patients treated with XIAFLEX.LICENSING AND MARKETING AGREEMENTSTopical Collagenase AgreementIn connection with the sale of our topical collagenase business to DFB Biotech, Inc. and its affiliates (“DFB”) in March 2006, we continue toreceive payments for certain technical assistance and certain transition services that we provide to DFB, as well as earn out payments basedon the sales of certain products. Our consulting obligations generally expire during March 2011, and our right to receive earn out paymentswith respect to the marketed topical product sold to DFB expire in 2013, but earn out payments for second generation collagenase products, ifany, continue indefinitely.In 2009, we received $200,000 of technical assistance related payments, and as of December 31, 2009, we have received a total of $1.2million in consulting fees. In addition, we have recognized $1.270 million in earn out payments from DFB in connection with the net sales oftopical collagenase in 2009.Auxilium AgreementUnder the Auxilium Agreement, in 2009 we received $6.375 million of the $75 million upfront payment paid to Auxilium by Pfizer. In March2010, we anticipate receiving $1.275 million of the $15 million paid to Auxilium by Pfizer. We will receive 8.5% of the $395 million inpotential additional milestone payments that may be made by Pfizer to Auxilium under the Pfizer Agreement. Of these additional milestones,$135 million are tied to regulatory milestones and $260 million are based on sales milestones.Under the Auxilium Agreement, we granted to Auxilium exclusive worldwide rights to develop, market and sell certain products containingour injectable collagenase. Currently its licensed rights cover the indications of Dupuytren’s contracture, Peyronie’s disease and frozenshoulder. Auxilium may further expand the Auxilium Agreement, at its exclusive option, to develop and license our injectable collagenase foruse in additional indications. Under the Pfizer Agreement, Pfizer is responsible for marketing XIAFLEX for the treatment of both Dupuytren’scontracture and Peyronie's disease in 27 member countries of the European Union and 19 other European and Eurasian countries (the“Pfizer Territory”). In addition, Pfizer will be primarily responsible for regulatory activities for XIAFLEX in the Pfizer Territory.The royalty obligations under the Auxilium Agreement extend, on a country-by-country and product-by-product basis, for the longer of thepatent life (including pending patents), the expiration of any regulatory exclusivity period or June 3, 2016. Auxilium may terminate theAuxilium Agreement upon 90 days prior written notice. In January 2006, Auxilium filed a patent application with regard to the compositionand manufacturing process for XIAFLEX which, if granted, would expire in January 2027, subject to certain statutory extensions.Auxilium is generally responsible, at its own cost and expense (excluding the third party costs for the development of the lyophilization of theinjection formulation, which are shared equally by Auxilium and us), for developing the formulation and finished dosage form of products andarranging for the clinical supply of products. Auxilium is responsible for all clinical development and regulatory costs for Peyronie’s disease,Dupuytren’s contracture, frozen shoulder and all additional indications for which it exercises its options.7Source: BIOSPECIFICS TECHNOLOGIES CORP, 10-K, March 15, 2010Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.We have the option, exercisable no later than August 2, 2010 (six months after FDA approval of the Biologics License Application (“BLA”)with respect to XIAFLEX), to assume the right and obligation to supply, or arrange for the supply from a third party other than a back-upsupplier qualified by Auxilium of, a specified portion of Auxilium’s commercial product requirements in all countries and territories of theworld excluding the Pfizer Territory (the “Auxilium Territory”). The Auxilium Agreement provides that Auxilium may withhold a specifiedamount of a milestone payment until the sooner of (i) we execute an agreement, containing certain milestones, with a third party for thecommercial manufacture of the product, (ii) we commence construction of a facility, compliant with Current Good Manufacturing Practices(“cGMP”), for the commercial supply of the product or (iii) 30 days after we notify Auxilium in writing that we will not exercise the supplyoption. If we exercise the supply option, we will be responsible for supplying, either ourselves or through a third party other than a back-upsupplier qualified by Auxilium, a specified portion of the commercial supply of the product for the Auxilium Territory. If we do not exercise thesupply option, then Auxilium will be responsible for arranging for the entire commercial product supply. In the event that we do exercise thesupply option, then we and Auxilium are required to use commercially reasonable efforts to enter into a commercial supply agreement oncustomary and reasonable terms and conditions which are not worse than those with back-up suppliers qualified by Auxilium.Auxilium must pay us on a country-by-country and product-by-product basis a low double digit royalty as a percentage of worldwide net salesfor products covered by the Auxilium Agreement. The royalty rate is independent of sales volume, clinical indication, territory, and whetherthe product is sold by Auxilium or Pfizer. This royalty rate may vary depending on whether we exercise the supply option. In addition, thepercentage may be reduced if (i) we fail to supply commercial product supply in accordance with the terms of the Auxilium Agreement; (ii)market share of a competing product exceeds a specified threshold; or (iii) Auxilium is required to obtain a license from a third party in order topractice our patents without infringing such third party’s patent rights. In addition, if Auxilium out-licenses to a third party, then we will receivea specified percentage of certain payments made to Auxilium in consideration of such out-licenses.On top of the payments set forth above, Auxilium must pay to us an amount equal to a specified mark-up of the cost of goods sold forproducts sold by Auxilium or Pfizer that are not manufactured by or on behalf of us, provided that, in the event that we exercise the supplyoption, no payment will be due for so long as we fail to supply the commercial supply of the product in accordance with the terms of theAuxilium Agreement.In addition to the payments already received by us with respect to the Dupuytren’s contracture indication, Auxilium will be obligated to makecontingent milestone payments, with respect to each of the Peyronie’s disease and frozen shoulder indications, upon the acceptance of theregulatory filing and receipt by Auxilium, its affiliate or sublicensee of regulatory approval. Through December 31, 2009, Auxilium paid us up-front licensing and sublicensing fees and milestone payments under the Auxilium Agreement of $14.9 million. Auxilium could make inexcess of $4 million of additional contingent milestone payments for exercised indications under the Auxilium Agreement if all existingconditions are met. Additional milestone obligations will be due if Auxilium exercises its option to develop and license XIAFLEX for additionalmedical indications.In addition to the milestone payments from Auxilium, the Company is entitled to 8.5% of all sublicense income that Auxilium receives fromPfizer under the Pfizer Agreement, which payments are dependent on the achievement by Pfizer of certain regulatory and sales relatedmilestones.In its Form 10-K filed with the SEC on February 26, 2010, Auxilium stated that it plans “to prioritize our development of additional pipelineindications for XIAFLEX. We have previously taken a license for the development and commercialization of Frozen Shoulder syndrome, butother areas of interest could include cellulite and lipoma.” In the event that Auxilium does license XIAFLEX in other indications, we will beentitled to receive a certain percentage of sublicense income and milestone payments for such indications pursuant to the terms of theAuxilium Agreement.A copy of the Auxilium Agreement was filed on Form 8-K with the SEC on December 19, 2008. The foregoing descriptions of the AuxiliumAgreement do not purport to be complete and are qualified in their entirety by reference to the full text of the agreement.8Source: BIOSPECIFICS TECHNOLOGIES CORP, 10-K, March 15, 2010Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.In-Licensing and Royalty AgreementsWe have entered into several in-licensing and royalty agreements with various investigators, universities and other entities throughout theyears.Dupuytren’s ContractureOn November 21, 2006, we entered into a license agreement (the “Dupuytren’s License Agreement”) with the Research Foundation of theState University of New York at Stony Brook (the “Research Foundation”), pursuant to which the Research Foundation granted to us and ouraffiliates an exclusive worldwide license, with the right to sublicense to certain third parties, to know-how owned by the Research Foundationrelated to the development, manufacture, use or sale of (i) the collagenase enzyme obtained by a fermentation and purification process (the“Enzyme”), and (ii) all pharmaceutical products containing the Enzyme or injectable collagenase, in each case to the extent it pertains to thetreatment and prevention of Dupuytren’s contracture.In consideration of the license granted under the Dupuytren’s License Agreement, we agreed to pay to the Research Foundation certainroyalties on net sales (if any) of pharmaceutical products containing the Enzyme or injectable collagenase for the treatment and prevention ofDupuytren’s contracture (each a “Dupuytren’s Licensed Product”).Our obligation to pay royalties to the Research Foundation with respect to sales by the Company, its affiliates or any sublicensee of anyDupuytren’s Licensed Product in any country (including the U.S.) arises only upon the first commercial sale of such Dupuytren’s LicensedProduct on a country-by-country basis. The royalty rate is 0.5% of net sales. Our obligation to pay royalties to the Research Foundation willcontinue until the later of (i) the expiration of the last valid claim of a patent pertaining to the Dupuytren’s Licensed Product; (ii) the expirationof the regulatory exclusivity period conveyed by the FDA’s Orphan Product Division with respect to the Dupuytren’s Licensed Product; or (iii)June 3, 2016.Unless terminated earlier in accordance with its termination provisions, the Dupuytren’s License Agreement and the licenses granted underthat agreement will continue in effect until the termination of our royalty obligations. After that, all licenses granted to us under theDupuytren’s License Agreement will become fully paid, irrevocable exclusive licenses.Peyronie’s DiseaseOn August 27, 2008, we entered into an agreement to improve the deal terms related to our future royalty obligations for Peyronie’s diseaseby buying down our future royalty obligations with a one-time cash payment. A copy of the agreement was filed on Form 8-K with the SECon September 5, 2008.Frozen ShoulderOn November 21, 2006, we entered into a license agreement (the “Frozen Shoulder License Agreement”) with the Research Foundation,pursuant to which the Research Foundation granted to us and our affiliates an exclusive worldwide license, with the right to sublicense tocertain third parties, to know-how owned by the Research Foundation related to the development, manufacture, use or sale of (i) the Enzymeand (ii) all pharmaceutical products containing the Enzyme or injectable collagenase, in each case to the extent it pertains to the treatmentand prevention of frozen shoulder. Additionally, the Research Foundation granted to us an exclusive license to the patent applications inrespect of frozen shoulder. The license granted to us under the Frozen Shoulder License Agreement is subject to the non-exclusive license(with right to sublicense) granted to the U.S. government by the Research Foundation in connection with the U.S. government’s funding ofthe initial research.In consideration of the license granted under the Frozen Shoulder License Agreement, we agreed to pay to the Research Foundation certainroyalties on net sales (if any) of pharmaceutical products containing the Enzyme or injectable collagenase for the treatment and prevention offrozen shoulder (each a “Frozen Shoulder Licensed Product”). In addition, we and the Research Foundation will share in any milestonepayments and sublicense income received by us in respect of the rights licensed under the Frozen Shoulder License Agreement.9Source: BIOSPECIFICS TECHNOLOGIES CORP, 10-K, March 15, 2010Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Our obligation to pay royalties to the Research Foundation with respect to sales by us, our affiliates or any sublicensee of any FrozenShoulder Licensed Product in any country (including the U.S.) arises only upon the first commercial sale of a Frozen Shoulder LicensedProduct. Our obligation to pay royalties to the Research Foundation will continue until, the later of (i) the expiration of the last valid claim of apatent pertaining to a Frozen Shoulder Licensed Product or (ii) June 3, 2016.Unless terminated earlier in accordance with its termination provisions, the Frozen Shoulder License Agreement and licenses granted underthat agreement will continue in effect until the termination of our royalty obligations. After that, all licenses granted to us under the FrozenShoulder License Agreement will become fully paid, irrevocable exclusive licenses.In connection with the execution of the Dupuytren’s License Agreement and the Frozen Shoulder License Agreement, we made certain up-front payments to the Research Foundation and the clinical investigators working on the Dupuytren’s contracture and frozen shoulderindications for the Enzyme.Other IndicationsWe have entered into certain other license and royalty agreements with respect to other indications that we may elect to pursue.COMPETITIONWe face worldwide competition from larger pharmaceutical companies, specialty pharmaceutical companies and biotechnology firms,universities and other research institutions and government agencies that are developing and commercializing pharmaceutical products.Many of our competitors have substantially greater financial, technical and human resources than we have and may subsequently developproducts that are more effective, safer or less costly than any products that we have developed, are developing or will develop, or that aregeneric products. Our success will depend on our ability to acquire, develop and commercialize products and our ability to establish andmaintain markets for our products that receive marketing approval.COST OF RESEARCH AND DEVELOPMENT ACTIVITIESDuring fiscal years 2009 and 2008, the Company invested $488,646 and $439,919, respectively, in research and development activities.GOVERNMENT REGULATIONAll of our products labeled for use in humans require regulatory approval by government agencies prior to commercialization. In particular,human therapeutic products are subject to rigorous preclinical and clinical trials to demonstrate safety and efficacy and other approvalprocedures of the FDA and similar regulatory authorities in foreign countries. Various federal, state, local, and foreign statutes andregulations also govern testing, manufacturing, labeling, distribution, storage and record-keeping related to such products and theirpromotion and marketing. The process of obtaining these approvals and the compliance with federal, state, local, and foreign statutes andregulations require the expenditure of substantial time and financial resources. In addition, the current political environment and the currentregulatory environment at the FDA could lead to increased testing and data requirements which could impact regulatory timelines and costs.Clinical trials involve the administration of the investigational product candidate or approved products to human subjects under thesupervision of qualified investigators. Clinical trials are conducted under protocols detailing, among other things, the objectives of the studyand the parameters to be used in assessing the safety and the effectiveness of the drug. Typically, clinical evaluation involves a time-consuming and costly three-phase sequential process, but the phases may overlap. Each trial must be reviewed, approved and conductedunder the auspices of an independent institutional review board, and each trial must include the patient’s informed consent.Clinical testing may not be completed successfully within any specified time period, if at all. The FDA monitors the progress of all clinicaltrials that are conducted in the U.S. and may, at its discretion, reevaluate, alter, suspend or terminate the testing based upon the dataaccumulated to that point and the FDA’s assessment of the risk/benefit ratio to the patient. The FDA can also provide specific guidance on theacceptability of protocol design for clinical trials. The FDA, we or our partners may suspend or terminate clinical trials at any time for variousreasons, including a finding that the subjects or patients are being exposed to an unacceptable health risk. The FDA can also request thatadditional clinical trials be conducted as a condition to product approval. During all clinical trials, physicians monitor the patients to determineeffectiveness and/or to observe and report any reactions or other safety risks that may result from use of the drug candidate.10Source: BIOSPECIFICS TECHNOLOGIES CORP, 10-K, March 15, 2010Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Assuming successful completion of the required clinical trials, drug developers submit the results of preclinical studies and clinical trials,together with other detailed information including information on the chemistry, manufacture and control of the product, to the FDA, in theform of an NDA or BLA, requesting approval to market the product for one or more indications. In most cases, the NDA/BLA must beaccompanied by a substantial user fee. The FDA reviews an NDA/BLA to determine, among other things, whether a product is safe andeffective for its intended use.Before approving an NDA or BLA, the FDA will inspect the facility or facilities where the product is manufactured. The FDA will not approvethe NDA or BLA unless cGMP compliance is satisfactory. The FDA will issue an approval letter if it determines that the NDA or BLA,manufacturing process and manufacturing facilities are acceptable. If the FDA determines that the NDA or BLA, manufacturing process ormanufacturing facilities are not acceptable, it will outline the deficiencies in the submission and will often request additional testing orinformation. Notwithstanding the submission of any requested additional information, the FDA ultimately may decide that the NDA or BLAdoes not satisfy the regulatory criteria for approval and refuse to approve the NDA or BLA by issuing a “not approvable” letter.The testing and approval process requires substantial time, effort and financial resources, which may take several years to complete. TheFDA may not grant approval on a timely basis, or at all. We or our partners may encounter difficulties or unanticipated costs in our or theirefforts to secure necessary governmental approvals, which could delay or preclude us or them from marketing our products. Furthermore,the FDA may prevent a drug developer from marketing a product under a label for its desired indications or place other conditions, includingrestrictive labeling, on distribution as a condition of any approvals, which may impair commercialization of the product. After approval, sometypes of changes to the approved product, such as adding new indications, manufacturing changes and additional labeling claims, are subjectto further FDA review and approval.If the FDA approves the NDA or BLA, the drug can be marketed to physicians to prescribe in the U.S. After approval, the drug developer mustcomply with a number of post-approval requirements, including delivering periodic reports to the FDA (i.e., annual reports), submittingdescriptions of any adverse reactions reported, biological product deviation reporting, and complying with drug sampling and distributionrequirements and any other requirements set forth in the FDA’s approval (such as a risk evaluation and mitigation strategy program, whichthe FDA has required for XIAFLEX and consists of a communication plan and a medication guide). The holder of an approved NDA/BLA isrequired to provide updated safety and efficacy information and to comply with requirements concerning advertising and promotional labeling.Also, quality control and manufacturing procedures must continue to conform to cGMP after approval. Drug manufacturers and theirsubcontractors are required to register their facilities and are subject to periodic unannounced inspections by the FDA to assess compliancewith cGMP which impose procedural and documentation requirements relating to manufacturing, quality assurance and quality control.Accordingly, manufacturers must continue to expend time, money and effort in the area of production and quality control to maintaincompliance with cGMP and other regulatory requirements. The FDA may require post-market testing and surveillance to monitor theproduct’s safety or efficacy, including additional studies to evaluate long-term effects.In addition to studies requested by the FDA after approval, a drug developer may conduct other trials and studies to explore use of theapproved drug for treatment of new indications, which require submission of a supplemental or new NDA/BLA and FDA approval of the newlabeling claims. The purpose of these trials and studies is to broaden the application and use of the drug and its acceptance in the medicalcommunity.We use, and will continue to use, third party manufacturers to produce our products in clinical quantities. Future FDA inspections mayidentify compliance issues at our facilities, at the facilities of our contract manufacturers or at those of our partners that may disrupt productionor distribution, or require substantial resources to correct. In addition, discovery of problems with a product or the failure to comply withrequirements may result in restrictions on a product, manufacturer or holder of an approved NDA/BLA, including withdrawal or recall of theproduct from the market or other voluntary or FDA-initiated action that could delay further marketing. Newly discovered or developed safety oreffectiveness data may require changes to a product’s approved labeling, including the addition of new warnings and contraindications. Also,new government requirements may be established that could delay or prevent regulatory approval of our products under development.11Source: BIOSPECIFICS TECHNOLOGIES CORP, 10-K, March 15, 2010Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.INTELLECTUAL PROPERTY AND RIGHTSOur success will depend in part on our ability to protect our existing products and the products we acquire or in-license by obtaining andmaintaining a strong proprietary position both in the U.S. and in other countries. To develop and maintain such a position, we intend tocontinue relying upon patent protection, trade secrets, know-how, continuing technological innovations and licensing opportunities. Inaddition, we intend to seek patent protection whenever available for any products or product candidates and related technology we develop oracquire in the future.PatentsWe are the assignee or licensee of five U.S. patents, which have received patent protection in various foreign countries. In addition, we havelicenses to other pending patent applications. Although we believe these patent applications, if they issue as patents, will provide acompetitive advantage, the scope of the patent positions of pharmaceutical firms involves complex legal, scientific and factual questions and,as such, is generally uncertain. In addition, the coverage claimed in a patent application can be significantly reduced before the patent isissued. Consequently, we do not know whether any of our current patent applications, or the products or product candidates we develop,acquire or license will result in the issuance of patents or, if any patents are issued, whether they will provide significant proprietaryprotection, will be of any value to us or will be challenged, circumvented or invalidated by our competitors or otherwise.While we attempt to ensure that our product candidates and the methods we employ to manufacture them do not infringe other parties’patents and proprietary rights, competitors or other parties may assert that we infringe on their proprietary rights. Because patent applicationsin the U.S. and some other jurisdictions can proceed in secrecy until patents issue, third parties may obtain other patents without ourknowledge prior to the issuance of patents relating to our product candidates, which they could attempt to assert against us. Also, sincepublication of discoveries in the scientific or patent literature often lags behind actual discoveries, we cannot be certain of the priority ofinventions covered by pending patent applications. Moreover, we may have to participate in interference proceedings declared by the U.S.Patent and Trademark Office (the “USPTO”) or a foreign patent office to determine priority of invention, or in opposition proceedings in aforeign patent office, either of which could result in substantial cost to us, even if the eventual outcome is favorable to us. There can be noassurance that the patents, if issued and challenged in a court of competent jurisdiction, would be found valid or enforceable. An adverseoutcome could subject us to significant liabilities to third parties, require disputed rights to be licensed from third parties or require us to ceaseusing such technology.Although we believe that our product candidates, production methods and other activities do not currently infringe the intellectual propertyrights of third parties, we cannot be certain that a third party will not challenge our position in the future. If a third party alleges that we areinfringing its intellectual property rights, we may need to obtain a license from that third party, but there can be no assurance that any suchlicense will be available on acceptable terms or at all. Any infringement claim that results in litigation could result in substantial cost to us andthe diversion of management’s attention from our core business. To enforce patents issued to us or to determine the scope and validity ofother parties’ proprietary rights, we may also become involved in litigation or in interference proceedings declared by the USPTO, whichcould result in substantial costs to us or an adverse decision as to the priority of our inventions. We may be involved in interference and/oropposition proceedings in the future. We believe there will continue to be litigation in our industry regarding patent and other intellectualproperty rights.We licensed to Auxilium our injectable collagenase for the treatment of Dupuytren’s contracture, Peyronie’s disease, and frozen shoulder. Wehave two use patents in the U.S. covering the enzyme underlying our injectable collagenase, one for the treatment of Dupuytren’scontracture, which issued from a reissue proceeding in December 2007, and one for the treatment of Peyronie’s disease. The Dupuytren’spatent expires in 2014, and the Peyronie’s patent expires in 2019. Both the Dupuytren’s and Peyronie’s patents are limited to the use of theenzyme for the treatment of Dupuytren’s contracture and Peyronie’s disease within certain dose ranges. Auxilium has submitted a patentapplication in connection with “Compositions and Methods for Treating Collagen Mediated Diseases,” which, if not rejected, will extend theroyalty payments until 2027.12Source: BIOSPECIFICS TECHNOLOGIES CORP, 10-K, March 15, 2010Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Orphan Drug DesignationsTwo indications, Dupuytren’s contracture and Peyronie’s disease, have received orphan drug status from the FDA’s Office of OrphanProducts Development (“OOPD”).The OOPD administers the major provisions of the Orphan Drug Act, an innovative program that provides incentives for sponsors todevelop products for rare diseases. The incentives for products that qualify under the Orphan Drug Act include seven-year exclusivemarketing rights post FDA approval (which means, with respect to Dupuytren’s contracture, exclusivity until February 2, 2017), tax creditsfor expenses associated with clinical trials including a 20 year tax carry-forward, availability of FDA grants, and advice on design of the clinicaldevelopment plan.The orphan drug provisions of the Federal Food, Drug, and Cosmetic Act also provide incentives to drug and biologics suppliers to developand supply drugs for the treatment of rare diseases, currently defined as diseases that affect fewer than 200,000 individuals in the U.S. or, fora disease that affects more than 200,000 individuals in the U.S. and for which there is no reasonable expectation that the cost of developingand making available in the U.S. a drug for such disease or condition will be recovered from its sales in the U.S. Under these provisions, asupplier of a designated orphan product can seek tax benefits, and the holder of the first FDA approval of a designated orphan product will begranted a seven-year period of marketing exclusivity for that product for the orphan indication. It would not prevent other drugs from beingapproved for the same indication.In its Form 10-K filed with the SEC on February 26, 2010, Auxilium stated that “[w]hile XIAFLEX does not have orphan drug status for anyindication in Europe, foreign patents cover these products in certain countries, and on approval of XIAFLEX for a first indication in Europe, weexpect the product will benefit from 10 years of market exclusivity and 8 years of data exclusivity. We may obtain an additional year of marketexclusivity if the regulatory authorities approve an additional indication that they determine to represent a significant clinical benefit.”Trade SecretsWe also rely on trade secret protection for our confidential and proprietary information. No assurance can be given that others will notindependently develop substantially equivalent proprietary information and techniques or otherwise gain access to our trade secrets ordisclose such technology or that we can meaningfully protect our trade secrets.It is our policy to require certain employees, consultants, outside scientific collaborators, sponsored researchers and other advisors to executeconfidentiality agreements upon the commencement of employment or consulting relationships with us. These agreements provide that allconfidential information developed or made known to the individual during the course of the individual’s relationship with us is to be keptconfidential and not disclosed to third parties except in specific circumstances. In the case of employees, the agreements provide that allinventions conceived by the individual shall be our exclusive property. There can be no assurance, however, that these agreements willprovide meaningful protection or adequate remedies for our trade secrets in the event of unauthorized use or disclosure of such information.EMPLOYEESThe Company currently has five employees, who are all full-time employees.CORPORATE INFORMATIONBioSpecifics Technologies Corp. was incorporated in Delaware in 1990. ABC-NY was incorporated in New York in 1957. Our telephonenumber is 516-593-7000. Our corporate headquarters are currently located at 35 Wilbur St., Lynbrook, NY 11563. Our lease for our corporateheadquarters expires on June 30, 2010 as described under “Item 2 - Description of Property.”13Source: BIOSPECIFICS TECHNOLOGIES CORP, 10-K, March 15, 2010Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Item 1A. RISK FACTORSIn addition to the other information included in this Report, the following factors should be considered in evaluating our business and futureprospects. Any of the following risks, either alone or taken together, could materially and adversely affect our business, financial position orresults of operations. If one or more of these or other risks or uncertainties materialize or if our underlying assumptions prove to be incorrect,our actual results may vary materially from what we projected. There may be additional risks that we do not presently know or that wecurrently believe are immaterial which could also impair our business or financial position.Risks Related to Our Limited Sources of RevenueOur future revenue is primarily dependent upon option, milestone and contingent royalty payments from Auxilium andtechnical assistance payments and contingent earn out payments from DFB.Our primary sources of revenues are from (i) option, milestone and contingent royalty payments from Auxilium under the AuxiliumAgreement, (ii) payments from DFB for technical assistance we provide and contingent earn out payments from DFB and (iii) the sale ofsmall amounts of collagenase for laboratory research.As described in Item 1 above, under the Auxilium Agreement, in exchange for the right to receive royalties and other payments, we grantedto Auxilium the right to develop, manufacture, market and sell worldwide products (other than dermal formulations for topical administration)that contain collagenase for the treatment of Dupuytren’s contracture, Peyronie’s disease and frozen shoulder. However, we have no controlover Auxilium’s ability to successfully manufacture, market and sell candidate products for the treatment of Dupuytren’s contracture,Peyronie’s disease, or, in the case of frozen shoulder, to pursue commercialization, and we may receive limited, if any, royalty paymentsfrom Auxilium. Moreover, such royalties are subject to certain expenses we owe Auxilium under the Auxilium Agreement, includinglyophilization and certain patent costs. We have received in the past, and are entitled to receive in the future, certain milestone paymentsfrom Auxilium in respect of its efforts to commercialize such candidate products, but we have no control over Auxilium’s ability to achieve themilestones. Additionally, we have received in the past, and are entitled to receive in the future, 8.5% of all sublicense income that Auxiliumreceives from Pfizer under the Pfizer Agreement, which payments are dependent on the achievement by Pfizer of certain regulatory and salesrelated milestones, of which we have no control.We have also granted to Auxilium an option to expand its license and development rights to one or more additional indications for injectablecollagenase not currently licensed to Auxilium, including for the treatment of lipomas and cellulite. If Auxilium exercises its option withrespect to an additional indication, we are entitled to receive a one-time license fee for the rights to, as well as potential milestone and royaltypayments with respect to, such new indication. If Auxilium does not exercise its option as to any additional indication, we may offer to anythird party such development rights with regard to products in the Auxilium Territory, provided that we first offer the same terms to Auxilium,or develop the product ourselves. Auxilium has no obligation to exercise its option with respect to any such additional indication, and itsdecision to do so is in its complete discretion. Clinical trials can be expensive and the results are subject to different interpretations, therefore,there is no assurance that after conducting Phase II clinical trials on any additional indication, and incurring the associated expenses,Auxilium will exercise its option or we will receive any revenue from it. Under the Auxilium Agreement, we may only offer to a third partydevelopment rights with regard to products in the Auxilium Territory and not in the Pfizer Territory. Auxilium’s ability to develop orcommercialize additional indications in the Pfizer Territory are subject to negotiation with Pfizer under the terms of the Pfizer Agreement.As part of the sale of our topical collagenase business to DFB, we are entitled to receive earn out payments in respect of sales of certainproducts developed and manufactured by DFB that contain collagenase for topical administration. However, our right to receive earn outpayments from DFB is dependent upon DFB’s decision to pursue the manufacture and commercialization of such products and its ability toachieve certain sales thresholds. We are aware that DFB has certain competitive products that may adversely affect the volume of sales ofthose topical collagenase products for which we are entitled to earn out payments.We also agreed to provide technical assistance to DFB’s affiliate, DPT Lakewood, for a fixed period of time in consideration for certainpayments and we are required to maintain certain scientific resources and records in order to provide such assistance and be entitled toreceive such payments.14Source: BIOSPECIFICS TECHNOLOGIES CORP, 10-K, March 15, 2010Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Our dependence upon revenue from Auxilium and DFB make us subject to the commercialization and other risk factorsaffecting those two companies over which we have limited or no control.Auxilium has disclosed in its securities filings a number of risk factors to consider when evaluating its business and future prospects. Givenour dependence upon revenue from Auxilium, Auxilium’s operating success or failure has a significant impact on our potential royaltystream and other payment rights. As such, we refer you to the full text of Auxilium’s disclosed risk factors in its securities filings, which weremost recently included on its Form 10-K filed on February 26, 2010.DFB is not a publicly traded company and therefore we have little information about its business and future prospects. Although we cannot becertain, we presume that many of the risk factors affecting Auxilium’s business may have some bearing in evaluating DFB’s ability to meetits payment obligations to us for technical assistance or to generate sufficient sales of topical collagenase products to entitle us to receive anyearn out payments.Unstable market conditions may have serious adverse consequences on our business.Our general business strategy may be adversely affected by unpredictable and unstable market conditions. If the current equity and creditmarkets deteriorate, or do not improve, it may make any necessary equity or debt financing more difficult, more costly, and more dilutive.While we believe we have adequate capital resources to meet our expected working capital and capital expenditure requirements until at leastthe second half of 2012, a radical economic downturn or increase in our expenses could require additional financing on less than attractiverates or on terms that are excessively dilutive to existing stockholders. Failure to secure any necessary financing in a timely manner and onfavorable terms could have a material adverse effect on our growth strategy, financial performance and stock price. In addition, there is a riskthat one or more of our partners may encounter difficulties during challenging economic times, which could have an adverse effect on ourbusiness, results of operations and financial condition.Risks Related to Clinical TrialsWe have a limited supply of clinical material, which may limit our ability to conduct other clinical trials and to obtain theassociated option, milestone and contingent royalty payments under the Auxilium Agreement.Although we currently have our own clinical material, if this clinical material is damaged or otherwise becomes unusable, then we may haveinsufficient clinical material to conduct other clinical trials. Auxilium has agreed to provide us with additional clinical material, but there is noguaranty that Auxilium will do so. Consequently, the lack of availability of clinical material may limit our ability to obtain additional option,milestone and royalty payments under the Auxilium Agreement.If clinical trials for our potential new indications are delayed, we may not be able to obtain option, milestone or royalty paymentsunder the Auxilium Agreement for new indications.Clinical trials that we or our investigators may conduct may not begin on time or may need to be restructured or temporarily suspended afterthey have begun. Clinical trials can be delayed or may need to be restructured for a variety of reasons, including delays or restructuringrelated to:changes to the regulatory approval process for product candidates;obtaining regulatory approval to commence a clinical trial;timing of responses required from regulatory authorities;negotiating acceptable clinical trial agreement terms with prospective investigators or trial sites;obtaining institutional review board, or equivalent, approval to conduct a clinical trial at a prospective site;recruiting subjects to participate in a clinical trial;15Source: BIOSPECIFICS TECHNOLOGIES CORP, 10-K, March 15, 2010Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.competition in recruiting clinical investigators;shortage or lack of availability of clinical trial supplies from external and internal sources;the need to repeat clinical trials as a result of inconclusive results or poorly executed testing;failure to validate a patient-reported outcome questionnaire;the placement of a clinical hold on a study;the failure of third parties conducting and overseeing the operations of our clinical trials to perform their contractual or regulatoryobligations in a timely fashion; andexposure of clinical trial subjects to unexpected and unacceptable health risks or noncompliance with regulatory requirements, whichmay result in suspension of the trial.Risks Related to Our Agreements with Auxilium and DFBOur ability to conduct clinical trials and develop products for dermal formulations for topical or injectable administration ofcollagenase is limited by the agreements we have signed with Auxilium and DFB.Under our agreements with Auxilium and DFB, we have sold, licensed, or granted options to certain of our rights to conduct clinical trials anddevelop products for dermal formulations for topical or injectable administration of collagenase. Under the terms of the Auxilium Agreementand our agreement with DFB, we have agreed to certain non-competition provisions, which may limit our clinical development activities.Risks Related to Our Limited Financial ResourcesIf we are unable to obtain option, milestone, earn out and royalty payments from Auxilium or DFB or meet our needs foradditional funding from other sources, we may be required to limit, scale back or cease our operations.Our negative cash flows from operations are expected to continue for at least the foreseeable future. Our business strategy contains elementsthat we will not be able to implement if we do not receive the anticipated option, milestone, royalty or earn out payments from Auxilium orDFB, or secure additional funding from other sources. Specifically, we may need to raise additional capital to:acquire or in-license approved products or product candidates or technologies for development;fund our product development, including clinical trials relating to in-licensed technology and the remaining indications; andcommercialize any resulting product candidates for which we receive regulatory approval.We believe that our existing cash resources and interest on these funds will be sufficient to meet our anticipated operating requirements untilat least the second half of 2012. Our future funding requirements will depend on many factors, including:DFB’s ability to meet its payment obligations and to manufacture and commercialize topical collagenase products for which we wouldreceive earn out payments;Auxilium’s ability to manufacture and commercialize XIAFLEX for which we would receive milestone and royalty payments;Pfizer’s ability to develop and commercialize the product in the Pfizer Territory and Auxilium’s receipt of milestone payments fromPfizer under the Pfizer Agreement for which we would receive a percentage of sublicense income and royalty payments (for moreinformation regarding Auxilium’s financial risks associated with Pfizer under the Pfizer Agreement, we refer you to the full text ofAuxilium’s disclosed risk factors in its securities filings, which were most recently included on its Form 10-K filed on February 26,2010);16Source: BIOSPECIFICS TECHNOLOGIES CORP, 10-K, March 15, 2010Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.the amount actually owed to Auxilium for lyophilization and patent related costs;the scope, rate of progress, cost and results of our clinical trials on additional indications, including lipomas and cellulite, for whichAuxilium could exercise its option to acquire rights to them, and whether Auxilium exercises the option;the terms and timing of any future collaborative, licensing, co-promotion and other arrangements that we may establish; andthe cost of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights or defending against anyother litigation.These factors could result in variations from our currently projected operating requirements. If our existing resources are insufficient to satisfyour operating requirements, we may need to limit, scale back or cease operations or, in the alternative, borrow money. Given our operationsand history, we may not be able to borrow money on commercially reasonable terms, if at all. If we issue any equity or debt securities, theterms of such issuance may not be acceptable to us and would likely result in substantial dilution of our stockholders’ investment. If we donot receive revenues from Auxilium or DFB, and are unable to secure additional financing, we may be required to cease operations.In order to finance and to secure the rights to conduct clinical trials for products we have licensed to Auxilium, we have grantedto third parties significant rights to share in royalty payments received by us.To finance and secure the rights to conduct clinical trials for products we have licensed to Auxilium, we have granted to third parties certainrights to share in royalty payments received by us from Auxilium under the Auxilium Agreement. Consequently, we will be required to sharea significant portion of the payments due from Auxilium under the Auxilium Agreement.Risks Related to Regulatory RequirementsWe are subject to numerous complex regulatory requirements and failure to comply with these regulations, or the cost ofcompliance with these regulations, may harm our business.Conducting clinical trials and the testing, development and manufacturing and distribution of product candidates are subject to regulation bynumerous governmental authorities in the U.S. and other jurisdictions, if we desire to export the resulting products to such otherjurisdictions. These regulations govern or affect the testing, manufacture, safety, labeling, storage, record-keeping, approval, distribution,advertising and promotion of product candidates, as well as safe working conditions. Noncompliance with any applicable regulatoryrequirements can result in suspension or termination of any ongoing clinical trials of a product candidate or refusal of the government toapprove a product candidate for commercialization, criminal prosecution and fines, recall or seizure of products, total or partial suspension ofproduction, prohibitions or limitations on the commercial sale of products or refusal to allow the entering into of federal and state supplycontracts. The FDA and comparable governmental authorities have the authority to suspend or terminate any ongoing clinical trials of aproduct candidate or withdraw product approvals that have been previously granted. Even after a product candidate has been approved, theFDA and comparable governmental authorities subject such product to continuing review and regulatory requirements including, forexample, requiring the conducting and reporting of the results of certain clinical studies or trials, commitments to voluntarily conductadditional clinical trials and a risk evaluation and mitigation strategy program, such as the one the FDA has required for XIAFLEX andconsists of a communication plan and a medication guide. Currently, there is a substantial amount of congressional and administrativereview of the FDA and the regulatory approval process for drug candidates in the U.S. As a result, there may be significant changes made tothe regulatory approval process in the U.S. In addition, the regulatory requirements relating to the development, manufacturing, testing,promotion, marketing and distribution of product candidates may change in the U.S. Such changes may increase our costs and adverselyaffect our operations.17Source: BIOSPECIFICS TECHNOLOGIES CORP, 10-K, March 15, 2010Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Additionally, failure to comply with, or changes to applicable regulatory requirements may result in a variety of consequences, including thefollowing:restrictions on our products or manufacturing processes;warning letters;withdrawal of a product from the market;voluntary or mandatory recall of a product;fines;suspension or withdrawal of regulatory approvals for a product;refusal to permit the import or export of our products;refusal to approve pending applications or supplements to approved applications that we submit;denial of permission to file an application or supplement in a jurisdiction;product seizure; andinjunctions or the imposition of civil or criminal penalties against us.Our corporate compliance program cannot guarantee that we are in compliance with all potentially applicable laws andregulations and we have incurred and will continue to incur costs relating to compliance with applicable laws and regulations.We are a small company and we rely heavily on third parties and outside consultants to conduct many important functions. As abiopharmaceutical company, we are subject to a large body of legal and regulatory requirements. In addition, as a publicly traded company weare subject to significant regulations, including the Sarbanes-Oxley Act of 2002 (“SOX”), some of which have only recently been revised oradopted. We cannot assure you that we are or will be in compliance with all potentially applicable laws and regulations. Failure to comply withall potentially applicable laws and regulations could lead to the imposition of fines, cause the value of our common stock to decline, impedeour ability to raise capital or list our securities on certain securities exchanges. New rules could make it more difficult or more costly for us toobtain certain types of insurance, including director and officer liability insurance, and we may be forced to accept reduced policy limits andcoverage or incur substantially higher costs to obtain the same or similar coverage. The impact of these events could also make it moredifficult for us to attract and retain qualified persons to serve on our board of directors, our board committees and as executive officers. Wecannot predict or estimate the amount of the additional costs we may incur or the timing of such costs to comply with these rules andregulations.We may fail to maintain effective internal controls over external financial reporting or such controls may fail or becircumvented.SOX requires us to report annually on our internal controls over financial reporting, and our business and financial results could beadversely effected if we, or our independent registered public accounting firm, determine that these controls are not effective. In addition, anyfailure or circumvention of our internal controls and procedures or failure to comply with regulations concerning controls and procedures couldhave a material effect on our business, results of operation and financial condition. The impact of these events could also make it moredifficult for us to attract and retain qualified persons to serve on our board of directors, our board committees and as executive officers.Risks Related to Growth and EmployeesOur failure to successfully in-license or acquire additional technologies, product candidates or approved products could impairour ability to grow or continue to operate.We currently have only five employees. We may decide to pursue other opportunities to in-license, acquire, develop and market additionalproducts and product candidates so that we are not solely reliant on Auxilium and DFB sales for our revenues. Because we have limitedinternal research capabilities, we are dependent upon pharmaceutical and biotechnology companies and other researchers and independentinvestigators to sell or license products or technologies to us. The success of this strategy depends upon our ability to identify, select andacquire the right pharmaceutical product candidates, products and technologies.18Source: BIOSPECIFICS TECHNOLOGIES CORP, 10-K, March 15, 2010Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.We may not be able to successfully identify any commercial products or product candidates to in-license, acquire or internally develop.Moreover, negotiating and implementing an economically viable in-licensing arrangement or acquisition is a lengthy and complex process.Other companies, including those with substantially greater financial, marketing and sales resources, may compete with us for the in-licensing or acquisition of product candidates and approved products. We may not be able to acquire or in-license the rights to additionalproduct candidates and approved products on terms that we find acceptable, or at all. If we are unable to in-license or acquire additionalcommercial products or product candidates we may be reliant solely on Auxilium and DFB sales for revenues. As a result, our ability to growour business or increase our revenues could be severely limited.Even if we are able to develop any product candidates for additional indications of injectable collagenase, we may not be able toobtain option, milestone or royalty payments under the Auxilium Agreement, which could impair our ability to grow and couldcause a decline in the price of our common stock.The process of conducting clinical trials and developing product candidates involves a high degree of risk and may take several years. Productcandidates that appear promising in the early phases of development may fail to reach the market for several reasons, including:clinical trials may show product candidates to be ineffective or not as effective as anticipated or to have harmful side effects or anyunforeseen result;product candidates may fail to receive regulatory approvals required to bring the products to market;manufacturing costs, the inability to scale up to produce supplies for clinical trials or other factors may make our product candidatesuneconomical; andthe proprietary rights of others and their competing products and technologies may prevent product candidates from being effectivelycommercialized or from obtaining exclusivity.Success in preclinical and early clinical trials does not ensure that large-scale clinical trials will be successful. Clinical results are frequentlysusceptible to varying interpretations that may delay, limit or prevent regulatory approvals. The length of time necessary to complete clinicaltrials and to submit an application for marketing approval for a final decision by a regulatory authority varies significantly and may be difficultto predict. Currently, there is substantial congressional and administration review of the regulatory approval process for drug candidates in theU.S. Any changes to the U.S. regulatory approval process could significantly increase the timing or cost of regulatory approval for productcandidates making further development uneconomical or impossible. In addition, once Auxilium exercises its option with respect to anyadditional indications, further clinical trials, development, manufacturing, marketing and selling of such product is out of our control. Ourinterest is limited to receiving option, milestone and royalty payments, and the option in certain circumstances to manufacture according toparticular specifications set by Auxilium.Any product acquisition or development efforts also could result in large and immediate write-offs, incurrence of debt and contingent liabilitiesor amortization of expenses related to intangible assets, any of which could negatively impact our financial results.Adverse events or lack of efficacy in clinical trials may force us and/or our partners upon whom we are wholly dependent to stopdevelopment of our product candidates or prevent regulatory approval of our product candidates or significant safety issuescould arise after regulatory approval of our products, any of which could materially harm our business.The prescribing information for XIAFLEX for Dupuytren’s contracture made available by Auxilium lists “tendon ruptures or other seriousinjury to the injected extremity” as a reported serious adverse reaction to XIAFLEX and states that the most frequently reported adverse drugreactions in XIAFLEX clinical trials included swelling of the injected hand, contusion, injection site reaction, injection site hemorrhage, andpain in the treated extremity. The prescribing information notes that adverse reaction rates observed in clinical trials of a drug may not reflectthose observed in practice because such trials “are conducted under widely varying conditions.”19Source: BIOSPECIFICS TECHNOLOGIES CORP, 10-K, March 15, 2010Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Auxilium reported in its Form 10-K filed February 26, 2010 that the most common adverse events in the Peyronie’s phase IIb clinical trialwere “injection site bruising, injection site pain, injection site edema, contusion, penile edema and penile pain.”Adverse events or lack of efficacy may force us to stop development of our product candidates or prevent regulatory approval of our productcandidates, which could materially harm our business. In addition, any adverse events or lack of efficacy may force Auxilium to stopdevelopment of the products we have licensed to it or prevent regulatory approval of such products, which could materially impair all or amaterial part of the future revenue we hope to receive from Auxilium. Even if our product candidates receive regulatory approval, new safetyissues may be reported and we or our partners may be required to amend the conditions of use for a product.We face competition in our product development efforts from pharmaceutical and biotechnology companies, universities andother not-for-profit institutions.We face competition in our product development from entities that have substantially greater research and product development capabilitiesand greater financial, scientific, marketing and human resources. These entities include pharmaceutical and biotechnology companies, aswell as universities and not-for-profit institutions. Our competitors may succeed in developing products or intellectual property earlier than wedo, entering into successful collaborations before us, obtaining approvals from the FDA or other regulatory agencies for such products beforeus, or developing products that are more effective than those we could develop. The success of any one competitor in these or other respectswill have a material adverse effect on our business, our ability to receive option payments from Auxilium or ability to generate revenues fromthird party arrangements with respect to additional indications for which Auxilium does not exercise its option.Because of the specialized nature of our business, the termination of relationships with key management, consulting andscientific personnel or the inability to recruit and retain additional personnel could prevent us from developing ourtechnologies, conducting clinical trials and obtaining financing.The competition for qualified personnel in the biotechnology field is intense, and we rely heavily on our ability to attract and contract withqualified independent scientific and medical investigators, and technical and managerial personnel. We face intense competition for qualifiedindividuals from numerous pharmaceutical, biopharmaceutical and biotechnology companies, as well as academic and other researchinstitutions. To the extent we are unable to attract and retain any of these individuals on favorable terms our business may be adverselyaffected.If product liability lawsuits are brought against us, we may incur substantial liabilities.We continue to have product liability exposure for topical product sold by us prior to the sale of our topical business to DFB. In addition, underthe Auxilium Agreement, we are obligated to indemnify Auxilium and its affiliates for any harm or losses they suffered relating to anypersonal injury and other product liability resulting from our development, manufacture or commercialization of any injectable collagenaseproduct. In addition, the clinical testing and, if approved, commercialization of our product candidates involves significant exposure to productliability claims. We have clinical trial and product liability insurance in the aggregate amount of $3 million dollars that we believe is adequatein both scope and amount and has been placed with what we believe are reputable insurers. We may not be able to maintain our clinical trialand product liability insurance at an acceptable cost, if at all, and this insurance may not provide adequate coverage against potential claimsor losses. If losses from product liability claims exceed our insurance coverage, we may incur substantial liabilities that exceed our financialresources, and our business and results of operations may be harmed. Whether or not we are ultimately successful in product liabilitylitigation, such litigation could consume substantial amounts of our financial and managerial resources, and might result in adversepublicity, all of which could impair our business.20Source: BIOSPECIFICS TECHNOLOGIES CORP, 10-K, March 15, 2010Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Risks Related to Intellectual Property RightsIf we breach any of the agreements under which we license rights to products or technology from others, we could lose licenserights that are critical to our business and our business could be harmed.We are a party to a number of license agreements by which we have acquired rights to use the intellectual property of third parties that arenecessary for us to operate our business. If any of the parties terminates its agreement, whether by its terms or due to our breach, our right touse the party’s intellectual property may negatively affect our licenses to Auxilium or DFB and, in turn, their obligation to make option,milestone, contingent royalty or other payments to us.Our ability and the ability of our licensors, licensees and collaborators to develop and license products based on our patentsmay be impaired by the intellectual property of third parties.Auxilium’s, DFB’s and our commercial success in developing and manufacturing collagenase products based on our patents is dependenton these products not infringing the patents or proprietary rights of third parties. While we currently believe that we, our licensees, licensorsand collaborators have freedom to operate in the collagenase market, others may challenge that position in the future. There has been, andwe believe that there will continue to be, significant litigation in the pharmaceutical industry regarding patent and other intellectual propertyrights.Third parties could bring legal actions against us, our licensees, licensors or collaborators claiming damages and seeking to enjoin clinicaltesting, manufacturing and marketing of the affected product or products. A third party might request a court to rule that the patents we in-licensed or licensed to others, or those we may in-license in the future, are invalid or unenforceable. In such a case, even if the validity orenforceability of those patents were upheld, a court might hold that the third party’s actions do not infringe the patent we in-license or licenseto others, which could, in effect, limit the scope of our patent rights and those of our licensees, licensors or collaborators. Our agreementswith Auxilium and DFB require us to indemnify them against any claims for infringement based on the use of our technology. If we becomeinvolved in any litigation, it could consume a substantial portion of our resources, regardless of the outcome of the litigation. If Auxilium orDFB becomes involved in such litigation, it could also consume a substantial portion of their resources, regardless of the outcome of thelitigation, thereby jeopardizing their ability to commercialize candidate products and/or their ability to make option, milestone or royaltypayments to us. If any of these actions is successful, in addition to any potential liability for damages, we could be required to obtain a licenseto permit ourselves, our licensees, licensors or our collaborators to conduct clinical trials, manufacture or market the affected product, inwhich case we may be required to pay substantial royalties or grant cross-licenses to our patents. However, there can be no assurance thatany such license will be available on acceptable terms or at all. Ultimately, we, our licensees, licensors or collaborators could be preventedfrom commercializing a product, or forced to cease some aspect of their or our business, as a result of patent infringement claims, whichcould harm our business or right to receive option, milestone and contingent royalty payments.Risks Related to our Common StockAlthough we currently meet the listing requirements for the Nasdaq Global Market (“Nasdaq”), our common stock could bedelisted from Nasdaq.To maintain our listing on Nasdaq, we must continue to meet listing requirements including a minimum bid price and a certain market valueof publicly held shares. If we are unsuccessful in maintaining our Nasdaq listing, then we may pursue listing and trading of our commonstock on the Over-The-Counter Bulletin Board or another securities exchange or association with different listing standards than Nasdaq,which could significantly impact our common stockholders’ ability to sell their shares.If securities analysts do not publish research reports about our business or if they downgrade us or our sector, the price of ourcommon stock could decline.The trading market for our common stock will depend in part on research reports that industry or financial analysts publish about us or ourbusiness. We are currently covered by one research analyst. If the analyst downgrades us or any of our licensees, or other research analystsdowngrade the industry in which we operate or the stock of any of our competitors or licensees, the price of our common stock will probablydecline.21Source: BIOSPECIFICS TECHNOLOGIES CORP, 10-K, March 15, 2010Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Future sales of our common stock could negatively affect our stock price.If our common stockholders sell substantial amounts of common stock in the public market, or the market perceives that such sales mayoccur, the market price of our common stock could decline. In addition, we may need to raise additional capital in the future to fund ouroperations. If we raise additional funds by issuing equity securities, our stock price may decline and our existing stockholders mayexperience dilution of their interests. Because we historically have not declared dividends, stockholders must rely on an increase in the stockprice for any return on their investment in us.Our stock price has, in the past, been volatile, and the market price of our common stock may drop below the current price.Our stock price has, at times, been volatile. Currently, our common stock is traded on Nasdaq and is thinly traded. Market prices forsecurities of pharmaceutical, biotechnology and specialty pharmaceutical companies have been particularly volatile. Some of the factors thatmay cause the market price of our common stock to fluctuate include:listing of our common stock on a securities exchange or market;results of our clinical trials;failure of any product candidates we have licensed to Auxilium or sold to DFB to achieve commercial success;regulatory developments in the U.S. and foreign countries;developments or disputes concerning patents or other proprietary rights;litigation involving us or our general industry, or both;future sales of our common stock by the estate of our former Chairman and CEO or others;changes in the structure of healthcare payment systems, including developments in price control legislation;departure of key personnel;announcements of material events by those companies that are our competitors or perceived to be similar to us;changes in estimates of our financial results;investors’ general perception of us; andgeneral economic, industry and market conditions.If any of these risks occurs, or continues to occur, it could cause our stock price to fall and may expose us to class action lawsuits that, even ifunsuccessful, could be costly to defend and a distraction to management.We have no current plan to pay dividends on our common stock and investors may lose the entire amount of their investment.We have no current plans to pay dividends on our common stock. Therefore, investors will not receive any funds absent a sale of theirshares. We cannot assure investors of a positive return on their investment when they sell their shares nor can we assure that investors willnot lose the entire amount of their investment.Our outstanding options to purchase shares of common stock could have a possible dilutive effect.As of December 31, 2009, options to purchase 1,464,850 shares of common stock were outstanding. In addition, as of December 31, 2009 atotal of 269,098 options were available for grant under our stock option plans. The issuance of common stock upon the exercise of theseoptions could adversely affect the market price of the common stock or result in substantial dilution to our existing stockholders.22Source: BIOSPECIFICS TECHNOLOGIES CORP, 10-K, March 15, 2010Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Provisions in our certificate of incorporation, bylaws and stockholder rights agreement may prevent or frustrate a change incontrol.Provisions of our certificate of incorporation, bylaws (as amended) and stockholder rights agreement may discourage, delay or prevent amerger, acquisition or other change in control that stockholders may consider favorable, including transactions in which you might otherwisereceive a premium for your shares. These provisions:provide for a classified board of directors;give our Board the ability to designate the terms of and issue new series of preferred stock without stockholder approval, commonlyreferred to as “blank check” preferred stock, with rights senior to those of our common stock;limit the ability of the stockholders to call special meetings; andimpose advance notice requirements on stockholders concerning the election of directors and other proposals to be presented atstockholder meetings.In addition, during May 2002, the Board implemented a rights agreement (commonly known as a “Poison Pill”), which effectivelydiscourages or prevents acquisitions of more than 15% of our common stock in transactions (mergers, consolidations, tender offer, etc.) thathave not been approved by our Board. These provisions could make it more difficult for common stockholders to replace members of theBoard. Because our Board is responsible for appointing the members of our management team, these provisions could in turn affect anyattempt to replace the current management team.If our principal stockholders, executive officers and directors choose to act together, they may be able to control our operations,acting in their own best interests and not necessarily those of other stockholders.As of March 2, 2010 our executive officers, directors and their affiliates, in the aggregate, beneficially owned shares representingapproximately 36% of our common stock. Beneficial ownership includes shares over which an individual or entity has investment or votingpower and includes shares that could be issued upon the exercise of options within 60 days. As a result, if these stockholders were to chooseto act together, they may be able to control all matters submitted to our stockholders for approval, as well as our management and affairs. Forexample, these individuals, if they chose to act together, could control the election of directors and approval of any merger, consolidation orsale of all or substantially all of our assets. This concentration of ownership could have the effect of delaying, deferring or preventing a changein control or impeding a merger or consolidation, takeover or other business combination that could be favorable to other stockholders.This significant concentration of share ownership may adversely affect the trading price for our common stock because investors oftenperceive disadvantages in owning stock in companies with controlling stockholders.Item IB. UNRESOLVED STAFF COMMENTSNone.Item 2. DESCRIPTION OF PROPERTY.Our corporate headquarters are currently located at 35 Wilbur St., Lynbrook, NY 11563. As previously reported, ABC-NY (together with theCompany, the “Tenant”) and Wilbur St. Corp. (the “Landlord”), entered into a Commercial Lease Agreement on January 30, 1998 (the“Commercial Lease Agreement”), pursuant to which the Landlord leased to Tenant this space for a term of 7 years or until January 31, 2005and for an annual rental price of $125,000.Also as previously reported, the Tenant, without the approval of the board of directors of the Company, and the Landlord entered into anExtension and Modification Agreement on July 1, 2005 (the “Modification Agreement” and together with the Commercial Lease Agreement,the “Lease Agreement”), pursuant to which the term of the Commercial Lease Agreement was extended for an additional 5 years or untilJune 30, 2010 and the annual rent increased to $150,000.23Source: BIOSPECIFICS TECHNOLOGIES CORP, 10-K, March 15, 2010Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.In connection with the settlement of the previously reported dispute between the Tenant and the Landlord regarding payments of amountsdue under the Modification Agreement, the parties entered into a Lease Modification Agreement dated June 22, 2009 and effective as of June24, 2009 (the “LMA”). Pursuant to the LMA, the Tenant ratified the Lease Agreement, including the Modification Agreement, subject to theterms thereof, and agreed to a $15,000 reduction in the annual rent to $135,000. The Lease Agreement expires on June 30, 2010.Item 3. LEGAL PROCEEDINGS.None.Item 4. RESERVED.PART IIItem 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS.Market InformationOur common stock currently trades under the symbol BSTC on Nasdaq. We were listed and commenced trading on Nasdaq on January 9,2009. From January 29, 2008 through market close on January 8, 2009, our common stock was quoted and traded on the Over-The-Counter Bulletin Board (the “OTCBB”) under the symbol BSTC.OB. Prior to January 29, 2008, our common stock was quoted on the PinkSheets.The table below sets forth the high and low closing sale prices for our common stock for each of the quarterly periods in 2009 and 2008 asreported by and as quoted in the OTCBB or Nasdaq, as applicable:2009HIGHLOWFourth Quarter$33.00$27.86Third Quarter$32.05$23.67Second Quarter$24.98$18.06First Quarter$21.50$17.50 2008HIGHLOWFourth Quarter$22.00$11.75Third Quarter$22.50$17.00Second Quarter$19.00$11.00First Quarter$14.90$9.50These quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions.HoldersAs of March 1, 2010, to the best of our knowledge, there were approximately 844 beneficial stockholders of our common stock.DividendsIt has been our policy to retain potential earnings to finance the growth and development of our business and not pay dividends, and we haveno current plans to pay dividends. Any payment of cash dividends in the future will depend upon our financial condition, capital requirementsand earnings as well as such other factors as the Board may deem relevant.24Source: BIOSPECIFICS TECHNOLOGIES CORP, 10-K, March 15, 2010Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Equity Compensation Plan InformationThe following table provides information as of December 31, 2009 with respect to the shares of our common stock that may be issued underour existing equity compensation plans: Number of securities toWeighted-averageNumber of securities be issued upon exerciseexercise price ofremaining available of outstanding options,outstanding options,for future issuance warrants and rightswarrants and rightsunder equity compensation plans (excluding securities reflected in column (a)) (a)(b)(c)Equity compensation plans approved by security holders(1)1,464,850$7.64269,098Equity compensation plans not approved by security holders---Total1,464,850$7.64269,098(1) Please see Note 9, “Stockholders’ Equity,” of the notes to the consolidated financial statements for a description of the material features ofeach of our plans.Performance GraphThe graph below compares the cumulative total stockholder return on our common stock with the cumulative total stockholder return of (i) theNASDAQ Biotechnology Index, and (ii) the NASDAQ Composite Index, assuming an investment of $100 on December 31, 2004, in each ofour common stock; the stocks comprising the NASDAQ Composite Index; and the stocks comprising the NASDAQ Biotechnology Index.Comparison of Cumulative Total Return* Among BioSpecifics Technologies Corp, the NASDAQ Biotechnology Index and theNASDAQ Composite Index 12/30/2004 12/31/2005 12/31/2006 12/31/2007 12/31/2008 12/31/2009 BioSpecifics Technologies Corp.$ 100.00 $ 55.03 $ 255.03 $ 671.14 $ 1,436.24 $ 1,969.80 Nasdaq Biotechnology Index$ 100.00 $ 102.84 $ 103.89 $ 108.65 $ 94.93 $ 109.74 Nasdaq Composite Index$ 100.00 $ 101.37 $ 111.03 $ 121.92 $ 72.49 $ 104.31 25Source: BIOSPECIFICS TECHNOLOGIES CORP, 10-K, March 15, 2010Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Total return assumes $100 invested on December 31, 2004 in our common stock, the NASDAQ Composite Index, and theNASDAQ Biotechnology Index and reinvestment of dividends through fiscal year ended December 31, 2009.Recent Sales of Unregistered SecuritiesNone.Item 6. SELECTED FINANCIAL DATANot applicable.Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONThis Report includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, andSection 21E of the Securities Exchange Act of 1934, as amended. All statements other than statements of historical facts are “forward-lookingstatements” for purposes of these provisions, including any projections of earnings, revenues or other financial items, any statements of theplans and objectives of management for future operations, any statements concerning proposed new products or licensing or collaborativearrangements, any statements regarding future economic conditions or performance, and any statement of assumptions underlying any ofthe foregoing. In some cases, forward-looking statements can be identified by the use of terminology such as “may,” “will,” “expects,” “plans,”“anticipates,” estimates,” “potential,” or “continue” or the negative thereof or other comparable terminology. Although we believe that theexpectations reflected in the forward-looking statements contained in this Report are reasonable, there can be no assurance that suchexpectations or any of the forward-looking statements will prove to be correct, and actual results could differ materially from those projected orassumed in the forward-looking statements. Our future financial condition and results of operations, as well as any forward-lookingstatements, are subject to inherent risks and uncertainties, including but not limited to the risk factors set forth above, and for the reasonsdescribed elsewhere in this Report. All forward-looking statements and reasons why results may differ included in this Report are made as ofthe date hereof, and we assume no obligation to update these forward-looking statements or reasons why actual results might differ.OverviewWe are a biopharmaceutical company involved in the development of an injectable collagenase for multiple indications. Pursuant to theAuxilium Agreement, we have licensed to Auxilium our injectable collagenase (which Auxilium has named “XIAFLEXTM” (formerly knownas “AA4500”)) for clinical indications in Dupuytren’s contracture, Peyronie’s disease and frozen shoulder (adhesive capsulitis), andAuxilium has an option to acquire additional indications that we may pursue, including lipomas and cellulite. Auxilium has an agreementwith Pfizer pursuant to which Pfizer will market XIAFLEX for the treatment of Dupuytren’s contracture and Peyronie’s disease in Europe andvarious other territories.Auxilium announced on February 2, 2010 that it received marketing approval from the FDA for XIAFLEX for the treatment of adultDupuytren’s contracture patients with a palpable cord as further described in Item 1 of this Report under the heading “Collagenase forTreatment of Dupuytren’s Contracture.” Auxilium plans to launch XIAFLEX, the only drug approved by the FDA for the treatment ofDupuytren’s contracture, in late March 2010. In its March 2010 presentation materials, Auxilium stated, “We believe there are at least450,000 potential patients annually in [the] U.S. and EU for Dupuytren’s & Peyronie’s indications or > $1 Billion opportunity based onmarket research and analysis.”Auxilium has also announced the list price to distributors of XIAFLEX. In a February 17, 2010 press release, Auxilium stated this list pricewill be $3,250 and that it anticipates that Dupuytren’s contracture patients treated with XIAFLEX will have 1.5 cords treated, on average, andthat each cord will be treated with an average of 1.1 vials of XIAFLEX. As discussed in more detail under Item 1 above in the section titled“Licensing and Marketing Agreements,” we will be entitled to low double-digit royalties for net sales of XIAFLEX pursuant to our developmentand licensing agreement with Auxilium.26Source: BIOSPECIFICS TECHNOLOGIES CORP, 10-K, March 15, 2010Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Pfizer and Auxilium announced, on January 21, 2010, that the scientific/technical review procedure for the Marketing Authorization Approvalfor XIAFLEX for Dupuytren’s contracture in Europe had begun. Pfizer is responsible for marketing XIAFLEX for Dupuytren’s contracture andPeyronie’s disease in 27 member countries of the European Union and 19 other European and Eurasian countries.The Auxilium Agreement and other licensing agreements are discussed more fully in Item 1 of this Report under the section titled “Licensingand Marketing Agreements.”OutlookWe foresee the potential to generate income from limited sources in the next several years. In connection with the sale of our topicalcollagenase business to DFB in March 2006, we continue to receive payments for certain technical assistance and certain transition servicesthat we provide to DFB, as well as earn out payments based on the sales of certain products. Under the Auxilium Agreement, in 2009 wereceived $6.375 million of the $75 million upfront payment paid to Auxilium by Pfizer. In March 2010, we anticipate receiving $1.275 millionof the $15 million paid to Auxilium by Pfizer. We will receive 8.5% of the $395 million in potential additional milestone payments that may bemade by Pfizer to Auxilium under the Pfizer Agreement. Of these additional milestones, $135 million are tied to regulatory milestones and$260 million are based on sales milestones. In addition to the payments already received by us with respect to the Dupuytren’s contractureindication, Auxilium will be obligated to make contingent milestone payments, with respect to each of the Peyronie’s disease and frozenshoulder indications, upon the acceptance of the regulatory filing and receipt by Auxilium, its affiliate or sublicensee of regulatory approval.Based on our current business model, we expect to have adequate cash reserves until at least the second half of 2012. As a significantportion of our revenues is tied directly to the success of Auxilium in commercializing XIAFLEX, we cannot reasonably forecast our financialcondition beyond this time.Significant RisksIn recent history we have had operating losses and may not achieve sustained profitability. As of December 31, 2009 we had an accumulateddeficit from continuing operations of approximately $8.4 million.We are dependent to a significant extent on third parties, and our principal licensee, Auxilium, may not be able to successfully developXIAFLEX for additional indications, obtain required regulatory approvals, manufacture XIAFLEX at an acceptable cost, in a timely mannerand with appropriate quality, or successfully market products or maintain desired margins for products sold, and as a result we may notachieve sustained profitable operations.As of December 31, 2009, we held no auction rate securities (“ARS”). In October 2008, the Company received notice from UBS of a solutionthat provided us the option to continue to hold our ARS or sell the securities back to UBS at par value plus any accrued interest. On October24, 2008 we accepted UBS’s offer and instructed UBS that we would notify them if and when we want to exercise our rights and sell ourARS to UBS during the period January 2, 2009 through January 4, 2011. In early January 2009, we exercised our rights and instructed UBSto sell all our remaining ARS. On January 6, 2009, we received the remaining principal balance of our investment in auction rate securitiesof $0.9 million.Critical Accounting Policies, Estimates and AssumptionsThe preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles requires managementto make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets andliabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period.These estimates are based on historical experience and on various other assumptions that we believe are reasonable under thecircumstances. Actual results could differ from those estimates. While our significant accounting policies are described in more detail in thenotes to our consolidated financial statements, we believe the following accounting policies to be critical to the judgments and estimates usedin the preparation of our consolidated financial statements.27Source: BIOSPECIFICS TECHNOLOGIES CORP, 10-K, March 15, 2010Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Revenue Recognition. We currently recognize revenues resulting from product sales, the licensing and sublicensing of the use of ourtechnology and from services we sometimes perform in connection with the licensed technology under the guidance of Accounting StandardsCodification 605, Revenue Recognition (“ASC 605”).We recognize revenues from product sales when there is persuasive evidence that an arrangement exists, title passes, the price is fixed anddeterminable, and payment is reasonably assured.We enter into product development licenses and collaboration agreements that may contain multiple elements, such as upfront license andsublicense fees, and milestones related to the achievement of particular stages in product development and royalties. As a result, significantcontract interpretation is sometimes required to determine the appropriate accounting, including whether the deliverables specified in amultiple-element arrangement should be treated as separate units of accounting for revenue recognition purposes, and if so, how theaggregate contract value should be allocated among the deliverable elements and when to recognize revenue for each element.We recognize revenue for delivered elements only when the fair values of undelivered elements are known, when the associated earningsprocess is complete and, to the extent the milestone amount relates to our performance obligation, when our licensee confirms that we havemet the requirements under the terms of the agreement, and when payment is reasonably assured. Changes in the allocation of the contractvalue between various deliverable elements might impact the timing of revenue recognition, but in any event, would not change the totalrevenue recognized on the contract. For example, nonrefundable upfront product license fees for product candidates where we are providingcontinuing services related to product development are deferred and recognized as revenue over the development period.Milestones, in the form of additional license fees, typically represent nonrefundable payments to be received in conjunction with theachievement of a specific event identified in the contract, such as completion of specified clinical development activities and/or regulatorysubmissions and/or approvals. We believe that a milestone represents the culmination of a distinct earnings process when it is notassociated with ongoing research, development or other performance on our part. We recognize such milestones as revenue when theybecome due and payment is reasonably assured. When a milestone does not represent the culmination of a distinct earnings process, werecognize revenue in a manner similar to that of an upfront product license fee.Royalty/Earn-Out Revenue. Under the DFB Agreement, pursuant to which we sold our topical collagenase business, we have the right toreceive earn out payments in the future based on sales of certain products. Generally, under this agreement we would receive royaltypayments and a report within ninety (90) days from the end of each calendar year after the licensee has sold the royalty-bearing product. Werecognize royalty revenues when we can reliably estimate such amounts and collectability is reasonably assured.Consulting and Technical Assistance Services. We recognize revenues from a consulting and technical assistance contracts primarilyas a result of our DFB Agreement and Auxilium Agreement. Consulting revenues are recognized ratably over the term of the contract. Theconsulting obligations to DFB generally expire during March 2011.Inventory and Warranty Provisions. Inventories are stated at the lower of cost or realizable market value. In assessing the ultimaterealization of inventories, we are required to make judgments as to future demand requirements and compare that with the current inventorylevels. In March 2006 we sold our topical collagenase business to DFB, including certain product inventory. As of a result of this sale ourproduct inventory as of December 31, 2009 and 2008 was zero.Reimbursable Third Party Development Costs. We accrue expenses for research and development and capitalize certain patent costsrelated to estimated third party development costs that are reimbursable under our agreement with Auxilium. Estimates are based oncontractual terms, historical development costs, reviewing third party data and expectations regarding future development for certain products.Further, we monitor the activities and clinical trials of our development partners.If conditions or other circumstances change, we may take actions to revise our reimbursable third party development cost estimates. Theserevisions could result in an incremental increase or decrease in research and development costs. For example, the Auxilium Agreementprovides that Auxilium and BioSpecifics will share equally in third party costs for the development of the lyophilization of the injectionformulation and certain patent expenses.28Source: BIOSPECIFICS TECHNOLOGIES CORP, 10-K, March 15, 2010Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.In January 2010, we received an updated invoice from Auxilium for approximately $3.0 million which represents an increase ofapproximately $0.2 million in the total amount due that Auxilium believes is owed by us through year end 2009 under this provision. Theincrease in 2009 was primarily due to patent and related legal fees. Based upon the updated invoice, we changed our estimates forreimbursable third party development and certain patent costs from approximately $2.8 million to approximately $3.0 million.Based on our preliminary review, we believe that only a portion of the amounts invoiced actually relates to the development of thelyophilization of the injection formulation as well as for reimbursable patent and related legal fees, and therefore, reserve all rights related tothis matter, including but not limited to our right to contest the amount charged by Auxilium. In addition, we believe that this matter will besettled within calendar year 2010 and have reclassified accrued third party development costs as current liabilities at December 31, 2009.Actual results have differed in the past, and may differ in the future, from our estimates and could impact our earnings in any period duringwhich an adjustment is made.Stock Based Compensation. Under the Accounting Standards Codification 718, Compensation - Stock Compensation (“ASC 718”), weestimate the fair value of our employee stock awards at the date of grant using the Black-Scholes option-pricing model, which requires theuse of certain subjective assumptions. The most significant of these assumptions are our estimates of the expected volatility of the marketprice of our stock and the expected term of an award. When establishing an estimate of the expected term of an award, we consider thevesting period for the award, our recent historical experience of employee stock option exercises (including forfeitures) and the expectedvolatility. When there is uncertainty in the factors used to determine the expected term of an award, we use the simplified method inaccordance with SEC Staff Accounting Bulletin 107. As required under the accounting rules, we review our valuation assumptions at eachgrant date and, as a result, our valuation assumptions used to value employee stock-based awards granted in future periods may change.Further, ASC 718 requires that employee stock-based compensation costs be recognized over the requisite service period, or the vestingperiod, in a manner similar to all other forms of compensation paid to employees. Accordingly, in 2009 we recognized employee stock-basedcompensation as part of our operating expenses and allocated $108,465 to research and development expenses and $1,381,618 to generaland administrative expenses.We account for stock options granted to persons other than employees or directors at fair value using the Black-Scholes option-pricing modelin accordance with Accounting Standards Codification 505-50, Equity Based Payments to Non-Employees (“ASC 505-50”). Stock optionsgranted to such persons and stock options that are modified and continue to vest when an employee has a change in employment status aresubject to periodic revaluation over their vesting terms. We recognize the resulting stock-based compensation expense during the serviceperiod over which the non-employee provides services to us. The stock-based compensation expense related to non-employees for the yearended December 31, 2009 was zero.RESULTS OF OPERATIONSYEAR ENDED DECEMBER 31, 2009 COMPARED WITH YEAR ENDED DECEMBER 31, 2008Product Revenues, netProduct revenues include the sales of the collagenase for laboratory use recognized at the time it is shipped to customers. We had a smallamount of revenue from the sale of collagenase for laboratory use. For the calendar years ended 2009 and 2008 product revenues were$39,035 and $37,343, respectively. This increase of $1,692 or 5% was primarily related to the amount of material required to performtesting and additional research by our customers.Royalties/Earn-OutAll of the royalty revenues we received in 2009 are from DFB under the earn-out payment provision of the DFB Agreement. Total royaltyrevenues recognized under that agreement were $1,271,597 and $510,126 for calendar years 2009 and 2008, respectively. The increase of$761,470, or 149%, from calendar year 2008 to 2009 was due to certain sales levels achieved by DFB in connection with the sale of topicalcollagenase.29Source: BIOSPECIFICS TECHNOLOGIES CORP, 10-K, March 15, 2010Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Licensing, Sublicensing and Milestone RevenuesWe recognized as licensing, sublicensing and milestone revenue $1,565,125 and $7,440,125 in calendar years 2009 and 2008,respectively. The decrease of $5,875,000, or 79%, from 2008 to 2009 was due to a sublicense fee of $6,375,000 recognized in 2008 partiallyoffset by a $500,000 milestone received in 2009 in connection with the Auxilium Agreement.Consulting ServicesWe recognize revenues from consulting and technical assistance contracts primarily as a result of the DFB Agreement and a consultingagreement signed in October 2007 with Auxilium. We recognize consulting revenues ratably over the term of the contract. The consultingobligations under the DFB Agreement generally expire during March 2011. For calendar years 2009 and 2008 we recognized $280,000 and$424,185, respectively, in consulting revenue. The decrease of $144,185 or 34% from 2008 to 2009 was primarily due to the recognition in2008 of revenues earned in connection with the October 2007 consulting agreement with Auxilium.Research and Development ActivitiesResearch and development expenses were $488,646 and $439,919 respectively, for calendar years 2009 and 2008, representing anincrease from 2008 to 2009 of $48,727, or 11%. This increase was primarily due to certain employee costs which were reimbursable underthe DFB Agreement until October 2008 and stock-based compensation expense partially offset by decreases in external study developmentcosts.General and Administrative ExpensesGeneral and administrative expenses were $4,832,019 and $4,191,052 for calendar years 2009 and 2008, respectively, an increase of$640,967, or 15%, from 2008 to 2009. This increase was primarily due to outside consulting services, certain facility costs which werereimbursable under the DFB Agreement until October 2008, employee costs, legal fees and board member service partially offset by adecrease in patent related fees and stock-based compensation expense.Other Income and expenseOther income, for calendar year 2009 was $46,791 compared to $262,811for calendar year 2008. Other income, during 2009 was due tointerest of $55,693 earned on our investments and other consisting of tax penalties of $9,463 which was partially offset by a $600 gainrelated to an asset sale. Other income during 2008 was due to interest earned of $107,552 on our investments, a reversal of interestexpense penalty of $80,409 associated with our delinquent tax filings partially offset by an interest expense tax payment of $33,880 afterfinalizing our delinquent tax returns, a reversal of accrued tax penalties of $103,203 and a small gain from the sale of an asset of $5,527.Income TaxesThe income tax benefit for 2009 was $161,574 as compared to an income tax expense of $299,212 for 2008. In 2009 the Company utilizedits current federal NOL to carry-back to the 2008 tax year to claim a refund of taxes paid of $198,239 which were partially offset by 2009 statetax of $1,784 and a $34,881 tax adjustment related to prior years’ tax returns. In 2008, we accrued approximately $494,234 associated withfederal and state taxes based on our net income in 2008 which was partially offset by a tax benefit related to the exercise of stock options of$314,648 and we recognized a $195,022 tax benefit in connection with our 2007 net operating loss.The Company’s statutory marginal federal tax rate is 34%. The effective rate for 2009 was (2.6%) reflecting the benefit derived from our netoperating loss carry-back, deferred revenue and stock based compensation.30Source: BIOSPECIFICS TECHNOLOGIES CORP, 10-K, March 15, 2010Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Liquidity and Capital ResourcesTo date, we have financed our operations primarily through product sales, debt instruments, licensing revenues under agreements with thirdparties and sales of our common stock. At December 31, 2009 and 2008 we had cash, cash equivalents and investments in the aggregate of$8,498,930 and $4,394,150, respectively.Net Cash provided by Operating ActivitiesNet cash provided by operating activities in calendar year 2009 was $3,724,751, compared with net cash used in operating activities of$3,101,055 in calendar year 2008. The change in net cash provided by operating activities from 2008 to 2009 was primarily attributable to areduction in accounts receivable due to the receipt of a payment for a sublicense fee of $6.375 million partially offset by an increase in earn-out royalties under certain agreements, higher operating expenses and lower accounts payable and accrued expenses.Net Cash Used in Investing ActivitiesNet cash used in investing activities in calendar year 2009 was $3,648,541, compared with $1,167,000 in calendar year 2008. The changein net cash used in investing activities from 2008 to 2009 reflects our purchase of marketable securities of $6,448,295 partially offset by theredemption of marketable securities of $2,799,754. Net cash used in investing activities in 2008 reflects our investment in marketablesecurities of $2,000,000, a one-time cash payment related to our future royalty obligations for Peyronie's disease of $1,250,000 and by thesale or maturity of marketable securities of $2,075,000.Net Cash provided by Financing ActivitiesNet cash provided by financing activities for calendar year 2009 was $380,029 as compared $7,693,641 for calendar year 2008. Net cashprovided by financing activities in 2009 was from proceeds received from stock option exercises. Net cash provided by financing activities for2008 consisted of proceeds from the sale of our common stock of $6,007,047, repayment of an outstanding loan from our former Chairmanand CEO of $1,116,558, $314,648 related to excess tax benefits from share-based payment arrangements and proceeds received from stockoption exercises of $255,388.Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.Not applicable.Item 8. FINANCIAL STATEMENTS.For the discussion of Item 8, “Financial Statements” please see the Consolidated Financial Statements, beginning on page F-1 of thisReport.Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.None.Item 9A. EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES.The Company, under the supervision and with the participation of Thomas L. Wegman, the Company’s President, Principal ExecutiveOfficer and Principal Financial Officer, evaluated the effectiveness of its disclosure controls and procedures as of the end of the period coveredby this Report. Based on that evaluation, management has concluded that the Company’s disclosure controls and procedures are effective toensure that information required to be disclosed in reports filed under the Securities Exchange Act of 1934, as amended (the “Exchange Act”),is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC, and that suchinformation is accumulated and communicated to the Company’s management, to allow timely decisions regarding required disclosure.Because of the inherent limitations in all control systems, any controls and procedures, no matter how well designed and operated, canprovide only reasonable assurance of achieving the desired control objectives, and management necessarily is required to apply its judgmentin evaluating the cost-benefit relationship of possible controls and procedures. Furthermore, our controls and procedures can be circumventedby the individual acts of some persons, by collusion of two or more people or by management override of the control, and misstatements dueto error or fraud may occur and not be detected on a timely basis.31Source: BIOSPECIFICS TECHNOLOGIES CORP, 10-K, March 15, 2010Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Management’s Annual Report on Internal Control Over Financial ReportingManagement of the Company is responsible for establishing and maintaining adequate internal control over financial reporting for theCompany as defined in Rule 13a-15(f) under the Exchange Act. The Company’s internal control over financial reporting is designed toprovide reasonable assurance to the Company’s management and board of directors regarding the preparation and fair presentation ofpublished financial statements and the reliability of financial reporting.Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even thosesystems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2009. In making thisassessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission(“COSO”) in Internal Control – Integrated Framework. We believe that, as of December 31, 2009, the Company’s internal control overfinancial reporting was effective based on this criteria.Tabriztchi & Co, the independent registered public accounting firm that audited our Consolidated Financial Statements included in thisReport, audited the effectiveness of our internal control over financial reporting as of December 31, 2009, as stated in their report which isincluded in Part IV, Item 15 of this Report.Changes in Internal Control Over Financial ReportingThere were no changes in our internal control over financial reporting identified in connection with the evaluation of our controls performedduring the year ended December 31, 2009 that have materially affected, or are reasonably likely to materially affect, our internal control overfinancial reporting.Item 9B. OTHER INFORMATIONNot applicable.PART IIIItem 10. DIRECTORS AND EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION16(a) OF THE EXCHANGE ACTThe information required by this item is incorporated herein by reference to the sections captioned “Directors and Executive Officers,”“Committees of the Board of Directors,” and “Section 16(a) Beneficial Ownership Reporting Compliance” in our definitive Proxy Statementrelating to our 2010 Annual Meeting of Stockholders.Item 11. EXECUTIVE COMPENSATION.The information required by this item is incorporated herein by reference to the section captioned “Executive Compensation” in our definitiveProxy Statement relating to our 2010 Annual Meeting of Stockholders.Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERMATTERS.The information required by this item is incorporated herein by reference to the sections captioned “Security Ownership of Certain BeneficialOwners and Management” and “Equity Compensation Plan Information” in our definitive Proxy Statement relating to our 2010 AnnualMeeting of Stockholders.32Source: BIOSPECIFICS TECHNOLOGIES CORP, 10-K, March 15, 2010Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.The information required by this item is incorporated herein by reference to the section captioned “Certain Relationships and RelatedTransactions” in our definitive Proxy Statement relating to our 2010 Annual Meeting of Stockholders.Item 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.The information required by this item is incorporated herein by reference to the section captioned “Ratification of Selection of IndependentRegistered Public Accounting Firm” in our definitive Proxy Statement relating to our 2010 Annual Meeting of Stockholders.PART IVItem 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES. (a)The following documents are filed as part of this Report: (1)Consolidated Financial Statements (See Index to Consolidated Financial Statements on page F-1) (2)Financial Statement Schedules All schedules to the consolidated financial statements are omitted as the required information is either inapplicable orpresented in the consolidated financial statements (3)Exhibits The information required by this Item is set forth in the Exhibit Index hereto which is incorporated herein by reference. (b)Exhibits The information required by this Item is set forth in the Exhibit Index hereto which is incorporated herein by reference.33Source: BIOSPECIFICS TECHNOLOGIES CORP, 10-K, March 15, 2010Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.BIOSPECIFICS TECHNOLOGIES CORP.INDEX TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2009 PageReport of Independent Registered Public Accounting FirmF-2Consolidated Balance SheetsF-4Consolidated Statements of OperationsF-5Consolidated Statements of Cash FlowsF-6Consolidated Statements of Stockholders’ DeficitF-7Notes to Consolidated Financial StatementsF-8F-1Source: BIOSPECIFICS TECHNOLOGIES CORP, 10-K, March 15, 2010Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMTo the Board of Directors andStockholders ofBioSpecifics Technologies Corp.We have audited the accompanying balance sheets of BioSpecifics Technologies Corp. as of December 31, 2008 and 2009, and the relatedstatements of income, stockholders' equity and comprehensive income, and cash flows for each of the years in the two-year period endedDecember 31, 2009. BioSpecifics Technologies Corp's management is responsible for these financial statements. Our responsibility is toexpress an opinion on these financial statements based on our audits.We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Thosestandards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free ofmaterial misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financialstatements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well asevaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of BioSpecificsTechnologies Corp as of December 31, 2008 and 2009, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2009 in conformity with accounting principles generally accepted in the United States of America.We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), BioSpecificsTechnologies Corp's internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control -Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report datedMarch 12, 2010 expressed an unqualified opinion./s/ Tabriztchi & Co., CPA, P.C.Tabriztchi & Co., CPA, P.C.Garden City, NYMarch 12, 2010F-2Source: BIOSPECIFICS TECHNOLOGIES CORP, 10-K, March 15, 2010Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMTo the Board of Directors andStockholders ofBioSpecifics Technologies Corp.We have audited BioSpecifics Technologies Corp's internal control over financial reporting as of December 31, 2009 based on criteriaestablished in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission(COSO). BioSpecifics Technologies Corp's management is responsible for maintaining effective internal control over financial reporting andfor its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management's Annual Reporton Internal Control over Financial Reporting. Our responsibility is to express an opinion on the company's internal control over financialreporting based on our audit.We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Thosestandards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financialreporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding ofinternal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design andoperating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as weconsidered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability offinancial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accountingprinciples. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance ofrecords that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) providereasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generallyaccepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations ofmanagement and directors of the company and (3) provide reasonable assurance regarding prevention of timely detection of unauthorizedacquisition, use, or disposition of the company's assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of anyevaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, orthat the degree of compliance with the policies or procedures may deteriorate.In our opinion, BioSpecifics Technologies Corp. maintained, in all material respects, effective internal control over financial reporting as ofDecember 31, 2009, based on criteria established in Internal Control - Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission (COSO).We have also audited, in accordance with the standards of the Pubic Company Accounting Oversight Board (United States), the balancesheets of December 31, 2009 and 2008 and the related statements of income, stockholders' equity and comprehensive income, and cashflow of BioSpecifics Technologies Corp. for each of the two years then ended, and our report dated March 12, 2010 expressed an unqualifiedopinion./s/ Tabriztchi & Co., CPA, P.C.Tabriztchi & Co., CPA, P.C.Garden City, NYMarch 12, 2010F-3Source: BIOSPECIFICS TECHNOLOGIES CORP, 10-K, March 15, 2010Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.BioSpecifics Technologies Corp. Consolidated Balance Sheet December 31, 2009 2008 Assets Current assets: Cash and cash equivalents$3,950,389 $3,494,150 Short term investments 4,548,541 900,000 Accounts receivable, net 1,295,399 6,912,001 Income tax receivable 416,821 40,780 Prepaid expenses and other current assets 63,260 67,709 Total current assets 10,274,410 11,414,640 Deferred royalty buy-down 1,250,000 1,250,000 Property, plant and equipment, net 610 2,297 Patent costs, net 223,458 164,424 Total assets 11,748,478 12,831,361 Liabilities and Stockholders' Equity Current liabilities: Accounts payable and accrued expenses 584,509 642,465 Accrued third party development expenses 2,965,225 - Deferred revenue 877,778 1,271,792 Accrued liabilities of discontinued operations 78,138 78,138 Total current liabilities 4,505,650 1,992,395 Accrued third party development expenses - 2,758,595 Deferred revenue - license fees 1,150,721 1,901,832 Stockholders' equity: Series A Preferred stock, $.50 par value, 700,000 shares authorized; none outstanding - - Common stock, $.001 par value; 10,000,000 shares authorized; 6,327,318 and 6,140,068shares issued and outstanding at December 31, 2009 and 2008, respectively 6,327 6,140 Additional paid-in capital 15,164,727 13,294,803 Accumulated deficit (8,384,990) (6,428,447)Treasury stock, 131,267 shares at cost as of December 31, 2009 and 2008 (693,957) (693,957)Total stockholders' equity 6,092,107 6,178,539 Total liabilities and stockholders’ equity$11,748,478 $12,831,361 F-4Source: BIOSPECIFICS TECHNOLOGIES CORP, 10-K, March 15, 2010Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.BioSpecifics Technologies Corp. Consolidated Statements of Operations Years Ended December 31, 2009 2008 Revenues: Net sales$ 39,035 $ 37,343 Royalties 1,271,597 510,127 Licensing fees 1,565,125 7,440,125 Consulting fees 280,000 424,185 Total revenues 3,155,757 8,411,780 Costs and expenses: Research and development 488,646 439,919 General and administrative 4,832,019 4,191,052 Total costs and expenses 5,320,665 4,630,971 Operating income (loss) (2,164,908) 3,780,809 Other income (expense): Interest income 55,693 107,552 Interest expense (39) 46,529 Other (8,863) 108,730 46,791 262,811 Income (loss) before benefit (expense) for income tax (2,118,117) 4,043,620 Income tax benefit (expense) 161,574 (299,212)Net income (loss)$ (1,956,543)$ 3,744,408 Basic net income (loss) per share$ (0.32)$ 0.64 Diluted net income (loss) per share$ (0.32)$ 0.55 Shares used in computation of basic net income (loss) per share 6,065,939 5,854,836 Shares used in computation of diluted net income (loss) per share 6,065,939 6,836,911 F-5Source: BIOSPECIFICS TECHNOLOGIES CORP, 10-K, March 15, 2010Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.BioSpecifics Technologies Corp. Consolidated Statements of Cash Flows Years Ended December 31,Cash flows from operating activities: 2009 2008 Net income (loss)$ (1,956,543)$ 3,744,408 Adjustments to reconcile net income (loss) to net cash used in operating activities: Depreciation and amortization 35,669 55,774 Gain on disposal of fixed assets - (5,535)Stock-based compensation expense 1,490,083 1,476,148 Deferred revenue (1,145,125) (1,145,125)Changes in operating assets and liabilities: Accounts receivable 5,616,601 (6,843,974)Prepaid expenses and other current assets (371,592) 5,449 Accounts payable and accrued expenses 55,658 (388,200)Net cash provided by (used in) operating activities from continuing operations 3,724,751 (3,101,055) Cash flows from investing activities: Maturities of marketable securities 2,799,754 2,075,000 Purchases of marketable securities (6,448,295) (2,000,000)Payment for royalty buy down - (1,250,000)Proceeds from sale of fixed asset - 8,000 Net cash used in investing activities from continuing operations (3,648,541) (1,167,000) Cash flows from financing activities: Proceeds from issuance of capital stock - 6,007,047 Proceeds from stock option exercises 380,029 255,388 Excess tax benefits from share-based payment arrangements - 314,648 Proceeds from pay-off of notes receivable from former CEO and Chairman - 1,116,558 Net cash provided by financing activities from continuing operations 380,029 7,693,641 Increase (decrease) in cash and cash equivalents 456,239 3,425,586 Cash and cash equivalents at beginning of year 3,494,150 68,564 Cash and cash equivalents at end of year$ 3,950,389 $ 3,494,150 Supplemental disclosures of cash flow information: Cash paid during the year for: Interest$ - $ 33,880 Taxes$ 214,467 $ 225,824 Supplemental disclosures of non-cash transactions: Under our agreement with Auxilium certain patent costs paid by Auxilium on behalf of the Company are creditable against future royalties.As of December 31, 2009 we accrued $282,297 related to this issue of which $33,983 and $24,856 was amortized in the 2009 and 2008periods, respectively. See accompanying notes to consolidated financial statementsF-6Source: BIOSPECIFICS TECHNOLOGIES CORP, 10-K, March 15, 2010Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.BioSpecifics Technologies Corp. Consolidated Statements of Stockholders' Equity (Deficit) Additional Accumulated Shares Amount Paid in Capital Deficit Balances - December 31, 2007 5,480,768 $ 5,481 $ 4,751,447 $ (10,172,855) Issuance of common stock at $10.50 to a private investor, net ofissuance costs 200,000 200 2,093,450 - Issuance of common stock at $13.00 to a private investor, net ofissuance costs 100,000 100 1,299,900 - Issuance of common stock at $15.00 to a private investor, net ofissuance costs 100,000 100 1,488,929 - Issuance of common stock at $22.50 to a private investor, net ofissuance costs 50,000 50 1,124,318 - Issuance of common stock under stock option plans 209,300 209 255,178 Tax benefit from exercised stock options - - 314,648 - Stock compensation expense - - 1,476,149 - Payment from former CEO and Chairman loan principal andinterest - - 490,784 - Net income - - - 3,744,408 Balances - December 31, 2008 6,140,068 $ 6,140 $ 13,294,803 $ (6,428,447) Issuance of common stock under stock option plans 187,250 187 379,841 - Stock compensation expense - - 1,490,083 - Net loss - - - (1,956,543)Balances - December 31, 2009 6,327,318 $ 6,327 $ 15,164,727 $ (8,384,990) Due from former Shareholder Treasury Chairman Equity (Deficit) Stock and CEO Total Balances - December 31, 2007 (693,957)$ (625,774)$ (6,735,658) Issuance of common stock at $10.50 to a private investor, net ofissuance costs - - Issuance of common stock at $13.00 to a private investor, net ofissuance costs - - 2,093,650 Issuance of common stock at $15.00 to a private investor, net ofissuance costs - - 1,300,0001,489,029 Issuance of common stock at $22.50 to a private investor, net ofissuance costs - - 1,124,368 Issuance of common stock under stock option plans - - 255,387 Tax benefit of exercised stock options 314,648 Stock compensation expense 1,476,149 Payment from former CEO and Chairman loan principal andinterest - 625,774 1,116,558 Net income - - 3,744,408 Balances - December 31, 2008 (693,957)$ - $ 6,178,539 Issuance of common stock under stock option plans - - 380,028 Stock compensation expense - - 1,490,083 Net loss - - (1,956,543) Balances - December 31, 2009 (693,957)$ - 6,092,107 F-7Source: BIOSPECIFICS TECHNOLOGIES CORP, 10-K, March 15, 2010Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.BIOSPECIFICS TECHNOLOGIES CORP.Notes to Consolidated Financial Statements December 31, 2009 and 20081. ORGANIZATION AND DESCRIPTION OF BUSINESSWe are a biopharmaceutical company involved in the development of an injectable collagenase for multiple indications. We have adevelopment and license agreement with Auxilium Pharmaceuticals, Inc. (“Auxilium”) for injectable collagenase (which Auxilium hasnamed “XIAFLEXTM” (formerly known as “AA4500”)) for clinical indications in Dupuytren’s contracture, Peyronie’s disease and frozenshoulder (adhesive capsulitis), and Auxilium has an option to acquire additional indications that we may pursue, including lipomas andcellulite.We entered into the development and license agreement with Auxilium on June 3, 2004, as amended on May 10, 2005 and December 15,2005, respectively (the “Prior Auxilium Agreement”), pursuant to which we granted to Auxilium an exclusive worldwide license to develop,market and sell products containing our injectable collagenase for the treatment of Dupuytren’s contracture, Peyronie's disease and frozenshoulder, as well as an exclusive option to develop and license the technology for use in additional indications other than dermalformulations labeled for topical administration.On December 11, 2008, the parties amended and restated, in its entirety, the Prior Auxilium Agreement (the “Auxilium Agreement”), whichbecame effective on December 17, 2008 upon the execution and effectiveness of the Development, Commercialization and SupplyAgreement, dated December 17, 2008 (the “Pfizer Agreement”) between Auxilium International Holdings, Inc., a wholly-owned subsidiary ofAuxilium, and Pfizer, Inc. (“Pfizer”). Under the Pfizer Agreement, Pfizer will market XIAFLEX for the treatment of Dupuytren’s contractureand Peyronie’s disease in Europe and various other territories.DISCONTINUED OPERATIONSPrior to March 2006, we were a party to an exclusive license agreement with Abbott Laboratories, Inc. and its subsidiaries, for the productionof the active pharmaceutical ingredient for topical collagenase. In March 2006 we sold our topical collagenase business to DFB Biotech, Inc.and its affiliates (“DFB”), including all rights to the exclusive license agreement and we were released of any obligations thereunder (the“DFB Agreement”).In addition, at the closing of the DFB Agreement, DFB (i) acquired from us certain inventory and manufacturing equipment used in thetopical collagenase business, (ii) was granted a perpetual royalty free license to use, solely in connection with the topical collagenasebusiness, certain intangible assets retained by us and (iii) was granted the right (for a limited period of time which was subsequentlyextended until October 2009) to use, solely in connection with the topical collagenase business, certain tangible assets retained by us. As partof the sale, we transferred to DFB our FDA manufacturing license.As consideration for the purchased assets we received $8 million in cash, DFB’s assumption of certain liabilities, and the right to receiveearn out payments in the future based on sales of certain products. In connection with the closing of the DFB Agreement, we agreed toprovide certain technical assistance and certain transition services to DFB in consideration of fees and costs totaling over $1.4 million. At theclosing, DFB paid to us a partial payment of $400,000 in respect of the technical assistance to be provided by us. As of December 31, 2009,we have received a total of $1.2 million in payments from DFB. The consulting obligations generally expire during March 2011.2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIESPrinciples of ConsolidationThe audited consolidated financial statements include the accounts of the Company and its subsidiary, Advance Biofactures Corp. (“ABC-NY”).F-8Source: BIOSPECIFICS TECHNOLOGIES CORP, 10-K, March 15, 2010Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Management EstimatesThe preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles requires the use ofmanagement’s estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanyingnotes. Actual results could differ from those estimates.Cash, Cash Equivalents and Short-term InvestmentsCash, cash equivalents and short-term investments are stated at market value. Cash equivalents include only securities having a maturityof three months or less at the time of purchase. The Company limits its credit risk associated with cash, cash equivalents and short-terminvestments by placing its investments with banks it believes are highly creditworthy and with highly rated money market funds, U.S.government securities, or short-term commercial paper.Fair Value MeasurementsAccounting Standards Codification 820, Fair Value Measurements and Disclosures, requires expanded disclosures about fair valuemeasurements. We adopted these provisions relating to assets and liabilities recognized or disclosed in the financial statements at fair valueon a recurring basis on January 1, 2008. The adoption of these provisions did not have a material effect on our consolidated financialstatements.Auction Rate SecuritiesAs of December 31, 2009, we held no auction rate securities (“ARS”). In October 2008, the Company received notice from UBS of a solutionthat provided us the option to continue to hold our ARS or sell the securities back to UBS at par value plus any accrued interest. On October24, 2008 we accepted UBS’s offer and instructed UBS that we would notify them if and when we want to exercise our rights and sell ourARS to UBS during the period January 2, 2009 through January 4, 2011. In early January 2009, we exercised our rights and instructed UBSto sell all our remaining ARS. On January 6, 2009, we received the remaining principal balance of our investment in auction rate securitiesof $0.9 million.Revenue RecognitionWe currently recognize revenues resulting from product sales, the licensing and sublicensing of the use of our technology and from serviceswe sometimes perform in connection with the licensed technology under the guidance of Accounting Standards Codification 605, RevenueRecognition (“ASC 605”).If we determine that separate elements exist in a revenue arrangement under ASC 605, we recognize revenue for delivered elements onlywhen the fair values of undelivered elements are known, when the associated earnings process is complete, when payment is reasonablyassured and, to the extent the milestone amount relates to our performance obligation, when our customer confirms that we have met therequirements under the terms of the agreement.Revenues, and their respective treatment for financial reporting purposes, are as follows:Product SalesWe recognize revenue from product sales when there is persuasive evidence that an arrangement exists, title passes, the price is fixed ordeterminable and collectability is reasonably assured. No right of return exists for our products except in the case of damaged goods. To date,we have not experienced any significant returns of our products.Net sales include the sales of the collagenase for lab use that are recognized at the time the product is shipped to customers for laboratoryuse.Royalty/Earn-Out RevenueUnder the DFB Agreement, pursuant to which we sold our topical collagenase business, we have the right to receive earn out payments inthe future based on sales of certain products. Generally, under this agreement we would receive royalty payments and a report within ninety(90) days from the end of each calendar year after the licensee has sold the royalty-bearing product. We recognize royalty revenues when wecan reliably estimate such amounts and collectability is reasonably assured.F-9Source: BIOSPECIFICS TECHNOLOGIES CORP, 10-K, March 15, 2010Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.License and Sublicense FeesWe include revenue recognized from upfront licensing, sublicensing and milestone payments in “License Fees” in our consolidatedstatements of operations in this Report.Upfront License and Sublicensing FeesWe generally recognize revenue from upfront licensing and sublicensing fees when the agreement is signed, we have completed theearnings process and we have no ongoing performance obligation with respect to the arrangement. Nonrefundable upfront technology licensefor product candidates for which we are providing continuing services related to product development are deferred and recognized as revenueover the development period.MilestonesMilestones, in the form of additional license fees, typically represent nonrefundable payments to be received in conjunction with theachievement of a specific event identified in the contract, such as completion of specified development activities and/or regulatorysubmissions and/or approvals. We believe that a milestone represents the culmination of a distinct earnings process when it is notassociated with ongoing research, development or other performance on our part. We recognize such milestones as revenue when theybecome due and collection is reasonably assured. When a milestone does not represent the culmination of a distinct earnings process, werecognize revenue in a manner similar to that of an upfront license fee.The timing and amount of revenue that we recognize from licenses of technology, either from upfront fees or milestones where we areproviding continuing services related to product development, is primarily dependent upon our estimates of the development period. Wedefine the development period as the point from which research activities commence up to regulatory approval of either our, or our partners’submission assuming no further research is necessary. As product candidates move through the development process, it is necessary torevise these estimates to consider changes to the product development cycle, such as changes in the clinical development plan, regulatoryrequirements, or various other factors, many of which may be outside of our control. Should the FDA or other regulatory agencies requireadditional data or information, we would adjust our development period estimates accordingly. The impact on revenue of changes in ourestimates and the timing thereof is recognized prospectively over the remaining estimated product development period.Consulting and Technical Assistance ServicesWe recognize revenues from consulting and technical assistance contracts primarily as a result of our DFB Agreement and AuxiliumAgreement. Consulting revenues are recognized ratably over the term of the contract. The consulting obligations to DFB generally expireduring March 2011.Accounts receivable and Allowance for Doubtful AccountsThe Company performs ongoing credit evaluations of its customers and maintains allowances for potential credit losses which when realizedhave been within the range of management’s expectations. Our policy is to write off bad debts as uncollectible when it is determined that theycannot be collected.As of December 31, 2009, accounts receivables include approximately $1.3 million due from DFB in accordance with the terms of the AssetPurchase Agreement. Under the Asset Purchase Agreement with DFB, we receive royalty payments and a report within ninety (90) daysfrom the end of each calendar year after the licensee has sold the royalty-bearing product.Reimbursable Third Party Development CostsWe accrue expenses to research and development for estimated third party development costs and capitalize certain patent costs that arereimbursable under our agreement with Auxilium. Estimates are based on contractual terms, historical development costs, reviewing thirdparty data and expectations regarding future development for certain products. Further, we monitor the activities and clinical trials of ourdevelopment partners.F-10Source: BIOSPECIFICS TECHNOLOGIES CORP, 10-K, March 15, 2010Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.If conditions or other circumstances change, we may take actions to revise our reimbursable third party development cost estimates. Theserevisions could result in an incremental increase or decrease in research and development costs. For example, the Auxilium Agreementprovides that Auxilium and BioSpecifics will share equally in third party costs for the development of the lyophilization of the injectionformulation and certain patent expenses.In January 2010, we received an updated invoice from Auxilium for approximately $3.0 million which represents an increase ofapproximately $0.2 million in the total amount due that Auxilium believes is owed by us through year end 2009 under this provision. Theincrease in 2009 was primarily due to patent and related legal fees. Based upon the updated invoice, we changed our estimates forreimbursable third party development and certain patent costs from approximately $2.8 million to approximately $3.0 million.Based on our preliminary review, we believe that only a portion of the amount charged actually relates to the development of thelyophilization of the injection formulation as well as for reimbursable patent and related legal fees and, therefore, reserve all rights related tothis matter, including but not limited to our right to contest the amount charged by Auxilium. In addition, we believe that this matter will besettled within calendar year 2010 and have reclassified accrued third party development costs as current liabilities at December 31, 2009.Actual results have differed in the past, and may differ in the future, from our estimates and could impact our earnings in any period duringwhich an adjustment is made.Research and Development ExpensesOur research and development (“R&D”) costs are expensed as incurred. R&D includes, but is not limited to, internal costs, such as salariesand benefits, costs of materials, lab expense, facility costs and overhead. R&D also consists of third party costs, such as medical professionalfees, contract manufacturing costs for material used in clinical trials, consulting fees and costs associated with clinical study R&Darrangements. We fund R&D at medical research institutions under agreements that are generally cancelable. All of these costs are chargedto R&D as incurred, which may be measured by percentage of completion, contract milestones, patient enrollment, or the passage of time.Clinical Trial ExpensesOur cost accruals for clinical trials are based on estimates of the services received and efforts expended pursuant to contracts with variousclinical trial centers and clinical research organizations. In the normal course of business we contract with third parties to perform variousclinical trial activities in the ongoing development of potential drugs. The financial terms of these agreements are subject to negotiation andvary from contract to contract and may result in uneven payment flows. Payments under the contracts depend on factors such as theachievement of certain events, the successful enrollment of patients, the completion of portions of the clinical trial, or similar conditions. Theobjective of our accrual policy is to match the recording of expenses in our financial statements to the actual cost of services received andefforts expended. As such, expenses related to each patient enrolled in a clinical trial are recognized ratably beginning upon entry into the trialand over the course of the patient’s continued participation in the trial. In the event of early termination of a clinical trial, we accrue an amountbased on our estimate of the remaining non-cancelable obligations associated with the winding down of the clinical trial. Our estimates andassumptions could differ significantly from the amounts that may actually be incurred.Stock Based CompensationThe Company has two stock-based compensation plans in effect which are described more fully in Note 9. Accounting Standards Codification718, Compensation - Stock Compensation (“ASC 718”) requires the recognition of compensation expense, using a fair-value basedmethod, for costs related to all share-based awards including stock options and common stock issued to our employees and directors underour stock plans. It requires companies to estimate the fair value of share-based awards on the date of grant using an option-pricing model.The value of the portion of the award that is ultimately expected to vest is recognized as expense on a straight-line basis over the requisiteservice periods in our Consolidated Statements of Operations.F-11Source: BIOSPECIFICS TECHNOLOGIES CORP, 10-K, March 15, 2010Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Under the ASC 718, we estimate the fair value of our employee stock awards at the date of grant using the Black-Scholes option-pricingmodel, which requires the use of certain subjective assumptions. The most significant of these assumptions are our estimates of theexpected volatility of the market price of our stock and the expected term of an award. When establishing an estimate of the expected term ofan award, we consider the vesting period for the award, our recent historical experience of employee stock option exercises (includingforfeitures) and the expected volatility. When there is uncertainty in the factors used to determine the expected term of an award, we use thesimplified method. As required under the accounting rules, we review our valuation assumptions at each grant date and, as a result, ourvaluation assumptions used to value employee stock-based awards granted in future periods may change. The ranges of valuationassumptions used were as follows: Year Ended Year Ended December 31, December 31, 2009 2008 Stock Option Plans Expected life, in years 5.0 5.0 Risk free interest rate 1.9%- 2.7% 1.9%- 2.9% Volatility 41% - 69% 61% - 80% Dividend yield — — Further, ASC 718 requires that employee stock-based compensation costs to be recognized over the requisite service period, or the vestingperiod, in a manner similar to all other forms of compensation paid to employees. The allocation of employee stock-based compensationcosts to each operating expense line are estimated based on specific employee headcount information at each grant date and estimated stockoption forfeiture rates and revised, if necessary, in future periods if actual employee headcount information or forfeitures differ materially fromthose estimates. As a result, the amount of employee stock-based compensation costs we recognize in each operating expense category infuture periods may differ significantly from what we have recorded in the current period.Stock-based compensation expense recognized under ASC 718 was as follows: December 31, 2009 2008 Research and development$ 108,465 $ 37,789 General and administrative 1,381,618 1,438,360 Total stock-based compensation expense$ 1,490,083 $ 1,476,149 We account for stock options granted to persons other than employees or directors at fair value using the Black-Scholes option-pricing modelin accordance with Accounting Standards Codification 505-50, Equity Based Payments to Non-Employees (“ASC 505-50”). Stock optionsgranted to such persons and stock options that are modified and continue to vest when an employee has a change in employment status aresubject to periodic revaluation over their vesting terms. We recognize the resulting stock-based compensation expense during the serviceperiod over which the non-employee provides services to us. The stock-based compensation expense related to non-employees for the yearsended December 31, 2009 and 2008 was zero and $572,424, respectively.Property, Plant and EquipmentProperty, plant and equipment are stated at cost, less accumulated depreciation. Machinery and equipment, furniture and fixtures, and autosare depreciated on the straight-line basis over their estimated useful lives of 5 to 10 years.F-12Source: BIOSPECIFICS TECHNOLOGIES CORP, 10-K, March 15, 2010Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Patent CostsWe amortize intangible assets with definite lives on a straight-line basis over their estimated useful lives, ranging from 4 to 12 years, andreview for impairment on a quarterly basis and when events or changes in circumstances indicate that the carrying amount of such assetsmay not be recoverable.As of December 31, 2009, the Company’s capitalized costs related to certain patents paid by Auxilium on behalf of the Company and arereimbursable to Auxilium under our agreement. These patent costs are creditable against future royalty revenues. At December 31, netpatent costs consisted of: 2009 2008 Patents, net$ 223,458 $ 164,424 The amortization expense for patents was $33,983 and $24,856, for the years ended December 31, 2009 and 2008. The estimatedaggregate amortization expense for each of the next five years is as follows:2010$39,000201139,000201236,000201334,000201429,000Income TaxesIn accordance with Accounting Standards Codification 740-10-45-25, Income Statement Classification of Interest and Penalties (“ASC740-10-45-25”) we classify interest associated with income taxes under interest expense and tax penalties under other.Recent Accounting PronouncementsIn April 2009, the FASB issued an update to ASC 820, Fair Value Measurements and Disclosures (“ASC 820”), to provide additionalguidance on estimating fair value when the volume and level of transaction activity for an asset or liability have significantly decreased inrelation to normal market activity for the asset or liability. Additional disclosures are required regarding fair value in interim and annualreports. These provisions are effective for interim and annual periods ending after June 15, 2009. We have included these additionaldisclosures in Note 3.In May 2009, the FASB issued ASC 855, Subsequent Events (“ASC 855”), which provides guidance on events that occur after the balancesheet date but prior to the issuance of the financial statements. ASC 855 distinguishes events requiring recognition in the financialstatements and those that may require disclosure in the financial statements. Furthermore, ASC 855 requires disclosure of the date throughwhich subsequent events were evaluated. These requirements are effective for interim and annual periods after June 15, 2009. We adoptedthese requirements for the quarter ended June 30, 2009, and have evaluated subsequent events through March 11, 2010.In June 2009, the FASB issued an update of ASC 105, Generally Accepted Accounting Principles (“ASC 105”), changing the accountingfor securitizations and special-purpose entities. ASC 105 enhances disclosure requirements related to the transfers of financial assets,including securitization transactions, and the continuing risk exposures related to transferred financial assets. The concept of a “qualifyingspecial-purpose entity” is eliminated and the requirements for derecognizing financial assets have been modified. ASC 105 modifies thecriteria which determine whether an entity should be consolidated. ASC 105 enhances the disclosure requirements related to an entity’sinvolvement with variable interest entities and any changes to the related risk exposure. ASC 105 will be effective for fiscal years beginningafter November 15, 2009. We are currently evaluating the impact the adoption of these standards will have on our financial statements andrelated disclosures.In June 2009, the FASB issued an update of ASC 105, Generally accepted accounting principles (“ASC 105”), which establishes theFASB Accounting Standards CodificationTM, or Codification, which supersedes all existing accounting standard documents and has becomethe single source of authoritative non-governmental U.S. GAAP. All other accounting literature not included in the Codification is considerednon-authoritative. We have conformed our financial statements and related Notes to the new Codification.F-13Source: BIOSPECIFICS TECHNOLOGIES CORP, 10-K, March 15, 2010Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.In September 2009, the EITF reached final consensus on Issue 08-1, Revenue Arrangements with Multiple Deliverables, or Issue 08-1,which will update ASC 605 and changes the accounting for certain revenue arrangements. The new requirements change the allocationmethods used in determining how to account for multiple payment streams and will result in the ability to separately account for moredeliverables, and potentially less revenue deferrals. Additionally, Issue 08-1 requires enhanced disclosures in financial statements. Issue 08-1 is effective for revenue arrangements enter into or materially modified in fiscal years beginning after June 15, 2010 on a prospective basis,with early application permitted. We are currently evaluating the impact this Issue will have on our financial statements.3. FAIR VALUE MEASUREMENTSASC 820 requires expanded disclosures about fair value measurements. We adopted these provisions relating to assets and liabilitiesrecognized or disclosed in the financial statements at fair value on a recurring basis on January 1, 2008. The adoption of these provisions didnot have a material effect on our consolidated financial statements.ASC 820 clarifies that fair value is an exit price, representing the price that would be received to sell an asset or paid to transfer a liability inan orderly transaction between market participants based on the highest and best use of the asset or liability. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. ASC820 requires us to use valuation techniques to measure fair value that maximize the use of observable inputs and minimize the use ofunobservable inputs. These inputs are prioritized as follows:Level 1: Observable inputs such as quoted prices for identical assets or liabilities in active marketsLevel 2: Other inputs that are observable directly or indirectly, such as quoted prices for similar assets or liabilities or market-corroborated inputsLevel 3: Unobservable inputs for which there is little or no market data and which require us to develop our own assumptions abouthow market participants would price the assets or liabilitiesThe following table sets forth the fair value of our financial assets that were measured on a recurring basis as of December 31, 2009: Level 1 Level 2 Level 3 Cash and cash equivalents$ 3,950,389 - - Certificates of Deposit 4,548,541 - - 4. EARNINGS PER SHAREBasic earnings per share is computed by dividing net income (loss) by the weighted-average number of common shares outstanding duringthe period. Diluted earnings per share is computed by dividing net income by the weighted-average number of common shares outstandingduring the period increased to include all additional common shares that would have been outstanding assuming potentially dilutivecommon shares, resulting from option exercises, had been issued and any proceeds thereof used to repurchase common stock at theaverage market price during the period. In periods in which there is a net loss, potentially dilutive common shares are excluded from thecomputation of diluted earnings per share as their effect would be anti-dilutive.F-14Source: BIOSPECIFICS TECHNOLOGIES CORP, 10-K, March 15, 2010Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. 2009 2008 Net income (loss) for diluted computation$ (1,956,543)$ 3,744,408 Weighted average shares: Basic 6,065,939 5,854,836 Effect of dilutive securities: - 982,075 Stock options 6,065,939 6,836,911 Diluted Net Income (Loss) Per Share: Basic$(0.32)$0.64 Diluted$(0.32)$0.55 For the year ended December 31, 2009, 923,900 of potential common shares were excluded from the diluted loss per share calculationbecause their effect was anti-dilutive as a result of the Company’s 2009 net loss.5. INVENTORIES, NETNone.6. PROPERTY, PLANT AND EQUIPMENTProperty, plant and equipment from continuing operations consist of: December 31, 2009 2008 Machinery and equipment$ 562,610 $ 562,610 Furniture and fixtures 91,928 91,928 Leasehold improvements 1,185,059 1,185,059 1,839,597 1,839,597 Less accumulated depreciation and amortization (1,838,987) (1,837,300) $ 610 $ 2,297 Total depreciation expense amounted to $1,687 and $30,919 for calendar years 2009 and 2008, respectively.7. ACCOUNTS PAYABLE AND ACCRUED LIABILITIESAccounts payable and accrued liabilities consist of the following: December 31, 2009 2008 Trade accounts payable and accrued expenses$ 378,872 $ 409,433 Accrued legal and other professional fees 70,935 117,837 Accrued payroll and related costs 134,702 115,195 $ 584,509 $ 642,465 8. INCOME TAXESThe provision for income taxes consist of the following:Year ended December 31, 2009 2008 Current: Federal$ (198,239)$ 172,186 State 1,784 7,400 (196,455) 179,586 Deferred: Federal - - State - - Total$ (196,455)$ 179,586 F-15Source: BIOSPECIFICS TECHNOLOGIES CORP, 10-K, March 15, 2010Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.The effective income tax rate of the Company differs from the federal statutory tax rate of 34% due to the following items:Year ended December 31, 2009 2008 Computed tax expense at statutory rate (34.0%) 34.0% State income taxes, net of federal tax benefit (0.03%) 0.1% Deferred revenues (17.1%) (9.0%)Tax benefit of exercised options and warrant - (6.4%)Stock-based compensation 23.9% 12.4% Tax benefit of NOL - (14.7%)Depreciation and amortization 0.3% (8.4%)Tax refund 2008 (3.2%) - Other 1.1% (3.6%)Increase (decrease) in valuation allowance 25.8% - Effective tax rate (benefit) (3.2%) 4.4% The significant components of the Company's net deferred tax assets are summarized as follows:Year ended December 31, 2009 2008 Tax Credit carryforward 1,039,390 $ 1,039,390 Deferred revenues 741,714 1,231,287 Other 54,846 37,736 Options 406,517 815,686 Net operating loss carryforward 556,504 128,775 Net deferred tax assets before valuation allowance 2,798,971 3,252,874 Valuation allowance (2,798,971) (3,252,874) Net deferred tax asset$ - $ - In assessing the realizability of deferred tax assets, the Company considers whether it is more likely than not that some portion or all of thedeferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxableincome during the periods in which the temporary differences representing net future deductible amounts become deductible. Based on theCompany's uncertainty of anticipated future taxable income, the Company is keeping a full valuation allowance for all its deferred tax assets.The Company’s valuation allowance decreased by $255,664 primarily due to the recognition of deferred revenue under the DFB andAuxilium Agreements and change in estimate related to incentive stock options.F-16Source: BIOSPECIFICS TECHNOLOGIES CORP, 10-K, March 15, 2010Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.At December 31, 2009, we had federal tax return net operating loss carry forwards of approximately $1.6 million, which will expire in 2029,if not utilized. In addition, we had state tax return net operating loss carry forwards of approximately $3.3 million related to New York State,which will expire in 2027 through 2029 if not utilized. The recorded deferred tax asset amount of $0.5 million for net operating losses shownin the above table is net of windfall stock compensation deductions due to the disqualification of certain stock option that were exercised andsold in 2009, which when realized, will be recorded directly to additional paid-in capital in accordance with ASC 718-25-09.The Company plans to apply $198,239 of its NOL deferred tax asset in applying for a refund of federal income taxes paid for fiscal year 2008.The effect of this carry back is to reduce the tax asset related to our NOL by $198,239.At December 31, 2009, we had orphan drug tax credits of approximately $1.0 million that can be carried forward and will generally expire in2023 through 2029, if not utilized.As of December 31, 2009, the Company believes that there are no significant uncertain tax positions, and no amounts have been recordedfor interest and penalties. The Company does not anticipate any events that would require it to record a liability related to any uncertain taxposition.9. STOCKHOLDERS’ EQUITYStock Option PlansIn July 1997, the Company's stockholders approved a stock option plan (the “1997 Plan”) for eligible key employees, directors, independentagents, and consultants who make a significant contribution toward the Company's success and development and to attract and retainqualified employees which expired in July 2007. Under the 1997 Plan, qualified incentive stock options and non-qualified stock options maybe granted to purchase up to an aggregate of 500,000 shares of the Company's common stock, subject to certain anti-dilution provisions. Theexercise price per share of common stock may not be less than 100% (110% for qualified incentive stock options granted to stockholdersowning at least 10% of common shares) of the fair market value of the Company's common stock on the date of grant. In general, the optionsvest and become exercisable in four equal annual installments following the date of grant, although the Board, at its discretion, may providefor different vesting schedules. The options expire ten years (five years for qualified incentive stock options granted to stockholders owning atleast 10% of common shares) after such date. In accordance with terms of the 1997 Plan, no options were granted ten years after the effectivedate of the 1997 Plan, or July 2007. In July 2007, approximately 231,000 stock options expired unissued, and there are no shares availablefor grant remaining under the 1997 Plan. As of December 31, 2009 there were 29,000 options outstanding under the 1997 Plan.In August 2001, the Company's stockholders approved a stock option plan (the “2001 Plan”), with terms similar to the 1997 Plan. The 2001Plan authorizes the granting of awards of up to an aggregate of 750,000 shares of the Company's common stock, subject to certain anti-dilution provisions. On December 16, 2003, stockholders approved an amendment to the 2001 Plan, which increased the number of sharesauthorized for grant from 750,000 shares to 1,750,000 shares, an increase of 1,000,000 shares. On June 17, 2009, our stockholdersapproved an amendment to the 2001 Plan to extend the term of the 2001 Plan from April 6, 2011 to April 23, 2019 and to authorize anadditional 300,000 shares of our common stock for issuance under the 2001 Plan. A total of 2,050,000 shares of common stock are nowauthorized for issuance under the amended 2001 Plan. The Company filed a Registration Statement on Form S-8 for the 2001 Plan with theCommission on October 5, 2007 and on July 15, 2009 as amended to register these securities. As of December 31, 2009 options topurchase 1,464,850 shares of common stock were outstanding under the 1997 Plan and 2001 Plan, and a total of 269,098 shares availablefor grant remaining under the 2001 Plan.F-17Source: BIOSPECIFICS TECHNOLOGIES CORP, 10-K, March 15, 2010Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.The summary of the stock options activity is as follows for year ended: December 31, 2009 2008 Weighted Weighted Average Average Exercise Exercise Shares Price Shares Price Outstanding at beginning of year 1,427,100 4.25 1,409,700 $1.86 Options granted 225,000 24.43 232,500 16.00 Options exercised (187,250) 2.03 (209,300) 1.22 Options canceled or expired -- -- (5,800) 4.18 Outstanding at end of year 1,464,850 7.64 1,427,100 4.25 Options exercisable at year end 1,164,850 4.98 1,220,850 3.12 Shares available for future grant 269,098 -- 194,098 -- During 2009, the Company granted 225,000 options to Board members, employees and consultants on various dates. Of the 225,000options granted in 2009, 75,000 options granted to our Board members vest over one year, 40,000 options granted to our employees vestover four years, 50,000 options granted to the President are contingent upon obtaining certain corporate milestones and 60,000 optionsgranted to a consultant vest upon achievement of certain corporate milestones. As of December 31, 2009, the contingent grant milestone toour President was not achieved and no employee stock-based compensation cost was recognized. During 2008, the Company granted232,500 options to Board members, employees and consultants on various dates. Of the 232,500 options granted in 2008, 200,000 optionsgranted to our Board members vest over one year, 30,000 options granted to our employees vest over four years, 2,500 options granted to ouremployees vested immediately and 50,000 options granted to a consultant vested immediately. The options granted in 2009 and 2008 weregranted at exercise prices ranging from $18.21 to $30.79 per share.The following table summarizes information relating to stock options by exercise price at December 31, 2009:Outstanding Exercisable Weighted Weighted Option Weighted Average Average Exercise Average Life Exercise Option Price Shares (years) Price Shares Price $0.83-2.00 745,350 5.24 $1.00 695,350 $1.01 4.00-6.00 262,000 7.41 4.68 237,000 4.65 13.00-14.00 125,000 8.38 13.51 102,500 13.57 17.00-18.99 70,000 9.48 17.69 30,000 17.00 19.00-21.00 142,500 8.75 20.24 85,000 19.73 26.00-28.00 45,000 9.69 26.43 11,250 26.43 29.00-31.00 75,000 9.88 29.53 3.750 30.79 1,464,850 6.79 $7.64 1,164,850 $4.98 The weighted-average grant-date fair value for options granted during 2009 was $24.43 per share and $16.00 per share in 2008. During the2009 and 2008, $380,029 and $255,388 were received from stock options exercised by employees, respectively. The aggregate intrinsicvalue of options outstanding and exercisable as of December 31, 2009 was approximately $31.5 million. Aggregate intrinsic value representsthe total pre-tax intrinsic value, based on the closing price of our common stock of $32.01 on December 31, 2009, which would have beenreceived by the option holders had all option holders exercised their options as of that date. Total unrecognized compensation cost related tonon-vested stock options outstanding as of December 31, 2009 was approximately $1.9 million which we expect to recognize over aweighted-average period of 1.2 years.During 2009, the exercise of 114,000 stock options resulted in a realized benefit of $1.1 million in tax return deductions, in excess ofcompensation cost recognized and is accounted for as a reduction of the Company’s tax liability and an increase in additional paid-in capital.Accounting Standards Codification 230, Statement of Cash Flows (“ASC 230”), as amended, the realized tax benefit related to the excess ofthe deductible amount over the compensation cost recognized is classified as a cash inflow from financing activities and a cash outflow fromoperating activities in the statement of cash flows.F-18Source: BIOSPECIFICS TECHNOLOGIES CORP, 10-K, March 15, 2010Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.10. COMMITMENTS AND CONTINGENCIESLease AgreementsThe Company's operations are principally conducted on leased premises. Future minimum annual rental payments required under non-cancelable operating leases are approximated as follows:Year ending December 31, 2010 $67,500 thereafter -0-Rent expense under all operating leases amounted to approximately $136,250 and $150,000 for calendar year 2009 and 2008.As previously reported, ABC-NY (together with the Company, the “Tenant”) and Wilbur St. Corp. (the “Landlord”), entered into a CommercialLease Agreement on January 30, 1998 (the “Commercial Lease Agreement”), pursuant to which the Landlord leased to ABC the premiseslocated at 35 Wilbur Street, Lynbrook, NY 11563 (the “Premises”) for a term of 7 years or until January 31, 2005 and for an annual rentalprice of $125,000.Also as previously reported, the Tenant, without the approval of the board of directors of the Company, and the Landlord entered into anExtension and Modification Agreement on July 1, 2005 (the “Modification Agreement” and together with the Commercial Lease Agreement,the “Lease Agreement”), pursuant to which the term of the Commercial Lease Agreement was extended for an additional 5 years or untilJune 30, 2010 and the annual rental price for the Premises increased to $150,000.In connection with the settlement of the previously reported dispute between the Tenant and the Landlord regarding payments of amountsdue under the Modification Agreement, the parties entered into a Lease Modification Agreement dated June 22, 2009 and effective as of June24, 2009 (the “LMA”). Pursuant to the LMA, the Tenant ratified the Lease Agreement, including the Modification Agreement, subject to theterms thereof, and agreed to a $15,000 reduction in the annual rental price of the Premises to $135,000. The Lease Agreement expires onJune 30, 2010.Receivables and Deferred RevenueUnder the DFB Agreement, we agreed to provide certain technical assistance and certain transition services to DFB in consideration of feesand costs totaling over $1.4 million. At the closing of the DFB Agreement, DFB paid to us a partial payment of $400,000 in respect of thetechnical assistance to be provided by us. As of December 31, 2009, we have received a total of $1,200,000 in payments from DFB. Theconsulting obligations generally expire during March 2011. As of December 31, 2009, the remaining accounts receivable balance due was$200,000 for future services and was offset by the associated deferred revenues to be recognized in future periods of $200,000.Potential Product LiabilityThe sale of our topical collaganese product, as well as the development and marketing of any potential products of the Company, exposes usto potential product liability claims both directly from patients using the product or products in development, as well as from our agreement toindemnify certain distributors of the product for claims made by others. We have product liability insurance, which covers the use of ourlicensed topical collagenase product and clinical experiments of potential products in the U.S. No known claims are pending against us at thecurrent time. Our insurance policy has a limit of $3 million and is renewed annually during the month of February.11. RELATED PARTY TRANSACTIONSOn February 1, 2008, the Estate of Edwin H. Wegman (the “Estate”) sold an aggregate of 344,114 shares of the Company's common stock,par value $0.001, at a purchase price of $12.00 per share to certain private investors. The Estate used certain of the proceeds of thetransaction to repay the loan owed to the Company by Edwin H. Wegman, our former Chairman and CEO. The total loan repaymentamount was $1,116,558, which represents the principal amount of $625,774 owed to the Company and accrued interest through January31, 2008 of $490,784.F-19Source: BIOSPECIFICS TECHNOLOGIES CORP, 10-K, March 15, 2010Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.As described above in Note 10, Tenant and the Landlord entered into the LMA, pursuant to which, the Tenant ratified the Lease Agreement,including the Modification Agreement, subject to the terms thereof, and agreed to a $15,000 reduction in the annual rental price of thePremises to $135,000.12. EMPLOYEE BENEFIT PLANSABC-NY has a 401(k) Profit Sharing Plan for employees who meet minimum age and service requirements. Contributions to the plan byABC-NY are discretionary and subject to certain vesting provisions. The Company made no contributions to this plan for calendar years 2009or 2008.13. SUBSEQUENT EVENTSOn January 21, 2010, Pfizer and Auxilium announced that Pfizer received notification from the European Medicines Agency that theMarketing Authorization Application (MAA) for XIAFLEX for the treatment of Dupuytren's contracture has completed the validation phasesuccessfully. As a result, the scientific/technical review procedure began on January 21, 2010.Auxilium announced on February 2, 2010 that it received marketing approval from the United States Food and Drug Administration (“FDA”)for XIAFLEX for the treatment of adult Dupuytren’s contracture patients with a palpable cord as further described in this Item 1 under theheading “Collagenase for Treatment of Dupuytren’s Contracture.” Auxilium plans to launch XIAFLEX, the only drug approved by the FDA forthe treatment of Dupuytren’s contracture, in late March 2010. Pfizer and Auxilium have also announced that the scientific/technical reviewprocedure for the Marketing Authorization Approval for XIAFLEX for Dupuytren’s contracture in Europe began on January 21, 2010.In a February 17, 2010 press release, Auxilium announced that the list price to distributors of XIAFLEX will be $3,250 and that it anticipatesthat Dupuytren’s contracture patients treated with XIAFLEX will have 1.5 cords treated, on average, and that each cord will be treated with anaverage of 1.1 vials of XIAFLEX.14. SELECTED QUARTERLY DATA (Unaudited)The following table sets forth certain unaudited quarterly data for each of the four quarters in the years ended December 31, 2009 and 2008.The data has been derived from the Company's unaudited consolidated financial statements that, in management's opinion, include alladjustments (consisting of normal recurring adjustments) necessary for a fair presentation of such information when read in conjunctionwith the Consolidated Financial Statements and Notes thereto. The results of operations for any quarter are not necessarily indicative of theresults of operations for any future period. First Second Third Fourth Quarter Quarter Quarter Quarter Year ended December 31, 2009 Net sales$ 343,473 $ 1,221,595 $ 836,568 $ 754,122 Operating profit (loss) (939,370) (43,082) (453,237) (729,219) Net income (loss) (945,977) (87,809) (382,121) (540,637) Basic earnings per share (0.16) (0.01) (0.06) (0.09) Diluted earnings per share (1) (0.16) (0.01) (0.06) (0.09) Year ended December 31, 2008 Net sales$ 401,219 $ 434,356 $ 349,323 $ 7,226,882 Operating profit (loss) (493,508) (833,392) (588,988) 5,696,697 Net income (loss) (463,684) (801,337) (214,008) 5,223,437 Basic earnings per share (0.08) (0.14) (0.04) 0.87 Diluted earnings per share (1) (0.08) (0.14) (0.04) 0.75 (1) Quarterly income (loss) per share may not equal the annual reported amountsF-20Source: BIOSPECIFICS TECHNOLOGIES CORP, 10-K, March 15, 2010Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.EXHIBIT INDEXThe documents listed below are being filed or have previously been filed on behalf of the Company and are incorporated herein by referencefrom the documents indicated and made a part hereof. Exhibits not identified as previously filed are filed herewith:ExhibitDescriptionNumber 3.1Registrant’s Certificate of Incorporation, as amended (incorporated by reference to Exhibit 3.1 of the Registrant’s Form10-KSB filed with the Commission on March 2, 2007)3.2Registrant’s Amended and Restated By-laws (incorporated by reference to Exhibit 3.2 of the Registrant’s Form 10-KSBfiled with the Commission on March 2, 2007)10.1Lease Modification Agreement dated June 22, 2009 between ABC-NY, the Company and Wilbur St. Corp. (incorporatedby reference to Exhibit 10.1 of the Registrant’s Form 8-K filed with the Commission on June 29, 2009)10.2Copy of Extension and Modification Agreement, dated July 1, 2005, between the Company and the Wilbur StreetCorporation (incorporated by reference to Exhibit 10.5 of the Registrant’s Form 10-KSB filed with the Commission onMarch 2, 2007)10.3Asset Purchase Agreement between the Company, ABC-NY and DFB dated March 3, 2006 (incorporated by referenceto Exhibit 2.1 of the Registrant’s Form 8-K filed with the Commission on March 9, 2006)10.4Amendment to Asset Purchase Agreement between the Company, ABC-NY and DFB dated January 8, 2007(incorporated by reference to Exhibit 10.1 of the Registrant’s Form 8-K filed with the Commission on January 12, 2007)10.5Dupuytren’s License Agreement dated November 21, 2006 between the Company and the Research Foundation(incorporated by reference to Exhibit 10.1 of the Registrant’s Form 8-K filed with the Commission on November 28,2006)10.6Frozen Shoulder License Agreement dated November 21, 2006 between the Company and the Research Foundation(incorporated by reference to Exhibit 10.2 of the Registrant’s Form 8-K filed with the Commission on November 28,2006)10.7Form of 1997 Stock Option Plan of Registrant (incorporated by reference as Exhibit 4.1 of the Registrant’s Form S-8filed with the Commission on September 26, 1997)10.8Amended and Restated 2001 Stock Option Plan of Registrant (incorporated by reference to Appendix D of theRegistrant’s Schedule14A filed with the Commission on April 30, 2009)10.9Rights Agreement dated as of May 14, 2002 (incorporated by reference as Exhibit 1 to the Registrant’s Form 8-A filedwith the Commission on May 30, 2002)10.10Amendment No.1 to Rights Agreement, dated June 19, 2003 (incorporated by reference to Exhibit 10.19 of theRegistrant’s Form 10-KSB filed with the Commission on March 2, 2007)10.11Change of Control Agreement, dated June 18, 2007 between the Company and Henry Morgan (incorporated byreference to Exhibit 10.21 of the Registrant’s Form 10-KSB filed with the Commission on September 26, 2007)10.12Change of Control Agreement, dated June 18, 2007 between the Company and Michael Schamroth (incorporated byreference to Exhibit 10.22 of the Registrant’s Form 10-KSB filed with the Commission on September 26, 2007)10.13Change of Control Agreement, dated June 18, 2007 between the Company and Dr. Paul Gitman (incorporated byreference to Exhibit 10.23 of the Registrant’s Form 10-KSB filed with the Commission on September 26, 2007)10.14Agreement dated August 27, 2008 (incorporated by reference to Exhibit 10.1 of the Registrant’s Form 8-K filed with theCommission on September 5, 2008)10.15Amended and Restated Development and License Agreement dated December 11, 2008 and effective December 17,2008 between the Company and Auxilium Pharmaceuticals, Inc. (incorporated by reference to Exhibit 10.1 of theRegistrant’s Form 8-K filed with the Commission on December 19, 2008)10.16Executive Employment Agreement, dated August 5, 2008 between the Company and Thomas L. Wegman(incorporated by reference to Exhibit 10.1 of the Registrant’s Form 8-K filed with the Commission on August 8, 2008)10.17Change of Control Agreement, dated October 1, 2008 between the Company and Dr. Matthew Geller14Amended and Restated Code of Business Conduct and Ethics (incorporated by reference to Exhibit 14.1 of theRegistrant’s Form 10-KSB filed with the Commission on March 2, 2007)21Subsidiaries of the Registrant (incorporated by reference to Exhibit 21.1 of the Registrant’s Form 10-KSB filed with theCommission on March 2, 2007)23*Consent of Tabriztchi & Co. CPA, P.C.*31*Certification of Principal Executive Officer and Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*32*Certification of Principal Executive Officer and Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*_________________* filed herewithSource: BIOSPECIFICS TECHNOLOGIES CORP, 10-K, March 15, 2010Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.SIGNATURESIn accordance with section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant caused this Report on Form 10-K to be signedon its behalf by the undersigned, thereto duly authorized individual.Date: March 15, 2010 BIOSPECIFICS TECHNOLOGIES CORP. By: /s/ Thomas L. Wegman Name: Thomas L. Wegman Title: PresidentIn accordance with the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of theRegistrant and in the capacities and on the dates indicated.SIGNATURE TITLE /s/ Thomas L. Wegman President, Director, and Principal Executive, FinancialName: Thomas L. Wegman and Accounting OfficerDate: March 15, 2010 /s/ Henry Morgan DirectorName: Henry Morgan Date: March 15, 2010 /s/ Dr. Paul Gitman DirectorName: Dr. Paul Gitman Date: March 15, 2010 /s/ Dr. Mark Wegman DirectorName: Dr. Mark Wegman Date: March 15, 2010 /s/ Toby Wegman DirectorName: Toby Wegman Date: March 15, 2010 Source: BIOSPECIFICS TECHNOLOGIES CORP, 10-K, March 15, 2010Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Exhibit 23Consent of the Independant Registered Certified Public Accounting FirmWe hereby consent to the incorporation of our audit report dated March 12, 2010 with respect to the consolidated balance sheets ofBioSpecifics Technologies Corp. as of December 31, 2009 and 2008, and the related statements of income, stockholders' equity and cashflows for each of the years in the two year period ended December 31, 2009, and our report dated March 12, 2010 with respect to internalcontrol over financial reporting as of December 31, 2009, in Form 10-K for the year ended December 31, 2009 for BioSpecifics TechnologiesCorp./s/ Tabriztchi & Co., CPA, P.C.Tabriztchi & Co., CPA, P.C.Garden City, NYMarch 12, 2010 7 Twelfth Street Garden City, NY 11530 • Tel: 516-746-4200 • Fax: 516-746-7900 Email: Info@tabrizcpa.com • www.tabrizcpa.comSource: BIOSPECIFICS TECHNOLOGIES CORP, 10-K, March 15, 2010Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Exhibit 31CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICERPURSUANT TO RULES 13a-14(a) AND 15d-14(a) OF THE SECURITIES EXCHANGE ACT OF 1934I, Thomas L. Wegman, certify that:1.I have reviewed this annual report on Form 10-K for the fiscal year ended December 31, 2009 of BioSpecifics Technologies Corp.; 2.Based on my knowledge, the report does not contain any untrue statement of a material fact or omit to state a material fact necessaryto make the statements made, in light of the circumstances under which such statements were made, not misleading with respect tothe period covered by this report; 3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all materialrespects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (asdefined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules13a-15(f) and 15d-15(f)) for the registrant and have: (a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed underour supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is madeknown to us by others within those entities, particularly during the period in which this report is being prepared; (b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designedunder our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation offinancial statements for external purposes in accordance with generally accepted accounting principles; (c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusionsabout the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based onsuch evaluation; and (d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during theregistrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materiallyaffected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and 5.The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financialreporting, to the registrant’s auditors and to the audit committee of the registrant’s board of directors (or persons performing theequivalent functions): (a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting whichare reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information;and (b)Any fraud, whether or not material, that involves management or other employees who have a significant role in theregistrant’s internal controls over financial reporting.Date: March 15, 2010/s/ Thomas L. WegmanThomas L. Wegman President, Principal Executive and Financial OfficerSource: BIOSPECIFICS TECHNOLOGIES CORP, 10-K, March 15, 2010Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Exhibit 32CERTIFICATION OF PRINCIPAL FINANCIAL OFFICERPURSUANT TO RULES 13a-14(b) AND 15d-14(b) OF THE SECURITIES EXCHANGE ACT OF 1934 AND 18 U.S.C. SECTION 1350The undersigned, Thomas L. Wegman, the President, Principal Executive Officer and Principal Financial Officer of BioSpecificsTechnologies Corp. (the “Company”), DOES HEREBY CERTIFY that: 1.The Company’s annual report on Form 10-K for the fiscal year ended December 31, 2009 (the “Report”), fully complies withthe requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and 2.The information contained in the Report fairly presents, in all material respects, the financial condition and results of operationof the Company for the period covered by the Report.IN WITNESS WHEREOF, the undersigned has executed this certification this 15th day of March, 2010./s/ Thomas L. WegmanThomas L. Wegman President, Principal Executive and Financial OfficerThis certification shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange of 1934, as amended, or otherwise subjectto liability pursuant to that section. Such certification shall not be deemed to be incorporated by reference into any filing under the SecuritiesAct of 1933, as amended, or the Securities Exchange Act of 1934, as amended, except to the extent that the Company specificallyincorporates it by reference.Source: BIOSPECIFICS TECHNOLOGIES CORP, 10-K, March 15, 2010Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.

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