BioSpecifics Technologies Corp.
Annual Report 2011

Plain-text annual report

Morningstar® Document Research℠ FORM 10-KBIOSPECIFICS TECHNOLOGIES CORP - BSTCFiled: March 13, 2012 (period: December 31, 2011)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 STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549FORM 10-K(Mark One) x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended December 31, 2011o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from __________________ to __________________Commission File Number: 001-34236BIOSPECIFICS TECHNOLOGIES CORP.(Exact name of registrant as specified in its charter)Delaware 11-3054851(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)35 Wilbur Street, Lynbrook, NY 11563(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 className of each exchange on which registeredCommon Stock The Nasdaq Global Market Securities 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 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 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 from their obligationsunder 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 of 1934 during thepreceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements forthe past 90 days.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 contained herein, and willnot be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K orany amendment to this Form 10-K. ¨Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See thedefinitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. i Source: BIOSPECIFICS TECHNOLOGIES CORP, 10-K, March 13, 2012Powered 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. Large accelerated filer ¨ Accelerated filer  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 NoThe aggregate market value of voting and non-voting common stock held by non-affiliates of the Registrant as of June 30, 2011, the last business day of theregistrant’s most recently completed second fiscal quarter, was approximately $112 million.Note – If a determination as to whether a particular person or entity is an affiliate cannot be made without involving unreasonable effort and expense, theaggregate market value of the common stock held by non-affiliates may be calculated on the basis of assumptions reasonable under 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 9, 2012 is 6,336,139.DOCUMENTS INCORPORATED BY REFERENCEPortions of the registrant’s definitive proxy statement for its 2012 Annual Meeting of Stockholders scheduled to be held on June 15, 2012, which is expected tobe filed with the Securities and Exchange Commission not later than 120 days after the end of the registrant’s fiscal year ended December 31, 2011, areincorporated by reference into Part III of this annual report on Form 10-K. With the exception of the portions of the registrant’s definitive proxy statement for its2012 Annual Meeting of Stockholders that are expressly incorporated by reference into this annual report on Form 10-K, such proxy statement shall not bedeemed filed as part of this annual report on Form 10-K. ii Source: BIOSPECIFICS TECHNOLOGIES CORP, 10-K, March 13, 2012Powered 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 CONTENTS PagePART I2 Item 1. DESCRIPTION OF BUSINESS.2 Item IB. UNRESOLVED STAFF COMMENTS26 Item 2. DESCRIPTION OF PROPERTY.26 Item 3. LEGAL PROCEEDINGS.26 Item 4. (REMOVED AND RESERVED).26PART II26 Item 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS.26 Item 6. SELECTED FINANCIAL DATA29 Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION30 Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.42 Item 8. FINANCIAL STATEMENTS.43 Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIALDISCLOSURE.43 Item 9A. EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES.43 Item 9B. OTHER INFORMATION44PART III44 Item 10. DIRECTORS AND EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITHSECTION 16(a) OF THE EXCHANGE ACT44 Item 11. EXECUTIVE COMPENSATION.44 Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATEDSTOCKHOLDER MATTERS.44 Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.44 Item 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.44PART IV44 Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.44 Source: BIOSPECIFICS TECHNOLOGIES CORP, 10-K, March 13, 2012Powered 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 Content 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 Statements This Report includes “forward-looking statements” within the meaning of, and made pursuant to the safe harbor provisions of, the Private SecuritiesLitigation Reform Act of 1995. All statements other than statements of historical fact, including statements regarding our strategy, future operations, futurefinancial position, future revenues, projected costs, prospects, plans and objectives of management, expected revenue growth, and the assumptions underlyingor relating to such statements, are “forward-looking statements”. In some cases, you can identify these statements by forward-looking words such as“believe,” “expect,” “anticipate,” “plan,” “estimate,” “likely,” “may,” “will,” “could,” “continue,” “project,” “predict,” “goal,” the negative or plural of thesewords, and other similar expressions. Our forward-looking statements are predictions based on our current expectations and our projections about futureevents. There are a number of important factors that could cause our actual results to differ materially from those indicated by such forward-lookingstatements, including the statements made by us or by our partner Auxilium Pharmaceuticals, Inc. regarding progress toward achievement of its objectives forthe sale and marketing of XIAFLEX® for Dupuytren’s contracture in the U.S., including, among other things, developments in the reimbursement process;the ability of Pfizer, Inc. to achieve its objectives for XIAPEX® in Europe; the ability of Asahi Kasei Pharma Corporation to achieve its objectives forXIAFLEX in Japan; the ability of Actelion Pharmaceuticals Ltd. to achieve its objectives for XIAFLEX in Canada, Australia, Brazil and Mexico; the successof the Phase III trials for XIAFLEX for the treatment of Peyronie’s disease; the potential market for XIAFLEX in a given indication; the initiation and outcomeof clinical trials for additional indications including frozen shoulder, cellulite, human lipoma and canine lipoma, all of which will determine the amount ofmilestone, royalty and sublicense income we may receive; the potential of XIAFLEX to be used in additional indications; the timing of results of any clinicaltrials; the timing of regulatory filings and action; the receipt of any applicable milestone payments from Auxilium Pharmaceuticals, Inc.; whether royaltypayments we are entitled to receive will exceed set-offs; and other risk factors set forth in Part I, Item 1A of this Report under the heading "Risk Factors". Allforward-looking statements included in this Report are made as of the date hereof, and we assume no obligation to update these forward-looking statements. 1Source: BIOSPECIFICS TECHNOLOGIES CORP, 10-K, March 13, 2012Powered 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 Content PART I Item 1. DESCRIPTION OF BUSINESS. OverviewWe are a biopharmaceutical company involved in the development of an injectable collagenase for multiple indications. We have a development and licenseagreement with Auxilium Pharmaceuticals, Inc. (“Auxilium”) for injectable collagenase (which Auxilium has named XIAFLEX® (collagenase clostridiumhistolyticum)) for clinical indications in Dupuytren’s contracture, Peyronie’s disease and frozen shoulder (adhesive capsulitis). Auxilium has an option toacquire additional indications that we may pursue, including cellulite, for which we have granted Auxilium the right to initiate early development studies at itscost, and human and canine lipoma. Auxilium is currently selling XIAFLEX in the U.S. for the treatment of Dupuytren’s contracture. Auxilium has anagreement with Pfizer, Inc. (“Pfizer”) pursuant to which Pfizer has the right to market XIAFLEX for Dupuytren’s contracture and Peyronie’s disease in Europeand certain Eurasian countries, and will do so under the registered trademark XIAPEX® (collagenase clostridium histolyticum). Pfizer is currently sellingXIAPEX in nine countries in Europe, including the United Kingdom, Germany and Spain. In addition, Auxilium has an agreement with Asahi Kasei PharmaCorporation (“Asahi”) pursuant to which Asahi has the right to commercialize XIAFLEX for the treatment of Duputyren’s contracture and Peyronie’s diseasein Japan. Auxilium also has an agreement with Actelion Pharmaceuticals Ltd. (“Actelion”) pursuant to which Actelion has the right to commercialize XIAFLEXfor the treatment of Duputyren’s contracture and Peyronie’s disease in Canada, Australia, Brazil and Mexico.Operational HighlightsAs previously reported, on August 31, 2011, we and Auxilium announced the dismissal of all pending litigation between us in accordance with a settlementagreement. Pursuant to the settlement agreement, among other things, we became a co-owner with Auxilium of U.S. Patent No. 7,811,560 and anycontinuations and divisionals of that patent. Also on August 31, 2011, we amended and restated our development and license agreement with Auxilium toclarify and change certain of our and Auxilium’s rights and responsibilities. We clarified, for example, that we retain the right to conduct trials, studies ordevelopment work for: indications in canine lipomas and human lipomas; additional indications upon approval by the parties’ joint development committee;tissue disassociation research and development; and in vitro research and development. In addition, on August 31, 2011, we announced with Auxilium plansto move XIAFLEX forward in the clinic for cellulite and human and canine lipoma as well as to collaborate on the initiation of further studies for XIAFLEXfor additional indications. A phase Ib trial of XIAFLEX for the treatment of cellulite is currently underway by Auxilium. Auxilium expects top line studyresults in the fourth quarter of 2012. In addition, as announced by Auxilium on December 1, 2011, Auxilium currently has underway a phase IIa, open-label,controlled dose-ranging study to assess the safety and efficacy of XIAFLEX for the treatment of Frozen Shoulder syndrome in comparison to an exercise-onlycontrol group. Auxilium expects topline study results in the first half of 2013. Auxilium continues to market XIAFLEX in the U.S. for the treatment of adult Dupuytren’s contracture patients with a palpable cord. On November 2, 2011,it announced that the American Medical Association (the “AMA”) has issued two new Category I Current Procedural Terminology (“CPT”) Codes that will beused with XIAFLEX for the treatment of adult Dupuytren’s contracture patients with a palpable cord beginning January 1, 2012. CPT codes are the mostwidely accepted form of medical nomenclature used to report medical procedures and services under public and private health insurance programs in the U.S.The new CPT codes are 20527 for the XIAFLEX injection procedure and 26341 for the finger extension or manipulation procedure administered 24 hours afterthe XIAFLEX injection, in accordance with the label. According to the November 2, 2011 press release, “The CPT codes will apply to the procedures only,and leave in place the separate J code for reimbursement” of XIAFLEX. In December 2011, we announced the appointment of George Gould, Esq., to our board of directors. Mr. Gould brings considerable expertise inpharmaceutical and biotechnology intellectual property law and has served as an expert witness in patent cases. Auxilium has also recently announced leadership changes including a new Chief Executive Officer, Adrian Adams in December 2011, a new Executive VicePresident, Chief Administrative Officer and General Counsel, Andrew I. Koven and a new Senior Vice President, Sales, Mark A. Glickman, in February2012. In the press release announcing Mr. Adams’ appointment as CEO, the Chairman of Auxilium’s board of directors, Rolf Classon, stated "We believe that[Adrian’s] visionary leadership and operational expertise will lead Auxilium to profitability and success as we seek to maximize the value of XIAFLEX . . .while delivering on our current pipeline.” 2Source: BIOSPECIFICS TECHNOLOGIES CORP, 10-K, March 13, 2012Powered 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 Content In a February 23, 2012 press release, Auxilium announced that it had entered into a Collaboration Agreement with Actelion pursuant to which Actelion has theright to develop and commercialize XIAFLEX for the treatment of Dupuytren’s contracture and Peyronie’s disease in Canada, Australia, Brazil and Mexico.According to the release, XIAFLEX for the treatment of Dupuytren’s contracture has been accepted for review by Health Canada and regulatory action isexpected in the second half of 2012. Additionally, Actelion expects to file for approval of XIAFLEX for the treatment of Dupuytren’s contracture in Australia,Brazil and Mexico over the next 12 months. Under the terms of the agreement with Actelion, Auxilium is to receive a $10 million upfront payment fromActelion, as well as up to $16 million in potential regulatory, pricing, and reimbursement milestone payments and $42.5 million in potential sales milestonepayments. Under the terms of our development and license agreement with Auxilium, we will receive a certain percentage from Auxilium in connection with theupfront payment by Actelion, and a specified percentage of any additional milestones received by Auxilium. We will also receive from Auxilium royalties fromnet sales and payments on costs of goods sold in Canada, Australia, Brazil and Mexico, which will be a specified percentage of what Auxilium is entitled toreceive from Actelion without regard to any offset that Actelion may have with respect to Auxilium. Research and Development of Injectable Collagenase for Multiple Indications On June 3, 2004, we entered into, and later amended, a development and license agreement with Auxilium pursuant to which we granted to Auxilium anexclusive worldwide license to develop, market and sell products containing our injectable collagenase for the treatment of Dupuytren’s contracture, Peyronie'sdisease and frozen shoulder, as well as an exclusive option to develop and license the technology for use in additional indications other than dermalformulations labeled for topical administration. We have amended and restated that agreement twice, once on December 11, 2008 in connection with theDevelopment, Commercialization and Supply Agreement, dated December 17, 2008 between an Auxilium subsidiary and Pfizer, and more recently on August31, 2011 (the “Auxilium Agreement”). The Auxilium Agreement and other licensing agreements are discussed more fully throughout this Item 1, in particularunder the section titled “Licensing and Marketing Agreements.” Background on CollagenaseCollagenase is the only protease that can hydrolyze the triple helical region of collagen under physiological conditions. The specific substrate collagencomprises approximately one-third of the total protein in mammalian organisms, and it is the main constituent of skin, tendon, and cartilage, as well as theorganic component of teeth and bone. The body relies on endogenous collagenase production to remove dead tissue and collagenase production is an essentialbiological mechanism, which regulates matrix remodeling and the normal turnover of tissue. The Clostridial collagenase produced by us has a broadspecificity towards all types of collagen and is acknowledged as much more efficient than mammalian collagenases. Clostridial collagenase cleaves thecollagen molecule at multiple sites along the triple helix whereas the mammalian collagenase is only able to cleave the molecule at a single site along the triplehelix.Collagenase is widely used for cell dispersion for tissue disassociation and cell culture because it does not damage the cell membrane. Since the maincomponent of scar tissue is collagen, collagenase has been used in a variety of clinical investigations to remove scar tissue without surgery. Histological andbiochemical studies have shown that the tissue responsible for the deformities associated with Dupuytren’s contracture and Peyronie’s disease is primarilycomposed of collagen. Surgical removal of scar tissue has the potential to result in complications including increased scar formation. Due to the highly specificnature of the Clostridial collagenase enzyme, we consider its use to be more desirable for the removal of unwanted tissue than the application of generalproteolytic enzymes. Treatment with injectable collagenase for removal of excessive scar tissue represents a first in class non-invasive approach to this unmetmedical need. The lead indications involving our injectable collagenase are Dupuytren’s contracture, Peyronie’s disease and frozen shoulder. New clinicalindications involving the therapeutic application of Clostridial collagenase to supplement the body’s own natural enzymes are continuously being proposed tous by specialists in the medical community. 3Source: BIOSPECIFICS TECHNOLOGIES CORP, 10-K, March 13, 2012Powered 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 ContentCollagenase 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 in physical disability.The onset of Dupuytren’s contracture is characterized by the formation of nodules in the palm that are composed primarily of collagen. As the diseaseprogresses, the collagen nodules begin to form a cord causing the patient’s finger(s) to contract, making it impossible to open the hand fully. Patients oftencomplain 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 inindividuals of northern European ancestry. Well-known individuals with Dupuytren’s contracture include President Ronald Reagan, President George Bush,and Prime Minister Margaret Thatcher.XIAFLEX is the only drug approved by the U.S. Food and Drug Administration (the “FDA”) for the treatment of Dupuytren’s contracture. Prior to FDAapproval of XIAFLEX, the only proven treatment for Dupuytren’s contracture was surgery. Recurrence rates after surgery can be as high as 30% the first twoyears after surgery and 55% within ten years of surgery. In addition, as reported by Auxilium in its February 2012 presentation (the “Auxilium Presentation”),XIAFLEX is a “minimally invasive treatment,” requires only “simple injection and manipulation procedure”, is an “efficient use of surgeon’s time,” does notrequire active physical therapy and provides a “long protection period.” In Auxilium’s Annual Report on 10-K filed with the Securities and ExchangeCommission (the “SEC”) on February 29, 2012 (the “Auxilium 10-K”), Auxilium cited the following reasons that “treatment with XIAFLEX offers benefitscompared to surgery”. It: ·“delivers improvement to 0 to 5 degrees of normal joint contracture without surgery for a majority of 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; and ·significantly reduces costly and time-consuming physical therapy associated with surgery.”Commercialization of XIAFLEX for Dupuytren’s Contracture in the United StatesAuxilium has been marketing XIAFLEX for the treatment of adult Dupuytren's contracture patients with a palpable cord since it became available byprescription in March 2010, following Auxilium’s receipt of marketing approval from the FDA. The prescribing information for XIAFLEX made available byAuxilium lists “tendon rupture or other serious injury to the injected extremity,” as well as “pulley rupture, ligament injury, complex regional pain syndrome,and sensory abnormality of the hand,” as reported serious adverse reactions to XIAFLEX. The prescribing information for XIAFLEX also states that the mostfrequently reported adverse drug reactions in XIAFLEX clinical trials included swelling of the injected hand, contusion, injection site reaction, injection sitehemorrhage, and pain 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.” As a condition of its approval of XIAFLEX, the FDA requireda risk evaluation and mitigation strategy (“REMS”) program for XIAFLEX, which consists of a communication plan and a medication guide. This REMSprogram is designed (1) to evaluate and mitigate known and potential risks and serious adverse events; (2) to inform healthcare providers about how toproperly inject XIAFLEX and perform finger extension procedures; and (3) to inform patients about the serious risks associated with XIAFLEX.According to the Auxilium Presentation, Auxilium is working to establish XIAFLEX as the standard of care for Dupuytren’s contracture with the followinghighlighted strategies: “streamline reimbursement”, “motivate physicians” and “activate patients”. In terms of streamlining reimbursement, Auxilium notedthat it has had “additional wins with managed care - 96% of covered lives have access to XIAFLEX” and that “2012 XIAFLEX growth should be helpedmodestly by [the] new CPT codes”. Auxilium highlighted the following for purposes of motivating physicians “compelling clinical efficacy and safety data,facilitat[ing] peer to peer dialogue, activat[ing] a critical mass of experienced prescribers, a sample program for XIAFLEX-naïve physicians, and the multi-cord phase IV clinical study [that Auxilium has] initiated”. In terms of activating patients, Auxilium highlighted a patient copay assistance program and a“direct response TV campaign in 12 ready markets”. 4Source: BIOSPECIFICS TECHNOLOGIES CORP, 10-K, March 13, 2012Powered 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 Content Status of Regulatory Approval of XIAFLEX for Dupuytren’s Contracture in Europe Pursuant to Auxilium’s agreement with Pfizer (the “Pfizer Agreement”), Pfizer has the right to market XIAFLEX for Dupuytren’s contracture and Peyronie’sdisease in Europe and certain Eurasian countries, and will do so under the registered trademark XIAPEX® (collagenase clostridium histolyticum). TheEuropean Commission granted XIAPEX marketing authorization for the treatment of Dupuytren’s contracture in adult patients with a palpable cord in the firstquarter of 2011. To date, XIAPEX has been launched in nine countries in Europe, including the United Kingdom, Germany and Spain. 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 make intercourse difficultor impossible in advanced cases. In some mild cases, the plaque can resolve spontaneously without medical intervention. In severe cases, the penis can be bentat a 90-degree angle during erection. Significant psychological distress has been noted in patients with Peyronie’s disease who are sexually active. Frequentpatient complaints include increased pain, painful erections, palpable plaque, penile deformity, and erectile dysfunction. Patients with Peyronie’s disease havebeen reported to have an increased likelihood of having Dupuytren’s contracture, frozen shoulder, plantar fibromatosis, knuckle pads, hypertension anddiabetes. Peyronie’s disease typically affects males in the range of 40-70 years. The cause of Peyronie’s disease is unknown, although some investigators haveproposed that it may 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.Currently, there are no FDA approved pharmaceutical products that are labeled as effective for use in Peyronie’s disease. As Auxilium reported in the AuxiliumPresentation, “surgery is a treatment of last resort and most patients are treated first-line with unapproved medical therapy.” Development Status As described in more detail below, Auxilium currently has underway phase III studies of XIAFLEX for the treatment of Peyronie’s disease. These double-blind, placebo-controlled phase III studies reached target enrollment in the first quarter of 2011, and the active dosing phase of the studies is complete.According to the Auxilium Presentation, Auxilium expects to announce top-line results late in the second quarter of 2012. Phase IIb Trial On December 16, 2009, Auxilium announced top-line efficacy and safety results from a phase IIb trial of XIAFLEX for the treatment of Peyronie’s disease.According to the Auxilium 10-K, the phase IIb trial was a “randomized, double-blind, placebo-controlled study designed to assess the safety and efficacy ofXIAFLEX when administered two times a week every six weeks for up to three treatment cycles (2 x 3) in subjects with Peyronie’s. The study was conductedat 12 sites throughout the U.S., and patients were monitored for 36 weeks following the first injection. The trial was designed to validate a proprietaryPeyronie’s Disease Questionnaire (“PDQ”) which measures several domains of patients’ sexual quality of life over a 36 week period. The four domainsmeasured by the PDQ are penile pain, Peyronie’s bother, intercourse discomfort and intercourse constraint. Patients had to have a penile contracture between 30and 90 degrees to be included in the study. Patients were stratified by the degree of penile curvature (i.e. 30 degrees to 60 degrees versus 60 to 90 degrees) andthen randomized into four treatment groups to receive either XIAFLEX or placebo with or without modeling of the penile plaque. Modeling refers to massagingof the plaque after the second injection of a treatment series and is intended to maximize the enzymatic effect of the XIAFLEX injection in the plaque. Patientswere randomized in a 3:1 ratio of XIAFLEX to placebo and a 1:1 ratio to receive penile plaque modeling or no modeling.” 5Source: BIOSPECIFICS TECHNOLOGIES CORP, 10-K, March 13, 2012Powered 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 Content In addition, the Auxilium 10-K stated that “Data demonstrated that XIAFLEX improved penile curvature when compared to placebo with a mean improvementof 29.7% vs. 11%, respectively (P=0.001). In addition, the PDQ domain of Peyronie’s symptom bother was significantly improved in XIAFLEX treatedsubjects compared to placebo. The use of modeling also demonstrated significant improvement in XIAFLEX subjects compared to placebo, 32.4%improvement in curvature compared to a 2.5% worsening of curvature in placebo subjects (p<0.001). In the no-modeling group, XIAFLEX subjectsexperienced a 27.1% mean improvement in penile curvature, which was not statistically different from the 27.9% mean improvement for subjects receiving theplacebo. The most common adverse events reported in the phase IIb trial were injection site bruising, injection site pain, injection site edema, contusion, penileedema and penile pain. There was a total of five (3.4%) subjects who experienced eight non-fatal serious adverse events, none of which were considered to berelated to XIAFLEX. [Auxilium] sought to accomplish two goals with this study. First, [Auxilium] wanted to validate the PDQ as a tool for use in futurepivotal studies. Second, [Auxilium] aimed to establish an acceptable primary endpoint related to the PDQ for use in pivotal phase III trials.” Phase III In the Auxilium 10-K, Auxilium stated that “[f]ollowing discussions with the FDA where [Auxilium] achieved agreement that the PDQ was a valid tool for usein a pivotal phase III trial and the appropriate endpoint for such trials, [Auxilium] commenced its phase III studies.” Auxilium “completed enrollment in [its]Phase III trial in March 2011 and, in August 2011, [Auxilium] announced that dosing had been completed.” Also in the Auxilium 10-K, Auxilium noted itsphase III plan “consists of four clinical studies and is known by the acronym IMPRESS – The Investigation for Maximal Peyronie’s Reduction Efficacy andSafety Studies. There are two randomized, double-blind, placebo-controlled phase III studies, which enrolled over 800 patients at approximately 70 sites in theU.S. and Australia, with a 2:1 ratio of XIAFLEX to placebo. There is one open label study, which enrolled at least 250 patients, at approximately 30 sites inthe U.S., EU and New Zealand, and one pharmacokinetic study, which enrolled approximately 16 patients in the U.S. XIAFLEX was administered twotimes a week every six weeks for up to four treatment cycles (2 x 4). Each treatment cycle was followed by a penile modeling procedure. Patients will befollowed for 52 weeks post-first injection in the double-blind studies and for 36 weeks in the open label trial. The trials’ co-primary endpoints are the meanchange from baseline in the Peyronie’s disease bother domain of the PDQ compared to placebo and mean percent improvement from baseline in penilecurvature compared to placebo. The remaining domains of the PDQ will be considered secondary endpoints. Safety measurements will include adverse eventmonitoring, immunogenicity testing and clinical labs.” 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 people worldwide with aslightly higher incidence in women. It is estimated that 700,000 patients visit doctors annually in the U.S. in connection with frozen shoulder. It typicallyoccurs between the ages of 40-70. Individuals with insulin dependent diabetes have been reported to have a 36% higher incidence rate and are more likely tohave bilateral symptoms. As noted in the Auxilium Presentation, there are currently no FDA approved non-surgical therapies for frozen shoulder syndrome. According to the Auxilium Presentation, current treatment options for frozen shoulder syndrome have limited results and “manipulation of the shoulder underanesthesia, long-term intensive physical therapy or arthroscopic surgery can disrupt the frozen capsule”. In addition, Auxilium “believe[s] that XIAFLEX mayact by thinning the thickened collagen capsule allowing improved range of motion of the affected shoulder”.We initiated, monitored and supplied requisite study drug for a Phase II clinical trial using our injectable collagenase in the treatment of frozen shoulder. Threedifferent doses of injectable collagenase were compared to placebo in this double-blind, randomized trial in 60 patients. Results of this Phase II clinical trialwere presented at the annual meeting of the American Academy of Orthopaedic Surgeons in March 2006. Based on its prior review of the data contained in theoral presentation, Auxilium elected to exercise its option to develop and commercialize this additional indication for collagenase injection in December 2005. Ina press release dated December 20, 2005 and issued concurrently with the exercise of its option, Auxilium stated its belief that “the addition of a thirdindication for this development program enhances the commercial potential of AA4500” (now known as XIAFLEX).Phase IIaAuxilium currently has underway a phase IIa open-label, controlled dose-ranging study designed to assess the safety and efficacy of XIAFLEX for thetreatment of Frozen Shoulder syndrome in comparison to an exercise-only control group. The study will involve approximately 50 adult men and women atapproximately nine sites throughout the U.S. Topline study results are expected in the first half of 2013. 6Source: BIOSPECIFICS TECHNOLOGIES CORP, 10-K, March 13, 2012Powered 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 Content According to a December 1, 2011 press release in which Auxilium announced that the first patient has been dosed in this phase IIa trial, “[t]o qualify for theFrozen Shoulder syndrome study, patients must have unilateral idiopathic adhesive capsulitis of the shoulder with restricted range of motion in the affectedshoulder for at least three months, but not more than 12 months. Following screening and determination of study eligibility, subjects will be assigned to fourgroups that vary in dosing (injection volume and concentration) or a fifth group receiving shoulder exercises only. Patients may receive up to three ultrasound-guided injections of varying doses of XIAFLEX (ranging from 0.29 mg to 0.58 mg in varying concentrations) separated by a minimum of 21 days and allpatients will be instructed to perform home shoulder exercises. The study's primary endpoint is the change (degrees) from baseline to the day 92 follow-up inforward flexion (active) in the affected shoulder. Safety assessments, including immunogenicity testing, will be made during all study visits. More informationon the study, including study sites participating in this trial, can be found at clinicaltrials.gov.”Collagenase For Treatment of Cellulite (Edematous Fibrosclerotic Panniculopathy) Cellulite is a condition characterized by dimpling of the skin and a mattress phenomenon typically affecting the thighs and buttocks. It is due to irregular anddiscontinuous subcutaneous connective tissue. An open label study has been completed to assess whether injectable collagenase can restore the cellulite-affectedareas to a more cosmetically acceptable appearance. An abstract of an article titled “Collagenase Injection in the Treatment of Cellulite” by A. Dagum and M.Badalamente, describing the promising results of this study was published in Plastic and Reconstructive Surgery on September 15, 2006.In the Auxilium 10-K, Auxilium noted that “[c]ellulite has been reported to occur in 85-98% of post-pubertal females and rarely in men. The condition isprevalent in women of all races.” In the Auxlium Presentation, Auxilium noted that there are no FDA-approved medical therapies for cellulite, that current non-surgical options have not shown benefit, that surgical approaches have shown some benefit but are invasive and that it “believes [that] XIAFLEX may enablephysicians to enzymatically and specifically lyse the connective septae, in a more targeted fashion than subscision, possibly resulting in a smootherappearance to the skin surface.”Under the Auxilium Agreement, we have granted Auxilium the right to initiate early development studies for cellulite, and Auxilium will be responsible for allcosts associated with such development. Auxilium has the option, upon completion of such early stage development and upon its payment to us of a one-timefee of $500,000, to add the treatment of cellulite as an Auxilium exercised indication under the Auxilium Agreement, in which case we would receive milestonepayments, low double digit royalties and a mark-up on cost of goods for sales in cellulite.Auxilium currently has underway a single site, phase Ib, open-label dose escalation study of XIAFLEX for the treatment of cellulite. The study is targeted toenroll 63 women between 21 and 60 years of age. The study’s objectives are to assess the safety, effectiveness and pharmacokinetics of XIAFLEX for thetreatment of cellulite. Auxilium expects topline results in the fourth quarter of 2012. According to a January 26, 2012 press release in which Auxiliumannounced that the first cohort of patients had been dosed, “[t]o qualify for the study, participants must have EFP in the posterolateral thighs and/or buttocksfor at least 12 months prior to a screening visit. Following screening and determination of eligibility, study participants will be assigned to one of seven groupsthat vary in treatment dose, injection concentration and volume. Subjects will receive 10 concurrent injections (0.1 or 0.5 mL per injection) of XIAFLEX via astandardized template over a targeted area (8 cm x 10 cm) of EFP. The total dose of XIAFLEX that will be administered into the targeted area will rangebetween 0.0029 mg and 0.116 mg; these doses represent between 0.5% and 20% of the dose used in a single injection for Dupuytren's contracture (0.58 mg).Safety will be evaluated through the collection of adverse events, as well as a targeted assessment of local reactions to the treatment. The treatment effectivenesswill be evaluated by investigator and patient assessments, as well as 3-D photographic imaging techniques. More information on the study will be posted atwww.clinicaltrials.gov”. 7Source: BIOSPECIFICS TECHNOLOGIES CORP, 10-K, March 13, 2012Powered 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 Content Additional Clinical Indications For CollagenaseHuman Lipoma Lipomas are benign fatty tumors that occur as bulges under the skin and affect humans and canines. It is estimated that lipomas are the primary diagnosis in575,000 patients in the U.S. annually. The only proven therapy for lipoma treatment is surgery, which is often not practical for patients with multiplelipomas. Based on observations made during preclinical studies that a collagenase injection decreased the size of fat pads in animals, we initiated, monitoredand supplied the requisite study drug for a Phase I open label clinical trial for the treatment of human lipomas with a single injection of collagenase. Favorableinitial 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 meetingof the American Society of Plastic Surgeons. We have designed a phase II dose escalation clinical study of XIAFLEX for the treatment of human lipomas. The study consists of 14 patients and four dosagegroups for the treatment of benign subcutaneous lipomas. We have received FDA clearance to initiate the clinical trial and plan to do so during the first half of2012. Canine Lipoma Based on the encouraging results reported in the clinical investigations in human lipoma, we began clinical trials in canine lipoma. Lipomas are found in 2.3%of canines, and there may be as many as 1.7 million canines affected with skin lipomas in the U.S. Lipomas in older canines are very common, and lipomasthat restrict motion in older canines are a serious problem. The only proven therapy for this condition is surgical excision of the lipoma, which necessarilyinvolves the use of general anesthesia. It has been estimated that up to 2% of sick canines die as a complication of general anesthesia (See Brodbelt Vet J 2009Dec; 182 (3): 375-6). We surveyed 77 veterinarians which included participants from the academic field and others that are in private practice. Theparticipants indicated that on average they perform 25 lipoma excision surgeries per year at an average cost of $530 for the surgical procedure. It isconservatively estimated that 47,000 veterinarians are in active practice in the U.S. Chien-801 and Chien-802 Clinical Trials Chien-801 was a pilot study conducted for the purpose of evaluating the use of purified collagenase for the non-surgical treatment of lipoma in six canines. Thestudy evaluated the appropriate dosage and frequency of injections necessary to significantly reduce the size of the lipoma. The dose administered ranged from0.012 to 0.021 mg/ cm2 which was approximately ½ to ¾ of the dose used in previous human clinical trials. Based on this dose escalation study theCompany selected the dose for Chien-802. Chien-802 was designed to evaluate the efficacy of injectable collagenase in canine lipoma in four healthy canines with subcutaneous lipomas. Inclusioncriteria required the lipoma to be benign, superficial and easily measureable. All canines had a second lipoma that was untreated and used as a control. At 90days post injection, in the three evaluable canines, the lipoma size was 0%, 0% or 7% of the original size as measured by a CT scan. By contrast, theuntreated lipomas were 129%, 113% and 128% of the original size at day 90. Thus, the treated lipomas showed a 97% reduction in the size of the lipoma andan increase in the size of the untreated controls of 23%. Chien-803 Based on the positive results from Chien-802, we announced on January 6, 2011 that we had begun enrollment in a randomized, double-blind, placebo-controlled study designed to evaluate the efficacy of purified collagenase for injection for the treatment of canine lipomas. The trial was to enroll 25 canines,each having two or more lipomas. To meet the primary endpoint, an animal would have to have achieved at least a 50% decrease in the drug-treated lipomavolume relative to baseline as measured by CT scan at 3 months post injection. We subsequently discontinued this study and designed a new clinical trial,Chien 804, following our settlement and amended and restated development and license agreement with Auxilium in August 2011. Chien-804 We have designed a placebo controlled randomized study to evaluate the efficacy of XIAFLEX for the treatment of subcutaneous benign lipomas in canines.The study will consist of 32 canines randomized at 1:1 XIAFLEX or placebo. The treatment is a single injection of XIAFLEX or placebo. We have receivedclearance from the FDA’s Center for Veterinary Medicine to begin the study and expect to do so during the first half of 2012. 8Source: BIOSPECIFICS TECHNOLOGIES CORP, 10-K, March 13, 2012Powered 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 Content Other Clinical Indications Other clinical indications for which our collagenase injection has been tested include keloids, hypertrophic scars, scarred tendons, glaucoma, herniatedintervertebral discs, and as an adjunct to vitrectomy. LICENSING AND MARKETING AGREEMENTSTopical Collagenase AgreementIn connection with a March 2006 agreement (the “DFB Agreement”), pursuant to which we sold our topical collagenase business to DFB Biotech, Inc. and itsaffiliates (“DFB”), until March 2011 we received payments for certain technical assistance and certain transition services that we provided to DFB. Pursuantto the DFB Agreement, we continue to receive earn out payments based on the sales of certain products. Our right to receive earn out payments with respect tothe marketed topical product sold to DFB expires in June 2013, but earn out payments for second generation collagenase products, if any, continue indefinitely.In 2011, we received $46,667 of technical assistance related payments, and as of December 31, 2011, we have received a total of $1.4 million in consultingfees. In addition, we have recognized $2.3 million in earn out payments from DFB in connection with the net sales of topical collagenase in 2011.Auxilium Agreement Under the Auxilium Agreement, we granted to Auxilium exclusive worldwide rights to develop, market and sell certain products containing our injectablecollagenase. Currently its licensed rights cover the indications of Dupuytren’s contracture, Peyronie’s disease and frozen shoulder. We also granted Auxiliumthe right to initiate early stage development of cellulite, and Auxilium is responsible for all costs associated with that development. Auxilium may furtherexpand the Auxilium Agreement, at its exclusive option, to develop and license our injectable collagenase for use in additional indications. Auxilium haspartnered with Pfizer pursuant to the Pfizer Agreement, and Pfizer is responsible for marketing XIAPEX for the treatment of both Dupuytren’s contracture andPeyronie's disease in Europe and certain Eurasian countries (the “Pfizer Territory”) and is primarily responsible for regulatory activities for XIAPEX in thePfizer Territory. Auxilium has granted to Asahi the exclusive right to develop and commercialize XIAFLEX for the treatment of Dupuytren’s contracture andPeyronie’s disease in Japan. Auxilium has granted to Actelion the exclusive right to develop and commercialize XIAFLEX for the treatment of Dupuytren’scontracture and Peyronie’s disease in Canada, Australia, Brazil and Mexico. Through December 31, 2011, Auxilium has paid us up-front licensing and sublicensing fees and milestone payments under the Auxilium Agreement of $22.2million, including amounts in connection with the Pfizer Agreement and Auxilium’s agreement with Asahi. In addition to the payments already received by usand to be received by us with respect to the Dupuytren’s contracture indication, Auxilium will be obligated to make contingent milestone payments, withrespect to each of the Peyronie’s disease and frozen shoulder indications, upon the acceptance of the regulatory filing and receipt by Auxilium, its affiliate orsublicensee of regulatory approval. Auxilium will also be obligated to make sublicense fee payments to us if it out-licenses to third parties the right to marketand sell XIAFLEX for the treatment of frozen shoulder. Additional milestone obligations will be due if Auxilium exercises its option to develop and licenseXIAFLEX for additional indications.In addition to the milestone payments from Auxilium, the Company is entitled to 8.5% of all sublicense income that Auxilium receives from Pfizer under thePfizer Agreement, which payments are dependent on the achievement by Pfizer of certain regulatory and sales related milestones. Under the Pfizer Agreement,Auxilium received a $30 million milestone payment from Pfizer following the first sale of XIAPEX in the United Kingdom, which was the first major marketcountry in which Pfizer sold XIAPEX, and we received from Auxilium $2.5 million in connection with that first sale. For each additional major marketcountry in which XIAPEX is launched, Auxilium is eligible to receive an additional $7.5 million. In connection with the launch of XIAPEX in each ofGermany and Spain, we received from Auxilium 8.5% of each of the $7.5 million milestone payments from Pfizer to Auxilium, or $637,500. We will receive8.5% of the $350 million, or $29.8 million, in potential additional milestone payments that may be made by Pfizer to Auxilium under the Pfizer Agreement.As of January 25, 2012, we have received $11.4 million in milestones related to the Pfizer Agreement. In 2011, we received $750,000 of the $15 millionupfront payment Auxilium received from Asahi. Auxilium has reported that it is to receive a $10 million upfront payment from Actelion in connection withtheir recently announced agreement, and we will receive a specified percentage from Auxilium in connection with such payment. To the extent Auxilium entersinto an agreement or agreements related to other territories, the percentage of sublicense income that Auxilium would pay us will depend on the stage ofdevelopment and approval of XIAFLEX for the particular indication at the time such other agreement or agreements are executed. 9Source: BIOSPECIFICS TECHNOLOGIES CORP, 10-K, March 13, 2012Powered 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 Content Auxilium must pay us on a country-by-country and product-by-product basis a low double digit royalty as a percentage of net sales for products covered bythe Auxilium Agreement and sold in the United States, the Pfizer Territory and Japan. In the case of products covered by the Auxilium Agreement and sold inother countries (the “Rest of the World”), Auxilium must pay us on a country-by-country and product-by-product basis a specified percentage of the royaltiesit is entitled to receive from a partner or partners with whom it has contracted for such countries (a “Rest of the World Partner”), which in the case of Canada,Australia, Brazil and Mexico is Actelion. The royalty rate is independent of sales volume and clinical indication in the United States, the Pfizer Territory andJapan, but is subject to set-off in those countries and the Rest of the World for certain expenses we owe to Auxilium relating to certain development and patentcosts. In addition, the royalty percentage may be reduced if (i) market share of a competing product exceeds a specified threshold; or (ii) Auxilium is requiredto obtain a license from a third party in order to practice our patents without infringing such third party’s patent rights, although Auxilium has confirmed tous that no license from a third party is required. In addition, if Auxilium out-licenses to a third party, then we will receive a specified percentage of certainpayments made to Auxilium in consideration of such out-licenses.These royalty obligations extend, on a country-by-country and product-by-product basis, for the longer of the patent life (including pending patents), theexpiration of any regulatory exclusivity period based on orphan drug designation or foreign equivalent thereof or June 3, 2016. Auxilium may terminate theAuxilium Agreement upon 90 days prior written notice. If Auxilium terminates the Auxilium Agreement other than because of an uncured, material breach byus, all rights revert to us. Pursuant to our August 31, 2011 settlement agreement with Auxilium, we are now co-owners of U.S. Patent No. 7,811,560 and anycontinuations and divisionals thereof. Auxilium expects this patent will expire in July 2028.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 for products sold in theUnited States, the Pfizer Territory or Japan. For products sold in the Rest of the World, Auxilium must pay to us a specified percentage of the mark-up of thecost of goods sold it is entitled to receive from a Rest of the World Partner, including Actelion, without regard to any set-offs that the Rest of the World Partnermay have with respect to Auxilium.Auxilium is generally responsible, at its own cost and expense, for developing the formulation and finished dosage form of products and arranging for theclinical supply of products. Auxilium is generally responsible for all clinical development and regulatory costs for Peyronie’s disease, Dupuytren’scontracture, frozen shoulder and all additional indications for which it exercises its options. In addition, Auxilium is responsible for all costs associated withits early stage development for cellulite.A redacted copy of the Auxilium Agreement was filed on Form 8-K with the SEC on September 1, 2011. 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 Auxilium Agreement.In-Licensing and Royalty AgreementsWe have entered into several in-licensing and royalty agreements with various investigators, universities and other entities throughout the years.Dupuytren’s ContractureOn November 21, 2006, we entered into a license agreement (the “Dupuytren’s License Agreement”) with the Research Foundation of the State University ofNew York at Stony Brook (the “Research Foundation”), pursuant to which the Research Foundation granted to us and our affiliates an exclusive worldwidelicense, with the right to sublicense to certain third parties, to know-how owned by the Research Foundation related to the development, manufacture, use orsale of (i) the collagenase enzyme obtained by a fermentation and purification process (the “Enzyme”), and (ii) all pharmaceutical products containing theEnzyme or injectable collagenase, in each case to the extent it pertains to the treatment and prevention of Dupuytren’s contracture. 10Source: BIOSPECIFICS TECHNOLOGIES CORP, 10-K, March 13, 2012Powered 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 Content In consideration of the license granted under the Dupuytren’s License Agreement, we agreed to pay to the Research Foundation certain royalties on net sales (ifany) of pharmaceutical products containing the Enzyme or injectable collagenase for the treatment and prevention of Dupuytren’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 any Dupuytren’s LicensedProduct in any country (including the U.S.) arises only upon the first commercial sale of such Dupuytren’s Licensed Product on a country-by-country basis.The royalty rate is 0.5% of net sales. Our obligation to pay royalties to the Research Foundation will continue until the later of (i) the expiration of the last validclaim of a patent pertaining to the Dupuytren’s Licensed Product; (ii) the expiration of the regulatory exclusivity period conveyed by the FDA’s Office ofOrphan Products Development (“OOPD”) 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 under that agreement willcontinue in effect until the termination of our royalty obligations. After that, all licenses granted to us under the Dupuytren’s License Agreement will becomefully 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 disease by buying down ourfuture royalty obligations with a one-time cash payment. A copy of the agreement was filed on Form 8-K with the SEC on 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 theResearch Foundation granted to us and our affiliates an exclusive worldwide license, with the right to sublicense to certain third parties, to know-how ownedby the Research Foundation related to the development, manufacture, use or sale of (i) the Enzyme and (ii) all pharmaceutical products containing the Enzymeor injectable collagenase, in each case to the extent it pertains to the treatment and prevention of frozen shoulder. Additionally, the Research Foundation grantedto us an exclusive license to the patent applications in respect of frozen shoulder. The license granted to us under the Frozen Shoulder License Agreement issubject 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 of the initial research.In consideration of the license granted under the Frozen Shoulder License Agreement, we agreed to pay to the Research Foundation certain royalties on net sales(if any) of pharmaceutical products containing the Enzyme or injectable collagenase for the treatment and prevention of frozen shoulder (each a “FrozenShoulder Licensed Product”). In addition, we and the Research Foundation will share in any milestone payments and sublicense income received by us inrespect of the rights licensed under the Frozen Shoulder License Agreement.Our obligation to pay royalties to the Research Foundation with respect to sales by us, our affiliates or any sublicensee of any Frozen Shoulder LicensedProduct in any country (including the U.S.) arises only upon the first commercial sale of a Frozen Shoulder Licensed Product. Our obligation to pay royaltiesto the Research Foundation will continue until, the later of (i) the expiration of the last valid claim of a patent pertaining to a Frozen Shoulder Licensed Productor (ii) June 3, 2016.Unless terminated earlier in accordance with its termination provisions, the Frozen Shoulder License Agreement and licenses granted under that agreement willcontinue in effect until the termination of our royalty obligations. After that, all licenses granted to us under the Frozen Shoulder License Agreement will becomefully 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 theResearch Foundation and the clinical investigators working on the Dupuytren’s contracture and frozen shoulder indications for the Enzyme. 11Source: BIOSPECIFICS TECHNOLOGIES CORP, 10-K, March 13, 2012Powered 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 Content Other IndicationsWe have entered into certain other license and royalty agreements with respect to other indications that we may elect to pursue. COMPETITION We and our licensees 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 ourcompetitors have substantially greater financial, technical and human resources than we have and may subsequently develop products that are more effective,safer or less costly than any products that we have developed, are developing or will develop, or that are generic products. Our success will depend on ourability to acquire, develop and commercialize products and our ability to establish and maintain markets for our products that receive marketing approval. COST OF RESEARCH AND DEVELOPMENT ACTIVITIESDuring fiscal years 2011 and 2010, the Company invested $972,078 and $1,223,931, respectively, in research and development activities.GOVERNMENT REGULATION Any product labeled for use in humans requires regulatory approval by government agencies prior to commercialization. In particular, human therapeuticproducts are subject to rigorous preclinical and clinical trials to demonstrate safety and efficacy and other approval procedures of the FDA and similarregulatory authorities in foreign countries. Various federal, state, local, and foreign statutes and regulations also govern testing, manufacturing, labeling,distribution, storage and record-keeping related to such products and their promotion and marketing. The process of obtaining these approvals and thecompliance with federal, state, local, and foreign statutes and regulations require the expenditure of substantial time and financial resources. In addition, thecurrent political environment and the current regulatory environment at the FDA could lead to increased testing and data requirements which could impactregulatory timelines and costs. Clinical trials involve the administration of the investigational product candidate or approved products to human subjects under the supervision of qualifiedinvestigators. Clinical trials are conducted under protocols detailing, among other things, the objectives of the study and the parameters to be used in assessingthe safety and the effectiveness of the drug. Typically, clinical evaluation involves a time-consuming and costly three-phase sequential process, but the phasesmay overlap. Each trial must be reviewed, approved and conducted under the auspices of an independent institutional review board, and each trial mustinclude 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 clinical trials that areconducted in the U.S. and may, at its discretion, reevaluate, alter, suspend or terminate the testing based upon the data accumulated to that point and theFDA’s assessment of the risk/benefit ratio to the patient. The FDA can also provide specific guidance on the acceptability of protocol design for clinical trials.The FDA, we or our partners may suspend or terminate clinical trials at any time for various reasons, including a finding that the subjects or patients arebeing exposed to an unacceptable health risk. The FDA can also request that additional clinical trials be conducted as a condition to product approval. Duringall clinical trials, physicians monitor the patients to determine effectiveness and/or to observe and report any reactions or other safety risks that may resultfrom use of the drug candidate.Assuming successful completion of the required clinical trials, drug developers submit the results of preclinical studies and clinical trials, together with otherdetailed information including information on the chemistry, manufacture and control of the product, to the FDA, in the form of an NDA or BLA, requestingapproval to market the product for one or more indications. In most cases, the NDA/BLA must be accompanied by a substantial user fee. The FDA reviewsan NDA/BLA to determine, among other things, whether a product is safe and effective for its intended use. 12Source: BIOSPECIFICS TECHNOLOGIES CORP, 10-K, March 13, 2012Powered 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 Content Before approving an NDA or BLA, the FDA will inspect the facility or facilities where the product is manufactured. The FDA will not approve the NDA orBLA unless cGMP compliance is satisfactory. The FDA will issue an approval letter if it determines that the NDA or BLA, manufacturing process andmanufacturing facilities are acceptable. If the FDA determines that the NDA or BLA, manufacturing process or manufacturing facilities are not acceptable, itwill outline the deficiencies in the submission and will often request additional testing or information. Notwithstanding the submission of any requestedadditional information, the FDA ultimately may decide that the NDA or BLA does not satisfy the regulatory criteria for approval and refuse to approve theNDA 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. The FDA may not grantapproval on a timely basis, or at all. We or our partners may encounter difficulties or unanticipated costs in our or their efforts to secure necessarygovernmental approvals, which could delay or preclude us or them from marketing our products. Furthermore, the FDA may prevent a drug developer frommarketing a product under a label for its desired indications or place other conditions, including restrictive labeling, on distribution as a condition of anyapprovals, which may impair commercialization of the product. After approval, some types of changes to the approved product, such as adding newindications, manufacturing changes and additional labeling claims, are subject to 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 must comply witha number of post-approval requirements, including delivering periodic reports to the FDA (i.e., annual reports), submitting descriptions of any adversereactions reported, biological product deviation reporting, and complying with drug sampling and distribution requirements and any other requirements setforth in the FDA’s approval (such as the REMS program, which the FDA has required for XIAFLEX and consists of a communication plan and a medicationguide). The holder of an approved NDA/BLA is required to provide updated safety and efficacy information and to comply with requirements concerningadvertising and promotional labeling. Also, quality control and manufacturing procedures must continue to conform to cGMP after approval. Drugmanufacturers and their subcontractors are required to register their facilities and are subject to periodic unannounced inspections by the FDA to assesscompliance with 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 maintain compliance with cGMPand other regulatory requirements. The FDA may require post-market testing and surveillance to monitor the product’s safety or efficacy, including additionalstudies 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 the approved drug fortreatment of new indications, which require submission of a supplemental or new NDA/BLA and FDA approval of the new labeling claims. The purpose ofthese trials and studies is to broaden the application and use of the drug and its acceptance in the medical community.We use, and will continue to use, third party manufacturers to produce our products in clinical quantities. Future FDA inspections may identify complianceissues at our facilities, at the facilities of our contract manufacturers or at those of our partners that may disrupt production or distribution, or requiresubstantial resources to correct. In addition, discovery of problems with a product or the failure to comply with requirements may result in restrictions on aproduct, manufacturer or holder of an approved NDA/BLA, including withdrawal or recall of the product from the market or other voluntary or FDA-initiatedaction that could delay further marketing. Newly discovered or developed safety or effectiveness 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 regulatoryapproval of our products under development.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 and maintaining a strongproprietary position both in the U.S. and in other countries. To develop and maintain such a position, we intend to continue relying upon patent protection,trade secrets, know-how, continuing technological innovations and licensing opportunities. In addition, we intend to seek patent protection whenever availablefor any products or product candidates and related technology we develop or acquire in the future. 13Source: BIOSPECIFICS TECHNOLOGIES CORP, 10-K, March 13, 2012Powered 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 Content Patents We are the assignee or licensee of various U.S. patents, which have received patent protection in various foreign countries. Pursuant to our August 31, 2011settlement agreement with Auxilium, we are now co-owners of U.S. Patent No. 7,811,560 and any continuations and divisionals thereof. Auxilium expectsthis patent will expire in July 2028. In addition, we have licenses to other pending patent applications. Although we believe these patent applications, if theyissue as patents, will provide a competitive advantage, the scope of the patent positions of pharmaceutical firms involves complex legal, scientific and factualquestions and, as such, is generally uncertain. In addition, the coverage claimed in a patent application can be significantly reduced before the patent is issued.Consequently, we do not know whether any of our current patent applications, or the products or product candidates we develop, acquire or license will resultin the issuance of patents or, if any patents are issued, whether they will provide significant proprietary protection, will be of any value to us or will bechallenged, 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 proprietaryrights, competitors or other parties may assert that we infringe on their proprietary rights. Because patent applications in the U.S. and some other jurisdictionscan proceed in secrecy until patents issue, third parties may obtain other patents without our knowledge prior to the issuance of patents relating to our productcandidates, which they could attempt to assert against us. Also, since publication of discoveries in the scientific or patent literature often lags behind actualdiscoveries, we cannot be certain of the priority of inventions covered by pending patent applications. Moreover, we may have to participate in interferenceproceedings declared by the U.S. Patent and Trademark Office (the “USPTO”) to determine priority of invention, or in opposition proceedings in the USPTO,either of which could result in substantial cost to us, even if the eventual outcome is favorable to us. In the U.S., issued patents may be broadened, narrowedor even canceled as a result of post-issuance procedures instituted by us or third parties, including reissue, reexamination and the new supplementalexamination procedure enacted as part of the Leahy-Smith America Invents Act. There can be no assurance that the patents, if issued and challenged in a courtof competent jurisdiction, would be found valid or enforceable. An adverse outcome could subject us to significant liabilities to third parties, require disputedrights to be licensed from third parties or require us to cease using such technology. Although we believe that our product candidates, production methods and other activities do not currently infringe the intellectual property rights of thirdparties, we cannot be certain that a third party will not challenge our position in the future. If a third party alleges that we are infringing its intellectual propertyrights, we may need to obtain a license from that third party, but there can be no assurance that any such license will be available on acceptable terms or at all.Any infringement claim that results in litigation could result in substantial cost to us and the diversion of management’s attention from our core business. Toenforce patents issued, assigned or licensed to us or to determine the scope and validity of other parties’ proprietary rights, we may also become involved inlitigation or in interference proceedings declared by the USPTO, which could result in substantial costs to us or an adverse decision as to the priority of ourinventions. We may be involved in interference and/or opposition proceedings in the future. We believe there will continue to be litigation in our industryregarding patent and other intellectual property rights. We licensed to Auxilium our injectable collagenase for the treatment of Dupuytren’s contracture, Peyronie’s disease, and frozen shoulder and have given adevelopment license to Auxilium with respect to cellulite. We have two use patents in the U.S. covering the enzyme underlying our injectable collagenase, onefor the treatment of Dupuytren’s contracture, which issued from a reissue proceeding in December 2007, and one for the treatment of Peyronie’s disease. TheDupuytren’s patent 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. An application to extend the term of the Dupytren’spatent to August 22, 2019 based upon regulatory delay in granting approval to sell XIAFLEX was filed in the USPTO on April 1, 2010. The USPTO hasnot taken any action on the request for extension, and we cannot be certain how much of an extension, if any, will be granted by the USPTO. 14Source: BIOSPECIFICS TECHNOLOGIES CORP, 10-K, March 13, 2012Powered 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 Content Orphan Drug Designations Two indications, Dupuytren’s contracture and Peyronie’s disease, have received orphan drug designation from the OOPD. These indications did not receivethe European equivalent of orphan drug designation. The OOPD administers the major provisions of the Orphan Drug Act, an innovative program that provides incentives for sponsors to develop products forrare diseases. The incentives for products that qualify under the Orphan Drug Act include seven-year exclusive marketing rights post-FDA approval (whichmeans, with respect to Dupuytren’s contracture, exclusivity until February 2, 2017), tax credits for expenses associated with clinical trials including a 20 yeartax carry-forward, availability of FDA grants, and advice on design of the clinical development plan. The orphan drug provisions of the Federal Food, Drug, and Cosmetic Act also provide incentives to drug and biologics suppliers to develop and supply drugsfor the treatment of rare diseases, currently defined as diseases that affect fewer than 200,000 individuals in the U.S. or, for a disease that affects more than200,000 individuals in the U.S. and for which there is no reasonable expectation that the cost of developing and making available in the U.S. a drug for suchdisease or condition will be recovered from its sales in the U.S. Under these provisions, a supplier of a designated orphan product can seek tax benefits, andthe holder of the first FDA approval of a designated orphan product will be granted a seven-year period of marketing exclusivity for that product for the orphanindication. It would not prevent other drugs from being approved for the same indication. In the Auxilium 10-K, Auxilium stated that “[w]hile XIAFLEX does not have orphan drug status for any indication in Europe, foreign patents cover theseproducts in certain countries, and on approval of XIAFLEX for a first indication in Europe, we believe the product will benefit from ten years of marketexclusivity and eight years of data exclusivity. We may obtain an additional year of market exclusivity if the regulatory authorities approve an additionalindication that they determine to represent a significant clinical benefit.” Our royalty term, however, is not extended by any period of marketing exclusivity ascontrasted with any period of orphan drug status or foreign equivalent thereof. Trade Secrets We also rely on trade secret protection for our confidential and proprietary information. No assurance can be given that others will not independently developsubstantially equivalent proprietary information and techniques or otherwise gain access to our trade secrets or disclose such technology or that we canmeaningfully protect our trade secrets. It is our policy to require certain employees, consultants, outside scientific collaborators, sponsored researchers and other advisors to execute confidentialityagreements upon the commencement of employment or consulting relationships with us. These agreements provide that all confidential information developedor made known to the individual during the course of the individual’s relationship with us is to be kept confidential and not disclosed to third parties except inspecific circumstances. In the case of employees, the agreements provide that all inventions conceived by the individual shall be our exclusive property. Therecan be no assurance, however, that these agreements will provide meaningful protection or adequate remedies for our trade secrets in the event of unauthorizeduse or disclosure of such information. EMPLOYEES The 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 telephone number is 516-593-7000. Our corporate headquarters are currently located at 35 Wilbur St., Lynbrook, NY 11563, as further described in this Report under “Item 2 -Description of Property.” 15Source: BIOSPECIFICS TECHNOLOGIES CORP, 10-K, March 13, 2012Powered 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 Content Item 1A. RISK FACTORS In addition to the other information included in this Report, the following factors should be considered in evaluating our business and future prospects. Any ofthe following risks, either alone or taken together, could materially and adversely affect our business, financial position or results of operations. If one or moreof these or other risks or uncertainties materialize or if our underlying assumptions prove to be incorrect, our actual results may vary materially from what weprojected. There may be additional risks that we do not presently know or that we currently believe are immaterial which could also impair our business orfinancial position. Risks Related to Our Limited Sources of RevenueOur future revenue is primarily dependent upon option, milestone and contingent royalty payments from Auxilium and contingent earn outpayments from DFB.Our primary sources of revenues are from (i) option, milestone and contingent royalty payments from Auxilium under the Auxilium Agreement, (ii) contingentearn out payments from DFB and (iii) the sale of small 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 granted to Auxilium the rightto develop, manufacture, market and sell worldwide products (other than dermal formulations for topical administration) that contain collagenase for thetreatment of Dupuytren’s contracture, Peyronie’s disease, and frozen shoulder. However, we have no control over Auxilium’s ability to successfullymarket, sell and manufacture candidate products for the treatment of Dupuytren’s contracture, or, in the case of Peyronie’s disease and frozen shoulder, topursue commercialization, and we may receive limited, if any, royalty payments from Auxilium.In addition, there is no guarantee that the XIAFLEX-specific CPT codes for the injection procedure and the finger extension or manipulation procedureadministered after the injection will meet the expectations of physicians or significantly or quickly increase sales of XIAFLEX. Moreover, under the AuxiliumAgreement, royalty payments are subject to set-off for certain expenses we owe Auxilium related to development and patent costs. We received our first royaltypayment from Auxilium in November 2011 because the amount of royalties exceeded accrued set-off expenses for the first time. We anticipate that the amountof royalties due to us will exceed the amount of any set-offs on a going forward basis. We have received in the past, and are entitled to receive in the future,certain milestone payments from Auxilium in respect of its efforts to commercialize candidate products, but we have no control over Auxilium’s ability toachieve the milestones. 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 sales related milestones,of which we have no control.We have also granted to Auxilium the right to initiate early stage development of XIAFLEX for the treatment of cellulite, and Auxilium will be responsible for allcosts associated with such early stage development. Auxilium has the option, upon completion of such early stage development and upon its payment to us ofa one-time fee of $500,000, to add the treatment of cellulite to the list of Auxilium exercised indications, in which case we would receive milestone paymentsand royalties for further cellulite development. Even if Auxilium exercises its option with respect to cellulite, its obligations to develop the product for suchindication are limited to initiating Stage II Development (as defined in the Auxilium Agreement) for such indication within one year of exercising the option as tosuch indication.In addition, we have granted to Auxilium an option to expand its license and development rights to one or more additional indications for injectable collagenasenot currently licensed to Auxilium, including for the treatment of human and canine lipoma. If Auxilium exercises its option with respect to an additionalindication, we are entitled to receive a one-time license fee for the rights to, as well as potential milestone, royalty and other payments with respect to, such newindication. If Auxilium does not exercise its option as to any additional indication, we may offer to any third party such development rights with regard toproducts in the Auxilium Territory, provided that we first offer the same terms to Auxilium, or develop the product ourselves. Auxilium has no obligation toexercise its option with respect to any such additional indication, and its decision to do so is in its complete discretion. Clinical trials can be expensive and theresults are subject to different interpretations, therefore, there is no assurance that after conducting Phase II clinical trials on any additional indication, andincurring the associated expenses, Auxilium will exercise its option or we will receive any revenue from it. Under the Auxilium Agreement, we may only offer toa third party development 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. Even if Auxiliumexercises its option as to any additional indication, its obligations to develop the product for such indication are limited to initiating Stage II Development (asdefined in the Auxilium Agreement) for such additional indication within one year of exercising the option as to such indication. 16Source: BIOSPECIFICS TECHNOLOGIES CORP, 10-K, March 13, 2012Powered 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 Content 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 certain products developed andmanufactured by DFB that contain collagenase for topical administration. However, our right to receive earn out payments from DFB is dependent uponDFB’s decision to pursue the manufacture and commercialization of such products and its ability to achieve certain sales thresholds.We also agreed to provide technical assistance to DFB’s affiliate, DPT Lakewood, for a fixed period of time in consideration for certain payments and we arerequired to maintain certain scientific resources and records in order to provide such assistance and be entitled to receive such payments. These obligationsexpired during March 2011.Our dependence upon revenue from Auxilium and DFB make us subject to the commercialization and other risk factors affecting those twocompanies 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. Given our dependenceupon revenue from Auxilium, Auxilium’s operating success or failure has a significant impact on our potential royalty stream and other payment rights. Assuch, we refer you to the full text of Auxilium’s disclosed risk factors in its securities filings, which were most recently included in the Auxilium 10-K.DFB is not a publicly traded company and therefore we have little information about its business and future prospects. Although we cannot be certain, wepresume that many of the risk factors affecting Auxilium’s business may have some bearing in evaluating DFB’s ability to generate sufficient sales of topicalcollagenase products to entitle us to receive any earn out payments. If we are unable to obtain option, milestone, earn out and royalty payments from Auxilium or DFB or meet our needs for additional fundingfrom other sources, we may be required to limit, scale back or cease our operations. Our business strategy contains elements that we will not be able to implement if we do not receive the anticipated option, milestone, royalty or earn outpayments from Auxilium or DFB, or secure additional funding from other sources. While we anticipate being profitable on an ongoing, annual basis, ourfuture 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 would receive earnout payments until June 2013, when DFB’s obligations to us terminate, absent the introduction of a second generation product as defined in the DFBAgreement; ●Auxilium’s ability to manufacture and commercialize XIAFLEX for which we would receive milestone and royalty payments; ●Pfizer’s ability to develop and commercialize XIAPEX in the Pfizer Territory and Auxilium’s receipt of milestone payments from Pfizer under thePfizer Agreement for which we would receive a percentage of sublicense income and royalty payments (for more information regarding Auxilium’sfinancial risks associated with Pfizer under the Pfizer Agreement, we refer you to the full text of Auxilium’s disclosed risk factors in its securitiesfilings, which were most recently included in the Auxilium 10-K); ●the amount actually owed to Auxilium for certain patent costs; ●the scope, rate of progress, cost and results of our clinical trials on additional indications, including human and canine lipoma, for which Auxiliumcould exercise its option to acquire rights to them, and whether Auxilium exercises the option; ●the rate of progress and results of Auxilium’s development of XIAFLEX for the treatment of cellulite, for which we granted Auxilium the right toinitiate clinical studies and Auxilium is responsible for development costs, and whether Auxilium pursues development beyond the early stages; 17Source: BIOSPECIFICS TECHNOLOGIES CORP, 10-K, March 13, 2012Powered 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 Content ●the terms and timing of any future collaborative, licensing, co-promotion and other arrangements that we may establish; and ●the cost of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights or defending against any otherlitigation. These factors could result in variations from our currently projected operating requirements. If our existing resources are insufficient to satisfy our operatingrequirements, we may need to limit, scale back or cease operations or, in the alternative, borrow money. Given our operations and history, we may not be ableto borrow money on commercially reasonable terms, if at all. If we issue any equity or debt securities, the terms of such issuance may not be acceptable to usand would likely result in substantial dilution of our stockholders’ investment. If we do not receive revenues from Auxilium or DFB, and are unable to secureadditional 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 granted to third partiessignificant 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 certain rights to share inroyalty payments received by us from Auxilium under the Auxilium Agreement. Consequently, we will be required to share a significant portion of thepayments due from Auxilium under the Auxilium Agreement.If we breach our agreements with third parties, our business could be materially harmed.Our agreements with third parties impose on us various obligations, such as those related to intellectual property rights, non-competition, and development ofproducts, as described throughout this Item 1A of this Report. If we fail to comply with such obligations, or a counterparty to our agreements believes that wehave failed to comply with such obligations, we may be sued and the costs of the resulting litigation could materially harm our business.Risks Related to Clinical Trials and Development of Drug CandidatesOur ability to conduct clinical trials may be limited by the Auxilium Agreement.Under the Auxilium Agreement, we have the right to conduct trials, studies or development work for, among other things, indications in canine lipomas andhuman lipomas, and, upon approval by the parties’ joint development committee (“JDC”), additional indications. Auxilium has pre-approved our protocolsfor canine lipomas and human lipomas. However, certain material changes to the protocols must be approved by the JDC, and the JDC may decide not toapprove such changes if the JDC has reasonable safety concerns. In addition, the JDC has the right to stop a study or trial in canine lipomas and humanlipomas if the rate of serious adverse events exceeds certain thresholds. If the JDC fails to approve changes to our protocols for canine lipomas and humanlipomas or if the JDC stops our studies or trials in canine lipomas and human lipomas due to safety concerns, our ability to obtain option, milestone androyalty payments with respect to those indications would be limited. We may only conduct trials, studies or development work for additional indicationsbeyond the pre-approved indications upon submission to and approval by the JDC of our development plan. In the case of indications in keloids, capsularcontraction after breast augmentation, arthrofibrosis following total joint replacement in humans and equine suspensory ligament desmitis, the JDC may rejectour submission only for reasonable safety concerns. The JDC may reject our submission for any other additional indications for safety or commercialconcerns. If the JDC rejects our submissions in any additional indications, our ability to obtain option, milestone and royalty payments with respect to thoseadditional indications would be limited. 18Source: BIOSPECIFICS TECHNOLOGIES CORP, 10-K, March 13, 2012Powered 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 Content We are dependent on Auxilium for access to XIAFLEX, which may limit our ability to conduct clinical trials and to obtain the associated option,milestone and contingent royalty payments under the Auxilium Agreement. Under the Auxilium Agreement, we have agreed to buy at cost plus a mark-up XIAFLEX from Auxilium for conducting our trials, studies and developmentwork. If Auxilium does not supply XIAFLEX to us, our ability to conduct clinical trials using XIAFLEX would be limited because we do not have the right tomake XIAFLEX or to purchase it from third parties. Moreover, our ability to use our own clinical material may be limited both by lack of availability and bycertain potential regulatory restrictions. Without adequate supply of clinical material our ability to obtain additional option, milestone and royalty paymentsunder the Auxilium Agreement would be limited.If clinical trials in humans or veterinarian trials for our potential new indications are delayed, we may not be able to obtain option, milestone orroyalty payments under 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 after they havebegun. Clinical trials can be delayed or may need to be restructured for a variety of reasons, including delays or restructuring related 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; ·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 regulatory obligations in atimely fashion; and ·exposure of clinical trial subjects to unexpected and unacceptable health risks or noncompliance with regulatory requirements, which may result insuspension of the trial. The process of conducting clinical trials and developing product candidates involves a high degree of risk and may take several years, and mayultimately not be successful. Product candidates 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 any unforeseen 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 candidates uneconomical;and ●the proprietary rights of others and their competing products and technologies may prevent product candidates from being effectively commercializedor from obtaining exclusivity. 19Source: BIOSPECIFICS TECHNOLOGIES CORP, 10-K, March 13, 2012Powered 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 Content Success in preclinical and early clinical trials does not ensure that large-scale clinical trials will be successful. Clinical results are frequently susceptible tovarying interpretations that may delay, limit or prevent regulatory approvals. The length of time necessary to complete clinical trials and to submit anapplication for marketing approval for a final decision by a regulatory authority varies significantly and may be difficult to predict. Any changes to the U.S.regulatory approval process could significantly increase the timing or cost of regulatory approval for product candidates making further developmentuneconomical or impossible. In addition, with respect to cellulite and, once Auxilium exercises its option with respect to any additional indications, furtherclinical trials, development, manufacturing, marketing and selling of such product are out of our control. Our interest is limited to receiving option, milestoneand royalty payments, and the option in certain circumstances to manufacture according to particular specifications set by Auxilium. Successful development of drug candidates is inherently difficult and uncertain, and our long-term prospects depend upon our ability and theability of our partners, particularly with respect to XIAFLEX, to continue to successfully commercialize these drug candidates. Successful development of drugs is inherently difficult and uncertain. Our business requires investments in research and development over many years,often for drug candidates that may fail during the research and development process. Even if the Company is able to successfully complete the development ofour drug candidates, our long-term prospects depend upon our ability and the ability of our partners, particularly with respect to XIAFLEX, to continue tosuccessfully commercialize these drug candidates. There is significant uncertainty regarding our ability to successfully develop drug candidates in other indications. These risks include the uncertainty of: ·the nature, timing and estimated costs of the efforts necessary to complete the development of our drug candidate projects; ·the anticipated completion dates for our drug candidate projects; ·the scope, rate of progress and cost of our clinical trials that we are currently running or may commence in the future with respect to our drugcandidate projects; ·the scope, rate of progress of our preclinical studies and other research and development activities related to our drug candidate projects; ·clinical trial results for our drug candidate projects; ·the cost of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights relating to our drug candidateprojects; ·the terms and timing of any strategic alliance, licensing and other arrangements that we have or may establish in the future relating to our drugcandidate projects; ·the cost and timing of regulatory approvals with respect to our drug candidate projects; and ·the cost of establishing clinical supplies for our drug candidate projects.Risks Related to Our Agreements with Auxilium and DFBOur ability to conduct clinical trials and develop products for injectable administration of collagenase is limited by the Auxilium Agreement.Under the Auxilium Agreement, we have licensed or granted options to certain of our rights to conduct clinical trials and develop products for injectableadministration of collagenase. We agreed, for example, to certain non-competition provisions, which may limit our clinical development activities.Our ability to conduct clinical trials and develop products for topical administration of collagenase is limited by the agreement we have signedwith DFB.Under the DFB Agreement, we have sold, licensed, or granted options to certain of our rights to conduct clinical trials and develop products for topicaladministration of collagenase. Under the terms of the DFB Agreement, we have agreed to certain non-competition provisions, which may limit our clinicaldevelopment activities. 20Source: BIOSPECIFICS TECHNOLOGIES CORP, 10-K, March 13, 2012Powered 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 Content Risks Related to Regulatory RequirementsWe are subject to numerous complex regulatory requirements and failure to comply with these regulations, or the cost of compliance with theseregulations, may harm our business.Conducting clinical trials for human drugs and, in certain circumstances, veterinarian trials for animal drugs, and the testing, development andmanufacturing and distribution of product candidates are subject to regulation by numerous governmental authorities in the U.S. and other jurisdictions, if wedesire to export the resulting products to such other jurisdictions. 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 applicableregulatory requirements can result in suspension or termination of any ongoing clinical trials of a product candidate or refusal of the government to approve aproduct candidate for commercialization, criminal prosecution and fines, recall or seizure of products, total or partial suspension of production, prohibitionsor limitations on the commercial sale of products or refusal to allow the entering into of federal and state supply contracts. The FDA and comparablegovernmental authorities have the authority to suspend or terminate any ongoing clinical trials of a product candidate or withdraw product approvals that havebeen previously granted. Even after a product candidate has been approved, the FDA and comparable governmental authorities subject such product tocontinuing review and regulatory requirements including, for example, requiring the conducting and reporting of the results of certain clinical studies or trialsand commitments to voluntarily conduct additional clinical trials. In addition, regulatory approval could impose limitations on the indicated or intended usesfor which product candidates may be marketed. With respect to its approval of XIAFLEX for the treatment of adult Dupuytren’s contracture patients with apalpable cord, for example, the FDA has required a REMS program consisting of a communication plan and a medication guide. Currently, there is asubstantial amount of congressional and administrative review of the FDA and the regulatory approval process for drug candidates in the U.S. As a result,there may be significant changes made to the 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 andadversely affect our operations. Additionally, failure to comply with, or changes to applicable regulatory requirements may result in a variety of consequences, including the following: ●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; and ●injunctions 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 and regulations and wehave incurred and will continue to incur costs relating to compliance with applicable laws and regulations. 21Source: BIOSPECIFICS TECHNOLOGIES CORP, 10-K, March 13, 2012Powered 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 Content We are a small company and we rely heavily on third parties and outside consultants to conduct many important functions. As a biopharmaceutical company,we are subject to a large body of legal and regulatory requirements. In addition, as a publicly traded company we are subject to significant regulations,including the Sarbanes-Oxley Act of 2002 (“SOX”), some of which have only recently been revised or adopted. We cannot assure you that we are or will be incompliance with all potentially applicable laws and regulations. Failure to comply with all potentially applicable laws and regulations could lead to theimposition of fines, cause the value of our common stock to decline, impede our ability to raise capital or list our securities on certain securities exchanges.New rules could make it more difficult or more costly for us to obtain certain types of insurance, including director and officer liability insurance, and wemay be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. The impact of theseevents could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, our board committees and as executiveofficers. We cannot predict or estimate the amount of the additional costs we may incur or the timing of such costs to comply with these rules and regulations. We may fail to maintain effective internal controls over external financial reporting or such controls may fail or be circumvented. SOX requires us to report annually on our internal controls over financial reporting, and our business and financial results could be adversely effected if we,or our independent registered public accounting firm, determine that these controls are not effective. In addition, any failure or circumvention of our internalcontrols and procedures or failure to comply with regulations concerning controls and procedures could have a material effect on our business, results ofoperation and financial condition. The impact of these events could also make it more difficult for us to attract and retain qualified persons to serve on ourboard of directors, our board committees and as executive officers.Risks Related to Growth and Employees Adverse events or lack of efficacy in clinical trials may force us and/or our partners upon whom we are wholly dependent to stop development ofour product candidates or prevent regulatory approval of our product candidates or significant safety issues could arise after regulatoryapproval 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 serious injury to theinjected extremity” as a reported serious adverse reaction to XIAFLEX and states that the most frequently reported adverse drug reactions in XIAFLEX clinicaltrials included swelling of the injected hand, contusion, injection site reaction, injection site hemorrhage, and pain in the treated extremity. The prescribinginformation notes that adverse reaction rates observed in clinical trials of a drug may not reflect those observed in practice because such trials “are conductedunder widely varying conditions.”Auxilium reported in the Auxilium 10-K that the most common adverse events in the Peyronie’s phase IIb clinical trial were “injection site bruising, injectionsite 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 product candidates,which could materially harm our business. In addition, any adverse events or lack of efficacy may force Auxilium to stop development of the products wehave licensed to it or prevent regulatory approval of such products, which could materially impair all or a material part of the future revenue we hope to receivefrom Auxilium. Even if our product candidates receive regulatory approval, new safety issues may be reported and we or our partners may be required toamend the conditions of use for a product.We and our licensees face competition in our product development and marketing efforts from pharmaceutical and biotechnology companies,universities and other not-for-profit institutions.We and our licensees face competition in our product development and marketing efforts from entities that have substantially greater research and productdevelopment capabilities and greater financial, scientific, marketing and human resources. These entities include pharmaceutical and biotechnologycompanies, as well as universities and not-for-profit institutions. Our and our licensees’ competitors may succeed in developing products or intellectualproperty earlier than we or our licensees do, entering into successful collaborations before us or our licensees, obtaining approvals from the FDA or otherregulatory agencies for such products before us or our licensees, or developing or marketing products that are more effective than those we or our licenseescould develop or market. The success of any one competitor in these or other respects will have a material adverse effect on our business, our ability to receiveoption payments from Auxilium or our ability to generate revenues from third party arrangements with respect to additional indications for which Auxiliumdoes not exercise its option. 22Source: BIOSPECIFICS TECHNOLOGIES CORP, 10-K, March 13, 2012Powered 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 Content Because of the specialized nature of our business, the termination of relationships with key management, consulting and scientific personnel or theinability to recruit and retain additional personnel could prevent us from developing our technologies, conducting clinical trials and/or obtainingfinancing. The competition for qualified personnel in the biotechnology field is intense, and we rely heavily on our ability to attract and contract with qualifiedindependent scientific and medical investigators, and technical and managerial personnel. We face intense competition for qualified individuals fromnumerous pharmaceutical, biopharmaceutical and biotechnology companies, as well as academic and other research institutions. To the extent we are unable toattract and retain any of these individuals on favorable terms our business may be adversely affected.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, under the AuxiliumAgreement, we are obligated to indemnify Auxilium and its affiliates for any harm or losses they suffer relating to any personal injury and other productliability resulting from our development, manufacture or commercialization of any injectable collagenase product. In addition, the clinical testing and, ifapproved, commercialization of our product candidates involves significant exposure to product liability claims. We have clinical trial and product liabilityinsurance in the aggregate amount of $5 million dollars that we believe is adequate in both scope and amount and has been placed with what we believe arereputable insurers. We may not be able to maintain our clinical trial and product liability insurance at an acceptable cost, if at all, and this insurance may notprovide adequate coverage against potential claims or losses. If losses from product liability claims exceed our insurance coverage, we may incur substantialliabilities that exceed our financial resources, and our business and results of operations may be harmed. Whether or not we are ultimately successful inproduct liability litigation, such litigation could consume substantial amounts of our financial and managerial resources, and might result in adversepublicity, all of which could impair our business. If we are unable to negotiate a new lease for our corporate headquarters or relocate, our existing operations and our operating results could beadversely affected. As described in this Report under “Item 2 - Description of Property”, we are holding over in our current premises on a month-to-month basis. If we are unableto negotiate a new lease for our current premises or relocate to other premises, our existing operations and operating results could be adversely affected.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 license rights that are criticalto 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 are necessary for us tooperate our business. If any of the parties terminates its agreement, whether by its terms or due to our breach, our right to use the party’s intellectual propertymay 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 patents may be impaired bythe intellectual property of third parties. Auxilium’s, DFB’s and our commercial success in developing and manufacturing collagenase products based on our patents is dependent on these productsnot infringing the patents or proprietary rights of third parties. While we currently believe that we, our licensees, licensors and collaborators have freedom tooperate in the collagenase market, others may challenge that position in the future. There has been, and we believe that there will continue to be, significantlitigation in the pharmaceutical industry regarding patent and other intellectual property rights. 23Source: BIOSPECIFICS TECHNOLOGIES CORP, 10-K, March 13, 2012Powered 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 Content Third parties could bring legal actions against us, our licensees, licensors or collaborators claiming damages and seeking to enjoin clinical testing,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 toothers, or those we may in-license in the future, are invalid or unenforceable. In such a case, even if the validity or enforceability of those patents were upheld,a court might hold that the third party’s actions do not infringe the patent we in-license or license to others, which could, in effect, limit the scope of our patentrights and those of our licensees, licensors or collaborators. Our agreements with Auxilium and DFB require us to indemnify them against any claims forinfringement based on the use of our technology. If we become involved in any litigation, it could consume a substantial portion of our resources, regardless ofthe outcome of the litigation. If Auxilium or DFB becomes involved in such litigation, it could also consume a substantial portion of their resources, regardlessof the outcome of the litigation, 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 license to permitourselves, our licensees, licensors or our collaborators to conduct clinical trials, manufacture or market the affected product, in which case we may berequired to pay substantial royalties or grant cross-licenses to our patents. However, there can be no assurance that any such license will be available onacceptable terms or at all. Ultimately, we, our licensees, licensors or collaborators could be prevented from commercializing a product, or forced to cease someaspect of their or our business, as a result of patent infringement claims, which could harm our business or right to receive option, milestone and contingentroyalty payments.Risks Related to our Common StockFuture 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 may occur, the marketprice of our common stock could decline. In addition, we may need to raise additional capital in the future to fund our operations. If we raise additional fundsby issuing equity securities, our stock price may decline and our existing stockholders may experience dilution of their interests. Because we historically havenot declared dividends, stockholders must rely on an increase in the stock price 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 The Nasdaq Global Market (“Nasdaq”) and is thinly traded. Market prices for securities 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: ●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; and ●general economic, industry and market conditions. 24Source: BIOSPECIFICS TECHNOLOGIES CORP, 10-K, March 13, 2012Powered 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 Content 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 if unsuccessful,could be costly to defend and a distraction to management. In addition, purchases of our common stock pursuant to our stock repurchase program may,depending on the timing and volume of such repurchases, result in our stock price being higher than it would be in the absence of such repurchases. Ifrepurchases pursuant to the program are discontinued, our stock price may fall.We may become subject to stockholder activism efforts that could cause material disruption to our business.Certain influential institutional investors, hedge funds and other stockholders have taken steps to involve themselves in the governance and strategic directionof certain companies due to governance or strategic related disagreements between such companies and such stockholders. If we become subject to suchstockholder activism efforts, it could result in substantial costs and a diversion of management’s attention and resources, which could harm our business andadversely affect the market price of our common stock.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 their shares. We cannotassure investors of a positive return on their investment when they sell their shares nor can we assure that investors will not lose the entire amount of theirinvestment.Our outstanding options to purchase shares of common stock could have a possible dilutive effect. As of December 31, 2011, options to purchase 1,261,425 shares of common stock were outstanding. In addition, as of December 31, 2011 a total of269,098 options were available for grant under our stock option plans. The issuance of common stock upon the exercise of these options could adverselyaffect the market price of the common stock or result in substantial dilution to our existing stockholders.If securities analysts do not publish research reports about our business or if they downgrade us or our sector, the price of our common stockcould decline.The trading market for our common stock will depend in part on research reports that industry or financial analysts publish about us or our business. Ifanalysts downgrade us or any of our licensees, or other research analysts downgrade the industry in which we operate or the stock of any of our competitors orlicensees, the price of our common stock will probably decline.Provisions in our certificate of incorporation and bylaws may prevent or frustrate a change in control. Provisions of our certificate of incorporation and bylaws may discourage, delay or prevent a merger, acquisition or other change in control that stockholdersmay consider favorable, including transactions in which you might otherwise receive 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, commonly referred 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; and ●impose advance notice requirements on stockholders concerning the election of directors and other proposals to be presented at stockholder meetings. 25Source: BIOSPECIFICS TECHNOLOGIES CORP, 10-K, March 13, 2012Powered 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 ContentIn addition, during May 2002, the Board implemented a rights agreement (commonly known as a “Poison Pill”), which effectively discourages or preventsacquisitions of more than 15% of our common stock in transactions (mergers, consolidations, tender offer, etc.) that have not been approved by our Board.The Board amended the Poison Pill in February 2011 to increase the threshold from 15% to 18% and extended the expiration date of the Poison Pill for anadditional two years, to May 31, 2014. These provisions could make it more difficult for common stockholders to replace members of the Board. Becauseour Board is responsible for appointing the members of our management team, these provisions could in turn affect any attempt to replace the currentmanagement team.If our principal stockholders, executive officers and directors choose to act together, they may be able to control our operations, acting in their ownbest interests and not necessarily those of other stockholders. As of March 12, 2012 our executive officers, directors and their affiliates, in the aggregate, beneficially owned shares representing approximately 29.6% ofour common stock. Beneficial ownership includes shares over which an individual or entity has investment or voting power and includes shares that could beissued upon the exercise of options within 60 days. As a result, if these stockholders were to choose to act together, they may be able to control all matterssubmitted to our stockholders for approval, as well as our management and affairs. For example, these individuals, if they chose to act together, could controlthe election of directors and approval of any merger, consolidation or sale of all or substantially all of our assets. This concentration of ownership could havethe effect of delaying, deferring or preventing a change in control or impeding a merger or consolidation, takeover or other business combination that could befavorable to other stockholders. This significant concentration of share ownership may adversely affect the trading price for our common stock because investors often perceive disadvantagesin owning stock in companies with controlling stockholders.Item IB. UNRESOLVED STAFF COMMENTS None. Item 2. DESCRIPTION OF PROPERTY. Our corporate headquarters are currently located at 35 Wilbur St., Lynbrook, NY 11563. As previously reported, we are currently holding over in ourpremises on a month-to-month basis.Item 3. LEGAL PROCEEDINGS. None.Item 4. (REMOVED AND RESERVED). PART II Item 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS. Market Information Our common stock currently trades under the symbol BSTC on Nasdaq. The table below sets forth the high and low closing sale prices for our common stock for each of the quarterly periods in 2011 and 2010 as reported by and asquoted by Nasdaq, as applicable: 2011 HIGH LOW Fourth Quarter $19.08 $13.36 Third Quarter $25.04 $14.80 Second Quarter $25.52 $22.40 First Quarter $26.88 $23.00 2010 HIGH LOW Fourth Quarter $27.86 $20.71 Third Quarter $27.36 $18.80 Second Quarter $31.72 $19.02 First Quarter $29.98 $26.53 26Source: BIOSPECIFICS TECHNOLOGIES CORP, 10-K, March 13, 2012Powered 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 Content These quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions.Holders of RecordAs of March 1, 2012, there were approximately 75 holders of record of our common stock. Because many of such shares are held by brokers and otherinstitutions on behalf of stockholders, we are unable to estimate the total number of stockholders represented by these record holders.Dividends It has been our policy to retain potential earnings to finance the growth and development of our business and not pay dividends, and we have no current plansto pay dividends. Any payment of cash dividends in the future will depend upon our financial condition, capital requirements and earnings as well as suchother factors as our board of directors may deem relevant. Securities Authorized for Issuance Under Equity Compensation Plans The following table provides information as of December 31, 2011 with respect to the shares of our common stock that may be issued under our existingequity compensation plans: Number of securities tobe issued upon exerciseof outstanding options,warrants and rights Weighted-averageexercise price ofoutstanding options,warrants and rights Number of securitiesremaining availablefor future issuanceunder equitycompensation plans(excluding securitiesreflected in column (a)) (a) (b) (c) Equity compensation plans approved by security holders(1) 1,261,425 $8.27 269,098 Equity compensation plans not approved by security holders - - - Total 1,261,425 $8.27 269,098 (1) Please see Note 9, “Stockholders’ Equity,” of the notes to the consolidated financial statements for a description of the material features of each of ourplans. Recent Sales of Unregistered Securities For the year ended December 31, 2011, we did not issue any unregistered shares of securities. 27Source: BIOSPECIFICS TECHNOLOGIES CORP, 10-K, March 13, 2012Powered 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 Content Issuer Purchases of Equity Securities (1)Month Total Number ofShares PurchasedDuring Quarter (2) Average Price Paid Per Share (3) Total Number ofShares Purchasedas Part of PubliclyAnnounced Plan Maximum DollarValue of Shares that may yet bePurchasedunder the Plan (4) January 1, 2011 – March 31, 2011 - - 20,608 $1,541,999 April 1, 2011 – June 30, 2011 8,777 $23.51 29,385 $1,335,651 $2,000,000(5)July 1, 2011 – September 30, 2011 8,981 $17.18 38,366 $1,845,900 October 1, 2011 to December 31, 2011 24,971 $15.18 63,337 $1,466,796 Total 42,729 (1)On June 4, 2010, we announced that our board of directors authorized a stock repurchase program under Rule 10b-18 of the Exchange Act of up to$2.0 million of our outstanding common stock over a period of 12 months. On June 20, 2011, we announced that our Board of Directors hadreauthorized this stock repurchase program. (2)The purchases were made in open-market transactions. (3)Includes commissions paid, if any, related to the stock repurchase transactions. (4)Represents the difference between the reauthorized $2.0 million of stock repurchases by our board of directors on June 20, 2011 less the value of thestock repurchased for the indicated period. (5)On June 20, 2011, our board of directors reauthorized the repurchase of up to $2.0 million of our common stock under the stock repurchaseprogram.Performance GraphThe graph below compares the cumulative total stockholder return on our common stock with the cumulative total stockholder return of (i) the NASDAQBiotechnology Index, and (ii) the NASDAQ Composite Index, assuming an investment of $100 on December 31, 2006, in each of our common stock; thestocks 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 the NASDAQComposite Index 12/31/2006 12/31/2007 12/31/2008 12/31/2009 12/31/2010 12/31/2011 Biospecifics Technologies Corp $100.00 $263.16 $563.16 $772.37 $673.68 $437.37 Nasdaq Biotechnology Index $100.00 $104.58 $91.38 $105.63 $121.52 $135.86 Nasdaq Composite Index $100.00 $109.81 $65.29 $93.95 $109.84 $107.86 28Source: BIOSPECIFICS TECHNOLOGIES CORP, 10-K, March 13, 2012Powered 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 Content *Total return assumes $100 invested on December 31, 2006 in our common stock, the NASDAQ Composite Index, and the NASDAQ Biotechnology Indexand reinvestment of dividends through fiscal year ended December 31, 2011.Item 6. SELECTED FINANCIAL DATA The following selected consolidated financial data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition andResults of Operations” and our consolidated financial statements and the related notes appearing elsewhere in this Report. The consolidated statements ofoperations data for the years ended December 31, 2011, 2010 and 2009 and the consolidated balance sheet data as of December 31, 2011 and 2010 have beenderived from our audited consolidated financial statements and related notes, which are included elsewhere in this Report. The consolidated statement ofoperations data for the years ended December 31, 2008 and 2007 and the consolidated balance sheet data as of December 31, 2009, 2008 and 2007 have beenderived from audited financial statements which do not appear in this Report. The historical results presented are not necessarily indicative of results to beexpected in any future period. Years Ended December 31, Consolidated Statement of Operations Data 2011 2010 2009 2008 2007 Net revenues $11,395,726 $5,661,348 $3,155,757 $8,411,780 $1,514,334 Operating expenses: Research and development 972,078 1,223,931 488,646 439,919 2,489,122 General and administrative 5,231,881 6,470,449 4,832,019 4,191,052 3,516,716 Total operating expenses 6,203,959 7,694,380 5,320,665 4,630,971 6,005,838 Operating income (loss) 5,191,767 (2,033,032) (2,164,908) 3,780,809 (4,491,504) Other income (expense): Interest income 55,780 86,310 55,693 107,552 126,821 Interest expense - - (39) 46,529 (781)Other 15,823 13,130 (8,863) 108,730 (125,000)Qualifying Therapeutic Credit - 426,403 - - - 71,603 525,843 46,791 262,811 1,040 Income (loss) before income tax 5,263,370 (1,507,189) (2,118,117) 4,043,620 (4,490,464)Income tax benefit (expense) 1,338,256 (1,351) 161,574 (299,212) (53,865)Net income (loss) $6,601,626 $(1,508,540) $(1,956,543) $3,744,408 $(4,544,329) Basic net income (loss) per share $1.04 $(0.24) $(0.32) $0.64 $(0.86) Diluted net income (loss) per share $0.95 $(0.24) $(0.32) $0.55 $(0.86) Shares used in computation of basic net income (loss) pershare 6,340,648 6,261,214 6,065,939 5,854,836 5,291,506 Shares used in computation of diluted net income (loss)per share 6,952,386 6,261,214 6,065,939 6,836,911 5,291,506 Years Ended December 31, Consolidated Balance Sheet Data: 2011 2010 2009 2008 2007 Cash and cash equivalents $3,196,831 $2,470,852 $3,950,389 $3,494,150 $68,564 Short-term investments 5,000,000 5,360,970 4,548,541 900,000 975,000 Total assets 16,265,073 11,518,701 11,748,478 12,831,361 1,261,211 Total stockholders’ equity (deficit) 14,872,314 6,700,723 6,092,107 6,178,539 (6,735,658) 29Source: BIOSPECIFICS TECHNOLOGIES CORP, 10-K, March 13, 2012Powered 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 Content Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financialstatements and the related notes appearing at the end of this Report. Some of the information contained in this discussion and analysis or set forthelsewhere in this Report, including information with respect to our plans and strategy for our business and related financing, includes forward-lookingstatements that involve risks and uncertainties. You should review the “Risk Factors” section of this Report for a discussion of important factors thatcould cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the followingdiscussion and analysis.OverviewWe are a biopharmaceutical company involved in the development of an injectable collagenase for multiple indications. We have a development and licenseagreement with Auxilium for injectable collagenase (which Auxilium has named XIAFLEX® (collagenase clostridium histolyticum)) for clinical indications inDupuytren’s contracture, Peyronie’s disease and frozen shoulder (adhesive capsulitis). Auxilium has an option to acquire additional indications that we maypursue, including cellulite, for which we have granted Auxilium the right to initiate early development studies at its cost, and human and canine lipoma.Auxilium is currently selling XIAFLEX in the U.S. for the treatment of Dupuytren’s contracture. Auxilium has an agreement with Pfizer pursuant to whichPfizer has the right to market XIAFLEX for Dupuytren’s contracture and Peyronie’s disease in Europe and certain Eurasian countries, and will do so underthe registered trademark XIAPEX® (collagenase clostridium histolyticum). Pfizer is currently selling XIAPEX in nine countries in Europe, including theUnited Kingdom, Germany and Spain. In addition, Auxilium has an agreement with Asahi pursuant to which Asahi has the right to commercialize XIAFLEXfor the treatment of Duputyren’s contracture and Peyronie’s disease in Japan. Auxilium also has an agreement with Actelion pursuant to which Actelion has theright to commercialize XIAFLEX for the treatment of Duputyren’s contracture and Peyronie’s disease in Canada, Australia, Brazil and MexicoOperational HighlightsAs previously reported, on August 31, 2011, we and Auxilium announced the dismissal of all pending litigation between us in accordance with a settlementagreement. Pursuant to the settlement agreement, among other things, we became a co-owner with Auxilium of U.S. Patent No. 7,811,560 and anycontinuations and divisionals of that patent. Also on August 31, 2011, we amended and restated our development and license agreement with Auxilium toclarify and change certain of our and Auxilium’s rights and responsibilities. We clarified, for example, that we retain the right to conduct trials, studies ordevelopment work for: indications in canine lipomas and human lipomas; additional indications upon approval by the parties’ joint development committee;tissue disassociation research and development; and in vitro research and development. In addition, on August 31, 2011, we announced with Auxilium plansto move XIAFLEX forward in the clinic for cellulite and human and canine lipoma as well as to collaborate on the initiation of further studies for XIAFLEXfor additional indications. A phase Ib trial of XIAFLEX for the treatment of cellulite is currently underway by Auxilium. Auxilium expects top line studyresults in the fourth quarter of 2012. In addition, as announced by Auxilium on December 1, 2011, Auxilium currently has underway a phase IIa, open-label,controlled dose-ranging study to assess the safety and efficacy of XIAFLEX for the treatment of Frozen Shoulder syndrome in comparison to an exercise-onlycontrol group. Auxilium expects topline study results in the first half of 2013. Auxilium continues to market XIAFLEX in the U.S. for the treatment of adult Dupuytren’s contracture patients with a palpable cord. On November 2, 2011,it announced that the AMA has issued two new CPT Codes that will be used with XIAFLEX for the treatment of adult Dupuytren’s contracture patients with apalpable cord beginning January 1, 2012. CPT codes are the most widely accepted form of medical nomenclature used to report medical procedures andservices under public and private health insurance programs in the U.S. The new CPT codes are 20527 for the XIAFLEX injection procedure and 26341 forthe finger extension or manipulation procedure administered 24 hours after the XIAFLEX injection, in accordance with the label. According to the November 2,2011 press release, “The CPT codes will apply to the procedures only, and leave in place the separate J code for reimbursement” of XIAFLEX. 30Source: BIOSPECIFICS TECHNOLOGIES CORP, 10-K, March 13, 2012Powered 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 Content In December 2011, we announced the appointment of George Gould, Esq., to our board of directors. Mr. Gould brings considerable expertise inpharmaceutical and biotechnology intellectual property law and has served as an expert witness in patent cases. Auxilium has also recently announced leadership changes including a new Chief Executive Officer, Adrian Adams in December 2011, a new Executive VicePresident, Chief Administrative Officer and General Counsel, Andrew I. Koven and a new Senior Vice President, Sales, Mark A. Glickman, in February2012. In the press release announcing Mr. Adams’ appointment as CEO, the Chairman of Auxilium’s board of directors, Rolf Classon, stated "We believe that[Adrian’s] visionary leadership and operational expertise will lead Auxilium to profitability and success as we seek to maximize the value of XIAFLEX . . .while delivering on our current pipeline.” In a February 23, 2012 press release, Auxilium announced that it had entered into a Collaboration Agreement with Actelion pursuant to which Actelion has theright to develop and commercialize XIAFLEX for the treatment in humans of Dupuytren’s contracture and Peyronie’s disease in Canada, Australia, Brazil andMexico. According to the release, XIAFLEX for the treatment of Dupuytren’s contracture has been accepted for review by Health Canada and regulatory actionis expected in the second half of 2012. Additionally, Actelion expects to file for approval of XIAFLEX for the treatment of Dupuytren’s contracture inAustralia, Brazil and Mexico over the next 12 months. Under the terms of the agreement with Actelion, Auxilium is to receive a $10 million upfront paymentfrom Actelion, as well as up to $16 million in potential regulatory, pricing, and reimbursement milestone payments and $42.5 million in potential salesmilestone payments. Under the terms of our development and license agreement with Auxilium, we will receive a certain percentage from Auxilium inconnection with the upfront payment by Actelion, and a certain percentage of any additional milestones received by Auxilium. We will also receive fromAuxilium royalties from net sales and payments on costs of goods sold in Canada, Australia, Brazil and Mexico, which will be a specified percentage of whatAuxilium is entitled to receive from Actelion without regard to any offset that Actelion may have with respect to Auxilium. OutlookIn connection with the DFB Agreement, pursuant to which we sold our topical collagenase business to DFB, until March 2011 we received payments forcertain technical assistance and certain transition services that we provided to DFB. Pursuant to the DFB Agreement, we continue to receive earn out paymentsbased on the sales of certain products. Our right to receive earn out payments with respect to the marketed topical product sold to DFB expires in June 2013,but earn out payments for second generation collagenase products, if any, continue indefinitely.In 2011, we received $46,667 of technical assistance related payments, and as of December 31, 2011, we have received a total of $1.4 million in consultingfees. In addition, we have recognized $2.3 million in earn out payments from DFB in connection with the net sales of topical collagenase in 2011. Under the Auxilium Agreement, we granted to Auxilium exclusive worldwide rights to develop, market and sell certain products containing our injectablecollagenase. Currently its licensed rights cover the indications of Dupuytren’s contracture, Peyronie’s disease and frozen shoulder. We also granted Auxiliumthe right to initiate early stage development of cellulite, and Auxilium is responsible for all costs associated with that development. Auxilium may furtherexpand the Auxilium Agreement, at its exclusive option, to develop and license our injectable collagenase for use in additional indications. Auxilium haspartnered with Pfizer pursuant to the Pfizer Agreement, and Pfizer is responsible for marketing XIAPEX for the treatment of both Dupuytren’s contracture andPeyronie's disease in the Pfizer Territory and is primarily responsible for regulatory activities for XIAPEX in the Pfizer Territory. Auxilium has granted toAsahi the exclusive right to develop and commercialize XIAFLEX for the treatment of Dupuytren’s contracture and Peyronie’s disease in Japan. Auxilium hasgranted to Actelion the exclusive right to develop and commercialize XIAFLEX for the treatment of Dupuytren’s contracture and Peyronie’s disease in Canada,Australia, Brazil and Mexico. Through December 31, 2011, Auxilium has paid us up-front licensing and sublicensing fees and milestone payments under the Auxilium Agreement of $22.2million, including amounts in connection with the Pfizer Agreement and Auxilium’s agreement with Asahi. In addition to the payments already received by usand to be received by us with respect to the Dupuytren’s contracture indication, Auxilium will be obligated to make contingent milestone payments, withrespect to each of the Peyronie’s disease and frozen shoulder indications, upon the acceptance of the regulatory filing and receipt by Auxilium, its affiliate orsublicensee of regulatory approval. Auxilium will also be obligated to make sublicense fee payments to us if it out-licenses to third parties the right to marketand sell XIAFLEX for the treatment of frozen shoulder. Additional sublicense fees and milestone obligations will be due if Auxilium exercises its option todevelop, license and sublicense XIAFLEX for additional indications. 31Source: BIOSPECIFICS TECHNOLOGIES CORP, 10-K, March 13, 2012Powered 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 Content In addition to the milestone payments from Auxilium, the Company is entitled to 8.5% of all sublicense income that Auxilium receives from Pfizer under thePfizer Agreement, which payments are dependent on the achievement by Pfizer of certain regulatory and sales related milestones. Under the Pfizer Agreement,Auxilium received a $30 million milestone payment from Pfizer following the first sale of XIAPEX in the United Kingdom, which was the first major marketcountry in which Pfizer sold XIAPEX, and we received from Auxilium $2.5 million in connection with that first sale. For each additional major marketcountry in which XIAPEX is launched, Auxilium is eligible to receive an additional $7.5 million. In connection with the launch of XIAPEX in each ofGermany and Spain, we received from Auxilium 8.5% of each of the $7.5 million milestone payments from Pfizer to Auxilium, or $637,500. We will receive8.5% of the $350 million, or $29.8 million, in potential additional milestone payments that may be made by Pfizer to Auxilium under the Pfizer Agreement.As of January 25, 2012, we have received $11.4 million in milestones related to the Pfizer Agreement. In 2011, we received $750,000 of the $15 millionupfront payment Auxilium received from Asahi. Auxilium has reported that it is to receive a $10 million upfront payment from Actelion in connection withtheir recently announced agreement, and we will receive a specified percentage from Auxilium in connection with such payment. To the extent Auxilium entersinto an agreement or agreements related to other territories, the percentage of sublicense income that Auxilium would pay us will depend on the stage ofdevelopment and approval of XIAFLEX for the particular indication at the time such other agreement or agreements are executed.Auxilium must pay us on a country-by-country and product-by-product basis a low double digit royalty as a percentage of net sales for products covered bythe Auxilium Agreement and sold in the United States, the Pfizer Territory and Japan. In the case of products covered by the Auxilium Agreement and sold inthe Rest of the World, Auxilium must pay us on a country-by-country and product-by-product basis a specified percentage of the royalties it is entitled toreceive from a Rest of the World Partner, which in the case of Canada, Australia, Brazil and Mexico is Actelion. The royalty rate is independent of salesvolume and clinical indication in the United States, the Pfizer Territory and Japan, but is subject to set-off in those countries and the Rest of the World forcertain expenses we owe to Auxilium relating to certain development and patent costs. In addition, the royalty percentage may be reduced if (i) market share of acompeting product exceeds a specified threshold; or (ii) Auxilium is required to obtain a license from a third party in order to practice our patents withoutinfringing such third party’s patent rights, although Auxilium has confirmed to us that no license from a third party is required. In addition, if Auxilium out-licenses to a third party, then we will receive a specified percentage of certain payments made to Auxilium in consideration of such out-licenses.These royalty obligations extend, on a country-by-country and product-by-product basis, for the longer of the patent life (including pending patents), theexpiration of any regulatory exclusivity period based on orphan drug designation or foreign equivalent thereof or June 3, 2016. Auxilium may terminate theAuxilium Agreement upon 90 days prior written notice. If Auxilium terminates the Auxilium Agreement other than because of an uncured, material breach byus, all rights revert to us. Pursuant to our August 31, 2011 settlement agreement with Auxilium, we are now co-owners of U.S. Patent No. 7,811,560 and anycontinuations and divisionals thereof. Auxilium expects this patent will expire in July 2028.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 for products sold in theUnited States, the Pfizer Territory or Japan. For products sold in the Rest of the World, Auxilium must pay to us a specified percentage of the mark-up of thecost of goods sold it is entitled to receive from a Rest of the World Partner, including Actelion, without regard to any set-offs that the Rest of the World Partnermay have with respect to Auxilium.Auxilium is generally responsible, at its own cost and expense, for developing the formulation and finished dosage form of products and arranging for theclinical supply of products. Auxilium is generally responsible for all clinical development and regulatory costs for Peyronie’s disease, Dupuytren’scontracture, frozen shoulder and all additional indications for which it exercises its options. In addition, Auxilium is responsible for all costs associated withits early stage development for cellulite. 32Source: BIOSPECIFICS TECHNOLOGIES CORP, 10-K, March 13, 2012Powered 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 Content A redacted copy of the Auxilium Agreement was filed on Form 8-K with the SEC on September 1, 2011. 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 Auxilium Agreement.Significant RisksIn recent history we have had operating losses and may not achieve sustained profitability. As of December 31, 2011, we had an accumulated deficit fromcontinuing operations of approximately $3.3 million.We are dependent to a significant extent on third parties, and our principal licensee, Auxilium, may not be able to continue successfully commercializingXIAFLEX for Dupuytren’s contracture, successfully develop XIAFLEX for additional indications, obtain required regulatory approvals, manufactureXIAFLEX at an acceptable cost, in a timely manner and with appropriate quality, or successfully market products or maintain desired margins for productssold, and as a result we may not achieve sustained profitable operations.Critical Accounting Policies, Estimates and AssumptionsThe preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimatesand assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidatedfinancial statements and the reported amounts of revenues and expenses during the reporting period. These estimates are based on historical experience and onvarious other assumptions that we believe are reasonable under the circumstances. Actual results could differ from those estimates. While our significantaccounting policies are described in more detail in the notes to our consolidated financial statements, we believe the following accounting policies to be criticalto the judgments and estimates used in the preparation of our consolidated financial statements.Revenue Recognition. We recognize revenues from product sales when there is persuasive evidence that an arrangement exists, title passes, the price is fixedand determinable, and payment is reasonably assured. We currently recognize revenues resulting from the licensing, sublicensing and use of our technologyand from services we sometimes perform in connection with the licensed technology.We enter into product development licenses, and collaboration agreements that may contain multiple elements, such as upfront license and sublicense fees,milestones related to the achievement of particular stages in product development and royalties. As a result, significant contract interpretation is sometimesrequired to determine the appropriate accounting, including whether the deliverables specified in a multiple-element arrangement should be treated as separateunits of accounting for revenue recognition purposes, and if so, how the aggregate contract value should be allocated among the deliverable elements and whento recognize revenue for each element.We recognize revenue for delivered elements only when the fair values of undelivered elements are known, when the associated earnings process is completeand, to the extent the milestone amount relates to our performance obligation, when our licensee confirms that we have met the requirements under the terms ofthe agreement, and when payment is reasonably assured. Changes in the allocation of the contract value between various deliverable elements might impact thetiming of revenue recognition, but in any event, would not change the total revenue recognized on the contract. For example, nonrefundable upfront productlicense fees, for product candidates for which we are providing continuing services related to product development, are deferred and recognized as revenue overthe development period.Milestones, in the form of additional license fees, typically represent nonrefundable payments to be received in conjunction with the achievement of a specificevent identified in a contract, such as completion of specified clinical development activities and/or regulatory submissions and/or approvals. We believe that amilestone represents the culmination of a distinct earnings process when it is not associated with ongoing research, development or other performance on ourpart. We recognize such milestones as revenue when they become due and payment is reasonably assured. When a milestone does not represent the culminationof a distinct earnings process, we recognize revenue in a manner similar to that of an upfront product license fee. 33Source: BIOSPECIFICS TECHNOLOGIES CORP, 10-K, March 13, 2012Powered 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 Content Royalty/ Mark-up on Cost of Goods Sold / Earn-Out Revenue For those arrangements for which royalty, mark-up on cost of goods sold or earn-out payment information becomes available and collectability is reasonablyassured, we recognize revenue during the applicable period earned. For interim quarterly reporting purposes, when collectability is reasonably assured but areasonable estimate of royalty, mark-up on cost of goods sold or earn-out payment revenues cannot be made, the royalty, mark-up on cost of goods sold orearn-out payment revenues are generally recognized in the quarter that the applicable licensee provides the written report and related information to us.Under the Auxilium Agreement, we do not participate in the selling, marketing or manufacturing of products for which we receive royalties and a mark-up ofthe cost of goods sold revenues. The royalty, mark-up on cost of goods sold revenues will generally be recognized in the quarter that Auxilium provides thewritten reports and related information to us, that is, royalty and mark-up on cost of goods sold revenues are generally recognized one quarter following thequarter in which the underlying sales by Auxilium occurred. The royalties payable by Auxilium to us are subject to set-off for certain third party developmentand patent costs.Under the DFB Agreement, pursuant to which we sold our topical collagenase business to DFB, we have the right to receive earn-out payments in the futurebased on sales of certain products. Generally, under the DFB Agreement we would receive payments and a report within ninety (90) days from the end of eachcalendar year after DFB has sold the royalty-bearing product. Currently, DFB is providing us earn-out reports on a quarterly basis.Consulting and Technical Assistance Services. We recognize revenues from consulting and technical assistance contracts primarily as a result of the DFBAgreement. Consulting revenues are recognized ratably over the term of the contract. The consulting and technical assistance obligations to DFB expired duringMarch 2011.Reimbursable Third Party Development Costs. We accrued expenses for research and development that are reimbursable by us under the AuxiliumAgreement. We capitalize certain patent costs related to estimated third party development costs that are reimbursable under the Auxilium Agreement. In August2011, through the amendment and restatement of our development and license agreement with Auxilium, we have clarified the rights and responsibilities of thejoint development of XIAFLEX. We resolved what had been an on-going dispute with Auxilium concerning the appropriate amount of creditable third partydevelopment expenses related to the lyophilization of the injection formulation and certain patent expenses for research and development costs that arereimbursable under the Auxilium Agreement. We agreed to reimburse Auxilium by offsetting future royalties payable for the amount invoiced us for third partydevelopment costs related to the development of the lyophilization of the injection formulation.As of December 31, 2011 our net reimbursable third party development and certain patent costs accrual is zero.Receivables and Deferred Revenue. Under the DFB Agreement, we agreed to provide certain technical assistance and transitional services in considerationof fees and costs totaling over $1.4 million. At the closing of the DFB Agreement, DFB made a partial payment to us of $400,000 in respect of the technicalassistance to be provided by us. To date, we have received a total of $1.4 million in payments from DFB. The consulting and technical assistance obligationsexpired during March 2011.Royalty Buy-Down. In August 2008, we signed an agreement to significantly improve the deal terms related to our future royalty obligations for Peyronie’sdisease by buying down our future royalty obligations with a one-time cash payment. We modified our agreement to lower future royalties payable on net salesof injectable collagenase, XIAFLEX, for Peyronie’s disease. In addition, we agreed to pay certain development milestones, if achieved.As of December 31, 2011, we capitalized $1,250,000 which will be amortized over approximately five years beginning on the date of the first commercial saleof XIAFLEX for the treatment of Peyronie’s disease, which represents the period estimated to be benefited using the straight-line method. In accordance withAccounting Standards Codification 350, Intangibles, Goodwill and Other, the Company amortizes intangible assets with finite lives in a manner thatreflects the pattern in which the economic benefits of the assets are consumed or otherwise used up. If that pattern cannot be reliably determined, the assets areamortized using the straight-line method.Stock Based Compensation. Under ASC 718, we estimate the fair value of our employee stock awards at the date of grant using the Black-Scholes option-pricing model, which requires the use of certain subjective assumptions. The most significant assumptions are our estimates of the expected volatility of themarket price of our stock and the expected term of an award. Expected volatility is based on the historical volatility of our common stock. When establishingan estimate of the expected term of an award, we consider the vesting period for the award, our historical experience of employee stock option exercises(including forfeitures) and the expected volatility. As required under the accounting rules, we review our valuation assumptions at each grant date and, as aresult, we are likely to change our valuation assumptions used to value future employee stock-based awards granted, to the extent any such awards aregranted. 34Source: BIOSPECIFICS TECHNOLOGIES CORP, 10-K, March 13, 2012Powered 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 Content Further, ASC 718 requires that employee stock-based compensation costs be recognized over the requisite service period, or the vesting period, in a mannersimilar to all other forms of compensation paid to employees. The allocation of employee stock-based compensation costs to each operating expense line areestimated based on specific employee headcount information at each grant date and estimated stock option forfeiture rates and revised, if necessary, in futureperiods if actual employee headcount information or forfeitures differ materially from those estimates. As a result, the amount of employee stock-basedcompensation costs we recognize in each operating expense category in future periods may differ significantly from what we have recorded in the currentperiod.RESULTS OF OPERATIONSYEAR ENDED DECEMBER 31, 2011 COMPARED WITH YEAR ENDED DECEMBER 31, 2010Net revenuesNet revenues for the two years ended December 31, 2011 and 2010 comprise the following: Year Ended December 31 2011 2010 Change % Change Net sales $21,998 $34,508 $(12,510) (36)%Royalties 6,314,959 2,320,729 3,994,230 172%Licensing revenue 5,012,102 3,026,111 1,985,991 66%Consulting fees 46,667 280,000 (233,333) (83)%Total net revenues $11,395,726 $5,661,348 $5,734,378 101%Product Revenues, netProduct revenues include the sales of the collagenase for laboratory use recognized at the time it is shipped to customers. We had a small amount of revenuefrom the sale of collagenase for laboratory use. For the calendar years ended 2011 and 2010 product revenues were $21,998 and $34,508, respectively. Thisdecrease of $12,510 or 36% was primarily related to the amount of material required to perform testing and additional research by our customers.RoyaltiesRoyalties consist of royalties and the mark-up on cost of goods sold under the Auxilium Agreement and earn-out revenues associated with the DFB Agreement.Total royalty, mark-up on cost of goods sold and earn-out revenues for year ended December 31, 2011 were $6,314,959 as compared to $2,320,729 in the2010 period, an increase of $3,994,230 or 172%. Royalty and the mark-up on cost of goods sold revenues recognized under the Auxilium Agreement were$4,028,623 for the 2011 period and $710,182 for the 2010 period. The increase was due to increased net sales of XIAFLEX during 2011 reported to us byAuxilium. Auxilium launched XIAFLEX in March 2010. We receive earn-out revenues from DFB under the earn-out payment provision of the DFB Agreement after certain net sales levels are achieved. Revenuesrecognized under the DFB Agreement were $2,286,336 for the year ended December 31, 2011 and $1,610,548 for the same period in 2010. This increase of$675,788 or 42% is mainly related to the increase in net sales during the 2011 period reported to us by DFB.Licensing Revenue Licensing revenue consists of licensing fees, sublicensing fees and milestones. For the years ended December 31, 2011 and 2010, we recognized total licensingand milestone revenue of $5,012,102 and $3,026,111, respectively, an increase of $1,985,991 or 66%. Certain licensing revenues recognized are related tothe cash payments received under the Auxilium Agreement in prior years and amortized over the expected development period. Licensing revenue recognized forthe years ended December 31, 2011 and 2010 were $437,102 and $751,111, respectively. The decrease of $314,009, or 42%, was mainly due to thecompleted recognition of licensing revenue associated with the Dupuytren’s contracture indication during the first quarter of 2010. Sublicensing fees recognizedin 2011 were $750,000 compared to zero in the same period in 2010. We recognized $750,000 of the $15.0 million paid to Auxilium by Asahi for the rights tocommercialize XIAFLEX for the treatment of Dupuytren's contracture and Peyronie's disease in Japan. 35Source: BIOSPECIFICS TECHNOLOGIES CORP, 10-K, March 13, 2012Powered 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 Content Milestone revenue recognized for the years ended December 31, 2011 and 2010 were $3.825 million and $2.275 million, respectively. In the 2011 period, werecognized milestones related to the first sale of XIAFLEX in Europe of $2.550 million, the first sale of XIAFLEX in Germany of $637,500 and the first saleof XIAFLEX in Spain of $637,500. In the comparable 2010 period, we received and recognized $1.275 million of the $15 million paid to Auxilium by Pfizerfor the scientific/technical review procedure of the Marketing Authorization Application for XIAFLEX for Dupuytren’s contracture in Europe. We also receivedand recognized in the 2010 period a milestone of $1.0 million related to the FDA’s approval of XIAFLEX for Dupuytren’s contracture in February 2010 andour notification to Auxilium in June 2010 of our election not to commercially manufacture XIAFLEX.Under current accounting guidance, nonrefundable upfront license fees for product candidates for which we are providing continuing services related toproduct development are deferred and recognized as revenue over the development period. The remaining balance will be recognized over the respectivedevelopment periods or when we determine that we have no ongoing performance obligations.Consulting ServicesWe recognize revenues from consulting and technical assistance contracts primarily as a result of the DFB Agreement. We recognize consulting revenuesratably over the term of the contract. For calendar years 2011 and 2010 we recognized $46,667 and $280,000 respectively. The decrease in revenues resultingfrom consulting and technical assistance contracts is due to the expiration in March 2011 of our consulting obligations under the DFB Agreement.Research and Development ActivitiesResearch and development expenses include, but are not limited to, internal costs, such as salaries and benefits, costs of materials, lab expense, facility costsand overhead. Research and development expenses also consist of third party costs, such as medical professional fees, product costs used in clinical trials,consulting fees and costs associated with clinical study arrangements. Research and development expenses were $972,078 and $1,223,931, respectively, forcalendar years 2011 and 2010, representing a decrease in 2011 of $251,853, or 21%. This decrease in research and development expenses was primarily dueto third party development costs that are reimbursable under the Auxilium Agreement partially offset by increased clinical development expenses. We are currently working to develop XIAFLEX for the treatment of human and canine lipoma. We have designed a placebo controlled randomized study toevaluate the efficacy of XIAFLEX for the treatment of subcutaneous benign lipomas in canines. The study will consist of 32 canines randomized at 1:1XIAFLEX or placebo. The treatment is a single injection of XIAFLEX or placebo. We have received clearance from the FDA’s Center for Veterinary Medicine tobegin the study and expect to do so in the first half of 2012. Also, we have designed a phase II dose escalation clinical study of XIAFLEX for the treatment ofhuman lipomas. The study consists of 14 patients and four dosage groups for the treatment of benign subcutaneous lipomas. We have received FDA clearanceto initiate the clinical trial and plan to do so during the first half of 2012. The following table summarizes our research and development expenses related to our clinical development programs. Please refer to Part I, Item 1,"Description of Business", for a more detailed description of each of these programs: Year EndedDecember 31, 2011 Year EndedDecember 31, 2010 Accumulated ExpensesSince January 1, 2010 Program Canine Lipoma $332,217 $198,030 $530,247 Human Lipoma 110,800 125,191 235,991 36Source: BIOSPECIFICS TECHNOLOGIES CORP, 10-K, March 13, 2012Powered 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 Content Successful development of drugs is inherently difficult and uncertain. Our business requires investments in research and development over many years,often for drug candidates that may fail during the research and development process. Even if the Company is able to successfully complete the development ofour drug candidates, our long-term prospects depend upon our ability and the ability of our partners, particularly with respect to XIAFLEX, to continue tosuccessfully commercialize these drug candidates.There is significant uncertainty regarding our ability to successfully develop drug candidates in other indications. These risks include the uncertainty of: ·the nature, timing and estimated costs of the efforts necessary to complete the development of our drug candidate projects; ·the anticipated completion dates for our drug candidate projects; ·the scope, rate of progress and cost of our clinical trials that we are currently running or may commence in the future with respect to our drugcandidate projects; ·the scope, rate of progress of our preclinical studies and other research and development activities related to our drug candidate projects; ·clinical trial results for our drug candidate projects; ·the cost of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights relating to our drug candidateprojects; ·the terms and timing of any strategic alliance, licensing and other arrangements that we have or may establish in the future relating to our drugcandidate projects; ·the cost and timing of regulatory approvals with respect to our drug candidate projects; and ·the cost of establishing clinical supplies for our drug candidate projects.Our current resources and liquidity are sufficient to advance our significant current research and development projects and, Auxilium will have the option toexclusively license the canine and human lipoma indications upon completion of the appropriate opt-in study.General and Administrative ExpensesGeneral and administrative expenses consist primarily of salaries and other related costs for personnel, consultant costs, legal fees, investor relations,professional fees and overhead costs. General and administrative expenses were $5,231,881 and $6,470,449 for calendar years 2011 and 2010, respectively,a decrease of $1,238,568, or 19%, from 2010. The decrease in general and administrative expenses was due to lower stock based compensation, consultingservices, general legal fees and services related to investor relations partially offset by increases in patent costs and director fees.Other Income and expenseOther income for calendar year 2011 was $71,603 compared to $525,843 for calendar year 2010. For calendar year 2011, other income consisted of interestearned on our investments of $55,780 (compared to $86,310 for the 2010 period) and a reversal of accrued tax penalties associated with our delinquent taxfilings in previous years of $15,823 (compared to $13,130 for the 2010 period). Other income for the calendar year 2010, unlike the comparable 2011 period,included revenue in connection with a $426,000 grant under the Qualifying Therapeutic Discovery Project Program. Although we received $324,000 of thisgrant in 2011, we did not recognize revenues related to it in 2011 because we had recognized the full amount of the grant during the 2010 period and hadincurred all of the qualifying expenses prior to 2011. We elected to classify this revenue as other income in the Consolidated Statement of Operations since thisprogram is non-recurring, Income TaxesOur deferred tax liabilities, deferred tax assets and related valuation allowances are impacted by events and transactions arising in the ordinary course ofbusiness, research and development activities, vesting of nonqualified options, deferred revenues and other items. Deferred tax assets are affected by thevaluation allowance which is dependent upon several factors, including estimates of the realization of deferred income tax assets, and the impact of estimatedfuture taxable income. Significant judgment is required to determine the estimated amount of valuation allowance to record. Changes in the estimate of thevaluation allowance could materially increase or decrease our provision for income taxes in future periods. 37Source: BIOSPECIFICS TECHNOLOGIES CORP, 10-K, March 13, 2012Powered 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 Content In 2011, 2010 and 2009. we had $0.7 million, $2.0 million and $1.9 million of unutilized tax deductible expenses from the exercise of non-qualified anddisqualified disposition of incentive stock options, respectively. Based on the results of our operations over the last two years, the growth in the market forXIAFLEX. and the trend in actual and anticipated royalty income, we have determined that is was more likely than not that the benefit of our deferred taxassets will be realized. Consequently, we have eliminated our 2010 valuation allowance of $3.6 million and increased our deferred tax assets by $0.3 million toreflect the application of our state statutory rates of 7.1% to temporary differences. Under the ASC 718-25-09. we recognized the tax effect of $4.6 million in disqualifying disposition of options and the exercise of nonqualified options in ourfinancial statements for the year ended December 31, 2011. The exercise of nonqualified options and disposition of disqualified options lowered our taxespayable by $1.9 million, reduced our tax assets related to non-qualified options by $0.2 million and increased additional paid in capital and provision forincome tax benefits by $1.7 million and $30,239. respectively. Additionally, we utilized tax assets from our federal and state net operating loss carryforwardsof $0.3 million and deferred licensing revenue of $0.2 million to reduce our taxes payable. Because our state net operating losses exceeded our federal netoperating losses we set up a valuation allowance of $0.2 million against our tax asset for our state net operating loss carryforwards. In the 2010 period we had a tax expense of $1,351. The income tax expense for 2010 was the result of minimum New York State taxes. YEAR ENDED DECEMBER 31, 2010 COMPARED WITH YEAR ENDED DECEMBER 31, 2009Net revenuesNet revenues for the two years ended December 31, 2010 and 2009 comprise the following: Year Ended December 31 2010 2009 Change % Change Net sales $34,508 $39,035 $(4,527) (12%)Royalties 2,320,729 1,271,597 1,049,132 83%Licensing revenue 3,026,111 1,565,125 1,460,986 93%Consulting fees 280,000 280,000 - - Total net revenues $5,661,348 $3,155,757 $2,505,591 79%Product Revenues, netProduct revenues include the sales of the collagenase for laboratory use recognized at the time it is shipped to customers. We had a small amount of revenuefrom the sale of collagenase for laboratory use. For the calendar years ended 2010 and 2009 product revenues were $34,508 and $39,035, respectively. Thisdecrease of $4,527, or 12%, was primarily related to the amount of material required to perform testing and additional research by our customers.RoyaltiesRoyalties consist of royalties and the mark-up on cost of goods sold under the Auxilium Agreement and earn-out revenues associated with the DFB Agreement.Total royalty and earn-out revenues for year ended December 31, 2010 were $2,320,729 as compared to $1,271,597 in the 2009 period, an increase of$1,049,132, or 83%. We receive royalty revenues from DFB under the earn-out payment provision of the DFB Agreement, after certain net sales levels areachieved. Royalty revenues recognized under the DFB Agreement were $1,610,548 for the year ended December 31, 2010 and $1,271,597 for the sameperiod in 2009. This increase of $338,950, or 27%, is mainly related to the increase in net sales during the 2010 period reported to us by DFB.In 2010, we began to recognize royalties and the mark-up on cost of goods sold due to us under the terms of the Auxilium Agreement. Under the AuxiliumAgreement, royalties to which we are entitled are subject to set-off for certain expenses we owe to Auxilium relating to certain development and patentcosts. Royalty and the mark-up on cost of goods sold revenues recognized under the Auxilium Agreement were $682,160 for the 2010 period and zero in thecomparable period of 2009. The increase was due to the net sales of XIAFLEX during 2010 reported to us by Auxilium. Auxilium launched XIAFLEX inMarch 2010. 38Source: BIOSPECIFICS TECHNOLOGIES CORP, 10-K, March 13, 2012Powered 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 Content Licensing Revenue Licensing revenue consists of licensing fees, sublicensing fees and milestones. For the years ended December 31, 2010 and 2009, we recognized total licensingand milestone revenue of $3,026,111 and $1,565,125, respectively, an increase of $1,490,986, or 93%. Licensing revenues recognized are related to thecash payments received under the Auxilium Agreement in prior years and amortized over the expected development period. Licensing revenue recognized for theyears ended December 31, 2010 and 2009 were $751,111 and $1,065,125, respectively. The decrease of $314,014, or 29%, was mainly due to thecompleted recognition of licensing revenue associated with the Dupuytren’s contracture indication during the first quarter of 2010.Milestone revenue recognized for the years ended December 31, 2010 and 2009 was $2.275 million and $0.5 million, respectively. In the 2010 period, wereceived and recognized $1.275 million of the $15 million paid to Auxilium by Pfizer for the scientific/technical review procedure of the MarketingAuthorization Application for XIAFLEX for Dupuytren’s contracture in Europe. We also received and recognized a milestone of $1.0 million related to theFDA’s approval of XIAFLEX for Dupuytren’s contracture in February 2010 and our notification to Auxilium in June 2010 of our election not to commerciallymanufacture XIAFLEX. In the comparable 2009 period, we recognized $500,000 related to a milestone received under the Auxilium Agreement for the filingand acceptance of a new drug application for Dupuytren’s contracture.Under current accounting guidance, nonrefundable upfront license fees for product candidates for which we are providing continuing services related toproduct development are deferred and recognized as revenue over the development period. The remaining balance will be recognized over the respectivedevelopment periods or when we determine that we have no ongoing performance obligations.Consulting ServicesWe recognize revenues from consulting and technical assistance contracts primarily as a result of the DFB Agreement. We recognize consulting revenuesratably over the term of the contract. The consulting and technical assistance obligations under the DFB Agreement expired during March 2011. For each ofcalendar years 2010 and 2009 we recognized $280,000 in consulting revenue.Research and Development ActivitiesResearch and development expenses include, but are not limited to, internal costs, such as salaries and benefits, costs of materials, lab expense, facility costsand overhead. Research and development expenses also consist of third party costs, such as medical professional fees, product costs used in clinical trials,consulting fees and costs associated with clinical study arrangements. Research and development expenses were $1,223,931 and $488,646, respectively, forcalendar years 2010 and 2009, representing an increase in 2010 of $735,285, or 150%. This increase in research and development expenses was primarilydue to third party development costs that are reimbursable under the Auxilium Agreement.We are currently working to develop XIAFLEX for the treatment of human and canine lipoma. We have designed a placebo controlled randomized study toevaluate the efficacy of XIAFLEX for the treatment of subcutaneous benign lipomas in canines. The study will consist of 32 canines randomized at 1:1XIAFLEX or placebo. The treatment is a single injection of XIAFLEX or placebo. We have received clearance from the FDA’s Center for Veterinary Medicine tobegin the study and expect to do so in the first half of 2012. Also, we have designed a phase II dose escalation clinical study of XIAFLEX for the treatment ofhuman lipomas. The study consists of 14 patients and four dosage groups for the treatment of benign subcutaneous lipomas. We have received FDA clearanceto initiate the clinical trial and plan to do so during the first half of 2012.The following table summarizes our research and development expenses related to our clinical development programs. Please refer to Part I, Item 1,"Description of Business", for a more detailed description of each of these programs: 39Source: BIOSPECIFICS TECHNOLOGIES CORP, 10-K, March 13, 2012Powered 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 Content Year Ended Accumulated Expenses December 31, 2010 Since January 1, 2010 Program Canine Lipoma $198,030 198,030 Human Lipoma 125,191 125,191 Successful development of drugs is inherently difficult and uncertain. Our business requires investments in research and development over many years,often for drug candidates that may fail during the research and development process. Even if the Company is able to successfully complete the development ofour drug candidates, our long-term prospects depend upon our ability and the ability of our partners, particularly with respect to XIAFLEX, to continue tosuccessfully commercialize these drug candidates.There is significant uncertainty regarding our ability to successfully develop drug candidates in other indications. These risks include the uncertainty of: ·the nature, timing and estimated costs of the efforts necessary to complete the development of our drug candidate projects; ·the anticipated completion dates for our drug candidate projects; ·the scope, rate of progress and cost of our clinical trials that we are currently running or may commence in the future with respect to our drugcandidate projects; ·the scope, rate of progress of our preclinical studies and other research and development activities related to our drug candidate projects; ·clinical trial results for our drug candidate projects; ·the cost of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights relating to our drug candidateprojects; ·the terms and timing of any strategic alliance, licensing and other arrangements that we have or may establish in the future relating to our drugcandidate projects; ·the cost and timing of regulatory approvals with respect to our drug candidate projects; and ·the cost of establishing clinical supplies for our drug candidate projects.Our current resources and liquidity are sufficient to advance our significant current research and development projects and, Auxilium will have the option toexclusively license the canine and human lipoma indications upon completion of the appropriate opt-in study.General and Administrative ExpensesGeneral and administrative expenses consist primarily of salaries and other related costs for personnel, consultant costs, legal fees, investor relations,professional fees and overhead costs. General and administrative expenses were $6,470,449 and $4,832,019 for calendar years 2010 and 2009, respectively,an increase of $1,638,430, or 34%, from 2009. The increase in general and administrative expenses was due to legal fees, stock based compensation andservices related to investor relations partially offset by lower patent costs.Other Income and expense Other income for calendar year 2010 was $525,843 compared to $46,791 for calendar year 2009. Other income during 2010 was due to interest of $83,310earned on our investments (compared to $55,693 in the 2009 period), as well as a reversal of accrued tax penalties of $13,130 associated with our delinquenttax filings in previous years. Other income during 2010 was also due to the Qualifying Therapeutic Discovery Project Program. In November 2010, we werenotified that we had been awarded a total cash grant of approximately $426,000 under the Qualifying Therapeutic Discovery Project program administeredunder section 48D of the Internal Revenue Code, of which approximately $102,000 relates to qualifying expenses we had previously incurred during the 2009fiscal year which was received during the fourth quarter of fiscal 2010. The remainder of the grant of approximately $324,000 was received in February 2011based on qualifying expenses that we incurred during the 2010 fiscal year. We recognized the full $426,000 of the grant as of the November 2010 date ofnotification since we had already incurred all of the qualifying expenses. Since this program is non-recurring, we elected to classify this revenue as otherincome in the Consolidated Statement of Operations for the year ended December 31, 2010. 40Source: BIOSPECIFICS TECHNOLOGIES CORP, 10-K, March 13, 2012Powered 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 Content Income TaxesThe income tax expense for 2010 was $1,351 as compared to an income tax benefit of $161,574 for 2009. The income tax expense for 2010 was the result ofminimum New York State taxes. In 2009, the Company utilized its 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 state tax of $1,784 and a $34,881 tax adjustment related to prior years’ tax returns.Liquidity and Capital ResourcesTo date, we have financed our operations primarily through product sales, debt instruments, licensing revenues and royalties under agreements with thirdparties and sales of our common stock. At December 31, 2011, 2010 and 2009, we had cash and cash equivalents and short-term investments in the aggregateof approximately $8.2 million, $7.8 million and $8.5 million, respectively.Sources and Uses of CashNet Cash provided by (Used In) Operating ActivitiesNet cash provided by (used in) operating activities was $(0.7) million, $(0.9) million and $3.7 million for 2011, 2010 and 2009. Net cash used in operationsfor 2011 was mainly due to a decrease in accrued expenses, increases in deferred tax assets and accounts receivable partially offset by lower stockcompensation expense. Cash used in operations for 2010 resulted primarily from operating losses, net of stock compensation expenses and other non-cashcharges. At December 31, 2010, accounts receivable increased by $0.4 million, compared to December 31, 2009 primarily due to a higher receivable balancerelated to the DFB Agreement. Our deferred revenue at December 31, 2010 decreased by $0.8 million compared to December 31, 2009 primarily due to theamortization of previously received license payments under the Auxilium Agreement.The majority of our cash expenditures in 2011, 2010, and 2009 were to fund research and development and our business activities.Net Cash provided by (used in) Investing ActivitiesNet cash provided by investing activities was $0.4 million in 2011, compared to net cash used in investing activities of $0.8 million in 2010 and $3.6 millionin 2009. In the 2011 period, maturities of $5.4 million exceeded purchases of $5.0 million. In 2010, purchases of marketable securities exceeded maturities by$0.8 million. In 2009, purchases of marketable securities exceeded maturities by $3.6 million.Net Cash provided by Financing ActivitiesNet cash provided by financing activities for 2011 was $1.1 million, as compared to $0.2 million and $0.4 million for 2010 and 2009 periods. Net cashprovided by financing activities was due to excess tax benefits related to share-based payments and stock option proceeds partly offset by the repurchase ofour common stock under our 2010 Stock Repurchase Program Net cash provided by financing activities in 2010 was from proceeds from stock optionexercises partly offset by the repurchase of our common stock under our 2010 Stock Repurchase Program. Net cash provided by financing activities in 2009was from proceeds received from stock option exercises. Contractual Commitments We are involved with licensing of products which are generally associated with payments to third parties from whom we have licensed the product. Suchpayments may take the form of an up-front payment; milestone payments which are paid when certain parts of the overall development program areaccomplished; payments upon certain regulatory events, such as the filing of an IND, an NDA or BLA, approval of an NDA or BLA, or the equivalents inother countries; and payments based on a percentage of sales. 41Source: BIOSPECIFICS TECHNOLOGIES CORP, 10-K, March 13, 2012Powered 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 Content We may also out-license products, for which we hold the rights, to other companies for commercialization in other territories, or at times, for other uses. Whenthis happens, the payments to us would also take the same form as described above. Operating Leases Our operating leases are principally for facilities and equipment. We currently lease approximately 15,000 square feet of space at our headquarters inLynbrook, New York on a month to month basis. Additionally, we lease certain vehicle and certain office equipment which generally expire in 2014.Future minimum annual payments required under non-cancelable operating leases are approximated as follows:Year ending December 31,2012 $8,000 2013 $8,000 2014 $3,000 Off-Balance Sheet Arrangements We do not have any off-balance sheet arrangements as defined in Item 303(a)(4) of Regulation S-K. Future Impact of Recently Issued Accounting StandardsIn May 2011, the Financial Accounting Standards Board (the “FASB”) issued a new standard on fair value measurement and disclosure requirements. Thenew standard changes fair value measurement principles and disclosure requirements including measuring the fair value of financial instruments that aremanaged within a portfolio, the application of applying premiums and discounts in a fair value measurement, and additional disclosure about fair valuemeasurements. The new standard is effective for interim and annual periods beginning after December 15, 2011. We do not expect a material impact with theadoption of this new standard.In June 2011, the FASB issued a new standard on the presentation of comprehensive income. The new standard eliminated the current option to report othercomprehensive income and its components in the statement of changes in equity. Under the new standard, companies can elect to present items of net incomeand other comprehensive income in one continuous statement or in two separate, but consecutive statements. The new standard is effective at the beginning offiscal years beginning after December 15, 2011, and we will comply with this requirement in the first quarter 2012.In September 2011, the FASB issued a new standard to simplify how an entity tests goodwill for impairment. The new standard allows companies an optionto first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basisfor determining if it is necessary to perform the two-step quantitative goodwill impairment test. Under the new standard, a company is no longer required tocalculate the fair value of a reporting unit unless the company determines, based on the qualitative assessment, that it is more likely than not that its fair valueis less than its carrying amount. The new standard is effective for annual and interim goodwill impairment tests performed for fiscal years beginning afterDecember 15, 2011. We do not expect a material impact with the adoption of this new standard.Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. We do not use derivative financial instruments or derivative commodity instruments for trading purposes. Our financial instruments consist of cash, cashequivalents, short-term investments, trade accounts receivable, accounts payable and long-term obligations. We consider investments that, when purchased,have a remaining maturity of 90 days or less to be cash equivalents.Our investment portfolio is subject to interest rate risk, although limited given the nature of the investments, and will fall in value in the event market interestrates increase. All our cash and cash equivalents at December 31, 2011, amounting to approximately $3.2 million, were maintained in bank demand accountsand money market accounts. Our short-term investments of $5.0 million were maintained in certificates of deposit. We do not hedge our interest rate risks, aswe believe reasonably possible near-term changes in interest rates would not materially affect our results of operations, financial position or cash flows. 42Source: BIOSPECIFICS TECHNOLOGIES CORP, 10-K, March 13, 2012Powered 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 Content Item 8. FINANCIAL STATEMENTS. For the discussion of Item 8, “Financial Statements” please see the Consolidated Financial Statements, beginning on page F-1 of this Report.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 Executive Officer, PrincipalFinancial Officer and Principal Accounting Officer, evaluated the effectiveness of its disclosure controls and procedures as of the end of the period covered bythis Report. Based on that evaluation, management has concluded that the Company’s disclosure controls and procedures are effective to ensure thatinformation 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 such information is accumulated and communicated tothe Company’s management, to allow timely decisions regarding required disclosure. Because of the inherent limitations in all control systems, any controlsand procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and managementnecessarily is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Furthermore, our controls andprocedures can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of the control, andmisstatements due to error or fraud may occur and not be detected on a timely basis. Management’s Annual Report on Internal Control Over Financial Reporting Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting for the Company as defined inRule 13a-15(f) under the Exchange Act. The Company’s internal control over financial reporting is designed to provide reasonable assurance to the Company’smanagement and board of directors regarding the preparation and fair presentation of published 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 those systems determinedto 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, 2011. In making this assessment,management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control – IntegratedFramework. We believe that, as of December 31, 2011, the Company’s internal control over financial reporting was effective based on this criteria. Tabriztchi & Co, the independent registered public accounting firm that audited our Consolidated Financial Statements included in this Report, audited theeffectiveness of our internal control over financial reporting as of December 31, 2011, as stated in their report which is included in Part IV, Item 15 of thisReport. Changes in Internal Control Over Financial Reporting There were no changes in our internal control over financial reporting identified in connection with the evaluation of our controls performed during the yearended December 31, 2011 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. 43Source: BIOSPECIFICS TECHNOLOGIES CORP, 10-K, March 13, 2012Powered 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 Content Item 9B. OTHER INFORMATION Not applicable.PART III Item 10. DIRECTORS AND EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a)OF THE EXCHANGE ACT The information required by this item is incorporated herein by reference to the sections captioned “Directors and Executive Officers,” “Committees of theBoard of Directors,” and “Section 16(a) Beneficial Ownership Reporting Compliance” in our definitive Proxy Statement relating to our 2012 Annual Meetingof Stockholders.Item 11. EXECUTIVE COMPENSATION. The information required by this item is incorporated herein by reference to the section captioned “Executive Compensation” in our definitive Proxy Statementrelating to our 2012 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 Beneficial Owners andManagement” and “Equity Compensation Plan Information” in our definitive Proxy Statement relating to our 2012 Annual Meeting of Stockholders.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 Related Transactions” in ourdefinitive Proxy Statement relating to our 2012 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 Independent Registered PublicAccounting Firm” in our definitive Proxy Statement relating to our 2012 Annual Meeting of Stockholders.PART IV Item 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 or presented in theconsolidated 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. 44Source: BIOSPECIFICS TECHNOLOGIES CORP, 10-K, March 13, 2012Powered 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 Content BIOSPECIFICS TECHNOLOGIES CORP.INDEX TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARENDED DECEMBER 31, 2011 PageReport of Independent Registered Public Accounting FirmF-2 Consolidated Balance SheetsF-4 Consolidated Statements of OperationsF-5 Consolidated Statements of Cash FlowsF-6 Consolidated Statements of Stockholders’ DeficitF-7 Notes to Consolidated Financial StatementsF-8 F-1Source: BIOSPECIFICS TECHNOLOGIES CORP, 10-K, March 13, 2012Powered 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 Content REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors andStockholders ofBioSpecifics Technologies Corp. We have audited the accompanying consolidated balance sheets of BioSpecifics Technologies Corp. (the Company) as of December 31, 2011 and 2010, andthe related consolidated statements of operations, stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 2011.BioSpecifics Technologies Corp.'s management is responsible for these financial statements. Our responsibility is to express an opinion on these financialstatements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require thatwe plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accountingprinciples used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our auditsprovide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of BioSpecificsTechnologies Corp. as of December 31, 2011 and 2010, and the results of its operations and its cash flows for each of the years in the three-year period endedDecember 31, 2011 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), BioSpecifics TechnologiesCorp.'s internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control—Integrated Framework issuedby the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 12, 2012 expressed an unqualifiedopinion. /s/ Tabriztchi & Co., CPA, P.C. Garden City, NYMarch 12, 2012 7 Twelfth Street Garden City, NY 11530 s Tel: 516-746-4200 s Fax: 516-746-7900Email:Info@Tabrizcpa.com s www.Tabrizcpa.com Source: BIOSPECIFICS TECHNOLOGIES CORP, 10-K, March 13, 2012Powered 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 Content REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors andStockholders ofBioSpecifics Technologies Corp. We have audited BioSpecifics Technologies Corp.'s internal control over financial reporting as of December 31, 2011 based on criteria established in InternalControl—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). BioSpecifics TechnologiesCorp's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internalcontrol over financial reporting included in the accompanying Management's Annual Report on Internal Control over Financial Reporting. Our responsibility isto express an opinion on the company's internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require thatwe plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all materialrespects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing therisk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our auditalso included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for ouropinion. A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting andthe preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control overfinancial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflectthe transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are beingmade only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention ortimely detection of unauthorized acquisition, 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 any evaluation ofeffectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliancewith the policies or procedures may deteriorate. In our opinion, BioSpecifics Technologies Corp. maintained, in all material respects, effective internal control over financial reporting as of December 31,2011, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the TreadwayCommission (COSO). We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the balance sheets and the relatedstatements of income, stockholders' equity and cash flows of BioSpecifics Technologies Corp. and our report dated March 12, 2012 expressed an unqualifiedopinion. /s/ Tabriztchi & Co., CPA, P.C. Garden City, NYMarch 12, 2012 7 Twelfth Street Garden City, NY 11530 s Tel: 516-746-4200 s Fax: 516-746-7900Email:Info@Tabrizcpa.com s www.Tabrizcpa.com Source: BIOSPECIFICS TECHNOLOGIES CORP, 10-K, March 13, 2012Powered 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 Content BioSpecifics Technologies Corp.Consolidated Balance Sheet December 31, 2011 2010 Assets Current assets: Cash and cash equivalents $3,196,831 $2,470,852 Short term investments 5,000,000 5,360,970 Accounts receivable, net 3,236,917 1,986,125 Income tax receivable 244,720 185,386 Deferred tax asset 1,309,801 - Prepaid expenses and other current assets 98,234 91,925 Total current assets 13,086,503 10,095,258 Deferred royalty buy-down 1,250,000 1,250,000 Deferred tax assets –long term 1,738,154 - Patent costs, net 190,416 173,443 Total assetsss 16,265,073 11,518,701 Liabilities and Stockholders' Equity Current liabilities: Accounts payable and accrued expenses 601,002 893,083 Accrued third party development expenses - 2,649,369 Deferred revenue 437,099 483,769 Accrued liabilities of discontinued operations 78,138 78,138 Total current liabilities 1,116,239 4,104,359 Deferred revenue - license fees 276,520 713,619 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; 6,530,743 and 6,445,743shares issued at December31, 2011 and 2010, respectively 6,531 6,446 Additional paid-in capital 20,049,196 17,739,765 Accumulated deficit (3,291,904) (9,893,530)Treasury stock, 194,604 and 151,875 shares at cost as of December 31, 2011 and 2010 (1,891,509) (1,151,958)Total stockholders' equity 14,872,314 6,700,723 Total liabilities and stockholders’ equity $16,265,073 $11,518,701 F-4Source: BIOSPECIFICS TECHNOLOGIES CORP, 10-K, March 13, 2012Powered 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 Content BioSpecifics Technologies Corp.Consolidated Statements of Operations Years Ended December 31, 2011 2010 2009 Revenues: Net sales $21,998 $34,508 $39,035 Royalties 6,314,959 2,320,729 1,271,597 Licensing revenue 5,012,102 3,026,111 1,565,125 Consulting fees 46,667 280,000 280,000 Total revenues 11,395,726 5,661,348 3,155,757 Costs and expenses: Research and development 972,078 1,223,931 488,646 General and administrative 5,231,881 6,470,449 4,832,019 Total costs and expenses 6,203,959 7,694,380 5,320,665 Operating income (loss) 5,191,767 (2,033,032) (2,164,908) Other income (expense): Interest income 55,780 86,310 55,693 Interest expense - - (39)Other 15,823 13,130 (8,863)Qualifying Therapeutic Discovery Grant - 426,403 - 71,603 525,843 46,791 Income (loss) before benefit (expense) for income tax 5,263,370 (1,507,189) (2,118,117)Income tax benefit (expense) 1,338,256 (1,351) 161,574 Net income (loss) $6,601,626 $(1,508,540) $(1,956,543) Basic net income (loss) per share $1.04 $(0.24) $(0.32) Diluted net income (loss) per share $0.95 $(0.24) $(0.32) Shares used in computation of basic net income (loss) per share 6,340,648 6,261,214 6,065,939 Shares used in computation of diluted net income (loss) per share 6,952,386 6,261,214 6,065,939 F-5Source: BIOSPECIFICS TECHNOLOGIES CORP, 10-K, March 13, 2012Powered 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 ContentBioSpecifics Technologies Corp.Consolidated Statements of Cash Flows Years Ended December 31, Cash flows from operating activities: 2011 2010 2009 Net income (loss) $6,601,626 $(1,508,540) $(1,956,543)Adjustments to reconcile net income (loss) to net cash used in operating activities: Depreciation and amortization 50,685 18,949 35,669 Stock-based compensation expense 517,367 1,901,781 1,490,083 Deferred tax assets (3,047,955) - - Changes in operating assets and liabilities: Accounts receivable (1,250,792) (459,291) 5,616,601 Prepaid expenses and other current assets (65,642) (28,664) (371,592)Accounts payable and accrued expenses (3,009,109) 24,394 55,658 Deferred revenue (483,769) (831,111) (1,145,125)Net cash provided by (used in) operating activities from continuing operations (687,589) (882,482) 3,724,751 Cash flows from investing activities: Maturities of marketable securities 5,360,970 4,548,541 2,799,754 Purchases of marketable securities (5,000,000) (5,360,970) (6,448,295)Net cash used in investing activities from continuing operations 360,970 (812,429) (3,648,541) Cash flows from financing activities: Proceeds from stock option exercises 82,450 673,375 380,029 Repurchases of common stock (739,551) (458,001) - Excess tax benefits from share-based payment arrangements 1,709,699 - - Net cash provided by financing activities from continuing operations 1,052,598 215,374 380,029 Increase (decrease) in cash and cash equivalents 725,979 (1,479,537) 456,239 Cash and cash equivalents at beginning of year 2,470,852 3,950,389 3,494,150 Cash and cash equivalents at end of year $3,196,831 $2,470,852 $3,950,389 Supplemental disclosures of cash flow information: Cash paid during the year for: Interest $- $- $- Taxes $190,000 $9,851 $214,467 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 December31, 2011 we accrued $318,280 related to this issue of which $50,685, $36,041and $33,983 was amortized in the 2011, 2010 and 2009 periods,respectively. The net patent amortization expense for 2010 was $18,339 due to a reduction of reimbursable patents fees under our agreement with Auxiliumfrom prior periods.See accompanying notes to consolidated financial statements F-6Source: BIOSPECIFICS TECHNOLOGIES CORP, 10-K, March 13, 2012Powered 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 ContentBioSpecifics Technologies Corp.Consolidated Statement of Stockholders' Equity (Deficit) Shares Amount Additional Paidin Capital AccumulatedDeficit 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)Issuance of common stock under stock option plans 118,425 119 673,257 - Stock compensation expense - - 1,901,781 - Repurchases of common stock - - - - Net loss - - - (1,508,540)Balances - December 31, 2010 6,445,743 $6,446 $17,739,765 $(9,893,530)Issuance of common stock under stock option plans 85,000 85 82,365 - Stock compensation expense - - 517,367 - Repurchases of common stock - - - - Excess tax benefits from share-based payment arrangements - - 1,709,699 - Net profit - - - 6,601,626 Balances - December 31, 2011 6,530,743 $6,531 $20,049,196 $(3,291,904) TreasuryStock ShareholderEquity (Deficit)Total 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 Issuance of common stock under stock option plans - 673,376 Stock compensation expense - 1,901,781 Repurchases of common stock (458,001) (458,001)Net loss - (1,508,540)Balances - December 31, 2010 $(1,151,958) $6,700,723 Issuance of common stock under stock option plans - 82,450 Stock compensation expense - 517,367 Repurchases of common stock (739,551) (739,551)Excess tax benefits from share-based payment arrangements - 1,709,699 Net profit - 6,601,626 Balances - December 31, 2011 $(1,891,509) $14,872,314 F-7Source: BIOSPECIFICS TECHNOLOGIES CORP, 10-K, March 13, 2012Powered 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 Content BIOSPECIFICS TECHNOLOGIES CORP.Notes to Consolidated Financial StatementsDecember 31, 2011, 2010 and 20091. ORGANIZATION AND DESCRIPTION OF BUSINESSWe are a biopharmaceutical company involved in the development of an injectable collagenase for multiple indications. We have a development and licenseagreement with Auxilium Pharmaceuticals, Inc. (“Auxilium”) for injectable collagenase (which Auxilium has named XIAFLEX® (collagenase clostridiumhistolyticum)) for clinical indications in Dupuytren’s contracture, Peyronie’s disease and frozen shoulder (adhesive capsulitis). Auxilium has an option toacquire additional indications that we may pursue, including cellulite, for which we have granted Auxilium the right to initiate early development studies at itscost, and human and canine lipoma. Auxilium is currently selling XIAFLEX in the U.S. for the treatment of Dupuytren’s contracture. Auxilium has anagreement with Pfizer, Inc. (“Pfizer”) pursuant to which Pfizer has the right to market XIAFLEX for Dupuytren’s contracture and Peyronie’s disease in Europeand certain Eurasian countries, and will do so under the registered trademark XIAPEX® (collagenase clostridium histolyticum). Pfizer is currently sellingXIAPEX in nine countries in Europe, including the United Kingdom, Germany and Spain. In addition, Auxilium has an agreement with Asahi Kasei PharmaCorporation (“Asahi”) pursuant to which Asahi has the right to commercialize XIAFLEX for the treatment of Duputyren’s contracture and Peyronie’s diseasein Japan. Auxilium also has an agreement with Actelion Pharmaceuticals Ltd. (“Actelion”) pursuant to which Actelion has the right to commercialize XIAFLEXfor the treatment of Duputyren’s contracture and Peyronie’s disease in Canada, Australia, Brazil and Mexico.2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIESPrinciples of Consolidation The audited consolidated financial statements include the accounts of the Company and its subsidiary, Advance Biofactures Corp. (“ABC-NY”).Use of Estimates The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles requires the use of management’sestimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ fromthose 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 maturity of three months orless at the time of purchase. The Company limits its credit risk associated with cash, cash equivalents and short-term investments by placing its investmentswith banks it believes are highly creditworthy and with highly rated money market funds, U.S. government securities, or short-term commercial paper.Fair Value MeasurementsManagement believes that the carrying amounts of the Company’s financial instruments, including cash, cash equivalents, short-term investments, accountsreceivable, accounts payable and accrued expenses approximate fair value due to the short-term nature of those instruments. Concentration of Credit Risk and Major CustomersThe Company maintains bank account balances, which, at times, may exceed insured limits. The Company has not experienced any losses with theseaccounts and believes that it is not exposed to any significant credit risk on cash.The Company maintains its investment in FDIC insured certificates of deposits with several banks.At December 31, 2011, the accounts receivable balance of $3.3 million was primarily from two customers, comprising of $2.3 million (71% of total) fromDFB Biotech, Inc. and $0.9 million (28% of total) from Auxilium Pharmaceutical, Inc.The Company has been dependent in each year on a two customers who generate almost all its revenues. In the year ended December 31, 2011, the licensingand royalty revenues from Auxilium Pharmaceutical Inc. were $9.0 (79% of total) and royalties and consulting revenues from DFB Biotech, Inc. were $2.3million (20% of total). Revenue Recognition We currently recognize revenues resulting from product sales, the licensing and sublicensing of the use of our technology and from services we sometimesperform in connection with the licensed technology under the guidance of Accounting Standards Codification 605, Revenue Recognition (“ASC 605”). F-8Source: BIOSPECIFICS TECHNOLOGIES CORP, 10-K, March 13, 2012Powered 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 Content If we determine that separate elements exist in a revenue arrangement under ASC 605, we recognize revenue for delivered elements only when the fair values ofundelivered elements are known, when the associated earnings process is complete, when payment is reasonably assured and, to the extent the milestoneamount relates to our performance obligation, when our customer confirms that we have met the requirements 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 or determinable andcollectability is reasonably assured. No right of return exists for our products except in the case of damaged goods. To date, we have not experienced anysignificant returns of our products.Net sales include the sales of the collagenase for laboratory use that are recognized at the time the product is shipped to customers for laboratory use.Royalty/Mark-Up on Cost of Goods Sold / Earn-Out RevenueUnder our development and license agreement with Auxilium (as amended and restated on each of December 11, 2008 and August 31, 2011, the “AuxiliumAgreement”), we do not participate in the selling, marketing or manufacturing of products for which we receive royalties and a mark-up of the cost of goodssold revenues, The royalty and mark-up on cost of goods sold revenues will generally be recognized in the quarter that Auxilium provides the written reportsand related information to us, that is, royalty and mark up on cost of goods sold revenues are generally recognized one quarter following the quarter in whichsales by Auxilium occurred. The royalties payable by Auxilium to us are subject to set-off for certain third party development and patent costs.Under a March 2006 agreement (the “DFB Agreement”), pursuant to which we sold our topical collagenase business to DFB Biotech, Inc. and its affiliates(“DFB”), we have the right to receive earn-out payments in the future based on sales of certain products. Generally, under the DFB Agreement we wouldreceive payments and a report within ninety (90) days from the end of each calendar year after DFB has sold the royalty-bearing product. Currently, DFB isproviding us earn-out reports on a quarterly basis.Licensing RevenueWe include revenue recognized from upfront licensing, sublicensing and milestone payments in “License Revenues” in our consolidated statements ofoperations 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 the earnings process and wehave no ongoing performance obligation with respect to the arrangement. Nonrefundable upfront technology license for product candidates for which we areproviding continuing services related to product development are deferred and recognized as revenue over the development period.MilestonesMilestones, in the form of additional license fees, typically represent nonrefundable payments to be received in conjunction with the achievement of a specificevent identified in the contract, such as completion of specified development activities and/or regulatory submissions and/or approvals. We believe that amilestone represents the culmination of a distinct earnings process when it is not associated with ongoing research, development or other performance on ourpart. We recognize such milestones as revenue when they become due and collection is reasonably assured. When a milestone does not represent theculmination of a distinct earnings process, we recognize revenue in a manner similar to that of an upfront license fee. F-9Source: BIOSPECIFICS TECHNOLOGIES CORP, 10-K, March 13, 2012Powered 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 Content The timing and amount of revenue that we recognize from licenses of technology, either from upfront fees or milestones where we are providing continuingservices related to product development, is primarily dependent upon our estimates of the development period. We define the development period as the pointfrom which research activities commence up to regulatory approval of either our, or our partners’ submission assuming no further research is necessary. Asproduct candidates move through the development process, it is necessary to revise these estimates to consider changes to the product development cycle, suchas changes in the clinical development plan, regulatory requirements, or various other factors, many of which may be outside of our control. Should the U.S.Food and Drug Administration or other regulatory agencies require additional data or information, we would adjust our development period estimatesaccordingly. The impact on revenue of changes in our estimates and the timing thereof is recognized prospectively over the remaining estimated productdevelopment period.Consulting and Technical Assistance ServicesWe recognize revenues from consulting and technical assistance contracts primarily as a result of our DFB Agreement and Auxilium Agreement. Consultingrevenues are recognized ratably over the term of the contract. The consulting and technical assistance obligations to DFB expired in March 2011. Treasury Stock The Company accounts for treasury stock under the cost method and includes treasury stock as a component of stockholders’ equity. Accounts receivable and Allowance for Doubtful Accounts Trade accounts receivable are stated at the amount the Company expects to collect. We maintain allowances for doubtful accounts for estimated lossesresulting from the inability of its customers to make required payments. We consider the following factors when determining the collectability of specificcustomer accounts: customer credit-worthiness, past transaction history with the customer, current economic industry trends, and changes in customerpayment terms. Our accounts receivable balance is typically due from its two large pharmaceutical customers. These companies have historically paidtimely and have been financially stable organizations. Due to the nature of the accounts receivable balance, we believe the risk of doubtful accounts isminimal. If the financial condition of our customers were to deteriorate, adversely affecting their ability to make payments, additional allowances would berequired. We provide for estimated uncollectible amounts through a charge to earnings and a credit to a valuation allowance. Balances that remainoutstanding after we have used reasonable collection efforts are written off through a charge to the valuation allowance and a credit to accounts receivable. Werecorded no material bad debt expense in each of the last three years. The allowance for doubtful accounts balance was $30,581 and $32,758, at December31, 2011 and 2010, respectively. As of December 31, 2011, accounts receivable of $3.2 million includes approximately $2.3 million due from DFB under the earn-out provision andapproximately $0.9 million in royalties due from Auxilium in accordance with the terms of our agreements. Reimbursable Third Party Development CostsWe accrued expenses for research and development that are reimbursable by us under the Auxilium Agreement. We capitalize certain patent costs related toestimated third party development costs that are reimbursable under the Auxilium Agreement. In August 2011, through the amendment and restatement of ourdevelopment and license agreement with Auxilium, we have clarified the rights and responsibilities of the joint development of XIAFLEX. We resolved whathad been an on-going dispute with Auxilium concerning the appropriate amount of creditable third party development expenses related to the lyophilization ofthe injection formulation and certain patent expenses for research and development costs that are reimbursable under the Auxilium Agreement. We agreed toreimburse Auxilium by offsetting future royalties payable for the amount invoiced us for third party development costs related to the development of thelyophilization of the injection formulation. Any estimates are based on contractual terms, historical development costs, reviewing third party data andexpectations 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. These revisions couldresult in an incremental increase or decrease in research and development costs. For example, the Auxilium Agreement provides that Auxilium and BioSpecificswill share equally in third party costs for the development of the lyophilization of the injection formulation and certain patent expenses which are creditableagainst future royalty revenues.As of December 31, 2011 our net reimbursable third party development and certain patent costs accrual is zero. Research and Development ExpensesResearch and development expenses include, but are not limited to, internal costs, such as salaries and benefits, costs of materials, lab expense, facility costsand overhead. Research and development (“R&D”) expenses also consist of third party costs, such as medical professional fees, product costs used in clinicaltrials, consulting fees and costs associated with clinical study arrangements. We may fund R&D at medical research institutions under agreements that aregenerally cancelable. All of these costs are charged to R&D as incurred, which may be measured by percentage of completion, contract milestones, patientenrollment, or the passage of time. F-10Source: BIOSPECIFICS TECHNOLOGIES CORP, 10-K, March 13, 2012Powered 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 Content Clinical Trial ExpensesOur cost accruals for clinical trials are based on estimates of the services received and efforts expended pursuant to contracts with various clinical trial centersand clinical research organizations. In the normal course of business we contract with third parties to perform various clinical trial activities in the ongoingdevelopment of potential drugs. The financial terms of these agreements are subject to negotiation and vary from contract to contract and may result in unevenpayment flows. Payments under the contracts depend on factors such as the achievement of certain events, the successful enrollment of patients, thecompletion of portions of the clinical trial, or similar conditions. The objective of our accrual policy is to match the recording of expenses in our financialstatements to the actual cost of services received and efforts expended. As such, expenses related to each patient enrolled in a clinical trial are recognized ratablybeginning upon entry into the trial and over the course of the patient’s continued participation in the trial. In the event of early termination of a clinical trial, weaccrue an amount based 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.Income TaxesDeferred tax assets and liabilities are recognized based on the expected future tax consequences, using current tax rates, of temporary differences between thefinancial statement carrying amounts and the income tax basis of assets and liabilities. A valuation allowance is applied against any net deferred tax asset if,based on the weighted available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.We use the asset and liability method of accounting for income taxes, as set forth in Accounting Standards Codification 740-10-25-2. Under this method,deferred income taxes, when required, are provided on the basis of the difference between the financial reporting and income tax basis of assets and liabilities atthe statutory rates enacted for future periods. In accordance with Accounting Standards Codification 740-10-45-25, Income Statement Classification ofInterest and Penalties, we classify interest associated with income taxes under interest expense and tax penalties under other.Stock Based CompensationThe Company has two stock-based compensation plans in effect which are described more fully in Note 9. Accounting Standards Codification 718,Compensation - Stock Compensation (“ASC 718”) requires the recognition of compensation expense, using a fair-value based method, for costs related to allshare-based awards including stock options and common stock issued to our employees and directors under our stock plans. It requires companies to estimatethe 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 vestis recognized as expense on a straight-line basis over the requisite service periods in our Consolidated Statements of Operations.Under the ASC 718, we estimate the fair value of our employee stock awards at the date of grant using the Black-Scholes option-pricing model, whichrequires the use of certain subjective assumptions. The most significant of these assumptions are our estimates of the expected volatility of the market price ofour stock and the expected term of an award. When establishing an estimate of the expected term of an award, we consider the vesting period for the award, ourrecent historical experience of employee stock option exercises (including forfeitures) and the expected volatility. When there is uncertainty in the factors used todetermine the expected term of an award, we use the simplified method. 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. The company didnot grant stock options during the 2011 and 2010 periods. Further, ASC 718 requires that employee stock-based compensation costs to be recognized over the requisite service period, or the vesting period, in a mannersimilar to all other forms of compensation paid to employees. The allocation of employee stock-based compensation costs to each operating expense line areestimated based on specific employee headcount information at each grant date and estimated stock option forfeiture rates and revised, if necessary, in futureperiods if actual employee headcount information or forfeitures differ materially from those estimates. As a result, the amount of employee stock-basedcompensation costs we recognize in each operating expense category in future periods may differ significantly from what we have recorded in the currentperiod. F-11Source: BIOSPECIFICS TECHNOLOGIES CORP, 10-K, March 13, 2012Powered 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 Content Stock-based compensation expense recognized under ASC 718 was as follows: December 31, 2011 2010 2009 Research and development $ 96,849 $ 109,385 $ 108,465 General and administrative 420,518 1,792,396 1,381,618 Total stock-based compensation expense $517,367 $1,901,781 $1,490,083 We account for stock options granted to persons other than employees or directors at fair value using the Black-Scholes option-pricing model in accordancewith Accounting Standards Codification 505-50, Equity Based Payments to Non-Employees (“ASC 505-50”). Stock options granted to such persons andstock options that are modified and continue to vest when an employee has a change in employment status are subject to periodic revaluation over their vestingterms. We recognize the resulting stock-based compensation expense during the service period over which the non-employee provides services to us. The stock-based compensation expense related to non-employee consultants for the years ended December 31, 2011, 2010 and 2009 was zero, $685,096 and zero,respectively.Property, Plant and EquipmentProperty, plant and equipment are stated at cost, less accumulated depreciation. Machinery and equipment, furniture and fixtures, and autos are depreciatedon the straight-line basis over their estimated useful lives of 5 to 10 years.Patent CostsWe amortize intangible assets with definite lives on a straight-line basis over their estimated useful lives, ranging from 2 to 8 years, and review for impairmenton a quarterly basis and when events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable.As of December 31, 2011, the Company’s capitalized costs related to certain patents paid by Auxilium on behalf of the Company and are reimbursable toAuxilium under the Auxilium Agreement. These patent costs are creditable against future royalty revenues. At December 31, net patent costs consisted of: 2011 2010 2009 Patents, net $190,416 $173,443 $223,458 The amortization expense for patents was $50,685, $36,041 and $33,983, for the years ended December 31, 2011, 2010 and 2009. The net patentamortization expense for 2010 was $18,339 due to a reduction of reimbursable patents fees under the Auxilium Agreement from prior periods. The estimatedaggregate amortization expense for each of the next five years is as follows:2012 $52,000 2013 46,000 2014 36,000 2015 13,000 2016 13,000 F-12Source: BIOSPECIFICS TECHNOLOGIES CORP, 10-K, March 13, 2012Powered 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 Content Income Taxes In accordance with Accounting Standards Codification 740-10-45-25, Income Statement Classification of Interest and Penalties (“ASC 740-10-45-25”) weclassify interest associated with income taxes under interest expense and tax penalties under other.Qualifying Therapeutic Discovery Project Program In November 2010, we were notified that we had been awarded a total cash grant of approximately $426,000 under the Qualifying Therapeutic DiscoveryProject program administered under section 48D of the Internal Revenue Code, of which approximately $102,000 relates to qualifying expenses we hadpreviously incurred during the 2009 fiscal year which was received during the fourth quarter of fiscal 2010. The remainder of the grant of approximately$324,000 was received in February 2011 based on qualifying expenses that we incurred during the 2010 fiscal year. In the 2010 period, we recognized the full$426,000 of the grant since we had already incurred all of the qualifying expenses. Since this program is non-recurring, we elected to classify this revenue asother income in the Consolidated Statement of Operations.Future Impact of Recently Issued Accounting StandardsIn May 2011, the Financial Accounting Standards Board (“FASB”) issued a new standard on fair value measurement and disclosure requirements. The newstandard changes fair value measurement principles and disclosure requirements including measuring the fair value of financial instruments that are managedwithin a portfolio, the application of applying premiums and discounts in a fair value measurement, and additional disclosure about fair value measurements.The new standard is effective for interim and annual periods beginning after December 15, 2011. We do not expect a material impact with the adoption of thisnew standard.In June 2011, the FASB issued a new standard on the presentation of comprehensive income. The new standard eliminated the current option to report othercomprehensive income and its components in the statement of changes in equity. Under the new standard, companies can elect to present items of net incomeand other comprehensive income in one continuous statement or in two separate, but consecutive statements. The new standard is effective at the beginning offiscal years beginning after December 15, 2011, and we will comply with this requirement in the first quarter 2012.In September 2011, the FASB issued a new standard to simplify how an entity tests goodwill for impairment. The new standard allows companies an optionto first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basisfor determining if it is necessary to perform the two-step quantitative goodwill impairment test. Under the new standard, a company is no longer required tocalculate the fair value of a reporting unit unless the company determines, based on the qualitative assessment, that it is more likely than not that its fair valueis less than its carrying amount. The new standard is effective for annual and interim goodwill impairment tests performed for fiscal years beginning afterDecember 15, 2011. We do not expect a material impact with the adoption of this new standard.3. FAIR VALUE MEASUREMENTSThe authoritative literature for fair value measurements established a three-tier fair value hierarchy, which prioritizes the inputs in measuring fair value. Thesetiers are as follows: Level 1, defined as observable inputs such as quoted market prices in active markets; Level 2, defined as inputs other than the quotedprices in active markets that are either directly or indirectly observable; and Level 3, defined as significant unobservable inputs (entity developedassumptions) in which little or no market data exists.As of December 31, 2011, the Company held certain investments that are required to be measured at fair value on a recurring basis. The following tablespresent the Company’s fair value hierarchy for these financial assets as of December 31, 2011, 2010 and 2009:December 31, 2011 Fair Value Level 1 Level 2 Level 3 Cash and cash equivalents $3,196,831 $3,196,831 - - Certificates of Deposit 5,000,000 5,000,000 - - F-13Source: BIOSPECIFICS TECHNOLOGIES CORP, 10-K, March 13, 2012Powered 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 Content December 31, 2010 Fair Value Level 1 Level 2 Level 3 Cash and cash equivalents $2,470,852 $2,470,852 - - Certificates of Deposit 5,360,970 5,360,970 - - December 31, 2009 Cash and cash equivalents $3,950,389 $3,950,389 - - Certificates of Deposit 4,548,541 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 during the period. Dilutedearnings per share is computed by dividing net income by the weighted-average number of common shares outstanding during the period increased to includeall additional common shares that would have been outstanding assuming potentially dilutive common shares, resulting from option exercises, had beenissued and any proceeds thereof used to repurchase common stock at the average market price during the period. In periods in which there is a net loss,potentially dilutive common shares are excluded from the computation of diluted earnings per share as their effect would be anti-dilutive. 2011 2010 2009 Net income (loss) for diluted computation $6,601,626 $(1,508,540) $(1,956,543) Weighted average shares: Basic 6,340,648 6,261,214 6,065,939 Effect of dilutive securities: Stock options 611,738 - - Diluted 6,952,386 6,261,214 6,065,939 Net income (loss) Per Share: Basic $1.04 $(0.24) $(0.32)Diluted $0.95 $(0.24) $(0.32)For the years ended December 31, 2010 and 2009, 912,001 and 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 net loss.5. INVENTORIES, NETNone.6. PROPERTY, PLANT AND EQUIPMENTProperty, plant and equipment from continuing operations consist of: December 31, 2011 2010 2009 Machinery and equipment $562,610 $562,610 $562,610 Furniture and fixtures 91,928 91,928 91,928 Leasehold improvements 1,185,059 1,185,059 1,185,059 1,839,597 1,839,597 1,839,597 Less accumulated depreciation and amortization (1,839,597) (1,839,597) (1,838,987) $- $- $610 F-14Source: BIOSPECIFICS TECHNOLOGIES CORP, 10-K, March 13, 2012Powered 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 Content Total depreciation expense amounted to zero, $610 and $1,687 for calendar years 2011, 2010 and 2009, respectively.7. ACCOUNTS PAYABLE AND ACCRUED LIABILITIESAccounts payable and accrued liabilities consist of the following: December 31, 2011 2010 2009 Trade accounts payable and accrued expenses $407,954 $674,917 $378,872 Accrued legal and other professional fees 50,000 77,442 70,935 Accrued payroll and related costs 144,048 140,725 134,702 $601,002 $893,084 $584,509 8. INCOME TAXES The provision for income taxes consists of the following: Year ended December 31, 2011 2010 2009 Current taxes: Federal $- $- $(198,239)State 3,525 1,351 1,784 Total current taxes 3,525 1,351 (196,455)Deferred taxes: Federal (122,593) - - State (1,219,190) - - Total deferred taxes (1,341,783) Total provision for income taxes $(1,338,258) $1,351 $(196,455) 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, 2011 2010 2009 Statutory rate 34.0% 34.0% 34.0%State income taxes, net of federal income tax benefit 7.1% 5.0% 5.0%Stock-based compensation 4.0% (42.8%) (23.9%)Other, net (5.9%) 21.4% 10.7%Increase (decrease) in valuation allowance (64.6%) (17.6%) (25.8%)Effective tax rate (benefit) (25.4%) - 3.2% The effective rate reconciliation includes the permanent differences and changes in valuation allowance for windfalls, stock-based compensation, and netoperating loss. F-15Source: BIOSPECIFICS TECHNOLOGIES CORP, 10-K, March 13, 2012Powered 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 Content Year ended December 31, 2011 2010 2009 Tax credit carry forward $1,027,633 $1,027,633 $1,039,390 Deferred revenues 293,297 466,981 741,714 Other 17,252 - 54,846 Options 1,687,780 1,757,303 406,517 Net operating loss carry forward 21,992 350,617 556,504 Net deferred tax assets before valuation allowance 3,047,955 3,602,534 2,798,971 Valuation allowance - (3,602,534) (2,798,971)Net deferred tax asset $3,047,955 $- $- In assessing the realization of deferred tax assets, we consider whether it is more likely than not that some portion or all of the deferred tax assets will not berealized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which the temporarydifferences representing net future deductible amounts become deductible. Based on our current and anticipated future taxable income, we have released thevaluation allowance for all or our deferred tax assets. At December 31, 2010, we had a full valuation allowance of $3.6 million against our tax assets. In 2011, 2010 and 2009, we had $0.7 million, $2.0 millionand $1.9 million of unutilized tax deductible expenses from the exercise of non-qualified and disqualified disposition of incentive stock options,respectively. Based on the results of our operations over the last two years, the growth in the market for XIAFLEX, and the trend in actual and anticipatedroyalty income, we have determined that is was more likely than not that the benefit of our deferred tax assets will be realized. Consequently, we haveeliminated the valuation allowance of $3.6 million and increased our deferred tax assets by $0.3 million to reflect the application of our state statutory rates of7.1% to temporary differences.Under the ASC 718-25-09, we recognized the tax effect of $4.6 million in disqualifying disposition of options and the exercise of nonqualified options in ourfinancial statements for the year ended December 31, 2011. The exercise of nonqualified options and disposition of disqualified options lowered our taxespayable by $1.9 million, reduced our tax assets related to non-qualified options by $0.2 million and increased additional paid in capital and provision forincome tax benefits by $1.7 million and $30,239, respectively. Additionally, we utilized tax assets from our federal and state net operating loss carryforwardsof $0.3 million and deferred licensing revenue of $0.2 million to reduce our taxes payable. Because our state net operating losses exceeded our federal netoperating losses we set up a valuation allowance of $0.2 million against our tax asset for our state net operating loss carryforwards.In the 2010 period we had a tax expense of $1,351. The income tax expense for 2010 was the result of minimum New York State taxes. As of December 31, 2011, the Company believes that there are no significant uncertain tax positions, and no amounts have been recorded for interest andpenalties. The Company does not anticipate any events that would require it to record a liability related to any uncertain tax position. 9. STOCKHOLDERS’ EQUITYStock Option PlansIn July 1997, the Company's stockholders approved a stock option plan (the “1997 Plan”) for eligible key employees, directors, independent agents, andconsultants who make a significant contribution toward the Company's success and development and to attract and retain qualified employees which expiredin July 2007. Under the 1997 Plan, qualified incentive stock options and non-qualified stock options may be granted to purchase up to an aggregate of500,000 shares of the Company's common stock, subject to certain anti-dilution provisions. The exercise price per share of common stock may not be lessthan 100% (110% for qualified incentive stock options granted to stockholders owning at least 10% of common shares) of the fair market value of theCompany's common stock on the date of grant. In general, the options vest and become exercisable in four equal annual installments following the date ofgrant, although the Company’s board of directors, at its discretion, may provide for different vesting schedules. The options expire ten years (five years forqualified incentive stock options granted to stockholders owning at least 10% of common shares) after such date. The Company filed with the Securities andExchange Commission a Registration Statement on Form S-8 for the 1997 Plan on September 26, 1997 to register these securities. In accordance with termsof the 1997 Plan, no options were granted ten years after the effective date of the 1997 Plan, or July 2007. In July 2007, approximately 231,000 stock optionsexpired unissued, and there are no shares available for grant remaining under the 1997 Plan. As of December 31, 2011 there were 9,000 options outstandingunder the 1997 Plan. F-16Source: BIOSPECIFICS TECHNOLOGIES CORP, 10-K, March 13, 2012Powered 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 Content In August 2001, the Company's stockholders approved a stock option plan (the “2001 Plan”), with terms similar to the 1997 Plan. The 2001 Plan authorizesthe 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 shares authorized for grant from 750,000 shares to 1,750,000shares, an increase of 1,000,000 shares. On June 17, 2009, our stockholders approved an amendment to the 2001 Plan to extend the term of the 2001 Planfrom April 6, 2011 to April 23, 2019 and to authorize an additional 300,000 shares of our common stock for issuance under the 2001 Plan. A total of2,050,000 shares of common stock are now authorized for issuance under the amended 2001 Plan. The Company filed with the Securities and ExchangeCommission a Registration Statement on Form S-8 for the 2001 Plan on October 5, 2007 and on July 15, 2009 as amended to register these securities. As ofDecember 31, 2011 options to purchase 1,261,425 shares of common stock were outstanding under the 1997 Plan and 2001 Plan, and a total of 269,098shares available for grant remaining under the 2001 Plan.The summary of the stock options activity is as follows for year ended: Shares WeightedAverageExercisePrice Outstanding at December 31, 2010 1,346,425 $7.81 2011Options granted - - Options exercised (85,000) 0.97 Options canceled or expired -- -- Outstanding at end of year 1,261,425 8.27 Options exercisable at year end 1,163,925 7.16 Shares available for future grant 269,098 -- The Company did not grant any stock options during 2011.The following table summarizes information relating to stock options by exercise price at December 31, 2011:Option Outstanding WeightedAverage Life WeightedAverage Exercisable WeightedAverageOption Exercise Price Shares (years) Exercise Price Shares Price $0.83-2.00 576,925 3.76 $1.01 576,925 $1.01 4.00-6.00 257,000 5.42 4.69 257,000 4.69 13.00-14.00 125,000 6.38 13.51 117,500 13.53 17.00-18.99 70,000 6.93 17.69 50,000 17.48 19.00-21.00 112,500 6.75 20.57 62,500 20.23 26.00-28.00 45,000 7.69 26.43 45,000 26.43 29.00-31.00 75,000 7.88 29.53 55,000 29.64 1,261,425 5.18 $8.27 1,163,925 $7.16 F-17Source: BIOSPECIFICS TECHNOLOGIES CORP, 10-K, March 13, 2012Powered 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 Content We did not grant any stock options during 2011. The weighted-average grant-date fair value for options granted during 2009 was $24.43 per share. During the2011, 2010 and 2009, $82,450, $673,375 and $380,029 were received from stock options exercised by employees, respectively. The aggregate intrinsicvalue of options outstanding and exercisable as of December 31, 2011 was approximately $11.0 million. Aggregate intrinsic value represents the total pre-taxintrinsic value, based on the closing price of our common stock of $16.62 on December 30, 2011, which would have been received by the option holders hadall option holders exercised their options as of that date. Total unrecognized compensation cost related to non-vested stock options outstanding as of December31, 2011 was approximately $0.2 million which we expect to recognize over a weighted-average period of 1.5 years.10. COMMITMENTS AND CONTINGENCIESLease AgreementsOur corporate headquarters are currently located at 35 Wilbur St., Lynbrook, NY 11563. As previously reported, our previous lease for our headquartersterminated on June 30, 2010. Our subsidiary, ABC-NY (together with the Company, the “Tenant”) and Wilbur St. Corp. (the “Landlord”) were parties to alease agreement initially dated as of January 30, 1998 and modified as of June 24, 2009 (the “Lease Agreement”), pursuant to which the Landlord leased to theTenant the premises located at 35 Wilbur Street, Lynbrook, NY 11563 (the “Premises”) until June 30, 2010 and for a monthly rental price of $11,250 plusutilities and real estate taxes. Following the expiration of the Lease Agreement, the Tenant continued to lease the Premises from the Landlord on a month-to-month basis. We notified the Landlord of our termination of the Lease Agreement effective March 31, 2011, but continue to hold over in the Premises.On April 14, 2011, the Landlord entered into an agreement to sell the Premises to an unrelated third party named 35 Wilbur Street Associates, LLC. InOctober 2011, this agreement was terminated, and the sale did not occur. We are currently evaluating our options with respect to remaining in or leaving thePremises. Until that evaluation is complete, we will continue to hold over in the Premises on a month-to-month basis.The Company's operations are principally conducted on leased premises. Future minimum annual rental payments required under non-cancelable operatingleases are zero.Rent expense under all operating leases amounted to approximately $135,000, $136,250 and $136,250 for calendar year 2011, 2010 and 2009.11. RELATED PARTY TRANSACTIONSAs described above in Note 10, the Tenant and the Landlord were parties to the Lease Agreement. Following the expiration of the Lease Agreement, the Tenantcontinued to lease the Premises from the Landlord on a month-to-month basis. We notified the Landlord of our termination of the Lease Agreement effectiveMarch 31, 2011, but continue to hold over in the Premises.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 by ABC-NY arediscretionary and subject to certain vesting provisions. The Company made no contributions to this plan for calendar years 2011, 2010 or 2009.13. SUBSEQUENT EVENTSIn a February 23, 2012 press release, Auxilium announced that it had entered into a Collaboration Agreement with Actelion pursuant to which Actelion has theright to develop and commercialize XIAFLEX for the treatment of Dupuytren’s contracture and Peyronie’s disease in Canada, Australia, Brazil and Mexico.According to the release, XIAFLEX for the treatment of Dupuytren’s contracture has been accepted for review by Health Canada and regulatory action isexpected in the second half of 2012. Additionally, Actelion expects to file for approval of XIAFLEX for the treatment of Dupuytren’s contracture in Australia,Brazil and Mexico over the next 12 months. Under the terms of the agreement with Actelion, Auxilium is to receive a $10 million upfront payment fromActelion, as well as up to $16 million in potential regulatory, pricing, and reimbursement milestone payments and $42.5 million in potential sales milestonepayments. Under the terms of the Auxilium Agreement, we will receive a certain percentage from Auxilium in connection with the upfront payment by Actelion,and a specified percentage of any additional milestones received by Auxilium. We will also receive from Auxilium royalties from net sales and payments oncosts of goods sold in Canada, Australia, Brazil and Mexico, which will be a specified percentage of what Auxilium is entitled to receive from Actelion withoutregard to any offset that Actelion may have with respect to Auxilium. F-18Source: BIOSPECIFICS TECHNOLOGIES CORP, 10-K, March 13, 2012Powered 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 Content We have evaluated subsequent events for recognition or disclosure through the time of filing these consolidated financial statements on Form 10-K with theU.S. Securities and Exchange Commission on March 12, 2012.14. 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, 2011 and 2010. The data has beenderived from the Company's unaudited consolidated financial statements that, in management's opinion, include all adjustments (consisting of normalrecurring adjustments) necessary for a fair presentation of such information when read in conjunction with the Consolidated Financial Statements and Notesthereto. The results of operations for any quarter are not necessarily indicative of the results of operations for any future period. First Second Third Fourth Quarter Quarter Quarter Quarter Year ended December 31, 2011 Net revenues $1,856,915 $5,008,824 $1,921,395 $2,608,592 Operating profit (loss) 135,323 3,320,009 452,100 1,284,335 Net income (loss) 3,691,123 2,569,341 268,836 71,326 Basic earnings per share (1) $0.59 $0.40 $0.04 $0.01 Diluted earnings per share (1) $0.51 $0.36 $0.04 $0.01 First Second Third Fourth Quarter Quarter Quarter Quarter Year ended December 31, 2010 Net revenues $2,659,032 $854,807 $1,004,097 $1,143,413 Operating profit (loss) (271,963) (936,157) (501,784) (323,128)Net income (loss) (254,180) (910,232) (484,297) 140,169 Basic earnings per share (1) $(0.04) $(0.15) $(0.08) $0.02 Diluted earnings per share (1) $(0.04) $(0.15) $(0.08) $0.02 F-19Source: BIOSPECIFICS TECHNOLOGIES CORP, 10-K, March 13, 2012Powered 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 Content EXHIBIT INDEXThe documents listed below are being filed or have previously been filed on behalf of the Company and are incorporated herein by reference from thedocuments indicated and made a part hereof. Exhibits not identified as previously filed are filed herewith:ExhibitNumberDescription 3.1Registrant’s Certificate of Incorporation, as amended (incorporated by reference to Exhibit 3.1 of the Registrant’s Form 10-KSB filed with theCommission 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-KSB filed with theCommission on March 2, 2007)4.1Rights Agreement dated as of May 14, 2002 (incorporated by reference as Exhibit 1 to the Registrant’s Form 8-A filed with the Commission onMay 30, 2002)4.2Amendment No. 1 to Rights Agreement, dated June 19, 2003 (incorporated by reference to Exhibit 10.19 of the Registrant’s Form 10-KSB filedwith the Commission on March 2, 2007)4.3Amendment No. 2 to Rights Agreement, dated as of February 3, 2011 (incorporated by reference to Exhibit 4.1 to the Registrant’s CurrentReport on Form 8-K filed with the Securities and Exchange Commission on February 4, 2011)10.1Lease Modification Agreement dated June 22, 2009 between ABC-NY, the Company and Wilbur St. Corp. (incorporated by reference toExhibit 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 Street Corporation (incorporatedby reference to Exhibit 10.5 of the Registrant’s Form 10-KSB filed with the Commission on March 2, 2007)10.3Asset Purchase Agreement between the Company, ABC-NY and DFB dated March 3, 2006 (incorporated by reference to Exhibit 2.1 of theRegistrant’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 toExhibit 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 toExhibit 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 referenceto 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-8 filed with theCommission on September 26, 1997)10.8Amended and Restated 2001 Stock Option Plan of Registrant (incorporated by reference to Appendix D of the Registrant’s Schedule14A filedwith the Commission on April 30, 2009)10.9Change of Control Agreement, dated June 18, 2007 between the Company and Henry Morgan (incorporated by reference to Exhibit 10.21 of theRegistrant’s Form 10-KSB filed with the Commission on September 26, 2007)10.10Change of Control Agreement, dated June 18, 2007 between the Company and Michael Schamroth (incorporated by reference to Exhibit 10.22of the Registrant’s Form 10-KSB filed with the Commission on September 26, 2007)10.11Change of Control Agreement, dated June 18, 2007 between the Company and Dr. Paul Gitman (incorporated by reference to Exhibit 10.23 ofthe Registrant’s Form 10-KSB filed with the Commission on September 26, 2007)10.12Agreement dated August 27, 2008 (incorporated by reference to Exhibit 10.1 of the Registrant’s Form 8-K filed with the Commission onSeptember 5, 2008) Source: BIOSPECIFICS TECHNOLOGIES CORP, 10-K, March 13, 2012Powered 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 Content 10.13Amended and Restated Development and License Agreement dated December 11, 2008 and effective December 17, 2008 between the Companyand Auxilium Pharmaceuticals, Inc. (incorporated by reference to Exhibit 10.1 of the Registrant’s Form 8-K filed with the Commission onDecember 19, 2008)10.14Executive Employment Agreement, dated August 5, 2008 between the Company and Thomas L. Wegman (incorporated by reference to Exhibit10.1 of the Registrant’s Form 8-K filed with the Commission on August 8, 2008)10.15Change of Control Agreement, dated October 1, 2008 between the Company and Dr. Matthew Geller (incorporated by reference to Exhibit 10.23of the Registrant’s Form 10-K filed with the Commission on March 31, 2009)10.16Second Amended and Restated Development and License Agreement, dated as of August 31, 2011, by and between BioSpecifics TechnologiesCorp. and Auxilium Pharmaceuticals, Inc. (incorporated by reference to Exhibit 10.1 of the Registrant's Form 8-K filed with the SEC onSeptember 1, 2011)10.17Settlement Agreement, dated as of August 31, 2011, by and between BioSpecifics Technologies Corp. and Auxilium Pharmaceuticals, Inc.(incorporated by reference to Exhibit 10.2 of the Registrant's Form 8-K filed with the SEC on September 1, 2011)14Amended and Restated Code of Business Conduct and Ethics (incorporated by reference to Exhibit 14.1 of the Registrant’s Form 10-KSB filedwith 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 the Commission on March2, 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 herewith Source: BIOSPECIFICS TECHNOLOGIES CORP, 10-K, March 13, 2012Powered 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 Content 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 signed on its behalf bythe undersigned, thereto duly authorized individual. Date: March 12, 2012 BIOSPECIFICS TECHNOLOGIES CORP. By:/s/ Thomas L. Wegman Name: Thomas L. Wegman Title:President In accordance with the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in thecapacities and on the dates indicated. SIGNATURE TITLE /s/ Thomas L. Wegman President, Director, and Principal Executive, FinancialName: Thomas L. Wegman and Accounting OfficerDate: March 12, 2012 /s/ Dr. Matthew Geller DirectorName: Dr. Matthew Geller Date: March 12, 2012 /s/ Dr. Paul Gitman DirectorName: Dr. Paul Gitman Date: March 12, 2012 /s/ George Gould DirectorName: George Gould Date: March 12, 2012 /s/ Henry G. Morgan DirectorName: Henry G. Morgan Date: March 12, 2012 /s/ Michael Schamroth DirectorName: Michael Schamroth Date: March 12, 2012 /s/ Dr. Mark Wegman DirectorName: Dr. Mark Wegman Date March 12, 2012 /s/ Toby Wegman DirectorName: Toby Wegman Date: March 12, 2012 Source: BIOSPECIFICS TECHNOLOGIES CORP, 10-K, March 13, 2012Powered 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 23 Consent of the Independent Registered Certified Public Accounting Firm We hereby consent to the incorporation of our audit report dated March 12, 2012 with respect to the consolidated balance sheets of BioSpecifics TechnologiesCorp. as of December 31, 2011 and 2010, and the related statements of income, stockholders' equity and cash flows for each of the years in the three-yearperiod ended December 31, 2011, 2010, 2009 and our report dated March 12, 2012 with respect to internal control over financial reporting as of December 31,2011, in Form 10-K for the year ended December 31, 2011 for BioSpecifics Technologies Corp. /s/ Tabriztchi & Co., CPA, P.C. Garden City, NYMarch 12, 2012 Source: BIOSPECIFICS TECHNOLOGIES CORP, 10-K, March 13, 2012Powered 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 31 CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICERPURSUANT TO RULES 13a-14(a) AND 15d-14(a) OFTHE SECURITIES EXCHANGE ACT OF 1934 I, Thomas L. Wegman, certify that: 1.I have reviewed this annual report on Form 10-K for the fiscal year ended December 31, 2011 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 necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by thisreport; 3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial 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 (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-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 under oursupervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us byothers 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 designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements forexternal 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 conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s mostrecent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likelyto 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 financial reporting, to theregistrant’s auditors and to the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): (a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which arereasonably 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 the registrant’s internalcontrols over financial reporting. Date: March 12, 2012 /s/ Thomas L. Wegman Thomas L. Wegman President, Principal Executive and Financial Officer Source: BIOSPECIFICS TECHNOLOGIES CORP, 10-K, March 13, 2012Powered 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 32 CERTIFICATION OF PRINCIPAL FINANCIAL OFFICERPURSUANT TO RULES 13a-14(b) AND 15d-14(b) OFTHE SECURITIES EXCHANGE ACT OF 1934 AND18 U.S.C. SECTION 1350 The undersigned, Thomas L. Wegman, the President, Principal Executive Officer and Principal Financial Officer of BioSpecifics Technologies Corp. (the“Company”), DOES HEREBY CERTIFY that: 1.The Company’s annual report on Form 10-K for the fiscal year ended December 31, 2011 (the “Report”), fully complies with the requirements ofSection 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 operation of the Company forthe period covered by the Report. IN WITNESS WHEREOF, the undersigned has executed this certification this 12th day of March, 2012. /s/ Thomas L. Wegman Thomas L. Wegman President, Principal Executive and Financial Officer This certification shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange of 1934, as amended, or otherwise subject to liabilitypursuant to that section. Such certification shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, orthe Securities Exchange Act of 1934, as amended, except to the extent that the Company specifically incorporates it by reference. Source: BIOSPECIFICS TECHNOLOGIES CORP, 10-K, March 13, 2012Powered 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.Source: BIOSPECIFICS TECHNOLOGIES CORP, 10-K, March 13, 2012Powered 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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