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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-21937
CERUS CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 68-0262011
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
2525 STANWELL DR., SUITE 300
CONCORD, CALIFORNIA 94520
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(925) 603-9071
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, PAR VALUE $.001 PER SHARE
(TITLE OF CLASS)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The approximate aggregate market value of the Common Stock held by
non-affiliates of the registrant, based upon the closing price of the Common
Stock reported on the Nasdaq National Market on March 24, 2000, was
$487,427,794.
As of March 24, 2000, there were 12,786,551 shares of the registrant's
common stock outstanding.
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TABLE OF CONTENTS
PAGE
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PART I
Item 1. Business.................................................... 3
Item 2. Properties.................................................. 32
Item 3. Legal Proceedings........................................... 32
Item 4. Submission of Matters to a Vote of Security Holders......... 32
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters......................................... 33
Item 6. Selected Financial Data..................................... 34
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 35
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk........................................................ 38
Item 8. Financial Statements and Supplemental Data.................. 38
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 38
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 39
Item 11. Executive Compensation...................................... 39
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 39
Item 13. Certain Relationships and Related Transactions.............. 39
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K......................................................... 40
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PART I
This report contains forward-looking statements. These forward-looking
statements are based on Cerus Corporation's current expectations about its
business and industry, and include, but are not limited to, statements
concerning Cerus' plans to continue development of its current product
candidates; conduct clinical trials with respect to its product candidates; seek
regulatory approvals; address certain markets; engage third-party manufacturers
to supply its clinical trial and commercial requirements; continue to rely on a
third party for a marketing, sales and distribution capability; and evaluate
additional product candidates for subsequent clinical and commercial
development. In some cases, these statements may be identified by terminology
such as "may," "will," "should," "expects," "plans," "anticipates," "believes,"
"estimates," "predicts," "potential," or "continue' or the negative of such
terms and other comparable terminology. In addition, statements that refer to
expectations or other characterizations of future events or circumstances are
forward-looking statements. These statements involve known and unknown risks and
uncertainties that may cause Cerus' or its industry's results, levels of
activity, performance or achievements to be materially different from those
expressed or implied by the forward-looking statements. Factors that may cause
or contribute to such differences include, among others, those discussed under
the captions "Business," "Risk Factors" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations." Forward-looking
statements not specifically described above also may be found in these and other
sections of this report. Cerus undertakes no obligation to update any
forward-looking statement to reflect events after the date of this report.
ITEM 1. BUSINESS
OVERVIEW
Cerus Corporation is developing medical products based on a platform
technology that prevents nucleic acid (DNA and RNA) replication. Cerus' initial
application of this technology is the development of systems to inactivate
viruses, bacteria and other pathogens in blood components used for transfusion.
These blood components are platelets, fresh frozen plasma (FFP) and red blood
cells. Cerus is also focusing research and development efforts on other
potential health care applications for this platform technology, including
pathogen inactivation of source plasma used for fractionation, improving the
outcomes of stem cell transplantation procedures and treatments for
proliferative disorders, such as restenosis.
Cerus' platelet pathogen inactivation system is in Phase 3 clinical trials
in the United States and in Europe. Cerus' FFP pathogen inactivation system is
in Phase 3 clinical trials in the United States, and its red blood cell pathogen
inactivation system is in Phase 1 clinical trials in the United States. Cerus'
allogeneic cellular immune therapy (ACIT) program, designed to enhance the
safety and efficacy of bone marrow transplants, is in Phase 1 clinical trials in
the United States. Cerus' pathogen inactivation system for source plasma and
treatment for restenosis are in pre-clinical development.
Cerus is conducting its platelet, FFP and red blood cell pathogen
inactivation product development and commercialization programs with Baxter
Healthcare Corporation pursuant to agreements providing for development,
manufacture and marketing of pathogen inactivation systems for these blood
components. These agreements provide for Baxter and Cerus to generally share
development expenses, for Baxter's exclusive right and responsibility to market
the systems worldwide and for Cerus to receive a share of the gross profits from
the sale of the systems.
INDUSTRY BACKGROUND
Blood Supply Market. Blood transfusions are required to treat a variety of
medical conditions, including anemia, low blood volume, surgical bleeding,
trauma, acquired and congenital bleeding disorders and chemotherapy-induced
blood deficiencies. Worldwide, over 90 million whole blood donations occur each
year. Approximately 40 million of those donations occur in North America,
Western Europe and Japan, the major geographical markets for Cerus' products.
Whole blood is composed of plasma, the liquid portion of blood containing
essential clotting proteins, and three cellular blood components: platelets, red
blood cells and white blood cells. Platelets are essential to
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coagulation, while red blood cells carry oxygen to tissues and carbon dioxide to
the lungs. Leukocytes play a critical role in immune and other defense systems,
but can cause harmful transfusion-related immune reactions in, or transmit
disease to, transfusion recipients.
Blood collection centers periodically experience shortages of critical
blood components due to temporary increases in demand, reduced donor
availability during holiday periods and the limited shelf life of cellular blood
components. To efficiently allocate the limited available blood supply and to
optimize transfusion therapy, essentially all donated blood is separated into
platelets, plasma and red blood cells. These blood components are obtained
either by manually processing donor units of whole blood or by apheresis, a
process by which a specific blood component is separated and collected from the
donor's blood while the other components are simultaneously returned to the
donor.
Patients requiring transfusions typically are treated with one or more
specific blood components required for their particular deficiency, except in
cases of rapid, massive blood loss, in which whole blood may be transfused.
Platelets often are used to treat cancer patients following chemotherapy or
organ transplantation. Red blood cells frequently are administered to patients
with trauma or surgical bleeding, acquired chronic anemia or genetic disorders,
such as sickle cell anemia. Plasma used for transfusions is stored in frozen
form and is referred to as fresh frozen plasma, or FFP. FFP generally is used to
control bleeding. Plasma also can be separated, or "fractionated," into
different products that are used to expand blood volume, fight infections or
treat diseases such as hemophilia.
Blood Supply Contaminants. A primary goal of every blood collection center
is to provide blood components for transfusion that are free of viruses,
bacteria and protozoans. Despite recent improvements in donor screening and in
the testing and processing of blood, patients receiving blood transfusions still
face a number of significant risks from blood contaminants, as well as adverse
immune and other transfusion-related reactions induced by leukocytes. Viruses
such as hepatitis B (HBV), hepatitis C (HCV), human immunodeficiency virus
(HIV), cytomegalovirus (CMV) and human T-cell lymphotropic virus (HTLV) can
present life-threatening risks. In addition, bacteria, the most common agents of
transfusion-transmitted disease, can cause complications such as sepsis, which
can result in serious illness or death. Many other agents can transmit disease
during transfusion, including the protozoans that cause malaria and Chagas'
disease.
Infectious pathogens are not the only cause of adverse events arising from
the transfusion of blood components. Leukocytes present in a blood unit can
multiply after transfusion, mounting an often fatal graft versus host immune
response against the recipient. Similarly, alloimmunization, an immune response
that can develop from repeated exposure to transfused leukocytes, can
significantly reduce the efficacy of subsequent transfusions. Moreover,
leukocytes themselves may harbor and transmit bacteria and infectious viruses,
such as HIV, CMV and HTLV.
Emerging and unidentified pathogens also present a threat to the blood
supply, a problem illustrated by the recent history of HIV. It is estimated that
HIV was present in the blood supply for at least seven years before it was
identified as the causative agent of AIDS and at least eight years before a test
was commercially implemented to detect the presence of HIV antibodies in donated
blood. During those years, many transfusion recipients were infected with the
virus, including approximately 70% of patients with severe hemophilia. Recently,
new variants of HIV and other viruses such as hepatitis G have been identified.
Transfused blood is not routinely tested for these emerging viruses, despite the
potential risk to transfusion recipients.
The risk of transmission of pathogens from an infected donor is compounded
by a number of factors. If a unit of blood contains an infectious pathogen,
dividing the blood into its components may expose three or more patients to the
pathogen in that unit. Blood products are commonly pooled from several donors to
form a single therapeutic dose, which increases the recipient's risk of
infection. Similarly, patient populations that require frequent transfusions,
such as patients with cancer, suppressed immune systems, congenital anemias and
kidney and liver disorders, experience a heightened risk of infection due to
multiple donor exposures.
Current Approaches to Address Blood Supply Contamination. Public awareness
in recent years of the significant rates of hepatitis, HIV and other viral
transmission from blood transfusions has led to expanded efforts to improve the
safety of the blood supply. For many years, the only approach available to
reduce the
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risk of transmission of diseases was donor screening interviews. In addition to
required donor screening, diagnostic tests have been developed to detect the
presence of certain infectious pathogens known to be transmitted in blood.
However, there remain a number of other blood-borne pathogens for which tests
have not been routinely administered or even developed.
Although donor screening and diagnostic testing of donated blood have been
successful in reducing the incidence of transmission of some of these known
pathogens, these current methods have significant limitations. As the preceding
table indicates, tests are currently performed for only a limited number of
blood-borne pathogens. Moreover, these tests occasionally fail, and human
errors, such as mistesting or mislabeling, further expose patients to
contaminated blood. All tests currently approved for use in blood centers are
intended to detect antibodies directed against a pathogen or surface antigens.
These tests can fail if performed during the "infectivity window," that is,
early in the course of an infection before antibodies or antigens appear in
detectable quantities. Similarly, tests for viral infection may be ineffective
in detecting a genetic variant of the virus that the test was not developed to
detect. For instance, certain strains of HIV, such as Subtype O, are sometimes
not detected in the standard HIV tests. Finally, there are no current tests
available to screen effectively for many emerging pathogens, and testing cannot
be performed for pathogens that have yet to be identified. As a result of these
limitations, a number of infectious pathogens still pass into the blood supply.
In light of these continuing concerns, many patients have attempted to
mitigate the risks of transfusion through "autologous donation," donation of
their own blood for anticipated future use, or, where autologous donation is
impracticable, through the designation of donors such as family members.
Although autologous donations eliminate many risks, the blood collected is still
subject to the risk of bacterial growth during storage and is rarely available
in emergency situations or when a patient is chronically ill. In addition, the
statistical incidence of positive diagnostic test results from designated donor
blood has been found to be as high as in random donor blood.
Blood centers and health care providers have initiated additional
procedures in an effort to address pathogen transmission issues. For example,
platelet apheresis is sometimes used to limit donor exposure from pooled,
manually collected platelets. In addition, blood centers may quarantine single
donor plasma apheresis units until after the infectivity window has elapsed,
followed by confirmatory retesting of the donor, if the donor is available, to
verify the safety of the donated plasma. However, quarantined plasma can be
unwieldy, and the process is expensive and inventory is difficult to manage.
Moreover, a quarantine cannot be used with platelets and red blood cells because
these components have shelf lives that are shorter than the infectivity window
related to antibody production. No commercial processes are currently available
to eliminate pathogens in platelets and red blood cells. Two pathogen
inactivation methods are used commercially for FFP; treatment with
solvent-detergent and methylene blue, which is used in Europe. Because the
solvent-detergent process pools hundreds of units of plasma, the potential risk
of transmitting pathogens not inactivated by the process, such as parvovirus
B19, is increased. Methylene blue has not been shown to be effective in the
inactivation of intracellular viruses and bacteria.
The current method used by blood centers to inactivate leukocytes utilizes
gamma irradiation. This nonspecific method for inactivating leukocytes has a
narrow range of efficacy: insufficient treatment can leave viable leukocytes in
the blood, while excessive treatment can impair the therapeutic function of the
desirable blood components being transfused. Leukocyte depletion by filtration
decreases the concentration of leukocytes in transfusion units, but does not
inactivate or completely eliminate leukocytes.
Economic Costs of Blood Supply Contamination. In economically developed
countries, many of the tests and inactivation measures described above are
mandated by regulatory agencies, resulting in a safer and more uniform blood
supply, but also significantly increasing costs of processing and delivering
blood products.
Moreover, the development and widespread use of testing for many unusual or
low-incidence pathogens may not be cost-effective to undertake. For example, the
development of tests to detect the presence of all forms of harmful bacteria
would be extremely expensive. As a result, the only test regularly conducted to
detect the presence of bacteria is the test for the bacterium that causes
syphilis. With managed health care organizations and other third-party payors
increasingly challenging the cost of medical services performed, these cost
limitations may become more pronounced in the future.
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The continuing risk of transmission of serious diseases through transfusion
of contaminated blood components from both known and unknown pathogens, together
with the limitations of current approaches to providing a safe blood supply,
have created the need for a new approach to pathogen inactivation that is safe,
easy to implement and cost-effective. To address this need, a successful
approach should have broad application in the effective inactivation of
clinically significant pathogens, whether or not currently identified, while
providing therapeutically functional blood components.
THE CERUS SOLUTION
Cerus is developing pathogen inactivation systems to improve the safety of
blood transfusions. These systems employ Cerus' proprietary small molecule
compounds. Studies conducted by Cerus have indicated the ability of these
compounds to inactivate a broad array of viral and bacterial pathogens that may
be transmitted in blood transfusions. Cerus believes that, as a result of the
mechanism of action of its proprietary technology, its systems also have the
potential to inactivate many new pathogens before they are identified and before
tests are developed to detect their presence in the blood supply. Because Cerus'
systems are being designed to inactivate rather than merely test for pathogens,
Cerus' systems also have the potential to reduce the risk of transmission of
pathogens that would otherwise remain undetected by testing.
Cerus' inactivation compounds act by preventing the replication of DNA or
RNA. Platelets, FFP and red blood cells do not contain nuclear DNA or RNA. When
the inactivation compounds are introduced into the blood components for
treatment, they cross bacterial cell walls or viral membranes, then move into
the interior of the nucleic acid structure. When subsequently activated by an
energy source, such as light, the compounds bind to the nucleic acid of the
viral or bacterial pathogen, preventing replication of the nucleic acid. This
process prevents infection because a virus, bacteria or other pathogenic cell
must replicate in order to cause infection. The Cerus compounds react in a
similar manner with the nucleic acid in leukocytes. This interaction inhibits
the leukocyte activity that is responsible for certain adverse immune and other
transfusion-related reactions. These compounds are designed to react with
nucleic acid only during the pathogen inactivation process and not after the
treated blood component is transfused. The systems are also designed to reduce
the amount of unbound, or residual, inactivation compound and breakdown products
of the inactivation process prior to transfusion.
Cerus' pathogen inactivation systems are being designed to integrate into
current blood collection, processing and storage procedures. Furthermore, Cerus
believes that the use of its pathogen inactivation products could, over time,
lead to a reduction in the use of certain costly procedures that are currently
employed in blood component transfusions, such as gamma irradiation, CMV testing
and leukocyte filtration.
CERUS STRATEGY
Cerus' objective is to improve the safety of blood products by becoming the
global leader in the development and commercialization of systems to inactivate
pathogens in blood components used for transfusion and for fractionation into
derivative blood products. Cerus' compounds target and bind with DNA and RNA,
thereby preventing pathogens from replicating and causing infection. Using this
approach, the Cerus systems have the ability to inactivate a broad array of
pathogens, with the potential to inactivate emerging pathogens (such as HIV and
hepatitis C were in the 1980s, prior to the development of screening and testing
methods). Key elements of Cerus' strategy to achieve this objective are the
following:
Establish Pathogen Inactivation Systems as the Standard of
Care. Domestically, the target customers for Cerus' blood component treatment
systems are the approximately 105 community blood center organizations that
collect approximately 85% of blood in the United States. There is an even
greater concentration among blood centers in foreign countries. Baxter, Cerus'
development and marketing partner, has a significant marketing presence in these
blood centers in the United States and abroad. In addition, Cerus has developed
strong relationships with prominent transfusion medicine experts in a number of
these centers as well as in the broader medical communities worldwide. Cerus
intends to work with these experts to encourage support for the adoption of its
pathogen inactivation systems as the standard of care.
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Leverage Expertise and Core Technology. Cerus is using its broad expertise
in nucleic acid chemistry to develop proprietary compounds designed to
inactivate infectious pathogens in blood components. Cerus has first sought to
gain regulatory approval and commercialize its platelet pathogen inactivation
system. Cerus' strategy is to build on its core technology and experience gained
in developing its platelet pathogen inactivation system to develop its FFP and
red blood cell pathogen inactivation systems. Cerus believes that, if regulatory
approval of its first product is obtained, market penetration achieved by such
product may facilitate the entry into the market of its other products. Cerus
further believes that it can leverage its development activities and expertise
to develop a pathogen inactivation system for source plasma. In addition, Cerus
believes that its nucleic acid-targeting platform technology has potential
application in a number of health and research-related fields, such as bone
marrow transplantation and restenosis, which are beyond the initial area of
pathogen inactivation targeted by Cerus.
Use Strategic Alliances. Cerus has received significant development funding
from Baxter, and intends to leverage Baxter's manufacturing, marketing and
distribution expertise and resources. Cerus believes that Baxter's established
position as a manufacturer and leading supplier of devices, disposables and
other products related to the transfusion of human blood products can provide
Cerus with access to an established marketing, sales and distribution network.
The pathogen inactivation systems are being designed to integrate into Baxter's
current product line and into current blood collection, processing and storage
processes. Cerus has entered into an agreement for development of its pathogen
inactivation system for source plasma with the Consortium for Plasma Science, an
industry group funded by several large plasma fractionators with a charter to
improve the safety of plasma derivative products. Under this agreement,
currently in its initial term which will expire on June 30, 2000, the Consortium
is providing development funding and technical assistance in the development of
the system and Cerus will pay the Consortium a royalty based on a percentage of
product sales, if any. Cerus intends to continue to develop its products
together with partners that can provide direct funding and manufacturing,
marketing and distribution resources and expertise.
Protect and Enhance Proprietary Position. Cerus believes that the
protection of its proprietary technologies is important to its business
prospects and that its intellectual property position may create competitive
barriers to entry into the blood component treatment market. Cerus currently
holds issued and allowed patents covering a number of fundamental aspects of
Cerus' blood component treatment system technology. Cerus intends to continue to
pursue its patent filing strategy and to vigorously defend its intellectual
property position against infringement.
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PRODUCT DEVELOPMENT
Cerus is developing treatment systems to inactivate infectious pathogens
and leukocytes in platelets, FFP, red blood cells and source plasma and to
improve the outcomes of bone marrow transplantation procedures. The following
table identifies Cerus' product development programs:
CERUS PRODUCT INACTIVATION DEVELOPMENT
PROGRAM THERAPEUTIC INDICATION IN DEVELOPMENT COMPOUND STATUS
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Platelets Surgery, cancer chemotherapy, Platelet Pathogen S-59 Phase 1 and 2 Clinical Trials
transplantation, bleeding disorders Inactivation completed; European Phase 3
System (CE Marking) Clinical Trial
ongoing, enrollment completed
in March 2000; Phase 3
Clinical Trial enrollment
commenced in the United States
in July 1999
Plasma (FFP) Surgery, transplantation, bleeding FFP Pathogen S-59 Phase 1 and 2 Clinical Trials
disorders Inactivation completed; Phase 3 Clinical
System Trial enrollment commenced in
the United States in July 1999
Red Blood Cells Surgery, transplantation, anemia, Red Blood Cell S-303 Phase 1a and 1b Clinical
cancer chemotherapy, trauma Pathogen Trials completed; Phase 1c
Inactivation Clinical Trial protocol
System currently under discussion
with the FDA
Allogeneic Allogeneic bone marrow transplant to Leukocyte S-59 Phase 1 Clinical Trial
Cellular treat leukemia and lymphoma Treatment Systems enrollment commenced in the
Immunotherapies United States in June 1999
(ACIT)
Plasma for Coagulation factor and immunoglobulin Source Plasma -- Pre-clinical development
Fractionation deficiencies, blood volume expansion Pathogen
Inactivation
System
Clinical Trial Design. Cerus conducts clinical trials using several
designs. In a controlled study, treated and untreated blood components are
administered to subjects who are randomly assigned to either a test group or a
control group, and the results are compared. In a cross-over study, each subject
receives both treated and untreated blood components in random order. To avoid
bias in reporting side effects, studies are usually blinded. In a single-blind
study, subjects are not told whether they are receiving treated or untreated
blood components. In a double-blind study, neither the subject (patient) nor the
investigator (physician) knows whether the subject is receiving treated or
untreated blood components.
PLATELET PROGRAM
Platelet Usage and Market. Platelets are cellular components of blood that
are an essential part of the clotting mechanism. Platelets facilitate blood
clotting and wound healing by adhering to damaged blood vessels and to other
platelets. Platelet transfusions are used to prevent or control bleeding in
platelet-deficient patients, such as those undergoing chemotherapy or organ
transplant. Transfusion units of platelets are obtained either by combining the
platelets from four to six whole blood donations (pooled random donor
platelets), or in an automated procedure in which a therapeutic dose of
platelets is obtained from a single donor (apheresis or single donor platelets).
A principal motivation for platelet apheresis is to limit donor exposure from
pooled, manually collected platelets. Platelet transfusions may also require one
or more additional procedures with additional costs. Cerus believes that its
platelet pathogen inactivation system may reduce the need for many of these
procedures.
Cerus estimates the production of platelets in 1999 to have been 2.0
million transfusion units in North America, 1.3 million transfusion units in
Western Europe and 0.7 million transfusion units in Japan. In the United States,
based on a study of six blood centers conducted in October 1998 on behalf of
Cerus (the "Cost Study"), the estimated base cost for a transfusion unit of
apheresis platelets ranges from approximately $400 to $550 and for a transfusion
unit of random donor platelets ranges from approximately $170 to $330. These
estimates include donor screening and diagnostic tests, such as those for HIV,
HTLV, HBV and HCV. Blood centers may also charge up to $210 per unit for
additional procedures such as gamma irradiation and CMV screening. The table
below indicates, based on the Cost Study, the estimated range of costs for the
additional
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procedures for platelet transfusions described above for each of apheresis and
random donor platelet transfusion units. The frequency of use and additional
charge for each procedure vary widely.
ADDED COST PER
-------------------------------
APHERESIS RANDOM DONOR
TRANSFUSION TRANSFUSION
PROCEDURE UNIT UNIT
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Gamma irradiation........................................ $10 to $50 $60 to $210
CMV screening............................................ $15 to $35 $90 to $210
Leukocyte filtration..................................... $32 to $60 $32 to $ 60
Platelet Pathogen Inactivation System. Cerus is developing a system for
pathogen inactivation in platelets using a technology that combines light and
Cerus' proprietary inactivation compound, S-59, which is a synthetic small
molecule from a class of compounds known as psoralens. The selection of S-59 was
based on analyses of over 100 psoralen derivatives assessing safety, ability to
inactivate pathogens and leukocytes and post-treatment platelet function.
When illuminated, S-59 undergoes a specific and irreversible chemical
reaction with nucleic acid. This chemical reaction renders the genetic material
of a broad array of pathogens and cells incapable of replication. A virus,
bacteria or other pathogenic cell must replicate in order to cause infection. A
similar reaction with leukocyte nucleic acid inhibits the leukocyte activity
that is responsible for certain adverse immune and other transfusion-related
reactions. Most of the S-59 is converted to breakdown products during and after
the inactivation reaction. Studies conducted by Cerus with pre-clinical models
have indicated that, following transfusion, the unbound S-59 and its unbound
breakdown products are rapidly metabolized and excreted. As a further safety
measure, the system under development employs a removal process designed to
reduce the amount of residual S-59 and unbound breakdown products prior to
transfusion (the S-59 reduction device or SRD).
Cerus' platelet pathogen inactivation system, developed with Baxter, has
been designed for use in the blood center setting. The system consists of a
disposable processing set, containing the S-59 compound and the SRD, and an
illumination device to deliver light to trigger the inactivation reaction. The
current configuration of the platelet photochemical treatment system under
development involves the collection of the platelets, as normally performed, but
with two-thirds of the plasma replaced by a platelet additive solution (PAS III)
followed by transfer of the platelets to a disposable treatment container with
the S-59 compound. The mixture of S-59 and platelets is then illuminated for
approximately three minutes. The final step employs the SRD, a passive
adsorption device, to reduce the amount of residual S-59 and unbound S-59
breakdown products. Following the SRD treatment, which takes approximately six
hours, the platelets are transferred to the final storage container.
Development Status. Cerus' platelet pathogen inactivation system is in
Phase 3 clinical trials in Europe and the United States.
In vitro and non-primate animal model studies conducted by Cerus have
indicated the efficacy of Cerus' platelet pathogen inactivation system for the
inactivation of a broad array of viral and bacterial pathogens transmitted
through blood transfusions, including HIV, CMV, model hepatitis viruses and
thirteen strains of bacteria. A primate study conducted by Cerus in
collaboration with the National Institutes of Health demonstrated that platelet
concentrates contaminated with high levels of hepatitis B virus or hepatitis C
virus, and treated with Cerus' pathogen inactivation system, did not transmit
the viruses to susceptible animals. Cerus has tested these pathogens at and
above concentrations that it believes may be present in contaminated platelet
concentrates. However, there can be no assurance that contamination levels will
never exceed the capacity of Cerus' platelet pathogen inactivation system.
Similar in vitro studies have indicated inhibition of leukocyte activity,
including the synthesis of certain proteins associated with adverse immune
reactions. In addition, three studies conducted by Cerus have indicated that use
of the platelet pathogen inactivation system prevented graft-versus-host disease
in two pre-clinical mouse models. Because of the mechanism of action of its
platelet pathogen inactivation system and based on studies performed with
psoralens other than S-59, Cerus believes that its platelet system may also
inactivate protozoans in platelets. However, to date Cerus has
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conducted no studies on protozoans with S-59 in platelets, and there can be no
assurance that Cerus' platelet pathogen inactivation system would effectively
inactivate protozoans. To complete the safety profile for regulatory submission,
Cerus will be required to perform additional pre-clinical safety studies of its
S-59 psoralen compound. Planned studies include a three month chronic
transfusion study; other studies may be performed as required.
In March 1996, Cerus completed a Phase 1a single-blind, randomized clinical
trial in 23 healthy human subjects divided between two sites. This study used a
cross-over design in which all subjects received both treated and untreated
platelets. The study compared the proportion of transfused platelets circulating
in the first hours after transfusion (post-transfusion recovery) and the length
of time the transfused platelets circulate in the recipient's bloodstream
(lifespan) of a small volume of five-day-old treated and untreated platelets.
Under current FDA regulations, platelets may not be stored for more than five
days after collection from the donor. This pilot study was conducted without the
use of the SRD, which was evaluated in Phase 2a.
In September 1996, Cerus completed a Phase 1b single-blind, randomized,
cross-over clinical trial in 10 healthy human subjects. This study compared the
tolerability and safety of photochemically treated platelets processed with the
SRD with untreated platelets. This second study involved the transfusion of full
therapeutic doses of platelets given at the maximum tolerable transfusion rate.
No adverse events attributable to transfusion with the treated platelets were
reported. Post-transfusion levels of S-59 in plasma and clearance of S-59 were
measured. These clinical data, together with Cerus' pre-clinical data, reflected
acceptable safety margins.
In November 1996, Cerus completed a Phase 2a clinical trial designed to
measure the post-transfusion platelet recovery and lifespan of photochemically
treated platelets processed with the SRD and stored for five days. This study
was conducted in 16 healthy subjects from the Phase 1a study to permit
comparisons with prior results. In Cerus' Phase 2a clinical study report, the
average post-transfusion recovery of five-day-old platelets treated with Cerus'
platelet pathogen inactivation system was lower than that of the untreated five-
day-old platelets. Although this difference was statistically significant, the
average post-transfusion recovery was within the range of average recoveries
reported in most published studies funded by NIH and Baxter, as well as in a
number of other studies reported in the scientific literature. These published
studies used currently approved processing and storage systems. In addition, in
Cerus' clinical study, the average lifespan of treated platelets was shorter
than that of untreated platelets. Although this difference was statistically
significant and the average lifespan was lower than the range of average
untreated platelet lifespans reported in the published studies referred to
above, the average lifespan was within the distribution of ranges of untreated
platelet lifespans reported in such studies. Post-transfusion recovery and
lifespan of five-day-old standard platelets varies widely, even in healthy
individuals. As a result, there is no established regulatory or clinical
standard for post- transfusion recovery and lifespan of platelets. The clinical
investigators reported no adverse events attributable to transfusion with the
treated platelets.
In 1997, Cerus completed a Phase 2b clinical trial in 15 healthy subjects
available from the Phase 2a clinical trial to assess the combined effect of
treatment with the platelet pathogen inactivation system and gamma irradiation
on post-transfusion platelet recovery and lifespan. The mean platelet recovery
and life span data collected in Phase 2b were consistent with those of the 2a
study, and fell within the range of published studies of currently approved
platelet concentrates. The clinical investigators reported no adverse events
attributable to transfusion with the treated platelets. Cerus believes, based on
discussions with the FDA, that the post-transfusion recovery and lifespan of
platelets following treatment with Cerus' platelet pathogen inactivation system
are clinically acceptable.
In 1998, Cerus completed a Phase 2c clinical trial in 29 platelet-deficient
patients. The Phase 2c trial was initially designed as a double-blind,
randomized, cross-over study in which double dose platelet transfusions were
given to platelet-deficient patients and post-transfusion platelet count
increment and bleeding time correction were measured. Cerus amended the Phase 2c
protocol to include patients for whom only platelet count increment would be
measured and to add a second site to evaluate its system with platelets
collected using alternate automated collection equipment. Based on the results
from this study, the FDA cleared Cerus
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to proceed into a Phase 3 clinical trial. The Phase 2c clinical trial, given its
small size, was of limited statistical power.
In July 1999, Cerus commenced a United States Phase 3 clinical trial of
treated apheresis donor platelets in patients requiring platelet transfusions.
The trial is a double-blind, randomized, controlled study designed to evaluate
the ability of platelets treated with Cerus' pathogen inactivation system to
control clinical bleeding. The United States Phase 3 trial will enroll
approximately 600 patients, who will receive either treated or untreated
platelets for a specified period of time. The primary endpoint to be evaluated
is the clinical severity of bleeding.
The Phase 3 United States apheresis clinical trial is designed to assess
the therapeutic efficacy of platelets treated with the pathogen inactivation
system for apheresis platelets. In order to obtain FDA approval of the platelet
pathogen inactivation system for use in treating pooled random donor platelets,
Cerus will need to complete development of an additional configuration of its
platelet system and may be required by the FDA to conduct additional clinical
studies. Additionally, because of the risk of bacterial growth, current FDA
rules require that pooled platelets be transfused within four hours of pooling
and, as a result, most pooling occurs at hospitals. However, Cerus' platelet
pathogen inactivation system is intended to be used at blood centers, not at
hospitals, and requires a processing time (including processing with the SRD) of
approximately six hours. Therefore, in order for Cerus' platelet pathogen
inactivation system to be effectively implemented and accepted at blood centers
using pooled random donor platelets, the FDA-imposed limit on the time between
pooling and transfusion would need to be lengthened or eliminated for pooled
random donor platelets treated with Cerus' systems, which are being designed to
inactivate bacteria that would otherwise contaminate the platelets.
In March 2000, Cerus completed enrollment in a European Phase 3 (CE
Marking) clinical trial of treated pooled random donor platelets in 100 patients
requiring platelet transfusions. The study is being conducted in four European
countries. The random donor platelets are collected using the Buffy Coat
process, which is used predominantly in Europe to prepare platelet concentrates.
The trial is a double-blind, randomized, controlled study designed to assess the
therapeutic efficacy of platelets treated with the pathogen inactivation system
for pooled random donor platelets. The primary endpoint in these studies is the
increase in post-transfusion platelet count. Cerus will be required to perform
additional separate clinical studies to qualify the system for its commercial
configuration and for apheresis donor platelets.
FFP PROGRAM
FFP Usage and Market. Plasma is a noncellular component of blood that
contains coagulation factors and is essential for maintenance of intravascular
volume. Plasma is either separated from collected units of whole blood or
collected directly by apheresis. The collected plasma is then packaged and
frozen to preserve the coagulation factors. Some of the frozen plasma is made
available for fractionation into plasma derivatives, while some is designated
for use as FFP. FFP is a source of all blood clotting factors except platelets
and is used to control bleeding in patients who require clotting factors, such
as patients undergoing transplants or other extensive surgical procedures,
patients with chronic liver disease or certain genetic clotting factor
deficiencies.
Cerus estimates the production of FFP in 1999 to have been 2.5 million
transfusion units in North America, 2.2 million transfusion units in Western
Europe and 2.3 million transfusion units in Japan. In the Cost Study, the
estimated base price of a 250 ml transfusion unit of FFP in the United States
ranges from approximately $26 to $55. In comparison, donor retest procedures
have a $56 to $110 added cost per transfusion unit, and solvent detergent
pathogen inactivation is priced at approximately $125 per transfusion unit. A
typical therapeutic transfusion consists of four transfusion units of FFP.
FFP Pathogen Inactivation System. The pathogen inactivation system for FFP
uses the same S-59 psoralen compound and illumination device and an SRD similar
to that being used by Cerus in its clinical trials for its platelet pathogen
inactivation system. The FFP pathogen inactivation system is compatible with
plasma collected either manually or by apheresis. In the Cerus system, untreated
plasma is transferred to a disposable container with S-59. The mixture of S-59
and plasma is then illuminated for approximately three
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minutes. In the final step, the treated plasma then undergoes an SRD step, which
reduces the amount of residual S-59 and unbound S-59 breakdown products, and is
transferred into the final storage container and frozen in accordance with
standard protocols.
Development Status. Cerus' FFP pathogen inactivation system currently is in
Phase 3 clinical trials in the United States.
In vitro studies conducted by Cerus to date have indicated the efficacy of
the FFP pathogen inactivation system for the inactivation in FFP of a broad
array of viral pathogens transmitted through blood transfusion. Because of the
mechanism of action of its FFP pathogen inactivation system, Cerus believes that
its system may also inactivate protozoans and inhibit leukocyte activity.
Although bacterial contamination in FFP is typically not as significant a
problem as in platelets, Cerus believes that the FFP pathogen inactivation
system will inactivate bacteria at the levels typically found in FFP. To date,
Cerus has conducted no studies on protozoans or to detect inhibition of
leukocyte activity in FFP and only limited studies on bacteria in FFP which were
not performed under good laboratory practice standards. There can be no
assurance that Cerus' FFP pathogen inactivation system would effectively
inactivate protozoans, leukocytes or bacteria. Cerus has assessed the impact of
S-59 photochemical treatment on the function of plasma proteins. Plasma derived
from whole blood or apheresis must be frozen within eight hours of collection to
meet the standard as "fresh frozen plasma." After freezing, FFP may be stored
for up to one year, thawed once, and must be transfused within four hours of
thawing. Cerus has measured the in vitro coagulation function activity of
various clotting factors in FFP after photochemical treatment, SRD treatment,
freezing and thawing. Cerus believes that in vitro data from these studies
indicate that treated FFP maintained adequate levels of coagulation function for
FFP. These results are not necessarily indicative of coagulation function that
may be obtained in clinical trials or with the commercial system configuration,
and there can be no assurance that the FDA or foreign regulatory authorities
would view such levels of coagulation function as adequate.
In July 1997, Cerus completed a Phase 1 clinical study in healthy subjects
that demonstrated the safety and tolerability of FFP treated with the pathogen
inactivation system as well as the comparability of post-transfusion coagulation
factors between subjects transfused with treated and untreated FFP.
In November 1998, Cerus completed a Phase 2a clinical trial. In this study,
27 healthy subjects donated plasma. The Phase 2a study showed that
post-transfusion coagulation factor levels of subjects receiving FFP treated
with Cerus' FFP pathogen inactivation system were comparable to those of
subjects receiving untreated FFP. There were no safety issues attributable to
transfusion of the treated FFP.
In 1999, Cerus completed a Phase 2b clinical trial, in patients, of its FFP
pathogen inactivation system. The study was a controlled, double-blind trial in
13 patients diagnosed with chronic liver diseases. Each patient, prior to an
invasive surgical or diagnostic procedure, received a therapeutic dose of up to
two liters of either treated or untreated FFP. Correction of patients' blood
clotting time and certain coagulation factor levels after transfusion were
recorded and compared, and found to be comparable to those of patents receiving
untreated FFP. The Phase 2b clinical trial, given its small size, was of limited
statistical power.
In July 1999, Cerus initiated three Phase 3 clinical trials of its FFP
pathogen inactivation system to address each of the three major clinical
indications for FFP use. The Phase 3a trial is an open-label study in 20 to 35
patients with congenital coagulation factor deficiencies treated with FFP. The
Phase 3b trial is a double-blind, randomized, controlled, trial of treated
versus untreated FFP in 120 patients with chronic liver disease and other
acquired coagulation factor deficiencies requiring FFP transfusions. The Phase
3c trial is a prospective, double-blind, randomized, controlled study of treated
versus untreated FFP used in therapeutic plasma exchange of 30 patients with a
disease called thrombotic thrombocytopenic purpura (TTP). The Phase 3 studies
will assess coagulation factor function and effectiveness of plasma exchange
therapy with treated FFP.
RED BLOOD CELL PROGRAM
Red Blood Cell Usage and Market. Red blood cells are essential components
of blood that carry oxygen to tissues and carbon dioxide to the lungs. Red blood
cells may be transfused as a single treatment in surgical
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and trauma patients with active bleeding or on a repeated basis in patients with
acquired anemia or genetic disorders, such as sickle cell anemia, or in
connection with chemotherapy.
Cerus estimates the production of red blood cells in 1999 to have been 14.0
million transfusion units in North America, 15.5 million transfusion units in
Western Europe and 4.8 million transfusion units in Japan. The Cost Study
indicated that the estimated base cost of a transfusion unit of red blood cells
in the United States ranges from approximately $66 to $93. A typical red blood
cell transfusion consists of two or more red blood cell transfusion units. As
shown in the Cost Study, a red blood cell transfusion may also require one or
more additional procedures with additional costs ranging from $10 to $164 for
each procedure. The procedures are used to address problems presented by
leukocytes and to conduct pathogen diagnostic testing beyond the standard
testing.
ADDED COST
PROCEDURE PER UNIT
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Gamma irradiation.............................. $10 to $ 50
CMV screening.................................. $15 to $ 35
Leukocyte filtration........................... $22 to $ 57
Designated donor............................... $0 to $114
Autologous donor............................... $30 to $164
Red Blood Cell Pathogen Inactivation System. Cerus is developing a system
for pathogen inactivation in red blood cells using a compound that forms
covalent bonds with nucleic acids, as does S-59, but does not require light.
Cerus' method for inactivating pathogens in red blood cells is based on a
proprietary frangible anchor-linker-effector (FRALE) compound, S-303, a small
molecule synthesized by Cerus. The selection of S-303 was based on analyses of
many compounds assessing safety and ability to inactivate pathogens and
leukocytes, and post-treatment red blood cell survival and function.
Development Status. Cerus' red blood cell pathogen inactivation system is
in Phase 1 clinical trials in the United States.
In vitro studies by Cerus have indicated the efficacy of the FRALE process
for the inactivation of a broad array of viral and bacterial pathogens with
preservation of red blood cell function. Because of the mechanism of action of
its red blood cell FRALE treatment system, Cerus believes that its system may
also inactivate protozoans and inhibit leukocyte function. However, Cerus has
conducted no studies on protozoans or to detect inhibition of leukocyte activity
in red blood cells, and there can be no assurance that Cerus' red blood cell
system would be effective to inactivate protozoans or leukocytes. Cerus is
currently conducting toxicology and pathogen inactivation validation studies
consistent with good laboratory practice standards on its red blood cell
pathogen inactivation system.
In May 1999, Cerus completed a Phase 1a clinical trial of its red blood
cell pathogen inactivation system. The study was a randomized, controlled trial
in 42 healthy subjects. The study was designed to evaluate the post-transfusion
viability of treated red blood cells which were stored for 35 days prior to
transfusion. The study showed that the circulation of treated red blood cells
exceeded the American Association of Blood Banks standard for red blood cell
recovery 24 hours after transfusion.
In October 1999, Cerus completed a Phase 1b clinical trial of its red blood
cell pathogen inactivation system. The study included 28 healthy subjects, each
of whom received four transfusions of treated red blood cells. The study
demonstrated there was no detectable immune response directed against treated
red blood cells which were stored for 35 days prior to transfusion. The study
also showed that circulation of treated red blood cells exceeded the American
Association of Blood Banks standard for red blood cell recovery in response to
multiple small doses of treated red blood cells 24 hours after transfusion.
Cerus anticipates that it will conduct a Phase 1c trial to evaluate the
safety and tolerability of full transfusion doses of S-303 treated red blood
cells following the completion of additional development work which is currently
underway. There can be no assurance as to the timing of these studies or
acceptance of the design of the Phase 1c study or any later studies by the FDA.
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ACIT PROGRAM
Cerus believes its proprietary technology may have application in treating
leukocytes (or white blood cells) which are transfused during stem cell
(blood-forming) transplantation procedures used to treat certain cancers such as
lymphoma and leukemia. Cerus has conducted pre-clinical studies which have
indicated that donor white blood cells treated with its technology may reduce
the risk of serious complications and may also improve the availability and
success rate of bone marrow transplantation.
Stem Cell Transplantation. Stem cells used for transplantation can be
harvested from either bone marrow or circulating blood. ACIT uses donor
leukocytes which are transfused to improve immune function in patients whose
immune systems have been weakened by disease or disease-related therapies such
as chemotherapy and radiation therapy. A typical application is following a bone
marrow or stem cell transplantation, which are used principally in leukemia and
lymphoma patients to reconstitute blood-forming cells after chemotherapy or
radiation therapy to kill leukemia and lymphoma cells. The stem cells are
collected from the patient (autologous transplantation) or from a
closely-matched donor (allogeneic transplantation). Autologous transplantation
is typically safer but is not a curative therapy and often results in a relapse
of the disease. Allogeneic transplantation can be curative, but carries
significant risk of complications such as GVHD and viral and bacterial
infections which often lead to the patient's death. GVHD is nearly always fatal
and occurs when the donor leukocytes recognize the patient's body as foreign and
proliferate and attack the patient's healthy tissue. Allogeneic transplantation
also requires very close matching between the donor and the patient. Often,
patients die from the progression of disease while awaiting transplantation from
a matched donor.
Stem Cell Transplantation Market. Bone marrow and stem cell transplantation
are emerging as the primary treatments for many patients diagnosed with a
variety of advanced malignant diseases. Typical diseases for which this therapy
is used include chronic and acute leukemias and non-Hodgkin's lymphoma where
first line therapies such as chemotherapy have not been effective. Each year
over 200,000 new cases of these diseases are diagnosed.
Donor Leukocyte Treatment System. Cerus believes that it can apply its
proprietary technology to slightly modify donor leukocytes to improve the
engraftment of donor stem cells and the reconstitution of a patient's immune
system while greatly reducing the risk of GVHD. Cerus is developing a system
designed to treat the leukocytes in a way that will preserve their therapeutic
properties while eliminating their ability to proliferate and attack the
patient's healthy tissues. Cerus further believes that its technology can
increase the number of suitable stem cell donors available for a patient.
Development Status. In vitro and animal studies conducted and presented by
Cerus have indicated that it can modulate the dosage of its proprietary
technology to slightly modify leukocytes in a way that has the potential to
prevent the leukocytes from proliferating while preserving their ability to aid
engraftment and to improve transplant outcomes. Cerus has also completed animal
studies that indicate that its technology can facilitate engraftment of donor
stem cells, which indicate the system has the potential to increase the number
of patients eligible to receive allogeneic transplants.
In June 1999, Cerus commenced enrollment in a Phase 1 clinical study of its
ACIT system designed to treat allogeneic donor leukocytes with S-59 for use as
supplemental therapy in conjunction with mismatched bone marrow transplantation.
The study is designed to measure the tolerability, safety, and efficacy of S-59
treated allogeneic leukocytes in approximately 30 patients receiving mismatched
allogeneic bone marrow transplants.
Cerus believes that there are potential applications for its ACIT system
beyond allogeneic stem cell transplantation procedures for leukemia and
lymphoma.
SOURCE PLASMA PROGRAM
Cerus believes that its technology may have application in the
decontamination of pooled source plasma which is separated (fractionated) into
commonly used plasma components or fractions. These derivatives include Factor
VIII concentrate, Factor IX concentrate, albumin and immunoglobulins. Worldwide,
approxi-
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mately 11 million liters of plasma are collected and fractionated annually for
treatment of a variety of coagulation factor and immunoglobulin deficiencies.
Annual sales of blood products derived from this fractionation process are
estimated to be approximately $5.0 billion. The market is highly concentrated,
with four manufacturers providing the majority of products derived from human
plasma. The plasma is collected from either dedicated collection facilities as
source plasma, or obtained from blood banks as recovered plasma, or FFP that is
not used for transfusion. Plasma is pooled and then processed into several
specialized plasma derivative proteins used to treat diseases such as hemophilia
and immune deficiency.
The pooling of 5,000 to 10,000 liters, typical for the fractionation
process, introduces the risk of contamination of thousands of blood products
with the inadvertent use of one contaminated unit. In the early 1980's, such
occurrences resulted in the transmission of HIV to approximately 70% of the
hemophiliac community. The FDA has since mandated an improvement in the pathogen
inactivation methods used during processing to reduce the risk of transmission
of infectious pathogens through use of blood products derived from source
plasma. Further, regulatory agencies worldwide are moving towards the
requirement for two decontamination processing steps for all manufactured
components. Today, a variety of inactivation procedures are used for one or more
of the fractionated components during the processing; however, there is no
up-front treatment of plasma prior to the commencement of the fractionation
process.
FUTURE PRODUCT DEVELOPMENT
Cerus believes that its proprietary technology may have applications beyond
inactivating pathogens in blood products and in modifying leukocytes to improve
clinical outcomes of cellular therapies. Cerus is currently researching methods
to apply its technology to prevent or inhibit restenosis, which can restrict or
occlude blood flow through arteries following angioplasty. Cerus is also
researching the application of its technology for the development of "universal"
red blood cells which will not require donor and recipient type matching. Such
immunologically-transparent red blood cells would improve outcomes of patients
who require repeated red blood cell transfusion to treat diseases such as
sickle-cell anemia.
ALLIANCE WITH BAXTER
Cerus has established an alliance with Baxter for the development of
pathogen inactivation systems for transfusion blood products. Under two primary
development, manufacturing and marketing agreements, Cerus and Baxter generally
share development activities with the primary development activity for the
compounds and the pre-clinical and clinical studies by Cerus and the primary
development activity for the system disposable and device at Baxter. Upon
commercialization, Cerus will be required to provide the inactivation compounds
and Baxter will be responsible for manufacturing and assembling the system
disposables and ultraviolet light devices. Baxter will also be responsible for
marketing, selling, and distributing the systems.
Agreement with Baxter for the development of pathogen inactivation systems
for platelets. In December 1993, Cerus entered into a development and
commercialization agreement with Baxter to develop a system for inactivation of
pathogens in platelets used for transfusions. As amended to date, the agreement
provides for Baxter and Cerus to generally share system development costs
equally, subject to mutually agreed budgets established from time to time, and
for Cerus to receive 33.5% of revenue from sales of inactivation system
disposables after each party is reimbursed for its cost of goods above a
specific level. The agreement also provides for Baxter to make a $5 million cash
milestone payment to Cerus upon approval by the FDA of an application to market
products developed under the platelet program, comparable approval in Europe or
termination of the program.
Agreement with Baxter for the development of pathogen inactivation systems
for red blood cells and FFP. In April 1996, Cerus entered into a development and
commercialization agreement with Baxter, principally focused on the development
of plasma and red blood cell pathogen inactivation systems. The agreement was
amended in March 1998 and June 1998. The amended agreement provides for Baxter
and Cerus generally to share red blood cell system development costs equally,
subject to mutually agreed to budgets established from time to time. The
agreement also provides for a sharing of revenue from sales of red blood cell
inactivation system disposables after each party is reimbursed for its cost of
goods and a specified
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percentage allocation, not to exceed 14% of revenue, is retained by Baxter for
marketing and administrative expenses. Also under the agreement, Cerus and
Baxter equally funded the FFP program development through December 31, 1997
after which time Baxter's funding commitment for the FFP development program was
limited to $1.2 million which offset payments owed Baxter in January 1999 and
January 2000. The agreement provides for Cerus to receive 75% and Baxter to
receive 25% of revenue from sales of FFP inactivation system disposables after
each party is reimbursed for its cost of goods and a specified percentage
allocation, not to exceed 14% of revenue, is retained by Baxter for marketing
and administrative expenses. Baxter will be responsible for manufacturing and
marketing the FFP product, and will retain its exclusive, worldwide distribution
license.
As of December 31, 1999, Baxter has made approximately $22.2 million of
development and milestone payments to Cerus and has made $37.0 million of equity
investments.
Baxter has certain discretion in decisions concerning the development and
marketing of pathogen inactivation systems. There can be no assurance that
Baxter will not elect to pursue alternative technologies or product strategies
or that its corporate interests and plans will remain consistent with those of
Cerus. If the agreements with Cerus were terminated, if Baxter failed to provide
the funding committed or if Baxter's product development efforts were
unsuccessful, Cerus may need to obtain additional funding from other sources and
would be required to devote additional resources to the development of its
products, delaying the development of its products. Any such delay would have a
material adverse effect on Cerus' business, financial condition and results of
operations. There can also be no assurance that disputes will not arise in the
future with respect to these agreements. Possible disagreements between Baxter
and Cerus could lead to delays in the research, development or commercialization
of certain planned products or could require or result in time-consuming and
expensive litigation or arbitration and would have a material adverse effect on
Cerus' business, financial condition and results of operations.
A development program under the agreements may be terminated by either
Baxter or Cerus on 90 days' notice in the case of the platelet program, or 270
days' written notice in the case of the FFP or red blood cell program. If either
party so terminates a program, the other party gains exclusive development and
marketing rights to the program, and the terminating party's sharing in program
revenue is significantly reduced.
ALLIANCE WITH THE CONSORTIUM FOR PLASMA SCIENCE
In December 1998, Cerus and the Consortium entered into an agreement for
the development of a pathogen inactivation system for source plasma used for
fractionation. The Consortium is co-funded by four plasma fractionation
companies: Alpha Therapeutics Corporation, Aventis Behring, Bayer Corporation
and Baxter. The Consortium, which is a separate entity from its members,
provides research and development funding worldwide for technologies to improve
the safety of plasma derivative products. Under the agreement, the Consortium is
funding development of Cerus' proprietary technology for use with source plasma,
subject to an annual review process. Subject to the Consortium meeting certain
funding requirements, Cerus will pay the Consortium a royalty based on a
percentage of product sales, if any. The initial term of the agreement expires
on June 30, 2000. There is no guarantee that the agreement will be renewed.
RESEARCH GRANTS
Cerus has an ongoing federal grant which is administered by the National
Institutes of Health (NIH) which funds pre-clinical research related to its ACIT
program. The grant is a three-year award totaling approximately $800,000. This
federal grant must be renewed annually by submitting an Application for
Continuing Support to the NIH. Cerus retains all rights to technology funded by
these grants, subject to certain rights of the federal government if Cerus fails
to commercialize the technology in a timely manner or if action is necessary to
alleviate health or safety needs not addressed by Cerus, to meet requirements
for public use specified by federal regulations or in the event Cerus were to
breach certain agreements. The United States government also has a
non-exclusive, non-transferable, irrevocable, paid-up license to practice or
have practiced for or on its behalf any subject invention throughout the world.
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MANUFACTURING AND SUPPLY
Cerus has used, and intends to continue to use, third parties to
manufacture and supply the psoralen and FRALE inactivation compounds for its
systems for use in clinical trials and for the potential commercialization of
its products in development. Cerus has no experience in manufacturing products
for commercial purposes and does not have any manufacturing facilities.
Consequently, Cerus is dependent on contract manufacturers for the production of
compounds and on Baxter for other system components for development and
commercial purposes.
Under its agreements with Baxter, Cerus is responsible for developing and
delivering its proprietary compounds for effecting pathogen inactivation to
Baxter for incorporation into the final system configuration. Baxter is
responsible for manufacturing or supplying the disposable units, such as blood
storage containers and related tubing, as well as any device associated with the
inactivation process. This arrangement applies both to the current supply for
clinical trials and, if applicable regulatory approvals are obtained, the future
commercial supply. In order to provide the inactivation compounds for its
platelet and FFP pathogen inactivation systems, Cerus has contracted with two
manufacturing facilities for pilot-scale synthesis of S-59, although one
currently performs only the final step of the manufacturing process. Cerus
currently has a stock of compound sufficient to support the anticipated
remaining clinical trials planned for the platelet and FFP pathogen inactivation
systems. There can be no assurance that Cerus will be able to contract for the
manufacturing of products and compounds for its pathogen inactivation systems in
the future on reasonable terms, if at all.
The red blood cell pathogen inactivation system will require the
manufacture of S-303, which Cerus has produced in only limited quantities for
its research, pre-clinical and early clinical development requirements. Although
Cerus has contracted with a manufacturing facility that has produced sufficient
quantities of S-303 for pre-clinical and clinical studies, no assurance can be
given that this or any new manufacturer will be able to produce S-303 on a
commercial scale or that Cerus will be able to enter into arrangements for the
commercial-scale manufacture of S-303 on reasonable terms, if at all.
Under the terms of its agreements with Cerus, Baxter is responsible for
manufacturing or supplying the disposable units, such as blood storage
containers and related tubing, as well as any device associated with the
inactivation processes. If these agreements were terminated or if Baxter
otherwise failed to deliver an adequate supply of components, Cerus would be
required to identify other third-party component manufacturers. There can be no
assurance that Cerus would be able to identify such manufacturers on a timely
basis or enter into contracts with such manufacturers on reasonable terms, if at
all. Any delay in the availability of devices or disposables from Baxter could
adversely affect the timely submission of products for regulatory approval or
the market introduction and subsequent sales of such products and would have a
material adverse effect on Cerus' business, financial condition and results of
operations. Moreover, the inclusion of components manufactured by others could
require Cerus to seek new approvals from government regulatory authorities,
which could result in delays in product delivery. There can be no assurance that
Cerus would receive any such required regulatory approvals. Any such delay would
have a material adverse effect on Cerus' business, financial condition and
results of operations.
There can be no assurance that Cerus will be able to contract for the
manufacturing of products and compounds for its pathogen inactivation systems on
reasonable terms, if at all. In the event that Cerus is unable to obtain or
retain third-party manufacturing, it will not be able to commercialize its
products as planned. Cerus' dependence upon third parties, including Baxter, for
the manufacture of critical portions of its pathogen inactivation systems may
adversely affect Cerus' operating margins and its ability to develop, deliver
and sell products on a timely and competitive basis. Failure of any third-party
manufacturer to deliver the required quantities of products on a timely basis
and at commercially reasonable prices could materially adversely affect Cerus'
business, financial condition and results of operations. In the event Cerus
undertakes to establish its own commercial manufacturing capabilities, it will
require substantial additional funds, manufacturing facilities, equipment and
personnel.
Cerus purchases certain key components of its compounds from a limited
number of suppliers. While Cerus believes that there are alternative sources of
supply for such components, establishing additional or replacement suppliers for
any of the components in Cerus' compounds, if required, may not be accomplished
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quickly and could involve significant additional costs. Any failure by Cerus to
obtain any of the components used to manufacture Cerus' compounds from
alternative suppliers, if required, could limit Cerus' ability to manufacture
its compounds and could have a material adverse effect on Cerus' business,
financial condition and results of operations.
MARKETING, SALES AND DISTRIBUTION
The market for blood component treatment systems consists of the blood
centers and hospitals that collect, store and distribute blood and blood
components. In the United States, the American Red Cross collects and
distributes approximately 50% of the nation's supply of blood and blood
components. Other major blood centers include the New York Blood Center and
United Blood Services, each of which distributes approximately 6% of the
nation's supply of blood and blood components. In Western Europe and Japan,
various national blood transfusion services or Red Cross organizations collect,
store and distribute virtually all of their respective nations' blood and blood
components supply. Hospital-affiliated blood banks also store and dispense blood
and blood components but generally do not collect significant quantities of
blood. Cerus believes that, if its products receive appropriate regulatory
approvals, the relatively concentrated nature of the market may facilitate its
ability to penetrate the market. However, if Cerus fails to gain market
acceptance from any of these participants, its business, results of operations
and financial condition will be materially adversely affected.
Cerus believes that market acceptance of Cerus' pathogen inactivation
systems will depend, in part, on Cerus' ability to provide acceptable evidence
of the safety, efficacy and cost-effectiveness of its products, as well as the
ability of blood centers to obtain appropriate FDA licenses and adequate
reimbursement for such products. Cerus believes that market acceptance of its
pathogen inactivation systems will also depend upon the extent to which
physicians, patients and health care payors perceive that the benefits of using
blood components treated with Cerus' systems justify the additional costs and
processing requirements in a blood supply that has become safer in recent years.
While Cerus believes that its pathogen inactivation systems are able to
inactivate pathogens up to concentrations that Cerus believes are present in
contaminated blood components when the blood is donated, there can be no
assurance that contamination will never exceed such levels. Cerus does not
expect that its planned products will be able to inactivate all known and
unknown infectious pathogens, and there can be no assurance that the inability
to inactivate certain pathogens will not affect the market acceptance of its
products. There can be no assurance that Cerus' pathogen inactivation systems
will gain any significant degree of market acceptance among blood centers,
physicians, patients and health care payors, even if clinical trials demonstrate
safety and efficacy and necessary regulatory approvals and health care
reimbursement approvals are obtained.
If appropriate regulatory approvals are received, Baxter will be
responsible for the marketing, sales and distribution of Cerus' pathogen
inactivation systems for blood components worldwide. Cerus does not currently
maintain, nor does it intend to develop, its own marketing and sales
organization but instead expects to continue to rely on Baxter to market and
sell its pathogen inactivation systems. There can be no assurance that Cerus
will be able to maintain its relationship with Baxter or that such marketing
arrangements will result in payments to Cerus. Revenue to be received by Cerus
through any marketing and sales arrangement with Baxter will be dependent on
Baxter's efforts, and there can be no assurance that Cerus will benefit from
Baxter's present or future market presence or that such efforts will otherwise
be successful. If the agreements were terminated or if Baxter's marketing
efforts were unsuccessful, Cerus' business, financial condition and results of
operations would be materially adversely affected.
COMPETITION
Cerus expects to encounter significant competition in the sale of products
it may develop. If regulatory approvals are received, Cerus' products may
compete with other approaches to blood safety currently in use, as well as with
future products developed by medical device, biotechnology and pharmaceutical
companies, hospital supply companies, national and regional blood centers, and
certain governmental organizations and agencies. Many companies and
organizations that may be competitors or potential competitors have
substantially greater financial and other resources than Cerus and may have
greater experience in pre-clinical
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testing, human clinical trials and other regulatory approval procedures. Cerus'
ability to compete successfully will depend, in part, on its ability to develop
proprietary products, develop and maintain products that reach the market first,
are technologically superior to and/or are of lower cost than other products on
the market, attract and retain scientific personnel, obtain patent or other
proprietary protection for its products and technologies, obtain required
regulatory approvals, and manufacture, market and sell any product that it
develops. In addition, other technologies or products may be developed that have
an entirely different approach or means of accomplishing the intended purposes
of Cerus' products, or that might render Cerus' technology and products
uncompetitive or obsolete.
Cerus believes that the primary competitive factors in the market for
pathogen inactivation systems will include the breadth and effectiveness of
pathogen inactivation processes, ease of use, the scope and enforceability of
patent or other proprietary rights, product price, product supply and marketing
and sales capability. In addition, the length of time required for products to
be developed and to receive regulatory and, in some cases, reimbursement
approval is an important competitive factor. Cerus believes it competes
favorably with respect to these factors, although there can be no assurance that
it will be able to continue to do so. The biopharmaceutical field is
characterized by rapid and significant technological changes. Accordingly,
Cerus' success will depend in part on its ability to respond quickly to medical
and technological changes through the development and introduction of new
products. Product development involves a high degree of risk, and there can be
no assurance that Cerus' product development efforts will result in any
commercially successful products.
In its agreements with Cerus, Baxter agreed to certain limited restrictions
on its ability to independently develop and market products that compete with
the products under the agreements with the exception of methylene blue for FFP.
Baxter is conducting several independent product development efforts in blood
collection and processing that may improve blood component quality and safety.
The development and commercialization of Cerus' FFP pathogen inactivation system
could be materially adversely affected by competition with a methylene
blue-based product developed and marketed by Baxter or by Baxter's election to
pursue alternative methods for improving blood safety outside the field of
pathogen inactivation.
PATENTS, LICENSES AND PROPRIETARY RIGHTS
Cerus' success depends in part on its ability to obtain patents, to protect
trade secrets, to operate without infringing upon the proprietary rights of
others and to prevent others from infringing on the proprietary rights of Cerus.
Cerus' policy is to seek to protect its proprietary position by, among other
methods, filing United States and foreign patent applications related to its
proprietary technology, inventions and improvements that are important to the
development of its business. As of December 31, 1999, Cerus owned 52 issued or
allowed United States patents and 19 issued or allowed foreign patents. Cerus'
patents expire at various dates between 2003 and 2018. In addition, Cerus has 23
pending United States patent applications and has filed 19 corresponding patent
applications under the Patent Cooperation Treaty, 12 of which are currently
pending in Europe, Japan, Australia and Canada. Proprietary rights relating to
Cerus' planned and potential products will be protected from unauthorized use by
third parties only to the extent that they are covered by valid and enforceable
patents or are effectively maintained as trade secrets. There can be no
assurance that any patents owned by, or licensed to, Cerus will afford
protection against competitors or that any pending patent applications now or
hereafter filed by, or licensed to, Cerus will result in patents being issued.
In addition, the laws of certain foreign countries do not protect Cerus'
intellectual property rights to the same extent as do the laws of the United
States.
The patent positions of biopharmaceutical companies involve complex legal
and factual questions and, therefore, their enforceability cannot be predicted
with certainty. There can be no assurance that any of Cerus' patents or patent
applications, if issued, will not be challenged, invalidated or circumvented, or
that the rights granted thereunder will provide proprietary protection or
competitive advantages to Cerus against competitors with similar technology.
Furthermore, there can be no assurance that others will not independently
develop similar technologies or duplicate any technology developed by Cerus.
Because of the extensive time required for development, testing and regulatory
review of a potential product, it is possible that, before any of Cerus'
products can be commercialized, any related patent may expire or remain in
existence for only a short period
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following commercialization, thus reducing any advantage of the patent, which
could adversely affect Cerus' ability to protect future product development and,
consequently, its operating results and financial position.
Because patent applications in the United States are maintained in secrecy
until patents issue and since publication of discoveries in the scientific or
patent literature often lag behind actual discoveries, Cerus cannot be certain
that it was the first to make the inventions covered by each of its issued or
pending patent applications or that it was the first to file for protection of
inventions set forth in such patent applications. There can be no assurance that
Cerus' planned or potential products will not be covered by third-party patents
or other intellectual property rights, in which case continued development and
marketing of such products would require a license under such patents or other
intellectual property rights. There can be no assurance that such required
licenses will be available to Cerus on acceptable terms, if at all. If Cerus
does not obtain such licenses, it could encounter delays in product
introductions while it attempts to design around such patents, or could find
that the development, manufacture or sale of products requiring such licenses is
foreclosed. Litigation may be necessary to defend against or assert such claims
of infringement, to enforce patents issued to Cerus, to protect trade secrets or
know-how owned by Cerus or to determine the scope and validity of the
proprietary rights of others. In addition, interference proceedings declared by
the United States Patent and Trademark Office may be necessary to determine the
priority of inventions with respect to patent applications of Cerus. Litigation
or interference proceedings could result in substantial costs to and diversion
of effort by Cerus, and could have a material adverse effect on Cerus' business,
financial condition and results of operations. There can be no assurance that
these efforts by Cerus would be successful.
Cerus is a licensee under a license agreement with Miles, Inc. and Diamond
Scientific Corporation with respect to two United States patents covering
inventions pertaining to psoralen-based photochemical decontamination treatment
of whole blood or blood components and four United States patents relating to
vaccines, as well as related foreign patents. Whether Cerus' psoralen-based
pathogen inactivation systems practice either of the photochemical
decontamination patents depends on an interpretation of the scope of the patent
claims. If such systems practice such patents, the license would provide for
Cerus to make certain milestone payments which may be credited against any
royalties payable by Cerus. The license requires a royalty payable by Cerus on
revenue from such systems and certain annual minimum royalty payments per year
until termination of the license. The manner in which any such milestone
payments and royalties would be shared by Baxter, if at all, has not been
determined. Cerus does not believe that any amounts that might be payable by it
under the agreement to date would be material.
Cerus may rely, in certain circumstances, on trade secrets to protect its
technology. However, trade secrets are difficult to protect. Cerus seeks to
protect its proprietary technology and processes, in part, by confidentiality
agreements with its employees and certain contractors. There can be no assurance
that these agreements will not be breached, that Cerus will have adequate
remedies for any breach, or that Cerus' trade secrets will not otherwise become
known or be independently discovered by competitors. To the extent that Cerus'
employees or its consultants or contractors use intellectual property owned by
others in their work for Cerus, disputes may also arise as to the rights in
related or resulting know-how and inventions.
GOVERNMENT REGULATION
Cerus and its products are comprehensively regulated in the United States
by the FDA and, in some instances, by state and local governments, and by
comparable governmental authorities in other countries. The FDA regulates drugs,
medical devices, and biologics under the Federal Food, Drug, and Cosmetic Act
and other laws, including, in the case of biologics, the Public Health Service
Act. These laws and implementing regulations govern, among other things, the
development, testing, manufacturing, record keeping, storage, labeling,
advertising, promotion and pre-market clearance or approval of products subject
to regulation.
Cerus believes its pathogen inactivation systems will be regulated by the
FDA as medical devices. It is also possible, however, that the FDA will decide
to regulate the pathogen inactivation systems as biologics, as drugs, as
combination products including drugs or biologics and one or more medical
devices, or as drugs or biologics with one or more medical devices (i.e., the
blood bags and light source) requiring separate approval or clearance. Whether
the FDA regulates the pathogen inactivation systems as devices or as one or more
of
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the other alternatives, it is likely that the FDA's Center for Biologics
Evaluation and Research will be principally responsible for regulating the
pathogen inactivation systems.
Before a medical device may be marketed in the United States, the FDA must
clear a pre-market notification (a "510(k)") or approve a pre-market approval
application (PMA) for the product. Before a new drug may be marketed in the
United States, the FDA must approve an NDA for the product. Before a biologic
may be marketed in the United States, the FDA must approve a Biologic License
Application (BLA). Before a combination product can be marketed in the United
States, it must have an approved NDA, BLA or PMA, depending on which statutory
authority the FDA elects to use.
Despite the multiplicity of statutory and regulatory possibilities, the
steps required before approval are essentially the same whether the product is
ultimately regulated as a medical device, biologic, drug, a combination product,
or a combination thereof. The steps required before a medical device, drug or
biologic may be approved for marketing in the United States pursuant to a PMA,
BLA or NDA, respectively, generally include (i) pre-clinical laboratory and
animal tests, (ii) submission to the FDA of an investigational device exemption
(IDE) (for medical devices) or an investigational new drug application (IND)
(for drugs or biologics) for human clinical testing, which must become effective
before human clinical trials may begin, (iii) appropriate tests to show the
product's safety, (iv) adequate and well-controlled human clinical trials to
establish the product's safety and efficacy for its intended indications, (v)
submission to the FDA of a PMA, BLA or NDA, as appropriate and (vi) FDA review
of the PMA, BLA or NDA in order to determine, among other things, whether the
product is safe and effective for its intended uses. In addition, the FDA
inspects the facilities at which the product is manufactured and will not
approve the product unless compliance with current Good Manufacturing Practices
(cGMP) or Quality System Regulation requirements is satisfactory. The steps
required before a medical device may be cleared for marketing in the United
States pursuant to a 510(k) are likely to be the same, except that instead of
conducting tests to demonstrate safety and efficacy, data, including clinical
data if necessary, must be obtained to show that the product is substantially
equivalent to a legally marketed device, and the FDA must make a determination
of substantial equivalence rather than a determination that the product is safe
and effective. Cerus believes the FDA will require a PMA for its platelet, FFP
and red blood cell pathogen inactivation systems. Cerus is developing a European
investigational plan based on the platelet and FFP treatment systems using S-59
being categorized as Class III drug/device combination under the Medical Device
Directives (MDD) of the European Union. However, there can be no assurance that
this approach will be accepted by European authorities. The European Union
requires that medical devices affix the CE Marking, an international symbol of
adherence to quality assurance standards and compliance with the MDD. Failure to
receive CE Marking certification will prohibit Cerus from selling its products
in the European Union.
To support Cerus' requests for FDA approval to market its pathogen
inactivation products, Cerus conducts various types of studies, including
toxicology studies to evaluate product safety, in vitro and animal studies to
evaluate product effectiveness and human clinical trials to evaluate the safety,
tolerability and effectiveness of treated blood components. Cerus believes that,
in deciding whether a pathogen inactivation system is safe and effective, the
FDA is likely to take into account whether it adversely affects the therapeutic
efficacy of blood components as compared to the therapeutic efficacy of blood
components not treated with the system, and that the FDA will weigh the system's
safety, including potential toxicities of the inactivation compounds, and other
risks against the benefits of using the system in a blood supply that has become
safer in recent years. Cerus has conducted many toxicology studies designed to
demonstrate its products' safety, and will be required to conduct additional
studies, including three month tolerability studies for the S-59 compound and
various studies to evaluate the safety of the S-303 compound. There can be no
assurance that the FDA will not require further toxicology or other studies of
Cerus' products. Based on discussions with the FDA, Cerus believes that it will
be required to provide data from human clinical studies to demonstrate the
safety of treated platelets and their therapeutic comparability to untreated
platelets, but that only data from in vitro and animal studies, not data from
human clinical studies, will be required to demonstrate the system's efficacy in
inactivating pathogens. In light of these criteria, Cerus' clinical trial
programs for platelets and FFP consist of studies that differ from typical Phase
1, Phase 2 and Phase 3 clinical studies.
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There can be no assurance, however, that these means of demonstrating
safety and efficacy will ultimately be acceptable to the FDA or that the FDA
will continue to believe that this clinical plan is appropriate. Moreover, even
if the FDA considers these means of demonstrating safety and efficacy to be
acceptable in principle, there can be no assurance that the FDA will find the
data submitted sufficient to demonstrate safety and efficacy. In particular,
although Cerus anticipates that the FDA will consider in vitro and animal data
an appropriate means of demonstrating efficacy in pathogen inactivation, there
can be no assurance that the FDA will so conclude, and any requirement to
provide other than in vitro and animal data would adversely affect the timing
and could affect the success of Cerus' efforts to obtain regulatory approval.
The testing and approval/clearance process requires substantial time,
effort and financial resources, and is generally lengthy, expensive and
uncertain. Even if regulatory approval or clearance is granted, it could include
significant limitations on the indicated uses for which a product could be
marketed. For example, Cerus does not believe that it will be able to make any
labeling or promotional claims that Cerus' pathogen inactivation systems may
inactivate any pathogens for which it does not have in vitro, and in certain
cases animal, data supporting such claims. After FDA approval for the initial
indications, further clinical trials will be necessary to gain approval for the
use of the product for additional indications. The FDA may also require post-
marketing testing, which can involve significant expense. Later discovery of
problems with a product may result in restrictions on the product, including
withdrawal of the product from the market. In addition, the policies of the FDA
may change, and additional regulations may be promulgated which could prevent or
delay regulatory approval of Cerus' planned products. There can be no assurance
that any approval or clearance will be granted on a timely basis, if at all. Any
failure to obtain or delay in obtaining such approvals or clearances, and any
significant limitation on their indicated uses or any restrictions from
discovery of product problems, could have a material adverse effect on Cerus'
business, financial condition and results of operations.
A medical device, biologic or drug, its manufacturer, and the holder of the
PMA or 510(k), BLA or NDA for the product are subject to comprehensive
regulatory oversight, both before and after approval or clearance is obtained.
Violations of regulatory requirements at any stage, including during the
pre-clinical and clinical testing process, during the approval/clearance process
or after the product is approved/cleared for marketing, could result in various
adverse consequences, including the FDA's requiring that a clinical trial be
suspended or halted, the FDA's delay in approving/clearing or refusing to
approve/clear a product, withdrawal of an approved/cleared product from the
market and the imposition of criminal penalties. For example, the holder of a
PMA or 510(k), BLA or NDA is required to report certain adverse reactions to the
FDA, and must comply with certain requirements concerning advertising and
promotional labeling for the product. Also, quality control and manufacturing
procedures must continue to conform to cGMP and Quality System regulations after
approval or clearance, and the FDA periodically inspects manufacturing
facilities to assess compliance with cGMP and Quality System. Accordingly,
manufacturers must continue to expend time, monies and efforts on regulatory
compliance, including cGMP and Quality System compliance. In addition, new
government requirements may be established that could delay or prevent
regulatory approval or clearance of Cerus' products under development or
otherwise alter the applicable law. There can be no assurance that the FDA will
determine that the facilities and manufacturing procedures of Baxter or any
other third-party manufacturer of Cerus' planned products will conform to cGMP
or Quality System requirements.
In addition to the regulatory requirements applicable to Cerus and its
products, there are also regulatory requirements applicable to Cerus'
prospective customers, which are primarily entities that ship blood and blood
products in interstate commerce. Such entities are regulated by the FDA pursuant
to the Food, Drug and Cosmetic Act and the Public Health Service Act and
implementing regulations. Blood centers and others that ship blood and blood
products interstate will likely be required to obtain approved license
supplements from the FDA before shipping products processed with Cerus' pathogen
inactivation systems. This requirement and/or FDA delays in approving such
supplements may deter some blood centers from using Cerus' products, and blood
centers that do submit supplements may face disapproval or delays in approval
that could provide further disincentives to use of the systems. The regulatory
impact on potential customers could have a material adverse effect on Cerus'
business, financial condition and results of operations.
The Phase 3 European Buffy Coat clinical trial is being conducted to assess
the therapeutic efficacy of the platelet pathogen inactivation system for use in
treating pooled random donor platelets collected using the
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Buffy Coat process. The Buffy Coat process is the predominant method used in
Europe to prepare platelet concentrates. If Cerus decides to seek European
regulatory approval for apheresis donor platelets, Cerus will be required to
perform additional clinical studies. The Phase 3 United States apheresis
clinical trial is being conducted to assess the therapeutic efficacy of the
platelet pathogen inactivation system for use in treating apheresis platelets,
which represent approximately 60% of the market, not pooled random donor
platelets. If Cerus decides to seek FDA approval of the platelet pathogen
inactivation system for use in treating pooled random donor platelets, Cerus
will be required by the FDA to conduct additional clinical studies. In addition,
there currently are three principal manufacturers of automated apheresis
collection equipment, including Baxter. The equipment of each manufacturer
collect platelets into plastic disposables designed for that equipment; thus, a
pathogen inactivation system designed for disposables used by one manufacturer
will not necessarily be compatible with other manufacturers' collection
equipment. Cerus intends initially to seek FDA approval of a platelet pathogen
inactivation system configured for Baxter's apheresis collection equipment. If
Cerus determines that compatibility with other equipment is desirable, it will
need to develop additional processing procedures. Cerus believes that the FDA
may also require supplemental clinical data before approving its system for use
with platelets collected using other equipment.
Because of the risk of bacterial growth, current FDA rules require that
platelets may not be stored for more than five days after collection from the
donor. The rules also require that pooled platelets be transfused within four
hours of pooling and, as a result, most pooling occurs at hospitals. However,
Cerus' platelet pathogen inactivation system is being designed to be used at
blood centers, not at hospitals, and requires a processing time of approximately
six hours. Therefore, in order for Cerus' platelet pathogen inactivation system
to be effectively implemented and accepted at blood centers as planned, the
FDA-imposed limit on the time between pooling and transfusion would need to be
lengthened or eliminated for blood products treated with Cerus' systems, which
are being designed to inactivate bacteria that would otherwise contaminate
pooled platelets. If Cerus were to pursue the pooled random donor platelet
market, it would need to work with the FDA during the approval/clearance process
to obtain the necessary changes in these limitations. There can be no assurance,
however, that the FDA would change this requirement and, if such a change were
not made, Cerus' business, financial condition and results of operations would
be materially adversely affected.
Cerus is conducting its clinical trials using prototype system disposables
and ultraviolet light sources, and is completing the commercial design for these
products contemporaneously. Cerus' current clinical plan includes a study in
patients using the commercial version of the system prior to receiving
regulatory approval. However, there can be no assurance that regulatory agencies
will not require additional studies. Such additional studies, if required, could
delay commercialization of the system.
Cerus is subject to federal, state and local laws, rules, regulations and
policies governing the use, generation, manufacture, storage, air emission,
effluent discharge, handling and disposal of certain materials, biological
specimens and wastes. There can be no assurance that Cerus will not be required
to incur significant costs to comply with environmental and health and safety
regulations in the future. Cerus' research and development involves the
controlled use of hazardous materials, including certain hazardous chemicals and
radioactive materials. Although Cerus believes that its safety procedures for
handling and disposing of such materials comply with the standards prescribed by
state and federal regulations, the risk of accidental contamination or injury
from these materials cannot be eliminated. In the event of such an accident,
Cerus could be held liable for any damages that result and any such liability
could exceed the resources of Cerus.
HEALTH CARE REIMBURSEMENT AND REFORM
The future revenue and profitability of biopharmaceutical and related
companies as well as the availability of capital to such companies may be
affected by the continuing efforts of the United States and foreign governments
and third-party payors to contain or reduce costs of health care through various
means. In the United States, given recent federal and state government
initiatives directed at lowering the total cost of health care, it is likely
that the United States Congress and state legislatures will continue to focus on
health care reform and the cost of pharmaceuticals and on the reform of the
Medicare and Medicaid systems. While Cerus cannot predict whether any such
legislative or regulatory proposals will be adopted, the announcement
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or adoption of such proposals could have a material adverse effect on Cerus'
business, financial condition and results of operations.
Cerus' ability to commercialize its products successfully will depend in
part on the extent to which appropriate reimbursement levels for the cost of the
products and related treatment are obtained from governmental authorities,
private health insurers and other organizations, such as HMOs. Third-party
payors are increasingly challenging the prices charged for medical products and
services. The trend toward managed health care in the United States and other
countries and the concurrent growth of organizations such as HMOs, which could
control or significantly influence the purchase of health care services and
products, as well as legislative proposals to reform health care or reduce
government insurance programs, may all result in lower prices for Cerus'
products. The cost containment measures that health care payors and providers
are instituting and the effect of any health care reform could materially
adversely affect Cerus' ability to operate profitably.
EMPLOYEES
As of February 29, 2000, Cerus had 115 employees, 80 of whom were engaged
in research and development and 35 in general and administrative. No employees
of Cerus are covered by collective bargaining agreements, and Cerus believes
that its relationship with its employees is good.
RISK FACTORS
Cerus' business faces significant risks. These risks include those
described below and may include additional risks of which Cerus is not currently
aware or which Cerus currently does not believe are material. If any of the
events or circumstances described in the following risks actually occurs, Cerus'
business, financial condition or results of operations could be materially
adversely affected. These risks should be read in conjunction with the other
information set forth in this report.
OUR PRODUCTS ARE IN AN EARLY STAGE OF DEVELOPMENT AND THERE IS A HIGH RISK OF
FAILURE.
We have no products that have received regulatory approval for commercial
sale. All of our product candidates are in early stages of development, and we
face the risks of failure inherent in developing medical devices and
biotechnology products based on new technologies. Our products must satisfy
rigorous standards of safety and efficacy before they can be approved by the
United States Food and Drug Administration and international regulatory
authorities for commercial use. Our platelet, fresh frozen plasma, red blood
cell and stem cell transplantation programs are undergoing clinical testing. Our
other programs are still in the early stages of research and development. We
will have to conduct significant additional research and pre-clinical (animal)
and clinical (human) testing before we can file applications with the FDA for
product approval. Clinical trials are expensive and have a high risk of failure.
In addition, to compete effectively, our products must be easy to use,
cost-effective and economical to manufacture on a commercial scale. We cannot
assure you that we can achieve any of these objectives. Any of our products may
fail in the testing phase or may not attain market acceptance. Also, third
parties may develop superior products or have proprietary rights that preclude
us from marketing our products. If research and testing is not successful, our
products are not commercially viable or we cannot compete effectively, our
business, financial condition and results of operation will be materially
adversely affected.
THE PROGRESS AND RESULTS OF OUR PRE-CLINICAL AND CLINICAL TESTING ARE UNCERTAIN.
We must provide the FDA and foreign regulatory authorities with
pre-clinical and clinical data that demonstrate the safety and efficacy of our
products before they can be approved for commercial sale. Clinical development,
including pre-clinical testing, is a long, expensive and uncertain process. It
may take us several years to complete our testing, and failure can occur at any
stage of testing. We cannot rely on interim results of trials to necessarily
predict their final results, and acceptable results in early trials might not be
repeated in later trials. Any trial may fail to produce results satisfactory to
the FDA. Pre-clinical and clinical data can be interpreted in different ways,
which could delay, limit or prevent regulatory approval. Negative or
inconclusive
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results from a pre-clinical study or clinical trial or adverse medical events
during a clinical trial could cause a pre-clinical study or clinical trial to be
repeated or a program to be terminated, even if other studies or trials relating
to a program are successful.
We typically rely on third-party clinical investigators to conduct our
clinical trials and other third-party organizations to perform data collection
and analysis, and as a result, we face certain additional delaying factors
outside our control. These factors include:
- difficulty in enrolling qualified subjects
- inadequately trained or insufficient personnel at the study site
- delays in approvals from a study site's review board.
We cannot assure you that planned trials will begin on time or that any of
our clinical trials will be completed on schedule or at all. Certain of our
clinical trials involve patient groups that have rare medical conditions, and we
may have difficulty in identifying and enrolling a sufficient number of patients
to complete the trials on a timely basis. We cannot assure you that any trials
will result in marketable products or that any products will be commercially
successful even if approved for marketing. Our product development costs will
increase if we have delays in testing or approvals. If the delays are
significant, our business, financial condition and results of operations will be
materially adversely affected.
WE FACE MANUFACTURING UNCERTAINTIES BECAUSE OUR PRODUCTS HAVE NOT BEEN
MANUFACTURED ON A COMMERCIAL SCALE.
Our products, and many of their components, have never been manufactured on
a commercial scale. It may be difficult or impossible to economically
manufacture our products on a commercial scale. We intend to use third-party
manufacturers to produce commercial quantities of our products, including the
inactivation compounds.
We have contracted with two manufacturers to provide enough S-59, the
inactivation compound we use in our platelet and fresh frozen plasma systems, to
meet our anticipated clinical trial requirements. Only one of the manufacturers
is performing the complete synthesis of S-59. If this manufacturer cannot
produce S-59 in commercial quantities, we may face delays and shortfalls before
our alternate manufacturer can produce sufficient quantities. Also, any new
manufacturer will have to prove both to us and to the FDA that its manufacturing
process complies with government regulations. We may need to identify and
qualify additional manufacturers for commercial production. We cannot be certain
that our existing manufacturers or any new manufacturer will be able to provide
required quantities of S-59.
We have produced only limited quantities of S-303, the inactivation
compound we use in our red blood cell pathogen inactivation system, sufficient
for pre-clinical research and early clinical development. To date, S-303 has
been produced by a sole third-party manufacturer. We cannot be certain that this
manufacturer will be able to produce S-303 on a commercial scale. We also do not
know whether we will be able to enter into arrangements for the commercial-scale
manufacture of S-303 on reasonable terms or at all.
We purchase certain key components of our compounds from a limited number
of suppliers. While we believe there are alternative suppliers for these
components, it would be expensive and time-consuming to establish additional or
replacement suppliers for our compounds.
Baxter is responsible for manufacturing and assembling components of our
systems. Baxter has not manufactured these components in commercial quantities
and may not be able to provide them to us on an economical basis. Baxter intends
to rely on third parties to manufacture some of these components, which are
customized and have not been manufactured on a commercial scale. If Baxter or
its third-party component suppliers fail to develop commercially acceptable
manufacturing processes for these components, our business, results of
operations and financial condition will be materially adversely affected. If we
were unable to find adequate suppliers for these components, we would be
required to redesign the systems, which could lead to additional testing and
clinical trials. If we were required to redesign the products, our development
costs would increase and our programs could be delayed significantly.
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OUR PRODUCTS MAY NEVER BE ACCEPTED BY THE HEALTH CARE COMMUNITY.
We believe that our ability to commercialize our pathogen inactivation
systems effectively will depend on the safety, efficacy and cost-effectiveness
of our products and the availability of adequate insurance reimbursement for
these products. We believe that market acceptance will depend on the extent to
which physicians, patients and health care payors perceive that the benefits of
using our systems justify their additional cost, given that the blood supply has
become safer in recent years. Our ability to successfully commercialize our
products depends in part on obtaining adequate reimbursement for product costs
and related treatment of blood components from governmental authorities and
private health care insurers (including health maintenance organizations).
Government and private third-party payors are increasingly attempting to contain
health care costs by limiting both the extent of coverage and the reimbursement
rate for new tests and treatments. In addition, we do not expect our products to
inactivate all known pathogens, and the inability of our systems to inactivate
certain pathogens may adversely affect market acceptance of our products. Even
if our products receive the necessary regulatory and health care reimbursement
approvals, our products may not achieve any significant degree of market
acceptance among blood centers, physicians, patients and health care payors.
Other technologies have been developed in recent years that have the potential
to improve the safety of the blood supply. These technologies include donor
retested fresh frozen plasma, solvent-detergent treated fresh frozen plasma and
new methods to test for various blood-borne pathogens. For various reasons, such
as implementation costs and logistical concerns, the transfusion industry has
not always integrated these technologies into their processes. Although we
believe our inactivation systems can significantly improve the safety of the
blood supply, we cannot assure you that our technologies will be accepted
rapidly or at all. If our products fail to achieve market acceptance, our
business, results of operations and financial condition would be materially
adversely affected.
We are currently developing our platelet pathogen inactivation system in
the United States to treat apheresis platelets. Apheresis platelets are
collected from a single donor using an automated collection machine. Currently,
we estimate that approximately 60% of platelets are collected by apheresis in
the United States, and the balance are pooled random donor platelets. We cannot
predict whether the market for apheresis platelets will be maintained or will
develop further. If this market declines, our business, results of operation and
financial condition will be materially adversely affected. If we conduct
additional clinical trials to obtain FDA approval of the system for use in
treating random donor platelets, our development expenses will increase
significantly. In addition, FDA regulations limit the time from pooling to
transfusion to four hours to minimize the proliferation of bacterial
contamination in the pooled product. As a result, most pooling occurs in
hospitals. Our platelet system is designed for use in blood centers and requires
approximately six hours of processing. Therefore, the FDA's time limit between
pooling and transfusion currently precludes the use of our system with pooled
random donor platelets. Although our system is designed to reduce the risk of
bacterial contamination, we cannot predict whether the FDA would remove this
process time constraint to allow our system to be used with pooled random donor
platelets.
Baxter is one of three primary manufacturers of equipment for the
collection of apheresis platelets. The equipment, design and materials used to
collect the platelets vary from manufacturer to manufacturer. We are conducting
our pre-clinical and clinical studies using only Baxter's equipment and
materials, and initially we intend to seek FDA approval for our systems for use
only with Baxter's collection systems. As a result, market acceptance of our
platelet system will depend on the market acceptance of Baxter's collection
equipment. Blood centers may be reluctant to replace their existing equipment,
and the FDA may require us to make our systems compatible with other equipment.
If we are required to develop our platelet system for use on other
manufacturers' equipment, or if we decide to address a broader market, we will
need to perform additional studies, which will increase our development costs
and which may not be successful.
A SMALL NUMBER OF CUSTOMERS WILL DETERMINE MARKET ACCEPTANCE OF OUR PRODUCTS.
The market for our pathogen inactivation systems is dominated by a small
number of blood collection centers. In the United States, the American Red Cross
collects and distributes approximately 50% of the nation's supply of blood and
blood components. Other major United States blood centers include the New York
Blood Center and United Blood Services, each of which distributes approximately
6% of the nation's
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supply of blood and blood components. In Western Europe and Japan, various
national blood transfusion services or Red Cross organizations collect, store
and distribute virtually all of their respective nations' blood and blood
components supply. If we fail to properly market, price or sell our products to
even a small number of these large customers, our business, financial condition
and results of operations could be materially adversely affected.
WE RELY HEAVILY ON BAXTER FOR DEVELOPMENT FUNDING, MARKETING AND SALES.
We have development and marketing agreements with Baxter for our platelet,
fresh frozen plasma and red blood cell pathogen inactivation systems, and we
rely on Baxter for significant financial and technical contributions to these
programs. Our ability to develop, manufacture and market these products
successfully depends significantly on Baxter's performance under these
agreements.
- Baxter can terminate our agreements or fail to perform. Baxter can
terminate the agreements without cause under certain circumstances. If
Baxter terminates the agreements or fails to provide adequate funding to
support the product development efforts, we will need to obtain
additional funding from other sources and will be required to devote
additional resources to the development of our products. We cannot assure
you that we would be able to find a suitable substitute partner in a
timely manner, on reasonable terms or at all. If we fail to find a
suitable partner, our research, development or commercialization of
certain planned products would be delayed significantly which would cause
us to incur additional expenditures.
- We rely on Baxter for the marketing, sales and distribution of our
products. We do not have and currently do not plan to develop our own
marketing and sales organization. Instead, we plan to rely on Baxter to
market and sell the pathogen inactivation systems. If our joint
development agreements with Baxter are terminated or if Baxter is unable
to market the products successfully, we will be required to find another
marketing, sales and distribution partner or develop these capabilities
ourselves. We may not be able to find a suitable partner on favorable
terms or on a timely basis, if at all. Developing marketing, sales and
distribution capabilities ourselves would delay commercialization of our
products and increase our costs.
- We lack control over management decisions. Baxter and we share
responsibility for managing the development programs for the pathogen
inactivation systems. Management decisions are made by a management board
that has equal representation from both Baxter and us. Our interests and
Baxter's may not always be aligned. If we disagree with Baxter on program
direction, a neutral party will make the decision. The neutral party may
not decide in our best interest. Under the agreements, Baxter may
independently develop a pathogen inactivation system for fresh frozen
plasma using their pre-existing methylene blue technology. Such an effort
by Baxter could create conflicts in our joint program for the development
of a pathogen inactivation system for fresh frozen plasma.
OUR PRODUCTS ARE SUBJECT TO EXTENSIVE REGULATION BY DOMESTIC AND FOREIGN
GOVERNMENTS.
Our products under development and anticipated future products are subject
to extensive and rigorous regulation by United States local, state and federal
regulatory authorities and by foreign regulatory bodies. These regulations are
wide-ranging and govern, among other things:
- product development,
- product testing,
- product manufacturing,
- product labeling,
- product storage,
- product pre-market clearance or approval,
- product sales and distribution, and
- product advertising and promotion.
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The FDA and other agencies in the United States and in foreign countries
impose substantial requirements upon the manufacturing and marketing of products
such as those being developed by our company or any partner. The process of
obtaining FDA and other required regulatory approvals is long, expensive and
uncertain. The time required for regulatory approvals is uncertain and the
process typically takes a number of years, depending on the type, complexity and
novelty of the product. We may encounter significant delays or excessive costs
in our efforts to secure necessary approvals or licenses.
We cannot be sure that our products will receive FDA approval in a timely
manner, if at all. Even if approvals are obtained, the marketing and
manufacturing of drug products are subject to continuing FDA and other
regulatory requirements, such as requirements to comply with good manufacturing
practices. The failure to comply with such requirements could result in
enforcement action, which could adversely affect us and our business. Later
discovery of problems with a product, manufacturer or facility may result in
additional restrictions on the product or manufacturer, including withdrawal of
the product from the market. The government may impose new regulations which
could further delay or preclude regulatory approval of our potential products.
We cannot predict the impact of adverse governmental regulation which might
arise from future legislative or administrative action.
We intend to generate product revenue from sales outside of the United
States. Distribution of our products outside the United States also may be
subject to extensive government regulation. These regulations, including the
requirements for approvals or clearance to market, the time required for
regulatory review and the sanctions imposed for violations, vary by country. It
is uncertain whether we will obtain regulatory approvals in such countries or
that we will be required to incur significant costs in obtaining or maintaining
our foreign regulatory approvals. Failure to obtain necessary regulatory
approvals or any other failure to comply with regulatory requirements could
result in reduced revenue and earnings.
To support our requests for FDA approval to market our products, we intend
to conduct various types of studies including:
- toxicology studies to evaluate product safety,
- in vitro and animal studies to evaluate product effectiveness, and
- human clinical trials to evaluate the safety, tolerability and
effectiveness of treated blood components.
We have conducted many toxicology studies to demonstrate our products'
safety, and we plan to conduct additional toxicology studies throughout the
product development process. At any time, the FDA may require further toxicology
or other studies to further demonstrate our products' safety, which could delay
commercialization. We believe the FDA is likely to weigh the potential risks of
using our pathogen inactivation products against the incremental benefits, which
may be less compelling in light of improved safety in the blood supply. In
addition, our clinical development plan assumes that we will not be required to
perform human clinical studies to demonstrate our systems' ability to inactivate
pathogens. Although we have discussed this plan with the FDA, they may find it
unacceptable at any time and may require human clinical trials to demonstrate
efficacy in inactivating pathogens. Such trials may be too large and expensive
to be practical.
Regulatory agencies may limit the uses, or indications, for which any of
our products is approved. For example, we believe that we will be able to claim
the inactivation of particular pathogens only to the extent we have in vitro or
animal data to support such claims.
In addition to the regulatory requirements applicable to us and our
products, there are regulatory requirements applicable to our prospective
customers, the blood centers that process and distribute blood and blood
products. Blood centers and others will likely be required to obtain approved
license supplements from the FDA before shipping products processed with our
pathogen inactivation systems interstate. This requirement or FDA delays in
approving these supplements may deter some blood centers from using our
products. Blood centers that do submit supplements may face disapproval or
delays in approval that could provide further delay or deter them from using our
products. The regulatory impact on potential customers could slow or limit the
potential sales of our products.
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WE ARE USING PROTOTYPE COMPONENTS IN OUR CLINICAL TRIALS AND HAVE NOT COMPLETED
THEIR COMMERCIAL DESIGN.
The system disposables and ultraviolet light sources we use in our clinical
trials are prototypes. We are developing the commercial design for these
products at the same time. As a result, we plan to perform studies, both
pre-clinical and clinical, to demonstrate the equivalence of the prototype and
the commercial design. However, regulatory agencies may require us to perform
additional studies, both pre-clinical and clinical, using the commercial
versions of the systems, which may delay the commercialization of our products.
If we fail to develop commercial versions of the systems on schedule, our
business, results of operations and financial condition will be materially
adversely affected.
WE HAVE ONLY A LIMITED OPERATING HISTORY AND WE EXPECT TO CONTINUE TO GENERATE
LOSSES.
We may never achieve a profitable level of operations. To date, we have
engaged primarily in research and development. Our development and general and
administrative expenses have resulted in substantial losses. As of December 31,
1999, we had an accumulated deficit of approximately $87.5 million. All of our
products are in the research and development stage, and we have not received any
revenue from product sales. We have received all of our revenue under our
agreements with Baxter and the Consortium, and federal research grants. We will
be required to conduct significant research, development, clinical testing and
regulatory compliance activities for each of these products. We expect our
losses to continue at least through 2002. We also expect our losses to fluctuate
significantly from quarter to quarter due to differences in the timing of our
expenses and potential revenue from Baxter. Our ability to become profitable
will depend on our ability to, among other things:
- establish adequate protection of our intellectual property rights,
- complete our product development,
- obtain product regulatory approvals, and
- achieve market acceptance for our products.
WE WILL NEED ADDITIONAL FUNDS.
Our product development programs are capital-intensive. We expect to
continue to spend substantial funds for our operations for the foreseeable
future. We believe that our existing capital resources, together with
anticipated payments from Baxter under our agreements with Baxter and projected
interest income, will support our current and planned operations for at least
the next 18 months. Our cash, liquidity and capital requirements will depend on
numerous factors, including additional research and development needs, product
testing results, regulatory requirements, competitive pressures and
technological advances and setbacks.
In addition, we may require substantial funds for our long-term product
development, marketing programs and operating expenses. We cannot assure you
that we will be able to raise additional funds on acceptable terms. If we raise
additional funds by issuing equity securities, our existing stockholders may
experience substantial dilution.
WE OPERATE IN A COMPETITIVE INDUSTRY WITH RAPIDLY CHANGING TECHNOLOGY.
We expect our products to encounter significant competition. Our products
may compete with other approaches to blood safety and improving the outcome of
stem cell transplantation currently in use, as well as with future products
developed by biotechnology and pharmaceutical companies, hospital supply
companies, national and regional blood centers, and governmental organizations
and agencies. Our success will depend in part on our ability to respond quickly
to medical and technological changes through the development and introduction of
new products. Product development is risky and uncertain, and we cannot assure
you that we will develop our products successfully. Competitors' products or
technologies may make our products obsolete or non-competitive before we are
able to generate any significant revenue. Many of our competitors or potential
competitors have substantially greater financial and other resources than we
have. They may also
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have greater experience in pre-clinical testing, human clinical trials and other
regulatory approval procedures. Our ability to compete successfully will depend,
in part, on our ability to:
- attract and retain skilled scientific personnel,
- develop technologically superior products,
- develop lower cost products,
- obtain patent or other proprietary protection for our products and
technologies,
- obtain required regulatory approvals for our products,
- be early entrants to the market, and
- manufacture, market and sell our products, independently or through
collaborations.
Several companies are developing technologies which are, or in the future
may be, the basis for products that will directly compete with or reduce the
market for our pathogen inactivation systems. A number of companies are
specifically focusing on alternative strategies for pathogen inactivation in
various blood components. In May 1998, the FDA approved solvent-detergent for
use in treating fresh frozen plasma in the United States. If the treatment of
fresh frozen plasma by solvent-detergent becomes a widespread practice, which
has not happened to date, it could adversely affect our ability to market our
fresh frozen plasma pathogen inactivation system in the United States. Several
other companies are currently marketing solvent-detergent or methylene
blue-based pathogen inactivation systems for fresh frozen plasma in Europe.
Other groups are developing synthetic blood product substitutes and
products to stimulate the growth of platelets. If any of these technologies is
successfully developed, it could have a material adverse effect on our business,
financial condition and results of operations. Baxter has agreed to certain
restrictions on its ability to independently develop and market products that
compete with our products, however, these provisions may not prevent Baxter from
developing or marketing competing products using methylene blue.
FAILURE TO ATTRACT AND RETAIN KEY EMPLOYEES WILL ADVERSELY AFFECT OUR BUSINESS.
Because of the scientific nature of our business, we depend on the
principal members of our management and scientific staff. Our success will
depend largely on our ability to attract and retain highly skilled scientific
and managerial personnel. Competition for such personnel is intense. We cannot
assure you that we will be successful in attracting and retaining such
personnel. The failure to maintain our management and scientific staff and to
attract additional key personnel could materially adversely affect our business,
financial condition and results of operations. Although we intend to provide
incentive compensation to attract and retain our key personnel, we cannot
guarantee these efforts will be successful.
WE MAY NOT BE ABLE TO PROTECT OUR INTELLECTUAL PROPERTY OR OPERATE OUR BUSINESS
WITHOUT INFRINGING INTELLECTUAL PROPERTY RIGHTS OF OTHERS.
Our technology will be protected from unauthorized use by others only to
the extent that it is covered by valid and enforceable patents or effectively
maintained as trade secrets. As a result, our success depends in part on our
ability to:
- obtain patents,
- protect trade secrets,
- operate without infringing upon the proprietary rights of others, and
- prevent others from infringing on our proprietary rights.
We cannot be certain that our patents or patents that we license from
others will be enforceable and afford protection against competitors. Our
patents or patent applications, if issued, may be challenged, invalidated or
circumvented. Our patent rights may not provide us with proprietary protection
or competitive advantages against competitors with similar technologies. Others
may independently develop technologies
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similar to ours or independently duplicate our technologies. Due to the
extensive time required for development, testing and regulatory review of our
potential products, our patents may expire or remain in existence for only a
short period following commercialization. This would reduce or eliminate any
advantage of the patents.
We cannot be certain that we were the first to make the inventions covered
by each of our issued or pending patent applications or that we were the first
to file patent applications for such inventions. We may need to license the
right to use third-party patents and intellectual property to continue
development and marketing of our products. We may not be able to acquire such
required licenses on acceptable terms, if at all. If we do not obtain such
licenses, we may need to design around other parties' patents or we may not be
able to proceed with the development, manufacture or sale of our products.
We may face litigation to defend against claims of infringement, assert
claims of infringement, enforce our patents, protect our trade secrets or
know-how, or determine the scope and validity of others' proprietary rights.
Patent litigation is costly. In addition, we may require interference
proceedings declared by the United States Patent and Trademark Office to
determine the priority of inventions relating to our patent applications.
Litigation or interference proceedings could have a material adverse effect on
our business, financial condition and results of operations and could be
unsuccessful in our efforts to enforce our intellectual property rights.
WE MAY BE LIABLE IF OUR PRODUCTS HARM PEOPLE.
We are exposed to potential liability risks inherent in the testing and
marketing of medical devices and products. We may be liable if any of our
products causes injury, illness or death. We intend to obtain product liability
insurance before the commercial introduction of any product, but do not know
whether we will be able to obtain and maintain such insurance on acceptable
terms. Any insurance we obtain may not provide adequate coverage against
potential liabilities. A liability claim, regardless of merit or eventual
outcome, could materially adversely affect our business, results of operation
and financial condition.
WE USE HAZARDOUS SUBSTANCES THAT ARE SUBJECT TO ENVIRONMENTAL REGULATION.
Our research and development involves the controlled use of hazardous
materials, including certain hazardous chemicals, radioactive materials and
pathogens. Accordingly, we are subject to federal, state and local laws
governing the use, handling and disposal of these materials. We may incur
significant costs to comply with additional environmental and health and safety
regulations in the future. Although we believe that our safety procedures for
handling and disposing of hazardous materials comply with regulatory
requirements, we cannot eliminate the risk of accidental contamination or
injury. If an accident occurs, we could be held liable for any damages that
result.
THE MARKET PRICE OF OUR STOCK MAY BE HIGHLY VOLATILE.
The market prices for securities of emerging medical device and
biotechnology companies like us have been highly volatile. Announcements may
have a significant impact on the market price of our common stock. Such
announcements may include:
- biological or medical discoveries,
- technological innovations or new commercial services by us or our
competitors,
- developments concerning proprietary rights, including patents and
litigation matters,
- regulatory developments in both the United States and foreign countries,
- public concern as to the safety of new technologies,
- general market conditions,
- comments made by analysts, including changes in analysts' estimates of
our financial performance, and
- quarterly fluctuations in our revenue and financial results.
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The stock market has from time to time experienced extreme price and volume
fluctuations, which have particularly affected the market prices for emerging
biotechnology and medical device companies, and which have often been unrelated
to the operating performance of such companies. These broad market fluctuations
may adversely affect the market price of our common stock. In the past,
following periods of volatility in the market price of a company's stock,
securities class action litigation has occurred against the issuing company.
Such litigation could result in substantial costs and a diversion of
management's attention and resources, which could have a material adverse effect
on our revenue and earnings. Any adverse determination in such litigation could
also subject us to significant liabilities.
DELAWARE LAW, PROVISIONS IN OUR CHARTER AND OUR RIGHTS PLAN COULD MAKE THE
ACQUISITION OF OUR COMPANY BY ANOTHER COMPANY MORE DIFFICULT.
Provisions of our certificate of incorporation may have the effect of
delaying or preventing changes in control or management or limit the price that
investors may be willing to pay for shares of our common stock. We also are
subject to the provisions of Section 203 of the Delaware General Corporation
Law, an anti-takeover law, which could delay a merger, tender offer to proxy
contest or make a similar transaction more difficult. In addition, our board of
directors has the authority to issue up to 5,000,000 shares of preferred stock
without stockholders' approval, of which 8,327 shares currently are outstanding.
The rights of the holders of common stock will be subject to, and may be
affected by, the rights of the holders of outstanding preferred stock and any
preferred stock that may be issued in the future. The issuance of preferred
stock could have the effect of making it more difficult for a third party to
acquire a majority of our outstanding voting stock.
Also, in November 1999, our board of directors adopted a stockholder rights
plan, or "poison pill," which has anti-takeover effects.
ITEM 2. PROPERTIES
Cerus leases approximately 17,400 square feet for its main facility and
approximately 9,900 square feet for an additional facility, both of which
contain laboratory and office space, in Concord, California. The lease of the
main facility extends through June 2004 with one five-year renewal option. The
lease of the additional facility extends through January 2005. Cerus also has a
lease for approximately 11,300 square feet at a facility located near its main
facility in Concord. The lease extends through August 31, 2000, with options to
renew for five additional one-year periods. In addition, Cerus has a lease for
21,400 square feet of office space in a office building currently under
construction near its main facility in Concord. This lease extends through July
2004, with options to renew for two additional three-year periods. Cerus expects
to be able to occupy this space in September 2000. Cerus believes that its
facilities will be adequate to meet its needs for the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
(a) Cerus' common stock is traded on the Nasdaq National Market under the
symbol "CERS." Cerus completed the initial public offering of its common stock
on January 30, 1997. The following table sets forth, for the periods indicated,
the high and low sales prices for the common stock as reported by the Nasdaq
National Market:
HIGH LOW
------ ---
Year Ended December 31, 1998:
First Quarter............................................. $22 1/2 $14 1/2
Second Quarter............................................ 16 7/8 12
Third Quarter............................................. 25 13 1/4
Fourth Quarter............................................ 21 11 1/4
Year Ended December 31, 1999:
First Quarter............................................. 33 7/8 19
Second Quarter............................................ 24 3/4 15 1/4
Third Quarter............................................. 29 3/8 20 3/8
Fourth Quarter............................................ 31 1/8 20 13/16
On March 24, 2000, the last reported sale price of Cerus' common stock on
the Nasdaq National Market was $49.00 per share. On March 24, 2000, Cerus had
approximately 207 holders of record of common stock.
Cerus has not paid dividends on its common stock and does not intend to pay
cash dividends on its common stock in the foreseeable future.
(b) On February 16, 2000, Cerus sold 1,000,000 shares of unregistered
common stock to selected institutional and other accredited investors, including
Baxter Healthcare Corporation, for an aggregate purchase price of $25 million.
Such sale of common stock was exempt from registration under the Securities Act
pursuant to Section 4(2) thereof, as a transaction not involving any public
offering.
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ITEM 6. SELECTED FINANCIAL DATA
The following table summarizes certain selected financial data for the
fiscal year ended December 31, 1999. The information presented should be read in
conjunction with the financial statements and notes included elsewhere herein.
The selected financial data for the periods prior to the financial statements
included herein are derived from audited financial statements.
YEARS ENDED DECEMBER 31,
------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Revenue.................................... $ 2,408 $ 2,903 $ 6,851 $ 3,609 $ 6,799
Operating expenses:
Research and development................... 22,514 29,783 19,569 12,080 8,125
General and administrative................. 4,837 3,841 3,163 2,200 1,517
-------- -------- -------- -------- -------
Total operating expenses........... 27,351 33,624 22,732 14,280 9,642
-------- -------- -------- -------- -------
Loss from operations....................... (24,943) (30,721) (15,881) (10,671) (2,843)
Net interest income........................ 2,315 1,163 1,217 464 483
-------- -------- -------- -------- -------
Net loss................................... $(22,628) $(29,558) $(14,664) $(10,207) $(2,360)
======== ======== ======== ======== =======
Net loss per share-basic and diluted(1).... $ (2.04) $ (3.17) $ (1.76) $ (5.98) $ (1.67)
Shares used in computing net loss per
share-basic and diluted(1).............. 11,102 9,325 8,352 1,706 1,414
AS OF DECEMBER 31,
---------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- -------
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash, cash equivalents and short-term
investments............................. $ 40,419 $ 19,802 $ 21,581 $ 6,002 $ 9,659
Working capital............................ 31,951 537 21,374 2,653 7,263
Total assets............................... 41,780 20,934 27,315 8,812 11,349
Capital lease obligations, less current
portion................................. 115 12 43 92 32
Redeemable convertible preferred stock..... 5,000 5,000 -- -- --
Accumulated deficit........................ (87,518) (64,428) (34,870) (20,206) (9,999)
Total stockholders' equity (deficit)....... 27,959 (3,656) 22,475 4,839 8,663
- ---------------
(1) See Note 1 of Notes to Financial Statements for a description of the method
used in computing the net loss per share.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion of the financial condition and results of
operations of Cerus should be read in conjunction with the Financial Statements
and Notes thereto included elsewhere in this report. This report contains
forward-looking statements that involve risks and uncertainties. Cerus' actual
results could differ significantly from those discussed in these forward-looking
statements as a result of certain factors, including those set forth under "Risk
Factors" and elsewhere in this report.
OVERVIEW
Since its inception in 1991, Cerus has devoted substantially all of its
efforts and resources to the research, development and clinical testing of
systems based on its platform technologies, which prevent nucleic acid (DNA and
RNA) replication. Cerus has been unprofitable since inception and, as of
December 31, 1999, had an accumulated deficit of approximately $87.5 million.
All of Cerus' systems are in the research and development stage, and Cerus has
not received any revenue from product sales. Cerus will be required to conduct
significant research, development, pre-clinical and clinical evaluation and
regulatory compliance activities on these systems that, together with
anticipated general and administrative expenses, are expected to result in
substantial losses at least until after commercialization of its products under
development. Cerus' ability to achieve a profitable level of operations in the
future will depend on its ability to successfully complete development, obtain
regulatory approvals and achieve market acceptance of its pathogen inactivation
systems. Cerus may never achieve a profitable level of operations. Further,
under the agreements discussed below, a significant portion of Cerus'
development funding is provided by Baxter based on an annual budgeting process.
There can be no assurance that these agreements will not be modified or
terminated.
Agreement with Baxter for the development of pathogen inactivation systems
for platelets. Cerus has a development and commercialization agreement with
Baxter for the joint development of a system for inactivation of viruses,
bacteria and other infectious pathogens in platelets used for transfusion (the
"Platelet Agreement"). The Platelet Agreement provides for Baxter and Cerus to
generally share system development costs equally, subject to mutually determined
budgets established from time to time, and for Cerus to receive 33.5% of revenue
from sales of inactivation system disposables after each party is reimbursed for
its cost of goods above a specified level. The Platelet Agreement also provides
for Baxter to make a $5 million cash milestone payment to Cerus upon approval by
the FDA of an application to market products developed under the platelet
program, comparable approval in Europe or termination of the platelet system
development program.
Cerus has received a $1.0 million equity investment under the Platelet
Agreement from Baxter and has recognized $14.7 million in revenue from Baxter
cumulatively through December 31, 1999, including $3.0 million in license fees,
$2.5 million in milestone payments and $9.2 million in development funding.
License fees and payments for achieved milestones are non-refundable and are not
subject to future performance. Development funding is in the form of balancing
payments made by Baxter to Cerus, if necessary, to reimburse Cerus for
development spending in excess of the levels agreed to by Baxter and Cerus.
Development funding revenue is recognized as the related project costs are
incurred.
Agreement with Baxter for the development of pathogen inactivation systems
for red blood cells and FFP. Cerus also has a development and commercialization
agreement with Baxter for the joint development of systems for inactivation of
viruses, bacteria and other infectious pathogens in red blood cells and fresh
frozen plasma (FFP) (the "RBC/FFP Agreement").
The RBC/FFP Agreement provides for Baxter and Cerus generally to share red
blood cell system development costs equally, subject to mutually determined
budgets established from time to time. The RBC/ FFP Agreement also provides for
an equal sharing of revenue from sales of red blood cell inactivation
disposables after each party is reimbursed for its cost of goods and a specified
percentage allocation, not to exceed 14% of revenue, is retained by Baxter for
marketing and administrative expenses.
Under the RBC/FFP Agreement, Cerus and Baxter equally funded the FFP
program development through December 31, 1997, after which time Baxter's funding
commitment for the FFP development
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program was limited to $1.2 million, which offset payments owed to Baxter in
January 1999 and January 2000. Baxter has an exclusive, worldwide distribution
license and will be responsible for manufacturing and marketing the FFP product.
The RBC/FFP Agreement also provides for Cerus to receive 75% and Baxter to
receive 25% of revenue from sales of FFP inactivation system disposables after
each party is reimbursed for its cost of goods and a specified percentage
allocation, not to exceed 14% of revenue, is retained by Baxter for marketing
and administrative expenses.
Under the RBC/FFP Agreement, Cerus received $16.0 million in equity
investments from Baxter and recognized $7.5 million in revenue from Baxter
cumulatively through December 31, 1999 to fund the development of the red blood
cell and FFP systems. Development funding is in the form of payments made by
Baxter to Cerus, if necessary, to reimburse Cerus for development spending in
excess of the levels agreed to by Baxter and Cerus. Development funding revenue
is recognized as the related project costs are incurred.
Agreement with the Consortium for Plasma Science. In December 1998, Cerus
and the Consortium entered into an agreement for the development of a pathogen
inactivation system for source plasma used for fractionation. The Consortium is
co-funded by four plasma fractionation companies: Alpha Therapeutics
Corporation, Aventis Behring, Bayer Corporation and Baxter. The Consortium,
which is a separate entity from its members, provides research and development
funding worldwide for technologies to improve the safety of plasma derivative
products. Under the agreement, the Consortium is funding development of Cerus'
proprietary technology for use with source plasma, subject to an annual review
process. Subject to the Consortium meeting certain funding requirements, Cerus
will pay the Consortium a royalty based on a percentage of product sales, if
any. The initial term of the agreement expires on June 30, 2000. There is no
guarantee that the agreement will be renewed.
RESULTS OF OPERATIONS
1999 COMPARED WITH 1998
Revenue. Cerus anticipates that its sources of revenue until product sales
occur will be limited to payments under collaboration agreements, including
Cerus' development and commercialization agreements with Baxter and development
agreement with the Consortium, and payments from the United States government
under research grant programs. For the year ended December 31, 1999, development
revenue from Baxter and the Consortium decreased 20% to $1.7 million from $2.1
million for 1998. Revenue earned under the agreements with Baxter is dependent
on the relative spending by Cerus and Baxter on the programs for which
development costs are shared. The decrease in revenue from Baxter was primarily
a result of Cerus being solely responsible for funding the FFP program in 1999,
whereas Baxter partially funded this program in 1998. Additionally, development
revenue from Baxter for the red blood cell pathogen inactivation system for 1999
was significantly less than in 1998, as Baxter's relative share of expenses for
this program increased in 1999. Decreased revenue from Baxter was partially
offset by $0.8 million of development revenue from the Consortium in 1999. Cerus
did not recognize any revenue from the Consortium in 1998.
Government grant revenue decreased 8% to $0.7 million for 1999, compared to
$0.8 million for 1998. Cerus' current government grant expires in 2002. There
can be no assurance that Cerus will receive additional government grants in the
future.
Research and Development Expenses. Research and development expenses
decreased 24% to $22.5 million for 1999 from $29.8 million for 1998. The
decrease was primarily due to a one-time expense of $8.3 million in 1998 which
related to Cerus' purchase of an increased share of future platelet pathogen
inactivation system revenue. In addition, Cerus incurred research and
development expenses during 1998 related to an amendment to the Platelet
Agreement, under which Cerus funded $5 million of development costs previously
to be funded by Baxter. In 1999, Cerus and Baxter shared the development costs
of the platelet program equally. Excluding the effects of these items in 1998,
research and development expenses increased, due to the addition of scientific
personnel, increased costs for toxicology studies and clinical trials and
increased expenses incurred for fee-for-service development activities at Baxter
relating to the FFP program. Cerus anticipates that its research and development
expenses will continue to increase as Phase 3
36
37
clinical trials of its platelet and FFP systems continue, and as research and
development activity relating to its other programs increases.
General and Administrative Expenses. General and administrative expenses
increased 26% to $4.8 million for 1999 from $3.8 million for 1998. The increase
was primarily attributable to increased personnel levels associated with the
expansion of Cerus' operations. Cerus expects its general and administrative
expenses to continue to increase as it expands its development activities.
Net Interest Income. Net interest income increased 99% to $2.3 million for
1999 from $1.2 million for 1998. The increase was attributable primarily to
increased average cash balances related to proceeds from Cerus' public offering
of common stock in April 1999 and private placements of common and preferred
stock to Baxter. Cerus typically maintains substantial balances of cash
equivalents and short-term investments to fund future research and development
activities. Cerus expects to earn interest at market rates in proportion to the
securities balances it maintains.
1998 COMPARED WITH 1997
Revenue. For 1998 and 1997, Cerus primary source of revenue was development
funding from Baxter. Revenue earned under the agreements with Baxter is
dependent on the relative spending by Cerus and Baxter on the programs for which
development costs are shared. For the year ended December 31, 1998, development
revenue from Baxter decreased 66% to $2.1 million from $6.2 million for 1997.
The decrease was primarily due to an increase in Baxter's relative share of
development expenses for the platelet and red blood cell programs, and Cerus'
agreement to fund a portion of Baxter's development commitment for the platelet
system in 1998.
Government grant revenue increased 18% to $0.8 million for 1998, compared
to $0.7 million for 1997.
Research and Development Expenses. Research and development expenses
increased 52% to $29.8 million for 1998 from $19.6 million for 1997. The
increase was primarily due to increased third-party costs relating to toxicology
studies and clinical trials, and costs related to increased personnel. In
addition, under amendments to the Platelet Agreement, Cerus recognized research
and development expenses in 1998 and 1997 of $8.3 million and $5.5 million,
respectively, to increase its share of platelet pathogen inactivation system
adjusted product revenue from 26.0% to 33.5%.
General and Administrative Expenses. General and administrative expenses
increased 21% to $3.8 million for 1998 from $3.2 million for 1997. The increase
was primarily attributable to increased personnel levels associated with the
expansion of Cerus' operations.
Net Interest Income. Net interest income, relatively unchanged between the
two years, was $1.2 million in 1998 and 1997.
LIQUIDITY AND CAPITAL RESOURCES
Cerus' sources of capital to date have consisted of public and private
placements of equity securities, development funding by Baxter and the
Consortium, United States government grants and interest income. To date, Cerus
has not received any revenue from product sales, and it will not derive revenue
from product sales unless and until one or more planned products receives
regulatory approval and achieves market acceptance.
In March 1999, Baxter purchased 3,327 shares of Series B preferred stock
for an aggregate purchase price of $9.5 million. From April 1999 until March
2000, a premium equal to 7% per annum on the purchase price is being accrued.
The premium is payable in cash to Baxter in March 2000. At any time after one
year from issuance, the holder may convert the Series B preferred stock into
332,700 common shares. Cerus has the right to redeem the Series B preferred
stock prior to conversion for a payment to Baxter equal to the aggregate
purchase price of the shares redeemed.
In April 1999, Cerus completed a public offering of 2,200,000 shares of
common stock at $21.00 per share and received net proceeds of $42.7 million,
after deducting offering expenses. Also in April 1999, Cerus
37
38
sold 62,912 shares of common stock to Baxter pursuant to Cerus' achievement of a
milestone under the RBC/ FFP Agreement. The purchase price was $31.79 per share,
for an aggregate purchase price of $2.0 million.
At December 31, 1999, Cerus had cash, cash equivalents and short-term
investments of approximately $40.4 million.
In February 2000, Cerus completed a private placement of 1,000,000 shares
of common stock at $25.00 per share and received net proceeds of approximately
$23.5 million, after deducting estimated offering expenses. The shares were
purchased by institutional and other accredited investors, including Baxter,
which purchased 390,000 shares.
Net cash used in operating activities was approximately $33.3 million in
1999, compared to $9.7 million in 1998. The use of cash primarily resulted from
a net loss of $22.6 million and a decrease in accounts payable to Baxter of
$12.2 million. Accounts payable to Baxter decreased primarily due to payments to
Baxter in 1999. Net cash used in investing activities in 1999 of approximately
$23.9 million resulted principally from purchases of $71.9 million of short-term
investments offset by the sale and maturities of $48.6 million of short-term
investments and the purchase of $0.7 million of furniture and equipment. Working
capital increased to $32.0 million at December 31, 1999 from $0.5 million at
December 31, 1998, primarily due to increases in short-term investments balances
and the decrease in accounts payable to Baxter.
Cerus believes that its available cash balances, together with cash flows
from existing development and grant arrangements, will be sufficient to meet its
capital requirements for at least the next twelve months. These near-term
capital requirements are dependent on various factors, including the development
progress of Cerus' pathogen inactivation systems and other programs; payments by
Baxter and the Consortium; and costs related to creating, maintaining and
defending Cerus' intellectual property position. Cerus' long-term capital
requirements will be dependent on these factors and on Cerus' ability to raise
capital through public or private equity or debt financings or through
additional collaborative arrangements or government grants, the achievement of
milestones, regulatory approval and successful commercialization of Cerus'
pathogen inactivation systems and other products under development, competitive
developments and regulatory factors. Future capital funding transactions may
result in dilution to investors in Cerus. Capital may not be available on
favorable terms, or at all. There can be no assurance that Cerus will be able to
meet its capital requirements for this or any other period.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Cerus maintains an investment portfolio of various issuers, types and
maturities. These securities are generally classified as available for sale and,
consequently, are recorded on the balance sheet at fair value with unrealized
gains or losses reported as a separate component of stockholders' equity, if
material. Unrealized gains and losses at December 31, 1999 and 1998 were not
material. Cerus' investments primarily consist of short-term money market mutual
funds, United States and state government obligations and commercial paper. Of
Cerus' investments balance of $40.4 million at December 31, 1999, approximately
9% have original maturity dates of less than 90 days, 55% have original
maturities of 90 days to one year and the remaining balance have maturities of
two years or less. Cerus does not believe its exposure to interest rate risk to
be material given the short-term nature of its investment portfolio.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
The Company's financial statements, together with related notes and report
of Ernst & Young LLP, independent auditors, are listed in Item 14(a) and
included herein beginning on page 42.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
38
39
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding the Company's directors and officers, and the
compliance of certain reporting persons with Section 16(a) of the Securities
Exchange Act of 1934 will be set forth under the captions "Election of
Directors," "Management" and "Compliance with the Reporting Requirements of
Section 16(a)" in the Company's proxy statement for use in connection with the
Annual Meeting of Stockholders to be held on May 11, 2000 (the "2000 Proxy
Statement") and is incorporated herein by reference. The 2000 Proxy Statement
will be filed with the Securities and Exchange Commission within 120 days after
the end of the Company's fiscal year.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated herein by reference
from the information set forth under the caption "Executive Compensation" in the
2000 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated herein by reference
from the information set forth under the caption "Security Ownership of Certain
Beneficial Owners and Management" in the 2000 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated herein by reference
from the information set forth under the option "Certain Transactions" in the
2000 Proxy Statement.
39
40
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
The following documents are being filed as part of this report on Form
10-K:
(a) Financial Statements.
PAGE
----
Report of Ernst & Young LLP, Independent Auditors........... 42
Balance Sheets as of December 31, 1999 and 1998............. 43
Statements of Operations for the three years ended December
31, 1999.................................................. 44
Statements of Stockholders' Equity (Deficit) for the three
years ended December 31, 1999............................. 45
Statements of Cash Flows for the three years ended December
31, 1999.................................................. 46
Notes to Financial Statements............................... 47
Other information is omitted because it is either presented elsewhere, is
inapplicable or is immaterial as defined in the instructions.
(b) The Company filed a report on Form 8-K, dated November 3, 1999, reporting
adoption of a Stockholder Rights Plan.
(c) Exhibits
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
3.1.1(4) Restated Certificate of Incorporation of Cerus Corporation,
as amended to date.
3.2(1) Bylaws of Cerus.
10.1(1) Form of Indemnity Agreement entered into between Cerus and
each of its directors and executive officers.
10.2(1) 1996 Equity Incentive Plan.
10.3(1) Form of Incentive Stock Option Agreement under the 1996
Equity Incentive Plan.
10.4(1) Form of Nonstatutory Stock Option Agreement under the 1996
Equity Incentive Plan.
10.5(1) 1996 Employee Stock Purchase Plan Offering.
10.14(1) Series E Preferred Stock Purchase Agreement, dated April 1,
1996, between Cerus and Baxter Healthcare Corporation.
10.15(1) Common Stock Purchase Agreement, dated September 3, 1996
between Cerus and Baxter Healthcare Corporation.
10.16(1) Amended and Restated Investors' Rights Agreement, dated
April 1, 1996, among Cerus and certain investors.
10.17+(1) Development, Manufacturing and Marketing Agreement, dated
December 10, 1993 between Cerus and Baxter Healthcare
Corporation.
10.21(1) Industrial Real Estate Lease, dated October 1, 1992, between
Cerus and Shamrock Development Company, as amended on May
16, 1994 and December 21, 1995.
10.22(1) Real Property Lease, dated August 8, 1996, between the
Registrant and S.P. Cuff.
10.23(1) Lease, dated February 1, 1996, between Cerus and Holmgren
Partners.
10.24(1) First Amendment to Common Stock Purchase Agreement, dated
December 9, 1996, between Cerus and Baxter Healthcare
Corporation.
10.25+(1) Amendment, dated as of January 3, 1997, to the Agreement
filed as Exhibit 10.17.
10.26(1) Memorandum of Agreement, dated as of January 3, 1997,
between Cerus and Baxter Healthcare Corporation.
10.27+ License Agreement, dated as of November 30, 1992, by and
among the Company, Miles Inc. and Diamond Scientific
Corporation.
10.28+(2) Amendment to Development, Manufacturing and Marketing
Agreement, dated as of March 6, 1998, by and between Cerus
and Baxter Healthcare Corporation.
40
41
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
10.29(3) Series A Preferred Stock Purchase Agreement, dated as of
June 30, 1998, by and between Cerus and Baxter Healthcare
Corporation.
10.30(3) Series B Preferred Stock Purchase Agreement, dated as of
June 30, 1998, by and between Cerus and Baxter Healthcare
Corporation.
10.31(3) Memorandum of Agreement, dated as of June 30, 1998, by and
between Cerus and Baxter Healthcare Corporation.
10.32(3) Second Amendment to Development, Manufacturing and Marketing
Agreement, dated as of June 30, 1998, by and between Cerus
and Baxter Healthcare Corporation.
10.33+(3) Development, Manufacturing and Marketing Agreement, dated
April 1, 1996, by and between Cerus and Baxter Healthcare
Corporation, as amended and restated June 30, 1998.
10.34(4) Stockholder Rights Plan, dated November 3, 1999.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
27.1 Financial Data Schedule.
- ---------------
+ Certain portions of this exhibit are subject to a confidential treatment
order.
(1) Incorporated by reference to Cerus' Registration Statement on Form S-1 (File
No. 333-11341) and amendments thereto.
(2) Incorporated by reference to Cerus' Quarterly Report on Form 10-Q for the
quarter ended March 31, 1998.
(3) Incorporated by reference to Cerus' Current Report on Form 8-K, dated June
30, 1998.
(4) Incorporated by reference to Cerus' Current Report on Form 8-K, dated
November 3, 1999.
41
42
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Cerus Corporation
We have audited the accompanying balance sheets of Cerus Corporation as of
December 31, 1999 and 1998, and the related statements of operations,
stockholders' equity (deficit) and cash flows for each of the three years in the
period ended December 31, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Cerus Corporation at
December 31, 1999 and 1998, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1999 in conformity
with accounting principles generally accepted in the United States.
/s/ ERNST & YOUNG LLP
Walnut Creek, California
January 27, 2000, except for Note 9, as to which the date is
February 16, 2000
42
43
CERUS CORPORATION
BALANCE SHEETS
ASSETS
DECEMBER 31,
----------------------------
1999 1998
------------ ------------
Current assets:
Cash and cash equivalents................................. $ 3,537,134 $ 6,161,088
Short-term investments.................................... 36,881,664 13,640,945
Other current assets...................................... 238,436 312,398
------------ ------------
Total current assets................................... 40,657,234 20,114,431
Furniture and equipment at cost:
Laboratory and office equipment........................... 2,229,818 1,458,084
Leasehold improvements.................................... 1,668,351 1,597,520
------------ ------------
3,898,169 3,055,604
Less accumulated depreciation and amortization............ 2,899,121 2,330,876
------------ ------------
Net furniture and equipment................................. 999,048 724,728
Other assets................................................ 123,968 94,536
------------ ------------
Total assets...................................... $ 41,780,250 $ 20,933,695
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable to a related party....................... $ 531,474 $ 12,718,801
Accounts payable.......................................... 1,479,905 1,335,776
Accrued compensation and related expenses................. 1,130,829 982,458
Accrued contract research expenses........................ 3,157,359 2,571,000
Accrued cash dividend on preferred stock, payable to a
related party.......................................... 462,414 --
Other accrued expenses.................................... 1,913,032 1,939,016
Current portion of capital lease obligations.............. 31,138 30,792
------------ ------------
Total current liabilities.............................. 8,706,151 19,577,843
Capital lease obligations, less current portion............. 115,022 12,211
Commitments and contingencies
Redeemable convertible preferred stock, $.001 par value;
5,000,000 shares authorized: issuable in series; 5,000
shares issued and outstanding at December 31, 1999 and
1998; aggregate liquidation preference of $5,000,000 at
December 31, 1999 and 1998................................ 5,000,000 5,000,000
Stockholders' equity (deficit):
Preferred stock: issuable in series; 3,327 shares issued
and outstanding at December 31, 1999 and none at
December 31, 1998; aggregate liquidation preference of
$9,495,996 at December 31, 1999........................ 9,495,996 --
Common stock, $.001 par value; 50,000,000 shares
authorized:
11,744,092 and 9,416,843 shares issued and outstanding
at December 31, 1999 and 1998, respectively.......... 11,744 9,417
Additional paid-in capital................................ 105,976,758 60,813,174
Deferred compensation..................................... (7,089) (50,853)
Accumulated deficit....................................... (87,518,332) (64,428,097)
------------ ------------
Total stockholders' equity (deficit)................... 27,959,077 (3,656,359)
------------ ------------
Total liabilities and stockholders' equity
(deficit)....................................... $ 41,780,250 $ 20,933,695
============ ============
See accompanying notes.
43
44
CERUS CORPORATION
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31,
--------------------------------------------
1999 1998 1997
------------ ------------ ------------
Revenue:
Licenses, milestones and development funding
from related parties........................ $ 1,692,787 $ 2,127,413 $ 6,190,781
Government grants.............................. 715,546 775,886 660,066
------------ ------------ ------------
Total revenue.......................... 2,408,333 2,903,299 6,850,847
Operating expenses:
Research and development....................... 22,513,960 29,783,285 19,569,469
General and administrative..................... 4,837,490 3,840,816 3,163,012
------------ ------------ ------------
Total operating expenses............... 27,351,450 33,624,101 22,732,481
------------ ------------ ------------
Loss from operations............................. (24,943,117) (30,720,802) (15,881,634)
Interest income (expense):
Interest income................................ 2,336,623 1,171,903 1,232,322
Interest expense............................... (21,327) (9,153) (14,901)
------------ ------------ ------------
Net interest income.............................. 2,315,296 1,162,750 1,217,421
------------ ------------ ------------
Net loss......................................... $(22,627,821) $(29,558,052) $(14,664,213)
============ ============ ============
Net loss per share -- basic and diluted.......... $ (2.04) $ (3.17) $ (1.76)
============ ============ ============
Shares used in computing net loss per share --
basic and diluted.............................. 11,102,226 9,325,269 8,351,872
============ ============ ============
See accompanying notes.
44
45
CERUS CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
NOTES
PREFERRED STOCK COMMON STOCK ADDITIONAL RECEIVABLE
----------------------- -------------------- PAID-IN DEFERRED FROM
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION STOCKHOLDERS
---------- ---------- ---------- ------- ------------ ------------ ------------
Balances at December 31,
1996...................... 3,001,630 $ 3,002 1,928,807 $ 1,929 $ 25,425,529 $(310,387) $(75,206)
Public offering of common
stock, net of expenses of
$2,945,259................ -- -- 2,000,000 2,000 21,052,741 -- --
Issuance of common stock.... -- -- 714,080 714 10,542,502 -- --
Conversion of preferred
stock..................... (3,001,630) (3,002) 4,412,243 4,412 (3,118) -- --
Issuance of common stock
under stock option and
employee stock purchase
plans and warrant
exercises................. -- -- 129,664 130 459,754 -- --
Common shares reacquired.... -- -- (1,165) (1) (633) -- --
Payment on notes
receivable................ -- -- -- -- -- -- 75,206
Amortization of deferred
compensation.............. -- -- -- -- -- 169,450 --
Net loss.................... -- -- -- -- -- -- --
---------- ---------- ---------- ------- ------------ --------- --------
Balances at December 31,
1997...................... -- -- 9,183,629 9,184 57,476,775 (140,937) --
Issuance of common stock.... -- -- 159,595 159 2,975,470 -- --
Issuance of common stock
under stock option and
employee stock purchase
plans and warrant
exercises................. -- -- 77,984 78 364,767 -- --
Common shares reacquired.... -- -- (4,365) (4) (3,838) -- --
Amortization of deferred
compensation.............. -- -- -- -- -- 90,084 --
Net loss.................... -- -- -- -- -- -- --
---------- ---------- ---------- ------- ------------ --------- --------
Balances at December 31,
1998...................... -- -- 9,416,843 9,417 60,813,174 (50,853) --
Issuance of common stock.... -- -- 62,912 62 1,999,911 -- --
Public offering of common
stock, net of expenses of
$3,523,556................ -- -- 2,200,000 2,200 42,674,244 -- --
Issuance of Series B
preferred stock........... 3,327 9,495,996 -- -- -- -- --
Issuance of common stock
under stock option and
employee stock purchase
plans and warrant
exercises................. -- -- 78,770 79 499,724 -- --
Common shares reacquired.... -- -- (14,433) (14) (10,295) -- --
Accretion of cash dividend
on preferred stock........ -- -- -- -- -- -- --
Amortization of deferred
compensation.............. -- -- -- -- -- 43,764 --
Net loss.................... -- -- -- -- -- -- --
---------- ---------- ---------- ------- ------------ --------- --------
Balances at December 31,
1999...................... 3,327 $9,495,996 11,744,092 $11,744 $105,976,758 $ (7,089) $ --
========== ========== ========== ======= ============ ========= ========
TOTAL
ACCUMULATED STOCKHOLDERS'
DEFICIT EQUITY (DEFICIT)
------------ ----------------
Balances at December 31,
1996...................... $(20,205,832) $ 4,839,035
Public offering of common
stock, net of expenses of
$2,945,259................ -- 21,054,741
Issuance of common stock.... -- 10,543,216
Conversion of preferred
stock..................... -- (1,708)
Issuance of common stock
under stock option and
employee stock purchase
plans and warrant
exercises................. -- 459,884
Common shares reacquired.... -- (634)
Payment on notes
receivable................ -- 75,206
Amortization of deferred
compensation.............. -- 169,450
Net loss.................... (14,664,213) (14,664,213)
------------ ------------
Balances at December 31,
1997...................... (34,870,045) 22,474,977
Issuance of common stock.... -- 2,975,629
Issuance of common stock
under stock option and
employee stock purchase
plans and warrant
exercises................. -- 364,845
Common shares reacquired.... -- (3,842)
Amortization of deferred
compensation.............. -- 90,084
Net loss.................... (29,558,052) (29,558,052)
------------ ------------
Balances at December 31,
1998...................... (64,428,097) (3,656,359)
Issuance of common stock.... -- 1,999,973
Public offering of common
stock, net of expenses of
$3,523,556................ -- 42,676,444
Issuance of Series B
preferred stock........... -- 9,495,996
Issuance of common stock
under stock option and
employee stock purchase
plans and warrant
exercises................. -- 499,803
Common shares reacquired.... -- (10,309)
Accretion of cash dividend
on preferred stock........ (462,414) (462,414)
Amortization of deferred
compensation.............. -- 43,764
Net loss.................... (22,627,821) (22,627,821)
------------ ------------
Balances at December 31,
1999...................... $(87,518,332) $ 27,959,077
============ ============
See accompanying notes.
45
46
CERUS CORPORATION
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
------------------------------------------
1999 1998 1997
------------ ------------ ------------
OPERATING ACTIVITIES
Net loss............................................. $(22,627,821) $(29,558,052) $(14,664,213)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization...................... 568,245 611,892 562,066
Amortization of deferred compensation.............. 43,764 90,084 169,450
Accrued cash dividend on preferred stock, payable
to a related party.............................. (462,414) -- --
Changes in operating assets and liabilities:
Accounts receivable from a related party...... -- 4,376,141 (4,050,626)
Other current assets.......................... 73,962 (97,711) (8,672)
Other assets.................................. (29,432) 17,189 12,938
Accounts payable to a related party........... (12,187,327) 12,718,801 --
Accounts payable.............................. 144,129 36,908 907,601
Accrued compensation and related expenses..... 148,371 50,467 300,611
Accrued contract research expenses............ 586,359 1,675,000 41,700
Accrued cash dividend on preferred stock,
payable to a related party................. 462,414 -- --
Other accrued expenses........................ (25,984) 338,514 1,085,654
Deferred revenue.............................. -- -- (981,523)
------------ ------------ ------------
Net cash used in operating activities................ (33,305,734) (9,740,767) (16,625,014)
INVESTING ACTIVITIES
Purchases of furniture and equipment................. (700,806) (304,791) (378,645)
Purchases of short-term investments.................. (71,864,541) (29,261,767) (31,977,178)
Sale of short-term investments....................... 4,114,471 -- 1,000,000
Maturities of short-term investments................. 44,509,351 25,598,000 21,000,000
------------ ------------ ------------
Net cash used in investing activities................ (23,941,525) (3,968,558) (10,355,823)
FINANCING ACTIVITIES
Net proceeds from sale of preferred stock............ 9,495,996 5,000,000 --
Net proceeds from issuance of common stock........... 45,176,220 3,340,474 32,613,983
Payment of fractional shares on preferred stock
conversion......................................... -- -- (1,708)
Repurchase of common stock........................... (10,309) (3,842) (634)
Payments on notes receivable from shareholders....... -- -- 75,206
Payments on capital lease obligations................ (38,602) (69,815) (104,464)
------------ ------------ ------------
Net cash provided by financing activities............ 54,623,305 8,266,817 32,582,383
------------ ------------ ------------
Net increase (decrease) in cash and cash
equivalents........................................ (2,623,954) (5,442,508) 5,601,546
Cash and cash equivalents, beginning of period....... 6,161,088 11,603,596 6,002,050
------------ ------------ ------------
Cash and cash equivalents, end of period............. $ 3,537,134 $ 6,161,088 $ 11,603,596
------------ ------------ ------------
Supplemental disclosures:
Interest paid...................................... $ 21,327 $ 9,153 $ 14,901
------------ ------------ ------------
Supplemental schedule of noncash investing and
financing activities:
Capital lease obligations incurred................. $ 141,759 $ -- $ 31,025
------------ ------------ ------------
Conversion of preferred stock to common stock...... $ -- $ -- $ 24,534,998
------------ ------------ ------------
See accompanying notes.
46
47
CERUS CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
1. THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
Cerus Corporation (the "Company") (formerly Steritech, Inc.), incorporated
on September 19, 1991, is developing systems designed to improve the safety of
transfusion blood products through inactivation of viruses, bacteria and other
pathogens. In addition to systems to treat platelets, fresh frozen plasma
("FFP") and red blood cells intended for transfusion, the Company is developing
a system to treat plasma derivative products. The Company's platform
technologies, which prevent viral, bacterial and other cellular replication,
have potential applications in the health care field beyond pathogen
inactivation in blood components. The Company has collaboration agreements with
Baxter Healthcare Corporation ("Baxter") and the Consortium for Plasma Science
("the Consortium") (see Note 2). The Company has not received any revenue from
product sales, and all revenue recognized by the Company to date has resulted
from the Company's agreements with Baxter and the Consortium and federal
research grants. The Company will be required to conduct significant research,
development, testing and regulatory compliance activities on its pathogen
inactivation systems that, together with anticipated general and administrative
expenses, are expected to result in substantial additional losses, and the
Company may need to adjust its operating plans and programs based on the
availability of cash resources. The Company's ability to achieve a profitable
level of operations will depend on successfully completing development,
obtaining regulatory approvals and achieving market acceptance of its pathogen
inactivation systems. There can be no assurance that the Company will ever
achieve a profitable level of operations.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
REVENUE AND RESEARCH AND DEVELOPMENT EXPENSES
Development funding is in the form of payments made (i) by Baxter to the
Company to reimburse the Company for development spending in excess of the
levels determined by Baxter and the Company and (ii) by Baxter and the
Consortium to reimburse the Company for certain fee-for-service development
activities. Revenue related to the cost reimbursement provisions under
development contracts is recognized as the costs on the project are incurred.
Revenue related to milestones specified under development contracts is
recognized as the milestones are achieved. License fees and payments for
achieved milestones are non-refundable and are not subject to future
performance. Research and development costs are expensed as incurred.
Revenue recognized under agreements with Baxter and the Consortium for the
years ended December 31, 1999, 1998 and 1997 consisted of the following:
1999 1998 1997
---------- ---------- ----------
Licenses................................................... $ -- $ -- $ 981,523
Milestones................................................. -- -- 750,000
Development funding........................................ 1,692,787 2,127,413 4,459,258
---------- ---------- ----------
Total licenses, milestones and development
funding........................................ $1,692,787 $2,127,413 $6,190,781
========== ========== ==========
The Company receives certain United States government grants which support
the Company's research effort in defined research projects. These grants
generally provide for reimbursement of approved costs
47
48
CERUS CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
incurred as defined in the various grants. Revenue associated with these grants
is recognized as costs under each grant are incurred.
CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
The Company considers all highly liquid investments with original
maturities of less than three months to be cash and cash equivalents. Cash
equivalents consist principally of short-term money market instruments and
commercial paper.
In accordance with Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," the Company
has classified all debt securities as available-for-sale at the time of purchase
and reevaluates such designation as of each balance sheet date. The
available-for-sale securities recorded at amounts which approximate fair value
at December 31, 1999 and 1998 totaled $40,418,398 and $19,801,633, respectively.
Unrealized gains and losses at December 31, 1999 and 1998 and realized
gains and losses for the years then ended were not material. Accordingly, the
Company has not made a provision for such amounts in its balance sheets. The
cost of securities sold is based on the specific identification method.
Substantially all of the Company's cash, cash equivalents and short-term
investments are maintained by three major financial institutions.
FURNITURE AND EQUIPMENT
Furniture and equipment is stated at cost less accumulated depreciation and
amortization. Depreciation on furniture and equipment is calculated on a
straight-line basis over the estimated useful lives of the assets (generally
three to five years). Leasehold improvements are amortized on a straight-line
basis over the shorter of the lease term or the estimated useful lives of the
improvements.
STOCK-BASED COMPENSATION
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("FAS 123"). The Company adopted FAS 123 in 1996. The Company
accounts for employee stock options in accordance with Accounting Principles
Board Opinion No. 25 and has adopted the "disclosure only" alternative described
in FAS 123.
INCOME TAXES
The Company accounts for income taxes based upon Financial Accounting
Standards Board Statement No. 109, "Accounting for Income Taxes." Under this
method, deferred tax assets and liabilities are determined based on differences
between the financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse.
NET LOSS PER SHARE -- BASIC AND DILUTED
The Company calculates basic and diluted earnings per share in accordance
with Statement of Financial Accounting Standards No. 128, "Earnings Per Share"
("FAS 128"). Under FAS 128, basic earnings per share is computed by dividing net
income (loss) by the weighted average number of common shares outstanding for
the period. Diluted earnings per share reflects the assumed conversion of all
dilutive securities, such as options, warrants, convertible debt and convertible
preferred stock. Common stock equivalent shares from redeemable convertible
preferred stock and from stock options and warrants are not included as the
effect is anti-dilutive.
48
49
CERUS CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
COMPREHENSIVE INCOME (LOSS)
In 1997, the Financial Accounting Standards Board issued Statement No. 130,
"Reporting Comprehensive Income" ("FAS 130"), which requires that all items that
are required to be recognized under accounting standards as comprehensive income
(revenues, expenses, gains and losses) be reported in a financial statement that
is displayed with the same prominence as other financial statements. The Company
does not have material components of other comprehensive income. Therefore,
comprehensive loss is equal to net loss reported for all periods presented.
DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE
In 1997, the Financial Accounting Standards Board issued Statement No. 131,
"Disclosures about Segments of an Enterprise and Related Information," ("FAS
131"), which establishes standards for the way public business enterprises
report information about operating segments in annual financial statements. The
Company has one reportable operating segment under this statement, which is the
development of biomedical systems to treat blood products, and the required
disclosures are reflected in the financial statements.
2. LICENSING AGREEMENTS
AGREEMENTS WITH BAXTER, A RELATED PARTY OF THE COMPANY
The Company has a development and commercialization agreement with Baxter
for the joint development of a system for inactivation of viruses, bacteria and
other infectious pathogens in platelets used for transfusions (the "Platelet
Agreement"). The Platelet Agreement provides for Baxter and Cerus to generally
share system development costs equally, subject to mutually determined budgets
established from time to time, and for the Company to receive 33.5% of revenue
from sales of inactivation system disposables after each party is reimbursed for
its cost of goods above a specified level. The Platelet Agreement also provides
for Baxter to make a $5 million cash milestone payment to the Company upon
approval by the FDA of an application to market products developed under the
platelet program, comparable approval in Europe or termination of the platelet
system development program.
The Company also has a development and commercialization agreement with
Baxter for the joint development of systems for inactivation of viruses,
bacteria and other infectious pathogens in red blood cells and FFP for
transfusion (the "RBC/FFP Agreement"). The RBC/FFP Agreement provides for Baxter
and the Company generally to share red blood cell system development costs
equally, subject to mutually determined budgets established from time to time.
The RBC/FFP Agreement also provides for an equal sharing of revenue from sales
of red blood cell inactivation system disposables after each party is reimbursed
for its cost of goods and a specified percentage allocation is retained by
Baxter for marketing and administrative expenses. Under the RBC/FFP Agreement,
the Company and Baxter equally funded the FFP program development through
December 31, 1997 after which time Baxter's funding commitment for the FFP
development program was limited to $1.2 million. The RBC/FFP Agreement also
provides for the Company to receive 75% and Baxter to receive 25% of revenue
from sales of FFP inactivation system disposables after each party is reimbursed
for its cost of goods and a specified percentage allocation not to exceed 14% of
revenue is retained by Baxter for marketing and administrative expenses. Baxter
will be responsible for manufacturing and marketing the FFP product, and will
retain its exclusive, worldwide distribution license.
As of December 31, 1999, the Company has received $37.0 million in equity
investments from Baxter and has recognized approximately $22.2 million in
revenue, since inception. Development funding is in the form of balancing
payments made between Baxter and the Company to adjust the relative spending of
the companies to the levels agreed to by Baxter and the Company and to reimburse
each party for fee-for-service development activities.
49
50
CERUS CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
As of December 31, 1999, Baxter owned 1,680,337 shares of the common stock
of the Company, representing approximately 14.3% of the outstanding common
stock. Baxter has agreed that it will not at any time, nor will it permit any of
its affiliates, to acquire, other than by conversion of preferred stock, any
capital stock of the Company if, after such acquisition, Baxter and its
affiliates would own 20.1% or more of the outstanding voting power of the
Company. Such restrictions on stock purchases will not apply in the event a
third party makes a tender offer for a majority of the outstanding voting
securities of the Company or if the Board of Directors of the Company determines
to liquidate or sell to a third party substantially all of the assets or a
majority of the voting securities of the Company or to approve a merger or
consolidation in which the Company's stockholders will not own a majority of the
voting securities of the surviving entity.
AGREEMENT WITH THE CONSORTIUM FOR PLASMA SCIENCE
In December 1998, the Company and the Consortium entered into an agreement
for the development of a pathogen inactivation system for source plasma used for
fractionation. The Consortium is co-funded by four plasma fractionation
companies, one of which is Baxter, a related party of the Company. The
Consortium, which is a separate entity from its members, provides research and
development funding worldwide for technologies to improve the safety of plasma
derivative products. Under the agreement, the Consortium is funding development
of the Company's proprietary technology for use with source plasma, subject to
an annual review process. The Company will pay the Consortium a royalty based on
a percentage of product sales, if any, subject to the Consortium meeting certain
funding requirements. The initial term of the agreement expires on June 30,
2000. There is no guarantee that the agreement will be renewed.
3. INVESTMENTS
Available-for-sale securities are recorded at amounts which approximate
fair market value. Realized and unrealized gains and losses at December 31, 1999
and 1998 were not material. Investments classified as available-for-sale were as
follows:
DECEMBER 31,
--------------------------
1999 1998
----------- -----------
Money market mutual funds................................. $ 1,045,320 $ 344,265
United States and state government obligations............ 9,615,817 3,001,128
Commercial paper.......................................... 29,757,261 16,456,240
----------- -----------
Total investments......................................... 40,418,398 19,801,633
Less: amounts classified as cash equivalents.............. (3,536,734) (6,160,688)
----------- -----------
Short-term investments.................................... $36,881,664 $13,640,945
=========== ===========
4. COMMITMENTS AND CONTINGENCIES
The Company leases its office facilities and certain equipment under
non-cancelable operating leases with initial terms in excess of one year which
require the Company to pay operating costs, property taxes, insurance and
maintenance. These facility leases generally contain renewal options and
provisions adjusting the lease payments.
Capital lease obligations represent the present value of future rental
payments under capital lease agreements for laboratory and office equipment. The
original cost and accumulated amortization on the equipment under capital leases
is $586,753 and $441,698, respectively, at December 31, 1999 and $444,994 and
$373,071, respectively, at December 31, 1998.
50
51
CERUS CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Future minimum payments under capital and operating leases are as follows:
CAPITAL OPERATING
YEAR ENDING DECEMBER 31, LEASES LEASES
------------------------ -------- ----------
2000........................................................ $ 47,916 $ 531,927
2001........................................................ 45,120 682,941
2002........................................................ 39,528 682,941
2003........................................................ 39,528 682,941
2004........................................................ 19,763 412,031
Thereafter.................................................. -- 7,115
-------- ----------
Total minimum lease payments................................ 191,855 $2,999,896
==========
Amount representing interest................................ 45,695
--------
Present value of net minimum lease payments................. 146,160
Current portion............................................. 31,138
--------
Long-term portion........................................... $115,022
========
Rent expense for office facilities and certain equipment was $520,994,
$641,564 and $677,501 for the years ended December 31, 1999, 1998 and 1997,
respectively.
PATENT LICENSES
The Company is a licensee under a license agreement with an unaffiliated
company with respect to two United States patents covering inventions pertaining
to psoralen-based photochemical decontamination treatment of whole blood or
blood components and four United States patents relating to vaccines, as well as
related foreign patents. Whether the Company's psoralen-based pathogen
inactivation systems practice either of the photochemical decontamination
patents depends on an interpretation of the scope of the patent claims. If such
systems practice such patents, the license would provide for the Company to make
certain milestone payments which may be credited against any royalties payable
by the Company. The license requires a royalty payable by the Company on
revenues from such systems and certain annual minimum royalty payments per year
until termination of the license. The manner in which any such milestone
payments and royalties would be shared by Baxter, if at all, has not been
determined. The Company does not believe that any amounts that might be payable
by it under the agreement to date would be material.
5. PREFERRED STOCK
SERIES A REDEEMABLE CONVERTIBLE PREFERRED STOCK
In June 1998, the Company and Baxter entered into an agreement for Baxter
to purchase 5,000 shares of Series A preferred stock at $1,000.00 per share.
These shares were issued in July 1998. The holders of Series A preferred stock
have no voting rights, except in certain instances. The Company may redeem all
or a portion of these shares at the original issuance price upon achievement of
certain milestones. If the shares are not redeemed upon achievement of these
milestones, each share will be automatically converted into common shares equal
to the original issuance price divided by 120% of the average closing price of
the common stock. Upon termination of the Platelet Agreement, either the Company
or the holders of the majority of outstanding Series A preferred stock may
require the Company to redeem all Series A preferred stock at the original
issuance price. If the shares are not redeemed upon termination, each share will
be automatically converted into common shares equal to the original issuance
price divided by the average closing price of the common stock.
51
52
CERUS CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SERIES B PREFERRED STOCK
In March 1999, Baxter purchased 3,327 shares of Series B preferred stock
for an aggregate purchase price of $9.5 million. From April 1999 until March
2000, a premium equal to 7.0% per annum on the purchase price is being accrued.
The premium is payable in cash to Baxter in March 2000. At December 31, 1999,
$462,414 has been accrued under this arrangement. At any time after one year
from issuance, the holder may convert each share of Series B preferred stock
into 100 common shares. The Company has the right to redeem the Series B
preferred stock prior to conversion for a payment equal to the aggregate
purchase price of the shares redeemed.
6. STOCKHOLDERS' EQUITY
COMMON STOCK
In January 1997, the Company completed an initial public offering of
2,000,000 shares of common stock at $12.00 per share. The Company received net
proceeds of $21.1 million, after deducting offering expenses. Simultaneously,
the Company sold an additional 496,878 shares of its common stock to Baxter for
an aggregate purchase price of approximately $5.5 million. Additionally, at the
time of the initial public offering, 33,315 warrants to purchase 47,605 shares
of common stock were exercised for an aggregate price paid to the Company of
$183,000 and Series A, B, C, D and E preferred stock converted into 4,412,243
shares of common stock.
In April 1999, the Company completed a public offering of 2,200,000 newly
issued shares of its common stock at $21.00 per share. The Company received net
proceeds of $42.7 million, after deducting offering expenses. Also in April
1999, the Company sold 62,912 shares of common stock to Baxter pursuant to the
achievement of a milestone under the RBC/FFP Agreement. The purchase price was
$31.79 per share, for an aggregate purchase price of $2.0 million.
In November 1999, the Company's Board of Directors adopted a stockholder
rights plan, commonly referred to as a "poison pill," that is intended to deter
hostile or coercive attempts to acquire the Company. The stockholder rights plan
enables stockholders to acquire shares of the Company's common stock, or the
common stock of an acquiror, at a substantial discount to the public market
price should any person or group acquire more than 15% of the Company's common
stock without the approval of the Board of Directors under certain
circumstances. Baxter will be exempt from the rights plan, unless it acquires
beneficial ownership of 20.1% or more of the Company's common stock, excluding
shares of the Company's common stock issuable upon conversion of Series A or
Series B preferred stock currently held by Baxter. The Company has designated
250,000 shares of Series C Junior Participating preferred stock for issuance in
connection with the stockholder rights plan.
STOCK OPTION PLANS
The Company has reserved 1,470,000 shares of common stock for issuance
under its 1996 Equity Incentive plan (the "1996 Plan"). The 1996 Plan provides
for grants of Incentive Stock Options ("ISOs") to employees and Nonstatutory
Stock Options ("NSOs"), restricted stock purchase awards, stock appreciation
rights and stock bonuses to employees, directors and consultants of the Company.
The ISOs may be granted at a price per share not less than the fair market value
at the date of grant. The NSOs may be granted at a price per share not less than
85% of the fair market value at the date of grant. The option term is ten years.
Vesting, as determined by the Board of Directors, generally occurs ratably over
four years. In the event option holders cease to be employed by the Company,
except in the event of death or disability or as otherwise provided in the
option grant, all unvested options are forfeited and all vested options must be
exercised within a three-month period, otherwise the options are forfeited.
52
53
CERUS CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The Company has reserved 120,000 shares of common stock for issuance under
its 1998 Non-Officer Stock Option Plan. Under the terms of this plan, options
may be granted to employees or consultants at an exercise price of at least 85%
of the fair market value per share at the date of grant. The option term is ten
years.
In April 1999, the Company adopted the 1999 Equity Incentive plan (the
"1999 Plan") (approved by the stockholders in July 1999), and reserved an
additional 580,000 shares of common stock for issuance thereunder. The 1999 Plan
provides for grants of ISOs to employees and NSOs, stock bonuses and restricted
stock purchase awards to employees, directors and consultants of the Company.
The option term is ten years.
Options granted are immediately exercisable, and unvested (but issued)
shares are subject to repurchase by the Company if the holder is no longer
employed by the Company. As of December 31, 1999, 1,643 outstanding shares were
subject to this repurchase provision.
STOCK-BASED COMPENSATION
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" ("APB 25") and related
interpretations in accounting for its employee stock awards because, as
discussed below, the alternative fair value accounting provided for under FAS
123 requires the use of option valuation models that were not developed for use
in valuing employee stock options. Under APB 25, because the exercise price of
the Company's employee common stock options equals the market price of the
underlying common stock on the grant date (for certain Company common stock
grants), no compensation expense is recorded.
Pro forma information regarding net loss and net loss per share is required
by FAS 123, and has been determined as if the Company had accounted for its
employee stock options and employee stock purchase plan under the fair value
method of that Statement. The fair value for these options and shares was
estimated at the date of grant using a Black-Scholes option pricing model with
the following weighted-average assumptions for the years ended December 31:
EMPLOYEE STOCK
STOCK OPTION PLANS PURCHASE PLAN
-------------------------- --------------------------
1999 1998 1997 1999 1998 1997
------ ------ ------ ------ ------ ------
Expected dividend yield........................ 0% 0% 0% 0% 0% 0%
Expected volatility .6500.. .6267 .7424 .6500 .6267 .7424
Risk-free interest rate........................ 6.55% 5.75% 6.13% 5.76% 5.75% 6.13%
Expected life of the option (years)............ 5 5 5 0.5 0.5 0.5
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options and purchased shares
have characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its employee
stock awards.
53
54
CERUS CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the awards' vesting period. The effects of
applying FAS 123 on pro forma net loss are not likely to be representative of
the effects on reported net loss/income for future years. The Company's reported
and pro forma information for the years ended December 31 follows:
1999 1998 1997
------------ ------------ ------------
Net loss, as reported.................... $(22,627,821) $(29,558,052) $(14,664,213)
Net loss, pro forma...................... (25,103,291) (30,271,930) (14,966,213)
Net loss per share -- basic and diluted,
as reported............................ (2.04) (3.17) (1.76)
Net loss per share -- basic and diluted,
pro forma.............................. (2.25) (3.25) (1.79)
Activity under the stock option plans is set forth below:
NUMBER OF WEIGHTED AVERAGE
OPTIONS EXERCISE PRICE
OUTSTANDING PER SHARE
----------- ----------------
Balances at December 31, 1996............................ 407,383 $ 2.523
Granted................................................ 51,300 14.925
Cancelled.............................................. (10,184) 3.240
Exercised.............................................. (61,229) 1.045
--------- -------
Balances at December 31, 1997............................ 387,270 $ 4.380
Granted................................................ 558,742 14.788
Cancelled.............................................. (8,794) 4.310
Exercised.............................................. (18,784) 1.026
--------- -------
Balances at December 31, 1998............................ 918,434 $10.778
Granted................................................ 381,450 22.256
Cancelled.............................................. (190,075) 12.978
Exercised.............................................. (43,033) 4.943
--------- -------
Balances at December 31, 1999............................ 1,066,776 $14.725
========= =======
The weighted average fair value of options granted during the years ended
December 31, 1999, 1998 and 1997 was $11.039, $7.212, and $8.107 per share,
respectively. Options to purchase 484,590 shares of common stock were available
for future grant.
OPTIONS OUTSTANDING
----------------------------------------
WEIGHTED OPTIONS VESTED
AVERAGE --------------------------
REMAINING WEIGHTED WEIGHTED
NUMBER CONTRACTUAL AVERAGE NUMBER AVERAGE
RANGE OF EXERCISE PRICES OF SHARES LIFE EXERCISE PRICE OF SHARES EXERCISE PRICE
------------------------ --------- ----------- -------------- --------- --------------
$ 0.262 - 2.721........................ 246,236 6.26 $ 2.589 223,278 $ 2.576
$ 4.082 - 15.000........................ 82,145 7.67 $12.096 53,045 $11.514
$15.500 - 22.250........................ 576,665 9.08 $17.033 133,771 $16.453
$22.750 - 29.250........................ 161,730 9.48 $26.305 17,116 $25.441
--------- ---- ------- ------- -------
1,066,776 8.38 $14.725 427,210 $ 8,947
========= ==== ======= ======= =======
54
55
CERUS CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
EMPLOYEE STOCK PURCHASE PLAN
The Company has reserved 220,500 shares of common stock for issuance under
its Employee Stock Purchase Plan (the "Purchase Plan"). The Purchase Plan is
intended to qualify as an employee stock purchase plan within the meaning of
Section 423(b) of the Internal Revenue Code. Under the Purchase Plan, the Board
of Directors may authorize participation by eligible employees, including
officers, in periodic offerings following the adoption of the Purchase Plan. The
offering period for any offering will be no more than 27 months. Employees
purchased 18,784, 32,189 and 20,830 shares under the Purchase Plan during the
years ended December 31, 1999, 1998 and 1997, respectively. At December 31,
1999, 148,697 shares were available for issuance. The weighted average fair
value of the rights granted during the years ended December 31, 1999, 1998 and
1997 using the Black-Scholes model was $4.330, $2.834 and $2.240, respectively.
STOCK SPLIT
On January 14, 1997, the Company effected a stock split of all outstanding
shares of common stock such that each share of common stock was split into 1.47
shares of common stock. All common shares in the accompanying financial
statements have been retroactively adjusted to reflect the stock split. In
connection with the stock split, the conversion and exercise provisions of the
outstanding shares of preferred stock, stock options and warrants have been
adjusted accordingly.
7. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets are as follows:
DECEMBER 31,
----------------------------
1999 1998
------------ ------------
Net operating loss carryforward......................... $ 26,600,000 $ 17,800,000
Research and development credit carryforward............ 4,800,000 2,600,000
Certain expenses not currently deductible for tax
purposes.............................................. 4,500,000 4,500,000
Accrued liabilities..................................... 2,000,000 1,500,000
Capitalized research and development.................... 600,000 800,000
Other................................................... 600,000 700,000
------------ ------------
Gross deferred tax assets............................... 39,100,000 27,900,000
Valuation allowance..................................... (39,100,000) (27,900,000)
------------ ------------
Net deferred tax assets................................. $ -- $ --
============ ============
The valuation allowance increased by $11,200,000 and $12,700,000 for the
years ended December 31, 1999 and 1998, respectively. The increase is primarily
attributable to the increase in the net operating loss and tax credit
carryforwards. The Company believes that, based on a number of factors, the
available objective evidence creates sufficient uncertainty regarding the
realizability of the deferred tax assets such that a full valuation allowance
has been recorded. These factors include the Company's history of net losses
since its inception, the need for regulatory approval of the Company's products
prior to commercialization, expected near-term future losses and the absence of
taxable income in prior carryback years. The valuation allowance at December 31,
1999 includes $700,000 related to deferred tax assets arising from tax benefits
associated with stock option plans. This benefit, when realized, will be
recorded as an increase in stockholders' equity rather than as a reduction in
the income tax provision.
Although management's operating plans assume, beyond the near-term, taxable
and operating income in future periods, management evaluation of all available
information in assessing the realizability of the deferred
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CERUS CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
tax assets in accordance with Statement of Financial Accounting Standards No.
109, "Accounting for Income Taxes," indicates that such plans were subject to
considerable uncertainty. Therefore, the valuation allowance was increased to
fully reserve the Company's deferred tax assets. The Company will continue to
assess the realizability of the deferred tax assets based on actual and
forecasted operating results.
At December 31, 1999, the Company had net operating loss carryforwards of
approximately $67,800,000 for federal and $59,000,000 for state income tax
purposes. The Company also had research and development tax credit carryforwards
of approximately $3,500,000 for federal income tax purposes and approximately
$2,000,000 for state income tax purposes at December 31, 1999. The federal net
operating loss and tax credit carryforwards expire between the years 2007 and
2019. The state net operating loss carryforwards expire between the years 2001
and 2004.
Utilization of the Company's net operating losses and credits may be
subject to a substantial annual limitation due to the ownership change
limitations provided by the Internal Revenue Code. The annual limitation may
result in the expiration of net operating losses and credits before utilization.
8. RETIREMENT PLAN
The Company maintains a defined contribution savings plan (the "401(k)
Plan") that qualifies under the provisions of Section 401(k) of the Internal
Revenue Code and covers all employees of the Company. Under the terms of the
401(k) Plan, employees may contribute varying amounts of their annual
compensation. The Company may contribute a discretionary percentage of qualified
individual employee's salaries, as defined, to the 401(k) Plan. The Company did
not contribute to the 401(k) Plan in the years ended December 31, 1999, 1998 and
1997.
9. SUBSEQUENT EVENT
In February 2000, the Company completed a private placement of 1,000,000
shares of common stock to accredited investors, including Baxter, which
purchased 390,000 shares. The purchase price was $25.00 per share, and the
Company received net proceeds of approximately $23.5 million, after deducting
estimated offering expenses.
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57
SIGNATURES
Pursuant to the requirement of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Concord, State of California, on the 29th day of March, 2000.
CERUS CORPORATION
By: /s/ STEPHEN T. ISAACS
------------------------------------
Stephen T. Isaacs
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, this report has
been signed below by the following persons in the capacities and on the dates
indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ STEPHEN T. ISAACS President, Chief Executive March 29, 2000
- ----------------------------------------------------- Officer and Director (Principal
Stephen T. Isaacs Executive Officer)
/s/ GREGORY W. SCHAFER Chief Financial Officer and March 29, 2000
- ----------------------------------------------------- Vice President, Finance
Gregory W. Schafer (Principal Financial and
Accounting Officer)
/s/ B. J. CASSIN Chairman of the Board March 29, 2000
- -----------------------------------------------------
B. J. Cassin
/s/ JOHN E. HEARST Director March 29, 2000
- -----------------------------------------------------
John E. Hearst
/s/ C. RAYMOND LARKIN, JR. Director March 29, 2000
- -----------------------------------------------------
C. Raymond Larkin, Jr.
/s/ PETER H. MCNERNEY Director March 29, 2000
- -----------------------------------------------------
Peter H. McNerney
/s/ DALE A. SMITH Director March 29, 2000
- -----------------------------------------------------
Dale A. Smith
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INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------
23.1 Consent of Ernst & Young LLP, Independent Auditors.
27.1 Financial Data Schedule.