Back to GetFilings.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ................... to .......................
Commission file number 0-19410
HemaSure Inc.
(Exact name of registrant as specified in its charter)
Delaware 04-3216862
State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
140 Locke Drive
Marlborough, Massachusetts 01752
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (508) 485-6850
-----------------------------
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 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 (ss.229.405 of this chapter) 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. [X]
The aggregate market value of voting stock held by non-affiliates of the
registrant was $3,931,621 on January 31, 1998.
Number of shares outstanding of the registrant's class of common stock as of
January 31, 1998: 8,991,042.
DOCUMENTS INCORPORATED BY REFERENCE
1997 Annual Report to Stockholders - Part II
Proxy Statement for 1998 Annual Meeting of Stockholders - Part III
EXPLANATORY NOTE
This Annual Report on Form 10-K contains predictions, projections and
other statements about the future that are intended to be "forward-looking
statements" within the meaning of Section 21E of the Securities Exchange Act of
1934, as amended (collectively, "Forward-Looking Statements"). Forward-Looking
Statements are included with respect to various aspects of the Company's
strategy and operations, including but not limited to its product development
efforts, including regulatory requirements and approvals; potential development
and strategic alliances; and the Company's liquidity. Each Forward-Looking
Statement that the Company believes is material is accompanied by cautionary
statements identifying important factors that could cause actual results to
differ materially from those described in the Forward-Looking Statement. The
cautionary statements are set forth following the Forward-Looking Statement,
and/or in other sections of the Annual Report on Form 10-K. IN ASSESSING
FORWARD-LOOKING STATEMENTS CONTAINED IN THIS ANNUAL REPORT ON FORM 10-K, READERS
ARE URGED TO READ CAREFULLY ALL CAUTIONARY STATEMENTS -- INCLUDING THOSE
CONTAINED IN OTHER SECTIONS OF THIS ANNUAL REPORT ON FORM 10-K.
PART I
Item 1. BUSINESS
HemaSure Inc. (the "Company") was established in December 1993 as a
wholly-owned subsidiary of Sepracor Inc. ("Sepracor"). Prior to that date, its
business was conducted as part of Sepracor's bioprocessing division. Effective
as of January 1, 1994, in exchange for 3,000,000 shares of common stock, par
value $.01 per share (the "Common Stock"), of the Company, Sepracor transferred
to the Company its technology relating to the manufacture, use and sale of
medical devices for the separation and purification of blood, blood products and
blood components and its membrane filter design technologies.
The Company is applying its proprietary filtration technologies to
develop products to increase the safety of donated blood and to improve certain
blood transfusion and collection procedures. The Company is developing the
following products for use by blood centers, hospital blood banks and hospitals:
o The Red Cell Leukoreduction System (the "r\LS System") is
designed for use by blood centers and hospital blood banks to
remove harmful leukocytes (white blood cells) from donated red
blood cells.
o The LeukoVir-MB-Filter is designed for use by blood centers
and hospital blood banks to remove methylene blue that has
been used to inactivate viruses in blood plasma and to remove
contaminating leukocytes, microaggregates and excess lipids
that may compromise the integrity of plasma.
o The Platelet Leukoreduction Filtration System (the "p\LS
System") is designed for use by hospitals to remove leukocytes
from pooled donor platelet concentrates.
Industry Background
Individuals suffering physical trauma or anemia, undergoing complex
surgical procedures or hemodialysis or undergoing treatment for cancer are among
the diverse group of patients who require blood transfusions in the course of
their medical care. Health risks, such as transfusion complications and
infections, may arise from contaminated blood and blood products, although
infection risks are lower today than in the recent past as a result of improved
donor education and selection and implementation of screening procedures to
identify certain virus contaminated blood prior to transfusion. Moreover, these
health risks can increase in patients who receive frequent transfusions, such as
those suffering from kidney and liver disorders, and patients who are
immune-suppressed, such as those undergoing treatment for cancer.
The number of units of whole blood, blood components or plasma a
patient receives in a blood transfusion varies significantly. A patient
undergoing routine surgery may typically receive three or four units, while a
cancer patient undergoing platelet transfusion may receive in excess of 100
units over time. The risk of infection to a patient increases as the number of
units transfused increases.
-1-
Transfusion Risks
Health risks from transfusions, including complications and infections,
arise from the presence of leukocytes, viruses and other pathogens in blood,
cellular blood components and plasma. In addition, autologous blood recovery and
reinfusion results in an increased risk of contamination of a patient's blood.
Leukocytes. Leukocytes (white blood cells) may cause adverse reactions
in patients receiving blood transfusions, such as fever, chills, immune system
suppression or development of immunological responses that could cause the
affected patient to reject subsequent blood transfusions. In addition,
leukocytes may harbor infectious viruses, including cytomegalovirus and human
T-cell lymphocyte virus I (HTLV-I). The Company believes that the demand for
filtered blood for transfusions will continue to increase over the next several
years due to the growing recognition in the medical field of the benefits of
leukocyte reduction.
Pathogens. Viruses such as HIV, hepatitis B and hepatitis C may be
contained inside or outside of the leukocytes and may be transmitted during
transfusions. Other viruses may develop or become prevalent over time. Of the
currently known viruses, there has been significant public focus on hepatitis
and HIV.
Other Blood-Borne Pathogens. In addition to viruses, other blood-borne
pathogens may be transmitted by blood transfusions. These include the parasites
which cause malaria and Chagas' disease and the spirochetes which cause syphilis
and Lyme disease.
Other Contaminants. During surgical procedures, the walls of red blood
cells can break down and release hemoglobin, the oxygen carrying chemical
component normally contained within red blood cells. In its free form,
hemoglobin is toxic and can result in renal shutdown if present in sufficient
quantities. The contamination of blood by free hemoglobin has limited the use of
reinfusion of recovered blood.
Products and Products Under Development
Red Blood Cell Systems
r\LS System
The Company's r\LS System is being designed for leukocyte filtration by
blood centers and hospital blood banks immediately prior to blood storage, a
process which the Company believes results in improved quality leukocyte reduced
blood. The Company believes that the demand for filtered blood for transfusions
will continue to increase over the next several years and that, while leukocyte
filtration currently takes place primarily at the patient bedside, as the demand
for filtered blood increases, leukocyte removal will shift from bedside
filtration of individual units on an "as needed" basis to centralized filtration
performed at blood centers.
The r\LS System is based on a proprietary filter medium comprised of
multiple fibrous components. Leukocytes are removed by a combination of
entrapment and adhesion. With a proprietary automatic internal prime and drain
design, the filter device reduces operator intervention and facilitates high
volume, centralized processing in a regional blood center environment. The
Company is focusing its marketing efforts exclusively on blood centers and
hospital blood banks for pre-storage leukocyte reduction.
-2-
The Company expects to file an application for 510(K) premarket
notification clearance with respect to its r\LS System with the United States
Food and Drug Administration (the "FDA") in 1998. There can be no assurance that
the r\LS System will receive the necessary regulatory approval or achieve market
acceptance.
While the Company believes that the performance and ease-of-use of the
r\LS System will compare favorably with other blood filtration devices, there
can be no assurance that the performance or price of the r\LS System will be
sufficient to achieve significant sales, particularly in view of the dominant
position in the market held by Pall Corporation. See "-- Competition."
LeukoNet System
In December 1994, the Company filed a 510(k) premarket notification
clearance with the FDA for the LeukoNet Pre-Storage Leukoreduction System (the
"LeukoNet System"), the Company's first generation leukoreduction system, and in
June 1995 the Company received such clearance. The Company commenced
commercialization of the LeukoNet System in the United States and in foreign
countries in the second half of 1995. In February 1998, the Company determined
to discontinue manufacturing the LeukoNet System and focus on the completion of
development and market introduction of the r\LS System.
Sales of the Company's LeukoNet System to the American Red Cross
Biomedical Services accounted for 86% of the Company's total revenues in 1997
and 83% of the Company's total revenues in 1996.
Plasma System
LeukoVir-MB Filter
The Company expects to complete clinical trials of its LeukoVir-MB
Filter in Europe in 1998. Developed in collaboration with the German Red Cross
of Lower Saxony and the Swiss Red Cross, the Company's LeukoVir-MB Filter is
designed to remove the virucidal agent methylene blue, which is used to treat
plasma for transfusion. Methylene blue has not been approved for use in the
United States. The LeukoVir-MB Filter, currently awaiting marketing approval in
Europe, is designed to process individual units of plasma by a single,
disposable system, eliminating the potential infection-spreading danger of
systems requiring pooling of many units before processing. The Company believes
that the reduction of this viral inactivation agent to undetectable levels
should eliminate concerns regarding methylene blue's potential toxicity.
Additionally, the LeukoVir-MB Filter is designed to remove contaminating
leukocytes and eliminate microaggregates, bacteria and excess lipids that may
compromise the integrity of plasma.
There can be no assurance however that the LeukoVir-MB Filter will
receive marketing approval or achieve market acceptance.
-3-
Platelet System
p\LS System
Platelets are a cellular component of peripheral blood, used
therapeutically to prevent bleeding. There are two sources of platelets:
1. Pooled platelets, a by-product of whole blood donation and
subsequent component preparation, and
2. Single donor platelets produced by a platelet apheresis
procedure and typically leukoreduced at that time.
Pooled platelets (from whole blood) account for approximately 4.4
million transfusions worldwide. Anywhere from 30% (Asia-Pacific) to 70% (United
States) of these pooled platelets are leukoreduced.
The p\LS System is designed to remove leukocytes from pooled donor
platelet concentrates. The Company is engaged in preliminary discussions
pertaining to a cooperative agreement with a manufacturer of leukoreduction
medium for platelets. This medium has been extensively used in Europe and the
Near East for platelet leukoreduction.
The Company expects to file an application for 510(K) premarket
notification clearance with the FDA and introduce the product for sale in the
United States in 1998. There can be no assurance, however, that the p\LS System
will receive the necessary regulatory approval or achieve market acceptance.
Regulatory Approval
The Company believes that its blood filtration products under
development will be classified as medical devices and that it will be able to
secure regulatory approval in the United States for each of its medical device
products through 510(k) premarket notification clearance with the FDA. There is
no assurance, however, that the FDA will determine that any of the Company's
products will meet the requirements for its expected classification. If the FDA
concludes that any product does not meet such requirements, then the process for
obtaining regulatory approval for such product in the United States would be
significantly lengthened. See "-- Government Regulation."
Membrane Products
Since its inception in December 1993 through the first quarter of 1996,
the Company manufactured and sold certain non-blood related process-scale
membrane devices used for the separation and purification of certain
pharmaceuticals, chemicals and biologics. See "-- Relationship with Sepracor."
Substantially all of the Company's revenues through the first quarter of 1996
were attributable to sales of these non- blood related membrane filter products.
Revenues from these products were $13,000 and $517,000 in 1996 and 1995,
respectively.
In 1996 and 1995, sales to Sepracor with respect to membrane products
accounted for 2% and 57% of the Company's total revenues, respectively. Revenues
from the U.S. Department of the Army related
-4-
to such products represented 7% and 36% of the Company's revenues in 1996 and
1995, respectively. The Company's agreement with the U.S. Department of the Army
concluded in 1996.
Technologies
The Company's planned products are based on its proprietary
technologies in the areas of affinity separations, membrane technology and
device design and fabrication.
Affinity Separations
The Company has proprietary affinity separations technology that
utilizes ligands, which are molecules that bind to complementary biomolecules,
in connection with the Company's various filtration products. The Company has
identified a family of carbohydrate-based ligands that recognize and bind to the
cell surface receptors on leukocytes. The Company has filed patent applications
covering the use of these carbohydrate-based ligands for removing leukocytes.
Membrane Technology
The Company believes that, as a result of the research and development
work performed at Sepracor over an eight-year period and transferred to the
Company on January 1, 1994, the Company has expertise in the field of
separations technology using both composite matrices and flat- and hollow-fiber
membranes. Successful separation of a substance from its source depends on
matching the properties of that substance, such as size, molecular weight and
surface characteristics, to appropriate separations media. The ability to select
and modify the composition and physical structure of the media is a key to
successful separations technology. The Company can utilize a variety of media
compositions, custom made structures and surface modifications, including the
attachment of selective ligands, to separate a diverse variety of substances.
The Company's separations technologies can be used to separate substances
including particulates, such as cells and debris, macromolecules, such as
enzymes, and low molecular weight substances, such as salts, nutrients and
anti-viral chemicals. See "-- Relationship with Sepracor."
Device Design and Fabrication
The Company believes that the benefits of high performance separations
media can only be realized in a well-designed device where access to and
placement of the media, hydrodynamics and selection of biocompatible materials
have been optimized. The Company has expertise in module design, including
theoretical calculations of mass transfer, hydrodynamic modeling, prototyping,
testing and manufacturing engineering.
Drawing from this expertise, the Company is integrating its proprietary
technologies in device design and media development with blood flow control
systems, tubing, collection containers and other assembly components, in devices
which are designed to achieve efficiency in increasing the safety of donated
blood and improving certain blood transfusion and collection procedures. The
Company considers its device design and fabrication capabilities to be
proprietary and intends to file patent applications where appropriate.
-5-
The Company has undertaken preliminary studies on the use of its
proprietary media in other applications such as the removal of tumor cells from
peripheral stem cell preparations and in whole blood leukoreduction.
Research and Development Expenses
Research and development expenses were $3,577,000 in 1997, $6,128,000
in 1996 and $4,061,000 in 1995. The decrease in 1997 is primarily attributable
to a decrease in expenses associated with the Company's SteriPath Blood Pathogen
Inactivation System, which program was discontinued in 1997. The increase in
1996 over the amounts expended in 1995 is primarily attributable to a higher
level of spending associated with development of the Company's SteriPath Blood
Pathogen Inactivation System and preparation for commercialization of the
Company's LeukoNet System.
Plasma Pharmaceuticals
In May 1996, the Company acquired, through its United States and Danish
subsidiaries, the plasma product unit of Novo Nordisk A/S, a Danish company
("Novo Nordisk"). See "--Agreements." The Company's plasma product unit
processed blood plasma into plasma pharmaceutical products. In February 1997,
the Company determined to discontinue the development and operation of its
Danish plasma business due, in large part, to Pharmacia & Upjohn's ("P&U")
wrongful termination of the Company's planned acquisition of P&U's plasma
division in Sweden, which was a critical part of the Company's initial strategy
to enter the plasma business, as well as certain other factors. See "--
Agreements," Item 3, "Legal Proceedings" and Item 7, "Management's Discussion
and Analysis of Financial Condition and Results of Operations." The Company
recorded a one-time charge of $15,200,000 in the fourth quarter of 1996
associated with its determination to exit the plasma business.
Agreements
Under the terms of the May 1996 agreement relating to the Company's
acquisition of the plasma product unit of Novo Nordisk (the "Denmark
Acquisition"), the purchase price to be paid for the plasma product unit was to
be comprised of three portions: (i) $1,800,000 was to be payable in 1998 in cash
or Common Stock of the Company or a subsidiary of the Company, at the Company's
option; (ii) approximately $13,000,000 was to be payable from time to time upon
the sale of acquired inventory (valued at approximately $13,000,000) but in any
event no later than 1998, provided that up to approximately $3,000,000 of such
portion could be forgiven in certain circumstances; and (iii) approximately
$8,000,000 was to be payable in 1998 in cash or Common Stock of the Company or a
subsidiary of the Company, at the Company's option, provided that all of this
portion would be forgiven in certain circumstances. In January 1997, the Company
and Novo Nordisk entered into a Restructuring Agreement relating to the Novo
Acquisition (the "Restructuring Agreement"). Pursuant to the Restructuring
Agreement, approximately $23,000,000 million of indebtedness owed to Novo
Nordisk was restructured by way of issuance by the Company to Novo Nordisk of a
12% convertible subordinated promissory note in the principal amount of
approximately $11,722,000, which was due and payable on December 31, 2001 (the
"Note"), with interest payable quarterly (provided that up to approximately
$3,000,000 would be forgiven in certain circumstances). Approximately $8,500,000
of the reduction of such indebtedness was forgiven. The remainder of the
reduction represents a net amount due from Novo Nordisk to the Company related
to various service arrangements between the two companies. On January 6, 1998,
the Company elected to convert all indebtedness under the Note, pursuant to the
terms thereof,
-6-
into shares of Common Stock of the Company at a conversion price equal to $10.50
per share, or 827,375 shares. Pursuant to a registration rights agreement, the
Company previously granted Novo Nordisk certain registration rights with respect
to any shares of Common Stock acquired by Novo Nordisk upon conversion of the
Note. Novo Nordisk has contested the conversion of the Note, including the
forgiveness of the $3,000,000 amount. The Company believes that such claims are
without merit.
In June 1996, the Company entered into a ten-year Master Strategic
Alliance Agreement with the American Red Cross BioMedical Services, a
not-for-profit, charitable corporation ("ARCBS"), which provides for, among
other things, the development and enhancement of a number of filtration
practices based on the Company's core technology including red blood cell
leukoreduction, leukocyte recovery, platelet filtration, whole blood filtration
and tumor cell filtration. No assurance can be given, however, that such
products will ultimately be developed or that any definitive development
arrangements with respect to such products will result from the strategic
alliance with ARCBS.
In March 1996, the Company entered into a three-year agreement with
ARCBS for the sale of the LeukoNet System. The agreement provides for target
purchases by ARCBS over the term of this agreement. The Agreement does not
include minimum purchase obligations by ARCBS. The ARCBS has the right to
terminate the agreement under certain circumstances. Pursuant to that agreement,
the Company agrees to indemnify the ARCBS against all losses, damages and
liabilities incurred for, among other things, infringement of patent rights
owned or held by Pall Corporation in connection with the use of Company products
delivered under the terms and conditions of the contract. See Item 3, "Legal
Proceedings."
In February 1996, the Company signed a cooperation agreement with the
German Red Cross of Lower Saxony. Under the terms of the agreement, the Company
will be the worldwide nonexclusive licensing agent for the methylene blue
process (excluding the United States, Canada, Puerto Rico and Switzerland). Both
parties have agreed to collaborate on advancing the methylene blue process in
order to broaden its acceptance worldwide.
Competition
The Company expects to encounter intense competition in the sale of its
proposed products. The Company's proposed products, if commercialized, will
compete with other products currently on the market as well as with future
products developed by other medical device companies' biotechnology and
pharmaceutical companies, hospital supply companies, national and regional blood
centers, certain governmental organizations and agencies and academic
institutions. Many of the Company's competitors in the field of leukocyte
reduction have substantially greater resources, manufacturing and marketing
capabilities, research and production staffs and production facilities than the
Company. Moreover, some of the Company's competitors are significantly larger
than the Company, have greater experience in preclinical testing, human clinical
trials and other regulatory approval procedures. In addition, many of the
Company's competitors have access to greater capital and other resources, may
have management personnel with more experience than that of the Company and may
have other advantages over the Company in conducting certain businesses and
providing certain services. The Company's ability to compete successfully will
depend, in part, on its ability to develop and maintain products which are
technically superior to and/or of lower cost than those currently on the market;
develop proprietary products; attract and retain scientific personnel; obtain
patent or other proprietary protection for its products and technologies; obtain
required regulatory approvals; and manufacture, assemble and successfully market
any products it develops. In addition, many of the Company's competitors have
long-
-7-
standing relationships with the national and regional blood centers to which the
Company will market its products. There can be no assurance that the Company
will be able to compete effectively against such companies.
In the area of leukocyte removal, the Company will compete primarily
with Pall Corporation, which manufactures and sells a substantial majority of
leukocyte removal filters currently on the market and has long-standing and, in
certain cases, exclusive, relationships, including long-term supply contracts,
with the blood centers that are the Company's target customers. In addition, the
Company will compete with Baxter Healthcare Corporation ("Baxter") and Asahi
America, Inc. ("Asahi") which have formed an alliance pursuant to which Baxter
exclusively markets Asahi's leukocyte removal products in North America. The
Company expects that the principal competitive factors in the area of leukocyte
removal will be removal efficiency, cost and ease of use.
The Company is pursuing areas of product development in a relatively
new field in which there is a potential for extensive technological innovation
in relatively short periods of time. The Company's competitors may succeed in
developing technologies or products that are more effective than those of the
Company. Rapid technological change or developments by others may result in the
Company's technology or proposed products becoming obsolete or noncompetitive.
Licenses, Patents and Proprietary Information
The Company entered into a Technology Transfer and License Agreement
with Sepracor under which Sepracor transferred to the Company all rights to the
technology developed by Sepracor for the development, manufacture, use and sale
of medical devices for the separation and purification of blood and blood
components, including technology relating to (1) optimization of flat membranes,
hollow fiber membranes and fibrous supports; (2) specific affinity and
immunoaffinity ligands; (3) linking chemistries; (4) surface modification
including hydrophilic polymers and coatings; (5) device designs and engineering;
(6) fabrication and manufacturing including encapsulation and assembly
techniques; and (7) organic chemical synthesis. The Technology Transfer and
License Agreement expired on January 1, 1998 pursuant to its terms. The Company
does not expect such termination to have a material effect upon its business,
future operating results or financial condition. See "-- Relationship with
Sepracor."
The Company believes that protection of the proprietary nature of its
products and technology is critical to its business. Accordingly, it has adopted
and will maintain a vigorous program to secure and maintain such protection. The
Company's practice is to file patent applications with respect to technology,
inventions and improvements that are important to its business. The Company also
relies on trade secrets, unpatented know-how, continuing technological invention
and the pursuit of licensing opportunities to develop and maintain its
competitive position. There can be no assurance that others will not
independently develop substantially equivalent proprietary technology or that
the Company can meaningfully protect its proprietary position.
To date, the Company owns or has filed 21 patent applications in the
United States relating to blood filtration and pathogen inactivation
technologies. Corresponding foreign patent applications have been filed with
respect to certain of these United States patent applications. Where
appropriate, the Company intends to file, or cause to be filed on its behalf,
additional patent applications relating to future discoveries and improvements,
including, among other things, the use of certain ligands for affinity
separations. To date, nine patents have been issued to the Company (which expire
at various dates from 2011 through 2017).
-8-
The Company's 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 the Company. See Item 3, "Legal Proceedings." Proprietary rights relating to
the Company's planned 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 maintained in confidence as trade secrets. There can be no
assurance that any patents owned by or licensed to the Company will afford
protection against competitors or that any pending patent applications now or
hereafter filed by or licensed to the Company will result in patents being
issued. Competitors, including those with substantially greater resources than
the Company, may seek to challenge the validity of the patents owned by or
licensed to the Company or may use their resources to design comparable products
that do not infringe these patents. See Item 3, "Legal Proceedings."
There are many issued third-party patents in the field of blood
filtration, including patents held by competitors of the Company. The Company
may need to acquire licenses to, or contest the validity of, some of such
patents. It is likely that significant funds would be required to defend any
claim that the Company infringes a third-party patent, and any such claim could
adversely affect sales of the challenged product until the claim is resolved.
There can be no assurance that any license required under any such patent would
be made available on acceptable terms or that the Company would prevail in any
litigation involving such patent. See Item 3, "Legal Proceedings."
Much of the know-how of importance to the Company's technology and many
of its processes are dependent upon the unpatentable knowledge, experience and
skills of its key scientific and technical personnel. To protect its rights and
to maintain the confidentiality of trade secrets and proprietary information,
the Company requires all of its employees, consultants and commercial partners
and members of its Scientific/Medical Advisory Board to agree to keep the
Company's proprietary information confidential. These agreements generally
prohibit the disclosure of confidential information to anyone outside the
Company and require disclosure and assignment to the Company of ideas,
developments, discoveries and inventions. There can be no assurances, however,
that these agreements will provide meaningful protection for the Company's
proprietary information in the event of unauthorized use or disclosure of such
information.
Government Regulation
Government regulations in the United States and other countries are a
significant factor in the research, development and commercialization of the
Company's products. The products manufactured and marketed by the Company are
subject to regulation by the FDA and similar authorities in foreign countries.
The Company believes that all of its products will be classified as "devices"
under federal law and FDA regulations. The process of obtaining approvals from
the FDA and other regulatory authorities can be costly, time consuming and
subject to unanticipated delays. There can be no assurance that the FDA will
approve any of the Company's products for marketing or, if they are approved,
that they will be approved on a timely basis.
Among the conditions for FDA approval of a drug, biologic or device is
the requirement that the manufacturer's quality control and manufacturing
procedures conform to cGMP, which must be followed at all times. Although the
Company's facilities and manufacturing procedures are designed to conform to
cGMP, there can be no assurance that the FDA will determine that they conform.
These practices control every phase of production from the incoming receipt of
raw materials, components and subassemblies to
-9-
the labeling of the finished product, tracing of consignees after distribution
and follow-up and reporting of complaint information.
The Company believes that its blood filtration products will be
classified as medical devices. All medical devices introduced to the market
since 1976 are required by the FDA, as a condition of marketing in the U.S., to
secure either a 510(k) premarket notification clearance or an approved PMA. A
510(k) premarket notification clearance indicates FDA agreement with an
applicant's determination that the product for which clearance has been sought
is substantially equivalent to another medical device that was on the market
prior to 1976. An approved PMA application indicates that the FDA has determined
that the device has been proven, through the submission of clinical data and
manufacturing information, to be safe and effective for its labeled indications.
The process of obtaining a 510(k) clearance typically takes at least six months,
and may take several years, and involves the submission of clinical data and
supporting information, while the PMA process typically lasts at least several
years and requires the submission of significant quantities of clinical data and
supporting information. The Company intends to seek 510(k) premarket
notification clearance for its blood filtration products. There can be no
assurance that the FDA will conclude that any of the Company's products, other
than the LeukoNet System, meet the requirements for 510(k) premarket
notification clearance.
In the event the FDA does not classify the Company's planned blood
filtration products as medical devices, these products would probably be
regulated as drugs or biologics. If regulated as drugs or biologics, the
products would require premarket approval, as described below. The Company
believes that the FDA will classify the Company's blood filtration products as
medical devices.
Manufacturing and Facilities
The Company's facilities consist of approximately 30,000 square feet of
leased office, laboratory and manufacturing space in a modern facility in
Marlborough, Massachusetts. The Company believes that these facilities are
adequate and suitable for its needs through 1998. See Item 2, "Properties."
The leased facilities in Massachusetts include 25,000 square-feet of
product development and manufacturing space. This space is expected to be
adequate to address clinical and early commercial-scale production requirements
of the Company through 1998. The facility is designed to conform to cGMP and
other applicable government standards. The Company anticipates that its facility
will be subject to ongoing inspections by the FDA and foreign regulatory
authorities in connection with their review of the Company's products.
In January 1998, the Company received ISO 9001 Registration, which was
awarded by Bureau Veritas Quality International. The ISO 9000 Series of
international standards was developed by the International Organization for
Standardization to promote homogeneous quality processes through the global
trade community. ISO 9001 specifically addresses requirements for the
manufacture, design, development, installation and service of products.
For manufacturing outside the United States, the Company will also be
subject to foreign regulatory requirements governing human clinical trials,
manufacturing and marketing approval for drugs or biologics and medical devices.
The regulatory requirements may vary widely from country to country.
-10-
Employees
As of March 1, 1998, the Company employed a total of 45 persons of whom
13 were in research and development, 19 were in manufacturing and development
support and 13 were in sales and administration. Three of the Company's
employees hold Ph.D. degrees.
Relationship with Sepracor
The Company was organized in December 1993 as a wholly-owned subsidiary
of Sepracor. Effective January 1, 1994, Sepracor transferred its blood
filtration and membrane filter design business to the Company in exchange for
3,000,000 shares of Common Stock. As of January 31, 1998, Sepracor owned 33% of
the Company's Common Stock.
Sepracor is engaged in the business of using chiral chemistry to
develop single-isomer forms of existing, widely sold pharmaceuticals and to
supply major pharmaceutical companies with bulk quantities of chiral
intermediates.
Sale of Membrane Products. From inception through December 31, 1995,
the Company's sales of membrane models to Sepracor amounted to $668,000. Such
sales did not continue in any material respect beyond December 31, 1995. See
Item 7, "Management's Discussion and Analysis of Financial Condition and Results
of Operations -- Results of Continuing Operations."
Registration Rights. Beginning in April 1998, Sepracor will be entitled
to certain rights with respect to the registration under the Securities Act of
1933, as amended, of a total of 3,000,000 shares of Common Stock. These rights
provide that Sepracor may require the Company, on two occasions, to register
shares having an aggregate offering price of at least $5,000,000, subject to
certain conditions and limitations.
All future arrangements and transactions between the Company and
Sepracor will continue to be on terms which the Company determines are fair and
reasonable to the Company.
Item 2. PROPERTIES
The Company's facilities consist of approximately 30,000 square feet of
leased office, laboratory and manufacturing space in a modern facility in
Marlborough, Massachusetts (which lease expires in February 2004, and provides
for two five-year renewal options thereafter). The Company believes that these
facilities are adequate and suitable for its needs through 1998. See Item 1.
"Business -- Manufacturing and Facilities."
Item 3. LEGAL PROCEEDINGS
The Company is a defendant in two lawsuits brought by Pall Corporation
("Pall"). In complaints filed in February 1996 and November 1996, Pall alleged
that the Company's manufacture, use and/or sale of the LeukoNet product
infringes upon three patents held by Pall.
-11-
On October 14, 1996, in connection with the first action concerning
U.S. Patent No. 5,451,321, (the "'321 Patent") the Company filed a motion for
summary judgment of noninfringement. Pall filed a cross motion for summary
judgment of infringement at the same time.
In October 1997, the Eastern District of New York granted in part
Pall's summary judgment motion relating to the '321 patent. The Company has
agreed to terminate the manufacture, use, sale and offer for sale of the filter
subject to the court's order. The court has not yet ruled on the validity of
Pall's '321 patent claims, which HemaSure has asserted are invalid and
unenforceable. No date has been set for the proceeding to determine the validity
and enforceability of Pall's '321 patent claims.
With respect to the second action concerning U.S. Patent Nos. 4,340,479
(the "'479 patent") and 4,952,572 (the "'572 patent"), the Company has answered
the complaint stating that it does not infringe any claim of the asserted
patents. Further, the Company has counterclaimed for declaratory judgment of
invalidity, noninfringement and unenforceability of the '572 patent, and a
declaratory judgment of noninfringement of the '479 patent, as a result of a
license. Pall has attempted to withdraw the '479 patent from the second action.
The Company believes, based on advice of its patent counsel, that a
properly informed court should conclude that the manufacture, use and/or sale by
the Company or its customers of the present LeukoNet product does not infringe
any valid enforceable claim of the three asserted Pall patents. However, there
can be no assurance that the Company will prevail in the pending litigations,
and an adverse outcome in a patent infringement action would have a material
adverse effect on the Company's future business and operations.
On November 1, 1996, the Company filed a complaint in the Supreme
Court, State of New York, County of New York, against P&U. In its complaint, the
Company sought to receive damages arising out of the alleged breach by P&U of an
agreement to sell to the Company P&U's plasma pharmaceutical business located in
Stockholm, Sweden. In September 1997, the Company reached an out-of-court
settlement with P&U. The terms of settlement included a cash payment to HemaSure
and the granting of an option to P&U to license, on a non-exclusive basis,
certain intellectual property held by HemaSure Inc. and its subsidiaries
relating to plasma fractionation. The cash payment was recognized as other
income in the third quarter ended September 30, 1997.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders of the Company,
through solicitation of proxies or otherwise, during the last quarter of the
year ended December 31, 1997.
-12-
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
(a) Market Information.
The Common Stock of the Company has been included for quotation on the
OTC bulletin board under the symbol HMSR since January 14, 1998. From October
28, 1997 until January 13, 1998, the Common Stock was included for quotation on
The Nasdaq SmallCap Market under the symbol HMSRC. Prior to October 28, 1997 and
since April 7, 1994, the Common Stock of the Company was included for quotation
on the Nasdaq National Market under the symbol HMSR. Prior to April 7, 1994, the
Company's Common Stock was not publicly traded. The following table sets forth
for the periods indicated the range of high and low bid information per share of
the Common Stock as included for quotation on the Nasdaq National Market or The
Nasdaq SmallCap Market, as the case may be.
1997 High Low
---- ---- ---
First Quarter 8 3 3/4
Second Quarter 4 1/16 1 9/16
Third Quarter 4 5/8 2 1/4
Fourth Quarter 4 1/4 11/16
1996 High Low
---- ---- ---
First Quarter 19 1/4 11 3/4
Second Quarter 17 1/4 12 1/2
Third Quarter 15 6 1/2
Fourth Quarter 10 7/8 4 7/8
(b) Holders.
On March 13, 1998, the Company's Common Stock was held by approximately
99 stockholders of record. On March 13, 1998, the last reported sale price of
the Company's Common Stock on the OTC bulletin board was $1.00.
-13-
(c) Dividend Information.
The Company has never paid dividends on its Common Stock. The Company
currently intends to reinvest its earnings, if any, for use in the business and
does not expect to pay cash dividends in the foreseeable future.
Item 6. SELECTED FINANCIAL DATA
The information under the heading "Selected Financial Data" contained
in the Company's 1997 Annual Report to Stockholders is incorporated by reference
herein and filed as Exhibit 13.1 hereto. With the exception of the information
specifically incorporated herein by reference, the Company's 1997 Annual Report
to Stockholders is not to be deemed filed as part of this report for the
purposes of this Item.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The information under the heading "Management's Discussion and Analysis
of Financial Condition and Results of Operations" contained in the Company's
1997 Annual Report to Stockholders is incorporated by reference herein and filed
as Exhibit 13.1 hereto. With the exception of the information specifically
incorporated herein by reference, the Company's 1997 Annual Report to
Stockholders is not to be deemed filed as part of this report for the purposes
of this Item.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements filed as part of this Annual Report on Form
10-K are (i) provided under Item 14 below and (ii) the information under the
heading "Financial Statements and Notes" contained in the Company's 1997 Annual
Report to Stockholders is incorporated by reference herein and filed as Exhibit
13.1 hereto. With the exception of the information specifically incorporated
herein by reference, the Company's 1997 Annual Report to Stockholders is not to
be deemed filed as part of this report for the purposes of this Item.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
Items 10-13.
The information required for Part III in this Annual Report on Form
10-K is incorporated by reference from the Company's definitive proxy statement
for the Company's 1998 Annual Meeting of Stockholders. Such information will be
contained in the sections of such proxy statement captioned "Stock Ownership of
Certain Beneficial Owners and Management," "Election of Directors," "Board and
Committee Meetings," "Compensation for Directors," "Executive Officers of the
Registrant," "Compensation for Executive Officers" and "Certain Relationships
and Related Transactions."
-14-
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
(a) The following documents are incorporated by reference or included
as part of this Annual Report on Form 10-K.
1. The following financial statements (and related notes) of
the Company are incorporated by reference from the Company's
1997 Annual Report to Stockholders:
Page
Report of Independent Accountants 15*
Consolidated Balance Sheets at December 31, 1997 and 1996 16*
Consolidated Statements of Operations for the Years Ended 17*
December 31, 1997, 1996 and 1995
Consolidated Statements of Stockholders' Equity (Deficit) 18*
for the Years Ended December 31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows for the Years Ended 19*
December 31, 1997, 1996 and 1995
Notes to Consolidated Financial Statements 20*
* Refers to page number of 1997 Annual Report to Stockholders
2. All schedules are omitted as the information required is
inapplicable or the information is presented in the
consolidated financial statements or the related notes.
3. The Exhibits listed in the Exhibit Index immediately
preceding the Exhibits hereto are filed as a part of this
Annual Report on Form 10-K.
(b) No Current Reports on Form 8-K were filed by the Company during the
last quarter of the period covered by this report.
The following trademarks are mentioned in this Annual Report on Form
10-K: HemaSure, LeukoNet and LeukoVir.
-15-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on the 31st day of
March, 1998.
HEMASURE INC.
Date: March 31, 1998 By: /s/ John F. McGuire
-------------------
John F. McGuire, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
/s/ John F. McGuire President, Chief Executive Officer March 31, 1998
- ------------------------ and Director (Principal Executive
John F. McGuire Officer)
/s/ James B. Murphy Senior Vice President, Finance and March 31, 1998
- ------------------------ Administration (Principal Financial
James B. Murphy Officer)
/s/ Timothy J. Barberich Director March 31, 1998
- ------------------------------------
Timothy J. Barberich
/s/ David S. Barlow Director March 31, 1998
- ------------------------------------
David S. Barlow
/s/ Rolf S. Stutz Director March 31, 1998
- ------------------------------------
Rolf S. Stutz
S-1
Exhibit Index
The following exhibits are filed as part of this Annual Report on Form
10-K.
Sequential
Exhibit No. Description Page No.
- ---------- ----------- --------
2.1(7) Heads of Agreement, dated as of January 31, 1996,
between the Company and Novo Nordisk A/S.
3.1(2) Certificate of Incorporation of the Company. 3.2(2)
By-Laws of the Company.
4.1(2) Specimen Certificate for shares of Common Stock, $.01
par value, of the Company. 4.2(10) Registration Rights
Agreement, dated January 23, 1997, by and among the Company
and Novo Nordisk A/S.
10.1(10) 1994 Stock Option Plan, as amended.
10.2(10) 1994 Director Option Plan.
10.3(2) Form of Technology Transfer and License Agreement between
the Company and Sepracor Inc.
10.4(7) Lease Agreement for 140 Locke Drive, Marlborough, MA,
dated as of November 1995, between the Company and
First Marlboro Development Trust.
10.5(3) Purchase Agreement, dated as of September 14, 1994,
between the Company and Lydall Central, Inc./Westex
Division.
10.6(3) Letter of Intent, dated as of February 2, 1995,
between the Company and DRK-Niederschsen.
10.7(4) Amendment of Solicitation/Modification of Contract
issued by the United States Army Medical Research
Acquisition Activity effective March 15, 1995.
10.8(5)+ Purchase Agreement, dated July 28, 1995, by and
between the Company and Blood Centers of America.
10.9(5) Employment Agreement between the Company and Dr. Hans
Heiniger, dated January 10, 1994.
10.10(7)+ Purchase Agreement between the Company and American
Red Cross Biomedical Services, dated March 11, 1996.
10.11(7) Employment Agreement between the Company and Steven
H. Rouhandeh, dated February 16, 1996.
10.12(7)+ Cooperation Agreement dated February 26, 1996 between
the Company and the German Red Cross.
I-1
Sequential
Exhibit No. Description Page No.
- ---------- ----------- --------
10.13(6)+ Purchase Agreement between the Company and Blood
Centers of America, dated September 11, 1995.
10.14(8) Asset Purchase Agreement dated as of May 2, 1996 between
the Company, HemaPharm Inc., HemaSure A/S and Novo Nordisk A/S.
10.15(10) Employment Agreement between the Company and Jeffrey
B. Davis, dated May 23, 1996. 10.16(9) Restructuring Agreement,
dated January 23, 1997, between the Company, HemaPharm
Inc., HemaSure A/S and Novo Nordisk A/S.
10.17(10) Convertible Subordinated Note Due December 31, 2001
in the amount of U.S. $11,721,989, issued by the
Company to Novo Nordisk A/S, dated January 23, 1997.
10.18(10) Master Strategic Alliance Agreement, dated June 5, 1996, by
and between the Company and American Red Cross BioMedical Services.
10.19(10) Amendment to the Company's 1994 Director Option Plan,
dated June 25, 1996. 10.20(10) Amendment to the Company's 1994
Director Option Plan, effective as of May 16, 1996. 10.21(10)
Amendment to the Company's 1994 Stock Option Plan, dated June
25, 1996. 10.22(10) Amendment to the Company's 1994 Stock Option
Plan, effective as of May 16, 1996. 10.23(10) Sublease
Agreement, between the Company and Novo Nordisk A/S, dated May
2, 1996, for the Premises (Denmark), as amended.
10.24(10) Sublease Agreement between the Company and Novo Nordisk A/S, dated
May 2, 1996, for the Warehouse (Denmark), as amended.
10.25(1) Employment Agreement between the Company and John F. McGuire, dated
April 1, 1997. 10.26(1) Settlement Agreement, dated September 1997,
by and among the Company, HemaSure AB, HemaPharm Inc., Pharmacia &
Upjohn Inc. and Pharmacia & Upjohn AB.
13.1 Selected pages of the Company's 1997 Annual Report to Stockholders
incorporated by reference into Part II of the Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 1997.
21.1 Subsidiaries of the Company.
23.1 Consent of Coopers & Lybrand L.L.P.
27.1 Financial Data Schedule.
I-2
- ----------------------------
(1) Management contract or other contract or arrangement filed as an exhibit to this Form pursuant
to Items 14(a) and 14(c) of Form 10-K.
(2) Incorporated herein by reference to the Company's Registration Statement on Form S-1, as
amended (File No. 33-75930).
(3) Incorporated herein by reference to the Company's Annual Report on Form 10-K for the year ended
December 31, 1994.
(4) Incorporated herein by reference to the Company's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1995.
(5) Incorporated herein by reference to the Company's Registration Statement on Form S-1, as
amended (File No. 33-95540).
(6) Incorporated herein by reference to the Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1994.
(7) Incorporated herein by reference to the Company's Annual Report on Form 10-K for the year ended
December 31, 1995.
(8) Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1996.
(9) Incorporated by reference to the Company's Current Report on Form 8-K filed with the Securities
and Exchange Commission on February 27, 1997.
(10) Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended
December 31, 1996.
+ Confidential treatment requested as to certain portions.
I-3