UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

 

FORM 10 - Q

 

 

Commission File Number 0-21937

 

CERUS CORPORATION

(Exact name of registrant as specified in its charter)

 

 

2411 Stanwell Dr.

Concord, California  94520

(Address of principal executive offices, including zip code)

 

(925) 288-6000

(Registrant’s telephone number, including area code)

 

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 ý NO o

 

As of July 31, 2002, there were 15,786,801 shares of the registrant’s common stock outstanding.

 

 

CERUS CORPORATION

 

QUARTERLY REPORT ON FORM 10-Q

THREE MONTHS ENDED JUNE 30, 2002

 

TABLE OF CONTENTS

 

PART I		FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)
		Condensed Balance Sheets - June 30, 2002 and December 31, 2001
		Condensed Statements of Operations - Three and six months ended June 30, 2002 and 2001
		Condensed Statements of Cash Flows - Six months ended June 30, 2002 and 2001
		Notes to Condensed Financial Statements
Item 2.	Management’s Discussion and Analysis of financial Condition and Results of Operations
Item 3.	Quantitative and Qualitative Disclosures About Market Risk
PART II		OTHER INFORMATION
Item 1.	Legal Proceedings
Item 2.	Changes in Securities and Use of Proceeds
Item 3.	Defaults upon Senior Securities
Item 4.	Submission of Matters to a Vote of Security Holders
Item 5.	Other Information
Item 6.	Exhibits and Reports on Form 8-K
SIGNATURES

 

2

 

PART I:                     FINANCIAL INFORMATION

                                   

ITEM 1.                     FINANCIAL STATEMENTS

 

CERUS CORPORATION

 

CONDENSED BALANCE SHEETS

UNAUDITED

(in thousands)

 

		June 30, 2002			December 31, 2001
Assets
Current assets:
Cash and cash equivalents		$	26,491		$	64,503
Short-term investments		66,783			58,958
Accounts receivable from a related party		5,028			26
Other current assets		2,752			1,573
Total current assets		101,054			125,060
Furniture and equipment, net of depreciation		6,274			3,012
Other assets		218			188
Total assets		$	107,546		$	128,260
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable to a related party		$	8,410		$	5,029
Accounts payable		3,655			3,220
Accrued expenses		6,473			7,247
Deferred revenue		789			927
Current portion of capital lease obligations		33			31
Total current liabilities		19,360			16,454
Capital lease obligations, less current portion		34			51
Redeemable convertible preferred stock		5,000			5,000
Total stockholders’ equity		83,152			106,755
Total liabilities and stockholders’ equity		$	107,546		$	128,260

 

See notes to condensed financial statements.

 

3

 

CERUS CORPORATION

 

CONDENSED STATEMENTS OF OPERATIONS

UNAUDITED

(in thousands, except per share data)

 

		Three Months Ended June 30,						Six Months Ended June 30,
		2002			2001			2002			2001
Revenue:
Milestone and development funding, related parties		$	5,000		$	1,021		$	5,002		$	1,866
Development funding, other		36			224			139			450
Government grants and cooperative agreements		613			314			1,011			687
Total revenue		5,649			1,559			6,152			3,003
Operating expenses:
Research and development		14,484			12,086			26,405			23,404
General and administrative		3,024			2,658			5,826			5,037
Total operating expenses		17,508			14,744			32,231			28,441
Loss from operations		(11,859		)	(13,185		)	(26,079		)	(25,438		)
Interest income, net		575			1,210			1,248			2,398
Loss before provision for income taxes		(11,284		)	(11,975		)	(24,831		)	(23,040		)
Provision for income taxes		—			—			—			(100		)
Net loss		$	(11,284	)	$	(11,975	)	$	(24,831	)	$	(23,140	)
Net loss per share - basic and diluted		$	(0.71	)	$	(0.80	)	$	(1.57	)	$	(1.60	)
Shares used in computing net loss per share - basic and diluted		15,782			14,887			15,767			14,492

 

See notes to condensed financial statements.

 

4

 

CERUS CORPORATION

 

CONDENSED STATEMENTS OF CASH FLOWS

UNAUDITED

(in thousands)

 

		Six Months Ended June 30,
		2002			2001
Operating activities:
Net loss		$	(24,831	)	$	(23,140	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		894			574
Issuance of common stock for services		—			420
Changes in operating assets and liabilities:
Accounts receivable from a related party		(5,002		)	118
Other current assets		(1,179		)	(543		)
Other assets		(30		)	(9		)
Accounts payable to a related party		3,381			1,497
Accounts payable and accrued expenses		(339		)	329
Deferred revenue		(138		)	937
Net cash used in operating activities		(27,244		)	(19,817		)
Investing activities:
Purchases of furniture, equipment and leasehold improvements		(4,156		)	(484		)
Purchases of short-term investments		(61,610		)	(3,995		)
Sales of short-term investments		20,033			—
Maturities of short-term investments		33,752			13,451
Net cash provided by (used in) investing activities		(11,981		)	8,972
Financing activities:
Net proceeds from issuance of common stock		1,228			77,361
Payments on capital lease obligations		(15		)	(19		)
Net cash provided by financing activities		1,213			77,342
Net increase (decrease) in cash and cash equivalents		(38,012		)	66,497
Cash and cash equivalents, beginning of period		64,503			71,871
Cash and cash equivalents, end of period		$	26,491		$	138,368

 

See notes to condensed financial statements.

 

5

 

CERUS CORPORATION

 

NOTES TO CONDENSED FINANCIAL STATEMENTS

UNAUDITED

 

Note 1 - Basis of Presentation

 

The accompanying unaudited condensed financial statements of Cerus Corporation have been prepared in accordance with generally accepted accounting principles for interim financial information and pursuant to the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments, consisting of normal recurring accrual adjustments, considered necessary for a fair presentation have been included. Operating results for the three- and six-month periods ended June 30, 2002 are not necessarily indicative of the results that may be expected for the year ending December 31, 2002 or for any future period.

 

These condensed financial statements and notes should be read in conjunction with Cerus’ audited financial statements and notes thereto for the year ended December 31, 2001 included in the company’s 2001 Annual Report on Form 10-K.

 

Note 2 - Comprehensive Income (Loss)

 

Statement of Financial Accounting Standards No. 130, “Reporting Comprehensive Income,” requires that all items recognized under accounting standards as comprehensive income (revenue, expenses, gains and losses) be reported in a financial statement that is displayed with the same prominence as other financial statements. Cerus does not have material components of other comprehensive income. Therefore, comprehensive loss is equal to net loss for all periods presented.

 

Note 3 - Net Loss per Share

 

Cerus’ net loss per share has been calculated in accordance with Statement of Financial Accounting Standards No. 128, “Earnings per Share.” Basic and diluted net loss per share has been computed using the weighted average number of common shares outstanding during the period. The effects of outstanding stock options and other convertible securities are excluded from the calculation of diluted net loss per share, as inclusion would be antidilutive.

 

Note 4 - Revenue and Research and Development Expenses

 

Development funding revenue includes amounts recognized under development agreements with Baxter Healthcare Corporation, Kirin Brewery Company, Ltd. and the Consortium for Plasma Science. Baxter and the Consortium are related parties to Cerus. Revenue from related parties for the three and six months ended June 30, 2002 was $5,000,000 and $5,002,000, respectively.

 

6

 

Revenue from related parties for the three and six months ended June 30, 2001 was $1,021,000 and $1,866,000, respectively. Development funding revenue is recognized as the related project costs are incurred. Research and development expenses are recognized as incurred. Revenue related to at-risk milestones specified under development contracts is recognized as the milestones are achieved. Payments for achieved milestones are non-refundable and are not subject to future performance. In the three and six months ended June 30, 2002, Cerus recognized $5,000,000 of milestone revenue from Baxter upon CE Mark approval of the disposable set for the platelet system. There was no milestone revenue recognized in 2001.

 

Cerus receives certain United States government grants in support of its research efforts in defined research projects. These grants generally provide for reimbursement of approved costs incurred as defined in the various grants. Revenue associated with these grants is recognized as costs under each grant are incurred. Grants recorded as revenue are non-refundable.

 

Note 5 - Preferred Stock

 

At June 30, 2002, Baxter held 5,000 shares of Cerus’ Series A preferred stock, which represented 100% of the total outstanding shares of Series A preferred stock. In July 2002, all outstanding shares of Series A preferred stock were converted to common shares. Cerus issued 86,526 common shares upon this conversion. The conversion price was based on 120% of the average closing price of the common stock 30 trading days prior to CE Mark approval of the disposable set for the platelet system. Because of the separate approval dates for the two components of the platelet system, Cerus expects to enter into an agreement with Baxter that the number of common shares issued upon conversion of Series A preferred stock will be adjusted based on the average of the previously calculated conversion price and 120% of the average closing price of the common stock 30 trading days prior to CE Mark of the illumination device for the platelet system. This adjustment may result in additional common shares being issued if and when this approval occurs.

 

Baxter holds 3,327 shares of Cerus’ Series B preferred stock, which represents 100% of the total outstanding shares of Series B preferred stock. The holder of Series B preferred stock has no voting rights, except with respect to the authorization of any class or series of stock having preference or priority over the Series B preferred stock as to voting, liquidation or conversion or with respect to the determination of fair market value of non-publicly traded shares received by the holder of Series B stock in the event of a liquidation, or except as required by Delaware law. At any time, the holder may convert each share of Series B preferred stock into 100 common shares. If all shares of Series B preferred stock were converted to common stock, 332,700 shares would be issued, which represents 2.1% of the outstanding common shares of Cerus at June 30, 2002. Cerus has the right to redeem the Series B preferred stock prior to conversion for a payment of $9.5 million.

 

7

 

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

 

This discussion and analysis should be read in conjunction with Cerus’ financial statements and accompanying notes included in this report and the company’s 2001 audited financial statements and accompanying notes included in its 2001 Annual Report on Form 10-K. Operating results for the periods presented are not necessarily indicative of results for the year ending December 31, 2002 or any future period.

 

The following discussion includes forward-looking statements that involve risks and uncertainties. When used herein, the words “believe,” “anticipate,” “expect,” “estimate” and similar expressions are intended to identify such forward-looking statements. There can be no assurance that these statements will prove to be correct. Certain important factors could cause actual results to differ materially from those discussed in such statements, including uncertainties associated with pre-clinical and clinical testing, regulatory approvals, manufacturing, reimbursement, market acceptance and other factors discussed below and under the caption “Risk Factors,” and in the company’s other documents filed with the Securities and Exchange Commission. Cerus undertakes no obligation to update any of the forward-looking statements contained herein to reflect any future events or developments.

 

The condensed balance sheet at December 31, 2001 has been derived from the audited financial statements at that date, but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.

 

Cerus and Helinx are United States registered trademarks of Cerus Corporation.

 

INTERCEPT is a trademark of Baxter International, Inc.

 

Overview

 

Cerus Corporation is developing medical systems and therapeutics based on its proprietary HelinxÒ technology for controlling biological replication. Cerus’ most advanced programs are focused on systems to enhance the safety of blood products used for transfusion. The INTERCEPT Blood System, based on the company’s Helinx technology, is designed to inactivate viruses, bacteria, other pathogens and white blood cells. Cerus also is pursuing therapeutic applications to treat and prevent serious diseases.

 

Cerus is developing the INTERCEPT Blood System for platelets, plasma and red blood cells with its development and marketing partner, Baxter Healthcare Corporation. The INTERCEPT Blood System is intended to target and inactivate blood-borne pathogens, such as HIV and hepatitis B and C, as well as harmful white blood cells, while leaving intact the therapeutic properties of the blood components. The INTERCEPT Blood System inactivates a broad array of pathogens and has the potential to reduce the risk of transmission of pathogens for which testing is not completely effective or is not currently performed. Cerus believes that the INTERCEPT Blood System also has the potential to inactivate new pathogens before they are identified and before tests are developed to detect their presence in donated blood.

 

8

 

Cerus and Baxter have received a CE Mark for the INTERCEPT Blood System disposable set for platelets. Baxter must complete the CE Mark process for the illumination device before the system can be commercialized. Regulatory applications have been submitted in Australia and Canada, and the companies have begun the regulatory submission process to obtain approval in the United States. Separately, Cerus and Baxter are preparing the U.S. submission for the INTERCEPT Blood System for plasma, and also plan to submit a CE Mark application for this product. In addition, the companies are conducting Phase III clinical trials for INTERCEPT Red Blood Cells. Cerus’ allogeneic cellular immune therapy (ACIT) program, designed to improve the outcome of bone marrow transplantation procedures through use of T-cells treated with the Helinx technology, is in Phase I clinical trials. Cerus’ Epstein-Barr Virus (EBV) cellular vaccine program is in pre-clinical development.

 

Since its inception in 1991, Cerus has devoted substantially all of its efforts and resources to the research, development and clinical testing of medical systems based on its Helinx technology.  Cerus has been unprofitable since inception and, as of June 30, 2002, had an accumulated deficit of approximately $197.9 million. All of Cerus’ product candidates are in the research and development stage, and Cerus has not received any revenue from product sales. Cerus and Baxter must conduct significant research, development, pre-clinical and clinical evaluation, commercialization and regulatory compliance activities on these product candidates that, together with anticipated general and administrative expenses, are expected to result in substantial losses at least until after commercialization. Cerus’ ability to achieve a profitable level of operations in the future will depend on its and Baxter's ability to successfully complete development, obtain regulatory approvals and commercialize, and on Baxter's ability to achieve market acceptance of, the INTERCEPT Blood System. Cerus may never achieve a profitable level of operations. Further, under the agreements discussed below, Baxter provides significant funding for development of the INTERCEPT Blood System, based on an annual budgeting process, and is responsible for manufacturing and marketing the products following regulatory approvals. These agreements may be modified or terminated.

 

Agreement with Baxter for the Development of the INTERCEPT Blood System for Platelets. Cerus has a development and commercialization agreement with Baxter for the joint development of the INTERCEPT Blood System to inactivate viruses, bacteria and other infectious pathogens in platelets used for transfusion. This agreement provides for Baxter and Cerus generally to share system development costs equally, subject to mutually determined budgets established from time to time, and for Cerus to receive approximately 33.5% of revenue from sales of inactivation system disposables after each party is reimbursed for its cost of goods to the extent the cost exceeds specified amounts. Baxter has an exclusive, worldwide distribution license and will be responsible for manufacturing and marketing the INTERCEPT Blood System for platelets following regulatory approval. The agreement also provided for Baxter to make a $5 million cash milestone payment to Cerus upon approval to market products developed under the platelet program. The $5 million milestone was earned and recognized as revenue by Cerus in the second quarter of 2002 upon regulatory approval of the disposable set for the system in Europe. Cerus received payment of the $5 million milestone from Baxter in July 2002.

 

Agreement with Baxter for the Development of the INTERCEPT Blood System for Red Blood Cells and Plasma. Cerus also has a development and commercialization agreement with Baxter for the joint development of the INTERCEPT Blood System to inactivate viruses, bacteria and

 

9

 

other infectious pathogens in red blood cells and fresh frozen plasma for transfusion. This 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. Cerus is solely responsible for funding the development costs of the plasma system. Baxter has an exclusive, worldwide distribution license and will be responsible for manufacturing and marketing the red blood cell and plasma systems following regulatory approvals. The agreement also provides for an equal sharing of revenue from sales of red blood cell system disposables, and for Cerus to receive 75% and Baxter to receive 25% of revenue from sales of plasma system disposables, in each case after each party is reimbursed for its cost of goods and a specified percentage, not to exceed 14% of revenue, is retained by Baxter for marketing and administrative expenses.

 

This agreement also provides that Baxter and its affiliates will not acquire capital stock of Cerus if the acquisition would result in Baxter and its affiliates owning 5.4% or more of the outstanding voting power of Cerus. The provision excludes the conversion of preferred stock and will not apply in the event a third party makes a tender offer for a majority of the outstanding voting shares of Cerus, the Board of Directors decides to liquidate or sell to a third party substantially all of Cerus’ assets or a majority of Cerus’ voting securities approve a merger in which Cerus’ stockholders do not own a majority of the voting securities of the post-merger company. As of June 30, 2002, Baxter owned less than 5% of Cerus’ outstanding common stock.

 

From inception through June 30, 2002, Cerus has received $46.7 million in equity investments from Baxter and $25.9 million in an equity investment from Baxter International Inc. and Subsidiaries Pension Trust, and has recognized $30.0 million in revenue from Baxter. Baxter has advised Cerus that Baxter International Inc. and Subsidiaries Pension Trust is not an affiliate of Baxter. 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 determined by Baxter and Cerus. Development funding revenue is recognized as the related project costs are incurred.

 

Agreement with Kirin. In January 2001, Cerus entered into a collaborative agreement with the Pharmaceutical Division of Kirin to develop and market products for stem cell transplantation based on Cerus’ Helinx technology. Under the terms of the agreement, Cerus and Kirin will jointly develop the products. Cerus has received an initial license fee of $1 million, and may receive additional payments upon achievement of development milestones. The license fee is being deferred and recognized as development funding ratably over the development period. In addition, the agreement calls for Kirin to fund all development expenses for the Asia-Pacific region and a portion of Cerus’ development activities aimed at obtaining product approval in the United States. Upon product approval, Kirin has exclusive rights to market the products in the Asia-Pacific region, including Japan, China, Korea and Australia, and Cerus will receive a specified share of product revenue, including a royalty and reimbursement of its cost of goods. Cerus retains all marketing rights for the rest of the world, including the United States and Europe.

 

Cooperative Agreement with the Armed Forces of the United States. In February 2001, Cerus was awarded a $3.5 million cooperative agreement by the Army Medical Research Acquisition Activity division of the Department of Defense. Cerus received the award to develop its pathogen inactivation technologies to improve the safety and availability of blood that may be used by the United States Armed Forces for medical transfusions. Under the conditions of the agreement, Cerus will conduct research on the inactivation of infectious pathogens, including

 

10

 

unusual viruses, bacterial and parasites, which are of particular concern to the Armed Forces. Cerus, in collaboration with investigators at Walter Reed Army Institute of Research, also will investigate ways to improve the storage and shelf life of blood and blood components, which may be used for medical transfusion support in combat zones. Also under the terms of the agreement, Cerus would receive commercial rights to the discoveries and inventions arising from the research performed under the collaboration.

 

Agreement with the Consortium for Plasma Science. In December 1998, Cerus and the Consortium for Plasma Science 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 source plasma. Under the agreement, the Consortium has funded development of Cerus’ proprietary technology for use with source plasma. Cerus does not expect to receive additional funding from the Consortium. Cerus will pay the Consortium a royalty based on a percentage of product sales, if any.

 

Results of Operations

 

Three- and Six-Month Periods Ended June 30, 2002 and 2001

 

Revenue. Milestone and development funding from Baxter and the Consortium increased to $5.0 million for the three months ended June 30, 2002 from $1.0 million for the comparable period in 2001, and increased to $5.0 million for the six months ended June 30, 2002 from $1.9 million for the comparable period in 2001. The increases in both periods were due to a $5 million milestone payment from Baxter earned in 2002 upon regulatory approval of the disposable set for the INTERCEPT Blood System for platelets in Europe. No development funding revenue from Baxter was recognized in 2002. Development funding 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.

 

Development funding from non-related parties decreased 84% to $36,000 for the three months ended June 30, 2002 from $224,000 for the comparable period in 2001, and decreased 69% to $139,000 for the six months ended June 30, 2002 from $450,000 for the comparable period in 2001. The changes for both periods were due to decreased development funding from Kirin, principally resulting from reduced ACIT program expenses incurred by Cerus in 2002.

 

Milestone revenue from Baxter was 89% and 81% of total revenue for the three and six months ended June 30, 2002, respectively. Development funding from Kirin was less than 1% of total revenue for the three months ended June 30, 2002, and was 2% of total revenue for the six months ended June 30, 2002. Development funding from the Consortium was less than 1% of total revenue for the three and six months ended June 30, 2002.

 

Revenue from government grants and cooperative agreements increased 95% to $0.6 million for the three months ended June 30, 2002 from $0.3 million for the comparable period in 2001, and increased 47% to $1.0 million for the six months ended June 30, 2002 from $0.7 million for the comparable period in 2001. The changes in both periods were primarily due to the timing of

 

11

 

various external contract research activities. Cerus has a three-year cooperative agreement with the Armed Forces of the United States that was entered into in February 2001. Cerus’ grant from the National Institutes of Health expired in July 2002. There can be no assurance that Cerus will receive additional government grants in the future.

 

Cerus anticipates that its sources of revenue until product sales occur will be limited to payments under collaboration agreements, including Cerus’ development agreements with Baxter, and payments from the United States government under cooperative agreement and research grant programs. There can be no assurance that Cerus will receive additional payments under collaboration agreements or additional government grants in the future or that Cerus’ development agreements will not be modified or terminated. If the CE Mark process for the illumination device is completed and the INTERCEPT Blood System for platelets is commercialized in Europe, Cerus does not expect to recognize revenue from product sales before the fourth quarter of 2002, and does not expect revenue from product sales in 2002, if any, to be significant.

 

Research and Development Expenses. Research and development expenses include salaries and related expenses for scientific personnel, payments to consultants, supplies and chemicals used in in-house laboratories, costs of research and development facilities, depreciation of equipment and external contract research expenses, including clinical trials, pre-clinical safety studies, compound manufacturing and other laboratory studies. Research and development expenses increased 20% to $14.5 million for the three months ended June 30, 2002 from $12.1 million for the comparable period in 2001, and increased 13% to $26.4 million for the six months ended June 30, 2002 from $23.4 million for the comparable period in 2001. The increase was due principally to the addition of scientific personnel and increased development spending at Baxter for development of the INTERCEPT Blood System.

 

Cerus’ total research and development costs included $12.5 million for the INTERCEPT Blood System and $2.0 million for all other programs for the three months ended June 30, 2002, and $9.8 million for the INTERCEPT Blood System and $2.2 million for all other programs for the comparable period in 2001. Cerus’ total research and development costs included $22.8 million for the INTERCEPT Blood System and $3.6 million for all other programs for the six months ended June 30, 2002, and $19.6 million for the INTERCEPT Blood System and $3.8 million for all other programs for the comparable period in 2001.

 

Cerus anticipates that its research and development expenses will continue to increase as additional regulatory approval filings are prepared and additional product configurations and testing are completed for the platelet and plasma systems, Phase III clinical trials of INTERCEPT Red Blood Cells continue and research and development activity relating to other pre-clinical programs increases. Due to the inherent uncertainties and risks associated with developing biomedical products, including but not limited to intense and changing government regulation, uncertainty of future pre-clinical and clinical study results and uncertainty associated with manufacturing, it is not possible to reasonably estimate the costs to complete these research and development projects. Cerus faces numerous risks and uncertainties associated with the successful completion of its research and development projects; see “Risk Factors” beginning on page 14.

 

12

 

General and Administrative Expenses. General and administrative expenses increased 14% to $3.0 million for the three months ended June 30, 2002 from $2.7 million for the comparable period in 2001, and increased 16% to $5.8 million for the six month period ended June 30, 2002 from $5.0 million for the comparable period in 2001. The increase was primarily attributable to the addition of administrative personnel and increased facilities expenses associated with expansion of Cerus’ operations. Cerus expects its general and administrative expenses to continue to increase as development and commercialization activities progress.

 

Net Interest Income. Net interest income decreased 52% to $0.6 million for the three months ended June 30, 2002 from $1.2 million for the comparable period in 2001, and decreased 48% to $1.2 million for the six months ended June 30, 2002 for the comparable period in 2001. The decrease was principally due to reduced investment balances carried by Cerus in 2002 and less favorable yields on investments as a result of declining interest rates. Cerus expects to earn interest at market rates in proportion to the balances it maintains.

 

Liquidity and Capital Resources

 

Cerus’ sources of capital to date have consisted of public offerings and private placements of equity securities, payments received under its agreements with Baxter, Kirin and the Consortium, United States government grants and cooperative agreements 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 products under development receives regulatory approval and achieves market acceptance. Cerus does not expect Baxter to receive regulatory approval for or commercialize the INTERCEPT Blood System for platelets in Europe until the fourth quarter of 2002 or later, or in the United States until the second half of 2003 or later. Cerus does not expect regulatory approval to be received for the INTERCEPT Blood System for plasma in Europe or in the United States until the end of 2003 or later. Cerus does not expect regulatory approval to be received for the INTERCEPT Red Blood Cell System until 2005 or later.

 

At June 30, 2002, Cerus had cash, cash equivalents and short-term investments of $93.3 million. Net cash used in operating activities was $27.2 million for the six months ended June 30, 2002, compared to $19.8 million for the same period in 2001, resulting primarily from the net loss of $24.8 million during the period and changes in other operating balances. Net cash used in investing activities during the six months ended June 30, 2002 of $12.0 million resulted principally from the purchases of $61.6 million of short-term investments and $4.2 million of furniture and equipment, offset by the sales and maturities of $53.8 million of short-term investments. Working capital decreased to $81.7 million at June 30, 2002 from $108.6 million at December 31, 2001, primarily due to decreased cash and cash equivalents balances from operating and investing activities.

 

Cerus believes that its available cash balances, together with anticipated cash flows from existing development and grant arrangements, will be sufficient to meet its capital requirements for at least the next 12 months. These near-term capital requirements are dependent on various factors, including: the development progress and costs of the INTERCEPT Blood System and other programs; payments from Baxter and the United States government; 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

 

13

 

government grants, regulatory approval and successful commercialization of the INTERCEPT Blood System and other product candidates, competitive developments and regulatory factors. If Baxter were to terminate its agreements with Cerus, Cerus might not be able to meet its long-term capital requirements. Future capital funding transactions may result in dilution to investors in Cerus, and may not be available on favorable terms or at all. In August 2001, Cerus filed a shelf registration statement on Form S-3 to offer and sell up to $300 million of common stock and/or debt securities. Cerus has no current commitments to offer or sell securities pursuant to this registration statement.

 

Financial Instruments

 

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 June 30, 2002 and December 31, 2001 were not material. Cerus’ investments primarily consist of short-term money market mutual funds, United States government obligations and commercial paper. Of Cerus’ investments balance of $93.3 million at June 30, 2002, approximately 28% have original maturity dates of less than 90 days, and approximately 33% have original maturities of 90 days to one year. Cerus does not believe its exposure to interest rate risk to be material given the short-term nature of its investment portfolio.

 

Risk Factors

 

Cerus’ business faces significant risks. If any of the events or circumstances described in the following risks actually occur, Cerus’ business may suffer, the trading price of Cerus’ common stock could decline and Cerus’ financial condition or results of operations could be harmed. These risks should be read in conjunction with the other information set forth in this report.

 

Our products are in development; if our pre-clinical and clinical trials are not successful or the data are not considered sufficient by regulatory authorities to grant marketing approval, Baxter and we will be unable to commercialize our products and generate revenue.

 

We have no products that have received regulatory approval for commercial sale. Our product candidates are in various 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 the United States Food and Drug Administration and international regulatory authorities can approve them for commercial use. Our INTERCEPT Blood System and stem cell transplantation programs are undergoing clinical testing. We must provide the FDA and foreign regulatory authorities with pre-clinical, clinical and manufacturing data that demonstrate our products are safe, effective and in compliance with federal regulations before the products can be approved for commercial sale.

 

In June 2002, we received CE Mark approval of the disposable set for the INTERCEPT Blood System for platelets in Europe. Our development and marketing partner, Baxter Healthcare Corporation must complete the CE Mark process for the illumination device before the system can be commercialized. In addition to CE Mark approval in Europe, Baxter will need to obtain regulatory and reimbursement approvals in individual European countries to market our products. The level of additional product testing varies by country, but could take up to six months or more

 

14

 

to complete after CE Mark approval. We have also submitted a CE Mark application to extend qualification of the system to platelets collected by Baxter's apheresis collection system, which is a system to separate and collect a full unit of platelets from a donor using an automated collection machine. We completed our Phase III clinical trial of the INTERCEPT Blood System for platelets in the United States in March 2001, but we have not yet submitted all of the modules of our pre-market approval application with the FDA. We have completed Phase IIIa and Phase IIIb clinical trials of the INTERCEPT Blood System for plasma in the United States and are conducting a Phase IIIc clinical trial. We are conducting Phase III clinical trials of INTERCEPT Red Blood Cells in the United States. Our allogeneic cellular immune therapy (referred to as ACIT) program, designed to improve the outcome of bone marrow transplantation procedures through use of T-cells treated with the Helinx technology, is in Phase I clinical trials in the United States. Last, our Epstein-Barr Virus cellular vaccine program is in pre-clinical development. We will have to conduct significant additional research and pre-clinical (animal) and clinical (human) testing before we can file additional applications for product approval with the FDA and foreign regulatory authorities. Clinical trials in particular 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. Any of our product candidates may fail in the testing phase or may not attain market acceptance, which could prevent us from achieving profitability.

 

It may take us several years to complete our clinical 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 or foreign regulatory authorities. Pre-clinical and clinical data can be interpreted in different ways, which could delay, limit or prevent regulatory approval. Negative or inconclusive 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 may fail to complete our clinical trials on time or be unable to complete the trials at all.

 

Significant clinical trial delays could allow competitors to bring products to market before we do and impair our ability to commercialize our products. Some of our clinical trials involve patient groups with rare medical conditions, which has in the past made, and may continue to make, it difficult to identify and enroll a sufficient number of patients to complete the trials on time. Other factors, including the unavailability of blood products, could also delay our clinical trials. Our product development costs will increase if we have additional delays in testing or approvals.

 

We are using prototype components in our pre-clinical studies and clinical trials and have not completed the components’ commercial design.

 

If we fail to develop commercial versions of the systems on schedule, our competitors may be able to bring products to market before we do, which would delay or diminish our potential revenue. The system disposables and instruments we use in our pre-clinical studies and clinical trials are prototypes of those to be used in the final products. As a result, we plan to perform studies, both pre-clinical and clinical, to demonstrate the acceptability of the commercial configuration and the equivalence of the prototype and the commercial design. However, regulatory authorities may require us to perform additional studies, both pre-clinical and clinical, using the commercial versions of the systems, which may increase our expenses and delay the commercialization of our products.

 

15

 

Because our product candidates have not been manufactured on a commercial scale, we face manufacturing uncertainties that could limit their commercialization.

 

Our product candidates, including many of the components, have never been manufactured on a commercial scale. We intend to use third-party manufacturers to produce commercial quantities of the chemical compounds and other components to be used in our products to inactivate viruses, bacteria and other pathogens. These inactivation compounds and other components have never been produced in commercial quantities, and we currently do not have any third-party manufacturing agreements in place for commercial production of compounds or other components. Any commercial manufacturer will need to develop new methods and processes to manufacture these compounds on a commercial scale and demonstrate to us, the FDA and foreign regulatory authorities that its commercial scale manufacturing processes comply with government regulations. It may be difficult or impossible to economically manufacture our products on a commercial scale.

 

Baxter is responsible for manufacturing and assembling our pathogen inactivation systems. Baxter intends to rely on third parties to manufacture and assemble some of the system components, many of which are customized and have not been manufactured on a commercial scale. Baxter has not produced the pathogen inactivation systems in commercial quantities and may not be able to manufacture and assemble them, or do so economically. Prior to product sales of the platelet system in Europe, Baxter will need to complete studies relating to illumination device manufacturing that will enable it to make a self-declaration concerning quality of device manufacturing. In the United States, studies related to the illumination device, disposable and compound manufacturing need to be completed and included in FDA submissions before the FDA would consider the application for approval. Product stability studies to establish the shelf life of the disposables have not been completed. If studies do not support a sufficient shelf life, the disposables and/or packaging may need to be redesigned and validated through additional studies. If sufficient shelf life cannot be demonstrated, the products may not achieve customer acceptance and may not receive regulatory approval in the United States. It may be difficult or impossible to complete all studies in a timeframe consistent with intended commercialization.

 

If our third-party manufacturers fail to produce our compounds and other product components satisfactorily and in sufficient quantities, we may incur delays, shortfalls and additional expenses.

 

A limited number of suppliers manufacture our inactivation compounds for our use in product development, including clinical trials. Of these manufacturers, we currently have contracted with one manufacturer to provide enough amotosalen, the inactivation compound we use in our platelet and plasma systems, to meet our anticipated clinical trial, product development and initial platelet system European launch requirements. We have contracted with one manufacturer to produce an intermediate compound, S-301, which is used by another manufacturer as a raw material of S-303, the inactivation compound we use in our red blood cell system. If any of these manufacturers cannot produce our compounds in the required quantities or to the required standards, we may face delays and shortfalls before we are able to identify alternate or additional manufacturers to meet these requirements. While alternative suppliers for the inactivation compounds exist, any new manufacturer will have to prove both to us and to the FDA and foreign regulatory authorities that its manufacturing process complies with government regulations. Identifying and qualifying such new suppliers could be expensive and time-consuming.

 

Baxter has advised us that it intends to purchase certain key components of the pathogen

 

16

 

inactivation systems 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 these components. If Baxter were unable to find adequate suppliers for these components, we may 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.

 

Our products may not achieve acceptance in, or be rapidly adopted by, the health care community.

 

Even if our product candidates receive regulatory approval for commercial sale, physicians, patients and healthcare payors may not believe that the benefits of using our systems justify their additional cost, because the blood supply has become safer or for other reasons. Baxter's ability to successfully commercialize our products will depend in part on the availability of adequate reimbursement for product costs and related treatment of blood components from governmental authorities and private health care insurers (including health maintenance organizations), which 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, our products may not inactivate all known pathogens, and the inability of our systems to inactivate certain pathogens may inhibit their acceptance. For logistical and financial reasons, the transfusion industry has not always integrated new technologies into their processes, even those with the potential to improve the safety of the blood supply. If our products fail to achieve market acceptance, we may never become profitable.

 

We will need to develop and test additional configurations of our platelet pathogen inactivation system to address the entire market.

 

In the United States, our efforts to develop our systems to inactivate viruses, bacteria and other pathogens in platelets have focused almost entirely on apheresis platelets collected on Baxter’s automated collection platform. Apheresis platelets are platelets that are collected from a single donor using an automated collection machine. Currently, we estimate that the majority of platelets used in the United States are collected by apheresis, with the remainder prepared from pooled random donor platelets. Blood centers in the United States preparing random donor platelets may be reluctant to switch to apheresis collection, and the FDA may require us to make our systems to inactivate viruses, bacteria and other pathogens in platelets compatible with random donor platelets. In order to develop a platelet pathogen inactivation system compatible with random donor platelets, we plan to perform additional product development and testing, including clinical trials. These development activities would increase our costs significantly, and may not be successful. 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, not at hospitals, and is intended to permit storage and transfusion of treated platelets for up to five days after pooling. 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, and we have not yet made a formal request for the FDA to do so.

 

Baxter is one of three primary manufacturers of equipment for the collection of apheresis

 

17

 

platelets in the United States. The equipment, design and materials used to collect the platelets vary from manufacturer to manufacturer. We have conducted our pre-clinical and clinical studies in the United States for apheresis platelets collected using only Baxter’s equipment and materials. Under an agreement with Haemonetics Corporation, Baxter has agreed to provide Haemonetics with a platelet storage solution proprietary to Cerus and Baxter, with the objective that platelets collected on certain future Haemonetics apheresis collection equipment may be directly treated using our platelet system. Baxter and we also are adapting our platelet system to allow compatibility with other manufacturers’ equipment. Such adaptations will require additional product development and testing, including clinical trials. These development activities will increase our costs significantly, and may not be successful. Market acceptance of the platelet system in the United States may be delayed until the system receives regulatory approval for use on such other equipment.

 

In Europe, platelets also are typically prepared from several units of whole blood using a semi-automated process known as the buffy coat process. We have conducted our pre-clinical and clinical studies for platelets prepared by the buffy coat process using only Baxter’s platelet collection and pooling materials. As a result, market acceptance in Europe of our platelet system for platelets prepared by the buffy coat process will depend on market acceptance of Baxter’s platelet collection and pooling sets or on our ability to develop products compatible with other manufacturers’ platelet collection and pooling sets.

 

For apheresis platelets in Europe, we have conducted a clinical trial of our pathogen inactivation system using largely Baxter’s equipment and materials. Baxter and we are adapting our platelet system to allow compatibility with other manufacturers’ equipment. Such adaptations will require additional product development and testing. These development activities may not be successful. Market acceptance of the platelet system in Europe may be delayed until the system receives regulatory approval for use on such other equipment.

 

If we receive regulatory approval for our products, a small number of customers will determine market acceptance of our pathogen inactivation systems.

 

Even if our products receive regulatory approval to be commercialized and marketed, due to the intense market concentration, failure to properly market, price or sell our products to any of these large customers could significantly diminish potential product revenue. The market for our pathogen inactivation systems is dominated by a small number of blood collection organizations. 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 collection organizations 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 many countries of Western Europe and in 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.

 

We rely heavily on Baxter for development funding, manufacturing, marketing and sales.

 

We have two development and commercialization agreements with Baxter for our systems to inactivate viruses, bacteria and other pathogens in each of the three commonly transfused blood components: platelets, fresh frozen plasma and red blood cells, and we rely on Baxter for significant financial and technical contributions to these programs. Since the beginning of our

 

18

 

relationship with Baxter in 1993 through June 30, 2002, we have received $46.7 million in equity investments from Baxter and $25.9 million from Baxter International Inc. and Subsidiaries Pension Trust, and we have recognized $30.0 million in revenue from Baxter. Our ability to develop, manufacture and market these products successfully depends significantly on Baxter’s performance under these agreements.

 

•                  We rely on Baxter for manufacturing and supplying components of our pathogen inactivation systems. Under the terms of our agreements, 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, we would be required to identify other third-party component manufacturers. We cannot assure you that we 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 delay the submission of INTERCEPT Blood Systems for regulatory approval or the market introduction and subsequent sales of such systems. Moreover, the inclusion of components manufactured by others could require us to seek new approvals from government regulatory authorities, which could result in delays in product delivery. We may not receive any such required regulatory approvals.

 

•                  We rely on Baxter for the marketing, sales and distribution of our pathogen inactivation systems. We currently have a small marketing group that helps support Baxter’s marketing organization; however, we do not intend to develop our own independent marketing and sales organization and expect to continue to rely on Baxter to market and sell the INTERCEPT Blood 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 pathogen inactivation systems and increase our costs.

 

•                  We share 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. Disagreements with Baxter may be time-consuming to resolve and cause significant delays in the development of our products. 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 a pre-existing 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.

 

•                  Baxter can terminate our agreements or fail to perform. Baxter can terminate the agreements without cause under certain circumstances. A development program under the agreements may be terminated by either party on 90 days’ notice in the case of the platelet program, or 270 days’ written notice in the case of the plasma or red blood cell

 

19

 

programs. 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.

 

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 premarket clearance or approval;

 

•                  product sales and distribution;

 

•                  product use standards and documentation; and

 

•                  product advertising and promotion.

 

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 we are developing. 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, or we may not be successful at all.

 

Even if our product candidates receive approval for commercial sale, their marketing and manufacturing will be subject to continuing FDA and other regulatory requirements, such as requirements to comply with good manufacturing practices. The failure to comply with these requirements could result in enforcement action, which could harm 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. Regulatory authorities may also require post-marketing testing, which can involve significant expense. The government may impose new regulations that could further delay or preclude regulatory approval of our potential products. We cannot predict the impact of adverse governmental regulation that might arise from future legislative or administrative action.

 

20

 

Distribution of our products outside the United States also is 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. In addition to CE Mark approval in Europe, we will need to obtain regulatory approvals in individual European countries to market our products. The level of additional product testing varies by country, but could take up to six months or more to complete after CE Mark approval. 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 regulatory approval to market our product candidates, we have conducted and intend to conduct various types of studies including:

 

•                  toxicology studies to evaluate product safety;

 

•                  laboratory and animal studies to evaluate product effectiveness;

 

•                  human clinical trials to evaluate the safety, tolerability and effectiveness of treated blood components; and

 

•                  manufacturing and stability studies.

 

We have conducted many toxicology studies to demonstrate our product candidates’ safety, and we plan to conduct additional toxicology studies throughout the product development process. At any time, the FDA and other regulatory authorities may require further toxicology or other studies to further demonstrate our products’ safety, which could delay commercialization. We believe the FDA and other regulatory authorities are 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 and other regulatory authorities, they may find it unacceptable at any time and may require human clinical trials to demonstrate efficacy in inactivating pathogens. Trials of this type 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 laboratory or animal data to support such claims. After regulatory approval for the initial indications, further clinical trials may be necessary to gain approval for the use of the product for additional indications.

 

In addition to the regulatory requirements applicable to us and to 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 using products processed with our pathogen inactivation systems. 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.

 

21

 

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 each year since our inception, including net losses of $22.6 million in 1999, $36.0 million in 2000 and $49.4 million in 2001. As of June 30, 2002, we had an accumulated deficit of approximately $197.9 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 from our agreements with Baxter, Kirin and the Consortium for Plasma Science and from federal research grants and cooperative agreements. 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 until our product candidates are commercialized and achieve significant market acceptance.

 

If we fail to obtain the capital necessary to fund our future operations, we will not be able to develop product candidates in our pipeline.

 

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, the United States government and projected interest income, will support our current and planned operations for at least the next 12 months. Our cash, liquidity and capital requirements will depend on many factors, including the development progress and costs of our programs, payments by Baxter and the United States government, costs related to creating, maintaining and defending our intellectual property position, regulatory approval and successful commercialization of our product candidates, competitive developments and regulatory factors.

 

We expect to require substantial additional funds for our long-term product development, marketing programs and operating expenses. We do not know if 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.

 

If our competitors develop and market products that are more effective than our product candidates, our commercial opportunity will be reduced or eliminated.

 

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. Competitors or potential competitors may have substantially greater financial and other resources than we have. They may also 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:

 

22

 

•                  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 that 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 Europe, several companies, including Grifols, Octapharma AG and Maco Pharma International GmbH, are developing or have developed commercial systems to treat fresh frozen plasma.

 

Other groups are developing synthetic blood product substitutes and products to stimulate the growth of platelets, and new methods of testing blood for specific pathogens have recently been approved by the FDA. Development of any of these technologies could impair the potential market for our products.

 

We may not be able to protect our intellectual property or operate our business without infringing intellectual property rights of others.

 

Our commercial success will depend, in part, on obtaining and maintaining patent protection on our products and successfully defending our products against third-party challenges. 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.

 

As of June 30, 2002, we owned 60 issued or allowed United States patents and 59 issued or allowed foreign patents. Our patents expire at various dates between 2003 and 2021. In addition, we have 27 pending United States patent applications and have filed 16 corresponding patent applications under the Patent Cooperation Treaty, which are currently pending in Europe, Japan, Australia and Canada, and of which six are also pending in China and Hong Kong. In addition, we are a licensee under a license agreement 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

 

23

 

foreign patents. We are also a licensee under an agreement with Emory University with respect to two United States patents covering inventions related to our ACIT program. The license provides for us to make certain future milestone payments to Emory as well as royalties on any sales of products using the licensed technology. 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 similar to ours or independently duplicate our technologies. For example, a patent has recently issued to a third-party covering methods to remove psoralen compounds from blood products. We have reviewed the patent and believe our work predates the invention disclosed in that patent. We are continuing to review that patent and will make a determination as to whether any action is necessary. 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 patents 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 commercialization 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 be expensive and time consuming, and we could be unsuccessful in our efforts to enforce our intellectual property rights.

 

We may rely, in certain circumstances, on trade secrets to protect our technology. However, trade secrets are difficult to protect. We protect our proprietary technology and processes, in part, by confidentiality agreements with employees and certain contractors. However, these agreements may be breached, we may not have adequate remedies for any breach or our trade secrets may otherwise become known or be independently discovered by competitors. To the extent that our employees, consultants or contractors use intellectual property owned by others, disputes may also arise as to the rights in related or resulting know-how and inventions.

 

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. If we cannot successfully defend ourselves against product liability claims, we may incur

 

24

 

substantial liabilities or be required to limit commercialization of our products.

 

We may be liable if hazardous materials used in the development of our products harm the environment, our employees or other people.

 

Our research and development activities involve the controlled use of hazardous materials, including certain hazardous chemicals, radioactive materials and infectious pathogens, such as HIV and hepatitis viruses. 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 our securities and those of other emerging medical device and biotechnology companies have been, and may continue to be, volatile. For example, during the period from January 1, 1999 to June 30, 2002, the closing sale price of our common stock as quoted on the Nasdaq National Market fluctuated from a low of $15.44 to a high of $80.50. 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.

 

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.

 

25

 

ITEM 3.                                                                 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

The information called for by this item is provided under the caption “Financial Instruments” under Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

PART II:                                                           OTHER INFORMATION

 

ITEM 1.                                                                 LEGAL PROCEEDINGS

 

None.

 

ITEM 2.                      CHANGES IN SECURITIES AND USE OF PROCEEDS

 

None.

 

ITEM 3.                      DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 4.                      SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

 

The Company’s annual meeting of stockholders was held on June 5, 2002, to consider and vote upon three matters. The first matter related to the election of two director nominees: Stephen T. Isaacs and Bruce C. Cozadd. The two directors elected will hold office until the 2005 annual meeting of stockholders and until their successors are elected. The votes cast and withheld for such nominees were as follows:

 

Nominee		Votes in Favor		Votes Withheld
Stephen T. Isaacs		12,286,793		941,496
Bruce C. Cozadd		13,184,488		43,801

 

The term of office for the following directors continued after the annual meeting: B.J. Cassin, William R. Rohn, John E. Hearst and C. Raymond Larkin Jr.

 

The second matter related to the approval of an amendment to the Company’s 1999 Equity Incentive Plan to increase the number of shares of common stock authorized for issuance under the Incentive Plan by 1,000,000 shares, to a total of 4,080,000 shares. 4,636,131 votes were cast for approval, 4,191,337 were cast against with 31,179 abstentions and

4,369,642 broker non-votes. The third matter related to the ratification of the appointment of Ernst & Young LLP as independent auditors of the Company for 2002. 13,119,099 votes were cast for approval, 80,175 were cast against with 29,015 abstentions.

 

26

 

Based on these voting results, each of the directors nominated was elected and the second and third matters were passed.

 

ITEM 5.                      OTHER INFORMATION

 

None.

 

ITEM 6.                      EXHIBITS AND REPORTS ON FORM 8-K

 

 

* The certification attached as Exhibit 99.1 accompanies the Quarterly Report on Form 10-Q pursuant to § 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed "filed" by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.

 

27

 

SIGNATURES

 

Pursuant to the requirements 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.

 

			CERUS CORPORATION
Date:	August 12, 2002			/s/ Gregory W. Schafer
				Gregory W. Schafer
				Chief Financial Officer
				(Principal Financial and Accounting Officer)

 

28