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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 11, 1999
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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CERUS CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 68-0262011
(STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
2525 STANWELL DRIVE, SUITE 300
CONCORD, CA 94520
(925) 603-9071
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
STEPHEN T. ISAACS
PRESIDENT AND CHIEF EXECUTIVE OFFICER
CERUS CORPORATION
2525 STANWELL DRIVE, SUITE 300
CONCORD, CA 94520
(925) 603-9071
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES TO:
ALAN C. MENDELSON, ESQ. DAVID J. SEGRE, ESQ.
HOWARD G. ERVIN, ESQ. WILSON SONSINI GOODRICH & ROSATI
ANDREA VACHSS, ESQ. PROFESSIONAL CORPORATION
COOLEY GODWARD LLP 650 PAGE MILL ROAD
ONE MARITIME PLAZA, 20TH FLOOR PALO ALTO, CA 94306
SAN FRANCISCO, CA 94111 (650) 493-9300
(415) 693-2000
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF CLASS OF AMOUNT TO BE OFFERING AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED(1) PRICE PER SHARE(1)(2) OFFERING PRICE(1)(2) REGISTRATION FEE
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Common Stock, par value $.001 per share...... 2,300,000 $29.375 $67,562,500 $18,782.38
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(1) Includes 300,000 shares of Common Stock issuable upon exercise of the
underwriters' over-allotment option.
(2) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(c) of the Securities Act of 1933, as amended, based
on the average of the high and low sales prices of the Common Stock on the
Nasdaq National Market on February 8, 1999.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
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THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND WE ARE NOT SOLICITING OFFERS TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
PROSPECTUS (Subject to Completion)
Issued , 1999
2,000,000 Shares
LOGO
COMMON STOCK
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CERUS CORPORATION IS OFFERING 2,000,000 SHARES OF ITS COMMON STOCK.
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THE COMMON STOCK IS LISTED ON THE NASDAQ NATIONAL MARKET UNDER THE SYMBOL
"CERS."
ON FEBRUARY 10, 1999, THE LAST SALE PRICE OF THE COMMON STOCK WAS $30 PER SHARE.
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INVESTING IN THE COMMON STOCK INVOLVES RISKS.
SEE "RISK FACTORS" BEGINNING ON PAGE 9.
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PRICE $ A SHARE
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UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS COMPANY
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Per Share..................... $ $ $
Total......................... $ $ $
The Securities and Exchange Commission and state securities regulators have not
approved or disapproved these securities or determined if this prospectus is
truthful or complete. Any representation to the contrary is a criminal offense.
Cerus Corporation has granted the underwriters the right to purchase up to an
additional 300,000 shares of common stock to cover over-allotments. Morgan
Stanley & Co. Incorporated expects to deliver the shares of common stock to
purchasers on March , 1999.
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MORGAN STANLEY DEAN WITTER
BT ALEX. BROWN
SG COWEN
February , 1999
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TABLE OF CONTENTS
PAGE
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Special Note Regarding Forward-Looking
Statements........................... 3
Where You Can Find More Information.... 4
Prospectus Summary..................... 5
Risk Factors........................... 9
Use of Proceeds........................ 18
Dividend Policy........................ 18
Common Stock Price Range............... 18
Capitalization......................... 19
Dilution............................... 19
Selected Financial Data................ 20
PAGE
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Management's Discussion and Analysis of
Financial Condition and Results of
Operations........................... 21
Business............................... 26
Management............................. 51
Principal Stockholders................. 54
Description of Capital Stock........... 55
Underwriters........................... 59
Legal Matters.......................... 60
Experts................................ 60
Additional Information................. 61
Index to Financial Statements.......... F-1
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We are a Delaware corporation. Our principal executive offices are
located at 2525 Stanwell Drive, Suite 300, Concord, California 94520, and our
telephone number is (925) 603-9071. We maintain a world wide web site at
www.ceruscorp.com. The reference to our world wide web address does not
constitute incorporation by reference of the information contained at the site.
In this prospectus, the "Company," "Cerus," "we," "us," and "our" refer to Cerus
Corporation, unless the context otherwise requires.
You should rely only on the information incorporated by reference or
provided in this prospectus. We have authorized no one to provide you with
different information. We are not making an offer of these securities in any
state where the offer is not permitted. You should not assume that the
information in this prospectus or the prospectus supplement is accurate as of
any date other than the date on the front of the document.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements under "Prospectus Summary," "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business," and elsewhere in this prospectus constitute
forward-looking statements. These statements involve known and unknown risks,
uncertainties, and other factors that may cause our or our industry's results,
levels of activity, performance, or achievements to be materially different from
any future results, levels of activity, performance, or achievements expressed
or implied by such forward-looking statements. Such factors include, among
others, those listed under "Risk Factors" and elsewhere in this prospectus.
In some cases, you can identify forward-looking statements by
terminology such as "may," "will," "should," "expects," "plans," "anticipates,"
"believes," "estimates," "predicts," "potential," or "continue" or the negative
of such terms or other comparable terminology.
Although we believe that the expectations reflected in the
forward-looking statements are reasonable, we cannot guarantee future results,
events, levels of activity, performance, or achievements. We do not assume
responsibility for the accuracy and completeness of the forward-looking
statements. We do not intend to update any of the forward-looking statements
after the date of this prospectus to conform them to actual results.
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The Cerus logo, Cerus Corporation(TM) and Cerus(TM) are trademarks of
Cerus. Trade names and trademarks of other companies appearing in this
Prospectus are the property of their respective holders.
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WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and
other information with the SEC. You may read and copy any document we file at
the SEC's public reference rooms in Washington, D.C., New York, New York and
Chicago, Illinois. You can request copies of these documents by contacting the
SEC and paying a fee for the copying cost. Please call the SEC at 1-800-SEC-0330
for further information on the public reference rooms. Our SEC filings are also
available to the public from the SEC's website at www.sec.gov.
The SEC allows us to "incorporate by reference" the information
contained in documents that we file with them, which means that we can disclose
important information to you by referring you to those documents. The
information incorporated by reference is considered to be part of this
prospectus. Information in this prospectus supersedes information incorporated
by reference that we filed with the SEC prior to the date of this prospectus,
while information that we file later with the SEC will automatically update and
supersede prior information. We incorporate by reference the documents listed
below and any future filings we will make with the SEC under Sections 13(a),
13(c), 14 or 15(d) of the Securities Exchange Act of 1934:
1. our Annual Report on Form 10-K for the fiscal year ended December 31,
1997 (as amended by Amendment No. 1 on Form 10-K/A);
2. our Quarterly Reports on Form 10-Q for the quarters ended March 31,
1998, June 30, 1998 and September 30, 1998;
3. our Current Report on Form 8-K dated June 30, 1998; and
4. the description of our common stock set forth in our Registration
Statement on Form 8-A filed with the SEC on January 8, 1997.
You may request a copy of these filings, at no cost, by writing or
telephoning us at:
Cerus Corporation
Attention: Investor Relations Officer
2525 Stanwell Drive, Suite 300
Concord, California 94520
Telephone (925) 603-9071
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PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this
prospectus. It is not complete and may not contain all the information that you
should consider before investing in Cerus' common stock. You should read the
entire prospectus carefully, including the "Risk Factors" section and the
financial statements and the notes to those statements.
CERUS
Cerus develops products to prevent the transmission of diseases through
blood transfusions. Our systems inactivate infectious pathogens in blood
components and inhibit the white blood cell activity that is responsible for
certain adverse immune and other transfusion-related reactions. Blood components
include platelets, fresh frozen plasma and red blood cells. Our pathogen
inactivation systems, which are at various stages of pre-commercial development,
treat each of these components. We believe that our proprietary technology has
the potential to inactivate many new pathogens before they are identified and
before screening tests have been developed to detect them in the blood supply.
Because our systems are designed to inactivate rather than merely test for
pathogens, they may reduce the risk of transmission of pathogens that would
remain undetected by current testing methods. We also are leveraging our core
technology into programs for decontaminating plasma derivatives and improving
the outcome of bone marrow or stem cell transplants in cancer patients.
We have completed five clinical trials of our platelet system and three
clinical trials of our fresh frozen plasma system. Our platelet system is in a
Phase 3 clinical trial in Europe, and we have determined the preliminary
framework of the protocol for a Phase 3 clinical trial in the United States. Our
fresh frozen plasma system is in a Phase 2 clinical trial in the United States.
Our system for red blood cells is in a Phase 1 clinical trial in the United
States.
Today, the safety of blood is maintained by screening donors for
high-risk activity and testing blood for a limited number of infectious
pathogens. However, many known infectious agents continue to be transmitted
through blood transfusions. There also is a risk that new viruses and bacteria
may enter the blood supply undetected. Emerging pathogens such as HIV and
hepatitis B and C were widely transmitted through blood transfusions before
adequate testing methods were developed. Our laboratory studies have shown our
compounds to be effective against a broad array of viruses and bacteria,
including HIV and hepatitis B and C. The continuing risk of transmitting
diseases through blood transfusions and the limitations of current screening and
testing methods create a need for a new approach to blood safety.
Our proprietary systems work by targeting and forming irreversible bonds
with nucleic acid molecules, such as DNA and RNA. These bonds act to prevent the
molecules from replicating. Because pathogens contain nucleic acids, our systems
prevent the pathogens from replicating and infecting transfusion recipients.
Platelets, fresh frozen plasma and red blood cells, the commonly transfused
blood components, do not contain DNA or RNA. As a result, our compounds
inactivate pathogens, both known and unknown, without harming the therapeutic
components of blood.
Platelet Program. Platelet transfusions are used to prevent or control
bleeding in platelet-deficient patients, such as those undergoing cancer
chemotherapy or organ transplants. We estimate the production of platelets in
1998 to have been 1.4 million transfusion units in North America, 1.3 million
transfusion units in Western Europe and 700,000 transfusion units in Japan. We
currently are conducting a European Phase 3 clinical trial in approximately 100
patients. We have determined the preliminary framework for a protocol for a
Phase 3 clinical trial in the United States which will assess clinical bleeding
in response to platelet transfusions in approximately 600 patients.
Fresh Frozen Plasma Program. Fresh frozen plasma is a source of all
blood clotting factors except platelets. It is used to control bleeding in
patients undergoing extensive surgical procedures. It is also used to treat
patients with chronic liver disease and inherited clotting factor deficiencies.
We estimate
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the production of fresh frozen plasma in 1998 to have been 3.3 million
transfusion units in North America, 3.0 million transfusion units in Western
Europe and 2.0 million transfusion units in Japan. Our fresh frozen plasma
pathogen inactivation system currently is in Phase 2 clinical trials in the
United States. A Phase 2a trial in healthy subjects has been completed, and we
have commenced enrollment in a Phase 2b patient study.
Red Blood Cell Program. Red blood cells are essential components of
blood that carry oxygen to tissues and carbon dioxide to the lungs. Red blood
cells are frequently administered to patients with anemia, trauma, surgical
bleeding or certain inherited disorders. We estimate the production of red blood
cells in 1998 to have been 10.7 million transfusion units in North America, 12.2
million transfusion units in Western Europe and 3.0 million transfusion units in
Japan. Our red blood cell pathogen inactivation system is in Phase 1 clinical
trials in the United States.
We have entered into two development and commercialization agreements
with Baxter Healthcare Corporation to develop, manufacture and market pathogen
inactivation systems for platelets, fresh frozen plasma and red blood cells.
Under these agreements, Baxter shares development expenses and will have primary
responsibility for manufacturing, marketing and distributing the systems. Baxter
will also receive a share of revenue from the sales of these systems. Through
January 31, 1999, Baxter has made equity investments and provided program
development funding of approximately $53.8 million and has made equity
investment and funding commitments to provide an additional $76.5 million.
In addition, we are developing applications of our technology beyond the
treatment of whole blood components used for transfusion. We are developing a
system using our core technology to improve the safety of proteins derived from
pooled or source plasma. We estimate the market for products derived from source
plasma to be approximately $5 billion. In December 1998, we entered into an
agreement with the Consortium for Plasma Science, which represents four of the
world's largest plasma processors, for the development of a pathogen
inactivation system for source plasma.
We believe our proprietary technology also may have application in the
treatment of white blood cells for use during stem cell transplantation
procedures. These procedures are used to treat certain cancers such as lymphoma
and leukemia. The use of untreated donor white blood cells with these procedures
often results in serious and often fatal complications, such as graft versus
host disease. We have conducted preclinical studies which have indicated that
donor white blood cells treated with our technology may reduce the risk of these
complications and improve the success rate of stem cell transplantation. We have
received regulatory clearance to proceed into Phase 1 clinical trials in the
United States to evaluate this system.
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THE OFFERING
Common stock offered....... 2,000,000 shares
Common stock to be
outstanding after the
offering................. 11,419,243 shares(1)(2)
Overallotment option....... 300,000 shares
Use of proceeds............ For research and development activities and
continuing clinical trials, general and
administrative support, capital expenditures,
working capital and general corporate purposes.
Dividend policy............ We do not anticipate paying any cash dividends in
the foreseeable future. Any future determination to
pay dividends will be at the discretion of our
board of directors and will be dependent upon then
existing conditions, including our financial
condition, results of operations, contractual
restrictions, capital requirements, business
prospects, and other factors our board of directors
deems relevant.
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(1) Unless otherwise noted, the information in this prospectus does not take
into account the possible issuance of 300,000 additional shares of our
common stock to the underwriters pursuant to their rights to purchase
additional shares to cover over-allotments.
(2) Based upon the number of shares outstanding as of January 31, 1999.
Excludes, as of January 31, 1999, (i) 929,434 shares of common stock subject
to outstanding options under our stock option plans at a weighted average
exercise price of $10.94 and 997,567 shares reserved for future issuance
under these plans and (ii) 167,481 shares of common stock reserved for
future issuance under our Employee Stock Purchase Plan. See Note 6 of Notes
to Financial Statements for descriptions of our stock plans.
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SUMMARY FINANCIAL DATA
YEAR ENDED DECEMBER 31,
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1998 1997 1996
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(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Revenue................................................. $ 2,903 $ 6,851 $ 3,609
Operating expenses:
Research and development............................. 29,783 19,569 12,080
General and administrative........................... 3,841 3,163 2,200
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Total operating expenses........................ 33,624 22,732 14,280
Loss from operations.................................... (30,721) (15,881) (10,671)
Other income, net....................................... 1,163 1,217 464
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Net loss................................................ $(29,558) $(14,664) $(10,207)
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Net loss per share -- basic and diluted(1).............. $ (3.17) $ (1.76) $ (5.98)
Shares used in computing net loss per share -- basic and
diluted(1)........................................... 9,325 8,352 1,706
DECEMBER 31 , 1998
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ACTUAL AS ADJUSTED(2)
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(IN THOUSANDS)
BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments......... $ 19,802 $ 75,552
Working capital........................................... 537 56,287
Total assets.............................................. 20,934 76,684
Capital lease obligations,
less current portion................................... 12 12
Accumulated deficit....................................... (64,428) (64,428)
Stockholders' equity (deficit)............................ (3,656) 52,094
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(1) See Note 1 of Notes to Financial Statements for a description of the method
used in computing the net loss per share.
(2) As adjusted to reflect the sale of 2,000,000 shares of our common stock in
this offering at an assumed offering price of $30.00 per share and receipt
of this offering's estimated net proceeds.
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RISK FACTORS
This prospectus contains forward-looking statements. These statements
relate to future events or our future clinical or product development or
financial performance. In some cases, you can identify forward-looking
statements by terminology such as "may," "will," "should," "expects," "plans,"
"anticipates," "believes," "estimates," "predicts," "potential," or "continue"
or the negative of such terms and other comparable terminology. These statements
reflect only management's current expectations. Actual events or results may
differ materially. In evaluating these statements, you should specifically
consider various factors, including the risks outlined below. These factors may
cause our actual results to differ materially from any forward-looking
statements. We are not undertaking any obligation to update any forward-looking
statements contained in this prospectus to reflect any future events or
developments.
You should carefully consider the following risk factors and warnings
before making an investment decision. The risks described below are not the only
risks we face. Additional risks that we do not yet know of or that we currently
think are immaterial may also impair our business operations. If any of the
events or circumstances described in the following risks actually occurs, our
business, financial condition, or results of operations could be materially
adversely affected. In such case, the trading price of our common stock could
decline, and you may lose all or part of your investment. You should also refer
to the other information set forth in this prospectus, including our financial
statements and the related notes.
OUR PRODUCTS ARE IN AN EARLY STAGE OF DEVELOPMENT AND THERE IS A HIGH RISK OF
FAILURE
We have no products that have received regulatory approval for
commercial sale. All of our product candidates are in early stages of
development, and we face the risks of failure inherent in developing medical
devices and biotechnology products based on new technologies. Our products must
satisfy rigorous standards of safety and efficacy before they can be approved by
the United States Food and Drug Administration and international regulatory
authorities for commercial use. Our platelet, fresh frozen plasma and red blood
cell programs are undergoing clinical testing. Our stem cell transplantation
program has been cleared to proceed into clinical trials. Our other programs are
still in the early stages of research and development. We will have to conduct
significant additional research and preclinical (animal) and clinical (human)
testing before we can file applications with the FDA for product approval.
Clinical trials are expensive and have a high risk of failure. In addition, to
compete effectively, our products must be easy to use, cost-effective and
economical to manufacture on a commercial scale. We cannot assure you that we
can achieve any of these objectives. Any of our products may fail in the testing
phase or may not attain market acceptance. Also, third parties may develop
superior products or have proprietary rights that preclude us from marketing our
products. If research and testing is not successful, our products are not
commercially viable or we cannot compete effectively, our business, financial
condition and results of operation will be materially adversely affected.
THE PROGRESS AND RESULTS OF OUR PRECLINICAL AND CLINICAL TESTING ARE UNCERTAIN
We must provide the FDA and foreign regulatory authorities with clinical
data that demonstrate the safety and efficacy of our products before they can be
approved for commercial sale. Clinical development, including preclinical
testing, is a long, expensive and uncertain process. It may take us several
years to complete our testing, and failure can occur at any stage of testing. We
cannot rely on interim results of trials to necessarily predict their final
results, and acceptable results in early trials might not be repeated in later
trials. Any trial may fail to produce results satisfactory to the FDA.
Preclinical and clinical data can be interpreted in different ways, which could
delay, limit or prevent regulatory approval. Negative or inconclusive results or
adverse medical events during a trial could cause a trial to be repeated or a
program to be terminated. We typically rely on third-party clinical
investigators to conduct
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our clinical trials and other third-party organizations to perform data
collection and analysis, and as a result, we face certain additional delaying
factors outside our control. These factors include:
- difficulty in enrolling qualified subjects
- inadequately trained or insufficient personnel at the study site
- delays in approvals from a study site's review board.
We cannot assure you that planned trials will begin on time or that any
of our clinical trials will be completed on schedule or at all. We cannot assure
you that any trials will result in marketable products or that any products will
be commercially successful even if approved for marketing. Our product
development costs will increase if we have delays in testing or approvals. If
the delays are significant, our business, financial condition and results of
operations will be materially adversely affected.
WE FACE MANUFACTURING UNCERTAINTIES BECAUSE OUR PRODUCTS HAVE NOT BEEN
MANUFACTURED ON A COMMERCIAL SCALE
Our products, and many of their components, have never been manufactured
on a commercial scale. It may be difficult or impossible to economically
manufacture our products on a commercial scale. We intend to use third-party
manufacturers to produce commercial quantities of our products, including the
inactivation compounds.
We have contracted with two manufacturers to provide enough S-59, the
inactivation compound we use in our platelet and fresh frozen plasma systems, to
meet our anticipated clinical trial requirements. Only one of the manufacturers
is performing the complete synthesis of S-59. If this manufacturer cannot
produce S-59 in commercial quantities, we may face delays and shortfalls before
our alternate manufacturer can produce sufficient quantities. Also, any new
manufacturer will have to prove both to us and to the FDA that its manufacturing
process is accurate. We may need to identify and qualify additional
manufacturers for commercial production. We cannot be certain that our existing
manufacturers or any new manufacturer will be able to provide required
quantities of S-59.
We have produced only limited quantities of S-303, the inactivation
compound we use in our red blood cell pathogen inactivation system, for research
and clinical development. A sole third-party manufacturer has produced enough
S-303 for anticipated preclinical and clinical studies. We cannot be certain
that this manufacturer will be able to produce S-303 on a commercial scale. We
also do not know whether we will be able to enter into arrangements for the
commercial-scale manufacture of S-303 on reasonable terms or at all.
We purchase certain key components of our compounds from a limited
number of suppliers. While we believe there are alternative suppliers for these
components, it would be expensive and time-consuming to establish additional or
replacement suppliers for our compounds.
Baxter is responsible for manufacturing and assembling components of our
systems. Baxter has not manufactured these components in commercial quantities
and may not be able to provide them to us on an economical basis. Baxter intends
to rely on third parties to manufacture some of these components, which are
customized and have not been manufactured on a commercial scale. If Baxter or
its third-party component suppliers fail to develop commercially acceptable
manufacturing processes for these components, our business, results of
operations and financial condition will be materially adversely affected. If we
were unable to find adequate suppliers for these components, we would be
required to redesign the systems, which could lead to additional testing and
clinical trials. If we were required to redesign the products, our development
costs would increase and our programs could be delayed significantly.
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OUR PRODUCTS MAY NEVER BE ACCEPTED BY THE HEALTH CARE COMMUNITY
We believe that our ability to commercialize our pathogen inactivation
systems effectively will depend on the safety, efficacy and cost-effectiveness
of our products and the availability of adequate insurance reimbursement for
these products. We believe that market acceptance will depend on the extent to
which physicians, patients and health care payors perceive that the benefits of
using our systems justify their additional cost, given that the blood supply has
become safer in recent years. Our ability to successfully commercialize our
products depends in part on obtaining adequate reimbursement for product costs
and related treatment of blood components from governmental authorities and
private health care insurers (including health maintenance organizations).
Government and private third-party payors are increasingly attempting to contain
health care costs by limiting both the extent of coverage and the reimbursement
rate for new tests and treatments. In addition, we do not expect our products to
inactivate all known pathogens, and the inability of our systems to inactivate
certain pathogens may adversely affect market acceptance of our products. Even
if our products receive the necessary regulatory and health care reimbursement
approvals, our products may not achieve any significant degree of market
acceptance among blood centers, physicians, patients and health care payors.
Other technologies have been developed in recent years that have the potential
to improve the safety of the blood supply. These technologies include donor
retested fresh frozen plasma, solvent-detergent treated fresh frozen plasma and
new methods to test for various blood-borne pathogens. For various reasons, such
as implementation costs and logistical concerns, the transfusion industry has
not always integrated these technologies into their processes. Although we
believe our inactivation systems can significantly improve the safety of the
blood supply, we cannot assure you that our technologies will be accepted
rapidly or at all. If our products fail to achieve market acceptance, our
business, results of operations and financial condition would be materially
adversely affected.
We are currently developing our platelet pathogen inactivation system in
the United States to treat apheresis platelets. Apheresis platelets are
collected from a single donor using an automated collection machine. Currently,
we estimate that approximately 60% of platelets are collected by apheresis in
the United States, and the balance are pooled random donor platelets. We cannot
predict whether the market for apheresis platelets will be maintained or will
develop further. If this market declines, our business, results of operation and
financial condition will be materially adversely affected. If we conduct
additional clinical trials to obtain FDA approval of the system for use in
treating random donor platelets, our development expenses will increase
significantly. In addition, FDA regulations limit the time from pooling to
transfusion to four hours to minimize the proliferation of bacterial
contamination in the pooled product. As a result, most pooling occurs in
hospitals. Our platelet system is designed for use in blood centers and requires
approximately six hours of processing. Therefore, the FDA's time limit between
pooling and transfusion currently precludes the use of our system with pooled
random donor platelets. Although our system is designed to reduce the risk of
bacterial contamination, we cannot predict whether the FDA would remove this
process time constraint to allow our system to be used with pooled random donor
platelets.
Baxter is one of three primary manufacturers of equipment for the
collection of apheresis platelets. The equipment, design and materials used to
collect the platelets vary from manufacturer to manufacturer. We are conducting
our preclinical and clinical studies using only Baxter's equipment and
materials, and initially we intend to seek FDA approval for our systems for use
only with Baxter's collection systems. As a result, market acceptance of our
platelet system will depend on the market acceptance of Baxter's collection
equipment. Blood centers may be reluctant to replace their existing equipment,
and the FDA may require us to make our systems compatible with other equipment.
If we are required to develop our platelet system for use on other
manufacturers' equipment, or if we decide to address a broader market, we will
need to perform additional studies, which will increase our development costs
and which may not be successful.
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A SMALL NUMBER OF CUSTOMERS WILL DETERMINE MARKET ACCEPTANCE OF OUR PRODUCTS
The market for our pathogen inactivation systems is dominated by a small
number of blood collection centers. In the United States, the American Red Cross
collects and distributes approximately 50% of the nation's supply of blood and
blood components. Other major United States blood centers include the New York
Blood Center and United Blood Services, each of which distributes approximately
6% of the nation's supply of blood and blood components. In Western Europe and
Japan, various national blood transfusion services or Red Cross organizations
collect, store and distribute virtually all of their respective nations' blood
and blood components supply. If we fail to properly market, price or sell our
products to even a small number of these large customers, our business,
financial condition and results of operations could be materially adversely
affected.
WE RELY HEAVILY ON BAXTER FOR DEVELOPMENT FUNDING, MARKETING AND SALES
We have development and marketing agreements with Baxter for our
platelet, fresh frozen plasma and red blood cell pathogen inactivation systems,
and we rely on Baxter for significant financial and technical contributions to
these programs. Our ability to develop, manufacture and market these products
successfully depends significantly on Baxter's performance under these
agreements.
- Baxter can terminate our agreements or fail to perform. Baxter can
terminate the agreements without cause under certain circumstances. If
Baxter terminates the agreements or fails to provide adequate funding
to support the product development efforts, we will need to obtain
additional funding from other sources and will be required to devote
additional resources to the development of our products. We cannot
assure you that we would be able to find a suitable substitute partner
in a timely manner, on reasonable terms or at all. If we fail to find a
suitable partner, our research, development or commercialization of
certain planned products would be delayed significantly which would
cause us to incur additional expenditures.
- We rely on Baxter for the marketing, sales and distribution of our
products. We do not have and currently do not plan to develop our own
marketing and sales organization. Instead, we plan to rely on Baxter
to market and sell the pathogen inactivation systems. If our joint
development agreements with Baxter are terminated or if Baxter is
unable to market the products successfully, we will be required to
find another marketing, sales and distribution partner or develop
these capabilities ourselves. We may not be able to find a suitable
partner on favorable terms or on a timely basis, if at all. Developing
marketing, sales and distribution capabilities ourselves would delay
commercialization of our products and increase our costs.
- We lack control over management decisions. Baxter and we share
responsibility for managing the development programs for the pathogen
inactivation systems. Management decisions are made by a management
board that has equal representation from both Baxter and us. Our
interests and Baxter's may not always be aligned. If we disagree with
Baxter on program direction, a neutral party will make the decision.
The neutral party may not decide in our best interest. Under the
agreements, Baxter may independently develop a pathogen inactivation
system for fresh frozen plasma using their pre-existing methylene blue
technology. Such an effort by Baxter could create conflicts in our
joint program for the development of a pathogen inactivation system
for fresh frozen plasma.
OUR PRODUCTS ARE SUBJECT TO EXTENSIVE REGULATION BY DOMESTIC AND FOREIGN
GOVERNMENTS
Our products under development and anticipated future products are
subject to extensive and rigorous regulation by United States local, state and
federal regulatory authorities and by foreign regulatory bodies. These
regulations are wide-ranging and govern, among other things:
- product development
- product testing
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- product manufacturing
- product labeling
- product storage
- product pre-market clearance or approval
- product sales and distribution
- 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 being developed by our company or any partner. The process of
obtaining FDA and other required regulatory approvals is long, expensive and
uncertain. The time required for regulatory approvals is uncertain and the
process typically takes a number of years, depending on the type, complexity and
novelty of the product. We may encounter significant delays or excessive costs
in our efforts to secure necessary approvals or licenses.
We cannot be sure that our products will receive FDA approval in a
timely manner, if at all. Even if approvals are obtained, the marketing and
manufacturing of drug products are subject to continuing FDA and other
regulatory requirements, such as requirements to comply with good manufacturing
practices. The failure to comply with such requirements could result in
enforcement action, which could adversely affect us and our business. Later
discovery of problems with a product, manufacturer or facility may result in
additional restrictions on the product or manufacturer, including withdrawal of
the product from the market. The government may impose new regulations which
could further delay or preclude regulatory approval of our potential products.
We cannot predict the impact of adverse governmental regulation which might
arise from future legislative or administrative action.
We intend to generate product revenues from sales outside of the United
States. Distribution of our testing services or products outside the United
States also may be subject to extensive government regulation. These
regulations, including the requirements for approvals or clearance to market,
the time required for regulatory review and the sanctions imposed for
violations, vary by country. It is uncertain whether we will obtain regulatory
approvals in such countries or that we will be required to incur significant
costs in obtaining or maintaining our foreign regulatory approvals. Failure to
obtain necessary regulatory approvals or any other failure to comply with
regulatory requirements could result in reduced revenues and earnings.
To support our requests for FDA approval to market our products, we
intend to conduct various types of studies including:
- toxicology studies to evaluate product safety
- in vitro and animal studies to evaluate product effectiveness
- human clinical trials to evaluate the safety, tolerability and
effectiveness of treated blood components.
We believe the FDA is likely to weigh the potential risks of using our pathogen
inactivation products against the incremental benefits, which may be less
compelling in light of improved safety in the blood supply. We have conducted
many toxicology studies to demonstrate our products' safety, and we plan to
conduct additional toxicology studies throughout the product development
process. At any time, the FDA may require further toxicology or other studies to
further demonstrate our products' safety, which could delay commercialization.
Our clinical development plan assumes that we will not be required to perform
human clinical studies to demonstrate our systems' ability to inactivate
pathogens. Although we have discussed this plan with the FDA, they may find it
unacceptable at any time and may require human clinical trials to demonstrate
efficacy in inactivating pathogens. Such trials may be too large and expensive
to be practical.
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Regulatory agencies may limit the uses, or indications, for which any of
our products is approved. For example, we do not believe that we will be able to
claim the inactivation of pathogens unless we have in vitro or animal data to
support such claims.
In addition to the regulatory requirements applicable to us and our
products, there are regulatory requirements applicable to our prospective
customers, the blood centers that process and distribute blood and blood
products. Blood centers and others will likely be required to obtain approved
license supplements from the FDA before shipping products processed with our
pathogen inactivation systems interstate. This requirement or FDA delays in
approving these supplements may deter some blood centers from using our
products. Blood centers that do submit supplements may face disapproval or
delays in approval that could provide further delay or deter them from using our
products. The regulatory impact on potential customers could slow or limit the
potential sales of our products.
WE ARE USING PROTOTYPE COMPONENTS IN OUR CLINICAL TRIALS AND HAVE NOT COMPLETED
THEIR COMMERCIAL DESIGN
The system disposables and ultraviolet light sources we use in our
clinical trials are only prototypes. We are developing the commercial design for
these products at the same time. As a result, we will be required to perform
studies to demonstrate the equivalence of the prototype and the commercial
design. We plan to demonstrate this equivalence by conducting these studies in
healthy subjects using the commercial versions of the systems. However,
regulatory agencies may require us to perform additional studies, both
preclinical and clinical, using the commercial versions of the systems. If we
are required to perform our planned studies with patients or to conduct
additional preclinical studies, the commercialization of our products will be
delayed. If we fail to develop commercial versions of the systems on schedule,
our business, results of operations and financial condition will be materially
adversely affected.
WE HAVE ONLY A LIMITED OPERATING HISTORY AND WE EXPECT TO CONTINUE TO GENERATE
LOSSES
We may never achieve a profitable level of operations. To date, we have
engaged primarily in research and development. Our development and general and
administrative expenses have resulted in substantial losses. As of December 31,
1998, we had an accumulated deficit of approximately $64.4 million. All of our
products are in the research and development stage, and we have not received any
revenues from product sales. We have received all of our revenues under our
agreements with Baxter and federal research grants. We will be required to
conduct significant research, development, clinical testing and regulatory
compliance activities for each of these products. We expect our losses to
continue at least through 2001. We also expect our losses to fluctuate
significantly from quarter to quarter due to differences in the timing of our
expenses and potential revenues from Baxter. Our ability to become profitable
will depend on our ability to, among other things:
- establish adequate protection of our intellectual property rights
- complete our product development
- obtain product regulatory approvals
- achieve market acceptance for our products.
WE WILL NEED ADDITIONAL FUNDS
Our product development programs are capital-intensive. We expect to
continue to spend substantial funds for our operations for the foreseeable
future. We believe that our existing capital resources, together with the net
proceeds from this offering, anticipated payments from Baxter under our
agreements with Baxter and projected interest income, will support our current
and planned operations for at least the next 18 months. Our cash liquidity and
capital requirements will depend on numerous factors, including additional
research and development needs, product testing results, regulatory
requirements, competitive pressures and technological advances and setbacks.
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In addition, we may require substantial funds for our long-term product
development, marketing programs and operating expenses. We cannot assure you
that we will be able to raise additional funds on acceptable terms. If we raise
additional funds by issuing equity securities, our existing stockholders may
experience substantial dilution.
WE OPERATE IN A COMPETITIVE INDUSTRY WITH RAPIDLY CHANGING TECHNOLOGY
We expect our products to encounter significant competition. Our
products may compete with other approaches to blood safety currently in use, as
well as with future products developed by biotechnology and pharmaceutical
companies, hospital supply companies, national and regional blood centers, and
governmental organizations and agencies. Our success will depend in part on our
ability to respond quickly to medical and technological changes through the
development and introduction of new products. Product development is risky and
uncertain, and we cannot assure you that we will develop our products
successfully. Competitors' products or technologies may make our products
obsolete or non-competitive before we are able to generate any significant
revenue. Many of our competitors or potential competitors have substantially
greater financial and other resources than we have. They may also have greater
experience in preclinical testing, human clinical trials and other regulatory
approval procedures. Our ability to compete successfully will depend, in part,
on our ability to:
- attract and retain skilled scientific personnel
- develop technologically superior products
- develop lower cost products
- obtain patent or other proprietary protection for our products and
technologies
- obtain required regulatory approvals for our products
- be early entrants to the market
- manufacture, market and sell our products, independently or through
collaborations.
Several companies are developing technologies which are, or in the
future may be, the basis for products that will directly compete with or reduce
the market for our pathogen inactivation systems. A number of companies are
specifically focusing on alternative strategies for pathogen inactivation in
various blood components, such as treatment of fresh frozen plasma with
solvent-detergent or methylene blue. In May 1998, the FDA approved
solvent-detergent for use in treating fresh frozen plasma in the United States.
If the treatment of fresh frozen plasma by solvent-detergent becomes a
widespread practice, which has not happened to date, it could adversely affect
our ability to market our fresh frozen plasma pathogen inactivation system in
the United States.
Several other companies are currently marketing solvent-detergent or
methylene blue-based pathogen inactivation systems for fresh frozen plasma in
Europe. Other groups are developing synthetic blood product substitutes and
products to stimulate the growth of platelets. If any of these technologies is
successfully developed, it could have a material adverse effect on our business,
financial condition and results of operations. Baxter has agreed to certain
restrictions on its ability to independently develop and market products that
compete with our products, however, these provisions may not prevent Baxter from
developing or marketing competing products using methylene blue.
FAILURE TO ATTRACT AND RETAIN KEY EMPLOYEES WILL ADVERSELY AFFECT OUR BUSINESS
Because of the scientific nature of our business, we depend on the
principal members of our management and scientific staff. Our success will
depend largely on our ability to attract and retain highly skilled scientific
and managerial personnel. Competition for such personnel is intense. We cannot
assure you that we will be successful in attracting and retaining such
personnel. The failure to maintain our management and scientific staff and to
attract additional key personnel could materially adversely affect
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our business, financial condition and results of operations. Although we intend
to provide incentive compensation to attract and retain our key personnel, we
cannot guarantee these efforts will be successful.
WE MAY NOT BE ABLE TO PROTECT OUR INTELLECTUAL PROPERTY OR OPERATE OUR BUSINESS
WITHOUT INFRINGING INTELLECTUAL PROPERTY RIGHTS OF OTHERS
Our technology will be protected from unauthorized use by others only to
the extent that it is covered by valid and enforceable patents or effectively
maintained as trade secrets. As a result, our success depends in part on our
ability to:
- obtain patents
- protect trade secrets
- operate without infringing upon the proprietary rights of others
- prevent others from infringing on our proprietary rights.
We cannot be certain that our patents or patents that we license from
others will be enforceable and afford protection against competitors. Our
patents or patent applications, if issued, may be challenged, invalidated or
circumvented. Our patent rights may not provide us with proprietary protection
or competitive advantages against competitors with similar technologies. Others
may independently develop technologies similar to ours or independently
duplicate our technologies. Due to the extensive time required for development,
testing and regulatory review of our potential products, our patents may expire
or remain in existence for only a short period following commercialization. This
would reduce or eliminate any advantage of the patents.
We cannot be certain that we were the first to make the inventions
covered by each of our issued or pending patent applications or that we were the
first to file patent applications for such inventions. We may need to license
the right to use third-party patents and intellectual property to continue
development and marketing of our products. We may not be able to acquire such
required licenses on acceptable terms, if at all. If we do not obtain such
licenses, we may need to design around other parties' patents or we may not be
able to proceed with the development, manufacture or sale of our products.
We may face litigation to defend against claims of infringement, assert
claims of infringement, enforce our patents, protect our trade secrets or
know-how, or determine the scope and validity of others' proprietary rights.
Patent litigation is costly. In addition, we may require interference
proceedings declared by the United States Patent and Trademark Office to
determine the priority of inventions relating to our patent applications.
Litigation or interference proceedings could have a material adverse effect on
our business, financial condition and results of operations and could be
unsuccessful in our efforts to enforce our intellectual property rights.
WE MAY BE LIABLE IF OUR PRODUCTS HARM PEOPLE
We are exposed to potential liability risks inherent in the testing and
marketing of medical devices and products. We may be liable if any of our
products causes injury, illness or death. We intend to obtain product liability
insurance before the commercial introduction of any product, but do not know
whether we will be able to obtain and maintain such insurance on acceptable
terms. Any insurance we obtain may not provide adequate coverage against
potential liabilities. A liability claim, regardless of merit or eventual
outcome, could materially adversely affect our business, results of operation
and financial condition.
WE USE HAZARDOUS SUBSTANCES THAT ARE SUBJECT TO ENVIRONMENTAL REGULATION
Our research and development involves the controlled use of hazardous
materials, including certain hazardous chemicals, radioactive materials and
pathogens. Accordingly, we are subject to federal, state and local laws
governing the use, handling and disposal of these materials. We may incur
significant costs to comply with additional environmental and health and safety
regulations in the future. Although we believe that our safety procedures for
handling and disposing of hazardous materials comply with
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regulatory requirements, we cannot eliminate the risk of accidental
contamination or injury. If an accident occurs, we could be held liable for any
damages that result.
THE MARKET PRICE OF OUR STOCK MAY BE HIGHLY VOLATILE
The market prices for securities of emerging medical device and
biotechnology companies like us have been highly volatile. Announcements may
have a significant impact on the market price of our common stock. Such
announcements may include:
- biological or medical discoveries
- technological innovations or new commercial services by us or our
competitors
- developments concerning proprietary rights, including patents and
litigation matters
- regulatory developments in both the United States and foreign
countries
- public concern as to the safety of new technologies
- general market conditions
- comments made by analysts, including changes in analysts' estimates
of our financial performance
- quarterly fluctuations in our revenues 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
addition, sales of substantial amounts of our common stock in the public market
following this offering could lower 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 revenues and earnings. Any adverse determination in such litigation could
also subject us to significant liabilities.
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USE OF PROCEEDS
The net proceeds to Cerus from the sale of the 2,000,000 shares of
common stock in this offering at the assumed public offering price of $30.00 per
share are estimated to be approximately $55.8 million (approximately $64.2
million if the Underwriters' over-allotment option is exercised in full), after
deducting underwriting discounts and commissions and estimated offering expenses
payable by Cerus.
Cerus expects to use approximately $38.0 million of the proceeds of this
offering for research and development, including clinical trials in support of
its pathogen inactivation systems (including payment to Baxter of $8.3 million
for research and development expense recognized in the second quarter of 1998);
approximately $5.0 million for general and administrative expenses and
approximately $4.0 million for capital expenditures. Cerus intends to use the
remaining proceeds for general corporate purposes, including the funding of
working capital requirements. Cerus may use a portion of the net proceeds to
acquire or invest in complementary businesses or products or to obtain the right
to use complementary technologies. There are no present understandings,
commitments or agreements with respect to any material acquisition of other
businesses, products or technologies. The amounts and timing of Cerus' actual
expenditures for each purpose may vary significantly depending upon numerous
factors, including the status of Cerus' product development efforts, regulatory
approvals, competition, marketing and sales activities and the market acceptance
of any products introduced by Cerus. Pending such uses, Cerus intends to invest
the net proceeds of this offering in short-term, investment-grade,
interest-bearing securities.
DIVIDEND POLICY
Cerus has never declared or paid any cash dividends on its common stock.
Cerus currently intends to retain any future earnings to finance the growth and
development of its business. Cerus does not intend to pay any cash dividends on
its common stock in the foreseeable future. Future dividends on the common
stock, if any, will be determined by the board of directors.
COMMON STOCK PRICE RANGE
Cerus' common stock is traded on the Nasdaq National Market under the
symbol "CERS." Cerus completed the initial public offering of its common stock
on January 30, 1997. The following table sets forth, for the periods indicated,
the high and low sales prices for the common stock as reported by the Nasdaq
National Market.
COMMON
STOCK PRICE
-----------
HIGH LOW
---- ---
Year ended December 31, 1997:
First Quarter (from January 30)........................... $12 3/8 $ 7 3/4
Second Quarter............................................ 12 3/4 8 1/2
Third Quarter............................................. 18 1/8 8
Fourth Quarter............................................ 25 1/2 16 7/8
Year ended December 31, 1998:
First Quarter............................................. 22 1/2 14 1/2
Second Quarter............................................ 16 7/8 12
Third Quarter............................................. 25 13 1/4
Fourth Quarter............................................ 21 11 1/4
Year ending December 31, 1999:
First Quarter (through February 10, 1999)................. 33 7/8 20 1/8
A recent reported last sale price for Cerus' common stock, as reported
on the Nasdaq National Market, is as set forth on the cover page of this
prospectus. On January 31, 1999, we had approximately 247 holders of record of
common stock.
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CAPITALIZATION
The following table sets forth the capitalization of Cerus as of
December 31, 1998, and as adjusted to reflect the sale of 2,000,000 shares of
common stock pursuant to this offering (assuming the underwriters'
over-allotment option is not exercised). This table should be read in
conjunction with the Financial Statements and related Notes and "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
appearing elsewhere in this Prospectus.
DECEMBER 31, 1998
-----------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)
Short term debt(1)
Current portion of capital lease obligations.............. $ 31 $ 31
-------- ---------
Total short term debt.................................. 31 31
Long term debt(1)
Capital lease obligations, less current portion........... 12 12
-------- ---------
Total long term debt................................... 12 12
Redeemable convertible preferred stock, $.001 par value;
5,000,000 shares authorized, 5,000 shares issued and
outstanding, actual and as adjusted(2).................... 5,000 5,000
Stockholders' equity (deficit):
Common stock, $.001 par value; 50,000,000 shares
authorized, 9,416,843 shares issued and outstanding,
actual, and 11,416,843 shares issued and outstanding,
as adjusted(3)......................................... 9 11
Additional paid-in capital................................ 60,813 116,561
Deferred compensation..................................... (50) (50)
Accumulated deficit....................................... (64,428) (64,428)
-------- ---------
Total stockholders' equity (deficit)................... (3,656) 52,094
-------- ---------
Total capitalization................................. $ 1,356 $ 57,106
======== =========
- ---------------
(1) For information concerning Cerus' capital lease commitments, see Note 4 of
Notes to Financial Statements.
(2) Includes 5,000 shares of Series A preferred stock. Cerus also has the right
to cause Baxter to purchase up to $9.5 million of a new class of Series B
preferred stock prior to September 30, 1999. The Series B preferred stock
would be established at the time of purchase. See "Description of Capital
Stock."
(3) Excludes 1,167,447 shares of common stock reserved for issuance pursuant to
Cerus' employee benefit plans, under which options to purchase 918,434
shares were outstanding as of December 31, 1998. See "Note 6 of Notes to
Financial Statements."
DILUTION
The net tangible book value of Cerus as of December 31, 1998 was
approximately $(3,656,000) or $(.39) per share. Net tangible book value per
share represents the amount of Cerus' total tangible assets less total
liabilities, divided by the total number of shares of common stock outstanding.
After giving effect to the sale by Cerus of 2,000,000 shares of common stock
offered hereby at an assumed offering price of $27.88 per share (after deducting
underwriting discounts and commissions and estimated offering expenses), the net
tangible book value at December 31, 1998 would have been approximately
$52,094,000, or $4.86 per share. This represents an immediate increase in net
tangible book value of $5.25 per share to existing stockholders and an immediate
dilution of $23.02 per share to new investors in this offering, as illustrated
by the following table:
Assumed public offering price per share..................... $27.88
Net tangible book value per share before the offering..... $ (.39)
Increase per share attributable to new investors.......... $ 5.25
------
Pro forma net tangible book value per share after the
offering.................................................. 4.86
------
Dilution per share to new investors......................... $23.02
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SELECTED FINANCIAL DATA
The statement of operations data for the years ended December 31, 1998,
1997 and 1996 and the balance sheet data as of December 31, 1998 and 1997 are
derived from financial statements of Cerus that have been audited by Ernst &
Young LLP, independent auditors, and are included elsewhere in this Prospectus.
The statement of operations data for the years ended December 31, 1995 and 1994
and the balance sheet data as of December 31, 1996, 1995 and 1994 are derived
from financial statements of Cerus audited by Ernst & Young LLP that are not
included in this Prospectus. This information should be read in conjunction with
Cerus' Financial Statements and the related Notes and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" included
elsewhere in this Prospectus.
YEARS ENDED DECEMBER 31,
--------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Revenue................................ $ 2,903 $ 6,851 $ 3,609 $ 6,799 $ 4,796
Operating expenses:
Research and development............ 29,783 19,569 12,080 8,125 5,680
General and administrative.......... 3,841 3,163 2,200 1,517 1,194
-------- -------- -------- ------- -------
Total operating expenses.......... 33,624 22,732 14,280 9,642 6,874
-------- -------- -------- ------- -------
Loss from operations................... (30,721) (15,881) (10,671) (2,843) (2,078)
Other income, net...................... 1,163 1,217 464 483 278
-------- -------- -------- ------- -------
Net loss............................... $(29,558) $(14,664) $(10,207) $(2,360) $(1,800)
======== ======== ======== ======= =======
Net loss per share(1).................. $ (3.17) $ (1.76) $ (5.98) $ (1.67) $ (1.24)
Shares used in computing net loss per
share(1)............................ 9,325 8,352 1,706 1,414 1,456
DECEMBER 31,
--------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- ------- -------
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash, cash equivalents and short-term
investments......................... $ 19,802 $ 21,581 $ 6,002 $ 9,659 $ 7,802
Working capital........................ 537 21,374 2,653 7,263 5,865
Total assets........................... 20,934 27,315 8,812 11,349 9,684
Capital lease obligations, less current
portion............................. 12 43 92 32 94
Accumulated deficit.................... (64,428) (34,870) (20,206) (9,999) (7,639)
Total stockholders' equity (deficit)... (3,656) 22,475 4,839 8,663 5,439
- ---------------
(1) See Note 1 of Notes to Financial Statements for a description of the method
used in computing the net loss per share.
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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the financial condition and results of
operations of Cerus should be read in conjunction with the Financial Statements
and Notes thereto included elsewhere in this Prospectus. This Prospectus
contains forward-looking statements that involve risks and uncertainties. Cerus'
actual results could differ significantly from those discussed in these
forward-looking statements as a result of certain factors, including those set
forth under "Risk Factors" and elsewhere in this Prospectus.
OVERVIEW
Since its inception in 1991, Cerus has devoted substantially all of its
efforts and resources to the research, development and clinical testing of
techniques and systems for inactivating pathogens in transfusion blood
components. Cerus has been unprofitable since inception and, as of December 31,
1998, had an accumulated deficit of approximately $64.4 million. All of Cerus'
systems are in the research and development stage and Cerus has not received any
revenue from product sales. Cerus will be required to conduct significant
research, development, preclinical and clinical evaluation and regulatory
compliance activities on these systems that, together with anticipated general
and administrative expenses, are expected to result in substantial losses at
least until after commercialization of its products under development. Cerus'
ability to achieve a profitable level of operations in the future will depend on
its ability to successfully complete development, obtain regulatory approvals
and achieve market acceptance of its pathogen inactivation systems. There can be
no assurance that Cerus will ever achieve a profitable level of operations.
Further, under the agreements discussed below, a significant portion of Cerus'
development funding is provided by Baxter based on an annual budgeting process.
There can be no assurance that these agreements will not be modified or
terminated.
Agreement with Baxter for the development of pathogen inactivation
systems for platelets. In December 1993, Cerus entered into a development and
commercialization agreement with Baxter to develop a system for inactivation of
pathogens in platelets used for transfusions. The agreement was amended in
December 1996 and June 1998. The amended agreement (the "Platelet Agreement")
provides for Baxter and Cerus to generally share system development costs
equally, subject to mutually agreed budgets established from time to time and
for a sharing of revenue from sales of inactivation system disposables after
each party is reimbursed for its cost of goods above a specified level. The June
1998 amendment provides for Cerus, beginning April 1, 1998, to fund $5.0 million
of development costs previously to be funded by Baxter. At the time of the
amendment, Baxter agreed to purchase $5.0 million of Series A preferred stock
and agreed to make a $5.0 million cash milestone payment to Cerus upon the
approval by the FDA of an application to market products developed under the
platelet program or comparable approval in Europe or upon termination of the
platelet system development program. As part of the June 1998 amendment, Cerus
increased its share of the adjusted product revenue from future sales of the
platelet system disposables from approximately 28.2% of adjusted product revenue
to approximately 33.5% in exchange for Cerus' agreement to pay Baxter $8.3
million on June 30, 1999. Cerus may defer such payment for up to twelve months
under certain circumstances.
In addition to the sale of $5.0 million of Series A preferred stock,
Cerus has received a $1.0 million equity investment under the Platelet Agreement
from Baxter and has recognized approximately $13.8 million in revenue from
Baxter, including $3.0 million in license fees, $2.5 million in milestone
payments and approximately $8.3 million in development funding. License fees and
payments for achieved milestones are non-refundable and are not subject to
future performance. Development funding is in the form of balancing payments
made between Baxter and Cerus to adjust the relative spending of the companies
to the levels as agreed to by Baxter and Cerus.
Agreement with Baxter for the development of pathogen inactivation
systems for red blood cells and FFP. In January and July 1995, Cerus and Baxter
entered into interim funding agreements related to the development of pathogen
inactivation systems for plasma and red blood cells used for transfusions. In
April 1996, Cerus entered into a development and commercialization agreement
with Baxter, principally
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focused on the development of fresh frozen plasma (FFP) and red blood cell
pathogen inactivation systems. The agreement was amended in March 1998 and June
1998. The amended agreement (the "RBC/FFP Agreement") provides for Baxter and
Cerus generally to share red blood cell system development costs equally,
subject to mutually agreed to budgets established from time to time. The RBC/FFP
Agreement also provides for an equal sharing of revenue from sales of red blood
cell inactivation system disposables after each party is reimbursed for its cost
of goods and a specified percentage allocation is retained by Baxter for
marketing and administrative expenses.
Under the RBC/FFP Agreement, Cerus and Baxter equally funded the FFP
program development through December 31, 1997 after which time Baxter's funding
commitment for the FFP development program is limited to $1.2 million payable in
equal installments of $600,000 each in January 1999 and January 2000. The
RBC/FFP Agreement also provides for Cerus to receive 75% and Baxter to receive
25% of revenue from sales of FFP inactivation system disposables after each
party is reimbursed for its cost of goods and a specified percentage allocation
not to exceed 14% of revenue is retained by Baxter for marketing and
administrative expenses. Under Cerus' direction, Baxter will be responsible for
manufacturing and marketing the FFP product, and will retain its exclusive,
worldwide distribution license.
Under the RBC/FFP Agreement, Cerus has received $14.0 million in equity
investments from Baxter and has recognized approximately $7.4 million in revenue
from Baxter to fund the development of the red blood cell and FFP systems.
Development funding is in the form of balancing payments made between Baxter and
Cerus to adjust the relative spending of the companies to the levels agreed to
by Baxter and Cerus and to reimburse each party for fee-for-service development
activities. The RBC/FFP Agreement also provides for Baxter to make a $2.0
million equity investment in Cerus' common stock, subject to approval by the FDA
to commence Phase 3 clinical trials of the platelet system in the United States,
at a price equal to 120% of the average closing price of the common stock for
the thirty (30) trading days prior to and including February 11, 1999. Baxter
has agreed to make this investment in the second quarter of 1999.
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
Revenue. Cerus anticipates that its sources of revenue until product
sales occur will be limited to payments under development and commercialization
agreements with Baxter in the area of blood component pathogen inactivation,
payments from other collaboration agreements, including Cerus' agreement with
the Consortium for Plasma Science (the "Consortium"), and payments from the
United States government under research grant programs. Revenue earned under the
agreements with Baxter for the years ending December 31, 1998, 1997 and 1996 was
$2.1 million, $6.2 million and $2.9 million and accounted for 73%, 90% and 79%
of Cerus' total revenue, respectively. Revenue from Baxter decreased in 1998
from 1997, primarily due to greater increases in total development expenses on
the platelet and red blood cell programs relative to increases Company's
development expenses and Cerus' agreement to fund a portion of Baxter's
development commitment for the platelet system in 1998. Revenue from Baxter
increased in 1997 from 1996, as Cerus recognized milestone and license fee
revenue related to the platelet program of approximately $1.7 million and
recognized increased development revenue primarily relating to its FFP and red
blood cell programs. Government grant revenue, generally unchanged among the
periods, was approximately $776,000, $660,000 and $758,000 for the years 1998,
1997 and 1996, respectively.
Research and Development Expenses. Cerus' research and development
expenses include both the internal and external expenses relating to the
development of its products. Internal research and development expenses
primarily consist of personnel expenses, laboratory supplies and overhead
operating expenses. External research and development expenses primarily include
those relating to the manufacturing of its compounds, preclinical toxicology
studies, clinical trials and protecting and maintaining intellectual property.
Research and development expenses for the years ending December 31, 1998, 1997
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and 1996 were $29.8 million, $19.6 million and $12.1 million, respectively. The
increases in 1998 and 1997 were due principally to third party costs,
particularly toxicology studies, compound manufacturing development and
initiation of clinical trials relating to the platelet and plasma programs, as
well as to increased activity at Cerus in the plasma and red blood cell
programs. A significant portion of the increase was the result of increased
payroll and other personnel expenses, related laboratory supplies, equipment and
facilities expansion. In addition, under amendments to the 1993 platelet
agreement, Cerus recognized research and development expenses in 1998 and 1997
of $8.3 million and $5.5 million, respectively, to increase its share of
platelet pathogen inactivation system adjusted product revenue from 26.0% to
33.5%. Cerus anticipates that its research and development expenses will
increase as its platelet and plasma systems enter large-scale Phase 3 clinical
trials and as development activity relating to its other products increases.
General and Administrative Expenses. General and administrative expenses
consist primarily of salaries and related expenses for administrative, finance,
human resource and executive personnel, legal, accounting and other professional
fees and overhead operating expenses. General and administrative expenses were
approximately $3.8 million in 1998, $3.2 million in 1997 and $2.2 million in
1996. The increases were primarily attributable to increased personnel levels
associated with the expansion of Cerus' operations. Cerus expects its general
and administrative expenses to continue to increase as it expands its
development activities.
Other Income (Expense). Other income (expense) consists primarily of
interest earned on cash balances and short-term investments. Interest income was
approximately $1.2 million in 1998, $1.2 million in 1997 and $482,000 in 1996.
The increase in 1998 and 1997 from 1996 was attributable primarily to increased
average cash balances related to proceeds from Cerus' initial public offering
and private placements of common and preferred stock to Baxter. Interest expense
was relatively unchanged and was approximately $9,000, $15,000 and $18,000 for
the years 1998, 1997 and 1996, respectively. Cerus typically maintains
substantial balances of cash and short-term investments to fund future research
and development activities. Cerus expects to earn interest at market rates in
proportion to the cash balances it maintains.
LIQUIDITY AND CAPITAL RESOURCES
Cerus' sources of capital to date have consisted of public and private
placements of equity securities, development funding by Baxter, United States
government grants and interest income. To date, Cerus has not received any
revenue from product sales, and it will not derive revenue from product sales
unless and until one or more planned products receives regulatory approval and
achieves market acceptance. At December 31, 1998, Cerus had cash, cash
equivalents and short-term investments of approximately $19.8 million.
In January 1997, Cerus completed an initial public offering of 2,000,000
shares of common stock, generating net proceeds (after deduction of offering
costs) of approximately $21.1 million. Concurrent with this offering, Cerus sold
directly to Baxter an additional 496,878 shares of its common stock for an
aggregate purchase price of approximately $5.5 million. In October 1997, Cerus
completed a private placement of 217,202 shares of common stock to Baxter for an
aggregate purchase price of approximately $5.0 million.
In July 1998, Baxter purchased 5,000 shares of Series A preferred stock
for an aggregate purchase price of $5.0 million. The Series A preferred stock
will convert to Cerus common stock upon the approval of a new drug application
(NDA) or pre-market approval (PMA) or equivalent by the FDA or a CE Mark
approval in Europe under the Platelet Agreement or upon termination of
cooperative development work under the Platelet Agreement. In the event of
marketing approval, each share of Series A preferred stock shall automatically
be converted into that number of shares of common stock equal to $1,000 (the
"Original Issue Price") divided by one hundred twenty percent (120%) of the
average closing price of the common stock for the thirty (30) trading days prior
to and including the trading day immediately prior to the event of the marketing
approval. In the event of a program termination, each share of Series A
preferred stock shall automatically be converted into that number of
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shares of common stock equal to the Original Issue Price divided by the average
closing price of the common stock for the thirty (30) trading days commencing
with the fifteenth (15th) trading day prior to the event of program termination.
Cerus has the right to redeem the Series A preferred stock prior to conversion
for a $5.0 million cash payment. In the event of a program termination, Baxter
may require Cerus to redeem the Series A preferred stock for a $5.0 million cash
payment.
In July 1998, Cerus completed a private placement to Baxter pursuant to
Cerus' achievement of a milestone under the RBC/FFP Agreement. Baxter purchased
159,595 shares of common stock at one hundred twenty percent (120%) of the
average closing price of the common stock for the thirty (30) trading days prior
to the purchase for an aggregate purchase price of approximately $3.0 million.
In January 1999, Cerus, in consultation with the FDA, determined the
preliminary framework governing Cerus' Phase 3 clinical trial protocol for its
platelets pathogen inactivation system. As a result, Baxter agreed to purchase
$2 million of Cerus common stock on April 1, 1999 at 120% of the average closing
price of the common stock for the thirty (30) trading days prior to and
including February 11, 1999.
Net cash used in operating activities was approximately $9.7 million in
1998, compared to $16.6 million in 1997. The use of cash primarily resulted from
net losses of $29.6 million offset by an increase in accounts payable to Baxter
of $12.7 million and a decrease in accounts receivable from Baxter of $4.4
million. Net cash used in investing activities in 1998 of approximately $4.0
million resulted principally from purchases of $29.3 million of short-term
investments offset by the maturities of $25.6 million of short-term investments
and the purchase of approximately $305,000 furniture, equipment and leasehold
improvements.
In June 1998, Cerus and Baxter entered into a preferred stock purchase
agreement under which Baxter has agreed to purchase, at Cerus' option, up to
$9.5 million Series B preferred stock. The agreement provides that Baxter will
purchase, upon Cerus' request, up to $9.5 million of Series B preferred stock
during the period from October 1, 1998 through September 30, 1999. The purchases
will be made at Cerus' sole option and may be made in a single tranche of $9.5
million or two tranches of $5.0 million and $4.5 million each, also at Cerus'
option. Each tranche becomes convertible into Cerus common stock one year after
the purchase of the Series B preferred stock tranche at the average closing sale
price of Cerus' common stock 30 trading days prior to and including the trading
day that is two days before the closing date of the purchase. Upon Cerus'
completion of cumulative equity financings with parties other than Baxter in
excess of $20 million, the Series B preferred stock will earn a premium of 7%
per annum for a period not to exceed one year. Cerus has the right to redeem the
Series B preferred stock prior to conversion for a payment to Baxter equal to
the aggregate purchase price of the shares redeemed.
Cerus believes that its available cash balances, together with
anticipated proceeds of this offering, cash flows from existing Baxter and grant
arrangements, will be sufficient to meet its capital requirements for at least
the next eighteen months. These near-term capital requirements are dependent on
various factors including the development progress of Cerus' pathogen
inactivation systems; payments and equity investments by Baxter including the
Series B preferred stock should Cerus elect to cause such purchase; potential
deferral of the payment to Baxter of $8.3 million due on December 31, 1999 to
June 30, 2000; and costs related to creating, maintaining and defending Cerus'
intellectual property position. Cerus' long-term capital requirements will be
dependent on these factors in addition to Cerus' ability to raise capital
through public or private equity or debt financings or through additional
collaborative arrangements or government grants, the achievement of milestones,
regulatory approval and successful commercialization of Cerus' pathogen
inactivation systems and other products under development, competitive
developments and regulatory factors. Future capital funding transactions may
result in dilution to investors in Cerus. There can be no assurance that capital
will be available on favorable terms, if at all. There can be no assurance that
Cerus will be able to meet its capital requirements for this or any other
period.
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IMPACT OF THE YEAR 2000
The Year 2000 ("Y2K") issue is the result of computer programs using a
two-digit format, as opposed to four digits, to indicate the year. Such computer
systems will be unable to interpret dates beyond the year 1999, which could
cause a system failure or other computer errors, leading to disruptions in
operations.
Cerus has implemented a program to assess its exposure from Y2K related
failures in its internal systems and those of its significant suppliers. Cerus
has identified internal computer systems and software and instrumentation that
is critical to its operations and may be subject to the Y2K issue, such as
microprocessor-based analytical equipment. Based on its assessment to date,
Cerus has determined that it will be required to upgrade or replace a portion of
its software so that its computer systems will function properly with respect to
dates in the year 2000 and thereafter. Cerus estimates that costs associated
with the upgrade and conversion of existing computer software relating to the
Y2K issue will be less than $100,000. Cerus has contacted its significant
third-party suppliers, including Baxter, to assess their compliance with the Y2K
issue. There can be no assurance that costs will not exceed Cerus' estimate or
that other companies on which it relies will not experience Y2K issues that have
a material adverse effect on Cerus' operations. If Cerus is unable to upgrade
its systems and software for Y2K compliance or if third parties on which Cerus
relies are unable to operate fully due to a lack of Y2K compliance, Cerus'
operations may be materially adversely affected. Cerus does not currently have a
contingency plan in the event that Cerus' or its significant suppliers' systems
are not Y2K compliant.
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BUSINESS
OVERVIEW
Cerus is developing systems designed to improve the safety of blood
products by inactivating infectious pathogens. Cerus' systems prevent
replication of pathogens in platelets, FFP and red blood cells used for
transfusion and inhibit the white blood cell (leukocyte) activity that is
responsible for certain adverse immune and other transfusion-related reactions.
Because Cerus' systems are being designed to inactivate a broad array of
pathogens, Cerus' systems have the potential to reduce the risk of transmission
of pathogens for which testing currently is not performed. Cerus believes that
its systems also have the potential to inactivate new pathogens before they are
identified and before tests have been developed to detect their presence in the
blood supply.
Cerus' platelet pathogen inactivation system is in a Phase 3 clinical
trial in Europe and has completed a Phase 2 clinical trial in the United States.
In conjunction with the FDA, Cerus has determined the preliminary framework of
the protocol for a Phase 3 clinical trial in the United States. Cerus' FFP
pathogen inactivation program is in Phase 2 clinical trials in the United
States, and its red blood cell pathogen inactivation system is in Phase 1
clinical trials in the United States.
Cerus is conducting its platelet, FFP and red blood cell pathogen
inactivation product development and commercialization programs with Baxter
pursuant to agreements (the "Agreements") providing for development, manufacture
and marketing of pathogen inactivation systems for platelets, plasma and red
blood cells. The Agreements provide for Baxter and Cerus to generally share
development expenses, for Baxter's exclusive right and responsibility to market
the systems worldwide and for Cerus to receive a share of the gross profits from
the sale of the systems.
Cerus is developing a pathogen inactivation system to treat source
plasma, plasma that is used for fractionation. Unlike FFP, source plasma for
fractionation is generally collected from a paid donor pool and is processed
into various therapeutic components using a bulk manufacturing process. Cerus is
developing a pathogen inactivation system to treat source plasma prior to
processing the plasma into its therapeutic components.
Cerus is also developing a therapeutic process by which it can apply its
proprietary technology to improve the clinical outcomes of stem cell
transplantation procedures typically used in the treatment of various forms of
cancer, such as leukemia and lymphoma. Cerus believes its process may result in
improved donor engraftment while reducing the risk of generally fatal graft
versus host disease (GVHD). The process also may reduce the level of specificity
required in the matching between the donor and the recipient, which would
greatly increase the chances of a patient to find a suitable donor. Cerus has
recently received clearance to commence Phase 1 clinical trials of this
allogeneic cellular immunotherapy (ACIT) system in the United States.
INDUSTRY BACKGROUND
Blood Supply Market. Blood transfusions are required to treat a variety
of medical conditions, including anemia, low blood volume, surgical bleeding,
trauma, acquired and congenital bleeding disorders and chemotherapy-induced
blood deficiencies. Worldwide, over 90 million whole blood donations occur each
year. Approximately 40 million of those donations occur in North America,
Western Europe and Japan, the major geographical markets for Cerus' products.
Whole blood is composed of plasma, the liquid portion of blood
containing essential clotting proteins, and three cellular blood components:
platelets, red blood cells and white blood cells. Platelets are essential to
coagulation, while red blood cells carry oxygen to tissues and carbon dioxide to
the lungs. Leukocytes play a critical role in immune and other defense systems,
but can cause harmful transfusion-related immune reactions in, or transmit
disease to, transfusion recipients.
Blood collection centers periodically experience shortages of critical
blood components due to temporary increases in demand, reduced donor
availability during holiday periods and the limited shelf life
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of cellular blood components. To efficiently allocate the limited available
blood supply and to optimize transfusion therapy, essentially all donated blood
is separated into platelets, plasma and red blood cells. These blood components
are obtained either by manually processing donor units of whole blood or by
apheresis, a process in which a specific blood component is collected from a
donor while the other components are simultaneously returned to the donor's
blood.
Patients requiring transfusions typically are treated with the specific
blood component required for their particular deficiency, except in cases of
rapid, massive blood loss, in which whole blood may be transfused. Platelets
often are used to treat cancer patients following chemotherapy or organ
transplantation. Red blood cells frequently are administered to patients with
trauma or surgical bleeding, acquired chronic anemia or genetic disorders, such
as sickle cell anemia. Plasma used for transfusions is stored in frozen form and
is referred to as fresh frozen plasma, or FFP. FFP generally is used to control
bleeding. Plasma also can be separated, or "fractionated," into different parts
that are used to expand blood volume, fight infections or treat diseases such as
hemophilia.
Blood Supply Contaminants. A primary goal of every blood collection
center is to provide blood components for transfusion that are free of viruses,
bacteria and protozoans. Despite recent improvements in donor screening and in
the testing and processing of blood, patients receiving blood transfusions still
face a number of significant risks from blood contaminants, as well as adverse
immune and other transfusion-related reactions induced by leukocytes. Viruses
such as hepatitis B (HBV), hepatitis C (HCV), human immunodeficiency virus
(HIV), cytomegalovirus (CMV) and human T-cell lymphotropic virus (HTLV) can
present life-threatening risks. In addition, bacteria, the most common agents of
transfusion-transmitted disease, can cause complications such as sepsis, which
can result in serious illness or death. Many other agents can transmit disease
during transfusion, including the protozoans that cause malaria and Chagas'
disease.
Infectious pathogens are not the only cause of adverse events arising
from the transfusion of blood components. Leukocytes present in a blood unit can
multiply after transfusion, mounting an often fatal graft versus host immune
response against the recipient. Similarly, alloimmunization, an immune response
that can develop from repeated exposure to transfused leukocytes, can
significantly reduce the efficacy of subsequent transfusions as a result of the
production of antibodies. Moreover, leukocytes themselves may harbor and
transmit bacteria and infectious viruses, such as HIV, CMV and HTLV.
Emerging and unidentified pathogens also present a threat to the blood
supply, a problem illustrated by the recent history of HIV. It is estimated that
HIV was present in the blood supply for at least seven years before it was
identified as the causative agent of AIDS and at least eight years before a test
was commercially implemented to detect the presence of HIV antibodies in donated
blood. During those years, many transfusion recipients were infected with the
virus, including approximately 70% of patients with severe hemophilia. Recently,
new variants of HIV and other viruses such as Transfusion Transmitted Virus
(TTV) and hepatitis G have been identified. Transfused blood is not routinely
tested for these emerging viruses, despite the potential risk to transfusion
recipients.
The risk of transmission of pathogens from an infected donor is
compounded by a number of factors. If a unit of blood contains an infectious
pathogen, dividing the blood into its components may expose three or more
patients to the pathogen in that unit. Blood products are commonly pooled from
several donors to form a single therapeutic dose, which increases the
recipient's risk of infection. Similarly, patient populations that require
frequent transfusions, such as patients with cancer, suppressed immune systems,
congenital anemias and kidney and liver disorders, experience a heightened risk
of infection due to multiple donor exposures.
Current Approaches to Address Blood Supply Contamination. Public
awareness in recent years of the significant rates of hepatitis, HIV and other
viral transmission from blood transfusions has led to expanded efforts to
improve the safety of the blood supply. For many years, the only approach
available to reduce the risk of transmission of diseases was donor screening
interviews. In addition to required donor screening, diagnostic tests have been
developed to detect the presence of certain infectious pathogens known to be
transmitted in blood. However, there remain a number of other blood-borne
pathogens for
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which tests have not been routinely administered or even developed. The table
below identifies the significant infectious pathogens known to be transmitted
through transfusions of platelets, FFP and red blood cells:
- ---------------------------------------------------------------------------------------------------------------
ROUTINELY SCREENED FOR IN
THE UNITED STATES
FAMILY INFECTIOUS PATHOGEN DISEASE YES NO
--------------------------------------------------------------------------------------------------------------
Hepatitis viruses HBV, HCV Hepatitis X
HEV, HGV Hepatitis X
Retroviruses HIV-1 and -2 AIDS X
HTLV-I and -II Malignant X
lymphoproliferative
disorders, neuropathy
Herpes viruses CMV CMV retinitis, hepatitis,
pneumonia X
EBV Epstein-Barr Syndrome X
HHV-8 Kaposi's Sarcoma X
Parvoviruses B19 Aplastic anemia X
Bacteria Gram negative, gram positive Sepsis X
Treponema pallidum Syphilis X
Borrelia burgdorferi Lyme disease X
R. richettsiae Rocky Mountain Spotted Fever X
E. chafeensis Ehrlichiosis X
Protozoans T. cruzi Chagas' disease X
B. microti Babesiosis X
L. donovani Leishmaniasis X
Plasmodium sp. Malaria X
- ---------------------------------------------------------------------------------------------------------------
Although donor screening and diagnostic testing of donated blood have
been successful in reducing the incidence of transmission of many of these known
pathogens, diagnostic testing has a number of limitations. As the preceding
table indicates, tests are currently performed for only a limited number of
blood-borne pathogens. Moreover, these tests occasionally fail, and human
errors, such as mistesting or mislabeling, further expose patients to
contaminated blood. All tests currently used in blood centers, with the
exception of the recently developed p24 antigen test for HIV-1 and the HBV
surface antigen test, are antibody tests, which are intended to detect
antibodies directed against a pathogen, rather than to detect the pathogen
itself. All of these tests can fail if performed during the "infectivity
window," that is, early in the course of an infection before antibodies or
antigens appear in detectable quantities. Similarly, tests for viral infection
may be ineffective in detecting a genetic variant of the virus that the test was
not developed to detect. For instance, certain strains of HIV, such as Subtype
O, are sometimes not detected in the standard HIV tests. Finally, there are no
current tests available to screen effectively for many emerging pathogens, and
testing cannot be performed for pathogens that have yet to be identified. As a
result of these limitations, a number of infectious pathogens still pass into
the blood supply.
In light of these continuing concerns, many patients have attempted to
mitigate the risks of transfusion through "autologous donation," donation of
their own blood for anticipated future use, or, where autologous donation is
impracticable, through the designation of donors such as family members.
Although autologous donations eliminate many risks, the blood collected is still
subject to the risk of bacterial growth during storage and is rarely available
in emergency situations or when a patient is chronically ill. In addition, the
statistical incidence of positive diagnostic test results from designated donor
blood has been found to be as high as in random donor blood.
Blood centers and health care providers have initiated additional
procedures in an effort to address pathogen transmission issues. For example,
platelet apheresis is sometimes used to limit donor exposure from pooled,
manually collected platelets. In addition, blood centers may quarantine single
donor
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plasma apheresis units until after the infectivity window has elapsed, followed
by confirmatory retesting of the donor, if the donor is available, to verify the
safety of the donated plasma. However, quarantined plasma can be unwieldy, and
the process is expensive and inventory is difficult to manage. Moreover, a
quarantine cannot be used with platelets and red blood cells because these
components have shelf lives that are shorter than the infectivity window related
to antibody production. Although no commercial processes are currently available
to eliminate pathogens in platelets and red blood cells, two pathogen
inactivation methods are used commercially for FFP, including treatment with
solvent-detergent and methylene blue. Because the solvent-detergent process
pools hundreds of units of plasma, the potential risk of transmitting pathogens
not inactivated by the process, such as parvovirus B19, is increased. Methylene
blue has not been shown to be effective in the inactivation of intracellular
viruses and bacteria.
The current method used by blood centers to inactivate leukocytes
utilizes gamma irradiation. This nonspecific method for inactivating leukocytes
has a narrow range of efficacy: insufficient treatment can leave viable
leukocytes in the blood, while excessive treatment can impair the therapeutic
function of the desirable blood components being transfused. Leukocyte depletion
by filtration decreases the concentration of leukocytes in transfusion units,
but does not inactivate or completely eliminate leukocytes.
Economic Costs of Blood Supply Contamination. In economically developed
countries, many of the tests and inactivation measures described above are
mandated by regulatory agencies, resulting in a safer and more uniform blood
supply, but also significantly increasing costs of processing and delivering
blood products.
Moreover, the development and widespread use of testing for many unusual
or low-incidence pathogens may not be cost-effective to undertake. For example,
the development of tests to detect the presence of all forms of harmful bacteria
would be extremely expensive. As a result, the only test regularly conducted to
detect the presence of bacteria is the test for the bacterium that causes
syphilis. With managed health care organizations and other third-party payors
increasingly challenging the cost of medical services performed, these cost
limitations may become more pronounced in the future.
The continuing risk of transmission of serious diseases through
transfusion of contaminated blood components from both known and unknown
pathogens, together with the limitations of current approaches to providing a
safe blood supply, have created the need for a new approach to pathogen
inactivation that is safe, easy to implement and cost-effective. To address this
need, a successful approach should have broad application in the effective
inactivation of clinically significant pathogens, whether or not currently
identified, while providing therapeutically functional blood components.
THE CERUS SOLUTION
Cerus is developing pathogen inactivation systems to improve the safety
of blood transfusions. These systems employ Cerus' proprietary small molecule
compounds. Studies conducted by Cerus have indicated the ability of these
compounds to inactivate a broad array of viral and bacterial pathogens that may
be transmitted in blood transfusions. Cerus believes that, as a result of the
mechanism of action of its proprietary technology, its systems also have the
potential to inactivate many new pathogens before they are identified and before
tests are developed to detect their presence in the blood supply. Because Cerus'
systems are being designed to inactivate rather than merely test for pathogens,
Cerus' systems also have the potential to reduce the risk of transmission of
pathogens that would otherwise remain undetected by testing.
Cerus' inactivation compounds act by preventing the replication of DNA
or RNA. Platelets, FFP and red blood cells do not contain nuclear DNA or RNA.
When the inactivation compounds are introduced into the blood components for
treatment, they cross bacterial cell walls or viral membranes, then move into
the interior of the nucleic acid structure. When subsequently activated by an
energy source, such as light, the compounds bind to the nucleic acid of the
viral or bacterial pathogen, preventing replication of the nucleic acid. This
process prevents infection because a virus, bacteria or other pathogenic cell
must replicate in order to cause infection. The Cerus compounds react in a
similar manner with the nucleic acid in leukocytes. This interaction inhibits
the leukocyte activity that is responsible for certain
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adverse immune and other transfusion-related reactions. These compounds are
designed to react with nucleic acid only during the pathogen inactivation
process and not after the treated blood component is transfused. The systems are
also designed to reduce the amount of unbound, or residual, inactivation
compound and breakdown products of the inactivation process prior to
transfusion.
Cerus' pathogen inactivation systems are being designed to integrate
into current blood collection, processing and storage procedures. Furthermore,
Cerus believes that the use of its pathogen inactivation products could, over
time, lead to a reduction in the use of certain costly procedures that are
currently employed in blood component transfusions, such as gamma irradiation,
CMV testing and leukocyte filtration.
CERUS STRATEGY
Cerus' objective is to improve the safety of blood products by becoming
the global leader in the development and commercialization of systems to
inactivate pathogens in blood components used for transfusions and for
fractionation into derivative blood products. Currently, the blood supply is
protected by screening and testing. Cerus is developing systems designed to
augment current methods by providing comprehensive inactivation of blood-borne
pathogens. Cerus' compounds target and bind with DNA and RNA, thereby preventing
the pathogens from replicating and causing infection. Using this approach, the
Cerus systems have the ability to inactivate a broad array of pathogens
including emerging pathogens, such as HIV and hepatitis C in the 1980s, prior to
the development of screening and testing methods. Key elements of Cerus'
strategy to achieve this objective are the following:
Establish Pathogen Inactivation Systems as the Standard of Care. The
target customers for Cerus' blood component treatment systems are the
approximately 105 community blood center organizations that collect
approximately 85% of blood in the United States. There is an even greater
concentration among blood centers in foreign countries. To achieve its objective
of establishing its systems as the standard of care, Cerus has developed strong
relationships with prominent transfusion medicine experts in a number of these
centers as well as in the broader medical communities worldwide. Cerus intends
to work with these experts to identify specific needs in blood component
treatment technology and to encourage support for the adoption of its pathogen
inactivation systems as the standard of care.
Leverage Expertise and Core Technology. Cerus is using its broad
expertise in nucleic acid chemistry to develop proprietary compounds designed to
inactivate infectious pathogens in blood components. Cerus has first sought to
gain regulatory approval and commercialize its platelet pathogen inactivation
system. Cerus' strategy is to build on its core technology and experience gained
in developing its platelet pathogen inactivation system to develop its FFP and
red blood cell pathogen inactivation systems. Cerus believes that, if regulatory
approval of its first product is obtained, market penetration achieved by such
product may facilitate the entry into the market of its other products. In
addition, Cerus believes that its platform technology has potential application
in a number of health and research-related fields beyond the initial areas
targeted by Cerus. Cerus further believes that it can leverage its development
activities and expertise relating to its FFP pathogen inactivation system to
develop a pathogen inactivation system for source plasma. In addition, Cerus
believes that its nucleic acid-targeting platform technology has potential
application in a number of health and research-related fields, such as bone
marrow transplantation and restenosis, which are beyond the initial area of
pathogen inactivation targeted by Cerus.
Use Strategic Alliances. Cerus has received significant development
funding from Baxter, and intends to capitalize on Baxter's manufacturing,
marketing and distribution expertise and resources. Cerus believes that Baxter's
established position as a manufacturer and leading supplier of devices,
disposables and other products related to the transfusion of human blood
products can provide Cerus with access to an established marketing, sales and
distribution network. The pathogen inactivation systems are being designed to
integrate into Baxter's current product line and into current blood collection,
processing and storage processes. Cerus has entered into an agreement for
development of its source plasma program with the Consortium, an industry group
funded by several large plasma fractionators with a charter to improve
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the safety of plasma fractionation products. Under this agreement, the
Consortium will provide development funding and technical assistance in the
development of the source plasma system. Cerus intends to continue to develop
its products together with partners that can provide direct funding and
manufacturing, marketing and distribution resources and expertise.
Protect and Enhance Proprietary Position. Cerus believes that the
protection of its proprietary technologies is important to its business
prospects and that its intellectual property position may create competitive
barriers to entry into the blood component treatment market. Cerus currently
holds issued and allowed patents covering a number of fundamental aspects of
Cerus' blood component treatment system technology. Cerus intends to continue to
pursue its patent filing strategy and to vigorously defend its intellectual
property position against infringement.
PRODUCT DEVELOPMENT
Cerus is developing treatment systems to inactivate infectious pathogens
in platelets, FFP, red blood cells and plasma for fractionation and to
inactivate leukocytes to reduce the risk of certain adverse transfusion-related
reactions. The following table identifies Cerus' product development programs:
- ------------------------------------------------------------------------------------------------------------------
THERAPEUTIC CERUS PRODUCT INACTIVATION DEVELOPMENT
PROGRAM INDICATION IN DEVELOPMENT COMPOUND STATUS
-----------------------------------------------------------------------------------------------------------------
Platelets Surgery, cancer Platelet Pathogen S-59 Phase 1 and 2 Clinical
chemotherapy, Inactivation System Trials completed;
transplantation, Phase 3 Clinical Trial
bleeding disorders enrollment commenced in
Europe in June 1998;
Phase 3 Clinical Trial
protocol currently under
discussion with the FDA
Plasma (FFP) Surgery, FFP Pathogen S-59 Phase 1 Clinical Trial
transplantation, Inactivation System completed;
bleeding disorders Phase 2a Clinical Trial
completed;
Phase 2b Clinical Trial
enrollment commenced in
February 1999 in the United
States
Red Blood Cells Surgery, Red Blood Cell S-303 Phase 1a Clinical Trial
transplantation, Pathogen commenced in November 1998;
anemia, cancer Inactivation System Phase 1b Clinical Trial
chemotherapy, trauma enrollment commenced in
February 1999
Plasma for Coagulation factor Source Plasma -- Identifying compounds
Fractionation and immunoglobulin Pathogen
deficiencies, blood Inactivation System
volume expansion
Allogeneic Cellular Allogeneic bone Leukocyte Treatment S-59 IND in effect
Immunotherapies marrow transplant to Systems
(ACIT) treat leukemia and
lymphoma
- ------------------------------------------------------------------------------------------------------------------
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Clinical Trial Design. Cerus conducts clinical trials using several
designs. In a controlled study, treated and untreated blood components are
administered to subjects who are randomly assigned to either a test group or a
control group, and the results are compared. In a cross-over study, each subject
receives both treated and untreated blood components in random order. To avoid
bias in reporting side effects, studies are usually blinded. In a single-blind
study, subjects are not told whether they are receiving treated or untreated
blood components. In a double-blind study, neither the subject (patient) nor the
investigator (physician) knows whether the subject is receiving treated or
untreated blood components.
PLATELET PROGRAM
Platelet Usage and Market. Platelets are cellular components of blood
that are an essential part of the clotting mechanism. Platelets facilitate blood
clotting and wound healing by adhering to damaged blood vessels and to other
platelets. Platelet transfusions are used to prevent or control bleeding in
platelet-deficient patients, such as those undergoing cancer chemotherapy or
organ transplant. Transfusion units of platelets are obtained either by
combining the platelets from four to six whole blood donations (pooled random
donor platelets), or in an automated procedure in which a therapeutic dose of
platelets is obtained from a single donor (apheresis or single donor platelets).
A principal motivation for platelet apheresis is to limit donor exposure from
pooled, manually collected platelets. Platelet transfusions may also require one
or more additional procedures with additional costs. Cerus believes that its
platelet pathogen inactivation system may reduce the need for many of these
procedures and the motivation for single donor apheresis platelets.
Cerus estimates the production of platelets in 1998 to have been 1.4
million transfusion units in North America, 1.3 million transfusion units in
Western Europe and 700,000 transfusion units in Japan. In the United States,
based on a study of six blood centers conducted in October 1998 on behalf of
Cerus (the "Cost Study"), the estimated base cost for a transfusion unit of
apheresis platelets ranges from approximately $400 to $550 and for a transfusion
unit of random donor platelets ranges from approximately $170 to $330. These
estimates include donor screening and diagnostic tests, such as those for HIV,
HTLV, HBV and HCV. Blood centers may also charge up to $210 per unit for
additional procedures such as gamma irradiation and CMV screening. The table
below indicates, based on the Cost Study, the estimated range of costs for the
additional procedures for platelet transfusions described above for each of
apheresis and random donor platelet transfusion units. The frequency of use and
additional charge for each procedure vary widely.
ADDED COST PER
------------------------------------
APHERESIS RANDOM DONOR
PROCEDURE TRANSFUSION UNIT TRANSFUSION UNIT
- --------- ---------------- ----------------
Gamma irradiation.................................... $10 to $ 50 $60 to $210
CMV screening........................................ $15 to $ 35 $90 to $210
Leukocyte filtration................................. $32 to $ 60 $32 to $ 60
Of those procedures performed at blood centers, the maximum aggregate
estimated costs in the study ranged from approximately $400 to $690 for each
apheresis transfusion unit and from approximately $230 to $630 for each random
donor transfusion unit.
Platelet Pathogen Inactivation System. Cerus' platelet pathogen
inactivation system applies a technology that combines light and Cerus'
proprietary inactivation compound, S-59, which is a synthetic small molecule
from a class of compounds known as psoralens. Cerus conducted preclinical
studies to assess safety and ability of psoralen derivatives to inactivate
pathogens and leukocytes while preserving platelet function. As a result, Cerus
selected S-59 from over 100 psoralen derivatives.
When illuminated, S-59 undergoes a specific and irreversible chemical
reaction with nucleic acid. This chemical reaction renders the genetic material
of a broad array of pathogens and cells incapable of replication. A virus,
bacteria or other pathogenic cell must replicate in order to cause infection. A
similar reaction with leukocyte nucleic acid inhibits the leukocyte activity
that is responsible for certain adverse
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immune and other transfusion-related reactions. Most of the S-59 is converted to
breakdown products during and after the inactivation reaction. Studies conducted
by Cerus with preclinical models have indicated that, following transfusion, the
unbound S-59 and its unbound breakdown products are rapidly metabolized and
excreted. As a further safety measure, the system under development employs a
removal process designed to reduce the amount of residual S-59 and unbound
breakdown products prior to transfusion (the S-59 reduction device or SRD).
Cerus' platelet pathogen inactivation system, developed with Baxter, has
been designed for use in the blood center setting. The system consists of a
disposable processing set, containing the S-59 compound and the SRD, and an
illumination device to deliver light to trigger the inactivation reaction. The
current configuration of the platelet photochemical treatment system under
development involves the collection of the platelets, as normally performed, but
with two-thirds of the plasma replaced by a platelet additive solution (PAS III)
followed by transfer of the platelets to a disposable treatment container with
the S-59 compound. The mixture of S-59 and platelets is then illuminated for
approximately three minutes. The final step employs the SRD, a passive
adsorption device, to reduce the amount of residual S-59 and unbound S-59
breakdown products. Following the SRD treatment, which takes approximately six
hours, the platelets are transferred to the final storage container. Cerus
believes that, in order to manufacture the SRD for its platelet pathogen
inactivation system on a commercial scale, it will need to modify the SRD
configuration and the related manufacturing process. Cerus currently is pursuing
such modification. There can be no assurance that use of a reconfigured SRD will
not cause Cerus to have to conduct additional clinical studies or otherwise to
experience delays in the approval process.
Development Status. Cerus' platelet pathogen inactivation system is in
Phase 3 clinical trials in Europe and has completed Phase 2 clinical trials in
the United States. In consultation with the FDA, Cerus has determined the
preliminary framework governing its Phase 3 clinical trial in the United States.
In vitro and animal model studies conducted by Cerus have indicated the efficacy
of Cerus' platelet pathogen inactivation system for the inactivation of a broad
array of viral and bacterial pathogens transmitted through blood transfusions,
including HIV, CMV, hepatitis and several strains of bacteria. Cerus has tested
these pathogens at concentrations that it believes are present in contaminated
platelet concentrates. There can be no assurance that contamination levels will
never exceed the capacity of Cerus' platelet pathogen inactivation system.
Similar in vitro studies have indicated inhibition of leukocyte
activity, including the synthesis of certain proteins associated with adverse
toxic reactions. A primate study conducted by Cerus in collaboration with the
National Institutes of Health indicated that platelet concentrates contaminated
with high levels of hepatitis B virus or hepatitis C virus, treated with Cerus'
pathogen inactivation system, did not transmit the viruses to susceptible
animals. In addition, three studies conducted by Cerus have indicated that use
of the platelet pathogen inactivation system prevented graft-versus-host disease
in two preclinical mouse models. Because of the mechanism of action of its
platelet pathogen inactivation system, Cerus believes that its platelet system
may also inactivate protozoans in platelets. Psoralens other than S-59 have been
shown to inactivate protozoans in cell culture media. However, to date Cerus has
conducted no studies on protozoans with S-59 in platelets, and there can be no
assurance that Cerus' platelet pathogen inactivation system would effectively
inactivate protozoans. To develop a comprehensive safety profile, Cerus intends
to continue to perform preclinical safety studies of its S-59 psoralen compound.
Planned studies include reproductive toxicology studies, three month
tolerability studies and a p53 genotoxicity study in mice.
Cerus' platelet pathogen inactivation system contains three new
components not previously tested in humans: the inactivation compound S-59, a
synthetic platelet additive solution (PAS III) and the SRD. In the initial Phase
1a trial, Cerus compared platelets treated with the pathogen inactivation system
(without the SRD) with non-photochemically treated platelets suspended in the
new PAS III solution and stored in the new PL 2410 plastic container developed
by Baxter, rather than with standard platelets prepared in plasma and stored in
a currently approved container.
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The Phase 1a trial, completed in March 1996, was a single-blind,
randomized study in 23 healthy human subjects divided between two sites. This
study used a cross-over design in which all subjects received both treated and
untreated platelets. The study compared the proportion of transfused platelets
circulating in the first hours after transfusion (post-transfusion recovery) and
the length of time the transfused platelets circulate in the recipient's
bloodstream (lifespan) of a small volume of five-day-old treated and untreated
platelets. Under current FDA regulations, platelets may not be stored for more
than five days after collection from the donor. This pilot study was conducted
without the use of the SRD, which was evaluated in Phase 2a.
In September 1996, a Phase 1b single-blind, randomized, cross-over study
was completed in 10 healthy human subjects. This study compared the tolerability
and safety of photochemically treated platelets processed with the SRD with
untreated platelets. This second study involved the transfusion of full
therapeutic doses of platelets given at the maximum tolerable transfusion rate.
No adverse events attributable to transfusion with the treated platelets were
reported. Post-transfusion levels of S-59 in plasma and clearance of S-59 were
measured. This clinical data, together with Cerus' preclinical data, reflected
acceptable safety margins.
In November 1996, Cerus completed a Phase 2a clinical study designed to
measure the post-transfusion platelet recovery and lifespan of photochemically
treated platelets processed with the SRD and stored for five days. This study
was conducted in 16 healthy subjects from the Phase 1a study to permit
comparisons with prior results. Post-transfusion recovery and lifespan of
five-day-old standard platelets varies widely, even in healthy individuals. As a
result, there is no established regulatory or clinical standard for
post-transfusion recovery and lifespan of platelets. In Cerus' Phase 2a clinical
study report, the average post-transfusion recovery of five-day-old platelets
treated with Cerus' platelet pathogen inactivation system was lower than that of
the untreated five-day-old platelets. Although this difference was statistically
significant, the average post-transfusion recovery was within the range of
average recoveries reported in most published studies funded by NIH and Baxter,
as well as in a number of other studies reported in the scientific literature.
These published studies used currently approved processing and storage systems.
In addition, in Cerus' clinical study, the average lifespan of treated platelets
was shorter than that of untreated platelets. Although this difference was
statistically significant and the average lifespan was lower than the range of
average untreated platelet lifespans reported in the published studies referred
to above, the average lifespan was within the distribution of ranges of
untreated platelet lifespans reported in such studies. The clinical
investigators reported no adverse events attributable to transfusion with the
treated platelets.
Cerus completed a Phase 2b clinical trial in 1997 using 15 healthy
subjects available from the Phase 2a clinical trial to assess the combined
effect of treatment with the platelet pathogen inactivation system and gamma
irradiation on post-transfusion platelet recovery and lifespan. The mean
platelet recovery and life span data collected in Phase 2b were consistent with
those of the 2a study, and fell within the range of published studies of
currently approved platelet concentrates. The clinical investigators reported no
adverse events attributable to transfusion with the treated platelets. Cerus
believes, based on discussions with the FDA, that the post-transfusion recovery
and lifespan of platelets following treatment with Cerus' platelet pathogen
inactivation system are clinically acceptable.
Based on the results of the Phase 2a and 2b clinical trials, Cerus
submitted a protocol to the FDA for a Phase 3, controlled, randomized clinical
study of treated apheresis platelets in patients requiring platelet
transfusions. Cerus reviewed the protocol with FDA and agreed to perform a Phase
2c pilot study in approximately 15 platelet-deficient patients prior to
initiating a larger Phase 3 trial. The Phase 2c trial was a double-blind,
controlled, randomized, cross-over study in which double dose platelet
transfusions were given to platelet-deficient patients and post-transfusion
platelet count increment and bleeding time correction were measured. The results
of this pilot Phase 2c clinical trial, given its small size, were of limited
statistical power.
Cerus closed the Phase 2c study in 1998 after 18 severely
platelet-deficient patients completed the Phase 2c trial. No serious adverse
events were directly attributed to the treated platelets used in the
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Phase 2c study. Furthermore, the double therapeutic doses of treated platelets
were well-tolerated by the patients in the study. Based on the results of the
study, Cerus has concluded its Phase 2 studies.
Based on the results of the Phase 1 and 2 clinical trials, Cerus
submitted a protocol synopsis to FDA for a Phase 3 randomized clinical study of
treated apheresis donor platelets in patients requiring platelet transfusions.
Based on discussions with the FDA following the submission, Cerus believes that
the multiple site trial will be a randomized, controlled study designed to
evaluate the ability of platelets treated with Cerus' pathogen inactivation
system to control clinical bleeding. While the details of the final protocol are
not complete, Cerus believes the United States Phase 3 trial will enroll
approximately 600 patients, who will receive either treated or untreated
platelets for a specified period of time. The primary endpoint to be evaluated
is the clinical severity of bleeding.
The Phase 3 United States apheresis clinical trial is designed to assess
the therapeutic efficacy of platelets treated with the pathogen inactivation
system for apheresis platelets. In order to obtain FDA approval of the platelet
pathogen inactivation system for use in treating pooled random donor platelets,
Cerus may be required by the FDA to conduct additional clinical studies. Because
of the risk of bacterial growth, current FDA rules require that pooled platelets
be transfused within four hours of pooling and, as a result, most pooling occurs
at hospitals. However, Cerus' platelet pathogen inactivation system is intended
to be used at blood centers, not at hospitals, and requires a processing time of
approximately six hours. Therefore, in order for Cerus' platelet pathogen
inactivation system to be effectively implemented and accepted at blood centers
using pooled random donor platelets, the FDA-imposed limit on the time between
pooling and transfusion would need to be lengthened or eliminated for pooled
random donor platelets treated with Cerus' systems, which are being designed to
inactivate bacteria that would otherwise contaminate the platelets.
In 1998, Cerus submitted a protocol to the ethical committees of
institutions in four European countries to conduct a European Phase 3 clinical
trial of treated pooled random donor platelets in approximately 100 patients
requiring platelet transfusions. The random donor platelets are collected using
the Buffy Coat process, which is commonly used in Europe to prepare platelet
concentrates from whole blood. The primary endpoint in these studies is the
increase in post-transfusion platelet count. Enrollment in this trial commenced
in June 1998. The European Buffy Coat clinical trial is a randomized, controlled
study designed to assess the therapeutic efficacy of platelets treated with the
pathogen inactivation system for pooled random donor platelets.
FFP PROGRAM
FFP Usage and Market. Plasma is a noncellular component of blood that
contains coagulation factors and is essential for maintenance of intravascular
volume. Plasma is either separated from collected units of whole blood or
collected directly by apheresis. The collected plasma is then packaged and
frozen to preserve the coagulation factors. Some of the frozen plasma is made
available for fractionation, while some is designated for use as FFP. FFP is a
source of all blood clotting factors except platelets and is used to control
bleeding in patients who require clotting factors, such as patients undergoing
transplants or other extensive surgical procedures, patients with chronic liver
disease or certain genetic clotting factor deficiencies.
Cerus estimates the production of FFP in 1998 to have been 3.3 million
transfusion units in North America, 3.0 million transfusion units in Western
Europe and 2.0 million transfusion units in Japan. In the Cost Study, the
estimated base price of a 250 ml transfusion unit of FFP in the United States
ranges from approximately $26 to $55. In comparison, donor retest procedures
have a $56 to $110 added cost per transfusion unit, and solvent detergent
pathogen inactivation is priced at approximately $125 per transfusion unit. A
typical therapeutic transfusion consists of four transfusion units of FFP.
FFP Pathogen Inactivation System. The pathogen inactivation system for
FFP uses the same S-59 psoralen compound and illumination device and an SRD
similar to that being used by Cerus in its clinical trials for its platelet
pathogen inactivation system. The FFP pathogen inactivation system is compatible
with plasma collected either manually or by apheresis. In the Cerus system, FFP
is transferred
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to a disposable container with S-59. The mixture of S-59 and FFP is then
illuminated for approximately three minutes. In the final step, the treated FFP
is then transferred through a flow SRD, a passive adsorption device designed to
reduce the amount of residual S-59 and unbound S-59 breakdown products, into the
final storage container and is frozen in accordance with standard protocols.
FFP Development Status. Cerus' FFP pathogen inactivation system
currently is in Phase 2 clinical trials in the United States. A Phase 2a trial
in healthy subjects has been completed, and Cerus has commenced enrollment in a
Phase 2b patient study.
In vitro studies conducted by Cerus to date have indicated the efficacy
of the FFP pathogen inactivation system for the inactivation in FFP of a broad
array of viral pathogens transmitted through blood transfusion. Because of the
mechanism of action of its FFP pathogen inactivation system, Cerus believes that
its system may also inactivate protozoans and inhibit leukocyte activity.
Although bacterial contamination in FFP is typically not as significant a
problem as in platelets, Cerus believes that the FFP pathogen inactivation
system will inactivate bacteria at the levels typically found in FFP. To date,
Cerus has conducted no studies on protozoans or to detect inhibition of
leukocyte activity in FFP and only limited studies on bacteria in FFP which do
not satisfy good laboratory practice standards. There can be no assurance that
Cerus' FFP pathogen inactivation system would effectively inactivate protozoans,
leukocytes or bacteria. Cerus has assessed the impact of S-59 photochemical
treatment on the function of plasma proteins. Plasma derived from whole blood or
apheresis must be frozen within eight hours of collection to meet the standard
as "fresh frozen plasma." After freezing, FFP may be stored for up to one year,
thawed once, and must be transfused within four hours of thawing. Cerus has
measured the in vitro coagulation function activity of various clotting factors
in FFP after photochemical treatment, SRD treatment, freezing and thawing. Cerus
believes that in vitro data from these studies indicate that treated FFP
maintained adequate levels of coagulation function for FFP. These results are
not necessarily indicative of coagulation function that may be obtained in
clinical trials, and there can be no assurance that the FDA or foreign
regulatory authorities would view such levels of coagulation function as
adequate.
In July 1997, Cerus completed a Phase 1 clinical study in healthy
subjects that demonstrated the safety and tolerability of FFP treated with the
pathogen inactivation system as well as the comparability of post-transfusion
coagulation factors between subjects transfused with treated and untreated FFP.
In November 1998, Cerus completed a Phase 2a clinical trial. In this study, 27
healthy subjects donated plasma. The Phase 2a study showed that post-transfusion
coagulation factor levels of subjects receiving FFP treated with Cerus'
S-59-based FFP pathogen inactivation system were comparable to those of subjects
receiving untreated FFP. There were no safety issues attributable to transfusion
of the treated FFP.
Based on the results of the Phase 1 and Phase 2a clinical trials, Cerus
submitted a protocol to the FDA for a Phase 2b patient clinical trial of its FFP
pathogen inactivation system. The FDA cleared Cerus to proceed with a
controlled, double-blind trial in approximately 10 patients diagnosed with
chronic liver diseases. Each patient will receive a therapeutic dose of up to
two liters of either treated or untreated FFP. Correction of patients' blood
clotting time and certain coagulation factor levels after transfusion will be
recorded and compared. The FDA did not require this small study for entry into
Phase 3. Cerus initiated this study as a pilot study to evaluate the logistics
of a larger Phase 3 study of similar design in patients with chronic liver
disease. Cerus has submitted a proposal to the FDA for three Phase 3 studies
which it believes will be required for regulatory approval of the S-59 FFP
pathogen inactivation system. These studies are: an open-label study in 35
patients with congenital coagulation factor deficiencies treated with S-59 FFP;
a prospective, randomized, controlled study of treated versus untreated FFP
treatment of 24 patients with a disease called thrombotic thrombocytopenic
purpura (TTP); and a double-blind, randomized, controlled, trial of treated
versus untreated FFP in treatment of 120 patients with chronic liver disease and
other acquired coagulation factor deficiencies requiring FFP transfusions. While
Cerus has held discussions with the FDA regarding the design and scope of these
studies, Cerus has received no assurance from the FDA that these studies will be
the only Phase 3 studies required for regulatory approval of S-59 FFP.
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RED BLOOD CELL PROGRAM
Red Blood Cell Usage and Market. Red blood cells are essential
components of blood that carry oxygen to tissues and carbon dioxide to the
lungs. Red blood cells may be transfused as a single treatment in surgical and
trauma patients with active bleeding or on a repeated basis in patients with
acquired anemia or genetic disorders, such as sickle cell anemia, or in
connection with chemotherapy.
Cerus estimates the production of red blood cells in 1998 to have been
10.7 million transfusion units in North America, 12.2 million transfusion units
in Western Europe and 3.0 million transfusion units in Japan. The Cost Study
indicated that the estimated base cost of a transfusion unit of red blood cells
in the United States ranges from approximately $66 to $93. A typical red blood
cell transfusion consists of two or more red blood cell transfusion units. As
shown in the Cost Study, a red blood cell transfusion may also require one or
more additional procedures with additional costs ranging from $10 to $164 for
each procedure. The procedures are used to address problems presented by
leukocytes and to conduct pathogen diagnostic testing beyond the standard
testing.
PROCEDURE ADDED COST PER UNIT
- --------- -------------------
Gamma irradiation......................... $10 to $ 50
CMV screening............................. $15 to $ 35
Leukocyte filtration...................... $22 to $ 57
Designated donor.......................... $ 0 to $114
Autologous donor.......................... $30 to $164
Red Blood Cell ALE Treatment System. Cerus has developed a system for
pathogen inactivation in red blood cells using a compound that binds to nucleic
acid in a manner similar to that of S-59-based systems, but does not require
light. Cerus' method for inactivating pathogens in red blood cells is based on a
proprietary anchor-linker-effector (ALE) compound, S-303, a small molecule
synthesized by Cerus. The selection of S-303 was based on preclinical studies of
over 100 ALE compounds synthesized by Cerus to assess safety and ability to
inactivate pathogens and leukocytes, while preserving red blood cell survival
and function.
The red blood cell ALE treatment system, which is being co-developed
with Baxter, is being designed to be compatible with current processing
practices and to be compatible with both manual and automated red blood cell
collection systems.
Development Status. Cerus' red blood cell pathogen inactivation system
is in Phase 1 clinical trials in the United States.
In vitro studies by Cerus have indicated the efficacy of the ALE process
for the inactivation of a broad array of viral and bacterial pathogens with
preservation of red blood cell function. Because of the mechanism of action of
its red blood cell ALE treatment system, Cerus believes that its system may also
inactivate protozoans and inhibit leukocyte function. However, Cerus has
conducted no studies on protozoans or to detect inhibition of leukocyte activity
in red blood cells, and there can be no assurance that Cerus' red blood cell
system would be effective to inactivate protozoans or leukocytes. Cerus is
currently conducting toxicology and pathogen inactivation validation studies
consistent with good laboratory practice standards on its red blood cell
pathogen inactivation system.
In November 1998, Cerus commenced a Phase 1a clinical trial of the S-303
red blood cell pathogen inactivation system. The Phase 1a trial is a controlled,
randomized study in 40 healthy subjects to compare the post-transfusion recovery
of red blood cells prepared using the S-303 treatment to those prepared using
standard methods. In February 1999, Cerus commenced enrollment in a Phase 1b
trial designed to measure red blood cell viability after repeated administration
of S-303 treated red blood cells. Cerus anticipates that it will conduct a Phase
1c trial to evaluate the safety and tolerability of escalating doses of S-303
treated red blood cells. There can be no assurance as to whether the Phase 1a,
1b or 1c trials will be successful or as to the timing of these studies or the
acceptance of the design of the Phase 1c study or any later studies by the FDA.
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SOURCE PLASMA PROGRAM
Cerus believes that the technology it has developed for FFP may have
application in the decontamination of pooled plasma which is separated into
commonly used plasma components or fractions (fractionation). These factors
include Factor VIII concentrate, Factor IX concentrate, albumin and
immunoglobulins. Worldwide, approximately 11 million liters of plasma are
collected and fractionated annually for treatment of a variety of coagulation
factor and immunoglobulin deficiencies. Annual sales of blood products derived
from this fractionation process are estimated to be approximately $5.0 billion.
The market is highly concentrated, with four manufacturers providing the
majority of products derived from human plasma. The plasma is collected from
either dedicated collection facilities as source plasma, or obtained from blood
banks as recovered plasma, or FFP that is not used for transfusion. Plasma is
pooled and then processed into several specialized plasma protein fractions used
to treat diseases such as hemophilia and immune deficiency.
The pooling of 5,000 to 10,000 liters, typical for the fractionation
process, introduces the risk of contamination of thousands of blood products
with the inadvertent use of one contaminated unit. In the early 1980's, such
occurrences resulted in the transmission of HIV to 70% of the hemophiliac
community. Subsequent to this event, the FDA has mandated an improvement in the
pathogen inactivation methods used during processing to reduce the risk of
transmission of infectious pathogens through use of blood products derived from
source plasma. Further, regulatory agencies worldwide are also moving towards
the requirement for two decontamination processing steps for all manufactured
components. Today, a variety of inactivation procedures are used for one or more
of the fractionated components during the processing, however, there is no
up-front treatment of plasma prior to the commencement of the fractionation
process.
Source Plasma Pathogen Inactivation System. Cerus believes that its
proprietary pathogen inactivation technologies may have application in the
treatment of source plasma. Cerus believes that a system similar to the system
under development for FFP may be used to treat source plasma prior to the
pooling step in the fractionation process. This would potentially provide a
pathogen inactivated raw material which would improve the safety of all product
derived downstream in the fractionation process. Such a process also has the
potential to reduce the risk of worker exposure to pathogens during and after
the pooling process.
Agreement with the Consortium for Plasma Science. In December 1998,
Cerus and the Consortium entered into an agreement for the development of a
pathogen inactivation system for source plasma. The Consortium is co-funded by
four plasma fractionation companies: Alpha Therapeutics Corporation, Bayer
Corporation, Baxter Healthcare Corporation and Centeon. Under the agreement, the
Consortium will fund development of Cerus' proprietary technology for use with
source plasma subject to an annual review process and Cerus will pay the
Consortium a royalty based on a percentage of product sales, if any.
ACIT PROGRAM
Cerus believes its proprietary technology may have application in
treating white blood cells which are transfused during stem cell (blood-forming)
transplantation procedures used to treat certain cancers such as lymphoma and
leukemia. Cerus has conducted preclinical studies which have indicated that
donor white blood cells treated with its technology may reduce the risk of
serious complications and may also improve the availability and success rate of
bone marrow transplantation.
Stem Cell Transplantation. Stem cells used for transplantation can be
harvested from either bone marrow or circulating blood. ACIT uses donor
leukocytes which are transfused to improve immune function in patients whose
immune systems have been weakened by disease or disease-related therapies such
as chemotherapy and radiation therapy. A typical application is following a bone
marrow or stem cell transplantation, which are used principally in leukemia and
lymphoma patients to reconstitute blood-forming cells after chemotherapy or
radiation therapy to kill leukemia and lymphoma cells. The stem cells are
collected from the patient (autologous transplantation) or from a
closely-matched donor (allogeneic transplantation). Autologous transplantation
is typically safer but is not a curative therapy and often results
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in a relapse of the disease. Allogeneic transplantation can be curative, but
carries significant risk of complications such as GVHD and viral and bacterial
infections which often lead to the patient's death. GVHD is nearly always fatal
and occurs when the donor leukocytes recognize the patient's body as foreign and
proliferate and attack the patient's healthy tissue. Allogeneic transplantation
also requires very close matching between the donor and the patient. Often,
patients die from the progression of disease while awaiting transplantation from
a matched donor.
Stem Cell Transplantation Market. Bone marrow and stem cell
transplantation are emerging as the primary treatments for many patients
diagnosed with a variety of advanced malignant diseases. Typical diseases for
which this therapy is used include chronic and acute leukemias and non-Hodgkin's
lymphoma where first line therapies such as chemotherapy have not been
effective. Each year over 200,000 new cases of these diseases are diagnosed.
Donor Leukocyte Treatment System. Cerus believes that it can apply its
proprietary technology to slightly modify donor leukocytes to improve the
engraftment of donor stem cells and the reconstitution of a patient's immune
system while greatly reducing the risk of GVHD. Cerus is developing a system
designed to treat the leukocytes in a way that will preserve their therapeutic
properties while eliminating their ability to proliferate and attack the
patient's healthy tissues. Cerus further believes that its technology can
increase a patient's chance of finding a suitable donor.
Development Status. In vitro and animal studies conducted by Cerus have
indicated that it can modulate the dosage of its proprietary technology to
slightly modify leukocytes in a way that has the potential to prevent the
leukocytes from proliferating while preserving their ability to aid engraftment
and to improve transplant outcomes. Cerus has also completed animal studies that
indicate that its technology can facilitate engraftment of donor stem cells,
which indicate the system has the potential to increase the number of patients
eligible to receive allogeneic transplants. In February 1999, Cerus received
clearance from the FDA to conduct a Phase 1 clinical study of its ACIT system
designed to treat allogeneic donor leukocytes with S-59 for use as supplemental
therapy in conjunction with mismatched bone marrow transplantation. The study is
designed to measure the tolerability, safety, and efficacy of S-59 treated
allogeneic leukocytes in approximately 30 patients receiving mismatched
allogeneic bone marrow transplants.
FUTURE PRODUCT DEVELOPMENT
Cerus believes that its proprietary technology may have applications
beyond inactivating pathogens in blood products and in modifying leukocytes to
improve clinical outcomes of cellular therapies. Cerus is currently researching
methods to apply its technology to prevent or inhibit restenosis, which can
restrict or occlude blood flow through arteries following surgery. Cerus is also
researching the application of its technology for the development of "universal"
red blood cells which will not require donor and recipient type matching. Such
immunologically-transparent red blood cells would improve outcomes of patients
who require repeated red blood cell transfusion to treat diseases such as
sickle-cell anemia.
ALLIANCE WITH BAXTER
Cerus has established an alliance with Baxter for the development of
pathogen inactivation systems for transfusion blood products. Under two primary
development, manufacturing and marketing agreements, Cerus and Baxter generally
share development costs with the primary development activity for the compounds
and the preclinical and clinical studies by Cerus and the primary development
activity for the system disposable and device at Baxter. Upon commercialization,
Cerus will be required to provide the inactivation compounds and Baxter will be
responsible for manufacturing and assembling the system disposables and
ultraviolet light devices. Baxter will also be responsible for marketing,
selling, and distributing the systems.
Agreement with Baxter for the development of pathogen inactivation
systems for platelets. In December 1993, Cerus entered into a development and
commercialization agreement with Baxter to develop a system for inactivation of
pathogens in platelets used for transfusions. The agreement was
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amended in December 1996 and June 1998. The amended agreement (the "Platelet
Agreement") provides for Baxter and Cerus to generally share system development
costs equally, subject to mutually agreed budgets established from time to time.
The June 1998 amendment provides for Cerus, beginning April 1, 1998, to fund
$5.0 million of development costs previously to be funded by Baxter. At the time
of the amendment, Baxter agreed to purchase $5.0 million of Series A convertible
preferred stock and agreed to make a $5.0 million cash milestone payment to
Cerus upon the approval by the FDA of an application to market products
developed under the platelet program or comparable approval in Europe or upon
termination of the platelet system development program. As part of the June 1998
amendment, Cerus increased its share of the adjusted product revenue from future
sales of the platelet system disposables from approximately 28.2% of adjusted
product revenue to approximately 33.5% in exchange for Cerus' agreement to pay
Baxter $8.3 million on June 30, 1999. Cerus may defer such payment for up to 12
months under certain circumstances.
Under the Platelet Agreement, Cerus has received a $1.0 million equity
investment from Baxter and has recognized approximately $13.8 million in revenue
from Baxter, including $3.0 million in license fees, $2.5 million in milestone
payments and approximately $8.3 million in development funding. License fees and
payments for achieved milestones are non-refundable and are not subject to
future performance. Development funding is in the form of balancing payments
made between Baxter and Cerus to adjust the relative spending of the companies
to the levels as agreed to by Baxter and Cerus.
Agreement with Baxter for the development of pathogen inactivation
systems for red blood cells and FFP. In April 1996, Cerus entered into a
development and commercialization agreement with Baxter, principally focused on
the development of plasma and red blood cell pathogen inactivation systems. The
agreement was amended in March 1998 and June 1998. The amended agreement (the
"RBC/FFP Agreement") provides for Baxter and Cerus generally to share red blood
cell system development costs equally, subject to mutually agreed to budgets
established from time to time. The RBC/FFP Agreement also provides for a sharing
of revenue from sales of red blood cell inactivation system disposables after
each party is reimbursed for its cost of goods and a specified percentage
allocation is retained by Baxter for marketing and administrative expenses.
Under the RBC/FFP Agreement, Cerus and Baxter equally funded the FFP
program development through December 31, 1997 after which time Baxter's funding
commitment for the FFP development program is limited to $1.2 million payable in
equal installments in January 1999 and January 2000. The RBC/FFP Agreement also
provides for Cerus to receive 75% and Baxter to receive 25% of revenue from
sales of FFP inactivation system disposables after each party is reimbursed for
its cost of goods and a specified percentage allocation is retained by Baxter
for marketing and administrative expenses. Under Cerus' direction, Baxter will
be responsible for manufacturing and marketing the FFP product, and will retain
its exclusive, worldwide distribution license.
Under the RBC/FFP Agreement, Cerus has received $14.0 million in equity
investments from Baxter and has recognized approximately $7.4 million in revenue
from Baxter to fund the development of the red blood cell and FFP systems.
Development funding is in the form of balancing payments made between Baxter and
Cerus to adjust the relative spending of the companies to the levels agreed to
by Baxter and Cerus and to reimburse each party for fee-for-service development
activities. The RBC/FFP Agreement also provides for Baxter to make a $2.0
million equity investment in Cerus' common stock, subject to the achievement of
a specified milestone. The milestone-based investment is priced at 120% of the
market price of Cerus' common stock at the time of the investment. In January
1999, Cerus, in consultation with the FDA, determined the preliminary framework
governing Cerus' Phase 3 clinical trial protocol for its platelets pathogen
inactivation system. As a result, Baxter agreed to purchase $2.0 million of
Cerus common stock on April 1, 1999 at 120% of the average closing price of the
common stock for the thirty (30) trading days prior to and including February
11, 1999.
In June 1998, Cerus and Baxter also entered into a preferred stock
purchase agreement under which Baxter has agreed to purchase, at Cerus' option,
up to $9.5 million Series B preferred stock ("Series B") during the period
October 1, 1998 to September 30, 1999.
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Baxter has certain discretion in decisions concerning the development
and marketing of pathogen inactivation systems. There can be no assurance that
Baxter will not elect to pursue alternative technologies or product strategies
or that its corporate interests and plans will remain consistent with those of
Cerus. If the Agreements were terminated, if Baxter failed to provide the
funding committed, or if Baxter's product development efforts were unsuccessful,
Cerus may need to obtain additional funding from other sources and would be
required to devote additional resources to the development of its products,
delaying the development of its products. Any such delay would have a material
adverse effect on Cerus' business, financial condition and results of
operations. There can also be no assurance that disputes will not arise in the
future with respect to the Agreements. Possible disagreements between Baxter and
Cerus could lead to delays in the research, development or commercialization of
certain planned products or could require or result in time-consuming and
expensive litigation or arbitration and would have a material adverse effect on
Cerus' business, financial condition and results of operations.
A development program under the Agreements may be terminated by either
Baxter or Cerus on 90 days' notice in the case of the platelet program, or 270
days' written notice in the case of the FFP or red blood cell program. Neither
party may give such notice of termination under the FFP program or the red blood
cell program before January 1, 1999. If either party so terminates as to a
program, the other party gains exclusive development and marketing rights to the
program, and the terminating party's sharing in program revenues is
significantly reduced.
The Agreements expressly provide that they do not and shall not be
deemed to create any relationship or a joint venture or partnership.
ADDITIONAL ALLIANCES
Agreement with the Consortium for Plasma Science. In December 1998,
Cerus and the Consortium entered into an agreement for the development of a
pathogen inactivation system for source plasma. The Consortium is co-funded by
four plasma fractionation companies: Alpha Therapeutics Corporation, Bayer
Corporation, Baxter and Centeon. The Consortium, which is a separate entity from
its members, provides R&D funding worldwide for technologies to improve the
safety of source plasma. The agreement includes an initial commitment to fund
development of Cerus' proprietary technology for use with source plasma for one
year, beginning January 1999. The agreement contemplates funding by the
Consortium through the regulatory approval phase, with commitments after the
first year of funding to be determined by the Consortium annually. The agreement
provides for Cerus to pay the Consortium a royalty on potential product sales.
RESEARCH GRANTS
Cerus has three ongoing federal grants which are administered by the NIH
relating to Cerus' research and development of its pathogen inactivation
systems. Two of the grants were awarded directly to Cerus and are five-year
awards totaling approximately $1.9 million and $1.3 million, respectively. The
third grant was transferred from the University of California at San Francisco
to Cerus at the time Dr. Corash, the grant's principal investigator, began his
employment relationship with Cerus. The balance of the grant transferred to
Cerus was approximately $579,000. These three federal grants must be renewed
annually by submitting an Application for Continuing Support to the NIH. Cerus
retains all rights to technology funded by these grants, subject to certain
rights of the federal government if Cerus fails to commercialize the technology
in a timely manner or if action is necessary to alleviate health or safety needs
not addressed by Cerus, to meet requirements for public use specified by federal
regulations or in the event Cerus were to breach certain agreements. The United
States government also has a non-exclusive, non-transferable, irrevocable,
paid-up license to practice or have practiced for or on its behalf any subject
invention throughout the world.
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MANUFACTURING AND SUPPLY
Cerus has used, and intends to continue to use, third parties to
manufacture and supply the psoralen and ALE inactivation compounds for its
systems for use in clinical trials and for the potential commercialization of
its products in development. Cerus has no experience in manufacturing products
for commercial purposes and does not have any manufacturing facilities.
Consequently, Cerus is dependent on contract manufacturers for the production of
compounds and on Baxter for other system components for development and
commercial purposes.
Under the Agreements, Cerus is responsible for developing and delivering
its proprietary compounds for effecting pathogen inactivation to Baxter for
incorporation into the final system configuration. Baxter is responsible for
manufacturing or supplying the disposable units, such as blood storage
containers and related tubing, as well as any device associated with the
inactivation process. This arrangement applies both to the current supply for
clinical trials and, if applicable regulatory approvals are obtained, the future
commercial supply. In order to provide the inactivation compounds for its
platelet and FFP pathogen inactivation systems, Cerus has contracted with two
manufacturing facilities for pilot-scale synthesis of S-59, although one
currently performs only the final step of the manufacturing process. Cerus
currently has a stock of compound sufficient to support the anticipated
remaining clinical trials planned for the platelet and FFP pathogen inactivation
systems. There can be no assurance that Cerus will be able to contract for the
manufacturing of products and compounds for its pathogen inactivation systems in
the future on reasonable terms, if at all.
The red blood cell pathogen inactivation system will require the
manufacture of S-303, which Cerus has produced in only limited quantities for
its research, preclinical and early clinical development requirements. Although
Cerus has contracted with a manufacturing facility that has produced sufficient
quantities of S-303 for preclinical and clinical studies, no assurance can be
given that this or any new manufacturer will be able to produce S-303 on a
commercial scale or that Cerus will be able to enter into arrangements for the
commercial-scale manufacture of S-303 on reasonable terms, if at all.
Under the terms of the 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 the Agreements were terminated or if Baxter otherwise
failed to deliver an adequate supply of components, Cerus would be required to
identify other third-party component manufacturers. There can be no assurance
that Cerus would be able to identify such manufacturers on a timely basis or
enter into contracts with such manufacturers on reasonable terms, if at all. Any
delay in the availability of devices or disposables from Baxter could adversely
affect the timely submission of products for regulatory approval or the market
introduction and subsequent sales of such products and would have a material
adverse effect on Cerus' business, financial condition and results of
operations. Moreover, the inclusion of components manufactured by others could
require Cerus to seek new approvals from government regulatory authorities,
which could result in delays in product delivery. There can be no assurance that
Cerus would receive any such required regulatory approvals. Any such delay would
have a material adverse effect on Cerus' business, financial condition and
results of operations.
There can be no assurance that Cerus will be able to contract for the
manufacturing of products and compounds for its pathogen inactivation systems on
reasonable terms, if at all. In the event that Cerus is unable to obtain or
retain third-party manufacturing, it will not be able to commercialize its
products as planned. Cerus' dependence upon third parties, including Baxter, for
the manufacture of critical portions of its pathogen inactivation systems may
adversely affect Cerus' operating margins and its ability to develop, deliver
and sell products on a timely and competitive basis. Failure of any third-party
manufacturer to deliver the required quantities of products on a timely basis
and at commercially reasonable prices could materially adversely affect Cerus'
business, financial condition and results of operations. In the event Cerus
undertakes to establish its own commercial manufacturing capabilities, it will
require substantial additional funds, manufacturing facilities, equipment and
personnel.
Cerus purchases certain key components of its compounds from a limited
number of suppliers. While Cerus believes that there are alternative sources of
supply for such components, establishing
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additional or replacement suppliers for any of the components in Cerus'
compounds, if required, may not be accomplished quickly and could involve
significant additional costs. Any failure by Cerus to obtain any of the
components used to manufacture Cerus' compounds from alternative suppliers, if
required, could limit Cerus' ability to manufacture its compounds and could have
a material adverse effect on Cerus' business, financial condition and results of
operations.
MARKETING, SALES AND DISTRIBUTION
The market for blood component treatment systems consists of the blood
centers and hospitals that collect, store and distribute blood and blood
components. In the United States, the American Red Cross collects and
distributes approximately 50% of the nation's supply of blood and blood
components. Other major blood centers include the New York Blood Center and
United Blood Services, each of which distributes approximately 6% of the
nation's supply of blood and blood components. In Western Europe and Japan,
various national blood transfusion services or Red Cross organizations collect,
store and distribute virtually all of their respective nations' blood and blood
components supply. Hospital-affiliated blood banks also store and dispense blood
and blood components but generally do not collect significant quantities of
blood. Cerus believes that, if its products receive appropriate regulatory
approvals, the relatively concentrated nature of the market may facilitate its
ability to penetrate the market. However, if Cerus fails to gain market
acceptance from any of these participants, its business, results of operations
and financial condition will be materially adversely affected.
Cerus believes that market acceptance of Cerus' pathogen inactivation
systems will depend, in part, on Cerus' ability to provide acceptable evidence
of the safety, efficacy and cost-effectiveness of its products, as well as the
ability of blood centers to obtain appropriate FDA licenses and adequate
reimbursement for such products. Cerus believes that market acceptance of its
pathogen inactivation systems will also depend upon the extent to which
physicians, patients and health care payors perceive that the benefits of using
blood components treated with Cerus' systems justify the additional costs and
processing requirements in a blood supply that has become safer in recent years.
While Cerus believes that its pathogen inactivation systems are able to
inactivate pathogens up to concentrations that Cerus believes are present in
contaminated blood components when the blood is donated, there can be no
assurance that contamination will never exceed such levels. Cerus does not
expect that its planned products will be able to inactivate all known and
unknown infectious pathogens, and there can be no assurance that the inability
to inactivate certain pathogens will not affect the market acceptance of its
products. There can be no assurance that Cerus' pathogen inactivation systems
will gain any significant degree of market acceptance among blood centers,
physicians, patients and health care payors, even if clinical trials demonstrate
safety and efficacy and necessary regulatory approvals and health care
reimbursement approvals are obtained.
If appropriate regulatory approvals are received, Baxter will be
responsible for the marketing, sales and distribution of Cerus' pathogen
inactivation systems for blood components worldwide. Cerus does not currently
maintain, nor does it intend to develop, its own marketing and sales
organization but instead expects to continue to rely on Baxter to market and
sell its pathogen inactivation systems. There can be no assurance that Cerus
will be able to maintain its relationship with Baxter or that such marketing
arrangements will result in payments to Cerus. Revenues to be received by Cerus
through any marketing and sales arrangement with Baxter will be dependent on
Baxter's efforts, and there can be no assurance that Cerus will benefit from
Baxter's present or future market presence or that such efforts will otherwise
be successful. If the Agreements were terminated or if Baxter's marketing
efforts were unsuccessful, Cerus' business, financial condition and results of
operations would be materially adversely affected.
COMPETITION
Cerus expects to encounter significant competition in the sale of
products it may develop. If regulatory approvals are received, Cerus' products
may compete with other approaches to blood safety currently in use, as well as
with future products developed by medical device, biotechnology and
pharmaceutical companies, hospital supply companies, national and regional blood
centers, and certain governmental organizations and agencies. Many companies and
organizations that may be competitors or
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potential competitors have substantially greater financial and other resources
than Cerus and may have greater experience in preclinical testing, human
clinical trials and other regulatory approval procedures. Cerus' ability to
compete successfully will depend, in part, on its ability to develop proprietary
products, develop and maintain products that reach the market first, are
technologically superior to and/or are of lower cost than other products on the
market, attract and retain scientific personnel, obtain patent or other
proprietary protection for its products and technologies, obtain required
regulatory approvals, and manufacture, market and sell any product that it
develops. In addition, other technologies or products may be developed that have
an entirely different approach or means of accomplishing the intended purposes
of Cerus' products, or that might render Cerus' technology and products
uncompetitive or obsolete.
Cerus believes that the primary competitive factors in the market for
pathogen inactivation systems will include the breadth and effectiveness of
pathogen inactivation processes, ease of use, the scope and enforceability of
patent or other proprietary rights, product price, product supply and marketing
and sales capability. In addition, the length of time required for products to
be developed and to receive regulatory and, in some cases, reimbursement
approval is an important competitive factor. Cerus believes it competes
favorably with respect to these factors, although there can be no assurance that
it will be able to continue to do so. The biopharmaceutical field is
characterized by rapid and significant technological changes. Accordingly,
Cerus' success will depend in part on its ability to respond quickly to medical
and technological changes through the development and introduction of new
products. Product development involves a high degree of risk, and there can be
no assurance that Cerus' product development efforts will result in any
commercially successful products.
In the Agreements, Baxter agreed to certain limited restrictions on its
ability to independently develop and market products that compete with the
products under the Agreements with the exception of methylene blue for FFP.
Baxter is conducting several independent product development efforts in blood
collection and processing that may improve blood component quality and safety.
The development and commercialization of Cerus' FFP pathogen inactivation system
could be materially adversely affected by competition with a methylene
blue-based product developed and marketed by Baxter or by Baxter's election to
pursue alternative methods for improving blood safety outside the field of
pathogen inactivation.
PATENTS, LICENSES AND PROPRIETARY RIGHTS
Cerus' success depends in part on its ability to obtain patents, to
protect trade secrets, to operate without infringing upon the proprietary rights
of others and to prevent others from infringing on the proprietary rights of
Cerus. Cerus' policy is to seek to protect its proprietary position by, among
other methods, filing United States and foreign patent applications related to
its proprietary technology, inventions and improvements that are important to
the development of its business. As of December 31, 1998, Cerus owned 36 issued
or allowed United States patents and 14 issued or allowed foreign patents.
Cerus' patents expire at various dates between 2003 and 2016. In addition, Cerus
has 28 pending United States patent applications and has filed 18 corresponding
patent applications under the Patent Cooperation Treaty, 12 of which are
currently pending in Europe, Japan, Australia and Canada. Proprietary rights
relating to Cerus' planned and potential products will be protected from
unauthorized use by third parties only to the extent that they are covered by
valid and enforceable patents or are effectively maintained as trade secrets.
There can be no assurance that any patents owned by, or licensed to, Cerus will
afford protection against competitors or that any pending patent applications
now or hereafter filed by, or licensed to, Cerus will result in patents being
issued. In addition, the laws of certain foreign countries do not protect Cerus'
intellectual property rights to the same extent as do the laws of the United
States.
The patent positions of biopharmaceutical companies involve complex
legal and factual questions and, therefore, their enforceability cannot be
predicted with certainty. There can be no assurance that any of Cerus' patents
or patent applications, if issued, will not be challenged, invalidated or
circumvented, or that the rights granted thereunder will provide proprietary
protection or competitive advantages to Cerus against competitors with similar
technology. Furthermore, there can be no assurance that others will not
independently develop similar technologies or duplicate any technology developed
by Cerus. Because of the extensive time required for development, testing and
regulatory review of a potential product, it is possible
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that, before any of Cerus' products can be commercialized, any related patent
may expire or remain in existence for only a short period following
commercialization, thus reducing any advantage of the patent, which could
adversely affect Cerus' ability to protect future product development and,
consequently, its operating results and financial position.
Because patent applications in the United States are maintained in
secrecy until patents issue and since publication of discoveries in the
scientific or patent literature often lag behind actual discoveries, Cerus
cannot be certain that it was the first to make the inventions covered by each
of its issued or pending patent applications or that it was the first to file
for protection of inventions set forth in such patent applications. There can be
no assurance that Cerus' planned or potential products will not be covered by
third-party patents or other intellectual property rights, in which case
continued development and marketing of such products would require a license
under such patents or other intellectual property rights. There can be no
assurance that such required licenses will be available to Cerus on acceptable
terms, if at all. If Cerus does not obtain such licenses, it could encounter
delays in product introductions while it attempts to design around such patents,
or could find that the development, manufacture or sale of products requiring
such licenses is foreclosed. Litigation may be necessary to defend against or
assert such claims of infringement, to enforce patents issued to Cerus, to
protect trade secrets or know-how owned by Cerus or to determine the scope and
validity of the proprietary rights of others. In addition, interference
proceedings declared by the United States Patent and Trademark Office may be
necessary to determine the priority of inventions with respect to patent
applications of Cerus. Litigation or interference proceedings could result in
substantial costs to and diversion of effort by Cerus, and could have a material
adverse effect on Cerus' business, financial condition and results of
operations. There can be no assurance that these efforts by Cerus would be
successful.
Cerus is a licensee under a license agreement with Miles, Inc. and
Diamond Scientific Corporation with respect to two United States patents
covering inventions pertaining to psoralen-based photochemical decontamination
treatment of whole blood or blood components and four United States patents
relating to vaccines, as well as related foreign patents. Whether Cerus'
psoralen-based pathogen inactivation systems practice either of the
photochemical decontamination patents depends on an interpretation of the scope
of the patent claims. If such systems practice such patents, the license would
provide for Cerus to make certain milestone payments which may be credited
against any royalties payable by Cerus. The license requires a royalty payable
by Cerus on revenues from such systems and certain annual minimum royalty
payments per year until termination of the license. The manner in which any such
milestone payments and royalties would be shared by Baxter, if at all, has not
been determined. Cerus does not believe that any amounts that might be payable
by it under the agreement to date would be material. Cerus may rely, in certain
circumstances, on trade secrets to protect its technology. However, trade
secrets are difficult to protect. Cerus seeks to protect its proprietary
technology and processes, in part, by confidentiality agreements with its
employees and certain contractors. There can be no assurance that these
agreements will not be breached, that Cerus will have adequate remedies for any
breach, or that Cerus' trade secrets will not otherwise become known or be
independently discovered by competitors. To the extent that Cerus' employees or
its consultants or contractors use intellectual property owned by others in
their work for Cerus, disputes may also arise as to the rights in related or
resulting know-how and inventions.
In August 1996, Cerus received correspondence from Circadian
Technologies, Inc., an Australian company, regarding some trade secrets and
intellectual property rights that are jointly owned by Circadian and the
Auckland Division Cancer Society of New Zealand. Circadian claimed that these
trade secrets and rights were used without Circadian's permission by the Cancer
Society and Cerus in developing some compounds for our red blood cell program.
None of Circadian's claims relates to our platelet or plasma programs. In later
correspondence, Circadian indicated that it is seeking royalties or a lump sum
payment. Cerus has investigated these claims, and does not believe that they
have merit. If we became involved in litigation of these claims, however, the
results are not certain, particularly because of the complex technical issues
involved. There can be no assurance that any future litigation would be decided
in our
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favor. If Cerus were found liable, our business, results of operations and
financial condition could be materially adversely affected.
GOVERNMENT REGULATION
Cerus and its products are comprehensively regulated in the United
States by the FDA and, in some instances, by state and local governments, and by
comparable governmental authorities in other countries. The FDA regulates drugs,
medical devices, and biologics under the Federal Food, Drug, and Cosmetic Act
and other laws, including, in the case of biologics, the Public Health Service
Act. These laws and implementing regulations govern, among other things, the
development, testing, manufacturing, record keeping, storage, labeling,
advertising, promotion and premarket clearance or approval of products subject
to regulation.
Cerus believes its pathogen inactivation systems will be regulated by
the FDA as medical devices. It is also possible, however, that the FDA will
decide to regulate the pathogen inactivation systems as biologics, as drugs, as
combination products including drugs or biologics and one or more medical
devices, or as drugs or biologics with one or more medical devices (i.e., the
blood bags and light source) requiring separate approval or clearance. Whether
the FDA regulates the pathogen inactivation systems as devices or as one or more
of the other alternatives, it is likely that the FDA's Center for Biologics
Evaluation and Research will be principally responsible for regulating the
pathogen inactivation systems.
Before a medical device may be marketed in the United States, the FDA
must clear a pre-market notification (a "510(k)") or approve a pre-market
approval application ("PMA") for the product. Before a new drug may be marketed
in the United States, the FDA must approve an NDA for the product. Before a
biologic may be marketed in the United States, the FDA must approve a Biologic
License Application ("BLA"). Before a combination product can be marketed in the
United States, it must have an approved NDA, BLA or PMA, depending on which
statutory authority the FDA elects to use.
Despite the multiplicity of statutory and regulatory possibilities, the
steps required before approval are essentially the same whether the product is
ultimately regulated as a medical device, biologic, drug, a combination product,
or a combination thereof. The steps required before a medical device, drug or
biologic may be approved for marketing in the United States pursuant to a PMA,
BLA or NDA, respectively, generally include (i) preclinical laboratory and
animal tests, (ii) submission to the FDA of an investigational device exemption
("IDE") (for medical devices) or an IND (for drugs or biologics) for human
clinical testing, which must become effective before human clinical trials may
begin, (iii) appropriate tests to show the product's safety, (iv)
adequate and well-controlled human clinical trials to establish the product's
efficacy for its intended indications, (v) submission to the FDA of a PMA, BLA
or NDA, as appropriate and (vi) FDA review of the PMA, BLA or NDA in order to
determine, among other things, whether the product is safe and effective for its
intended uses. In addition, the FDA inspects the facilities at which the product
is manufactured and will not approve the product unless compliance with current
Good Manufacturing Practices ("cGMP") or Quality System requirements is
satisfactory. The steps required before a medical device may be cleared for
marketing in the United States pursuant to a 510(k) are likely to be the same,
except that instead of conducting tests to demonstrate safety and efficacy,
data, including clinical data if necessary, must be obtained to show that the
product is substantially equivalent to a legally marketed device, and the FDA
must make a determination of substantial equivalence rather than a determination
that the product is safe and effective.
To support Cerus' requests for FDA approval to market its pathogen
inactivation products, Cerus intends to conduct various types of studies,
including toxicology studies to evaluate product safety, in vitro and animal
studies to evaluate product effectiveness and human clinical trials to evaluate
the safety, tolerability and effectiveness of treated blood components. Cerus
believes that, in deciding whether a pathogen inactivation system is safe and
effective, the FDA is likely to take into account whether it adversely affects
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the therapeutic efficacy of blood components as compared to the therapeutic
efficacy of blood components not treated with the system, and that the FDA will
weigh the system's safety, including potential toxicities of the inactivation
compounds, and other risks against the benefits of using the system in a blood
supply that has become safer in recent years. Cerus has conducted many
toxicology studies designed to demonstrate its products' safety, and plans to
conduct additional studies including reproductive toxicology studies, three
month tolerability studies and a p-53 genotoxicity study in mice for the S-59
compound. There can be no assurance that the FDA will not require further
toxicology or other studies of Cerus' products. Based on discussions with the
FDA, Cerus believes that it will be required to provide data from human clinical
studies to demonstrate the safety of treated platelets and their therapeutic
comparability to untreated platelets, but that only data from in vitro and
animal studies, not data from human clinical studies, will be required to
demonstrate the system's efficacy in inactivating pathogens. In light of these
criteria, Cerus' clinical trial programs for platelets and FFP will consist of
studies that differ from the usual Phase 1, Phase 2 and Phase 3 clinical
studies.
There can be no assurance, however, that these means of demonstrating
safety and efficacy will ultimately be acceptable to the FDA or that the FDA
will continue to believe that this clinical plan is appropriate. Moreover, even
if the FDA considers these means of demonstrating safety and efficacy to be
acceptable in principle, there can be no assurance that the FDA will find the
data submitted sufficient to demonstrate safety and efficacy. In particular,
although Cerus anticipates that the FDA will consider in vitro and animal data
an appropriate means of demonstrating efficacy in pathogen inactivation, there
can be no assurance that the FDA will so conclude, and any requirement to
provide other than in vitro and animal data would adversely affect the timing
and could affect the success of Cerus' efforts to obtain regulatory approval.
The testing and approval/clearance process requires substantial time,
effort and financial resources, and is generally lengthy, expensive and
uncertain. Even if regulatory approval or clearance is granted, it could include
significant limitations on the indicated uses for which a product could be
marketed. For example, Cerus does not believe that it will be able to make any
labeling or promotional claims that Cerus' pathogen inactivation systems may
inactivate any pathogens for which it does not have in vitro, and in certain
cases animal, data supporting such claims. After FDA approval for the initial
indications, further clinical trials will be necessary to gain approval for the
use of the product for additional indications. The FDA may also require
post-marketing testing, which can involve significant expense. Later discovery
of problems with a product may result in restrictions on the product, including
withdrawal of the product from the market. In addition, the policies of the FDA
may change, and additional regulations may be promulgated which could prevent or
delay regulatory approval of Cerus' planned products. There can be no assurance
that any approval or clearance will be granted on a timely basis, if at all. Any
failure to obtain or delay in obtaining such approvals or clearances, and any
significant limitation on their indicated uses or any restrictions from
discovery of product problems, could have a material adverse effect on Cerus'
business, financial condition and results of operations.
A medical device, biologic or drug, its manufacturer, and the holder of
the PMA or 510(k), BLA or NDA for the product are subject to comprehensive
regulatory oversight, both before and after approval or clearance is obtained.
Violations of regulatory requirements at any stage, including during the
preclinical and clinical testing process, during the approval/clearance process
or after the product is approved/cleared for marketing, could result in various
adverse consequences, including the FDA's requiring that a clinical trial be
suspended or halted, the FDA's delay in approving/clearing or refusing to
approve/clear a product, withdrawal of an approved/cleared product from the
market and the imposition of criminal penalties. For example, the holder of a
PMA or 510(k), BLA or NDA is required to report certain adverse reactions to the
FDA, and must comply with certain requirements concerning advertising and
promotional labeling for the product. Also, quality control and manufacturing
procedures must continue to conform to cGMP and Quality System regulations after
approval or clearance, and the FDA periodically inspects manufacturing
facilities to assess compliance with cGMP and Quality System. Accordingly,
manufacturers must continue to expend time, monies and efforts on regulatory
compliance, including cGMP and Quality System compliance. In addition, new
government requirements may be
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established that could delay or prevent regulatory approval or clearance of
Cerus' products under development or otherwise alter the applicable law. There
can be no assurance that the FDA will determine that the facilities and
manufacturing procedures of Baxter or any other third-party manufacturer of
Cerus' planned products will conform to cGMP or Quality System requirements.
In addition to the regulatory requirements applicable to Cerus and its
products, there are also regulatory requirements applicable to Cerus'
prospective customers, which are primarily entities that ship blood and blood
products in interstate commerce. Such entities are regulated by the FDA pursuant
to the Food, Drug and Cosmetic Act and the Public Health Service Act and
implementing regulations. Blood centers and others that ship blood and blood
products interstate will likely be required to obtain approved license
supplements from the FDA before shipping products processed with Cerus' pathogen
inactivation systems. This requirement and/or FDA delays in approving such
supplements may deter some blood centers from using Cerus' products, and blood
centers that do submit supplements may face disapproval or delays in approval
that could provide further disincentives to use of the systems. The regulatory
impact on potential customers could have a material adverse effect on Cerus'
business, financial condition and results of operations.
The Phase 3 European Buffy Coat clinical trial is being designed to
assess the therapeutic efficacy of the platelet pathogen inactivation system for
use in treating pooled random donor platelets collected using the European Buffy
Coat process. The Phase 3 United States apheresis clinical trial is being
designed to assess the therapeutic efficacy of the platelet pathogen
inactivation system for use in treating apheresis platelets, not pooled random
donor platelets, which represent approximately 60% of the market. If Cerus
decides to seek FDA approval of the platelet pathogen inactivation system for
use in treating pooled random donor platelets, Cerus will be required by the FDA
to conduct additional clinical studies. In addition, there currently are three
principal manufacturers of automated apheresis collection equipment used in the
United States, including Baxter. The equipment of each manufacturer collect
platelets into plastic disposables designed for that equipment; thus, a pathogen
inactivation system designed for disposables used by one manufacturer will not
necessarily be compatible with other manufacturers' collection equipment. Cerus
intends initially to seek FDA approval of a platelet pathogen inactivation
system configured for Baxter's apheresis collection equipment. If Cerus
determines that compatibility with other equipment is desirable, it will need to
develop additional processing procedures. Although Cerus believes that the FDA
would accept the clinical data from the original system for platelets collected
using other equipment and procedures and would require only limited additional
studies to show comparability, there can be no assurance that it would do so.
Because of the risk of bacterial growth, current FDA rules require that
platelets may not be stored for more than five days after collection from the
donor. The rules also require that pooled platelets be transfused within four
hours of pooling and, as a result, most pooling occurs at hospitals. However,
Cerus' platelet pathogen inactivation system is being designed to be used at
blood centers, not at hospitals, and requires a processing time of approximately
six hours. Therefore, in order for Cerus' platelet pathogen inactivation system
to be effectively implemented and accepted at blood centers as planned, the FDA-
imposed limit on the time between pooling and transfusion would need to be
lengthened or eliminated for blood products treated with Cerus' systems, which
are being designed to inactivate bacteria that would otherwise contaminate
pooled platelets. If Cerus were to pursue the pooled random donor platelet
market, it would need to work with the FDA during the approval/clearance process
to obtain the necessary changes in these limitations. There can be no assurance,
however, that the FDA would change this requirement and, if such a change were
not made, Cerus' business, financial condition and results of operations would
be materially adversely affected. Cerus is developing a European investigational
plan based on the platelet and FFP treatment systems using S-59 being
categorized as Class III drug/device combination under European Union regulatory
authorities. However, there can be no assurance that this approach will be
accepted by European authorities. The European Union requires that medical
devices affix the CE Mark, an international symbol of adherence to quality
assurance standards and compliance with applicable European medical device
directives. Failure to receive CE Mark certification will prohibit Cerus from
selling its products in the European Union.
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Cerus is conducting its clinical trials using prototype system
disposables and ultraviolet light sources, and is completing the commercial
design for these products contemporaneously. Cerus' current clinical plan
includes a study in healthy subjects using the commercial version of the system
prior to receiving regulatory approval. However, there can be no assurance that
regulatory agencies will not require additional studies. Such additional
studies, if required, could delay commercialization of the system.
Cerus is subject to federal, state and local laws, rules, regulations
and policies governing the use, generation, manufacture, storage, air emission,
effluent discharge, handling and disposal of certain materials, biological
specimens and wastes. There can be no assurance that Cerus will not be required
to incur significant costs to comply with environmental and health and safety
regulations in the future. Cerus' research and development involves the
controlled use of hazardous materials, including certain hazardous chemicals and
radioactive materials. Although Cerus believes that its safety procedures for
handling and disposing of such materials comply with the standards prescribed by
state and federal regulations, the risk of accidental contamination or injury
from these materials cannot be eliminated. In the event of such an accident,
Cerus could be held liable for any damages that result and any such liability
could exceed the resources of Cerus.
HEALTH CARE REIMBURSEMENT AND REFORM
The future revenues and profitability of biopharmaceutical and related
companies as well as the availability of capital to such companies may be
affected by the continuing efforts of the United States and foreign governments
and third-party payors to contain or reduce costs of health care through various
means. In the United States, given recent federal and state government
initiatives directed at lowering the total cost of health care, it is likely
that the United States Congress and state legislatures will continue to focus on
health care reform and the cost of pharmaceuticals and on the reform of the
Medicare and Medicaid systems. While Cerus cannot predict whether any such
legislative or regulatory proposals will be adopted, the announcement or
adoption of such proposals could have a material adverse effect on Cerus'
business, financial condition and results of operations.
Cerus' ability to commercialize its products successfully will depend in
part on the extent to which appropriate reimbursement levels for the cost of the
products and related treatment are obtained from governmental authorities,
private health insurers and other organizations, such as HMOs. Third-party
payors are increasingly challenging the prices charged for medical products and
services. The trend toward managed health care in the United States and other
countries and the concurrent growth of organizations such as HMOs, which could
control or significantly influence the purchase of health care services and
products, as well as legislative proposals to reform health care or reduce
government insurance programs, may all result in lower prices for Cerus'
products. The cost containment measures that health care payors and providers
are instituting and the effect of any health care reform could materially
adversely affect Cerus' ability to operate profitably.
FACILITIES
Cerus leases approximately 17,800 square feet for its main facility and
approximately 9,900 square feet for an additional facility, both of which
contain laboratory and office space, in Concord, California. The lease of the
main facility extends through June 2004 with one five-year renewal option. The
lease of the additional facility extends through January 2000, with renewal
options for up to five years. Cerus also has a lease for approximately 9,455
square feet at a facility located near its main facility in Concord. The lease
extends through June 30, 2000. Cerus believes that its facilities will be
adequate to meet its needs for the foreseeable future.
EMPLOYEES
As of December 31, 1998, Cerus had 81 employees, 61 of whom were engaged
in research and development and 20 in finance and other administration. Cerus
also had consulting arrangements with
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seven individuals. No employee of Cerus is covered by collective bargaining
agreements, and Cerus believes that its relationship with its employees is good.
SCIENTIFIC ADVISORY BOARD
Cerus' Scientific Advisory Board is composed of experts in the fields of
transfusion medicine, blood collection, blood component preparation, virology,
chemistry, biochemistry, organic synthesis, hematology and related fields. The
Scientific Advisory Board members work with Cerus both as a group and, less
formally and more frequently, on an individual basis. The Scientific Advisory
Board members review Cerus' programs for research, assist in planning its future
research directions and provide advice concerning ongoing product development
programs.
The following are members of Cerus' Scientific Advisory Board:
Harvey Alter, M.D., is the Chief of the Infectious Diseases Section and
Assistant Director of Research in the Department of Transfusion Medicine
Clinical Center at the National Institutes of Health. His area of expertise is
in the epidemiology of transfusion-associated viral hepatitis.
Harry Greenberg, M.D., is a Professor of Medicine and Chief of
Gastroenterology at Stanford University. His expertise is in infectious viral
diseases.
Jeffrey McCullough, M.D., is a Professor of Laboratory Medicine and
Director of the Blood Bank at the University of Minnesota Hospitals and the
editor-in-chief of the medical journal Transfusion.
Scott Murphy, M.D., is the Chief Medical Officer of the American Red
Cross Blood Services, Penn - Jersey Region. He is also an Adjunct Professor of
Medicine at the University of Pennsylvania.
Sherrill Slichter, M.D., is the Director for the Division of Research
and Education at Puget Sound Blood Center, as well as a Professor of Medicine,
Hematology/Medicine, University of Washington.
Robert Stern, M.D., is an Associate Professor of Dermatology at the
Harvard Medical School and Beth Israel Hospital.
All members of the Scientific Advisory Board are employed elsewhere and
may have commitments to and/or consulting contracts with other organizations,
including potential competitors, that may limit their availability to Cerus.
Each member has entered into a Nondisclosure Agreement with Cerus, which
requires the maintenance of all proprietary information in complete confidence.
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MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND OTHER KEY EMPLOYEES
The directors, executive officers and other key employees of Cerus and
their ages as of January 31, 1999 are as follows:
NAME AGE POSITION
---- --- --------
EXECUTIVE OFFICERS AND DIRECTORS
Stephen T. Isaacs...................... 49 President, Chief Executive Officer and Director
Laurence M. Corash..................... 54 Vice President, Medical Affairs
John E. Hearst......................... Vice President, New Science Opportunities and
63 Director
Robert E. Miller....................... 56 Vice President, Finance and Chief Financial Officer
B. J. Cassin(1)(2)..................... 65 Chairman of the Board
Peter H. McNerney(1)................... 48 Director
Dale A. Smith.......................... 67 Director
Henry E. Stickney(2)................... 66 Director
KEY EMPLOYEES
David N. Cook.......................... 41 Vice President, Commercialization
Gary P. Wiesehahn...................... 49 Vice President, Commercialization
George D. Cimino....................... 47 Director of Product Development
William M. Greenman.................... 32 Director of Business Development
Lily Lin............................... 53 Director of Platelet Development
Tim E. McCullough...................... 49 Director of Preclinical Safety
Lori L. Roll........................... 39 Director of Administration, Controller and Secretary
Gregory W. Schafer..................... 34 Director of Finance
Ira Wallis............................. 49 Director of Regulatory Affairs
Susan Wollowitz........................ 46 Director of Chemical Technology
- ---------------
(1) Member of the Compensation Committee
(2) Member of the Audit Committee
STEPHEN T. ISAACS founded Cerus in September 1991 and has served as
President, Chief Executive Officer and a member of the Board of Directors since
that time. Mr. Isaacs was previously President and Chief Executive Officer of
HRI, a research and development company, from September 1984 to December 1996.
From 1975 to 1986, Mr. Isaacs held a faculty research position at the University
of California at Berkeley.
LAURENCE M. CORASH, M.D., a co-founder of Cerus, has been Vice
President, Medical Affairs of Cerus since July 1996. From July 1994 until he
assumed his current position, Dr. Corash was Director of Medical Affairs. Dr.
Corash was a consultant to Cerus from 1991 to July 1994. Dr. Corash has been a
Professor of Laboratory Medicine at the University of California, San Francisco
since July 1985 and Chief of the Hematology Laboratory for the Medical Center at
the University of California, San Francisco since January 1982. Dr. Corash has
served as a consultant to the FDA Advisory Panel for Hematology Devices since
1990.
JOHN E. HEARST, PH.D., D.SC., a co-founder of Cerus, was elected Vice
President, New Science Opportunities in July 1996. From January 1996 until July
1996, Dr. Hearst served as Director, New Science Opportunities. He has served as
a member of the Board of Directors of Cerus since January 1992. Dr. Hearst was a
Professor of Chemistry at the University of California at Berkeley from 1962 to
1996. As an Emeritus Professor, he retains the position of Senior Staff
Scientist at the Lawrence Berkeley Laboratory. He served as Director of the
Chemical Dynamics Division at the Lawrence Berkeley Laboratory from 1986 to
1989.
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ROBERT E. MILLER joined Cerus as Vice President and Chief Financial
Officer of Cerus on January 4, 1999. From January 1997 to November 1998 he was
employed by MedAcoustics, a privately held medical device company, holding
positions of Chief Financial Officer and Vice President of Sales and Marketing.
From September 1994 through December 1996 he was the Chief Financial Officer at
Systems Control, Inc., a privately held environmental testing company. Prior to
that, he was the Chief Financial Officer at GAF Corporation, Bugle Boy, Inc.,
Ameron Corporation and Penwest, Ltd. and the Treasurer of Mead Corporation. He
was also in investment banking at Merrill Lynch and Blyth Eastman Dillon.
B. J. CASSIN has served as Chairman of the Board of Cerus since December
1992. Mr. Cassin has been a private venture capitalist since 1979. Previously,
Mr. Cassin co-founded Xidex Corporation, a manufacturer of data storage media,
in 1969. Mr. Cassin is currently a director of Symphonix Devices, Inc., as well
as a number of private companies.
PETER H. MCNERNEY has served as a member of the Board of Directors of
Cerus since December 1992. Mr. McNerney has been a General Partner of Coral
Ventures, a venture capital investment firm, since 1992. Prior to that, Mr.
McNerney was a Managing Partner of Kensington Group, a management consulting
firm, from 1989 to 1992. Mr. McNerney serves as a director for Aksys, Ltd.
DALE A. SMITH has served as a member of the Board of Directors of Cerus
since March 1994. From 1978 to July 1995, Mr. Smith was Group Vice President of
Baxter Healthcare Corporation. Mr. Smith serves as a director of Vical, Inc.
HENRY E. STICKNEY has served as a member of the Board of Directors of
Cerus since January 1992. In 1988, Mr. Stickney founded Health IQ Corporation
(formerly, Reimbursement Dynamics, Inc.), a medical consulting company
specializing in health care economics and reimbursement issues, and has served
as its chief executive officer since that time.
DAVID COOK, PH.D., has been Vice President for Commercialization since
June 1998. He has been Director of the Red Blood Cell Program for Cerus since
January 1994. Prior to that time, Dr. Cook was a senior scientist in the
Platelet Program for Cerus from February 1993 to January 1994. From January 1990
to February 1993, Dr. Cook was a Postdoctoral Associate in the Department of
Chemistry at the University of California, Berkeley.
GARY WIESEHAHN, PH.D., has been Vice President for Commercialization
since August 1998. He has been Director of the Plasma Development for Cerus
since January 1996. From February 1994 to January 1996, Dr. Wiesehahn was a
senior scientist for Cerus. From December 1989 to January 1994, Dr. Wiesehahn
was Vice President of Research of Acrogen, Inc.
GEORGE D. CIMINO, PH.D., a co-founder of Cerus, has been Director of
Product Development for Cerus since January 1992. From 1985 to January 1992, Dr.
Cimino was Director of Research for HRI.
WILLIAM M. GREENMAN has been Director of Business Development for Cerus
since September 1995. From May 1993 to August 1995, Mr. Greenman was a manager
in the Corporate Development Group of the Biotech Group at Baxter International.
From March 1991 to May 1993, Mr. Greenman held various marketing and corporate
development positions in the Biotech Group at Baxter International.
LILY LIN, PH.D., a co-founder of Cerus, has been Director of the
Platelet Program for Cerus since April 1996. Prior to that time, Dr. Lin was
Director of Biological Research for Cerus from January 1992 to April 1996. From
1989 to February 1994, Dr. Lin was a senior scientist for HRI.
TIM E. MCCULLOUGH, PH.D., has been Director of Preclinical Safety for
Cerus since January 1996. From 1988 to January 1996, Dr. McCullough was
Department Head/Director of Toxicology of Roche Bioscience (formerly, Syntex
Discovery Research).
LORI L. ROLL has been the Director of Administration of Cerus since July
1997, Secretary of Cerus since February 1994, and the Controller of Cerus since
October 1992. From December 1991 to October 1992, Ms. Roll was a financial
services consultant for a variety of small private companies.
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GREGORY W. SCHAFER has been the Director of Finance for Cerus since May
1997. From September 1995 to April 1997, Mr. Schafer was an independent
management consultant. From August 1992 to September 1995, Mr. Schafer was a
management consultant for Deloitte & Touche LLP.
IRA WALLIS, PH.D., has been Director of Regulatory Affairs for Cerus
since June 1996. Dr. Wallis was Associate Director, Regulatory Affairs for
Genentech, Inc. from February 1993 to June 1996 and Manager, Regulatory Affairs
for Genentech, Inc. from February 1990 to February 1993.
SUSAN WOLLOWITZ, PH.D., has been Director of Chemical Technology for
Cerus since June 1992. From 1984 to June 1992, Dr. Wollowitz was Senior Research
Chemist/Project Leader for DowElanco (formerly Dow Chemical Agricultural
Products).
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PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the
beneficial ownership of Cerus' common stock as of January 31, 1999 and as
adjusted to reflect the sale of common stock offered by Cerus hereby for (i)
each stockholder who is known by Cerus to own beneficially more than 5% of the
common stock, (ii) each executive officer and director of Cerus, and (iii) all
executive officers and directors of Cerus as a group. Except as otherwise
indicated in the notes to this table, Cerus believes, based on information
furnished by such owners, that the persons named in the table have voting and
investment power with respect to all the shares of common stock, subject to
community property laws, where applicable
PERCENTAGE OF SHARES
BENEFICIALLY OWNED(1)
SHARES -----------------------
BENEFICIALLY PRIOR TO AFTER
BENEFICIAL OWNER OWNED(1) OFFERING OFFERING
- ---------------- ------------ -------- -----------
Baxter Healthcare Corporation............................. 1,617,425 17.2% 14.2%
One Baxter Parkway
Deerfield, IL 60015
Coral Partners II, a limited partnership(2)............... 914,218 9.7% 8.0%
60 South Sixth Street
Suite 3510
Minneapolis, MN 55402
Stephen T. Isaacs(3)...................................... 398,538 4.2% 3.5%
Laurence M. Corash(4)..................................... 300,925 3.2% 2.6%
John E. Hearst(5)......................................... 274,475 2.9% 2.4%
Robert E. Miller (6)...................................... 115,000 1.2% 1.0%
B.J. Cassin(7)............................................ 365,913 3.9% 3.2%
Peter H. McNerney(2)...................................... 914,218 9.7% 8.0%
Coral Group, Inc.
60 South Sixth Street
Suite 3510
Minneapolis, MN 55402
Dale A. Smith(8).......................................... 14,700 * *
Henry E. Stickney(9)...................................... 79,202 * *
All executive officers and directors as a group (8 2,462,971 25.3% 21.0%
persons)(10)............................................
- ---------------
* Less than one percent (1%)
(1) This table is based upon information supplied by officers, directors and
principal stockholders and Schedules 13D and 13G filed with the Securities
and Exchange Commission (the "SEC"). Unless otherwise indicated in the
footnotes to this table and subject to community property laws where
applicable, Cerus believes that each of the stockholders named in this
table has sole voting and investment power with respect to the shares
indicated as beneficially owned. Beneficial ownership also includes 322,900
shares of stock subject to options and warrants currently exercisable or
convertible within 60 days of the date of this table. Applicable
percentages are based on 9,419,243 shares outstanding on January 31, 1999,
adjusted as required by rules promulgated by the SEC.
(2) Includes 426,215 shares held by Coral Partners II, 463,749 shares held by
Coral Partners IV and 24,254 shares held by Peter H. McNerney. Mr. McNerney
is a General Partner of Coral Partners II and Coral Partners IV and
disclaims beneficial ownership of the shares held by such entities except
to the extent of his proportionate partnership interest therein.
(3) Includes 7,607 shares owned by Kathryn MacBride individually, 7,350 shares
held by Kathryn MacBride as custodian for Alexandra Isaacs and 7,350 shares
held by Kathryn MacBride as custodian for Megan Isaacs. Kathryn MacBride is
the spouse of Mr. Isaacs. Includes 76,750 shares underlying currently
exercisable stock options. If exercised in full within 60 days of the date
of this table, 47,387 shares would be subject to a right of repurchase in
favor of Cerus.
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(4) Includes 69,400 shares underlying currently exercisable stock options. If
exercised in full within 60 days of the date of this table, 45,243 shares
would be subject to a right of repurchase in favor of Cerus.
(5) Includes 94,774 shares held by the Hearst Revocable Trust, 50,000 shares
held by the John Hearst 1998 Annuity Trust, 50,000 shares held by the Jean
Hearst 1998 Annuity Trust, 22,050 shares held by the David Paul Hearst
Irrevocable Trust and 22,050 shares held by the Leslie Jean Hearst
Irrevocable Trust. Includes 32,350 shares underlying currently exercisable
stock options. If exercised in full within 60 days of the date of this
table, 25,062 shares would be subject to a right of repurchase in favor of
Cerus.
(6) Includes 115,000 shares underlying currently exercisable stock options. If
exercised in full within 60 days of the date of this table, all 115,000
shares would be subject to a right of repurchase in favor of Cerus.
(7) Includes 306,372 shares held by Brendan Joseph Cassin and Isabel B. Cassin,
Trustees of the Cassin Family Trust, 44,841 shares held by Cassin Family
Partners, a California Limited Partnership, and 14,700 shares underlying
currently exercisable stock options. If exercised in full within 60 days of
the date of this table, 4,288 shares would be subject to a right of
repurchase in favor of Cerus.
(8) Includes 14,700 shares underlying currently exercisable stock options. If
exercised in full within 60 days of the date of this table, 1,838 shares
would be subject to a right of repurchase in favor of Cerus.
(9) Includes 18,302 shares held by Mr. Stickney as Trustee of the Stickney
Family Trust, 1,500 shares held by Mr. Stickney's spouse and 4,288 shares
which are subject to a right of repurchase by Cerus that expires ratably
through May 2000.
(10) Includes information contained in the notes above, as applicable.
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of Cerus consists of 50,000,000 shares of
common stock, par value $.001 per share, and 5,000,000 shares of preferred
stock, par value $.001 per share.
COMMON STOCK
As of January 31, 1999, there were 9,419,243 shares of common stock
outstanding held of record by 247 stockholders.
The holders of common stock are entitled to one vote for each share held
of record on all matters submitted to a vote of the stockholders. Subject to
preferences that may be applicable to any outstanding shares of the preferred
stock, the holders of common stock are entitled to receive ratably such
dividends as may be declared by the board of directors out of funds legally
available therefor. See "Dividend Policy." In the event of a liquidation,
dissolution or winding up of Cerus, holders of the common stock are entitled to
share ratably in all assets remaining after payment of liabilities and the
liquidation preferences of any outstanding shares of preferred stock. Holders of
common stock have no preemptive rights and no right to convert their common
stock into any other securities. There are no redemption or sinking fund
provisions applicable to the common stock. All outstanding shares of common
stock are, and all shares of common stock to be outstanding upon the closing of
this offering will be, fully paid and nonassessable.
PREFERRED STOCK
As of January 31, 1999, 5,000 shares of Series A preferred stock were
issued and outstanding.
Pursuant to Cerus' Restated Certificate, the board of directors has the
authority, without further action by the stockholders, to issue up to 5,000,000
shares of preferred stock in one or more series and to fix the designations,
powers, preferences, privileges and relative participating, optional or special
rights and
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the qualifications, limitations or restrictions thereof, including dividend
rights, conversion rights, voting rights, terms of redemption and liquidation
preferences, any or all of which may be greater than the rights of the common
stock. The board of directors, without stockholder approval, can issue preferred
stock with voting, conversion or other rights that could adversely affect the
voting power and other rights of the holders of common stock. Preferred stock
could thus be issued quickly with terms calculated to delay or prevent a change
in control of Cerus or make removal of management more difficult. Additionally,
the issuance of preferred stock may have the effect of decreasing the market
price of the common stock and may adversely affect the voting and other rights
of the holders of common stock.
Series A Preferred Stock. The holders of Series A preferred stock have
no voting rights, except as required under the General Corporation Law of
Delaware, and as follows: Without first obtaining the affirmative vote or
written consent of the holders of at least a majority of the outstanding shares
of Series A preferred stock, voting as a separate class, Cerus shall not effect
any merger or consolidation in which Cerus is not the surviving entity, or any
merger, consolidation or other transaction in which Cerus' common stock becomes
no longer publicly traded (a "Covered Transaction"), unless the surviving entity
in the Covered Transaction shall have provided for the benefit of the holders of
Series A preferred stock certain contractual rights. Upon any liquidation,
dissolution, or winding up of Cerus, before any payment or distribution of
assets of Cerus shall be made to the holders of common stock, the holders of
Series A preferred stock shall be entitled to be paid out of the assets of Cerus
in an amount per share of Series A preferred stock equal to $1,000.00 (the
"Original Issue Price").
Cerus has the right to redeem, at the Original Issue Price, all or a
portion of the Series A preferred stock upon the approval of a NDA or PMA by the
FDA or the comparable approval in Europe under the Platelet Agreement (an
"Approval Event"). Cerus and the holders of Series A preferred stock may require
redemption, at the Original Issue Price, of all of the Series A preferred stock
upon the termination for any reason of the Platelet Agreement or upon the
cessation for any reason of the Cooperative Development Work (as such term is
defined in the Platelet Agreement) (either, a "Termination Event"). In addition,
immediately prior to consummation of a Covered Transaction, Cerus has the right
to redeem all of the Series A preferred stock then outstanding at the Original
Issue Price.
The Series A preferred stock automatically converts, at 120% of the
average closing price of the common stock for the 30 trading days prior to and
including the trading day immediately prior to the Approval Event, on the 15th
day following the Approval Payment Date (as such term is defined in the Platelet
Agreement). If a Termination Event occurs and a redemption notice has not been
sent by Cerus or the holder of the Series A preferred stock, the Series A
preferred stock shall automatically convert, at a price equal to the average
closing price of the common stock for the 30 trading days commencing with the
15th trading day prior to the Termination Event, on the 15th day following date
on which such conversion shall occur shall be the 15th day following the
Termination Payment Date (as such term is defined in the Platelet Agreement).
However, in the event that the approval of Cerus' stockholders is required
pursuant to Rule 4460(i) of the Nasdaq Stock Market ("Rule 4460(i)") prior to
the issuance of any of the shares of common stock issuable upon conversion of
the Series A preferred stock, Cerus shall obtain such approval by the applicable
conversion date, or, if such approval is not obtained, Cerus shall redeem any
shares of Series A preferred stock that would be convertible into shares of
common stock in excess of the limitation specified in Rule 4460(i).
Neither the Series A preferred stock nor any right to receive redemption
payments may be assigned, transferred, hypothecated or otherwise alienated by a
Series A preferred stock holder without the prior written consent of Cerus,
except (i) in connection with, and to the transferee of, all or substantially
all of the business and assets of such holder, or (ii) to a direct or indirect
wholly owned subsidiary of Baxter.
Series B Preferred Stock. Pursuant to a preferred stock purchase
agreement entered into by Cerus and Baxter in June 1998, Baxter will purchase,
upon Cerus' request, up to $9.5 million of Series B preferred stock during the
period October 1, 1998 to September 30, 1999. Cerus does not intend to establish
the Series B preferred stock until such time as it may be issued. Once the
Series B preferred
56
58
stock is established, the holders of Series B preferred stock will have no
voting rights, except as required under the General Corporation Law of Delaware,
and as follows: Without first obtaining the affirmative vote or written consent
of the holders of at least a majority of the outstanding shares of each series
of preferred stock that is designated as a sub-series of Series B preferred
stock, voting together as a separate class, Cerus shall not authorize or issue
shares of any class or series of stock, or reclassify any class or series of
stock, into shares having preference or priority over the Series B preferred
stock as to voting, liquidation preference or conversion rights. Upon any
liquidation, dissolution, or winding up of Cerus, before any payment or
distribution of assets of Cerus shall be made to the holders of common stock,
Series A preferred stock, or any other class or series of stock ranking junior
to the Series B preferred stock with respect to liquidation preference, the
holders of Series B Preferred shall be entitled to be paid out of the assets of
Cerus an amount per share of Series B Preferred equal to Original Issue Price
(as defined in the Series B preferred stock Certificate of Designation). As of
the date of this Prospectus, Cerus has not exercised its right to have Baxter
purchase any shares of Series B preferred stock. Cerus does not intend to file
the Series B preferred stock Certificate of Designation with the Secretary of
State of the State of Delaware until such time as Cerus elects to exercise its
right to have Baxter purchase such shares.
Cerus will have the right to redeem, at the Original Issue Price, all of
the Series B preferred stock at any time. At any time after the one-year
anniversary of the date of issuance of the Series B preferred stock, each share
of Series B preferred stock may, at the option of the holder, be converted at
any time into that number of shares of common stock equal to the Original Issue
Price divided by 100 (the "Conversion Price").
However, in the event that the approval of Cerus' stockholders is
required pursuant to Rule 4460(i) prior to the issuance of any of the shares of
common stock issuable upon conversion of the Series B preferred stock, Cerus
shall obtain such approval by the conversion date, or, if such approval is not
obtained, Cerus shall redeem any shares of Series B preferred stock that would
be convertible into shares of common stock in excess of the limitation specified
in Rule 4460(i).
Neither the Series B preferred stock nor any right to receive redemption
payments may be assigned, transferred, hypothecated or otherwise alienated by a
Series B preferred stock holder without the prior written consent of Cerus,
except (i) in connection with, and to the transferee of, all or substantially
all of the business and assets of such holder, or (ii) to a direct or indirect
wholly owned subsidiary of Baxter.
ANTITAKEOVER EFFECTS OF PROVISIONS OF CHARTER DOCUMENTS AND DELAWARE LAW
Charter Documents. The Restated Certificate and Bylaws include a number
of provisions that may have the effect of deterring hostile takeovers or
delaying or preventing changes in control or management of Cerus. First, Cerus'
board of directors will be classified into three classes of directors. Under
Delaware law, directors of a corporation with a classified board may be removed
only for cause unless the corporation's certificate of incorporation provides
otherwise. The Restated Certificate does not provide otherwise. In addition, the
Restated Certificate provides that all stockholder action must be effected at a
duly called meeting of stockholders and not by a consent in writing. Further,
the Bylaws limit who may call special meetings of the stockholders. Cerus'
Restated Certificate does not include a provision for cumulative voting for
directors. Under cumulative voting, a minority stockholder holding a sufficient
percentage of a class of shares may be able to ensure the election of one or
more directors. Finally, the Bylaws establish procedures, including advance
notice procedures, with regard to the nomination of candidates for election as
directors and stockholder proposals. These and other provisions of the Restated
Certificate and Bylaws and Delaware law could discourage potential acquisition
proposals and could delay or prevent a change in control or management of Cerus.
Delaware Takeover Statute. Cerus is subject to the provisions of Section
203 of the Delaware General Corporation Law. In general, the statute prohibits a
publicly held Delaware corporation from engaging in a "business combination"
with an "interested stockholder" for a period of three years after the date of
the transaction in which the person became an interested stockholder, unless the
business
57
59
combination is approved in a prescribed manner. For purposes of Section 203, a
"business combination" includes a merger, asset sale or other transaction
resulting in a financial benefit to the interested stockholder, and an
"interested stockholder" is a person who, together with affiliates and
associates, owns (or within three years prior, did own) 15% or more of the
corporation's voting stock.
REGISTRATION RIGHTS
Pursuant to an agreement between Cerus and the holders (or their
permitted transferees) of approximately 4,800,000 shares of common stock and
common stock issuable upon conversion of Series A preferred stock ("Holders"),
the Holders are entitled to certain rights with respect to the registration of
such shares under the Securities Act. If Cerus proposes to register its common
stock, subject to certain exceptions, under the Securities Act, the Holders are
entitled to notice of the registration and are entitled to include, at Cerus'
expense, such shares therein, provided that the managing underwriters have the
right to limit the number of such shares included in the registration.
Registration rights with respect to this offering have been waived. In addition,
certain of the Holders may require Cerus, on no more than two occasions and, on
one of such occasions, at Cerus' expense, to file a registration statement under
the Securities Act with respect to their shares of common stock. Such rights may
not be exercised until six months after the closing of this offering. Further,
certain Holders, at their expense, may require Cerus to register the shares on
Form S-3 when such form becomes available to Cerus, subject to certain
conditions and limitations. Such right expires on the tenth anniversary of the
closing of this offering.
58
60
UNDERWRITERS
Under the terms and subject to the conditions contained in an
Underwriting Agreement, the Underwriters named below (the "Underwriters"), for
whom Morgan Stanley & Co. Incorporated, BT Alex. Brown Incorporated and SG Cowen
Securities Corporation are serving as Representatives (the "Representatives"),
have severally agreed to purchase, and Cerus has agreed to sell to the
Underwriters, severally, the respective numbers of shares of common stock set
forth opposite the names of such Underwriters below:
NAME NUMBER OF SHARES
---- ----------------
Morgan Stanley & Co. Incorporated...........................
BT Alex. Brown Incorporated.................................
SG Cowen Securities Corporation.............................
--------
Total............................................. 2,000,000
========
The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the shares of common stock
offered hereby are subject to the approval of certain legal matters by their
counsel and to certain other conditions. The Underwriters are obligated to take
and pay for all of the shares of common stock offered hereby (other than those
covered by the Underwriters' over-allotment option described below) if any such
shares are taken.
The Underwriters initially proposed to offer part of the shares of
common stock offered hereby directly to the public at the public offering price
set forth on the cover page hereof and part to certain dealers at a price that
represents a concession not in excess of $ per share under the public
offering price. Any Underwriter may allow, and such dealers may reallow, a
concession not in excess of $ per share to other Underwriters or to
certain dealers. After the initial offering of the shares of common stock, the
offering price and other selling terms may from time to time be varied by the
Representatives.
Pursuant to the Underwriting Agreement, Cerus has granted to the
Underwriters an option, exercisable for 30 days from the date of this
Prospectus, to purchase up to an aggregate of 300,000 additional shares of
common stock at the public offering price set forth on the cover page hereof,
less underwriting discounts and commissions. The Underwriters may exercise such
option solely for the purpose of covering over-allotments, if any, incurred in
connection with the offering of the shares of common stock offered hereby. To
the extent such option is exercised, each Underwriter will become obligated,
subject to certain conditions, to purchase approximately the same percentage of
such additional shares as the number set forth next to such Underwriter's name
in the preceding table bears to the total number of shares of common stock set
forth next to the names of all Underwriters in the preceding table.
Cerus and the Underwriters have agreed to indemnify each other against
certain liabilities, including liabilities under the Securities Act.
Cerus has agreed that, without the prior written consent of Morgan
Stanley & Co. Incorporated, it will not offer, sell, contract to sell, or
otherwise dispose of any shares of common stock, for a period of 90 days after
the date of this Prospectus, other than any shares of common stock issued upon
the exercise of options or warrants, rights to acquire shares issued pursuant to
equipment or lease financing activities in the ordinary course of Cerus'
business. In addition, in connection with the offering, Cerus (subject to
certain exceptions), its executive officers and directors and certain existing
stockholders of Cerus, who will own an aggregate of approximately 3,750,000
shares of common stock after the offering, have agreed that, without the prior
written consent of Morgan Stanley & Co. Incorporated on behalf of the
Underwriters, they will not (a) offer, pledge, sell, contract to sell, sell any
option or contract to purchase, purchase any option or contract to sell, grant
any option, right or warrant to purchase, or otherwise transfer or dispose of,
directly or indirectly, any shares of common stock or any securities convertible
into or exercisable or exchangeable for common stock (whether such shares or any
such securities are then owned by such person or are thereafter acquired
directly from Cerus), or (b) enter into any swap or similar arrangement
59
61
that transfers, in whole or in part, the economic risk of ownership of the
common stock, whether any such transaction described in clause (a) or (b) of
this paragraph is to be settled by delivery of such common stock or such other
securities, in cash or otherwise, for a period of 90 days after the date of this
Prospectus, other than (i) as a bona fide gift or gifts, (ii) by will or
intestacy to the undersigned's immediate family or to a trust the beneficiaries
of which are exclusively the undersigned and/or a member or members of his or
her immediate family, (iii) as a distribution to limited partners or
shareholders of the undersigned, or (iv) with the prior written consent of
Morgan Stanley & Co. Incorporated provided that a gift, transfer or distribution
pursuant to clause (i), (ii) or (iii) above shall be conditioned upon such
donee, transferee or distributee executing and delivering a copy of a Lockup
Agreement to Morgan Stanley & Co. Incorporated.
In order to facilitate the offering of the common stock, the
Underwriters may engage in transactions that stabilize, maintain or otherwise
affect the price of the common stock. Specifically, the Underwriters may
over-allot in connection with the offering, creating a short position in the
common stock for their own account. In addition, to cover over-allotments or to
stabilize the price of the common stock, the Underwriters may bid for, and
purchase shares of common stock in the open market. Finally, the underwriting
syndicate may reclaim selling concessions allowed to an Underwriter or a dealer
for distributing the common stock in the offering, if the syndicate repurchases
previously distributed common stock in transactions to cover syndicate short
positions, in stabilization transactions or otherwise. Any of these activities
may stabilize or maintain the market price of the common stock above independent
market levels. The Underwriters are not required to engage in these activities,
and may end any of these activities at any time.
The Underwriters and dealers may engage in passive market making
transactions in the common stock in accordance with Rule 103 of Regulation M
promulgated by the Commission. In general, a passive market maker may not bid
for, or purchase, the common stock at a price that exceeds the highest
independent bid. In addition, the net daily purchases made by any passive market
maker generally may not exceed 30% of its average daily trading volume in the
common stock during a specified two month prior period, or 200 shares, whichever
is greater. A passive market maker must identify passive market making bids as
such on the Nasdaq electronic inter-dealer reporting system. Passive market
making may stabilize or maintain the market price of the common stock above
independent market levels. Underwriters and dealers are not required to engage
in passive market making, and may end passive market making activities at any
time.
LEGAL MATTERS
The validity of the shares of common stock offered hereby will be passed
upon for Cerus by its counsel, Cooley Godward LLP, San Francisco, California.
Certain legal matters will be passed upon for the Underwriters by Wilson Sonsini
Goodrich & Rosati, Professional Corporation, Palo Alto, California.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our financial
statements included in our Annual Report on Form 10-K for the year ended
December 31, 1997 as set forth in their report, which is incorporated by
reference herein, and have audited our financial statements as of December 31,
1998 and 1997, and for each of the three years in the period ended December 31,
1998 as set forth in their report included herein. Our financial statements are
incorporated by reference, and are included in the prospectus and elsewhere in
the Registration Statement in reliance on Ernst & Young LLP's report, given on
their authority as experts in accounting and auditing.
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62
ADDITIONAL INFORMATION
A registration statement on Form S-3 with respect to the Shares offered
hereby (together with all amendments, exhibits and schedules thereto, the
"Registration Statement") has been filed with the Commission under the
Securities Act. This Prospectus does not contain all of the information
contained in such Registration Statement, certain portions of which have been
omitted pursuant to the rules and regulations of the Commission. For further
information with respect to Cerus and the Shares offered hereby, reference is
made to the Registration Statement. Statements contained in this Prospectus
regarding the contents of any contract or any other documents are not
necessarily complete and, in each instance, reference is hereby made to the copy
of such contract or document filed as an exhibit to the Registration Statement.
The Registration Statement may be inspected without charge at the Securities and
Exchange Commission's principal office in Washington, D.C., and copies of all or
any part thereof may be obtained from the Public Reference Section, Securities
and Exchange Commission, Washington, D.C. 20549, upon payment of the prescribed
fees. Cerus' common stock is listed for trading on the Nasdaq National Market
and reports, proxy statements and other information concerning Cerus may also be
inspected at the offices of the National Association of Securities Dealers, 1735
K Street, N.W., Washington, D.C. 20006.
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63
CERUS CORPORATION
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Report of Ernst & Young LLP, Independent Auditors........... F-2
Balance Sheets.............................................. F-3
Statements of Operations.................................... F-4
Statements of Stockholders' Equity (Deficit)................ F-5
Statements of Cash Flows.................................... F-6
Notes to Financial Statements............................... F-7
F-1
64
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Cerus Corporation
We have audited the accompanying balance sheets of Cerus Corporation as
of December 31, 1998 and 1997, and the related statements of operations,
stockholders' equity (deficit), and cash flows for each of the three years in
the period ended December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Cerus Corporation at
December 31, 1998 and 1997, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1998 in conformity
with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
Walnut Creek, California
January 22, 1999,
except for Note 2 as to which the date is
January 30, 1999
F-2
65
CERUS CORPORATION
BALANCE SHEETS
DECEMBER 31,
-------------------------
1998 1997
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents................................. $ 6,161,088 $11,603,596
Short-term investments.................................... 13,640,945 9,977,178
Accounts receivable from a related party.................. -- 4,376,141
Other current assets...................................... 312,398 214,687
----------- -----------
Total current assets........................................ 20,114,431 26,171,602
Furniture and equipment at cost:
Laboratory and office equipment........................... 1,458,084 1,309,950
Leasehold improvements.................................... 1,597,520 1,440,863
----------- -----------
3,055,604 2,750,813
Less accumulated depreciation and amortization............ 2,330,876 1,718,984
----------- -----------
Net furniture and equipment................................. 724,728 1,031,829
Other assets................................................ 94,536 111,725
----------- -----------
Total assets................................................ $20,933,695 $27,315,156
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable to a related party....................... $12,718,801 $ --
Accounts payable.......................................... 1,335,776 1,298,868
Accrued compensation and related expenses................. 982,458 931,991
Accrued third-party toxicology and development expenses... 2,571,000 896,000
Other accrued expenses.................................... 1,939,016 1,600,502
Current portion of capital lease obligations.............. 30,792 69,816
----------- -----------
Total current liabilities................................... 19,577,843 4,797,177
Capital lease obligations, less current portion............. 12,211 43,002
Commitments and contingencies
Redeemable convertible preferred stock, $.001 par value;
5,000,000 shares authorized: issuable in series; 5,000
shares issued and outstanding at December 31, 1998 and
none at December 31, 1997; aggregate liquidation
preference of $5,000,000 at December 31, 1998............. 5,000,000 --
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock, $.001 par value; 50,000,000 shares
authorized: 9,416,843 and 9,183,629 shares issued and
outstanding at December 31, 1998 and 1997,
respectively........................................... 9,417 9,184
Additional paid-in capital................................ 60,813,174 57,476,775
Deferred compensation..................................... (50,853) (140,937)
Accumulated deficit....................................... (64,428,097) (34,870,045)
----------- -----------
Total stockholders' equity (deficit)........................ (3,656,359) 22,474,977
----------- -----------
Total liabilities and stockholders' equity (deficit)........ $20,933,695 $27,315,156
=========== ===========
See accompanying notes.
F-3
66
CERUS CORPORATION
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31,
------------------------------------------
1998 1997 1996
------------ ------------ ------------
Revenue:
Licenses, milestones and development funding from a
related party................................... $ 2,127,413 $ 6,190,781 $ 2,851,236
Government grants.................................. 775,886 660,066 758,305
------------ ------------ ------------
Total revenue........................................ 2,903,299 6,850,847 3,609,541
Operating expenses:
Research and development........................... 29,783,285 19,569,469 12,080,445
General and administrative......................... 3,840,816 3,163,012 2,200,018
------------ ------------ ------------
Total operating expenses............................. 33,624,101 22,732,481 14,280,463
------------ ------------ ------------
Loss from operations................................. (30,720,802) (15,881,634) (10,670,922)
Other income (expense):
Interest income.................................... 1,171,903 1,232,322 482,384
Interest expense................................... (9,153) (14,901) (18,347)
------------ ------------ ------------
Total other income (expense)......................... 1,162,750 1,217,421 464,037
------------ ------------ ------------
Net loss............................................. $(29,558,052) $(14,664,213) $(10,206,885)
============ ============ ============
Net loss per share -- basic and diluted.............. $ (3.17) $ (1.76) $ (5.98)
============ ============ ============
Shares used in computing net loss per share -- basic
and diluted........................................ 9,325,269 8,351,872 1,705,821
============ ============ ============
See accompanying notes.
F-4
67
CERUS CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
NOTES
PREFERRED STOCK COMMON STOCK ADDITIONAL RECEIVABLE
----------------------- ------------------ PAID-IN DEFERRED FROM
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION STOCKHOLDERS
---------- ---------- --------- ------ ----------- ------------ ------------
Balances at December 31,
1995....................... 2,620,677 $ 2,621 1,417,895 $1,418 $18,738,135 $ -- $(80,588)
Exercise of stock
options.................. -- -- 510,912 511 258,411 -- --
Issuance of Series E
convertible preferred
stock, net of issuance
costs of $100,777........ 380,953 381 -- -- 5,898,768 -- --
Payment on notes
receivable............... -- -- -- -- -- -- 5,382
Deferred compensation...... -- -- -- -- 530,215 (530,215) --
Amortization of deferred
compensation............. -- -- -- -- -- 219,828 --
Net loss................... -- -- -- -- -- -- --
---------- ---------- --------- ------ ----------- --------- --------
Balances at December 31,
1996....................... 3,001,630 3,002 1,928,807 1,929 25,425,529 (310,387) (75,206)
Public offering of common
stock, net of expenses of
$2,945,259................. -- -- 2,000,000 2,000 21,052,741 -- --
Issuance of common stock.... -- -- 714,080 714 10,542,502 -- --
Conversion of preferred
stock...................... (3,001,630) (3,002) 4,412,243 4,412 (3,118) -- --
Issuance of common stock
under stock option and
employee stock purchase
plans and warrant
exercises.................. -- -- 129,664 130 459,754 -- --
Common shares reacquired.... -- -- (1,165) (1) (633) -- --
Payment on notes
receivable................. -- -- -- -- -- -- 75,206
Amortization of deferred
compensation............... -- -- -- -- -- 169,450 --
Net loss.................... -- -- -- -- -- -- --
---------- ---------- --------- ------ ----------- --------- --------
Balances at December 31,
1997....................... -- -- 9,183,629 9,184 57,476,775 (140,937) --
Issuance of common stock... -- -- 159,595 159 2,975,470 -- --
Issuance of common stock
under stock option and
employee stock purchase
plans and warrant
exercises................ -- -- 77,984 78 364,767 -- --
Common shares reacquired... -- -- (4,365) (4) (3,838) -- --
Amortization of deferred
compensation............. -- -- -- -- -- 90,084 --
Net loss................... -- -- -- -- -- -- --
---------- ---------- --------- ------ ----------- --------- --------
Balances at December 31,
1998....................... -- $ -- 9,416,843 $9,417 $60,813,174 $ (50,853) $ --
========== ========== ========= ====== =========== ========= ========
TOTAL
ACCUMULATED STOCKHOLDERS'
DEFICIT EQUITY (DEFICIT)
------------ -----------------
Balances at December 31,
1995....................... $(9,998,947) $ 8,662,639
Exercise of stock
options.................. -- 258,922
Issuance of Series E
convertible preferred
stock, net of issuance
costs of $100,777........ -- 5,899,149
Payment on notes
receivable............... -- 5,382
Deferred compensation...... -- --
Amortization of deferred
compensation............. -- 219,828
Net loss................... (10,206,885) (10,206,885)
------------ ------------
Balances at December 31,
1996....................... (20,205,832) 4,839,035
Public offering of common
stock, net of expenses of
$2,945,259................. -- 21,054,741
Issuance of common stock.... -- 10,543,216
Conversion of preferred
stock...................... -- (1,708)
Issuance of common stock
under stock option and
employee stock purchase
plans and warrant
exercises.................. -- 459,884
Common shares reacquired.... -- (634)
Payment on notes
receivable................. -- 75,206
Amortization of deferred
compensation............... -- 169,450
Net loss.................... (14,664,213) (14,664,213)
------------ ------------
Balances at December 31,
1997....................... (34,870,045) 22,474,977
Issuance of common stock... -- 2,975,629
Issuance of common stock
under stock option and
employee stock purchase
plans and warrant
exercises................ -- 364,845
Common shares reacquired... -- (3,842)
Amortization of deferred
compensation............. -- 90,084
Net loss................... (29,558,052) (29,558,052)
------------ ------------
Balances at December 31,
1998....................... $(64,428,097) $ (3,656,359)
============ ============
See accompanying notes.
F-5
68
CERUS CORPORATION
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
------------------------------------------
1998 1997 1996
------------ ------------ ------------
OPERATING ACTIVITIES
Net loss............................................. $(29,558,052) $(14,664,213) $(10,206,885)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization...................... 611,892 562,066 477,551
Amortization of deferred compensation.............. 90,084 169,450 219,828
Changes in operating assets and liabilities:
Accounts receivable from a related party........ 4,376,141 (4,050,626) (325,515)
Other current assets............................ (97,711) (8,672) 52,568
Other assets.................................... 17,189 12,938 36,706
Accounts payable to a related party............. 12,718,801 -- --
Accounts payable................................ 36,908 907,601 133,657
Accrued compensation and related expenses....... 50,467 300,611 275,869
Accrued third-party toxicology and development
expenses...................................... 1,675,000 41,700 854,300
Other accrued expenses.......................... 338,514 1,085,654 472,500
Deferred revenue................................ -- (981,523) (918,981)
------------ ------------ ------------
Net cash used in operating activities................ (9,740,767) (16,625,014) (8,928,402)
INVESTING ACTIVITIES
Purchases of furniture and equipment................. (304,791) (378,645) (164,960)
Purchases of short-term investments.................. (29,261,767) (31,977,178) --
Sale of short-term investments....................... -- 1,000,000 --
Maturities of short-term investments................. 25,598,000 21,000,000 --
------------ ------------ ------------
Net cash used in investing activities................ (3,968,558) (10,355,823) (164,960)
FINANCING ACTIVITIES
Net proceeds from sale of preferred stock............ 5,000,000 -- 5,899,149
Proceeds from issuance of common stock............... 3,340,474 32,613,983 258,922
Payment of fractional shares on preferred stock
conversion......................................... -- (1,708) --
Repurchase of common stock........................... (3,842) (634) --
Deferred financing costs............................. -- -- (556,142)
Payments on notes receivable from shareholders....... -- 75,206 5,382
Payments on capital lease obligations................ (69,815) (104,464) (170,916)
------------ ------------ ------------
Net cash provided by financing activities............ 8,266,817 32,582,383 5,436,395
------------ ------------ ------------
Net increase (decrease) in cash and cash
equivalents........................................ (5,442,508) 5,601,546 (3,656,967)
Cash and cash equivalents, beginning of period....... 11,603,596 6,002,050 9,659,017
------------ ------------ ------------
Cash and cash equivalents, end of period............. $ 6,161,088 $ 11,603,596 $ 6,002,050
============ ============ ============
Supplemental disclosures:
Interest paid...................................... $ 9,153 $ 14,901 $ 18,347
============ ============ ============
Supplemental schedule of noncash investing and
financing activities:
Capital lease obligations incurred................. $ -- $ 31,025 $ 226,936
============ ============ ============
Deferred compensation related to stock option
grants.......................................... $ -- $ -- $ 530,215
============ ============ ============
Conversion of preferred stock to common stock...... $ -- $ 24,534,998 $ --
============ ============ ============
See accompanying notes.
F-6
69
CERUS CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
1. THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
Cerus Corporation (the "Company") (formerly Steritech, Inc.),
incorporated in California on September 19, 1991, is developing systems designed
to improve the safety of blood products by inactivating infectious pathogens in
blood products (platelets, fresh frozen plasma ("FFP") and red blood cells) and
inhibiting the leukocyte (white blood cell) activity that is responsible for
certain adverse immune and other transfusion-related reactions. The Company has
entered into two development and commercialization agreements with Baxter
Healthcare Corporation ("Baxter") to develop, manufacture and market, these
pathogen inactivation systems (see Note 2). The Company has not received any
revenues from product sales, and all revenues recognized by the Company to date
have resulted from the Company's agreements with Baxter and federal research
grants. The Company will be required to conduct significant research,
development, testing and regulatory compliance activities on its pathogen
inactivation systems that, together with anticipated general and administrative
expenses, are expected to result in substantial additional losses, and the
Company may need to adjust its operating plans and programs based on the
availability of cash resources. The Company's ability to achieve a profitable
level of operations will depend on successfully completing development,
obtaining regulatory approvals and achieving market acceptance of its pathogen
inactivation systems. There can be no assurance that the Company will ever
achieve a profitable level of operations.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
REVENUES AND RESEARCH AND DEVELOPMENT EXPENSES
Revenues related to the cost reimbursement provisions under development
contracts are recognized as the costs on the project are incurred. Revenues
related to milestones specified under development contracts are recognized as
the milestones are achieved. License fees and payments for achieved milestones
are non-refundable and are not subject to future performance. Research and
development costs are expensed as incurred.
The Company receives certain United States government grants which
support the Company's research effort in defined research projects. These grants
generally provide for reimbursement of approved costs incurred as defined in the
various grants. Revenues associated with these grants are recognized as costs
under each grant are incurred.
CASH, CASH EQUIVALENTS, AND SHORT-TERM INVESTMENTS
The Company considers all highly liquid investments with original
maturities less than three months to be cash and cash equivalents. Cash
equivalents consist principally of short-term money market instruments and
commercial paper.
In accordance with Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," the Company
has classified all debt securities as available-for-sale at the time of purchase
and re-evaluates such designation as of each balance sheet date. The
available-for-sale securities recorded at amounts which approximate fair value
at December 31, 1998 and 1997 totaled $19,801,633 and $21,580,374, respectively.
F-7
70
CERUS CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
1. THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CASH, CASH EQUIVALENTS, AND SHORT-TERM INVESTMENTS (CONTINUED)
Unrealized gains and losses at December 31, 1998 and 1997 and realized
gains and losses for the years then ended were not material. Accordingly, the
Company has not made a provision for such amounts in its balance sheets. The
cost of securities sold is based on the specific identification method.
Substantially, all of the Company's cash, cash equivalents, and short-term
investments are maintained by three major financial institutions.
FURNITURE AND EQUIPMENT
Furniture and equipment is stated at cost less accumulated depreciation
and amortization. Depreciation on equipment is calculated on a straight-line
basis over the estimated useful lives of the assets (principally five years for
laboratory equipment and furniture and three years for office equipment).
Leasehold improvements are amortized on a straight-line basis over the shorter
of the lease term or the estimated useful lives of the improvements.
STOCK-BASED COMPENSATION
In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("FAS 123"). The Company adopted FAS 123 in 1996. The Company
accounts for employee stock options in accordance with Accounting Principles
Board Opinion No. 25 and has adopted the "disclosure only" alternative described
in FAS 123.
INCOME TAXES
The Company accounts for income taxes based upon Financial Accounting
Standards Board Statement No. 109, "Accounting for Income Taxes." Under this
method, deferred tax assets and liabilities are determined based on differences
between the financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse.
NET LOSS PER SHARE -- BASIC AND DILUTED
The Company calculates basic and diluted earnings per share in
accordance with Financial Accounting Standards Board Statement No. 128,
"Earnings Per Share" ("FAS 128"). Under FAS 128, basic earnings per share is
computed by dividing net income (loss) by the weighted average number of common
shares outstanding for the period. Diluted earnings per share reflects the
assumed conversion of all dilutive securities, such as options, warrants,
convertible debt and convertible preferred stock. Common stock equivalent shares
from redeemable convertible preferred stock and from stock options and warrants
are not included as the effect is anti-dilutive.
PRO FORMA NET LOSS PER SHARE
Pro forma basic and diluted net loss per share is computed as described
above and also gives effect, even if anti-dilutive, to common equivalent shares
from convertible preferred shares that converted to common shares upon the
closing of the Company's initial public offering (using the as-if-converted
method).
F-8
71
CERUS CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
1. THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PRO FORMA NET LOSS PER SHARE (CONTINUED)
YEARS ENDED DECEMBER 31,
--------------------------------------------
1998 1997 1996
------------ ------------ ------------
Net loss....................................... $(29,558,052) $(14,664,213) $(10,206,885)
------------ ------------ ------------
Weighted average common shares outstanding..... 9,325,269 8,351,872 1,705,821
Adjustment to reflect the effect of the assumed
conversion of convertible preferred stock.... -- -- 4,202,396
------------ ------------ ------------
Shares used in computing pro forma net loss per
share -- basic and diluted................... 9,325,269 8,351,872 5,908,217
============ ============ ============
Pro forma net loss per share -- basic and
diluted...................................... $ (3.17) $ (1.76) $ (1.73)
============ ============ ============
Common stock equivalents are excluded from the diluted net loss per
share calculation, as the effect is antidilutive.
COMPREHENSIVE INCOME (LOSS)
In 1997, the Financial Accounting Standard Board issued Statement No.
130, "Reporting Comprehensive Income" ("FAS 130"), which requires that all items
that are required to be recognized under accounting standards as comprehensive
income (revenues, expenses, gains and losses) be reported in a financial
statement that is displayed with the same prominence as other financial
statements. The Company does not have material components of other comprehensive
income. Therefore, comprehensive loss is equal to net loss reported for all
periods presented.
DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE
In 1997, the Financial Accounting Standards Board issued Statement No.
131, "Disclosures about Segments of an Enterprise and Related Information,"
("FAS 131"), which establishes standards for the way public business enterprises
report information about operating segments in annual financial statements. The
Company has one reportable operating segment under this statement, which is the
development of systems to treat blood products, and the required disclosures are
reflected in the financial statements.
2. LICENSING AGREEMENTS
AGREEMENTS WITH BAXTER, A RELATED PARTY OF THE COMPANY
In December 1993, the Company entered into a development and
commercialization agreement with Baxter to develop a system for inactivation of
pathogens in platelets used for transfusions. The agreement was amended in
December 1996 and June 1998. The amended agreement (the "Platelet Agreement")
provides for Baxter and the Company to generally share system development costs
equally, subject to mutually agreed budgets established from time to time and
for a sharing of revenue from sales of inactivation system disposables after
each party is reimbursed for its cost of goods above a specified level. The June
1998 amendment provides for the Company, beginning April 1, 1998, to fund $5.0
million of development costs previously to be funded by Baxter. At the time of
the amendment, Baxter agreed to make a $5.0 million milestone payment to the
Company upon the approval by the United States Food and Drug Administration (the
"FDA") of an application to market products developed under the platelet program
or comparable approval in Europe or upon termination of the platelet system
development
F-9
72
CERUS CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
2. LICENSING AGREEMENTS (CONTINUED)
AGREEMENTS WITH BAXTER, A RELATED PARTY OF THE COMPANY (CONTINUED)
program. As part of the June 1998 amendment, the Company increased its share of
the adjusted product revenue from any future sales of the platelet system
disposables from approximately 28.2% of adjusted product revenue to
approximately 33.5% in exchange for the Company's agreement to pay Baxter $8.3
million on June 30, 1999. By mutual agreement with Baxter, the Company may defer
such payment for up to twelve months under certain circumstances.
In April 1996, the Company entered into a development and
commercialization agreement with Baxter, principally focused on the development
of plasma and red blood cell pathogen inactivation systems. The agreement was
amended in March 1998 and June 1998. The amended agreement (the "RBC/FFP
Agreement") provides for Baxter and the Company generally to share red blood
cell system development costs equally, subject to mutually agreed to budgets
established from time to time. The RBC/FFP Agreement also provides for an equal
sharing of revenue from sales of red blood cell inactivation system disposables
after each party is reimbursed for its cost of goods and a specified percentage
allocation is retained by Baxter for marketing and administrative expenses.
Under the RBC/FFP Agreement, the Company and Baxter equally funded the FFP
program development through December 31, 1997 after which time Baxter's funding
commitment for the FFP development program was limited to $1.2 million payable
in equal installments in January 1999 and January 2000. The RBC/FFP Agreement
also provides for the Company to receive 75% and Baxter to receive 25% of
revenue from sales of FFP inactivation system disposables after each party is
reimbursed for its cost of goods and a specified percentage allocation not to
exceed 14% of revenue is retained by Baxter for marketing and administrative
expenses. Under the Company's direction, Baxter will be responsible for
manufacturing and marketing the FFP product, and will retain its exclusive,
worldwide distribution license.
The RBC/FFP Agreement also provided for Baxter to make $5.0 million
equity investments in the Company's common stock, subject to the achievement of
specified milestones, at a price equal to 120% of the market price of the
Company's common stock at the time of the investments. In July 1998, the initial
$3.0 million equity investment was made and, in January 1999, the milestone for
the remaining $2.0 million equity investment was achieved. Baxter can terminate
the agreements without cause under certain circumstances.
Under the agreements, the Company has received $20.0 million in equity
investments from Baxter and has recognized approximately $21.2 million in
revenue. Development funding is in the form of balancing payments made between
Baxter and the Company to adjust the relative spending of the companies to the
levels agreed to by Baxter and the Company and to reimburse each party for
fee-for-service development activities.
As of December 31, 1998, Baxter owned 1,617,425 shares of the common
stock of the Company, representing approximately 17.2% of the outstanding common
stock of the Company. Baxter has agreed that it will not at any time, nor will
it permit any of its affiliates, to own capital stock of the Company having
20.1% or more of the outstanding voting power of the Company. Such restrictions
on stock purchases will not apply in the event a third party makes a tender
offer for a majority of the outstanding voting securities of the Company or if
the Board of Directors of the Company determines to liquidate or sell to a third
party substantially all of the assets or a majority of the voting securities of
the Company or to approve a merger or consolidation in which the Company's
stockholders will not own a majority of the voting securities of the surviving
entity.
Revenue relating to licenses, milestones and development funding for all
periods presented are as a result of agreements with Baxter.
F-10
73
CERUS CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
2. LICENSING AGREEMENTS (CONTINUED)
AGREEMENT WITH THE CONSORTIUM FOR PLASMA SCIENCE
In December 1998, the Company and the Consortium for Plasma Science (the
"Consortium") entered into an agreement for the development of a pathogen
inactivation system for source plasma. The Consortium is co-funded by four
plasma fractionation companies, one of which is Baxter, a related party of the
Company. The Consortium, which is a separate entity from its members, provides
R&D funding worldwide for technologies to improve the safety of source plasma.
The agreement includes an initial commitment to fund development of the
Company's proprietary technology for use with source plasma. The initial term of
the agreement is one year, beginning January 1999. The agreement contemplates
funding by the Consortium through the regulatory approval phase, with future
commitments to be determined by the Consortium annually. The agreement provides
for the Company to pay the Consortium a royalty on potential product sales.
3. INVESTMENTS
Investments classified as available-for-sale were as follows:
DECEMBER 31,
----------------------------
1998 1997
------------ ------------
Money market mutual funds............................. $ 344,265 $ 4,584,900
United States and state government obligations........ 3,001,128 5,092,388
Commercial paper...................................... 16,456,240 11,903,086
------------ ------------
Total investments..................................... 19,801,633 21,580,374
Less: amounts classified as cash equivalents.......... (6,160,688) (11,603,196)
------------ ------------
Short-term investments................................ $ 13,640,945 $ 9,977,178
============ ============
4. COMMITMENTS AND CONTINGENCIES
The Company leases its office facilities and certain equipment under
non-cancelable operating leases with initial terms in excess of one year which
require the Company to pay operating costs, property taxes, insurance and
maintenance. These facility leases generally contain renewal options and
provisions adjusting the lease payments.
Capital lease obligations represent the present value of future rental
payments under capital lease agreements for laboratory and office equipment. The
original cost and accumulated amortization on the equipment under capital leases
is $444,994 and $373,071, respectively, at December 31, 1998 and $444,994 and
$269,941, respectively, at December 31, 1997.
F-11
74
CERUS CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
4. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Future minimum payments under capital and operating leases are as
follows:
CAPITAL OPERATING
YEAR ENDING DECEMBER 31, LEASES LEASES
------------------------ ------- ----------
1999........................................................ $32,541 $ 498,532
2000........................................................ 8,389 253,313
2001........................................................ 4,893 248,089
2002........................................................ -- 248,089
Thereafter.................................................. -- 372,133
------- ----------
Total minimum lease payments................................ 45,823 $1,620,156
==========
Amount representing interest................................ 2,820
-------
Present value of net minimum lease payments................. 43,003
Current portion............................................. 30,792
-------
Long-term portion........................................... $12,211
=======
Rent expense for office facilities and certain equipment was $641,564,
$677,501 and $732,302 for the years ended December 31, 1998, 1997 and 1996,
respectively.
TRADE SECRET MATTER
In August 1996, an Australian entity alleged that its unspecified trade
secrets and know-how were used in the development by the Company of unspecified
compounds for the Company's red cell program without its consent. This entity
has indicated that it is seeking compensation in the form of royalties or a
lump-sum payment. Based on its investigation of the matter to date, the Company
believes that the claims are without merit. However, any future litigation
involving these allegations would be subject to inherent uncertainties,
especially in cases where complex technical issues are decided by a lay jury.
There can be no assurance that, if a lawsuit were commenced, it would not be
decided against the Company, in which case, settlement of this claim could have
a material adverse effect upon the Company's business, financial condition and
results of operations.
The Company is a licensee under a license agreement with an unaffiliated
company with respect to two United States patents covering inventions pertaining
to psoralen-based photochemical decontamination treatment of whole blood or
blood components and four United States patents relating to vaccines, as well as
related foreign patents. Whether the Company's psoralen-based pathogen
inactivation systems practice either of the photochemical decontamination
patents depends on an interpretation of the scope of the patent claims. If such
systems practice such patents, the license would provide for the Company to make
certain milestone payments which may be credited against any royalties payable
by the Company. The license requires a royalty payable by the Company on
revenues from such systems and certain annual minimum royalty payments per year
until termination of the license. The manner in which any such milestone
payments and royalties would be shared by Baxter, if at all, has not been
determined. The Company does not believe that any amounts that might be payable
by it under the agreement to date would be material.
F-12
75
CERUS CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
5. PREFERRED STOCK
SERIES A REDEEMABLE CONVERTIBLE PREFERRED STOCK
In June 1998, the Company and Baxter entered into an agreement for
Baxter to purchase 5,000 shares of Series A preferred stock at $1,000.00 per
share. These shares were issued in July 1998. The holders of Series A preferred
stock have no voting rights, except in certain instances. The Company may redeem
all or a portion of these shares at the original issuance price upon achievement
of certain milestones. If the shares are not redeemed upon achievement of these
milestones, each share will be automatically converted into common shares equal
to the original issuance price divided by 120% of the average closing price of
the common stock. Upon termination of the Platelet Agreement, either the Company
or the holders of the majority of outstanding Series A preferred stock may
require the Company to redeem all Series A preferred stock at the original
issuance price. If the shares are not redeemed upon termination, each share will
be automatically converted into common shares equal to the original issuance
price divided by the average closing price of the common stock.
SERIES B PREFERRED STOCK
Also in June 1998, the Company entered into a Series B Preferred Stock
Purchase Agreement with Baxter, whereby Baxter agrees to purchase Series B
preferred stock at an aggregate purchase price of up to $9.5 million by
September 30, 1999. The Company may elect to sell these shares to Baxter in two
tranches of $5.0 million and $4.5 million, respectively. The purchase price per
share shall equal the average closing price per share of the Company's common
stock multiplied by 100. In the event the Company completes an equity financing
of at least $20.0 million (excluding purchases by Baxter), the Company will pay
Series B preferred stockholders a premium equal to 7.0% per annum interest on
the purchase price. At any time one year after issuance, the holders of Series B
preferred stock may convert their shares into common shares equal to the
original issue price divided by the conversion price. The initial conversion
price is equal to the original issuance price divided by 100.
6. STOCKHOLDERS' EQUITY
COMMON STOCK
In January 1997, the Company completed an initial public offering of
2,000,000 shares of common stock at $12.00 per share. The Company received net
proceeds of $21.1 million. In conjunction with the initial public offering, the
Company sold an additional 496,878 shares of its common stock to Baxter for an
aggregate purchase price of approximately $5.5 million. Additionally, at the
time of the initial public offering, 33,315 warrants to purchase 47,605 shares
of common stock were exercised for an aggregate price paid to the Company of
$183,000 and Series A, B, C, D and E preferred stock converted into 4,412,243
shares of common stock. In October 1997, the Company completed a private
placement of 217,202 shares of common stock to Baxter for an aggregate purchase
price of approximately $5.0 million.
STOCK OPTION PLANS
In January 1992, the Company's Board of Directors approved the 1992
Stock Option Plan (the "Plan"). Common stock reserved for issuance under the
Plan is 1,029,000 shares. Under the Plan, two types of options may be granted:
Incentive Stock Options ("ISOs") and Non-Qualified Stock Options ("NQSOs"). The
ISOs may be granted at a price per share not less than the fair market value at
the date of grant. The NQSOs may be granted at a price per share not less than
85% of the fair market value at the date of grant. The option term is ten years.
Vesting, as determined by the Board of Directors, generally occurs ratably over
four years. In the event option holders cease to be employed by the Company,
except
F-13
76
CERUS CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
6. STOCKHOLDERS' EQUITY (CONTINUED)
STOCK OPTION PLANS (CONTINUED)
in the event of death or disability or as otherwise provided in the option
grant, all unvested options are forfeited and all vested options must be
exercised within a three-month period, otherwise the options are forfeited.
In July 1996, the Company adopted the 1996 Equity Incentive plan (the
"Incentive Plan") (approved by the stockholders in January 1997) as an amendment
and restatement of the Company's 1992 Stock Option Plan, and reserved an
additional 441,000 shares of common stock for issuance thereunder. The Incentive
Plan provides for grants of ISOs to employees and NQSOs, restricted stock
purchase awards, stock appreciation rights and stock bonuses to employees,
directors and consultants of the Company.
In November 1998, the Company adopted the 1998 Non-Officer Stock Option
Plan, which provides for the grant of stock options to purchase up to 120,000
shares of the Company's common stock. Under the terms of this plan, options may
be granted to employees or consultants at an exercise price of at least 85% of
the fair market value per share at the date of grant. The option term is ten
years.
Options granted are immediately exercisable and unvested (but issued)
shares are subject to repurchase by the Company if the holder is no longer
employed by the Company. As of December 31, 1998, 42,910 shares outstanding were
subject to this repurchase provision.
STOCK-BASED COMPENSATION
The Company has elected to follow Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and related
interpretations in accounting for its employee stock awards because, as
discussed below, the alternative fair value accounting provided for under FAS
123 requires the use of option valuation models that were not developed for use
in valuing employee stock options. Under APB 25, because the exercise price of
the Company's employee common stock options equals the market price of the
underlying common stock on the grate date (for certain Company common stock
grants), no compensation expense is recorded.
"As adjusted" information regarding net loss and net loss per share is
required by FAS 123, and has been determined as if the Company had accounted for
its employee stock options and employee stock purchase plan under the fair value
method of that Statement. The fair value for these options and shares was
estimated at the date of grant using a Black-Scholes option pricing model with
the following weighted-average assumptions for the years ended December 31:
EMPLOYEE STOCK
STOCK OPTION PLANS PURCHASE PLAN
------------------------ ---------------
1998 1997 1996 1998 1997
------ ------ ------ ------ ------
Expected dividend yield............................... 0% 0% 0% 0% 0%
Expected volatility................................... .6267 .7424 .5925 .6267 .7420
Risk-free interest rate............................... 5.75% 6.13% 5.09% 5.75% 6.13%
Expected life of the option (years)................... 5 5 5 0.5 0.5
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options and purchased shares
have characteristics significantly
F-14
77
CERUS CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
6. STOCKHOLDERS' EQUITY (CONTINUED)
STOCK-BASED COMPENSATION (CONTINUED)
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock awards.
For purposes of "as adjusted" disclosures, the estimated fair value of
the options is amortized to expense over the awards' vesting period. The effects
of applying FAS 123 on "as adjusted" net loss are not likely to be
representative of the effects on reported net loss/income for future years. The
Company's reported and "as adjusted" information at December 31 follows:
1998 1997 1996
------------ ------------ ------------
Net loss, as reported................................ $(29,558,052) $(14,664,213) $(10,206,885)
Net loss, "as adjusted".............................. (30,271,930) (14,966,213) (10,509,885)
Net loss per share -- basic and diluted, as
reported........................................... (3.17) (1.76) (5.98)
Net loss per share -- basic and diluted, "as
adjusted".......................................... (3.25) (1.79) (6.16)
Activity under the stock option plans is set forth below:
NUMBER OF WEIGHTED AVERAGE
OPTIONS EXERCISE PRICE PER
OUTSTANDING SHARE
----------- ------------------
Balances at December 31, 1995............................... 506,048 $ .670
Granted................................................... 418,126 2.533
Cancelled................................................. (5,879) .714
Exercised................................................. (510,912) .344
-------- -------
Balances at December 31, 1996............................... 407,383 2.523
Granted................................................... 51,300 14.925
Cancelled................................................. (10,184) 3.240
Exercised................................................. (61,229) 1.045
-------- -------
Balances at December 31, 1997............................... 387,270 4.380
Granted................................................... 558,742 14.788
Cancelled................................................. (8,794) 4.310
Exercised................................................. (18,784) 8.163
-------- -------
Balances at December 31, 1998............................... 918,434 $10.778
======== =======
F-15
78
CERUS CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
6. STOCKHOLDERS' EQUITY (CONTINUED)
STOCK-BASED COMPENSATION (CONTINUED)
The weighted average fair value of options granted during 1998, 1997 and
1996 was $7.212, $8.107, and $6.005 per share, respectively. Options to purchase
81,532 shares of common stock were available for future grant.
OPTIONS OUTSTANDING
----------------------------------------------- OPTIONS VESTED
WEIGHTED AVERAGE ----------------------------
NUMBER REMAINING WEIGHTED AVERAGE NUMBER WEIGHTED AVERAGE
RANGE OF EXERCISE PRICES OF SHARES CONTRACTUAL LIFE EXERCISE PRICE OF SHARES EXERCISE PRICE
- ------------------------ --------- ---------------- ---------------- --------- ----------------
$0.262-2.721.................. 277,886 7.22 $ 2.488 189,723 $ 2.409
$4.082-12.375................. 162,016 9.24 $11.023 23,640 $ 7.044
$13.938-15.500................ 463,082 9.76 $15.341 27,000 $14.530
$16.563-23.875................ 15,900 9.07 $20.234 3,110 $21.101
------- ---- ------- ------- -------
918,884 8.90 $10.778 243,473 $ 4.442
======= ==== ======= ======= =======
The Company recognized deferred compensation of $530,215 for the
difference between the exercise price and deemed fair value of certain stock
options granted during the year ended December 31, 1996. This amount is being
amortized by periodic charges to operations over the four year vesting periods
of the individual options. Amortization expense related to deferred compensation
totaled $90,084, $169,450, and $219,828 for the years ended December 31, 1998,
1997, and 1996, respectively.
EMPLOYEE STOCK PURCHASE PLAN
In July 1997, the Company's Board of Directors approved the Employee
Stock Purchase Plan (the "Purchase Plan") (approved by the stockholders in
January 1998) covering an aggregate 220,500 shares of common stock. The Purchase
Plan is intended to qualify as an employee stock purchase plan within the
meaning of Section 423(b) of the Code. Under the Purchase Plan, the Board of
Directors may authorize participation by eligible employees, including officers,
in periodic offerings following the adoption of the Purchase Plan. The offering
period for any offering will be no more than 27 months. Employees purchased
32,189 and 20,830 shares under the Purchase Plan during 1998 and 1997,
respectively. At December 31, 1998, 167,481 shares were available for issuance.
The weighted average fair value of the rights granted in 1998 and 1997 using the
Black-Scholes model was $2.834 and $2.240, respectively.
WARRANTS
At December 31, 1998, the following warrants to purchase shares of
common stock were issued in connection with an operating lease line, all of
which expire in February 2002:
NUMBER EXERCISE DATE
OF SHARES PRICE PER SHARE ISSUED
- --------- --------------- ----------
5,805.. $3.45 July 1993
9,187.. $5.44 May 1994
6,615.. $7.14 April 1995
------
21,607..
======
F-16
79
CERUS CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
6. STOCKHOLDERS' EQUITY (CONTINUED)
WARRANTS (CONTINUED)
REINCORPORATION AND STOCK SPLIT
On January 14, 1997, the Company effected a stock split of all
outstanding shares of common stock such that each share of common stock was
split into 1.47 shares of common stock. All common shares in the accompanying
financial statements have been retroactively adjusted to reflect the stock
split. In connection with the stock split, the conversion and exercise
provisions of the outstanding shares of preferred stock, stock options and
warrants have been adjusted accordingly. At the same time, the Board authorized
the Company to proceed with the reincorporation of the Company into Delaware.
Upon the reincorporation, the authorized stock of the Company became 5,000,000
shares of preferred stock, par value $.001 per share, and 50,000,000 shares of
common stock, par value $.001 per share. Also upon reincorporation, the Board of
Directors received the authority, without further action by the stockholders, to
issue up to 5,000,000 shares of preferred stock in one or more series and to fix
the designations, powers, preferences, privileges, and relative participating,
optional or special rights and the qualifications, limitations, or restrictions
thereof, including dividend rights, conversion rights, voting rights, and terms
of redemption and liquidation preferences, any or all of which may be greater
than the rights of the common stock.
7. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Significant
components of the Company's deferred tax assets are as follows:
DECEMBER 31,
----------------------------
1998 1997
------------ ------------
Net operating loss carryforward....................... $ 17,800,000 $ 10,200,000
Research and development credit carryforward.......... 2,600,000 1,600,000
Certain expenses not currently deductible for tax
purposes............................................ 4,500,000 2,200,000
Accrued liabilities................................... 1,500,000 --
Capitalized research and development.................. 800,000 900,000
Capitalized patent costs.............................. 200,000 --
Other................................................. 500,000 300,000
------------ ------------
Gross deferred tax assets............................. 27,900,000 15,200,000
Valuation allowance................................... (27,900,000) (15,200,000)
------------ ------------
Net deferred tax assets............................... $ -- $ --
============ ============
The valuation allowance increased by $12,700,000 and $7,000,000 for the
years ended December 31, 1998 and 1997, respectively. The increase is primarily
attributable to the increase in the net operating loss and tax credit
carryforwards. The Company believes that, based on a number of factors, the
available objective evidence creates sufficient uncertainty regarding the
realizability of the deferred tax assets such that a full valuation allowance
has been recorded. These factors include the Company's history of net losses
since its inception, the need for FDA approval of the Company's products prior
to commercialization, expected near-term future losses and the absence of
taxable income in prior carryback years. The valuation allowance at December 31,
1998 includes $400,000 related to deferred tax assets arising from tax benefits
associated with stock option plans. This benefit, when realized, will be
recorded as an increase in stockholders' equity rather than as a reduction in
the income tax provision.
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80
CERUS CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
7. INCOME TAXES (CONTINUED)
Although management's operating plans assume, beyond the near-term,
taxable and operating income in future periods, management evaluation of all
available information in assessing the realizability of the deferred tax assets
in accordance with Financial Accounting Standards Board Statement No. 109,
"Accounting for Income Taxes," indicates that such plans were subject to
considerable uncertainty. Therefore, the valuation allowance was increased to
fully reserve the Company's deferred tax assets. The Company will continue to
assess the realizability of the deferred tax assets based on actual and
forecasted operating results.
At December 31, 1998, the Company had net operating loss carryforwards
of approximately $46,200,000 for federal and $35,100,000 for state income tax
purposes. The Company also had research and development tax credit carryforwards
of approximately $2,100,000 for federal income tax purposes and approximately
$800,000 for state income tax purposes at December 31, 1998. The federal net
operating loss and tax credit carryforwards expire between the years 2007 and
2018. The state net operating loss carryforwards expire between the years 2001
and 2003.
Utilization of the Company's net operating losses and credits are
subject to a substantial annual limitation due to the ownership change
limitations provided by the Internal Revenue Code. The annual limitation may
result in the expiration of net operating losses and credits before utilization.
8. RETIREMENT PLAN
The Company maintains a defined contribution savings plan (the "401(k)
Plan") that qualifies under the provisions of Section 401(k) of the Internal
Revenue Code and covers all employees of the Company. Under the terms of the
401(k) Plan, employees may contribute varying amounts of their annual
compensation. The Company may contribute a discretionary percentage of qualified
individual employee's salaries, as defined, to the 401(k) Plan. Company
contributions of $3,500 were charged to operations in the year ended December
31, 1996. The Company did not contribute to the 401(k) Plan in the years ended
in December 31, 1998 and 1997.
F-18
81
LOGO
82
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth all expenses, other than the underwriting
discounts and commissions, payable by the Registrant in connection with the sale
of the common stock being registered. All the amounts shown are estimates except
for the registration fee.
Registration fee............................................ $ 18,783
NASD filing fee............................................. $ 7,300
Nasdaq listing fee.......................................... $ 17,500
Printing expenses........................................... $200,000
Legal fees and expenses..................................... $250,000
Accounting fees and expenses................................ $150,000
Miscellaneous............................................... $ 6,417
--------
Total..................................................... $650,000
========
ITEM 15. INDEMNIFICATION OF OFFICERS AND DIRECTORS
Under Section 145 of the Delaware General Corporation Law, the
Registrant has broad powers to indemnify its directors and officers against
liabilities they may incur in such capacities, including liabilities under the
Securities Act of 1933, as amended ("Securities Act"). The Registrant's Bylaws
also provide that the Registrant will indemnify its directors and executive
officers and may indemnify its other officers, employees and other agents to the
fullest extent permitted by Delaware law.
The Registrant's Restated Certificate of Incorporation ("Restated
Certificate") provides that the liability of its directors for monetary damages
shall be eliminated to the fullest extent permissible under Delaware law.
Pursuant to Delaware law, this includes elimination of liability for monetary
damages for breach of the directors' fiduciary duty of care to the Registrant
and its stockholders. These provisions do not eliminate the directors' duty of
care and, in appropriate circumstances, equitable remedies such as injunctive or
other forms of non-monetary relief will remain available under Delaware law. In
addition, each director will continue to be subject to liability for breach of
the director's duty of loyalty to the Registrant, for acts or omissions not in
good faith or involving intentional misconduct, for knowing violations of law,
for any transaction from which the director derived an improper personal
benefit, and for payment of dividends or approval of stock repurchases or
redemptions that are unlawful under Delaware law. The provision also does not
affect a director's responsibilities under any other laws, such as the federal
securities laws or state or federal environmental laws.
The Registrant has entered into agreements with its directors and
officers that require Cerus to indemnify such persons to the fullest extent
authorized or permitted by the provisions of the Restated Certificate and
Delaware law against expenses, judgements, fines, settlements and other amounts
actually and responsibly incurred (including expenses of a derivative action) in
connection with any proceeding, whether actual or threatened, to which any such
person may be made a party by reason of the fact that such person is or was a
director, officer, employee or other agent of the Registrant or any of its
affiliated enterprise. Delaware law permits such indemnification, provided such
person acted in good faith and in a manner such person reasonably believed to be
in or not opposed to the best interest of the Registrant and, with respect to
any criminal proceeding, had no reasonable cause to believe his or her conduct
was unlawful. The indemnification agreements also set forth certain procedures
that will apply in the event of a claim for indemnification thereunder.
At present, there is no pending litigation or proceeding involving a
director or officer of the Registrant as to which indemnification is being
sought nor is the Registrant aware of any threatened litigation that may result
in claims for indemnification by any officer or director.
II-1
83
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
The exhibits listed in the Exhibit Index are filed as part of this
Registration Statement.
(a) EXHIBITS.
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
1.1 Form of Underwriting Agreement.
3.1 Amended and Restated Certificate of Incorporation(1).
3.2 Bylaws(1).
5.1 Opinion of Cooley Godward LLP.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
23.2 Consent of Cooley Godward LLP (Reference is made to Exhibit
5.1).
24.1 Power of Attorney. Reference is made to the signature page.
27 Financial Data Schedule.
- ---------------
(1) Filed as an exhibit to Cerus' Registration Statement on Form S-1 (No.
333-11341) and incorporated by reference herein.
(b) FINANCIAL STATEMENT SCHEDULES.
Schedules are omitted because they are not required, they are not
applicable or the information is already included in the financial statements or
the notes thereto.
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement: (i) to
include any prospectus required by Section 10(a) (3) of the Securities Act;
(ii) to reflect in the prospectus any facts or events arising after the
effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
Registration Statement; and (iii) to include any material information with
respect to the plan of distribution not previously disclosed in the
Registration Statement or any material change to such information in the
Registration Statement; provided, however, that (i) and (ii) do not apply
if the Registration Statement is on Form S-3 or Form S-8, and the
information required to be included in a post-effective amendment by (i)
and (ii) is contained in periodic reports filed with or furnished to the
Commission by the Registrant pursuant to Section 13 or Section 15(d) of the
Exchange Act that are incorporated by reference in the Registration
Statement.
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a
new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
Registrant's annual report pursuant to Section 13(a) or 15(d) of the Exchange
Act (and, where applicable, each filing of an employee benefit plan's annual
report pursuant to Section 15(d) of the Exchange Act) that is incorporated by
reference in the registration statement shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
II-2
84
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus files as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
II-3
85
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
the Registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form S-3 and has duly caused this
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Concord, State of California, on the 11th day of
February, 1999.
CERUS CORPORATION
By: /s/ STEPHEN T. ISAACS
------------------------------------
Stephen T. Isaacs
President and Chief Executive
Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Stephen T. Isaacs and John E. Hearst, and
each or any one of them, his true and lawful attorney-in-fact and agent, with
full power of substitution and resubstitution, for him and in his name, place
and stead, in any and all capacities, to sign any and all amendments (including
post-effective amendments and registration statements filed pursuant to Rule
462) to this Registration Statement, and to file the same, with all exhibits
thereto, and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents, and each
of them, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in connection therewith, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or any of them, or their
or his substitutes or substitute, may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ STEPHEN T. ISAACS President, Chief Executive Officer February 11, 1999
- --------------------------------------------- and Director (Principal Executive
Stephen T. Isaacs Officer)
/s/ ROBERT E. MILLER Chief Financial Officer and Vice February 11, 1999
- --------------------------------------------- President, Finance (Principal
Robert E. Miller Financial and Accounting)
/s/ B.J. CASSIN Director February 11, 1999
- ---------------------------------------------
B.J. Cassin
/s/ JOHN E. HEARST Director February 11, 1999
- ---------------------------------------------
John E. Hearst
/s/ PETER H. MCNERNEY Director February 11, 1999
- ---------------------------------------------
Peter H. McNerney
/s/ DALE A. SMITH Director February 11, 1999
- ---------------------------------------------
Dale A. Smith
/s/ HENRY E. STICKNEY Director February 11, 1999
- ---------------------------------------------
Henry E. Stickney
II-4
86
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
1.1 Form of Underwriting Agreement.
3.1 Amended and Restated Certificate of Incorporation(1).
3.2 Bylaws(1).
5.1 Opinion of Cooley Godward LLP.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
Consent of Cooley Godward LLP (Reference is made to Exhibit
23.2 5.1).
24.1 Power of Attorney. Reference is made to the signature page.
27 Financial Data Schedule
- ---------------
(1) Filed as an exhibit to Cerus' Registration Statement on Form S-3 (No.
333-11341) and incorporated by reference herein.