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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-21937
CERUS CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 68-0262011
(State or other jurisdiction of (IRS Employer Identification
incorporation or organization) Number)
2525 STANWELL DR., SUITE 300 94520
CONCORD, CALIFORNIA (Zip Code)
(Address of principal executive
offices)
(925) 603-9071
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.001 PER SHARE
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The approximate aggregate market value of the Common Stock held by
non-affiliates of the registrant, based upon the closing price of the Common
Stock reported on the Nasdaq National Market on March 23, 1999, was
$132,186,700.
As of March 23, 1999, there were 9,437,946 shares of the registrant's
common stock outstanding.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I ..................................................................................... 2
Item 1. Business............................................................................ 2
Item 2. Properties.......................................................................... 31
Item 3. Legal Proceedings................................................................... 31
Item 4. Submission of Matters to a Vote of Security Holders................................. 31
PART II .................................................................................... 32
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters........... 32
Item 6. Selected Financial Data............................................................. 33
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations.......................................................................... 34
Item 7A. Quantitative and Qualitative Disclosures About Market Risk........................ 38
Item 8. Financial Statements and Supplemental Data.......................................... 38
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure.......................................................................... 38
PART III.................................................................................... 39
Item 10. Directors and Executive Officers of the Registrant................................. 39
Item 11. Executive Compensation............................................................. 40
Item 12. Security Ownership of Certain Beneficial Owners and Management..................... 44
Item 13. Certain Relationships and Related Transactions..................................... 45
PART IV.................................................................................... 47
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.................... 47
</TABLE>
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PART I
This report contains forward-looking statements. These forward-looking
statements include, but are not limited to, statements concerning Cerus
Corporation's plans to continue development of its current product candidates;
conduct clinical trials with respect to its product candidates; seek regulatory
approvals; address certain markets; engage third-party manufacturers to supply
its clinical trial and commercial requirements; continue to rely on a third
party for a marketing, sales and distribution capability; and evaluate
additional product candidates for subsequent clinical and commercial
development. In some cases, these statements may be identified by terminology
such as "may," "will," "should," "expects," "plans," "anticipates," "believes,"
"estimates," "predicts," "potential," or "continue" or the negative of such
terms and other comparable terminology. These statements involve known and
unknown risks and uncertainties that may cause Cerus' or its industry's results,
levels of activity, performance or achievements to be materially different from
those expressed or implied by the forward-looking statements. Factors that may
cause or contribute to such differences include, among others, those discussed
under the captions "Business," "Risk Factors" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations." Forward-looking
statements not specifically described above also may be found in these and other
sections of this report.
ITEM 1. BUSINESS
OVERVIEW
Cerus Corporation is developing systems designed to improve the safety
of blood products by inactivating infectious pathogens. Cerus' systems prevent
replication of pathogens in blood components used for transfusion and inhibit
the white blood cell (leukocyte) activity that is responsible for certain
adverse immune and other transfusion-related reactions. Blood components include
platelets, fresh frozen plasma ("FFP") and red blood cells. 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 to obtain a CE Marking 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
Healthcare Corporation 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.
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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 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.
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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 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:
<TABLE>
<CAPTION>
ROUTINELY SCREENED FOR
INFECTIOUS IN THE UNITED STATES
FAMILY PATHOGEN DISEASE YES NO
- ----------------- ----------------- ----------------------------- ----------------------
<S> <C> <C> <C> <C>
Hepatitis viruses HBV, HCV Hepatitis X
HEV, HGV Hepatitis X
Retroviruses HIV-1 and -2 AIDS X
HTLV-I and -II Malignant lymphoproliferative X
disorders, neuropathy
Herpes viruses CMV CMV retinitis, hepatitis, X
pneumonia
EBV Epstein-Barr Syndrome X
HHV-8 Kaposi's Sarcoma X
Parvoviruses B19 Aplastic anemia X
Bacteria Gram negative, Sepsis X
gram positive
Treponema pallidum Syphilis X
Borrelia
burgdorferi Lyme disease X
R. richettsiae Rocky Mountain Spotted Feder X
E. chafeensis Ehrlichiosis X
Protozoans T. cruzi Chagas' disease X
B. microti Babesiosis X
L. donovani Leishmaniasis X
Plasmodium sp. Malaria X
</TABLE>
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
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detected in the standard HIV tests. Finally, there are no current tests
available to screen effectively for many emerging pathogens, and testing cannot
be performed for pathogens that have yet to be identified. As a result of these
limitations, a number of infectious pathogens still pass into the blood supply.
In light of these continuing concerns, many patients have attempted to
mitigate the risks of transfusion through "autologous donation," donation of
their own blood for anticipated future use, or, where autologous donation is
impracticable, through the designation of donors such as family members.
Although autologous donations eliminate many risks, the blood collected is still
subject to the risk of bacterial growth during storage and is rarely available
in emergency situations or when a patient is chronically ill. In addition, the
statistical incidence of positive diagnostic test results from designated donor
blood has been found to be as high as in random donor blood.
Blood centers and health care providers have initiated additional
procedures in an effort to address pathogen transmission issues. For example,
platelet apheresis is sometimes used to limit donor exposure from pooled,
manually collected platelets. In addition, blood centers may quarantine single
donor plasma apheresis units until after the infectivity window has elapsed,
followed by confirmatory retesting of the donor, if the donor is available, to
verify the safety of the donated plasma. However, quarantined plasma can be
unwieldy, and the process is expensive and inventory is difficult to manage.
Moreover, a quarantine cannot be used with platelets and red blood cells because
these components have shelf lives that are shorter than the infectivity window
related to antibody production. 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
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rather than merely test for pathogens, Cerus' systems also have the potential to
reduce the risk of transmission of pathogens that would otherwise remain
undetected by testing.
Cerus' inactivation compounds act by preventing the replication of DNA
or RNA. Platelets, FFP and red blood cells do not contain nuclear DNA or RNA.
When the inactivation compounds are introduced into the blood components for
treatment, they cross bacterial cell walls or viral membranes, then move into
the interior of the nucleic acid structure. When subsequently activated by an
energy source, such as light, the compounds bind to the nucleic acid of the
viral or bacterial pathogen, preventing replication of the nucleic acid. This
process prevents infection because a virus, bacteria or other pathogenic cell
must replicate in order to cause infection. The Cerus compounds react in a
similar manner with the nucleic acid in leukocytes. This interaction inhibits
the leukocyte activity that is responsible for certain adverse immune and other
transfusion-related reactions. These compounds are designed to react with
nucleic acid only during the pathogen inactivation process and not after the
treated blood component is transfused. The systems are also designed to reduce
the amount of unbound, or residual, inactivation compound and breakdown products
of the inactivation process prior to transfusion.
Cerus' pathogen inactivation systems are being designed to integrate
into current blood collection, processing and storage procedures. Furthermore,
Cerus believes that the use of its pathogen inactivation products could, over
time, lead to a reduction in the use of certain costly procedures that are
currently employed in blood component transfusions, such as gamma irradiation,
CMV testing and leukocyte filtration.
CERUS STRATEGY
Cerus' objective is to improve the safety of blood products by becoming
the global leader in the development and commercialization of systems to
inactivate pathogens in blood components used for 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.
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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 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
and leukocytes in platelets, FFP, red blood cells and plasma for fractionation
and to improve the outcomes of bone marrow transplantation procedures. The
following table identifies Cerus' product development programs:
<TABLE>
<CAPTION>
THERAPEUTIC CERUS PRODUCT INACTIVATION DEVELOPMENT
PROGRAM INDICATION IN DEVELOPMENT COMPOUND STATUS
- ------- ---------- -------------- ------------ --------------
<S> <C> <C> <C> <C>
Platelets Surgery, cancer Platelet S-59 Phases 1, and 2
chemotherapy, Pathogen Clinical Trials
transplantation, Inactivation completed;
bleeding disorders System Phase 3 (CE Marking)
Clinical Trial 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 completed; Phase 2a
bleeding disorders System Clinical Trial
completed; Phase 2b
Clinical Trial
enrollment commence in
February 1999 in the
United States
Red Blood Surgery, Red Blood Cell S-303 Phase 1a Clinical
Cells transplantation, Pathogen Trial commenced in
anemia, cancer Inactivation November 1998; Phase
chemotherapy, trauma System 1b Clinical Trial
enrollment commenced
in February 1999
Plasma for Coagulation factor Source Plasma -- Identifying compounds
Fractionation and immunoglobulin Pathogen
deficiencies, blood Inactivation
volume expansion System
Allogeneic Allogeneic bone Leucocyte S-59 IND in effect
Cellular marrow transplant to Treatment Systems
Immunotherapies treat leukemia and
(ACIT) lymphoma
</TABLE>
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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.
<TABLE>
<CAPTION>
ADDED COST PER
-------------------------------------
APHERESIS RANDOM DONOR
PROCEDURE TRANSFUSION UNIT TRANSFUSION UNIT
- --------- ---------------- ----------------
<S> <C> <C>
Gamma irradiation.......... $10 to $ 50 $60 to $210
CMV screening.............. $15 to $ 35 $90 to $210
Leukocyte filtration....... $32 to $ 60 $32 to $ 60
</TABLE>
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 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
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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
immune 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 complete the safety profile for regulatory submission,
Cerus will be required to perform additional preclinical safety studies of its
S-59 psoralen compound. Planned studies include reproductive toxicology studies,
three month tolerability studies and a p53 carcinogenicity 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.
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.
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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 initially designed as
a double-blind, randomized, cross-over study in which double dose platelet
transfusions were given to platelet-deficient patients and post-transfusion
platelet count increment and bleeding time correction were measured. Cerus
amended the Phase 2c protocol to include patients for whom only platelet count
increment would be measured and to add a second site to evaluate its system with
platelets collected using alternate automated collection equipment. Cerus closed
the initial study site in 1998 after 29 severely platelet-deficient patients
completed the bleeding time and platelet count increment assessments. Based on
the results from the initial study site, the FDA concurred that Cerus may
proceed into a Phase 3 clinical trial. The results from the ten patients at the
second site will be analyzed and included in Cerus' final report to the FDA. The
pilot Phase 2c clinical trial, given its small size, was of limited statistical
power.
Cerus has 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
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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 (CE Marking) 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 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
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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.
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.
<TABLE>
<CAPTION>
PROCEDURE ADDED COST PER UNIT
- --------------- -------------------
<S> <C>
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
</TABLE>
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Red Blood Cell FRALE 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 frangible anchor-linker-effector (FRALE) compound, S-303, a small
molecule synthesized by Cerus. The selection of S-303 was based on preclinical
studies of over 100 FRALE 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 FRALE 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 FRALE
process for the inactivation of a broad array of viral and bacterial pathogens
with preservation of red blood cell function. Because of the mechanism of action
of its red blood cell FRALE treatment system, Cerus believes that its system may
also inactivate protozoans and inhibit leukocyte function. However, Cerus has
conducted no studies on protozoans or to detect inhibition of leukocyte activity
in red blood cells, and there can be no assurance that Cerus' red blood cell
system would be effective to inactivate protozoans or leukocytes. Cerus is
currently conducting toxicology and pathogen inactivation validation studies
consistent with good laboratory practice standards on its red blood cell
pathogen inactivation system.
In 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.
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.
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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 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
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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 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
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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 purchased $9.5 million of Series B
preferred stock in March 1999.
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. 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 revenue 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.
ALLIANCE WITH THE CONSORTIUM FOR PLASMA SCIENCE
In December 1998, Cerus and the Consortium entered into an agreement for
the development of a pathogen inactivation system for source plasma. 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.
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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.
MANUFACTURING AND SUPPLY
Cerus has used, and intends to continue to use, third parties to
manufacture and supply the psoralen and FRALE inactivation compounds for its
systems for use in clinical trials and for the potential commercialization of
its products in development. Cerus has no experience in manufacturing products
for commercial purposes and does not have any manufacturing facilities.
Consequently, Cerus is dependent on contract manufacturers for the production of
compounds and on Baxter for other system components for development and
commercial purposes.
Under 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.
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There can be no assurance that Cerus will be able to contract for the
manufacturing of products and compounds for its pathogen inactivation systems on
reasonable terms, if at all. In the event that Cerus is unable to obtain or
retain third-party manufacturing, it will not be able to commercialize its
products as planned. Cerus' dependence upon third parties, including Baxter, for
the manufacture of critical portions of its pathogen inactivation systems may
adversely affect Cerus' operating margins and its ability to develop, deliver
and sell products on a timely and competitive basis. Failure of any third-party
manufacturer to deliver the required quantities of products on a timely basis
and at commercially reasonable prices could materially adversely affect Cerus'
business, financial condition and results of operations. In the event Cerus
undertakes to establish its own commercial manufacturing capabilities, it will
require substantial additional funds, manufacturing facilities, equipment and
personnel.
Cerus purchases certain key components of its compounds from a limited
number of suppliers. While Cerus believes that there are alternative sources of
supply for such components, establishing additional or replacement suppliers for
any of the components in Cerus' compounds, if required, may not be accomplished
quickly and could involve significant additional costs. Any failure by Cerus to
obtain any of the components used to manufacture Cerus' compounds from
alternative suppliers, if required, could limit Cerus' ability to manufacture
its compounds and could have a material adverse effect on Cerus' business,
financial condition and results of operations.
MARKETING, SALES AND DISTRIBUTION
The market for blood component treatment systems consists of the blood
centers and hospitals that collect, store and distribute blood and blood
components. In the United States, the American Red Cross collects and
distributes approximately 50% of the nation's supply of blood and blood
components. Other major blood centers include the New York Blood Center and
United Blood Services, each of which distributes approximately 6% of the
nation's supply of blood and blood components. In Western Europe and Japan,
various national blood transfusion services or Red Cross organizations collect,
store and distribute virtually all of their respective nations' blood and blood
components supply. Hospital-affiliated blood banks also store and dispense blood
and blood components but generally do not collect significant quantities of
blood. Cerus believes that, if its products receive appropriate regulatory
approvals, the relatively concentrated nature of the market may facilitate its
ability to penetrate the market. However, if Cerus fails to gain market
acceptance from any of these participants, its business, results of operations
and financial condition will be materially adversely affected.
Cerus believes that market acceptance of Cerus' pathogen inactivation
systems will depend, in part, on Cerus' ability to provide acceptable evidence
of the safety, efficacy and cost-effectiveness of its products, as well as the
ability of blood centers to obtain appropriate FDA licenses and adequate
reimbursement for such products. Cerus believes that market acceptance of its
pathogen inactivation systems will also depend upon the extent to which
physicians, patients and health care payors perceive that the benefits of using
blood components treated with Cerus' systems justify the additional costs and
processing requirements in a blood supply that has become safer in recent years.
While Cerus believes that its pathogen inactivation systems are able to
inactivate pathogens up to concentrations that Cerus believes are present in
contaminated blood components when the blood is donated, there can be no
assurance that contamination will never exceed such levels. Cerus does not
expect that its planned products will be able to inactivate all known and
unknown infectious pathogens, and there can be no assurance that the inability
to inactivate certain pathogens will not affect the market acceptance of its
products. There can be no assurance that Cerus' pathogen inactivation systems
will gain any significant degree of market acceptance among blood centers,
physicians, patients and health care payors, even if clinical trials demonstrate
safety and efficacy and necessary regulatory approvals and health care
reimbursement approvals are obtained.
If appropriate regulatory approvals are received, Baxter will be
responsible for the marketing, sales and distribution of Cerus' pathogen
inactivation systems for blood components worldwide. Cerus does not currently
maintain, nor does it intend to develop, its own marketing and sales
organization but instead expects to continue to rely on Baxter to market and
sell its pathogen inactivation systems. There can be no assurance that Cerus
will be able to maintain its relationship with Baxter or that such marketing
arrangements will result in payments to Cerus. Revenue to be received by Cerus
through any marketing and sales arrangement with Baxter will be dependent on
Baxter's efforts, and there can be no assurance that Cerus will benefit from
Baxter's present or future market presence or that such efforts will otherwise
be successful. If the Agreements were terminated or if Baxter's marketing
efforts were unsuccessful, Cerus' business, financial condition and results of
operations would be materially adversely affected.
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COMPETITION
Cerus expects to encounter significant competition in the sale of
products it may develop. If regulatory approvals are received, Cerus' products
may compete with other approaches to blood safety currently in use, as well as
with future products developed by medical device, biotechnology and
pharmaceutical companies, hospital supply companies, national and regional blood
centers, and certain governmental organizations and agencies. Many companies and
organizations that may be competitors or potential competitors have
substantially greater financial and other resources than Cerus and may have
greater experience in 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
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granted thereunder will provide proprietary protection or competitive advantages
to Cerus against competitors with similar technology. Furthermore, there can be
no assurance that others will not independently develop similar technologies or
duplicate any technology developed by Cerus. Because of the extensive time
required for development, testing and regulatory review of a potential product,
it is possible that, before any of Cerus' products can be commercialized, any
related patent may expire or remain in existence for only a short period
following commercialization, thus reducing any advantage of the patent, which
could adversely affect Cerus' ability to protect future product development and,
consequently, its operating results and financial position.
Because patent applications in the United States are maintained in
secrecy until patents issue and since publication of discoveries in the
scientific or patent literature often lag behind actual discoveries, Cerus
cannot be certain that it was the first to make the inventions covered by each
of its issued or pending patent applications or that it was the first to file
for protection of inventions set forth in such patent applications. There can be
no assurance that Cerus' planned or potential products will not be covered by
third-party patents or other intellectual property rights, in which case
continued development and marketing of such products would require a license
under such patents or other intellectual property rights. There can be no
assurance that such required licenses will be available to Cerus on acceptable
terms, if at all. If Cerus does not obtain such licenses, it could encounter
delays in product introductions while it attempts to design around such patents,
or could find that the development, manufacture or sale of products requiring
such licenses is foreclosed. Litigation may be necessary to defend against or
assert such claims of infringement, to enforce patents issued to Cerus, to
protect trade secrets or know-how owned by Cerus or to determine the scope and
validity of the proprietary rights of others. In addition, interference
proceedings declared by the United States Patent and Trademark Office may be
necessary to determine the priority of inventions with respect to patent
applications of Cerus. Litigation or interference proceedings could result in
substantial costs to and diversion of effort by Cerus, and could have a material
adverse effect on Cerus' business, financial condition and results of
operations. There can be no assurance that these efforts by Cerus would be
successful.
Cerus is a licensee under a license agreement with Miles, Inc. and
Diamond Scientific Corporation with respect to two United States patents
covering inventions pertaining to psoralen-based photochemical decontamination
treatment of whole blood or blood components and four United States patents
relating to vaccines, as well as related foreign patents. Whether Cerus'
psoralen-based pathogen inactivation systems practice either of the
photochemical decontamination patents depends on an interpretation of the scope
of the patent claims. If such systems practice such patents, the license would
provide for Cerus to make certain milestone payments which may be credited
against any royalties payable by Cerus. The license requires a royalty payable
by Cerus on revenue from such systems and certain annual minimum royalty
payments per year until termination of the license. The manner in which any such
milestone payments and royalties would be shared by Baxter, if at all, has not
been determined. Cerus does not believe that any amounts that might be payable
by it under the agreement to date would be material. Cerus may rely, in certain
circumstances, on trade secrets to protect its technology. However, trade
secrets are difficult to protect. Cerus seeks to protect its proprietary
technology and processes, in part, by confidentiality agreements with its
employees and certain contractors. There can be no assurance that these
agreements will not be breached, that Cerus will have adequate remedies for any
breach, or that Cerus' trade secrets will not otherwise become known or be
independently discovered by competitors. To the extent that Cerus' employees or
its consultants or contractors use intellectual property owned by others in
their work for Cerus, disputes may also arise as to the rights in related or
resulting know-how and inventions.
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 favor. If Cerus were found liable, our business, results of operations
and financial condition could be materially adversely affected.
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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 safety and
efficacy for its intended indications, (v) submission to the FDA of a PMA, BLA
or NDA, as appropriate and (vi) FDA review of the PMA, BLA or NDA in order to
determine, among other things, whether the product is safe and effective for its
intended uses. In addition, the FDA inspects the facilities at which the product
is manufactured and will not approve the product unless compliance with current
Good Manufacturing Practices ("cGMP") or Quality System requirements is
satisfactory. The steps required before a medical device may be cleared for
marketing in the United States pursuant to a 510(k) are likely to be the same,
except that instead of conducting tests to demonstrate safety and efficacy,
data, including clinical data if necessary, must be obtained to show that the
product is substantially equivalent to a legally marketed device, and the FDA
must make a determination of substantial equivalence rather than a determination
that the product is safe and effective. Cerus believes the FDA will require a
PMA for its platelet, FFP and red blood cell pathogen inactivation systems.
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
the therapeutic efficacy of blood components as compared to the therapeutic
efficacy of blood components not treated with the system, and that the FDA will
weigh the system's safety, including potential toxicities of the inactivation
compounds, and other risks against the benefits of using the system in a blood
supply that has become safer in recent years. Cerus has conducted many
toxicology studies designed to demonstrate its products' safety, and will be
required to conduct additional studies, including reproductive toxicology
studies, three month tolerability studies and a p53 carcinogenicity 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
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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 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.
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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.
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 revenue and profitability of biopharmaceutical and related
companies as well as the availability of capital to such companies may be
affected by the continuing efforts of the United States and foreign governments
and third-party payors to contain or reduce costs of health care through various
means. In the United States, given recent federal and state government
initiatives directed at lowering the total cost of health care, it is likely
that the
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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.
EMPLOYEES
As of February 28, 1999, Cerus had 83 employees, 60 of whom were engaged
in research and development and 23 in finance and other administration. Cerus
also had consulting arrangements with seven individuals. No employee of Cerus is
covered by collective bargaining agreements, and Cerus believes that its
relationship with its employees is good.
RISK FACTORS
Cerus' business faces significant risks. These risks include those
described below and may include additional risks of which Cerus is not currently
aware or which Cerus currently does not believe are material. If any of the
events or circumstances described in the following risks actually occurs, Cerus'
business, financial condition or results of operations could be materially
adversely affected. These risks should be read in conjunction with the other
information set forth in this report.
OUR PRODUCTS ARE IN AN EARLY STAGE OF DEVELOPMENT AND THERE IS A HIGH RISK OF
FAILURE
We have no products that have received regulatory approval for
commercial sale. All of our product candidates are in early stages of
development, and we face the risks of failure inherent in developing medical
devices and biotechnology products based on new technologies. Our products must
satisfy rigorous standards of safety and efficacy before they can be approved by
the United States Food and Drug Administration and international regulatory
authorities for commercial use. Our platelet, fresh frozen plasma 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
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cause a trial to be repeated or a program to be terminated. We typically rely on
third-party clinical investigators to conduct our clinical trials and other
third-party organizations to perform data collection and analysis, and as a
result, we face certain additional delaying factors outside our control. These
factors include:
o difficulty in enrolling qualified subjects
o inadequately trained or insufficient personnel at the study site
o 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 complies with government regulations. We may need to identify and
qualify additional manufacturers for commercial production. We cannot be certain
that our existing manufacturers or any new manufacturer will be able to provide
required quantities of S-59.
We have produced only limited quantities of S-303, the inactivation
compound we use in our red blood cell pathogen inactivation system, 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.
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
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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.
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.
o 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
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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.
o 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.
o 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:
o product development
o product testing
o product manufacturing
o product labeling
o product storage
o product pre-market clearance or approval
o product sales and distribution
o 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.
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We intend to generate product revenue from sales outside of the United
States. Distribution of our products outside the United States also may be
subject to extensive government regulation. These regulations, including the
requirements for approvals or clearance to market, the time required for
regulatory review and the sanctions imposed for violations, vary by country. It
is uncertain whether we will obtain regulatory approvals in such countries or
that we will be required to incur significant costs in obtaining or maintaining
our foreign regulatory approvals. Failure to obtain necessary regulatory
approvals or any other failure to comply with regulatory requirements could
result in reduced revenue and earnings.
To support our requests for FDA approval to market our products, we
intend to conduct various types of studies including:
o toxicology studies to evaluate product safety
o in vitro and animal studies to evaluate product effectiveness
o 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.
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
revenue from product sales. We have received all of our revenue 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
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quarter to quarter due to differences in the timing of our expenses and
potential revenue from Baxter. Our ability to become profitable will depend on
our ability to, among other things:
o establish adequate protection of our intellectual property
rights
o complete our product development
o obtain product regulatory approvals
o achieve market acceptance for our products.
WE WILL NEED ADDITIONAL FUNDS
Our product development programs are capital-intensive. We expect to
continue to spend substantial funds for our operations for the foreseeable
future. We believe that our existing capital resources, together with
anticipated payments from Baxter under our agreements with Baxter and projected
interest income, will support our current and planned operations for at least
the next 18 months. Our cash liquidity and capital requirements will depend on
numerous factors, including additional research and development needs, product
testing results, regulatory requirements, competitive pressures and
technological advances and setbacks.
In addition, we may require substantial funds for our long-term product
development, marketing programs and operating expenses. We cannot assure you
that we will be able to raise additional funds on acceptable terms. If we raise
additional funds by issuing equity securities, our existing stockholders may
experience substantial dilution.
WE OPERATE IN A COMPETITIVE INDUSTRY WITH RAPIDLY CHANGING TECHNOLOGY
We expect our products to encounter significant competition. Our
products may compete with other approaches to blood safety 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:
o attract and retain skilled scientific personnel
o develop technologically superior products
o develop lower cost products
o obtain patent or other proprietary protection for our products
and technologies
o obtain required regulatory approvals for our products
o be early entrants to the market
o 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
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products, however, these provisions may not prevent Baxter from developing or
marketing competing products using methylene blue.
FAILURE TO ATTRACT AND RETAIN KEY EMPLOYEES WILL ADVERSELY AFFECT OUR BUSINESS
Because of the scientific nature of our business, we depend on the
principal members of our management and scientific staff. Our success will
depend largely on our ability to attract and retain highly skilled scientific
and managerial personnel. Competition for such personnel is intense. We cannot
assure you that we will be successful in attracting and retaining such
personnel. The failure to maintain our management and scientific staff and to
attract additional key personnel could materially adversely affect our business,
financial condition and results of operations. Although we intend to provide
incentive compensation to attract and retain our key personnel, we cannot
guarantee these efforts will be successful.
WE MAY NOT BE ABLE TO PROTECT OUR INTELLECTUAL PROPERTY OR OPERATE OUR BUSINESS
WITHOUT INFRINGING INTELLECTUAL PROPERTY RIGHTS OF OTHERS
Our technology will be protected from unauthorized use by others only to
the extent that it is covered by valid and enforceable patents or effectively
maintained as trade secrets. As a result, our success depends in part on our
ability to:
o obtain patents
o protect trade secrets
o operate without infringing upon the proprietary rights of others
o 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
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laws governing the use, handling and disposal of these materials. We may incur
significant costs to comply with additional environmental and health and safety
regulations in the future. Although we believe that our safety procedures for
handling and disposing of hazardous materials comply with regulatory
requirements, we cannot eliminate the risk of accidental contamination or
injury. If an accident occurs, we could be held liable for any damages that
result.
THE MARKET PRICE OF OUR STOCK MAY BE HIGHLY VOLATILE
The market prices for securities of emerging medical device and
biotechnology companies like us have been highly volatile. Announcements may
have a significant impact on the market price of our common stock. Such
announcements may include:
o biological or medical discoveries
o technological innovations or new commercial services by us or
our competitors
o developments concerning proprietary rights, including patents
and litigation matters
o regulatory developments in both the United States and foreign
countries
o public concern as to the safety of new technologies
o general market conditions
o comments made by analysts, including changes in analysts'
estimates of our financial performance
o quarterly fluctuations in our revenue and financial results.
The stock market has from time to time experienced extreme price and
volume fluctuations, which have particularly affected the market prices for
emerging biotechnology and medical device companies, and which have often been
unrelated to the operating performance of such companies. These broad market
fluctuations may adversely affect the market price of our common stock. In the
past, following periods of volatility in the market price of a company's stock,
securities class action litigation has occurred against the issuing company.
Such litigation could result in substantial costs and a diversion of
management's attention and resources, which could have a material adverse effect
on our revenue and earnings. Any adverse determination in such litigation could
also subject us to significant liabilities.
ITEM 2. PROPERTIES
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.
ITEM 3. LEGAL PROCEEDINGS
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
(a) Cerus' common stock is traded on the Nasdaq National Market under
the symbol "CERS." Cerus completed the initial public offering of its common
stock on January 30, 1997. The following table sets forth, for the periods
indicated, the high and low sales prices for the common stock as reported by the
Nasdaq National Market:
<TABLE>
<CAPTION>
HIGH LOW
------- --------
<S> <C> <C>
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
</TABLE>
On March 23, 1999, the last reported sale price of Cerus' common stock
on the Nasdaq National Market was $23.25 per share. On March 23, 1999, Cerus had
approximately 239 holders of record of Common Stock.
(b) On March 3, 1999, Cerus sold 3,327 shares of unregistered Series B
preferred stock to Baxter for an aggregate purchase price of $9.5 million. Such
sale of Series B preferred stock was exempt from registration under the
Securities Act pursuant to Section 4(2) thereof, as a transaction not involving
any public offering.
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<PAGE> 34
ITEM 6. SELECTED FINANCIAL DATA
The following table summarizes certain selected financial data for the
fiscal year ended December 31, 1998. The information presented should be read in
conjunction with the financial statements and notes included elsewhere herein.
The selected financial data for the periods prior to the financial statements
included herein are derived from audited financial statements.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
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-basic and
diluted(1) .................. $ (3.17) $ (1.76) $ (5.98) $ (1.67) $ (1.24)
Shares used in computing net
loss per share-basic and
diluted(1) ................. 9,325 8,352 1,706 1,414 1,456
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
----------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
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
Redeemable convertible
preferred stock ............ 5,000 -- -- -- --
Accumulated deficit .......... (64,428) (34,870) (20,206) (9,999) (7,639)
Total stockholders' equity ... (3,656) 22,475 4,839 8,663 5,439
(deficit) .................. (3,656) 22,475 4,839 8,663 5,439
</TABLE>
- ------------------
(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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<PAGE> 35
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion of the financial condition and results of
operations of Cerus should be read in conjunction with the Financial Statements
and Notes thereto included elsewhere in this report. This report contains
forward-looking statements that involve risks and uncertainties. Cerus' actual
results could differ significantly from those discussed in these forward-looking
statements as a result of certain factors, including those set forth under "Risk
Factors" and elsewhere herein.
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 from inception cumulatively through December 31, 1998, 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 payments made by Baxter to Cerus if
necessary to reimburse Cerus for development spending in excess of the levels
agreed to by Baxter and Cerus. Development funding revenue is recognized as the
related project costs are incurred.
Agreement with Baxter for the development of pathogen inactivation
systems for red blood cells and FFP. 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 focused on the development of fresh frozen plasma (FFP)
and red blood cell pathogen inactivation systems. The agreement was amended in
March 1998
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<PAGE> 36
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, cumulatively through December 31, 1998, to fund the development of
the red blood cell and FFP systems. Development funding is in the form of
payments made by Baxter to Cerus if necessary to reimburse Cerus for development
spending in excess of the levels agreed to by Baxter and Cerus and to reimburse
Cerus for fee-for-service development activities. Development funding revenue is
recognized as the related project costs are incurred. 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. In January 1999, Cerus, in conjunction
with the FDA, determined the preliminary framework governing the Phase 3
protocol. As a result, Baxter will make the investment on April 1, 1999, at
$31.79 per share, which is 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.
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 by Baxter relative to increased
development expenses by Cerus 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
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 FFP programs, as well
as to increased activity at Cerus in the FFP and red blood cell programs. A
significant portion of the increase was the result of increased payroll and
other personnel expenses, related laboratory supplies,
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<PAGE> 37
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 FFP 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 Marking
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 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.
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<PAGE> 38
In January 1999, Cerus, in consultation with the FDA, determined the
preliminary framework governing Cerus' Phase 3 clinical trial protocol for its
platelet pathogen inactivation system. As a result, Baxter will purchase $2
million of Cerus common stock on April 1, 1999 at $31.79 per share, which is
120% of the average closing price of the common stock for the thirty (30)
trading days prior to and including February 11, 1999.
In March 1999, Baxter purchased 3,327 shares of Series B preferred stock
for an aggregate purchase price of $9.5 million. Each share of Series B
preferred stock becomes convertible at Baxter's option into 100 shares of Cerus
common stock on March 3, 2000. Upon Cerus' completion of cumulative equity
financings with parties other than Baxter in excess of $20 million, including
this offering, 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.
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. Accounts payable to Baxter increased primarily due to research and
development expenses of $8.3 million incurred to increase Cerus' share of future
product revenue from the platelet pathogen inactivation system, as well as
reimbursement of Baxter's portion of the development costs for the platelet and
FFP programs in 1998. Cerus intends to fund the payable to Baxter from available
cash resources and the proceeds from the sale of Series B preferred stock to
Baxter. 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. Working capital decreased to $0.5 million at December 31, 1998
from $21.4 million at December 31, 1997, primarily due to increases in accounts
payable to Baxter and the decrease in accounts receivable from Baxter.
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; potential
deferral of the payment to Baxter of $8.3 million due on June 30, 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.
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,
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<PAGE> 39
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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Cerus maintains an investment portfolio of various issuers, types, and
maturities. These securities are generally classified as available for sale and,
consequently, are recorded on the balance sheet at fair value with unrealized
gains or losses reported as a separate component of stockholders' equity, if
material. Unrealized gains and losses at December 31, 1998 and 1997 were not
material. Cerus' investments primarily consist of short-term money market mutual
funds, United States and state government obligations and commercial paper. Of
Cerus' investments balance of $19.8 million at December 31, 1998, approximately
31% have original maturity dates of less than 90 days and 69% of this balance
have original maturities of 90 days to one year. Cerus does not believe its
exposure to interest rate risk to be material given the short-term nature of its
investment portfolio.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
The Company's financial statements, together with related notes and
report of Ernst & Young, LLP, independent auditors, are listed in Item 14(a) and
included herein beginning on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Cerus and their ages as of
February 28, 1999 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
EXECUTIVE OFFICERS AND DIRECTORS
Stephen T. Isaacs................... 50 President, Chief Executive Officer and Director
Laurence M. Corash.................. 54 Vice President, Medical Affairs
John E. Hearst...................... 63 Vice President, New Science Opportunities and
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
</TABLE>
(1) Member of the Compensation Committee
(2) Member of the Audit Committee
The Board of Directors is divided into three classes, each class having
a three-year term. Dr. Hearst and Mr. Stickney are Class I directors, whose
terms expire in 2001; Mr. Isaacs and Mr. Smith are Class II directors, whose
terms expire in 1999; and Mr. Cassin and Mr. McNerney are Class III directors,
whose terms expire in 2000.
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.
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.
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<PAGE> 41
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.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended
("Section 16(a)"), requires Cerus' directors and executive officers, and persons
who own more than 10 percent of a registered class of Cerus' equity securities,
to file with the SEC initial reports of ownership and reports of changes in
ownership of common stock and other equity securities of Cerus. Officers,
directors and greater than 10 percent stockholders are required by SEC
regulation to furnish Cerus with copies of all Section 16(a) forms they file.
To Cerus's knowledge, based solely on a review of the copies of such
reports furnished to Cerus and written representations that no other reports
were required, during the fiscal year ended December 31, 1998, all Section 16(a)
filing requirements applicable to its directors, officers and greater than 10
percent beneficial owners were complied with except that Mr. McNerney and Mr.
Stickney each filed late one report covering one transaction.
ITEM 11. EXECUTIVE COMPENSATION
COMPENSATION OF DIRECTORS
Directors currently do not receive any cash compensation for their
services as members of the Board of Directors, although they are reimbursed for
certain expenses in connection with attendance at Board and Committee meetings.
There are no standard arrangements pursuant to which directors receive equity
compensation, although they are eligible to receive awards under the Company's
1996 Equity Incentive Plan (the "Plan").
The Plan provides for the grant of incentive stock options and stock
appreciation rights appurtenant thereto to employees (including officers and
employee-directors) and nonstatutory stock options, stock appreciation rights,
restricted stock purchase awards and stock bonuses to employees, directors and
consultants. The Plan is administered by the Board of Directors, or a committee
appointed by the Board, which determines recipients and types of awards to be
granted, including the exercise price, number of shares subject to the award and
the exercisability thereof. The terms of stock options granted under the Plan
generally may not exceed 10 years. The exercise price of options granted under
the Plan is determined by the Board of Directors, provided that the exercise
price of an incentive stock option cannot be less than 100% of the fair market
value of the common stock on the date of the option grant and the exercise price
of a nonstatutory stock option cannot be less than 85% of the fair market value
of the Common Stock on the date of the option grant. Options granted under the
Plan vest at the rate specified in the option agreement. Restricted stock
purchase awards granted under the Plan may be granted pursuant to a repurchase
option in favor of Cerus in accordance with a vesting schedule and at a price
determined by the Board of Directors. Restricted stock purchases must be at a
price equal to at least 85% of the stock's fair market value on the
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<PAGE> 42
award date, but stock bonuses may be awarded in consideration of past services
without a purchase payment. Upon certain changes in control, all outstanding
awards under the Plan will either be assumed, continued or substituted by the
surviving entity. If the surviving entity determines not to assume, continue or
substitute such awards, with respect to persons then performing services as
employees, directors or consultants, the time during which such awards may be
exercised will be accelerated and the awards terminated if not exercised prior
to such change in control. There were no awards under the Plan in 1998 to
directors who are not employes of Cerus. Messrs. Isaacs and Hearst were awarded
options as set forth in the table captioned "Option Grants in Fiscal 1998."
COMPENSATION OF EXECUTIVE OFFICERS
The following table sets forth, for the fiscal years ended December 31,
1998, 1997 and 1996, the compensation awarded to or earned by Cerus' Chief
Executive Officer and the other executive officers whose combined salary and
bonus for the year ended December 31, 1998 was in excess of $100,000
(collectively, the "Named Executive Officers"):
SUMMARY COMPENSATION TABLE (1)
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION AWARDS
--------------------------------------------- ---------------------
FISCAL SECURITIES UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) OPTIONS(#) COMPENSATION($)
------ --------- -------- --------------------- ---------------
<S> <C> <C> <C> <C> <C>
Stephen T. Isaacs 1998 280,000 80,000 40,000 1,102(2)
President and Chief 1997 260,000 60,000 -- --
Executive Officer 1996 230,833 61,290(3) 36,750 1,110(4)
Laurence M. Corash 1998 250,000 40,000 41,000 1,440(2)
Vice President, Medical 1997 235,000 35,000 -- --
Affairs 1996 179,870 26,945(5) 29,400 813(4)
John E. Hearst 1998 176,158(6) 25,000 30,000 3,763(2)
Vice President, New 1997 153,000(6) 20,000 -- --
Science Opportunities . 1996 138,958(6) 15,839(7) 7,530 722(4)
</TABLE>
- --------------------
(1) In accordance with the rules of the SEC, the compensation described in
this table does not include medical, group life insurance or other
benefits received by the Named Executive Officers which are available
generally to all salaried employees, and certain perquisites and other
personal benefits received by the Named Executive Officers which do not
exceed the lesser of $50,000 or 10% of any such officer's salary and
bonus disclosed in this table.
(2) Reflects group term life insurance premiums paid by Cerus.
(3) Includes $1,290 of interest forgiven.
(4) Reflects reimbursement for the amount of taxes payable in connection
with forgiveness of interest.
(5) Includes $945 of interest forgiven.
(6) Reflects salary for employment at 80% of full time through August 31,
1998 and 100% of full time starting September 1, 1998.
(7) Includes $839 of interest forgiven.
41
<PAGE> 43
STOCK OPTION GRANTS AND EXERCISES
Cerus grants stock options to its executive officers under the Plan. As
of December 31, 1998, options to purchase 918,434 shares were outstanding under
the Plan and options to purchase 81,532 shares remained available for grant
thereunder.
The following table sets forth certain information for each grant of
stock options made during the fiscal year ended December 31, 1998, to each of
the Named Executive Officers:
OPTION GRANTS IN FISCAL 1998
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE
AT ASSUMED ANNUAL RATES
OF STOCK PRICE APPRECIATION
INDIVIDUAL GRANTS FOR OPTION TERM (3)
----------------------------------------------------------- ---------------------------
PERCENTAGE
NUMBER OF OF TOTAL
SECURITIES OPTIONS
UNDERLYING GRANTED TO EXERCISE
OPTIONS EMPLOYEES OR BASE
GRANTED IN FISAL PRICE EXPIRATION
NAME (#)(1) 1998(%)(2) ($/SH) DATE 5%($) 10%($)
- ----------------------- ---------- ---------- -------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Stephen T. Isaacs 40,000 7.2% $ 15.50 11/18/08 $390,600 $985,800
Laurence M. Corash 40,000 7.2 $ 15.50 11/18/08 390,600 985,800
John E. Hearst 25,000 4.5 $ 15.50 11/18/08 244,125 616,125
</TABLE>
- ---------------
(1) Options become exercisable at a rate of 1/48th per month from the date
of grant. Options may be exercised immediately pursuant to early
exercise provisions contained in the option agreements. Any shares
issued pursuant to such early exercise provisions are subject to
repurchase upon termination of employment. Such repurchase option
terminates at a rate of 1/48th per month. The options expire 10 years
from the date of grant or earlier upon termination of employment..
(2) Based on options to purchase 558,742 shares granted in 1998.
(3) The potential realizable value is based on the term of the option at its
time of grant (10 years). It is calculated by assuming that the stock
price on the date of grant appreciates at the indicated annual rate,
compounded annually for the entire term of the option and that the
option is exercised and sold on the last day of its term for the
appreciated stock price. These amounts represent certain assumed rates
of appreciation only, in accordance with the rules of the SEC, and do
not reflect Cerus' estimate or projection of future stock price
performance. Actual gains, if any, are dependent on the actual future
performance of Cerus' common stock and no gain to the optionee is
possible unless the stock price increases over the option term.
The Named Executive Officers did not exercise any stock options during
the fiscal year ended December 31, 1998. The following table sets forth
for each of the Named Executive Officers the number and value of
securities underlying unexercised options held by the Named Executive
Officers at December 31, 1998.
42
<PAGE> 44
AGGREGATED OPTION EXERCISES IN LAST
FISCAL YEAR AND FISCAL YEAR END OPTION VALUES
<TABLE>
<CAPTION>
VALUE OF
NUMBER OF SECURITIES UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS AT FY-END (#) OPTIONS AT FY-END
NAME EXERCISABLE/UNEXERCISABLE ($) EXERCISABLE/UNEXERCISABLE
- ---- ------------------------- -----------------------------
<S> <C> <C>
Stephen T. Isaacs 76,750/0 891,790/0
Laurence M. Corash 69,400/0 757,432/0
John E. Hearst 32,350/0 271,858/0
</TABLE>
(1) Value of unexercised in-the-money options is based on the per share
deemed value at year end, determined after the date of grant solely for
financial accounting purposes, less the exercise price payable for such
shares.
43
<PAGE> 45
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the
beneficial ownership of the Company's Common Stock as of February 28, 1999 by:
(i) each director; (ii) each of the executive officers named in the Summary
Compensation Table; (iii) all executive officers and directors of the Company as
a group; and (iv) all those known by the Company to be beneficial owners of more
than five percent of its Common Stock.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP
----------------------------
NUMBER OF PERCENT OF
BENEFICIAL OWNER SHARES TOTAL (%)
- ---------------- --------- ----------
<S> <C> <C>
Baxter Healthcare Corporation ............... 1,617,425 17.2%
One Baxter Parkway
Deerfield, IL 60015
Coral Partners II, a limited partnership(2)..
60 South Sixth Street 914,218 9.7%
Suite 3510
Minneapolis, MN 55402
Stephen T. Isaacs(3) ........................ 398,538 4.2%
Laurence M. Corash(4) ....................... 300,925 3.2%
John E. Hearst(5) ........................... 274,475 2.9%
Robert E. Miller(6) ......................... 115,000 1.2%
B.J. Cassin(7) .............................. 365,913 3.9%
Peter H. McNerney(2) ........................ 914,218 9.7%
Coral Group, Inc.
60 South Sixth Street
Suite 3510
Minneapolis, MN 55402
Dale A. Smith(8) ............................ 14,700 *
Henry E. Stickney(9) ........................ 74,202 *
All executive officers and directors as a
group (8 persons)(10) ..................... 2,457,971 25.2%
</TABLE>
- ---------------
* Less than on percent (1%)
(1) This table is based upon information supplied by officers, directors and
principal stockholders and Schedules 13D and 13 G 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, the Company 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 9,422,503 shares
outstanding on February 28, 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
44
<PAGE> 46
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, 45,789 shares would be subject
to a right of repurchase in favor of Cerus.
(4) Includes 69,400 shares underlying currently exercisable stock options.
If exercised in full within 60 days of the date of this table, 43,797
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, 24,389 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, 3,982 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, 1,532
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 3,982
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.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
BAXTER HEALTHCARE CORPORATION
Cerus is a party to development agreements with Baxter for the
development and commercialization of platelet, FFP and red cell pathogen
inactivation systems, and has sold and issued to Baxter shares of capital stock
pursuant to certain stock purchase agreements. The development agreements were
amended in June 1998.
The amended development agreement for the platelet program 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. Beginning April 1,
1998, Cerus will fund $5.0 million of development costs previously agreed to be
funded by Baxter. Baxter also purchased $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
program. In addition, Cerus increased its share of the adjusted product revenue
from future sales of 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. The development agreement for the
FFP and red blood cell programs provides for Baxter and Cerus generally to share
red blood cell system development costs equally, subject to mutually agreed to
budgets
45
<PAGE> 47
established from time to time and 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, not to exceed 14%
of revenue, is retained by Baxter for marketing and administrative expenses.
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. Cerus and Baxter will receive 75% and
25%, respectively, 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. In June 1998, Cerus and Baxter also entered into
a preferred stock purchase agreement under which Baxter purchased $9.5 million
of Series B preferred stock on March 3, 1999.
Baxter currently holds approximately 1,617,425 shares of Cerus' common
stock, or 17.2%, and has paid Cerus an aggregate of approximately $68.5 million
cumulatively since inception, consisting of $35 million in equity investments
and $33 million in development and milestone payments under various development
and commercialization agreements, and has made equity and other funding
commitments to provide up to an additional $64.9 million.
CONSORTIUM FOR PLASMA SCIENCE
In December 1998, Cerus and the Consortium for Plasma Science entered
into an agreement for the development of a pathogen inactivation system for
source plasma. The Consortium is co-funded by four plasma fractionation
companies, one of which is Baxter. The Consortium, which is a separate entity
from its members, provides research and development funding worldwide for
technologies to improve the safety of source plasma. The agreement includes an
initial commitment of approximately $2.0 million to fund development of Cerus'
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.
INDEMNIFICATION AND LIMITATION OF DIRECTOR AND OFFICER LIABILITY
In July 1996, the Board authorized Cerus to enter into indemnity
agreements with each of the Company's directors, executive officers, Controller
and Director of Finance. The form of indemnity agreement provides that Cerus
will indemnify against any and all expenses of the indemnified person who
incurred such expenses because of his or her status as a director or executive
officer, to the fullest extent permitted by Cerus' Bylaws and Delaware law. In
addition, Cerus' Bylaws provide that Cerus shall indemnify its directors and
executive officers to the fullest extent permitted by Delaware law, subject to
certain limitations, and may also secure insurance, to the fullest extent
permitted by Delaware law, on behalf of any director, officer, employee or agent
against any expense, liability or loss arising out of his or her actions in such
capacity.
Cerus' Restated Certificate of Incorporation contains certain provisions
relating to the limitation of liability of directors. Cerus' Restated
Certificate provides that a director shall not be personally liable to Cerus or
its stockholders for monetary damages for any breach of fiduciary duty as a
director, except for liability (i) for any breach of the director's duty of
loyalty to the corporation or its stockholders, (ii) for acts or omissions not
in good faith or which involve intentional misconduct or a knowing violation of
law, (iii) for unlawful payment of dividends or unlawful stock repurchases or
redemptions, or (iv) for any transaction from which the director derived an
improper benefit. If the Delaware General Corporation Law is amended to
authorize corporate action further eliminating or limiting the personal
liability of a director, then the liability of a Cerus director shall be
eliminated or limited to the fullest extent permitted by the Delaware General
Corporation Law, as so amended. The provision in the Restated Certificate does
not eliminate the 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. The provision also does not affect a director's
responsibilities under any other law, such as the federal securities laws or
state or federal environmental laws.
46
<PAGE> 48
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
The following documents are being filed as part of this report on Form
10-K:
(a) Financial Statements.
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Auditors ......................................... F-2
Balance Sheets as of December 31, 1998 and 1997......................... F-3
Statements of Operations for the three years ended December 31, 1998.... F-4
Statements of Stockholders' Equity (Deficit)
for the three years ended December 31, 1998........................... F-5
Statements of Cash Flows for the three years ended December 31, 1998.... F-6
Notes to Financial Statements........................................... F-7
</TABLE>
Other information is omitted because it is either presented elsewhere,
is inapplicable or is immaterial as defined in the instructions.
(b) No reports on Form 8-K were filed during the quarter ended December 31,
1998.
(c) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------
<S> <C>
3.1.1 Amended and Restated Certificate of Incorporation of Cerus
Corporation.
3.1.2 Form of Certificate of Designations of Series A Preferred Stock
of Cerus.
3.1.3 Form of Certificate of Designations of Series B Preferred Stock
of Cerus.
3.2(1) Bylaws of Cerus.
10.1(1) Form of Indemnity Agreement entered into between Cerus and each
of its directors and executive officers.
10.2(1) 1996 Equity Incentive Plan.
10.3(1) Form of Incentive Stock Option Agreement under the 1996 Equity
Incentive Plan.
10.4(1) Form of Nonstatutory Stock Option Agreement under the 1996 Equity
Incentive Plan.
10.5(1) 1996 Employee Stock Purchase Plan Offering.
10.7(1) Warrant Agreement, dated May 11, 1992, between Cerus and
Comdisco, Inc. to purchase Series A Preferred Stock.
10.8(1) Warrant Agreement, dated July 12, 1993, between Cerus and
Comdisco, Inc. to purchase Series B Preferred Stock.
10.9(1) Warrant Agreement, dated May 25, 1994, between Cerus and
Comdisco, Inc. to purchase Series C Preferred Stock.
10.10(1) Warrant Agreement, dated April 25, 1995, between Cerus and
Comdisco, Inc. to purchase Series D Preferred Stock.
10.11(1) Form of Warrant to purchase shares of Series B Preferred Stock of
Cerus.
10.12(1) Form of Warrant to purchase shares of Series C Preferred Stock of
Cerus.
10.13(1) Series D Preferred Stock Purchase Agreement, dated March 1, 1995,
between Cerus and certain investors.
</TABLE>
47
<PAGE> 49
<TABLE>
<CAPTION>
<S> <C>
10.14(1) Series E Preferred Stock Purchase Agreement, dated April 1, 1996,
between Cerus and Baxter Healthcare Corporation.
10.15(1) Common Stock Purchase Agreement, dated September 3, 1996 between
Cerus and Baxter Healthcare Corporation.
10.16(1) Amended and Restated Investors' Rights Agreement, dated April 1,
1996, among Cerus and certain investors.
10.17+(1) Development, Manufacturing and Marketing Agreement, dated
December 10, 1993 between Cerus and Baxter Healthcare
Corporation.
10.21(1) Industrial Real Estate Lease, dated October 1, 1992, between
Cerus and Shamrock Development Company, as amended on May 16,
1994 and December 21, 1995.
10.22(1) Real Property Lease, dated August 8, 1996, between the Registrant
and S.P. Cuff.
10.23(1) Lease, dated February 1, 1996, between Cerus and Holmgren
Partners.
10.24(1) First Amendment to Common Stock Purchase Agreement, dated
December 9, 1996, between Cerus and Baxter Healthcare
Corporation.
10.25+(1) Amendment, dated as of January 3, 1997, to the Agreement filed as
Exhibit 10.17.
10.26(1) Memorandum of Agreement, dated as of January 3, 1997, between
Cerus and Baxter Healthcare Corporation.
10.27+ License Agreement, dated as of November 30, 1992, by and among
the Company, Miles Inc. and Diamond Scientific Corporation.
10.28+(2) Amendment to Development, Manufacturing and Marketing Agreement,
dated as of March 6, 1998, by and between Cerus and Baxter
Healthcare Corporation.
10.29(3) Series A Preferred Stock Purchase Agreement, dated as of June 30,
1998, by and between Cerus and Baxter Healthcare Corporation.
10.30(3) Series B Preferred Stock Purchase Agreement, dated as of June 30,
1998, by and between Cerus and Baxter Healthcare Corporation.
10.31(3) Memorandum of Agreement, dated as of June 30, 1998, by and
between Cerus and Baxter Healthcare Corporation.
10.32(3) Second Amendment to Development, Manufacturing and Marketing
Agreement, dated as of June 30, 1998, by and between Cerus and
Baxter Healthcare Corporation.
10.33+(3) Development, Manufacturing and Marketing Agreement, dated April
1, 1996, by and between Cerus and Baxter Healthcare Corporation,
as amended and restated June 30, 1998.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
27.1 Financial Data Schedule
</TABLE>
- --------------
+ Certain portions of this exhibit are subject to a confidential treatment
order.
(1) Incorporated by reference to Cerus' Registration Statement on Form S-1
(File No. 333-11341) and amendments thereto.
(2) Incorporated by reference to Cerus' Quarterly Report on Form 10-Q for
the quarter ended March 31, 1998 (filed May 15, 1998).
(3) Incorporated by reference to Cerus' Current Report on Form 8-K, dated
June 30, 1998 (filed July 22, 1998).
48
<PAGE> 50
CERUS CORPORATION
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
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
</TABLE>
F-1
<PAGE> 51
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,
and Note 5, as to which the date is
March 3, 1999
F-2
<PAGE> 52
CERUS CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------
1998 1997
------------ ------------
<S> <C> <C>
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
============ ============
</TABLE>
See accompanying notes.
F-3
<PAGE> 53
CERUS CORPORATION
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
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
============ ============ ============
</TABLE>
See accompanying notes.
F-4
<PAGE> 54
CERUS CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK
------------------------------- -------------------------------
SHARES AMOUNT SHARES AMOUNT
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Balances at December 31, 1995 ..... 2,620,677 $ 2,621 1,417,895 $ 1,418
Exercise of stock options ........ -- -- 510,912 511
Issuance of Series E
convertible preferred
stock, net of issuance
costs of $100,777 .............. 380,953 381 -- --
Payment on notes receivable ...... -- -- -- --
Deferred compensation ............ -- -- -- --
Amortization of deferred
compensation ................... -- -- -- --
Net loss ......................... -- -- -- --
------------ ------------ ------------ ------------
Balances at December 31, 1996 ..... 3,001,630 3,002 1,928,807 1,929
Public offering of common
stock, net of expenses of
$2,945,259 ....................... -- -- 2,000,000 2,000
Issuance of common stock .......... -- -- 714,080 714
Conversion of preferred stock ..... (3,001,630) (3,002) 4,412,243 4,412
Issuance of common stock
under stock option and employee
stock purchase plans and
warrant exercises ................ -- -- 129,664 130
Common shares reacquired .......... -- -- (1,165) (1)
Payment on notes receivable ....... -- -- -- --
Amortization of deferred
compensation ..................... -- -- -- --
Net loss .......................... -- -- -- --
------------ ------------ ------------ ------------
Balances at December 31, 1997 ..... -- -- 9,183,629 9,184
Issuance of common stock ......... -- -- 159,595 159
Issuance of common stock
under stock option and
employee stock purchase
plans and warrant
exercises ...................... -- -- 77,984 78
Common shares reacquired ......... -- -- (4,365) (4)
Amortization of deferred
compensation ................... -- -- -- --
Net loss ......................... -- -- -- --
------------ ------------ ------------ ------------
Balances at December 31, 1998 ..... -- $ -- 9,416,843 $ 9,417
============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
NOTES
ADDITIONAL RECEIVABLE TOTAL
PAID-IN DEFERRED FROM ACCUMULATED STOCKHOLDERS'
CAPITAL COMPENSATION STOCKHOLDERS DEFICIT EQUITY (DEFICIT)
------------ ------------ ------------ ------------ ----------------
<S> <C> <C> <C> <C> <C>
Balances at December 31, 1995 ..... $ 18,738,135 $ -- $ (80,588) $ (9,998,947) $ 8,662,639
Exercise of stock options ........ 258,411 -- -- -- 258,922
Issuance of Series E
convertible preferred
stock, net of issuance
costs of $100,777 .............. 5,898,768 -- -- -- 5,899,149
Payment on notes receivable ...... -- -- 5,382 -- 5,382
Deferred compensation ............ 530,215 (530,215) -- -- --
Amortization of deferred
compensation ................... -- 219,828 -- -- 219,828
Net loss ......................... -- -- -- (10,206,885) (10,206,885)
------------ ------------ ------------ ------------ ------------
Balances at December 31, 1996 ..... 25,425,529 (310,387) (75,206) (20,205,832) 4,839,035
Public offering of common
stock, net of expenses of
$2,945,259 ....................... 21,052,741 -- -- -- 21,054,741
Issuance of common stock .......... 10,542,502 -- -- -- 10,543,216
Conversion of preferred stock ..... (3,118) -- -- -- (1,708)
Issuance of common stock
under stock option and employee
stock purchase plans and
warrant exercises ................ 459,754 -- -- -- 459,884
Common shares reacquired .......... (633) -- -- -- (634)
Payment on notes receivable ....... -- -- 75,206 -- 75,206
Amortization of deferred
compensation ..................... -- 169,450 -- -- 169,450
Net loss .......................... -- -- -- (14,664,213) (14,664,213)
------------ ------------ ------------ ------------ ------------
Balances at December 31, 1997 ..... 57,476,775 (140,937) -- (34,870,045) 22,474,977
Issuance of common stock ......... 2,975,470 -- -- -- 2,975,629
Issuance of common stock
under stock option and
employee stock purchase
plans and warrant
exercises ...................... 364,767 -- -- -- 364,845
Common shares reacquired ......... (3,838) -- -- -- (3,842)
Amortization of deferred
compensation ................... -- 90,084 -- -- 90,084
Net loss ......................... -- -- -- (29,558,052) (29,558,052)
------------ ------------ ------------ ------------ ------------
Balances at December 31, 1998 ..... $ 60,813,174 $ (50,853) $ -- $(64,428,097) $ (3,656,359)
============ ============ ============ ============ ============
</TABLE>
See accompanying notes.
F-5
<PAGE> 55
CERUS CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Operating activities ..................................... $(29,558,052) $(14,664,213) $(10,206,885)
Net loss
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 $ --
============ ============ ============
</TABLE>
See accompanying notes.
F-6
<PAGE> 56
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
revenue from product sales, and all revenue 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 revenue and
expenses during the reporting period. Actual results could differ from those
estimates.
REVENUE AND RESEARCH AND DEVELOPMENT EXPENSES
Development funding is in the form of payments made by Baxter to the
Company to reimburse the Company for development spending in excess of the
levels agreed to by Baxter and the Company and to reimburse the Company for
certain fee-for-service development activities. Revenue related to the cost
reimbursement provisions under development contracts are recognized as the costs
on the project are incurred. Revenue 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.
As of December 31, 1998, all revenue recognized under development contracts has
been from Baxter. Such revenue principally consists of reimbursements to the
Company for development spending in excess of the levels agreed to by Baxter and
the Company and to reimburse the Company for fee-for-service development
activities.
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. Revenue 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.
F-7
<PAGE> 57
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.
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
F-8
<PAGE> 58
the closing of the Company's initial public offering (using the as-if-converted
method).
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
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)
============ ============ ============
</TABLE>
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 (revenue, 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 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. This amount is
included in accounts payable to a related party at December 31, 1998. Also
included in accounts payable to a related party at December 31, 1998 is $4.4
million of payments due to Baxter to reimburse Baxter for program development
spending in excess of agreed upon amounts.
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
F-9
<PAGE> 59
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, not to exceed 14% of revenue, 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 payments made by Baxter to the
Company to reimburse the Company for development spending in excess of the
levels agreed to by Baxter and the Company and to reimburse the Company 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.
Revenue recognized under agreements with Baxter for the years ended
December 31, 1998, 1997 and 1996 consisted of the following:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Licenses ...................... $ -- $ 981,523 --
Milestones .................... -- 750,000 --
Development funding ........... 2,127,413 4,459,258 2,851,236
---------- ---------- ----------
Total licenses, milestones, and
development funding ........... $2,127,413 $6,190,781 $2,851,236
========== ========== ==========
</TABLE>
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
F-10
<PAGE> 60
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
Available-for-sale securities are recorded at amounts which approximate
their fair market value. Realized and unrealized gains and losses at December
31, 1998 and 1997 were not material. Investments classified as
available-for-sale were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------
1998 1997
------------ ------------
<S> <C> <C>
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
============ ============
</TABLE>
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.
Future minimum payments under capital and operating leases are as
follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
YEAR ENDING DECEMBER 31, LEASES LEASES
---------- ----------
<S> <C> <C>
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
==========
</TABLE>
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.
F-11
<PAGE> 61
PATENT LICENSES
The Company is a licensee under a license agreement with an unaffiliated
company with respect to two United States patents covering inventions pertaining
to psoralen-based photochemical decontamination treatment of whole blood or
blood components and four United States patents relating to vaccines, as well as
related foreign patents. Whether the Company's psoralen-based pathogen
inactivation systems practice either of the photochemical decontamination
patents depends on an interpretation of the scope of the patent claims. If such
systems practice such patents, the license would provide for the Company to make
certain milestone payments which may be credited against any royalties payable
by the Company. The license requires a royalty payable by the Company on revenue
from such systems and certain annual minimum royalty payments per year until
termination of the license. The manner in which any such milestone payments and
royalties would be shared by Baxter, if at all, has not been determined. The
Company does not believe that any amounts that might be payable by it under the
agreement to date would be material.
5. PREFERRED STOCK
SERIES A REDEEMABLE CONVERTIBLE PREFERRED STOCK
In June 1998, the Company and Baxter entered into an agreement for
Baxter to purchase 5,000 shares of Series A preferred stock at $1,000.00 per
share. These shares were issued in July 1998. The holders of Series A preferred
stock have no voting rights, except in certain instances. The Company may redeem
all or a portion of these shares at the original issuance price upon achievement
of certain milestones. If the shares are not redeemed upon achievement of these
milestones, each share will be automatically converted into common shares equal
to the original issuance price divided by 120% of the average closing price of
the common stock. Upon termination of the Platelet Agreement, either the Company
or the holders of the majority of outstanding Series A preferred stock may
require the Company to redeem all Series A preferred stock at the original
issuance price. If the shares are not redeemed upon termination, each share will
be automatically converted into common shares equal to the original issuance
price divided by the average closing price of the common stock.
SERIES B PREFERRED STOCK
Also in June 1998, the Company entered into a Series B Preferred Stock
Purchase Agreement with Baxter, whereby Baxter agreed to purchase Series B
preferred stock at an aggregate purchase price of up to $9.5 million by
September 30, 1999. In March 1999, Baxter purchased 3,327 shares of Series B
preferred stock for an aggregate purchase price of $9.5 million. 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.
F-12
<PAGE> 62
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 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 grant 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:
<TABLE>
<CAPTION>
EMPLOYEE STOCK
STOCK OPTION PLANS PURCHASE PLAN
---------------------------------- -------------------
1998 1997 1996 1998 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
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
</TABLE>
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options and purchased shares
have characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in
F-13
<PAGE> 63
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:
<TABLE>
<CAPTION>
1998 1997 1996
-------------- -------------- --------------
<S> <C> <C> <C>
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)
</TABLE>
Activity under the stock option plans is set forth below:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
NUMBER OF EXERCISE PRICE
OPTIONS PER
OUTSTANDING SHARE
----------- ----------------
<S> <C> <C>
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) 1.026
-------- --------
Balances at December 31, 1998 ..... 918,434 $ 10.778
======== ========
</TABLE>
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.
<TABLE>
<CAPTION>
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
--------- ---------------- ---------------- --------- ----------------
<S> <C> <C> <C> <C> <C>
$0.262-2.721 ............ 277,436 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
------- ------- ------- ------- -------
918,434 8.90 $10.778 243,473 $ 4.442
======= ======= ======= ======= =======
</TABLE>
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
F-14
<PAGE> 64
"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:
<TABLE>
<CAPTION>
NUMBER EXERCISE DATE
OF SHARES PRICE PER SHARE ISSUED
- --------- --------------- ------
<S> <C> <C>
5,805 $3.45 July 1993
9,187 $5.44 May 1994
6,615 $7.14 April 1995
- ------
21,607
======
</TABLE>
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:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------
1998 1997
------------ ------------
<S> <C> <C>
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
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 .................................. $ -- $ --
============ ============
</TABLE>
F-15
<PAGE> 65
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.
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 may be
subject to a substantial annual limitation due to the ownership change
limitations provided by the Internal Revenue Code. The annual limitation may
result in the expiration of net operating losses and credits before utilization.
8. RETIREMENT PLAN
The Company maintains a defined contribution savings plan (the "401(k)
Plan") that qualifies under the provisions of Section 401(k) of the Internal
Revenue Code and covers all employees of the Company. Under the terms of the
401(k) Plan, employees may contribute varying amounts of their annual
compensation. The Company may contribute a discretionary percentage of qualified
individual employee's salaries, as defined, to the 401(k) Plan. 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-16
<PAGE> 66
SIGNATURES
Pursuant to the requirement of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Concord, State of California, on the 26th day of March, 1999.
CERUS CORPORATION
By: /s/ STEPHEN T. ISAACS
-------------------------------------
Stephen T. Isaacs
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this report
has been signed below by the following persons in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ STEPHEN T. ISAACS President, Chief Executive Officer and March 26, 1999
- ------------------------------- Director
Stephen T. Isaacs (Principal Executive Officer)
/s/ ROBERT E. MILLER Chief Financial Officer and Vice March 26, 1999
- ------------------------------- President, Finance
Robert E. Miller (Principal Financial and Accounting
Officer)
/s/ B.J. CASSIN Chairman of the Board March 26, 1999
- -------------------------------
B.J. Cassin
/s/ JOHN E. HEARST Director March 26, 1999
- -------------------------------
John E. Hearst
/s/ PETER H. MCNERNEY Director March 26, 1999
- -------------------------------
Peter H. McNerney
/s/ DALE A. SMITH Director March 26, 1999
- -------------------------------
Dale A. Smith
/s/ HENRY E. STICKNEY Director March 26, 1999
- -------------------------------
Henry E. Stickney
</TABLE>
<PAGE> 67
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
- ------ ----------------------
<S> <C>
3.1.1 Amended and Restated Certificate of Incorporation of Cerus
Corporation.
3.1.2 Form of Certificate of Designations of Series A Preferred Stock
of Cerus.
3.1.3 Form of Certificate of Designations of Series B Preferred Stock
of Cerus.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
27.1 Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 3.1.1
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
CERUS CORPORATION, a corporation organized and existing under and by
virtue of the General Corporation Law of the State of Delaware, hereby certifies
as follows:
1. The name of the corporation is Cerus Corporation.
2. The corporation's original Certificate of Incorporation was filed
with the Secretary of State on July 31, 1996.
3. The Amended and Restated Certificate of Incorporation of this
corporation, in the form attached hereto as Exhibit A, has been duly adopted in
accordance with the provisions of Sections 242 and 245 of the General
Corporation Law of the State of Delaware by the Board of Directors and by the
stockholders of the corporation, and prompt written notice was duly given
pursuant to Section 228 of the General Corporation Law of the State of Delaware
to those stockholders who did not approve the Amended and Restated Certificate
of Incorporation by written consent.
4. The Amended and Restated Certificate of Incorporation so adopted
reads in full as set forth in Exhibit A attached hereto and hereby incorporated
by reference.
IN WITNESS WHEREOF, Cerus Corporation has caused this Amended and
Restated Certificate of Incorporation to be signed by its President and Chief
Executive Officer and attested to by its Secretary this 6th day of February,
1997.
/s/ Stephen T. Isaacs
-------------------------------------
STEPHEN T. ISAACS
President and Chief Executive Officer
ATTEST:
/s/ Lori Roll
- -------------------------------
LORI ROLL
Secretary
1.
<PAGE> 2
EXHIBIT A
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
CERUS CORPORATION
I.
The name of this corporation is Cerus Corporation.
II.
The address of the registered office of the corporation in the State of
Delaware is 9 East Loockerman Street, City of Dover, County of Kent, and the
name of the registered agent of the corporation in the State of Delaware at such
address is the National Registered Agents, Inc.
III.
The purpose of this corporation is to engage in any lawful act or
activity for which a corporation may be organized under the General Corporation
Law of the State of Delaware.
IV.
A. This corporation is authorized to issue two classes of stock to be
designated, respectively, "Common Stock" and "Preferred Stock." The total number
of shares which the corporation is authorized to issue is fifty-five million
(55,000,000) shares. Fifty million (50,000,000) shares shall be Common Stock,
each having a par value of one-tenth of one cent ($.001). Five million
(5,000,000) shares shall be Preferred Stock, each having a par value of
one-tenth of one cent ($.001).
The Preferred Stock may be issued from time to time in one or more
series. The Board of Directors is hereby authorized, by filing a certificate (a
"Preferred Stock Designation") pursuant to the Delaware General Corporation Law,
to fix or alter from time to time the designation, powers, preferences and
rights of the shares of each such series and the qualifications, limitations or
restrictions of any wholly unissued series of Preferred Stock, and to establish
from time to time the number of shares constituting any such series or any of
them; and to increase or decrease the number of shares of any series subsequent
to the issuance of shares of that series, but not below the number of shares of
such series then outstanding. In case the number of shares of any series shall
be decreased in accordance with the foregoing sentence, the shares constituting
such decrease shall resume the status that they had prior to the adoption of the
resolution originally fixing the number of shares of such series.
1.
<PAGE> 3
V.
For the management of the business and for the conduct of the affairs of
the Corporation, and in further definition, limitation and regulation of the
powers of the Corporation, of its directors and of its stockholders or any class
thereof, as the case may be, it is further provided that:
A.
1. The management of the business and the conduct of the affairs
of the Corporation shall be vested in its Board of Directors. The number of
directors which shall constitute the whole Board of Directors shall be fixed
exclusively by one or more resolutions adopted by the Board of Directors.
2. Subject to the rights of the holders of any series of
Preferred Stock to elect additional directors under specified circumstances,
following the closing of the initial public offering pursuant to an effective
registration statement under the Securities Act of 1933, as amended (the "1933
Act"), covering the offer and sale of Common Stock to the public (the "Initial
Public Offering"), the directors shall be divided into three classes designated
as Class I, Class II and Class III, respectively. Directors shall be assigned to
each class in accordance with a resolution or resolutions adopted by the Board
of Directors. At the first annual meeting of stockholders following the closing
of the Initial Public Offering, the term of office of the Class I directors
shall expire and Class I directors shall be elected for a full term of three
years. At the second annual meeting of stockholders following the closing of the
Initial Public Offering, the term of office of the Class II directors shall
expire and Class II directors shall be elected for a full term of three years.
At the third annual meeting of stockholders following the closing of the Initial
Public Offering, the term of office of the Class III directors shall expire and
Class III directors shall be entered for a full-term of three years. At each
succeeding annual meeting of stockholders, directors shall be elected for a full
term of three years to succeed the directors of the class whose terms expire at
such annual meeting.
Notwithstanding the foregoing provisions of this Article, each
director shall serve until his successor is duly elected and qualified or until
his death, resignation or removal. No decrease in the number of directors
constituting the Board of Directors shall shorten the term of any incumbent
director.
3. Subject to the rights of the holders of any series of
Preferred Stock, any vacancies on the Board of Directors resulting from death,
resignation, disqualification, removal or other causes and any newly created
directorships resulting from any increase in the number of directors, shall,
unless the Board of Directors determines by resolution that any such vacancies
or newly created directorships shall be filled by the stockholders, except as
otherwise provided by law, be filled only by the affirmative vote of a majority
of the directors then in office, even though less than a quorum of the Board of
Directors, and not by the stockholders. Any director elected in accordance with
the preceding sentence shall hold office for the remainder of the full term of
the director for which the vacancy was created or occurred and until such
director's successor shall have been elected and qualified.
2.
<PAGE> 4
B.
1. Subject to paragraph (h) of Section 43 of the Bylaws, the
Bylaws may be altered or amended or new Bylaws adopted by the affirmative vote
of at least sixty-six and two-thirds percent (66-2/3%) of the voting power of
all of the then-outstanding shares of voting stock of the Corporation entitled
to vote at an election of directors (the "Voting Stock"). The Board of Directors
shall also have the power to adopt, amend, or repeal Bylaws.
2. The directors of the Corporation need not be elected by
written ballot unless the Bylaws so provide.
3. No action shall be taken by the stockholders of the
Corporation except at an annual or special meeting of stockholders called in
accordance with the Bylaws and following the closing of the Initial Public
Offering no action shall be taken by the stockholders by written consent.
4. Advance notice of stockholder nominations for the election of
directors and of business to be brought by stockholders before any meeting of
the stockholders of the Corporation shall be given in the manner provided in the
Bylaws of the Corporation.
VI.
A. A director of the Corporation shall not be personally liable to the
Corporation or its stockholders for monetary damages for any breach of fiduciary
duty as a director, except for liability (i) for any breach of the director's
duty of loyalty to the Corporation or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) under Section 174 of the Delaware General Corporation
Law, or (iv) for any transaction from which the director derived an improper
personal benefit. If the Delaware General Corporation Law is amended after
approval by the stockholders of this Article to authorize corporate action
further eliminating or limiting the personal liability of directors, then the
liability of a director shall be eliminated or limited to the fullest extent
permitted by the Delaware General Corporation Law, as so amended.
B. Any repeal or modification of this Article VI shall be prospective
and shall not affect the rights under this Article VI in effect at the time of
the alleged occurrence of any act or omission to act giving rise to liability or
indemnification.
VII.
A. The Corporation reserves the right to amend, alter, change or repeal
any provision contained in this Certificate of Incorporation, in the manner now
or hereafter prescribed by statute, except as provided in paragraph B of this
Article VII, and all rights conferred upon the stockholders herein are granted
subject to this reservation.
B. Notwithstanding any other provisions of this Certificate of
Incorporation or any provision of law which might otherwise permit a lesser vote
or no vote, but in addition to any affirmative vote of the holders of any
particular class or series of the Voting Stock required by law, this Certificate
of Incorporation or any Preferred Stock Designation, the affirmative vote of the
holders of at least sixty-six and two-thirds percent (66-2/3%) of the voting
power of all of the
3.
<PAGE> 5
then-outstanding shares of the Voting Stock, voting together
as a single class, shall be required to alter, amend or repeal Articles V, VI
and VII.
4.
<PAGE> 1
EXHIBIT 3.1.2
CERTIFICATE OF DESIGNATION
OF SERIES A PREFERRED STOCK
OF CERUS CORPORATION
The undersigned, Stephen T. Isaacs, hereby certifies that:
1. He is the duly elected and acting President and Secretary,
respectively, of CERUS CORPORATION, a Delaware corporation (the "Company"). The
date of filing of the Amended and Restated Certificate of Incorporation (the
"Certificate") was February 7, 1997.
2. The Board of Directors of the Company adopted the following recitals
and resolutions as required by Section 151 of the General Company Law of the
State of Delaware at a meeting held on June 30, 1998:
WHEREAS, the Certificate provides for a class of shares known as
Preferred Stock, issuable from time to time in one or more series; and
WHEREAS, the Board of Directors of the Company is authorized by
Section A of Article IV of the Certificate and, pursuant to its
authority as aforesaid, desires to fix the terms of the first series of
said Preferred Stock, the number of shares constituting said series and
the designation of said series.
NOW, THEREFORE, BE IT RESOLVED, that the Board of Directors
deems it advisable to adopt, and hereby adopts, the following
Certificate of Designation of Preferences of Series A Preferred Stock of
the Company:
SECTION 1. DESIGNATION. Five Thousand (5,000) shares of Preferred
Stock, $0.001 par value, are designated "Series A Preferred Stock" with the
powers, preferences, rights, qualifications, limitations and restrictions
specified herein (the "Series A Preferred").
SECTION 2. VOTING RIGHTS. The holders of shares of Series A
Preferred shall not have any voting rights, except as provided in this Section 2
and as required under the General Corporation Law of Delaware. 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, voting as a separate
class, the Company shall not effect any merger or consolidation in which the
Company is not the surviving entity, or any merger, consolidation or other
transaction in which the Company's 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 contractual rights (the "Contractual Rights") to receive (i) on the
15th day following the Approval Payment Date (as hereinafter defined) or the
Termination Payment Date (as hereinafter defined), as the case may be, the
consideration that the holders of Series A Preferred would have received in the
Covered Transaction had the Series A Preferred been converted into Company
Common Stock immediately prior to the effectuation or consummation of the
Covered Transaction in accordance with the method of conversion used in Section
5(a)(1) or 5(a)(2), as the case may be, at one hundred twenty percent (120%) (in
the case of an Approval Event (as hereinafter defined)), or at one hundred
percent (100%) (in the case of
1.
<PAGE> 2
a Termination Event (as hereinafter defined)) of the closing price of the
Company's Common Stock immediately prior to the Covered Transaction, (with any
securities that would have been received as part of such consideration being
adjusted for any stock splits, stock combinations and the like from the date of
the Covered Transaction to the date of the Approval Event or the Termination
Event, as the case may be) and (ii) any dividends or other distributions, or
shares issued in any reclassification, exchange or substitution of securities or
in any reorganization, merger or consolidation, that the Series A Preferred
holders would have received from the date of the Covered Transaction to the date
of the Approval Event or Termination Event, as the case may be, in respect of
the securities, if any, that holders of the Series A Preferred would have
received in the Covered Transaction as set forth in (i) above; provided that the
Contractual Rights shall be subject to a right by the surviving entity to
repurchase, and upon a Termination Event, a right of the holders of a majority
of the outstanding shares of the Series A Preferred to require the repurchase
of, the Contractual Rights in the same manner, at the same times and at the same
price as the Company's right to redeem the Series A Preferred pursuant to
Section 4 below.
SECTION 3. LIQUIDATION RIGHTS.
(a) Upon any liquidation, dissolution, or winding up of
the Company, whether voluntary or involuntary, the holders of Series A Preferred
shall be entitled to be paid out of the assets of the Company, before any
payment or distribution of assets of the Company (whether capital or surplus)
shall be made to or set aside for the holders of Common Stock and after and
subordinate to any other class or series of Preferred Stock, an amount per share
of Series A Preferred equal to the "Original Issue Price." The Original Issue
Price of the Series A Preferred shall be One Thousand Dollars ($1,000.00). If,
upon any liquidation, distribution, or winding up, the assets of the Company
shall be insufficient to make payment in full under this Section 3(a) to all
holders of Series A Preferred, then such assets shall be distributed among the
holders of Series A Preferred at the time outstanding, ratably in proportion to
the full stated amounts to which they would otherwise be respectively entitled
under this Section 3(a).
(b) The following events shall not be considered a
liquidation, dissolution or winding up under this Section 3:
(1) any consolidation or merger of the Company with
or into any other corporation or other entity or person, or any other corporate
reorganization or other transaction or series of transactions resulting in a
change in ownership of the outstanding securities of the Company; or
(2) a sale, lease or other disposition of all or any
part of the assets of the Company.
SECTION 4. REDEMPTION.
(a) Upon (i) the approval of a new drug application (NDA)
or pre-market approval (PMA) or equivalent by the United States Food and Drug
Administration under the Development, Manufacturing and Marketing Agreement
dated as of December 10, 1993 between the Company and Baxter Healthcare
Corporation, as amended from time to time (the "Platelet Agreement") or (ii) CE
Mark approval in Europe under the Platelet Agreement (either,
2.
<PAGE> 3
an "Approval Event"), the Company shall have the right to redeem all or any
portion of the Series A Preferred at the Original Issue Price.
(b) Upon the termination for any reason of the Platelet
Agreement or upon cessation for any reason of the Cooperative Development Work
(as such term is defined in the Platelet Agreement) (either, a "Termination
Event"), the Company shall have the right, and the holders of a majority of the
outstanding shares of Series A Preferred shall have the right to require the
Company, to redeem all, but not less than all, the Series A Preferred at the
Original Issue Price.
(c) Immediately prior to consummation of a Covered
Transaction, the Company shall have the right to redeem all, but not less than
all, shares of Series A Preferred Stock then outstanding at the Original Issue
Price.
(d) In the event the Company desires to redeem the Series
A Preferred pursuant to Section 4(a), the Company shall, within ten (10) days
after the Approval Payment Date (as defined below), send a notice to the Series
A Preferred holders notifying the holders of redemption and setting forth the
number of shares of Series A Preferred to be redeemed and the total amount to be
paid for the shares of Series A Preferred being redeemed (the "Redemption
Price"). If, at the time of any redemption pursuant to Section 4(a) for less
than all of the Series A Preferred, there shall be more than one holder of the
Series A Preferred, such redemption shall be made pro rata among the holders of
the Series A Preferred in proportion to the number of shares of Series A
Preferred held by each such holder. The "Approval Payment Date" means the date
on which the Company receives payment of the amount payable to it under Section
4.3 of the Platelet Agreement
(e) In the event the Company or the holders of a majority
of the outstanding shares of the Series A Preferred desires to have the Series A
Preferred redeemed pursuant to Section 4(b) above, the Company or the Series A
Preferred holders shall, within ten (10) days after the Termination Payment Date
(as defined below), send a notice to the Company or the Series A Preferred
holders, as the case may be, stating that the Series A Preferred shall be
redeemed pursuant to this subsection (e). The amount to be paid for the Series A
Preferred being redeemed shall also be referred to as the "Redemption Price."
The "Termination Payment Date" means the date on which the Company receives
payment of the amount payable to it under Section 13.4 of the Platelet
Agreement.
(f) In the event the Company desires to have the Series A
Preferred redeemed pursuant to Section 4(c) above, the Company shall, not less
than ten (10) days before the date of consummation of the Covered Transaction,
send a notice to the Series A Preferred holders indicating that the Series A
Preferred shall be redeemed pursuant to this subsection (f). The amount to be
paid for the Series A Preferred being redeemed shall also be referred to as the
"Redemption Price."
(g) Within five (5) days after receipt of a redemption
notice from the Company or within five (5) days after the sending of a
redemption notice to the Company pursuant to Section 4(d), Section 4(e) or
Section 4(f) above, as the case may be, the Series A Preferred holders shall
surrender that number of Series A Preferred share certificates set forth in a
redemption notice by the Company, in the case of redemption pursuant to Section
4(a) above,
3.
<PAGE> 4
or all Series A Preferred share certificates, in the case of redemption pursuant
to Section 4(b) or Section 4(c) above, at the principal executive office of the
Company, and thereupon the Redemption Price shall be payable, in cash by wire
transfer or certified check, to the order of the person whose name appears on
such certificate or certificates as the owner thereof and each surrendered
certificate shall be canceled. Notwithstanding the foregoing, the Redemption
Price payable upon a redemption in connection with a Covered Transaction will be
payable, and the share certificates for the Series A Preferred shall be
canceled, only upon consummation of the Covered Transaction. If the Company does
not have sufficient funds legally available to redeem all shares to be redeemed
pursuant to this Section 4, then it shall use those funds which are legally
available to redeem the maximum possible number of such shares pro rata among
the holders of the Series A Preferred Stock. At any time thereafter when funds
of the Company are legally available for the redemption of shares of Series A
Preferred, such funds will immediately be used to redeem the balance of the
shares which the Company has become obligated to redeem pursuant to this Section
4 but which it has not redeemed. In the event that a redemption notice is given
pursuant to Section 4(f) above in connection with an impending Covered
Transaction, and the Covered Transaction is later terminated without being
consummated, the Company will so notify the holders of the Series A Preferred
Stock, and the redemption notice and redemption will be deemed rescinded and any
tendered share certificates will be returned to the holders of the Series A
Preferred, with the same effect as if such redemption notice had not been given.
SECTION 5. CONVERSION RIGHTS. The following provisions shall
apply with respect to the conversion of the Series A Preferred into shares of
Common Stock:
(a) CONVERSION.
(1) Subject to Section 5(a)(3) below, upon the
occurrence of an Approval Event, if a notice of redemption of the Series A
Preferred has not been sent by the Company pursuant to Section 4(d) above, each
share of Series A Preferred shall automatically be converted into that number of
fully paid and nonassessable shares of Common Stock equal to the Original Issue
Price divided by one hundred twenty percent (120%) of the average closing price
of the Common Stock, as reported in The Wall Street Journal, for the thirty (30)
trading days prior to and including the trading day immediately prior to the
Approval Event. The date on which such conversion shall occur shall be the 15th
day following the Approval Payment Date.
(2) Subject to Section 5(a)(3) below, upon the
occurrence of a Termination Event, if a redemption notice has not been sent by
the Company or the holder of the Series A Preferred pursuant to Section 4(e)
above, each share of Series A Preferred shall automatically be converted into
that number of fully paid and nonassessable shares of Common Stock equal to the
Original Issue Price divided by the average closing price of the Common Stock,
as reported in The Wall Street Journal, for the thirty (30) trading days
commencing with the fifteenth (15th) trading day prior to the Termination Event.
The date on which such conversion shall occur shall be the 15th day following
the Termination Payment Date.
(3) Notwithstanding anything contained in this
Section 5 to the contrary, the Series A Preferred shall not convert, and no
shares of Common Stock shall be issued by the Company thereby, unless and until
the pre-merger notification requirements of the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended (the "HSR Act"), have been complied with,
and any waiting period under the HSR Act applicable to the conversion of the
4.
<PAGE> 5
Series A Preferred has expired or been terminated and any approvals required
thereunder have been obtained.
(4) Upon the conversion of the Series A Preferred
pursuant to this Section 5, the outstanding shares of Series A Preferred shall
be converted automatically without any further action by the holders of such
shares and whether or not the certificates representing such shares are
surrendered to the Company or its transfer agent; provided, however, that the
Company shall not be obligated to issue certificates evidencing the shares of
Common Stock issuable upon such conversion unless the certificates evidencing
such shares of Series A Preferred are either delivered to the Company or its
transfer agent as provided below, or the holder notifies the Company or its
transfer agent that such certificates have been lost, stolen or destroyed and
executes an agreement satisfactory to the Company to indemnify the Company from
any loss incurred by it in connection with such certificates. Upon the
occurrence of such automatic conversion of the Series A Preferred, the holders
of Series A Preferred shall surrender the certificates representing such shares
at the office of the Company or any transfer agent for the Series A Preferred.
Thereupon, there shall be issued and delivered to such holder promptly at such
office and in its name as shown on such surrendered certificate or certificates,
a certificate or certificates for the number of shares of Common Stock into
which the shares of Series A Preferred surrendered were convertible on the date
on which such automatic conversion occurred.
(5) Notwithstanding anything contained in this
Section 5 to the contrary, in the event that the approval of the Company's
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, the Company shall obtain
such approval by the applicable conversion date under Section 5(a)(i) or 5(a)(2)
hereof. In the event such approval is not obtained by the applicable conversion
date, the Company shall, in accordance with Section 4 hereof, redeem any shares
of Series A Preferred that would be convertible into shares of Common Stock in
excess of the limitation specified in Rule 4460(i).
(b) FRACTIONAL SHARES. No fractional shares of Common
Stock shall be issued upon conversion of Series A Preferred and the number of
shares of Common Stock to be issued shall be rounded down to the nearest whole
share. The Company shall, in lieu of issuing any fractional share, pay the
holder otherwise entitled to such fraction a sum in cash equal to the fair
market value of such fraction on the date of conversion (as determined in good
faith by the Board of Directors).
(c) RESERVATION OF STOCK ISSUABLE UPON CONVERSION. The
Company shall at all times reserve and keep available out of its authorized but
unissued shares of Common Stock or its treasury shares, solely for the purpose
of effecting the conversion of the shares of the Series A Preferred, such number
of its shares of Common Stock as shall from time to time be sufficient to effect
the conversion of all outstanding shares of the Series A Preferred. If at any
time the number of authorized but unissued shares of Common Stock shall not be
sufficient to effect the conversion of all then outstanding shares of the Series
A Preferred, the Company will take such corporate action as may, in the opinion
of its counsel, be necessary to increase its authorized but unissued shares of
Common Stock to such number of shares as shall be sufficient for such purpose.
5.
<PAGE> 6
(d) NOTICES. Any notice required by the provisions of this
Section 5 to be given to the holders of shares of the Series A Preferred shall
be deemed given upon the earlier of actual receipt or seventy-two (72) hours
after the same has been deposited in the United States mail, by certified or
registered mail, return receipt requested, and addressed to each holder of
record at the address of such holder appearing on the books of the Company.
(e) PAYMENT OF TAXES. The Company will pay all taxes
(other than taxes based upon income) and other governmental charges that may be
imposed with respect to the issue or delivery of shares of Common Stock upon
conversion of shares of Series A Preferred, excluding any tax or other charge
imposed in connection with any transfer involved in the issue and delivery of
shares of Common Stock in a name other than that in which the shares of Series A
Preferred so converted were registered.
SECTION 6. NOTICES OF RECORD. Upon any taking by the Company of a
record of the holders of any class of securities for the purpose of determining
the holders thereof who are entitled to receive any dividend or other
distribution, or upon any capital reorganization of the Company, any
reclassification or recapitalization of the capital stock of the Company, any
merger or consolidation of the Company with or into any other corporation, or
any transfer of all or substantially all the assets of the Company to any other
person, or any voluntary or involuntary dissolution, liquidation or winding up
of the Company, or any shareholders' meeting to approve the terms thereof, the
Company shall mail to each holder of Series A Preferred at least twenty (20)
days prior to the record date specified therein a notice specifying (i) the date
on which any such record is to be taken for the purpose of such dividend or
distribution and a description of such dividend or distribution, (ii) the date
on which any such reorganization, reclassification, transfer, consolidation,
merger, dissolution, liquidation or winding up is expected to become effective,
and the date of the shareholders meeting to approve the terms thereof, if
applicable, (iii) the date, if any, that is to be fixed as to when the holders
of record of Common Stock (or other securities) shall be entitled to exchange
their shares of Common Stock (or other securities) for securities or other
property deliverable upon such reorganization, reclassification, transfer,
consolidation, merger, dissolution, liquidation or winding up, and (iv) the
material terms thereof.
SECTION 7. NO REISSUANCE OF PREFERRED STOCK. No share or shares
of Series A Preferred acquired by the Company by reason of redemption, purchase,
conversion or otherwise shall be reissued.
SECTION 8. RESTRICTION ON TRANSFER. Neither the shares of Series
A Preferred nor any right to receive redemption payments, nor any Contractual
Rights, shall be assigned, transferred, hypothecated or otherwise alienated by
the holder thereof without the prior written consent of the Company, 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 International, Inc. Any such attempted action shall be null
and void. The foregoing restriction shall not apply to any Common Stock issued
on conversion of the Preferred Stock.
SECTION 9. CANCELLATION OF PREFERRED STOCK. Upon the effectuation
or consummation of any Covered Transaction pursuant to which the holders of the
Series A Preferred receive the Contractual Rights, the Series A Preferred shall
be canceled.
6.
<PAGE> 7
3. The authorized number of shares of Preferred Stock of this Company is
five million (5,000,000), none of which has been issued.
IN WITNESS WHEREOF, this Company has caused this Certificate to be signed by its
duly authorized officer this 6th day of July, 1998.
CERUS CORPORATION
By: /s/ Stephen T. Isaacs
-------------------------------
Stephen T. Isaacs
President
CERTIFICATES OF DESIGNATION
SERIES A PREFERRED
<PAGE> 1
EXHIBIT 3.1.3
CERTIFICATE OF DESIGNATION
OF SERIES B PREFERRED STOCK
OF CERUS CORPORATION
The undersigned, Robert E. Miller, hereby certifies that:
1. He is the duly elected and acting Chief Financial Officer of CERUS
CORPORATION, a Delaware corporation (the "Company"). The date of filing of the
Amended and Restated Certificate of Incorporation (the "Certificate") was
February 7, 1997.
2. The Board of Directors of the Company adopted the following recitals
and resolutions as required by Section 151 of the General Company Law of the
State of Delaware by unanimous written consent dated June 30, 1998:
WHEREAS, the Certificate provides for a class of shares known as
Preferred Stock, issuable from time to time in one or more series; and
WHEREAS, the Board of Directors of the Company is authorized by
Section A of Article IV of the Certificate and, pursuant to its
authority as aforesaid, desires to fix the terms of the second series of
said Preferred Stock, the number of shares constituting said series and
the designation of said series.
NOW, THEREFORE, BE IT RESOLVED, that the Board of Directors
deems it advisable to adopt, and hereby adopts, the following
Certificate of Designation of Preferences of Series B Preferred Stock of
the Company:
SECTION 1. DESIGNATION. Three thousand three hundred twenty-seven
(3,327) shares of Preferred Stock, $0.001 par value, are designated "Series B
Preferred Stock" with the powers, preferences, rights, qualifications,
limitations and restrictions specified herein (the "Series B Preferred").
SECTION 2. VOTING RIGHTS. The holders of shares of Series B
Preferred shall not have any voting rights, except as provided in Section 2,
Section 3(c)(1)(C), Section 3(c)(2) hereof, and as required under the General
Corporation Law of Delaware. Without first obtaining the affirmative vote or
written consent of the holders of at least a majority of the outstanding shares
of Series B Preferred Stock, voting together as a separate class, the Company
shall not authorize or issue shares of any class or series of stock, or
reclassify any class or series of stock, including without limitation, the
Company's Common Stock, into shares having preference or priority over the
Series B Preferred as to voting, liquidation preference or conversion rights.
SECTION 3. LIQUIDATION RIGHTS.
(a) Upon any liquidation, dissolution, or winding up of
the Company, whether voluntary or involuntary, before any payment or
distribution of assets of the Company (whether capital or surplus) shall be made
to or set aside for the holders of Common Stock, Series A Preferred Stock, or
any other class or series of stock ranking junior to the Series B Preferred with
respect to liquidation preference, the holders of Series B Preferred shall be
<PAGE> 2
entitled to be paid out of the assets of the Company an amount per share of
Series B Preferred equal to the "Original Issue Price." The Original Issue Price
of the Series B Preferred shall be Two Thousand Eight Hundred Fifty-Four Dollars
Seventy-Nine and Three Tenths Cents ($2,854.793). If, upon any liquidation,
distribution, or winding up, the assets of the Company shall be insufficient to
make payment in full under this Section 3(a) to all holders of Series B
Preferred, then such assets shall be distributed among the holders of Series B
Preferred at the time outstanding, ratably in proportion to the full stated
amounts to which they would otherwise be respectively entitled under this
Section 3(a).
(b) The following events shall be considered a
liquidation, dissolution or winding up under this Section 3:
(1) any consolidation or merger of the Company with
or into any other corporation or other entity or person in which the Company is
not the surviving entity, or any other consolidation, merger, corporate
reorganization or other transaction or series of transactions pursuant to which
the holders of the outstanding voting securities of the Company immediately
prior to such consolidation, merger, reorganization or other transaction or
series of transactions fail to hold equity securities representing a majority of
the voting power of the surviving entity immediately following such
consolidation, merger or reorganization or any transaction or series of related
transactions; or
(2) a sale, lease or other disposition of all or
substantially all of the assets of the Company.
(c) Any securities to be delivered to the holders of the
Series B Preferred pursuant to a transaction treated as a liquidation shall be
valued as follows:
(1) Securities not subject to investment letter or
other similar restrictions on free marketability:
(A) If traded on a national securities exchange
or the National Market System of the National Association of Securities Dealers,
Inc. (the "NMS"), the value shall be deemed to be the average of the security's
closing prices on such exchange or the NMS over the thirty (30) day period
ending three (3) days prior to the closing;
(B) If traded over-the-counter (but not on the
NMS), the value shall be deemed to be the average of the mean of the closing bid
and ask prices over the thirty (30) day period ending three (3) days prior to
the closing; or
(C) If there is no active public market, the
value shall be the fair market value thereof, as mutually determined by the
Board of Directors of the Company and the holders of a majority of the
outstanding Series B Preferred, voting together as a single class.
(2) The method of valuation of securities subject to
investment letter or other restrictions on free marketability shall be to make
an appropriate discount from the market value determined as above in Sections
3(c)(1)(A), (B) or (C) to reflect the approximate fair market value thereof, as
mutually determined by the Board of Directors of the Company and
2.
<PAGE> 3
the holders of not less than a majority of the outstanding Series B Preferred,
voting together as a single class.
SECTION 4. REDEMPTION.
(a) The Company may elect to redeem all, but not less than
all, of the outstanding Series B Preferred at the Original Issue Price at any
time, from funds legally available for redemption. Without limiting the
foregoing, the Company shall have the right to redeem the outstanding Series B
Preferred within thirty (30) days after receipt of a Conversion Notice (as
defined below). Any redemption pursuant to this Section 4(b) shall be for all
shares of Series B Preferred then outstanding. In the event the Company desires
to redeem the Series B Preferred pursuant to this subsection (b), the Company
shall send a notice to the Series B Preferred holder stating that the Series B
Preferred shall be redeemed pursuant to this subsection (b); provided that, if
such notice is in response to a Conversion Notice, the notice must be sent
within thirty (30) days of receipt of the Conversion Notice. The amount to be
paid for the Series B Preferred being redeemed shall be referred to as the
"Redemption Price."
(b) Within five (5) days after receipt of a redemption
notice from the Company pursuant to Section 4(a) above, the Series B Preferred
holders shall surrender all Series B Preferred share certificates at the
principal executive office of the Company, and thereupon the Redemption Price
shall be payable, in cash to the order of the person whose name appears on such
certificate or certificates as the owner thereof and each surrendered
certificate shall be canceled. If the Company does not have sufficient funds
legally available to redeem all shares to be redeemed pursuant to this Section
4, then it shall use those funds which are legally available to redeem the
maximum possible number of such shares pro rata among the holders of the Series
B Preferred Stock. At any time thereafter when funds of the Company are legally
available for the redemption of shares of Series B Preferred, such funds will
immediately be used to redeem the balance of the shares which the Company has
become obligated to redeem pursuant to this Section 4 but which it has not
redeemed.
SECTION 5. CONVERSION RIGHTS. The following provisions shall
apply with respect to the conversion of the Series B Preferred into shares of
Common Stock:
(a) OPTIONAL CONVERSION.
(1) At any time after the one-year anniversary of the
date of issuance of the Series B Preferred, each share of Series B Preferred
may, at the option of the holder, be converted at any time into that number of
fully paid and nonassessable shares of Common Stock equal to the Original Issue
Price divided by the Conversion Price (as defined below), subject to the
Company's right to redeem the Series B Preferred pursuant to Section 4(a) above.
The conversion price for the Series B Preferred shall initially be equal to the
Original Issue Price divided by 100 (the "Conversion Price"). Such initial
Conversion Price shall be adjusted from time to time in accordance with this
Section 5. All references to the Conversion Price herein shall mean the
Conversion Price as so adjusted.
(2) Notwithstanding anything contained in this
Section 5 to the contrary, the Series B Preferred shall not convert, and no
shares of Common Stock shall be issued by the Company thereby, unless and until
the pre-merger notification requirements of the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended (the "HSR Act"), have been
3.
<PAGE> 4
complied with, and any waiting period under the HSR Act applicable to the
conversion of the Series B Preferred has expired or been terminated and any
approvals required thereunder have been obtained.
(3) Before any holder of Series B Preferred shall be
entitled to convert the same into shares of Common Stock, such holder shall
surrender the certificate or certificates therefor, duly endorsed, at the
principal executive office of the Company or its transfer agent for such stock,
and shall give written notice to the corporation at such office that such holder
elects to convert the Series B Preferred and shall state therein the name or
names in which the holder wishes the certificate or certificates for shares of
Common Stock to be issued (the "Conversion Notice"). The Company shall, as soon
as practicable thereafter, issue and deliver at such office to such holder of
Series B Preferred at the holder's address as set forth on the Company's
records, or such other address as the holder shall have furnished to the Company
in writing, a certificate or certificates for the number of shares of Common
Stock to which such holder shall be entitled as aforesaid. Such conversion shall
be deemed to have been made immediately prior to the close of business on the
date of surrender of the shares of Series B Preferred to be converted, and the
person or persons entitled to receive the shares of Common Stock issuable upon
such conversion shall be treated for all purposes as the record holder or
holders of such shares of Common Stock on such date.
(4) Notwithstanding anything contained in this
Section 5 to the contrary, in the event that the approval of the Company's
stockholders is required pursuant to Rule 4460(i) of the Nasdaq Stock Market
prior to the issuance of any of the shares of Common Stock issuable upon
conversion of the Series B Preferred, the Company shall obtain such approval by
the conversion date under Section 5(a)(1) hereof. In the event such approval is
not obtained, the Company shall, in accordance with Section 4 hereof, redeem any
shares of Series B Preferred that would be convertible into shares of Common
Stock in excess of the limitation specified in Rule 4460(i).
(b) ADJUSTMENT FOR STOCK SPLITS AND COMBINATIONS. If the
Company shall at any time or from time to time after the date that the first
share of Series B Preferred is issued (the "Original Issue Date") fix a record
date for the effectuation of a split or subdivision of the outstanding Common
Stock, the Conversion Price for the Series B Preferred in effect immediately
before that subdivision shall be proportionately decreased. Conversely, if the
Company shall at any time or from time to time after the Original Issue Date
combine the outstanding shares of Common Stock into a smaller number of shares,
the Conversion Price for the Series B Preferred in effect immediately before the
combination shall be proportionately increased. Any adjustment under this
Section 5(b) shall become effective at the close of business on the date the
split, subdivision or combination becomes effective.
(c) ADJUSTMENT FOR COMMON STOCK DIVIDENDS AND
DISTRIBUTIONS. If the Company at any time or from time to time after the
Original Issue Date makes, or fixes a record date for the determination of
holders of Common Stock entitled to receive, a dividend or other distribution
payable in additional shares of Common Stock, in each such event the Conversion
Price for the Series B Preferred that is then in effect shall be decreased as of
the time of such issuance or, in the event such record date is fixed, as of the
close of business on such
4.
<PAGE> 5
record date, by multiplying the Conversion Price then in effect by a fraction
(i) the numerator of which is the total number of shares of Common Stock issued
and outstanding immediately prior to the time of such issuance or the close of
business on such record date, and (ii) the denominator of which is the total
number of shares of Common Stock issued and outstanding immediately prior to the
time of such issuance or the close of business on such record date plus the
number of shares of Common Stock issuable in payment of such dividend or
distribution; provided, however, that if such record date is fixed and such
dividend is not fully paid or if such distribution is not fully made on the date
fixed therefor, the Conversion Price shall be recomputed accordingly as of the
close of business on such record date and thereafter the Conversion Price shall
be adjusted pursuant to this Section 5(c) to reflect the actual payment of such
dividend or distribution or other securities or rights convertible into, or
entitling the holder thereof to receive directly or indirectly, additional
shares of Common Stock.
(d) ADJUSTMENTS FOR OTHER DIVIDENDS AND DISTRIBUTIONS. If
the Company at any time or from time to time after the Original Issue Date makes
or fixes a record date for the determination of holders of Common Stock entitled
to receive a dividend or other distribution payable in securities of the Company
other than shares of Common Stock, in each such event for purposes of this
subsection 5(d), provision shall be made so that the holders of the Series B
Preferred shall receive upon conversion thereof, in addition to the number of
shares of Common Stock receivable thereupon, the amount of other securities of
the Company which they would have received had their Series B Preferred been
converted into Common Stock as of the record date fixed for the determination of
the holders of Common Stock of the Company entitled to receive such distribution
and had they thereafter, during the period from the date of such event to and
including the conversion date, retained such securities receivable by them as
aforesaid during such period, subject to all other adjustments called for during
such period under this Section 5 with respect to the rights of the holders of
the Series B Preferred or with respect to such other securities by their terms.
(e) ADJUSTMENT FOR RECLASSIFICATION, EXCHANGE AND
SUBSTITUTION. If at any time or from time to time after the Original Issue Date,
the Common Stock issuable upon the conversion of the Series B Preferred is
changed into the same or a different number of shares of any class or classes of
stock, whether by recapitalization, reclassification or otherwise (other than a
subdivision or combination of shares or stock dividend or a reorganization,
merger, consolidation or sale of assets provided for elsewhere in this Section 5
or in Section 3), in any such event each holder of Series B Preferred shall have
the right thereafter to convert such stock into the kind and amount of stock and
other securities and property receivable upon such recapitalization,
reclassification or other change by holders of the maximum number of shares of
Common Stock into which such shares of Series B Preferred could have been
converted immediately prior to or as of such recapitalization, reclassification
or change, all subject to further adjustment as provided herein or with respect
to such other securities or property by the terms thereof. In any such case,
appropriate adjustment shall be made in the application of the provisions of
this Section 5 with respect to the rights of the holders of Series B Preferred
after such recapitalization, reclassification or change to the end that the
provisions of this Section 5 (including adjustment of the Conversion Price then
in effect and the number of shares issuable upon conversion of the Series B
Preferred) shall be applicable after that event and be as nearly equivalent as
practicable.
5.
<PAGE> 6
(f) REORGANIZATIONS. If at any time or from time to time
after the Original Issue Date, there is a capital reorganization of the Common
Stock (other than a recapitalization, subdivision, combination,
reclassification, exchange or substitution of shares provided for elsewhere in
this Section 5 or in Section 3), as a part of such capital reorganization,
provision shall be made so that the holders of the Series B Preferred shall
thereafter be entitled to receive upon conversion of the Series B Preferred the
number of shares of stock or other securities or property of the Company or
otherwise to which a holder of the number of shares of Common Stock deliverable
upon conversion would have been entitled on such capital reorganization, subject
to adjustment in respect of such stock or securities by the terms thereof. In
any such case, appropriate adjustment shall be made in the application of the
provisions of this Section 5 with respect to the rights of the holders of Series
B Preferred after the capital reorganization to the end that the provisions of
this Section 5 (including adjustment of the Conversion Price then in effect and
the number of shares issuable upon conversion of the Series B Preferred) shall
be applicable after that event and be as nearly equivalent as practicable.
(g) FRACTIONAL SHARES. No fractional shares of Common
Stock shall be issued upon conversion of Series B Preferred and the number of
shares of Common Stock to be issued shall be rounded down to the nearest whole
share. The Company shall, in lieu of issuing any fractional share, pay the
holder otherwise entitled to such fraction a sum in cash equal to the fair
market value of such fraction on the date of conversion (as determined in good
faith by the Board of Directors).
(h) RESERVATION OF STOCK ISSUABLE UPON CONVERSION. The
Company shall at all times reserve and keep available out of its authorized but
unissued shares of Common Stock or its treasury shares, solely for the purpose
of effecting the conversion of the shares of the Series B Preferred, such number
of its shares of Common Stock as shall from time to time be sufficient to effect
the conversion of all outstanding shares of the Series B Preferred. If at any
time the number of authorized but unissued shares of Common Stock shall not be
sufficient to effect the conversion of all then outstanding shares of the Series
B Preferred, the Company will take such corporate action as may, in the opinion
of its counsel, be necessary to increase its authorized but unissued shares of
Common Stock to such number of shares as shall be sufficient for such purpose.
(i) NOTICES. Any notice required by the provisions of this
Section 5 to be given to the holders of shares of the Series B Preferred shall
be deemed given upon the earlier of actual receipt or seventy-two (72) hours
after the same has been deposited in the United States mail, by certified or
registered mail, return receipt requested, and addressed to each holder of
record at the address of such holder appearing on the books of the Company.
(j) PAYMENT OF TAXES. The Company will pay all taxes
(other than taxes based upon income) and other governmental charges that may be
imposed with respect to the issue or delivery of shares of Common Stock upon
conversion of shares of Series B Preferred, excluding any tax or other charge
imposed in connection with any transfer involved in the issue and delivery of
shares of Common Stock in a name other than that in which the shares of Series B
Preferred so converted were registered.
(k) NO DILUTION OR IMPAIRMENT. The Company shall not amend
its Certificate of Incorporation or participate in any reorganization, transfer
of assets, consolidation,
6.
<PAGE> 7
merger, dissolution, issue or sale of securities or any other voluntary action,
for the purpose of avoiding or seeking to avoid the observance or performance of
any of the terms to be observed or performed hereunder by the Company, but shall
at all times in good faith assist in carrying out all such action as may be
reasonably necessary or appropriate in order to protect the conversion rights of
the holders of the Series B Preferred against dilution or other impairment.
SECTION 6. NOTICES OF RECORD. Upon any taking by the Company of a
record of the holders of any class of securities for the purpose of determining
the holders thereof who are entitled to receive any dividend or other
distribution, or upon any capital reorganization of the Company, any
reclassification or recapitalization of the capital stock of the Company, any
merger or consolidation of the Company with or into any other corporation, or
any transfer of all or substantially all the assets of the Company to any other
person, or any voluntary or involuntary dissolution, liquidation or winding up
of the Company, or any shareholders' meeting to approve the terms thereof, the
Company shall mail to each holder of Series B Preferred at least twenty (20)
days prior to the record date specified therein a notice specifying (i) the date
on which any such record is to be taken for the purpose of such dividend or
distribution and a description of such dividend or distribution, (ii) the date
on which any such reorganization, reclassification, transfer, consolidation,
merger, dissolution, liquidation or winding up is expected to become effective,
and the date of the shareholders meeting to approve the terms thereof, if
applicable, (iii) the date, if any, that is to be fixed as to when the holders
of record of Common Stock (or other securities) shall be entitled to exchange
their shares of Common Stock (or other securities) for securities or other
property deliverable upon such reorganization, reclassification, transfer,
consolidation, merger, dissolution, liquidation or winding up, and (iv) the
material terms thereof.
SECTION 7. NO REISSUANCE OF SERIES B PREFERRED STOCK. No share or
shares of Series B Preferred acquired by the Company by reason of redemption,
purchase, conversion or otherwise shall be reissued.
SECTION 8. RESTRICTION ON TRANSFER. Neither the shares of Series
B Preferred nor any right to receive redemption payments shall be assigned,
transferred, hypothecated or otherwise alienated by the holder thereof without
the prior written consent of the Company, 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
International Inc. Any such attempted action shall be null and void. The
foregoing restriction shall not apply to any Common Stock issued on conversion
of the Series B Preferred.
The authorized number of shares of Preferred Stock of this Company is five
million (5,000,000), of which 5,000 shares designated as Series A Preferred
Stock are issued and outstanding.
7.
<PAGE> 8
IN WITNESS WHEREOF, this Company has caused this Certificate to be
signed by its duly authorized officer this 2nd day of March, 1999.
CERUS CORPORATION
By: /s/ Robert E. Miller
-------------------------------
Robert E. Miller
Chief Financial Officer
CERTIFICATE OF DESIGNATION
SERIES B PREFERRED
<PAGE> 1
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Form S-8) pertaining to the 1996 Equity Incentive Plan, Employee Stock Purchase
Plan and 1998 Non-Officer Stock Option Plan of Cerus Corporation of our report
dated January 22, 1999, except for Note 2 as to which the date is January 30,
1999, and Note 5, as to which the date is March 3, 1999, with respect to the
financial statements of Cerus Corporation included in its Annual Report (Form
10-K) for the year ended December 31, 1998, filed with the Securities and
Exchange Commission.
Walnut Creek, California
March 29, 1999
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<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 19,802,033
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 312,398
<PP&E> 3,055,604
<DEPRECIATION> 2,330,876
<TOTAL-ASSETS> 20,933,695
<CURRENT-LIABILITIES> 19,577,843
<BONDS> 0
5,000,000
0
<COMMON> 9,417
<OTHER-SE> (3,665,776)
<TOTAL-LIABILITY-AND-EQUITY> 20,933,695
<SALES> 0
<TOTAL-REVENUES> 2,903,299
<CGS> 0
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<OTHER-EXPENSES> 29,783,285
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9,153
<INCOME-PRETAX> (29,558,052)
<INCOME-TAX> 0
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<DISCONTINUED> 0
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<NET-INCOME> (29,558,052)
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