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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
PAGE
----
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
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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:
ROUTINELY SCREENED FOR
INFECTIOUS IN THE UNITED STATES
FAMILY PATHOGEN DISEASE YES NO
- ----------------- ----------------- ----------------------------- ----------------------
Hepatitis viruses HBV, HCV Hepatitis X
HEV, HGV Hepatitis X
Retroviruses HIV-1 and -2 AIDS X
HTLV-I and -II Malignant 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
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:
THERAPEUTIC CERUS PRODUCT INACTIVATION DEVELOPMENT
PROGRAM INDICATION IN DEVELOPMENT COMPOUND STATUS
- ------- ---------- -------------- ------------ --------------
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
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Clinical Trial Design. Cerus conducts clinical trials using several
designs. In a controlled study, treated and untreated blood components are
administered to subjects who are randomly assigned to either a test group or a
control group, and the results are compared. In a cross-over study, each subject
receives both treated and untreated blood components in random order. To avoid
bias in reporting side effects, studies are usually blinded. In a single-blind
study, subjects are not told whether they are receiving treated or untreated
blood components. In a double-blind study, neither the subject (patient) nor the
investigator (physician) knows whether the subject is receiving treated or
untreated blood components.
PLATELET PROGRAM
Platelet Usage and Market. Platelets are cellular components of blood
that are an essential part of the clotting mechanism. Platelets facilitate blood
clotting and wound healing by adhering to damaged blood vessels and to other
platelets. Platelet transfusions are used to prevent or control bleeding in
platelet-deficient patients, such as those undergoing cancer chemotherapy or
organ transplant. Transfusion units of platelets are obtained either by
combining the platelets from four to six whole blood donations (pooled random
donor platelets), or in an automated procedure in which a therapeutic dose of
platelets is obtained from a single donor (apheresis or single donor platelets).
A principal motivation for platelet apheresis is to limit donor exposure from
pooled, manually collected platelets. Platelet transfusions may also require one
or more additional procedures with additional costs. Cerus believes that its
platelet pathogen inactivation system may reduce the need for many of these
procedures and the motivation for single donor apheresis platelets.
Cerus estimates the production of platelets in 1998 to have been 1.4
million transfusion units in North America, 1.3 million transfusion units in
Western Europe and 700,000 transfusion units in Japan. In the United States,
based on a study of six blood centers conducted in October 1998 on behalf of
Cerus (the "Cost Study"), the estimated base cost for a transfusion unit of
apheresis platelets ranges from approximately $400 to $550 and for a transfusion
unit of random donor platelets ranges from approximately $170 to $330. These
estimates include donor screening and diagnostic tests, such as those for HIV,
HTLV, HBV and HCV. Blood centers may also charge up to $210 per unit for
additional procedures such as gamma irradiation and CMV screening. The table
below indicates, based on the Cost Study, the estimated range of costs for the
additional procedures for platelet transfusions described above for each of
apheresis and random donor platelet transfusion units. The frequency of use and
additional charge for each procedure vary widely.
ADDED COST PER
-------------------------------------
APHERESIS RANDOM DONOR
PROCEDURE TRANSFUSION UNIT TRANSFUSION UNIT
- --------- ---------------- ----------------
Gamma irradiation.......... $10 to $ 50 $60 to $210
CMV screening.............. $15 to $ 35 $90 to $210
Leukocyte filtration....... $32 to $ 60 $32 to $ 60
Of those procedures performed at blood centers, the maximum aggregate
estimated costs in the study ranged from approximately $400 to $690 for each
apheresis transfusion unit and from approximately $230 to $630 for each random
donor transfusion unit.
Platelet Pathogen Inactivation System. Cerus' platelet pathogen
inactivation system applies a technology that combines light and Cerus'
proprietary inactivation compound, S-59, which is a synthetic small molecule
from a class of compounds known as psoralens. Cerus conducted preclinical
studies to assess safety and ability of psoralen derivatives to inactivate
pathogens and leukocytes while preserving platelet function. As a result, Cerus
selected S-59 from over 100 psoralen derivatives.
When illuminated, S-59 undergoes a specific and irreversible chemical
reaction with nucleic acid. This chemical reaction renders the genetic material
of a broad array of pathogens and cells incapable of replication. A virus,
bacteria or other pathogenic cell must replicate in order to cause infection. A
similar reaction with leukocyte nucleic acid inhibits the leukocyte activity
that is responsible for certain adverse 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.
PROCEDURE ADDED COST PER UNIT
- --------------- -------------------
Gamma irradiation........... $10 to $50
CMV screening............... $15 to $35
Leukocyte filtration........ $22 to $57
Designated donor............ $0 to $114
Autologous donor............ $30 to $164
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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 w