We are developing and commercializing novel, proprietary products and technologies within the fields of blood safety and immunotherapy that are intended
to provide safer, more effective medical options to patients in areas of substantial unmet medical need. In the field of blood safety, we are developing and commercializing the INTERCEPT Blood System for platelets, plasma and red blood cells, or
INTERCEPT Blood System. The INTERCEPT Blood System, which is based on our proprietary Helinx technology for controlling biological replication, is designed to enhance the safety of donated blood components by inactivating viruses, bacteria,
parasites and other pathogens, as well as potentially harmful white blood cells. In the field of immunotherapy, we are employing our proprietary attenuated Listeria vaccine platform to develop a series of novel therapies to treat cancer. We
currently have three immunotherapeutic cancer vaccine product candidates, one of which entered Phase I human clinical trials in 2006 and two of which are in preclinical development. These product candidates are designed to stimulate both innate and
adaptive immune pathways, generating highly specific and highly potent anti-tumor responses. We are collaborating in the development of these product candidates with investigators at The Johns Hopkins University, or Johns Hopkins, and with
MedImmune, Inc., or MedImmune. Also in immunotherapy, we are applying our proprietary Killed But Metabolically Active, or KBMA, technology platform in the research and development of prophylactic and therapeutic vaccines for infectious diseases,
including hepatitis C and HIV. We have two prophylactic KBMA vaccine product candidates in early stages of development, one against anthrax and the other against tularemia. Both of these programs have received funding from the National Institutes of
Health, or NIH, under national bioterrorism initiatives.
We have worldwide commercialization rights for the INTERCEPT Blood System for
platelets, plasma and red blood cells, excluding certain countries in Asia where we have licensed commercialization rights to the platelets and plasma systems to BioOne Corporation, or BioOne. We previously collaborated with subsidiaries of Baxter
International Inc., or Baxter, in the development and commercialization of the INTERCEPT Blood
System. In February 2005 and February 2006, we announced agreements with Baxter that resulted in our acquisition of all commercialization rights to the
INTERCEPT Blood System that have not been licensed to BioOne. The INTERCEPT platelet and plasma systems have both received CE mark approval in Europe and are being marketed for commercial sale. Certain European countries require additional approvals
of INTERCEPT-treated blood products. Such additional approvals have been obtained for the platelet and plasma systems in France and for INTERCEPT-treated platelets at one blood center in Germany. The French plasma system approval is subject to
publication in the official journal. We have prioritized the commercialization of the INTERCEPT Blood System for platelets and plasma in Europe and the continued development of the INTERCEPT red blood cell system ahead of our regulatory approval
activities in the United States relating to these systems.
Cerus is a corporation that was incorporated in California in 1991 and
reincorporated in Delaware in 1996. Information regarding our revenue, net income or losses, and total assets for the last three fiscal years can be found in the financial statements and related notes found elsewhere in this report. Our wholly-owned
subsidiary, Cerus Europe B.V. was formed in the Netherlands in 2006.
Product Development
We have incurred total research and development expenses of $29.5 million, $24.1 million and $27.7 million for the years ended December 31, 2006, 2005 and 2004, respectively. The following table identifies our
products and product development programs and their current status:
Product or Product
Under
Development
Potential
Therapeutic Indication/Use
Development Status
Commercial Rights
Blood Safety
INTERCEPT Blood System—Platelets
Inactivation of viruses, bacteria and other pathogens in platelets for transfusion
Europe: Commercialized in certain countries
U.S.: Phase III clinical trial completed; supplemental clinical trial required
Cerus worldwide, except rights granted to BioOne in certain Asian countries
INTERCEPT Blood System—Plasma
Inactivation of viruses, bacteria and other pathogens in plasma for transfusion
Europe: Commercialized in certain countries
U.S.: Phase III clinical trials completed
Cerus worldwide, except rights granted to BioOne in certain Asian countries
INTERCEPT Blood System—Red Blood Cells
Inactivation of viruses, bacteria and other pathogens in red blood cells for transfusion
Research and Phase I trial fully enrolled in late 2006, completion expected in mid-2007
Cerus
Immunotherapy – Attenuated Listeria Platform
CRS-100
(attenuated Listeria)
Cancers that have metastasized to the liver, including colorectal cancer
Phase I clinical trial initiated in 2006
Cerus
CRS-207
(attenuated Listeria expressing Mesothelin antigen)
Pancreatic and ovarian cancer
Preclinical development; IND filing expected in mid-2007
Cerus
MEDI-543 (EphA2)
(attenuated Listeria expressing EphA2 antigen)
Breast, prostate and colon cancers and metastatic melanoma
Preclinical development
MedImmune
Immunotherapy – KBMA Platform
Hepatitis C Vaccine
Therapeutic vaccine against hepatitis C virus
Preclinical research and development
Cerus
HIV Vaccine
Therapeutic vaccine against HIV
Preclinical research and development
Cerus
Anthrax Vaccine
Prophylactic vaccine against anthrax
Preclinical research and development
Cerus
Tularemia Vaccine
Prophylactic vaccine against tularemia
Preclinical research and development
Cerus
Blood Safety
Background
The INTERCEPT Blood System is designed to broadly target and inactivate blood-borne pathogens, such as
viruses (HIV, West Nile, SARS, and hepatitis B and C, for example), bacteria and parasites, as well as potentially harmful white blood cells, while preserving the therapeutic properties of platelet, plasma and red blood cell transfusion products.
The INTERCEPT Blood System inactivates a broad array of pathogens and has the potential to reduce the risk of transfusion related transmission of pathogens for which testing is not completely effective or is not currently performed. We believe that
the INTERCEPT Blood System also has the potential to inactivate most new pathogens before they are identified and before tests are developed and adopted to detect their presence in donated blood. The INTERCEPT Blood System is based on our
proprietary Helinx technology for controlling biological replication.
We have worldwide commercialization rights for the INTERCEPT Blood
System, excluding certain countries in Asia. We previously collaborated with Baxter and have licensed to BioOne commercialization rights to the INTERCEPT Blood System for platelets and plasma in Japan, China, Taiwan, South Korea, Thailand, Vietnam,
and Singapore.
Products, Product Candidates and Development Activities
INTERCEPT Blood System for Platelets
The INTERCEPT Blood System for platelets, or platelet system, is designed to inactivate blood-borne pathogens in donated platelets for transfusion. The platelet system has received CE mark approval in Europe and is being marketed and sold
in several countries in Europe. Certain European countries require additional approvals of INTERCEPT-treated blood products. Such additional approvals have been obtained for the platelet system in France and for INTERCEPT-treated platelets at one
blood center in Germany. We must file an application for marketing approval and obtain such approval in Switzerland before being able to sell the platelet system there. The extent of the validation studies varies by country. Further clinical
studies, ranging from small-scale experience studies to larger randomized trials, will be conducted in some regions and countries, such as the Netherlands. These studies may be conducted to gain broader market acceptance, expand product labeling or
provide data to support applications for regulatory and/or reimbursement approval. In France , the platelet system has been approved for use by blood centers in treating platelets, but we do not expect widespread commercial adoption of the
platelet system to occur until national reimbursement levels have been determined.
We completed a Phase III clinical trial of the platelet
system in the United States in March 2001 and have submitted data from this trial, along with several other modules of our pre-market approval application, to the United States Food and Drug Administration, or FDA. Based on discussions with the FDA,
an independent expert physician panel performed an additional analysis of some of the clinical trial data, which was collected by an independent contract research organization, to determine if apparent differences between treatment groups in the
category of pulmonary adverse events reported in the study were attributable to inconsistent event reporting. The assessments of primary patient records on a blinded basis by the independent expert physician panel found no statistically significant
differences in clinically significant pulmonary adverse events between test and control groups. These assessments differed from adverse events drawn from the case report forms from the Phase III clinical trial, which showed statistically significant
differences in specific pulmonary events. Furthermore, this assessment supported our interpretation that the imbalance observed based on the case report forms was due to reporting differences among the clinical sites. Together with Baxter, we
submitted in 2005 a final report of the analysis to the FDA for review. The final report included conclusions from the expert physician panel. We have had several interactions with the FDA subsequent to the final report submission and understand
that the FDA will require a significantly larger randomized, blinded clinical trial than we and Baxter completed in 2001 before a product license application can be finalized and the platelet system considered for approval in the United States.
Information regarding our revenues from the platelet system for the years ended December 31, 2006,
2005, and 2004 can be found in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operation , and Item 15(a), Consolidated Financial Statements and Supplementary Data.
INTERCEPT Blood System for Plasma
The INTERCEPT Blood System for plasma, or plasma system, is designed to inactivate blood-borne pathogens in donated plasma for transfusion. We completed the last of three planned Phase III clinical trials of the plasma system in 2004, and
the primary and secondary efficacy endpoints of the trial for therapeutic plasma exchange were met. The study showed no clinically and statistically significant differences in overall adverse events between the treatment group and the control group.
A final Phase III report was submitted to the FDA in 2005. Based on the results of the Phase III clinical trials, we received CE mark approval for the plasma system in November 2006 and have prioritized the commercial launch of the plasma system in
Europe ahead of further regulatory efforts relating to the plasma system in the United States. We obtained French in-country approval of the plasma system in January 2007, subject to publication in the official journal. Pathogen inactivated plasma
is already reimbursed in many European countries.
Information regarding our revenues from the plasma system for the years ended
December 31, 2006, 2005, and 2004 can be found in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operation , and Item 15(a), Consolidated Financial Statements and Supplementary
Data.
INTERCEPT Blood System for Red Blood Cells
The INTERCEPT Blood System for red blood cells, or red blood cell system, is designed to inactivate blood-borne pathogens in donated red blood cells for transfusion. In September 2003, we terminated Phase III clinical
trials of the red blood cell system due to the detection of antibody reactivity to INTERCEPT-treated red blood cells in two patients. We evaluated the antibodies detected in the trial and developed process changes that may greatly diminish the
likelihood of antibody reactivity in red blood cells treated with our modified process. We announced several findings related to these evaluations and developments in late 2004 and 2005 at several scientific and trade association meetings. Based on
these findings and other preclinical work we have conducted, we re-entered Phase I clinical trials for the red blood cell system in the United States in the second half 2006 with our modified process, and expect to complete Phase I trial by
mid-2007. We expect to spend approximately two years developing and implementing commercial product and system design changes to the original red blood cell system prior to entering Phase III clinical trials no earlier than late 2008.
Collaborations
Baxter
We collaborated with Baxter on the development and commercialization of the INTERCEPT Blood System commencing in 1993. Effective February 1, 2006, we
entered into a restructuring of our agreements with Baxter pursuant to which we obtained exclusive worldwide commercialization rights to market, distribute and sell the platelet and plasma systems, excluding certain Asian countries where we have
licensed rights to BioOne. We regained worldwide commercialization rights to market the red blood cell system from Baxter in February 2005. In connection with the transfer of commercialization rights to us, Baxter agreed to supply, at our expense,
certain transition services, including regulatory, technical and related administrative support through December 31, 2006. We agreed to purchase UVA illumination devices from Baxter in inventory in February 2006 and, INTERCEPT platelet and
plasma system disposable kits from Baxter’s inventory. Baxter has agreed to manufacture systems and components for the platelet and plasma systems on a cost-plus basis through December 31, 2008, and components through December 31,
2009. Baxter also has agreed to supply only very limited types of components for the prototype of the red blood cell system. We will be obligated to pay Baxter royalties on future INTERCEPT Blood System product sales at royalty rates that vary by
product: 10% of
product sales for the platelet system, 3% for the plasma system and 5% for the red blood cell system. As a result of the 2006 agreement, we recognized gains
and deferred gains in excess of $6.5 million in 2006. At December 31, 2006, we had approximately $0.6 million in remaining deferred gains, all of which are associated with payments made to vendors by December 31, 2006 in support of
INTERCEPT commercialization efforts. We anticipate recognizing the remainder of the deferred gain balance in 2007 as the services are completed by the vendors.
BioOne
In June 2004, we entered into an agreement with Baxter and BioOne for commercialization of
our platelet system in specified parts of Asia. Under the terms of the agreement, BioOne is responsible, at its expense, for seeking regulatory approvals for the platelet system in Japan, China, Taiwan, South Korea, Thailand, Vietnam and Singapore
in exchange for exclusive marketing and distribution rights in each of those countries. We have received a total of $10 million in up-front payments under the terms of the agreement and will be eligible to receive contingent milestone payments for
our sole account and royalties on future product sales, which will be shared equally by Baxter and us.
In June 2005, we announced our
entry into a definitive agreement with Baxter and BioOne for commercialization of our plasma system in specified parts of Asia. Under the terms of the definitive agreement, BioOne is responsible, at its expense, for seeking regulatory approvals for
the plasma system in Japan, China, Taiwan, South Korea, Thailand, Vietnam and Singapore in exchange for exclusive marketing and distribution rights in each of those countries. We have received a total of $9.5 million in cash and $10.0 million in
BioOne equity securities in connection with the definitive agreement as of December 31, 2006 and will be eligible to receive (i) contingent milestone payments, payable to us solely; and (ii) royalties on future product sales, which
will be shared by Baxter and us.
U.S. Armed Forces
In February 2001, we were awarded $2.6 million under a cooperative agreement with the Army Medical Research Acquisition Activity division of the Department of Defense. In September 2002, May 2003, January
2004, August 2004, July 2006, and September 2006 we were awarded additional funding of $5.0 million, $6.0 million, $5.5 million, $3.7 million, $1.0 million, and $3.5 million, respectively, all of which was for the continued funding of
projects to develop our pathogen inactivation technologies to improve the safety and availability of blood for medical transfusions. Under the terms of the agreements, we are conducting research on the inactivation of infectious pathogens in blood,
including unusual viruses, bacteria and parasites, which are of concern to the U.S. armed forces.
MedImmune
In April 2004, we entered into an agreement with MedImmune to co-develop a novel therapeutic vaccine designed to target antigens expressed in breast,
prostate and colon cancer, as well as metastatic melanoma. MedImmune is developing MEDI-543 (EphA2) using our Listeria vaccine platform and MedImmune’s EphA2 cancer antigen. Under the terms of the agreement, we have conducted preclinical
development activities in support of MedImmune, which is responsible for preclinical development, clinical testing, manufacturing and commercialization of any product resulting from the collaboration, and development of a therapeutic vaccine
candidate. We received development funding and may receive contingent milestone payments and royalties on future product sales. As of December 31, 2006, we had received up front and milestone payments of $1.5 million from MedImmune under the
terms of the agreement, as well as development funding. The $1.5 million in milestone and upfront payments consist of a $1.0 million up front payment and a $0.5 million milestone payment. We recognized revenue of $0.3 million, $2.4 million and $1.6
million from MedImmune during the years ended December 31, 2006, 2005 and 2004, respectively.
Immunotherapy
Background
We are using our proprietary, versatile vaccine platforms to develop therapies to stimulate the immune
system to selectively target and attack cancer cells and infectious diseases. Our vaccine platforms are based on specially designed and proprietary strains of the bacterium Listeria monocytogenes . We believe that our proprietary strains of
Listeria, alone or expressing cancer antigens, have the potential to harness the power of the immune system to selectively attack cancer cells. In September 2004, preclinical efficacy and safety data for our attenuated Listeria -based
cancer immunotherapy technology were published in the Proceedings of the National Academy of Sciences , or PNAS. The PNAS paper described studies in which experimental vaccines based on our proprietary Listeria platform were engineered
to express specific tumor antigens. These vaccines were shown to elicit therapeutic anti-tumor responses in tumor-bearing mice, resulting in prolonged survival. In addition, the Listeria strain used in these studies demonstrated a one
thousand-fold reduction in toxicity when compared to wild-type Listeria .
In comparison to other strains, the optimized platform
Listeria strain used in the studies was cleared more rapidly in vivo and showed significantly higher safety margins while preserving immunogenic potency. When used at comparable doses to unmodified Listeria , the optimized strain
generated equivalent immune responses, yet could be administered at higher doses, resulting in more potent T cell responses than possible with wild-type Listeria . Finally, therapeutic administration of an experimental vaccine using the
optimized strain resulted in a significant reduction in metastases and a significant increase in survival in mice with established tumors.
In addition to our attenuated Listeria vaccine platform, we have developed a second immunotherapy platform based on our KBMA technology. We currently are utilizing this platform to develop therapeutic and prophylactic vaccines for
serious infectious diseases. Our KBMA platform is based on the application of our proprietary Helinx technology, which is designed to bind with the DNA of infectious pathogens resulting in their inability to replicate. Using this method, we are able
to inhibit the infectivity, but maintain the metabolic activity of specially engineered, proprietary pathogens. Accordingly, we are seeking to develop KBMA vaccine candidates that retain the potency typically found in live viral and bacterial
vaccines, but with the safety advantages of killed vaccines. A scientific paper detailing preclinical data on KBMA Listeria as a vaccine platform appeared in the August 2005 edition of Nature Medicine . Early research and development
efforts relating to our KBMA technology platform have been funded in part by grants from the NIH and the National Institute of Allergy and Infectious Diseases, or NIAID. Under other grants, we are conducting early preclinical development of
therapeutic vaccines for hepatitis C virus and HIV using our KBMA technology platform applied to our attenuated Listeria strain.
Product
Candidates and Development Activities
Our Attenuated Listeria Vaccine Platform
CRS-100
We have conducted preclinical
development of a strain of proprietary attenuated Listeria for use in treating liver metastases of certain cancers, including colorectal cancer. Preclinical experiments of our product candidate, CRS-100, suggest that our Listeria
strain selectively stimulates an anti-cancer immune response in the liver. When administered intravenously to mice, CRS-100 is taken up by macrophages in the liver and induces a cascade of immune stimulating cytokines and chemokines. This
inflammatory response leads to the recruitment and activation of immune cells to the liver, such as Natural Killer cells that mediate anti-tumor effects, and dendritic cells that prime long-lasting immunity against the tumor. We have conducted
toxicology studies of CRS-100 in non-human primates and filed an investigational new drug application, or IND, with the FDA in late 2005, which was approved in early 2006. We initiated a Phase I clinical trial of CRS-100 in the United States in the
second half of 2006. The Phase I trial is an open label, dose escalation study designed to assess safety and maximum tolerated dose of our attenuated Listeria strain, as well as to monitor biological activity associated with immune system
activation. The trial is being conducted at multiple investigational sites in the United States.
CRS-207
In collaboration with investigators at Johns Hopkins, we are conducting late-stage preclinical studies of a therapeutic pancreatic cancer vaccine candidate, CRS-207, using the same proprietary strain of attenuated
Listeria used in CRS-100, but in this product application the strain is engineered to express Mesothelin. Mesothelin is an antigen that is prevalently expressed in pancreatic and ovarian tumors, but not in normal pancreatic or ovarian tissue.
In clinical studies at Johns Hopkins, three pancreatic cancer patients vaccinated with an experimental, non- Listeria vaccine developed T cell responses against Mesothelin, and those patients are alive and disease-free more than seven years
after their initial cancer diagnosis. Cytotoxic T cells isolated from these patients recognized and destroyed tumor cells in vitro , further validating Mesothelin as a target in pancreatic cancers. In December 2003, we licensed certain rights
to Mesothelin from Johns Hopkins. In December 2004, we entered into an exclusive license with Chugai Pharmaceutical Co., Ltd., relating to the DNA sequence of Mesothelin in the field of cancer vaccines. We expect to file an IND for CRS-207 with the
FDA in mid-2007.
MEDI-543 (EphA2)
In April 2004, we entered into an agreement with MedImmune to co-develop a novel immunotherapeutic vaccine for cancer. This product candidate, MEDI-543 (EphA2), combines our attenuated Listeria platform with
MedImmune’s proprietary EphA2 antigen, which is expressed in a number of solid tumor cancers. According to a paper published on August 1, 2004 in Clinical Cancer Research by researchers from the University of Texas M.D. Anderson
Cancer Center, elevated levels of EphA2 have been linked to cancer progression and decreased patient survival in ovarian cancer patients. EphA2 is also overexpressed by other types of cancers, including breast, prostate and metastatic melanoma.
Under the terms of the agreement, we conducted preclinical development activities in support of MedImmune, who is now responsible for
remaining preclinical development, clinical testing, manufacturing and commercialization of any product resulting from the collaboration. Ending in early 2006, we received development funding from MedImmune and may receive contingent milestone
payments and royalties on future product sales. In September 2005, MedImmune selected a lead candidate strain as a predicate to advanced preclinical testing.
KBMA Platform
Hepatitis C and HIV Vaccines
We believe that our KBMA technology has the potential to be used to develop novel therapeutic vaccines for serious infectious diseases, such as hepatitis
C and HIV. Hepatitis C establishes chronic infections in the liver, and can be treated with a combination of small molecule drugs and interferon, an immune-activating protein. However, current treatments are suboptimal because systemic interferon
treatment is difficult for patients to tolerate and induces a flu-like syndrome. Our approach is to utilize our KBMA platform to produce killed but metabolically active strains of Listeria . We believe that these strains would take advantage
of Listeria’s natural tropism, or biological affinity, to the liver and induce localized production of cytokines, notably including interferon, that, in combination with small molecule drugs, may lead to elimination of the hepatitis C
virus. We believe that our KBMA platform will also allow us to engineer KBMA Listeria strains that express hepatitis C antigens in order to elicit a specific and long-lasting T cell response against virally infected tissues. We believe that
this approach may be better tolerated and have a higher rate of efficacy than current immunotherapies. We are also engaged in early preclinical research and development of therapeutic vaccine candidates to treat HIV using KBMA Listeria
strains expressing HIV antigens, which may elicit specific and long-lasting T cell responses against virally infected tissues.
Anthrax Vaccine
In July 2004, we were awarded a $3.8 million grant from the NIH to begin development of a prophylactic anthrax vaccine based on our KBMA vaccine platform. This award is shared with a consortium of researchers at the
University of California at Berkeley and the University of New Mexico Health Sciences Center, with Cerus serving as the principal investigator. Exposure to the bacterium Bacillus anthracis leads to a serious and life-threatening infectious
disease and has become a major concern due to its potential to be used as an agent for bioterrorism. The only currently licensed human anthrax vaccine was developed in the late 1950’s and has limited efficacy. We believe that an anthrax vaccine
based on our KBMA platform technology has the potential to offer greater potency than the current vaccine. To date, we have demonstrated that a KBMA anthrax vaccine has the ability to induce broad-based immune responses and protect mice from
developing anthrax after exposure to a usually lethal dose of anthrax spores.
Tularemia Vaccine
In October 2005, we announced that a consortium of which we are a member was awarded $24.8 million from the NIAID for the study of the basic biology of
and development of a prophylactic vaccine against Francisella tularensis , the bacterium that causes the infectious disease tularemia. Of the total award amount, we expect to receive $2.7 million over a three-year period. Tularemia, also known
as Rabbit Fever, is a serious and life-threatening infectious disease for which there is currently no effective human vaccine. Similar to anthrax, tularemia has emerged as a growing bioterrorism concern because of its high level of infectivity, ease
of dissemination and substantial mortality rate. Our work with the consortium will center on the development of a prophylactic tularemia vaccine using our KBMA technology platform, and we and our collaborators are currently constructing vaccine
candidates.
We intend to leverage the experience and know-how from our research and development efforts in prophylactic vaccines against
anthrax and tularemia to develop therapeutic vaccines for other infectious diseases.
Manufacturing and Supply
We have used, and intend to continue to use, third parties to manufacture and supply the inactivation compounds for the INTERCEPT Blood System and
immunotherapy product candidates for use in clinical trials and for commercialization. We have no experience in manufacturing products for commercial purposes and have only limited manufacturing facilities capable of producing small lots of
preclinical materials for our immunotherapy programs. Consequently, we are dependent on Baxter for INTERCEPT Blood System components and on contract manufacturers for the production of Helinx compounds and immunotherapy materials for development and
commercial purposes.
Under our agreements with Baxter, we are responsible for developing and delivering our proprietary compounds to
Baxter for incorporation into the final system configuration. Baxter is responsible for manufacturing or supplying the disposable units for the platelet and plasma systems, such as blood storage containers and related tubing, as well as any device
associated with the inactivation process on a cost-plus basis through 2008 and components through 2009.
We have contracted with one
manufacturing facility for the synthesis of amotosalen, an inactivation compound used in our platelet and plasma systems. Under this contract, we are not subject to minimum annual purchase requirements. However, if specified quantities of amotosalen
are not purchased in any year, we are required to pay a maintenance fee of up to $50,000 for such year. We currently have a stock of compound sufficient to support the anticipated commercial demand for the platelet and plasma systems in Europe.
We and our contract manufacturers purchase certain raw materials from a limited number of suppliers. While we believe that there are
alternative sources of supply for such materials, establishing additional or replacement suppliers for any of the raw materials, if required, may not be accomplished quickly and could
involve significant additional costs. Any failure to obtain from alternative suppliers any of the materials used to manufacture our compounds, if required,
would limit our ability to manufacture our compounds.
Marketing, Sales and Distribution
The market for the INTERCEPT Blood System is dominated by a small number of blood collection organizations in the United States, Western Europe and Japan,
where various national blood transfusion services or Red Cross organizations collect, store and distribute virtually all of their respective nations’ blood and blood component supplies. The largest European markets for our products are in
England, Germany and France. In England, decisions on product adoption are centralized in the National Blood Service. In Germany, decisions on product adoption are expected to be on a blood center-by-blood center basis. While obtaining CE marks
allow us to sell the platelet and plasma systems to blood centers in Germany, blood centers in Germany must still obtain both local manufacturing approval and national marketing authorization from the Paul Ehrlich Institute before being allowed to
sell platelets and plasma units treated with the INTERCEPT Blood System to transfusing hospitals and physicians. To date, one blood center in Germany has received such requisite approvals and authorizations for the platelet system. In France,
decisions on product adoption are expected to be on a region-by-region basis with national direction.
Our ability to successfully
commercialize our products will depend in part on the availability of adequate reimbursement for product costs and related treatment of blood components from governmental authorities and private health care insurers (including health maintenance
organizations, or HMOs), which are increasingly attempting to contain health care costs by limiting both the extent of coverage and the reimbursement rate for new tests and treatments. National reimbursement rates for platelet pathogen inactivation
must be set before we would expect broad commercial adoption of the platelet system in France. National reimbursement rates for pathogen inactivated plasma units have been set in France, but need to be extended to include the INTERCEPT Blood System
before we would expect broad commercial adoption of the plasma system in France.
For logistical and financial reasons, the transfusion
industry has not always integrated new technologies into their processes, even those technologies with the potential to improve the safety of the blood supply, such as the INTERCEPT Blood System. In addition, healthcare professionals may require
further safety information or additional studies before adopting our products. Our products may require changes to our potential customers’ space and staffing requirements and require upfront investment in UVA illuminators, disposable kit
inventory and staff training. Even if our product candidates receive regulatory approval for commercial sale, blood centers, physicians, patients and healthcare payors may not believe that the benefits of using our products justify their additional
cost. Furthermore, our products may be inappropriate for certain patients, which could reduce the potential market size.
There is some
volume loss in the yield of blood products as a result of our pathogen inactivation process. In addition, our process today is not fully compatible with the common practice of collecting two units of platelets from a single apheresis donor. If the
volumetric reduction of blood product leads to increased costs, or our process requires changes in blood center or clinical regimens, customers may not adopt our product. In addition, our products do not inactivate all known pathogens, and the
inability of our systems to inactivate certain pathogens may inhibit their acceptance.
Prior to February 2006, Baxter had been responsible
for the marketing, sales and distribution of the platelet system in the United States, Europe and other regions not covered by the agreements with BioOne. Baxter also had been responsible for the marketing, sales and distribution of the plasma
system following marketing approval in Europe and other countries, excluding North America, and the regions covered by the agreements with BioOne. As a consequence of the February 2006 agreement with Baxter, we have established a wholly-owned
subsidiary, Cerus Europe B.V., located in the Netherlands and are building our own independent marketing and sales organization based in Europe to market and sell the INTERCEPT Blood System in Europe and Middle East. We also have a small scientific
affairs group that supports the commercialization efforts.
Under our April 2004 agreement with MedImmune, MedImmune is responsible for development, sales and
marketing of any products resulting from our collaboration. We are solely responsible for the continued development, clinical trials, regulatory approval and subsequent marketing and sales of our immunotherapy product candidates that are not
partnered. It will take a long time for us to complete preclinical development, clinical trials and regulatory approval for one or more of our immunotherapy product candidates. Before we submit any applications for regulatory approval of these
products, we expect to have a sales and marketing plan in place, which could include formation of internal sales and marketing functions, collaborating with one or more third-parties with sales and marketing capabilities, or both.
Competition
We believe that the INTERCEPT Blood
System has certain competitive advantages over competing blood-borne pathogen inactivation methods that are either on the market, or in development. The INTERCEPT Blood System is designed for use in blood centers on a distributed basis with single
units of blood products, which allows for integration with current blood collection, processing and storage procedures. Competing products in development or currently on the market, such as solvent detergent-treated plasma, use centralized
processing that takes blood products away from the blood center. In addition, some potential competitors utilize a pooling process prior to pathogen inactivation, which significantly increases the risk of cross-contamination by pathogens that are
not inactivated. One potential competitor has initiated a Phase III clinical trial in France using a pathogen inactivation process for platelets. Other competitors are marketing pathogen inactivation products for plasma in Europe. There are no known
competitors in the clinical development stage for pathogen inactivation of red blood cells. In addition to direct competition from other pathogen inactivation methods, we encounter indirect competition from other approaches to blood safety,
including methods of testing blood products for bacterial and viral pathogens.
We believe that the primary competitive factors in the
market for pathogen inactivation of blood products will include the breadth and effectiveness of pathogen inactivation processes, ease of use, the scope and enforceability of patent or other proprietary rights, product value, 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 are also important competitive factors. We believe that the INTERCEPT Blood
System will compete favorably with respect to these factors, although there can be no assurance that it will be able to do so. The biopharmaceutical field is characterized by rapid and significant technological changes. Accordingly, our success will
depend in part on our ability to respond quickly to medical and technological changes through the development and introduction of new products. Product development involves a high degree of risk, and there can be no assurance that our product
development efforts will result in any commercially successful products.
We believe our approaches to cancer and infectious disease
immunotherapy have certain competitive advantages over currently available treatments or those now in development. However, the markets for treatments of cancer and infectious disease are intensely competitive and subject to rapid change. Many
companies with significantly greater resources than ours have established products on the market, as well as promising product candidates in more advanced development stages than our programs. Our ability to bring to market products that achieve a
significant degree of commercial success will be dependent on a number of factors, including their efficacy and safety as shown in human clinical trials relative to the standards of care then in place, our ability to receive regulatory approval to
sell products in the United States and in foreign jurisdictions, our ability to scale up and manufacture at acceptable cost, the availability of reimbursement from managed care organizations, and our ability to establish distribution channels for
our products.
Patents, Licenses and Proprietary Rights
Our success depends in part on our 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 our proprietary
rights.
Our policy is to seek to protect our proprietary position by, among other methods, filing United States and foreign patent applications related to our
proprietary technology, inventions and improvements that are important to the development of our business. As of December 31, 2006, we owned approximately 40 issued or allowed United States patents and approximately 50 issued or allowed foreign
patents. Our patents expire at various dates between 2009 and 2018. In addition, we have pending United States patent applications and have filed corresponding patent applications under the Patent Cooperation Treaty. We have a license from Baxter to
United States and foreign patents relating to the INTERCEPT Blood System and have licenses to United States and foreign patents relating to our immunotherapy programs. Proprietary rights relating to our 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 us will
afford protection against competitors or that any pending patent applications now or hereafter filed by, or licensed to, us will result in patents being issued. In addition, the laws of certain foreign countries do not protect our intellectual
property rights to the same extent as do the laws of the United States.
Government Regulation
We and our 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.
Our European investigational plan has been based on the INTERCEPT Blood System
being categorized as Class III drug/device combinations under the Medical Device Directives, or MDD of the European Union. The European Union requires that medical devices affix the CE mark, an international symbol of adherence to quality assurance
standards and compliance with the MDD. The INTERCEPT Blood System for platelets received the CE mark in October 2002. The INTERCEPT Blood System for plasma received the CE mark in November 2006. A separate CE mark certification must be received for
the red blood cell system to be sold in the European Union. Several European countries require additional in-country studies to support an approval to market the products in such 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 pre-market clearance or approval of
products subject to regulation. The steps required before a medical device or biologic may be approved for marketing in the United States pursuant to a pre-market approval application, or PMA, or a biologics license application, or BLA,
respectively, generally include (i) preclinical laboratory and animal tests, (ii) submission to the FDA of an investigational device exemption (for medical devices) or an IND application (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 or BLA, as appropriate, and (vi) FDA review of the PMA or BLA 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 Practice or Quality System Regulation requirements is satisfactory. The FDA will
require a PMA for each of the systems for platelets, plasma and red blood cells, and a BLA for vaccines for cancer and infectious diseases. In addition, the FDA will require site-specific licenses from our United States-based blood center customers
before they can engage in interstate transport of blood components processed using our pathogen inactivation systems, and a delay in obtaining these licenses would adversely impact our ability to sell products in the United States.
The FDA regulates the INTERCEPT Blood System as a biological medical device. The FDA Center for Biologics Evaluation and Research, or CBER, is
principally responsible for regulating the INTERCEPT Blood System. In addition to regulating our product, CBER also regulates the blood collection centers and the blood products they prepare using our medical device.
Before the FDA determines whether to approve our blood safety products, we expect our approval
applications to be reviewed by the Blood Products Advisory Committee, or BPAC, an advisory committee convened by and reporting to the FDA. BPAC will make a recommendation to the FDA for, or against, approval. Before a medical device may be marketed
in the United States, the FDA must approve a pre-market approval application for the product.
Baxter used a modular process for our PMA
application for the platelet system in the United States, which we have followed since assuming responsibility for regulatory activities in the U.S. under terms of the February 2005 and 2006 agreements. The content, order and submission timing of
the modules must be approved by the FDA, and a modular PMA application cannot be approved until all modules have been submitted to, reviewed by and accepted by the FDA.
In addition to the regulatory requirements applicable to the INTERCEPT Blood System, there are regulatory requirements applicable to our prospective customers, the blood centers that process and distribute blood and
blood products. Blood centers and others will likely be required to obtain approved license supplements from the FDA before using the INTERCEPT Blood System. There can be no assurance that any blood centers will be able to obtain the required
licenses on a timely basis, or at all.
To support applications for regulatory approval to market the INTERCEPT Blood System, we conduct
various types of studies, including toxicology studies to evaluate product safety, laboratory and animal studies to evaluate product effectiveness and human clinical trials to evaluate the safety, tolerability and effectiveness of treated blood
components. We believe that, in deciding whether the INTERCEPT Blood System is safe and effective, regulatory authorities are 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 regulatory authorities 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. We have conducted many toxicology studies designed to demonstrate the INTERCEPT Blood System’s safety. There can be no assurance that regulatory authorities will not require further toxicology or
other studies of our products. Based on discussions with the FDA and European regulatory authorities, we believe that data from human clinical studies is required to demonstrate the safety of treated blood components and their therapeutic
comparability to untreated blood components, but that only data from laboratory and animal studies, not data from human clinical studies, will be required to demonstrate the system’s efficacy in inactivating pathogens. In light of these
criteria, our clinical trial programs for the INTERCEPT Blood System consists of studies that differ from typical Phase I, Phase II and Phase III clinical studies.
Many of the INTERCEPT Blood System preclinical and clinical studies have been conducted using prototype system disposables and devices. We plan to perform laboratory studies to demonstrate equivalency between the
prototype and the commercial configuration. We cannot be certain that these studies will be successful or the FDA will not require additional studies, which could delay commercialization. If we decide to seek FDA approval of the platelet system for
use in treating pooled random donor platelets, additional clinical studies will be required. In addition, there currently are three principal manufacturers of automated apheresis collection equipment, including Baxter. The equipment of each
manufacturer collects 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. If we elect to prioritize regulatory efforts in the United States, we may initially seek FDA approval of the platelet system configured for Baxter’s apheresis collection equipment. If we determine that compatibility with other
equipment is desirable, additional processing procedures and system configurations will need to be developed. We believe that the FDA will also require supplemental clinical data before approving our system for use with platelets collected using
other equipment.
Cancer immunotherapies and vaccines for infectious diseases are regulated by CBER. Cerus has filed one IND for which
approval was granted in early 2006, and is planning to file one or more applications for
immunotherapies in the future. Toxicology studies will be required. Completion of such studies could result in findings that limit the feasibility of one or
more particular immunotherapy development programs. There is no assurance at this time that the FDA will accept the design of the planned clinical protocols until pre-IND meetings are held. For some immunotherapies, including CRS-207, submission to
the Recombinant DNA Advisory Committee, or RAC, of the NIH will be necessary. The RAC may make recommendations that delay initiation of clinical trials. A series of clinical studies will be necessary to gain sufficient information to submit a BLA to
the FDA. Failure of pivotal clinical trials to demonstrate safety and efficacy will preclude moving forward in clinical development or filing of the associated BLA for a product candidate. During the review process for the BLA, it is expected that
the FDA will request review by an advisory committee, which will make recommendations for or against approval. There are a number of companies pursuing development of cancer immunotherapies. Failure of these types of approaches to demonstrate
sufficient efficacy or safety to gain regulatory approval could influence the regulatory process for our product candidates.
Health Care Reimbursement
and Reform
The future revenue and profitability of biopharmaceutical and related companies as well as the availability of capital to
such companies may be affected by the continuing efforts of the United States and foreign governments and third-party payors to contain or reduce costs of health care through various means. In the United States, given federal and state government
initiatives directed at lowering the total cost of health care, it is likely that the United States Congress and state legislatures will continue to focus on health care reform and the cost of pharmaceuticals and on the reform of the Medicare and
Medicaid systems.
Our ability to commercialize our products successfully will depend in part on the extent to which appropriate
reimbursement levels for the cost of the products and related treatment are obtained from governmental authorities, private health insurers and other organizations, such as HMOs. Third-party payors are increasingly challenging the prices charged for
pharmaceuticals, medical devices and services. The trend toward managed health care in the United States and other countries and the concurrent growth of organizations such as HMOs, which could control or significantly influence the purchase of
health care services and products, as well as legislative proposals to reform health care or reduce government insurance programs, may all affect the prices for our products.
Employees
As of December 31, 2006, we had 124 employees, 71 of whom were engaged in research
and development and 53 in selling, general, and administrative activities. Of the 53 employees engaged in selling, general, and administrative activities, 17 employees were employed by our European subsidiary, Cerus Europe B.V. None of our employees
are covered by collective bargaining agreements, and we believe that our relationship with our employees is good.
Available Information
We maintain a website at www.cerus.com ; however, information found on our website is not incorporated by reference into this report. We make
available free of charge on or through our website our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934, as amended, or Exchange Act, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC.
Item 1A.
Risk Factors
Risk Factors
Our business faces significant risks. If any of the events or circumstances described in the following risks actually occur, our
business may suffer, the trading price of our common stock could decline and our financial condition or results of operations could be harmed. These risks should be read in conjunction with the other information set forth in this report. There may
be additional risks faced by our business. All references to “Baxter” in these Risk Factors should be read, as to future contingencies, to include any assignee of Baxter’s obligations under our agreements.
The INTERCEPT Blood System may not achieve broad market acceptance.
Under our previous agreements, Baxter’s sales and marketing organization had made only modest progress in commercializing the platelet system in European countries where it has been fully approved for sale.
Despite obtaining CE mark approval of the platelet system in late 2002, Baxter and we have encountered governmental and blood banking community resistance to commercial adoption, including concerns from some national transfusion services,
governmental agencies and healthcare policy groups regarding efficacy, cost and risk-benefit profile. Some potential customers have indicated that further safety information or additional studies would be required before adopting our products. There
is some volume loss in the yield of blood products as a result of our pathogen inactivation process. In addition, our platelet system process today is not fully compatible with the common practice of collecting two units of platelets from a single
apheresis donor. If the volumetric reduction of blood product leads to increased costs, or our process requires changes in blood center or clinical regimens, customers may not adopt our platelet system product. Our products do not inactivate all
known pathogens, and the inability of our systems to inactivate certain pathogens may limit their acceptance. In addition, our products may not demonstrate economic value sufficient to offset their price, imposing a financial burden on the
healthcare system that may limit market acceptance.
For logistical and financial reasons, the transfusion industry has not always
integrated new technologies into their processes, even those with the potential to improve the safety of the blood supply, such as the INTERCEPT Blood System. Our products may require significant changes to our potential customers’ blood
component collection methods, space and staffing requirements and require upfront investment in UVA illuminators, disposable kit inventory and staff training. Even if our product candidates receive regulatory approval for commercial sale, blood
centers, physicians, patients and healthcare payors may not believe that the benefits of using the INTERCEPT Blood System justify their additional cost. If customers experience operational or technical problems with the use of INTERCEPT Blood System
products, market acceptance may be reduced. For example, if adverse events arise from incomplete inactivation of pathogens, improper processing or user error, or if testing of INTERCEPT Blood System-treated blood samples fails to reliably confirm
pathogen inactivation, whether or not directly attributable to a shortcoming of the INTERCEPT Blood System, customers may refrain from purchasing the products.
Market acceptance of our products may also be affected by the availability of reimbursement from governments, managed care payors, such as insurance companies, or other third parties. In many cases, due to the
structure of the blood products industry, we will have little control over reimbursement discussions, which generally occur between blood centers and national or regional ministries of health and private payors. For example, while the platelet
system has been approved in France for use by blood centers in treating platelets, commercial adoption has been delayed pending determination of national reimbursement rates for pathogen inactivated platelets. We may be required to seek explicit
reimbursement in European countries for our plasma system, even though other competing pathogen inactivation products for plasma have been approved and are being reimbursed in Europe presently. It is difficult to predict the reimbursement status of
newly approved, novel medical device or biopharmaceutical products. In certain foreign markets, governments have issued regulations relating to the pricing and profitability of medical products and medical products companies. There also have been
proposals in the United States, at both the Federal and state government level, to implement such controls.
The widespread adoption of managed care in the United States has also placed pressure on the pricing of medical products. These pressures can be expected to
continue and may limit the prices we can obtain for our products.
We may be required to reduce the sales price for our products in order
to make them economically attractive to our customers and to governmental and private payors, which would reduce and may eliminate our gross profit on sales. Pricing levels may differ widely from country to country, depending on economic, social and
industry practices specific to each country. At our present low unit sales levels of the platelet and plasma systems, our costs to manufacture and sell the systems are in excess of revenue. We may be unable to increase sales to a level sufficient to
generate profit contribution. We believe that future product sales in Europe and other regions may be negatively affected because we do not have FDA approval for any of our products, nor are we prioritizing seeking such approval. If the INTERCEPT
Blood System products fail to achieve market acceptance, we may never become profitable. In addition, failure to advance the red blood cell system toward regulatory approval and commercialization may have a negative impact on customers’
willingness to adopt the platelet and plasma systems, which could prevent us from achieving profitability. Deferring pursuit of regulatory approval of the INTERCEPT Blood System in the United States due to strategic priorities favoring Europe may
have adverse consequences on market acceptance of the INTERCEPT Blood System globally.
The market for the INTERCEPT Blood System is highly
concentrated with few customers, including often-dominant regional or national blood collection entities. Even if our products receive regulatory approval and reimbursement is available, failure to properly market, price or sell our products to any
of these large customers could significantly diminish potential product revenue in those geographies. The market for our pathogen inactivation systems in the United States is highly concentrated, dominated by a small number of blood collection
organizations. In many countries in Western Europe and in Japan, various national blood transfusion services or Red Cross organizations collect, store and distribute virtually all of their respective nation’s blood and blood components supply.
In Europe, the largest markets for our products are in England, Germany and France. Decisions on product adoption in England are centralized with the National Blood Service, where general cost containment pressures have delayed consideration of the
INTERCEPT Blood System to date. In Germany, decisions on product adoption and subsequent reimbursement are expected to be on a blood center-by-blood center basis, but depend on both local and centralized regulatory approvals. While the platelet
system has received in-country regulatory approval in France, adoption has been delayed in the absence of national reimbursement rates for pathogen inactivated platelets. In-country regulatory approval in France for the plasma system was obtained in
early 2007. However, adoption may be delayed until the existing national reimbursement rates for pathogen inactivated plasma are extended to the INTERCEPT plasma system. The Japanese Red Cross controls a significant majority of blood transfusions in
Japan. If approvals are not obtained to market our products in these countries, or if the products are not adopted in these countries, our potential product revenue will be significantly decreased.
Our products, blood products treated with the INTERCEPT Blood System and we are subject to extensive regulation by domestic and foreign authorities.
Our products under development, and anticipated future products, are subject to extensive and rigorous regulation by local, state
and federal regulatory authorities in the United States and by foreign regulatory bodies. These regulations are wide-ranging and govern, among other things:
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development;
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testing;
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manufacturing;
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labeling;
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storage;
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pre-market clearance or approval;
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sales and distribution;
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use standards and documentation;
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post-launch surveillance;
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quality;
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advertising and promotion; and
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reimbursement. The FDA and other
agencies in the United States and in foreign countries impose substantial requirements upon the manufacturing and marketing of products such as those we are developing. The process of obtaining FDA and other required regulatory approvals is long,
expensive and uncertain, and typically takes a number of years, depending on the type, complexity and novelty of the product. We may encounter significant delays or excessive costs in our efforts to secure necessary approvals or licenses, or we may
not be successful at all.
Before the FDA determines whether to approve the INTERCEPT Blood System products, we expect our approval
applications to be reviewed by the BPAC. BPAC would then make a recommendation to the FDA for, or against, approval. Even if BPAC were to recommend approval of one or more of our products, the FDA would not necessarily approve those products. If
BPAC were to recommend against approval of one or more of our products, it is likely that the FDA would not approve those products. Before entering human clinical trials, product candidates in our immunotherapy programs beyond CRS-100 likely will be
subject to review by the RAC of the NIH, which could delay initiation of clinical trials.
If our product candidates receive approval for
commercial sale, their marketing and manufacturing will be subject to continuing FDA and other regulatory requirements, such as requirements to comply with Good Manufacturing Practice and ISO 13485, a quality management system standard applicable to
the products we sell in Europe. We were found to be in compliance with ISO 13485 quality management system requirements in an audit conducted by European Union regulators in late 2006. The failure to comply with these requirements on an ongoing
basis could result in delaying or precluding commercialization efforts in certain geographies, including the United States, and could result in enforcement action, which could harm our business. Gaining FDA approval for our platelet and plasma
products would require additional investment and time, because the current manufacturing sites we rely upon for producing the platelet and plasma system products for European distribution are not FDA-qualified facilities. Regulatory authorities may
also require post-marketing testing, which can involve significant expense. Governments or regulatory authorities may impose new regulations or other changes that could further delay or preclude regulatory approval of our potential products. We
cannot predict the impact of adverse governmental regulation that might arise from future legislative or administrative action.
Distribution of our products outside the United States also is subject to extensive government regulation. These regulations vary by country, including the requirements for approvals or clearance to market, the time required for regulatory
review and the sanctions imposed for violations. In some countries, we may be required to register as a medical device manufacturer, even though we outsource manufacturing to third parties. In addition, countries outside the European Union may
require clinical data submissions, registration packages, import licenses or other documentation with which we have no familiarity.
We
will be required to obtain a CE mark extension from European Union regulators for our platelet system, originally obtained by Baxter in 2002, by May 2007 and every five years thereafter. In addition to European Union-level approval, we must obtain
regulatory and reimbursement approvals in some individual European countries, including France, Germany and England, to market our products. In addition, our customers in many
countries must obtain regulatory approval to sell blood components treated with the INTERCEPT Blood System. The level of additional product testing varies by
country, but could take a long time to complete. Failure to obtain necessary regulatory approvals or any other failure to comply with regulatory requirements could result in lost product sales and profitability.
To support our requests for regulatory approval to market our product candidates, we have conducted and intend to conduct various types of studies
including:
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toxicology studies to evaluate product safety;
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laboratory and animal studies to evaluate product effectiveness;
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human clinical trials to evaluate the safety, tolerability and effectiveness of treated blood components or immunotherapies; and
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manufacturing and stability studies. We have conducted many toxicology studies to demonstrate the INTERCEPT platelet and plasma systems’ safety, and we have conducted and plan to conduct toxicology studies for the INTERCEPT red blood cell system and our vaccine candidates
throughout the product development process. At any time, the FDA and other regulatory authorities may require further toxicology or other studies to further demonstrate our products’ safety, which could delay commercialization. In addition, the
FDA or foreign regulatory authorities may alter guidance at any time as to what constitutes acceptable clinical trial endpoints or trial design, which may necessitate our having to redesign our product candidates or proposed clinical trials and
cause us to incur substantial additional expense or time in attempting to gain regulatory approval. We believe the FDA and other regulatory authorities are likely to weigh the potential risks of using our pathogen inactivation products against the
incremental benefits, which may be less compelling in light of improved safety in the blood supply. With respect to an additional Phase III trial of the platelet system in the United States, we expect the FDA to require us to demonstrate a very low
level of potential side effects. Trials of this type may be too large and expensive to be practical.
Preclinical testing and clinical
trials involving our immunotherapy product candidates are long, expensive and uncertain processes. We have only recently begun Phase I human clinical testing of our Listeria platform technology and we have not yet begun testing of our KBMA
platform technology in humans. Preclinical results in animals and in vitro testing we have conducted to date with our two immunotherapy platform technologies may not translate to demonstration of safety and efficacy in human clinical trials.
A number of companies in the pharmaceutical industry, including biotechnology companies, have suffered significant setbacks in advancing stages of clinical trials, even after promising results in earlier preclinical and clinical trials. In addition,
regulators and investigators may impose more stringent, time consuming and expensive clinical trial requirements than we might otherwise choose to pursue as a precondition to proceeding with clinical testing. It may take us or our collaborators
several years to complete this testing, and failure can occur at any stage of the process.
We do not know whether we or our collaborators
will begin and conduct planned clinical trials on schedule, if at all. Significant delays in clinical testing could materially impact our clinical trials. We also do not know whether planned clinical trials will need to be revamped or will be
completed on schedule, if at all. Criteria for regulatory approval in cancer and infectious disease indications are evolving with competitive advances in the standard of care against which new product candidates are judged, as well as with changing
market needs and reimbursement levels. Clinical trial design, including enrollment criteria, endpoints, and anticipated label claims are thus subject to change, even if original objectives are being met. In addition to the reasons stated above,
clinical trials can be delayed for a variety of reasons, including delays in obtaining regulatory approval to commence a study, delays in reaching agreement on acceptable clinical study agreement terms with prospective clinical sites, delays in
obtaining institutional review board approval to conduct a study at a prospective clinical site and delays in recruiting subjects to participate in a study. We do not know whether any clinical trials will result in marketable products. Typically,
there is a high rate of failure for product candidates in preclinical and
clinical trials and product candidates emerging from any successful trials would not reach the market for several years.
Regulatory delays can also materially impact our product development costs. If we experience delays in testing or approvals, our product development
costs will increase. For example, we may need to repeat clinical trials to address regulatory or clinical questions. We may also need to make additional payments to third-party investigators and organizations to retain their services. If the delays
are significant, our financial results and the commercial prospects for our product candidates will be harmed, and our ability to become profitable will be delayed.
Regulatory agencies may limit the uses, or indications, for which any of our products are approved. For example, we believe that the INTERCEPT Blood System products will be able to claim the inactivation of particular
pathogens only to the extent we have laboratory or animal data to support such claims. After regulatory approval for the initial indications, further clinical trials may be necessary to gain approval for the use of the product for additional
indications.
In addition to the regulatory requirements applicable to us and to our products, there are regulatory requirements applicable
to our prospective customers of INTERCEPT Blood System products, the blood centers that process and distribute blood and blood products. Blood centers and others will likely be required to obtain approved license supplements from the FDA or European
regulatory authorities before making available blood products processed with our pathogen inactivation systems to hospitals and transfusing physicians. This requirement or regulators’ delays in approving these supplements may deter some blood
centers from using our products. Blood centers that do submit supplements may face disapproval or delays in approval that could provide further delay or deter them from using our products. The regulatory impact on potential customers could slow or
limit the potential sales of our products.
If our preclinical and clinical data are not considered sufficient by regulatory authorities to grant
marketing approval, we will be unable to commercialize our products and generate revenue. Our red blood cell system requires extensive additional testing and development.
Except for the INTERCEPT platelet and plasma systems, which have received CE mark approval and regulatory approval in certain countries in Europe, we have
no products that have received regulatory approval for commercial sale and are being marketed. Our product candidates are in various stages of development, and we face the risks of failure inherent in developing medical devices and biotechnology
products based on new technologies. Our product candidates must satisfy rigorous standards of safety and efficacy and we must adhere to quality standards regarding manufacturing and customer-facing business processes before the FDA and international
regulatory authorities can approve them for commercial use. We must provide the FDA and international regulatory authorities with preclinical, clinical and manufacturing data that demonstrate our products are safe, effective and in compliance with
government regulations before the products can be approved for commercial sale.
In 2002, the platelet system received CE mark approval in
Europe. We will need to complete validation studies and obtain regulatory and reimbursement approvals in certain European countries before we can market our products in those countries. We expect that further randomized clinical trials funded by
third parties will be conducted in some European countries, such as the Netherlands. We also expect to conduct many smaller scale experience trials with prospective customers in a number of European countries. We expect that decisions to adopt the
platelet system may be deferred until completion of the additional trials and experience studies in Europe. In certain countries, including Germany and Switzerland, the system must be approved for purchase or use by a specific governmental or
non-governmental entity or entities, such as the Paul Ehrlich Institute in Germany. In France, the platelet system has been approved for use by blood centers in treating platelets; however, we do not expect to sell the platelet system broadly to
commercial customers until national reimbursement rates for pathogen inactivated platelets treated with the INTERCEPT platelet system are set.
We completed our Phase III clinical trial of the platelet system in the United States in March 2001 and
have submitted data from this trial, along with several other modules of our pre-market approval application, to the FDA. Based on discussions with the FDA, we performed an additional blinded analysis of the clinical trial data, under the direction
of an independent expert physician panel, to determine if apparent differences between treatment groups in the category of pulmonary adverse events reported in the study were attributable to inconsistent event reporting. The reassessment of primary
patient records by the expert physician panel showed no statistically significant differences between groups. This reassessment differed from the earlier analysis of adverse events that was based on clinical trial case report forms, which showed
statistically significant differences in specific pulmonary events. We submitted a report of the analysis to the FDA for review. The report included conclusions from the expert physician panel. Based upon further discussions with the FDA following
submission of that report, we continue to expect that the FDA will require an additional, significantly larger Phase III clinical trial to evaluate the hemostatic efficacy and safety of the platelet system, using the Company’s final commercial
product design, as compared to conventional platelets. We also understand that our reassessment of our previously completed Phase III clinical trial data will not be sufficient to address the apparent differences observed in that trial between the
treatment groups in the category of pulmonary adverse events, and that data on such events would need to be gathered in the additional Phase III trial. The dimensions of such a Phase III trial may be prohibitively large due either to prospective
cost, logistics or both. The additional Phase III clinical trial would need to be completed and data from the trial submitted to the FDA before we could complete our regulatory submission. The FDA may not find the data from any additional clinical
trials to be acceptable for approval. Before we begin an additional clinical trial, we will need to gain concurrence with the FDA on our trial design. We may not be able to reach concurrence on the size, scope or design of the study.
We have completed Phase IIIa, Phase IIIb and Phase IIIc clinical trials of the plasma system, in the United States, reports for which were filed with the
FDA during 2005. We obtained a CE mark approval in Europe of the plasma system in November 2006. We have not submitted any applications for regulatory approval of the plasma system in the United States or any other regions other than Europe. In some
countries, including several in Europe, we may be required to perform additional clinical studies using the commercial configuration of the system in order to obtain regulatory approval.
As a result of the termination of Phase III clinical trials of our red blood cell system due to the detection of antibody reactivity to red blood cells
treated with the INTERCEPT red blood cell system in two patients, we have been conducting additional research activities on our red blood cell system to determine if the system can be reconfigured to reduce the potential for antibody reactivity to
treated red blood cells. Based upon an internal evaluation of the results to date from these additional research activities and after consulting with regulatory authorities, we initiated a new Phase I trial in 2006 in the United States using a
modified red blood cell system before potentially progressing to later-stage clinical trials. We are utilizing a manual processing system in the Phase I trial, which system is not in a commercially feasible form. A number of trial design, process
and product design issues that could impact efficacy, regulatory approval and market acceptance will need to be resolved prior to the initiation of further clinical trials and while those clinical trials are being conducted, including determining
the appropriate design of additional Phase I or subsequent Phase II clinical trials, if deemed necessary, and Phase III clinical trials, and developing a commercially feasible red blood cell system, including disposables, hardware and software for
implementing the process in blood collection centers. These development initiatives may be costly and time consuming. Even if the project proceeds on course, we would not expect to initiate a Phase III trial for our red blood cell system prior to
late 2008. A delay in completing such activities could result in a delay in the timely progression to later stage trials. If we are unsuccessful in advancing a modified red blood cell system through clinical trials, resolving process and product
design issues or in obtaining subsequent regulatory approvals and acceptable reimbursement rates, we may never realize a return on our development expenses incurred to date in the red blood cell system program.
Clinical trials in particular are expensive and have a high risk of failure. Any of our product candidates may fail in the testing phase or may not
achieve results sufficient to attain market acceptance, which could prevent us from achieving profitability.
It may take us several years to complete our clinical testing, and failure can occur at any stage of
testing. Enrollment criteria for certain of our clinical trials may be quite narrow. Consequently, we may be unable to recruit suitable patients into the trial on a timely basis, if at all. We cannot rely on interim results of trials to predict
their final results, and acceptable results in early trials might not be repeated in later trials. Any trial may fail to produce results satisfactory to the FDA or foreign regulatory authorities. In addition, preclinical and clinical data can be
interpreted in different ways, which could delay, limit or prevent regulatory approval. Negative or inconclusive results from a preclinical study or clinical trial or adverse medical events during a clinical trial could cause a preclinical study or
clinical trial to be repeated, require other studies to be performed or cause a program to be terminated, even if other studies or trials relating to a program are successful.
We have very limited experience in marketing and sales, or in managing a commercial operation in Europe. We can no longer rely upon Baxter for sales, marketing, distribution and regulatory support of the
INTERCEPT Blood System products and have formed a new subsidiary in Europe to assume such responsibilities. We have limited experience in managing regulatory affairs, particularly with foreign authorities.
Upon reaching agreements with Baxter in February 2006, we became fully responsible for sales, marketing and distribution support of the INTERCEPT Blood
System worldwide, except in those Asian territories covered by our agreements with BioOne for the platelet and plasma systems. As a consequence, we will no longer be able to rely upon Baxter for sales, marketing and distribution support of the
INTERCEPT Blood System. Further, the February 2006 agreements required that Baxter provide regulatory support for the INTERCEPT Blood System only through the end of 2006, and as a result, we can no longer rely on such support from Baxter. We have
been particularly dependent on Baxter in Europe, where the platelet system and, more recently, the plasma system, have been approved for sale in certain countries. If we fail in our efforts to develop such internal competencies or establish
acceptable relationships with third parties on a timely basis, our attempts to commercialize the INTERCEPT Blood System may be irreparably harmed.
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We must develop, build and manage marketing, sales, distribution, customer service and back office functions necessary to support commercialization of the
INTERCEPT Blood System in Europe . Historically, we have had a small scientific affairs group that has helped support Baxter’s European sales and marketing organization; however, we did not maintain our own independent sales and marketing
organization. We may be unable to maintain existing customer relationships established by Baxter as we take on responsibility for sales, marketing and customer service. Beginning in early 2006, we began to recruit a small European organization
dedicated primarily to selling and marketing the platelet system and more recently, the plasma system, in Europe. We may be unable to recruit suitable sales, marketing, regulatory, and quality assurance personnel on a timely basis, if at all. We
also need to continue developing distribution, customer service, and back office capabilities either internally or by contracting with third parties, which we may be unable to accomplish on a timely or maintain on an affordable basis. In addition to
adding sales and marketing capabilities, we have needed to develop appropriate inventory and logistics management, receivables and collections, foreign exchange, risk management, human resources, information and quality systems capabilities.
Generally, such capabilities must be built in compliance with European standards and practices, with which we have little experience. We also have had to develop customer service capabilities to insure uninterrupted supply, timely calibration and
servicing of UVA illuminators, and appropriate and timely resolution of customer complaints. We may be unable to operate a European organization effectively and efficiently, even after Cerus Europe B.V. is fully staffed. Developing sales, marketing
and operational capabilities ourselves will increase our costs and may delay commercialization of our pathogen inactivation systems.
•
We must develop regulatory capabilities for clinical-stage and Phase IV trials involving the INTERCEPT Blood System globally. Following our February 2006
agreements with Baxter, we have taken on worldwide responsibility for regulatory activities regarding the INTERCEPT Blood System,
except in territories covered by our agreement with BioOne for the platelet and plasma systems, provided that Baxter remained as the registrant or applicant
under European registrations and applications for a transition period in 2006. We will need to complete the transition from Baxter, where we must gain regulatory approval to switch product labels to our brand. Failure to do so may slow the rate of
sales of the platelet system or delay the launch of our plasma system. We need additional resources to support regulatory activities and post-approval trials relating to these products. We may not have adequate internal resources and capabilities to
manage Phase IV and post-approval trials and to respond appropriately to possible customer complaints or required regulatory reporting of adverse events arising from the use of the platelet system. We will need to increase our regulatory and trial
management resources or contract with independent regulatory consultants, which we may be unable to do on a timely basis. Adding regulatory and trial management resources will result in increased costs and may potentially delay regulatory filings.
Delays or inabilities to complete regulatory filings and obtain approvals will also delay or prevent us from being able to recognize sales of our products and attaining profitability. We will continue to rely on Baxter for manufacturing and supplying components of our platelet and plasma systems for a limited period of time. Over a longer
period, we will need to identify, select and qualify third party sources of supply for the INTERCEPT Blood System, including the INTERCEPT red blood cell system.
•
We rely on third parties for manufacturing and supplying components of our platelet and plasma systems. Under the terms of our agreements, Baxter is
currently responsible for manufacturing and supplying illuminators and disposable kits associated with the platelet and plasma systems for commercial use through 2008 and certain components of the platelet and plasma systems through 2009. We will
also be dependent on Baxter to transfer know-how relevant to the INTERCEPT Blood System; however, certain of Baxter’s materials, manufacturing processes and methods are proprietary to Baxter. We may be unable to establish alternate sources of
supply to Baxter without having to redesign certain elements of the platelet and plasma systems. Such redesign may be costly, time consuming and require further regulatory review, which would delay our ability to commercialize the platelet and
plasma systems. If Baxter fails to manufacture an adequate supply of components or devices within quality specifications, we may be unable to supply products to our customers. Baxter is not obligated to provide support for development and testing of
improvements or changes we may make to the INTERCEPT Blood System. We may be unable to identify, select, and qualify such manufacturers or those third parties able to provide support for development and testing activities on a timely basis or enter
into contracts with them on reasonable terms, if at all. Any delay in the availability of devices or components from Baxter could delay further regulatory approvals, market introduction and subsequent sales of the systems. Moreover, the inclusion of
components manufactured by others could require us to seek new approvals from regulatory authorities, which could result in delays in product delivery. We may not receive any such required regulatory approvals. Baxter manufactures our platelet and
plasma systems in facilities that are not FDA-approved. Our agreements do not require Baxter to validate these manufacturing facilities with the FDA. In order to be sold in the United States, our systems would be required to be manufactured in an
FDA-approved facility. FDA validation of a manufacturing facility, whether owned by Baxter or by another party, will be costly and time-consuming.
•
Baxter has entered into a definitive agreement to sell its Transfusion Therapies business unit and, under that agreement, the buyer will assume Baxter’s
manufacturing obligations to Cerus. On October 3, 2006, Baxter announced that it had entered into a definitive agreement to sell its Transfusion Therapies business, the unit of Baxter that has performed many of the manufacturing and supply
chain activities related to our relationship with Baxter, to a new company formed by an investment group led by Texas Pacific Group. Subject to regulatory approvals and other customary closing conditions, Baxter has informed us that it expects the
transaction to close within the first quarter of 2007. We have been informed by Baxter that the new company will assume Baxter’s obligations to us under the manufacturing agreement. However, the new company may fail to manufacture an adequate
supply of
components or devices of the INTERCEPT Blood System, which would subject us to the risks described above. Certain components of the INTERCEPT Blood System
are currently manufactured or assembled at facilities not within the Transfusion Therapies business unit. Baxter and/or the new company will continue to be obligated to supply illuminators and disposable kits associated with the platelet and plasma
systems to us generally through 2008 and for certain components through 2009. Failure to supply an adequate supply of components or devices of the INTERCEPT Blood System, would subject us to the risks described above. In addition, because the
components of the INTERCEPT Blood System are manufactured and assembled at multiple facilities owned by both Baxter and the new company leading up to final assembly, Baxter and the new company will remain interdependent with respect to the INTERCEPT
Blood System supply chain. Baxter and the new company may fail to coordinate or meet interdependent supply chain obligations, leading to a failure to manufacture an adequate supply of components or devices of the INTERCEPT Blood System, which would
also subject us to the risks described above.
•
We will be required to identify and enter into agreements with third parties to manufacture the INTERCEPT Blood System products and related blood component
storage solutions. Baxter’s manufacturing responsibilities for illuminators and disposable kits associated with the platelet and plasma systems in general extend through 2008 and for certain components of the platelet and plasma systems
through 2009, after which we will assume manufacturing responsibilities. Except for very limited manufacturing of disposable components, Baxter is no longer obligated to provide manufacturing services related to the red blood cell system. We will
need to identify parties to provide those manufacturing services related to our red blood cell system. It may be difficult to enter into these types of agreements on reasonable terms. In particular, it will be time-consuming for other manufacturers
to develop the capability to manufacture the INTERCEPT Blood System products and blood component storage solutions economically and to gain regulatory approval to do so for commercial use. We may be unable to identify and contract with manufacturers
that can make our products cost-effectively, which would delay our efforts to commercialize our products.
•
Our potential remedies against Baxter may be inadequate in assuring that Baxter meets its contractual obligations. In the event of a failure by Baxter to
perform its obligations to supply components of the INTERCEPT Blood System to us, damages recoverable by us may be insufficient to compensate us for the full loss of business opportunity. Our supply agreement with Baxter contains limitations on
incidental and consequential damages that we may recover. Baxter’s potential liability in the event of non-performance may not be sufficient to compel Baxter to continue to act in conformity with our agreements. The platelet system is not compatible with some commercial platelet collection methods and platforms and platelet storage solutions manufactured by others.
The equipment and materials used to collect platelets vary by manufacturer and by geographic region. Platelets may be collected
from a single donor by apheresis using an automated collection machine. Apheresis devices currently used in the United States and European markets differ, among other characteristics, by in their ability to collect platelets in reduced volumes of
plasma. Platelet concentrates may also be prepared from whole blood by pooling together platelets from multiple donors. There are two commonly used methods for preparing whole blood platelets: the buffy coat method, which is used extensively in
Europe and Canada, and the pooled random donor method, which is used in the United States and to a more limited extent in Europe.
Our
system for platelets is designed to work with platelets collected using a proprietary platelet storage solution, called Intersol, manufactured by Baxter. For platelets collected by apheresis, the INTERCEPT platelet system is most compatible with
Baxter’s apheresis platelet collection system, because it facilitates the use of Intersol. For platelets prepared from whole blood, our platelet system is most compatible with the buffy coat collection method, again because this method
facilitates the use of Intersol as an additive solution to the platelet
concentrate. As a result, we have conducted most of our clinical studies using either Baxter’s equipment or buffy coat platelets. More recently, we have
begun conducting studies in Europe supporting the use of the platelet system in combination with other collection and preparation platforms.
In order to address the entire market in the United States, we would need to develop and test additional configurations of the INTERCEPT platelet system. Our efforts to develop the platelet system to date have focused almost entirely on
apheresis platelets collected on Baxter’s automated collection platform. We estimate that the majority of platelets used in the United States are collected by apheresis, though a significant minority is prepared from pooled random donor
platelets derived from whole blood collections. We may be required to make our systems compatible with random donor platelets. In order to develop a platelet pathogen inactivation system compatible with random donor platelets, we would need to
perform additional product development and testing, including additional clinical trials. These development activities would increase our costs significantly, and may not be successful.
Baxter has committed to us to make Intersol collection and pooling products and conversion kits available to customers. However, Baxter may not make such
products or its apheresis collection system available for sale in certain countries and has elected to discontinue sales efforts for its apheresis collection system in Japan.
Other manufacturers supplying blood component collection platforms to the market may resist our efforts to make the INTERCEPT Blood System compatible
with their platforms. Making our platelet system readily compatible with the Haemonetics apheresis collection system will require certain changes in the Haemonetics device, and there can be no assurance that Haemonetics will undertake this effort on
a timely basis or be commercially successful. Gambro, Inc., or Gambro, another major supplier of automated platelet collection systems, is conducting clinical trials of its own system for pathogen inactivation of platelets. For competitive reasons,
Gambro may have little or no incentive to make its apheresis collection system compatible with our platelet system. Attaining compatibility with collection platforms manufactured by others would require adaptations to either our platelet system or
to the collection platforms, which may be difficult to engineer, expensive to implement and test, require additional clinical trials, cause delays in regulatory approval and/or be commercially unattractive to pursue. These development activities
will increase our costs significantly, and may not be successful. Market acceptance of the platelet system may be delayed until the system receives regulatory approval for use on such other equipment.
Because the INTERCEPT Blood System products have not been manufactured on more than a limited commercial scale, we face manufacturing uncertainties that could
limit their commercialization. If our third-party manufacturers fail to produce our products or compounds satisfactorily and in sufficient quantities, we may incur delays, shortfalls and additional expenses, which may in turn result in permanent
harm to our customer relations.
The INTERCEPT Blood System products, including many of the components, have been manufactured on a
commercial scale on only a limited basis. Baxter relies on third parties to manufacture and assemble some of the platelet and plasma system components, many of which are customized and have not been manufactured on a commercial scale. Baxter has
produced some pathogen inactivation systems in modest commercial quantities, but may not be able to manufacture and assemble other systems or in larger quantities, or do so economically. Because of low sales volumes and other reasons, Baxter’s
costs to manufacture commercial components for the platelet system have been greater than we previously anticipated and may continue to rise. This may reduce our potential gross profit margin from platelet and plasma system sales.
We may be unable to contract with third parties to supply the INTERCEPT Blood System in adequate quantities or to manufacture the system or its
components at acceptable cost. We are in the initial stages of commercializing the INTERCEPT Blood System in Europe and may not accurately forecast demand for the INTERCEPT Blood System. We may be unable to contract with third parties to supply
adequate numbers of platelet and plasma systems and components to meet demand and, as a result, supply to our customers may be
interrupted. If Baxter or third-party manufacturers fail to produce our products or Intersol products satisfactorily, at acceptable costs and in sufficient
quantities, we may incur delays, shortfalls and additional expenses, which may in turn result in permanent harm to our customer relations. In the United States, studies related to the platelet system disposable and compound manufacturing need to be
completed and included in FDA submissions before the FDA would consider the applications for approval.
Baxter and we purchase certain key
components of the INTERCEPT Blood System from a limited number of suppliers. Contracts for the long-term supply of certain components have not yet been signed. It would be expensive and time-consuming to establish additional or replacement suppliers
for these components. Some components of the INTERCEPT Blood System, including components of the UVA illuminator device, are no longer manufactured, which will require Baxter or us to identify and qualify replacement components and may require that
we conduct additional studies, which could include clinical trials, to demonstrate equivalency or validate any required design or component changes. If Baxter or we are unable to identify and supply replacement components, we may be unable to supply
products to our customers. If we were required to redesign the products, our development costs would increase, and our programs and commercialization efforts could be delayed significantly.
We intend to use third-party manufacturers to produce commercial quantities of the chemical compounds to be used in our products. These compounds have
not yet been produced in quantities sufficient to support commercialization for all regions in which we may market our products. We have an agreement with a manufacturer to produce commercial quantities of amotosalen, a proprietary compound used in
our platelet and plasma systems. We currently do not have any third-party manufacturing agreements in place for commercial production of compounds used in our red blood cell system. Any new or additional commercial manufacturer will need to develop
new methods and processes to manufacture these compounds on a commercial scale and demonstrate to us, the FDA and foreign regulatory authorities that its commercial scale manufacturing processes comply with government regulations and that its
compounds are equivalent to originally licensed compounds in order for us to maintain commercial licensure of our products. It may be difficult or impossible to economically manufacture our products on a commercial scale.
We have relied on Baxter for transition services. We will need to perform these services ourselves or identify one or more alternative third- party providers.
Under the terms of our February 2006 agreement, Baxter was required to provide certain transition services relating to European
activities, at our expense. These services included specified regulatory and clinical support activities, installation, maintenance and calibration services, and order entry, billing and collections from customers, device and systems development,
monitoring and responding to customer complaints, and clinical education and training provided through December 31, 2006, and manufacturing technical information and advice, which Baxter is obligated to provide through December 31, 2008.
We have also been reliant on Baxter to manage operational aspects of our presence in Europe, including compliance with local, national and EU regulations relating to labor law, taxes, logistics, credit and collections and administration. We need to
continue to develop internal competencies in sales, marketing, distribution, regulatory support, operations and administration or arrange for third parties to provide certain of these necessary services. We may be unable to assume these functions
ourselves or identify alternative third-party providers on a timely basis or on reasonable terms, if at all. Any delay in these activities could delay further regulatory approvals, market introduction and subsequent sales of the systems.
We have used prototype components in our preclinical studies and clinical trials of the INTERCEPT red blood cell system and have not completed the
components’ commercial design.
The system disposables and instruments of our red blood cell system that we used in our
preclinical studies and clinical trials in the United States historically and those we are now using in our new Phase I red blood cell trial are prototypes of systems to be used in the final products. As a result, we expect regulatory authorities
will
require us to perform additional preclinical and clinical studies using the commercial versions of the systems to demonstrate the acceptability of the
commercial configuration and the equivalence of the prototypes and the commercial products’ design, which may increase our expenses and delay the commercialization of our products. If we fail to develop commercial versions of the INTERCEPT red
blood cell system on schedule, our potential revenue would be delayed or diminished and our competitors may be able to bring products to market before we do.
In addition, the design and engineering effort required to complete the final commercial product is substantial and time-consuming. As with any complex development effort, we expect to encounter design, engineering
and manufacturing issues. Such issues have previously arisen, sometimes unexpectedly, and solutions to these issues have not always been readily forthcoming. Additional unforeseen design, engineering and manufacturing issues may arise in the future,
which could increase the development cost and delay commercialization of our products.
We rely on BioOne for commercialization of our platelet and
plasma systems in many Asian countries.
Baxter and we have licensed to BioOne, rights to commercialization of the platelet and
plasma systems in Japan, China, Taiwan, South Korea, Vietnam, Thailand, and Singapore. BioOne is solely responsible for obtaining regulatory approvals, marketing and selling the platelet and plasma systems in those countries. We understand that
Baxter does not intend to maintain its CE mark registration for the platelet system after it expires in mid-2007. In addition, we received CE mark approval for the plasma system independently from Baxter, and Baxter is not intending to apply for a
CE mark for the plasma system. However, BioOne is dependent on Baxter for the manufacture and supply of the platelet and plasma systems well beyond the time when Baxter intends to let its CE mark registration for the platelet system lapse. BioOne is
also dependent on Baxter for providing certain regulatory support and the timely transition of regulatory files and dossiers. BioOne may be unable to qualify the platelet and plasma systems for sale in certain countries in its territory in the
absence of CE marks being held by Baxter, even if CE marks are held by us. BioOne has made only limited progress to date in commercializing the platelet and plasma systems in Asian territories. Because we only have a minority investment interest in
BioOne, we lack the ability to significantly influence BioOne, and are dependent on BioOne’s performance to realize milestone and royalty revenue from commercialization of our platelet and plasma systems in those countries. In Japan, regulatory
authorities may require our platelet and plasma systems to be widely adopted commercially in Europe or approved by the FDA before the platelet and plasma systems are considered for approval in Japan, which would delay or prevent BioOne from
achieving significant product sales. We understand that BioOne will need to raise additional capital in the first half of 2007 in order to fund its operations. There is no assurance that BioOne will be able to attract additional required capital to
successfully commercialize those products licensed from Baxter and us. BioOne may not be successful in commercializing the platelet and plasma systems in its Asian territories, in which case the value of BioOne’s equity likely would decline and
may give rise to an impairment in the carrying value of our equity interest in BioOne.
Our vaccine programs are in an early stage of development.
Our vaccine programs are in an early stage of development and there is a high risk of failure. We will be required to perform
extensive preclinical and clinical testing before any product candidate can be submitted for regulatory approval prior to commercialization. Clinical testing is very expensive, takes many years, and the outcome is uncertain. Failure to demonstrate
the safety or efficacy of a product candidate in preclinical studies or clinical trials would delay or prevent regulatory approval of that product candidate. Our potential vaccine products must meet rigorous testing standards in order to advance to
clinical testing. Other than CRS-100 being tested in our current Phase I clinical trial, no product candidates employing either our Listeria or our KBMA platform technologies have been tested in humans, and preclinical data in animal studies
and from in vitro experiments may not be predictive of clinical safety and efficacy once product candidates are tested in humans. Our immunotherapy product candidates are unlikely to be used as single agents for the treatment of cancer or
infectious diseases, but rather in combination with other drugs and treatment regimens. Testing our vaccines in
combination with other drugs and treatment regimens in clinical trials will introduce additional clinical, timeline and regulatory risks and complexities,
including added expense, delay in conducting clinical trials and uncertain regulatory requirements.
Naturally-occurring Listeria is
a bacterium that is a human pathogen that can cause serious illness. Our immunotherapy product candidates for cancer indications use proprietary, modified strains of Listeria that are designed to have a substantially reduced ability to cause
illness in humans. However, before our vaccine candidates can be accepted for clinical testing, we must successfully complete a number of preclinical safety studies. We may not be able to identify a dose range in which our product candidates are
therapeutically effective and yet maintain adequate safety margins. Investigators have encountered and may continue to encounter difficulties in enrolling suitable patients in our trials, which have contributed to delays and increased costs in
completing the CRS-100 Phase I trial. Clearance of a Phase I clinical trial using CRS-100 does not imply concurrence by FDA to our conducting later stage studies with CRS-100 and does not imply clearance for clinical trials of our other Listeria
vaccine candidates expressing antigens, such as CRS-207. Because CRS-207 and our other preclinical product candidates using Listeria rely on the same base strain of Listeria used in CRS-100, any adverse findings in clinical trials
of CRS-100 would likely adversely affect our ability to develop and test these other product candidates in human clinical trials. Our Phase I clinical trial for CRS-100 involves testing in a patient population with advanced disease. We may be unable
to test CRS-100 and our other product candidates in subsequent trials in patient populations that we believe may be better suited clinically or commercially to our vaccines.
Because our vaccine candidates use novel platforms, the FDA or foreign regulators may require studies that we have not anticipated. In addition, we have
contracted with third-party manufacturers to produce our vaccines for research, preclinical and clinical testing. We have manufactured CRS-100 for toxicology studies and Phase I clinical trials, but have not engaged in scale-up of the manufacturing
process or the development of a commercial formulation. We also rely on third parties to conduct aspects of preclinical and clinical development on our behalf, including contract manufacturing and research services. These third parties may encounter
delays, over which we have significantly less control than research and development activities performed in-house, or experience unexpected results. We may experience numerous unforeseen events during, or as a result of, the preclinical research and
development process that could delay or prevent clinical testing, regulatory approval and commercialization of our potential products.
Our ability
to successfully develop cancer and infectious disease products is dependent in part on being able to attract and retain partners and collaborators, as well as governmental funding sources.
The development and commercialization of product candidates employing our Listeria and KBMA platform technologies will be expensive, lengthy and
uncertain. To date, we have relied not only upon internal scientific, development and financial resources, but also upon third parties. We have licensed our Listeria platform to MedImmune for use in developing a product candidate potentially
applicable to cancers expressing EphA2, a proprietary antigen owned by MedImmune. We are collaborating with investigators at Johns Hopkins University on other cancer and infectious disease programs. We also rely on advice and insights from our
scientific advisory board, a group of independent clinicians, professors and investigators, regarding our research and development activities. These relationships provide us with external perspectives and independent validation that may be critical
to our future success. Loss of these relationships or failure to attract others may result in additional expense, delays in development and regulatory approval and failure to commercialize products. We have received significant funding from United
States government agencies for research and development in both cancer and infectious disease, as well as funding from MedImmune under our license agreement relating to development of MEDI-543 (EphA2); however, development funding from MedImmune to
Cerus ceased at the completion of contracted work we had performed through early 2006 and MedImmune is pursuing advanced preclinical work on MEDI-543 on its own. Due to budgetary constraints, funding from the Federal government, particularly funding
from the Department of Defense and National Institutes of Health, is expected to be reduced from prior years and is subject to political and economic forces beyond our control. Additionally, we no longer
are deemed to be a s for purposes of being eligible for certain grants administered by the National Institutes of Health and regulated by Small
Business Administration.
Academic and third-party funding we have been awarded to date for early-stage preclinical development of our
therapeutic vaccine candidates for hepatitis C and HIV may be inadequate to allow us to demonstrate proof-of-concept of our KBMA Listeria approach as potential standalone or combination therapies for these indications. Federal funding in
support of our programs to develop prophylactic vaccines against anthrax and tularemia is not expected to lead to substantial commercial opportunities beyond potential biodefense applications, and we cannot be certain that the research conducted
into those two infectious diseases will readily translate into applications with greater commercial potential. We may be unable to attract additional external funding to allow us to continue development of these product candidates. Loss of funding
from government sources and third parties would require us to reduce the scope of our research and development efforts in immunotherapeutics, narrowing the number of programs to those we could support through internal resources.
If our competitors develop and market products that are more effective than our product candidates, our commercial opportunity will be reduced or eliminated.
Conversely, if competitors encounter difficulties or failures in human clinical trials, we may face additional clinical and regulatory challenges.
We expect our products to encounter significant competition. The INTERCEPT Blood System products may compete with other approaches to blood safety currently in use, as well as with future products that may be
developed by others. Our success will depend in part on our ability to respond quickly to medical and technological changes brought about by the development and introduction of new products. Product development is risky and uncertain, and we cannot
assure you that we will develop our products successfully. Competitors’ products or technologies may make our products obsolete or non-competitive before we are able to generate any significant revenue. In addition, competitors or potential
competitors may have substantially greater financial and other resources than we have. They may also have greater experience in preclinical testing, human clinical trials and other regulatory approval procedures.
Several companies are developing technologies that are, or in the future may be, the basis for products that will directly compete with or reduce the
market for our pathogen inactivation systems. A number of companies are specifically focusing on alternative strategies for pathogen inactivation in platelets and plasma. In Europe, several companies, including Grifols, Octapharma AG and Maco Pharma
International GmbH, are developing or have developed and are selling commercial pathogen inactivation systems to treat fresh frozen plasma. Navigant Biotechnologies, a wholly owned subsidiary of Gambro Group, is developing a pathogen inactivation
system for blood products.
New methods of testing blood for specific pathogens have been approved by the FDA and in Europe, as have tests
for bacteria in platelets. Continued delays in commercialization of the platelet system in France and Germany may impact our ability to compete with bacterial testing for platelets. Tests have recently been approved to detect West Nile Virus in
blood products. Other groups are developing rapid, point-of-care bacterial tests, synthetic blood product substitutes and products to stimulate the growth of platelets. Development and commercialization of any of these or other related technologies
could impair the potential market for our products.
There are many companies pursuing programs for the treatment of cancer and treatment
and prevention of infectious disease. Some are large pharmaceutical companies, such as Pfizer, GlaxoSmithKline, Sanofi-Aventis, Bristol-Myers Squibb, Genentech and Gilead, which have greater experience and resources in product development,
preclinical testing, human clinical trials, obtaining FDA and other regulatory approvals and in manufacturing and marketing new therapies. We are also competing with other biotechnology companies, such as Cell Genesys, Inc., Coley Pharmaceutical
Group, and Dendreon Corporation, that have cancer vaccine programs that are in more advanced stages of development than ours. In addition, other companies are pursuing early-stage research and development of Listeria -based immunotherapies. If
any of these companies’ products
are shown to be more efficacious than ours, our Listeria -based products may fail to gain regulatory approval or commercial acceptance. If these
companies’ products fail in human clinical trials, we may be required to overcome more significant regulatory barriers prior to gaining approval, face more challenging impediments to market acceptance and may be unable to raise capital to fund
development of our Listeria or KBMA programs.
We may be liable and we may need to withdraw our products from the market if our products harm
people. We may be liable if an accident occurs in our controlled use of hazardous materials.
We are exposed to potential liability
risks inherent in the testing and marketing of medical devices and pharmaceutical products. We may be liable if any of our products cause injury, illness or death. Although we will have completed rigorous preclinical and clinical safety testing
prior to marketing our products, there may be harmful effects caused by our products that we are unable to identify in preclinical or clinical testing. In particular, unforeseen, rare reactions or adverse side effects related to long-term use of our
products may not be observed until the products are in widespread commercial use. Because of the limited duration and number of patients receiving blood components treated with the INTERCEPT Blood System products in clinical trials, it is possible
that harmful effects of our products not observed in clinical and preclinical testing could be discovered in clinical trials or after a marketing approval has been received. Later discovery of problems with a product, manufacturer or facility may
result in additional restrictions on the product or manufacturer, including withdrawal of the product from the market. We are subject to risks and costs of product recall, which include not only potential out-of-pocket costs, but also potential
interruption to our supply chain. In such an event, our customer relations would be harmed and we would incur unforeseen losses. We maintain product liability insurance, but do not know whether the insurance will provide adequate coverage against
potential liabilities. If we cannot successfully defend ourselves against product liability claims, we may incur substantial liabilities or be required to limit commercialization of our products.
Our research and development activities involve the controlled use of hazardous materials, including certain hazardous chemicals, radioactive materials
and infectious pathogens, such as HIV and hepatitis viruses. Although we believe that our safety procedures for handling and disposing of hazardous materials are adequate and comply with regulatory requirements, we cannot eliminate the risk of
accidental contamination or injury. If an accident occurs, we could be held liable for any damages that result.
Virtually all of our research and
development activities and the significant majority of our general and administrative activities are performed in or managed from at a single site that may be subject to lengthy business interruption in the event of a severe earthquake.
Virtually all of our research and development activities and the significant majority of our general and administrative activities
are performed in or managed from our facilities in Concord, California, which are within an active earthquake fault zone. Should a severe earthquake occur, we might be unable to occupy our facilities or conduct research and development and general
and administrative activities in support of our business and products until such time as our facilities could be repaired and made operational. Our property and casualty and business interruption insurance in general does not cover losses caused by
earthquakes. While we have taken certain measures to protect our scientific, technological and commercial assets, a lengthy or costly disruption due to an earthquake would have a material adverse effect on us.
We have o