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The Gatherer Three probe obtained the material in region with low x-ray radiation. Sheldon conducted experiments in the Dorsill islands. Discovering it could regenerate tissue, he hoped it could be used to end to injury and disease.
However, he was infected and used as an incubator for the material. The Denarians spread through all life on the island, even sheep and chickens. It evolved and by the third generation had taken over human minds and began to develop a group consciousness. The Sixth Doctor created a solution which cured everyone under Denarian control. (PROSE: Grave Matter)