UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED September 30, 1996
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
Commission File number: 0-19750
-------------
MATRIX PHARMACEUTICAL, INC.
(Exact name of registrant as specified in its charter)
Delaware 94-2957068
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
34700 Campus Drive, Fremont, California 94555
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (510) 742-9900
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceeding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
Number of shares of Common Stock, $.01 par value, outstanding as of September
30, 1996: 21,253,618.
<PAGE>
MATRIX PHARMACEUTICAL, INC.
INDEX
PART I. FINANCIAL INFORMATION Page No.
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
September 30, 1996 and December 31, 1995 3
Condensed Consolidated Statements of Operations -
Three Months and Nine Months Ended September 30, 1996 and 1995 4
Condensed Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 1996 and 1995 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
PART II. OTHER INFORMATION
Risk Factors 11
Item 6. Exhibits and Reports on Form 8-K 20
Signatures 21
Page 2
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<TABLE>
MATRIX PHARMACEUTICAL, INC.
(a development stage company)
Condensed Consolidated Balance Sheets
<CAPTION>
(In thousands)
September 30, December 31,
1996 1995
------------- ------------
Assets (Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents ........................... $ 19,683 $ 55,675
Short-term investments .............................. 32,688 9,646
Other current assets ................................ 2,206 952
--------- ---------
Total current assets ............................. 54,577 66,273
Property and equipment, net ............................. 17,055 15,919
Non-current investments ................................. 68,970 12,010
Deposits and other assets, net .......................... 178 217
--------- ---------
$ 140,780 $ 94,419
========= =========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable .................................... $ 1,414 $ 1,605
Accrued compensation ................................ 1,051 844
Accrued clinical trial costs ........................ 1,035 1,814
Other accrued liabilities ........................... 771 664
Current portion of debt and capital lease obligations 661 830
--------- ---------
Total current liabilities ........................ 4,932 5,757
Debt and capital lease obligations, less current portion 11,890 12,307
Stockholders' equity
Capital stock ....................................... 222,367 153,427
Other ............................................... (1,067) (826)
Deficit accumulated during the development stage .... (97,342) (76,246)
--------- ---------
Total stockholders' equity ....................... 123,958 76,355
--------- ---------
$ 140,780 $ 94,419
========= =========
<FN>
See Accompanying Notes
</FN>
</TABLE>
Page 3
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MATRIX PHARMACEUTICAL, INC.
(a development stage company)
Condensed Consolidated Statements of Operations
(In thousands except per share amounts)
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- ---------------------
1996 1995 1996 1995
-------- -------- -------- --------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Revenues ..................... $ -- $ -- $ -- $ --
Costs and expenses:
Research and development .. 6,110 5,471 18,114 14,406
General and administrative 2,732 3,562 7,036 6,198
-------- -------- -------- --------
Total costs and expenses 8,842 9,033 25,150 20,604
-------- -------- -------- --------
Loss from operations ......... (8,842) (9,033) (25,150) (20,604)
Interest and other income, net 2,030 361 4,054 1,093
-------- -------- -------- --------
Net loss ..................... $ (6,812) $ (8,672) $(21,096) $(19,511)
======== ======== ======== ========
Net loss per share ........... $ (0.32) $ (0.76) $ (1.07) $ (1.78)
======== ======== ======== ========
Weighted average number of
shares outstanding ........... 21,248 11,366 19,689 10,975
======== ======== ======== ========
See Accompanying Notes
Page 4
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MATRIX PHARMACEUTICAL, INC.
(a development stage company)
Condensed Consolidated Statements of Cash Flows
Increase (Decrease) in Cash and Cash Equivalents
(In thousands)
For the nine months
ended September 30,
1996 1995
---------- -----------
(Unaudited) (Unaudited)
Cash flows from operating activities:
Net loss ...................................... $ (21,096) $ (19,511)
Adjustments to reconcile net loss to
net cash used by operating activities:
Depreciation and amortization .............. 772 677
Amortization of deferred compensation ...... 120 101
Accrued marketing rights and fees (payments) (250) 2,104
Other ...................................... 138 128
Changes in other assets and liabilities .... (1,871) 797
--------- ---------
Net cash (used) by operating activities ... (22,187) (15,704)
Cash flows from investing activities:
Capital expenditures .......................... (1,908) (363)
Investment in securities available-for-sale ... (144,531) (14,796)
Proceeds of securities available-for-sale ..... 42,832 5,114
Maturities of investments ..................... 21,734 4,072
--------- ---------
Cash flows (used) by investing activities .. (81,873) (5,973)
Cash flows from financing activities:
Payments on debt and capital lease obligations (336) (309)
Net cash proceeds from issuance of:
Debt and capital lease financing ........... -- 232
Convertible preferred stock ................ -- (45)
Common stock ............................... 68,404 17,006
--------- ---------
Cash flows provided by financing activities 68,068 16,884
Net decrease in cash and cash equivalents ............ (35,992) (4,793)
Cash and cash equivalents at the beginning of period . 55,675 10,276
--------- ---------
Cash and cash equivalents at the end of period ....... $ 19,683 $ 5,483
========= =========
Page 5
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MATRIX PHARMACEUTICAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996
1. Basis of presentation
The results of operations for the interim periods shown in
this report are not necessarily indicative of results to be expected
for the year ending December 31, 1996. In the opinion of management,
the information contained herein reflects all adjustments necessary to
make the results of operations for the interim periods a fair statement
of such operations. All such adjustments are of a normal recurring
nature.
These condensed consolidated financial statements should be
read in conjunction with the Company's audited consolidated financial
statements for the year ended December 31, 1995, which were filed with
the Securities and Exchange Commission on Form 10-K, and the Company's
quarterly reports on Form 10-Q, filed with the Securities and Exchange
Commission for the quarters ended March 31, 1996 and June 30, 1996.
2. Principles of consolidation
The consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiary after elimination of all
material intercompany balances and transactions.
3. Net loss per share
Net loss per share is computed using the weighted average
number of shares of common stock outstanding during the period. Common
stock equivalents consisting of stock options, convertible Series A
preferred shares and warrants are excluded from the computation as
their impact is anti-dilutive.
4. Cash and cash equivalents, short-term investments, and non-current
investments
The Company invests its excess cash in government and
corporate securities. Highly liquid investments with maturities of
three months or less at the date of acquisition are considered by the
Company to be cash equivalents. Investments with maturities beyond
three months at the date of acquisition and that mature within one year
from the balance sheet date are considered to be short-term
investments. Investments with maturities longer than one year from the
balance sheet date are classified as short-term investments or
non-current investments based on the Company's intended holding period.
The Company maintains its cash, cash equivalents and
investments in several different instruments held by various banks and
brokerage houses. This diversification of risk is consistent with the
Company's policy to maintain liquidity and ensure the safety of
principal.
Page 6
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The Company determines the appropriate classification of debt
securities at the time of purchase and reevaluates such designation as
of each balance sheet date. The amortized cost of debt securities is
adjusted for amortization of premiums and accretion of discounts to
maturity. Such amortization is included in interest and other income.
Realized gains and losses and declines in value judged to be
other-than-temporary are also included in interest and other income.
The cost of securities sold is based on the specific identification
method. Debt securities are classified as held-to-maturity when the
Company has the positive intent and ability to hold the securities to
maturity and are carried at amortized cost.
Debt securities which are not classified as held-to-maturity
and which are not held for resale in anticipation of short-term market
movements are classified as available-for-sale. Available-for-sale
securities are carried at fair value, with the unrealized gains and
losses, net of tax, reported in a separate component of stockholders'
equity.
5. Stockholders' equity
On April 8, 1996, the Company closed a public offering
pursuant to which 3,162,500 shares of the Company's common stock were
sold at $22.63 per share resulting in net proceeds of $67.4 million to
the Company.
Page 7
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MATRIX PHARMACEUTICAL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This report contains certain statements of a forward-looking nature
relating to future events or the future performance of the Company. Such
statements are only predictions and the actual events or results may differ
materially from the results discussed in the forward-looking statements. Factors
that could cause or contribute to such differences include those discussed in
"Risk Factors" in the Company's reports on Form 10-K for 1995 and Forms 10-Q for
the quarters ended March 31 and June 30, 1996, as well as those discussed
elsewhere in this report.
Results of Operations
Three and Nine Months Ended September 30, 1996 and 1995
Since the Company's inception in 1985, the primary focus of its
operations has been research and development, and to date it has not received
any revenues from the commercial sale of products. The Company anticipates that
it will not recognize any revenues from commercial sales until 1997. The Company
has a history of operating losses and expects to incur substantial additional
losses over the next several years as it continues to develop its products. For
the period from February 11, 1985 (inception) to September 30, 1996 the Company
has incurred a cumulative net loss of $97,342,000.
The Company had no revenue in the third quarters of 1996 and 1995 and
the first nine months of 1996 and 1995.
Research and development expenses for the third quarter of 1996
increased by 12% to $6,110,000 compared to $5,471,000 for the third quarter of
1995. For the first nine months of 1996, research and development expenses
increased by 26% to $18,114,000 compared to $14,406,000 in 1995. The quarterly
and year-to-date increases were primarily due to higher personnel expenses,
higher clinical costs to support studies in the areas of head and neck cancer
and other accessible tumors, higher occupancy expenses, and higher production
costs in preparation for the commercial launch of AccuSite(TM) for the treatment
of genital warts. This increase was partially offset by a decrease in clinical
costs for basal cell cancer.
General and administrative expenses decreased by 23% to $2,732,000 for
the third quarter of 1996 compared to $3,562,000 for the third quarter of 1995.
For the first nine months of 1996, general and administrative expenses increased
by 14% to $7,036,000 compared to $6,198,000 for the same period in 1995. The
third quarter 1996 reflected a net decrease in expenses as a result of the
repurchase of the US and European marketing rights to AccuSite(TM) in the third
quarter 1995 for $2,000,000. This was offset by increases in personnel expenses,
including the hiring of additional marketing staff, Accusite(TM) market
prelaunch expenses, and legal expenses due to ongoing litigation. The
year-to-date increase was due to increases in personnel expenses, including the
hiring of additional marketing staff, Accusite(TM) market prelaunch expenses,
legal expenses due to ongoing litigation, and office related expenses. This
increase was partially offset by the repurchase of marketing rights to
AccuSite(TM) in the third quarter of 1995. Legal expenses related to the
Company's ongoing litigation, regardless of outcome, may exceed $2,000,000 in
1996.
Page 8
<PAGE>
Net interest and other income increased to $2,030,000 for the third
quarter of 1996 compared to $361,000 for the third quarter of 1995. For the
first nine months of 1996, net interest and other income increased to $4,054,000
compared to $1,093,000 in 1995. The increase was primarily the result of higher
average balances in cash, cash equivalents and marketable securities in 1996 and
rental income received from the lease of a portion of the Company's San Diego
facility. This was partially offset by higher interest expense associated with
the mortgage on the Company's San Diego manufacturing facility.
Liquidity and Capital Resources
At September 30, 1996, the Company had $121.3 million in cash, cash
equivalents and marketable securities compared to $77.3 million at December 31,
1995.
On April 8, 1996, the Company closed a public offering pursuant to
which 3,162,500 shares of the Company's common stock were sold at $22.63 per
share resulting in net proceeds of $67.4 million to the Company.
During the first quarter of 1996, 13,334 outstanding shares of the
Company's Series A preferred stock were converted into 1,333,400 shares of the
Company's common stock.
From its inception, the Company has financed its operations and capital
asset acquisitions through the sale of equity securities, contract research
revenues, interest income, and capital lease and debt financing. The Company
expects to finance its continued operating requirements principally with cash on
hand as well as with additional capital generated through equity and debt
financings and collaborative agreements.
The Company's working capital and capital requirements will depend on
numerous factors, including the progress of the Company's research and
development programs, preclinical testing and clinical trial activities, the
timing and cost of obtaining regulatory approvals, the levels of resources that
the Company devotes to the development of manufacturing and marketing
capabilities, technological advances and the status of competitors.
In December 1995, the Company purchased a research and manufacturing
facility in San Diego, California. The Company intends to use this facility to
meet its long-term commercial scale production requirements. This facility
requires validation and process installation that will require capital
expenditures of approximately $10.5 million. On July 15, 1996, the Company
entered into an agreement to lease out a portion of its San Diego manufacturing
facility. The lease has a term of two years and the rental income during the
period totals approximately $2.9 million.
In May 1996 the Company announced a delay in the development of
AccuSite(TM) Injectable Gel for patients with basal cell cancer. This delay is a
result of disappointing findings in preliminary data analysis of two identical
Phase II "contribution of components" trials. These studies were designed to
demonstrate that each major component of the AccuSite(TM) gel system provides a
statistically significant contribution to the performance of the product. In
September 1996, the Company further updated the status of its basal cell cancer
program. As a result of conducting an interim analysis of data from another
Phase III basal cell cancer study, the Company has concluded that it will be
difficult to commercialize this program given the high response rates obtained
by surgical procedures.
Page 9
<PAGE>
The Company expects to incur substantial additional costs relating to
the continued clinical development of its products, continued research and
development programs, the development of marketing and manufacturing
capabilities, the purchase of additional capital equipment and general working
capital requirements. The Company anticipates that its existing and committed
capital resources, including the proceeds of the April 1996 public offering,
will enable it to maintain its current and planned operations through 1998. The
Company may require additional outside financing to complete the process of
bringing current products to market, and while the Company is not aware of any
limitations on future sources of capital, there can be no assurance that such
financing will be available on favorable terms, if at all.
Capital expenditures for environmental control efforts were not
material during the first nine months of 1996 and 1995.
Page 10
<PAGE>
MATRIX PHARMACEUTICAL, INC.
RISK FACTORS
No Assurance of Regulatory Approvals
The preclinical and clinical testing, manufacturing, and marketing of
the Company's products are subject to extensive regulation by numerous
governmental authorities in the United States and other countries, including,
but not limited to, the FDA. Among other requirements, FDA approval of the
Company's products, including a review of the manufacturing processes and
facilities used to produce such products, will be required before such products
may be marketed in the United States. Similarly, marketing approval by a foreign
governmental authority is typically required before such products may be
marketed in a particular foreign country. Matrix has no products approved by the
FDA and one product approved by a foreign authority and does not expect to
achieve profitable operations unless other product candidates now under
development receive FDA and foreign regulatory approval and are thereafter
commercialized successfully.
In order to obtain FDA approval of a product, the Company must
demonstrate to the satisfaction of the FDA that such product is safe and
effective for its intended uses and that the Company is capable of manufacturing
the product with procedures that conform to the FDA's current good manufacturing
practice ("GMP") regulations, which must be followed at all times. The Company
has had only limited experience in submitting and pursuing regulatory
applications. The process of obtaining FDA approvals can be costly, time
consuming, and subject to unanticipated delays. There can be no assurance that
such approvals will be granted to the Company on a timely basis, or at all.
The process of obtaining FDA regulatory approval involves a number of
steps that, taken together, may involve seven years or more from the initiation
of clinical trials and require the expenditure of substantial resources. Among
other requirements, this process requires that the product undergo extensive
preclinical and clinical testing and that the Company file an NDA requesting FDA
approval. When a product contains more than one component that contributes to
the product's effect, as do all of the Company's current product candidates, the
FDA may request that additional data be submitted in order to demonstrate the
contribution of each such component to clinical efficacy. In addition, when
there has been a manufacturing change in a product component (either in the
process by which the component is manufactured or the site at which it is
manufactured) during product development, as is the case with the collagen gel
used in the Company's AccuSite product, the FDA may request that additional data
be submitted to demonstrate that the manufacturing change has not affected the
clinical performance of the product. In addition, the manufacturing facilities
for the product must be inspected and accepted by the FDA as being in compliance
with GMP regulations prior to approval of the product. There can be no assurance
that the Company's current manufacturing facilities in San Jose and Milpitas
will continue to be accepted by the FDA, or that its San Diego facility will be
accepted in the future, and failure to receive or maintain such acceptance would
have a material adverse effect on the Company's business.
Matrix has used three different sources of collagen gel in the products
on which it has conducted clinical trials: Koken Co., Ltd. ("Koken"), Collagen
Corporation ("Collagen") and its own production. The Company intends to use
collagen gel of its own manufacture in products it markets commercially if FDA
approval is received. Accordingly, the Company has not referenced Collagen's
Pre-Market Approval files in its NDA. (See "--Litigation" )
Page 11
<PAGE>
However, as noted above, when there has been a manufacturing change in
a product, such as a change in the supplier of a component, the FDA may request
that additional data be submitted to demonstrate that the manufacturing change
has not affected the clinical performance of the product as shown in earlier
clinical trials. Accordingly, Matrix has conducted a series of preclinical
studies to show comparability of products made from Collagen, Koken and Matrix
collagen gel, a human pharmakokinetic study to show comparability of products
made with Matrix and Collagen collagen gel, and Phase III clinical trials to
show comparability in clinical performance of a product made with Koken collagen
gel and a product made with Collagen collagen gel. The Company also conducted a
Phase III(b) clinical trial to demonstrate the comparable clinical performance
of a product made with Matrix collagen gel to a product made with Collagen
collagen gel. The Company believes that all studies conducted to date have
supported the comparable clinical performance of products made with collagen gel
from all three sources, but there can be no assurance that the FDA will agree.
In addition, there can be no assurance that the FDA will not require further
clinical demonstrations either of the comparability of a product made with
Matrix collagen gel to product made with Collagen collagen gel or Koken collagen
gel, or the safety and efficacy of a product made with Matrix collagen gel. If
questions arise during the FDA review process about comparability or about the
safety and efficacy of a product made with collagen, it could delay the approval
process or prevent approval and will increase the costs of obtaining such
approval.
The Company's analysis of the results of its clinical studies submitted
as part of an NDA is subject to review and interpretation by the FDA, which may
differ from the Company's analysis. There can be no assurance that the Company's
data or its interpretation of data will be accepted by the FDA. In addition,
delays or rejections may be encountered based upon changes in applicable law or
FDA policy during the period of product development and FDA regulatory review.
Any failure to obtain, or delay in obtaining, FDA approvals would adversely
affect the ability of the Company to market its proposed products. Moreover,
even if FDA approval is granted, such approval may include significant
limitations on indicated uses for which a product could be marketed.
Both before and after approval is obtained, a product, its
manufacturer, and the holder of the NDA for the product are subject to
comprehensive regulatory oversight. Violations of regulatory requirements at any
stage, including the preclinical and clinical testing process, the approval
process or thereafter (including after approval), may result in adverse
consequences, including the FDA's delay in approving or refusal to approve a
product, withdrawal of an approved product from the market, and/or the
imposition of criminal penalties against the manufacturer and/or the NDA holder.
In addition, later discovery of previously unknown problems relating to a
marketed product may result in restrictions on such product, manufacturer, or
the NDA holder, including withdrawal of the product from the market. Also, new
government requirements may be established that could delay or prevent
regulatory approval of the Company's products under development. See
"--Uncertainty of Pharmaceutical Pricing; No Assurance of Adequate
Reimbursement."
The processes required by European regulatory authorities before the
Company's products can be marketed in Western Europe are similar to those in the
United States. First, appropriate preclinical laboratory and animal tests as
well as analytical product quality tests must be done, followed by submission of
a clinical trial exemption ("CTX") or similar documentation before human
clinical trials can be initiated. Upon completion of adequate and
well-controlled clinical trials in humans that establish that the drug is safe
and efficacious, regulatory approval of a Market Authorization Application (MAA)
must be obtained from the relevant regulatory authorities. The Company filed its
MAA for AccuSite in the United Kingdom in August 1995. The Company subsequently
filed an MAA in Germany, France, Italy and Sweden. As with the United States FDA
review process, there are numerous risks associated with the MAA review.
Additional data may be requested by the regulatory agency reviewing the MAA to
demonstrate the contribution of a
Page 12
<PAGE>
product component to the clinical safety and efficacy of a product, or to
confirm the comparable performance of materials produced by a changed
manufacturing process or at a changed manufacturing site.
In June 1996, the Company was notified by the Medicines Control Agency
in the United Kingdom that a product license has been granted for AccuSite(TM)
for the treatment of genital warts. However, there can be no assurance of mutual
recognition by other participating countries of the approval obtained in the
United Kingdom.
Uncertainties Associated with Clinical Trials
Matrix has conducted and plans to continue to undertake extensive and
costly clinical testing to assess the safety and efficacy of its potential
products. Failure to comply with FDA regulations applicable to such testing can
result in delay, suspension, or cancellation of such testing, and/or refusal by
the FDA to accept the results of such testing. In addition, the FDA may suspend
clinical trials at any time if it concludes that the subjects or patients
participating in such trials are being exposed to unacceptable health risks.
Further, there can be no assurance that human clinical testing will show any
current or future product candidate to be safe and effective or that data
derived therefrom will be suitable for submission to the FDA.
The Company is currently conducting multiple clinical trials in the
United States and certain foreign countries, including two ongoing Phase III
trials. The rate of completion of the Company's clinical trials is dependent
upon, among other factors, the rate of patient enrollment. Patient enrollment is
a function of many factors, including the size of the patient population, the
nature of the protocol, the proximity of patients to clinical sites and the
eligibility criteria for the study. Delays in planned patient enrollment may
result in increased costs and delays, which could have a material adverse effect
on the Company. Generally similar considerations apply to clinical testing that
is subject to regulatory oversight by foreign authorities and/or that is
intended to be used in connection with foreign marketing applications.
In May 1996 the Company announced a delay in the development of
AccuSite(TM) Injectable Gel for patients with basal cell cancer. This delay is a
result of disappointing findings in preliminary data analysis of two identical
Phase II "contribution of components" trials. These studies were designed to
demonstrate that each major component of the AccuSite(TM) gel system provides a
statistically significant contribution to the performance of the product. In
September 1996, the Company further updated the status of its basal cell cancer
program. As a result of conducting an interim analysis of data from another
Phase III basal cell cancer study, the Company has concluded that it will be
difficult to commercialize this program given the high response rates obtained
by surgical procedures. If the Company fails to commercialize its basal cell
cancer program, this could have a material adverse impact on the Company.
History of Losses; Future Profitability Uncertain
Matrix was incorporated in 1985 and has experienced significant losses
since that date. As of September 30, 1996, the Company's accumulated deficit was
approximately $97.3 million. The Company has not generated revenues from its
products and expects to incur significant additional losses over the next
several years. The Company's ability to achieve a profitable level of operations
is dependent in large part on successfully developing products, obtaining
regulatory approvals for its products, and making the transition to an
organization producing commercial products and entering into agreements for
product commercialization. No assurance can be given that the Company's product
development efforts will be completed, that required regulatory approvals will
be obtained, that any products will be manufactured and marketed successfully,
or that profitability will be achieved.
Page 13
<PAGE>
Additional Financing Requirements and Uncertain Access to Capital Markets
The Company has expended and will continue to expend substantial funds
to complete the research, development and marketing of its products. The Company
will require additional funds for these purposes through additional equity or
debt financings, collaborative arrangements with corporate partners or from
other sources. No assurance can be given that such additional funds will be
available on acceptable terms, if at all. If adequate funds are not available
from operations or additional sources of financing, the Company's business could
be materially and adversely affected. Based on its current operating plan, the
Company anticipates that its existing capital resources will be adequate to
satisfy its capital needs through 1998. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Limited Sales and Marketing Experience
The Company intends to market and sell certain of its products, if
successfully developed and approved, through a direct sales force in the United
States, by co-promoting certain products to selected physician specialties and
through sales and marketing partnership arrangements outside the United States.
The Company currently has limited marketing and sales staff, and has yet to
announce any co-promotion or distribution arrangements. The Company is
developing a sales and marketing plan for AccuSite and its other products in
clinical development. In order to market its products directly, the Company must
develop a sales force with technical expertise. There can be no assurance that
the Company will be able to establish a successful direct sales organization or
co-promotion or distribution arrangements. In addition, there can be no
assurance that there will be sufficient sales of AccuSite or other products to
fund related expenses, many of which must be incurred before sales commence.
Failure to establish a marketing and sales capability in the United States
and/or outside the United States may have a material adverse effect on the
Company.
Limited Manufacturing Experience
The Company's ability to conduct clinical trials on a timely basis, to
obtain regulatory approvals and to commercialize its products will depend in
part upon its ability to manufacture its products, either directly or through
third parties, at a competitive cost and in accordance with applicable FDA and
other regulatory requirements, including GMP regulations. The Company is
currently manufacturing AccuSite and IntraDose for its clinical trials at its
manufacturing facilities in San Jose and Milpitas, California, as well as
contract manufacturing facilities. The Company anticipates that its facilities
in San Jose and Milpitas should provide sufficient production capacity to meet
clinical and early commercial requirements of its AccuSite product and selected
components for IntraDose products through 1997. However, there can be no
assurance that the Company will be able to produce adequate quantities of its
products for commercial marketing and for its clinical trials in a
cost-effective manner or that the Company's current manufacturing facilities
will continue to be accepted by the FDA.
In December 1995, the Company purchased a research and manufacturing
facility in San Diego, California. The Company intends to use this facility to
meet its long-term commercial scale production requirements. This facility
requires validation and process installation that will require capital
expenditures of approximately $10.5 million. The Company estimates that this
facility will not be available for production until 1998. There can be no
assurance that the Company will be able to validate and scale up this facility
in a timely manner or that this facility will be adequate for Matrix's long-term
needs without delay to the Company's ability to meet product demand. Matrix
expects to continue to use selected contract manufacturers, in addition to its
own manufacturing capability, for some or all of its product components. Failure
to establish additional manufacturing capacity on a timely basis may have a
material adverse effect on the Company.
Page 14
<PAGE>
Dependence on Sources of Supply
Several of the materials used in the Company's products are available
from a limited number of suppliers. These items, including collagen gel and
various bulk drug substances used in the Company's products, have generally been
available to Matrix and others in the pharmaceutical industry on commercially
reasonable terms. If the Company's manufacturing facilities are not able to
produce sufficient quantities of collagen gel in accordance with applicable
regulations, the Company would have to obtain collagen gel from another source
and gain regulatory approval for that source. There can be no assurance that the
Company would be able to locate an alternative, cost-effective source of supply
of collagen gel. Matrix has negotiated and intends to continue to negotiate
supply agreements, as appropriate, for the components of raw materials utilized
in its products. Matrix is also in the process of attempting to approve second
sources for as many as possible of these supplies. Any interruption of supply
could have a material adverse effect on the Company's ability to manufacture its
products, and thus the ability to complete the clinical trials or to
commercialize products. In addition, cisplatin, a chemotherapeutic drug being
used by the Company in its current clinical trials, is currently available only
for research purposes in the United States. Prior to the expiration of the
patent in the United States, the Company may not commercialize products
incorporating cisplatin in the United States without a license. To the Company's
knowledge, there are no such restrictions in Europe. The Company's process for
manufacturing collagen gel is currently being challenged in litigation with
Collagen. See "--Litigation."
Litigation
On December 21, 1994, Collagen filed a lawsuit against the Company in
Santa Clara County Superior Court alleging misappropriation of trade secrets
concerning the manufacturing process for collagen, including breach of contract
and fraud. The Complaint seeks unspecified damages and injunctive relief related
to Matrix's manufacture of collagen, its regulatory filings and its hiring of
current or former Collagen employees. On February 14, 1995, the Company filed
its answer to Collagen's complaint, denying all claims of misappropriation,
asserting several affirmative defenses and seeking recovery of its attorneys'
fees. Matrix has also filed a cross-complaint against Collagen and Howard
Palefsky, Collagen's Chief Executive Officer, seeking recovery of damages for
defamation, violations of California antitrust law and other causes of action.
The parties are currently conducting discovery and no trial date has been set
with respect to any of the claims asserted by Collagen or by the Company.
On September 12, 1995, Collagen filed a First Amended Complaint, adding
as defendants two former Collagen employees currently working at Matrix,
alleging that these employees used confidential documents and information
acquired by them as Collagen employees for the benefit of Matrix. These
employees had been accused of wrong-doing in the original Complaint along with
other former Collagen employees, but not named as defendants. The First Amended
Complaint purports to add causes of action for conversion against Matrix and the
two individual defendants, and for breach of contract, breach of confidence,
breach of fiduciary obligation and breach of the duty of loyalty against the
former Collagen employees. Matrix is alleged to have induced such breaches. The
First Amended Complaint adds to the requested relief of the original Complaint
for damages and injunctive relief a request for the imposition of a constructive
trust on the alleged fruits of the alleged trade secret misappropriation.
The lawsuit follows a series of contract negotiations in 1994 aimed at
developing a long-term supply relationship between Collagen and Matrix. Although
processes to manufacture collagen gel have been in the public domain for many
years, Collagen is presently the only commercial source for collagen gel in the
United States. Prior to developing its own manufacturing process, Matrix used
collagen gel from two additional sources in its clinical trials, including
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collagen gel manufactured by Koken and by Collagen. See "-- No Assurance of
Regulatory Approvals."
The Company believes that the manufacturing process which it has
developed for collagen gel does not incorporate any Collagen trade secrets and
that the lawsuit filed by Collagen is without merit. Although the Company
intends to defend against this suit vigorously, no assurances can be given
regarding its eventual outcome. This litigation does not involve any claims of
patent infringement. A finding of misappropriation of trade secrets could result
in damages and/or a significant restriction on the Company's ability to
manufacture its products. Such a finding would also require the Company to alter
its manufacturing process, or seek an alternate source of collagen gel. There
can be no assurance that the Company would be able to alter its manufacturing
process, if required, in a timely manner, or at all or that it would be able to
secure an alternative source of collagen gel on commercially reasonable terms,
or at all. As a result, there can be no assurance that this lawsuit will not
delay the Company's product approvals or affect its ability to manufacture its
products, each of which would have a material adverse effect on the Company, its
prospects and financial condition. Additionally, the costs of litigating this
matter, regardless of outcome, may exceed $2,000,000 in 1996.
Uncertainty Regarding Patents and Proprietary Rights
The Company's success depends in part on its ability to obtain patent
protection for its products and to preserve its trade secrets and operate
without infringing on the proprietary rights of third parties. No assurance can
be given that the Company's pending patent applications will be approved or that
any patents will provide competitive advantages for the Company's products or
will not be successfully challenged or circumvented by its competitors. The
Company has not conducted an exhaustive patent search and no assurance can be
given that patents do not exist or could not be filed which would have a
material adverse effect on the Company's ability to market its products or
maintain its competitive position with respect to its products. The Company's
patents may not prevent others from developing competitive products using
related technology. Other companies obtaining patents claiming products or
processes useful to the Company may bring infringement actions against the
Company. As a result, the Company may be required to obtain licenses from others
to develop, manufacture or market its products. There can be no assurance that
the Company will be able to obtain any such licenses on commercially reasonable
terms, if at all. The Company also relies on trade secrets and proprietary
know-how which it seeks to protect, in part, by confidentiality agreements with
its employees, consultants, suppliers and licensees. There can be no assurance
that these agreements will not be breached, that the Company would have adequate
remedies for any breach, or that the Company's trade secrets will not otherwise
become known or be independently developed by competitors.
No assurance can be given that any patent issued to, or licensed by,
the Company will provide protection that has commercial significance. In this
regard, the patent position of pharmaceutical compounds and compositions is
particularly uncertain. Even issued patents may later be modified or revoked by
the United States Patent and Trademark Office ("PTO") in proceedings instituted
by Matrix or others. During an opposition proceeding in Japan, the Company
became aware of a reference which may affect the scope of its United States
Patent claims which cover the collagen gel matrix products. The Company has
brought this reference to the attention of the PTO for a determination of the
extent to which the claims should be modified in light of this reference. No
assurance can be given concerning the outcome of the determination, although the
Company believes that modifications of the claims that may be required because
of the reference will not materially adversely affect the Company's proprietary
protection for its products. In addition, no assurance can be given that the
Company's patents will afford protection against competitors with similar
compounds or technologies, that others will not obtain patents claiming aspects
similar to those covered by the Company's patents or applications, or that the
patents of others will not have an adverse effect on the ability of the Company
to do business. Moreover, the
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<PAGE>
Company believes that obtaining foreign patents may be more difficult than
obtaining domestic patents because of differences in patent laws, and recognizes
that its patent position therefore may be stronger in the United States than
abroad. In addition, the protection provided by foreign patents, once they are
obtained, may be weaker than that provided by domestic patents.
Rapid Technological Change and Substantial Competition
The pharmaceutical industry is subject to rapid and substantial
technological change. Technological competition in the industry from
pharmaceutical and biotechnology companies, universities, governmental entities
and others diversifying into the field is intense and is expected to increase.
Most of these entities have significantly greater research and development
capabilities, as well as substantially more marketing, financial and managerial
resources than the Company, and represent significant competition for the
Company. Acquisitions of, or investments in, competing biotechnology companies
by large pharmaceutical companies could increase such competitors' financial,
marketing and other resources. There can be no assurance that developments by
others will not render the Company's products or technologies noncompetitive or
that the Company will be able to keep pace with technological developments.
Competitors have developed or are in the process of developing technologies that
are, or in the future may be, the basis for competitive products. Some of these
products may have an entirely different approach or means of accomplishing
similar therapeutic effects than products being developed by the Company. These
competing products may be more effective and less costly than the products
developed by the Company. In addition, conventional drug therapy, surgery and
other more familiar treatments and modalities will offer competition to the
Company's products.
Any product which the Company succeeds in developing and for which it
gains regulatory approval must then compete for market acceptance and market
share. Accordingly, important competitive factors, in addition to completion of
clinical testing and the gaining of regulatory approval, will include product
efficacy, safety, timing and scope of regulatory approvals, availability of
supply, marketing and sales capability, reimbursement coverage, pricing and
patent protection.
Uncertainty of Pharmaceutical Pricing; No Assurance of Adequate Reimbursement
The future revenues and profitability of and availability of capital
for biopharmaceutical companies may be affected by the continuing efforts of
governmental and third party payers to contain or reduce the costs of health
care through various means. For example, in certain foreign markets pricing or
profitability of prescription pharmaceuticals is subject to government control.
In the United States, there have been, and the Company expects that there will
continue to be, a number of federal and state proposals to implement similar
government control. While the Company cannot predict whether any such
legislative or regulatory proposals will be adopted, the announcement or
adoption of such proposals could have a material adverse effect on the Company's
prospects. Additionally, the cost of prescription drugs is receiving substantial
attention in the United States Congress. Legislation enacted in 1990, and
amended and strengthened in 1992, requires pharmaceutical manufacturers to
rebate to the government a portion of their revenues from drugs furnished to
Medicaid patients. In 1992, legislation was enacted that extends these
requirements to cover outpatient pharmaceuticals, and also mandates a reduction
in pharmaceutical prices charged to certain federally-funded facilities as well
as to certain hospitals serving a disproportionate share of low-income patients.
It is likely that Congressional attention will continue to focus on the cost of
drugs generally, and particularly on increases in drug prices in excess of the
rate of inflation, given recent government initiatives pertaining to the overall
reform of the U.S. health care system, and those specifically directed at
lowering total costs. The Company cannot predict the likelihood of passage of
federal and state legislation related to health care reform or lowering drug
costs.
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<PAGE>
The Company's ability to commercialize its products successfully will
depend in part on the extent which appropriate reimbursement levels for the cost
of such products and related treatment are obtained from government authorities,
private health insurers and other organizations, such as health maintenance
organizations ("HMOs"). Third-party payers are increasingly challenging the
prices charged for medical products and services. Also, the trend towards
managed health care in the United States and the concurrent growth of
organizations such as HMOs, which could control or significantly influence the
purchase of health care services and products, as well as legislative proposals
to reform health care or reduce government insurance programs, may all result in
lower prices for the Company's products. The cost containment measures that
health care payers and providers are instituting and the effect of any health
care reform could adversely affect the Company's ability to sell its products
and may have a material adverse effect on the Company.
Dependence Upon Qualified and Key Personnel
Because of the specialized nature of the Company's business, the
Company's ability to maintain its competitive position depends on its ability to
attract and retain qualified management and scientific personnel. Competition
for such personnel is intense. There can be no assurance that the Company will
be able to continue to attract or retain such persons. The loss of key personnel
or the failure to recruit additional personnel could have a material adverse
effect on the Company's business.
Product Liability Exposure; Limited Insurance Coverage
The Company faces an inherent business risk of exposure to product
liability claims in the event that the use of products during research or
commercialization results in adverse effects. While the Company will continue to
attempt to take appropriate precautions, there can be no assurance that it will
avoid significant product liability exposure. The Company maintains product
liability insurance for clinical studies. However, there can be no assurance
that such coverage will be adequate or that adequate insurance coverage for
future clinical or commercial activities will be available at all, or at
acceptable cost, or that a product liability claim would not materially
adversely affect the business or financial condition of the Company.
Hazardous Materials and Product Risks
The Company's research and development involves the controlled use of
hazardous materials, such as cytotoxic drugs, other toxic and carcinogenic
chemicals and various radioactive compounds. Although the Company believes that
its safety procedures for handling and disposing of such materials comply with
the standards prescribed by federal, state and local regulations, the risk of
accidental contamination or injury from these materials cannot be completely
eliminated. In the event of such an accident, the Company could be held liable
for any damages that result, and any such liability could be extensive. The
Company is also subject to substantial regulation relating to occupational
health and safety, environmental protection, hazardous substance control, and
waste management and disposal. The failure to comply with such regulations could
subject the Company to, among other things, fines and criminal liability.
Certain of the chemotherapeutic agents employed by the Company in its
Therapeutic Implant, ADV and Therapeutic Adhesive products are known to have
toxic side effects, particularly when used in traditional methods of
administration. Each product incorporating such a chemotherapeutic agent will
require separate FDA approval as a new drug under the procedures specified
above. Bovine collagen is a significant component of the Company's protein
matrix. Two rare autoimmune connective tissue conditions, polymyositis and
dermatomyositis ("PM/DM"), have been alleged to occur with increased frequency
in patients who have received cosmetic collagen treatments. Based upon the
occurrence of these conditions, the FDA requested a major manufacturer of bovine
collagen products for cosmetic applications to investigate the safety of such
Page 18
<PAGE>
uses of its collagen. In October 1991, an expert panel convened by the FDA to
examine this issue found no statistically significant relationships between
injectable collagen and the occurrence of autoimmune disease, but noted that
certain limitations in the available data made it difficult to establish a
statistically significant association.
Volatility of Stock Price; No Dividends
The market prices for securities of biopharmaceutical and biotechnology
companies (including the Company) have historically been highly volatile, and
the market has from time to time experienced significant price and volume
fluctuations that are unrelated to the operating performance of particular
companies. Future announcements concerning the Company, its competitors or other
biopharmaceutical products, governmental regulation, developments in patent or
other proprietary rights, litigation or public concern as to the safety of
products developed by the Company or others and general market conditions may
have a significant effect on the market price of the Common Stock. The Company
has not paid any cash dividends on its Common Stock and does not anticipate
paying any dividends in the foreseeable future.
Anti-Takeover Provisions
The ability of the Board of Directors of the Company to issue shares of
Preferred Stock without stockholder approval and a stockholder rights plan
adopted by the Company may, alone or in combination, have certain anti-takeover
effects. The Company also is subject to provisions of the Delaware General
Corporation Law which may make certain business combinations more difficult.
Page 19
<PAGE>
MATRIX PHARMACEUTICAL, INC.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Number Exhibit Table
- ------ -------------
27 Financial Data Schedule
(b) Reports on Form 8-K
The Company filed no Current Reports on Form 8-K during the
quarter ended September 30, 1996.
Page 20
<PAGE>
MATRIX PHARMACEUTICAL, INC.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MATRIX PHARMACEUTICAL, INC.
Date: November 5, 1996 By: /s/ James R. Glynn
--------------------------- ------------------------------------
James R. Glynn
Senior Vice President, Chief
Financial Officer & Secretary
Signing on behalf of the registrant
and as principal financial officer
Page 21
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