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 March 31, 1997
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 March 31,
1997: 21,269,530.
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MATRIX PHARMACEUTICAL, INC.
INDEX
PART I. FINANCIAL INFORMATION
---------------------
Item 1. Financial Statements Page
---------------------- No.
Condensed Consolidated Balance Sheets -
March 31, 1997 and December 31, 1996 3
Condensed Consolidated Statements of Operations -
Three Months Ended March 31, 1997 and 1996 4
Condensed Consolidated Statements of Cash Flows -
Three Months Ended March 31, 1997 and 1996 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 10
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 20
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<TABLE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<CAPTION>
MATRIX PHARMACEUTICAL, INC.
(a development stage company)
Condensed Consolidated Balance Sheets
(In thousands)
March 31, December 31,
1997 1996
--------- ---------
Assets (Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents 9,435 $ 20,138
Short-term investments 38,998 38,997
Inventory 1,872 758
Other current assets 2,839 2,283
--------- ---------
Total current assets 53,144 62,176
Property and equipment, net 17,712 17,152
Non-current investments 55,281 55,449
Deposits and other assets, net 168 173
--------- ---------
$ 126,305 $ 134,950
========= =========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable 3,214 $ 2,636
Accrued compensation 727 1,045
Accrued clinical trials 1,370 1,239
Other accrued liabilities 1,736 2,135
Current portion of debt and capital lease obligations 627 660
--------- ---------
Total current liabilities 7,674 7,715
Debt and capital lease obligations, less current portion 11,665 11,724
Stockholders' equity
Capital stock 222,327 222,256
Other (971) (856)
Deficit accumulated during the development stage (114,390) (105,889)
--------- ---------
Total stockholders' equity 106,966 115,511
--------- ---------
126,305 $ 134,950
========= =========
<FN>
See Accompanying Notes
</FN>
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</TABLE>
<PAGE>
MATRIX PHARMACEUTICAL, INC.
(a development stage company)
Condensed Consolidated Statements of Operations
(In thousands except per share amounts)
Three Months Ended
March 31,
1997 1996
-------- --------
(Unaudited) (Unaudited)
Revenues $ -- $ --
Costs and expenses:
Research and development 6,545 5,700
Selling, general and administrative 3,622 2,128
-------- --------
Total costs and expenses 10,167 7,828
-------- --------
Loss from operations (10,167) (7,828)
Interest and other income, net 1,666 750
-------- --------
Net loss $ (8,501) $ (7,078)
======== ========
Net loss per share $ (0.40) $ (0.42)
======== ========
Weighted average number
of shares outstanding 21,259 16,941
======== ========
See Accompanying Notes
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<TABLE>
MATRIX PHARMACEUTICAL, INC.
(a development stage company)
Condensed Consolidated Statements of Cash Flows
Increase (Decrease) in Cash and Cash Equivalents
(In thousands)
<CAPTION>
For the Three Months
Ended March 31
1997 1996
-------- --------
(Unaudited) (Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (8,501) $ (7,078)
Adjustments to reconcile net loss to
net cash used by operating activities:
Depreciation, amortization and other 335 300
Changes in assets and liabilities:
Inventory (1,114) --
Other changes in assets and liabilities (559) (573)
-------- --------
Net cash used by operating activities (9,839) (7,351)
Cash flows from investing activities:
Capital expenditures (843) (693)
Investment in securities available-for-sale -- (20,658)
Proceeds of securities-available-for-sale -- 268
Maturities of investments -- 6,221
-------- --------
Cash flows provided (used) by investing activities (843) (14,862)
Cash flows from financing activities:
Payments on debt and capital lease obligations (92) (134)
Net cash proceeds from issuance of:
Debt and capital lease financing -- --
Capital stock 71 328
-------- --------
Cash flows provided by financing activities (21) 194
Net decrease in cash and cash equivalents (10,703) (22,019)
Cash and cash equivalents at the beginning of period 20,138 55,675
-------- --------
Cash and cash equivalents at the end of period $ 9,435 $ 33,656
======== ========
<FN>
See Accompanying Notes
</FN>
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</TABLE>
<PAGE>
MATRIX PHARMACEUTICAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1997
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, 1997. 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, 1996, which were included in
the Company's annual report on Form 10-K, filed with the Securities and
Exchange Commission.
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. In
February 1997, the Financial Accounting Standards Board issued the
Statement of Financial Accounting Standard No. 128 (SFAS 128),
"Earnings per Share," which the Company is required to adopt for its
fiscal year ending December 31, 1997. At that time, the Company will be
required to change the method currently used to compute earnings per
share and to restate all prior periods. The Company's compliance with
SFAS 128 is not expected to have a material impact on the Company's
calculation of per share earnings or loss.
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 a bank and a
brokerage house. This diversification of risk is consistent with the
Company's investment policy which is to maintain liquidity and ensure
the safety of principal.
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.
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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. 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 Chairman and former Chief
Executive Officer, seeking recovery of damages for defamation,
violations of California antitrust law and other causes of action.
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 of collagen gel for human use in the United States.
Before Matrix developed its own manufacturing process, Matrix products
in clinical trials included collagen gel manufactured by Koken and
Collagen.
The case has been assigned out to trial. The first pre-trial
motion was heard by the trial judge on Monday May 5, 1997. Further
pre-trial motions will be heard on May 16, 1997 with trial to follow
thereafter.
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 $3,500,000 in
1997.
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS
This Quarterly Report on Form 10-Q contains, in addition to historical
statements, forward-looking statements including without limitation, statements
regarding the timing and outcome of regulatory reviews and clinical trials.
Forward-looking statements are based on management's current expectations and
are subject to a number of risks and uncertainties that could cause actual
results to differ materially from expected results. For additional information,
including risk factors, such as no assurance of regulatory approvals;
uncertainties associated with clinical trials; history of losses; future
profitability uncertain; additional financing requirements and uncertain access
to capital markets; limited sales and marketing experience; limited
manufacturing experience; uncertainty regarding patents and proprietary rights;
and uncertainty of pharmaceutical pricing; no assurance of adequate
reimbursement, please see the Risk Factors" section included in the Company's
1996 Form 10-K and in this Form 10-Q as well as forward-looking statements
discussed below and elsewhere in this report.
Results of Operations
Three Months Ended March 31, 1997 and 1996
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 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
its inception to March 31, 1997, the Company has incurred a cumulative net loss
of $114,390,000.
The Company had no revenue in either of the first quarters of 1997 and
1996.
Research and development expenses for the first quarter of 1997
increased by 15% to $6,545,000 as compared to $5,700,000 for the first quarter
of 1996. This increase was primarily due to increases in clinical costs to
support the IntraDose Injectable Gel cancer program, a higher level of
production development expenses in preparation for the commercial introduction
of AccuSite(TM), and higher occupancy costs. This increase was partially offset
by lower expenses on clinical trials for AccuSite(TM) as well as the transfer of
certain production expenses to inventory at the end of the quarter.
Selling, general and administrative expenses for the first quarter of
1997 increased by 70% to $3,622,000 as compared to $2,128,000 for the first
quarter of 1996. This increase was primarily due to higher legal expenses due to
the ongoing Collagen litigation, market launch expenses for AccuSite(TM) in
Europe, and higher personnel expenses. The legal expenses related to the ongoing
litigation with Collagen, regardless of outcome, may exceed $3,500,000 in 1997.
Net interest and other income increased to $1,666,000 for the first
quarter of 1997 as compared to $750,000 for the first quarter of 1996. This
increase was primarily the result of higher average balances in cash, cash
equivalents, and marketable securities due to a follow-on public offering in
April 1996, which contributed net proceeds of $67.4 million, and rental income
received from the lease of a section of the Company's San Diego facility.
Liquidity and Capital Resources
At March 31, 1997, the Company had $103.7 million in cash, cash
equivalents and marketable securities compared to $114.6 million at December 31,
1996. During the first quarter of 1997, cash was primarily used to fund
operating expenses, inventory, and capital purchases.
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<PAGE>
The Company has financed its operations and capital asset acquisitions
from its inception through the sale of equity securities, interest income, and
capital lease and debt financing. The Company expects to finance its continued
operating requirements principally with cash on hand, sales from AccuSite(TM) as
well as 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 for $13.1 million. This facility requires
validation and process installation that will require capital expenditures of
approximately $10.5 million.
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 and
commercial sales of AccuSite(TM) 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 quarter of 1997 and 1996.
The Company began selling and marketing activities with respect to
AccuSite (TM) in the United Kingdom during the first quarter of 1997. During the
second quarter of 1997, the Company commenced sales of AccuSite(TM) in the
United Kingdom for the treatment of genital warts. Also, during the first and
second quarters of 1997, the Company signed agreements pursuant to which one
company has exclusive rights to distribute AccuSite(TM) in Italy, and another
company has exclusive rights to distribute AccuSite(TM) in Spain and Portugal.
The Company has filed separate regulatory submissions for AccuSite(TM)
in Germany, France and Italy. Additionally, the regulatory approval in the
United Kingdom was submitted in other countries of the European Union under the
mutual recognition process. These applications are currently under review by the
relevant regulatory authorities.
In the United States, the Company received an action letter in December
1996 from the Food and Drug Administration (FDA) identifying issues that need to
be resolved before the Company's New Drug Application (NDA) for AccuSite(TM) can
be approved for the treatment of genital warts. In March 1997, the Company
submitted an amendment to its NDA that the Company believes addresses the
questions raised in the FDA's action letter and during a subsequent meeting. If
the Company fails to commercialize its program for genital warts in the United
States, this would have a material adverse impact on the future revenues of the
company.
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PART II. OTHER INFORMATION
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 ("cGMP") 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 many 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 a product must be inspected and accepted by the FDA as being in compliance
with cGMP 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" )
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 pharmacokinetic study to show comparability of products
made with Matrix and Collagen collagen
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gel, and Phase III clinical trials showing 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 Company's NDA for AccuSite was accepted for filing by the FDA in
November 1995. In December 1996, the Company announced that it received an
action letter from the FDA identifying issues that will need to be resolved
before the Company's NDA for AccuSite can be approved for the treatment of
genital warts.
The FDA letter cited the information submitted by Matrix to be
inadequate and said that the AccuSite application is consequently not approvable
as submitted. The FDA's response raised issues relating to clinical matters (the
importance of the persistence of one side effect as it relates to product
equivalence, length of patient follow-up, and a potential risk of serious side
effects -- though no such side effects were observed in clinical studies),
chemistry matters (e.g., expiration dating and sampling plans) and microbiology
issues (e.g., filter and equipment sterilization validations). In February 1997,
the Company met with FDA officials to discuss the clinical issues raised in the
agency's December 1996 letter. In March 1997, Matrix filed an amendment to its
NDA that the Company believes addresses the questions raised in the action
letter and during the subsequent meeting. However, there can be no assurance
that the FDA may not ask for additional information on these issues, or raise
new issues, either of which could delay or preclude marketing approval. If the
Company fails to commercialize its program for genital warts in the United
States, this could have a material adverse impact on the Company.
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
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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 and subsequently filed an MAA in Germany, France, and Italy. In May 1996,
the Company was notified by the Medicines Control Agency in the United Kingdom
that a product license has been granted for AccuSite for the treatment of
genital warts. In December 1996, the Company submitted an application for mutual
recognition of the United Kingdom approval by various members of the European
Union to which it did not make a national submission. However, there can be no
assurance of mutual recognition by other participating countries of the approval
obtained in the United Kingdom. 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 product component to the clinical safety and efficacy of a
product or to compare the efficacy of the product to other treatments, or to
confirm the comparable performance of materials produced by a changed
manufacturing process or at a changed manufacturing site.
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 or the
Company 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 four 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. The Company has experienced slower than
planned accrual of patients with its ongoing Phase III trials. Further delays in
completing enrollment in these trials or delays in other clinical studies 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.
History of Losses; Future Profitability Uncertain
Matrix was incorporated in 1985 and has experienced significant losses
since that date. As of March 31, 1997, the Company's accumulated deficit was
approximately $114.4 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.
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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
may 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 dedicated contract sales force in
the United States and certain countries in Europe, by co-promoting certain
products to selected physician specialties, and through sales and marketing
partnership arrangements in other countries. The Company currently has limited
marketing and sales staff, utilizes a small contract sales organization in the
UK, and has not entered into co-promotion or distribution arrangements other
than for Italy, Spain and Portugal. 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 cGMP regulations. The Company is
currently manufacturing commercial quantities of AccuSite and supplies of
IntraDose for its clinical trials at its manufacturing facilities in San Jose
and Milpitas, California. 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 into 1998. 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; or that the Company will be
able to manufacture 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 late 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 13
<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, the Company's ability to commercialize its
IntraDose Injectable Gel product in the United States could be limited by the
issuance in 1996 of a new U.S. patent for cisplatin, a chemotherapeutic drug
that is the active compound in IntraDose, if the newly-issued patent were upheld
and if IntraDose were found to infringe that patent, and if the Company were
unable to obtain a license under that patent. See "--Uncertainty Regarding
Patents and Proprietary Rights." 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 Chairman and former Chief Executive Officer, seeking
recovery of damages for defamation, violations of California antitrust law and
other causes of action.
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 of collagen gel for
human use in the United States. Before Matrix developed its own manufacturing
process, Matrix products in clinical trials included collagen gel manufactured
by Koken and Collagen. See "-- No Assurance of Regulatory Approvals."
The case has been assigned out to trial. The first pre-trial motion was
heard by the trial judge on Monday May 5, 1997. Further pre-trial motions will
be heard on May 16, 1997 with trial to follow thereafter.
Page 14
<PAGE>
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 $3,500,000 in 1997.
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 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.
Page 15
<PAGE>
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. In 1996,
for instance, a composition of matter patent for the cytotoxic drug cisplatin
was granted in the United States to a pharmaceutical company whose use patent on
cisplatin as an anti-tumor agent expired in December 1996. The Company, on
advice of patent counsel, believes the new patent for cisplatin, the active
agent in the Company's IntraDose product, was improperly awarded and should be
invalidated. However, if the new patent on cisplatin is upheld and if IntraDose
were found to infringe that patent, there can be no assurance that the Company
will be able to obtain a license to the patent in order to commercialize
IntraDose in the United States.
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.
Page 16
<PAGE>
The Company's ability to commercialize its products successfully will
depend in part on the extent to 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 payors 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 payors 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
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
Page 17
<PAGE>
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 in
addition, 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 18
<PAGE>
MATRIX PHARMACEUTICAL, INC.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
There were no current Reports on Form 8-K filed during the
quarter ended March 31, 1997.
Page 19
<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: May 7, 1997 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 20
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