UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
Commission File number: 0-19750
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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
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
- ------------------- ---------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 Par Value
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of Form 10-K or any amendment to this Form
10-K.
The aggregate market value of voting stock, $.01 par value, held by
non-affiliates of the registrant as of February 28, 1997: $125,699,700.
Number of shares of Common Stock and Common Stock equivalents, $.01 par value,
outstanding as of February 28, 1997: 21,257,908.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following document are incorporated by reference into Part III
of this Form 10-K Report: the Proxy Statement for the Registrant's 1997 Annual
Meeting of Stockholders scheduled to be held on June 25, 1997.
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Item 1. Business
Overview
Matrix is a leader in the formulation and development of novel
site-specific treatments for cancer and serious skin diseases. The Company's
most advanced product candidates, AccuSite(TM) (fluorouracil/epinephrine)
Injectable Gel and IntraDose(TM) (cisplatin/epinephrine) Injectable Gel, utilize
established chemotherapeutic agents in a proprietary viscous gel formulation and
are directly injected into skin lesions (AccuSite) and solid tumors (IntraDose).
AccuSite and IntraDose have demonstrated the ability to increase drug
concentrations within solid tumors and to reduce the systemic toxicities
associated with conventional chemotherapy.
To date, the Company has pursued six disease indications for AccuSite
and IntraDose. The Company has conducted or presently is conducting Phase III
trials in genital warts, basal cell cancer, and head and neck cancer and Phase
II trials in squamous cell cancer, psoriasis, and liver cancer. The Company
received a product license in the United Kingdom in May 1996 to market AccuSite
for the treatment of external genital warts and commenced marketing and sales
activities in January 1997. The Company has filed for marketing clearance for
AccuSite in other European countries and in the United States.
Matrix has developed a core expertise in a range of scientific and
analytical disciplines to improve the delivery of cancer drugs to more
effectively treat solid tumors. The Company's capabilities include tumor biology
and physiology, advanced imaging techniques, pharmaceutical chemistry, polymer
chemistry, analytical chemistry/biochemistry and chemical engineering. The
Company has effectively leveraged its technical expertise to develop platform
technologies with distinct drug delivery characteristics and capabilities:
Therapeutic Implant (aqueous based protein systems) for water-soluble
chemotherapeutic agents; Anhydrous Delivery Vehicles ("ADV") (nonaqueous lipid
emulsion systems) for water-insoluble chemotherapeutic agents; and methods under
development for the regional delivery of chemotherapeutic agents. The Company
believes that its technical expertise combined with its proprietary technology
base allows it to design and develop delivery systems tailored to the properties
of specific chemotherapeutic drugs to improve their therapeutic utility in
treating a broad range of cancer indications and tumor types.
Matrix Technology
Therapeutic Implant. Matrix's AccuSite and IntraDose products are based
on its patented Therapeutic Implant injectable gel technology, in which a
chemotherapeutic drug is combined with a protein matrix and chemical modifier to
create an injectable gel. This gel enables targeted delivery of drug by direct
injection into solid tumors and skin lesions, placing high local concentrations
of drug specifically where needed. Any accessible lesion or solid tumor which
can be seen, palpated or visualized with established imaging techniques can
potentially be treated. The biodegradable protein matrix sustains the local drug
release, maintaining high drug concentrations at the tumor or lesion site and
increasing the duration of exposure of drug to the targeted tissue. The activity
of the drug is further enhanced by the addition of chemical modifiers, such as
vasoconstrictors, which reduce local blood flow and act as a "chemical
tourniquet" to hold the drug in place.
The Company believes that its technology allows the utilization of
established drugs or agents in development that may be available from other
companies or institutions, thus reducing the risk, cost and time involved in
drug discovery and preclinical development. Although the chosen drugs or
compounds may or may not be "off-patent," when they are incorporated into the
Company's proprietary drug delivery system, the resulting product will be
proprietary to the Company. The Company, therefore, expects to be competitive in
the marketplace and have a proprietary position in such products for the length
of the patents on its technology and resulting products.
The Company's Therapeutic Implant products currently in development
employ fluorouracil or cisplatin, two of the most widely used chemotherapeutic
agents to treat solid tumors. These chemotherapeutic drugs exert a cytotoxic
effect on dividing cells at various stages during their growth and
multiplication. Cancer and hyperproliferative skin diseases are characterized by
rapid and unregulated cell division. The abnormal cells tend to be more
susceptible than normal cells to the effects of such drugs. Unfortunately, there
are normal cells (e.g., in the bone marrow and
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gastrointestinal mucosa) that rapidly divide and are also sensitive to the
cytotoxic drugs. This toxicity to normal tissue limits the maximum dosing
permitted with systemically administered chemotherapeutic drugs and often
results in the tolerated dose being substantially lower than the dose necessary
to kill all diseased tissue. Suboptimal dosing contributes to the emergence of
drug resistance among remaining cancer cells, complicating further drug therapy.
The Company believes that the principal advantages of the Therapeutic
Implant technology include:
o Sustained high, local drug concentrations at the target site.
By maintaining high, local drug concentrations in the target
tissue, the Therapeutic Implant increases the exposure of
diseased tissue to the drug. The effect can be further
enhanced by the addition of a chemical modifier to aid in
holding the drug in place.
o Lowered systemic toxicity. Because the Therapeutic Implant
concentrates the drug at the disease site and limits the drug
exposure to normal tissues, overall systemic toxicity is
sharply reduced compared to systemic chemotherapy.
o Site specific application. The Therapeutic Implant is injected
directly into the tumor or skin lesion. Any accessible lesion
or solid tumor which can be seen or visualized with
established imaging techniques can potentially be treated.
o Applicability to a broad range of therapeutic compounds. Many
conventional drugs and novel biopharmaceuticals can be
incorporated into the Therapeutic Implant technology. This
allows the Company to utilize new or approved drugs and other
biological agents available from other companies or
institutions, thus reducing the risk, cost and time involved
in drug discovery.
o Minimally invasive cost-effective procedures. The Therapeutic
Implant should permit administration in an outpatient setting
in most applications.
Anhydrous Delivery Vehicle (ADV). Approximately half of the anti-cancer
drugs in use today, including paclitaxel, etoposide, and teniposide, are poorly
soluble in water, posing difficulties for administration by conventional
systemic routes such as intravenous injection or infusion. The solubilizing
agents employed in several of these drug products to prepare suitable IV
solutions have led to significant toxicity. The development of potential new
anti-cancer agents such as camptothecin has also been limited by poor aqueous
solubility. The Company's therapeutic approach to cancer treatment by local
delivery of chemotherapeutic agents may obviate many of these difficulties. In
addition, the Company has developed a series of ADVs that in preclinical
experiments significantly enhance the local efficacy of these drugs compared to
the efficacy obtained when these drugs are delivered systemically using more
conventional aqueous delivery systems. The Company believes that ADV carriers
may be applicable to a large variety of water-insoluble drugs, with the
potential to significantly improve the clinical utility of these agents. The
Company also believes that this technology may also lend itself well to
water-soluble drugs that have limited stability when dissolved in aqueous media.
Water insoluble cytotoxic drugs such paclitaxel, camptothecin, and
etoposide disrupt the ability of cancer cells to multiply using novel
mechanisms. Paclitaxel binds tubulin, the protein critical for cell division.
Camptothecin interferes with the topoisomerase I enzyme, which is necessary for
DNA transcription and translation. Preclinical studies conducted by the Company
have demonstrated substantially improved effectiveness in antitumor activity
with local delivery of camptothecin, paclitaxel, etoposide, and other cytotoxic
drugs when delivered in various ADV formulations. The therapeutic utility of
other chemotherapeutic drugs, including other tubulin-binding drugs, thymidine
synthetase inhibitors, topoisomerase inhibitors and platinum-based drugs,
potentially also could be enhanced by this delivery technology. A patent for ADV
technology was granted in 1996 in the United States, and similar patent claims
have been filed in Europe and Japan. The Company has also filed a patent
application in the United States for a related ADV technology.
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Products in Clinical Development
<TABLE>
Matrix is pursuing several broad programs for the development of novel
treatments for cancer and serious skin diseases. The following table summarizes
the Company's products in development, the primary indications for each product
and the current clinical development status. The Company has additional products
in preclinical development and is conducting fundamental research and studies in
several areas.
<CAPTION>
Product Area/ Development Commercial
Indication Delivery Platform Status(1) Rights
------------- ----------------- ----------- ----------
<S> <C> <C> <C>
AccuSite
Genital Warts Therapeutic Implant Marketed in the United Matrix (4)
Kingdom, MAA filed
elsewhere in Europe (2)
NDA filed in the U.S. (3)
Basal Cell Cancer Therapeutic Implant Phase III Matrix
Squamous Cell Carcinoma Therapeutic Implant Phase II Matrix
IntraDose
Head & Neck Cancer/ Therapeutic Implant Phase III Matrix
Accessible Solid Tumors
Liver Cancer Therapeutic Implant Phase I/II Matrix
MPI 5020 Radiopotentiator
Recurrent breast cancer Therapeutic Implant Investigational New Drug Matrix
(chest wall metastases) Application (IND) filed
Preclinical
Topoisomerase Inhibitors ADV, Therapeutic Implant Preclinical Matrix
Tubulin-Binding ADV, Therapeutic Implant Preclinical Matrix
<FN>
(1) The Company's products are generally developed in the following stages:
pre-clinical studies (preparing to file an Investigational New Drug
("IND") Application or Clinical Trial Exemptions (CTX-foreign)),
clinical trials (which may include Phases I, II, III and IV and
variants or combinations of the foregoing) and regulatory submission
(New Drug Application ("NDA") or Market Authorization Application
("MAA")). See "-- Government Regulation."
(2) The Company filed its original MAA in the United Kingdom under the
mutual recognition process in August 1995, and subsequently filed MAAs
in Germany, Sweden and France in November 1995 and Italy in December
1995. An application for approval under the mutual recognition process
by other members of the European Union was completed in December 1996.
The Company received a product license from the United Kingdom in May
1996 and commenced marketing and sales activities in the United Kingdom
in January 1997.
(3) The Company submitted an NDA in the United States in September 1995
that was accepted for filing by the U.S. Food and Drug Administration
("FDA") in November 1995. In December 1996, the Company received an
action letter from the FDA. See "-- Genital Warts."
(4) The Company has licensed marketing rights for AccuSite in Italy to
Dompe Farmaceutici. See "-- Sales and Marketing."
</FN>
</TABLE>
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AccuSite Injectable Gel
Matrix has evaluated AccuSite in clinical trials in four major skin
disease indications: genital warts, basal cell cancer, squamous cell cancer, and
psoriasis. These skin diseases are characterized by superficially occurring
hyperproliferative lesions which are sensitive to fluorouracil, the active agent
in AccuSite.
Genital Warts
AccuSite was introduced in the United Kingdom in January 1997 following
approval from the United Kingdom's Medicines Control Agency in May 1996. In
December 1996, the Company completed filings under the European Union's mutual
recognition process for marketing clearance by other member states of the
European Union. In addition, the Company filed MAA applications in Germany,
France, Italy and Sweden in 1995 for direct approval by regulatory agencies in
those nations.
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 Injectable Gel can be approved for the treatment of
genital warts. The NDA was accepted for filing by the FDA in November 1995.
The FDA letter cited the information submitted by Matrix to be
inadequate and said that the AccuSite application was consequently unapprovable
as submitted. The FDA's response raised issues relating to clinical matters (the
importance of the persistence of one tissue condition as it relates to product
equivalence, length of patient follow-up, and a potential risk of inadvertent
administration that could lead to serious side effects -- though no such
inadvertent administration was observed in clinical studies), chemistry matters
(e.g., expiration dating and sampling plans) and microbiology issues (e.g.,
filter and equipment sterilization validations). The Company met with
representatives of the FDA in February 1997 in order to clarify issues raised in
the FDA letter. Following this meeting, in March 1997 the Company filed with the
FDA an amendment to its NDA containing additional clinical data and other
information in support of the Company's submission.
Genital warts are one of the most common sexually transmitted diseases.
They are caused by infection by the human papillomavirus ("HPV") and have no
known cure. The Company estimates that there are approximately 6.7 million
individuals who have genital warts in the United States. Of these, it is
estimated that approximately 2 million patients are actively seeking treatment.
SRI International estimates that there are approximately 1 million new cases of
genital warts in Western Europe each year.
Current treatments for genital warts include the application of topical
medications such as podophyllin, podofilox, bi-and tri-chloroacetic acids and
liquid nitrogen. Surgery, electrodesiccation, interferon therapy and laser
ablation are also used. The aim of these treatments is to destroy and/or remove
the wart tissue. Despite this variety of treatment options, many lesions are not
completely eradicated, recurrence rates are high and many of these treatments
are associated with persistent pain. The Company estimates that greater than 40%
of patients who are treated for genital warts have recurrent lesions. Based upon
interviews with patients and clinicians, the Company believes that a relatively
low percentage of afflicted patients in the United States and Western Europe
seek treatment due to the limited effectiveness of currently available therapies
and the time and expense associated with suboptimal results.
The Company has completed pivotal trials of its AccuSite product for
the treatment of genital warts. The Company's Phase III trial consisted of 359
evaluable patients who were prospectively divided into three subgroups
determined by the extent of disease area. The mean duration of disease prior to
treatment for the patients entered in this trial was 24 months, and most
patients had been previously treated with other therapies. In this trial, the
Company's AccuSite product achieved a complete response rate (defined as 100%
clearing of the treated lesion) in 77% of treated lesions, and an overall
response rate (combined complete and partial response) in 89% of treated
lesions. Sixty-one percent of patients treated with AccuSite achieved a 100%
clearing of all genital warts compared to 5% of patients receiving placebo.
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The Company believes that patients with total wart areas equal to or
less than 55mm2 are representative of average patients seeking treatment for
genital warts. Such patients comprised 52% of the patients treated in the
Company's Phase III trial. In these patients, AccuSite had an 88% rate of per
lesion complete response and a 93% overall per lesion response rate (complete
and partial responses). In addition, response duration in this patient sub-group
at the 90 day follow up point showed that 71% of the complete response group
remained free of recurrence. This study demonstrated that per lesion and per
patient response rates were statistically significant and consistent with data
from the Company's earlier pivotal study, providing a basis to seek regulatory
approval for AccuSite for the treatment of genital warts.
Basal Cell Cancer
Basal cell cancer is the most common form of skin cancer, and is
typically caused by overexposure to ultraviolet rays in sunlight. Unlike other
forms of cancers, basal cell cancers rarely form distant metastases. However, in
advanced cases, the tumor may invade underlying vital structures, requiring
surgery to remove large amounts of facial or other tissues. In the United
States, Western Europe and Australia, over 1.5 million people seek treatment for
basal cell cancer annually.
Currently available treatments include a number of local therapies:
conventional surgical removal (the most commonly used treatment), Moh's
micrographic surgery, curettage, electrodesiccation, freezing with liquid
nitrogen, laser ablation, radiation, and topical medication. Despite these
treatments, documented post-treatment recurrence rates range from 2-26%. In
addition, surgical procedures may result in trauma, discomfort, cosmetic
defects, scarring, and depression deformities.
The Company has evaluated AccuSite as a non-surgical, potentially
non-scarring, alternative to existing therapies. The Company's goal in
conducting clinical trials in this indication has been to demonstrate efficacy
rates comparable to or better than those published for surgical removal, but
with the added benefit of improved cosmetic results without incurring the risks
and trauma associated with surgery. Matrix's regulatory strategy has been to
conduct clinical trials that support approval of basal cell cancer as a second
indication for AccuSite in the United States and Western Europe, assuming that
the Company first receives marketing approval for the genital warts indication.
In September 1994, the Company presented data from a Phase II dose
optimization and scheduling study in basal cell cancer. The clinical endpoint of
the study was the presence or absence of cancer cells in the treated area as
determined by histological examination of excised tissue three months after
AccuSite treatment. In this study, 91% of 116 evaluable patients achieved a
complete response (histological confirmation of no remaining disease). Results
from this Phase II study demonstrated a 100% complete response rate in the most
effective treatment schedule (three treatments per week for a two week period).
In addition, good to excellent cosmetic results were reported by the patients
and physicians, with no clinically significant drug-related systemic side
effects.
In April 1995, the Company initiated a Phase III basal cell cancer
clinical trial program on three continents. The trial enrolled more than 500
patients with clinical sites in certain European countries, Australia, New
Zealand and the United States, utilizing the treatment regimen that exhibited a
100% complete response in the Company's Phase II trial.
In order to satisfy FDA requirements for approval, the Company has also
conducted two multicenter double blind studies in patients with basal cell
cancer to statistically confirm the relative contribution to efficacy made by
each of the three components of the AccuSite formulation. Similar "contribution
of component" trials have been successfully completed for genital warts. In May
1996, the Company concluded that an analysis of the histology data from the
basal cell contribution of component studies showed that these trials were
insufficient to meet this regulatory requirement.
Additionally, in September 1996, an interim analysis was conducted of
the clinical response rate data from the Phase III basal cell cancer trial. That
analysis indicated that treatment with AccuSite achieved complete response rates
of more than 80% but less than the 90% response rates perceived to be associated
with surgery. Though the Company intends to evaluate one-year follow-up data
from the Phase III basal cell program when these data become available in 1997,
at the present
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time the Company believes the available data from these three trials would make
it difficult to commercialize AccuSite for the additional indication of basal
cell cancer in the United States.
Squamous Cell Carcinoma of the Skin
Squamous cell carcinoma is the second most prevalent skin cancer. This
type of skin cancer is characterized by a more rapid growth rate and a higher
rate of metastasis than basal cell cancer. There are approximately 280,000 new
cases of squamous cell carcinoma diagnosed in the United States, Western Europe
and Australia each year.
Squamous cell carcinoma is treated in much the same manner as basal
cell cancer, with surgical excision the predominant approach. Curettage and
electrodesiccation are also utilized, but only for very small squamous cell
carcinomas. Due to the aggressive nature of this cancer, surgical excision can
often be disfiguring or entail expensive cosmetic procedures to repair or
minimize the scarring that frequently results from treatment.
The Company conducted an open-label, multicenter Phase II clinical
study to evaluate AccuSite for the treatment of squamous cell carcinoma of the
skin. The clinical endpoint of the trial was histological confirmation of
complete tumor resolution. Study results presented in 1996 indicated that 96%
(22 of 23) of evaluable squamous cell lesions completely resolved following six
weekly treatments with AccuSite. Cosmetic appearance of the treated sites was
typically judged as "good to excellent" by both the physician and patient. No
clinically significant treatment-related adverse medical events were reported.
The Company expects to publish this study but not to pursue registration of
AccuSite as a treatment for squamous cell carcinoma.
IntraDose Injectable Gel
Matrix is developing IntraDose Injectable Gel for a wide variety of
solid tumors. Ninety percent of cancer patients suffer from solid tumors (i.e.,
carcinomas and sarcomas). Approximately 70% of these patients have local disease
with no evidence of distant disease spread at time of diagnosis. Conventional
therapies for cancer include surgery, radiation and systemic drug therapy.
Despite continued advances in these treatments, they are limited by negative
side effects, such as loss of normal body functions, weakness, loss of appetite
and nausea, which are the result of the killing, altering or removing of normal
cell tissue, Therefore, quality of life factors such as pain management, control
of tumor related symptoms and the potential to retard disease progression and
possibly prolong survival become important.
The Company's IntraDose product represents a new approach to the
treatment of solid tumors. IntraDose is designed for direct injection into solid
tumors, including primary, metastatic and recurrent tumors. Imaging techniques
such as endoscopy, ultrasound and computerized tomography ("CT") have
substantially increased the number of solid tumors potentially treatable by the
Company's products. The Company believes IntraDose may be efficacious when used
as a single agent as well as when used in combination with conventional
treatment modalities. In addition, Matrix's IntraDose product can generally be
administered in an outpatient setting, offering the potential for cost-effective
treatment without hospitalization for surgery.
Head and Neck Cancer/Other Accessible Solid Tumors
The Company is currently conducting Phase III clinical trials for head
and neck cancer as well as accessible solid tumors including recurrent chest
wall metastases (from breast cancer, ovarian cancer and lung cancer), esophageal
cancer, melanoma and various squamous cell carcinomas. These tumors may be
either primary or metastatic. The Company believes that these cancers are well
suited to a direct injection with the Company's IntraDose product as they are
either visible, palpable or easily accessible with an endoscope. The Company
plans to combine data from its Phase III trials in this indication to support
approval of the broadest possible label for IntraDose in the United States and
in Western Europe.
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Head and Neck Cancer Market. There are approximately 115,000 new cases
of head and neck cancer diagnosed in the United States and Western Europe each
year. Cancers of the head and neck are predominately squamous cell carcinomas.
Of these, approximately 70% are diagnosed as later stage disease which has
spread throughout the patient's body, and 30% are diagnosed as early stage
disease that is localized. Cancers of the head and neck are often difficult to
treat effectively with conventional surgery and radiotherapy techniques. Tumor
location can make resection difficult or even impossible, due to proximity to
vital body structures and/or cosmetic or functional considerations, while
radiotherapy often damages surrounding healthy tissues. Systemic chemotherapy
has been ineffective in the management of head and neck cancers due to the
difficulty of achieving adequate and lasting tumor responses without incurring
unacceptable side effects. This has led to a continuing investigation of new
chemotherapeutics and combinations of chemotherapy and radiation. The most
important limitation of the available therapies for head and neck cancer is the
high recurrence rate, generally 50% or higher.
A standard course of chemotherapy for patients with head and neck
cancer typically requires up to five days of hospitalization with continuous
intravenous infusion of chemotherapy. The majority of patients who receive
chemotherapy will also require ancillary supportive treatments, such as
hydration, antiemetics or growth factor support to control the toxic side
effects of the chemotherapy. Clinical results suggest that the use of IntraDose
may not require some or all of these supportive treatments. IntraDose can be
administered in an outpatient setting in less than one hour.
Accessible Solid Tumor Market. Accessible solid tumors are diagnosed in
approximately 150,000 new patients annually in the United States and in Western
Europe. The major types of accessible solid tumors being evaluated in the
Company's Phase III trials include chestwall metastases from breast cancer,
esophageal tumors and melanoma. Metastatic tumors found in the chest wall and
other locations are usually treated with systemic chemotherapy and radiotherapy.
However, this approach often leads to the development of drug resistance or
cumulative radiation toxicity. Currently there are few treatment options for
recurrent tumors.
Clinical Studies. In October 1996, at the American Academy of
Otolaryngology-Head and Neck Surgery meeting, clinical investigators presented
an update from the Company's completed open-label Phase I/II clinical trial for
the treatment of head and neck cancer/other accessible solid tumors with
IntraDose. The investigators reported on 45 patients with a total of 82 treated
tumors, of which 70 were evaluable. Forty-one of the 45 patients had received
radiotherapy or cancer drug therapy prior to being treated with IntraDose,
factors which reduce the likelihood of a significant response to the future use
of chemotherapy. In this trial, 47% of all evaluable treated tumors exhibited a
complete response (100% reduction in tumor volume) and 59% of evaluable tumors
exhibited a complete response or partial response (greater than 50% reduction in
tumor volume).
IntraDose achieved these response rates in these patients with
advanced disease without causing a clinically unacceptable level of systemic
toxicity. Dose-limiting toxicity was not observed in this trial, and the overall
side effects were deemed to be moderate in severity when compared to standard
chemotherapy regimens. In addition, these patients did not experience any of the
principal side effects associated with the systemic use of cisplatin including
nephrotoxicity, neurologic changes and ototoxicity.
In June 1995, the Company announced initiation of two Phase III trials
for patients with head and neck cancer and two trials for patients with other
accessible solid tumors. The head and neck Phase III trial is a double-blind,
placebo controlled trial and will enroll approximately 180 patients, 90 patients
in the United States and 90 patients in certain European countries. The
accessible tumor Phase III trials are open label studies that will enroll
approximately 130 patients, 65 patients in the United States and 65 patients in
Western Europe. Assuming successful results from these Phase III trials, the
Company anticipates using the data from these trials to support regulatory
submissions in the United States and Western Europe.
The Company believes IntraDose may also become an effective alternative
for patients with unresectable esophageal cancer. The American Cancer Society
estimates that 12,100 new cases of
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esophageal cancer were diagnosed in the United States in 1995, of which 90% are
expected to be fatal. Patients often suffer debilitating symptoms from the
growth of the tumor, including difficulties in swallowing solid food, weight
loss, pain and eventually death. Currently, local palliation is aimed at
allowing patients to swallow and requires surgical intervention, radiation
therapy, laser therapy or stent placement. Of the four patients with esophageal
cancer treated in the Company's Phase I/II accessible tumor trial, dysphagia
(inability to swallow) resolved in all patients. All four patients retained
their ability to swallow during the follow-up period of the study. In addition,
two patients had in excess of 50% reduction in tumor volume and two patients
showed stable disease.
Liver Cancer
Two types of tumors are found in the liver -- primary hepatocellular
cancer (a cancer arising from liver cells) and tumors originating in other
tissues that have metastasized to the liver. Primary liver cancer is a
significant health problem in the parts of the world where hepatitis is
prevalent (e.g., Japan, Korea and Southeast Asia), with more than 100,000 new
cases in 1995. In the United States and Western Europe, there were approximately
40,000 newly diagnosed patients with primary liver cancer in 1996 and 142,000
newly diagnosed patients with hepatic metastases from colorectal cancers.
When possible, surgery is the first line treatment for both types of
liver tumors. However, fewer than 10% of patients with liver tumors are operable
due to tumor location, size and extent of disease. For unresectable liver
cancer, treatments have included the use of systemic chemotherapy, radiotherapy,
liver transplantation, cryotherapy, hepatic arterial infusion of chemotherapy
and chemoembolization, all of which have had only limited beneficial results.
Due to the limited effectiveness of current therapies, the Company believes that
fewer than 50% of all patients with liver cancer are treated.
Matrix believes that IntraDose may become a first line treatment for
many patients with unresectable liver tumors for either primary or metastatic
liver tumors. Clinical investigators treated patients with both forms of
unresectable liver cancer in a Phase I/II clinical trial program. The
investigators treated 28 patients who had 25 tumors evaluable for tumor necrosis
(tumor destruction, estimated by CT scan). Ten of the 25 evaluable tumors
exhibited at least 90% necrosis in response to IntraDose treatment. Liver tumors
as small as 1.6 cm and as large as 3,164 cm were treated. Patients were treated
in an outpatient setting, with the treatment assisted by either CT or
ultrasound.
Patients treated in this study experienced none of the typical side
effects associated with intravenous cisplatin, such as nephrotoxicity,
neurologic changes or ototoxicity. In addition, in a pharmacokinetics study
conducted in patients treated at the M.D. Anderson Cancer Center, less than 5%
of the drug levels anticipated from a standard intravenous dose of cisplatin was
found in patient plasma after treatment with IntraDose. The majority of the
IntraDose product was confined to the treated tumor. The type and severity of
side effects were similar to those experienced by patients treated for liver
cancer.
In 1997, the Company plans to initiate two Phase II trials for patients
with liver cancer. A multicenter Phase II trial for patients with primary liver
cancer will be conducted in the United States, Europe and Hong Kong. A
multicenter Phase II trial for patients with cancers metastatic to the liver
from colorectal cancer will be conducted in the United States and Europe. These
trials are designed to evaluate tumor necrosis, tumor response (as measured by
CT), time to tumor progression, pattern of disease progression, and survival.
MPI 5020 Radiopotentiator
The Company has expanded efforts in exploring drug product candidates
for the enhancement of radiation therapy. Radiation therapy remains a critical
tool in the management of many types of solid tumors. However, radiation
resistance, hypoxic tumor cells, and normal tissue sensitivity to radiation has
limited the benefit of this therapy. Using its platform technologies, the
Company has demonstrated in preclinical experiments that effective local
delivery of radiopotentiating agents significantly improves the effects of
radiation in solid tumors. The Company's lead candidate in this area, MPI 5020,
is a fluorouracil (5-FU)-based product that uses the Company's Therapeutic
Implant technology. In January 1997 the Company filed an IND for a
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Phase I/II trial in chest wall metastatic disease from recurrent breast cancer.
This dose-escalating study is intended to evaluate the safety of MPI 5020 when
injected within one hour prior to standard radiotherapy and to compare the
effect on tumor growth of tumors treated with MPI 5020 and radiotherapy to
tumors treated with radiotherapy alone.
Preclinical Programs
In addition to its clinical programs, the Company is pursuing
preclinical programs focused on the modification and optimization of the
Company's core drug delivery technologies for use with specific drugs in target
cancer indications. The Company anticipates that its more recently-developed
drug delivery technologies, such as its ADV technology, may be used to
effectively deliver a family of both water-soluble and water-insoluble
anticancer drugs for local administration. The Company believes that these
delivery technologies, combined with the Company's technical expertise, provide
the opportunity to tailor a specific drug delivery technology to the
requirements of various anticancer agents, thereby improving their therapeutic
ratio (i.e., increasing the drug's local effectiveness and/or significantly
reducing dose-limiting side effects which result from their systemic
administration). The Company has recently focused preclinical research efforts
on topoisomerase inhibitors and tubulin-binding agents. These two classes of
chemical compounds have demonstrated potent anti-cancer activity in vitro and in
vivo, but many of the compounds comprising these chemical classes have needed to
be formulated with soluble agents that cause serious dose-limiting side effects
in order to be administered intravenously.
Topoisomerase Inhibitors. Topoisomerase inhibitors are agents that
interfere with DNA binding enzymes that are involved in the copying and repair
of a cell's DNA. The Company has developed a formulation of camptothecin, a
well-known topoisomerase inhibitor, which uses the Company's ADV technology.
Preclinical experiments suggest that camptothecin locally delivered in Matrix's
ADV technology may be more effective and less toxic than systemic administration
of camptothecin. In addition, in 1996, Matrix in-licensed a group of
topoisomerase inhibitors known as azatoxins from the National Cancer Institute
that will be the subject of a new research and preclinical development program.
Potential indications for the Company's topoisomerase inhibitors include
bladder, colorectal, and prostate cancer.
Tubulin binding agents. Tubulin is a protein critical for cell
division. The Company has designed an ADV formulation of paclitaxel, a known
anti-cancer agent that binds tubulin. Potential indications for the Company's
formulation of paclitaxel include breast and ovarian cancer.
Manufacturing and Supply
Matrix maintains worldwide manufacturing rights to all of its products.
The Company is currently manufacturing AccuSite for commercial sales and
IntraDose for its clinical trials at its manufacturing facilities in San Jose
and Milpitas, California, as well as at a contract manufacturing facility. The
Company's facilities in San Jose and Milpitas are currently leased by Matrix and
are utilized for the aseptic processing of collagen gel, sterile filling
operations and non-sterile processing of collagen gel, as well as for all
materials receiving activities, labeling, packaging and shipping operations. The
lease on the San Jose facility extends through November 1997, with options to
renew through November 1999. The Company currently is negotiating an extension
of the lease on the Milpitas facility, which expires in August 1997.
The Company's San Jose and Milpitas facilities were the subject of a
Pre-Approval Inspection (PAI) by the FDA in 1996 in connection with the
Company's New Drug Application for AccuSite. This inspection found that the
facilities conform to FDA cGMP (Current Good Manufacturing Practices) standards.
The facility was similarly inspected and accepted by British regulatory
personnel as a condition of AccuSite's approval in the United Kingdom.
The Company anticipates that its San Jose and Milpitas facilities
should provide sufficient production capacity to meet clinical and early
commercial requirements of its AccuSite product and selected components for
IntraDose products through 1998. In December 1995, the Company purchased a
research and manufacturing facility in San Diego, California. The facility
totals approximately 67,000 square feet and includes production, research and
development and administrative operations, as well as an adjacent parcel of
land. The Company intends to use the
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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.
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. Because both of the
Company's initial product candidates, AccuSite and IntraDose, utilize the
Company's proprietary protein carrier, the Company uses a common manufacturing
facility for these products. As a result, the Company believes it may be able to
realize product cost economies of scale over the next few years when and if both
products receive marketing approvals.
Several of the materials used in the Company's products are available
from a limited number of suppliers. These items, including collagen gel and
drugs, 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.
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.
The Company's process of manufacturing collagen gel is currently being
challenged in litigation with Collagen Corporation. See "Risk Factors --
Litigation."
Sales and Marketing
The Company currently has worldwide marketing rights for all its
products, except for AccuSite in Italy. In the United States, the Company
intends to utilize a direct sales organization to market AccuSite primarily to
dermatologists and urologists and to market IntraDose to oncologists, if and
when regulatory approvals for these products are obtained. The Company believes
that the dermatology, urology, and oncology markets in the United States are
highly concentrated and, therefore, that a direct sales force will enable it to
effectively penetrate these primary target markets. The Company also intends to
evaluate potential product acquisition and in-licensing opportunities in
oncology which would leverage its direct sales efforts. In addition, the Company
may pursue co-marketing or co-promotional activities to address other medical
specialties (e.g., Ob/Gyn for AccuSite) beyond its initial target markets.
In the United Kingdom, the Company is marketing AccuSite through a
direct sales organization supplied on a contract basis. The Company may utilize
this approach to field its own sales force in the United States and in certain
other European countries. In general, for geographic markets outside the United
States the Company intends to establish relationships with marketing partners
for the sale of its products. As part of this strategy, the Company may enter
into marketing and collaborative arrangements which include granting marketing
rights with respect to selected products and markets. In March 1997, the Company
announced the first such relationship, a distribution agreement with Dompe
Farmaceutici, a unit of the Dompe Group, for the sale of AccuSite in Italy.
Since 1995, the Company has employed experienced marketing executives
to plan and manage the sales of its products. These personnel include a Vice
President of Sales and Marketing who has extensive experience in starting and
managing sales and marketing organizations in the pharmaceutical industry; a
Director of Marketing who has significant market research, product management
and marketing communications experience, and who has been responsible for
several successful pharmaceutical product introductions; a Senior Sales Director
with extensive industry experience in managing large sales forces as well as
forming and managing smaller start-up company sales forces; and a Commercial
Director for Europe who has experience with a multinational, Europe-based
pharmaceutical company. See "Risk Factors -- Limited Sales and Marketing
Experience."
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Patents and Proprietary Rights
The Company's policy is to aggressively seek patent protection and to
enforce all of its intellectual property rights. The Company has five patents
issued in the United States and has six pending applications. In Western Europe,
the Company has three issued patents and four pending applications. The Company
has three pending applications in Japan. Three of the five issued United States
patents relate to the Company's base technologies. The first of these three
patents claims compositions consisting of collagen or fibrinogen as protein
matrices, cytotoxic and antiproliferative drugs, and (optionally) a
vasoconstrictive agent. This patent (discussed earlier in this section) expires
in the United States in 2003 and also covers the method of use of these
compositions in treating cancerous or hyperproliferative lesions by local
application. The second patent, which expires in the United States in 2007,
includes pharmaceutical compositions consisting of a range of cytotoxic agents
(including radionuclides, etc.) in combination with vasoconstrictive agents and
(optionally) a variety of other tissue modifiers, formulated in aqueous
pharmacologically acceptable vehicles. The method of use of these compositions
in treating cancerous lesions by local application is also covered. The third
patent covers certain formulations of the Company's Anhydrous Delivery Vehicle
(ADV) technology for delivering water-insoluble anti-cancer drugs, and
specifically covers water-immiscible fatty acid ester matrices containing
cytostatic agents and their use for treating cancer via intralesional
administration.
Competition
The development of therapeutic agents for human disease is intensely
competitive. Many different approaches are being developed or have already been
adopted for routine use for the management of diseases targeted by the Company.
Certain skin diseases and cancers are the targets for therapeutic product
development at numerous entities, many of which have greater human and financial
resources than the Company dedicated to product development and human clinical
testing. In addition, conventional drug therapy, surgery and other more
established treatments and modalities will offer competition to the Company's
products.
The pharmaceutical industry is subject to rapid and substantial
technological change. Technological competition 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 substantial marketing, financial and managerial resources, 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 the therapeutic effect
than products being developed by the Company. These competing products may be
more effective and less costly than the products developed by the Company.
Government Regulation
The Company and its products are subject to comprehensive regulation by
the FDA in the United States and by comparable authorities in other countries.
These national agencies and other federal, state, and local entities regulate,
among other things, the preclinical and clinical testing, safety, effectiveness,
approval, manufacture, labeling, marketing, export, storage, record keeping,
advertising, and promotion of the Company's products.
The process required by the FDA before the Company's products may be
approved for marketing in the United States generally involves (i) preclinical
laboratory and animal tests, (ii) submission to the FDA of an IND, which must
become effective before clinical trials may begin, (iii) adequate and
well-controlled human clinical trials to establish the safety and efficacy of
the drug for its intended indication (iv) submission to the FDA of an NDA, and
(v) FDA review of the NDA in order to determine, among other things, whether the
drug is safe and effective for its intended uses. When a product contains more
than one active drug component, as do some of the Company's
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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.
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
Corporation's Pre-Market Approval files in its NDA. See "Risk Factors --
Litigation".
When there has been a manufacturing change in a product during product
development, such as a change in the supplier of a component or in the process
by which the component is manufactured or in the site at which it is
manufactured, as is the case with the collagen gel used in the Company's
AccuSite product, the FDA may request (and has requested in Matrix's case) 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 bioequivalency 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.
Clinical trials are typically conducted in three sequential phases
which may overlap. During Phase I, when the drug is initially given to human
subjects, the product is tested for safety, dosage tolerance, absorption,
metabolism, distribution, and excretion. Phase II involves studies in a limited
patient population to (i) evaluate preliminarily the efficacy of the product for
specific, targeted indications, (ii) determine dosage tolerance and optimal
dosage, and (iii) identify possible adverse effects and safety risks. Phase III
trials are undertaken in order to further evaluate clinical efficacy and to
further test for safety within an expanded patient population at geographically
dispersed clinical study sites. The FDA may suspend clinical trials at any point
in this process if it concludes that clinical subjects are being exposed to an
unacceptable health risk.
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. The process
of obtaining approvals from the FDA can be costly, time consuming, and subject
to unanticipated delays. Any failure to obtain or delay in obtaining such
approvals would adversely affect the ability of the Company to market its
proposed products. Moreover, even if regulatory approval is granted, such
approval may include significant limitations on indicated uses for which a
product could be marketed. See "-- Genital Warts".
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 CTX or similar documentation before human clinical trials can be initiated.
Upon completion of adequate and well controlled clinical trials in humans that
establish the drug is safe and efficacious, regulatory approval of an MAA must
be obtained from the relevant regulatory authorities.
MAA approvals for European countries may be obtained by three different
routes: (i) national submissions, in which MAA approval is sought from each
local health authority, (ii) the mutual recognition process, in which an
approval is received from one member state and then submitted to the remaining
member states for mutual recognition of the approval, or (iii) a centralized
licensing procedure in which the European Medicines Evaluation Agency issues
approval for member states of the European Union. The Company chose the mutual
recognition process for its first MAA filing and the United Kingdom as its
reference member state. The Company subsequently filed MAAs in Germany, France,
Italy and Sweden. In May 1996, the Company was granted a product license by the
British Medicines Control Agency to market AccuSite for the treatment of genital
warts in the United Kingdom. In December 1996, the Company filed for mutual
recognition by members of the European Union to which it did not make a national
submission. As of March
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1997, the Company has responded or is in the process of responding to questions
submitted by regulatory agencies in Germany, France, and Sweden in connection
with the Company's MAAs in those countries. 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, or
to confirm the comparable performance of materials produced by a changed
manufacturing process or at a changed manufacturing site.
The proposed products and technologies of the Company may also be
subject to certain other federal, state, and local government laws and
regulations, including, but not limited to, various environmental laws, the
Occupational Safety and Health Act, and state, local, and foreign counterparts
to such laws. Compliance with such laws and regulations does not have, nor is
such compliance presently expected to have, a material adverse effect on the
business of the Company.
Research and Development
The Company's sponsored research and development expenses were
approximately $17,072,000, $20,256,000, and $24,320,000 in 1994, 1995, and 1996,
respectively.
Employees
As of December 31, 1996, the Company had a total of 157 full-time
employees, including 36 in research and development, 35 in medical and
regulatory affairs, biostatistics, and technical services and 54 in
manufacturing. The Company also has a wholly-owned subsidiary located in the
United Kingdom, Matrix Pharmaceutical, Ltd., which is managing the Company's
European clinical trials. The Company believes that it has been highly
successful in attracting skilled and experienced personnel; however, competition
for such personnel is intense. None of the Company's employees are covered by
collective bargaining agreements and management considers relations with its
employees to be good.
This Form 10-K contains, in addition to historical information,
forward-looking statements that involve risks and uncertainties. The Company's
actual results could 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" as well as those discussed
elsewhere in this Form 10-K.
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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 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 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 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,
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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. See "Business -- Government Regulation."
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." See "Business -- Government Regulation."
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 understand better the clinical issues
raised in the agency's December 1996 action 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, 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 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, Italy and Sweden. 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
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an application for mutual recognition of the United Kingdom approval by 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 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 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. See
"Business -- Government Regulation."
History of Losses; Future Profitability Uncertain
Matrix was incorporated in 1985 and has experienced significant losses
since that date. As of December 31, 1996, the Company's accumulated deficit was
approximately $105.9 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.
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."
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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, and has yet to announce co-promotion or distribution
arrangements other than for Italy. 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.
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 is upheld
and if IntraDose were found to infringe that patent, and if the Company is
unable to obtain a license under that patent.
Page 18
<PAGE>
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."
Discovery in the case is ongoing. The trial is scheduled to begin on
April 7, 1997.
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 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
Page 19
<PAGE>
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.
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
Page 20
<PAGE>
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.
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
Page 21
<PAGE>
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 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 22
<PAGE>
MANAGEMENT
<TABLE>
Executive Officers of the Company
Certain information about the Company's executive officers is set forth below:
<CAPTION>
Name Age Position
- --------------------- --- ----------------------------------------------
<S> <C> <C>
Craig R. McMullen 53 President, Chief Executive Officer and Director
James R. Glynn 50 Senior Vice President, Chief Financial Officer and
Secretary
Richard D. Leavitt, M.D. 51 Senior Vice President, Medical and Regulatory
Affairs
Dennis M. Brown, Ph.D. 47 Vice President, Discovery Research
Lewis P. Chapman 46 Vice President, Sales and Marketing
Richard E. Jones, Ph.D. 52 Vice President, Research and Development
Andrew G. Korey, Ph.D. 48 Vice President, Medical Information and
Extramural Scientific Affairs
Ronald P. Lucas 55 Vice President, Operations
Natalie L. McClure, Ph.D. 44 Vice President, Regulatory Affairs and Quality
Assurance
</TABLE>
Mr. McMullen has been President and Chief Executive Officer and a
director of the Company since March 1991. From November 1990 until his
appointment as President and CEO, he served as a consultant to the Company. From
October 1989 to February 1991, Mr. McMullen was a consultant with CRM
Associates. Until October 1989, he was with Hana Biologics, Inc., a
biotechnology company, which he joined as Executive Vice President and Chief
Operating Officer in 1984. He became President in 1985 and Chief Executive
Officer, and a director of Hana Biologics in 1986. From 1978 to 1984, he held a
number of positions at Baxter Travenol Laboratories, Inc. ("Baxter Travenol"),
including National Sales Manager, Director of Marketing and Sales for the
American Instrument Company, Director of Marketing and Sales for the Hyland
Diagnostic Division and Vice President of Marketing for the Laboratory Products
and Service Division. Prior to joining Baxter Travenol, he held various
management positions with the Scientific Products Division of American Hospital
Supply Corporation.
Mr. Glynn was named Senior Vice President, Chief Financial Officer and
Secretary of the Company in July 1995, after spending eight years as Executive
Vice President, Chief Financial Officer and Director of Mycogen Corporation.
From 1982 to 1987, Mr. Glynn was Vice President, Finance and Treasurer of
Lubrizol Enterprises, Inc., a venture development company. He also worked as an
audit manager with Price Waterhouse from 1974 to 1982.
Dr. Leavitt was named Senior Vice President, Medical and Regulatory
Affairs in November 1996. From 1993 to 1996, he was Vice President, Clinical and
Regulatory Affairs of Focal Incorporated. Prior to joining Focal Incorporated,
from 1991 to 1993 he served as Director, Clinical Research at Genetics
Institute. Prior to joining Genetics Institute, from 1986 to 1991 he held
various management positions for a division of Fujisawa USA, Fujisawa Smith
Kline Corporation, and at Centocor Incorporated. Prior to joining Centocor
Incorporated, he was an Assistant Professor at the University of Maryland School
of Medicine and John Hopkins University School of Medicine.
Dr. Brown, a founder of the Company, has been Vice President, Discovery
Research since 1995 and was Vice President of Scientific Affairs from 1985 to
1995. He was also a director of Matrix from 1985 to 1991. From 1985 until 1987,
he was an Assistant Professor of Radiology at the
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<PAGE>
Joint Center for Radiation Therapy at Harvard Medical School. From 1979 to 1985,
he was a Research Associate, Department of Radiology at the Stanford University
School of Medicine.
Mr. Chapman has been Vice President, Sales and Marketing since August
1995. From 1989 to 1995, he served as executive director of marketing at Berlex
Laboratories, Inc. Mr. Chapman also worked at Genentech, Inc., where he served
as product manager from 1985 to 1988. He has also held various marketing
positions at Syntex Laboratories, Inc. and Eli Lilly and Company.
Dr. Jones was named Vice President of Research and Development in
October 1991. Prior to joining Matrix, he held the position of Vice President of
Pharmaceutical Development at Pharmetrix Corporation, a biotechnology company,
from 1989 to 1991. From 1988 to 1989, he held the position of Vice President of
Development at Liposome Technology, Inc., a biotechnology company, and from 1984
to 1988 he was at Genentech, Inc. as Director, Pharmaceutical Research &
Development and Acting Director, Pharmaceutical Manufacturing in 1985 and 1986.
He held various positions at Syntex Research from 1969 to 1984.
Dr. Korey became Vice President, Medical Information and Extramural
Scientific Affairs, in January 1997. From 1990 to 1996, he held the position in
the Company of Vice President, Clinical and Medical Affairs. Prior to joining
Matrix, Dr. Korey was a consultant with A. Korey & Associates from January 1989.
He held the position of Vice President, Medical Affairs at Genelabs, Inc., a
biotechnology company, from July 1987 to January 1989 and Director of Scientific
and Medical Affairs at Syntex Pharmaceuticals Canada from 1981 to June 1987.
From 1978 to 1981, he served as Assistant Director of Clinical Research at G.D.
Searle in Canada.
Mr. Lucas became Vice President of Operations at Matrix in March of
1996. From 1994 to 1996, he was the Vice President of Operations at Telios
Pharmaceuticals a division of Integra LifeSciences. Prior to Telios he was the
Vice President of Operations from 1991 to 1994 at IVAC Corporation a division of
Eli Lilly and Company. From 1986 to 1991 he was Director of Project Management
and Director of Manufacturing Operations at Hybritech, Inc. a division of Eli
Lilly and Company. He also held a number of management and technical positions
at Lilly's Corporate Headquarters in Indianapolis.
Dr. McClure was named Vice President, Regulatory Affairs of the Company
in March 1996. In September, 1996, she also assumed responsibility for the
Quality Assurance Group. From 1993 to 1996 Dr. McClure held the positions in the
Company of Associate Director of Regulatory Affairs and Director of Regulatory
Affairs. Prior to Matrix, she held various positions at Syntex Corporation in
the Chemical Process Development department and in Regulatory Affairs.
Item 2. Properties
In May 1994, the Company entered into an eighteen-year lease agreement
beginning in January, 1996, for a facility totaling approximately 50,000 square
feet in Fremont, California. This facility includes administrative space and
research and development space. This lease has an escalation clause in which the
annual rent expense ranges from $420,000 to $1,034,000.
In December 1995, the Company purchased a research and manufacturing
facility in San Diego, California for $13.1 million. The facility, which totals
approximately 67,000 square feet, includes production, research and development,
and administrative operations as well as an adjacent parcel of land. This
facility requires validation and process installation that will require capital
expenditures of approximately $10.5 million The facility will be used to meet
the Company's long-term commercial-scale production requirements. 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 ending July 1998
and the rental income during the period totals approximately $2.9 million.
The Company currently leases a manufacturing facility located in San
Jose, California, and a manufacturing and storage facility in Milpitas,
California. The San Jose plant, which totals approximately 11,000 square feet,
is utilized for the aseptic processing of collagen and for sterile filling
operations. The lease on this plant extends through November 1997 with options
to renew through November 1999. This facility received a Drug Manufacturing
License in February 1995
Page 24
<PAGE>
from the State of California. This license allows the Company to manufacture
products from this location.
The Milpitas facility, which totals approximately 10,000 square feet,
is designed for portions of the non-sterile processing of collagen as well as
for materials receiving activities, labeling, packaging, and shipping
operations. The Company is currently negotiating an extension of the lease on
this facility which expires in August 1997. The Milpitas facility is licensed by
the State of California for labeling and packaging activities and is presently
validated for non-sterile production activities.
Item 3. Legal Proceedings
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.
Discovery in the case is ongoing. The trial is scheduled to begin on
April 7, 1997.
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
collagen gel manufactured by Koken and by Collagen. See "Risk Factors -- 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 1997. See "Risk Factors
- -- Litigation" and "Risk Factors -- Uncertainty Regarding Patent and Proprietary
Rights."
Page 25
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of the Company's stockholders
through solicitation of proxies or otherwise during the last quarter of the
fiscal year ended December 31, 1996.
Part II
Item 5. Market for Registrants Common Equity and Related Stockholder Matters
The common shares of Matrix Pharmaceutical, Inc. trade on the Nasdaq
National Market tier of the Nasdaq Stock Market Association under the symbol
MATX. The following table presents quarterly information on the high and low
sale prices of the Company's common stock for fiscal years 1996 and 1995.
Fiscal Year High Low
----------- ---- ---
1996
1st Quarter $26.00 $16.75
2nd Quarter 28.75 14.75
3rd Quarter 20.25 6.75
4th Quarter 9.50 5.38
1995
1st Quarter $14.50 $ 9.50
2nd Quarter 15.38 12.50
3rd Quarter 16.00 11.63
4th Quarter 19.00 13.25
Page 26
<PAGE>
<TABLE>
Item 6. Selected Financial Data
<CAPTION>
(In thousands except per share amounts)
- ----------------------------------------------------------------------------------------------------------------------------
Period from
Inception
(February 11,
1985) to
For the Years Ended December 31, December 31,
- ----------------------------------------------------------------------------------------------------------------------------
1992 1993 1994 1995 1996 1996
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Consolidated Statement of
Operations Data:
Revenues $ -- $ 2,150 $ 100 $ -- $ -- $ 2,250
Costs and expenses
Research and development 5,685 12,651 17,072 20,256 24,320 89,355
General and administrative 2,289 3,289 3,806 8,336 11,428 32,965
- ----------------------------------------------------------------------------------------------------------------------------
Total costs and expenses 7,974 15,940 20,878 28,592 35,748 122,320
- ----------------------------------------------------------------------------------------------------------------------------
Loss from operations 7,974 13,790 20,778 28,592 35,748 120,070
Interest and other income 2,177 1,941 1,311 2,179 7,193 15,927
Interest expense 48 100 121 204 1,088 1,746
- ----------------------------------------------------------------------------------------------------------------------------
Net loss $ (5,845) $ (11,949) $ (19,588) $ (26,617) $ (29,643) $ (105,889)
============================================================================================================================
Net loss per share $ (0.60) $ (1.18) $ (1.86) $ (2.19) $ (1.48)
Weighted average number of
shares outstanding 9,719 10,132 10,538 12,173 20,081
</TABLE>
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------------------
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash, cash equivalents
and investments $ 44,241 $ 35,316 $ 35,059 $ 77,331 $ 114,584
Total assets 46,624 39,077 37,767 94,419 134,950
Total long-term debt 711 870 761 12,307 11,724
Total stockholders' equity 44,551 35,629 34,168 76,355 115,511
</TABLE>
Page 27
<PAGE>
Item 7. Management's Discussion and Analysis of Consolidated Financial
Condition and Results of Operations.
This Form 10-K contains, in addition to historical information,
forward-looking statements that involve risks and uncertainties. The Company's
actual results could differ materially from the results discussed in the
forward-looking statements. Factors that could cause or contribute to such
differences include those discussed below as well as those discussed elsewhere
in this Form 10-K.
Overview
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 received
regulatory approval for AccuSite in the United Kingdom during 1996 and will
commence commercial sales in 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 its
inception to December 31, 1996, the Company has incurred a cumulative net loss
of $105,889,000.
Revenues in 1993 and 1994 were generated primarily by amounts earned
under license agreements which were discontinued in 1995 and 1996.
The following discussion should be read in conjunction with the
consolidated financial statements and related notes included elsewhere herein.
Results of Operations
Years ended December 31, 1996 and 1995. The Company had no revenue for 1996 and
1995.
Research and development expenses for 1996 increased by 20% to
$24,320,000 as compared to $20,256,000 for 1995. This increase was primarily
due to increases in clinical costs to support the IntraDose Injectable Gel
cancer program, a higher level of production expenses in preparation for the
commercial introduction of AccuSite, and higher occupancy costs. This increase
was partially offset by lower expenses on clinical trials for AccuSite as well
as the transfer of certain production expenses to inventory at year end.
General and administrative expenses for 1996 increased by 37% to
$11,428,000 as compared to $8,336,000 for 1995. This increase was primarily due
to higher legal expenses due to the ongoing Collagen litigation,
higher-personnel expenses, including the hiring of additional marketing staff,
and AccuSite market prelaunch expenses. This increase was partially offset by
the repurchase of marketing rights to AccuSite for $2,000,000 in 1995. The
legal expenses related to the ongoing litigation with Collagen, regardless of
outcome, may exceed $2,000,000 in 1997.
Net interest and other income for 1996 increased to $6,105,000 as
compared to $1,975,000 for 1995. The increase was primarily the result of
higher average balances in cash, cash equivalents, and marketable securities
due to a secondary public offering 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.
As of December 31, 1996, the Company had federal and state net
operating loss carryforwards of approximately $101.4 million and $10.6 million,
respectively. The Company also had federal research and development tax credit
carryforwards of approximately $2.3 million. The federal net operating loss and
credit carryforwards will expire at various dates beginning in the year 2000
through 2011, if not utilized. The state net operating losses will expire at
various dates beginning in 1997 through 2000, if not utilized.
Years ended December 31, 1995 and 1994. The Company had no revenue for 1995 as
compared to $100,000 for 1994. Revenue for 1994 came from research and
development work performed for a pharmaceutical company.
Page 28
<PAGE>
Research and development expenses for 1995 increased by 19% to
$20,256,000 as compared to $17,072,000 for 1994. This increase was primarily
due to higher costs associated with ongoing and advanced clinical trials as
well as higher employee expenses that supported the submission of the Company's
first NDA for AccuSite. This was partially offset by lower costs for clinical
materials.
General and administrative expenses for 1995 increased by 119% to
$8,336,000 as compared to $3,806,000 for 1994. This increase was primarily due
to the repurchase of the U.S. and European marketing rights to AccuSite from
Medeva PLC for $2,000,000, increased legal expenses of $1,290,000 related to
the ongoing litigation and consulting and personnel related expenses.
Net interest and other income for 1995 increased by 66% to $1,975,000
as compared to $1,190,000 for 1994. The increase was primarily the result of
higher average balances in cash, cash equivalents, and marketable securities in
1995 and higher yields on similar average balances.
Liquidity and Capital Resources
At December 31, 1996, the Company had $114.6 million in cash, cash
equivalents and marketable securities compared to $77.3 million at December 31,
1995.
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 as
well as additional capital generated through equity and debt financings and
collaborative agreements.
In May 1994, the Company signed a lease agreement for a facility
located in Fremont, California. The term of the lease is for a period of 18
years starting January 1996. This facility, which totals approximately 50,000
square feet, includes administrative space, and research and development space.
This lease has an escalation clause in which the annual rent expense ranges
from $420,000 to $1,034,000.
In August 1994, the Company issued 13,334 shares of Series A preferred
stock to a group of private investors and received proceeds of $11,790,000, net
of offering costs. The shares were converted into 1,333,400 shares of the
Company's common stock during the first quarter of 1996.
On August 29, 1995, the Company raised $16.8 million after issuance
costs in a private placement of the Company's common stock to a group of
investors. The offering involved the sale of 1,481,982 new shares of the
Company's common stock at a price of $12.00 per share.
In September 1995, the Company repurchased from Medeva PLC all
marketing rights related to its AccuSite product for $2,000,000, to be paid
over a period of five years.
On October 17, 1995, the Company closed a public offering pursuant to
which 4,097,000 new shares of common stock were sold at $13.25 per share, which
resulted in net proceeds of $50.9 million to the Company.
In December 1995, the Company purchased a research and manufacturing
facility in San Diego, California for $13.1 million. The facility, which
includes furniture and equipment and an adjacent parcel of land, is being
financed with a ten year installment loan for $9,938,000, amortized over a
period of 30 years. 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 this period totals approximately $2.9 million.
On April 8, 1996, the Company closed a public offering pursuant to
which 3,162,500 new 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 29
<PAGE>
In May 1996 the Company announced a delay in the development of
AccuSite 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 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.
In December 1996, the Company announced that it received an action
letter from the U.S. Food and Drug Administration (FDA) identifying issues that
will need to be resolved before the Company's New Drug Application (NDA) for
AccuSite Injectable Gel can be approved for the treatment of genital warts. If
the Company fails to commercialize its program for genital warts in the United
States, this would have a material adverse impact on future revenues of the
Company.
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.
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 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 1996, 1995, and 1994.
Page 30
<PAGE>
<TABLE>
Item 8. Financial Statements and Supplementary Data
<S> <C>
Index to Consolidated Financial Statements
Consolidated Balance Sheets--December 31, 1995 and 1996. Page 36
Consolidated Statements of Operations
Years Ended December 31, 1994, 1995 and 1996, and Period from
Inception (February 11, 1985) To December 31, 1996. Page 37
Consolidated Statement of Stockholders' Equity
Period from Inception (February 11, 1985) To
December 31, 1996. Pages 38-39
Consolidated Statements of Cash Flows
Years Ended December 31, 1994, 1995 and 1996, and Period from
Inception (February 11, 1985) To December 31, 1996. Page 40
Notes to Consolidated Financial Statements Pages 41-49
Report of Ernst & Young LLP, Independent Auditors Page 50
</TABLE>
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
Not applicable.
Part III
Item 10. Directors and Executive Officers of the Registrant
The information required by the item (with respect to Directors) is
hereby incorporated by reference from the information under the caption
"Election of Directors" contained in the Company's definitive Proxy Statement,
to be filed with the Securities and Exchange Commission no later than 120 days
from the end of the Company's last fiscal year in connection with the
solicitation of proxies for its Annual Meeting of Shareholders to be held on
June 25, 1997 (the "Proxy Statement"). The required information concerning
Executive Officers of the Company is contained in Item 1, Part 1 of this Form
10-K under the caption "Executive Officers of the Company" on pages 23 and 24.
The information required by Section 16(a) is incorporated by reference from the
information under the caption "Compliance with Section 16(a) of the Securities
Exchange Act of 1934" in the Proxy Statement.
Item 11. Executive Compensation
The information required by this item is incorporated by reference from
the information under the caption "Election of Directors, Summary of Cash and
Certain Other Compensation, Stock Options, Exercises and Holdings" of the Proxy
Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this item is incorporated by reference from
the information under the caption "Ownership of Management and Certain
Beneficial Owners" in the Proxy Statement.
Page 31
<PAGE>
Item 13. Certain Relationships and Related Transactions
The information required by this item is incorporated by reference from
the information under the caption "Certain Relationships and Related
Transactions" in the Proxy Statement.
PART IV
Item 14. Financial Statements, Financial Statement Schedules, Exhibits and
Reports on Form 8-K
(a) 1. Financial Statements
The following financial statements and supplemental data are filed as
part of this Form 10-K. See Index to Consolidated Financial Statements under
Item 8.
Consolidated Balance Sheets-- December 31, 1995 and 1996.
Consolidated Statements of Operations
Years Ended December 31, 1994, 1995 and 1996, and Period from
Inception (February 11, 1985) To December 31, 1996.
Consolidated Statement of Stockholders' Equity Period from
Inception (February 11, 1985) To December 31, 1996.
Consolidated Statements of Cash Flows
Years Ended December 31, 1994, 1995 and 1996, and Period from
Inception (February 11, 1985) To December 31, 1996.
Notes to Consolidated Financial Statements
Report of Ernst & Young LLP, Independent Auditors
(a) 2. Financial Statement Schedules
All schedules are omitted because they are not applicable or are not
required or the information required to be set forth therein is included in the
consolidated financial statements or notes thereto.
(b) Reports on Form 8-K
There were no Current Reports on Form 8-K filed during the quarter
ended December 31, 1996.
(c) Exhibits
Number Exhibit Table
- ------ -------------
3.1 Certificate of Designation of Preferences of Preferred Shares
of the Company as filed with the Delaware Secretary of State
on August 25, 1994 (Incorporated by reference to Exhibit 5.3
filed with the Company's Form 8-K as filed with the Securities
and Exchange Commission on September 27, 1994)
3.11 Restated Certificate of Incorporation filed with the Delaware
Secretary of State on August 13, 1992 (Incorporated by
reference to the exhibit of the same number filed with the
Company's Form 10-K as filed with the Securities and Exchange
Commission on March 31, 1993)
3.2 Amended and restated bylaws.
3.3 Certificate of Designation of Preferences of Preferred Shares
of the Company as filed with the Delaware Secretary of State
on August 25, 1994 (Incorporated by reference to Exhibit 5.3
filed with the Company's Form 8-K as filed with the Securities
and Exchange Commission on September 27, 1994)
Page 32
<PAGE>
3.4 Certificate of Designations of Series B Junior Participating
Preferred Stock of the Company filed with the Delaware
Secretary of State on May 24, 1995 (Incorporated by reference
to Exhibit 3.4 as filed with the Company's Form 10-Q for the
quarter ended June 30, 1995.)
4.1 Amended and Restated Registration Rights Agreement between the
Company and the investors listed therein dated August 26, 1994
(Incorporated by reference to Exhibit 5.2 filed with Company's
Form 8-K as filed with the Securities and Exchange Commission
on September 27, 1994)
4.2 Rights Agreement between the Company and the First National
Bank of Boston dated May 18, 1995 (Incorporated by reference
to Exhibit No. 1 to the Company's Registration Statement on
Form 8-A dated May 17, 1995).
10.1a Series B Preferred Stock Purchase Agreement dated July 29,
1987
10.2a Series B Preferred Stock Purchase Agreement dated June 30,
1988
10.3a Series C Preferred Stock Purchase Agreement dated May 24, 1990
10.4a Amendment Agreement dated May 24, 1990
10.5a Stock Restriction Agreement between the Company and Edward E.
Luck, dated July 29, 1987
10.6a Stock Restriction Agreement between the Company and Dennis M.
Brown, Ph.D. dated July 29, 1987
10.7a Agreement to Issue Warrant dated December 17, 1988
10.8a Series B Preferred Stock Warrant issued to Western Technology
Investment dated December 30, 1988
10.9a Series B Preferred Stock Warrant issued to USX Credit
Corporation dated December 30, 1988
10.10a Series B Preferred Stock Warrant issued to Highline Financial
Services, Inc. dated December 30, 1988
10.11a Form of Common Stock Purchase Warrant
10.12a Voting Agreement dated May 24, 1990, as amended
10.13b 1988 Restricted Stock Plan, as restated
10.14b Form of Restricted Stock Purchase Agreement
10.15b Form of Stock Purchase Agreement (Repurchase Right with
Escrow)
10.16b Form of Stock Option Agreement
10.17b Form of Stock Pledge Agreement
10.18b 1991 Directors Stock Option Plan
10.19a Master Equipment Lease Agreement between the Company and
Western Technology Investment dated December 17, 1988
10.20a Lease between the Company, Menlo Business Park and Patrician
Associates, Inc. dated January 28, 1988
10.21a First Amendment to Lease between the Company, Menlo Business
Park and Patrician Associates, Inc. dated March 16, 1989
10.22a Technology Assignment Agreement between the Company and Edward
E. Luck and Dennis M. Brown, Ph.D. dated July 29, 1987
10.23a Supply Agreement between the Company and **** dated December
22, 1988 (confidential treatment has been granted with respect
to portions of this document)
10.24c Master Equipment Lease Agreement between the Company and Lease
Management Services, Inc. dated July 27, 1990
10.25c Form of Indemnification Agreement
10.26d Form of Recapitalization
10.27b Lease between the Company and Becton Dickinson Corporation,
dated November 16, 1992
10.28b Equipment Lease Agreement between the Company and Household
Commercial of California, Inc., dated November 16, 1992
- ------------------
a Incorporated herein by reference to the exhibits of the same number filed
with the Company's Registration Statement on Form S-1 (File No. 33-44459)
as filed with the Securities and Exchange Commission on December 19, 1991.
b Incorporated herein by reference to the exhibits of the same number filed
with the Company's Form 10-K as filed with the Securities and Exchange
Commission on March 31, 1993.
c Incorporated herein by reference to the exhibit of the same number filed
with Amendment No. 1 to the Company's Registration Statement on Form S-1
(File No. 33-44459) as filed with the Securities and Exchange Commission on
January 23, 1992.
d Incorporated herein by reference to the exhibit of the same number filed
with Amendment No. 2 to the Company's Registration Statement on Form S-1
(File No. 33-44459) as filed with the Securities and Exchange Commission on
January 27, 1992.
Page 33
<PAGE>
10.29b Equipment Lease Agreement between the Company and General
Electric Capital Corporation, dated December 17, 1992
10.30 Settlement Agreement and General Release dated February 2,
1993. (Incorporated herein by reference to Exhibit 19.1 filed
with the Company's Form 10-Q as filed with the Securities and
Exchange Commission on May 14, 1993)
10.31e Development Agreement by and between the Company and Medeva,
PLC dated May 18, 1993 (confidential treatment has been
requested for certain portions of this Exhibit pursuant to a
separate filing made by Medeva, PLC (File No. 1-10817) with
its Annual Report on Form 20-F filed with the Securities and
Exchange Commission on June 29, 1993, Exhibit No. 2.14)
10.32e Investment Agreement by and between the Company and Medeva,
PLC dated May 18, 1993 (confidential treatment has been
requested for certain portions of this Exhibit pursuant to a
separate filing made by Medeva, PLC (File No. 1-10817) with
its Annual Report on Form 20-F filed with the Securities and
Exchange Commission on June 29, 1993, Exhibit No. 2.14)
10.34e Note Secured by Stock Pledge Agreement dated June 30, 1993 by
and between the Company and Andrew G. Korey
10.35e Stock Pledge Agreement dated June 30, 1993 by and between the
Company and Andrew G. Korey
10.36 Lease between the Company and Calaveras Associates II, dated
August 4, 1993. (confidential treatment has been granted with
respect to portions of this document, Incorporated herein by
reference to the exhibit of the same number filed with the
Company's Form 10-Q as filed with the Securities and Exchange
Commission on November 12, 1993)
10.37 Lease between the Company, Menlo Business Park, and Patrician
Associates, Inc. dated July 27, 1993 (Incorporated herein by
reference to the exhibit of the same number filed with the
Company's Form 10-K as filed with the Securities and Exchange
Commission on March 24, 1994)
10.38 Lease between the Company, John Arrillaga and Richard T. Peery
Separate Property Trust, dated May 9, 1994 (Incorporated
herein by reference to the exhibit of the same number filed
with the Company's Form 10Q as filed with the Securities and
Exchange Commission on August 12, 1994)
10.39 Investment Agreement by and between the Company and the
investors listed therein dated August 26, 1994 (Incorporated
herein by reference to Exhibit 5.1 filed with the Company's
Form 8-K as filed with the Securities and Exchange Commission
on September 27, 1994)
10.40 Equipment Lease Agreement between the Company and Financing
For Science International, Inc. dated September 1, 1994
(Incorporated by reference to the exhibit of the same number
filed with the Securities and Exchange Commission on November
2, 1994)
10.41 Form of Stock purchase Agreement by and between the Company
and the investors listed therein dated July 14, 1995 and July
21, 1995 (Incorporated by reference to Exhibit No. 4.1 to the
registration Statement on Form S-3, Registration No. 33-94854,
filed with the Securities and Exchange Commission on July 21,
1995, as amended)
10.42 Termination and Repurchase Agreement between the Company and
Medeva PLC dated September 18, 1995 (Incorporated by reference
to exhibit No. 10.1 to the Company's Registration Statement on
Form S-3 (file No. 33-96556) as filed with the Securities and
Exchange Commission on September 25, 1995
10.43 Equipment Lease Agreement between the Company and Lease
Management Services, Inc. dated August 28, 1995 (Incorporated
herein by reference to exhibit No. 10.3 filed with the
Company's Form 10-Q as filed with the Security and Exchange
Commission on November 7, 1995)
10.44 Contract of Purchase and Sale and Joint Escrow Instructions
between the Company and the Federal Deposit Insurance
Corporation dated November 2, 1995 (Incorporated herein by
reference to the exhibit of the same number filed with the
Company's Form 10-K as filed with the Securities and Exchange
Commission on March 1, 1996)
10.45 Industrial Multi-Tenant Lease agreement dated July 15, 1996
between the Company, as landlord and Advanced Tissue Sciences,
Inc., as tenant filed herewith. (Incorporated herein by
reference to the exhibit of the same number filed with the
Company's Form 10-Q as filed with the Securities and Exchange
Commission on August 8, 1996)
23.1 Consent of Ernst & Young LLP, Independent Auditors
27 Financial Data Schedule
- ------------------
e Incorporated herein by reference to the exhibit of the same number filed
with the Company's Form 10-Q as filed with the Securities and Exchange
Commission on August 11, 1993.
Page 34
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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: March 19, 1997 By: /s/ Craig R. McMullen
---------------------- -----------------------------------
Craig R. McMullen
President, Chief Executive Officer
and Director
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS:
That the undersigned officers and directors of Matrix Pharmaceutical,
Inc., a Delaware corporation, do hereby constitute and appoint James R. Glynn
the lawful attorney and agent, with power and authority to do any and all acts
and things and to execute any and all instruments which said attorney and agent
determines may be necessary or advisable or required to enable said corporation
to comply with the Securities Exchange Act of 1934, as amended, and any rules or
regulations or requirements of the Securities and Exchange Commission in
connection with this Form 10-K. Without limiting the generality of the foregoing
power and authority, the powers granted include the power and authority to sign
the names of the undersigned officers and directors in the capacities indicated
below to this Form 10-K, to any and all amendments, and to any and all
instruments or documents filed as part of or in conjunction with this Form 10-K
or amendments or supplements thereof, and each of the undersigned hereby
ratifies and confirms all that said attorney and agent shall do or cause to be
done by virtue hereof. This Power of Attorney may be signed in several
counterparts.
IN WITNESS WHEREOF, each of the undersigned has executed this Power of
Attorney as of the date indicated.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Date: March 19, 1997 /s/ James R. Glynn
---------------------- --------------------------
James R. Glynn
Senior Vice President and Chief Financial
Officer and Secretary
Date: March 19, 1997 /s/ Edward E. Luck
---------------------- --------------------------
Edward E. Luck
Chairman of the Board
Date: March 19, 1997 /s/ John E. Lyons
---------------------- --------------------------
John E. Lyons
Director
Date: March 19, 1997 /s/ Julius L. Pericola
---------------------- --------------------------
Julius L. Pericola
Director
Date: March 19, 1997 /s/ Alan E. Salzman
---------------------- --------------------------
Alan E. Salzman
Director
Date: March 19, 1997 /s/ J. Stephan Dolezalek
---------------------- --------------------------
J. Stephan Dolezalek
Director
Page 35
<PAGE>
MATRIX PHARMACEUTICAL, INC.
(a development stage company)
<TABLE>
Consolidated Balance Sheets
<CAPTION>
(In thousands except share and per share amounts) December 31,
- --------------------------------------------------------------------------------------------------------------
1995 1996
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 55,675 $ 20,138
Short-term investments 9,646 38,997
Other current assets 952 3,041
- --------------------------------------------------------------------------------------------------------------
Total current assets 66,273 62,176
Property and equipment, net 15,919 17,152
Non-current investments 12,010 55,449
Deposits and other assets, net 217 173
- --------------------------------------------------------------------------------------------------------------
$ 94,419 $ 134,950
==============================================================================================================
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 1,605 $ 2,636
Accrued compensation 844 1,045
Accrued clinical trial costs 1,814 1,239
Other accrued liabilities 664 2,135
Current portion of debt and capital lease obligations 830 660
- --------------------------------------------------------------------------------------------------------------
Total current liabilities 5,757 7,715
Debt and capital lease obligations, less current portion 12,307 11,724
Commitments and contingency
Stockholders' equity
Preferred stock, $0.01 par value per share, 1,023,571 shares authorized;
14,445 shares designated as Series A preferred stock, 13,334 shares
issued and outstanding in 1995; no
shares issued or outstanding in 1996 -- --
Common stock, $0.01 par value per share; 30,000,000 shares
authorized, 16,492,510 shares issued and outstanding in 1995;
21,257,856 shares issued and outstanding in 1996 165 213
Additional paid-in capital 153,262 222,043
Deferred compensation (514) (780)
Unrealized losses on marketable securities (312) (76)
Deficit accumulated during the development stage (76,246) (105,889)
- --------------------------------------------------------------------------------------------------------------
Total stockholders' equity 76,355 115,511
- --------------------------------------------------------------------------------------------------------------
$ 94,419 $ 134,950
==============================================================================================================
<FN>
(See accompanying notes)
</FN>
</TABLE>
Page 36
<PAGE>
MATRIX PHARMACEUTICAL, INC.
(a development stage company)
<TABLE>
CONSOLIDATED STATEMENTS OF OPERATIONS
<CAPTION>
(In thousands except per share amounts)
- -------------------------------------------------------------------------------------------------------------
Period from
Inception
(February 11,
1985) to
For the Years Ended December 31, December 31,
- --------------------------------------------------------------------------------------------------------------
1994 1995 1996 1996
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $ 100 $ -- $ -- $ 2,250
Costs and expenses
Research and development 17,072 20,256 24,320 89,355
General and administrative 3,806 8,336 11,428 32,965
- -------------------------------------------------------------------------------------------------------------
Total costs and expenses 20,878 28,592 35,748 122,320
- -------------------------------------------------------------------------------------------------------------
Loss from operations 20,778 28,592 35,748 120,070
Interest and other income 1,311 2,179 7,193 15,927
Interest expense 121 204 1,088 1,746
- -------------------------------------------------------------------------------------------------------------
Net loss $ (19,588) $ (26,617) $ (29,643) $ (105,889)
=============================================================================================================
Net loss per share $ (1.86) $ (2.19) $ (1.48)
=========================================================================================
Weighted average number of
shares outstanding 10,538 12,173 20,081
=========================================================================================
<FN>
(See accompanying notes )
</FN>
</TABLE>
Page 37
<PAGE>
<TABLE>
MATRIX PHARMACEUTICAL, INC.
(a development stage company)
Consolidated Statements of Stockholders'
Equity For the period from inception
(February 11, 1985) to December 31, 1996
<CAPTION>
(In thousands)
- ------------------------------------------------------------------------------------------------------------------------------------
Deferred
Convertible Additional Compen-
Preferred Common Paid-in sation &
Stock Stock Capital Other
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Issuance of 508,867 shares of common stock $ -- $ 5 $ 137 $ (55)
Issuance of 3,564,000 shares of common stock at
$15.00 per share, less offering costs, in an initial
public offering in January 1992 -- 36 48,950 --
Issuance of 5,250,000 shares of convertible preferred stock 53 -- 5,272 --
Recapitalization of the Company (259,524 shares of
common stock converted to 3,500,000 shares of
convertible preferred stock) 35 (3) (32) --
Issuance of 4,571,429 shares convertible preferred
stock for cash and conversion of $400,000 notes
payable to stockholders (at $1.75 per share)
in May 1990, net of offering costs 45 -- 7,880 --
Conversion of 6,343,531 shares of convertible
preferred stock to common stock at the time of the
initial public offering (after 1-for-2.1
reverse stock split in January 1992) (133) 63 70 --
Issuance of 54,391 shares of common stock to
employees and consultants for cash under stock
option plan (from $0.23 to $0.37 per share) -- 1 13 --
Cancellation of promissory note in exchange
for the repurchase of 238,095 shares of common
stock from an officer in December 1990 -- (2) (53) 55
Deferred compensation related to grant
of stock options -- -- 819 (819)
Amortization of deferred compensation -- -- (12) 520
Issuance of 59,757 shares of common stock to
employees, consultants, and investors for cash
under the stock option plan and for exercise
of warrants (from $0.23 to $0.37 per share) -- -- 17 --
Issuance of 200,000 shares of common stock
to Medeva PLC in May 1993 at $15.00 per
share, less offering costs -- 2 2,833 --
Unrealized gains (losses) on marketable securities -- -- -- --
Net loss -- -- -- --
-------------------------------------------------------------
Balance at December 31, 1993 -- 102 65,894 (299)
Issuance of 40,118 shares of common stock to
employees and investors for cash
under the stock option plan and for exercise
of warrants (from $0.23 to $9.00 per share) -- 1 176 --
Issuance of 466,667 shares of common stock to
Medeva PLC in May 1994 at $15.00 per share,
less offering costs -- 5 6,600 --
Issuance of 13,334 shares of convertible
preferred stock in a private placement in
August 1994 at $900 per share, less offering costs -- -- 11,790 --
Amortization of deferred compensation -- -- -- 198
Unrealized gains (losses) on marketable securities -- -- -- --
Net loss -- -- -- --
-------------------------------------------------------------
Balance at December 31, 1994 -- 108 84,460 (101)
Issuance of 148,016 shares of common stock to
employees and investors for cash under the
stock option plan and for exercise of warrants
(from $0.23 to $11.38 per share) -- 1 425 --
Issuance of 10,800 shares to employees at
$14.00 per share -- -- 151 --
Issuance of 1,481,982 shares of common stock
for cash in a private placement in August 1995
at $12 per share, less offering costs -- 15 16,804 --
Issuance of 4,097,000 shares of common stock
for cash in a follow-on public offering in
October 1995 at $13.25 per share, less offering costs -- 41 50,908 --
Deferred compensation related to grant of stock options 514 (514)
Amortization of deferred compensation -- -- -- 101
Unrealized gains (losses) on marketable securities -- -- -- --
Net loss -- -- -- --
-------------------------------------------------------------
Balance at December 31, 1995 $ -- $ 165 $ 153,262 $ (514)
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
Unrealized Deficit
Gain Accumulated
(Losses) During the
on Develop- ` Total
Marketable ment Stockholders'
Securities Stage Equity
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Issuance of 508,867 shares of common stock $ -- $ -- $ 87
Issuance of 3,564,000 shares of common stock at
$15.00 per share, less offering costs, in an initial
public offering in January 1992 -- -- 48,986
Issuance of 5,250,000 shares of convertible preferred stock -- -- 5,325
Recapitalization of the Company (259,524 shares of
common stock converted to 3,500,000 shares of
convertible preferred stock) -- -- --
Issuance of 4,571,429 shares convertible preferred
stock for cash and conversion of $400,000 notes
payable to stockholders (at $1.75 per share)
in May 1990, net of offering costs -- -- 7,925
Conversion of 6,343,531 shares of convertible
preferred stock to common stock at the time of the
initial public offering (after 1-for-2.1
reverse stock split in January 1992) -- -- --
Issuance of 54,391 shares of common stock to
employees and consultants for cash under stock
option plan (from $0.23 to $0.37 per share) -- -- 14
Cancellation of promissory note in exchange
for the repurchase of 238,095 shares of common
stock from an officer in December 1990 -- -- --
Deferred compensation related to grant
of stock options -- -- --
Amortization of deferred compensation -- -- 508
Issuance of 59,757 shares of common stock to
employees, consultants, and investors for cash
under the stock option plan and for exercise
of warrants (from $0.23 to $0.37 per share) -- -- 17
Issuance of 200,000 shares of common stock
to Medeva PLC in May 1993 at $15.00 per
share, less offering costs -- -- 2,835
Unrealized gains (losses) on marketable securities (27) -- (27)
Net loss -- (30,041) (30,041)
------------------------------------------
Balance at December 31, 1993 (27) (30,041) 35,629
Issuance of 40,118 shares of common stock to
employees and investors for cash
under the stock option plan and for exercise
of warrants (from $0.23 to $9.00 per share) -- -- 177
Issuance of 466,667 shares of common stock to
Medeva PLC in May 1994 at $15.00 per share,
less offering costs -- -- 6,605
Issuance of 13,334 shares of convertible
preferred stock in a private placement in
August 1994 at $900 per share, less offering costs -- -- 11,790
Amortization of deferred compensation -- -- 198
Unrealized gains (losses) on marketable securities (643) -- (643)
Net loss -- (19,588) (19,588)
--------------------------------------------
Balance at December 31, 1994 (670) (49,629) 34,168
Issuance of 148,016 shares of common stock to
employees and investors for cash under the
stock option plan and for exercise of warrants
(from $0.23 to $11.38 per share) -- -- 426
Issuance of 10,800 shares to employees at
$14.00 per share -- -- 151
Issuance of 1,481,982 shares of common stock
for cash in a private placement in August 1995
at $12 per share, less offering costs -- -- 16,819
Issuance of 4,097,000 shares of common stock
for cash in a follow-on public offering in
October 1995 at $13.25 per share, less offering costs -- -- 50,949
Deferred compensation related to grant of stock options --
Amortization of deferred compensation -- -- 101
Unrealized gains (losses) on marketable securities 358 -- 358
Net loss -- (26,617) (26,617)
---------------------------------------------
Balance at December 31, 1995 $ (312) $ (76,246) $ 76,355
</TABLE>
Page 38
<PAGE>
<TABLE>
MATRIX PHARMACEUTICAL, INC.
(a development stage company)
Consolidated Statements of Stockholders'
Equity For the period from inception (February 11, 1985) to December 31, 1996
<CAPTION>
(In thousands)
- -----------------------------------------------------------------------------------------------------------------------------
Deferred
Convertible Additional Compen-
Preferred Common Paid-in sation &
Stock Stock Capital Other
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at December 31, 1995 $ -- $ 165 $ 153,262 $ (514)
Issuance of 269,446 shares of common stock to
employees and investors for cash under the
stock option plan (from $0.23 to $13.50 per share) -- 3 1,395 --
Issuance of 3,162,500 shares of common stock for cash
in a follow-on public offering in April 1996 at
$22.63 per share, less offering costs -- 32 67,336 --
Conversion of 13,334 shares of convertible preferred
stock into 1,333,400 shares of common stock -- 13 (357) --
Deferred compensation related to grant of
certain stock options -- 407 (407)
Amortization of deferred compensation -- -- -- 141
Unrealized gains (losses) on marketable securities -- -- -- --
Net loss -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 $ -- $ 213 $ 222,043 $ (780)
=============================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
Unrealized Deficit
Gain Accumulated
(Losses) During the
on Develop- ` Total
Marketable ment Stockholders'
Securities Stage Equity
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at December 31, 1995 $ (312) $ (76,246) $ 76,355
Issuance of 269,446 shares of common stock to
employees and investors for cash under the
stock option plan (from $0.23 to $13.50 per share) -- -- 1,398
Issuance of 3,162,500 shares of common stock for cash
in a follow-on public offering in April 1996 at
$22.63 per share, less offering costs -- -- 67,368
Conversion of 13,334 shares of convertible preferred
stock into 1,333,400 shares of common stock -- -- (344)
Deferred compensation related to grant of
certain stock options -- -- --
Amortization of deferred compensation -- -- 141
Unrealized gains (losses) on marketable securities 236 -- 236
Net loss -- (29,643) (29,643
- -------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 $ (76) $(105,889) $ 115,511
===================================================================================================================
<FN>
(See accompanying notes)
</FN>
</TABLE>
Page 39
<PAGE>
MATRIX PHARMACEUTICAL, INC.
(a development stage company)
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Increase (Decrease) in Cash and Cash Equivalents
<CAPTION>
(In thousands)
- ------------------------------------------------------------------------------------------------------------
Period from
Inception
(February 11,
1985) to
For the years ended December 31, December 31,
- ------------------------------------------------------------------------------------------------------------
1994 1995 1996 1996
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss $(19,588) $(26,617) $ (29,643) $(105,889)
Adjustments to reconcile net loss to
net cash used by operating activities:
Depreciation and amortization 831 946 1,051 4,467
Amortization of deferred compensation 198 101 141 960
Repurchase of marketing rights -- 2,000 -- 2,000
Other 146 154 83 428
Changes in assets and liabilities:
Other current assets 471 (425) (2,089) (3,041)
Deposits and other assets 272 3 44 (182)
Accounts payable 320 356 1,031 2,636
Accrued compensation 88 513 201 1,045
Accrued clinical trial costs (387) 1,476 (575) 1,239
Other accrued liabilities 198 138 1,471 2,135
- ------------------------------------------------------------------------------------------------------------
Net cash (used) by operating activities (17,451) (21,355) (28,285) (94,202)
Cash flows from investing activities:
Capital expenditures (524) (14,904) (2,326) (21,797)
Investment in available-for-sale securities (36,478) (14,796) (189,548) (350,883)
Investment in held-to-maturity securities -- -- -- (23,827)
Proceeds of available-for-sale securities 44,770 5,480 95,219 221,101
Maturities of investments 500 12,647 21,734 58,708
- ------------------------------------------------------------------------------------------------------------
Cash flows provided (used) by investing
activities 8,268 (11,573) (74,921) (116,698)
Cash flows from financing activities:
Payments on debt and capital lease obligations (348) (426) (753) (2,376)
Issuance of convertible promissory note
payable to stockholders -- -- -- 400
Net cash proceeds from issuance of:
Debt and capital lease financing 280 10,408 -- 12,885
Preferred stock 11,790 (46) -- 24,679
Common stock 6,782 68,391 68,422 195,450
- ------------------------------------------------------------------------------------------------------------
Cash flows provided by financing activities 18,504 78,327 67,669 231,038
Net increase in cash and cash equivalents 9,321 45,399 (35,537) 20,138
Cash and cash equivalents at the beginning of period 955 10,276 55,675 --
- ------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at the end of period $ 10,276 $ 55,675 $ 20,138 $ 20,138
============================================================================================================
Supplemental schedule of noncash investing
and financing activities:
Issuance of stock upon conversion of
promissory notes payable to stockholders $ -- $ -- $ -- $ 425
============================================================================================================
Supplemental disclosure of cash flow information:
Interest paid $ 121 $ 204 $ 1,088 $ 1,746
============================================================================================================
<FN>
(See accompanying notes)
</FN>
</TABLE>
Page 40
<PAGE>
MATRIX PHARMACEUTICAL, INC.
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation Matrix Pharmaceutical, Inc. (the "Company") was
incorporated in California on February 11, 1985 and reincorporated in Delaware
in January 1992. The Company's principal activities to date have involved
research and development of drug delivery systems using proprietary technology,
recruiting key personnel, establishing a manufacturing process and raising
capital to finance its operations. The Company is classified as a development
stage company.
In the course of its development activities, the Company has sustained
continuing operating losses and expects such losses to continue over the next
several years. The Company has financed its operations and capital acquisitions
primarily through stock issuances, capital leases, and in 1995, long-term debt.
The Company anticipates that its existing and committed capital resources
including the proceeds of the April 1996 public offering, and commercial sales
of AccuSite will enable it to maintain its planned operations through 1998.
Principles of consolidation In 1993, the Company incorporated a wholly owned
subsidiary, Matrix Pharmaceutical Limited. The consolidated financial statements
include the accounts of the Company and its wholly owned subsidiary after
elimination of all material intercompany balances and transactions.
Revenue recognition The Company has recognized revenue under collaborative
development agreements as it is earned. Non-refundable fees related to
reimbursement of past research and development efforts are recognized upon
signing of the agreement.
Net loss per share Net loss per share is computed using the weighted average
number of shares of common stock outstanding during the period.
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 policy 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.
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.
Page 41
<PAGE>
Depreciation and amortization The Company depreciates property and equipment
using the straight-line method over the assets' estimated useful lives. Building
and improvements are depreciated over 25 years. Prior to 1996, laboratory,
operating, office and computer equipment were depreciated over five years.
Beginning in 1996 laboratory, operating and office equipment and furniture were
depreciated over 10 years and computer equipment over five years. The change in
depreciation lives for certain assets did not materially impact the consolidated
financial statements. Leasehold improvements are depreciated over the shorter of
the estimated useful life or the lease term. Amortization of equipment under
capital leases is included with depreciation expense.
Stock based compensation Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation," encourages, but does not require,
companies to record compensation costs for stock-based employee compensation
plans at fair value. The Company has elected to continue to account for
stock-based compensation using the intrinsic value method prescribed in
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," and related Interpretations. Accordingly, compensation costs for
stock options granted to employees and directors is measured as the excess, if
any, of the quoted market price of the Company's stock at the date of the grant
over the amount an employee must pay to acquire the stock. Note 10 to the
Consolidated Financial Statement contains a summary of the pro forma effects to
reported net income and earnings per share for 1995 and 1996 as if the Company
had elected to recognize compensation cost based upon the fair value of options
granted at grant date as prescribed by SFAS No. 123.
Use of estimates The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
2. FINANCIAL INSTRUMENTS
<TABLE>
Investments The following is a summary of available-for-sale securities:
<CAPTION>
(In thousands) Available-For-Sale Securities
- -------------------------------------------------------------------------------------------------------------------
Gross Gross Estimated Fair
Unrealized Unrealized Value
December 31, 1996 Cost Gains Losses
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Certificates of deposit $ 57,982 $20 $ 2 $ 58,000
U.S. government securities 36,517 71 142 36,446
Repurchase agreements 15,046 -- -- 15,046
Master notes 3,907 -- -- 3,907
- -------------------------------------------------------------------------------------------------------------------
$113,452 $91 $144 $113,399
===================================================================================================================
</TABLE>
<TABLE>
Included in cash equivalents are $18,953,000 of available-for-sale
securities. The Company invests in repurchase agreement securities which are
collateralized by U.S. government securities which have a market value of 102%
of the investment. The securities are marked to market daily to ensure that the
market value of the underlying assets remain sufficient.
<CAPTION>
(In thousands) Available-For-Sale Securities
- -------------------------------------------------------------------------------------------------------------------
Gross Gross Estimated Fair
Unrealized Unrealized Value
December 31, 1995 Cost Gains Losses
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. government securities $ 43,704 $-- $ 262 $ 43,442
Commercial paper 26,000 -- -- 26,000
U.S. corporate securities 2,000 -- 10 1,990
Mortgage-backed securities 1,136 -- 27 1,109
State and municipal securities 855 -- -- 855
- -------------------------------------------------------------------------------------------------------------------
$ 73,695 $-- $ 299 $ 73,396
===================================================================================================================
</TABLE>
Page 42
<PAGE>
Included in cash equivalents are $51,740,000 of available-for-sale
securities. During 1995, U.S. government securities with a costs of $5,501,000,
gross unrealized losses of $120,000 and an estimated fair value of $5,381,000
were transferred from "held to maturity" to "available for sale." Management
determined that these securities would be utilized for the Company's ongoing
operations.
During the years ended December 31, 1996 and 1995, the Company sold
available-for-sale securities with a fair value of $46 million and $4 million,
respectively. The gross realized gain on such sales totaled $117,000 in 1996 and
$1,000 in 1995. In addition, the Company recorded a realized gain of $146,000
from the proceeds of a bond in 1996. The gross realized loss on such sales
totaled $187,000 in 1996 and $48,000 in 1995.
The amortized cost and estimated fair value of debt securities at
December 31, 1996, by contractual maturity, are shown below. Expected maturities
will differ from contractual maturities because the issuers of the securities
may have the right to prepay obligations without penalties.
(In thousands) Available-for-Sale Securities
- ----------------------------------------------------------------------------
Amortized Estimated
December 31, 1996 Cost Fair Value
- ------------------------------------------------------------------------------
Due in one year or less $ 57,935 $ 57,950
Due after one year through five years 55,517 55,449
- ------------------------------------------------------------------------------
$113,452 $113,399
==============================================================================
Long-term obligations The carrying amounts of the loan and installment notes
(note 6) approximates their fair value. The fair values of the loan and
installment notes are estimated using discounted cash flow analyses based on the
Company's current incremental borrowing rates for similar types of borrowing
arrangements.
3. COLLABORATIVE ARRANGEMENT
In May 1993, the Company established a strategic alliance with Medeva
PLC ("Medeva") to co-commercialize the Company's AccuSite product for selective
dermatological indications in the United States and Europe. Medeva purchased
200,000 shares in 1993 and 466,667 shares in 1994 of new Matrix common stock at
$15 per share for an aggregate purchase price of $10 million (before offering
costs). Medeva also made an initial payment to the Company in 1993 of $2,000,000
in non-refundable development fees for prior research and development work
performed by the Company. In September 1995, the Company repurchased from Medeva
all marketing rights related to its AccuSite product for $2,000,000, to be paid
over a period of five years. As of December 31, 1996 the obligation has a
balance of $1,750,000 and is included with installment notes on the balance
sheet.
4. INVENTORY
Inventory Inventory, which is included in other assets, is stated at the lower
of cost or market. Cost is determined on an average cost approach which
approximates the first in first out method.
(In thousands)
- --------------------------------------------------------------------------
December 31, 1995 1996
- --------------------------------------------------------------------------
Finished goods $ -- $ --
Work in process -- 440
Raw material -- 318
- --------------------------------------------------------------------------
Total Inventory $ -- $ 758
==========================================================================
Page 43
<PAGE>
5. PROPERTY AND EQUIPMENT
Property and equipment is stated at cost and consists of the following:
(In thousands)
- --------------------------------------------------------------------------------
December 31, 1995 1996
- --------------------------------------------------------------------------------
Land $ 4,258 $ 4,258
Building 6,869 6,928
Laboratory and operating equipment 2,835 4,234
Office and computer equipment 2,280 2,462
Leasehold improvements 2,572 2,890
Manufacturing start-up costs 490 490
Construction in progress -- 265
- --------------------------------------------------------------------------------
19,304 21,527
Less accumulated depreciation and amortization (3,385) (4,375)
- --------------------------------------------------------------------------------
Net property and equipment $15,919 $ 17,152
================================================================================
In December, 1995 the Company purchased a research and manufacturing facility in
San Diego, California for $13.1 million. The facility includes land, building
and related improvements, equipment, furniture, and an adjacent parcel of land.
6. DEBT AND CAPITAL LEASE OBLIGATIONS
Assets purchased under debt (installment notes) or capital lease
financing arrangements consist of building and improvements, laboratory,
leasehold improvements, operating, office and computer equipment with a cost of
approximately $15,838,000 at December 31, 1995 and 1996. Accumulated
depreciation of these assets totaled approximately $1,788,000 and $2,478,052 at
December 31, 1995 and 1996, respectively. The weighted average interest rate for
debt and capital lease obligations in 1996 was 10.13%.
During the fourth quarter of 1995, the Company entered into a loan
agreement for $9,938,000 to finance the purchase of a manufacturing and research
facility in San Diego, California. The loan bears interest at 10.0% per annum
and is for a period of ten years, amortized over 30 years. The loan is secured
by the property purchased.
Future principal payments under installment notes and minimum future
payments under capital leases, are as follows at December 31, 1996:
(In thousands)
- --------------------------------------------------------------------------------
Capital
Installment Lease
Years ending December 31, Notes Obligations Total
- --------------------------------------------------------------------------------
1997 $ 1,492 $ 210 $ 1,702
1998 1,545 318 1,863
1999 1,543 119 1,662
2000 1,543 -- 1,543
2001 1,043 -- 1,043
Thereafter 25,031 -- 25,031
- --------------------------------------------------------------------------------
32,197 647 32,844
Less amount representing interest 20,372 88 20,460
- --------------------------------------------------------------------------------
Present value of net minimum payments 11,825 559 12,384
Current portion 503 157 660
- --------------------------------------------------------------------------------
Amounts due after one year $ 11,322 $ 402 $11,724
================================================================================
Page 44
<PAGE>
7. LEASE COMMITMENTS
In 1996, the Company leased facilities in Fremont and San Jose as well
as two facilities in Milpitas located in the State of California. The Company
also leased a facility in the United Kingdom. In December 1995, the Company
terminated its remaining lease of the Menlo Park facility. Rent expense under
all of these arrangements was approximately $1,238,000 in 1994, $1,421,600 in
1995, and $1,610,000 in 1996. Rental commitments under the building and
equipment operating leases are as follows at December 31, 1996:
(In thousands)
- --------------------------------------------------------------------------------
Years ending December 31, Total
- --------------------------------------------------------------------------------
1997 $ 1,560
1998 902
1999 688
2000 639
2001 669
Thereafter 10,933
- --------------------------------------------------------------------------------
Total minimum lease payments $ 15,391
================================================================================
The Company entered into an eighteen-year lease agreement beginning in
January, 1996, for a facility totaling approximately 50,000 square feet in
Fremont, California. This facility includes administrative, and research and
development usage. This lease has an escalation clause in which the annual rent
expense ranges from $420,000 to $1,034,000.
The Company entered into a lease agreement for a storage and shipping
facility totaling approximately 5700 square feet in Milpitas, California. The
lease which expires on November, 1999 and has an annual rent expense which
ranges from $55,000 to $62,000.
8. LITIGATION
On December 21, 1994, Collagen Corporation 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.
Discovery in the case is ongoing. The trial is scheduled to begin on
April 7, 1997.
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
Page 45
<PAGE>
collagen gel from two additional sources in its clinical trials, including
collagen gel manufactured by Koken and by Collagen.
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 1997.
9. STOCKHOLDERS' EQUITY
Preferred Stock In August 1994, the Company issued 13,334 shares of Series A
preferred stock to a group of private investors and received proceeds of
$11,790,000, net of offering costs. 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.
Preferred Share Purchase Rights Plan On April 17, 1995, the Company's Board of
Directors adopted a Preferred Share Purchase Rights Plan under which
stockholders receive one one-hundredth Series B junior participating preferred
share purchase right for each share of Matrix common stock. The rights will be
distributed as a non-taxable dividend, will expire on May 28, 2005, and will be
exercisable only if a person or group acquires 20% or more of the Company's
common stock or announces a tender offer for 20% or more of the Company's common
stock. The Board of Directors designated 150,000 shares as Series B junior
participating preferred stock. As of December 31, 1996, no shares were issued or
outstanding.
Common Stock On August 29, 1995, the Company raised in a private placement of
the Company's common stock, $16.8 million after issuance costs from a group of
investors. The offering involved the sale of 1,481,982 new shares of the
Company's common stock at a price of $12.00 per share.
On October 17, 1995, the Company closed a public offering pursuant to
which 4,097,000 new shares of the Company's common stock were sold at $13.25 per
share, which resulted in net proceeds of $50.9 million to the Company.
On April 8, 1996, the Company closed a public offering pursuant to
which 3,162,500 new 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.
10. STOCK OPTIONS PLANS
1991 Directors Stock Option Plan The Board of Directors adopted a Directors
Stock Option Plan in 1991. In May 1994, the Board amended the plan which was
approved by stockholders at the annual stockholders' meeting in June 1995. Under
the amended plan, each individual who first becomes a non-employee member of the
Board of Directors will be automatically granted a non-statutory option to
purchase 40,000 shares of common stock which vest over a three-year period. Each
non-employee director (upon re-election to the Board) will automatically receive
an option to purchase 3,000 shares of common stock which vest over a one-year
period. The amended plan includes a provision for a special option grant for
Board members to receive a second stock option grant for 40,000 shares of common
stock upon the termination of a member's affiliation with a venture capital
firm, investment entity or corporate partner for which the member was affiliated
upon his appointment to the Board. Such member will not be eligible to receive
the automatic option grant of 3,000 shares until the first annual stockholders'
meeting held more than 6 months after the date of
Page 46
<PAGE>
the special option grant. Options have a maximum term of 10 years. The maximum
number of shares which may be issued under the automatic option grant program is
342,858 shares. At December 31, 1996, the total number of common shares reserved
for issuance under director's stock options was 342,858, of which 68,366 remain
available for grant. At December 31, 1996, options to purchase 183,966 shares of
common stock under the Director Stock Plan were exercisable.
Restricted stock plan The Company's Restricted Stock Plan ("the Plan") permits
the Company to (i) grant incentive options at 100 percent of fair value at the
date of grant; (ii) grant non-qualified options at 85 percent of fair value or
greater; and (iii) grant purchase rights authorizing the sale of common stock at
85 percent of fair value subject to stock purchase agreements. Options may
become exercisable immediately or in installments over time as specified in each
option agreement. Shares purchasable under immediately exercisable options and
under purchase rights may be subject to repurchase by the Company in the event
of termination of employment; the Company's repurchase right shall lapse in one
or more installments over the purchaser's period of service. The term of the
Plan is ten years. Options have a maximum term of ten years except that options
granted to ten-percent stockholders have a maximum term of five years. In May
1994, an additional 450,000 shares of common stock were reserved for issuance
pursuant to the Plan. In May, 1996, an additional 850,000 shares of common stock
were reserved for issuance pursuant to the Plan. At December 31, 1996, the total
number of common shares reserved for issuance under restricted stock options was
2,119,892 of which 248,256 remain available for grant.
<TABLE>
Activity under the Restricted Stock Plan is as follows:
<CAPTION>
Purchase
rights Weighted*
and average
Shares options exercise
available outstanding Price per share price
------------ ------------ ---------------------- --------------
<S> <C> <C> <C> <C>
Balances at December 31, 1993 202,106 1,012,907 $ 0.23 - $ 10.25
Additional authorization 450,000 --
Grants of options and purchase rights (296,500) 296,500 $ 10.75 - $ 13.50
Exercise of options and purchase rights -- (36,375) $ 0.23 - $ 9.00
Forfeitures 28,403 (28,403) $ 0.37 - $ 11.38
------------ ------------ ---------------------- -------------
Balances at December 31, 1994 384,009 1,244,629 $ 0.23 - $ 13.50
Grants of options and purchase rights (397,100) 397,100 $ 10.41 - $ 15.00 $ 11.96
Exercise of options and purchase rights -- (135,158) $ 0.23 - $ 11.38 $ 2.87
Forfeitures 39,581 (39,581) $ 5.63 - $ 14.63 $ 9.39
------------ ------------ ---------------------- -------------
Balances at December 31, 1995 26,490 1,466,990 $ 0.23 - $ 15.00 $ 7.18
Additional authorization 850,000 --
Grants of options and purchase rights (1,214,050) 1,214,050 $ 6.16 - $ 26.00 $ 10.42
Exercise of options and purchase rights -- (223,588) $ 0.23 - $ 13.50 $ 4.04
Forfeitures 585,816 (585,816) $ 5.63 - $ 26.00 $ 14.15
------------ ------------ ---------------------- -------------
Balances at December 31, 1996 248,256 1,871,636 $ 0.23 - $ 21.00 $ 7.47
============ ============
<FN>
*Weighted Average Price per Share not required for 1994
</FN>
</TABLE>
At December 31, 1996, options to purchase 753,186 shares of common
stock were exercisable at a weighted-average exercise price of $5.05 per share.
At December 31, 1995, options to purchase 919,665 shares of common stock were
exercisable at a weighted-average exercise price of $4.38 per share.
<TABLE>
Exercise prices for options outstanding as of December 31, 1996 ranged
from $0.23 to $21.00 per share. The weighted-average remaining contractual life
of those options is 8.3 years. Ranges of exercise price for 1996 are as follows:
Page 47
<PAGE>
<CAPTION>
Weighted-
average
Weighted- remaining Number Weighted-
Number average contractual of average
of options exercise life (in exercisable exercise
Exercise price range outstanding price years) options price
- --------------------------- ------------- ----------- --------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
$ 0.23 - $ 0.37 348,296 $ 0.36 4.0 348,296 $ 0.36
$ 5.63 - $ 9.00 997,728 $ 7.18 9.0 206,171 $ 6.99
$ 10.25 - $ 21.00 525,612 $ 12.74 8.5 198,719 $ 11.25
------------- ----------- -------------- ------------- -------------
1,871,636 $ 7.47 8.3 753,186 $ 5.05
============= =========== ============== ============= =============
</TABLE>
On September 26, 1996 the Board of Directors approved a resolution to
offer eligible employees (excluding executive officers) holding stock options
granted under the Plan, the opportunity to exchange their original stock options
for new options granted at the then current fair market value. Under this
program, each outstanding option granted from 1993 to 1996 with a price in
excess of $7.50 per share can be replaced with a new option grant for the same
number of shares with an exercise price of $7.50 per a share. As a result,
options on 409,050 shares were canceled and regranted at $7.50 per share. The
new options have vesting periods ranging from two to four years depending upon
the year the original grant was issued and are exercisable in installments over
time as specified in each option agreement.
The Company applies APB No. 25, "Accounting for Stock Issued to
Employees." Pro forma information regarding net income (loss) and earnings per
share is required by SFAS No. 123, "Accounting for Stock-Based Compensations,"
and has been determined as if the Company had accounted for its employee and
director stock options under the fair value method of that Statement. The Black-
Scholes option pricing model is used to calculate the fair value of these
options for 1995 and 1996 under SFAS 123 with the following assumptions:
dividend yield of zero % for both years, volatility factors of .62 for 1995 and
.66 for 1996, risk-free interest rate of 6.1% for 1995 and 6.2% for 1996,
assumed forfeiture rate of 6.4% for both years, and an expected life of 4.0
years for both years.
Had compensation costs for the Company's stock option plans been
determined based upon the fair value at the grant date for awards under these
plans consistent with the methodology prescribed under SFAS 123 the Company's
net income (loss) and earnings per share for 1995 and 1996 would have been as
follows:
- -----------------------------------------------------------------------------
For the Years ended December 31,
(In thousands) 1995 1996
- -----------------------------------------------------------------------------
Net loss - as reported $(26,617) $(29,643)
Net loss - pro forma $(26,761) $(30,706)
Net loss per share - as reported $(2.19) $(1.48)
Net loss per share - pro forma $(2.20) $(1.53)
The weighted average fair value of options granted at fair market value
during 1995 and 1996 is estimated at $6.98 and $5.73, respectively on the date
of grant. The weighted average of options granted at below fair market value
during 1995 and 1996 is estimated at $7.56 and $7.39, respectively on the date
of grant.
SFAS 123 is effective for options granted by the Company commencing
January 1, 1995. All options granted before January 1, 1995 have not been valued
and no pro forma compensation expense has been recognized. However, any option
granted before January 1, 1995 that was repriced in 1996 is treated as a new
grant within 1996 and valued accordingly. In addition, as compensation expense
is recognized over the vesting period of the option, the pro forma effect will
not be fully reflected until approximately 1998.
Page 48
<PAGE>
11. INCOME TAXES
As of December 31, 1996, the Company had federal and state net
operating loss carryforwards of approximately $101,400,000 and $10,600,000
respectively. The Company also had federal research and development tax credit
carryforwards of approximately $2,300,000. The federal net operating loss and
credit carryforwards will expire at various dates beginning in the year 2000
through 2011, if not utilized. The state of California net operating losses will
expire at various dates beginning in 1997 through 2000, if not utilized.
Utilization of the Company's net operating loss carryforwards and
credits may be subject to an annual limitation due to the "change in ownership"
provisions of the Internal Revenue Code of 1986 and similar state provisions.
The Company does not expect the limitation to impact its ability to utilize all
of its current net operating loss and credit carryforwards.
<TABLE>
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets for financial reporting and
the amount used for income tax purposes. Significant components of the Company's
deferred tax assets for federal and state income taxes for the years ended
December 31, 1994, 1995, and 1996 are as follows:
<CAPTION>
(In thousands)
=====================================================================================================================
At December 31, 1994 1995 1996
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Deferred tax assets
Net operating loss carryforwards $ 16,500 $ 25,500 $35,000
Research credits 1,900 2,700 3,500
Capitalized research expenses 1,200 3,800 5,300
Other 300 900 1,900
- ---------------------------------------------------------------------------------------------------------------------
Total deferred tax assets $ 19,900 $ 32,900 $45,700
Valuation allowance for deferred tax assets (19,900) (32,900) (45,700)
- ---------------------------------------------------------------------------------------------------------------------
Net deferred tax assets $ -- $ -- $ --
=====================================================================================================================
</TABLE>
The net valuation allowance increased by $7,500,000, $13,000,000 and
$12,800,000 in 1994, 1995, and 1996, respectively.
12. RELATED PARTIES
During the years ended December 31, 1996, 1995, and 1994, legal fees of
approximately $1,843,100, $1,494,700, and $420,200, respectively, were paid to
Brobeck, Phleger & Harrison, a law firm in which a current director of the
Company is a senior partner. As of December 31, 1996 and 1995, amounts owed to
Brobeck, Phleger, & Harrison were $387,300, and $115,800, respectively.
13. EMPLOYEE SAVINGS AND RETIREMENT PLAN
The Company adopted a 401 (k) savings and retirement plan in January
1990. The plan covers all eligible employees who are 21 years of age or older.
In May 1996, the Company approved a matching contribution under the Company's
401 (k) plan. Under this program, retroactive to January 1, 1996, the Company
makes a matching contribution on behalf of each eligible employee equal to 12.5%
of salary deferral contribution for 1996 and 50% beginning on January 1, 1997.
The Company contributes to the plan new shares of its common stock at fair
market value to satisfy its liability for matching contributions. Company
matching contributions were $71,000 in 1996.
Page 49
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Matrix Pharmaceutical, Inc.
We have audited the accompanying consolidated balance sheets of Matrix
Pharmaceutical, Inc. (a development stage company) as of December 31, 1995 and
1996, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended December
31, 1996 and for the period from inception (February 11, 1985) to December 31,
1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Matrix
Pharmaceutical, Inc. (a development stage company) at December 31, 1995 and
1996, and the results of its operations and cash flows for each of the three
years in the period ended December 31, 1996 and for the period from inception
(February 11, 1985) to December 31, 1996, in conformity with generally accepted
accounting principles.
Ernst & Young LLP
Palo Alto, California
January 28, 1997
Page 50
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in: (i) The Registration Statements
(Form S-8 No. 33-47297), (Form S-8 No. 33-65542), (Form S-8 No. 33-79908), (Form
S-8 No. 33-93476), and (Form S-8 No. 33-10155) pertaining to the 1988 Restricted
Stock Plan and to the 1991 Directors Stock Option Plan of Matrix Pharmaceutical,
Inc.; and (ii) the Registration Statement (Form S-3 No. 33-88514) of Matrix
Pharmaceutical, Inc. for the registration of 1,333,400 shares of its common
stock, of our report dated January 28, 1997, with respect to the consolidated
financial statements of Matrix Pharmaceutical, Inc. included in this Annual
Report (Form 10-K) for the year ended December 31, 1996.
/s/ Ernst & Young LLP
-------------------------
Ernst & Young LLP
Palo Alto, California
March 24, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000882194
<NAME> Matrix Pharmaceutical, Inc.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 20,138
<SECURITIES> 38,997
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 758
<CURRENT-ASSETS> 62,176
<PP&E> 21,527
<DEPRECIATION> (4,375)
<TOTAL-ASSETS> 134,950
<CURRENT-LIABILITIES> 7,715
<BONDS> 11,724
<COMMON> 222,256
0
0
<OTHER-SE> (106,745)
<TOTAL-LIABILITY-AND-EQUITY> 134,950
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 35,748
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,088
<INCOME-PRETAX> (29,643)
<INCOME-TAX> 0
<INCOME-CONTINUING> (29,643)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (29,643)
<EPS-PRIMARY> (1.48)
<EPS-DILUTED> (1.48)
</TABLE>
