UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED June 30, 1998
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File number: 0-19750
MATRIX PHARMACEUTICAL, INC.
(Exact name of registrant as specified in its charter)
Delaware 94-2957068
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
34700 Campus Drive, Fremont, California 94555
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (510) 742-9900
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceeding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes _X_ No ___
Number of shares of Common Stock, $.01 par value, outstanding as of July 31,
1998: 22,111,586.
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MATRIX PHARMACEUTICAL, INC.
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements Page No.
Condensed Consolidated Balance Sheets -
June 30, 1998 and December 31, 1997 3
Condensed Consolidated Statements of Operations -
Three and Six Months Ended June 30, 1998 and 1997 4
Condensed Consolidated Statements of Cash Flows -
Six Months Ended June 30, 1998 and 1997 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk 10
PART II. OTHER INFORMATION
Risk Factors 11
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 6. Exhibits and Reports on Form 8-K 20
Signatures 21
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<TABLE>
MATRIX PHARMACEUTICAL, INC.
(a development stage company)
Condensed Consolidated Balance Sheets
(In thousands)
<CAPTION>
June 30, December 31,
1998 1997
--------- ---------
Assets (Unaudited) (*)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 8,338 $ 19,719
Short-term investments 63,763 40,666
Other current assets 2,875 2,128
--------- ---------
Total current assets 74,976 62,513
Property and equipment, net 14,247 26,742
Non-current investments 9,980 19,983
Deposits and other assets, net 1,057 1,191
========= =========
$ 100,260 $ 110,429
========= =========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 1,033 $ 2,800
Accruals for special charges 766 2,063
Accrued clinical trial costs 1,699 1,788
Other accrued liabilities 2,428 2,681
Current portion of debt and capital lease obligations 2,288 2,283
--------- ---------
Total current liabilities 8,214 11,615
Debt and capital lease obligations, less current portion 15,589 20,248
Deferred other income 5,198 1,913
--------- ---------
Total long-term liabilities 20,787 22,161
Stockholders' equity
Capital stock 225,257 225,144
Notes receivable from shareholders (2,018) (2,313)
Other (426) (558)
Deficit accumulated during the development stage (151,554) (145,620)
--------- ---------
Total stockholders' equity 71,259 76,653
--------- ---------
$ 100,260 $ 110,429
========= =========
<FN>
(*) Derived from audited financial statements.
See accompanying notes
</FN>
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</TABLE>
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<TABLE>
MATRIX PHARMACEUTICAL, INC.
(a development stage company)
Condensed Consolidated Statements of Operations
(In thousands except per share amounts)
(Unaudited)
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues $ -- $ -- $ -- $ --
Costs and expenses:
Research and development 5,596 7,798 11,101 14,343
General and administrative 1,627 4,791 3,106 8,413
-------- -------- -------- --------
Total costs and expenses 7,223 12,589 14,207 22,756
Loss from operations (7,223) (12,589) (14,207) (22,756)
Gain on sale and leaseback transaction -- -- 1,882 --
Interest and other income, net 5,312 1,561 6,391 3,227
-------- -------- -------- --------
5,312 1,561 8,273 3,227
-------- -------- -------- --------
Net loss $ (1,911) $(11,028) $ (5,934) $(19,529)
======== ======== ======== ========
Basic and diluted net loss per common share $ (0.09) $ (0.52) $ (0.27) $ (0.92)
======== ======== ======== ========
Weighted average shares used in computing
basic and diluted net loss per common share 22,003 21,276 21,962 21,267
======== ======== ======== ========
<FN>
See accompanying notes
</FN>
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</TABLE>
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<TABLE>
MATRIX PHARMACEUTICAL, INC.
(a development stage company)
Condensed Consolidated Statements of Cash Flows
Increase (Decrease) in Cash and Cash Equivalents
(In thousands)
<CAPTION>
For the Six Months
Ended June 30
1998 1997
-------- --------
(Unaudited) (Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (5,934) (19,529)
Adjustments to reconcile net loss to
net cash used by operating activities:
Depreciation, amortization, and other 985 1,189
Gain on sale and leaseback transaction (5,769)
Changes in assets and liabilities:
Inventory -- (930)
Deferred other income 3,285 2,753
Other changes in assets and liabilities (4,064) (481)
-------- --------
Net cash used by operating activities (11,497) (16,998)
Cash flows from investing activities:
Capital expenditures (415) (1,790)
Proceeds from sale of fixed assets 17,744 --
Investment in securities available-for-sale (23,763) (16,000)
Maturities of investments 10,669 33,000
-------- --------
Cash flows provided by investing activities 4,235 15,210
Cash flows from financing activities:
Payments on debt and capital lease obligations (10,659) (178)
Net cash proceeds from issuance of:
Debt and capital lease financing 6,000 24
Capital stock 113 211
Notes receivable from shareholders 427 --
-------- --------
Cash flows provided (used) by financing activities (4,119) 57
Net decrease in cash and cash equivalents (11,381) (1,731)
Cash and cash equivalents at the beginning of period 19,719 20,138
-------- --------
Cash and cash equivalents at the end of period $ 8,338 18,407
======== ========
<FN>
See accompanying notes
</FN>
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</TABLE>
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MATRIX PHARMACEUTICAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998
1. Basis of presentation
The condensed consolidated balance sheet as of June 30, 1998,
the condensed consolidated statements of operations for the three
months and six months ended June 30, 1998 and 1997, and the condensed
consolidated statements of cash flows for the six months ended June 30,
1998 and 1997, have been prepared by the Company, without audit. In the
opinion of management, all adjustments (which include only normal
recurring adjustments) necessary to present fairly the financial
position, results of operations, and cash flows at June 30, 1998 and
for all periods presented have been made. The condensed consolidated
balance sheet at December 31, 1997 has been derived from the audited
financial statements at that date.
Certain information and footnote disclosures normally included
in the financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant
to the Securities and Exchange Commission's rules and regulations.
The condensed financial statements should be read in
conjunction with the Company's audited financial statements as included
in the Company's Annual Report on Form 10-K for the year ended December
31, 1997 as filed with the Securities and Exchange Commission. The
results of operations for the three months and six months ended June
30, 1998 are not necessarily indicative of the results to be expected
for any subsequent quarter or for the entire fiscal year ending
December 31, 1998.
2. Principles of consolidation
The consolidated financial statements include the accounts of
the Company and its wholly owned subsidiary after elimination of all
material intercompany balances and transactions.
3. Basic and diluted net loss per common share
Basic and diluted net loss per common share is computed in
conformance with Statement of Financial Accounting Standards No. 128,
"Earnings Per Share" ("SFAS 128"), which the Company adopted during
1997. Accordingly, the weighted average number of shares of common
stock outstanding are used while common stock equivalents, consisting
of stock options and stock rights, are excluded from the computation as
their impact is anti-dilutive.
4. Cash and cash equivalents, short-term investments, and non-current
investments
The Company invests its excess cash in government and
corporate debt 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.
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The Company determines the appropriate classification of debt
securities at the time of purchase and reevaluates such designation as
of each balance sheet date. 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. Realized gains and losses and
declines in value judged to be other-than-temporary are included in
interest and other income. The cost of securities sold is based on the
specific identification method.
5. Gain on sale and leaseback transaction
In March 1998, the Company completed an agreement with a real
estate investment trust for the sale and leaseback of its San Diego
office/laboratory and manufacturing facility and an adjacent parcel of
land. The transaction was structured as an $18,400,000 purchase and a
$6,000,000 convertible loan secured by specific manufacturing related
building improvements. Under the terms of the agreement, the Company
will lease the facility for 13 years with the option to renew up to an
additional 25 years. Matrix will pay an average $2,600,000 in annual
lease expense which will be partially offset by rental income from a
portion of the facility currently leased to another bio-pharmaceutical
company. Net cash from the lease and loan agreement, after the payment
of the existing mortgage and escrow and other related fees, totals
approximately $14,000,000 and will be used to fund operating expenses
and capital purchases. The total gain on the transaction is $5,769,000
of which $1,882,000 has been recognized as an immediate gain while the
remaining balance is being deferred and will be recorded to income over
the 13-year lease term.
6. Litigation settlement
In April 1998, the Company received $4,000,000 from an
insurance company for the reimbursement of legal expenses incurred
during prior years. The payment settles litigation between the Company
and the insurer over coverage under the Company's general liability
policy. The payment was recorded to other income in the second quarter
of 1998.
7. New accounting pronouncements
As of January 1, 1998, the Company adopted Financial
Accounting Standards Board's Statement of Financial Accounting
Standards Statement No. 130, Reporting Comprehensive Income (Statement
130). Statement 130 establishes new rules for the reporting and display
of comprehensive income and its components; however, the adoption of
this Statement had no impact on the Company's net income or
shareholders' equity. Statement 130 requires unrealized gains or losses
on the Company's available-for-sale securities and foreign currency
translation adjustments, which prior to adoption were reported
separately in shareholders' equity to be included in other
comprehensive income. Prior year financial statements have been
reclassified to conform to requirements of Statement 130.
During the second quarter of 1998 and 1997, total
comprehensive loss amounted to $1,936,000 and $10,830,000,
respectively. For the first six months of 1998 and 1997, total
comprehensive loss amounted to $5,959,000 and $19,594,000,
respectively.
Effective January 1, 1998, the Company adopted the Financial
Accounting Standards Board's Statement of Financial Accounting
Standards No. 131, Disclosures about Segments of an Enterprise and
Related Information ( Statement 131). Statement 131 superseded FASB
Statement No. 14, Financial Reporting for Segments of a Business
Enterprise. Statement 131 establishes standards for the way that public
business enterprises report information about operating segments in
annual financial statements and requires that those enterprises report
selected information about operating segments in interim financial
reports. Statement 131 also establishes standards for related
disclosures about products and services, geographic areas, and major
customers. The adoption of Statement 131 did not affect the results of
operations, financial position, or the disclosure of segment
information.
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
This Form 10-Q may contain, in addition to historical information,
forward-looking statements, including without limitation, statements regarding
the timing and outcome of regulatory reviews and clinical trials. Any such
forward-looking statements are based on management's current expectations and
are subject to a number of risks and uncertainties that could cause actual
results to differ materially from expected results. For additional information,
including risk factors, such as no assurance of regulatory approvals;
uncertainties associated with clinical trials; history of losses; future
profitability uncertain; additional financing requirements and uncertain access
to capital markets; limited manufacturing and sales and marketing experience;
dependence on sources of supply; uncertainty regarding patents and proprietary
rights; rapid technological change and substantial competition; uncertainty of
pharmaceutical pricing; no assurance of adequate reimbursement; dependence upon
qualified and key personnel; product liability exposure; limited insurance
coverage; hazardous materials and product risks; volatility of stock price; no
dividends; anti-takeover provisions; year 2000 compliance, please see the "Risk
Factors" section included in the Company's 1997 Form 10-K and in this Form 10-Q
as well as other factors discussed below and elsewhere in this report.
Results of Operations
Three Months and Six Months Ended June 30, 1998 and 1997
Since the Company's inception in 1985, the primary focus of its
operations has been research and development, and, to date, it has not received
any revenues from the commercial sale of products. The Company has a history of
operating losses and expects to incur substantial additional losses over the
next several years as it continues to develop its products. For the period from
its inception to June 30, 1998, the Company has incurred a cumulative net loss
of $151,554,000.
The Company had no revenue in the second quarters of 1998 and 1997 or
in the first six months of 1998 and 1997.
Research and development expenses for the second quarter of 1998
decreased by 28% to $5,596,000 compared to $7,798,000 for the second quarter of
1997. For the first six months of 1998, research and development expenses
decreased by 23% to $11,101,000 compared to $14,343,000 for the same period in
1997. The decrease was primarily due to lower personnel costs, the termination
of clinical trials for AccuSite(TM) Injectable Gel which were in progress during
the first six months of 1997, lower consulting expenses and lower purchases of
operation supplies and materials. The decrease was partially offset by higher
depreciation expense from capital leases, and higher building rent expense which
began in the second quarter of 1998 in connection with the sale and leaseback
transaction for the San Diego facility.
General and administrative expenses for the second quarter of 1998
decreased 66% to $1,627,000 compared to $4,791,000 for the second quarter of
1997. For the first six months of 1998, general and administrative expenses
decreased by 63% to $3,106,000 compared to $8,413,000 for the same period in
1997. The decreases were primarily due to lower litigation-related legal
expenses, the absence of AccuSite-related product marketing expenses, lower
recruiting fees and lower personnel costs.
Page 8
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In March 1998, the Company completed an agreement with a real estate
investment trust for the sale and leaseback of its San Diego office/laboratory
and manufacturing facility and an adjacent parcel of land. The transaction was
structured as an $18,400,000 purchase and a $6,000,000 convertible loan secured
by specific manufacturing related building improvements. Under the terms of the
agreement, the Company will lease the facility for 13 years with the option to
renew up to an additional 25 years. The Company will pay $2,600,000 in annual
lease and interest expense, which will be partially offset by rental income from
a portion of the facility currently leased to another pharmaceutical company.
Net cash from the sale and loan agreements, after the payment of the existing
mortgage and escrow and other related fees, totals approximately $14,000,000 and
will be used to fund operating expenses and capital purchases. The net gain on
the transaction is $5,769,000 of which $1,882,000 has been recognized in the
first quarter. The balance will be deferred and recorded as income over the
13-year lease term.
Net interest and other income increased by 240% to $5,312,000 for the
second quarter of 1998 compared to $1,561,000 for the second quarter of 1997.
For the first six months of 1998, net interest and other income increased by 98%
to $6,391,000 compared to $3,227,000 for the same period in 1997. This increase
was primarily due to $4,000,000 received from a settlement with an insurance
company which was recorded as other income in the second quarter of 1998. This
increase was offset by the decline in interest income due to lower average
balances in cash, cash equivalents and marketable securities. In addition,
interest expense increased for the second quarter and the first six months of
1998 as compared to the similar periods in 1997 as the result of the equipment
financing obligations which began in the third quarter of 1997.
Liquidity and Capital Resources
At June 30, 1998, the Company had approximately $82,100,000 in cash,
cash equivalents and marketable securities, compared to $80,400,000 at December
31, 1997. The net increase of $1,700,000 is primarily due to the proceeds from
the sale and leaseback transaction, and from the insurance settlement as well as
interest income and rental income totaling $20,223,000. The cash receipts were
offset by cash disbursements of approximately $18,523,000, used primarily to
fund operating activities and capital purchases.
In April 1998, the Company received $4,000,000 from an insurance
company for the reimbursement of legal expenses incurred during prior years. The
payment settles litigation between the Company and the insurer over coverage
under the Company's general liability policy. The payment was recorded as other
income in the second quarter of 1998.
As discussed in "Results of Operations," in March 1998, the Company
completed an agreement with a real estate investment trust for the sale and
leaseback of its San Diego facility and an adjacent parcel of land and entered
into a loan agreement. Net cash from the sale and loan agreement, after the
payment of the existing mortgage and escrow and other related fees, totals
approximately $14,000,000 and will be used to fund operating expenses and
capital purchases.
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. As of June 30, 1998, the remaining balance of this
obligation was $1,500,000.
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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 as well as additional
capital that may be generated through equity and debt financings and
collaborative agreements.
The Company's working capital and capital requirements will depend on
numerous factors, including the progress of the Company's research and
development programs, preclinical testing and clinical trial activities, the
timing and cost of obtaining regulatory approvals, the levels of resources that
the Company devotes to the development of manufacturing and marketing
capabilities, technological advances and the status of competitors.
The Company expects to incur substantial additional costs relating to
the continued clinical development of its oncology products, continued research
and development programs, the development of manufacturing capabilities, and
general working capital requirements. The Company anticipates that its existing
and committed capital resources will enable it to maintain its current and
planned operations at least through 2000. The Company may require additional
outside financing to complete the process of bringing current products to
market, and there can be no assurance that such financing will be available on
favorable terms, if at all.
Year 2000 Compliance
The Company is aware of the issues associated with the programming code
in existing computer systems as the millennium (year 2000) approaches. The "year
2000" problem is pervasive and complex as virtually every computer operation
will be affected in some way by the rollover of the two digit year value to 00.
The issue is whether computer systems will properly recognize date sensitive
information when the year changes to 2000. Systems that do not properly
recognize such information could generate erroneous data or cause a system to
fail.
During 1997, the Company installed a new accounting system that was
confirmed by the vendor to address the year 2000 related issues. However, the
Company has not analyzed the external factors, such as the impact on those
vendors adversely affected by the year 2000 issue, and has not assessed the
related potential effect on the Company's business, financial condition or the
Company results of operations. There can be no assurance that computer systems
and applications of other companies on which the Company's operations rely will
be converted in a timely fashion, or that such failure to correct by another
company would not have a material adverse effect on the Company.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
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PART II. OTHER INFORMATION
RISK FACTORS
No Assurance of Regulatory Approvals
The preclinical and clinical testing, manufacturing, and marketing of
the Company's products are subject to extensive regulation by numerous
governmental authorities in the United States and other countries, including,
but not limited to, the Food and Drug Administration ("FDA"). Among other
requirements, FDA approval of the Company's product candidate, including a
review of its manufacturing processes and production facilities, is required
before such product candidate 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 although Accusite has been approved by
foreign authorities, Matrix 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, the Company must demonstrate to the
satisfaction of the FDA that the Company's product candidate is safe and
effective for its intended uses and is manufactured in conformity with the FDA's
Good Manufacturing Practices ("GMP") regulations. 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 a New Drug
Application ("NDA") requesting FDA approval. When a product contains more than
one component that contributes to the product's effect, as do some 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 products, 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 GMP regulations prior to approval of the product.
During the first quarter of 1998, the Company closed its manufacturing
facilities in San Jose and Milpitas, California and consolidated manufacturing
personnel at the Company's San Diego production facility. There can be no
assurance that the Company's San Diego manufacturing facility will be accepted
by the FDA in the future, and failure to receive or maintain such acceptance
would have a material adverse effect on the Company's business.
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,
changes in applicable law or FDA policy during the period of product development
and FDA regulatory review may result in the delay or rejection of an NDA filed
by the Company. Any failure to obtain, or delay in obtaining, FDA approvals
would adversely affect the ability of the Company to market
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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.
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 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, the subsequent 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.
Matrix filed an NDA for AccuSite Injectable Gel for treatment of
condyloma (genital warts) with the FDA in 1995. The FDA has issued two action
(non-approvable) letters with respect to the Company's application. An action
letter received in September 1997 reiterated concerns expressed by the FDA in
December 1996 about the safety profile of AccuSite and, in particular, about the
persistence in certain AccuSite-treated patients of a bump-like thickening or
swelling (induration) at the site of injection, which the agency believes could
indicate an inflammatory process. The Company believes the clinical data for
AccuSite, including supplementary data submitted to the agency in March 1997 as
an amendment to the NDA, are supportive of the safety and efficacy of the
product in this indication. The Company continues to pursue approval of the
Accusite NDA. However, the Company does not intend to invest substantial Company
resources in this pursuit and believes it is unlikely that AccuSite will be
cleared for marketing in the United States. Accordingly, the Company has
indefinitely suspended further development and commercialization programs
related to AccuSite.
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 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 must be obtained from the relevant regulatory authorities.
AccuSite has been approved in Belgium, Denmark, Germany, Ireland,
Luxembourg, The Netherlands and the United Kingdom and recommended for approval
in Finland and Italy. A regulatory decision is expected in 1998 in France. The
Company is evaluating whether, in the absence of commercialization in the United
States, it may be cost effective to market AccuSite in Europe through local
partners. Commercialization of AccuSite in Europe would, in certain markets,
also require the negotiation of satisfactory pricing with local governments.
There can be no assurance that the Company will develop the distribution
agreements and regulatory approvals, including pricing approvals, that would be
necessary to commercialize AccuSite in Europe.
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 clinical testing
can result in delay, suspension, or cancellation of such testing, and/or refusal
by the FDA to accept the results of such testing. In addition, the FDA or the
Company may modify or suspend clinical trials at any time if it concludes that
the subjects or patients participating in such trials
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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 provide data 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 in its ongoing Phase III trials. Further delays in
completing enrollment in these trials or delays in other clinical studies may
result in increased costs and delays, which could have a material adverse effect
on the Company. Generally, similar considerations apply to clinical testing that
is subject to regulatory oversight by foreign authorities and/or that is
intended to be used in connection with foreign marketing applications.
History of Losses; Future Profitability Uncertain
Matrix was incorporated in 1985 and has experienced significant losses
since that date. As of June 30, 1998, the Company's accumulated deficit was
approximately $151,554,000. The Company has not generated revenues from its
products or product candidates and expects to incur significant additional
losses over the next several years. In order to achieve a profitable level of
operations, the Company must successfully develop products, obtain regulatory
approvals for its products, enter into agreements for product commercialization
outside the United States, and develop an effective sales and marketing
organization in the United States. 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 and development of its product candidates. 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 2000. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Limited Manufacturing and Sales and Marketing Experience
The Company intends to market and sell certain of its product
candidates, if successfully developed and approved, through its own dedicated
sales force in the United States and through pharmaceutical licensees in Europe.
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 resources will be
available to the Company to fund marketing and sales 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.
Page 13
<PAGE>
The Company's ability to conduct clinical trials on a timely basis, to
obtain regulatory approvals and to commercialize its products will depend in
part upon its ability to manufacture its products, either directly or through
third parties, at a competitive cost and in accordance with applicable FDA and
other regulatory requirements, including GMP regulations. The Company closed
manufacturing facilities in San Jose and Milpitas, California in March 1998 and
transferred manufacturing personnel to a research and manufacturing facility in
San Diego, California that was acquired in 1995 to meet the Company's
anticipated long-term commercial scale production requirements. The Company
expects that the San Diego facility and contract manufacturers should provide
sufficient production capacity to meet clinical requirements. There can be no
assurance that the Company will be able to validate this facility in a timely
manner or that this facility will be adequate for Matrix's long-term needs
without delaying the Company's ability to meet product demand or to manufacture
in a cost-effective manner. 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 raw materials and components utilized
in its products. Any interruption of supply could have a material adverse effect
on the Company's ability to manufacture its products, complete clinical trials,
or 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 U.S. patent for cisplatin, a chemotherapeutic drug
that is the active compound in IntraDose, if the newly-issued patent were upheld
and if IntraDose were found to infringe that patent, and if the Company were
unable to obtain a license under that patent. See "--Uncertainty Regarding
Patents and Proprietary Rights."
Uncertainty Regarding Patents and Proprietary Rights
The Company's success depends in part on its ability to obtain patent
protection for its products and to preserve its trade secrets and operate
without infringing on the proprietary rights of third parties. No assurance can
be given that the Company's pending patent applications will be approved or that
any patents will provide competitive advantages for the Company's products or
will not be successfully challenged or circumvented by its competitors. The
Company has not conducted an exhaustive patent search and no assurance can be
given that patents do not exist or could not be filed which would have a
material adverse effect on the Company's ability to market its products or
maintain its competitive position with respect to its products. The Company's
patents may not prevent others from developing competitive products using
related technology. Other companies that obtain 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
Page 14
<PAGE>
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 the prosecution of the Japanese version of the first
patent on the Company's base technology, the Company became aware of a
previously unknown prior art reference. This was brought to the attention of the
U.S. PTO in a reexamination of the U.S. patent. The Japanese patent has since
been issued, and the United States patent has been reissued with claims slightly
modified in light of the prior art. The Company believes, although no assurance
can be given, that the modified claims 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 with
claims 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 that the Company's IntraDose
product, which contains cisplatin, does not infringe this patent and also that
new patent may have been improperly awarded and should be found invalid and/or
unenforceable. 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 would be able to obtain a license to the patent on commercially
reasonable terms, if at all, in order to commercialize IntraDose in the United
States.
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.
Rapid Technological Change and Substantial Competition
The pharmaceutical industry is subject to rapid and substantial
technological change. Technological competition in the industry from
pharmaceutical and biotechnology companies, universities, governmental entities
and others diversifying into the field is intense and is expected to increase.
Most of these entities have significantly greater research and development
capabilities, as well as substantially more marketing, financial and managerial
resources than the Company, and represent significant competition for the
Company. Acquisitions of, or investments in, competing biotechnology companies
by large pharmaceutical companies could increase such competitors' financial,
marketing and other resources. There can be no assurance that developments by
others will not render the Company's products or technologies noncompetitive or
that the Company will be able to keep pace with technological developments.
Competitors have developed or are in the process of developing technologies that
are, or in the future may be, the basis for competitive products. Some of these
products may have an entirely different approach or means of accomplishing
similar therapeutic effects than products being developed by the Company. These
competing products may be more effective and less costly than the products
developed by the Company. In addition, conventional drug therapy, surgery and
other more familiar treatments and modalities will compete with the Company's
products.
Page 15
<PAGE>
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 receipt 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, profitability, 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.
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 payers are increasingly
challenging the prices charged for medical products and services. Also, the
trend towards managed health care in the United States and the concurrent growth
of organizations such as HMOs, which could control or significantly influence
the purchase of health care services and products, as well as legislative
proposals to reform health care or reduce government insurance programs, may
limit prices the Company can charge for its products. The cost containment
measures that health care payers and providers are instituting and the effect of
any health care reform could adversely affect the Company's ability to sell its
products and may have a material adverse effect on the Company.
Dependence Upon Qualified and Key Personnel
Because of the specialized nature of the Company's business, the
Company's ability to maintain its competitive position depends on its ability to
attract and retain qualified management and scientific personnel. Competition
for such personnel is intense. There can be no assurance that the Company will
be able to continue to attract or retain such persons.
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
take appropriate precautions, there can be no assurance that it will avoid
significant product liability exposure. The Company maintains product liability
insurance for clinical studies. However, there can be no assurance that such
coverage will be adequate or that adequate insurance coverage for future
clinical or commercial activities will be available at all, or at an acceptable
cost, or that a product liability claim would not materially adversely affect
the business or financial condition of the Company.
Page 16
<PAGE>
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 chemotherapeutic agents employed by the Company in its
aqueous-based protein systems, Anhydrous Delivery Vehicles ("ADV"), and regional
delivery technology 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.
In addition, bovine sourced materials are of some concern because of
transmission of Bovine Spongiform Encelphalopathy ("BSE"). The Company has taken
all precautions to minimize the risk of contamination of its collagen with BSE,
including the use of United States-sourced cow hides. The Committee For
Proprietary Medicinal Products ("CPMP"), a steering committee of the European
Medicines Evaluation Agency ("EMEA"), has classified materials made from bovine
skin products as showing no detectable infectivity, indicating minimal risk of
transmission of BSE.
Volatility of Stock Price; No Dividends
The market prices for securities of biopharmaceutical and biotechnology
companies (including the Company) have historically been highly volatile, and,
in addition, the market has from time to time experienced significant price and
volume fluctuations that are unrelated to the operating performance of
particular companies. Future announcements concerning the Company, its
competitors or other biopharmaceutical products, governmental regulation,
developments in patent or other proprietary rights, litigation or public concern
as to the safety of products developed by the Company or others and general
market conditions may have a significant effect on the market price of the
Common Stock. The Company has not paid any cash dividends on its Common Stock
and does not anticipate paying any dividends in the foreseeable future.
Page 17
<PAGE>
Anti-Takeover Provisions
Certain provisions of the Company's Certificate of Incorporation and
Bylaws may have the effect of making it more difficult for a third party to
acquire, or discouraging a third party from attempting to acquire, control of
the Company. Such provisions could limit the price that certain investors might
be willing to pay in the future for shares of the Company's Common Stock. The
Company's Board of Directors has the authority to issue shares of Preferred
Stock and to determine the price, rights, preferences, privileges and
restrictions of those shares without any further vote or action by the
stockholders.
The rights of the holders of Common Stock will be subject to, and may
be adversely affected by, the rights of the holders of any Preferred Stock that
may be issued in the future. The issuance of Preferred Stock, while providing
desirable flexibility in connection with possible acquisitions and other
corporate purposes, could have the effect of making it more difficult for a
third party to acquire a majority of the outstanding voting stock of the
Company. The Company has no present plans to issue shares of Preferred Stock.
Certain provisions of Delaware law applicable to the Company could also delay or
make more difficult a merger, tender offer or proxy contest involving the
Company, including Section 203 of the Delaware General Corporation Law, which
prohibits a Delaware corporation from engaging in any business combination with
any interested stockholder for a period of three years unless certain conditions
are met.
Year 2000 Compliance
The Company is aware of the issues associated with the programming code
in existing computer systems as the millennium (year 2000) approaches. The "year
2000" problem is pervasive and complex as virtually every computer operation
will be affected in some way by the rollover of the two digit year value to 00.
The issue is whether computer systems will properly recognize date sensitive
information when the year changes to 2000. Systems that do not properly
recognize such information could generate erroneous data or cause a system to
fail.
During 1997, the Company installed a new accounting system that was
confirmed by the vendor to address the year 2000 related issues. However, the
Company has not analyzed the external factors, such as the impact on those
vendors adversely affected by the year 2000 issue, and has not assessed the
related potential effect on the Company's business, financial condition or
results of operations. There can be no assurance that computer systems and
applications of other companies on which the Company's operations rely will be
converted in a timely fashion, or that such failure to correct by another
company would not have a material adverse effect on the Company.
Page 18
<PAGE>
MATRIX PHARMACEUTICAL, INC.
PART II OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The Company's 1998 Annual Meeting of Stockholders was held on May 18, 1998. The
following directors, all of whom served in such capacity prior to the meeting,
were re-elected by the stockholders:
For Withheld
---------- --------
Michael D. Casey 20,301,934 53,950
J. Stephan Dolezalek 20,302,584 53,300
James R. Glynn 20,302,534 53,350
Marvin E. Jaffe, M.D. 20,291,634 64,250
Bradley G. Lorimier 20,300,834 55,050
Edward E. Luck 20,302,634 53,250
John E. Lyons 20,298,934 56,950
Julius L. Pericola 20,302,284 53,600
The following additional matter was submitted to the stockholders for vote and
approved at the meeting:
o Ratification of the appointment of Ernst and Young LLP as
independent auditors of the Company for the fiscal year ending
December 31, 1998. Of the total shares voting on the foregoing
resolution, 20,324,234 voted in favor, 17,565 voted against, and
14,085 abstained.
Item 5. Other Information
None
Page 19
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
There were no Current Reports on Form 8-K
filed during the quarter ended June 30, 1998.
Page 20
<PAGE>
MATRIX PHARMACEUTICAL, INC.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MATRIX PHARMACEUTICAL, INC.
Date: August 12, 1998 By: /s/ Michael D. Casey
----------------- ---------------------------------
Michael D. Casey
President and
Chief Executive Officer
Signing on behalf of the registrant and as
principal executive and financial officer
Page 21
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