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, 1997
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 Identification No.)
incorporation or organization)
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, 1998: $66,223,000.
Number of shares of Common Stock, $.01 par value, outstanding as of February 28,
1998: 21,932,287.
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 1998 Annual
Meeting of Stockholders scheduled to be held on May 18, 1998.
<PAGE>
Item 1. Business
This Form 10-K may contain, 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 any such
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.
Overview
Matrix Pharmaceutical, Inc. ("Matrix" or "the Company") is a
development-stage company that is a leader in the formulation and development of
novel pharmaceutical product candidates that are designed to improve the
delivery of cancer drugs to more effectively treat solid tumors. The Company has
applied its expertise in tumor biology and physiology, advanced imaging
techniques, pharmaceutical chemistry, polymer chemistry, analytical chemistry
and biochemistry, and chemical engineering to develop platform technologies with
distinct drug delivery characteristics and capabilities: aqueous-based protein
gel systems for water-soluble chemotherapeutic agents; Anhydrous Delivery
Vehicles ("ADV") (predominantly non-aqueous semi-solid systems) for
chemotherapeutic agents that are poorly water soluble; and methods in an earlier
stage of 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.
Several Matrix products have been evaluated or are currently being
evaluated in human clinical trials. The Company's lead cancer product candidate,
IntraDose(TM) (cisplatin/epinephrine) Injectable Gel, incorporates cisplatin, an
established chemotherapeutic agent, in a proprietary viscous gel formulation
that facilitates the delivery and retention of cisplatin within solid tumors.
The Company's second oncology product under development, MPI 5020
Radiopotentiator, is designed to potentiate, that is, enhance, the efficacy of
radiation treatments when used concurrently with radiotherapy. MPI 5020
incorporates fluorouracil, another established chemotherapeutic agent, in a
proprietary gel formulation that delivers and retains fluorouracil within solid
tumors. The Company's core technology for delivery of water-soluble chemotherapy
agents is also used in AccuSite(TM) (fluorouracil/epinephrine) Injectable Gel,
which incorporates fluorouracil and has been tested in serious skin diseases
such as condyloma (genital warts), basal cell carcinoma, squamous cell
carcinoma, and psoriasis. IntraDose and AccuSite have demonstrated the ability
to provide sustained high drug concentrations within solid tumors and skin
lesions and to reduce the systemic toxicities associated with conventional
chemotherapy.
Matrix Technology
Aqueous-based protein systems. IntraDose, MPI 5020, and AccuSite are
based on the Company's patented injectable gel technology, in which a
chemotherapeutic drug is combined with a protein matrix and, in certain cases, a
vasoconstrictor, to create an injectable gel. This gel enables targeted delivery
of water-soluble drugs by direct injection into solid tumors and skin lesions.
The Matrix delivery system localizes the release of drug, maintaining high drug
concentrations at the tumor or lesion site and increasing the duration of
exposure of the targeted tissue to the therapeutic agent. In IntraDose and
AccuSite the activity of the drug can be further enhanced by the addition of
epinephrine, a vasoconstrictor which reduces local blood flow and acts as a
"chemical tourniquet" to hold the drug in place.
The Company believes that its technology will allow the development of
new products from established drugs or agents that may be available from other
companies or institutions, thus reducing the
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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 is 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.
Fluorouracil and cisplatin are widely used as systemic 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. Abnormal cells are more susceptible than normal cells to the effects
of such drugs. Unfortunately, normal cells (e.g., bone marrow and
gastrointestinal mucosa cells) 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 a tolerated dose that is 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 its aqueous-based
protein systems technology include:
o Sustained high concentrations of drug at the target site. By
maintaining high, local drug concentrations in the target
tissue, the systems increase the exposure of diseased tissue
to the drug.
o Lowered systemic toxicity. Because the systems concentrate the
drug at the disease site and limit the drug exposure to normal
tissues, overall systemic toxicity is reduced compared to
systemic chemotherapy.
o Site specific application. Products are injected directly into
the tumor or skin lesion. Any accessible lesion or solid tumor
which can be seen, palpated, or visualized with established
imaging techniques or accessed directly or by means of
minimally invasive techniques can potentially be treated.
o Applicability to a broad range of therapeutic compounds. Many
conventional drugs and novel biopharmaceuticals can be
delivered using the aqueous-based protein systems. 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.
Anhydrous Delivery Vehicles ("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 ("IV") injection or infusion.
The solubilizing agents employed in several of these drug products to prepare
suitable IV solutions may cause significant toxicity. The development of
potential new anti-cancer agents such as camptothecin has also been limited by
poor aqueous solubility. The Company's 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
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Company believes that this technology may also lend itself well to water-soluble
drugs that have limited stability when dissolved in aqueous media.
A number of water insoluble cytotoxic drugs, such as paclitaxel,
camptothecin, and etoposide, use novel mechanisms to disrupt the ability of
cancer cells. 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.
Products in Clinical Development
<TABLE>
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>
Development Commercial
Product/Indication Delivery Platform Status(1) Rights
------------------ ----------------- --------- ------
<S> <C> <C> <C>
IntraDose
Head & Neck Cancer Aqueous-based protein system Phase III Matrix
Other Solid Tumors Aqueous-based protein system Phase III Matrix
Liver Cancer - Primary Aqueous-based protein system Phase II Matrix
Liver Cancer - Metastatic Aqueous-based protein system Phase II Matrix
Colorectal Cancer
MPI 5020 Radiopotentiator
Recurrent breast cancer Aqueous-based protein system Phase I/II Matrix
(chest wall metastases)
MPI 5019 - Camptothecin
Topoisomerase Inhibition Anhydrous Delivery Vehicle Preclinical Matrix
MPI 5018 - Paclitaxel
Tubulin Inhibition Anhydrous Delivery Vehicle Preclinical Matrix
<FN>
(1) The Company's product candidates are generally developed in the
following stages: pre-clinical studies (preparing to file an
Investigational New Drug ("IND") Application in the United States or a
Clinical Trial Exemption ("CTX") in foreign countries); clinical trials
(which may include Phases I, II, III and IV and variants or
combinations of the foregoing); regulatory submission (New Drug
Application ("NDA") or Market Authorization Application ("MAA")); and
cleared for marketing. See "-- Government Regulation."
</FN>
</TABLE>
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IntraDose Injectable Gel
Matrix is developing IntraDose Injectable Gel for a 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 metastatic disease at the 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 and
control of other tumor related symptoms become important, as do the potential to
retard disease progression and possibly prolong survival.
The Company's IntraDose product candidate 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, computerized tomography ("CT" scan)
and magnetic resonance imaging ("MRI" scan) 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, the Company believes that treatments with IntraDose may be given in
any out-patient setting that is equipped to administer cytotoxic drugs, offering
the potential for cost-effective treatment without in-patient hospitalization
for surgery or prolonged chemotherapy.
Head and Neck Cancer/Other Solid Tumors
The Company is currently conducting placebo-controlled Phase III
clinical trials for head and neck cancer as well as pivotal open-label trials in
solid tumors including recurrent chest wall metastases (from breast cancer,
ovarian cancer and lung cancer), esophageal cancer, melanoma, and various other
carcinomas. These tumors may be either primary, recurrent, 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 utilize data from its trials
in head and neck cancer and other solid tumors to support approval of the
broadest possible label for IntraDose in the United States and Western Europe.
Head and Neck Cancer Market. The Company estimates that approximately
41,000 new cases of head and neck cancer are diagnosed annually in the United
States and 73,000 new cases are diagnosed annually in Western Europe, based on
data from the American Cancer Society and The International Agency for Research
on Cancer, a unit of the World Health Organization. The incidence is highest in
countries with high rates of cigarette smoking and consumption of alcoholic
beverages. Cancers of the head and neck are predominately squamous cell
carcinomas. Of these, approximately 70% are diagnosed as later stage disease
which has spread beyond the site of origin, 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 surgical resection difficult or impossible due to proximity to
vital body structures and/or cosmetic or functional considerations, while
radiotherapy often damages surrounding healthy tissues. The use of systemic
chemotherapy in the management of head and neck cancers has been limited by 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, radiation, and surgery. The
most important limitation of the available therapies for head and neck cancer is
the high recurrence rate, generally 50% or higher.
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A standard course of chemotherapy for patients with head and neck
cancer often requires hospitalization with daily intravenous infusion of
chemotherapy. The majority of patients who receive chemotherapy will also
require ancillary supportive treatments, such as intravenous fluids, 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.
Other Solid Tumor Market. Tumors that can be accessed and injected
directly or by means of an endoscopic procedure or minimally invasive technique
include tumors of the esophagus, chest wall metastases from primary breast
cancer, and malignant melanomas of the skin. The Company believes that
approximately 75,000 cases are diagnosed each year in the United States
(comprised of approximately 25,000 cases of chest wall metastases from primary
breast cancer, 12,000 cases of esophageal cancer, and 38,000 cases of malignant
melanoma) and that approximately 71,000 cases are diagnosed each year in Western
Europe (approximately 24,000 in esophageal cancer, 26,000 in chest wall
metastases from primary breast cancer, and 21,000 in malignant melanoma), based
on data from the American Cancer Society and The International Agency for
Research on Cancer. Recurrent solid tumors of these types are being evaluated in
the Company's open-label Phase III trials. 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 and other solid tumors with IntraDose. The
investigators reported on 45 patients with a total of 82 treated tumors.
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, 39% (32
of 82) of all treated tumors exhibited a complete response (100% reduction in
tumor volume) and 50% of all treated tumors (41 of 82) exhibited a complete
response or partial response (greater than 50% reduction in tumor volume). A
response was defined as tumor reduction of any duration, rather than duration
lasting at least 28 days, the standard clinical definition of a response,
because some patients received systemic chemotherapy for treatment of disease
progression in distant, untreated tumors shortly after being treated with
IntraDose. Sixteen of the complete responses (19.5% of treated tumors) could be
followed for at least 28 days and had a lasting complete response without other
therapy. The median duration of complete response was 125 days.
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 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
solid tumors. The double-blind, placebo-controlled Phase III head and neck
cancer trials require approximately 180 evaluable patients, 90 patients in the
United States trial and 90 patients in the European trial. The Phase III other
solid tumor trials are open-label studies that require approximately 130
evaluable patients, 65 in the United States and 65 in Western Europe. Patients
enrolled in the Phase III trials must have advanced recurrent or refractory
disease. The study endpoints are objective tumor responses (i.e., tumor
shrinkage of at least 50%) and achievement of pre-selected treatment goals, such
as prevention of obstruction of vital structures, prevention of
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breakthrough of the skin, pain control, wound care, improvement in ability to
hear, see, and eat, and other palliative benefits. Assuming completion of
patient enrollment and treatment in, and successful results from, these studies,
the Company anticipates using the data from these trials to support regulatory
submissions in the United States and Western Europe.
Liver Cancer
Two types of tumors are found in the liver -- primary hepatocellular
cancer (the most common cancer arising from liver cells) and tumors originating
in other tissues (most commonly from colorectal 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). The Company believes the incidence (number of new cases per year) of
primary liver cancer is approximately 20,000 in the United States and 20,000 in
Western Europe and the incidence of hepatic metastases from colorectal cancers
is approximately 44,000 and 82,000 in the United States and Western Europe,
respectively, based on data available from the American Cancer Society and The
International Agency for Research on Cancer.
When possible, surgery is the first line treatment for both types of
liver tumors. However, a majority of patients with liver tumors are inoperable
due to tumor location, tumor 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 are applicable to only a minority of
patients and have had only limited beneficial results. Due to the limited
availability and effectiveness of current therapies, the Company believes that
fewer than 50% of all patients with liver cancer are treated.
Matrix believes that IntraDose may have utility as a first line
treatment for many patients with unresectable liver cancer from 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 cm3 and as large as 3,164 cm3 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 five
percent of the platinum 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 initiated two open-label Phase II trials for
patients with liver cancer. A Phase II trial for patients with primary liver
cancer is in progress at medical centers in the United States, Europe, and Hong
Kong. A Phase II trial for patients with cancers metastatic to the liver from
colorectal cancer is underway at medical centers in the United States and
Europe. These trials are designed to evaluate tumor necrosis, tumor response (as
measured by CT scan), time to tumor progression, pattern of disease progression,
and survival.
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MPI 5020 Radiopotentiator
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 local delivery of radiopotentiating agents significantly
enhances 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 aqueous protein gel technology. In 1997, the Company initiated a Phase
I/II trial in chest wall metastatic disease from recurrent breast cancer at
medical centers in the United States. This dose-escalation and dose-frequency
study is intended to evaluate the safety of MPI 5020 when administered in
conjunction with 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
The Company has focused preclinical research efforts on delivery of
topoisomerase inhibitors and tubulin-binding agents through Matrix's proprietary
ADV technology. Topoisomerase inhibitors and tubulin-binding agents are classes
of chemical compounds that have demonstrated potent anti-cancer activity in
vitro and in vivo but are poorly water soluble. In order to be administered
intravenously, many of these chemical compounds have been formulated with
solubilizing agents that may cause serious systemic side effects. The Company
believes its ADV technology may improve the therapeutic ratio (i.e., to increase
a drug's local effectiveness and/or significantly reduce dose-limiting side
effects which result from its systemic administration) of these and other poorly
water soluble anti-cancer agents.
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 by Matrix's
ADV technology may be more effective and less toxic than systemic administration
of camptothecin or recently marketed camptothecin analogues. In addition, Matrix
is conducting laboratory and preclinical experiments on a group of topoisomerase
inhibitors known as azatoxins to which Matrix has a nonexclusive license from
the National Cancer Institute. Potential indications for systemic administration
of 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. The Company has
also designed several aqueous gel formulations of vinblastine, another
tubulin-binding anticancer drug.
AccuSite Injectable Gel
Matrix has evaluated AccuSite in four major skin disease indications:
condyloma (genital warts) and basal cell cancer, for which Phase III trials have
been completed, and squamous cell cancer and psoriasis, for which Phase I/II or
Phase II trials have been conducted. These skin diseases are characterized by
superficially occurring hyperproliferative lesions which are sensitive to
fluorouracil, the active agent in AccuSite.
The Company has pursued registration of AccuSite for the genital warts
indication in the United States and in most of Western Europe. AccuSite has been
approved for treatment of genital warts in
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Denmark, Germany, Ireland, Luxembourg, the Netherlands, and the United Kingdom
and recommended for approval in Belgium, Finland, and Italy. A regulatory
decision is expected in 1998 in France. However, in September 1997, the Company
indefinitely suspended, both within the United States and other countries,
further development and commercialization programs related to AccuSite,
including marketing of AccuSite in the United Kingdom, where it was introduced
by Matrix in January 1997, after receiving a second action letter from the
United States Food and Drug Administration ("FDA") with respect to the Company's
NDA for AccuSite. The FDA action letter reiterated concerns expressed by the
agency 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 FDA in
March 1997 as an amendment to the NDA originally filed in 1995, are supportive
of the safety and efficacy of the product in this indication. The Company has
requested a re-review by the FDA of its NDA and does not intend to conduct
further clinical studies or otherwise invest substantial Company resources in
pursuit of marketing clearance in the United States. 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. Currently,
AccuSite is licensed in Italy to the Dompe Group of Milan; in Spain and Portugal
to Laboratorios Dr. Esteve of Barcelona; and in the United States to Altana
Inc., a pharmaceutical subsidiary of Altana A.G., a German-based pharmaceutical
and chemical company that is active in the dermatology and women's health
markets, the principal segments for AccuSite. Marketing of AccuSite in Europe is
dependent upon, in addition to regulatory approvals, the availability of local
marketing partners and, in markets where prices are regulated, the negotiation
of satisfactory pricing with local governments.
Manufacturing and Supply
Matrix maintains worldwide manufacturing rights to all of its products.
The Company has manufactured AccuSite and IntraDose at facilities it has
operated in San Jose and Milpitas, California, as well as at a contract
manufacturing facility. The Company's San Jose facility and Milpitas facility
were inspected by FDA and British regulatory personnel and found to be in
compliance with Current Good Manufacturing Practices ("cGMP") and equivalent
British standards. These facilities are scheduled to be closed by the first
quarter of 1998 as part of a restructuring of the Company's work force and
consolidation of manufacturing operations in a 67,000 square foot research and
manufacturing facility in San Diego, California, which the Company acquired in
1995. Following extensive renovations that were completed in 1997, the San Diego
facility is scheduled to become operational in 1998 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 Company intends to use the San Diego
facility to meet its near-term clinical and long-term commercial scale
production requirements. This facility will require approval by regulatory
authorities prior to commercialization of products manufactured there. In March
1998, the Company entered into a sale and leaseback agreement for the San Diego
facility. See Item 2, "Properties."
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 the Company's
initial product candidates, IntraDose, MPI 5020, and AccuSite, 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
multiple products receive marketing approvals.
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Several of the materials used in the Company's products are available
from a limited number of suppliers. These items, including collagen gel and bulk
drug substance, 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 raw materials and components utilized in its
products.
Sales and Marketing
The Company currently owns worldwide marketing rights for all its
products under development, except for AccuSite in the United States, Italy,
Spain, and Portugal. The Company's business strategy is to market or co-market
IntraDose and its other oncology product candidates, if approved, in the United
States and to license its products outside the United States to pharmaceutical
partners who have substantially greater resources and experience in local
markets. See "Risk Factors - Limited Manufacturing and Sales and Marketing
Experience."
Patents and Proprietary Rights
The Company's policy is to aggressively seek patent protection and to
enforce all of its intellectual property rights. In the United States, the
Company has five issued patents, one allowed patent, and five pending
applications. In Western Europe, the Company has three issued patents and seven
pending applications. The Company has one allowed patent and two pending
applications in Japan. Three of the five patents issued in the United States
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 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 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. The allowed
patent in the United States, which expires in 2015, covers certain
dry-containing collagen gels, including AccuSite and, potentially, other
products developed by the Company.
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 cancers and skin diseases are targets for therapeutic product
development at numerous entities, many of which have greater human and financial
resources than the Company. In addition, conventional drug therapy, surgery and
other more established treatments and modalities will compete with 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
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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.
The Company's competitive position depends upon, among other factors,
its ability to attract and retain qualified personnel, obtain patent protection
or otherwise develop proprietary products or processes and secure sufficient
capital resources to complete product development and regulatory processes. The
Company expects that competition among products approved for sale will be based,
among other factors, on product activity, safety, reliability, availability,
price, patent position and new usage and purchasing patterns established by
managed care and other group purchasing organizations.
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 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.
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 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, is
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 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.
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<PAGE>
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 must be obtained
from the relevant regulatory authorities.
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 $20,256,000, $24,320,000, and $27,214,000 in 1995, 1996, and 1997,
respectively.
Employees
As of December 31, 1997, the Company had a total of 105 full-time
employees, including 30 in research and development, 31 in medical and
regulatory affairs, biostatistics, and technical services, 21 in manufacturing,
and 23 in other departments. The Company believes that it has been successful in
attracting skilled and experienced personnel; however, competition for such
personnel is intense and there can be no assurance that the Company will be
successful at attracting and retaining qualified personnel in the future. None
of the Company's employees are covered by collective bargaining agreements and
management considers relations with its employees to be good.
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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 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 one product approved by foreign authorities 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, 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
cGMP 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 an 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 cGMP 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 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.
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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 has requested a re-review by the FDA of
its NDA. However, the Company does not intend to invest substantial Company
resources in pursuit of marketing clearance of AccuSite in the United States 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 Denmark, Germany, Ireland, Luxembourg,
The Netherlands, and the United Kingdom and recommended for approval in Belgium,
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 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.
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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 December 31, 1997, the Company's accumulated deficit was
approximately $145,620,000. The Company has not generated revenues from its
products or product candidates and expects to incur significant additional
losses over the next several years. The Company's ability to achieve a
profitable level of operations is dependent on successfully developing products,
obtaining regulatory approvals for its products, entering into agreements for
product commercialization outside the United States, and developing 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 1999. 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.
However, for AccuSite, the Company has entered into a sales and marketing
agreement with Savage Laboratories, the U.S. marketing division of Altana, Inc.,
to sell, market and distribute AccuSite to dermatology and obstetrics and
gynecology audiences in the United States. The Company has similar agreements in
place for AccuSite with pharmaceutical companies in Italy, Spain, and Portugal.
The Company has announced the withdrawal of AccuSite from the United Kingdom,
where it has been marketed since January 1997 by a contract sales organization.
In order to establish a successful direct sales and marketing capability in any
of its targeted markets, the Company will need to 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 resources will be
available to the Company to fund marketing and sales expenses, many
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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.
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 closed
manufacturing facilities in San Jose and Milpitas, California on or before March
31, 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
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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 the prosecution of the Japanese version of the first
patent on the Company's base technology (see "Business--Patents and Proprietary
Rights"), 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. Both the Japanese application has been allowed, and the United States
patent has 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 the new patent for cisplatin,
the active agent in the Company's IntraDose product, 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
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by the Company. In addition, conventional drug therapy, surgery and other more
familiar treatments and modalities will compete with 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 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.
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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, 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.
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
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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.
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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>
Michael D. Casey 52 President, Chief Executive Officer and Director
James R. Glynn 51 Chief Operating Officer, Chief Financial Officer,
Assistant Secretary and Director
Richard D. Leavitt, M.D. 52 Senior Vice President, Medical and Regulatory
Affairs
Dennis M. Brown, Ph.D. 48 Vice President, Discovery Research
Richard E. Jones, Ph.D. 53 Vice President, Research and Development
Andrew G. Korey, Ph.D. 49 Vice President, Business Development/Scientific
Licensing
Ronald P. Lucas 56 Vice President, Operations
Natalie L. McClure, Ph.D. 45 Vice President, Regulatory Affairs and Quality
Assurance
Harry D. Pedersen 42 Vice President, Corporate Development
</TABLE>
Mr. Casey has been President, Chief Executive Officer and a director of
the Company since September 1997. From November 1995 to December 1996, he was
Executive Vice President of Schein Pharmaceutical, Inc., ("Schein"), a generic
and ethical pharmaceutical company, and in December 1996 he was appointed
President of the retail and specialty products division of Schein. From June
1993 to November 1995, he served as President and Chief Operating Officer of
Genetic Therapy, Inc., a biopharmaceutical company. Mr. Casey was President of
McNeil Pharmaceutical, a unit of Johnson & Johnson, from 1989 to June 1993 and
Vice President, Sales and Marketing for the Ortho Pharmaceutical Corp. ("Ortho")
subsidiary of Johnson & Johnson from 1985 to 1989. Previously, he held a number
of sales and marketing positions with Ortho.
Mr. Glynn was named Chief Operating Officer of the Company in September
1997 and has served as Chief Financial Officer since July 1995 and Assistant
Secretary and director of the Company since June 1997. Mr. Glynn served as
interim President and Chief Executive Officer from June to September 1997. He
joined the Company in July 1995 as Senior Vice President, Chief Financial
Officer and Secretary. Prior to joining the Company, from 1987 to February 1995,
he served 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.
Dr. Leavitt joined the Company in November 1996 as Senior Vice
President, Medical and Regulatory Affairs. From June 1993 to November 1996, he
was Vice President, Clinical and Regulatory
21
<PAGE>
Affairs of Focal Incorporated, a biopharmaceutical company. Prior to joining
Focal Incorporated, from 1991 to June 1993 he served as Director, Clinical
Research at Genetics Institute. Prior to joining Genetics Institute, from 1986
to 1991 he held various management positions at Fujisawa USA, Fujisawa
SmithKline Corporation, and Centocor Incorporated. Prior to joining Centocor
Incorporated, he was an Assistant Professor at the University of Maryland School
of Medicine and Johns Hopkins University School of Medicine.
Dr. Brown, a founder of the Company, has been Vice President, Discovery
Research since March 1995 and was Vice President of Scientific Affairs from 1985
to March 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 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.
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, Business Development/Scientific
Licensing in March 1998 after serving as Vice President, Medical Information and
Extramural Scientific Affairs from January 1997 to March 1998. He held the
position of Vice President, Clinical Research and Medical Affairs from January
1996 to January 1997. From 1990 to January 1996, he held the position of Vice
President, Medical and Regulatory Affairs. Prior to joining Matrix, in 1989 Dr.
Korey was a consultant with A. Korey & Associates. He held the position of Vice
President, Medical Affairs at Genelabs, Inc., a biotechnology company, from 1987
to 1989 and Director of Scientific and Medical Affairs at Syntex Pharmaceuticals
Canada from 1981 to 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 1996.
From September 1994 to February 1996, he was the Vice President of Operations at
Telios Pharmaceuticals ("Telios"), a division of Integra LifeSciences. Prior to
joining Telios, he was the Vice President of Operations from January 1991 to
September 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. He also
held a number of management and technical positions at Eli 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. Dr. McClure held the positions of Associate Director of
Regulatory Affairs from January 1993 to August 1993 and Director of Regulatory
Affairs from August 1993 to March 1996. Prior to joining Matrix, she held
various positions at Syntex Corporation in the Chemical Process Development
department and in Regulatory Affairs.
Mr. Pedersen was appointed Vice President, Corporate Development in
June 1997. Between December 1995 and May 1997, he was Senior Director, Strategic
Business Development, for Hoechst Marion Roussel. Between June 1992 and December
1995, he was Senior Director of Business Development for Marion Merrell Dow.
Prior to that, he held a variety of positions with Marion Laboratories including
Manager of European Licensing.
22
<PAGE>
Item 2. Properties
In December 1995, the Company purchased a research and manufacturing
facility in San Diego, California for $13.1 million. The facility, which
approximates 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 investments, to which the
Company has committed capital expenditures of approximately $8.9 million, of
which $6.9 million has been paid through December 31, 1997. 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 two-year period totals approximately $2.9 million.
In March 1998, the Company entered into an agreement with a real estate
investment trust for the sale and leaseback of its San Diego manufacturing
facility structured as an $18,600,000 purchase and a $6,000,000 convertible loan
secured by specific manufacturing related building improvements. The lease has a
term of thirteen years with the option to renew up to 25 years. 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.
During September 1997, the Company's management suspended further
development and commercialization of AccuSite after being notified that the FDA
did not approve AccuSite as a treatment for genital warts. Pursuant to the
restructuring plan which was established in the third quarter of 1997, the
Operations group relocated to the San Diego facility from its Northern
California facilities during the fourth quarter of 1997. During the first
quarter of 1998, the Company terminated its lease obligation on the
manufacturing facility in San Jose and negotiated termination agreements for the
manufacturing and storage facilities located in Milpitas, California. Costs
associated with the termination of the leases and write-off of leasehold
improvements for the leased facilities have been accrued in current liabilities
on the balance sheet. See "Management Discussion and Analysis--Results of
Operations."
In May 1994, the Company entered into an 18-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.
Item 3. Legal Proceedings
On December 21, 1994, Collagen Corporation ("Collagen") filed a lawsuit
against the Company in Santa Clara County Superior Court alleging
misappropriation of trade secrets concerning the Company's manufacturing process
for collagen and seeking unspecified damages and injunctive relief. The Company
denied all allegations of the complaint and subsequently filed a cross-complaint
against Collagen and Howard Palefsky, Collagen's former Chairman and Chief
Executive Officer, seeking recovery of damages for defamation and violations of
state law unfair competition.
On May 23, 1997, the lawsuit between the parties was settled on
mutually agreeable terms and dismissed with prejudice. All claims by and against
all parties have been released. Matrix agreed that for a period of five years it
shall not manufacture or sell products directly competitive with Collagen's
current core products. Collagen has granted Matrix a non-exclusive license to
certain Collagen intellectual property for certain non-monetary consideration.
23
<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, 1997.
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Common Stock of Matrix Pharmaceutical, Inc. trades on the Nasdaq
National Market tier of the Nasdaq Stock Market under the symbol MATX. The
Company's common stock began trading on January 28, 1992. The following table
presents quarterly information on the high and low sale prices of the Company's
Common Stock for fiscal years 1997 and 1996, as regularly quoted on the Nasdaq
National Market.
Fiscal Year High Low
----------- ---- ---
1997
1st Quarter $ 7.50 $ 5.75
2nd Quarter 7.84 5.00
3rd Quarter 7.44 3.94
4th Quarter 5.00 3.00
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
As of February 28, 1998, there were approximately 271 holders of record
of the Company's Common Stock. No dividends have been paid on the Common Stock
since the Company's inception, and the Company does not anticipate paying any
dividends in the foreseeable future.
24
<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,
- - ------------------------------------------------------------------------------------------------------------------------------------
1993 1994 1995 1996 1997 1997
- - ------------------------------------------------------------------------------------------------------------------------------------
Consolidated Statement of Operations Data:
<S> <C> <C> <C> <C> <C> <C>
Revenues $ 2,150 $ 100 $ -- $ -- $ -- $ 2,250
Costs and expenses
Research and development 12,651 17,072 20,256 24,320 27,214 116,569
General and administrative 3,289 3,806 8,336 11,428 14,270 47,235
Special charges -- -- -- -- 4,518 4,518
- - ------------------------------------------------------------------------------------------------------------------------------------
Total costs and expenses 15,940 20,878 28,592 35,748 46,002 168,322
- - ------------------------------------------------------------------------------------------------------------------------------------
Loss from operations (13,790) (20,778) (28,592) (35,748) (46,002) (166,072)
Interest and other income 1,941 1,311 2,179 6,534 5,913 21,181
Rental income -- -- -- 659 1,467 2,126
Interest expense (100) (121) (204) (1,088) (1,109) (2,855)
- - ------------------------------------------------------------------------------------------------------------------------------------
Net loss $ (11,949) $ (19,588) $ (26,617) $ (29,643) $ (39,731) $(145,620)
====================================================================================================================================
Basic and diluted net loss per
common share $ (1.18) $ (1.86) $ (2.19) $ (1.48) $ (1.85)
Weighted average shares used in
computing basic and diluted net
loss per common share 10,132 10,538 12,173 20,081 21,536
December 31,
- - -------------------------------------------------------------------------------------------------------------------
1993 1994 1995 1996 1997
- - -------------------------------------------------------------------------------------------------------------------
Summary of Consolidated Balance Sheet Data:
Cash, cash equivalents
and investments $ 35,316 $ 35,059 $ 77,331 $ 114,584 $ 80,368
Total assets 39,077 37,767 94,419 134,950 110,429
Total long-term liabilities 870 761 12,307 11,724 22,161
Total stockholders' equity 35,629 34,168 76,355 115,511 76,653
</TABLE>
25
<PAGE>
Item 7. Management's Discussion and Analysis of Consolidated Financial Condition
and Results of Operations.
This Form 10-K 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 sales and marketing experience; limited
manufacturing experience; dependence on sources of supply; rapid technological
change; substantial competition; uncertainty regarding patents and proprietary
rights; uncertainty of pharmaceutical pricing; and no assurance of adequate
reimbursement, please see the "Risk Factors" section included in this Form 10-K
as well as other factors discussed below and elsewhere in this report.
The following discussion should be read in conjunction with the
consolidated financial statements and related notes included on pages 35-53.
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 has a history of
operating losses and expects to incur substantial additional losses over the
next several years as it continues to develop its current and future products.
For the period from its inception to December 31, 1997, the Company has
incurred a cumulative net loss of $145,620,000.
Revenues in 1993 and 1994 were generated primarily by amounts earned
under license agreements. No revenues were recognized in 1995, 1996, or 1997.
Results of Operations
Years ended December 31, 1997 and 1996.
The Company had no revenue for 1997 or 1996.
Research and development expenses for 1997 increased by 12% to
$27,214,000 as compared to $24,320,000 for 1996. This increase was primarily
due to higher personnel costs for the Company's clinical and research and
development programs as well as increases in manufacturing personnel costs in
anticipation of the commercial introduction of AccuSite in the United States.
Higher clinical expenses related to IntraDose Injectable Gel in 1997 over 1996
were offset by lower clinical trial expenses for AccuSite in 1997.
General and administrative expenses for 1997 increased by 25% to
$14,270,000 as compared to $11,428,000 for 1996. This increase was primarily due
to higher legal expenses related to the Collagen litigation which was settled
during the second quarter of 1997, increases in recruiting and relocation
expenses, higher personnel costs, and product sales expenses associated with the
commercial launch of AccuSite in the United Kingdom during 1997.
26
<PAGE>
Pre-tax special charges of $4,518,000 were recorded during the third
quarter of fiscal 1997 in connection with the decision to suspend further
development and commercialization of AccuSite. Management suspended the AccuSite
program after being notified that the FDA was not prepared to approve AccuSite
as a treatment for genital warts. In September 1997, restructuring costs were
accrued to conclude the clinical trials and commercial programs associated with
AccuSite. The Company reduced its workforce by approximately 63 employees, of
which 46 positions related to manufacturing, resulting in severance expenses of
$1,478,000. Additional expenses included the write-off of inventory related to
AccuSite of $1,245,000, costs totaling $1,194,000 associated with the shut down
of the Company's Northern California facilities and write-off of manufacturing
equipment, the closing of clinical trials with respect to AccuSite of $414,000,
and sales and marketing costs associated with AccuSite of $187,000. At December
31, 1997, the reserve balance of $2,063,000 was included in current liabilities
of which accruals for future cash payments was approximately $1,500,000.
Net interest and other income increased by 3% to $6,271,000 for 1997 as
compared to $6,105,000 for 1996. The increase is primarily due to the receipt
of rental income from the lease in July 1996 of a portion of the San Diego
facility for fiscal 1997 and the amortization of a five year non-compete
agreement. This is partially offset by a decline in interest income as a result
of lower average cash balances experienced throughout the year.
As of December 31, 1997, the Company had federal and state net
operating loss carryforwards of approximately $140,600,000 and $13,100,000,
respectively. The Company also had federal research and development tax credit
carryforwards of approximately $3,200,000. The federal net operating loss and
credit carryforwards will expire at various dates beginning in the year 2000
through 2012, if not utilized. The state net operating loss carryforwards will
expire at various dates beginning in 1998 through 2003, if not utilized.
Years ended December 31, 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. In addition, 1995 general and
administrative expenses include the repurchase of marketing rights to AccuSite
for $2,000,000. This increase was primarily due to higher legal expenses due to
the Collagen litigation, higher-personnel expenses, including the hiring of
additional marketing staff, and AccuSite market prelaunch expenses.
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.
27
<PAGE>
Liquidity and Capital Resources
At December 31, 1997, the Company had $80,400,000 in cash, cash
equivalents and marketable securities, compared to $114,600,000 at December 31,
1996. The decrease of $34,200,000 includes cash receipts from an equipment
financing agreement of $9,950,000, interest and rental income of approximately
$7,400,000 and $2,800,000 as part of a non-compete agreement. Cash disbursements
were used primarily to fund operating activities, inventory and capital
purchases.
In March 1998, the Company entered into an agreement with a real estate
investment trust for the sale and leaseback of its San Diego manufacturing
facility structured as an $18,600,000 purchase and a $6,000,000 convertible loan
secured by specific manufacturing related building improvements. The lease has a
term of thirteen years with the option to renew up to 25 years. 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.
In October 1997, the Company received $9,950,000, net of commitment
fees, as part of a five-year equipment financing agreement maturing in 2002.
The agreement is secured by the equipment purchased by the Company between
October 21, 1995 and March 31, 1998.
Special charges of approximately $4,500,000 were recorded during the
third quarter of 1997 in connection with the decision to suspend further
development and commercialization of AccuSite. See "Results of Operations".
Total cash payments for restructuring are approximately $2,700,000, of which
$1,500,000 remained payable at December 31, 1997. The remaining amount is
expected to be paid during the first half of 1998.
In December 1995, the Company purchased a research and manufacturing
facility in San Diego, California for $13,100,000. 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 investments to which
the Company has committed capital expenditures of approximately $8,900,000, of
which $6,900,000 has been paid through December 31, 1997. 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
for the year ended December 31, 1997 was approximately $1,500,000.
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 $67,400,000 to the Company.
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 $50,900,000 to the Company.
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 December 31, 1997, the remaining balance of this
obligation was $1,500,000.
On August 29, 1995, the Company raised $16,800,000 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.
28
<PAGE>
The Company has financed its operations and capital asset acquisitions
from its inception through the sale of equity securities, interest income, and
capital lease and debt financing. The Company expects to finance its continued
operating requirements principally with cash on hand 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, including the proceeds of its April 1996
public offering, October 1997 equipment financing, and recent sales and
leaseback agreement, will enable it to maintain its current and planned
operations at least through 1999. 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.
Capital expenditures for environmental control efforts were not
material during the 1997 and 1996 fiscal years.
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.
29
<PAGE>
<TABLE>
<CAPTION>
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
Item 8. Financial Statements and Supplementary Data
Index to Consolidated Financial Statements:
<S> <C> <C>
Consolidated Balance Sheets--December 31, 1996 and 1997. Page 35
Consolidated Statements of Operations
Years Ended December 31, 1995, 1996 and 1997, and Period from
Inception (February 11, 1985) To December 31, 1997. Page 36
Consolidated Statement of Stockholders' Equity
Period from Inception (February 11, 1985) To
December 31, 1997. Pages 37-38
Consolidated Statements of Cash Flows
Years Ended December 31, 1995, 1996 and 1997, and Period from
Inception (February 11, 1985) To December 31, 1997. Page 39
Notes to Consolidated Financial Statements Pages 40-52
Report of Ernst & Young LLP, Independent Auditors Page 53
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
Not applicable.
</TABLE>
Part III
Item 10. Directors and Executive Officers of the Registrant
The information required by this 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 Stockholders to be held on May
18, 1998 (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 21 and 22. 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.
30
<PAGE>
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.
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
<TABLE>
<CAPTION>
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.
Index to Consolidated Financial Statements:
<S> <C> <C>
Consolidated Balance Sheets--December 31, 1996 and 1997. Page 35
Consolidated Statements of Operations
Years Ended December 31, 1995, 1996 and 1997, and Period from
Inception (February 11, 1985) To December 31, 1997. Page 36
Consolidated Statement of Stockholders' Equity
Period from Inception (February 11, 1985) To
December 31, 1997. Pages 37-38
Consolidated Statements of Cash Flows
Years Ended December 31, 1995, 1996 and 1997, and Period from
Inception (February 11, 1985) To December 31, 1997. Page 39
Notes to Consolidated Financial Statements Pages 40-52
Report of Ernst & Young LLP, Independent Auditors Page 53
</TABLE>
(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, 1997.
31
<PAGE>
<TABLE>
(c) Exhibits
<CAPTION>
Number Exhibit
- - ------ ------------------------------------------------------------------------------------------------------------------
<S> <C>
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)
3.1b Restated Certificate of Incorporation filed with the Delaware Secretary of State on August 13, 1992
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)
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
10.14b 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
10.22a 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
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
10.29b Equipment Lease Agreement between the Company and General Electric Capital Corporation, dated December 17, 1992
- - --------
* Confidential treatment has been granted with respect to certain portions of this agreement.
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.
32
<PAGE>
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)
10.36* Lease between the Company and Calaveras Associates II, dated August 4, 1993 (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)
10.38 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 10-Q 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 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)
10.46* Settlement and License Agreement effective as of May 23, 1997 by and between Collagen Corporation and the Company
10.47* Distribution Agreement made as of August 4, 1997 by and between the Company and Altana, Inc.
10.48e 1988 Restricted Stock Plan (Amended and Restated through March 19, 1997)
10.49f Form of Stock Issuance Agreement
10.50g 1991 Directors Stock Option Plan (Amended and Restated through March 19, 1997)
10.51h Form of Non-Statutory Stock Option Agreement
10.52 Imperial Bank Credit Agreement date October 8, 1997
10.53 Option Acceleration Program dated January 27, 1998
10.54 Termination of Lease Agreement with Becton Dickinson
10.55 Employment Agreement between the Company and Michael D. Casey
23.1 Consent of Ernst & Young LLP, Independent Auditors
27 Financial Data Schedule
<FN>
- - ---------
* Confidential treatment has been granted with respect to certain portions of this agreement.
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.
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
e Incorporated by reference to Exhibit 99.1 of Registration Statement on Form S-8 (No. 333-32213).
f Incorporated by reference to Exhibit 99.6 of Registration Statement on Form S-8 (No. 333-32213).
g Incorporated by reference to Exhibit 99.7 of Registration Statement on Form S-8 (No. 333-32213).
h Incorporated by reference to Exhibit 99.8 of Registration Statement on Form S-8 (No. 333-32213).
33
</FN>
</TABLE>
<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 27, 1998 By: /s/ Michael D. Casey
---------------------- ----------------------------
Michael D. Casey
President and Chief Executive Officer
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.
<TABLE>
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.
<CAPTION>
<S> <C> <C>
Date: March 27, 1998 /s/ Michael D. Casey
---------------------- --------------------------------
Michael D. Casey
President, Chief Executive Officer and Director (Principal Executive
Officer)
Date: March 27, 1998 /s/ J. Stephan Dolezalek
---------------------- --------------------------------
J. Stephan Dolezalek
Director
Date: March 27, 1998 /s/ James R. Glynn
---------------------- --------------------------------
James R. Glynn
Director, Chief Operating Officer, Chief Financial Officer, Assistant
Secretary (Principal Financial and Accounting Officer)
Date: March 27, 1998 /s/ Marvin E. Jaffe, M.D.
---------------------- --------------------------------
Marvin E. Jaffe, M.D.
Director
Date: March 27, 1998 /s/ Bradley G. Lorimier
---------------------- --------------------------------
Bradley G. Lorimier
Director
Date: March 27, 1998 /s/ Edward E. Luck
---------------------- --------------------------------
Edward E. Luck
Chairman of the Board
Date: March 27, 1998 /s/ John E. Lyons
---------------------- --------------------------------
John E. Lyons
Director
Date: March 27, 1998 /s/ Julius L. Pericola
---------------------- --------------------------------
Julius L. Pericola
Director
</TABLE>
34
<PAGE>
<TABLE>
MATRIX PHARMACEUTICAL, INC.
(a development stage company)
Consolidated Balance Sheets
<CAPTION>
(In thousands except share and per share amounts) December 31,
- - ------------------------------------------------------------------------------------------------------------------------
1996 1997
- - ------------------------------------------------------------------------------------------------------------------------
Assets
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 20,138 $ 19,719
Short-term investments 38,997 40,666
Short-term notes from related parties - 750
Other current assets 3,041 1,378
- - ------------------------------------------------------------------------------------------------------------------------
Total current assets 62,176 62,513
Property and equipment, net 17,152 26,742
Non-current investments 55,449 19,983
Long term notes from related parties - 600
Deposits and other assets, net 173 591
- - ------------------------------------------------------------------------------------------------------------------------
$ 134,950 $ 110,429
========================================================================================================================
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 2,636 $ 2,800
Accruals for special charges - 2,063
Accrued compensation 1,045 922
Accrued clinical trial costs 1,239 1,788
Other accrued liabilities 2,135 1,759
Current portion of debt and capital lease obligations 660 2,283
- - ------------------------------------------------------------------------------------------------------------------------
Total current liabilities 7,715 11,615
Debt and capital lease obligations, less current portion 11,724 20,248
Deferred other income - 1,913
- - ------------------------------------------------------------------------------------------------------------------------
Total long-term liabilities 11,724 22,161
Stockholders' equity
Common stock, $0.01 par value per share; 30,000,000 shares authorized,
21,257,856 shares issued and outstanding in 1996; 21,908,300 shares
issued and outstanding in 1997 213 219
Additional paid-in capital 222,043 224,925
Notes receivable from shareholders - (2,313)
Deferred compensation (780) (539)
Unrealized losses on marketable securities (76) (19)
Deficit accumulated during the development stage (105,889) (145,620)
- - ------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 115,511 76,653
- - ------------------------------------------------------------------------------------------------------------------------
$ 134,950 $ 110,429
========================================================================================================================
<FN>
(See accompanying notes )
</FN>
</TABLE>
35
<PAGE>
<TABLE>
MATRIX PHARMACEUTICAL, INC.
(a development stage company)
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,
- - ------------------------------------------------------------------------------------------------------------------------------------
1995 1996 1997 1997
- - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $ -- $ -- $ -- $ 2,250
Costs and expenses
Research and development 20,256 24,320 27,214 116,569
General and administrative 8,336 11,428 14,270 47,235
Special charges -- -- 4,518 4,518
- - ------------------------------------------------------------------------------------------------------------------------------------
Total costs and expenses 28,592 35,748 46,002 168,322
- - ------------------------------------------------------------------------------------------------------------------------------------
Loss from operations (28,592) (35,748) (46,002) (166,072)
Interest and other income 2,179 6,534 5,913 21,181
Rental Income -- 659 1,467 2,126
Interest expense (204) (1,088) (1,109) (2,855)
- - ------------------------------------------------------------------------------------------------------------------------------------
Net loss $ (26,617) $ (29,643) $ (39,731) $(145,620)
====================================================================================================================================
Basic and diluted net loss per
common share $ (2.19) $ (1.48) $ (1.85)
================================================================================================================
Weighted average shares used in
computing basic and diluted net
loss per common share 12,173 20,081 21,536
================================================================================================================
<FN>
(See accompanying notes )
</FN>
</TABLE>
36
<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, 1997
(In thousands)
<CAPTION>
- - ------------------------------------------------------------------------------------------------------------------------------------
Unrealized Deficit
Notes Gain Accumulated
Receiv- (Losses) During the Total
Convertible Additional able Deferred on Develop- Stock-
Preferred Common Paid-in Share- Compen- Marketable ment holders'
Stock Stock Capital holders sation Securities Stage Equity
- - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of 508,867 shares of common stock $ -- $ 5 $ 137 $-- $ (55) $ -- $ -- $ 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 -- 36 48,950 -- -- -- -- 48,986
Issuance of 5,250,000 shares of convertible
preferred stock 53 -- 5,272 -- -- -- 5,325
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 stock-
holders(at $1.75 per share) in May 1990,
net of offering costs 45 -- 7,880 -- -- -- -- 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) (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 -- -- -- -- 14
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) -- -- --
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 -- -- -- -- 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 -- -- -- -- 2,835
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 -- -- -- -- 177
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 -- -- -- -- 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 -- -- -- -- 11,790
Amortization of deferred compensation -- -- (12) -- 718 -- -- 706
Unrealized gains (losses) on marketable
securities -- -- -- -- -- (670) -- (670)
Net loss -- -- -- -- -- -- (49,629) (49,629)
- - ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1994 -- 108 84,460 -- (101) (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) -- 1 425 -- -- -- -- 426
Issuance of 10,800 shares to employees at
$14.00 per share -- -- 151 -- -- -- -- 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 -- -- -- -- 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 -- 41 50,908 -- -- -- -- 50,949
Deferred compensation related to grant of
stock options -- -- 514 -- (514) -- -- --
Amortization of deferred compensation -- -- -- -- 101 -- -- 101
Unrealized gains (losses) on marketable
securities -- -- -- -- -- 358 -- 358
Net loss -- -- -- -- -- -- (26,617) (26,617)
- - ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1995 $ -- $ 165 $ 153,262 $-- $ (514) $ (312) $ (76,246) $ 76,355
</TABLE>
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, 1997
(In thousands)
<CAPTION>
- - ------------------------------------------------------------------------------------------------------------------------------------
Unrealized Deficit
Notes Gain Accumulated
Receiv- (Losses) During the Total
Convertible Additional able Deferred on Develop- Stock-
Preferred Common Paid-in Share- Compen- Marketable ment holders'
Stock Stock Capital holders sation Securities Stage Equity
- - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995
$ -- $ 165 $153,262 $-- $ (514) $ (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) -- 3 1,395 -- -- -- -- 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 -- 32 67,336 -- -- -- -- 67,368
Conversion of 13,334 shares of convertible
preferred stock into 1,333,400 shares
of common stock -- 13 (357) -- -- -- -- (344)
Deferred compensation related to grant of
certain stock options -- -- 407 -- (407) -- -- --
Amortization of deferred compensation -- -- -- -- 141 -- -- 141
Unrealized gains (losses) on marketable
securities -- -- -- -- -- 236 -- 236
Net loss -- -- -- -- -- -- (29,643) (29,643)
- - ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 -- 213 222,043 -- (780) (76) (105,889) 115,511
Issuance of 208,862 shares of common stock to
employees and investors for cash under the
stock option plan (from $0.23 to $.37
per share) -- 2 74 -- -- -- -- 76
Issuance of 71,582 shares to employees under
employee savings and retirement plan
(from $4.94 to $6.69 per share) -- -- 427 -- -- -- -- 427
Issuance of 370,000 shares to officers and
employees for promissory notes under
Shared Investment Program ($6.25 per share) -- 4 2,309 (2,313) -- -- -- --
Forfeitures of deferred compensation -- -- (576) -- 576 -- -- --
Deferred compensation related to grant of
certain stock options -- -- 648 -- (648) -- -- --
Amortization of deferred compensation -- -- -- -- 313 -- -- 313
Unrealized gains (losses) on marketable
securities -- -- -- -- -- 57 -- 57
Net loss -- -- -- -- -- -- (39,731) (39,731)
- - ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 $ -- $ 219 $224,925 $(2,313) $ (539) $ (19) $(145,620) $ 76,653
====================================================================================================================================
<FN>
(See accompanying notes)
</FN>
</TABLE>
38
<PAGE>
<TABLE>
MATRIX PHARMACEUTICAL, INC.
(a development stage company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
Increase (Decrease) in Cash and Cash Equivalents
<CAPTION>
- - ------------------------------------------------------------------------------------------------------------------------------------
Period from
Inception
(February 11,
1985) to
For the Years Ended December 31, December 31,
- - ------------------------------------------------------------------------------------------------------------------------------------
1995 1996 1997 1997
- - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash flows used in operating activities:
Net loss $ (26,617) $ (29,643) $ (39,731) $(145,620)
Adjustments to reconcile net loss to net cash used
by operating activities:
Depreciation and amortization 946 1,051 1,142 5,609
Amortization of deferred compensation 101 141 313 1,273
Repurchase of marketing rights 2,000 (250) (250) 1,500
Other 154 83 72 500
Changes in assets and liabilities:
Other current assets (425) (2,089) 1,663 (1,378)
Deposits and other assets 3 44 (418) (600)
Notes receivable from related parties -- -- (1,350) (1,350)
Accounts payable 356 1,031 164 2,800
Accrued compensation 513 201 (123) 922
Deferred other income -- -- 2,473 2,473
Restructuring costs -- -- 2,063 2,063
Accrued clinical trial costs 1,476 (575) 549 1,788
Other accrued liabilities 138 1,471 (936) 1,199
- - ------------------------------------------------------------------------------------------------------------------------------------
Net cash (used for) operating activities (21,355) (28,535) (34,369) (128,821)
Cash flows from investing activities:
Capital expenditures (14,904) (2,326) (9,857) (31,654)
Investment in available-for-sale securities (14,796) (189,548) (31,100) (381,983)
Investment in held-to-maturity securities -- -- -- (23,827)
Proceeds from sale of available-for-sale securities 5,480 95,219 -- 221,101
Maturities of investments 12,647 21,734 65,000 123,708
- - ------------------------------------------------------------------------------------------------------------------------------------
Cash flows provided by (used for) investing activities (11,573) (74,921) 24,043 (92,655)
Cash flows from financing activities:
Payments on debt and capital lease obligations (426) (503) (546) (2,672)
Issuance of convertible promissory note
payable to stockholders -- -- -- 400
Net cash proceeds from issuance of:
Debt and capital lease financing 10,408 -- 9,950 22,835
Preferred stock (46) -- -- 24,679
Common stock 68,391 68,422 503 195,953
- - ------------------------------------------------------------------------------------------------------------------------------------
Cash flows provided by financing activities 78,327 67,919 9,907 241,195
Net increase (decrease) in cash and cash equivalents 45,399 (35,537) (419) 19,719
Cash and cash equivalents at the beginning of period 10,276 55,675 20,138 --
- - ------------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at the end of period $ 55,675 $ 20,138 $ 19,719 $ 19,719
====================================================================================================================================
Supplemental schedule of noncash investing and
financing activities:
Notes receivable from shareholders in exchange
for capital stock $ -- $ -- $ 2,313 $ 2,313
Financing of capital equipment -- -- 943 943
Issuance of stock upon conversion of
promissory notes payable to stockholders -- -- -- 425
====================================================================================================================================
Supplemental disclosure of cash flow information:
Interest paid $ 204 $ 1,088 $ 1,229 $ 2,975
====================================================================================================================================
<FN>
(See accompanying notes)
</FN>
</TABLE>
39
<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 development 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 subsequent to 1995, by
long-term debt. The Company anticipates that its existing and committed capital
resources will enable it to maintain its planned operations through 1999.
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.
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. In 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS
128"). SFAS 128 replaced the calculation of primary and fully diluted per share
data with basic and diluted per share data. Unlike primary per share data, basic
per share data excludes any dilutive effects of options, warrants and
convertible securities. Diluted per share data is very similar to the previously
reported fully diluted per share data. All per share amounts for all periods
have been presented, and where appropriate, restated to conform to the SFAS 128
requirements.
Net loss per common share is computed using the weighted average number
of common shares outstanding. Common equivalent shares from stock options and
warrants are not included in the per share calculations because their inclusion
would be antidilutive.
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.
40
<PAGE>
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.
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, existing and new 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.
Long-term obligations. The carrying amounts of the loan and installment notes
(note 6) approximates their fair value.
Stock based compensation. Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123"), 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" ("APB 25"), 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 12 to
the Consolidated Financial Statements contains a summary of the pro forma
effects to reported net loss and per share data for 1995, 1996, and 1997 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 123.
New Accounting Pronouncements. In June 1997, the Financial Accounting Standards
Board issued the Statement of Financial Accounting Standard No. 130 ("SFAS
130"), "Reporting Comprehensive Income," which the Company is required to adopt
for its fiscal year ended December 31, 1998. This Statement requires that all
items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. In June 1997,
the Financial Accounting Standards Board issued the Statement of Financial
Accounting Standard No. 131 ("SFAS 131"), "Disclosures about Segments of an
Enterprise and Related Information," which the Company is required to adopt for
its fiscal year ended December 31, 1998. This Statement establishes standards
for the way that public business enterprises report information about operating
segments in annual financial statements and in interim financial reports issued
to stockholders. It also establishes standards for related disclosures about
products and services, geographic areas, and major customers. Both standards
will require additional disclosures, but will not have a material effect on the
Company's financial position, cash flows or results of operations.
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 these estimates.
41
<PAGE>
<TABLE>
2. FINANCIAL INSTRUMENTS
The following is a summary of available-for-sale securities:
<CAPTION>
(In thousands) Available-For-Sale Securities
- - -------------------------------------------------------------------------------------------------------------------
Gross Gross Estimated
Unrealized Unrealized Fair
December 31, 1997 Cost Gains Losses Value
- - -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. government securities $ 38,490 $ 76 $ 18 $ 38,548
Certificates of deposit 25,099 1 17 25,083
Commercial paper 13,300 - - 13,300
Master notes 1,687 - - 1,687
Repurchase agreements 338 - - 338
- - -------------------------------------------------------------------------------------------------------------------
$ 78,914 $ 77 $ 35 $ 78,956
===================================================================================================================
(In thousands) Available-For-Sale Securities
- - -------------------------------------------------------------------------------------------------------------------
Gross Gross Estimated
Unrealized Unrealized Fair
December 31, 1996 Cost Gains Losses Value
- - -------------------------------------------------------------------------------------------------------------------
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>
Included in cash equivalents at December 31, 1997 and 1996 are
$18,307,000 and $18,953,000, respectively, 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.
No securities were sold during 1997. During the year ended December 31,
1996, the Company sold available-for-sale securities with a fair value of
$46,000,000. The gross realized gain on such sales totaled $117,000 in 1996. 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.
42
<PAGE>
<TABLE>
The cost and estimated fair value of debt securities at December 31, 1997, 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.
<CAPTION>
(In thousands) Available-for-Sale Securities
- - -------------------------------------------------------------------------------------------------------------------
Estimated
December 31, 1997 Cost Fair Value
- - -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Due in one year or less $ 58,914 $ 58,973
Due after one year through five years 20,000 19,983
- - -------------------------------------------------------------------------------------------------------------------
$ 78,914 $ 78,956
===================================================================================================================
</TABLE>
3. REPURCHASE OF MARKETING RIGHTS
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 December 31, 1997 the obligation has a balance of
$1,500,000 and is included in current and long term obligations on the balance
sheet.
<TABLE>
4. INVENTORY
Inventory, which is included in other assets in 1996, 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.
During 1997, the Company recorded additional AccuSite product inventory
of $1,000,000 increasing the balance to $1,700,000, of which a reserve was
established at $500,000 during the second quarter of 1997 based on the
expiration date of the shelf life for the AccuSite product. The remaining
balance of $1,200,000 was written off in the third quarter of 1997 as a result
of the suspension of the AccuSite program.
<CAPTION>
(In thousands)
- - ----------------------------------------------------------------------------------------------------------------
December 31, 1996 1997
- - ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Finished goods $ - $ -
Work in process 440 -
Raw material 318 -
- - ----------------------------------------------------------------------------------------------------------------
Total Inventory $ 758 $ -
================================================================================================================
</TABLE>
43
<PAGE>
<TABLE>
5. PROPERTY AND EQUIPMENT
Property and equipment is stated at cost and consists of the following:
<CAPTION>
(In thousands)
- - -----------------------------------------------------------------------------------------------------------------
December 31, 1996 1997
- - -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Land $ 4,258 $ 4,258
Building 6,928 13,872
Laboratory and operating equipment 4,234 7,219
Office and computer equipment 2,462 3,413
Leasehold improvements 2,890 1,790
Manufacturing start-up costs 490 490
Construction in progress 265 -
- - -----------------------------------------------------------------------------------------------------------------
21,527 31,042
Less accumulated depreciation and amortization (4,375) (4,300)
- - -----------------------------------------------------------------------------------------------------------------
Net property and equipment $ 17,152 $ 26,742
=================================================================================================================
</TABLE>
In December 1995, the Company purchased a research and manufacturing
facility in San Diego, California for $13,100,000. The facility includes land,
building and related improvements, equipment, furniture, and an adjacent parcel
of land. As of December 31, 1997, approximately $8,400,000 has been incurred for
validation and process installation investments which are included in building
and laboratory and operating equipment.
Leasehold improvement balances as of December 31,1997 exclude
$1,100,000 of fully depreciated leasehold improvements pursuant to the
termination of the lease agreement for the Menlo Park facility.
The Company refinanced several of its existing operating leases in the
fourth quarter 1997. As the new leases were recorded as capital leases,
additional laboratory and operating equipment and office and computer equipment
of $900,000, together with a corresponding capital lease obligation, were
recorded as of December 31, 1997.
6. DEBT AND CAPITAL LEASE OBLIGATIONS
Asset purchased under debt (installment notes) or capital lease
financing arrangements consist of building and related improvements, leasehold
improvements, laboratory, operating, office and computer equipment with a cost
of approximately $15,838,000 and $16,749,000 at December 31, 1996 and 1997,
respectively. Accumulated depreciation of these assets totaled approximately
$2,478,000 and $2,772,000 at December 31, 1996 and 1997, respectively. The
weighted average interest rate for debt and capital lease obligations in 1997
was 9.90%.
In October 1997, the Company entered into a five year equipment
financing agreement for $10,000,000. The loan bears 9% interest per annum and
matures in 2002. The agreement is secured by all of the equipment purchased by
the Company between October 21, 1995 and March 31, 1998.
44
<PAGE>
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.
<TABLE>
Future principal payments under installment notes and minimum future
payments under capital leases, are as follows at December 31, 1997:
<CAPTION>
(In thousands)
- - --------------------------------------------------------------------------------------------------------------------
Capital
Installment Lease
Years ending December 31, Notes Obligations Total
- - --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1998 $ 3,476 $ 754 $ 4,230
1999 3,563 568 4,131
2000 3,474 26 3,500
2001 2,974 26 3,000
2002 6,233 26 6,259
Thereafter 12,321 - 12,321
- - --------------------------------------------------------------------------------------------------------------------
32,041 1,400 33,441
Less amount representing interest 10,765 145 10,910
- - --------------------------------------------------------------------------------------------------------------------
Present value of net minimum payments 21,276 1,255 22,531
Current portion 1,631 652 2,283
- - --------------------------------------------------------------------------------------------------------------------
Amounts due after one year $ 19,645 $ 603 $ 20,248
====================================================================================================================
</TABLE>
7. LEASE COMMITMENTS
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
leases a facility in the United Kingdom. Rent expense under all of these
arrangements was approximately $1,422,000 in 1995, $1,610,000 in 1996, and
$1,764,000 in 1997. Rental commitments under the building and equipment
operating leases are as follows at December 31, 1997:
(In thousands)
- - -----------------------------------------------------------------------------
Years ending December 31, Total
- - -----------------------------------------------------------------------------
1998 $ 1,290
1999 789
2000 646
2001 669
2002 699
Thereafter 10,234
- - -----------------------------------------------------------------------------
Total minimum lease payments $ 14,327
=============================================================================
45
<PAGE>
During September 1997, the Company's management suspended further
development and commercialization of AccuSite after being notified that the FDA
did not approve AccuSite as a treatment for genital warts. Pursuant to the
restructuring plan which was established in the third quarter of 1997, the
Operations group relocated to the San Diego facility from its Northern
California facilities during the fourth quarter of 1997.
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.
8. SPECIAL CHARGES
Pre-tax special charges of $4,518,000 were recorded during the third
quarter of fiscal 1997 in connection with the decision to suspend further
development and commercialization of AccuSite. Management suspended the AccuSite
program after being notified that the FDA is not prepared to approve AccuSite as
a treatment for genital warts. In September 1997, restructuring costs were
accrued to conclude the clinical trials and commercial programs associated with
AccuSite. Pursuant to the plan, the Company reduced its workforce by
approximately 63 employees, of which 46 positions related to manufacturing, for
a total severance package of $1,478,000. Additional expenses included the
write-off of inventory related to AccuSite of $1,245,000, costs totaling
$1,194,000 associated with the shut down of Northern California facilities and
write-off of manufacturing equipment, the closing of clinical trials with
respect to AccuSite of $414,000, and sales and marketing costs associated with
AccuSite of $187,000. At December 31, 1997, $2,063,000 remained in current
liabilities of which accruals for future cash payments was approximately
$1,500,000.
9. LITIGATION
On December 21, 1994, Collagen Corporation ("Collagen") filed a lawsuit
against the Company in Santa Clara County Superior Court alleging
misappropriation of trade secrets concerning the Company's manufacturing process
for collagen and seeking unspecified damages and injunctive relief. The Company
denied all allegations of the complaint and subsequently filed a cross-complaint
against Collagen and Howard Palefsky, Collagen's former Chairman and Chief
Executive Officer, seeking recovery of damages for defamation and violations of
state law unfair competition.
On May 23, 1997, the lawsuit between the parties was settled on
mutually agreeable terms and dismissed with prejudice. All claims by and against
all parties have been released. Matrix agreed that for a period of five years it
shall not manufacture or sell products directly competitive with Collagen's
current core products. Collagen has granted Matrix a non-exclusive license to
certain Collagen intellectual property for certain non-monetary consideration.
10. DEFERRED OTHER INCOME
In June 1997, the Company received $2,800,000 as part of a five year
non-compete agreement. This amount is amortized to other income over the
duration of the agreement. At December 31, 1997, the remaining balance of
$2,473,000 was included in other accrued liabilities and deferred other income
in current liabilities and long-term obligations, respectively.
46
<PAGE>
11. STOCKHOLDERS' EQUITY
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 rights 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, 1997, 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, $16,800,000 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 $50,900,000 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 $67,400,000 to the Company.
Shared Investment Program. In March 1997, the Board of Directors authorized a
special risk sharing arrangement designated as the Shared Investment Program
("the Program"). Under the Program, the Company's executive officers and other
key managerial personnel were given the opportunity to purchase shares of Common
Stock in an individually designated amount per participant determined by the
Committee of the Board of Directors. A total of 370,000 shares were purchased
under the Program by nine eligible employees at $6.25 per share, the fair market
value of the Common Stock on June 25, 1997, for an aggregate consideration of
$2,312,500. The purchase price was paid through the participant's delivery of a
full-recourse promissory note payable to the Company. Each note bears interest
at 6.69% compounded semi-annually and has a maximum term of nine years. The
notes are secured by a pledge of the purchased shares with the Company. The
Company recorded notes receivables from participants in this program for
$2,312,500 in the equity section in the Consolidated Balance Sheet.
12. STOCK OPTION PLANS
1991 Directors Stock Option Plan. The Board of Directors adopted a Directors
Stock Option Plan (the "Directors Plan") in 1991. Under the Directors Plan, each
individual who first becomes a non-employee member of the Board of Directors is
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. In May 1994, an
additional 200,000 shares were reserved for issuance pursuant to the Directors
Plan. In March 1997, the Board amended the Directors Plan which was approved by
stockholders at the annual stockholders' meeting in June 1997. Under the amended
Directors Plan, an additional 250,000 shares were reserved for issuance pursuant
to the Directors Plan, and allow each outstanding option held by a board member
on January 1, 1997 and each subsequently granted option to remain outstanding as
to any vested option shares for the full 10-year option term, whether or not the
optionee continues to serve on the board. The maximum number of shares which may
be issued under the automatic option grant program is 592,858 shares. At
December 31, 1997, the total number of common shares reserved for issuance under
director's stock options was 592,858, of which 243,033 remain
47
<PAGE>
available for grant. At December 31, 1997, options to purchase 208,967 shares of
common stock under the Directors 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. In June 1997, an additional
2,000,000 shares were reserved for issuance pursuant to the Plan. At December
31, 1997, the total number of common shares reserved for issuance under
restricted stock options was 3,911,030 of which 1,443,775 remain available for
grant.
<TABLE>
Activity under the Restricted Stock Plan is as follows:
<CAPTION>
Purchase Weighted
rights and average
Shares options exercise
available outstanding Price per share price**
------------ ------------ ----------------------- ----------
<S> <C> <C> <C> <C> <C>
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
Additional authorization 2,000,000 -
Restricted stock awards (185,000) -
Grants of options and purchase rights (3,030,584) 3,030,584 $ 3.50 - $ 6.69 $ 4.37
Exercise of options and purchase
rights - (208,862) $ .23 - $ .37 $ .36
Forfeitures 2,411,103 (2,411,103) $ 3.94 - $ 21.00 $ 7.36
------------ ------------ ----------------------- ----------
Balances at December 31, 1997 1,443,775 2,282,255 $ .23 - $ 15.00 $ 4.13
============ ============
<FN>
**Weighted Average Price per Share not required for 1994
</FN>
</TABLE>
At December 31, 1997, options to purchase 350,279 shares of common
stock were exercisable at a weighted-average exercise price of $4.67 per share.
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.
48
<PAGE>
<TABLE>
Exercise prices for options outstanding as of December 31, 1997 ranged
from $0.23 to $15.00 per share. The weighted-average remaining contractual life
of those options is 9.6 years. Ranges of exercise price for 1997 are as follows:
<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> <C>
$ 0.23 - $ 0.37 139,434 $ 0.35 4.4 139,434 $ 0.35
$ 0.38 - $ 3.94 1,946,361 $ 3.94 9.9 74,224 $ 3.94
$ 3.95 - $ 15.00 196,460 $ 8.65 10.6 136,621 $ 9.47
------------- ----------- -------------- ------------- -------------
2,282,255 $ 4.13 9.6 350,279 $ 4.67
============= =========== ============== ============= =============
</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 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.
On October 29, 1997, the Board of Directors approved a resolution to
offer eligible employees, including executive officers, holding stock options
granted under the Plan, the opportunity to exchange their existing stock options
for new options at the then current fair market value of $3.94 per share. The
resolution maintains the same vesting schedule for unvested shares as was
applicable for the existing stock options, but increases the service period for
those shares previously vested. Vested existing options exchanged for the new
options will vest 50% after six months and 50% after one year.
The Company applies APB 25, "Accounting for Stock Issued to Employees."
Pro forma information regarding net loss per share is required by SFAS 123,
"Accounting for Stock-Based Compensation," 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, 1996, and 1997 under SFAS
123 with the following assumptions: dividend yield of zero % for three years,
volatility factors of 0.62 for 1995, 0.66 for 1996, and 0.56 for 1997, risk-free
interest rate of 6.1% for 1995, 6.2% for 1996 and 1997, assumed forfeiture rate
of 6.4% for 1995 and 1996, and 10.57% for 1997, and an expected life of 4.0
years for all three years.
The Black-Scholes options valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options. However, the
Company has presented the pro forma net loss and pro forma basic and diluted net
loss per common share using the assumptions noted above.
49
<PAGE>
<TABLE>
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 loss and earnings per share for 1995, 1996, and 1997 would have been as
follows:
<CAPTION>
- - -----------------------------------------------------------------------------------------------------------------------
For the Years ended December 31,
(In thousands) 1995 1996 1997
- - -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net loss - as reported $ (26,617) $ (29,643) $ (39,731)
Net loss - pro forma $ (26,761) $ (30,706) $ (41,006)
Basic and diluted net loss per share - as reported $ (2.19) $ (1.48) $ (1.85)
Basic and diluted net loss per share - pro forma $ (2.20) $ (1.53) $ (1.90)
</TABLE>
The weighted average fair value of options granted at fair market value
during 1995, 1996, and 1997, is estimated at $6.98, $5.73, and $2.23,
respectively on the date of grant. The weighted average of options granted at
below fair market value during 1995, 1996, and 1997, is estimated at $7.56,
$7.39, and $2.19, 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 1999.
13. INCOME TAXES
As of December 31, 1997, the Company had federal and state net
operating loss carryforwards of approximately $140,600,000 and $13,100,000
respectively. The Company also had federal research and development tax credit
carryforwards of approximately $3,200,000. The federal net operating loss and
credit carryforwards will expire at various dates beginning in the year 2000
through 2012, if not utilized. The state of California net operating losses will
expire at various dates beginning in 1998 through 2003, 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.
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
50
<PAGE>
<TABLE>
components of the Company's deferred tax assets for federal and state income
taxes for the years ended December 31, 1995, 1996, and 1997 are as follows:
<CAPTION>
(In thousands)
- - ----------------------------------------------------------------------------------------------------------------------
At December 31, 1995 1996 1997
- - ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Deferred tax assets
Net operating loss carryforwards $ 25,500 $ 35,000 $ 48,600
Research credits 2,700 3,500 4,900
Capitalized research expenses 3,800 5,300 6,700
Other 900 1,900 3,300
- - ----------------------------------------------------------------------------------------------------------------------
Total deferred tax assets $ 32,900 $ 45,700 $ 63,500
Valuation allowance for deferred tax assets (32,900) (45,700) (63,500)
- - ----------------------------------------------------------------------------------------------------------------------
Net deferred tax assets $ -- $ -- $ --
======================================================================================================================
</TABLE>
The net valuation allowance increased by $13,000,000, $12,800,000 and
$17,800,000 in 1995, 1996, and 1997, respectively.
14. RELATED PARTIES
During the years ended December 31, 1997, 1996, and 1995, legal fees of
approximately $2,816,200, $1,843,100, and $1,494,700, 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, 1997 and 1996, amounts owed to
Brobeck, Phleger, & Harrison were $111,800 and $387,300, respectively.
In 1997, a director of the Company received $750,000 in exchange for
promissory notes secured by a deed of trust. The notes bear an interest rate of
7% per annum and are due in 1998. During 1997, two officers received $100,000
and $500,000, respectively, in exchange for non-interest bearing promissory
notes secured by deeds of trust.
In March 1997, the Board of Directors authorized a special risk sharing
arrangement designated as the Shared Investment Program ("the Program"). Under
the Program, the Company's executive officers and other key managerial personnel
were given the opportunity to purchase shares of Common Stock in an individually
designated amount per participant determined by the Committee of the Board of
Directors. A total of 370,000 shares were purchased under the Program by nine
eligible employees at $6.25 per share, the fair market value of the Common Stock
on June 25, 1997, for an aggregate consideration of $2,312,500.
15. 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 Board of Directors approved a matching contribution under the
Company's 401 (k) plan. Under this program, retroactive to January 1, 1996, the
Company made 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. At the end of each quarter, the Company issues new shares of its common
stock, using the fair market value, for its matching
51
<PAGE>
contribution. Company matching contributions were $71,000 and $424,000 in 1996
and 1997, respectively.
16. SUBSEQUENT EVENT (UNAUDITED)
In March 1998, the Company entered into an agreement with a real estate
investment trust for the sale and leaseback of its San Diego manufacturing
facility structured as an $18,600,000 purchase and a $6,000,000 convertible loan
secured by specific manufacturing related building improvements. The lease has a
term of thirteen years with the option to renew up to 25 years. 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.
52
<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, 1996 and
1997, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended December
31, 1997 and for the period from inception (February 11, 1985) to December 31,
1997. 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, 1996 and
1997, and the results of its operations and cash flows for each of the three
years in the period ended December 31, 1997 and for the period from inception
(February 11, 1985) to December 31, 1997, in conformity with generally accepted
accounting principles.
Ernst & Young LLP
Palo Alto, California
January 23, 1998
53
'
March 26, 1998
[NAME]
[ADDRESS 1]
[ADDRESS 2]
[CITY], [STATE] [ZIP]
[COUNTRY]
Dear [DEAR]:
We are pleased to inform you that the Company has selected you
to participate in two special benefit programs: the first of these is designed
to preserve the value of any option grants made to you under the Company's 1988
Restricted Stock Plan (the "1988 Plan"), including any options you currently
hold and any options which may subsequently be granted to you under that plan.
As a participant in this program, each of your outstanding options under the
1988 will vest in full on an accelerated basis should your employment terminate
under certain circumstances within a specified time period following a change in
control of the Company. The second benefit is to provide you with six months of
severance pay in the event of your termination without cause from the Company,
as further described below.
As you know, it is the Company's policy to grant officers and
key employees such as yourself options to purchase shares of the Company's
common stock. Those options normally become exercisable in a series of
installments over your period of service with the Company. The specific
exercise/vesting schedule for each of your options is set forth in the stock
option agreement for that grant.
Under the special benefit program, should your employment
terminate under certain circumstances following a change in control, each
outstanding option which you hold at that time under the 1988 Plan will, to the
extent that option is not otherwise fully exercisable for all the option shares,
immediately vest on an accelerated basis and become exercisable for all of the
option shares. You will then have a limited period in which to exercise those
options for any or all of the option shares as fully-vested shares.
The exact terms which will govern the accelerated vesting of
your options are set forth below. Since these acceleration provisions will be in
effect for all option grants made to you under the 1988 Plan, we ask that you
retain a copy of this letter as part of your option records so
<PAGE>
March 26, 1998
Page 2
that you will remain aware of all your rights and entitlements under those
options.
The accelerated vesting provisions of the special benefit program
under the 1988 Plan are as follows:
1. Accelerated Vesting of Option Grants and Option
Shares. Should your employment with the Company terminate by reason of an
Involuntary Termination, other than a Termination for Cause, within eighteen
(18) months after a Change in Control, then each outstanding option under the
1988 Plan which you hold at that time, to the extent not otherwise exercisable
for all the shares subject to that option, shall immediately vest and become
exercisable for all those option shares. You will then have a limited period
following such termination of employment in which to exercise those options for
any or all of the option shares as fully-vested shares. The exact duration of
the post-employment exercise period for each of your options is set forth in the
stock option agreement for that grant.
2. Definitions. For all purposes hereunder, the following
terms shall be defined as specified below:
A. The term "Change in Control" shall mean:
(i) a merger or consolidation in which securities
possessing more than 50% of the total combined voting power of the Company's
outstanding voting securities are transferred to a person or persons different
from the persons holding those securities immediately prior to such transaction;
(ii) a sale, transfer or other disposition of all or
substantially all of the assets of the Company in liquidation or dissolution of
the Company;
(iii) the acquisition of beneficial ownership, by
any person or a group of related persons, of securities possessing thirty
percent (30%) or more of the total combined voting power of the Company's
outstanding voting securities pursuant to a third-party tender or exchange offer
made to the Company's shareholders; or
(iv) a change in the composition of the Board over a
period of thirty-six (36) consecutive months or less such that a majority of the
Board ceases, by reason of one or more contested elections for Board membership,
to be
<PAGE>
March 26, 1998
Page 3
comprised of individuals who either (a) have been Board members continuously
since the beginning of such period or (b) have been elected or nominated for
election as Board members during such period by at least a majority of the Board
members described in clause (a) who were still in office at the time such
election or nomination was approved by the Board.
B. The term "Involuntary Termination" shall mean the
termination of your employment with the Company:
(i) involuntarily upon your dismissal; or
(ii) voluntarily following: (a) a change in your
position with the Company which materially reduces your duties and
responsibilities or the level of management to which you report; (b) a reduction
of ten percent (10%) or more in your level of compensation (including base
salary, fringe benefits and target bonus); or (c) a change in your place of
employment which is more than 50 miles from your place of employment immediately
prior to the Change in Control, provided and only if such change or reduction is
effected without your written concurrence.
C. The term "Termination for Cause" shall mean an
Involuntary Termination effected by reason of your having engaged in fraud, acts
of dishonesty or in any other illegal or intentional misconduct adversely
affecting the business reputation of the Company in a material manner.
3. Severance. If you are Involuntarily Terminated and
such termination is not a Termination for Cause, then you shall be entitled to
six (6) months of salary continuation at your then salary level, provided that
you must execute a standard waiver and release form, releasing the Company and
its officers, directors and agents from any and all employment or wage related
claims, such waiver and release to be executed and delivered by you prior to
your receipt of any severance benefits.
4. Miscellaneous. This Agreement shall be binding upon
the Company, its successors and assigns (including, without limitation, the
surviving entity or successor party resulting from the Change in Control) and
shall be construed and interpreted under the laws of the State of California.
This Agreement shall govern any and all option grants you hold under the
Company's 1988 Restricted Stock Plan. To the extent there is any conflict
between the terms and conditions of the documentation evidencing those grants
and the provisions of this letter, the provisions of this letter shall be
controlling.
<PAGE>
March 26, 1998
Page 4
Please indicate your acceptance of the foregoing by signing the
enclosed copy of this letter and returning it to the Company.
Very truly yours,
MATRIX PHARMACEUTICAL, INC.
By:______________________________________
Accepted and agreed to:
___________________________
___________________________,1998
Date
TERMINATION AGREEMENT
This Termination Agreement is made effective February 7, 1998
(the "Effective Date") by and between BECTON DICKINSON AND COMPANY, a New Jersey
corporation ("Landlord") and Matrix Pharmaceutical, Inc., a Delaware corporation
["Tenant").
RECITALS
A. Landlord and Tenant entered into a Standard Industrial Lease -
Multi-Tenant (the "Lease") dated as of November 16, 1992, as amended, for
premises commonly known as 2350 Qume Drive, San Jose, California and described
therein (the "Original Premises"), for a term of 4 years commencing on November
16, 1992, upon the terms and conditions set forth in said Lease; and
B. The parties desire to cancel and terminate said Lease upon the
terms and conditions herein provided;
NOW, THEREFORE, in consideration of the mutual covenants of the
respective parties hereto, it is agreed as follows:
1. Surrender: Tenant will surrender possession of the Premises
described in the Lease to Landlord and Landlord will accept the surrender
thereof on the Effective Date, and the said Lease shall be and the same will be
cancelled and terminated as of that date. Tenant shall fully comply with all
obligations under the Lease through the Effective Date, including those
provisions relating to the condition of the Premises and removal of Tenant's
personal property upon expiration of the term of the Lease. Landlord
acknowledges and agrees that the Premises are in compliance with the surrender
obligations of the Lease, and accepts the Premises in their "as is" condition.
2. Consideration: For and in consideration of the foregoing
surrender and acceptance and cancellation of the Lease, Tenant does concurrently
herewith pay to Landlord the sum of $82,806.98 (the "Consideration"). The
Consideration includes return by Landlord of all monies that Tenant has
deposited with Landlord as a security deposit pursuant the Lease.
3. Release: Tenant does hereby release and forever discharges
Landlord, and its partners, officers, directors, agents, trustees,
beneficiaries, and employees, of and from any and all claims, acts, damages,
demands, rights or action and causes of action which Tenant ever had, now has or
in the future may have, against Landlord, arising from or in any way connected
with the Premises and Landlord's management or operation of the building of
which the Premises is a part. Subject to Tenant's compliance with the surrender
obligations set forth herein and payment of the Consideration, and except for
the obligations of Tenant which are intended to survive termination of the Lease
(including, without limitation, the indemnity obligations contained in
paragraphs 8.7 and 50.4 of the Lease and the obligations concerning confidential
information contained in paragraph 54 of the Lease), Landlord does hereby
release and forever discharge Tenant, and its officers, directors, agents,
trustees, beneficiaries and employees of and from any and all claims, acts,
damages, demands, rights or actions or causes of action which Landlord ever
1.
<PAGE>
had, now has or in the future may have, whether known or unknown, arising from
or in any way connected to the Premises. Landlord and Tenant expressly waive any
and all rights which either may have under Section 1542 of the Civil Code of the
State of California (or other similar statutes), pertaining to the
aforementioned releases, which statute provides as follows:
"A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT
KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE,
WHICH, IF KNOWN BY HIM, MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH
THE DEBTOR."
IN WITNESS WHEREOF the parties hereto have set their hands as of the day
and year first above written.
"LANDLORD" "TENANT"
Becton Dickinson and Company Matrix Pharmaceutical, Inc.
By: /s/ Deborah Neff By: /s/ Ronald P. Lucas
-------------------------- ---------------------------------
Title: President-BDIS Title: V.P. of Operation
------------------------------
By:
--------------------------------
Title:
-----------------------------
2.
MATRIX PHARMACEUTICAL, INC.
34700 Campus Drive
Fremont, California 94555
August 25, 1997
Michael D. Casey
51 Butternut Lane
Basking Ridge NJ 07920
PERSONAL AND CONFIDENTIAL
RE: Terms of Employment
Dear Michael:
In accordance with our ongoing discussions, the following are the terms
and conditions that we propose for your employment with Matrix Pharmaceutical,
Inc. (the "Company"). If, after reviewing these terms and conditions, you feel
that they are acceptable to you, please so indicate by executing a copy of this
letter and returning same to us.
Specifically, the various terms and conditions on which I believe we
have reached agreement are as follows:
Base Salary: $400,000 per annum. This base salary will be subject to
review twelve months from now and annually thereafter and
shall be subject to adjustment at the sole discretion of the
Board of Directors.
Target Bonus: You shall be eligible to receive a performance based bonus,
targeted at 35% of your base salary. The performance
objectives shall be mutually acceptable to you and the
Conpensation Committee of the Board of Directors and shall
initially cover the objectives to be accomplished over
fiscal year 1998 (beginning January 1, 1998). You shall also
be eligible for a bonus of up to $50,OO0 at 6 months after
your start date based upon certain mutually-agreed upon
milestones.
Sign-on Bonus: $150,000 to replace bonus compensation lost at Schein to be
paid on your first day of employment with Matrix.
Stock Options: You shall be granted options to acquire 550,000 shares of
Matrix Common Stock. These options will be priced as of the
date on which you first begin rendering services to the
Company (which can be structured to be based upon an initial
brief part-time
<PAGE>
employment period, i.e. thirty days, during which you would
begin a transition process but would not be expected to
spend any significant time on Company matters). The options
will be priced to equal the closing price of the Company's
stock on the start date of your part time employment, would
be non-qualified options for tax purposes and would begin
their vesting effective your first day of full-time
employment. If you desire to have a portion of the options,
e.g. up to $100,000 in value structured as ISOs, those
options would have to be priced at the closing price on the
day you began full-time employment. All options will vest as
follows: 110,000 on the first day of full-time employment,
110,000 to "cliff" vest one year later, remainder to vest
ratably over 3 years on a monthly basis from cliff vesting
date. No additional vesting during severance period.
Second Option: Immediately following the Annual Meeting of Stockholders in
May 1998, you will receive a further option grant to
purchase an additional 50,000 share of Common Stock which
option shall be exercisable at the closing stock price on
that date and shall vest ratably over a four year period.
Relocation: Relocation package to cover all reasonable costs associated
with the sale of your house in Basking Ridge, New Jersey,
and your subsequent purchase of a primary residence in the
Bay Area. These costs would include, but not be limited to,
the transaction costs associated with the sale of your
present home (not including capital gains, if any), the
physical move of your personal items, transaction costs
associated with the purchase of a new residence, reasonable
costs for house-hunting trips, the costs of temporary
housing in the Bay Area pending a purchase of a house here
and any other ancillary items that are customarily paid by
the new employer. If needed to speed your transition process
to full time employment with Matrix, a third-party
relocation service will be employed by Matrix on your
behalf. In the event that your acquire a house here (rather
than renting temporary housing as covered above) prior to
completing the sale of your New Jersey residence, we will
cover the lower of the two houses' mortgage costs
(principal, interest and taxes) for a period not to exceed
six months from the date of your employment. We will further
take such actions as are necessary to make you whole with
respect to any ordinary income tax effects of the foregoing
items.
Residence Loan: We will provide you a residence loan (secured by the new
property) in an amount of $500,000 (to help cover the spread
between the cost of the house sold in New Jersey and the
house purchased here in California). This loan will have a
seven year term, be interest free (to the extent secured as
stated above to comply with IRS requirements for
interest-free loans), and shall be forgiven at the end of
years 3 through 7 of your employment (in $100,000
increments). If you are terminated for "Cause" (as defined
below) at any time the loan would immediately come due. If
terminated Without Cause the loan would come due on the
earlier of a sale of the house or three years after the date
of such termination. Notwithstanding the foregoing, if the
Company is acquired in a "Meaningful Acquisition" as defined
below, then the outstanding balance of the loan shall be
forgiven on the closing of such transaction. A "Meaningful
Acquisition" shall mean any transaction in which there is a
"Change in Control" (as defined below) of the Company and
(a) at least one of the following is true: (i) the price per
share of the consideration received by Matrix stockholders
is at least equal to twice the average trading price of
Matrix's Common Stock during the month of March 1998
(weighted for daily volume); (ii) the transaction is the
result of an unsolicited
<PAGE>
tender offer regardless of price; or (iii) the transaction
occurs more than twenty four months after the date of your
employment by Matrix; but (b) neither of the following is
true: (i) in the case of any merger between the Company and
another entity; you are offered the position of Chief
Executive Officer (in title and role) of the successor
entity (with commensurate compensation and duties to those
set forth herein) and this residence loan is assumed; or
(ii) in the case of any control-share transaction in which
less than eighty percent (80%) of the Company is acquired
with the acquiror having a contingent option to acquire the
remainder of the Company later; you are offered the
opportunity to remain the Chief Executive Officer (in title
and role) of the Company (with commensurate compensation and
duties to those set forth herein) and this residence loan is
assumed (provided, however, that any subsequent acquisition
of the remainder of the Company shall itself be treated as a
new Meaningful Acquisition). In addition, to assist in
reducing your mortgage costs we will provide coverage of up
to $25,000 to "buy down" the interest rate on your new
mortgage (this sum is intended to cover the buy-down to
approximately 6.75% on a five year fixed, therafter variable
mortgage).
Termnination
w/o Cause: The Company shall have the right to terminate you from time
to time and at any time with or Without Cause. If you are
terminated without Cause, the Company will continue your
compensation (including health and medical benefits) for a
period of 12 months from the date of termination. Your then
current base salary will be received without consulting
duties. An amount equal to the prior year's actual bonus
will be paid in exchange for reasonable but meaningful
consulting assistance, if requested by the Company. In
addition, if there is a termination Without Cause as a
result of a Meaningful Acquisition (as defined above) then
the foregoing amounts shall be doubled to 24 months.
Automobile
Allowance: You will receive an automobile allowance that covers the
cost of usage, gasoline, taxes, insurance and maintenance on
an automobile having an approximate retail purchase value of
$50,000.
Life Insurance: We will provide you with term a life insurance policy of
$1,000,000.
In addition, you will be appointed President and Chief Executive Officer
of the Company as of your date of full time employment and will be asked to join
the Board of Directors of the Company. Your duties shall include overseeing all
corporate functions and directing the organization to ensure the attainment of
the goals and objectives set forth from time to time by the Board of Directors.
Your employment shall be conditioned upon your acceptance of the
following:
(1) That you agree to abide by the terms and conditions of the Company's
standard Proprietary Information and Inventions Agreement between you and the
Company. You would further agree that at all times both during your employment
by the Company and after your termination, you will keep in confidence and
trust, and will not use or disclose, except as directed by the Company, any
confidential or proprietary information of the Company.
(2) That you shall indemnify and hold the Company harmless against any
liability, damage, claims, or suits and related costs and expenses that may
arise directly or indirectly out of your
<PAGE>
termination of any prior employment relationship or agreement. Further, you
represent that you have not entered into, and agrees not to enter into, any
agreement in conflict with the terms of this Agreement or your employment with
the Company.
(3) You shall devote substantially all of your business time, attention,
knowledge, skills and interests to the business of the Company and the Company
shall be entitled to all of the benefits and profits rising from or incident to
such work, services and advice.
(4) During the term of this Agreement, you shall not, whether directly
or indirectly, render any services of a commercial or professional nature to any
other person or organization, whether for compensation or otherwise without the
prior consent of the Board of Directors.
(5) During the term of this Agreement you shall not, directly or
indirectly, engage or participate in any business that is in competition with
the business of the Company.
For purposes of this letter, certain defined terms shall have the
meanings set forth below:
"Without Cause" shall mean that Matrix has without "Cause," as defined
below, and without your written consent: (i) terminated your services with the
Company; (ii) materially reduced your job title, duties, and material
responsibilities with Matrix; (iii) reduced your base salary by more than five
percent; or (iv) required that you be based at a location more than 40 miles
from the Company's present location.
"Cause" shall mean misconduct, including but not limited to the
following: (i) embezzlement, theft, misuse of confidential information or any
other illegal or improper act by you against Matrix; (ii) conduct that
constitutes a material breach of Matrix policy, after thirty (30) days' notice
and failure to cure; (iii) unauthorized conduct that causes, or could
potentially cause, harm to the health or safety of other Employees; and/or (iv)
any other unauthorized conduct that causes, or could potentially cause, material
harm to the business or reputation of Matrix, after thirty (30) days' notice and
failure to cure.
"Change of Control" solely for purposes of this Agreement shall mean any
transaction or series of related transactions in which (i) substantially all of
the assets of the Company are sold; or (ii) any merger, reorganization or
acquisition in which the stockholders of the Company immediately prior to such
transaction or series of related transactions hold less than 51% of the equity
securities of the surviving entity (or any parent thereof) immediately after
such transaction.
We hope that these terms and conditions are acceptable to you. If they
we, please so indicate by executing a copy of this letter and returning same to
me via facsimile at my office (415) 496-2736. We eagerly await your acceptance
and your ability to begin full-time employment with Matrix as soon as possible.
We understand and acknowledge that you will need some time to initiate the
transition process, but would like to include you in meetings of the Executive
Committee of the Board as soon as possible and would expect you to begin
full-time employment sometime in September. Please feel free to contact either
Ed Luck or myself with any questions.
Sincerely,
/s/ J. Stephan Dolezalek
AGREED AND ACCEPTED: -----------------------
J. Stephan Dolezalek
/s/ Michael D. Casey
------------------
Michael D. Casey
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<PERIOD-START> JAN-1-1997
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