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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, 1998
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File number: 0-19750
MATRIX PHARMACEUTICAL, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 94-2957068
(State or other jurisdiction of (I.R.S. Employer 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
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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, 1999: $35,383,232.
Number of shares of Common Stock, $.01 par value, outstanding as of February
28,1999: 22,278,942.
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 1999 Annual
Meeting of Stockholders scheduled to be held on May 4, 1999.
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MATRIX PHARMACEUTICAL, INC.
FORM 10-K
TABLE OF CONTENTS
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PAGE
NO.
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PART I
Item 1. Business....................................................................................1
Item 2. Properties.................................................................................19
Item 3. Legal Proceedings..........................................................................20
Item 4. Submission of Matters to a Vote of Security Holders........................................20
PART II
Item 5. Market for Registrant's Shares and Related Shareholder Matters..............................20
Item 6. Selected Consolidated Financial Data........................................................21
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.......22
Item 7A. Quantitative and Qualitative Disclosures about Market Risk..................................25
Item 8. Consolidated Financial Statements and Supplementary Schedules...............................25
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure........25
PART III
Item 10. Directors and Officers of Registrant.......................................................26
Item 11. Executive Compensation.....................................................................26
Item 12. Security Ownership of Certain Beneficial Owners and Management.............................26
Item 13. Certain Relationships and Related Transactions.............................................26
PART IV
Item 14. Exhibits, Financial Statement Schedule and Reports on Form 8-K............................27
Signatures................................................................................30
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PART I
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 developing novel drug product candidates for
cancer based on its internal research and development capabilities and through
licensing of product candidates from other pharmaceutical companies.
The Company is a leader in the formulation and development of novel
pharmaceutical product candidates that are designed to improve the delivery of
cancer drugs for more effective local treatment for 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 proprietary systems that
facilitate the direct delivery and retention of anticancer agents in solid
tumors. The Company has developed aqueous-based protein gel systems for delivery
of water-soluble chemotherapeutic agents and non-aqueous semi-solid systems for
delivery of chemotherapeutic agents that are poorly water soluble. Two product
candidates that utilize the Company's aqueous-based protein gel systems are
currently being evaluated in human clinical trials. These are IntraDose(TM)
(cisplatin/epinephrine) Injectable Gel and MPI 5020 Radiopotentiator. IntraDose
incorporates cisplatin, an established chemotherapeutic agent. MPI 5020
incorporates fluorouracil, another established chemotherapeutic agent.
In addition to developing product candidates based on its technology,
the Company also licenses product candidates for development, utilizing its
expertise to identify and subsequently implement appropriate development
strategies for in-licensed compounds. In 1998, Matrix in-licensed FMdC, a
systemic anticancer agent which has completed Phase I clinical trials. The
Company is developing FMdC as an intravenously-administered therapeutic in
non-small cell lung cancer and other cancers.
MATRIX TECHNOLOGY
AQUEOUS-BASED PROTEIN SYSTEMS. IntraDose and MPI 5020
Radiopotentiator are based on the Company's patented injectable gel
technology, in which a chemotherapeutic drug is combined with a protein
matrix and, in IntraDose, 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 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 may allow the development of
new products from established drugs or agents which may be available from other
companies or institutions. Whether or not the chosen drugs or compounds are
"off-patent," when they are incorporated into the Company's proprietary drug
delivery system, the resulting products are 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. Cells that
undergo rapid and unregulated cell division 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.
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The Company believes that the principal advantages of its aqueous-based
protein systems technology include:
- 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.
- 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.
- SITE SPECIFIC APPLICATION. Products are injected directly into
the tumor. 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.
- APPLICABILITY TO A BROAD RANGE OF THERAPEUTIC COMPOUNDS. Many
conventional drugs and novel biopharmaceuticals can be
delivered using the aqueous-based protein systems. This may
allow 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 add to toxicity. The Company's approach to cancer
treatment by local delivery of chemotherapeutic agents may obviate many of these
difficulties. The Company has developed a series of non-aqueous polymer delivery
vehicles (anhydrous delivery vehicles, or ADVs) which in preclinical experiments
significantly enhance the local efficacy of these drugs compared to the efficacy
obtained when these drugs are delivered systemically using more conventional
aqueous delivery systems. The Company believes that ADV carriers may be
applicable to a large variety of water-insoluble drugs, with the potential to
significantly improve the clinical utility of these agents. The Company believes
that this technology may also lend itself well to water-soluble drugs that have
limited stability when dissolved in aqueous media. Until such time as a
corporate partner is identified and additional financial resources are provided,
the Company does not intend to initiate clinical development of any product
candidate based on the ADV technology.
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PRODUCTS IN CLINICAL DEVELOPMENT
The following table summarizes the Company's products in clinical
development, the primary indications for each product and the current
development status.
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DEVELOPMENT COMMERCIAL
PRODUCT/INDICATION METHOD OF ADMINISTRATION STATUS (1) RIGHTS (2)
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INTRADOSE Local intratumoral injection
Head & Neck Cancer Phase III Matrix
Other Solid Tumors Completed Matrix
Phase III
Liver Cancer - Primary Phase II Matrix
Liver Cancer - Metastatic Phase II
Colorectal Cancer Phase II Matrix
FMDC Intravenous (IV)
Non-Small Cell Lung Cancer Phase II Matrix
MPI 5020 RADIOPOTENTIATOR Local intratumoral injection
Recurrent breast cancer Phase I/II Matrix
(chest wall metastases)
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(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."
(2) The Company has worldwide rights to all product candidates except FMdC, for
which the Company has licensed worldwide rights except for Japan.
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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 two placebo-controlled Phase III
clinical trials for head and neck cancer. Open-label Phase III trials in other
solid tumors including recurrent chest wall metastases (from breast cancer,
ovarian cancer and lung cancer), esophageal cancer, melanoma, and various other
carcinomas have been completed. 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 (number of
new cases per year) 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 60% are
diagnosed as later stage disease which has spread beyond the site of origin,
and 40% 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.
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 any
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 chest wall metastases from primary breast cancer, tumors of the
esophagus, 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 26,000 in chest wall metastases from primary
breast cancer, 24,000 in esophageal cancer, and 21,000 in malignant melanoma),
based on data from the American Cancer Society and The
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International Agency for Research on Cancer. Recurrent solid tumors of these
types were 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. An open-label Phase I/II clinical trial for the
treatment of head and neck cancer and other solid tumors was conducted in 45
patients with a total of 82 treated tumors. The study was published in
Otolaryngology-Head and Neck Surgery, the journal of the American Academy of
Otolaryngology-Head and Neck Surgery Foundation. 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) without other therapy 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 were designed to enroll approximately 180 evaluable patients, 90
patients in the United States trial and 90 patients in the European trial. Entry
of patients in the Phase III trials for other solid tumor trials is now
complete. These two Phase III studies are open-label studies designed to include
approximately 130 evaluable patients, 65 in the United States and 65 in Western
Europe. Patients enrolled in the Phase III trials had 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
breakthrough of the skin, pain control, wound care, improvement in ability to
hear, see, and eat, and other palliative benefits.
In June 1998, the Company announced that 60% of the 180 patients
planned for the head and neck studies had been enrolled. The Company also
disclosed that, in consultation with the FDA, study entry criteria have been
revised to exclude patients with neck tumors close to the carotid artery, who
are susceptible to cerebral vascular events including strokes and other serious
neurological adverse events. As of year-end 1998, approximately 75% of the
target number of patients had been enrolled in the head and neck studies. The
Company intends to complete or close enrollment during the fourth quarter of
1999. Assuming these studies are successfully completed, the Company anticipates
using the data from these trials to support regulatory submissions in the United
States and Western Europe.
In September 1998, the Company announced that the other solid tumor
studies were fully enrolled with 127 patients. In November 1998, preliminary
clinical results were presented on a subset of patients at the 16th annual
Chemotherapy Foundation Symposium. Data were presented on 30 women with
advanced breast cancer and 25 patients with malignant melanoma. For most
patients, two or more tumors were treated, including one that was identified
by the physician before the start of treatment as most troublesome, that is,
the tumor that was most threatening or bothersome to the patient. Objective
tumor response rates of 47% in the most troublesome breast tumors and 44% in
the most troublesome malignant melanomas were reported. Among the breast
tumors, five of the 14 responses were complete (100% reduction of tumor
volume for at least 28 days) and nine were partial (50% or greater reduction
of tumor volume for at least 28 days). Among the melanomas, four of the 11
responses were complete and seven were partial. Seven of the 11 melanoma
responses were sustained until the patients went off study. The other four
patients received additional therapies during study follow-up for melanoma
not treated with IntraDose. In patients with recurrent breast cancer, 40%
(12/30) achieved a patient benefit as assessed by the investigator and/or the
patient against predetermined treatment goals. Fifty-seven of the patients
(8/19) who had reduction in tumor volume also had a corresponding patient
benefit. Of the patients with malignant melanoma, 36% (9/25) achieved a
patient benefit and 45% (5/11) of the patients with a tumor response also
achieve a benefit. The therapy was generally well
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tolerated with fewer than 20% of the patients experiencing the nausea and
vomiting usually related to intravenous chemotherapy. The most commonly
reported side effects were local tissue reactions including but not limited
to necrosis, erythema (redness) and swelling at the treatment site and
injection-related pain.
LIVER CANCER
Two types of tumors are commonly 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 worldwide and especially in the parts of the world where
hepatitis is prevalent (E.G., Japan, Korea and Southeast Asia). The Company
believes the incidence 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 often 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 (blocking or draining
a blood vessel while injecting chemotherapy), 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. Patients were treated in an outpatient setting, with the treatment
guided by either CT or ultrasound.
Patients treated in this study have not experienced 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 were 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 and tumor
response (as measured by CT scan), time to tumor progression, pattern of
disease progression, and patient survival.
In April 1998, the Company announced that the criteria had been met
to proceed beyond the first phase of enrollment of 17 patients in each trial,
the first phase of the study, to the anticipated total enrollment of 37
patients in each. This decision was based on observation of changes in tumor
volume or tumor necrosis in at least four patients in each study.
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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 intratumoral 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 study is intended to evaluate the safety
of MPI 5020 when administered in conjunction with standard radiotherapy and
to compare the effect on tumor regression of tumors treated with MPI 5020 and
radiotherapy to tumors treated with radiotherapy alone.
Preliminary information from this ongoing trial was reported at the
annual meeting of the American Society for Therapeutic Radiation and Oncology
in October 1998 and at the Annual San Antonio (Texas) Breast Cancer Symposium
in December 1998. Patients have been treated in the first three of the six
planned dose-escalation and frequency-schedule treatment regimens, and the
combined use of radiation therapy and MPI 5020 has been feasible and well
tolerated.
FMdC
FMdC is a new chemical entity that belongs to a class of anticancer
and antiviral agents known as nucleoside analogs. Several nucleoside analogs
are marketed for treatment of certain leukemias or lymphomas, malignancies of
white blood cells. In addition, another nucleoside analog is marketed for
treatment of pancreatic cancer and non-small cell lung cancer, both of which
are solid tumor malignancies. Preclinical testing indicates that FMdC has
activity against solid tumors and may also be active against blood cell
cancers.
FMdC is an analog of deoxycytidine, one of the four nucleotides, or
bases, that form DNA. Researchers believe FMdC has several modes of action.
The two most important of these are thought to be DNA chain termination
during DNA replication and repair and inhibition of ribonucleotide reductase,
an enzyme that manufactures nucleotides (nucleic acid bases) for
incorporation into DNA. FMdC can be incorporated directly into the
replicating strand of DNA. Once FMdC is incorporated, the enzymes responsible
for further synthesis cannot add additional nucleotides to the DNA chain.
This causes the DNA chain to terminate before it is completely copied and
leads to the death of the cell. The incorporation of FMdC into DNA is also
facilitated by FMdC's inhibition of ribonucleotide reductase, as this
inhibition reduces the supply of the nucleic acid bases that are necessary
for DNA replication. Additionally, experiments indicate that FMdC suppresses
production of a protein that stimulates the growth of blood vessels near
tumors, suggesting that FMdC also may have anti-angiogenic properties.
Animal studies indicate that FMdC is effective against a broad
spectrum of human and rodent tumors, including tumors of the lung, colon,
breast (estrogen-dependent and estrogen-independent), prostate, ovaries, and
pancreas. It has been shown in laboratory studies to be a more effective DNA
chain terminator and inhibitor of ribonucleotide reductase than certain other
nucleoside analogs with known cytotoxic activity.
In an intravenous dosage form, FMdC was generally well tolerated in
four Phase I studies conducted by Hoechst Marion Roussel, Inc. Side events
included fever, flushing, and clinically manageable reductions in white blood
cell counts. FMdC has a relatively long plasma half life of three to six
hours, which also may make it more effective than other nucleoside analogs. A
Phase I trial of an oral dosage form of FMdC has been completed by Kyowa
Hakko, Ltd., which owns rights to the compound in Japan.
In February 1999, a Phase II study of FMdC in patients with
non-small cell lung cancer was initiated in the United States. The American
Cancer Society estimates that non-small cell lung cancer is the leading cause
of cancer deaths in the United States, accounting for 75% of the 160,100 lung
cancer deaths expected this year as well as 75% of the 171,500 expected new
cases of lung cancer. Lung cancer is also one of the most common forms of
cancer and one of the most frequent causes of death from cancer in the
European Union. The International Agency for Research on Cancer estimates
that 182,398 new cases of lung cancer are diagnosed each year in the European
Union and 173,042 deaths occur each year from lung cancer. The Company
expects to begin Phase II trials in one or more additional indications beyond
non-small cell lung cancer during 1999.
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Non-small cell lung cancer is frequently initially treated with
surgery or radiation treatments, although patients may not be eligible for
surgery. Relapse rates are high due, it is believed, to the presence of
metastatic disease. For relapsing patients, treatment options are
single-agent chemotherapy, combination-agent chemotherapy, or best supportive
care. The advent of newer chemotherapeutic agents (e.g. carboplatin,
paclitaxel, docetaxel, vindesine, vinorelbine, irinotecan, topetecan,
gemcitabine) has improved patient response, but durable complete responses
for more than one year are infrequently achieved. Effective new agents with
novel mechanisms of anticancer activity and favorable toxicity profiles are
needed to improve the outcome for these patients.
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.
Clinical development of the ADV technology will depend on the ability
of the Company to secure funding from other pharmaceutical companies.
ACCUSITE-TM- INJECTABLE GEL
AccuSite (fluorouracil/epinephrine) Injectable Gel, the first
product developed by the Company, has been approved for treatment of genital
warts in Belgium, Denmark, Germany, Ireland, Italy, Luxembourg, the
Netherlands, and the United Kingdom. A regulatory decision is pending 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 after receiving a second
action letter from the United States Food and Drug Administration ("FDA")
with respect to the Company's application for U.S. marketing clearance of
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. In subsequent
meetings, FDA officials have maintained this position and indicated that
reconsideration of the Company's New Drug Application would require further
clinical trials. The Company does not intend to conduct such studies or
otherwise invest substantial Company resources in pursuit of marketing
clearance in the United States. The Company has also concluded that in the
absence of commercialization in the United States, it would not be cost
effective to market AccuSite in Europe through local partners.
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 and Milpitas
facilities were closed during 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, the San Diego facility became 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 trials and long-term commercial scale production requirements for
IntraDose and MPI 5020. The Company may also utilize the San Diego facility
for contract manufacturing for other pharmaceutical companies in order to
generate near-term revenues. The facility has passed inspection by the State
of California but will require approval by the U.S. Food and Drug
Administration 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." FMdC will not be manufactured
by the Company. The Company has acquired supplies of FMdC sufficient for
anticipated near-term needs and intends to contract for longer-term
production needs.
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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.
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 FMdC in Japan. 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 - We Have
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 eight issued patents, three allowed patents, and four pending
applications. In Western Europe, the Company has three issued patents and
seven pending applications. The Company has three issued patents and several
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. Another issued patent in the United States,
which expires in 2015, covers certain drug-containing collagen gels,
including AccuSite, MPI 5020 and, potentially, other products developed by
the Company. The other allowed patents cover a key aspect of the Company's
collagen manufacturing process
As part of the in-licensing agreement on FMdC, the Company has
received licenses to a patent portfolio on this technology in the United
States, Europe and many other countries with the exception of Japan. The
first of these patent families is a composition-of-matter and method-of-use
case covering FMdC (and related compounds) and their use in treating
neoplastic or viral disease. The European patents in this family expire in
2009, and the last of the U.S. patents in this family expires in 2014. A
second patent family covers the synthetic method by which FMdC is made; the
last of these patents expire in 2013 in the United States and Europe. Another
U.S. patent covers the use of combinations of FMdC and radiation (U.S. expiry
2014, ex-U.S. in prosecution) and several other synthetic process and
method-of-use patents (combination chemotherapy with other cytotoxic drugs,
combination antiviral therapy, etc.) are issued in Europe or in prosecution
in the United States and Europe.
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.
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The pharmaceutical industry is subject to rapid and substantial
technological change. Technological competition from pharmaceutical and
biotechnology companies, universities, governmental entities and others
diversifying into the field is intense and is expected to increase. Most of
these entities have significantly greater research and development
capabilities, as well as substantial marketing, financial and managerial
resources, and represent significant competition for the Company.
Acquisitions of, or investments in, competing biotechnology companies by
large pharmaceutical companies could increase such competitors' financial,
marketing and other resources. There can be no assurance that developments by
others will not render the Company's products or technologies noncompetitive,
or that the Company will be able to keep pace with technological
developments. Competitors have developed or are in the process of developing
technologies that are, or in the future may be, the basis for competitive
products. Some of these products may have an entirely different approach or
means of accomplishing the therapeutic effect than products being developed
by the Company. These competing products may be more effective and less
costly than the products developed by the Company.
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.
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.
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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 $24,320,000, $27,214,000 and $21,589,000 in 1996, 1997, and 1998,
respectively.
EMPLOYEES
As of December 31, 1998, the Company had a total of 97 full-time
employees, including 23 in research and development, 23 in medical and
regulatory affairs, biostatistics, and technical services, 29 in manufacturing,
and 22 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
WE CAN GIVE NO ASSURANCE OF REGULATORY APPROVALS
The preclinical and clinical testing, manufacturing, and marketing
of our products are subject to extensive regulation by numerous governmental
authorities in the United States and other countries, including the Food and
Drug Administration ("FDA"). Among other requirements, the FDA must approve
our product candidates, manufacturing processes and production facilities
before we may market them in the United States. Similarly, a foreign
governmental authority must typically approve the marketing of a product
before that product's manufacturer can market it in a particular foreign
country. We have no products approved by the FDA and although AccuSite has
been approved by foreign authorities, we do not expect to achieve profitable
operations unless other product candidates now under development receive FDA
and foreign regulatory approval and are thereafter commercialized
successfully. We have 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, and we can give
no assurance that the FDA will grant us any approvals 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 candidate undergo
extensive preclinical and clinical testing to demonstrate its safety and
efficacy for its intended uses. We must also file a New Drug Application ("NDA")
requesting FDA approval. When a product contains more than one component that
contributes to the product's effect, as do some of our 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, prior to approval of a product, the FDA must inspect and
accept the product's manufacturing facilities as being in compliance with its
Good Manufacturing Practices ("GMP") regulations. We can give no assurance that
the FDA will accept our San Diego manufacturing facility, and failure to receive
or maintain such acceptance would materially and adversely affect our business.
When we submit an NDA, the FDA must review and interpret our analysis
of the results of our clinical studies submitted as part of the NDA. Any FDA
interpretation may differ from our analysis, and we can give no assurance that
the FDA will accept our data or our interpretation of that data. 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 our NDA. Any
failure to obtain, or delay in obtaining, FDA approvals would adversely affect
our ability to market our proposed products. Moreover, even if FDA approval is
granted, the approval may include significant limitations on indicated uses for
which a product could be marketed.
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 our products
under development.
The processes required by European regulatory authorities before our
product candidates can be marketed in Western Europe are similar to those in the
United States. We must first complete appropriate preclinical laboratory and
animal tests as well as analytical product quality tests and then submit a
clinical trial exemption or similar documentation before we can initiate human
clinical trials. Upon completion of adequate and well-controlled clinical trials
in humans that establish that the drug is safe and efficacious, we must obtain
regulatory approval from the relevant regulatory authorities.
UNCERTAINTIES ASSOCIATED WITH CLINICAL TRIALS
We have conducted and plan to continue to undertake extensive and
costly clinical testing to assess the safety and efficacy of our 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, we
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or the FDA may modify or suspend clinical trials at any time if the FDA
concludes that the subjects or patients participating in the trials are being
exposed to unacceptable health risks. Further, we can give 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.
We are currently conducting multiple clinical trials in the United
States and certain foreign countries, including two ongoing Phase III trials.
The rate of completion of our clinical trials depends 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. We have experienced slower than planned accrual of
patients in our 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 materially and adversely affect our
business. 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.
WE HAVE A HISTORY OF LOSSES AND OUR FUTURE PROFITABILITY IS UNCERTAIN
We incorporated in 1985 and have experienced significant losses since
that date. As of December 31, 1998, our accumulated deficit was approximately
$166,969,000. We have not generated revenues from our products or product
candidates and expect to incur significant additional losses over the next
several years. In order to achieve a profitable level of operations, we must
successfully develop products, obtain regulatory approvals for our products,
enter into agreements for product commercialization outside the United States,
and develop an effective sales and marketing organization in the United States.
We can give no assurance that we will complete our product development efforts,
that we will obtain the required regulatory approvals, that we will manufacture
or market any products successfully, or that we will achieve profitability.
WE WILL REQUIRE ADDITIONAL FINANCING
We have expended and will continue to expend substantial funds to
complete the research and development of our product candidates. We may require
additional funds for these purposes through additional equity or debt
financings, collaborative arrangements with corporate partners or from other
sources. We can give no assurance that such additional funds will be available
on acceptable terms, if at all. Our business could be materially and adversely
affected if adequate funds are not available from operations or additional
sources of financing. Based on our current operating plan, we anticipate that
our existing capital resources will be adequate to satisfy our capital needs
through 2000. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
WE HAVE LIMITED MANUFACTURING AND SALES AND MARKETING EXPERIENCE
We intend to market and sell certain of our product candidates, if
successfully developed and approved, through our own dedicated sales force in
the United States and through pharmaceutical licensees in Europe. We can give no
assurance that we will be able to establish a successful direct sales
organization or co-promotion or distribution arrangements. In addition, we can
give no assurance that resources will be available to us to fund our marketing
and sales expenses, many of which must be incurred before sales commence.
Failure to establish a marketing and sales capability in the United States
and/or outside the United States may materially and adversely affect our
business.
Our ability to conduct clinical trials on a timely basis, to obtain
regulatory approvals and to commercialize our products will depend in part
upon our ability to manufacture our products, either directly or through
third parties, at a competitive cost and in accordance with applicable FDA
and other regulatory requirements, including GMP regulations. We closed our
manufacturing facilities in San Jose and Milpitas, California in March 1998
and transferred manufacturing personnel to a research and manufacturing
facility in San Diego, California that we acquired in 1995 to meet our
anticipated long-term commercial scale production requirements. We expect
that the San Diego facility and contract manufacturers should provide
sufficient production capacity to meet clinical requirements. We can give no
assurance that we will be able to validate this facility in a timely manner
or that this facility will be adequate for our long-term needs without
delaying our ability to meet product demand or to manufacture in a
cost-effective manner. We expect to continue to use selected contract
manufacturers, in addition to our own manufacturing capability, for some or
all of our product components. Failure to establish additional manufacturing
capacity on a timely basis materially and adversely affect our business.
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WE DEPEND ON OUR SOURCES OF SUPPLY
Several of the materials used in our product candidates are
available from a limited number of suppliers. These items, including collagen
gel and various bulk drug substances, have generally been available to us and
others in the pharmaceutical industry on commercially reasonable terms. If
our manufacturing facilities are not able to produce sufficient quantities of
collagen gel in accordance with applicable regulations, we would have to
obtain collagen gel from another source and gain regulatory approval for that
source. We can give no assurance that we would be able to locate an
alternative, cost-effective source of supply of collagen gel.
We have negotiated and intend to continue to negotiate supply
agreements, as appropriate, for the raw materials and components utilized in
our products. Any interruption of supply could have a materially and
adversely affect our ability to manufacture our products, complete clinical
trials, or commercialize our products. In addition, the issuance in 1996 of a
U.S. patent for cisplatin, a chemotherapeutic drug that is the active
compound in our IntraDose Injectable Gel product, could limit our ability to
commercialize this product in the United States if the newly-issued patent
were upheld, if IntraDose were found to infringe that patent, and if we were
unable to obtain a license under that patent. See "Uncertainty Regarding
Patents and Proprietary Rights."
UNCERTAINTY REGARDING PATENTS AND PROPRIETARY RIGHTS
Our success depends in part on our ability to obtain patent
protection for our products and to preserve our trade secrets and operate
without infringing on the proprietary rights of third parties. We have not
conducted an exhaustive patent search and we can give no assurance that
patents do not exist or could not be filed which would materially and
adversely affect our ability to market our products or maintain our
competitive position with respect to our products. Our patents may not
prevent others from developing competitive products using related technology.
Other companies that obtain patents claiming products or processes useful to
us may bring infringement actions against us. As a result we may be required
to obtain licenses from others to develop, manufacture or market our
products. We can give no assurance that we will be able to obtain any such
licenses on commercially reasonable terms, if at all. We also rely on trade
secrets and proprietary know-how that we seek to protect, in part, by
confidentiality agreements with our employees, consultants, suppliers and
licensees. We can give no assurance that these third parties will not breach
these agreements, that we would have adequate remedies for any breach, or
that our trade secrets will not otherwise become known or be independently
developed by competitors.
We can give no assurance that the U.S. Patent and Trademark Office
("PTO") will approve our pending patent applications, that any patent issued
to, or licensed by us 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 PTO in proceedings instituted by us or others. In
addition, we can give no assurance that our patents will afford protection
against competitors with similar compounds or technologies, that others will
not obtain patents with claims similar to those covered by our patents or
applications, or that others' patents will not adversely affect our ability
to conduct our business.
In 1996, for instance, the PTO granted a composition-of-matter
patent for the cytotoxic drug cisplatin in the United States to a
pharmaceutical company whose use patent on cisplatin as an anti-tumor agent
expired in December 1996. We believe, on advice of patent counsel, that our
IntraDose product candidate, which contains cisplatin, does not infringe this
patent and also that new patent may have been improperly awarded and should
be found invalid and/or unenforceable. However, if the new patent on
cisplatin is upheld and if IntraDose were found to infringe that patent,
there can be no assurance that we 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.
We believe that obtaining foreign patents may be more difficult than
obtaining domestic patents because of differences in patent laws, and
recognize that our 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.
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RISKS RELATED TO 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 us, and represent significant competition for
us. Acquisitions of, or investments in, competing biotechnology companies by
large pharmaceutical companies could increase these competitors' financial,
marketing and other resources. We can give no assurance that developments by
others will not render our products or technologies noncompetitive or that we
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 that we are developing. These competing
products may be more effective and less costly than the products that we are
developing. In addition, conventional drug therapy, surgery and other more
familiar treatments and modalities will compete with our products.
Any product that we successfully develop and for which we gain
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.
PHARMACEUTICAL PRICING AND ADEQUATE REIMBURSEMENT IS UNCERTAIN
The continuing efforts of governmental and third party payers to
contain or reduce the costs of health care through various means may affect
the future revenues, profitability, and availability of capital for
biopharmaceutical companies. 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 we expect that there will
continue to be, a number of federal and state proposals to implement similar
government control. While we cannot predict whether any such legislative or
regulatory proposals will be adopted, the announcement or adoption of such
proposals could materially and adversely affect our prospects.
Our ability to commercialize our 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, or 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 like 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 we can charge for our products. The cost
containment measures that health care payers and providers are instituting
and the effect of any health care reform could adversely affect our ability
to sell our products and may materially and adversely affect our business.
WE DEPEND ON QUALIFIED AND KEY PERSONNEL
Because of the specialized nature of our business, our ability to
maintain our competitive position depends on our ability to attract and
retain qualified management and scientific personnel. Competition for such
personnel is intense. We can give no assurance that we will be able to
continue to attract or retain such persons.
RISKS ASSOCIATED WITH PRODUCT LIABILITY EXPOSURE; LIMITED INSURANCE COVERAGE
We face 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 we will continue to take
appropriate precautions, we can give no assurance that we will avoid
significant product liability exposure. Although we maintain product
liability insurance for clinical studies, we can give no assurance that this
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 our business or financial condition.
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RISKS ASSOCIATED WITH HAZARDOUS MATERIALS AND PRODUCTS
Our research and development involves the controlled use of
hazardous materials, such as cytotoxic drugs, other toxic and carcinogenic
chemicals and various radioactive compounds. Although we believe that our
safety procedures for handling and disposing of such materials comply with
the standards prescribed by federal, state and local regulations, we cannot
completely eliminate the risk of accidental contamination or injury from
these materials. In the event of this type of accident, we could be held
liable for any resulting damages, and any such liability could be extensive.
We are 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 us to, among other things, fines and criminal liability.
Certain chemotherapeutic agents that we employ in our aqueous-based
protein systems, Anhydrous Delivery Vehicles, and regional delivery
technology are known to have toxic side effects, particularly when used in
traditional methods of administration. Each product incorporating a
chemotherapeutic agent will require separate FDA approval as a new drug under
the procedures specified above. Bovine collagen is a significant component of
our protein matrix. Two rare autoimmune connective tissue conditions,
polymyositis and dermatomyositis, 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"). We have taken all
precautions to minimize the risk of contamination of our collagen with BSE,
including the use of United States-sourced cow hides. The Committee For
Proprietary Medicinal Products, a steering committee of the European
Medicines Evaluation Agency, has classified materials made from bovine skin
products as showing no detectable infectivity, indicating minimal risk of
transmission of BSE.
OUR STOCK PRICE IS VOLATILE; WE HAVE NOT DECLARED DIVIDENDS
The market prices for securities of biopharmaceutical and
biotechnology companies (including us) 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 us, our
competitors or other biopharmaceutical products, governmental regulation,
developments in patent or other proprietary rights, litigation or public
concern as to the safety of products that we or others have developed and
general market conditions may have a significant effect on the market price
of our securities. We have not paid any cash dividends on our Common Stock
and do not anticipate paying any dividends in the foreseeable future.
RISKS ASSOCIATED WITH ANTI-TAKEOVER PROVISIONS
Certain provisions of our Certificate of Incorporation and Bylaws
may make it more difficult for a third party to acquire, or discourage a
third party from attempting to acquire, control of us. These provisions could
limit the price that certain investors might be willing to pay in the future
for shares of our Common Stock. Our Board of Directors has the authority to
issue shares of Preferred Stock and to determine the price, rights,
preferences, privileges and restrictions of those shares without any further
vote or action by the stockholders.
The rights of the holders of Common Stock will be subject to, and
may be adversely affected by, the rights of the holders of any Preferred
Stock that may be issued in the future. The issuance of Preferred Stock,
while providing desirable flexibility in connection with possible
acquisitions and other corporate purposes, could have the effect of making it
more difficult for a third party to acquire a majority of our outstanding
voting stock. We have no present plans to issue shares of Preferred Stock.
Certain provisions of Delaware law applicable to us could also delay or make
more difficult a merger, tender offer or proxy contest involving us,
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.
16
<PAGE>
RISKS ASSOCIATED WITH THE YEAR 2000
We are aware of the issues associated with the programming code in
existing computer systems as the millennium year 2000 ("Y2K") approaches. The
"year 2000" problem is pervasive and complex and many computer operations
will be affected in some way by the rollover of the two digit year value to
00. Some computer systems may not 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.
We have formed a Year 2000 Task Force to determine what actions are
required to resolve year 2000 issues. We are performing an internal systems
assessment and we expect to complete any necessary conversion by the second
quarter of 1999. We have determined that the related potential effect on our
business, financial condition or results of operations are not expected to be
material.
During 1997, we installed a new accounting system that the vendor
confirmed addresses the year 2000 related issues. We have initiated formal
communication with other significant vendors and suppliers to determine the
extent to which the Company's operations are vulnerable to those third
parties' failure to remediate their own Y2K issues. In the event that any of
the Company's significant suppliers do not successfully achieve Y2K
compliance, the Company's business or operations could be adversely affected.
In addition, the Company may be vulnerable to external forces that might
generally affect industry and commerce, such as utility and transportation
company Y2K compliance failures and related service interruptions. There can
be no assurance that the systems of other companies on which the Company's
systems rely will be converted on a timely basis and would not have an
adverse effect on the Company's operations.
We have not yet fully developed a comprehensive contingency plan to
address situations that may result if any of the Company's significant
vendors and suppliers are unable to achieve Y2K readiness of its critical
operations. Development of such plan is in progress and is expected to be
completed by the second quarter of 1999.
To date we have spent $10,000 to rectify issues related to Y2K. At
the current stage of the assessment process, we do not expect total projected
costs of implementing year 2000 requirements to exceed $100,000 which
represents approximately 20% of the 1999 Information Technology budget.
17
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS OF THE COMPANY
Certain information about the Company's executive officers is set forth below:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------- --- ---------------------------------------------
<S> <C> <C>
Michael D. Casey 53 Chairman, President and Chief Executive Officer
David G. Ludvigson 48 Senior Vice President and Chief Financial Officer
Richard D. Leavitt, M.D. 53 Senior Vice President, Medical and Regulatory Affairs
Dennis M. Brown, Ph.D. 49 Vice President, Discovery Research
Richard E. Jones, Ph.D. 54 Vice President, Research and Development
Ronald P. Lucas 57 Vice President, Operations
Natalie L. McClure, Ph.D. 46 Vice President, Regulatory Affairs and Quality Assurance
Harry D. Pedersen 43 Vice President, Corporate Development
</TABLE>
Mr. Casey was appointed to the position of Chairman in February 1999
and has been President, Chief Executive Officer and a director of the Company
since October 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. Ludvigson has been Senior Vice President and Chief Financial
Officer since September 1998. From February 1996 to June 1998, he was President
and Chief Operating Officer and a member of the Board of Directors of NeTpower
Inc., a computer workstation company. From October 1993 to February 1996 he was
Vice President and Chief Financial Officer of IDEC Pharmaceuticals Corporation,
a biotechnology company. Previously, from 1992 to 1993, he was Vice President,
Worldwide Sales and Marketing at Conner Peripherals, Inc., a manufacturer of
computer storage equipment, and from 1988 to 1992, he held a series of senior
management positions with MIPS Computer Systems, Inc. ("MIPS"), including, most
recently, Executive Vice President, Chief Operating Officer and Chief Financial
Officer. Prior to joining MIPS, he was an officer of System Industries, Inc., a
computer storage systems supplier. He held a variety of financial management
positions at Unisys/Burroughs Corp. and was a senior manager at Price
Waterhouse.
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 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
18
<PAGE>
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.
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.
ITEM 2. PROPERTIES
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 $18,425,000 purchase and a $6,000,000 convertible loan
secured by specific manufacturing related building improvements. The lease has a
term of 13 years with options to renew for 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, totaled approximately $13,798,000 and is being used to
fund operating expenses and capital purchases.
In 1996, the Company entered into an agreement to lease out a portion
of its San Diego manufacturing facility. The original lease had a term of two
years ending July 1998 and the rental income during the two-year period totaled
approximately $2.9 million. The sublease was extended through April 1999 and
will result in additional rental income of $1,150,000.
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.
19
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
None.
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, 1998.
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 1998 and 1997, as regularly quoted on the Nasdaq
National Market.
<TABLE>
<CAPTION>
Fiscal Year High Low
----------- -------- --------
<S> <C> <C>
1998
1st Quarter $ 5.44 $ 3.25
2nd Quarter 5.75 3.88
3rd Quarter 4.38 1.75
4th Quarter 4.00 2.13
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
</TABLE>
As of February 28, 1999, there were approximately 278 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.
20
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
(In thousands except per share amounts)
- ---------------------------------------------------------------------------------------------------------------------------
Period from
Inception
(February 11,
1985) to
For the Years Ended December 31, December 31,
- ---------------------------------------------------------------------------------------------------------------------------
1994 1995 1996 1997 1998 1998
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS
DATA:
Revenues $ 100 $ -- $ -- $ -- $ -- $ 2,250
Costs and expenses
Research and development 17,072 20,256 24,320 27,214 21,589 138,158
In-license fee -- -- -- -- 4,000 4,000
General and administrative 3,806 8,336 11,428 14,270 6,649 53,884
Special charges -- -- -- 4,518 -- 4,518
- ---------------------------------------------------------------------------------------------------------------------------
Total costs and expenses 20,878 28,592 35,748 46,002 32,238 200,560
- ---------------------------------------------------------------------------------------------------------------------------
Loss from operations (20,778) (28,592) (35,748) (46,002) (32,238) (198,310)
Interest income 1,311 2,179 6,534 5,561 4,491 25,320
Rental income -- -- 659 1,467 1,554 3,680
Other income -- -- -- 352 6,640 6,992
Interest expense (121) (204) (1,088) (1,109) (1,796) (4,651)
- ---------------------------------------------------------------------------------------------------------------------------
Net loss $ (19,588) $ (26,617) $ (29,643) $ (39,731) $ (21,349) $ (166,969)
===========================================================================================================================
Basic and diluted net loss per
common share $ (1.86) $ (2.19) $ (1.48) $ (1.85) $ (0.97)
Weighted average shares used in
computing basic and diluted net
loss per common share 10,538 12,173 20,081 21,536 22,033
</TABLE>
<TABLE>
<CAPTION>
December 31,
- -----------------------------------------------------------------------------------------------------------
1994 1995 1996 1997 1998
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SUMMARY OF CONSOLIDATED BALANCE
SHEET DATA:
Cash, cash equivalents
and investments $ 35,059 $ 77,331 $ 114,584 $ 80,368 $ 66,545
Total assets 37,767 94,419 134,950 110,429 83,731
Total long-term liabilities 761 12,307 11,724 22,161 19,131
Total stockholders' equity 34,168 76,355 115,511 76,653 55,872
</TABLE>
21
<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 31-45.
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, 1998, the Company has incurred
a cumulative net loss of $166,969,000.
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1998 AND 1997.
The Company had no revenues for 1998 or 1997.
Research and development expenses for 1998 decreased by 21% to
$21,589,000 as compared to $27,214,000 for 1997. The decrease was primarily due
to lower personnel costs, the suspension of clinical trials for AccuSite(TM)
Injectable Gel and lower consulting expenses. The decrease was partially offset
by higher depreciation expense and building rent expense in 1998 in connection
with the sale and leaseback transaction for the San Diego manufacturing
facility.
An in-license fee of $4,000,000 was recorded during the third quarter
of fiscal 1998 in connection with a new agreement to in-license a systemic
anticancer agent known as FMdC which is in the early stages of clinical
development. There were no license fees in the year ended 1997.
General and administrative expenses for 1998 decreased by 53% to
$6,649,000 compared to $14,270,000 for 1997. The decrease was due primarily to
lower litigation-related expenses, the absence of AccuSite-related product
marketing expenses and lower personnel costs.
For 1998 no special charges were recorded as compared to special
charges of $4,518,000 which 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 the FDA notified the Company that it was not prepared to approve
AccuSite as a treatment for genital warts. In September 1997, costs to
conclude the clinical trials and commercial programs associated with AccuSite
were accrued. The Company reduced its workforce by 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 committed sales and marketing costs associated with
AccuSite of $187,000. At December 31, 1998, the remaining reserve balance of
$513,000 was included in current liabilities and is primarily for future cash
payments related to facility lease costs.
22
<PAGE>
Interest income decreased by 20% to $4,491,000 as compared to
$5,561,000 as a result of lower average cash balances during the year.
Other income increased to $6,640,000 for 1998 as compared to $352,000
for 1997 due primarily to the receipt of $4,000,000 from a settlement with an
insurance company, $2,108,000 from the gain on sale and leaseback of the San
Diego facility and $560,000 from amortization of a five year non-compete
agreement.
Interest expense increased by 62% to $1,796,000 for 1998 as compared to
$1,109,000 for 1997 due to the impact of new building and equipment financing
loans of $10,000,0000 in the fourth quarter of 1997 and $6,000,000 in 1998
offset by the payoff of the San Diego mortgage loan in the amount of $9,840,000
in 1998.
As of December 31, 1998, the Company had federal and state net
operating loss carryforwards of approximately $165,400,000 and $15,600,000,
respectively. The Company also had federal research and development tax credit
carryforwards of approximately $3,800,000. The federal net operating loss and
credit carryforwards will expire at various dates beginning in the year 2000
through 2018, if not utilized. The state of California net operating loss and
carryforwards will expire at various dates beginning in 1999 through 2004, if
not utilized.
YEARS ENDED DECEMBER 31, 1997 AND 1996.
The Company had no revenues 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 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.
Special charges of $4,518,000, were recorded during the third
quarter of fiscal 1997 in connection with the Company's decision to suspend
further development and commercialization of AccuSite. These special charges
included employee severance, write-off of inventory and manufacturing
equipment, shut down of Northern California facilities, the closing of
clinical trials with respect to AccuSite and sales and marketing associated
with AccuSite. Management suspended the AccuSite program after being notified
that the FDA was not prepared to approve AccuSite as a treatment for genital
warts.
Rental income increased by 123% to $1,467,000 for 1997 as compared to
$659,000 for 1996. The increase is primarily due to the full year effect of the
sublease of a portion of the San Diego facility which commenced July 1996.
Interest income decreased by 15% to $5,561,000 for 1997 from $6,534,000
for 1996 as a result of lower average cash balances experienced throughout the
year.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1998, the Company had $66,545,000 in cash, cash
equivalents and marketable securities, compared to $80,368,000 at December 31,
1997. The decrease of $13,823,000 reflects $25,097,000 of cash disbursements
used primarily to fund operating activities, including a $4,000,000 in-license
fee and $4,000,000 of other income received from a settlement from an insurance
company; payments of $1,718,000 on debt and capital lease obligations; and
capital purchases of $1,016,000. This was partially offset by net cash receipts
from the sale and leaseback of $13,798,000.
In September 1998, the Company entered into an agreement to license a
systemic anticancer agent known as FMdC for $4,000,000. The in-license fee was
recorded in the third quarter of 1998 and was paid on October 22, 1998.
23
<PAGE>
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 $18,425,000 purchase and a $6,000,000 convertible loan
secured by specific manufacturing related building improvements. The lease has a
term of 13 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, totaled approximately $13,798,000 and is being used to
fund operating expenses and capital purchases.
In October 1997, the Company received $10,000,000 before commitment
fees, as part of a five-year equipment financing agreement maturing in 2002. The
agreement is secured by equipment purchased by the Company between October 21,
1995 and March 31, 1998.
Special charges of approximately $4,518,000 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 in 1998 for restructuring were approximately $1,550,000, and
$513,000 remained payable at December 31, 1998. The remaining amount is expected
to be paid during the first half of 1999.
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, 1998, the remaining balance of this
obligation was $1,000,000.
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 and marketable securities
as well as additional capital that may be generated through equity and debt
financings and collaborative agreements.
The Company's working capital and capital requirements will depend on
numerous factors, including the progress of the Company's research and
development programs, preclinical testing and clinical trial activities, the
timing and cost of obtaining regulatory approvals, the levels of resources that
the Company devotes to the development of manufacturing and marketing
capabilities, technological advances and the status of competitors.
The Company expects to incur substantial additional costs relating to
the continued clinical development of its oncology products, continued research
and development programs, the development of manufacturing capabilities, and
general working capital requirements. The Company anticipates that its existing
and committed capital resources will enable it to maintain its current and
planned operations at least through 2000. The Company may require additional
outside financing to complete the process of bringing current products to
market, and there can be no assurance that such financing will be available on
favorable terms, if at all.
Capital expenditures for environmental control efforts were not
material during the 1998 and 1997 fiscal years.
YEAR 2000
The Company is aware of the issues associated with the programming code
in existing computer systems as the millennium year 2000 ("Y2K") approaches. The
"year 2000" problem is pervasive and complex and many computer operations will
be affected in some way by the rollover of the two digit year value to 00. Some
computer systems may not 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.
The Company has formed a Year 2000 Task Force to determine what actions
are required to resolve year 2000 issues. The Company is performing an internal
systems assessment and expects to complete any necessary conversion by the
second quarter of 1999. We have determined that the related potential effect on
our business, financial condition or results of operations are not expected to
be material.
During 1997, the Company installed a new accounting system that the
vendor confirmed addresses the year 2000 related issues. We have initiated
formal communication with other significant vendors and suppliers to
determine the extent to which the Company's operations are vulnerable to
those third parties' failure to remediate their own Y2K issues. In the event
that any of the Company's significant suppliers do not successfully achieve
Y2K compliance, the Company's
24
<PAGE>
business or operations could be adversely affected. In addition, the Company
may be vulnerable to external forces that might generally affect industry and
commerce, such as utility and transportation company Y2K compliance failures
and related service interruptions. There can be no assurance that the systems
of other companies on which the Company's systems rely will be converted on a
timely basis and would not have an adverse effect on the Company's operations.
The Company has not yet fully developed a comprehensive contingency
plan to address situations that may result if any of the Company's
significant vendors and suppliers are unable to achieve Y2K readiness of its
critical operations. Development of such plan is in progress and is expected
to be completed by the second quarter of 1999.
To date the Company has spent $10,000 to rectify issues related to
Y2K. At the current stage of the assessment process, we do not expect total
projected costs of implementing year 2000 requirements to exceed $100,000
which represents approximately 20% of the 1999 Information Technology budget.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's financial investment securities consist of certificates
of deposit, commercial paper, master notes, and repurchase agreements. These
securities all mature in 1999 and their estimated fair value approximates cost.
The following table provides information about the Company's debt securities
that are sensitive to changes in interest rates. The table presents principal
cash flows and related weighted-average interest rates by expected maturity
dates.
<TABLE>
<CAPTION>
Fair Value
(dollars in thousands) 1999 2000 2001 2002 2003 Thereafter Total 12/31/98
---- ---- ---- ---- ---- ---------- ----- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
LIABILITIES
Long-term Debt,
including
Current Portion
Fixed Rate
Imperial Bank $ 1,180 $ 1,291 $ 1,416 $ 4,868 $ - $ - $ 8,755 $ 8,755
Alexandria - - - 6,000 - - $ 6,000 $ 6,000
-------- -------- -------- -------- -------- -------- -------- --------
$ 1,180 $ 1,291 $ 1,416 $ 10,868 $ - $ - $ 14,755 $ 14,755
Average Interest Rate 9.5%
</TABLE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<S> <C>
Index to Consolidated Financial Statements:
Consolidated Balance Sheets--December 31, 1997 and 1998. Page 31
Consolidated Statements of Operations
Years Ended December 31, 1996, 1997 and 1998, and Period from
Inception (February 11, 1985) To December 31, 1998. Page 32
Consolidated Statement of Stockholders' Equity
Period from Inception (February 11, 1985) To
December 31, 1998. Pages 33-34
Consolidated Statements of Cash Flows
Years Ended December 31, 1992, 1993 and 1994, and Period
Years Ended December 31, 1996, 1997 and 1998, and Period from
Inception (February 11, 1985) To December 31, 1998. Page 35
Notes to Consolidated Financial Statements Pages 36-45
Report of Ernst & Young LLP, Independent Auditors Page 46
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
25
<PAGE>
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
4, 1999 (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 18 and 19. 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, Options and Stock Appreciation Rights, Option
Exercises and Holdings" of the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference from
the information under the caption "Stock 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.
26
<PAGE>
PART IV
ITEM 14. FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES, EXHIBITS AND
REPORTS ON FORM 8-K
(a) 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.
<TABLE>
<S> <C>
Index to Consolidated Financial Statements:
Consolidated Balance Sheets--December 31, 1997 and 1998. Page 31
Consolidated Statements of Operations
Years Ended December 31, 1996, 1997 and 1998, and Period from
Inception (February 11, 1985) To December 31, 1998. Page 32
Consolidated Statement of Stockholders' Equity
Period from Inception (February 11, 1985) To
December 31, 1998. Pages 33-34
Consolidated Statements of Cash Flows
Years Ended December 31, 1992, 1993 and 1994, and Period
Years Ended December 31, 1996, 1997 and 1998, and Period from
Inception (February 11, 1985) To December 31, 1998. Page 35
Notes to Consolidated Financial Statements Pages 36-45
Report of Ernst & Young LLP, Independent Auditors Page 46
</TABLE>
(b) 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.
(c) REPORTS ON FORM 8-K
One Special Report on Form 8-K was filed during the quarter ended
December 31, 1998. On October 28, 1998, the Company disclosed that it adopted an
amendment to the Company's Stockholder Rights Plan ("the Plan") eliminating the
"continuing director" provisions in such Plan.
27
<PAGE>
(d) EXHIBITS
<TABLE>
<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)
3.1(b) 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).
10.1(a) Series B Preferred Stock Purchase Agreement dated July 29,
1987
10.2(a) Series B Preferred Stock Purchase Agreement dated June 30,
1988
10.3(a) Series C Preferred Stock Purchase Agreement dated May 24,
1990
10.4(a) Amendment Agreement dated May 24, 1990
10.5(a) Stock Restriction Agreement between the Company and Edward E.
Luck, dated July 29, 1987
10.6(a) Stock Restriction Agreement between the Company and Dennis M.
Brown, Ph.D. dated July 29, 1987
10.7(a) Agreement to Issue Warrant dated December 17, 1988
10.8(a) Series B Preferred Stock Warrant issued to Western Technology
Investment dated December 30, 1988
10.9(a) Series B Preferred Stock Warrant issued to USX Credit
Corporation dated December 30, 1988
10.10(a) Series B Preferred Stock Warrant issued to Highline Financial
Services, Inc. dated December 30, 1988
10.11(a) Form of Common Stock Purchase Warrant
10.12(a) Voting Agreement dated May 24, 1990, as amended
10.14(b) Form of Restricted Stock Purchase Agreement
10.15(b) Form of Stock Purchase Agreement (Repurchase Right with
Escrow)
10.16(b) Form of Stock Option Agreement
10.17(b) Form of Stock Pledge Agreement
10.22(a) Technology Assignment Agreement between the Company and Edward
E. Luck and Dennis M. Brown, Ph.D. dated July 29, 1987
10.23(a)* Supply Agreement between the Company and **** dated December
22, 1988
10.25(c) Form of Indemnification Agreement
10.26(d) Form of Recapitalization
10.27(b) Lease between the Company and Becton Dickinson Corporation,
dated November 16, 1992
10.29(b) Equipment Lease Agreement between the Company and General
Electric Capital Corporation, dated December 17, 1992
10.30 Settlement Agreement and General Release dated February 2,
1993 (Incorporated herein by reference to Exhibit 19.1 filed
with the Company's Form 10-Q as filed with the Securities
and Exchange Commission on May 14, 1993)
10.36* 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)
</TABLE>
- ------------
* 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.
28
<PAGE>
<TABLE>
<S> <C>
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.
10.48(e) 1988 Restricted Stock Plan (Amended and Restated through March
19, 1997)
10.49(f) Form of Stock Issuance Agreement
10.50(g) 1991 Directors Stock Option Plan (Amended and Restated through
March 19, 1997)
10.51(h) Form of Non-Statutory Stock Option Agreement
10.52 Imperial Bank Credit Agreement date October 8, 1997 (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 27, 1998)
10.53 Option Acceleration Program dated January 27, 1998 (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 27, 1998)
10.54 Termination of Lease Agreement with Becton Dickinson (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 27, 1998)
10.55 Employment Agreement between the Company and Michael D. Casey
(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 27, 1998)
10.56 Purchase and Sale Agreement and Joint Escrow Instructions by
and between Alexandria Real Estate Equities, Inc. and Matrix
Pharmaceutical, Inc. dated February 3, 1998 (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
May 7, 1998)
10.57 Lease by and between ARE-4757 Nexus Centre, LLC and Matrix
Pharmaceutical, Inc. dated March 25, 1998. (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
May 7, 1998)
10.58 Loan and Security Agreement by and between ARE-4757 Nexus Centre,
LLC, and Matrix Pharmaceutical, Inc. dated March 25, 1998
(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 May 7, 1998)
10.59 Matrix Pharmaceutical, Inc. v. Chubb Customs Ins. Co., et al.
Settlement Agreement (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 May 7, 1998)
10.60* License Agreement by and between Hoechst Marion Roussel, Inc.
and Matrix Pharmaceutical, Inc. dated September 22, 1998 (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 10, 1998)
23.1 Consent of Ernst & Young LLP, Independent Auditors
27 Financial Data Schedule
</TABLE>
- --------
* Confidential treatment has been granted with respect to certain portions
of this agreement.
(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).
29
<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 25, 1999 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 David G.
Ludvigson the lawful attorney and agent, with power and authority to do any and
all acts and things and to execute any and all instruments which said attorney
and agent determines may be necessary or advisable or required to enable said
corporation to comply with the Securities Exchange Act of 1934, as amended, and
any rules or regulations or requirements of the Securities and Exchange
Commission in connection with this Form 10-K. Without limiting the generality of
the foregoing power and authority, the powers granted include the power and
authority to sign the names of the undersigned officers and directors in the
capacities indicated below to this Form 10-K, to any and all amendments, and to
any and all instruments or documents filed as part of or in conjunction with
this Form 10-K or amendments or supplements thereof, and each of the undersigned
hereby ratifies and confirms all that said attorney and agent shall do or cause
to be done by virtue hereof. This Power of Attorney may be signed in several
counterparts.
IN WITNESS WHEREOF, each of the undersigned has executed this Power of
Attorney as of the date indicated.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
<TABLE>
<S> <C>
Date: March 25, 1999 /s/ Michael D. Casey
---------------------- ------------------------------------
Michael D. Casey
Chairman, President and Chief Executive
Officer (Principal Executive Officer)
Date: March 25, 1999 /s/ David G. Ludvigson
---------------------- ------------------------------------
David G. Ludvigson
Senior Vice President and Chief Financial
Officer (Principal Financial and
Accounting Officer)
Date: March 25, 1999 /s/ J. Stephan Dolezalek
---------------------- ------------------------------------
J. Stephan Dolezalek
Director
Date: March 25, 1999 /s/ Marvin E. Jaffe, M.D.
---------------------- ------------------------------------
Marvin E. Jaffe, M.D.
Director
Date: March 25, 1999 /s/ Bradley G. Lorimier
---------------------- ------------------------------------
Bradley G. Lorimier
Director
Date: March 25, 1999 /s/ Edward E. Luck
---------------------- ------------------------------------
Edward E. Luck
Director
Date: March 25, 1999 /s/ John E. Lyons
---------------------- ------------------------------------
John E. Lyons
Director
Date: March 25, 1999 /s/ Julius L. Pericola
---------------------- ------------------------------------
Julius L. Pericola
Director
Date: March 25, 1999 /s/ James R. Glynn
---------------------- ------------------------------------
James R. Glynn
Director
</TABLE>
30
<PAGE>
MATRIX PHARMACEUTICAL, INC.
(a development stage company)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(In thousands except share and per share amounts) December 31,
- ------------------------------------------------------------------------------------------------------------------------
1997 1998
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 19,719 $ 24,840
Short-term investments 40,666 41,705
Short-term notes from related parties 750 404
Other current assets 1,378 2,657
- ------------------------------------------------------------------------------------------------------------------------
Total current assets 62,513 69,606
Property and equipment, net 26,742 13,416
Non-current investments 19,983 --
Long-term notes from related parties 600 600
Deposits and other assets 591 109
- ------------------------------------------------------------------------------------------------------------------------
$ 110,429 $ 83,731
========================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,800 $ 1,276
Accruals for special charges 2,063 513
Accrued compensation 922 1,094
Accrued clinical trial costs 1,788 1,505
Other accrued liabilities 1,199 1,483
Current portion of deferred other income 560 560
Current portion of debt and capital lease obligations 2,283 2,297
- ------------------------------------------------------------------------------------------------------------------------
Total current liabilities 11,615 8,728
Debt and capital lease obligations, less current portion 20,248 14,176
Deferred other income 1,913 4,955
- ------------------------------------------------------------------------------------------------------------------------
Total long-term liabilities 22,161 19,131
Stockholders' equity:
Common stock, $0.01 par value per share; 30,000,000 shares authorized,
21,908,300 shares issued and outstanding in 1997;
22,154,710 shares issued and outstanding in 1998 219 220
Additional paid-in capital 224,925 225,090
Notes receivable from shareholders (2,313) (2,282)
Deferred compensation (539) (232)
Accumulated other comprehensive income (loss) (19) 45
Deficit accumulated during the development stage (145,620) (166,969)
- ------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 76,653 55,872
- ------------------------------------------------------------------------------------------------------------------------
$ 110,429 $ 83,731
========================================================================================================================
</TABLE>
(See accompanying notes )
31
<PAGE>
MATRIX PHARMACEUTICAL, INC.
(a development stage company)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
(In thousands except per share amounts)
- -------------------------------------------------------------------------------------------------------------------------
Period from
Inception
(February 11,
1985) to
For the Years Ended December 31, December 31,
- -------------------------------------------------------------------------------------------------------------------------
1996 1997 1998 1998
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $ -- $ -- $ -- $ 2,250
Costs and expenses
Research and development 24,320 27,214 21,589 138,158
In-license fee -- -- 4,000 4,000
General and administrative 11,428 14,270 6,649 53,884
Special charges -- 4,518 -- 4,518
- -------------------------------------------------------------------------------------------------------------------------
Total costs and expenses 35,748 46,002 32,238 200,560
- -------------------------------------------------------------------------------------------------------------------------
Loss from operations (35,748) (46,002) (32,238) (198,310)
Interest income 6,534 5,561 4,491 25,320
Rental income 659 1,467 1,554 3,680
Other income -- 352 6,640 6,992
Interest expense (1,088) (1,109) (1,796) (4,651)
- -------------------------------------------------------------------------------------------------------------------------
Net loss $ (29,643) $ (39,731) $ (21,349) $ (166,969)
=========================================================================================================================
Basic and diluted net loss per
common share $ (1.48) $ (1.85) $ (0.97)
=====================================================================================================
Weighted average shares used in
computing basic and diluted net
loss per common share 20,081 21,536 22,033
=====================================================================================================
</TABLE>
(See accompanying notes )
32
<PAGE>
MATRIX PHARMACEUTICAL, INC.
(a development stage company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the period from inception (February 11, 1985) to December 31, 1998
<TABLE>
<CAPTION>
(In thousands)
- -----------------------------------------------------------------------------------------------------------------------------------
Accumu- Deficit
Notes lated Accumulated
Receiv- Other During the Total
Convertible Additional able from Deferred Compre- Develop- Stock-
Preferred Common Paid-in Share- Compen- hensive ment holders'
Stock Stock Capital holders sation Income Stage Equity
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Comprehensive loss:
Net loss from inception (February 11, 1985) $ - $ - $ - $ - $ - $ - $ (49,629) $ (49,629)
to December 31, 1994
Net unrealized gains (losses) on marketable - - - - - (670) - (670)
securities ---------
Comprehensive loss (50,299)
---------
Issuance of 508,867 shares of common - 5 137 - (55) - - 87
stock
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 53 - 5,272 - - - 5,325
preferred stock
Recapitalization of the Company (259,524 shares
of common stock converted to 3,500,000 shares of
convertible preferred stock) 35 (3) (32) - - - - -
Issuance of 4,571,429 shares convertible
preferred stock for cash and conversion of
$400,000 notes payable to stockholders (at $1.75
per share) in May 1990, net of offering costs 45 - 7,880 - - - - 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 - - 819 - (819) - - -
options
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
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1994 $ - $ 108 $ 84,460 $ - $ (101) $ (670) $ (49,629) $ 34,168
Comprehensive loss:
Net loss - - - - - - (26,617) (26,617)
Net unrealized gains (losses) on marketable - - - - - 358 - 358
---------
Comprehensive loss (26,259)
---------
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
- -------------------------------------------------------------------------------------------------- -------------------------------
Balance at December 31, 1995 $ - $ 165 $153,262 $ - $ (514) $ (312) $ (76,246) $ 76,355
</TABLE>
33
<PAGE>
MATRIX PHARMACEUTICAL, INC.
(a development stage company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the period from inception (February 11, 1985) to December 31, 1998
<TABLE>
<CAPTION>
(In thousands)
- -----------------------------------------------------------------------------------------------------------------------------------
Accumu- Deficit
Notes lated Accumulated
Receivable Other During the Total
Convertible Additional from Deferred Compre- Develop- Stock-
Preferred Common Paid-in Share- Compen- hensive ment holders'
Stock Stock Capital holders sation Income 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
Comprehensive loss:
Net loss - - - - - - (29,643) (29,643)
Net unrealized gains (losses) on marketable
securities - - - - - 236 - 236
--------
Comprehensive loss (29,407)
--------
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
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 $ - $ 213 $ 222,043 $ - $ (780) $ (76) $(105,889) $ 115,511
Comprehensive loss:
Net loss - - - - - - (39,731) (39,731)
Net unrealized gains (losses) on marketable
securities - - - - - 57 - 57
--------
Comprehensive loss (39,674)
--------
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
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 $ - $ 219 $ 224,925 $(2,313) $ (539) $ (19) $(145,620) $ 76,653
Comprehensive loss:
Net loss - - - - - - (21,349) (21,349)
Net unrealized gains (losses) on marketable
securities - - - - - 64 - 64
--------
Comprehensive loss (21,285)
--------
Issuance of 165,384 shares of common stock to
employees and investors for cash under the
stock option plan (from $0.231 to $3.94 per
share) - 1 71 - - - - 72
Issuance of 81,026 shares to employees under
employee savings and retirement plan (from $2.625
to $4.625 per share) - - 309 - - - - 309
Amortization of deferred compensation - - - - 184 - - 184
Forfeitures of deferred compensation - - (123) - 123 - - -
Repayment of notes receivable from shareholders - - - 31 - - - 31
Treasury stock - - (92) - - - - (92)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 $ - $ 220 $ 225,090 $(2,282) $ (232) $ 45 $ (166,969) $ 55,872
===================================================================================================================================
</TABLE>
(See accompanying notes)
34
<PAGE>
MATRIX PHARMACEUTICAL, INC.
(a development stage company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
Increase (Decrease) in Cash and Cash Equivalents
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Period from
Inception
(February 11,
1985) to
For the Years Ended December 31, December 31,
- -----------------------------------------------------------------------------------------------------------------------------
1996 1997 1998 1998
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash flows used in operating activities:
Net loss $ (29,643) $ (39,731) $ (21,349) $ (166,969)
Adjustments to reconcile net loss to net cash used by
operating activities:
Depreciation and amortization 1,051 1,142 2,259 7,868
Amortization of deferred compensation 141 313 184 1,457
Amortization of deferred income -- (560) (560)
Gain on sale & leaseback transaction -- -- (1,882) (1,882)
Repurchase of marketing rights (250) (250) (500) 1,000
Other 83 72 218 718
Changes in assets and liabilities:
Other current assets (2,089) 1,663 (1,279) (2,657)
Deposits and other assets 44 (418) 482 (118)
Notes receivable from related parties -- (1,350) 346 (1,004)
Accounts payable 1,031 164 (1,524) 1,276
Accrued compensation 201 (123) 172 1,094
Deferred other income -- 2,473 (177) 2,296
Restructuring costs -- 2,063 (1,550) 513
Accrued clinical trial costs (575) 549 (283) 1,505
Other accrued liabilities 1,471 (936) 346 1,545
- -----------------------------------------------------------------------------------------------------------------------------
Net cash used in operating activities (28,535) (34,369) (25,097) (153,918)
Cash flows from investing activities:
Capital expenditures (2,326) (9,857) (1,016) (32,670)
Proceeds from sale of fixed assets -- -- 17,744 17,744
Investment in securities (189,548) (31,100) (23,763) (429,573)
Proceeds from sale of available-for-sale securities 95,219 -- -- 221,101
Maturities of securities 21,734 65,000 42,707 166,415
- -----------------------------------------------------------------------------------------------------------------------------
Net cash flows provided by (used in) investing
activities (74,921) 24,043 35,672 (56,983)
Cash flows from financing activities:
Repayment of mortgage loan from sale -- -- (9,840) (9,840)
Payments on debt and capital lease obligations (503) (546) (1,718) (4,390)
Issuance of convertible promissory notes payable to
stockholders -- -- -- 400
Net cash proceeds from issuance of:
Debt and capital lease financing -- 9,950 6,000 28,835
Repayment of notes receivable from shareholders -- -- 32 32
Preferred stock -- -- -- 24,679
Common stock 68,422 503 72 196,025
- -----------------------------------------------------------------------------------------------------------------------------
Net cash flows provided by (used in) financing
activities 67,919 9,907 (5,454) 235,741
Net increase (decrease) in cash and cash equivalents (35,537) (419) 5,121 24,840
Cash and cash equivalents at the beginning of period 55,675 20,138 19,719 --
- -----------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at the end of period $ 20,138 $ 19,719 $ 24,840 $ 24,840
=============================================================================================================================
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: $ 1,088 $ 1,229 $ 1,669 $ 4,644
</TABLE>
(See accompanying notes)
35
<PAGE>
MATRIX PHARMACEUTICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATMENTS
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,
in-licensing of a product candidate, 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 1996, by
long-term debt.
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.
CASH AND CASH EQUIVALENTS AND SHORT-TERM 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. All other
investments are reported as short-term investments.
MARKETABLE SECURITIES AVAILABLE- FOR- SALE. All marketable securities
are classified as available-for-sale. Available-for-sale securities are carried
at fair value, with unrealized gains and losses reported as a separate component
of stockholders' equity. The amortized cost of debt securities in this category
is adjusted for amortization of premiums and accretions of discounts to
maturity. Such amortization is included in interest income. Realized gains and
losses and declines in value judged to be other than temporary for
available-for-sale securities are included in interest and other expense. 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. Laboratory,
operating and office equipment and furniture are depreciated over 10 years and
computer equipment over five years. Leasehold improvements are depreciated over
the shorter of the estimated useful life or the lease term. Amortization of
equipment under capital leases is included with depreciation expense.
STOCK BASED COMPENSATION. Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation" ("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 13 to the Consolidated Financial Statements contains a summary
of the pro forma effects to reported net loss and per share data for 1996, 1997
and 1998 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.
NET LOSS PER SHARE. Basic and diluted earnings per share have been
calculated using the weighted average common shares outstanding during the
periods in accordance with Statement of Financial Accounting Standards No.
128, "Earnings Per Share" ("SFAS 128") issued by the Financial Accounting
Standards Board and Securities and Exchange Commission Staff Accounting
Bulletin ("SAB No. 98").
36
<PAGE>
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.
NEW ACCOUNTING PRONOUNCEMENTS. The Company adopted Statement of
Financial Accounting Standards No. 131, "Disclosure about Segments of an
Enterprise and Related Information" ("SFAS 131"), at December 31, 1998. SFAS 131
establishes annual and interim reporting standards for an enterprise's operating
segments and related disclosures about its products, services, geographic areas
and major customers. Under SFAS 131, the Company's operations are treated as one
operating segment as it only reports profit and loss information on an aggregate
basis to chief operating decision makers of the Company.
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.
2. FINANCIAL INSTRUMENTS
The following is a summary of available-for-sale securities:
<TABLE>
<CAPTION>
(IN THOUSANDS) Available-For-Sale Securities
- --------------------------------------------------------------------------------------------------------------------------
Gross Gross Estimated
Unrealized Unrealized Fair
December 31, 1998 Cost Gains Losses Value
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Certificates of deposit $ 41,615 $ 98 $ (8) $ 41,705
Commercial paper 13,100 -- -- 13,100
Master notes 8,000 -- -- 8,000
Repurchase agreements 2,475 -- -- 2,475
- --------------------------------------------------------------------------------------------------------------------------
$ 65,190 $ 98 $ (8) $ 65,280
==========================================================================================================================
<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
==========================================================================================================================
</TABLE>
Included in cash equivalents at December 31, 1998 and 1997 are
$23,575,000 and $18,307,000, 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. All available-for-sale securities have
maturities of less than one year and cost approximates fair value.
37
<PAGE>
3. GAIN ON SALE AND LEASEBACK TRANSACTION
In March 1998, the Company completed an agreement with a real estate
investment trust for the sale and leaseback of its San Diego
office/laboratory and manufacturing facility and an adjacent parcel of land.
The transaction was structured as an $18,425,000 sale and a $6,000,000
convertible loan secured by specific manufacturing related building
improvements. Under the terms of the agreement, the Company will lease the
facility for 13 years with options to renew up to an additional 25 years.
Matrix will pay an average $2,800,000 in annual lease expense. Currently,
this rental expense is partially offset by rental income from a portion of
the facility leased to another bio-pharmaceutical company whose original
lease expired July 31, 1998. The sublease was extended through April 1999
which is expected to result in additional rental income of $1,150,000. The
Company is currently seeking to rent this portion of the facility following
the expiration of the existing lease. Net cash from the lease and loan
agreement, after the payment of the existing mortgage and escrow and other
related fees, totaled approximately $13,798,000 and will be used to fund
operating expenses and capital purchases. The total gain on the transaction
is $5,769,000 of which $1,882,000 has been recognized during the year ended
December 31, 1998 as an immediate gain while the remaining balance has been
deferred and is being recorded to income over the 13-year lease term.
4. OTHER INCOME
Other income during 1998 of $6,640,000 includes the receipt of
$4,000,000 from a settlement with an insurance company, $2,108,000 from the gain
on sale and leaseback of the San Diego facility and $560,000 from amortization
of a five year non-compete agreement.
5. 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, 1998 the obligation has a balance of
$1,000,000 and is included in current and long-term obligations on the balance
sheet.
6. PROPERTY AND EQUIPMENT
Property and equipment is stated at cost and consists of the following:
(IN THOUSANDS)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
December 31, 1997 1998
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Land $ 4,258 $ --
Building 6,928 --
Leasehold improvements 8,734 8,970
Laboratory and operating equipment 7,219 6,177
Office and computer equipment 3,413 3,381
Manufacturing start-up costs 490 --
- ------------------------------------------------------------------------------------------------------------------------
31,042 18,528
Less accumulated depreciation and amortization (4,300) (5,112)
- ------------------------------------------------------------------------------------------------------------------------
Net property and equipment $ 26,742 $ 13,416
========================================================================================================================
</TABLE>
In December 1995, the Company purchased a research and manufacturing
facility in San Diego, California for $13,100,000.
38
<PAGE>
In March 1998, the Company completed an agreement with a real estate
investment trust for the sale and leaseback of its San Diego office/laboratory
and manufacturing facility and an adjacent parcel of land. The transaction was
structured as an $18,425,000 purchase and a $6,000,000 convertible loan secured
by specific manufacturing related building improvements.
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.
7. DEBT AND CAPITAL LEASE OBLIGATIONS
As noted in Footnote 3, the Company completed an agreement with a real
estate investment trust for the sale and leaseback of its San Diego
office/laboratory and manufacturing facility and an adjacent parcel of land. The
transaction was structured as an $18,425,000 sale and a $6,000,000 convertible
loan secured by specific manufacturing related building improvements. The loan
bears interest at 11% per annum and the entire principal balance is due on March
26, 2002. The Company has the right prior to the maturity date to cause Lender
to convert the loan to a lease agreement based upon the attainment of certain
strategic alliances or joint ventures with a cumulative value in excess of
$15,000,000 as measured by initial and milestone payments. In the event the
Company meets certain milestones and chooses to exercise this option, rent shall
be increased by $660,000 per year from approximately $1,920,000 as per the lease
agreement.
Assets 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 $16,749,000 and $3,677,000 at December 31, 1997 and 1998,
respectively. Accumulated depreciation of these assets totaled approximately
$2,772,000 and $2,603,000 at December 31, 1997 and 1998, respectively. The
weighted average interest rate for debt and capital lease obligations in 1998
was 9.52%.
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 equipment purchased by the Company
between October 21, 1995 and March 31, 1998 with a cost of $6,183,000.
Future payments under capital leases, are as follows at December 31,
1998:
<TABLE>
<CAPTION>
(IN THOUSANDS)
- ------------------------------------------------------------------------------------------------------------------------
Capital
Lease
Years ending December 31, Obligations
- ------------------------------------------------------------------------------------------------------------------------
<S> <C>
1999 $ 657
2000 40
2001 40
2002 35
2003 8
- ------------------------------------------------------------------------------------------------------------------------
780
Less amount representing interest 62
- ------------------------------------------------------------------------------------------------------------------------
Present value of net minimum payments 718
Current portion 616
- ------------------------------------------------------------------------------------------------------------------------
Amounts due after one year $ 102
========================================================================================================================
</TABLE>
39
<PAGE>
Future payments under debt obligations, are as follows at December 31,
1998:
<TABLE>
<CAPTION>
(IN THOUSANDS)
- ------------------------------------------------------------------------------------------------------------------------
Installment
Years ending December 31, Notes
- ------------------------------------------------------------------------------------------------------------------------
<S> <C>
1999 $ 1,180
2000 1,291
2001 1,416
2002 10,868
2003 --
- ------------------------------------------------------------------------------------------------------------------------
14,755
Current portion 1,180
- ------------------------------------------------------------------------------------------------------------------------
Amounts due after one year $ 13,575
========================================================================================================================
</TABLE>
8. OPERATING LEASE COMMITMENTS
The Company leased facilities in Fremont, San Jose, Milpitas and San
Diego in the State of California. Rent expense under all of these arrangements
was approximately $1,610,000 in 1996, $1,764,000 in 1997 and $2,346,000 in 1998.
Non-cancellable rental commitments under building and equipment operating leases
are as follows at December 31, 1998:
<TABLE>
<CAPTION>
(IN THOUSANDS)
- ---------------------------------------------------------------------------------------------------------------------------
Years ending December 31, Total
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C>
1999 $ 2,663
2000 2,559
2001 2,589
2002 2,619
2003 2,650
Thereafter 26,592
- ---------------------------------------------------------------------------------------------------------------------------
Total minimum lease payments $ 39,672
===========================================================================================================================
</TABLE>
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.
The Company entered into an agreement with a real estate investment
trust for the sale and leaseback of its San Diego manufacturing facility in
March 1998. The lease has a term of 13 years with options to renew for up to 25
years in which the annual rent expense ranges from $1,920,000 to $2,373,000.
40
<PAGE>
9. SPECIAL CHARGES
Special charges of $4,518,000 were recorded during the third quarter
of 1997 in connection with the decision to suspend further development and
commercialization of AccuSite. No special charges were recorded in 1998.
Management suspended the AccuSite program after the FDA notified the Company
that it was not prepared to approve AccuSite as a treatment for genital
warts. In September 1997, restructuring costs to conclude the clinical trials
and commercial programs associated with AccuSite were accrued. The Company
reduced its workforce by 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, 1998, the reserve balance of $513,000 was included in current
liabilities and is primarily for future cash payments related to facility
lease costs.
10. 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.
11. 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, 1998, the remaining balance of
$1,913,000 was included in deferred other income in current liabilities and
long-term obligations.
12. 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, 1998, no
shares were issued or outstanding.
13. 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 Director's Plan was amended such
that all vested, unexercised options would remain outstanding for the full
10-year option term, regardless of whether the optionee continued to serve on
the board. At the same time, an additional 250,000 shares were reserved for
issuance under the Director's Plan. The aggregate maximum number of shares
which may be issued under the automatic option grant
41
<PAGE>
program is 592,858 shares. At December 31, 1998, the total number of common
shares reserved for issuance under director's stock options was 592,858, of
which 250,635 were exercisable and 231,033 remain available for grant. In
1998 12,000 shares were granted.
1988 RESTRICTED STOCK PLAN. The Company's 1988 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 options granted to ten-percent stockholders which 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, 1998, the total number of common shares reserved
for issuance under restricted stock options was 4,630,953 of which 819,836
remain available for grant.
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 a
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.
Activity under the 1988 Restricted Stock Plan is as follows:
<TABLE>
<CAPTION>
Stock
awards and Weighted
stock average
Shares options exercise
available outstanding Price per share price
------------- ------------ ------------------------- -----------
<S> <C> <C> <C> <C>
Balances at December 31, 1995 26,490 1,466,990 $ 0.23 - $ 15.00 $ 7.18
Additional authorization 850,000 --
Grants of options (1,214,050) 1,214,050 $ 6.16 - $ 26.00 $ 10.42
Exercise of options -- (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 --
Shared investment program shares (370,000) -- $ 6.25 - $ 6.25 $ 6.25
Restricted stock awards (185,000) 185,000 $ 0.00 - $ 0.00 $ 0.00
Grants of options (3,030,584) 3,030,584 $ 3.50 - $ 6.69 $ 4.37
Exercise of options -- (208,862) $ 0.23 - $ 0.37 $ 0.36
Forfeitures 2,411,103 (2,411,103) $ 3.94 - $ 21.00 $ 7.36
------------- ------------
Balances at December 31, 1997 1,073,775 2,467,255 $ 0.00 - $ 15.00 $ 4.13
Grants of options (834,750) 834,750 $ 2.25 - $ 4.94 $ 3.40
Exercise of options and issuance
of stock awards -- (186,355) $ 0.00 - $ 3.94 $ 0.42
Forfeitures 580,811 (580,811) $ 0.00 - $ 15.00 $ 4.05
------------- ------------
Balances at December 31, 1998 819,836 2,534,839 $ 0.00 - $ 11.90 $ 3.88
============= ============
</TABLE>
42
<PAGE>
At December 31, 1998, options to purchase 1,063,984 shares of common
stock were exercisable at a weighted average exercise price of $4.50 per share.
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.
Exercise prices for options outstanding as of December 31, 1998 ranged
from $0.23 to $11.90 per share. The weighted average remaining contractual life
of those options is 8.6 years.
Ranges of exercise price for 1998 are as follows:
<TABLE>
<CAPTION>
Weighted-
Stock awards Weighted- average Number Weighted-
and stock average remaining of average
options exercise contractual exercisable exercise
Exercise price range outstanding price life (in years) options price
- ----------------------------- ------------- ----------- -------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
$ 0.00 $ 2.60 173,233 $ 0.95 8.4 21,899 $ 0.35
$ 2.61 $ 5.20 2,236,233 $ 3.80 8.7 916,712 $ 3.94
$ 5.21 $ 11.90 125,373 $ 9.33 6.6 125,373 $ 9.33
------------- ----------- ------------- ------------- -----------
2,534,839 $ 3.88 8.6 1,063,984 $ 4.50
============= =========== ============== ============= ===========
</TABLE>
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 described in that Statement. The Black-Scholes option pricing model
is used to calculate the fair value of these options for 1996, 1997, and 1998
with the following assumptions: dividend yield of zero % for all three years,
volatility factors of 0.66 for 1996, 0.57 for 1997, and 0.74 for 1998, risk-free
interest rate of 6.2% for 1996 and 1997 and 6.1% for 1998, assumed forfeiture
rate of 6.4% for 1996, 10.57% for 1997 and 1998, 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.
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 net loss per share for 1996, 1997, and 1998 would have been as
follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
For the Years ended December 31,
(IN THOUSANDS) 1996 1997 1998
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net loss - as reported $ (29,643) $ (39,731) $ (21,349)
Net loss - pro forma $ (30,706) $ (41,006) $ (22,525)
Basic and diluted net loss per share - as reported $ (1.48) $ (1.85) $ (0.97)
Basic and diluted net loss per share - pro forma $ (1.53) $ (1.90) $ (1.02)
</TABLE>
The weighted average fair value of options granted at fair market value
during 1996, 1997, and 1998, is estimated at $5.73, $2.23, and $2.01,
respectively on the date of grant. The weighted average of options granted at
below fair market value during 1996 and 1997 is estimated at $7.39 and $2.19
respectively on the date of grant. No options were granted at below fair market
value in 1998.
43
<PAGE>
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.
14. INCOME TAXES
As of December 31, 1998, the Company had federal and state net
operating loss carryforwards of approximately $165,400,000 and $15,600,000,
respectively. The Company also had federal research and development tax credit
carryforwards of approximately $3,800,000. The federal net operating loss and
credit carryforwards will expire at various dates beginning in the year 2000
through 2018, if not utilized. The state of California net operating losses will
expire at various dates beginning in 1999 through 2004, 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.
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets for financial reporting and
the amount used for income tax purposes. Significant components of the Company's
deferred tax assets for federal and state income taxes for the years ended
December 31, 1997, and 1998 are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
- ---------------------------------------------------------------------------------------------------------------------------
At December 31, 1997 1998
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets
Net operating loss carryforwards $ 48,600 $ 57,100
Research credits 4,900 5,900
Capitalized research expenses 6,700 8,200
Other 3,300 1,500
- ---------------------------------------------------------------------------------------------------------------------------
Total deferred tax assets $ 63,500 $ 72,700
Valuation allowance for deferred tax assets (63,500) (72,700)
- ---------------------------------------------------------------------------------------------------------------------------
Net deferred tax assets $ -- $ --
===========================================================================================================================
</TABLE>
The net valuation allowance increased by $17,800,000 and $9,200,000 in
1997 and 1998, respectively.
15. RELATED PARTIES
During the years ended December 31, 1998, 1997, and 1996, legal fees of
approximately $244,000, $2,816,200 and $1,843,100, 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, 1998 and 1997, amounts owed to
Brobeck, Phleger, & Harrison were $16,000 and $111,800, respectively.
In 1997, a director of the Company received $750,000 in exchange for
promissory notes secured by a deed of trust. The notes were payable in 1998 and
accrued interest at 7% per annum. In 1998, the director repaid $346,000 of
principal and accrued interest of $4,000. The remaining balance of the loan was
extended to September 22, 1999. During 1997, two officers received $100,000 and
$500,000, respectively, in exchange for non-interest bearing promissory notes
secured by deeds of trust. The loans are to be forgiven over a period of four to
seven years from their inception. The compensation charge relating to the
forgiveness in 1998 was not material.
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
44
<PAGE>
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.
16. 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 contribution. Company
matching contributions were $71,000, $424,000 and $379,000 in 1996, 1997 and
1998, respectively.
45
<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, 1997 and
1998, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended December
31, 1998 and for the period from inception (February 11, 1985) to December 31,
1998. 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 audits.
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, 1997 and
1998, and the consolidated results of its operations and cash flows for each of
the three years in the period ended December 31, 1998 and for the period from
inception (February 11, 1985) to December 31, 1998, in conformity with generally
accepted accounting principles.
ERNST & YOUNG LLP
Palo Alto, California
January 25, 1999
46
<PAGE>
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 333-32213) pertaining to the 1988 Restricted Stock Plan and the
1991 Directors' Stock Option Plan of Matrix Pharmaceutical, Inc., of our
report dated January 25, 1999, with respect to the consolidated financial
statements of Matrix Pharmaceutical, Inc. included in the Annual Report (Form
10-K) for the year ended December 31, 1998.
Palo Alto, California
March 25, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 24,840
<SECURITIES> 41,705
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 69,606
<PP&E> 18,528
<DEPRECIATION> (5,112)
<TOTAL-ASSETS> 83,731
<CURRENT-LIABILITIES> 8,728
<BONDS> 14,755
0
0
<COMMON> 225,310
<OTHER-SE> (169,438)
<TOTAL-LIABILITY-AND-EQUITY> 83,731
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 32,238
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,796
<INCOME-PRETAX> (21,349)
<INCOME-TAX> 0
<INCOME-CONTINUING> (21,349)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (21,349)
<EPS-PRIMARY> (0.97)
<EPS-DILUTED> (0.97)
</TABLE>
