<PAGE>
- -------------------------------------------------------------------------------
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-19750
------------------
MATRIX PHARMACEUTICAL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
------------------
DELAWARE 94-2957068
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION ORGANIZATION ) IDENTIFICATION NUMBER)
34700 CAMPUS DRIVE
FREMONT, CALIFORNIA 94555
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(510) 742-9900
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes
of common stock , $.01 par value, outstanding as of the latest practicable date.
22,324,119 shares
As of April 30, 1999
- -------------------------------------------------------------------------------
<PAGE>
MATRIX PHARMACEUTICAL, INC.
TABLE OF CONTENTS
PART 1
FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page
----
<S> <C>
Item 1. Financial Statements:
a. Condensed Consolidated Balance Sheets
as of March 31, 1999 and December 31, 1998..................................... 2
b. Condensed Consolidated Statements of Operations
for the three months ended March 31, 1999 and 1998............................. 3
c. Condensed Consolidated Statements of Cash Flows
for the three months ended March 31, 1999 and 1998............................. 4
d. Notes to Condensed Consolidated Financial Statements............................ 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations...................................................... 7
Item 3. Quantitative and Qualitative Disclosures About Market Risk............................... 9
PART II
OTHER INFORMATION
Risk Factors............................................................................. 10
Item 4. Submission of Matters to a Vote of Security Holders...................................... 18
Item 5. Other Information........................................................................ 18
Item 6. Exhibits and Reports on Form 8-K......................................................... 18
Signature................................................................................ 19
</TABLE>
1
<PAGE>
MATRIX PHARMACEUTICAL, INC.
(a development stage company)
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
--------------- ------------------
(Unaudited) (*)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................................ $ 18,106 $ 24,840
Short-term investments................................................... 41,629 41,705
Short-term notes from related parties................................... 217 404
Other current assets..................................................... 3,191 2,657
----------------- ------------------
Total current assets.............................................. 63,143 69,606
Property and equipment, net................................................... 12,844 13,416
Long-term notes (including $443 and $600 from
related parties in 1999 and 1998, respectively)............................. 1,443 600
Deposits and other assets .................................................... 103 109
----------------- ------------------
Total assets...................................................... $ 77,533 $ 83,731
----------------- ------------------
----------------- ------------------
LIABILITIES
Current liabilities:
Accounts payable.......................................................... $ 2,075 $ 2,370
Accruals for special charges ............................................. -- 513
Accrued clinical trial costs ............................................. 1,603 1,505
Other accrued liabilities................................................. 1,421 1,483
Current portion of deferred income........................................ 688 560
Current portion of debt and capital lease obligations .................... 2,158 2,297
--------------- ------------------
Total current liabilities.......................................... 7,945 8,728
Debt and capital lease obligations, less current portion....................... 13,856 14,176
Deferred other income.......................................................... 4,789 4,955
--------------- ------------------
Total long-term liabilities ....................................... 18,645 19,131
STOCKHOLDERS' EQUITY
Common stock............................................................. 220 220
Additional paid-in capital............................................... 225,287 225,090
Notes receivable from shareholders........................................ (2,282) (2,282)
Deferred compensation..................................................... (193) (232)
Accumulated other comprehensive income................................... 11 45
Deficit accumulated during the development stage........................ (172,100) (166,969)
------------------ ------------------
Total stockholders' equity........................................ 50,943 55,872
----------------- ------------------
$ 77,533 $ 83,731
----------------- ------------------
----------------- ------------------
</TABLE>
(*) Derived from audited financial statements.
See accompanying notes
2
<PAGE>
MATRIX PHARMACEUTICAL, INC.
(a development stage company)
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1999 1998
----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C>
Revenues ................................................................... $ -- $ --
Costs and expenses:
Research and development ................................................ 4,100 5,504
General & Administrative ................................................ 1,667 1,480
-------- --------
Total costs and expenses ............................................. 5,767 6,984
-------- --------
Loss from operations ....................................................... (5,767) (6,984)
Interest and other income, net ............................................. 636 2,961
-------- --------
Net loss ................................................................... $ (5,131) $ (4,023)
-------- --------
-------- --------
Basic and diluted net loss per common share ................................ $ (0.23) $ (0.18)
-------- --------
-------- --------
Weighted average shares used in computing
basic and diluted net loss per common share ................................ 22,235 21,921
-------- --------
-------- --------
</TABLE>
See accompanying notes
3
<PAGE>
MATRIX PHARMACEUTICAL, INC.
(a development stage company)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
1999 1998
----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net loss ............................................................... $ (5,131) $ (4,023)
Adjustments to reconcile net loss to net cash used by operating
activities:
Depreciation, amortization, and other ................................ 1,340 568
Gain on sale and leaseback transaction ............................... -- (1,882)
Changes in assets and liabilities:
Notes receivable from related parties ................................ 187 (34)
Deferred other income ................................................ (26) (140)
Accruals for special charges ......................................... (513) (960)
Other changes in assets and liabilities .............................. (1,372) (1,616)
--------- ---------
Net cash used in operating activities ................................ (5,515) (8,087)
Cash flows from investing activities:
Capital expenditures ................................................... (161) (419)
Proceeds from sale of fixed assets ..................................... -- 17,744
Issuance of convertible promissory note ................................ (1,000) --
Investment in available-for-sale securities ............................ (13,100) (5,175)
Maturities of investments .............................................. 13,176 5,500
--------- ---------
Cash flows (used in) provided by investing activities ................ (1,085) 17,650
Cash flows from financing activities:
Repayment of mortgage loan from sale ................................... -- (9,840)
Payments on debt and capital lease obligations ......................... (331) (408)
Net cash proceeds from:
Debt and capital lease financing ..................................... -- 6,000
Capital stock ........................................................ 197 77
--------- ---------
Cash flows used in financing activities .............................. (134) (4,171)
Net (decrease) increase in cash and cash equivalents ........................... (6,734) 5,392
Cash and cash equivalents at the beginning of period ........................... 24,840 19,719
--------- ---------
Cash and cash equivalents at the end of period ................................. $ 18,106 $ 25,111
--------- ---------
--------- ---------
</TABLE>
See accompanying notes
4
<PAGE>
MATRIX PHARMACEUTICAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
1. BASIS OF PRESENTATION
The condensed consolidated balance sheet as of March 31,1999, the
condensed consolidated statements of operations for the three months ended
March 31, 1999 and 1998, and the condensed consolidated statements of cash
flows for the three months ended March 31, 1999 and 1998 have been prepared
by the Company, without audit. In the opinion of management, all
adjustments (which include only normal recurring adjustments) necessary to
present fairly the financial position, results of operations, and cash
flows at March 31, 1999 and for all periods presented have been made. The
condensed consolidated balance sheet at December 31, 1998 has been derived
from the audited financial statements at that date.
Certain information and footnote disclosures normally included in the
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to the
Securities and Exchange Commission's rules and regulations.
The condensed financial statements should be read in conjunction with
the Company's audited financial statements as included in the Company's
Annual Report on Form 10-K for the year ended December 31, 1998 as filed
with the Securities and Exchange Commission. The results of operations for
the three months ended March 31, 1999 are not necessarily indicative of the
results to be expected for any subsequent quarter or for the entire fiscal
year ending December 31, 1999.
2. PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiary after elimination of all material
intercompany balances and transactions.
3. NET LOSS PER SHARE
Net loss per 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.
4. CASH AND CASH EQUIVALENTS, SHORT-TERM INVESTMENTS, AND NON-CURRENT
INVESTMENTS
The Company invests its excess cash in government and corporate debt
securities. Highly liquid investments with maturities of three months or
less at the date of acquisition are considered by the Company to be cash
equivalents. All other investments are reported as short-term investments.
5
<PAGE>
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.
5. Gain on sale and leaseback transaction
In March 1998, the Company completed an agreement with a real estate
investment trust for the sale and leaseback of its San Diego
office/laboratory and manufacturing facility and an adjacent parcel of
land. The transaction was structured as an $18,425,000 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. The
sublease runs through July 1999 and results in additional income of
$134,000 per month. 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 had been recognized during the year ended December 31, 1998 as
an immediate gain while the remaining balance has been deferred and is
being recorded as an offset to rent expense over the 13-year lease term.
6. COMPREHENSIVE LOSS
During the first quarter of 1999 and 1998, total comprehensive loss
amounted to $5,020,000 and $4,012,000, respectively.
6
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
THIS FORM 10-Q MAY CONTAIN, IN ADDITION TO HISTORICAL INFORMATION,
FORWARD-LOOKING STATEMENTS, INCLUDING WITHOUT LIMITATION, STATEMENTS REGARDING
THE TIMING AND OUTCOME OF REGULATORY REVIEWS AND CLINICAL TRIALS. ANY SUCH
FORWARD-LOOKING STATEMENTS ARE BASED ON MANAGEMENT'S CURRENT EXPECTATIONS AND
ARE SUBJECT TO A NUMBER OF RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL
RESULTS TO DIFFER MATERIALLY FROM EXPECTED RESULTS. FOR ADDITIONAL INFORMATION,
INCLUDING RISK FACTORS, SUCH AS NO ASSURANCE OF REGULATORY APPROVALS;
UNCERTAINTIES ASSOCIATED WITH CLINICAL TRIALS; HISTORY OF LOSSES; FUTURE
PROFITABILITY UNCERTAIN; ADDITIONAL FINANCING REQUIREMENTS AND UNCERTAIN ACCESS
TO CAPITAL MARKETS; LIMITED MANUFACTURING AND SALES AND MARKETING EXPERIENCE;
DEPENDENCE ON SOURCES OF SUPPLY; UNCERTAINTY REGARDING PATENTS AND PROPRIETARY
RIGHTS; RAPID TECHNOLOGICAL CHANGE AND SUBSTANTIAL COMPETITION; UNCERTAINTY OF
PHARMACEUTICAL PRICING; NO ASSURANCE OF ADEQUATE REIMBURSEMENT; DEPENDENCE UPON
QUALIFIED AND KEY PERSONNEL; PRODUCT LIABILITY EXPOSURE; LIMITED INSURANCE
COVERAGE; HAZARDOUS MATERIALS AND PRODUCT RISKS; VOLATILITY OF STOCK PRICE; NO
DIVIDENDS; ANTI-TAKEOVER PROVISIONS AND YEAR 2000 COMPLIANCE, PLEASE SEE THE
"RISK FACTORS" SECTION INCLUDED IN THE COMPANY'S 1998 ANNUAL REPORT ON FORM 10-K
AND IN THIS FORM 10-Q AS WELL AS OTHER FACTORS DISCUSSED BELOW AND ELSEWHERE IN
THIS REPORT.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
Since the Company's inception in 1985, the primary focus of its operations
has been research and development, and, to date, it has not received any
revenues from the commercial sale of products. The Company has a history of
operating losses and expects to incur substantial additional losses over the
next several years as it continues to develop its products. For the period from
its inception to March 31, 1999, the Company has incurred a cumulative net loss
of approximately $172,100,000.
The Company had no revenue in the first quarter of 1999 and 1998.
Research and development expenses for the first quarter of 1999 decreased
by 26% to $4,100,000 compared to $5,504,000 for the first quarter of 1998. The
decrease was primarily due to lower clinical trial expenses reflecting the
completion of the treatment of patients in other solid tumors studies during the
fourth quarter of 1998, lower per patient costs associated with the liver
program, lower personnel costs, reduced depreciation and lower manufacturing
supplies and expenses.
General and administrative expenses for the first quarter of 1999 increased
13% to $1,667,000 compared to $1,480,000 for the first quarter of 1998. The
increase was primarily due to higher personnel costs related to amortization of
relocation loans previously made and recruiting costs partially offset by lower
consulting expenses.
Interest and other income decreased by 79% to $636,000 for the first
quarter of 1999 compared to $2,961,000 for the same period in 1998. This
decrease was largely due to a gain on the sale of the San Diego facility in the
amount of $1,882,000 recognized in the first quarter of 1998.
7
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1999, the Company had $59,735,000 in cash, cash equivalents
and marketable securities, compared to $66,545,000 at December 31, 1998. The
Company used $5,515,000 and $8,087,000 for operating activities for the three
months ended March 31, 1999 and March 31, 1998, respectively.
The decrease of $6,810,000 in cash, cash equivalents and short term
investments during the first quarter of 1999 reflects $5,515,000 of cash
disbursements used to fund operating activities, a $1,000,000 convertible
promissory note issued as part of the evaluation of acquisition or licensing of
cancer technology, payments of $331,000 on debt and capital lease obligations
and capital purchases of $161,000 .
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 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 March 31, 1999, 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 as well as additional
capital that may be generated through equity and debt financings and
collaborative agreements.
The Company's working capital and capital requirements will depend on
numerous factors, including the progress of the Company's research and
development programs, preclinical testing and clinical trial activities, the
timing and cost of obtaining regulatory approvals, the levels of resources that
the Company devotes to the development of manufacturing and marketing
capabilities, technological advances and the status of competitors.
The Company expects to incur substantial additional costs relating to the
continued clinical development of its oncology products, continued research and
development programs, the development of manufacturing capabilities, and general
working capital requirements. The Company anticipates that its existing and
committed capital resources will enable it to maintain its current and planned
operations at least through 2000. The Company may require additional outside
financing to complete the process of bringing current products to market, and
there can be no assurance that such financing will be available on favorable
terms, if at all.
YEAR 2000
The Company is aware of the issues associated with the programming code in
existing computer systems as the millennium year 2000 ("Y2K") approaches. The
Y2K problem is pervasive and complex
8
<PAGE>
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 Y2K issues. The Company is finalizing 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 its
business, financial condition and results of operations are not expected to be
material.
During 1997, the Company installed a new accounting system that the vendor
confirmed addresses the Y2K related issues. The Company has 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.
The Company is finalizing 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 their critical operations.
Completion of such plan is expected by the second quarter of 1999.
To date the Company has spent $18,000 to rectify issues related to Y2K.
At the current stage of the assessment process, total projected costs of
implementing Y2K requirements is not expected to exceed $100,000, which
represents approximately 20% of the Company's 1999 Information Technology
budget.
ITEM 3. 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) 3/31/99 2000 2001 2002 2003 Thereafter Total 03/31/99
------- ---- ---- ---- ---- ---------- ----- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
LIABILITIES
Long-term Debt, including
Current Portion
Fixed Rate
Imperial Bank $892 $1,291 $1,416 $4,868 $ - $ - $8,467 $8,467
Alexandria - - - 6,000 - - $6,000 $6,000
----- ------ ------ ------- ----- ---- ------- -------
$892 $1,291 $1,416 $10,868 $ - $ - $14,467 $14,467
Average Interest Rate 9.5%
</TABLE>
9
<PAGE>
PART II. OTHER INFORMATION
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
10
<PAGE>
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 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 March 31, 1999, our accumulated deficit was approximately
$172,100,000. 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
11
<PAGE>
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.
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."
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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.
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.
13
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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.
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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.
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
15
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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.
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 Y2K 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 Y2K issues. We are finalizing 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 Y2K related issues. We have initiated formal communication with
other significant vendors and suppliers to determine the extent to which our
operations are vulnerable to those third parties' failure to remediate their own
Y2K issues. In the event that any our significant suppliers do not successfully
achieve Y2K compliance, our business or operations could suffer. In addition, we
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. We can give no assurance that the systems of
other companies on which our systems rely will be converted on a timely basis or
would not have an adverse effect our operations.
16
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We are finalizing a comprehensive contingency plan to address situations
that may result if any of our significant vendors and suppliers are unable to
achieve Y2K readiness of their critical operations. Completion of such a plan is
expected by the second quarter of 1999.
To date the we have spent $18,000 to rectify issues related to Y2K. At the
current stage of the assessment process, we do not expect total projected costs
of implementing Y2K requirements to exceed $100,000, which represents
approximately 20% of our 1999 Information Technology budget.
17
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MATRIX PHARMACEUTICAL, INC.
PART II OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
27.1 Financial Data Schedule
(b) REPORTS ON FORM 8-K
There were no Current Reports on Form 8-K filed during the
quarter ended March 31, 1999.
18
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MATRIX PHARMACEUTICAL, INC.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MATRIX PHARMACEUTICAL, INC.
Date: May 12, 1999 By: /s/ David G. Ludvigson
------------- -----------------------
David G. Ludvigson
Chief Financial Officer, Senior Vice
President
Signing on behalf of the registrant as
principal financial officer
19
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