<PAGE>
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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 SEPTEMBER 30, 1999
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-19750
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MATRIX PHARMACEUTICAL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
----------------------
DELAWARE 94-2957068
-------- ----------
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION 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.
22,646,949 shares
As of October 29, 1999
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MATRIX PHARMACEUTICAL, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART 1
FINANCIAL INFORMATION
Page
<S> <C> <C>
Item 1. Financial Statements:
a. Condensed Consolidated Balance Sheets
as of September 30, 1999 and December 31, 1998 ....................... 2
b. Condensed Consolidated Statements of Operations
for the three and nine months ended September 30, 1999 and 1998 ...... 3
c. Condensed Consolidated Statements of Cash Flows
for the nine months ended September 30, 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 ................. 10
PART II
OTHER INFORMATION
Risk Factors ............................................................... 11
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)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------- ------------
(Unaudited) (*)
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents ................................................. $ 15,441 $ 24,840
Short-term investments .................................................... 36,401 41,705
Short-term notes from related parties ..................................... - 404
Other current assets ...................................................... 1,619 2,657
------------- ------------
Total current assets ............................................... 53,461 69,606
Property and equipment, net .................................................... 12,174 13,416
Long-term notes from related parties ........................................... 485 600
Deposits and other assets ...................................................... 104 109
------------- ------------
Total assets ....................................................... $ 66,224 $ 83,731
============= ============
LIABILITIES
Current liabilities:
Accounts payable .......................................................... $ 1,321 $ 1,531
Accruals for special charges .............................................. - 513
Accrued compensation ...................................................... 1,117 839
Accrued clinical trial costs .............................................. 1,751 1,505
Other accrued liabilities ................................................. 1,205 1,483
Current portion of deferred income ........................................ 560 560
Current portion of debt and capital lease obligations ..................... 1,935 2,297
------------- ------------
Total current liabilities .......................................... 7,889 8,728
Debt and capital lease obligations, less current portion ....................... 12,852 14,176
Deferred other income .......................................................... 4,367 4,955
------------- ------------
Total long-term liabilities ........................................ 17,219 19,131
STOCKHOLDERS' EQUITY
Common stock .............................................................. 237 220
Additional paid-in capital ................................................ 226,093 225,090
Notes receivable from shareholders ........................................ (2,208) (2,282)
Deferred compensation ..................................................... (116) (232)
Accumulated other comprehensive income .................................... (132) 45
Deficit accumulated during the development stage .......................... (182,758) (166,969)
------------- ------------
Total stockholders' equity ......................................... 41,116 55,872
------------- ------------
$ 66,224 $ 83,731
============= ============
</TABLE>
(*) Derived from audited financial statements.
See accompanying notes
2
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MATRIX PHARMACEUTICAL, INC.
(a development stage company)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1999 1998
--------- --------- ------- ---------
<S> <C> <C> <C> <C>
Revenues ......................................... $ - $ - $ - $ -
Costs and expenses:
Research and development ...................... 4,507 4,565 13,346 15,212
In-license Fee ................................ - 4,000 - 4,000
General and administrative .................... 1,226 1,831 4,187 4,938
-------- -------- -------- --------
Total costs and expenses ................... 5,733 10,396 17,533 24,150
-------- -------- -------- --------
Loss from operations ............................. (5,733) (10,396) (17,533) (24,150)
Gain on sale and leaseback transaction ........... - 113 - 1,995
Interest and other income (expense), net ......... 601 771 1,744 6,709
-------- -------- -------- --------
601 884 1,744 8,704
-------- -------- -------- --------
Net loss ......................................... $ (5,132) $ (9,512) $(15,789) $(15,446)
======== ======== ======== ========
Basic and diluted net loss per common share ...... $ (0.23) $ (0.43) $ (0.71) $ (0.70)
======== ======== ======== ========
Weighted average shares used in computing
basic and diluted net loss per common share ...... 22,490 22,088 22,357 22,004
======== ======== ======== ========
</TABLE>
See accompanying notes
3
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MATRIX PHARMACEUTICAL, INC.
(a development stage company)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED SEPTEMBER 30,
1999 1998
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net loss ................................................. $(15,789) $(15,446)
Adjustments to reconcile net loss to net cash used
by operating activities:
Depreciation, amortization, and other .................. 1,956 2,233
Gain on sale and leaseback transaction ................. - (1,882)
Amortization of deferred income ........................ (420) (773)
Changes in assets and liabilities:
Notes receivable from related parties .................. 404 -
Deferred other income .................................. (79) -
Accruals for special charges ........................... (513) (1,485)
Accrued compensation ................................... 23 11
Other changes in assets and liabilities ................ 709 627
-------- --------
Net cash used in operating activities .................. (13,709) (16,715)
Cash flows from investing activities:
Capital expenditures ..................................... (313) (518)
Proceeds from sale of fixed assets ....................... - 17,744
Investment in available-for-sale securities .............. (71,973) (26,926)
Maturities of investments ................................ 77,277 33,729
-------- --------
Cash flows provided by investing activities ............ 4,991 24,029
Cash flows from financing activities:
Repayment of mortgage loan from sale of building ......... - (9,840)
Payments on debt and capital lease obligations ........... (1,775) (1,701)
Net cash proceeds from:
Debt and capital lease financing ....................... - 6,000
Capital stock .......................................... 1,020 45
Notes receivable from shareholders ..................... 74 32
-------- --------
Cash flows used in financing activities ................ (681) (5,464)
Net (decrease) increase in cash and cash equivalents ............. (9,399) 1,850
Cash and cash equivalents at the beginning of period ............. 24,840 19,719
======== ========
Cash and cash equivalents at the end of period ................... $ 15,441 $ 21,569
======== ========
</TABLE>
See accompanying notes
4
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MATRIX PHARMACEUTICAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
1. BASIS OF PRESENTATION
The condensed consolidated balance sheet as of September 30,
1999, the condensed consolidated statements of operations for the three
and nine months ended September 30, 1999 and 1998, and the condensed
consolidated statements of cash flows for the nine months ended
September 30, 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 September
30, 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 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.
Certain items have been reclassified to conform with current
period classification.
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 and nine months ended September 30,
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. 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 for 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. 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. The total gain on the
transaction was $5,769,000 of which $1,882,000 was 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.
5
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3. COMPREHENSIVE LOSS
During the third quarter of 1999 and 1998, total comprehensive
loss amounted to $5,139,000 and $9,366,000, respectively. For the first
nine months of 1999 and 1998, total comprehensive loss amounted to
$15,966,000 and $15,346,000, respectively.
6
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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 AND NINE MONTHS ENDED SEPTEMBER 30, 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 September 30, 1999, the Company has
incurred a cumulative net loss of approximately $182,758,000.
The Company had no revenue in the third quarter of 1999 and 1998 or
in the first nine months of 1999 and 1998.
Research and development expenses for the third quarter of 1999
decreased by 1% to $4,507,000 compared to $4,565,000 for the third quarter of
1998. The decrease was primarily due to lower per patient costs associated
with the Company's Intradose clinical trial programs. This was offset by
higher costs associated with the FMdC clinical trial program which commenced
during 1999 and higher rental expense at the San Diego office/laboratory and
manufacturing facility. The increase in the San Diego rent expense is due to
lower rental income from the sublease of a portion of the facility. For the
first nine months of 1999, research and development expenses decreased by 12%
to $13,346,000 compared to $15,212,000 for the same period in 1998. The
decrease was primarily due to reduced clinical trial program costs including
the other solid tumor program which was completed during the fourth quarter
of 1998 as well as lower per patient costs for the Company's Intradose
programs. In addition, the decrease was due to lower manufacturing service,
supply and utility costs at the San Diego facility. This was partially offset
by the higher costs associated with the FMdC clinical trial program.
7
<PAGE>
For the three and nine months ended September 30, 1999, there was no
license fee expense as compared to the $4,000,000 license fee in the three
and nine months ended September 30, 1998, which was due to a new agreement to
in-license a systemic anticancer agent known as FMdC that is in the early
stages of clinical development.
General and administrative expenses for the third quarter of 1999
decreased 33% to $1,226,000 compared to $1,831,000 for the third quarter of
1998 due to lower relocation, consulting and legal expenses. For the first
nine months of 1999, general and administrative expenses decreased by 15% to
$4,187,000 compared to $4,938,000 for the same period in 1998. The decrease
was due to lower consulting costs, recruiting and relocation and legal
expenses.
Interest and other income decreased by 32% to $601,000 for the third
quarter of 1999 compared to $884,000 for the same period in 1998 due
primarily to lower interest earned from lower cash balances. For the first
nine months of 1999, interest and other income decreased by 80% to $1,744,000
compared to $8,704,000 for the same period in 1998, primarily due to the
income from an insurance settlement in the amount of $4,000,000 in the second
quarter of 1998 and the $1,882,000 gain on the sale and leaseback of the San
Diego facility recorded in the first quarter of 1998 as well as lower
interest earned from lower cash balances in 1999.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1999, the Company had $51,842,000 in cash, cash
equivalents and marketable securities, compared to $66,545,000 at December
31, 1998. The Company used $13,709,000 and $16,715,000 for operating
activities for the nine months ended September 30, 1999 and September 30,
1998, respectively.
The decrease of $14,703,000 in cash, cash equivalents and short-term
investments during the first nine months of 1999 reflects $13,709,000 of cash
disbursements used to fund operating activities, payments of $1,775,000 on
debt and capital lease obligations and capital purchases of $313,000. This
was offset by cash received for the purchase of the Company's common stock in
the amount of $1,020,000.
In September 1998, the Company entered into an agreement to license
a systemic anticancer agent known as FMdC for $4,000,000. The license fee was
recorded in the third quarter of 1998 and was paid on October 22, 1998.
In April 1998, the Company received $4,000,000 from an insurance
company for the reimbursement of legal expenses incurred during prior years.
The payment settles litigation between the Company and the insurer over
coverage under the Company's general liability policy. The payment was
recorded as other income in the second quarter of 1998.
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.
8
<PAGE>
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 September 30, 1999, the remaining balance
of this obligation was $500,000.
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 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.
The Company formed a Year 2000 Task Force to determine what actions
are required to resolve Y2K issues. The Company finalized its internal
systems assessment and completed all necessary conversion in the second
quarter of 1999. We have determined that the potential effect of the Y2K
issue on the Company's internal systems and 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
supplier confirmed addresses the Y2K related issues. The Company has
communicated with other significant 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 or financial condition.
9
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The Company has developed contingency plans to address situations
that may result if any of the Company's significant suppliers are unable to
achieve Y2K readiness of their critical operations. In the event that
suppliers are not compliant, the Company may adjust its purchasing decisions
or seek alternative sources of supplies or services. However, certain of the
Company's suppliers have been qualified for regulatory purposes such that
qualifying new suppliers could involve significant time and resource
commitments by the Company. The most likely worst case scenario would be the
interruption of our operations due to a failure of vendors to be Y2K
compliant which could limit the ability of the Company to timely complete its
regulatory compliance programs. Significant delays or expenditures due to
supplier failure to become Y2K compliant could have an adverse effect on the
Company's operations or financial condition.
Total costs expended to date and currently planned budgeted
expenditures are less than $100,000 which represents less than 20% of the
Company's 1999 Information Technology budget.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in the reported market risks
since December 31, 1998.
10
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PART II. OTHER INFORMATION
RISK FACTORS
WE MAY NOT RECEIVE REGULATORY APPROVALS OF OUR PRODUCT CANDIDATES,
MANUFACTURING PROCESSES AND PRODUCTION FACILITIES
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, or 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 had
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. Subsequent to the approval of AccuSite by foreign authorities
all marketing applications have been withdrawn. 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, or 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, or 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. NDAs for drug candidates that the FDA determines address
life-threatening diseases may be given more rapid ("fast track") regulatory
review, which is generally six months from submission. IntraDose Injectable
Gel was granted "fast track" status in May 1999. Although this designation is
expected to shorten the review period compared to NDAs that do not have "fast
track" status, it does not increase or decrease the probability of FDA
approval. 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.
11
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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 this testing, or
refusal by the FDA to accept the results of this 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.
Additionally, we have recently extended enrollment in a Phase II
Intradose trial beyond the original number of patients planned for that
study. Although this action was taken due to the encouraging results observed
to date, final study results may be different from the preliminary outcomes
as more patients are entered onto the study and as patients are followed for
a longer period of time.
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 September 30, 1999, our accumulated deficit was
approximately $182,758,000. 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
12
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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 at least 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 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
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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 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,
or PTO, will approve our pending patent applications, and or 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
14
<PAGE>
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. 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 endpoints 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. Specific legislation is currently being reviewed
concerning the reimbursement of oncology drugs. 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 oncology-related 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
15
<PAGE>
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.
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, or 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
16
<PAGE>
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 AND WE HAVE NOT DECLARED ANY 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.
RISKS ASSOCIATED WITH THE YEAR 2000
We are aware of the issues associated with the programming code in
existing computer systems as the year 2000 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.
Any failure of our material systems or the systems of our suppliers
to be Year 2000 compliant would have material adverse consequences for us.
Although we have finalized the assessment and conversions of our internal
systems, we cannot fully predict to what extent our business would be
affected if any of our suppliers' systems and services are not year 2000
compliant. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations"
17
<PAGE>
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 September 30, 1999.
18
<PAGE>
MATRIX PHARMACEUTICAL, INC.
SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MATRIX PHARMACEUTICAL, INC.
Date: November 5, 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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