<PAGE>
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
Amendment No. 1 to Form 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended DECEMBER 31, 1995.
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from __________ to __________.
Commission File Number 1-12128
MATRITECH, INC.
(Exact name of registrant as specified in its charter)
Delaware 04-2985132
(State or other jurisdiction of (IRS employer identification number)
incorporation or organization)
330 Nevada Street 02160
Newton, Massachusetts (ZIP code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (617) 928-0820
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
Common Stock, $.01 Par Value The Boston Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
(Title of class)
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. [X] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Aggregate market value, as of [March 21, 1996], of Common Stock held by
non-affiliates of the registrant: [$158,110,000] based on the last reported
sale price on the Nasdaq Stock Market. [ ]
Number of shares of Common Stock outstanding on [March 21, 1996:
15,910,683].
DOCUMENTS INCORPORATED BY REFERENCE
The registrant intends to file a definitive Proxy Statement pursuant to
Regulation 14A within 120 days of the end of the fiscal year ended December 31,
1995. Portions of such Proxy Statement are incorporated by reference in Part III
of this report.
================================================================================
<PAGE>
The undersigned registrant hereby amends and restates Item 1 and Item 7 of its
Form 10-K for the fiscal year ended December 31, 1995, so that as so amended and
restated said Item 1 and Item 7 shall read in their entireties as set forth on
the pages attached hereto.
2
<PAGE>
ITEM 1. BUSINESS
Overview
Matritech develops, manufactures and markets innovative cancer diagnostic
products based on its proprietary nuclear matrix protein ("NMP") technology.
The nuclear matrix, a three dimensional protein framework within the nucleus
of cells, plays a fundamental role in determining cell type by physically
organizing the contents of the nucleus, including DNA. The Company has
demonstrated that there are differences in the types and amounts of NMPs found
in cancerous and normal tissue and believes the detection of such differences
in NMPs provides important diagnostic information about cellular
abnormalities, including cancer. Using its proprietary NMP technology and
expertise, the Company is developing a series of non-invasive or minimally
invasive cancer diagnostic tests for bladder, colorectal, prostate, cervical
and breast cancer, among others, which the Company believes will be more
accurate and allow for reduced treatment costs and a higher standard of
patient care than currently available tests.
NMP22 Bladder Cancer Test. The Company's first product based on its NMP
technology, the Matritech NMP22 Test Kit for bladder cancer, is currently
awaiting U.S. Food and Drug Administration ("FDA") approval to be marketed in
the United States as a prognostic indicator for the recurrence of bladder
cancer. In January 1996, the Company received notification from the FDA
stating that the NMP22 Test Kit was approvable subject to certain conditions
relating to the demographic composition of the subject population of
Matritech's clinical trial. In response, the Company submitted data from
additional subjects to the FDA in February 1996. Subject to FDA approval, the
Company expects to begin marketing the NMP22 Test Kit in the United States
during 1996. The NMP22 Test Kit is already commercially available in Europe,
Asia (excluding Japan) and several other countries outside the United States.
Colorectal Cancer Test. The Company is developing a blood-based test utilizing
its NMP technology for use in the management of colorectal cancer patients.
Matritech recently completed a preliminary study involving over 150 subjects
which showed the clinical sensitivity of CEA in identifying subjects with colon
cancer was 42% compared to 67% clinical sensitivity for the Company's NMP-based
test. Based upon the higher sensitivity of the Company's test demonstrated in
the preliminary study, the Company plans to begin a multicenter clinical trial
involving an improved version of the test in the second half of 1996. The
Company has retained worldwide manufacturing rights for its colorectal cancer
assay as well as worldwide marketing rights outside of Japan and Taiwan.
Prostate, Cervical and Breast Cancer Tests. The Company has also identified
NMPs specific to prostate, cervical and breast cancer and is currently
developing diagnostic tests based on its proprietary NMP technology for these
cancers. Matritech is collaborating with Bayer Corporation ("Bayer") on the
development of an automated diagnostic test for cervical cancer. The Company
anticipates beginning preliminary clinical trials for its prostate and cervical
cancer diagnostic tests during the second half of 1997. The Company plans to
develop additional assays for lung, liver, pancreatic, stomach and renal
cancers.
3
<PAGE>
Cancer Diagnostics Market
The cancer diagnostics market is comprised of several overlapping categories,
each corresponding to a stage in the identification and management of the
disease. The categories are screening, diagnosing, monitoring and evaluating
prognosis. Screening tests and procedures, such as mammograms and Pap smears,
are performed regularly on individuals who may have no evidence of ill health
because the tests are effective in revealing hidden, asymptomatic disease.
Screening tests do not yield a final diagnosis. An actual diagnosis of cancer is
usually made after microscopic examination of a tissue biopsy. Following
diagnosis, additional tests can be used to monitor the course of the disease and
the patient's response to treatment. These monitoring tests may be repeated at
regular intervals, often every three months, and may be continued for the life
of an individual in order to detect the recurrence of cancer. In addition,
diagnostic tests are also used to evaluate a patient's prognosis and to select
appropriate therapy. Patients identified as having a high risk of recurrence
will be monitored more closely and may receive more aggressive treatment.
Generally cancer diagnostic assays are not intended for screening or for
diagnosis, but are intended to monitor patients with known disease or to make a
prognosis related to the recurrence of cancer in previously treated patients.
Ideally, a cancer diagnostic assay for use in a clinical laboratory should
be both sensitive and specific. Clinical sensitivity refers to the percentage
of cases in which the assay correctly identifies the presence of disease.
Clinical specificity refers to the percentage of cases in which the assay
correctly identifies the absence of disease. Clinical sensitivity and
specificity percentages reported from studies and trials of cancer diagnostic
products may not be directly comparable, as results may be affected by the
number of subjects studied, variability in the stages of disease present in
the subject population and the demographic composition of the subject
population, among other factors.
Effective in vitro diagnostic assays can reduce the need for more invasive
or expensive procedures for diagnosing cancer, such as surgery, biopsy, bone
scans and in vivo imaging. There are only a limited number of FDA-approved in
vitro cancer diagnostic tests currently available and the relatively low
clinical sensitivity and specificity of these tests have limited their
clinical utility. The Company believes that these tests suffer from inherent
inaccuracies because they detect substances that are only indirectly
correlated with the underlying cancer cells. As a consequence of low clinical
sensitivity, these tests yield false negatives and many patients with cancer
are not diagnosed early enough to receive effective treatment, resulting in
additional costs and morbidity. Conversely, low clinical specificity yields
false positives resulting in unnecessary, expensive and painful treatment of
patients without malignant disease.
NMP Technology
The Company believes that its NMP technology will allow it to develop cost-
effective in vitro assays that are more accurate than those currently available.
The nuclear matrix, a three-dimensional protein framework within the nucleus of
cells, helps organize active genes ("DNA") in the nucleus. In this way, the
nuclear matrix plays a fundamental role in determining cell type and cell
function. Although the specific mechanisms of action are not yet fully
understood, Matritech and independent scientists have demonstrated that there
are differences in the types and amounts of NMPs found in cancerous and normal
tissues and also among different types of normal
4
<PAGE>
cells. For example, during 1993 and 1994, three NMP-related scientific papers
were published, two in Cancer Research and one in the Proceedings of the
National Academy of Sciences, which described NMPs specific to prostate, breast
and colon cancer tissues. These NMPs were shown to be present in 100% of the
cancer tissue specimens examined, but were absent in all of the normal tissue
specimens. Subsequent to these papers, the Company has examined numerous
additional cancer tissue specimens with the same results. Matritech also has
demonstrated that cell death, including cell death related to early tumor
development, results in the release of NMPs into bodily fluids. As a result,
elevated levels of NMPs may be found in the bodily fluids of cancer patients.
The Company is not aware of any other cancer marker or class of markers which
exhibit this level of clinical specificity and sensitivity.
The Company uses its proprietary technology and expertise to identify,
isolate and extract NMPs from cancerous and normal tissues. Following
extraction, the Company's scientists characterize and sequence these cancer-
specific NMPs, which generally are absent, or present at low levels, in the
urine, blood and cells of healthy individuals. The Company then develops
proprietary antibodies to these NMPs and incorporates the antibodies into
industry-standard diagnostic formats, such as blood-based immunoassays.
The Company's core NMP technology is licensed from Massachusetts Institute of
Technology ("MIT"). Under the current terms of the Company's license from MIT,
the Company's worldwide license is exclusive until December 31, 1999 (subject to
extension), and non-exclusive thereafter, provided that the period of
exclusivity will be extended until 2006, provided the Company obtains FDA
approval for its first product based on the licensed patents by the end of
1997. The Company has made additional advances in NMP technology and has filed
its own patent applications for related protection.
Matritech's Products and Products Under Development
The Matritech NMP22 Test Kit for Bladder Cancer
The Company has developed and is marketing in Europe the NMP22 Test Kit as a
prognostic indicator for recurrence of bladder cancer following treatment. In
November 1994, the Company submitted a PMA application for the NMP22 Test Kit.
In January 1996, the Company received a letter from the FDA stating that the
NMP22 Test Kit was approvable subject to certain conditions requiring the
Company to submit additional data to broaden the demographic makeup of the
subject population on whom the Matritech NMP22 Test Kit had been studied. In
response to this approvable letter, the Company submitted data from additional
subjects to the FDA in February 1996. There can be no assurance that the
additional subject data submitted by the Company will satisfy the conditions set
forth in the FDA's approvable letter or that the FDA will not require the
submission of even more clinical trial data. If no regulatory delays are
encountered, and if the FDA approves the product, the Company expects sales of
its first FDA approved diagnostic product in the United States in 1996. Sales of
the NMP22 Test Kit began in certain countries in Europe in 1995.
5
<PAGE>
The Company conducted an extensive clinical trial of the NMP22 Test Kit
involving more than 1,000 subjects at 13 sites, including bladder cancer
patients, patients with other cancers, patients with non-cancerous urinary
conditions (such as urinary tract infections) and healthy subjects. In this
trial, the NMP22 Test Kit exhibited clinical sensitivity of 70% and clinical
specificity of 79%. Statistical analysis of the data from this trial revealed
that a negative NMP22 test result for urine specimens obtained from a bladder
cancer patient approximately 10 days after transurethral resection of his or
her tumor was over 85% predictive of the absence of bladder cancer in that
patient three to six months after treatment. The Company intends to conduct
additional clinical trials to generate data for submission to the FDA of a
monitoring claim for the NMP22 Test Kit, as well as a claim for screening
certain high risk individuals.
The Company believes that the use of the NMP22 Test Kit will enable
urologists to manage bladder cancer patients with less invasive and less
frequent procedures, thereby potentially reducing treatment costs while
maintaining a high standard of patient care. The following diagram illustrates
Matritech's clinical claim, which is the basis for its submission for FDA
approval. If a bladder cancer patient's NMP22 value is low (less than or equal
to 10 units per milliliter) 10 or more days after surgery, there is a high
probability that the follow-up cystoscopic examination will not indicate a
recurrence of disease. Using this information, the urologist may decide to
postpone this exam in order to reduce the cost, anxiety and risk to the
patient. Similarly, an NMP22 value greater than 10 units per milliliter
indicates a higher risk that the follow-up cystoscopic examination will
indicate a recurrence of disease, enabling the urologist to make more
aggressive treatment decisions.
6
<PAGE>
[Shown is a flow chart illustrating the Company's clinical claim for its NMP22
Test Kit, which consists of four squares and two circles containing text, each
connected by arrows indicating the logical relationship between them.]
The Company has retained worldwide manufacturing rights for the NMP22 Test
Kit, as well as all marketing rights in the United States, except that the
Company has granted UroCor, Inc. ("UroCor") the right to be the Company's
exclusive national reference laboratory customer for the NMP22 Test Kit until
September 30, 1996. UroCor has an option to extend the period of exclusivity
through December 30, 1996 upon the purchase of additional minimum quantities of
NMP22 Test Kits. In June 1996, the Company and its then exclusive distributor
in Europe terminated their distribution agreement for the NMP22 Test Kit. The
Company has recently reached agreements in principle with two new distributors
to be the exclusive distributors in Germany and Italy of Matritech-labeled
NMP22 Test Kits in those countries. The Company will continue to seek
additional distributors in Europe. The Company has also entered into exclusive
distribution arrangements for the NMP22 Test Kit in China and with Konica
Corporation ("Konica") in Japan. See "--Strategic Alliances."
Colorectal Cancer Product
Matritech is developing a blood-based test for use in the management of
colorectal cancer patients and has recently completed a preliminary study in
over 150 subjects, including both normal healthy volunteers and colon cancer
patients. Based upon the assay's performance in this preliminary study, the
Company expects to begin clinical trials in the second half of 1996.
7
<PAGE>
The Company has identified certain NMPs that are elevated in blood from
patients with colorectal cancer. The Company has also demonstrated that the
types and amounts of certain NMPs differ between colorectal cancer and normal
colorectal tissues. The Company is using proprietary antibodies to detect one
of these proteins, NuMA, and is developing an assay for colorectal cancer
based on these antibodies.
The Company has conducted a preliminary clinical study of its colorectal
cancer assay, the data from which were presented at the Annual Meeting of the
American Association for Cancer Research in April 1996. These data compared the
detection of NuMA in the blood of colon cancer patients and healthy individuals
to the levels of carcinoembryonic antigen "CEA" in the same subjects. In this
study, which involved 52 cancer patients and 96 normal individuals, the clinical
sensitivity of carcinoembryonic antigen ("CEA") in identifying subjects with
colon cancer was 42% compared to 67% clinical sensitivity for the NMP-based
test. Following this study, the Company made certain technical modifications to
this test resulting in improved sensitivity. Matritech plans to begin a
multicenter clinical trial for this test in the second half of 1996. The results
of this trial will be submitted to the FDA in order to seek approval to sell the
product in the United States. Following manufacturing scale-up and FDA approval
for export, the Company intends to begin selling the product in certain
countries outside of the United States during the second half of 1996.
The Company has retained worldwide manufacturing rights for its colorectal
cancer assay, as well as all marketing rights in the United States. Yamanouchi
Pharmaceutical Co., Ltd. ("Yamanouchi") currently has the option to obtain
exclusive rights to the Company's colorectal cancer assay in Japan and Taiwan.
The Company submitted the results of the preliminary trials of its colorectal
cancer assay to Yamanouchi in accordance with the terms of the Company's
agreement with Yamanouchi. Based on its evaluation of the data, Yamanouchi did
not elect to proceed with the development and clinical testing of the Company's
colorectal cancer product in Japan within the required time period (including a
30-day extension granted by the Company). Consequently, the Company has the
option to terminate Yamanouchi's rights with respect to that product. If the
Company should terminate such rights, the Company may need to seek a distributor
for this product in Japan.
Prostate Cancer Product
Matritech is currently developing a blood-based test for prostate cancer and
expects to begin in 1997 a clinical trial leading toward a submission for FDA
approval.
8
<PAGE>
The Company began a collaboration in 1992 with investigators from The Johns
Hopkins University School of Medicine ("Hopkins") to produce antibodies to a
prostate cancer specific NMP ("PC-1") for use in an immunoassay product for
prostate cancer, as well as for research purposes. In August 1993, the Company
obtained an exclusive, worldwide, royalty-bearing license from Hopkins to
patent rights covering certain NMPs that have potential clinical utility in
managing prostate cancer. In published research, investigators at Hopkins
reported that the level of one of these NMPs, PC-1, was elevated in all of the
limited number of prostate cancer specimens that were examined but in none of
the benign or normal specimens.
In an effort to complement the work done at Hopkins, the Company began
sponsoring the research of scientists at the University of Pittsburgh
("Pittsburgh") in March 1996 regarding additional prostate cancer specific
NMPs. As a result of this financial support, the Company obtained a right of
first refusal to an exclusive royalty-bearing license to inventions and/or
discoveries arising out of this research. Certain of these NMPs were shown by
the Pittsburgh scientists to be related to the metastatic potential of
prostate cancer cells in rats. The Pittsburgh scientists have demonstrated
that antibodies raised against these metastatic-related NMPs reacted with
malignant human prostate tissues. Furthermore, the Pittsburgh scientists
believe that these NMPs may be useful in clinically differentiating metastatic
from non-invasive tumors.
Matritech intends to develop a blood and/or tissue-based prostate cancer
test using the NMPs identified either by Hopkins or Pittsburgh and to conduct
preliminary and clinical trials leading toward a submission for FDA approval.
The Company has retained worldwide manufacturing and marketing rights for its
prostate cancer assay.
Cervical Cancer Product
Matritech is developing a test for cervical cancer screening in collaboration
with Bayer, one of its corporate partners. Bayer provided funding to Matritech
for the identification of cervical cancer specific NMPs and is continuing to
fund development of monoclonal antibodies which recognize malignant and pre-
malignant or dysplastic cervical cancer cells. These antibodies will be used
in clinical laboratories, in conjunction with instruments developed by Bayer,
to automate the review and evaluation of cervical cells. This system will
initially be designed as a complement to the Pap smear procedure.
9
<PAGE>
Under the terms of the Company's agreement with Bayer, Bayer has the option,
upon payment to Matritech, to acquire exclusive worldwide rights to distribute
the cervical cancer assay for automated systems and non-exclusive worldwide
rights for a manual assay product. Matritech has maintained its worldwide
manufacturing rights to its cervical cancer product. See "--Strategic
Alliances."
Breast Cancer Product
10
<PAGE>
The Company has identified certain NMPs present in breast cancer tissue and
absent in normal tissue. Matritech will develop antibodies reactive with these
NMPs and evaluate these antibodies on patient blood samples. The Company intends
to select antibodies to be used in assays and conduct clinical trials to
generate data required to apply for FDA approval of such assays. Matritech
believes that the distinctive NMP patterns found in breast cancer cells and the
Company's ability to detect these NMPs in blood may enable it to develop a more
accurate breast cancer blood assay intended to improve patient management.
The development and marketing of the Company's breast cancer products are
covered by agreements with AB Sangtec Medical ("Sangtec") and Yamanouchi, which
give Sangtec exclusive rights to market the Company's breast cancer product in
Europe and Yamanouchi exclusive rights to market the Company's breast cancer
product in Japan and Taiwan. The Company has retained worldwide manufacturing
rights for its breast cancer assay, as well as all marketing rights in the
United States. See "--Strategic Alliances."
Other Cancer Diagnostics Products
In addition to the Company's NMP22 Test Kit and its colorectal, prostate,
cervical and breast cancer products under development, the Company also intends
to develop diagnostic assays based on its proprietary NMP technology for lung,
liver, pancreatic, stomach and renal cancers.
Potential Therapeutic Products
In the ongoing development of its cancer diagnostic products, Matritech has
gained expertise in isolating and characterizing NMPs and has demonstrated the
ability to determine unique DNA and protein sequences associated with certain
NMPs. Matritech believes this expertise provides unique opportunities to further
understand how NMPs help control cell identity, behavior and growth. The Company
also believes that an increased understanding of the role NMPs play in these
processes may allow for the development of NMP-based cancer therapeutics.
Although Matritech has not yet expended significant resources on therapeutic
applications of its NMP technology, the Company is pursuing several programs
intended to establish the feasibility of NMP-based cancer therapeutic products.
These include programs to determine the DNA sequences of cancer-related NMPs, a
project demonstrating the ability to arrest the growth of cancer cells using DNA
"anti-sense" technology and a project designed to confirm the feasibility of
blocking the function of a target-regulatory NMP.
STRATEGIC ALLIANCES
To accelerate the early research and development of its products, the Company
has pursued a strategy of entering into strategic alliances to fund research and
development programs for selected cancer assays. These agreements typically
involve up-front and milestone payments in exchange for the right to obtain
exclusive distribution rights in selected geographical markets. In order to
retain control of its core NMP technology, the Company has not licensed or
sublicensed any of its technology to third-parties. The Company has retained
manufacturing rights for its NMP22 Test Kit and all other product candidates,
except for certain rights that could be granted to certain of its corporate
partners if the Company fails to deliver required quantities of product. Under
the terms of these funded development arrangements and other distribution
arrangements discussed below, the Company's partners purchase finished products
or components from Matritech at prices based on Matritech's list price, local
reimbursement rates or the partners' net selling price.
Konica. In 1994, the Company entered into a distribution agreement with
Konica. The Konica agreement grants exclusive distribution rights in Japan for
the NMP22 Test Kit in exchange for $325,000 in licensing fees. Under the terms
of its agreement with Konica, Matritech will sell NMP22 Test Kits to Konica for
resale in Japan at prices based on Japanese reimbursement rates. Konica is
responsible for obtaining the necessary approvals from the Japanese Ministry of
Health and Welfare ("Koseisho") to import and sell the NMP22 Test Kit. Clinical
trials must be conducted in Japan and the results submitted to Koseisho prior to
obtaining such approvals. Konica has limited manufacturing rights if the Company
fails to deliver required quantities.
11
<PAGE>
Bayer. In June 1995, Matritech signed a joint development and distribution
agreement with Bayer and received an initial payment of $150,000. Under the
terms of the agreement, Bayer provided funding to Matritech for the
identification of cervical cancer-specific NMPs and is currently funding the
development of monoclonal antibodies which recognize malignant and pre-malignant
or dysplastic cervical cancer cells. These antibodies will be used in clinical
laboratories, in conjunction with instruments developed by Bayer, to automate
the review and evaluation of cells obtained from cervical smears. Under the
terms of the Company's agreement with Bayer, Bayer has the option, upon payment
to Matritech, to acquire exclusive worldwide rights to distribute the cervical
cancer assay for automated systems and non-exclusive worldwide rights for a
manual assay product. If Bayer exercises its option, it would purchase
components from Matritech (unless Matritech fails to meet Bayer's product
delivery requirements) and would pay Matritech a percentage of Bayer's net
selling price. In the year ended December 31, 1995, the Company received $60,000
in milestone payments under this agreement.
Yamanouchi. In 1991, Matritech and Yamanouchi entered into a development and
supply agreement for the development of seven serum assays (breast, colorectal,
lung, liver, pancreatic, stomach and renal cancers) for exclusive sale by
Yamanouchi in Japan and Taiwan. The agreement provides for development payments
to the Company by Yamanouchi to be paid upon the accomplishment of certain
milestones. Matritech has received $1 million in milestone payments to date.
Yamanouchi did not make any payments to the Company in 1995. In January 1996,
the Company submitted the results of the preliminary trials of its colorectal
cancer assay to Yamanouchi in accordance with the terms of the agreement. Based
on its evaluation of the data, Yamanouchi did not elect to proceed with the
development and clinical testing of the Company's colorectal cancer product in
Japan within the required time period (including a 30-day extension granted by
the Company). Consequently, the Company has the option to terminate Yamanouchi's
rights with respect to that product. The purchase price for any products
distributed by Yamanouchi will be based on Yamanouchi's net selling price.
Sangtec. In 1990, Matritech and Sangtec, a Swedish company, entered into a
development and supply agreement which provides for the payment by Sangtec to
Matritech of up to $700,000 for the development of breast cancer products, of
which $60,000 has been paid to Matritech as of December 31, 1995. The
development payments are to be made over time, upon the successful achievement
of certain technical milestones by Matritech and Sangtec. Sangtec has the
exclusive right to market in Europe any breast cancer serum assay developed
under the agreement. The purchase price to be paid to the Company for any
products distributed by Sangtec will be based on Sangtec's net selling price.
Sangtec has limited manufacturing rights if the Company fails to meet Sangtec's
product delivery requirements.
MARKETING AND SALES
The Company has retained all rights to sell all of its products in the United
States, except for products for the automated detection of cervical cancer, for
which Bayer has an option to acquire exclusive rights. Matritech intends to sell
its NMP22 Test Kit in the United States to clinical laboratories using its own
direct sales force. The Company has two sales representatives who are in
training in anticipation of FDA approval of the NMP22 Test Kit. The Company
intends to expand this sales force as sales of the NMP22 Test Kit may warrant or
if new products are added. The Company may use one or more distributors for
sales to low-volume customers.
In foreign markets, the Company initially plans to use distributors, but may
establish its own sales offices when international sales warrant such a direct
presence. Matritech currently has funded development and marketing agreements
pursuant to which the Company has granted co-exclusive or exclusive rights to
distribute the resulting products in exchange for product development funding.
See "--Strategic Alliances."
THIRD-PARTY REIMBURSEMENT
The Company's ability to successfully commercialize its potential products
will depend in part on the extent to which reimbursement for the cost of such
products will be available from government health administration authorities,
private health insurers and other third-party payors. The Company believes that
FDA approval of a diagnostic product facilitates third-party reimbursement, but
there can be no assurance that reimbursement will be available for such products
or, if available, that it will be adequate.
12
<PAGE>
In the case of private insurance, the reimbursement of any medical device,
whether approved, or for investigational use only or for research use, is at
the sole discretion of the patient's individual carrier. The decision to
reimburse can be made on a case-by-case basis (as is done for research
therapies) or on a system-wide basis (such as screening mammography).
Historically, the decision to reimburse for a new medical procedure is made by
the carrier's medical director or review committee. This group will base their
reimbursement decision on published clinical data and information by the
treating physicians. Even if a procedure has been approved for reimbursement,
there are no assurances that the insurance carrier will continue to reimburse
the procedure.
Health care reform is an area of continuing national attention and a
priority of many governmental officials. Certain reform proposals, if adopted,
could impose limitations on the prices the Company will be able to charge in
the United States for its products or the amount of reimbursement available
for the Company's products from governmental agencies or third-party payors.
Manufacturing and Facilities
The Company currently assembles its test kits in its 22,500 square-foot
facility in Newton, Massachusetts and relies on subcontractors for certain
components and processes. The Company's lease is for a term of five years and
expires on December 31, 2001. The annual base rent for each year of the term
is $230,625. The Company believes that its current facilities are adequate to
satisfy the Company's needs as it expands its manufacturing capabilities for
at least the next two years, including the initial phases of commercial
production. Thereafter, the Company may be required to establish additional
manufacturing facilities elsewhere. There can be no assurance that the Company
will be able to extend its lease or lease other space on reasonable terms. The
Company has retained all manufacturing rights, except for certain rights that
could be granted to certain of its corporate partners if the Company fails to
perform under its agreements with those corporate partners. See "--Strategic
Alliances."
The Company currently relies on sole suppliers for certain key components
for its NMP22 Test Kit. In the event that the components from such suppliers
should become unavailable for any reason, the Company would seek alternative
sources of supply, which may entail making regulatory submissions and
obtaining regulatory approvals from the FDA or such alternative suppliers.
Although the Company attempts to maintain an adequate level of inventory to
provide for these and other contingencies, should its manufacturing process be
disrupted as a result of a shortage of key components or a revalidation of new
components, there can be no assurance that the Company would be able to meet
its commitments to customers. The Company is also subject to the FDA's GMP
requirements. See "--Government Regulation."
Competition
Matritech is not aware of any other company using NMP technology to develop
diagnostic or therapeutic products. However, competition in the development
and marketing of cancer diagnostics and therapeutics, using a variety of
technologies, is intense.
There are many pharmaceutical companies, biotechnology companies, public and
private universities and research organizations actively engaged in the
research and development of clinical cancer diagnostic products. Many of these
organizations have financial, manufacturing, marketing and human resources
greater than those of the Company. Matritech expects that its diagnostic
products will compete largely on the basis of clinical utility, accuracy
(sensitivity and specificity), ease of use and other performance
characteristics, price, and patent position, as well as on the capabilities of
the Company and its marketing partners.
The Company expects that certain of its assays will compete with existing
FDA-approved assays, including BTA, which was recently approved for monitoring
bladder cancer, CEA, which is used primarily for monitoring colorectal and
breast cancers, PSA, which is used primarily for monitoring and screening
prostate cancer, and TRUQUANT BR RIA, which is used for monitoring breast
cancer. Matritech is also aware of a number of companies exploring the
application of oncogene technology to cancer diagnostics.
13
<PAGE>
A number of companies are attempting to develop automated instruments for
Pap smear analysis that would compete with the cervical cancer product that
the Company is developing with Bayer. These companies are computerizing image
analysis techniques to automate much of the work currently done by
cytotechnologists. To date, two of these instruments have been approved by the
FDA for rescreening Pap smear slides previously identified by a
cytotechnologist as normal. It is not known if or when such instruments will
be approved for initial screening.
The Company's diagnostic products will also compete with more invasive or
expensive procedures such as surgery, bone scans, magnetic resonance imaging
("MRI") and other in vivo imaging techniques. Matritech believes that its
products, if successfully commercialized, will contribute to improved patient
management and lower overall costs, by providing accurate information and, in
some cases, by providing an alternative to these invasive or costly
procedures.
Should the Company decide to develop and seek to market therapeutic
products, competition will be based, among other things, on product efficacy,
safety, reliability, price and patent position as well as the state of the
industry and capabilities of the Company, future marketing partners and
competitors.
In addition, there can be no assurance that competing diagnostic and
therapeutic products based on other technologies will not be introduced by
other companies and adversely affect the competitive position of the Company.
Patents, Licenses and Trade Secrets
Matritech's diagnostic technology is protected by three United States
patents expiring in 2006, with corresponding foreign patents granted and/or
patent applications pending in Canada and selected countries in Europe and the
Far East. The NMP technology owned by MIT, is licensed to Matritech worldwide
in exchange for royalties payable until the expiration of underlying patent
rights. MIT has licensed its patent rights to Matritech on an exclusive basis
through 1999, which exclusivity will be extended until the expiration of all
patent rights in 2006 provided the Company obtains FDA approval for its first
product based on the licensed patents by the end of 1997.
The protection offered by these patents extends to the detection and
measurement of NMPs, or associated nucleic acids, using antibody or gene probe
formats, as well as to certain assay methods exploiting NMPs. MIT has
voluntarily applied for the reissue of one of its patents which seeks to
strengthen its protection of NMP technology. Matritech has filed additional
United States patent applications on related NMP advances and corresponding
applications under the Patent Cooperation Treaty designating Canada, Australia
and selected countries in Europe and the Far East. The Company currently has
11 applications on file in the United States on these disclosures. The Company
intends to file additional patent applications in the future. The Company
believes that any patents that may issue from its applications will provide
competitive protection for its products after expiration of its license from
MIT. The Company also intends to rely on its unpatented proprietary
information to maintain and develop its commercial position.
In 1993, the Company obtained an exclusive, worldwide, royalty-bearing
license from The Johns Hopkins University to patent rights covering certain
NMPs that scientists at Hopkins have reported to be specific to prostate
cancer.
In March 1995, the Company obtained an exclusive, worldwide, royalty-bearing
license from Yale University to patent rights covering Yale University's
discovery of a new group of proteins which interact with structural components
of the nuclear matrix. Beginning in 1997, Matritech is required to make
minimum royalty payments to Yale University under this agreement.
14
<PAGE>
Government Regulation
Diagnostic Products
The medical devices to be marketed and manufactured by the Company are
subject to extensive regulation by the FDA, and, in some instances, by foreign
governments. Pursuant to the Federal Food, Drug and Cosmetic Act of 1976, as
amended, and the regulations promulgated thereunder (the "FDC Act"), the FDA
regulates the clinical testing, manufacture, labeling, distribution, and
promotion of medical devices. Noncompliance with applicable requirements can
result in, among other things, fines, injunctions, civil penalties, recall or
seizure of products, total or partial suspension of production, failure of the
government to grant premarket clearance or premarket approval for devices,
withdrawal of marketing approvals, and criminal prosecution. The FDA also has
the authority to request repair, replacement or refund of the cost of any
device manufactured or distributed by the Company.
In the United States, medical devices and diagnostics are classified into
one of three classes (class I, II, or III) on the basis of the controls deemed
necessary by the FDA to reasonably assure their safety and effectiveness.
Under FDA regulations, class I devices are subject to general controls (for
example, labeling, premarket notification and adherence to GMPs) and class II
devices are subject to general and special controls (for example, performance
standards, postmarket surveillance, patient registries, and FDA guidelines).
Generally, class III devices are those which must receive PMA by the FDA to
ensure their safety and effectiveness (for example, life-sustaining, life-
supporting and implantable devices, or new devices which have not been found
substantially equivalent to legally marketed devices).
Before a new device can be introduced into the market, the manufacturer must
generally obtain marketing clearance through the filing of either a 510(k)
notification or a PMA. A 510(k) clearance will be granted if the submitted
information establishes that the proposed device is "substantially equivalent"
to a legally marketed class I or II medical device, or to a class III medical
device for which the FDA has not called for a PMA. The FDA may determine that
a proposed device is not substantially equivalent to a legally marketed
device, or that additional information or data are needed before a substantial
equivalence determination can be made. A request for additional data may
require that clinical studies of the safety and efficacy of the device be
performed.
Commercial distribution of a device for which a 510(k) notification is
required can begin only after the FDA issues an order finding the device to be
"substantially equivalent" to a predicate device. It generally takes from four
to twelve months from submission to obtain a 510(k) clearance, but may take
longer. The FDA may determine that a proposed device is not substantially
equivalent to a legally marketed device, or that additional information is
needed before a substantial equivalence determination can be made.
A PMA application must be filed if a proposed device is not substantially
equivalent to a legally marketed class I or class II device, or if it is a
class III device for which the FDA has called for PMAs. A PMA application must
be supported by valid scientific evidence which typically includes clinical
trial data to demonstrate safety and the effectiveness of the device. The PMA
application must also contain the results of all relevant bench tests,
laboratory and animal studies, a complete description of the device and its
components, and a detailed description of the methods, facilities and controls
used to manufacture the device, as well as proposed labeling.
Upon receipt of a PMA application, the FDA makes a threshold determination
as to whether the application is sufficiently complete to permit a substantive
review. If the FDA determines that the PMA application is sufficiently
complete to permit a substantive review, the FDA will accept the application
for filing. Once the submission is accepted for filing, the FDA begins an in-
depth review of the PMA. An FDA review of a PMA application generally takes
one to two years from the date the PMA application is accepted for filing, but
may take significantly longer. The review time is often significantly extended
as a result of the FDA requiring more information or clarification of
information already provided in the submission. During the review period, an
advisory committee, typically a panel of clinicians and/or other appropriate
experts in the relevant fields, will
15
<PAGE>
likely be convened to review and evaluate the application and provide
recommendations to the FDA as to whether the device should be approved. The
FDA is not bound by the recommendations of the advisory committee but
generally follows them. Toward the end of the PMA review process, the FDA
generally will conduct an inspection of the manufacturer's facilities to
ensure that the facilities are in compliance with applicable GMP requirements.
If the FDA's evaluations of both the PMA application and the manufacturing
facilities are favorable, the FDA will either issue an approval letter or an
approvable letter, which usually contains a number of conditions which must be
met in order to secure final approval for sale of the device. When and if
those conditions have been fulfilled to the satisfaction of the FDA, the
agency will issue a PMA approval letter, authorizing commercial marketing of
the device for certain indications. If the FDA's evaluations of the PMA
application or manufacturing facilities are not favorable, the FDA will deny
approval of the PMA application or issue a "not approvable letter." The FDA
may also determine that additional clinical trials are necessary, in which
case PMA approval may be substantially delayed while additional clinical
trials are conducted and submitted in an amendment to the PMA. The PMA process
can be expensive, uncertain and lengthy and a number of devices for which FDA
approval has been sought by other companies have never been approved for
marketing.
Once a device has successfully completed the PMA approval process,
modifications to the device, its labeling, or manufacturing process may
require approval by the FDA of PMA supplements or new PMAs. Supplements to a
PMA often require the submission of the same type of information required for
an initial PMA, except that the supplement is generally limited to that
information needed to support the proposed change from the product covered by
the original PMA.
Although clinical investigations of most devices are subject to the
investigational device exemption ("IDE") requirements, clinical investigations
of in vitro diagnostic ("IVDs") tests are exempt from the IDE requirements,
including FDA approval of investigations, provided the testing is non-
invasive, does not require an invasive sampling procedure that presents
significant risk, does not introduce energy into a subject, and the tests are
not used as a diagnostic procedure without confirmation of the diagnosis by
another medically established diagnostic product or procedure. IVD
manufacturers must also establish distribution controls to assure that IVDs
distributed for the purposes of conducting clinical investigations are used
only for that purpose. Pursuant to current FDA policy, manufacturers of IVDs
labeled for investigational use only ("IUO") or research use only ("RUO") are
encouraged by the FDA to establish a certification program under which
investigational IVDs are distributed to or utilized only by individuals,
laboratories, or health care facilities that have provided the manufacturer
with a written certification of compliance indicating that (1) the device will
be used for investigational or research purposes only, and (2) results will
not be used for diagnostic purposes without confirmation of the diagnosis
under another medically established diagnostic device or procedure. In
addition, the certification program requirements for IUO products should
include assurances that all investigations or studies will be conducted with
approval from an institutional review board ("IRB"), using an IRB-approved
study protocol and patient informed consent and that the device will be
labeled in accordance with the applicable labeling regulations. Sponsors of
clinical trials are permitted to sell those devices distributed in the course
of the study provided such compensation does not exceed recovery of the costs
of manufacture, research, development and handling.
In November 1994, the Company submitted a PMA application for its Matritech
NMP22 Test Kit as a prognostic indicator for bladder cancer (i.e., as a
predictor of bladder cancer recurrence following therapy, such as surgical
excision of cancerous tissue). In January 1996, the Company received a letter
from the FDA stating that the NMP22 Test Kit was approvable subject to certain
conditions requiring the Company to submit additional data to broaden the
demographic makeup of the subject population on whom the Matritech NMP22 Test
Kit had been studied. In response to this approvable letter, the Company
submitted data from additional subjects to the FDA in February 1996. There can
be no assurance that the additional subject data submitted by the Company will
satisfy the conditions set forth in the FDA's approvable letter or that the
FDA will not require
16
<PAGE>
the submission of even more clinical trial data. There can be no assurance
that data and information submitted by the Company in the original PMA
application or in response to the FDA's approvable letter, will adequately
demonstrate the safety and effectiveness of the Matritech NMP22 Test Kit to
obtain approval of the PMA application from the FDA.
Any products manufactured or distributed by the Company pursuant to FDA
clearances or approvals are subject to pervasive and continuing regulation by
the FDA, including recordkeeping requirements and reporting of adverse
experiences with the use of the device. Device manufacturers are required to
register their establishments and list their devices with the FDA, and are
subject to periodic inspections by the FDA and certain state agencies. The FDC
Act requires devices to be manufactured in accordance with GMP regulations
which impose certain procedural and documentation requirements upon the
Company with respect to manufacturing and quality assurance activities.
Labeling and promotional activities are subject to scrutiny by the FDA and,
in certain instances, by the Federal Trade Commission. If approved, the NMP22
Test Kit may only be promoted by the Company as a prognostic indicator. The
FDA actively enforces regulations prohibiting the promotion of devices for
unapproved uses and the promotion of devices for which premarket clearance or
approval has not been obtained. Consequently, the Company cannot promote the
NMP22 Test Kit for cancer screening or for any other unapproved use. Failure
to comply with these requirements can result in regulatory enforcement action
by the FDA that would adversely affect the Company's ability to conduct
testing necessary to obtain market clearance for these products and,
consequently, could have a material adverse effect on the Company's business,
financial condition and results of operations.
The Company and its products are also subject to a variety of state laws and
regulations in those states or localities where its products are or will be
marketed. Any applicable state or local regulations may hinder the Company's
ability to market its products in those states or localities. Manufacturers
are also subject to numerous federal, state and local laws relating to such
matters as safe working conditions, manufacturing practices, environmental
protection, fire hazard control, and disposal of hazardous or potentially
hazardous substances. There can be no assurance that the Company will not be
required to incur significant costs to comply with such laws and regulations
now or in the future or that such laws or regulations will not have a material
adverse effect upon the Company's ability to do business.
Foreign Sales
Export of unapproved products subject to the PMA requirements must be
approved in advance by the FDA for export unless they are approved for use by
the regulatory authorities in any member community of the European Community,
and certain other countries in which case they may be exported to any country
without FDA approval. To obtain FDA export approval, when it is required,
certain requirements must be met and information must be provided to the FDA,
including, with some exceptions, documentation demonstrating that the product
is approved for import into a country to which it is to be exported and safety
data from animal or human studies. There can be no assurance that FDA will
grant export approval when such approval is necessary, or that the countries
to which the devices are to be exported will approve the devices for import.
Failure on the part of the Company to obtain export approvals, when required,
could significantly delay and impair the Company's ability to continue exports
of its devices and could have a material adverse effect on the Company's
business, financial condition or results of operations.
The introduction of the Company's developmental-stage test products in
foreign markets will also subject the Company to foreign regulatory clearances
which may impose additional substantial costs and burdens. International sales
of medical devices are subject to the regulatory requirements of each country.
The regulatory review process varies from country to country. Many countries
also impose product standards, packaging requirements, labeling requirements
and import restrictions on devices. In addition, each country has its own
tariff regulations, duties and tax requirements. In Germany, where the Company
began selling its NMP22 Test Kit for bladder cancer in 1995, no regulatory
approval comparable to the U.S. PMA is required prior to public sale of
diagnostic products. In Japan, where the Company's distributor for NMP22,
Konica, is responsible for
17
<PAGE>
obtaining the necessary approvals from Koseisho to import and sell the NMP22
product, clinical trials must be conducted and the results submitted to
Koseisho prior to obtaining such approvals. The process of obtaining Koseisho
approval in Japan may require as much time as to obtain a PMA in the U.S.
The approval by the FDA and foreign government authorities is unpredictable
and uncertain and no assurance can be given that the necessary approvals or
clearances will be granted on a timely basis or at all. Delays in receipt of,
or a failure to receive, such approvals or clearances, or the loss of any
previously received approvals or clearances, could have a material adverse
effect on the business, financial condition and results of operations of the
Company.
Changes in existing requirements or adoption of new requirements or policies
could adversely affect the ability of the Company to comply with regulatory
requirements. Failure to comply with regulatory requirements could have a
material adverse effect on the Company's business, financial condition and
results of operations. There can be no assurance that the Company will not be
required to incur significant costs to comply with laws and regulations in the
future or that laws or regulations will not have a material adverse effect
upon the Company's business, financial condition or results of operations. See
"Risk Factors--Risks Associated with Extensive Government Regulation."
CLIA
Pursuant to the Clinical Laboratory Improvement Amendments ("CLIA"), the FDA
will assign a complexity category to each new in vitro diagnostic test. This
category will determine the rigor of quality control that must be followed by
purchasers and users of the device and, thus, can affect purchasing decisions
of laboratories and hospitals. In addition, as part of the premarket review
process, manufacturers must establish that the device's quality control
instructions are commensurate with CLIA quality control requirements for that
device. The review period for in vitro diagnostic tests may be extended due to
these new CLIA requirements.
Therapeutic Products
To obtain FDA approval for a new (non-biological) drug or biological drug, a
company must first conduct pre-clinical studies in the laboratory and in
animal models to gain preliminary information about a product's safety. This
pre-clinical stage can take several years to complete and there can be no
assurance that such pre-clinical studies will be supportive of a product
submission to the FDA. Following pre-clinical testing, clinical trials are
conducted, typically in three sequential phases, although the phases may
overlap. The process of completing clinical testing can take a number of years
and require the expenditure of substantial resources. Additionally, the length
of time it takes for the FDA to evaluate an application for marketing approval
varies considerably as does the amount of pre-clinical and clinical data
required to demonstrate the safety and efficacy of a specific product.
Generally, biological drugs are regulated more rigorously than are other
drugs.
The process currently required by the FDA before a new human non-biologic
drug or biological drug product may be marketed in the United States includes
(i) successful conclusion of pre-clinical laboratory and animal tests, (ii)
filing with the FDA of an Investigational New Drug ("IND") application to
conduct human trials for drugs or biologic products, which must become
effective before human trials for drugs or biologic products, which must
become effective before human clinical trials may commence, (iii) successful
completion of adequate and well-controlled human clinical investigations to
establish the safety and efficacy of the drug or, in the case of a biologic,
to establish that it is safe, pure, potent and effective for its recommended
conditions of use and (iv) filing by the Company and approval by the FDA of a
New Drug Application ("NDA") for a non-biologic drug product, or a Product
License Application ("PLA") and an Establishment License Application ("ELA")
for a biological drug product. In addition to obtaining FDA approval for each
product, each manufacturing establishment must receive a satisfactory
inspection by the FDA. The prospective manufacturer's
18
<PAGE>
quality control and manufacturing procedures must conform to the FDA's drug
GMP regulations, which must be followed at all times. Biologics are subject to
separate GMP requirements in addition to drug GMPs, and also usually are
subject to lot-by-lot release requirements. In complying with standards set
forth in these GMP regulations, manufacturers must continue to expend time,
money and effort in the area of production and quality control to ensure full
technical compliance.
Any therapeutic products that the Company may develop would likely be
subject to regulation by the FDA as either a new drug or biologic. Development
and approval of new drugs or biologics within these regulatory frameworks
takes a number of years, involves the expenditure of substantial resources and
is uncertain. Many drug and biologic products that initially appear promising
ultimately do not reach the market because they are not found to be safe or
effective or cannot meet other stringent FDA regulatory requirements. In
addition, there can be no assurance that the current regulatory framework for
approval of new drugs and biologics will not change or that additional
regulations will not arise at any stage of the Company's product development
of such products that may affect approval, delay the submission or review of
an application or license or require additional expenditures by the Company.
Further, in order to hold Product and Establishment Licenses for a biologic,
Matritech would have had to participate in the manufacturing process for that
product to a significant degree. The FDA recently has changed its regulations
in regard to manufacturing. The Company believes that these regulations would
not permit it to hold PLA/ELA without performing significant manufacturing
operations. Historically, the FDA has taken three to five years to review drug
and biologic product applications. Additionally, after review of the initial
application, the FDA may request additional data requiring new non-clinical
and clinical studies. Also, the FDA will require postmarket reporting and may
require surveillance programs to monitor the side effects of the drug or
biologic product.
Pursuant to the Prescription Drug User Fee Act of 1992, drug manufacturers
will be required to pay three types of user fees: (1) a one-time application
fee for approval of a prescription NDA or PLA; (2) an annual product fee
imposed on prescription drug products after FDA approval; and (3) an annual
establishment fee imposed on facilities used to manufacture prescription
drugs. There are exemptions for certain products, and deferrals of payment and
significant discounts for small business. It also is possible that as part of
health care reform, these user fees will be increased and/or extended to other
products, including devices.
Therapeutic products that may be developed by the Company and sold outside
the United States will be subject to regulation by the country where sales are
being made and may, in some cases, require FDA approval for export from the
United States. The time required to obtain foreign regulatory approvals will
vary from country to country and may be longer or shorter than that required
for FDA approval.
Other
In order for the Company to conduct preliminary studies or clinical trials
at a hospital or other health care facility, the Company's research
collaborators must first obtain approval from the IRB of the hospital or
health care facility. In each case, a written protocol must be submitted to
the IRB describing the study or trial, which is reviewed by the IRB with a
view to protecting the safety and privacy of the institution's patients.
In addition to the regulatory framework for clinical trials and product
approvals, the Company is subject to regulation under federal, state and local
law, including requirements regarding occupational safety, laboratory
practices, environmental protection and hazardous substance control, and may
be subject to other present and possible future local, state, federal and
foreign regulation.
19
<PAGE>
Employees
As of March 12, 1996, the Company had 39 full-time employees, 23 of whom were
engaged in research and development. The Company's future success depends in
part on its ability to recruit and retain talented and trained scientific,
technical, marketing and business personnel. The Company has been successful
to date in hiring and retaining such personnel, but there can be no assurance
that such success will continue. None of the Company's employees is
represented by a labor union, and the Company considers its relations with its
employees to be excellent.
Research and Development
Matritech's future success will depend in large part on its ability to develop
and bring to market new products based on its proprietary NMP technology.
Accordingly, Matritech devotes substantial resources to research and
development. The Company has assembled a scientific staff with a variety of
complementary skills in several advanced research disciplines, including
molecular biology, immunology and protein chemistry. In addition, Matritech
maintains consulting and advisory relationships with a number of prominent
researchers.
During 1992, 1993, 1994 and 1995 Matritech spent approximately $2.2 million,
$2.7 million, $3.5 million and $3.0 million, respectively, on research and
development. Substantially all of these expenditures were related to the
development of diagnostic products. In January 1995, the Company received an
SBIR grant for research related to PC-1. See "--Matritech's Products and
Products under Development--Prostate Cancer Product." In March 1995, the Company
received a $99,358 Small Business Innovation Research ("SBIR") grant to research
NMP colon cancer markers and in September 1995, the Company received a $99,731
SBIR grant to develop assays that screen drug compounds intended to arrest the
growth of cancer cells.
20
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Overview
The Company was incorporated in 1987 to develop, manufacture and market
innovative cancer diagnostic products based on its proprietary NMP technology.
Matritech has been unprofitable since inception and expects to incur
significant operating losses for at least the next two years. The Company was
considered a development-stage company until the fourth quarter of 1995. For
the period from inception to December 31, 1995, the Company incurred a
cumulative net loss of approximately $21 million.
In 1995, the Company began to sell its NMP22 Test Kits in certain countries
in Europe through a distributor. See "Business--Matritech's Products and
Products Under Development--The Matritech NMP22 Test Kit for Bladder Cancer."
The Company is currently awaiting FDA approval to begin selling the NMP22 Test
Kit in the United States. If approved by the FDA, the Company will begin to sell
and distribute its NMP22 Test Kits throughout the United States.
Results of Operations
21
<PAGE>
Year Ended December 31, 1995 Compared with Year Ended December 31, 1994
Collaborative research and development revenue, license fees and product sales
decreased to $1,023,000 for the year ended December 31, 1995 from $1,314,000 for
the year ended December 31, 1994. Revenue generated from collaborative research
and development and license fees in the year ended December 31, 1995 consisted
of $280,000 in license fees from a marketing agreement with Boehringer Ingelheim
International GmbH ("BII"), $210,000 from a funded development agreement with
Bayer, and $190,000 in SBIR grants for the Company's prostate, colon
and drug screening assay projects. Collaborative research and development
revenue and license fees in the year ended December 31, 1994 consisted of
$720,000 in license fees from a marketing agreement with BII, $325,000 in
license fees from a marketing agreement with Konica, $100,000 in milestone
revenues from Hybritech Incorporated ("Hybritech") relating to a funded
development and marketing agreement, which has been terminated, and $68,000 in
SBIR funding for the Company's prostate cancer research project. Revenue from
product sales increased 240% to $343,000 for the year ended December 31, 1995 as
compared to $101,000 in 1994. This increase was primarily due to expanded sales
of the Company's NMP22 Test Kit in Europe and Japan. Product sales in Europe
during 1995 were minimal due to product introduction in the second quarter and a
shift in the business focus of BII, the Company's former exclusive distributor
in Europe. See "Business--Matritech's Products and Products Under Development--
The Matritech NMP22 Test Kit for Bladder Cancer."
Interest and other income was $217,000 for the year ended December 31, 1995
and $92,000 for the year ended December 31, 1994, an increase of 136%
resulting from a combination of higher interest rates and significantly higher
average cash balances available for investment throughout 1995 as compared to
1994 resulting from financings during 1995.
Research and development expenses decreased 13% to $3,014,000 for the year
ended December 31, 1995 from $3,470,000 for the year ended December 31, 1994.
The decrease was due to reductions in both product development expenses and
clinical trial costs associated with the Company's bladder cancer diagnostic
product which was submitted to the FDA in November 1994.
Selling, general and administrative expenses increased 45% to $2,309,000 for
the year ended December 31, 1995 from $1,592,000 for the year ended December
31, 1994. The increase primarily related to increased professional fees for
the Company's patent protection applications and consulting fees as well as
the establishment in February 1995 of an internal sales and marketing function
and the expenses related to the launch of the Company's NMP22 Test Kit in
certain countries in Europe in 1995 and the anticipated launch in the United
States in 1996. The balance of the increase was attributable to expenses
incurred for the relocation of the Company to larger facilities in Newton,
Massachusetts during the latter part of 1995.
The Company incurred a net loss of $4,083,000 for the year ended December
31, 1995, as compared to a net loss of $3,656,000 for the year ended December
31, 1994. The increased loss for the year ended December 31, 1995 was
primarily a result of decreased revenues from license fees and increased
selling, general and administrative expenses which were partially offset by a
reduction in research and development expenses.
Year Ended December 31, 1994 Compared with Year Ended December 31, 1993
Collaborative research and development revenue, license fees and product
sales increased to $1,314,000 for the year ended December 31, 1994 from
$187,000 for the year ended December 31, 1993. Revenue generated from
collaborative research and development and license fees in the year ended
December 31, 1994 consisted of $720,000 in license fees from a marketing
agreement with BII, $325,000 in license fees from a marketing agreement with
Konica, $100,000 in milestone revenues from Hybritech relating to a funded
development and marketing agreement and $68,000 in SBIR funding for the
Company's prostate cancer research project. Matritech's revenue from
collaborative research and development for the year ended December 31, 1993
22
<PAGE>
consisted of $150,000 in milestone payments from Hybritech related to the same
funded development and marketing agreement. Revenue from product sales
increased 173% to $101,000 for the year ended December 31, 1994 as compared to
$37,000 in 1993. This increase was primarily due to sales of the Company's
NMP22 Test Kit in Japan to Konica.
Interest and other income was $92,000 for the year ended December 31, 1994
and $81,000 for the year ended December 31, 1993, an increase of 14% resulting
from a combination of higher interest rates and slightly higher average cash
balances available for investment throughout 1994 as compared to 1993.
Research and development expenses increased 27% to $3,470,000 for the year
ended December 31, 1994 from $2,728,000 for the year ended December 31, 1993.
Approximately 44% of the increase related to the transfer of personnel and
related expenses to research and development to support product manufacturing.
Approximately 35% of the increase was due to clinical trials for the Company's
bladder cancer diagnostic product. The balance of the increase was primarily
due to increased personnel costs, increased purchases of reagents and
laboratory supplies and the increased rent and utilities expense resulting
from the Company's expansion into larger facilities.
Selling, general and administrative expenses decreased 13% to $1,592,000 for
the year ended December 31, 1994 from $1,821,000 for the year ended December
31, 1993. In 1993, the Company expensed $59,000 of cost associated with an
unsuccessful private placement. Excluding this item, general and
administrative expenses decreased 10% which was primarily due to a transfer of
personnel to research and development to support product manufacturing and
decreased staffing in the marketing department in 1994.
The Company incurred a net loss of $3,656,000 for the year ended December
31, 1994, as compared to a net loss of $4,281,000 for the year ended December
31, 1993. The decreased loss for the year ended December 31, 1994 was
primarily a result of increased revenues from license fees, product sales, and
SBIR funding. Increased expenses in research and development were partially
offset by decreased expenses in operations and marketing.
Liquidity and Capital Resources
Since its inception, the Company has financed its operations primarily
through private and public offerings of its securities and through funded
development and marketing agreements. In September 1995, the Company received
net proceeds of approximately $6,658,000 from the private sale of Common
Stock. In December 1995, the Company received net proceeds of approximately
$4,656,000 from the exercise of certain Common Stock warrants which the
Company had called for redemption. In June 1995, the Company signed a product
development and marketing option agreement with Bayer and received a $150,000
initial payment. Under this agreement, Matritech is eligible to receive
further milestone and option payments upon the completion of specific product
development milestones. In the year ended December 31, 1995, Matritech
received $60,000 in milestone payments under this agreement. At December 31,
1995, the Company had cash and cash equivalents of $11,009,000 and working
capital of $10,839,000.
The Company's operating activities used cash of approximately $4,034,000,
$3,231,000 and $4,188,000 for the years ended December 31, 1993, 1994 and
1995, respectively, primarily to fund the Company's operating loss.
The Company's investing activities used cash of approximately $99,000 and
$147,000 in the years ended December 31, 1994 and 1995, respectively, primarily
for purchases of equipment, leasehold improvements and certain intangible
assets. The Company's investing activities provided cash of approximately
$770,000 in the year ended December 31, 1993 from the sale of marketable
securities partially offset by the purchases of equipment and leasehold
improvements and certain intangible assets.
23
<PAGE>
Financing activities provided cash of approximately $3,397,000, $4,648,000,
and $11,371,000 in the years ended December 31, 1993, 1994 and 1995,
respectively, primarily from the sale of equity securities and the exercise of
stock options and warrants, net of payments of capital lease obligations.
Capital expenditures totaled approximately $92,000 during the year ended
December 31, 1995, which consisted primarily of computer systems, laboratory
equipment and leasehold improvements to the Company's facilities in Newton,
Massachusetts. The Company currently estimates that it will acquire
approximately $331,000 of capital equipment during the year ending December 31,
1996, consisting primarily of computer systems, laboratory equipment and office
equipment.
The Company may from time to time consider obtaining additional long-term
funding for its operations from various sources including collaborative
arrangements and additional public or private financings. The Company
anticipates that its existing capital resources including working capital and
interest thereon will satisfy its capital needs at least through September 30,
1997. The survival of the Company in the long term, however, is dependent on its
ability to generate revenue from sales of its products. There can be no
assurance that such additional funding will be available on terms acceptable to
the Company, if at all.
The Company expects to incur continued research and development expenses and
other costs, including costs related to clinical studies to commercialize
additional products based on its NMP technology. The Company expects that such
costs will increase in the fiscal year ending December 31, 1996 and will
result in continued losses from operations. The Company may require
substantial additional funds to complete new product development, conduct
clinical trials and manufacture and market its products.
The Company's future capital requirements will depend on many factors,
including continued scientific progress in its research and development
programs, the magnitude of these programs, progress with clinical trials for
its diagnostic products, the time involved in obtaining regulatory approvals,
the costs involved in filing, prosecuting and enforcing patent claims,
competing technological and market developments, the ability of the Company to
establish additional development and marketing arrangements to provide funding
for research and development and funding to conduct clinical trials, obtain
regulatory approvals, and manufacture and market certain of the Company's
products. Should the Company pursue potential therapeutic applications of its
technology beyond initial feasibility studies, substantial additional
financing would also be required.
The Company's future financial and operational results, as well as future
conditions or objectives described in any statements in this report that are not
statements of historical fact (i.e. forward-looking statements), specifically
statements regarding the Company's future regulatory approvals, product
introductions and capital resources, are subject to a number of material risks
and uncertainties that may affect such results or conditions, including:
History of Operating Losses and Anticipated Future Losses. The Company has
incurred operating losses since its inception and expects to incur significant
operating losses over the next few years. The Company expects to improve
operating results in future periods, however, there can be no assurance that the
Company will achieve or maintain profitability or that its revenue growth can be
sustained in the future.
Uncertainties Associated with Future Performance. The Company's success in
the market for diagnostic products will depend, in part, on the Company's
ability: to successfully develop, test, produce and market its products; obtain
necessary governmental approvals in a timely manner; to attract and maintain key
employees; and to successfully respond to technological changes in its
marketplace.
Access to Capital. The Company will consider from time to time various
financing alternatives and may seek to raise additional capital through equity
or debt financing or to enter into corporate partnering arrangements. There can
be no assurance, however, that this funding will be available on terms
acceptable to the Company, if at all.
Fluctuation in Operating Results. The Company's future operating results
may vary significantly from quarter to quarter or from year to year depending on
a number of factors including: the timing of payments from corporate partners
and research grants; regulatory approvals and the introduction of new products
by the Company; the timing and size of orders from the Company's customers; and
the market acceptance of the Company's products. The Company's current planned
expense levels are based in part upon expectations as to future revenue.
Consequently, profits may vary significantly from quarter to quarter or year to
year based on the timing of revenue. Revenue or profits in any period will not
necessarily be indicative of results in subsequent periods.
24
<PAGE>
-3-
SIGNATURES
Pursuant to the requirements Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Newton,
Commonwealth of Massachusetts, on June 13, 1996.
MATRITECH, INC.
By: /s/ Stephen D. Chubb
---------------------
Stephen D. Chubb
Director, Chairman and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons in the capacities and on
the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Stephen D. Chubb Director, Chairman and June 13, 1996
- ------------------------- Chief Executive Officer,
Stephen D. Chubb (Principal Executive and
Financial Officer)
/s/ David L. Corbet Director, President and June 13, 1996
- ------------------------- Chief Operating Officer
David L. Corbet
/s/ Leslie R. Teso Vice President, Finance, June 13, 1996
- ------------------------- Secretary and Treasurer
Leslie R. Teso (Principal Accounting
Officer)
/s/ Thomas R. Morse Director June 13, 1996
- -------------------------
Thomas R. Morse
/s/ David Rubinfien Director June 13, 1996
- -------------------------
David Rubinfien
/s/ T. Stephen Thompson Director June 13, 1996
- -------------------------
T. Stephen Thompson
/s/ C. William Zadel Director June 13, 1996
- -------------------------
C. William Zadel
/s/ John R. Buchanan Director June 13, 1996
- -------------------------
John R. Buchanan
</TABLE>
