**U.S. SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 

**ý****        QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES**

**EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER30, 2001**

 

**OR**

 

**o****        TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE**

**SECURITIES EXCHANGE ACT OF 1934**

 

 

**Commissionfile number    0-19750**

 

----

 

**MATRIXPHARMACEUTICAL, INC.**

*(Exact name of Registrant asspecified in its charter)*

 

----

 

| **Delaware**                                                          | **94–2957068**                          |
|-----------------------------------------------------------------------|----------------------------------------------|
| *(State or other jurisdiction  of  incorporation organization )* | *(I.R.S. Employer*

*Identification Number)* |

 

**34700 Campus Drive**

**Fremont, California 94555**

*(Address of principal executiveoffices)*

 

**(510) 742-9900**

*(Registrant's telephone number,including area code)*

 

Indicate by checkmark whether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.

 

Yes  ý   No  o

 

 

Indicate thenumber of shares outstanding of each of the issuer's classes of common stock,$.01 par value, outstanding as of the latest practicable date.

 

 

 

 

 

26,527,830 shares

As of October 31,2001

 

 

 

**MATRIXPHARMACEUTICAL, INC.**

**TABLE OFCONTENTS**

** **
|     | **PART I**

**FINANCIAL INFORMATION**                                                  |                                                                                                              |
|----------|----------------------------------------------------------------------------------------|-------------------------------------------------------------------------------------------------------------------|
|     |                                                                                   |                                                                                                              |
|     |                                                                                   |                                                                                                              |
| Item 1.  | Financial Statements:                                                                  |                                                                                                              |
|     |                                                                                   |                                                                                                              |
|     | a.                                                                                     | Condensed  Consolidated Balance Sheets as of September 30, 2001 and December 31, 2000                             |   |
|     | b.                                                                                     | Condensed  Consolidated Statements of Operations for the three and nine months ended  September 30, 2001 and 2000 |   |
|     | c.                                                                                     | Condensed  Consolidated Statements of Cash Flows for the nine months ended September 30,  2001 and 2000           |   |
|     | d.                                                                                     | Notes  to Condensed Consolidated Financial Statements                                                             |   |
|     |                                                                                   |                                                                                                              |
| Item  2. | Management's  Discussion and Analysis of Financial Condition and Results of Operations |                                                                                                              |
| Item  3. | Quantitative  and Qualitative Disclosures About Market Risk                            |                                                                                                              |
|     |                                                                                   |                                                                                                              |
|     | **PART II**

**OTHER  INFORMATION**                                                    |                                                                                                              |
|     |                                                                                   |                                                                                                              |
|     | Risk Factors                                                                           |                                                                                                              |
| Item  2. | Changes  in Securities and Use of Proceeds                                             |                                                                                                              |
| Item 6.  | Exhibits and  Reports on Form 8-K                                                      |                                                                                                              |
|     | Signature                                                                              |                                                                                                              |

 

 

**MATRIX PHARMACEUTICAL, INC.**

**Condensed Consolidated Balance Sheets**

(In thousands)

 
|                                                     |   | **September 30,** |   | **December 31,** |   |
|----------------------------------------------------------|--------|-------------------|--------|------------------|--------|
|                                                     |   | **2001**          |   | **2000**         |   |
|                                                     |   | **(Unaudited)**   |   | **(*)**          |   |
| **ASSETS**                                               |   |              |   |             |   |
| Current assets:                                          |   |              |   |             |   |
| Cash and cash  equivalents                               |   | $                 | 17,738 |             | $      | 31,878 |   |
| Short-term  investments                                  |   | 15,288            |   | 22,098           |   |
| Other current  assets                                    |   | 2,163             |   | 2,074            |   |
| Total current  assets                                    |   | 35,189            |   | 56,050           |   |
|                                                     |   |              |   |             |   |
| Property and equipment, net                              |   | 10,526            |   | 10,924           |   |
| Long-term notes from related parties                     |   | 470               |   | 405              |   |
| Deposits and other assets                                |   | 124               |   | 454              |   |
| Total assets                                             |   | **$**             | 46,309 |             | $      | 67,833 |   |
|                                                     |   |              |   |             |   |
| **LIABILITIES**                                          |   |              |   |             |   |
| Current liabilities:                                     |   |              |   |             |   |
| Accounts payable                                         |   | $                 | 1,988  |             | $      | 1,803 |   |
| Accrued compensation                                     |   | 555               |   | 1,590            |   |
| Accrued clinical trial costs                             |   | 638               |   | 559              |   |
| Other accrued liabilities                                |   | 1,003             |   | 1,409            |   |
| Current portion of deferred income                       |   | 373               |   | 560              |   |
| Current portion of debt and capital lease obligations    |   | 7,552             |   | 1,457            |   |
| Total current liabilities                                |   | 12,109            |   | 7,378            |   |
| Debt and capital lease obligations, less current portion |   | 3,872             |   | 10,944           |   |
| Deferred other income                                    |   | 3,223             |   | 3,535            |   |
| Total long-term liabilities                              |   | 7,095             |   | 14,479           |   |
|                                                     |   |              |   |             |   |
| **STOCKHOLDERS' EQUITY**                                 |   |              |   |             |   |
| Common stock                                             |   | 327               |   | 259              |   |
| Additional paid-in capital                               |   | 260,495           |   | 258,348          |   |
| Notes receivable from stockholders                       |   | -                 |   | (1,344           | )      |
| Accumulated other comprehensive income (loss)            |   | 69                |   | 1                |   |
| Accumulated deficit                                      |   | (233,786          | )      | (211,288         | )      |
| Total stockholders’ equity                          |   | 27,105            |   | 45,976           |   |
|                                                     |   | $                 | 46,309 |             | $      | 67,833 |   |

 

(*) Derived from audited financialstatements.

 

 

 

See accompanying notes

 

**MATRIXPHARMACEUTICAL, INC.**

**CondensedConsolidated Statements of Operations**

(In thousands except pershare amounts)

(Unaudited)

 

 
|                                        |   | **Three  Months Ended** |   | **Nine  Months Ended** |   |
|---------------------------------------------|--------|-------------------------|--------|------------------------|--------|
|                                        |   | **September  30,**      |   | **September  30,**     |   |
|                                        |   | **2001**                |   | **2000**               |   | **2001** |   | **2000** |   |
|                                        |   |                    |   |                   |   |   |   |   |   |
| Revenues from contract services             |   | $                       | 773    |                   | $      | 620 |   | $ | 1,488 |   | $ | 1,052 |   |
|                                        |   |                    |   |                   |   |   |   |   |   |
| Operating costs and expenses:               |   |                    |   |                   |   |   |   |   |   |
| Contract  services                          |   | 440                     |   | 406                    |   | 820 |   | 687 |   |
| Research and development                    |   | 5,499                   |   | 4,692                  |   | 16,103 |   | 13,483 |   |
| General and administrative                  |   | 2,921                   |   | 1,731                  |   | 8,300 |   | 5,256 |   |
| Total costs and expenses                    |   | 8,860                   |   | 6,829                  |   | 25,223 |   | 19,426 |   |
|                                        |   |                    |   |                   |   |   |   |   |   |
| Loss from operations                        |   | (8,087                  | )      | (6,209                 | )      | (23,735 | ) | (18,374 | ) |
|                                        |   |                    |   |                   |   |   |   |   |   |
| Interest and other income, net              |   | 249                     |   | 910                    |   | 1,237 |   | 1,845 |   |
|                                        |   |                    |   |                   |   |   |   |   |   |
| Net loss                                    |   | $                       | (7,838 | )                      | $      | (5,299 | ) | $ | (22,498 | ) | $ | (16,529 | ) |
|                                        |   |                    |   |                   |   |   |   |   |   |
| Basic and diluted net loss per common share |   | $                       | (0.30  | )                      | $      | (0.21 | ) | $ | (0.86 | ) | $ | (0.70 | ) |
|                                        |   |                    |   |                   |   |   |   |   |   |
| Weighted average shares used in computing   |   |                    |   |                   |   |   |   |   |   |
| basic and diluted net loss per common share |   | 26,353                  |   | 24,828                 |   | 26,188 |   | 23,596 |   |

 

 

 

See accompanying notes

 

**MATRIX PHARMACEUTICAL, INC.**

**Condensed Consolidated Statements of CashFlows**

(Inthousands)

(Unaudited)

 
|                                                                         |   | **For  the Nine Months** |    |
|------------------------------------------------------------------------------|--------|--------------------------|---------|
|                                                                         |   | **Ended September 30,**  |    |
|                                                                         |   | **2001**                 |    | **2000** |   |
|                                                                         |   |                     |    |   |   |
| Cash flows from operating activities:                                        |   |                     |    |   |   |
| Net loss                                                                     |   | $                        | (22,498 | ) | $ | (16,529 | ) |
| Adjustments to reconcile net loss to net cash used by operating  activities: |   |                     |    |   |   |
| Depreciation, amortization, and other non-cash charges                       |   | 915                      |    | 637 |   |
| Changes in assets and liabilities:                                           |   |                     |    |   |   |
| Notes receivable from related parties                                        |   | (65                      | )       | 66 |   |
| Deferred other income                                                        |   | (79                      | )       | (79 | ) |
| Accrued compensation                                                         |   | (1,035                   | )       | (147 | ) |
| Other changes in assets                                                      |   | 99                       |    | (245 | ) |
| Net cash used in operating activities                                        |   | (22,663                  | )       | (16,297 | ) |
| Cash flows from investing activities:                                        |   |                     |    |   |   |
| Capital expenditures                                                         |   | (682                     | )       | (384 | ) |
| Net maturities of short-term investments                                     |   | 6,810                    |    | 11,879 |   |
| Net cash flows provided by investing activities                              |   | 6,128                    |    | 11,495 |   |
| Cash flows from financing activities:                                        |   |                     |    |   |   |
| Payments on debt and capital lease obligations                               |   | (1,164                   | )       | (827 | ) |
| Net cash proceeds from:                                                      |   |                     |    |   |   |
| Repayment of notes receivable from stockholders                              |   | 1,344                    |    | 890 |   |
| Issuance of common stock                                                     |   | 2,215                    |    | 30,888 |   |
| Net cash flows provided by financing activities                              |   | 2,395                    |    | 30,951 |   |
| Net increase (decrease) in cash and cash equivalents                         |   | (14,140                  | )       | 26,149 |   |
| Cash and cash equivalents at the beginning of period                         |   | 31,878                   |    | 16,042 |   |
| Cash and cash equivalents at the end of period                               |   | $                        | 17,738  |   | $ | 42,191 |   |

 

 

 

See accompanying notes

 

**MATRIXPHARMACEUTICAL, INC.**

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS**

 

**September 30, 2001**

 

1.             Basis of presentation

 

The condensedconsolidated balance sheet as of September 30, 2001, the condensed consolidatedstatements of operations for the three and nine months ended September 30, 2001and 2000, and the condensed consolidated statements of cash flows for the ninemonths ended September 30, 2001 and 2000 have been prepared by the Company,without audit.  In the opinion ofmanagement, all adjustments (which include only normal recurring adjustments)necessary to present fairly the financial position, results of operations, andcash flows at September 30, 2001 and for all periods presented have beenmade.  The condensed consolidatedbalance sheet at December 31, 2000 has been derived from the audited financialstatements at that date.

 

Certaininformation and footnote disclosures normally included in financial statementsprepared in accordance with generally accepted accounting principles have beencondensed or omitted pursuant to the Securities and Exchange Commission’s rulesand regulations.

 

The condensedconsolidated financial statements should be read in conjunction with theCompany’s audited financial statements included in the Company’s Annual Reporton Form 10-K for the year ended December 31, 2000 as filed with the Securitiesand Exchange Commission.  The results ofoperations for the three and nine months ended September 30, 2001 are notnecessarily indicative of the results to be expected for any subsequent quarteror for the entire fiscal year ending December 31, 2001.

 

2.             Comprehensive loss

 

During the thirdquarter of 2001 and 2000, total comprehensive loss amounted to $7,808,000 and $5,272,000,respectively.  For the first nine monthsof 2001 and 2000, total comprehensive loss amounted to $22,430,000 and $16,428,000, respectively.

 

3.             Revenue Recognition

 

To date, the Company’s primary source of revenue relates to itscontract aseptic manufacturing for clinical and commercial supply.  The Company’s customers have the right toinspect and reject products received if they do not meet customer-specifiedcriteria.  The Company performsextensive testing to ensure the products meet the customer-specified criteriaprior to shipment.  Therefore, theCompany recognizes such revenue when shipment has occurred, the sales price isfixed or determinable, collectibility is probable and the products or servicesmeet all of the customer-specified criteria. These criteria are met at the time the product is shipped.

 

4.            New Accounting Standards

 

In July 2001, theFinancial Accounting Standards Board issued Statement of Financial AccountingStandards No. 141, (“FAS 141”) Business combinations and Number 142, (“FAS142”) Goodwill and Other Intangible Assets. FAS 141 requires that all business combinations be accounted for underthe purchase method only and that certain acquired intangible assets in abusiness combination be recognized as assets apart from goodwill.  FAS 142 requires that goodwill andintangible assets deemed to have indefinite lives will no longer be amortizedbut will be subject to impairment tests in accordance with the Statements atlease annually.  Intangible assets withfinite lives will continue to be amortized over their estimated usefullives.  FAS 141 is effective for allbusiness combinations initiated after June 30, 2001 and for all businesscombinations accounted for by the purchase method for which the date ofacquisition is after June 30, 2001.  Theprovisions of FAS 142 will be effective for fiscal years beginning afterDecember 15, 2001.  The Company does notexpect the adoption of FAS 142 to have a material impact on the Company’sresults of operations and its financial position as the Company has nosignificant goodwill or intangible assets.

 

In August 2001,the Financial Accounting Standards Board issued Statement of FinancialAccounting Standard No. 144, “Accounting for the Impairment or Disposal ofLong-Lived Assets” (“FAS 144”), which is effective for fiscal periods beginningafter December 15, 2001 and interim periods within those fiscal years.  FAS 144 establishes an accounting model forimpairment or disposal of long-lived assets to be disposed of by sale.  The Company is currently evaluating thepotential impact, if any, the adoption of FAS 144 will have on its financialposition and results of operation.

 

5.             Subsequent Event

 

On October 10, 2001, the Company announced a restructuring plan tosupport a focused oncology research and development effort.  Plans to move forward rapidly with theclinical development of tezacitabine, a novel chemotherapy candidate;submission of an application for IntraDose® (cisplatin/epinephrine) InjectableGel for head and neck cancer in Europe; and identifying partneringopportunities have provided Matrix with revised corporate objectives requiringa shift in its business structure.

 

The first significant change in the structure of Matrix is theproposed sale of our manufacturing operations based in San Diego.  Matrix has begun the process of preparingthe entire manufacturing operation for sale to a company whose immediate goalsare more closely aligned with those of manufacturing.  The manufacturing operations as of September 30, 2001 includedapproximately $7,717,000 of assets, primarily property and equipment.  Approximately $9,000,000 of the Company’s$11,000,000 of debt is secured by assets in our manufacturing operations.  In addition to the proposed sale of the SanDiego manufacturing operations, Matrix has streamlined its business in Fremont,California through a workforce reduction of approximately 40% (excluding themanufacturing division). The newly focused team at Matrix will concentrate onresearch and development efforts for tezacitabine, as well as establishingopportunities for partnering. The Company’s restructuring is designed to reducethe overall monthly burn rate to approximately $1,400,000, assuming successfulcompletion of the sale of the manufacturing division.  Restructuring costs (excluding the manufacturing division),including severance and other expenses, are estimated to be approximately$1,000,000.

 

**Item 2.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ANDRESULTS OF OPERATIONS.**

 

*This Form 10-Q may contain, in addition to historicalinformation, forward-looking statements, including without limitation,statements regarding the timing and outcome of regulatory reviews and clinicaltrials. Any such forward-looking statements are based on management’s currentexpectations and are subject to a number of risks and uncertainties that couldcause actual results to differ materially from expected results. For additionalinformation, including risk factors, such as no assurance of regulatoryapprovals; uncertainties associated with clinical trials; history of losses;future profitability uncertain; additional financing requirements and uncertainaccess to capital markets; limited manufacturing and sales and marketingexperience; dependence on sources of supply; uncertainty regarding patents andproprietary 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; volatilityof stock price; no dividends; and anti-takeover provisions, please see the“Risk Factors” section included in the our 2000 Annual Report on Form 10-K andin this Form 10-Q as well as other factors discussed below and elsewhere inthis report.  Matrix disclaims, however,any intent or obligation to update these forward-looking statements.*

 

**Resultsof Operations**

 

Wehave a history of operating losses and expect to incur substantial additionallosses over the next several years as we continue to develop our products.  For the period from our inception toSeptember 30, 2001, we have incurred a cumulative net loss of $233,786,000.

 

**Threeand Nine Months Ended September 30, 2001 and 2000**

 

**Revenue**

 

Revenues for the thirdquarter of 2001 increased to $773,000, compared to $620,000 for the thirdquarter of 2000.  For the nine monthsended September 30, 2001, revenues were $1,488,000,compared to $1,052,000 for the same period of 2000.  Development of the Matrix Contract Services (MCS) division in SanDiego, which resulted in an increased customer base, was the cause for bothperiod-over-period increases in revenue.

 

**Operating Costs and Expenses**

 

Contractservices operating costs for the third quarter of 2001 increased to $440,000, compared to $406,000 for thethird quarter of 2000.  For the ninemonths ended September 30, 2001, contract services costs were $820,000, compared to $687,000 for thesame period of 2000.  Higher spending to support the growth in thecontract services business was the cause for both period-over-period increasesin operating costs.

 

Research and developmentexpenses for the third quarter of 2001 increased by 17% to $5,499,000, comparedto $4,692,000 for the third quarter of 2000. The increase was primarily dueto higher regulatory consulting expenses and San Diego plant operatingcosts.  This was partially offset byhigher NDA preparation costs in the third quarter of 2000.  For the first nine months ended September 30,2001, research and development expenses increased by 19% to $16,103,000, compared to $13,483,000 for the same period in2000.  The increase was primarily due to an increase in personnel costs, higherregulatory consulting expenses and San Diego plant operating costs.

 

General andadministrative expenses for the thirdquarter of 2001 increased 69% to$2,921,000, compared to $1,731,000 for the third quarter of 2000.  Thisincrease was primarily due to higher market preparation expenses for IntraDoseâ and consulting expenses.  For the firstnine months of 2001, general and administrative expenses increased by 58% to$8,300,000, compared to $5,256,000 for the same period in2000.  The increase was primarily due toan increase in personnel costs, higher marketpreparation expenses for IntraDoseâ and an increase in consulting expenses.

 

Net interest and otherincome (net) for the third quarter of 2001 decreased to $249,000, comparedto $910,000 for the third quarter of 2000. Lower interest income resulted from declining cash balances and lower interestrates on investments.  For the nine months ended September 30, 2001, interest and otherincome (net) was $1,237,000, compared to $1,845,000 for the same period of2000.  The decrease was due to the samereasons as noted for the third quarter of 2001.

 

**Liquidityand Capital Resources**

 

At September 30, 2001,Matrix had $33,026,000 in cash,cash equivalents and short-term investments, compared to $53,976,000 atDecember 31, 2000.  We used $22,663,000 and $16,297,000 foroperating activities for the nine months ended September 30, 2001 and September30, 2000, respectively.

 

Thedecrease of $20,950,000 in cash, cash equivalents and short-term investmentsduring the first nine months of 2001 reflects $22,663,000 ofcash used to fund operating activities, payments of $1,164,000 on debt andcapital lease obligations, and capital purchases of $682,000, partially offsetby cash receipts of $2,215,000 received primarily from stock option exercisesand $1,344,000 from repayment of employee loans.

 

We have financed ouroperations and capital asset acquisitions from inception through the sale ofequity securities, interest income, and capital lease and debt financing.  We expect to finance our continued operatingrequirements principally with cash on hand, as well as additional capital thatmay be generated through equity and debt financings and collaborativeagreements.

 

Our working capital andcapital requirements will depend on numerous factors, including the progress ofour research and development programs, pre-clinical testing and clinical trialactivities, the timing and cost of obtaining regulatory approvals, the levelsof resources that we devote to the development of manufacturing and marketingcapabilities, technological advances and the status of competitors.

 

**Subsequent Event**

 

OnOctober 10, 2001, Matrix announced a restructuring plan to support a focusedoncology research and development effort. Plans to move forward rapidly with the clinical development oftezacitabine, a novel chemotherapy candidate; submission of an application forIntraDose® (cisplatin/epinephrine) Injectable Gel for head and neck cancer inEurope; and identifying partnering opportunities have provided Matrix withrevised corporate objectives requiring a shift in our business structure.

 

Thefirst significant change in the structure of Matrix is the proposed sale of ourmanufacturing operations based in San Diego. Matrix has begun the process of preparing the entire manufacturingoperation for sale to a company whose immediate goals are more closely alignedwith those of manufacturing.  Themanufacturing operations as of September 30, 2001 included approximately$7,717,000 of assets, primarily property and equipment.  Approximately $9,000,000 of the Company’s$11,000,000 of debt is secured by assets in our manufacturing operations.  In addition to the proposed sale of the SanDiego manufacturing operations, Matrix has streamlined its business in Fremont,California through a workforce reduction of approximately 40% (excluding themanufacturing division).  The newlyfocused team at Matrix will concentrate on research and development efforts fortezacitabine, as well as on establishing opportunities for partnering.  The Company’s restructuring is designed toreduce the overall monthly burn rate to approximately $1,400,000 assumingsuccessful completion of the sale of the manufacturing division.  Restructuring costs (excluding themanufacturing division), including severance and other expenses, are estimatedto be approximately $1,000,000.

 

Following thisrestructuring, Matrix expects to incur substantial additional costs relating tothe continued clinical development of our oncology products, continued researchand development programs and general working capital requirements.  AtSeptember 30, 2001, Matrix had $33,026,000 in cash, cash equivalents andmarketable securities.  Assuming thesale of MCS, we anticipate that our existing resources, along with eitherrefinancing or transferring through the sale of MCS approximately $11,000,000in existing debt, will enable us to maintain our planned operations through2002.  We will require additional fundsto continue to support our operating needs beyond 2002.  We will need to generate such additionalfunds for operations after 2002 through equity or debt financings and/orcollaborative agreements.  We cannotassure that such additional funds will be available on acceptable terms, if atall.  We also cannot assure that MCS willbe sold or that a potential MCS buyer would assume existing debt.  We may require additional outside financingto complete the process of bringing current products to market, and we cannotassure that such financing will be available on favorable terms, if at all.

 

**Item 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURESABOUT MARKET RISK**

 

There have been nomaterial changes in the reported market risks since December 31, 2000.

 

 

**PART II. OTHER INFORMATION**

**RISK FACTORS**

 

 

**TheRegulatory Approval Process is Expensive, Time Consuming, and Uncertain and MayPrevent Us from Obtaining Required Approvals for the Commercialization of OurProducts or May Negatively Impact the Ongoing Marketing of Products WhenApproved.**

 

The pre-clinical andclinical testing, manufacturing, and marketing of our products are subject toextensive regulation by numerous governmental authorities in the United Statesand other countries, including the U.S. Food and Drug Administration (FDA) andthe European Medicines Evaluation Agency (EMEA).  Among other requirements, the FDA must approve our productcandidates, manufacturing processes and production facilities before we maymarket our products in the United States. Similarly, a foreign governmental authority, such as the EMEA, musttypically approve the marketing of a product before that product's manufacturercan market it in a particular foreign country. We have only limited experience in submitting and pursuing regulatoryapplications.  The process of obtainingFDA or EMEA approvals can be costly, time-consuming and subject tounanticipated delays, and we can give no assurance that either the FDA or EMEAwill grant us any approvals on a timely basis, or at all.  We currently have had no products approvedby the FDA and have had only one product approved in nine countries in Europeand we do not expect to achieve profitable operations unless our productcandidates now under development receive FDA, EMEA, and/or other foreignregulatory approval and are thereafter commercialized successfully.

 

The process of obtainingFDA regulatory approval involves a number of steps that, taken together, mayinvolve seven years or more from the initiation of clinical trials and requirethe expenditure of substantial resources. Among other requirements, this process requires that the productcandidate undergo extensive pre-clinical and clinical testing to demonstrateits safety and efficacy for its intended uses. We must also file a New Drug Application, or NDA, requesting FDAapproval.  When a product contains morethan one component that contributes to the product's effect, as do some of ourcurrent product candidates, the FDA may request that additional data besubmitted in order to demonstrate the contribution of each such component toclinical efficacy.  Further, when wesubmit an NDA, the FDA must review and interpret our analysis of the results ofour clinical studies submitted as part of the NDA.  An FDA interpretation may differ from our analysis and we cannotassure that the FDA will accept our data or our interpretation of thatdata.  In addition, changes inapplicable law or FDA policy during the period of product development and FDAregulatory review may result in the delay or rejection of our NDA.  Any failure to obtain, or delay inobtaining, FDA approvals would harm our ability to market our proposedproducts.  Moreover, even if FDAapproval is granted, the approval may include significant limitations onindicated uses for which a product could be marketed.

 

In addition, prior toapproval of a product, the FDA or EMEA must inspect and accept the product'smanufacturing facilities.  We cannotassure that the FDA or EMEA will accept our manufacturing arrangements, andfailure to receive or maintain such acceptance would prevent us fromsuccessfully commercializing our products.

 

Violations of regulatoryrequirements at any stage, including the pre-clinical and clinical testingprocess, the approval process or after approval, may result in adverseconsequences, including the FDA's or EMEA’s delay in approving or refusal toapprove a product, withdrawal of an approved product from the market, and/orthe imposition of criminal penalties against the manufacturer and/or the NDAholder.  In addition, the subsequentdiscovery of previously unknown problems relating to a marketed product mayresult 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 coulddelay or prevent regulatory approval of our products under development.

 

Our product, IntraDose®(cisplatin/epinephrine) Injectable Gel, is a potential new approach to treatinglocally recurrent or metastatic cancers. It delivers high concentrations of cisplatin (an established chemotherapyagent) for an extended time period at the injection site while reducingsystemic effects associated with intravenous administration.

 

In May 1999,IntraDose received Fast-Track designation. Fast-Track designation allows the submission of portions of the NDA assections are completed.  During 2000,IntraDose received Orphan Drug status for recurrent or refractory head and neckcancer.  The FDA may designate a productas an "Orphan Drug" if the drug is intended to treat a rare diseaseor condition.  A disease or condition isconsidered rare if it affects fewer than 200,000 people in the United States,or which affects more than 200,000 people but for which the development costsof the drug, plus a reasonable profit, will not be recovered within seven yearsfollowing FDA approval.  Upon approvalof the first NDA for a drug designated as an Orphan Drug for a specifiedindication, the sponsor of the NDA is entitled to exclusive marketing rights inthe United States for that drug for that indication for a period of sevenyears.  Orphan Drugs may also beeligible for federal income tax credits for costs associated with drugdevelopment.  Fast-Track designation andOrphan Drug status does not imply any greater or lesser likelihood of afavorable or timely review of the complete NDA.

 

In January 2001, theCompany announced that it had completed its submission to the FDA of its NDAfor IntraDose.  In March 2001, theFDA accepted the submission for filing and designated the IntraDose applicationfor standard review.  In July 2001, theCompany announced that the Oncologic Drugs Advisory Committee, or ODAC, of theFDA was scheduled to review IntraDose on September 10, 2001. On September 7,2001, the FDA made public its review of the IntraDose NDA.  The FDA review indicated that the NDA wasnot an approvable application.  OnSeptember 10, 2001, members of the ODAC voted 13-0 that, under a standardapproval scenario, the Company had not demonstrated substantial evidence thatIntraDose is safe and effective in the treatment of symptomatic recurrent headand neck cancer.  The ODAC alsodiscussed the question of whether or not tumor response rates in the twoclinical trials were reasonably likely to predict clinical benefit.  On this issue, six panel members voted"yes" and seven "no." ODAC members also requested discussion and a vote on whether IntraDoseshould be approved based on accelerated approval.  In response to this question, three panel members voted"yes" and nine "no" (with one abstention).

 

On November 2, 2001, theFDA issued a non-approvable letter to Matrix indicating that IntraDose wouldnot be cleared for U.S. marketing at this time.

 

The processes required bythe EMEA, the European regulatory authority, before our product candidates canbe marketed in the European Union (EU) are similar to those in the UnitedStates.  We must first completeappropriate pre-clinical laboratory and animal tests as well as analyticalproduct quality tests and then submit a clinical trial exemption or similardocumentation before we can initiate human clinical trials.  Upon completion of adequate andwell-controlled clinical trials in humans that establish that the drug is safeand efficacious, we must obtain regulatory approval to market the drug productfrom the EMEA.

 

In October 2001, theCompany announced they had received notification from the EMEA that IntraDosequalified for submission through the EMEA’s centralized applicationprocedure.  The Company intends tosubmit an application for the approval of IntraDose as a treatment of recurrentor refractory head and neck cancer to the EMEA for review through thecentralized procedure in the fourth quarter of 2001.   The centralized procedure provides that if approval is issued bythe EU it will be valid immediately in all EU member countries.  However, filing the IntraDose applicationthrough the EMEA’s centralized procedure does not assure that the EMEA willreview the product in a timely manner or approve the product.

 

**ClinicalTrials Required By the FDA, EMEA and Other Regulatory Agencies Can Be Lengthy,Expensive and May Not Provide Positive Results.**

 

We have conducted andplan to continue to undertake extensive and costly clinical testing to assessthe safety and efficacy of our potential products.  If we fail to comply with FDA or EMEA regulations applicable toclinical testing it could result in delay, suspension, or cancellation of thistesting, or refusal by the FDA or EMEA to accept the results of thistesting.  In addition, the FDA, EMEA orthe Company may modify or suspend clinical trials at any time if the FDA orEMEA concludes that the subjects or patients participating in the trials arebeing exposed to unacceptable health risks. Further, we cannot assure that human clinical testing will show anycurrent or future product candidate to be safe and effective or provide datasuitable for submission to the FDA or EMEA.

 

We are conductingmultiple clinical trials in the United States and have completed two randomizedplacebo controlled Phase III clinical trials for Intradose for head and neckcancer.  The rate of completion of ourclinical trials depends upon, among other factors, the rate of patientenrollment.  Patient enrollment is afunction of many factors, including the size of the patient population, thenature of the protocol, the proximity of patients to clinical sites and theeligibility criteria for the study.  Weexperienced slower than planned accrual of patients in two of our completedPhase III trials.  Delays in completingenrollment in other clinical studies may result in increased costs and delays,which could harm our business. Generally, similar considerations apply to clinical testing that issubject to regulatory oversight by foreign authorities and/or that is intendedto be used in connection with foreign marketing applications.

 

Additionally, weinitiated a Phase II study of tezacitabine, a novel systemic chemotherapycandidate, in colorectal cancer in 1999. It was later determined that the dose of tezacitabine being studied wassub-optimal, and the study protocol was amended to examine higher doses of thedrug.  This protocol amendment changedthe study to a Phase Ib study and is currently ongoing.  While the study is planned to be completedin the first half of 2002, many factors such as those listed above may delay orobscure the conclusion of this study.

 

**OurProducts Other Than IntraDose Are In Early Stages of Clinical Development.**

 

The FDA has decided notto approve IntraDose for head and neck cancer in the U.S.  and the EMEA may also ultimately decide notto approve IntraDose for head and neck cancer in Europe.  It may take several years to develop ourproduct tezacitabine and submit it for approval to U.S. and Europe regulatoryauthorities.  Tezacitabine, our secondproduct in development, is a novel nucleoside analog being studied as apotential systemic chemotherapy. Tezacitabine is currently being studied in Phase I and Phase II studies.

 

**We Havea History of Losses and Our Future Profitability Is Uncertain.**

 

We incorporated in 1985and have experienced significant losses since that date.  As of September 30, 2001, our accumulateddeficit was $233,786,000.  Our net lossfor the years ended December 31, 2000, nine months ending September 30,2001 and three months ended September 30, 2001 were $23,321,000, $22,498,000and $7,838,000, respectively.  We havegenerated limited revenues from our products or product candidates and expectto incur significant additional losses over the next several years.  In order to achieve a profitable level of operations,we must successfully develop products, obtain regulatory approvals for ourproducts, enter into agreements for product commercialization outside theUnited States, and develop an effective sales and marketing organization in theUnited States.  We cannot assure that wewill complete our product development efforts, that we will obtain the requiredregulatory approvals, that we will manufacture or market any productssuccessfully, or that we will achieve profitability.

 

**OurProposal to Sell the Matrix Contract Services Division (MCS) Must Be CarriedOut in a Timely Manner.**

 

The Matrix ContractServices Division (MCS) is the manufacturing business unit established byMatrix in 1995.  In October 2001, Matrixproposed the marketing and sale of MCS to a company with more immediatemanufacturing needs.  Due to the ongoingcosts of the operations of MCS and considerable loans associated with the MCSfacility, the timely sale of MCS is important to the ongoing ability of Matrixto pursue strategic development plans and continue its operations.  Delays in the sale of MCS may limit ourability to raise additional capital and negatively impact our cash burnrate.  We cannot assure that MCS will besold, or that a potential MCS buyer would acquire existing debt, or that MCScan be sold at the price we request.

 

**OurAdditional Financing Requirements and Limited Access to Financing May AdverselyAffect Our Ability to Develop Products.**

 

We have expended and willcontinue to expend substantial funds to complete the research and developmentof our product candidates.  At September30, 2001, we had $33,026,000 in cash, cash equivalents and marketablesecurities.  Assuming the sale of MCS, weanticipate that our existing resources, along with either refinancing or transferringthrough the sale of MCS approximately $11,000,000 in existing debt, will enableus to maintain our planned operations through 2002.  We will require additional funds to continue to support ouroperating needs beyond 2002.  We willneed to generate such additional funds for operations after 2002 through equityor debt financings and/or collaborative agreements.  We cannot assure that such additional funds will be available onacceptable terms, if at all.  We alsocannot assure that MCS will be sold, or that a potential MCS buyer wouldacquire existing debt, or that MCS will be sold at the price we request.  Our failure to raise additional funds on atimely basis would require us to scale back or eliminate some or all of ourresearch and development.  We might needto license to third parties our technologies, which we would otherwise seek todevelop ourselves.  We also might berequired to sell remaining aspects of our business or cease to operate.

 

**OurInability to Maintain “Liquid Assets” of a Specified Amount Will Cause theAcceleration of Certain Loan Repayments.**

 

We are bound by afinancial covenant associated with a $10 million loan.  The current balance of the loan as ofSeptember 30, 2001 was $5.2 million. Under that financial covenant, we are required to maintain liquid assetsof not less than the greatest of a) 2.5 times the most recent quarterly “CashBurn Rate” b) 2 times our total liabilities (excluding our outstanding mortgageobligation) or c) $22 million.   “Liquidassets” is defined as the sum of our cash, cash equivalents and short-terminvestments.  “Cash Burn Rate” isdefined as the decrease in Liquid Assets during the previous three months andcalculated and reported as of the last day of each month.

 

In the event we do notmaintain liquid assets as mentioned above, we will be required to promptlynotify the bank in writing and provide cash collateral to the bank in an amountequal to the balance of the loan at that time.

 

**We HaveLimited Sales and Marketing Experience, and if We Are Unable to Develop Our OwnSales and Marketing Capability, We May Be Unsuccessful in Commercializing OurProducts.**

 

We intend to market andsell some of our product candidates, if successfully developed and approved,through a dedicated sales force in the United States, which we would develop,and through pharmaceutical licensees in Europe.  We cannot assure that we will be able to establish a successfuldirect sales organization or co-promotion or distribution arrangements.  In addition, we cannot assure that we willbe able to fund our marketing and sales expenses, some of which would beincurred before sales commence.  If wefail to establish a marketing and sales capability in the United States oroutside the United States, we will not be able to successfully commercializeour products.

 

**The Saleof Our Manufacturing Division May Limit Our Ability to Ensure Continuous Supplyof Our Products.**

 

Our ability to conductclinical trials on a timely basis, to obtain regulatory approvals and tocommercialize our products will depend, in part, upon our ability tomanufacture our products, either directly or through third parties, at acompetitive cost and in accordance with applicable FDA and other regulatoryrequirements, including GMP regulations. We closed our manufacturing facilities in San Jose and Milpitas,California in March 1998 and transferred manufacturing personnel to aresearch and manufacturing facility in San Diego, California that we acquiredin 1995 to meet our anticipated long-term commercial scale productionrequirements.  If we complete the saleof MCS, Matrix will need to rely on additional contract manufacturers for themanufacturing of our products.  We maybe able to continue to work with the new owners, if any, of the San Diegofacility to ensure continued development of our products, but that is notassured.  We also cannot guarantee thatthe San Diego manufacturing facility or alternative new contract manufacturingfacilities will meet FDA or EMEA manufacturing standards.  We expect to continue to use selectedcontract manufacturers for our products’ components.  If we are unable to establish contract manufacturing to addressour needs on a timely basis we will not be able to successfully commercializeour products.

 

**OurPatents and Proprietary Rights May Not Keep Us From Infringing the Rights ofOthers or May Not Prohibit Potential Competitors From Commercializing Products.**

 

Our success depends, inpart, on our ability to obtain patent protection for our products and topreserve our trade secrets and operate without infringing on the proprietaryrights of third parties.  Our patentestate includes thirteen U.S. patents, three European patents (each granted inat least ten different European countries), four Japanese patents, fourCanadian patents, three Australian patents, as well as pending patentapplications in the U.S. and foreign jurisdictions.

 

At least three of theU.S. patents specifically cover the IntraDose formulation.  These are U.S. Patents Nos. 6,077,545;6,224,883; and Re. 35,748. An Australian patent corresponding to U.S. Patents6,077,545 and 6,224,883 has also been granted. In addition, foreign patents corresponding to Re. 35,748 have beengranted in Europe, Japan, Canada and Australia.

 

There are three patentsissued in the U.S. covering the composition of matter of tezacitabine and itsmethod of use in treating cancer.  Theyexpire in 2012 and 2014, respectively. In Europe, there is a single patent covering both aspects of the drugwhich expires in 2009.  There are also threeU.S. and one European patent covering the synthetic process used to producetezacitabine.  These expire in2012/2013.   In addition to thesepatents, there are two European patents (which expires in 2013) covering methodof use of tezacitabine in treating viral infections and combinations oftezacitabine with certain classes of other cytotoxic drugs in treatingcancer.  There is also a U.S. patent(which expires in 2014) covering the combination of tezacitabine with radiationin cancer therapy.  There are alsoseveral new patent applications.

 

We have not conducted anexhaustive patent search and we cannot assure that patents do not exist orcould not be filed, which would negatively affect our ability to market ourproducts or maintain our competitive position with respect to ourproducts.  Additionally, our patents maynot prevent others from developing competitive products using relatedtechnology.  Further, other companiesthat obtain patents claiming products or processes useful to us may bring infringementactions against us.  As a result, we maybe required to obtain licenses from others to develop, manufacture or marketour products.  We cannot assure that wewill be able to obtain any such licenses on commercially reasonable terms, ifat all.   We also rely on trade secretsand proprietary know-how that we seek to protect, in part, by confidentialityagreements with our employees, consultants, suppliers and licensees.  We cannot assure that these third partieswill not breach these agreements, that we would have adequate remedies for anybreach, or that our trade secrets will not otherwise become known or beindependently developed by competitors.

 

We cannot assure that theU.S. Patent and Trademark Office, or PTO, will approve our pending patent applications,or that any patent issued to, or licensed by us will provide protection thathas commercial significance.  In thisregard, the patent position of pharmaceutical compounds and compositions isparticularly uncertain.  Even issuedpatents may later be modified or revoked by the PTO in proceedings institutedby others or us.  In addition, we cannotassure that our patents will afford protection against competitors with similarcompounds or technologies, that others will not obtain patents with claimssimilar to those covered by our patents or applications, or that the patents ofothers will not adversely affect our ability to conduct our business.

 

In 1996, for instance,the PTO granted U.S. Patent 5,562,925 which claims a composition-of-matter for thecytotoxic drug cisplatin, which patent was exclusively licensed toBristol-Myers Squibb Company.   Anearlier patent covering the use of cisplatin in treating cancer was alsolicensed to this company, but expired in December 1996.  We believe that IntraDose, which containscisplatin, does not infringe this composition-of-matter patent.  Moreover, a U.S. District Court found thekey claims of this patent invalid in October 1999.  The District Court ruling was affirmed bythe U.S. Court of Appeals for the Federal Circuit on March 23, 2001.  Although a petition for certiorari may befiled with the U.S. Supreme Court, we believe that, even if filed, it isunlikely that the Supreme Court will grant such a petition.  However, if the decision of the Federal Circuitis reversed, we cannot assure that we would be able to obtain a license to thepatent on commercially reasonable terms, if at all, in order to commercializeIntraDose in the United States.

 

Foreign patentapplications covering IntraDose are pending in Canada, Europe, Japan andKorea.  We believe that obtainingforeign patents may be more difficult than obtaining domestic patents becauseof differences in patent laws, and recognize that our patent position thereforemay be stronger in the United States than abroad.  In addition, the protection provided by foreign patents, oncethey are obtained, may be weaker than that provided by domestic patents.

 

**OurDependence on Suppliers for Materials Could Impair Our Ability to ManufactureOur Products.**

 

Several of the materialsused in our product candidates are available from a limited number ofsuppliers.   These items, includingcollagen gel and various bulk drug substances, have generally been available tous on commercially reasonable terms.  Ifour manufacturing facilities are not able to produce sufficient quantities ofcollagen gel in accordance with applicable regulations, we would have to obtaincollagen gel from another source and gain regulatory approval for that source.  We cannot assure that we would be able tolocate an alternative, cost-effective and FDA approvable source of supply forcollagen gel.

 

We have negotiated andintend to continue to negotiate supply agreements, as appropriate, for the rawmaterials and components utilized in our products.  Any interruption of supply could impair our ability tomanufacture our products, complete clinical trials, or commercialize ourproducts.

 

**RapidTechnological Change and Substantial Competition May Impair Our Business.**

 

The pharmaceuticalindustry is subject to rapid and substantial technological change.  Technological competition in the industryfrom pharmaceutical and biotechnology companies, universities, governmentalentities and others diversifying into the field is intense and is expected toincrease.  Most of these entities havesignificantly greater research and development capabilities, as well assubstantially more marketing, financial and managerial resources than we do,and represent significant competition for us. Acquisitions of, or investments in, competing biotechnology companies bylarge pharmaceutical companies could increase these competitors' financial,marketing and other resources.  Wecannot assure that developments by others will not render our products ortechnologies noncompetitive or that we will be able to keep pace withtechnological developments.

 

Competitors havedeveloped or are in the process of developing technologies that are, or in thefuture may be, the basis for competitive products.  Products currently in clinical trials for head and neck cancerinclude ImClone "C-225", Onyx Pharmaceuticals "Onyx-015",and OSI Pharmaceuticals / Roche / Genentech "Tarceva".

 

Products currently beingmarketed that tezacitabine may directly compete with include but are notlimited to Eli Lilly’s Gemzar® (gemcitabine), a nucleoside analog.  Other systemic treatments for bothhematologic cancers and solid tumors currently marketed and in clinical trialsmay also compete with tezacitabine.

 

Some of these productsmay have a different approach or means of accomplishing similar therapeuticendpoints than products that we are developing and it is not clear at thisstage of development whether they will be competitive or complementary innature to our products.  These competingproducts may be more effective and less costly than the products that we aredeveloping.  In addition, conventionaldrug therapy, surgery and other more familiar treatments and modalities willcompete with our products.

 

Any product that wesuccessfully develop and for which we gain regulatory approval must thencompete for market acceptance and market share.  Accordingly, important competitive factors, in addition tocompletion of clinical testing and the receipt of regulatory approval, willinclude product efficacy, safety, timing and scope of regulatory approvals,availability of supply, marketing and sales capability, reimbursement coverage,pricing and patent protection.

 

**HealthcareReform and Restrictions on Reimbursement May Limit Our Returns on Our Products.**

 

The continuing efforts ofgovernmental and third party payers to contain or reduce the costs of healthcare through various means may affect the future revenues, profitability, andavailability of capital for biopharmaceutical companies.  For example, in certain foreign markets,pricing or profitability of prescription pharmaceuticals is subject togovernment control.  In the UnitedStates, there have been, and we expect that there will continue to be, a numberof federal and state proposals to implement similar government control.  Specific legislation is currently beingreviewed concerning the reimbursement of oncology drugs.  While we cannot predict whether any suchlegislative or regulatory proposals will be adopted, the announcement oradoption of such proposals could negatively affect our prospects.

 

Our ability tocommercialize our products successfully will depend, in part, on the extent towhich appropriate oncology-related reimbursement levels for the cost of suchproducts and related treatment are obtained from government authorities,private health insurers and other organizations, such as health maintenanceorganizations, or HMOs.  Third-partypayers are increasingly challenging the prices charged for medical products andservices.  Also, the trend towardsmanaged health care in the United States and the concurrent growth oforganizations like HMOs, which could control or significantly influence thepurchase of health care services and products, as well as legislative proposalsto reform health care or reduce government insurance programs, may limit priceswe can charge for our products.  Thecost containment measures that health care payers and providers are institutingand the effect of any health care reform could impair our ability to sell ourproducts and may negatively affect our business.

 

**If WeLose Qualified Management and Scientific Personnel or Are Unable to Attract andRetain Such Personnel, We May Be Unable to Successfully Develop Our Products orWe May Be Significantly Delayed in Developing Our Products.**

 

We are highly dependenton our President and Chief Executive Officer, Michael D. Casey, as well asthe other officers of the company, each of whom are employed at-will pursuantto letter agreements with us.  If welose their services we may not achieve our objectives.  Because of the specialized nature of ourbusiness, our ability to maintain our competitive position depends on ourability to attract and retain qualified management and scientific personnel.  We operate in geographical areas wherecompetition for such critical resources is intense, time consuming andexpensive.  We cannot assure that wewill be able to continue to attract or retain such persons.

 

**RecentDownsizing of Matrix Staff May Negatively Affect Our Ability to Achieve CorporateGoals.**

 

In October 2001, wereduced the number of full-time employees at Matrix (excluding those employeesinvolved in manufacturing) by 40 percent. While we believe that the scope and type of workforce reductions madewill provide adequate resources to help Matrix achieve corporate goals, theimpact of the downsizing has not been fully realized.  Reduced overall numbers of employees available to completeprojects may negatively affect the ultimate success of our products and impedethe timely achievement of corporate goals such as clinical trials, regulatoryapprovals, additional financing and developing partnering opportunities.

 

**We MayHave Significant Product Liability Exposure.**

 

We face an inherentbusiness risk of exposure to product liability and other claims in the eventthat the use of products during research or commercialization is alleged tohave resulted in adverse effects.  While we will continue to take precautions, we may not avoid significantproduct liability exposure.   Althoughwe maintain product liability insurance for clinical studies and contractservice activities in the amount of $4,000,000 per occurrence or $4,000,000 inthe aggregate on a claims-made basis, this coverage may not be adequate.  We may not be able to obtain adequateinsurance coverage for future clinical or commercial activities at all, or atan acceptable cost.  If we are sued forany injury caused by our technology or products, our liability could exceed ourassets.

 

**We UseHazardous Materials in Our Business.  Any Claims Relating to Improper Handling, Storage or DisposalCould Be Time Consuming and Costly.**

 

Our research anddevelopment involves the controlled use of hazardous materials, such ascytotoxic drugs, other toxic and carcinogenic chemicals and various radioactivecompounds.  Although we believe that oursafety procedures for handling and disposing of such materials comply with thestandards prescribed by federal, state and local regulations, we cannotcompletely eliminate the risk of accidental contamination or injury from thesematerials.  In the event of this type ofaccident, we could be held liable for any resulting damages, and any suchliability could be extensive.  We arealso subject to substantial regulation relating to occupational health and safety,environmental protection, hazardous substance control, and waste management anddisposal.  If we fail to comply withsuch regulations, we could be subject to, among other things, fines andcriminal liability.

 

Certain chemotherapeuticagents that we employ in our aqueous-based protein systems, Anhydrous DeliveryVehicles, and regional delivery technology are known to have toxic sideeffects, particularly when used in traditional methods of administration.  Each product incorporating a chemotherapeuticagent will require separate FDA approval as a new drug, under the proceduresspecified above.  Bovine collagen is asignificant component of our protein matrix. Two rare autoimmune connective tissue conditions, polymyositis anddermatomyositis, have been alleged to occur with increased frequency inpatients who have received cosmetic collagen treatments.  Based upon the occurrence of theseconditions, the FDA requested a major manufacturer of bovine collagen productsfor cosmetic applications to investigate the safety of such uses of itscollagen.  In October 1991, anexpert panel convened by the FDA to examine this issue found no statisticallysignificant relationships between injectable collagen and the occurrence ofautoimmune disease, but noted that certain limitations in the available datamade it difficult to establish a statistically significant association.

 

In addition,bovine-sourced materials are of some concern because of potential transmissionof Bovine Spongiform Encephalopathy, or BSE. We have taken precautions to minimize the risk of contamination of ourcollagen with BSE-causing agents, including the use of United States-sourcedhides.  The Committee for ProprietaryMedicinal Products, a steering committee of the European Medicines EvaluationAgency, has determined that materials made from bovine skin are unlikely toresult in any risk of contamination, indicating minimal risk of transmission ofBSE.  In March 2001, the EuropeanDirectorate for the Quality of Medicines issued a Certification of Suitabilityfor the bovine-derived collagen used for the manufacture of our products.  However, marketing issues exist for Europebecause of high levels of concern by the public about BSE and should BSE spreadto the U.S., such concerns might also arise in the U.S.  We have developed a back-up plan usingnon-bovine derived collagen, but significant risks may exist for such a programsince non-bovine sourced collagen has not been tested on humans, and it would notbe ready for marketing for several years.

 

**OurStock Price Could Continue to Be Volatile and Stockholders May Not Be Able toResell Their Shares At or Above the Price They Paid for Them.**

 

The market price for ourcommon stock and the market for biopharmaceutical and biotechnology companies'securities in general are highly volatile and have from time to timeexperienced significant price and volume fluctuations that are unrelated to theoperating performance of particular companies. For example, the market price ofour common stock fluctuated between $0.42 and $17.38 per share during the 52weeks ended September 30, 2001.

 

The following factors,among others, could have significant impact on the market for our common stock:

 

• Governmentalregulation,

 

• Future announcementsconcerning us,

 

• Future announcementsconcerning our competitors,

 

• Future announcementsconcerning other biopharmaceutical products,

 

• Actual or potential clinical results with respect toour products under development or those of our competitors,

 

• Developments in patentor other proprietary rights,

 

• Litigation or publicconcern as to the safety of products that we or others have developed,

 

• Changes orannouncements of changes in reimbursement policies,

 

• Period to periodfluctuations in our operating results,

 

• Changes in estimates ofour performance by securities analysts, and

 

• General marketconditions.

 

**OurStock May Become Subject to Penny Stock Rules, Which May Make It More Difficultfor You to Sell Your Shares.**Since September 18, 2001 our common stock has traded below $1.00 per share onthe Nasdaq National Market.  Nasdaqlisting rules provide that if the bid price of a company's stock is below $1.00for more than 30 trading days, the company faces possible delisting fromNasdaq.  Nasdaq temporarily suspendedthis rule until January 2, 2002.  IfNasdaq reinstates this listing rule and our common stock continues to tradebelow $1.00 per share, we may be delisted from Nasdaq.

 

If we are delisted fromNasdaq, our common stock will be considered a penny stock under regulations ofthe Securities and Exchange Commission and would therefore be subject to rulesthat impose additional sales practice requirements on broker-dealers who sellour securities.  The additional burdensimposed upon broker-dealers by these requirements could discouragebroker-dealers from effecting transactions in our common stock, which couldseverely limit the market liquidity of the common stock and your ability tosell our securities in the secondary market. We cannot assure you that we will be able to maintain our listing on theNasdaq.  This may have the effect oflimiting our ability to raise additional financing.

 

**OurFuture Efforts to Raise Additional Financing May Dilute the Value ofStockholder Equity.**

 

Matrix may decide toraise additional financing in the future. In many circumstances, raising capital through issuing company stock maydilute the value of existing stockholder equity.  Should Matrix need to make an additional public offering orprivate placement at share prices significantly less than 52-week highs,stockholder equity would be diluted.

 

**OurPolicy of Not Declaring Dividends Could Limit Stockholders’ Return on TheirInvestment.**

 

We have not paid any cashdividends on our common stock and do not anticipate paying any dividends in theforeseeable future.  As a result ourstockholders' sole source of any return on their investment will be priceappreciation of our common stock.

 

**OurCertificate of Incorporation and Bylaws Include Provisions that Could MakeAttempts By Stockholders to Change Management More Difficult.**

 

Some of the provisions ofour Certificate of Incorporation and Bylaws may make attempts by stockholdersto change management more difficult. Our Board of Directors has the authority to issue shares of preferredstock and to determine the price, rights, preferences, privileges andrestrictions of those shares without any further vote or action by thestockholders.  The rights of the holdersof common stock will be subject to, and may be adversely affected by, therights of the holders of any preferred stock that may be issued in thefuture.  The issuance of preferredstock, while providing desirable flexibility in connection with possibleacquisitions and other corporate purposes, could have the effect of making itmore difficult for stockholders to acquire a majority of our outstanding votingstock and to effect a change in management.

 

**We MayExperience Power Blackouts And Higher Electricity Prices As A Result OfCalifornia's Current Energy Crisis, Which Could Disrupt Our Operations AndIncrease Our Expenses.**

 

California is in themidst of an energy crisis that could disrupt our operations and increase ourexpenses.   We rely on the majorNorthern California public utility, Pacific Gas & Electric Company, orPG&E, to supply electric power to our facilities in NorthernCalifornia.  Due to problems associatedwith the de-regulation of the power industry in California and shortages inwholesale electricity supplies, customers of PG&E have been faced withincreased electricity prices, power shortages and, in some cases, rollingblackouts.  If blackouts interrupt ourpower supply, we may be unable temporarily to continue operations at ourfacilities.  Any such interruption inour ability to continue operations at our facilities could delay our ability todevelop or provide our products or services, which could damage our reputationand result in lost revenue, either of which could substantially harm ourbusiness and results of operations.

 

**MATRIX PHARMACEUTICAL, INC.**

 

**Item2.    CHANGES IN SECURITIES AND USE OFPROCEEDS**

 

On May 25, 2001, the Company filed a registration statement onForm S-3 (333-61616) with the Securities and Exchange Commission pursuant towhich the Company proposed to register $30,000,000 worth of Common Stock,shares of Preferred Stock, options, warrants and other rights to purchaseshares of the Company’s Common or Preferred Stock.  On July 2, 2001, July 23, 2001 and July 26, 2001, the Companyfiled amendments to the registration statement.  On August 3, 2001, the registration statement was declaredeffective.  There have been no sales todate under the registration statement.

 

**Item 6. EXHIBITS AND REPORTS ON FORM8-K**
|   |   |                                                                                                                                                                              |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (a)    |   | Exhibits                                                                                                                                                                          |
|   |   |                                                                                                                                                                              |
|   |   | None                                                                                                                                                                              |
|   |   |                                                                                                                                                                              |
| (b)    |   | Reports on  Form 8-K                                                                                                                                                              |
|   |   |                                                                                                                                                                              |
|   |   | The Company  filed a Current Report on Form 8-K on September 19, 2001 reporting under item  5, Other Events, to disclosed: (1) the result of the ODAC meeting in  September 2001. |

 

 

**MATRIXPHARMACEUTICAL, 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 theundersigned thereunto duly authorized.

 

 

**MATRIX  PHARMACEUTICAL, INC.**

 

 

 
| Date: November 9, 2001 | By:    | /s/ David W. Pritchard                            |
|------------------------|--------|---------------------------------------------------|
|                   |   |                                              |   |
|                   |   | David W. Pritchard                                |   |
|                   |   | Senior Vice President and Chief Financial Officer |
|                   |   |                                              |   |
|                   |   |                                              |   |
|                   |   |                                              |   |
|                   |   | Signing on behalf of the registrant               |   |
|                   |   | as principal financial officer                    |   |
|                        |        |                                                   |  |  |