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UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

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FORM 10-K

|/x/ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
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OR

|/ / | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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Commission File number: 0-19750

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MATRIX PHARMACEUTICAL, INC.(Exact name of registrant as specified in its charter)

|Delaware(State or other jurisdiction of
incorporation or organization)          |  | 94-2957068(I.R.S. Employer Identification No.)
|------------------------------------------------------------------------------- |  | ----------------------------------------------
|34700 Campus Drive, Fremont, California(Address of principal executive offices) |  | 94555(Zip Code)                               

Registrant's
telephone number, including area code: (510) 742-9900

Securities
registered pursuant to Section 12(b) of the Act:

|                    |  | Name of each exchange
|------------------- |  | ---------------------
|Title of each class |  | on which registered  
|None                |  | None                 

Securities
registered pursuant to Section 12(g) of the Act:

Common Stock, $.01 Par Value

Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes /x/  No / /

Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of
registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of Form 10-K or any amendment to this
Form 10-K.

The
aggregate market value of voting stock, $.01 par value, held by non-affiliates of the registrant as of February 29, 2000: $337,825,548.

Number
of shares of Common Stock, $.01 par value, outstanding as of February 29, 2000: 22,999,361.

DOCUMENTS INCORPORATED BY REFERENCE

Portions
of the following document are incorporated by reference into Part III of this Form 10-K Report: the Proxy Statement for the Registrant's 2000 Annual
Meeting of Stockholders scheduled to be held on May 9, 2000.

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PART I

Item 1. Business

This Form 10-K contains, in addition to historical information, forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from the results discussed in any such forward-looking statements. Factors that could cause or contribute to such differences
include those discussed in "Risk Factors" as well as those discussed elsewhere in this Form 10-K. These forward-looking statements represent the Company's judgment as of the date of
the filing of this Form 10-K. The Company disclaims, however, any intent or obligation to update these forward-looking statements.

Overview

Matrix® Pharmaceutical, Inc. ("Matrix" or "the Company") is a development-stage company that is developing novel drug product candidates for
cancer based on its internal research and development capabilities and through in-licensing of product candidates from other pharmaceutical companies.

The
Company is a leader in the formulation and development of novel pharmaceutical product candidates that are designed to improve the delivery of cancer drugs for more effective
treatment of solid tumors. The Company has applied its expertise in tumor biology and physiology, advanced imaging techniques, pharmaceutical chemistry, polymer chemistry, analytical chemistry and
biochemistry, and chemical engineering to develop proprietary systems that facilitate the direct delivery and retention of anticancer agents in solid tumors. The Company has developed aqueous-based
protein gel systems for delivery of water-soluble chemotherapeutic agents and non-aqueous semi-solid systems for delivery of chemotherapeutic agents that are poorly water
soluble. Two product candidates that utilize the Company's aqueous-based protein gel systems are currently being evaluated in human clinical trials. These are IntraDose®
(cisplatin/epinephrine) Injectable Gel and MPI 5020 Radiopotentiator. IntraDose incorporates cisplatin, an established chemotherapeutic agent. MPI 5020 incorporates fluorouracil, another established
chemotherapeutic agent.

In
addition to developing product candidates based on its technology, the Company also licenses product candidates for development, utilizing its expertise to identify and
subsequently implement appropriate development strategies for in-licensed compounds. In-licensed in 1998, Matrix is developing FMdC as an intravenously-administered therapeutic
in non-small cell lung cancer, colorectal cancer, hematologic and other cancers.

Matrix Technology

Aqueous-based protein systems.IntraDose and MPI 5020 Radiopotentiator are based on the Company's patented injectable
gel technology, in which a chemotherapeutic drug is combined with a protein matrix and, in IntraDose, a vasoconstrictor, to create an injectable gel. This gel enables targeted delivery of anticancer
drugs by direct injection into solid tumors. The Matrix delivery system localizes the release of drug, maintaining high drug concentrations at the tumor or lesion site and increasing the duration of
exposure of the targeted tissue to the therapeutic agent. The activity of Intradose is further enhanced by the addition of epinephrine, a vasoconstrictor which reduces local blood flow and acts as a
"chemical tourniquet" to further hold the drug at the site of the disease.

The
Company believes that its technology may allow the development of new products from established drugs or newer agents which may be available from other companies or institutions.
Whether or not the chosen drugs or compounds are "off-patent," when they are incorporated into the Company's proprietary drug delivery system, the resulting products are proprietary to the
Company. The Company, therefore, expects to be competitive in the marketplace and have a proprietary position in such products for the length of the patents on its technology and resulting products.

1



Cisplatin
and fluorouracil are widely used as systemic agents to treat solid tumors. These chemotherapeutic drugs exert a cytotoxic effect on dividing cells at various stages during
their growth and multiplication. Cells that undergo rapid and unregulated cell division are more susceptible than normal cells to the effects of such drugs. Unfortunately, normal cells
(e.g.,bone marrow and gastrointestinal mucosa cells) rapidly divide and are also sensitive to the cytotoxic drugs. This toxicity to normal tissue
limits the maximum dosing permitted with systemically administered chemotherapeutic drugs and often results in a tolerated dose that is substantially lower than the dose necessary to kill all diseased
tissue. Suboptimal dosing contributes to the emergence of drug resistance among remaining cancer cells, complicating further drug therapy.

The
Company believes that the principal advantages of its aqueous-based protein systems technology include:



Anhydrous Delivery Vehicles ("ADV").Approximately half of the anti-cancer drugs in use today, including
paclitaxel, etoposide, and teniposide, are poorly soluble in water, posing difficulties for administration by conventional systemic routes such as intravenous ("IV") injection or infusion. The
solubilizing agents employed in several of these drug products to prepare suitable IV solutions may add to toxicity. The Company has developed a series of non-aqueous delivery vehicles
(anhydrous delivery vehicles, or ADVs) which in preclinical experiments significantly enhance the local efficacy of these drugs compared to the efficacy obtained when these drugs are delivered
systemically using more conventional aqueous delivery systems. The Company believes that ADV carriers may be applicable to a large variety of water-insoluble drugs, with the potential to significantly
improve the clinical utility of these agents. The Company believes that this technology may also lend itself well to water-soluble drugs that have limited stability when dissolved in aqueous media.
Until such time as a corporate partner is identified and additional financial resources are provided, the Company does not intend to initiate clinical development of any product candidate based on the
ADV technology.

2



Products in Clinical Development

The following table summarizes the Company's products in clinical development, the primary indications for each product and the current development status.

|Product/Indication                                 |  | Development
Status(1)  |  | Commercial
Rights(2)
|-------------------------------------------------- |  | ---------------------- |  | --------------------
|IntraDose® (Intratumoral injection)                |  |                        |  |                     
|Head & Neck Cancer(3)                              |  | Phase III              |  | Matrix              
|Other Solid Tumors(4)                              |  | Completed Phase II/III |  | Matrix              
|Malignant Melanoma(5)                              |  | Phase II               |  | Matrix              
|Liver CancerPrimary Hepatocellular Cancer         |  | Phase II               |  | Matrix              
|Liver CancerMetastatic Colorectal Cancer          |  | Phase II               |  | Matrix              
|FMdC (Intravenous IV)                              |  |                        |  |                     
|Non-Small Cell Lung Cancer                         |  | Phase II               |  | Matrix              
|Colorectal Cancer                                  |  | Phase II               |  | Matrix              
|Leukemia/Lymphoma(5)                               |  | Phase I/II             |  | Matrix              
|Combination with Cisplatin                         |  | Phase Ia/Ib            |  | Matrix              
|Combination with Fluorouracil                      |  | Phase I                |  | Matrix              
|MPI 5020 Radiopotentiator (Intratumoral injection) |  |                        |  |                     
|Recurrrent breast cancer (Chest Wall Metastases)   |  | Completed Phase I      |  | Matrix              

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IntraDose Injectable Gel

Matrix is developing IntraDose Injectable Gel for head and neck cancer and a variety of other solid tumors. Ninety percent of cancer patients suffer from solid
tumors (i.e., carcinomas and sarcomas). Approximately 70% of these patients have local disease with no evidence of metastatic disease at the time of
diagnosis. Conventional therapies for cancer include surgery, radiation and systemic drug therapy. Despite continued advances in these treatments, they are limited by negative side effects, such as
loss of normal body functions, weakness, loss of appetite and nausea, which are the result of the killing, altering or removing of normal cell tissue. Therefore, quality of life factors such as pain
management and control of other tumor related symptoms become important, as do the potential to retard disease progression and possibly prolong survival.

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The
Company's IntraDose product candidate represents a new approach to the treatment of solid tumors. IntraDose is designed for direct injection into solid tumors, including primary,
metastatic and recurrent tumors. Imaging techniques such as endoscopy, ultrasound, computerized tomography ("CT" scan) and magnetic resonance imaging ("MRI" scan) have substantially increased the
number of solid tumors potentially treatable by the Company's products. The Company believes IntraDose may be efficacious when used as a single agent as well as when used in combination with
conventional treatment modalities. In addition, the Company believes that treatments with IntraDose may be given in any out-patient setting that is equipped to administer cytotoxic drugs,
offering the potential for cost-effective treatment without in-patient hospitalization for surgery or prolonged chemotherapy.

Head and Neck Cancer/Other Solid Tumors

The Company is currently completing two randomized placebo-controlled Phase III clinical trials for head and neck cancer. Enrollment for these two studies was
completed in January 2000 with patient treatment and follow-up expected to be completed during the first half of 2000. Two open-label Phase III trials in other solid
tumors including recurrent chest wall metastases (from breast cancer, ovarian cancer and lung cancer), esophageal cancer, melanoma, and various other carcinomas were completed in 1999. These tumors
may be either primary, recurrent, or metastatic. The Company believes that these cancers are well suited to a direct injection with the Company's IntraDose product as they are either visible, palpable
or easily accessible with an endoscope. The Company plans to utilize data from
its trials in head and neck cancer and other solid tumors to support its request for approval of the broadest possible label for IntraDose in the United States and Western Europe.

Head and Neck Cancer Market.The prevalence of head and neck cancer in the United States is estimated at 134,000
patients. In addition, the Company estimates that approximately 41,000 new cases of head and neck cancer are diagnosed annually in the United States and 73,000 new cases are diagnosed annually in
Western Europe, based on data from the American Cancer Society and The International Agency for Research on Cancer, a unit of the World Health Organization. The incidence (number of new cases per
year) is highest in patients with high rates of cigarette smoking and consumption of alcoholic beverages. Cancers of the head and neck are predominately squamous cell carcinomas. Of these,
approximately 60% to 70% are diagnosed as later stage disease which has spread beyond the site of origin, and 30% to 40% are diagnosed as early stage disease that is localized. Cancers of the head and
neck are often difficult to treat with conventional surgery and radiotherapy techniques. Tumor location can make surgical resection difficult or impossible due to proximity to vital body structures
and/or cosmetic or functional considerations, while radiotherapy often damages surrounding healthy tissues. The use of systemic chemotherapy in the management of head and neck cancers has been limited
by the difficulty of achieving adequate and lasting tumor responses without incurring unacceptable side effects. This has led to a continuing investigation of new chemotherapeutics and combinations of
chemotherapy, radiation, and surgery. The most important limitation of the available therapies for head and neck cancer is the high recurrence rate, generally 50% or higher.

A
standard course of chemotherapy for patients with head and neck cancer often requires hospitalization with daily intravenous infusion of chemotherapy. The majority of patients who
receive chemotherapy will also require ancillary supportive treatments, such as intravenous fluids, nutritional support, antiemetics or growth factor support to control the toxic side effects of the
chemotherapy. Clinical results suggest that the use of IntraDose may not require some or any of these supportive treatments.

Other Solid Tumor Market.Tumors that can be accessed and injected directly or by means of an endoscopic procedure or
minimally invasive technique include chest wall metastases from primary breast cancer, tumors of the esophagus, and malignant melanomas of the skin. The Company believes that approximately 76,000
cases are diagnosed each year in the United States (comprised of approximately 25,000 cases of chest wall metastases from primary breast cancer, 10,000 cases of esophageal cancer, and 41,000 cases of
malignant melanoma) and that approximately 71,000 cases are diagnosed each year in

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Western
Europe (approximately 26,000 in chest wall metastases from primary breast cancer, 24,000 in esophageal cancer, and 21,000 in malignant melanoma), based on data from the American Cancer Society
and The International Agency for Research on Cancer. Recurrent solid tumors of these types were evaluated in the Company's open-label Phase III trials. Metastatic tumors found in the chest
wall and other locations are usually treated with systemic chemotherapy and radiotherapy. However, this approach often leads to the development of drug resistance or cumulative radiation toxicity.
Currently there are few treatment options for recurrent tumors.

Clinical Studies.In 1992, an open-label Phase I/II clinical trial for the treatment of head and neck
cancer and other solid tumors was initiated. This clinical trial was conducted in 45 patients with a total of 82 treated tumors. The study was published in Otolaryngology-Head and Neck
Surgery, the journal of the American Academy of Otolaryngology-Head and Neck Surgery Foundation. Forty-one of the 45 patients had received radiotherapy or cancer drug therapy
prior to being treated with IntraDose, factors which reduce the likelihood of a significant response to the future use of chemotherapy. In this trial, 39% (32 of 82) of all treated tumors
exhibited a complete response (100% reduction in tumor volume) and 50% of all treated tumors (41 of 82) exhibited a complete response or partial response (greater than 50%
reduction in tumor volume). A response was defined as tumor reduction of any duration, rather than duration lasting at least 28 days, the standard clinical definition of a response, because
some patients received systemic chemotherapy for treatment of disease progression in distant, untreated tumors shortly after being treated successfully with IntraDose. Sixteen of the complete
responses (19.5% of treated tumors) without other therapy could be followed for at least 28 days without other therapy and had a lasting complete response. The median duration of complete
response was 125 days.

IntraDose
achieved these response rates in these patients with advanced disease without causing a clinically unacceptable level of systemic toxicity. Dose-limiting
toxicity was not observed in this trial, and the overall side effects were deemed to be moderate in severity when compared to standard chemotherapy regimens. The most commonly observed side effects
were irritation, inflammation and damage to the tissues in and around the injected tumor. However, these patients did not experience any of the principal side effects associated with the systemic use
of cisplatin, including nephrotoxicity and ototoxicity.

In
June 1995, the Company announced initiation of two Phase III trials for patients with head and neck cancer and two trials for patients with other solid tumors. The
randomized double-blind, placebo-controlled Phase III head and neck cancer trials were designed to enroll approximately 180 evaluable patients, 90 patients in the United States trial and 90 patients
in the European trial. The two Phase III studies for other solid tumors were open-label studies designed to include approximately 130 evaluable patients, 65 in the United States and 65 in
Western Europe. Patients enrolled in these Phase III trials had advanced recurrent or refractory disease. The study endpoints are objective tumor responses
(i.e., durable tumor shrinkage at or greater than 28 days of at least 50%) and achievement of pre-selected treatment goals, such as
prevention of obstruction of vital structures, pain control, wound care, improvement in ability to hear, see, and eat, prevention of breakthrough of the skin and other paliative benefits.

In
September 1998, the Company announced that the other solid tumor studies were fully enrolled with 127 patients. In November 1998, preliminary clinical results were
presented on a subset of patients at the 16th annual Chemotherapy Foundation Symposium. In May 1999, updated study results were presented at the American Society of Clinical Oncology ("ASCO").
Data were presented at ASCO on 102 evaluable patients including 28 women with advanced breast cancer, 25 patients with malignant melanoma, 18 patients with esophageal cancer and 31 patients with a
variety of recurrent and metastatic primary tumors. For most patients, two or more tumors were treated, including one that was identified by the physician before the start of treatment as most
troublesome, that is, the tumor that was most threatening or bothersome to the patient. Patients achieved objective tumor response rates of 50% in the most troublesome breast tumors, 48% in the most
troublesome malignant melanomas and 39% in the most troublesome esophageal cancer. Among the breast tumors, six of the 14 responses were complete (100% reduction of tumor volume for at least
28 days) and eight were partial (50% or greater reduction of tumor

5



volume
for at least 28 days). Among the melanomas, six of the 12 responses were complete and six were partial. Eight of the 12 melanoma responses were sustained until the patients went off
study. The other four patients received additional therapies during study follow-up for distant melanomas not treated with IntraDose. Among the esophageal patients, seven patients out of
18 had partial responses. In patients with recurrent breast cancer, 46% (13/28) achieved a patient benefit as assessed by the investigator and/or the patient against predetermined
treatment goals. Of the patients with malignant melanoma, 36% (9/25) achieved a patient benefit. Of the patients with esophageal cancer, 44% (8/18) achieved a patient
benefit. The therapy was generally well tolerated with 23% or fewer of the patients experiencing the nausea and vomiting symptoms typically related to intravenous chemotherapy. The most commonly
reported side effects were local tissue reactions including but not limited to necrosis, erythema (redness) and swelling at the treatment site and injection-related pain. There was a positive and
statistically significant association between "Most Troublesome Tumor ("MTT") response and achievement of patient benefit: patients with MTT responses were twice as likely to attain benefit as those
with less than a 50% MTT response (i.e. "nonresponder").

In
January 2000, the Company announced that the head and neck cancer studies were fully enrolled with a total of 179 patients, 88 in North America and 91 outside North America.
The Company had previously disclosed that, in consultation with the FDA, study entry criteria had been revised to exclude patients with neck tumors close to the carotid artery, who are susceptible to
cerebral vascular events including strokes and other serious neurological adverse events. If results from these two studies are adequate, the Company anticipates using the data from these trials to
support regulatory submissions in the United States in the fourth quarter of 2000 and Western Europe in early 2001.

Liver Cancer

Two types of cancers are commonly found in the liverprimary hepatocellular cancer (cancer arising from liver cells) and tumors originating in
other tissues (most commonly from colorectal cancer) that have metastasized to the liver. Primary liver cancer is a significant health problem worldwide and especially in the parts of the world where
hepatitis B is prevalent (e.g.,Japan, Korea and Southeast Asia). It is estimated that there will be 540,000 new cases in 2000 worldwide. The Company
believes the incidence of primary hepatocellular cancer is approximately 14,500 in the United States and 17,500 in Western Europe and the incidence of hepatic metastases from colorectal cancers is
approximately 36,000 and 73,000 in the United States and Western Europe, respectively, based on data available from the American Cancer Society and The International Agency for Research on Cancer.
However, some experts predict that the incidence of primary hepatocellular cancer may increase due to the frequency of hepatitis B and C carriers. There are currently no FDA approved drug or
pharmaceutical therapies for the treatment of primary hepatocellular cancer. The Company believes that this is an area where there is significant unmet medical need.

When
possible, surgery is most often the first line treatment for both types of liver tumors. However, a majority of patients with liver tumors are inoperable due to tumor location,
tumor size, and extent of disease. For unresectable liver cancer, treatments have included the use of systemic chemotherapy, radiotherapy, cryotherapy, hepatic arterial infusion of chemotherapy and
chemoembolization (blocking or draining a blood vessel while injecting chemotherapy), all of which are applicable to a minority of patients and have had limited beneficial results. Due to the limited
availability and effectiveness of current therapies, the Company believes that at most approximately 50% of all patients with liver cancer are treated. The Company believes that IntraDose may offer
enhanced tumor reduction as well as outpatient flexibility with the potential for improved quality of life as compared to non-surgical alternatives.

In
1992, clinical investigators began treating patients with both forms of unresectable liver cancer in a Phase I/II clinical trial program. The investigators treated 28 patients who
had 25 tumors evaluable for tumor necrosis (tumor destruction, estimated by CT scan). Ten of the 25 evaluable tumors exhibited at least 90% necrosis in response to IntraDose treatment. Patients were
treated in an outpatient setting, with the treatment guided by either CT or ultrasound.

6



Patients
treated in this study did not experience the typical side effects associated with intravenous cisplatin, such as nephrotoxicity, neurologic changes or ototoxicity. In
addition, in a pharmacokinetics study conducted in patients treated at the M.D. Anderson Cancer Center, less than 10% of the platinum levels anticipated from a standard intravenous dose of cisplatin
were found in patient plasma after treatment with IntraDose. The majority of the IntraDose product was confined to the treated tumor.

In
1997, the Company initiated two open-label Phase II trials for patients with liver cancer. A Phase II trial for patients with primary hepatocellular cancer was
initiated at medical centers in the United States, Europe, and Hong Kong. A Phase II trial for patients with cancers metastatic to the liver from colorectal cancer was initiated at medical centers in
the United States and Europe. These trials are designed to evaluate tumor necrosis and tumor response (as measured by CT scan), time to tumor progression, pattern of disease progression, and patient
survival.

In
April, 1999, the Company expanded enrollment in the Phase ll primary hepatocellular cancer study from 37 patients up to a maximum of 55 patients.

In
August 1999, the company concluded enrollment in the Phase ll trial for patients with colorectal cancer metastatic to the liver. Thirty-one patients have been
entered on study with follow-up and analysis to be completed and announced at an appropriate medical conference in 2000.

In
November 1999, the Company announced that 12 of 29 (41%) evaluable patients with primary hepatocellular cancer responded to treatment with IntraDose. Of the initial 12
responders, six experienced complete response (100% reduction in viable tumor volume) while the other six responders showed a reduction in viable tumor of at least 50%. As of this report, the median
survival was in excess of 15 months. Two patients of the 12 subsequently progressed, after 197 and 156 days of response respectively. In both patients, progression was due to development
of new tumors distant from the treated tumors and not due to growth of the treated tumors.

Tumor
response in this trial has been determined utilizing investigator site imaging techniques to estimate and assess the amount of necrotic tissue versus viable tumor in identified
tumors. No independent review of the imaging response has been used in determining tumor response and the Company expects that an independent review could lead to differing measurements of tumor
response.

FMdC

FMdC, licensed from Hoechst Marion Roussel, Inc. in September 1998, is a new chemical entity that belongs to a class of anticancer and antiviral
agents known as nucleoside analogs. Several nucleoside analogs are marketed for treatment of certain leukemias or lymphomas, malignancies of white blood cells. In addition, another nucleoside analog
is marketed for treatment of pancreatic cancer and non-small cell lung cancer, both of which are solid tumor malignancies. Preclinical testing indicates that FMdC may have activity against
solid tumors and may also be active against cancers of hematopoietic or blood cell origin.

FMdC
is an analog of deoxycytidine, one of the four nucleotides, or bases, that form DNA. Researchers believe FMdC has several modes of action. The two most important of these are
thought to be DNA chain termination during DNA replication and repair and inhibition of ribonucleotide reductase, an enzyme that manufactures nucleotides (nucleic acid bases) for incorporation into
DNA. FMdC can be incorporated directly into the replicating strand of DNA. Once FMdC is incorporated, the enzymes responsible for further synthesis cannot add additional nucleotides to the DNA chain.
This causes the
DNA chain to terminate before it is completely copied and leads to the death of the cell. The incorporation of FMdC into DNA is also facilitated by FMdC's inhibition of ribonucleotide reductase, as
this inhibition reduces the supply of the nucleic acid bases that are necessary for DNA replication. Additionally, experiments indicate that FMdC suppresses production of a protein that stimulates the
growth of blood vessels near tumors, suggesting that FMdC also may have anti-angiogenic properties.

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Animal
studies by Hoechst Marion Roussel and now by the Company indicate that FMdC is effective against a broad spectrum of human and rodent tumors, including tumors of the lung,
colon, breast (estrogen-dependent and estrogen-independent), prostate, ovaries, and pancreas. It has been shown in laboratory studies to be a more effective DNA chain terminator and inhibitor of
ribonucleotide reductase than certain other nucleoside analogs with known cytotoxic activity.

In
an intravenous dosage form, FMdC was generally well tolerated in four Phase I studies conducted by Hoechst Marion Roussel, Inc. Side effects included fever, flushing, and
clinically manageable reductions in white blood cell counts. FMdC has a relatively long plasma half life of three to six hours, which also may make it more effective than other nucleoside analogs. A
Phase I trial of an oral dosage form of FMdC has been completed in Japan by Kyowa Hakko, Ltd.. The Company believes that an oral formulation may eventually be of benefit in terms of outpatient
and administrative flexibility.

Lung Cancer

The American Cancer Society estimates that non-small cell lung cancer is the leading cause of cancer deaths in the United States, accounting for
75% of the 160,100 lung cancer deaths expected this year as well as 75% of the 171,500 expected new cases of lung cancer. Lung cancer is also one of the most common forms of cancer and one of the most
frequent causes of death from cancer in the European Union. The International Agency for Research on Cancer estimates that 182,398 new cases of lung cancer are diagnosed each year in the European
Union and 173,042 deaths occur each year from lung cancer.

First
line treatment of non-small cell lung cancer is often initially treated with surgery or radiation treatments. Many patients are not eligible for curative surgery.
Relapse rates are high, due it is believed, to the presence of metastatic disease. For relapsing patients, treatment options are single-agent chemotherapy, combination-agent chemotherapy, or best
supportive care. The advent of newer chemotherapeutic agents has improved patient response, but durable complete responses for more than one year are infrequently achieved. Effective new agents with
novel mechanisms of anticancer activity and favorable toxicity profiles are needed to improve the outcome for these patients.

In
February 1999, a Phase II study of FMdC in patients with non-small cell lung cancer was initiated in the United States. In October 1999, the Company
closed enrollment in this Phase ll study as the result of the application of a predetermined stopping rule. Preliminary analysis of the evaluable patients did not show meaningful clinical activity
with FMdC as a stand-alone therapy in this indication at the dose and regimen tested. The Company also plans to evaluate alternative dose levels and regimens.

Colon and Rectal Cancer

The prevalence of colorectal cancer is estimated to be over 540,000 patients in the United States and 575,000 in the European Union. Growth in the incidence of
colorectal cancer is increasing in both the United States and Europe. The American Cancer Society estimates that there will be 129,000 new cases of colorectal cancer in the United States. According to
the International Agency for Research on
Cancer almost 200,000 new cases are expected in the European Union. Surgery is the primary treatment for colon and rectal cancer. Unfortunately approximately 55% of patients will either not be
amenable to surgical cure or have recurrent cancer subsequent to surgery.

Chemotherapy
is used for paliation for patients who are not cured by surgery. Chemotherapy with an intravenous fluorouracil-based treatment is considered to be standard. Fluorouracil
has been shown to be more cytotoxic, with increased response rates but with variable effects on survival, when given in combination with leucovorin or methotrexate. Continuous-infusion fluorouracil
regimens have also resulted in increased response rates in some studies, with a modest benefit in median survival. Fluorouracil is in the class of drugs called fluoropyrimidines. Several oral
fluoropyrimidines are being evaluated in phase II-III trials. Recently the NDA was filed for one oral fluoropyrimidine, capecitabine, for advanced colorectal cancer. Approximately
15-20% of patients have a palliative partial response to

8



fluoropyrimidines.
Irinotecan (CPT-11) is a topoisomerase-I inhibitor with a 10% to 20% partial response rate in patients who have received no prior chemotherapy, and in
patients progressing on 5-FU. CPT-11 is now considered standard palliative therapy for patients who do not respond to or progress on 5-FU.

In
May 1999, a Phase ll study of FMdC in patients with colon cancer was initiated in the United States. This study is currently in progress and is expected to be completed
during the first half of 2000.

Combination Therapies

Preclinical studies performed by the Company indicated synergistic activity of FMdC and certain other agents. The Company commenced additional focused phase
Ia/Ib studies of FMdC for lung cancer during 2000 in combination with cisplatin, which could potentiate the response to FMdC.

In
February 2000, the Company commenced development of combination therapies with a phase I study to evaluate FMdC in combination with fluorouracil. Depending upon the
results of this trial, the Company may consider additional trials to evaluate FMdC in combination therapy with fluorouracil for other cancers including colon cancer.

Hematologic Cancer

Matrix is also collaborating with M.D. Anderson Cancer Center, where phase I/II investigator sponsored studies are being conducted in a variety of hematologic
cancers and lymphoma. These studies commenced in November 1999.

MPI 5020 Radiopotentiator

Radiation therapy remains a critical tool in the management of many types of solid tumors. However, radiation resistance, hypoxic tumor cells, and normal
tissue sensitivity to radiation has limited the benefit of this therapy. Using its platform technologies, the Company has demonstrated in preclinical experiments that intratumoral delivery of
radiopotentiating agents significantly enhances the effects of radiation in solid tumors. The Company's lead candidate in this area, MPI 5020, is a fluorouracil based product that uses the Company's
aqueous protein gel technology.

In
1997, the Company initiated a Phase I trial in chest wall metastatic disease from recurrent breast cancer at medical centers in the United States. This dose-escalation
study is intended to evaluate the safety of MPI 5020 when administered in conjunction with standard radiotherapy and to compare the
effect on tumor regression of tumors treated with MPI 5020 and radiotherapy to tumors treated with radiotherapy alone.

Preliminary
information from this ongoing trial was reported at the annual meeting of the American Society for Therapeutic Radiation and Oncology in October 1998 and at the
Annual San Antonio (Texas) Breast Cancer Symposium in December 1998. Patients have been treated in five dose-escalation and frequency-schedule treatment regimens, and the combined
use of radiation therapy and MPI 5020 has been found to be feasible and well tolerated.

The
Company has concluded the dose escalation phase of development and is currently gathering and analyzing clinical data. No further clinical work is expected on MPI 5020 during
2000. Further clinical development of the MPI 5020 program will depend on a number of factors including the ability of the Company to secure adequate funding from other pharmaceutical companies.

Preclinical Programs

The Company has focused certain preclinical research efforts on delivery of topoisomerase inhibitors and tubulin-binding agents through Matrix's proprietary
ADV technology. Topoisomerase inhibitors and tubulin-binding agents are classes of chemical compounds that have demonstrated potent anti-cancer

9



activity in vitroandin vivobut are poorly water soluble. In order to be administered intravenously,
many of these chemical compounds have been formulated with solubilizing agents that may cause serious systemic side effects. The Company believes its ADV technology may improve the therapeutic ratio
(i.e.,to increase a drug's local effectiveness and/or significantly reduce dose-limiting side effects which result from its systemic
administration) of these and other poorly water soluble anti-cancer agents.

Further
clinical development of the ADV technology will depend on the ability of the Company to secure funding from other pharmaceutical companies.

AccuSite Injectable Gel

The Company has withdrawn its new drug application for AccuSite Injectable Gel in the United States as it was deemed non-approvable by
the FDA. In 1999, the Company withdrew all license applications to market AccuSite Injectable Gel in Europe.

Manufacturing and Supply

Matrix maintains worldwide manufacturing rights to all of its products. The Company has manufactured collagen for IntraDose and MPI 5020 at facilities it
operated in San Jose and Milpitas, California, and obtained other product components from contract manufacturing facilities. The Company's San Jose and Milpitas facilities were closed during 1998 as
part of a restructuring of the Company's work force and consolidation of manufacturing operations in a 67,000 square foot research and manufacturing facility in San Diego, California, which the
Company acquired in 1995. In March 1998, the Company entered into a sale and leaseback agreement for the San Diego facility. See Item 2, "Properties." Following extensive renovations, the San
Diego facility became operational in 1998 for the non-sterile purification of collagen and aseptic processing and sterile filling of collagen gels as well as for all materials-receiving
activities, labeling, packaging and shipping operations. The Company intends to use the San Diego facility to meet its near-term clinical trials and long-term commercial scale
production requirements for collagen for its IntraDose products. The Company will also utilize the San Diego
facility for contract manufacturing for other pharmaceutical and medical device companies in order to generate revenues and offset operating costs. The facility has passed inspection by the State of
California but will require approval by the U.S. Food and Drug Administration prior to commercialization of products manufactured there. The Company has acquired supplies of FMdC sufficient for
anticipated near-term pre-clinical and clinical needs. For longer-term production of FMdC, the Company plans to contract for chemical production needs and do a
combination of internal and contract manufacturing for pharmaceutical production needs.

The
Company's ability to conduct clinical trials on a timely basis, to obtain regulatory approvals and to commercialize its products will depend in part upon its ability to
manufacture its products, either directly or through third parties, at a competitive cost and in accordance with applicable FDA and other regulatory requirements, including cGMP regulations. Several
of the materials used in the Company's products are available from a limited number of suppliers. These items, including collagen gel and various bulk drug substances, have generally been available to
Matrix on commercially reasonable terms. If the Company's manufacturing facilities are not able to produce sufficient quantities of collagen gel in accordance with applicable regulations, the Company
would have to obtain collagen gel from another source and gain regulatory approval for that source. Matrix has negotiated and intends to continue to negotiate supply agreements, as appropriate, for
the raw materials and components utilized in its products.

Sales and Marketing

The Company currently owns worldwide marketing rights for all its products under development, except for FMdC in Japan. The Company's business strategy is to
market or co-market IntraDose and its other oncology product candidates, if approved, in the United States and to license its products outside the

10



United
States to pharmaceutical partners who have substantially greater resources and experience in local markets. See "Risk FactorsWe Have Limited Manufacturing and Sales and Marketing
Experience."

Patents and Proprietary Rights

The Company's policy is to aggressively seek patent protection and to enforce all of its intellectual property rights. In the United States, the Company has
eleven issued patents, one allowed patent and four pending applications. In Western Europe, the Company has three issued patents and seven pending applications. The Company has four issued patents and
several pending applications in Japan. Ten of the eleven patents issued in the United States relate to the Company's base technologies. The first of these three patents claims compositions consisting
of collagen or fibrinogen as protein matrices, cytotoxic and antiproliferative drugs, and (optionally) a vasoconstrictive agent. This patent also covers the method of use of these compositions in
treating cancerous or hyperproliferative lesions by local application; it expires in the United States in 2003 and in Europe in 2005. A second patent, which expires in the United States in 2007,
includes pharmaceutical compositions consisting of a range of cytotoxic agents (including radionuclides, etc.) in combination with vasoconstrictive agents and (optionally) a variety of other tissue
modifiers, formulated in aqueous pharmacologically acceptable vehicles. The method of use of these compositions in treating cancerous lesions by local application is also covered. A third patent
covers certain formulations of the ADV technology for delivering water-insoluble anti-cancer drugs, and specifically covers water-immiscible fatty acid ester matrices containing cytostatic
agents and their use for treating cancer via intralesional administration. Another patent application covering Intradose composition of matter claims has been allowed in the United States and is in
prosecution in Europe. This patent will expire in 2015 in the United States and Europe. Two additional patents in the United States, which expire in 2015, cover certain drug-containing
collagen gels, including
MPI 5020, AccuSite and, potentially, other products developed by the Company. The other issued patents cover a key aspect of the Company's collagen manufacturing process, as well as other ancillary
drug products.

As
part of the in-licensing agreement of FMdC, the Company has received licenses to a patent portfolio on this technology in the United States, Europe and many other
countries with the exception of Japan. The first of these patent families is a composition-of-matter and method-of-use case covering FMdC (and related
compounds) and their use in treating neoplastic or viral disease. The European patents in this family expire in 2009, and the last of the U.S. patents in this family expires in 2014. A second patent
family covers the synthetic method by which FMdC is made; the last of these patents expire in 2013 in the United States and Europe. Another U.S. patent covers the use of combinations of FMdC and
radiation (U.S. expiry 2014, ex-U.S. in prosecution) and several other synthetic process and method-of-use patents (combination chemotherapy with other cytotoxic
drugs, combination antiviral therapy, etc.) are issued in Europe or in prosecution in the United States and Europe.

Competition

The development of therapeutic agents for human disease is intensely competitive. Many different approaches are being developed or have already been adopted
for routine use for the management of diseases targeted by the Company. Certain cancers and skin diseases are targets for therapeutic product development at numerous entities, many of which have
greater human and financial resources than the Company. In addition, conventional drug therapy, surgery and other more established treatments and modalities will compete with the Company's products.

The
pharmaceutical industry is subject to rapid and substantial technological change. Technological competition from pharmaceutical and biotechnology companies, universities,
governmental entities and others diversifying into the field is intense and is expected to increase. Most of these entities have significantly greater research and development capabilities, as well as
substantial marketing, financial and managerial resources, and represent significant competition for the Company. Acquisitions of, or investments in, competing biotechnology companies by large
pharmaceutical companies could increase such

11



competitors'
financial, marketing and other resources. There can be no assurance that developments by others will not render the Company's products or technologies noncompetitive, or that the Company
will be able to keep pace with technological developments. Competitors have developed or are in the process of developing technologies that are, or in the future may be, the basis for competitive
products. Some of these products may have an entirely different approach or means of accomplishing the therapeutic effect than products being developed by the Company. These competing products may be
more effective and less costly than the products developed by the Company.

The
Company's competitive position depends upon, among other factors, its ability to attract and retain qualified personnel, obtain patent protection or otherwise develop proprietary
products or processes and secure sufficient capital resources to complete product development and regulatory processes. The Company expects that competition among products approved for sale will be
based, among other factors, on product activity, safety, reliability, availability, price, patent position and new usage and purchasing patterns established by managed care and other group purchasing
organizations.

Government Regulation

The Company and its products are subject to comprehensive regulation by the FDA in the United States and by comparable authorities in other countries. These
national agencies and other federal,
state, and local entities regulate, among other things, the preclinical and clinical testing, safety, effectiveness, approval, manufacture, labeling, marketing, export, storage, record keeping,
advertising, and promotion of the Company's products.

The
process required by the FDA before the Company's products may be approved for marketing in the United States generally involves (i) preclinical laboratory and animal tests;
(ii) submission to the FDA of an IND, which must become effective before clinical trials may begin; (iii) adequate and well-controlled human clinical trials to establish the
safety and efficacy of the drug for its intended indication; (iv) submission to the FDA of an NDA, and; (v) FDA review of the NDA in order to determine, among other things, whether the
drug is safe and effective for its intended uses. When a product contains more than one active drug component, as do some of the Company's current product candidates, the FDA may request that
additional data be submitted in order to demonstrate the contribution of each such component to clinical efficacy.

Clinical
trials are typically conducted in three sequential phases which may overlap. During Phase I, when the drug is initially given to human subjects, the product is tested for
safety, dosage tolerance, absorption, metabolism, distribution, and excretion. Phase II involves studies in a limited patient population to (i) evaluate preliminarily the efficacy of the
product for specific, targeted indications, (ii) determine dosage tolerance and optimal dosage, and (iii) identify possible adverse effects and safety risks. Phase III trials are
undertaken in order to further evaluate clinical efficacy and safety within an expanded patient population at geographically dispersed clinical study sites. The FDA may suspend clinical trials at any
point in this process if it concludes that clinical subjects are being exposed to an unacceptable health risk.

FDA
approval of the Company's products, including a review of the manufacturing processes and facilities used to produce such products, is required before such products may be
marketed in the United States. The process of obtaining approvals from the FDA can be costly, time consuming, and subject to unanticipated delays. Any failure or delay in obtaining such approvals
would adversely affect the ability of the Company to market its proposed products. Moreover, even if regulatory approval is granted, such approval may include significant limitations on indicated uses
for which a product could be marketed.

The
processes required by European regulatory authorities before the Company's products can be marketed in Western Europe are similar to those in the United States. First, appropriate
preclinical laboratory and animal tests as well as analytical product quality tests must be done, followed by submission of a CTX or similar documentation before human clinical trials can be
initiated. Upon completion of

12



adequate
and well controlled clinical trials in humans that establish the drug is safe and efficacious, regulatory approval must be obtained from the relevant regulatory authorities.

The
proposed products and technologies of the Company may also be subject to certain other federal, state, and local government laws and regulations, including, but not limited to,
various environmental laws, the Occupational Safety and Health Act, and state, local, and foreign counterparts to such laws. Compliance with such laws and regulations does not have, nor is such
compliance presently expected to have, a material adverse effect on the business of the Company.

Research and Development

The Company's sponsored research and development expenses were approximately $27,214,000, $20,186,000 and $17,743,000 in 1997, 1998, and 1999, respectively.

Employees

As of December 31, 1999, the Company had a total of 93 full-time employees, including 21 in research and development, 26 in medical and
regulatory affairs, biostatistics, and technical services, 26 in manufacturing, and 20 in other departments. The Company believes that it has been successful in attracting and retaining skilled and
experienced personnel; however, competition for such personnel is intense and there can be no assurance that the Company will be successful at attracting and retaining qualified personnel in the
future. None of the Company's employees are covered by collective bargaining agreements and management considers relations with its employees to be good.

13



RISK FACTORS

We May Not Receive Regulatory Approvals of our Product Candidates, Manufacturing Processes and Production Facilities

The preclinical and clinical testing, manufacturing, and marketing of our products are subject to extensive regulation by numerous governmental authorities in
the United States and other countries, including the Food and Drug Administration, or FDA. Among other requirements, the FDA must approve our product candidates, manufacturing processes and production
facilities before we may market them in the United States. Similarly, a foreign governmental authority must typically approve the marketing of a product before that product's manufacturer can market
it in a particular foreign country. We have no products approved by the FDA and we do not expect to achieve profitable operations unless our product candidates now under development receive FDA and
foreign regulatory approval and are thereafter commercialized successfully. Subsequent to the approval of AccuSite by foreign authorities in certain countries in Europe all marketing applications have
been withdrawn. We have had only limited experience in submitting and pursuing regulatory applications. The process of obtaining FDA approvals can be costly, time consuming and subject to
unanticipated delays, and we can give no assurance that the FDA will grant us any approvals on a timely basis, or at all.

The
process of obtaining FDA regulatory approval involves a number of steps that, taken together, may involve seven years or more from the initiation of clinical trials and require
the expenditure of substantial resources. Among other requirements, this process requires that the product candidate undergo extensive preclinical and clinical testing to demonstrate its safety and
efficacy for its intended uses. We must also file a New Drug Application, or NDA, requesting FDA approval. When a product contains more than one component that contributes to the product's
effect, as do some of our current product candidates, the FDA may request that additional data be submitted in order to demonstrate the contribution of each such component to clinical efficacy.

In
addition, prior to approval of a product, the FDA must inspect and accept the product's manufacturing facilities as being in compliance with its Good Manufacturing Practices, or
GMP, regulations. We can give no assurance that the FDA will accept our San Diego manufacturing facility, and failure to receive or maintain such acceptance would materially and adversely affect our
business.

When
we submit an NDA, the FDA must review and interpret our analysis of the results of our clinical studies submitted as part of the NDA. Any FDA interpretation may differ from our
analysis, and we can give no assurance that the FDA will accept our data or our interpretation of that data. NDAs for drug candidates that the FDA determines address life-threatening
diseases may be given more rapid ("fast track") regulatory review, which is generally six months from submission. IntraDose Injectable Gel was granted "fast track" status in May 1999. Although
this designation is expected to shorten the review period compared to NDAs that do not have "fast track" status, it does not increase or decrease the probability of FDA approval. In addition, changes
in applicable law or FDA policy during the period of product development and FDA regulatory review may result in the delay or rejection of our NDA. Any failure to obtain, or delay in obtaining, FDA
approvals would adversely affect our ability to market our proposed products. Moreover, even if FDA approval is granted, the approval may include significant limitations on indicated uses for which a
product could be marketed.

Violations
of regulatory requirements at any stage, including the preclinical and clinical testing process, the approval process or after approval, may result in adverse consequences,
including the FDA's delay
in approving or refusal to approve a product, withdrawal of an approved product from the market, and/or the imposition of criminal penalties against the manufacturer and/or the NDA holder. In
addition, the subsequent discovery of previously unknown problems relating to a marketed product may result in restrictions on such product, manufacturer, or the NDA holder, including withdrawal of
the product from the market. Also, new government requirements may be established that could delay or prevent regulatory approval of our products under development.

14



The
processes required by European regulatory authorities before our product candidates can be marketed in Western Europe are similar to those in the United States. We must first
complete appropriate preclinical laboratory and animal tests as well as analytical product quality tests and then submit a clinical trial exemption or similar documentation before we can initiate
human clinical trials. Upon completion of adequate and well-controlled clinical trials in humans that establish that the drug is safe and efficacious, we must obtain regulatory approval
from the relevant regulatory authorities.

Uncertainties Associated with Clinical Trials

We have conducted and plan to continue to undertake extensive and costly clinical testing to assess the safety and efficacy of our potential products. Failure
to comply with FDA regulations applicable to clinical testing can result in delay, suspension, or cancellation of this testing, or refusal by the FDA to accept the results of this testing. In
addition, we or the FDA may modify or suspend clinical trials at any time if the FDA concludes that the subjects or patients participating in the trials are being exposed to unacceptable health risks.
Further, we can give no assurance that human clinical testing will show any current or future product candidate to be safe and effective or provide data suitable for submission to the FDA.

We
are currently conducting multiple clinical trials in the United States and certain foreign countries, including two ongoing Phase III trials. The rate of completion of our clinical
trials depends upon, among other factors, the rate of patient enrollment. Patient enrollment is a function of many factors, including the size of the patient population, the nature of the protocol,
the proximity of patients to clinical sites and the eligibility criteria for the study. We experienced slower than planned accrual of patients in our ongoing Phase III trials. Delays in completing
enrollment in other clinical studies may result in increased costs and delays, which could materially and adversely affect our business. Generally, similar considerations apply to clinical testing
that is subject to regulatory oversight by foreign authorities and/or that is intended to be used in connection with foreign marketing applications.

Additionally,
we extended enrollment in a Phase II Intradose trial beyond the original number of patients planned for that study. Although this action was taken due to the encouraging
results observed to date, final study results may be different from the preliminary outcomes as more patients are entered onto the study and as patients are followed for a longer period of time.

We Have a History of Losses and Our Future Profitability is Uncertain

We incorporated in 1985 and have experienced significant losses since that date. As of December 31, 1999, our accumulated deficit was approximately
$187,967,000. We have not generated revenues from our products or product candidates and expect to incur significant additional losses over the next several years. In order to achieve a profitable
level of operations, we must successfully develop products, obtain regulatory approvals for our products, enter into agreements for product commercialization outside the United States, and develop an
effective sales and marketing organization in the United States. We can give no assurance that we will complete our product development efforts, that we will
obtain the required regulatory approvals, that we will manufacture or market any products successfully, or that we will achieve profitability.

We Will Require Additional Financing

We have expended and will continue to expend substantial funds to complete the research and development of our product candidates. We may require additional
funds for these purposes through additional equity or debt financings, collaborative arrangements with corporate partners or from other sources. We can give no assurance that such additional funds
will be available on acceptable terms, if at all. Our business could be materially and adversely affected if adequate funds are not available from operations or additional sources of financing. Based
on our current operating plan, we anticipate that our

15



existing
capital resources will be adequate to satisfy our capital needs through at least mid-2001. See "Management's Discussion and Analysis of Financial Condition and Results of
Operations."

We Have Limited Manufacturing and Sales and Marketing Experience

We intend to market and sell certain of our product candidates, if successfully developed and approved, through our own dedicated sales force in the United
States and through pharmaceutical licensees in Europe. We can give no assurance that we will be able to establish a successful direct sales organization or co-promotion or distribution
arrangements. In addition, we can give no assurance that resources will be available to us to fund our marketing and sales expenses, many of which must be incurred before sales commence. Failure to
establish a marketing and sales capability in the United States or outside the United States may materially and adversely affect our business.

Our
ability to conduct clinical trials on a timely basis, to obtain regulatory approvals and to commercialize our products will depend in part upon our ability to manufacture our
products, either directly or through third parties, at a competitive cost and in accordance with applicable FDA and other regulatory requirements, including GMP regulations. We closed our
manufacturing facilities in San Jose and Milpitas, California in March 1998 and transferred manufacturing personnel to a research and manufacturing facility in San Diego, California that we
acquired in 1995 to meet our anticipated long-term commercial scale production requirements. We expect that the San Diego facility and contract manufacturers should provide sufficient
production capacity to meet clinical requirements. We can give no assurance that we will be able to validate this facility in a timely manner or that this facility will be adequate for our
long-term needs without delaying our ability to meet product demand or to manufacture in a cost-effective manner. We expect to continue to use selected contract manufacturers,
in addition to our own manufacturing capability, for some or all of our product components. Failure to establish additional manufacturing capacity on a timely basis materially and adversely affect our
business.

We Depend on Our Sources of Supply

Several of the materials used in our product candidates are available from a limited number of suppliers. These items, including collagen gel and various bulk
drug substances, have generally been available to us and others in the pharmaceutical industry on commercially reasonable terms. If our manufacturing facilities are not able to produce sufficient
quantities of collagen gel in accordance with applicable regulations, we would have to obtain collagen gel from another source and gain regulatory approval for that source. We can give no assurance
that we would be able to locate an alternative, cost-effective source of supply of collagen gel.

We
have negotiated and intend to continue to negotiate supply agreements, as appropriate, for the raw materials and components utilized in our products. Any interruption of supply
could materially and adversely affect our ability to manufacture our products, complete clinical trials, or commercialize our products. In addition, the issuance in 1996 of a U.S. patent for
cisplatin, a chemotherapeutic drug that is the active compound in our IntraDose Injectable Gel product, could limit our ability to commercialize this product in the United States if the newly-issued
patent were upheld, if IntraDose were found to infringe that patent, and if we were unable to obtain a license under that patent. See "Uncertainty Regarding Patents and Proprietary Rights."

Uncertainty Regarding Patents and Proprietary Rights

Our success depends in part on our ability to obtain patent protection for our products and to preserve our trade secrets and operate without infringing on the
proprietary rights of third parties. We have not conducted an exhaustive patent search and we can give no assurance that patents do not exist or could not be filed which would materially and adversely
affect our ability to market our products or maintain our competitive position with respect to our products. Our patents may not prevent others from

16



developing
competitive products using related technology. Other companies that obtain patents claiming products or processes useful to us may bring infringement actions against us. As a result we may
be required to obtain licenses from others to develop, manufacture or market our products. We can give no assurance that we will be able to obtain any such licenses on commercially reasonable terms,
if at all. We also rely on trade secrets and proprietary know-how that we seek to protect, in part, by confidentiality agreements with our employees, consultants, suppliers and licensees.
We can give no assurance that these third parties will not breach these agreements, that we would have adequate remedies for any breach, or that our trade secrets will not otherwise become known or be
independently developed by competitors.

We
can give no assurance that the U.S. Patent and Trademark Office, or PTO, will approve our pending patent applications, and or that any patent issued to, or licensed by us will
provide protection that has commercial significance. In this regard, the patent position of pharmaceutical compounds and compositions is particularly uncertain. Even issued patents may later be
modified or revoked by the PTO in proceedings instituted by us or others. In addition, we can give no assurance that our patents will afford protection against competitors with similar compounds or
technologies, that others will not obtain patents with claims similar to those covered by our patents or applications, or that others' patents will not adversely affect our ability to conduct our
business.

In
1996, for instance, the PTO granted a composition-of-matter patent for the cytotoxic drug cisplatin in the United States licensed to a pharmaceutical
company whose use patent on cisplatin as an anti-tumor agent expired in December 1996. We believe on advice of patent counsel that our IntraDose product candidate, which contains
cisplatin, does not infringe this new patent. Moreover, the key claims of this new patent were found invalid by the 7th U.S. District Court in October 1999. However, if the
court's decision is appealed and overturned, and if IntraDose were found to infringe that upheld patent, there can be no assurance that we would be able to obtain a license to the patent on
commercially reasonable terms, if at all, in order to commercialize IntraDose in the United States.

We
believe that obtaining foreign patents may be more difficult than obtaining domestic patents because of differences in patent laws, and recognize that our patent position therefore
may be stronger in the United States than abroad. In addition, the protection provided by foreign patents, once they are obtained, may be weaker than that provided by domestic patents.

Risks Related to Rapid Technological Change and Substantial Competition

The pharmaceutical industry is subject to rapid and substantial technological change. Technological competition in the industry from pharmaceutical and
biotechnology companies, universities, governmental entities and others diversifying into the field is intense and is expected to increase. Most of these entities have significantly greater research
and development capabilities, as well as substantially more marketing, financial and managerial resources than us, and represent significant competition for us. Acquisitions of, or investments in,
competing biotechnology companies by large pharmaceutical companies could increase these competitors' financial, marketing and other resources. We can give no assurance that developments by others
will not render our products or technologies noncompetitive or that we will be able to keep pace with technological developments. Competitors have developed or are in the process of developing
technologies that are, or in the future may be, the basis for competitive products. Some of these products may have an entirely different approach or means of accomplishing similar therapeutic
endpoints than products that we are developing. These competing products may be more effective and less costly than the products that we are developing. In addition, conventional drug therapy, surgery
and other more familiar treatments and modalities will compete with our products.

Any
product that we successfully develop and for which we gain regulatory approval must then compete for market acceptance and market share. Accordingly, important competitive
factors, in addition to completion of clinical testing and the receipt of regulatory approval, will include product efficacy, safety,

17



timing
and scope of regulatory approvals, availability of supply, marketing and sales capability, reimbursement coverage, pricing and patent protection.

Pharmaceutical Pricing and Adequate Reimbursement is Uncertain

The continuing efforts of governmental and third party payers to contain or reduce the costs of health care through various means may affect the future
revenues, profitability, and availability of capital for biopharmaceutical companies. For example, in certain foreign markets pricing or profitability of prescription pharmaceuticals is subject to
government control. In the United States, there have been, and we expect that there will continue to be, a number of federal and state proposals to implement similar government control. Specific
legislation is currently being reviewed concerning the reimbursement of oncology drugs. While we cannot predict whether any such legislative or regulatory proposals will be adopted, the announcement
or adoption of such proposals could materially and adversely affect our prospects.

Our
ability to commercialize our products successfully will depend in part on the extent to which appropriate oncology-related reimbursement levels for the cost of such products and
related treatment are obtained from government authorities, private health insurers and other organizations, such as health maintenance organizations, or HMOs. Third-party payers are increasingly
challenging the prices charged for medical products and services. Also, the trend towards managed health care in the United States and the concurrent growth of organizations like HMOs, which could
control or significantly influence the purchase of health care services and products, as well as legislative proposals to reform health care or reduce government insurance programs, may limit prices
we can charge for our products. The cost containment measures that health care payers and providers are instituting and the effect of any health care reform could adversely affect our ability to sell
our products and may materially and adversely affect our business.

We Depend on Qualified and Key Personnel

Because of the specialized nature of our business, our ability to maintain our competitive position depends on our ability to attract and retain qualified
management and scientific personnel. Competition for such personnel is intense. We can give no assurance that we will be able to continue to attract or retain such persons.

Risks Associated with Product Liability Exposure; Limited Insurance Coverage

We face an inherent business risk of exposure to product liability claims in the event that the use of products during research or commercialization results in
adverse effects. While we will continue to take appropriate precautions, we can give no assurance that we will avoid significant product liability exposure. Although we maintain product liability
insurance for clinical studies and contract service activities, we can give no assurance that this coverage will be adequate or that adequate insurance coverage for future clinical or commercial
activities will be available at all, or at an acceptable cost, or that a product liability claim would not materially adversely affect our business or financial condition.

Risks Associated with Hazardous Materials and Products

Our research and development involves the controlled use of hazardous materials, such as cytotoxic drugs, other toxic and carcinogenic chemicals and various
radioactive compounds. Although we believe that our safety procedures for handling and disposing of such materials comply with the standards prescribed by federal, state and local regulations, we
cannot completely eliminate the risk of accidental contamination or injury from these materials. In the event of this type of accident, we could be held liable for any resulting damages, and any such
liability could be extensive. We are also subject to substantial regulation relating to occupational health and safety, environmental protection, hazardous substance

18



control,
and waste management and disposal. The failure to comply with such regulations could subject us to, among other things, fines and criminal liability.

Certain
chemotherapeutic agents that we employ in our aqueous-based protein systems, Anhydrous Delivery Vehicles, and regional delivery technology are known to have toxic side
effects, particularly when used in traditional methods of administration. Each product incorporating a chemotherapeutic agent will require separate FDA approval as a new drug under the procedures
specified above. Bovine collagen is a significant component of our protein matrix. Two rare autoimmune connective tissue conditions, polymyositis and dermatomyositis, have been alleged to occur with
increased frequency in patients who have received cosmetic collagen treatments. Based upon the occurrence of these conditions, the FDA requested a major manufacturer of bovine collagen products for
cosmetic applications to investigate the safety of such uses of its collagen. In October 1991, an expert panel convened by the FDA to examine this issue found no statistically significant
relationships between injectable collagen and the occurrence of autoimmune disease, but noted that certain limitations in the available data made it difficult to establish a statistically significant
association.

In
addition, bovine sourced materials are of some concern because of transmission of Bovine Spongiform Encephalopathy, or BSE. We have taken all precautions to minimize the risk of
contamination of our collagen with BSE, including the use of United States-sourced hides. The Committee For Proprietary Medicinal Products, a steering committee of the European Medicines Evaluation
Agency, has determined that materials made from bovine skin are unlikely to result in any risk of contamination, indicating minimal risk of transmission of BSE.

Our Stock Price is Volatile and We Have Not Declared Any Dividends

The market prices for securities of biopharmaceutical and biotechnology companies (including us) have historically been highly volatile, and, in addition, the
market has from time to time experienced significant price and volume fluctuations that are unrelated to the operating performance of particular companies. Future announcements concerning us, our
competitors or other biopharmaceutical products, governmental regulation, developments in patent or other proprietary rights, litigation or public concern as to the safety of products that we or
others have developed and general market conditions may have a significant effect on the market price of our securities. We have not paid any cash dividends on our Common Stock and do not anticipate
paying any dividends in the foreseeable future.

Risks Associated with Anti-Takeover Provisions

Certain provisions of our Certificate of Incorporation and Bylaws may make it more difficult for a third party to acquire, or discourage a third party from
attempting to acquire, control of us. These provisions could limit the price that certain investors might be willing to pay in the future for shares of our Common Stock. Our Board of Directors has the
authority to issue shares of Preferred Stock and to determine the price, rights, preferences, privileges and restrictions of those shares without any further vote or action by the stockholders.

The
rights of the holders of Common Stock will be subject to, and may be adversely affected by, the rights of the holders of any Preferred Stock that may be issued in the future. The
issuance of Preferred Stock, while providing desirable flexibility in connection with possible acquisitions and other corporate purposes, could have the effect of making it more difficult for a third
party to acquire a majority of our outstanding voting stock. We have no present plans to issue shares of Preferred Stock. Certain provisions of Delaware law applicable to us could also delay or make
more difficult a merger, tender offer or proxy contest involving us, including Section 203 of the Delaware General Corporation Law, which prohibits a Delaware corporation from engaging in any
business combination with any interested stockholder for a period of three years unless certain conditions are met.

19



Impact of Year 2000

In prior years, the Company discussed the nature and progress of its plans to become Year 2000 ready. In late 1999, the Company completed its remediation and
testing of systems. As a result of those planning and implementation efforts, the Company experienced no significant disruptions in mission critical information technology and
non-information technology systems and believes those systems successfully responded to the Year 2000 date change. The Company spent approximately $100,000 during 1999 in connection with
remediating its systems. The Company is not aware of any material problems resulting from Year 2000 issues, either with its products, its internal systems, or the products and services of third
parties. The Company will continue to monitor its mission critical computer applications and those of its suppliers and vendors throughout the year 2000 to ensure that any latent Year 2000 matters
that may arise are addressed promptly. Although we have converted our internal systems, we cannot fully predict to what extent our business would be affected if any of our suppliers' systems and
services are not Year 2000 compliant. See "Management's Discussion and Analysis of Financial Condition and Results of Operations"

20



## 

MANAGEMENT

Executive Officers of the Company

Certain information about the Company's executive officers is set forth below:

|Name                     |  | Age |  | Position                                                                  
|------------------------ |  | --- |  | --------------------------------------------------------------------------
|Michael D. Casey         |  | 54  |  | Chairman, President and Chief Executive Officer                           
|David G. Ludvigson       |  | 49  |  | Senior Vice President, Chief Operating Officer and Chief Financial Officer
|Richard D. Leavitt, M.D. |  | 54  |  | Senior Vice President, Medical and Regulatory Affairs                     
|Richard E. Jones, Ph.D.  |  | 55  |  | Vice President, Research and Development                                  
|Ronald P. Lucas          |  | 58  |  | Vice President, Operations                                                
|Harry D. Pedersen        |  | 44  |  | Vice President, Corporate Development                                     

Mr. Casey
was appointed to the position of Chairman in February 1999 and has been President, Chief Executive Officer and a director of the Company since
October 1997. From November 1995 to December 1996, he was Executive Vice President of Schein Pharmaceutical, Inc., ("Schein"), a generic and ethical pharmaceutical company,
and in December 1996 he was appointed President of the retail and specialty products division of Schein. From June 1993 to November 1995, he served as President and Chief
Operating Officer of Genetic Therapy, Inc., a biopharmaceutical company. Mr. Casey was President of McNeil Pharmaceutical, a unit of Johnson & Johnson, from 1989 to
June 1993 and Vice President, Sales and Marketing for the Ortho Pharmaceutical Corp. ("Ortho") subsidiary of Johnson & Johnson from 1985 to 1989. Previously, he held a number of sales
and marketing positions with Ortho.

Mr. Ludvigson
was appointed to the position of Chief Operating Officer in November 1999 and has been Senior Vice President and Chief Financial Officer since
September 1998. From February 1996 to June 1998, he was President and Chief Operating Officer and a member of the Board of Directors of NeTpower Inc., a computer
workstation company. From October 1993 to February 1996 he was Vice President and Chief Financial Officer of IDEC Pharmaceuticals Corporation, a biotechnology company. Previously, from
1992 to 1993, he was Vice President, Worldwide Sales and Marketing at Conner Peripherals, Inc., a manufacturer of computer storage equipment, and from 1988 to 1992, he held a series of senior
management positions with MIPS Computer Systems, Inc. ("MIPS"), including, most recently, Executive Vice President, Chief Operating Officer and Chief Financial Officer. Prior to joining
MIPS, he was an officer of System Industries, Inc., a computer storage systems supplier. He held a variety of financial management positions at Unisys/Burroughs Corp. and was a senior manager
at Price Waterhouse.

Dr. Leavitt
was appointed Senior Vice President, Medical and Regulatory Affairs in November 1996. From June 1993 to November 1996, he was Vice President,
Clinical and Regulatory Affairs of Focal Incorporated, a biopharmaceutical company. Prior to joining Focal Incorporated, from 1991 to June 1993 he served as Director, Clinical Research at
Genetics Institute. Prior to joining Genetics Institute, from 1986 to 1991 he held various management positions at Fujisawa USA, Fujisawa SmithKline Corporation, and Centocor Incorporated. Prior to
joining Centocor Incorporated, he was an Assistant Professor at the University of Maryland School of Medicine and Johns Hopkins University School of Medicine.

Dr. Jones
was appointed Vice President of Research and Development in October 1991. Prior to joining Matrix, he held the position of Vice President of Pharmaceutical
Development at Pharmetrix Corporation, a biotechnology company, from 1989 to 1991. From 1988 to 1989, he held the position of Vice President of Development at Liposome Technology, Inc., a
biotechnology company, and from 1984 to 1988 he was at Genentech, Inc. as Director, Pharmaceutical Research & Development and Acting Director, Pharmaceutical Manufacturing in 1985 and
1986. He held various positions at Syntex Research from 1969 to 1984.

21



Mr. Lucas
was appointed Vice President of Operations at Matrix in March 1996. From September 1994 to February 1996, he was the Vice President of Operations
at Telios Pharmaceuticals ("Telios"), a division of Integra LifeSciences. Prior to joining Telios, he was the Vice President of Operations from January 1991 to September 1994 at IVAC
Corporation, a division of Eli Lilly and Company. From 1986 to 1991, he was Director of Project Management and Director of Manufacturing Operations at Hybritech, Inc., a division of Eli Lilly.
He also held a number of management and technical positions at Eli Lilly's corporate headquarters in Indianapolis.

Mr. Pedersen
was appointed Vice President, Corporate Development in June 1997. Between December 1995 and May 1997, he was Senior Director, Strategic
Business Development, for Hoechst Marion Roussel. Between June 1992 and December 1995, he was Senior Director of Business Development for Marion Merrell Dow. Prior to that, he held a
variety of positions with Marion Laboratories including Manager of European Licensing.

Item 2. Properties

In March 1998, the Company entered into an agreement with a real estate investment trust for the sale and leaseback of its San Diego manufacturing
facility structured as an $18,425,000 purchase and a $6,000,000 convertible loan secured by specific manufacturing related building improvements. The lease has a term of 13 years with options
to renew for up to 25 years. Net cash from the lease and loan agreement, after the payment of the existing mortgage and escrow and other related fees, totaled approximately $13,798,000 and is
being used to fund operating expenses and capital purchases.

In
1996, the Company entered into an agreement to lease out a portion of its San Diego manufacturing facility. The original lease which had a term of two years ending July 1998
was extended through July 1999 resulting in rental income of $4,472,000 during the three-year period. In September, 1999 the Company entered into another three-year
lease which will result in $2,429,000 in rental income.

During
September 1997, the Company's management suspended further development and commercialization of AccuSite after being notified that the FDA did not approve AccuSite as a
treatment for genital warts. Pursuant to the restructuring plan which was established in the third quarter of 1997, the Operations group relocated to the San Diego facility from its Northern
California facilities during the fourth quarter of 1997. During the first quarter of 1998, the Company terminated its lease obligation on the manufacturing facility in San Jose and negotiated
termination agreements for the manufacturing and storage facilities located in Milpitas, California. Costs associated with the termination of the leases and write-off of leasehold
improvements for the leased facilities have been accrued in current liabilities on the balance sheet. See "Management Discussion and AnalysisResults of Operations."

In
May 1994, the Company entered into an 18-year lease agreement beginning in January 1996, for a facility totaling approximately 50,000 square feet in
Fremont, California. This facility includes administrative space and research and development space. This lease has an escalation clause in which the annual rent expense ranges from $420,000 to
$1,034,000.

Item 3. Legal Proceedings

None.

Item 4. Submission of Matters to a Vote of Security Holders

No matters were submitted to a vote of the Company's stockholders through solicitation of proxies or otherwise during the last quarter of the fiscal year ended
December 31, 1999.

22



Part II

Item 5. Market for Registrant's Common Equity and Related Stockholder Matters

The Common Stock of Matrix Pharmaceutical, Inc. trades on the Nasdaq National Market tier of the Nasdaq Stock Market under the symbol MATX. The
Company's Common Stock began trading on January 28, 1992. The following table presents quarterly information on the high and low sale prices of the Company's Common Stock for fiscal years 1999
and 1998, as regularly quoted on the Nasdaq National Market.

|Fiscal Year |  | High |      | Low
|----------- |  | ---- | ---- | ---
|1999        |  |      |      |    
|1st Quarter |  | $    | 2.88 |    
|2nd Quarter |  |      | 9.00 |    
|3rd Quarter |  |      | 6.25 |    
|4th Quarter |  |      | 9.00 |    
|1998        |  |      |      |    
|1st Quarter |  | $    | 5.44 |    
|2nd Quarter |  |      | 5.75 |    
|3rd Quarter |  |      | 4.38 |    
|4th Quarter |  |      | 4.00 |    

As
of February 29, 2000, there were approximately 374 holders of record of the Company's Common Stock. No dividends have been paid on the Common Stock since the Company's
inception, and the Company does not anticipate paying any dividends in the foreseeable future.

23



## 

Item 6. Selected Financial Data

|                                                                                      |  |   |         |   |   |         |   |   |         |   |   | Period from
Inception
(February 11,
1985) to
December 31,
1999 |  
|------------------------------------------------------------------------------------- |  | - | ------- | - | - | ------- | - | - | ------- | - | - | -------------------------------------------------------------- | -
|
|
|
|Consolidated Statements of Operations Data:                                           |  |   |         |   |   |         |   |   |         |   |   |                                                                |  
|Revenues                                                                              |  | $ |        |   | $ |        |   | $ |        |   | $ |                                                               |  
|Costs and expenses                                                                    |  |   |         |   |   |         |   |   |         |   |   |                                                                |  
|Research and development                                                              |  |   | 20,256  |   |   | 24,320  |   |   | 27,214  |   |   | 20,186                                                         |  
|In-license fee                                                                        |  |   |        |   |   |        |   |   |        |   |   | 4,000                                                          |  
|General and administrative                                                            |  |   | 8,336   |   |   | 11,428  |   |   | 14,270  |   |   | 6,649                                                          |  
|Special charges                                                                       |  |   |        |   |   |        |   |   | 4,518   |   |   |                                                               |  
|                                                                                      |  |   |         |   |   |         |   |   |         |   |   |                                                                |  
|Total costs and expenses                                                              |  |   | 28,592  |   |   | 35,748  |   |   | 46,002  |   |   | 30,835                                                         |  
|                                                                                      |  |   |         |   |   |         |   |   |         |   |   |                                                                |  
|Loss from operations                                                                  |  |   | (28,592 | ) |   | (35,748 | ) |   | (46,002 | ) |   | (30,835                                                        | )
|Interest income                                                                       |  |   | 2,179   |   |   | 6,534   |   |   | 5,561   |   |   | 4,491                                                          |  
|Other income                                                                          |  |   |        |   |   | 659     |   |   | 1,819   |   |   | 6,791                                                          |  
|Interest expense                                                                      |  |   | (204    | ) |   | (1,088  | ) |   | (1,109  | ) |   | (1,796                                                         | )
|                                                                                      |  |   |         |   |   |         |   |   |         |   |   |                                                                |  
|Net loss                                                                              |  | $ | (26,617 | ) | $ | (29,643 | ) | $ | (39,731 | ) | $ | (21,349                                                        | )
|                                                                                      |  |   |         |   |   |         |   |   |         |   |   |                                                                |  
|Basic and diluted net loss per common share                                           |  | $ | (2.19   | ) | $ | (1.48   | ) | $ | (1.85   | ) | $ | (0.97                                                          | )
|Weighted average shares used in computing basic and diluted net loss per common share |  |   | 12,173  |   |   | 20,081  |   |   | 21,536  |   |   | 22,033                                                         |  

|                                            |  | December 31,
|------------------------------------------- |  | ------------
|
|Summary of Consolidated Balance Sheet Data: |  |             
|Cash, cash equivalents and investments      |  | $           
|Total assets                                |  |             
|Total long-term liabilities                 |  |             
|Total stockholders' equity                  |  |             

Item 7. Management's Discussion and Analysis of Consolidated Financial Condition and Results of Operations

This Form 10-K may contain, in addition to historical information, forward-looking statements, including without
limitation, statements regarding the timing and outcome of regulatory reviews and clinical trials. Any such forward-looking statements are based on management's current expectations and are subject to
a number of risks and uncertainties that could cause actual results to differ materially from expected results. For additional information, including risk factors such as no assurance of regulatory
approvals; uncertainties associated with clinical trials; history of losses; future profitability uncertain; additional financing requirements and uncertain access to capital markets; limited sales
and marketing experience; limited manufacturing experience; dependence on sources of supply; rapid technological change; substantial competition; uncertainty regarding patents and proprietary rights;
uncertainty of pharmaceutical pricing; and no assurance of adequate reimbursement, please see the "Risk Factors" section included in this Form 10-K as well as other factors
discussed below and elsewhere in this report. The Company disclaims, however, any intent or obligation to update these forward-looking statements.

24



The
following discussion should be read in conjunction with the consolidated financial statements and related notes included on pages 36-53.

Overview

Since the Company's inception in 1985, the primary focus of its operations has been research and development and, to date, it has not received any revenues
from the commercial sale of products. The Company has a history of operating losses and expects to incur substantial additional losses over the next several years as it continues to develop its
current and future products. For the period from its inception (February 11, 1985) to December 31, 1999, the Company has incurred a cumulative net loss of $187,967,000.

Results of Operations

Years ended December 31, 1999 and 1998.

The Company had no revenues for 1999 or 1998.

Research
and development expenses for 1999 decreased by 12% to $17,743,000 as compared to $20,186,000 for 1998. The decrease was due to reduced clinical trial program costs including
the other solid tumor program which was completed during the fourth quarter of 1998, lower per patient costs for the Company's Intradose programs, lower depreciation, personnel costs and certain
manufacturing costs at the San Diego facility. This was partially offset by higher rental expense at the San Diego facility and by the higher costs associated with the FMdC clinical trial program. The
increase in the San Diego rent expense is due to lower rental income from the sublease of a portion of the facility.

For
the year ended December 31, 1999, there was no license fee expense as compared to the $4,000,000 license fee in 1998, which was an initial payment to in-license
a systemic anticancer agent known as FMdC that is in the early stages of clinical development.

General
and administrative expenses for 1999 decreased by 13% to $5,762,000 compared to $6,649,000 for 1998. The decrease was due to lower personnel costs, consulting, legal and
relocation expenses.

Interest
income for 1999 decreased by 31% to $3,091,000 as compared to $4,491,000 as a result of lower average cash balances during the year.

Other
income decreased to $969,000 for 1999 as compared to $6,791,000 for 1998 due primarily to the receipt of $4,000,000 from a settlement with an insurance company and $2,108,000
from the gain on sale and leaseback of the San Diego facility, both of which occurred in 1998.

Interest
expense decreased by 14% to $1,553,000 for 1999 as compared to $1,796,000 for 1998 due to the payoff of certain equipment leases and declining interest payments on equipment
loans.

As
of December 31, 1999, the Company had federal and state net operating loss carryforwards of approximately $182,500,000 and $40,000,000, respectively. The Company also had
federal research and development tax credit carryforwards of approximately $3,900,000. The federal net operating loss and credit carryforwards will expire at various dates beginning in the year 2000
through 2019, if not utilized. The state of California net operating losses will expire at various dates beginning in 2000 through 2004, if not utilized.

Years ended December 31, 1998 and 1997.

The Company had no revenues for 1998 or 1997.

Research
and development expenses for 1998 decreased by 26% to $20,186,000 as compared to $27,214,000 for 1997. The decrease was primarily due to lower personnel costs, the suspension
of clinical

25



trials
for AccuSite Injectable Gel and lower consulting expenses. The decrease was partially offset by higher depreciation expense and building rent expense in 1998 in connection with the
sale and leaseback transaction for the San Diego manufacturing facility.

An
in-license fee of $4,000,000 was recorded during the third quarter of fiscal 1998 in connection with a new agreement to in-license a systemic anticancer
agent known as FMdC which is in the early stages of clinical development. There were no license fees in the year ended 1997.

General
and administrative expenses for 1998 decreased by 53% to $6,649,000 compared to $14,270,000 for 1997. The decrease was due primarily to lower litigation-related expenses, the
absence of AccuSite-related product marketing expenses and lower personnel costs.

For
1998, no special charges were recorded as compared to special charges of $4,518,000 which were recorded during the third quarter of fiscal 1997 in connection with the decision to
suspend further development and commercialization of AccuSite. Management suspended the AccuSite program after the FDA notified the Company that it was not prepared to approve AccuSite as a treatment
for genital warts. In September 1997, costs to conclude the clinical trials and commercial programs associated with AccuSite were accrued. The Company reduced its workforce by 63 employees, of
which 46 positions related to manufacturing, resulting in severance expenses of $1,478,000. Additional expenses included the write-off of inventory related to AccuSite of $1,245,000, costs
totaling $1,194,000 associated with the shut down of the Company's Northern California facilities and write-off of manufacturing equipment, the closing of clinical trials with respect to
AccuSite of $414,000, and committed sales and marketing costs associated with AccuSite of $187,000. At December 31, 1998, the remaining reserve balance of $513,000 was included in current
liabilities and is primarily for future cash payments related to facility lease costs.

Interest
income decreased by 20% to $4,491,000 as compared to $5,561,000 as a result of lower average cash balances during the year.

Other
income increased to $6,791,000 for 1998 as compared to $1,819,000 for 1997 due primarily to the receipt of $4,000,000 from a settlement with an insurance company, $2,108,000
from the gain on sale and leaseback of the San Diego facility and $560,000 from amortization of a five year non-compete agreement.

Interest
expense increased by 62% to $1,796,000 for 1998 as compared to $1,109,000 for 1997 due to the impact of new building and equipment financing loans of $10,000,000 in the
fourth quarter of 1997 and $6,000,000 in 1998 offset by the payoff of the San Diego mortgage loan in the amount of $9,840,000 in 1998.

Liquidity and Capital Resources

At December 31, 1999, the Company had $46,971,000 in cash, cash equivalents and marketable securities, compared to $66,545,000 at December 31,
1998. The decrease of $19,574,000 in cash, cash equivalents and short-term investments during the year ended December 31, 1999 reflects $19,271,000 of cash disbursements used to
fund operating activities, payments of $1,755,000 on debt and capital lease obligations and capital purchases of $428,000. This was partially offset by cash received for the purchase of the Company's
common stock in the amount of $1,743,000.

In
September 1998, the Company entered into an agreement to license a systemic anticancer agent known as FMdC for $4,000,000. The in-license fee was recorded in the
third quarter of 1998.

In
April 1998, the Company received $4,000,000 from an insurance company for the reimbursement of legal expenses incurred during prior years. The payment settles litigation
between the Company and the insurer over coverage under the Company's general liability policy. The payment was recorded as other income in the second quarter of 1998.

26



In
March 1998, the Company entered into an agreement with a real estate investment trust for the sale and leaseback of its San Diego manufacturing facility structured as an
$18,425,000 purchase and a $6,000,000 convertible loan secured by specific manufacturing related building improvements. The lease has a term of 13 years with the option to renew up to
25 years. Net cash from the lease and loan agreement, after the payment of the existing mortgage and escrow and other related fees, totaled approximately $13,798,000 and is being used to fund
operating expenses and capital purchases.

In
October 1997, the Company received $10,000,000 before commitment fees, as part of a five-year equipment financing agreement maturing in 2002. The agreement is
secured by equipment purchased by the Company between October 21, 1995 and March 31, 1998.

Special
charges of approximately $4,518,000 were recorded during the third quarter of 1997 in connection with the decision to suspend further development and commercialization of
AccuSite. See "Results of Operations". Total cash payments in 1999 for restructuring were approximately $513,000 with no amount payable at December 31, 1999.

In
September 1995, the Company repurchased from Medeva PLC all marketing rights related to its AccuSite product for $2,000,000, to be paid over a period of five years. As of
December 31, 1999, the remaining balance of this obligation was $500,000.

The
Company has financed its operations and capital asset acquisitions from its inception through the sale of equity securities, interest income, and capital lease and debt financing.
The Company expects to finance its continued operating requirements principally with cash on hand and marketable securities as well as additional capital that may be generated through equity and debt
financings and collaborative agreements.

The
Company's working capital and capital requirements will depend on numerous factors, including the progress of the Company's research and development programs, preclinical testing
and clinical trial activities, the timing and cost of obtaining regulatory approvals, the levels of resources that the Company devotes to the development of manufacturing and marketing capabilities,
technological advances and the status of competitors.

The
Company expects to incur substantial additional costs relating to the continued clinical development of its oncology products, continued research and development programs, the
development of manufacturing capabilities, and general working capital requirements. The Company anticipates that its existing and committed capital resources will enable it to maintain its current
and planned operations at least through mid-2001. The Company may require additional outside financing to complete the process of bringing current products to market, and there can be no
assurance that such financing will be available on favorable terms, if at all.

Capital
expenditures for environmental control efforts were not material during the 1999 and 1998 fiscal years.

Year 2000

In prior years, the Company discussed the nature and progress of its plans to become Year 2000 ready. In late 1999, the Company completed its remediation and
testing of systems. As a result of those planning and implementation efforts, the Company experienced no significant disruptions in mission critical information technology and
non-information technology systems and believes those systems successfully responded to the Year 2000 date change. The Company spent approximately $100,000 during 1999 in connection with
remediating its systems. The Company is not aware of any material problems resulting from Year 2000 issues, either with its products, its internal systems, or the products and services of third
parties. The Company will continue to monitor its mission critical computer applications and those of its suppliers and vendors throughout the year 2000 to ensure that any latent Year 2000 matters
that may arise are addressed promptly.

27



## 

Item 7A.  Quantitative and Qualitative Disclosures About Market Risk

The Company's financial investment securities consist of certificates of deposit, commercial paper, master notes, repurchase agreements and municipal bonds.
These securities all mature in 2000 and their estimated fair value approximates cost. The following table provides information about the Company's debt securities that are sensitive to changes in
interest rates. The table presents principal cash flows and related weighted-average interest rates by expected maturity dates.

|                                          |  | 2000 |       | 2001 |   | 2002  |  | 2003 |        | 2004 |   | Thereafter |  | Total |   | Fair Value
12/31/99
|----------------------------------------- |  | ---- | ----- | ---- | - | ----- |  | ---- | ------ | ---- | - | ---------- |  | ----- | - | -------------------
|
|Liabilities                               |  |      |       |      |   |       |  |      |        |      |   |            |  |       |   |                    
|Long-term Debt, including Current Portion |  |      |       |      |   |       |  |      |        |      |   |            |  |       |   |                    
|Fixed Rate                                |  |      |       |      |   |       |  |      |        |      |   |            |  |       |   |                    
|Imperial Bank                             |  | $    | 1,188 |      | $ | 1,416 |  | $    | 4,868  |      | $ |           |  | $     |  |                    
|Alexandria                                |  |      |      |      |   |      |  |      | 6,000  |      |   |           |  |       |  |                    
|                                          |  |      |       |      |   |       |  |      |        |      |   |            |  |       |   |                    
|                                          |  | $    | 1,188 |      | $ | 1,416 |  | $    | 10,868 |      | $ |           |  | $     |  |                    
|Average Interest Rate                     |  |      | 9.2   | %    |   |       |  |      |        |      |   |            |  |       |   |                    

Item 8.  Financial Statements and Supplementary Data

|Index to Consolidated Financial Statements:                                                                                                            |  |            
|------------------------------------------------------------------------------------------------------------------------------------------------------ |  | -----------
|Consolidated Balance Sheets
Years Ended December 31, 1998 and 1999                                                                                     |  | Page 36    
|Consolidated Statements of Operations
Years Ended December 31, 1997, 1998 and 1999, and Period from Inception (February 11, 1985) to December 31, 1999 |  | Page 37    
|Consolidated Statement of Stockholders' Equity
Period from Inception (February 11, 1985) to December 31, 1999                                          |  | Pages 38-40
|Consolidated Statements of Cash Flows
Years Ended December 31, 1997, 1998 and 1999, and Period from Inception (February 11, 1985) to December 31, 1999 |  | Page 41    
|Notes to Consolidated Financial Statements                                                                                                             |  | Pages 42-53
|Report of Ernst & Young LLP, Independent Auditors                                                                                                      |  | Page 54    

Item 9.  Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

None.

Part III

Item 10.  Directors and Executive Officers of the Registrant

The information required by this item (with respect to Directors) is hereby incorporated by reference from the information under the caption "Election of
Directors" contained in the Company's definitive Proxy Statement, to be filed with the Securities and Exchange Commission no later than 120 days from the end of the Company's last fiscal year
in connection with the solicitation of proxies for its Annual Meeting of Stockholders to be held on May 9, 2000 (the "Proxy Statement"). The required information concerning Executive Officers
of the Company is contained in Item 1, Part 1 of this Form 10-K under the caption "Executive Officers of the Company" on pages 21 and 22. The information required by
Section 16(a) is

28



incorporated
by reference from the information under the caption "Compliance with Section 16(a) of the Securities Exchange Act of 1934" in the Proxy Statement.

Item 11.  Executive Compensation

The information required by this item is incorporated by reference from the information under the caption "Election of Directors, Summary of Cash and Certain
Other Compensation, Options and Stock Appreciation Rights, Option Exercises and Holdings" of the Proxy Statement.

Item 12.  Security Ownership of Certain Beneficial Owners and Management

The information required by this item is incorporated by reference from the information under the caption "Stock Ownership of Management and Certain Beneficial
Owners" in the Proxy Statement.

Item 13.  Certain Relationships and Related Transactions

The information required by this item is incorporated by reference from the information under the caption "Certain Relationships and Related Transactions" in
the Proxy Statement.

PART IV

Item 14.  Financial Statements, Financial Statement Schedules, Exhibits and Reports on Form 8-K

(a)  Financial Statements

The following financial statements and supplemental data are filed as part of this Form 10-K. See Index to Consolidated Financial Statements
under Item 8.

|Index to Consolidated Financial Statements:                                                                                                             |  |            
|------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -----------
|Consolidated Balance Sheets
Years Ended December 31, 1998 and 1999                                                                                      |  | Page 36    
|Consolidated Statements of Operations
Years Ended December 31, 1997, 1998 and 1999, and Period from Inception (February 11, 1985) to December 31, 1999. |  | Page 37    
|Consolidated Statement of Stockholders' Equity
Period from Inception (February 11, 1985) to December 31, 1999                                           |  | Pages 38-40
|Consolidated Statements of Cash Flows
Years Ended December 31, 1997, 1998 and 1999, and Period from Inception (February 11, 1985) to December 31, 1999. |  | Page 41    
|Notes to Consolidated Financial Statements                                                                                                              |  | Pages 42-53
|Report of Ernst & Young LLP, Independent Auditors                                                                                                       |  | Page 54    

(b)  Financial Statement Schedules

All schedules are omitted because they are not applicable or are not required or the information required to be set forth therein is included in the
consolidated financial statements or notes thereto.

(c)  Reports on Form 8-K

No Reports on Form 8-K were filed during the year ended December 31, 1999.

29



(d) Exhibits

|Number |  | Exhibit                                                                                                                                                                                                                                                                                              
|------ |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.1    |  | Certificate of Designation of Preferences of Preferred Shares of the Company as filed with the Delaware Secretary of State on August 25, 1994 (Incorporated by reference to Exhibit 5.3 filed with the Company's
Form 8-K as filed with the Securities and Exchange Commission on September 27, 1994)
|3.1b   |  | Restated Certificate of Incorporation filed with the Delaware Secretary of State on August 13, 1992                                                                                                                                                                                                  
|3.2    |  | Amended and restated bylaws (Incorporated by reference to exhibit 3.2 filed with the Company's Form 10-Q as filed with the Securities and Exchange Commission on May 11, 1995).                                                                                                                      
|3.3    |  | Certificate of Designation of Preferences of Preferred Shares of the Company as filed with the Delaware Secretary of State on August 25, 1994 (Incorporated by reference to Exhibit 5.3 filed with the Company's
Form 8-K as filed with the Securities and Exchange Commission on September 27, 1994)
|3.4    |  | Certificate of Designations of Series B Junior Participating Preferred Stock of the Company filed with the Delaware Secretary of State on May 24, 1995 (Incorporated by reference to Exhibit 3.4 as filed with the
Company's Form 10-Q for the quarter ended June 30, 1995.)                         
|4.1    |  | Amended and Restated Registration Rights Agreement between the Company and the investors listed therein dated August 26, 1994 (Incorporated by reference to Exhibit 5.2 filed with Company's Form 8-K as filed
with the Securities and Exchange Commission on September 27, 1994)                    
|4.2    |  | Rights Agreement between the Company and the First National Bank of Boston dated May 18, 1995 (Incorporated by reference to Exhibit No. 1 to the Company's Registration Statement on Form 8-A dated May
 17, 1995).                                                                                  
|10.1a  |  | Series B Preferred Stock Purchase Agreement dated July 29, 1987                                                                                                                                                                                                                                      
|10.2a  |  | Series B Preferred Stock Purchase Agreement dated June 30, 1988                                                                                                                                                                                                                                      
|10.3a  |  | Series C Preferred Stock Purchase Agreement dated May 24, 1990                                                                                                                                                                                                                                       
|10.4a  |  | Amendment Agreement dated May 24, 1990                                                                                                                                                                                                                                                               
|10.5a  |  | Stock Restriction Agreement between the Company and Edward E. Luck, dated July 29, 1987                                                                                                                                                                                                              
|10.6a  |  | Stock Restriction Agreement between the Company and Dennis M. Brown, Ph.D. dated July 29, 1987                                                                                                                                                                                                       
|10.7a  |  | Agreement to Issue Warrant dated December 17, 1988                                                                                                                                                                                                                                                   
|10.8a  |  | Series B Preferred Stock Warrant issued to Western Technology Investment dated December 30, 1988                                                                                                                                                                                                     
|10.9a  |  | Series B Preferred Stock Warrant issued to USX Credit Corporation dated December 30, 1988                                                                                                                                                                                                            
|10.10a |  | Series B Preferred Stock Warrant issued to Highline Financial Services, Inc. dated December 30, 1988                                                                                                                                                                                                 
|10.11a |  | Form of Common Stock Purchase Warrant                                                                                                                                                                                                                                                                
|10.12a |  | Voting Agreement dated May 24, 1990, as amended                                                                                                                                                                                                                                                      
|10.14b |  | Form of Restricted Stock Purchase Agreement                                                                                                                                                                                                                                                          
|10.15b |  | Form of Stock Purchase Agreement (Repurchase Right with Escrow)                                                                                                                                                                                                                                      

30



|10.16b  |  | Form of Stock Option Agreement                                                                                                                                                                                                                                                                                                        
|------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.17b  |  | Form of Stock Pledge Agreement                                                                                                                                                                                                                                                                                                        
|10.22a  |  | Technology Assignment Agreement between the Company and Edward E. Luck and Dennis M. Brown, Ph.D. dated July 29, 1987                                                                                                                                                                                                                 
|10.23a* |  | Supply Agreement between the Company and **** dated December 22, 1988                                                                                                                                                                                                                                                                 
|10.25c  |  | Form of Indemnification Agreement                                                                                                                                                                                                                                                                                                     
|10.26d  |  | Form of Recapitalization                                                                                                                                                                                                                                                                                                              
|10.27b  |  | Lease between the Company and Becton Dickinson Corporation, dated November 16, 1992                                                                                                                                                                                                                                                   
|10.29b  |  | Equipment Lease Agreement between the Company and General Electric Capital Corporation, dated December 17, 1992                                                                                                                                                                                                                       
|10.30   |  | Settlement Agreement and General Release dated February 2, 1993 (Incorporated herein by reference to Exhibit 19.1 filed with the Company's Form 10-Q as filed with the Securities and Exchange Commission on May
 14, 1993)                                                                                                           
|10.36*  |  | Lease between the Company and Calaveras Associates II, dated August 4, 1993 (Incorporated herein by reference to the exhibit of the same number filed with the Company's Form 10-Q as filed with the Securities and
Exchange Commission on November 12, 1993)                                                                         
|10.38   |  | Lease between the Company, John Arrillaga and Richard T. Peery Separate Property Trust, dated May 9, 1994 (Incorporated herein by reference to the exhibit of the same number filed with the Company's Form
 10-Q as filed with the Securities and Exchange Commission on August 12, 1994)                                            
|10.39   |  | Investment Agreement by and between the Company and the investors listed therein dated August 26, 1994 (Incorporated herein by reference to Exhibit 5.1 filed with the Company's Form 8-K as filed with the
Securities and Exchange Commission on September 27, 1994)                                                                 
|10.40   |  | Equipment Lease Agreement between the Company and Financing For Science International, Inc. dated September 1, 1994 (Incorporated by reference to the exhibit of the same number filed with the Securities and Exchange
Commission on November 2, 1994)                                                                               
|10.41   |  | Form of Stock Purchase Agreement by and between the Company and the investors listed therein dated July 14, 1995 and July 21, 1995 (Incorporated by reference to Exhibit No. 4.1 to the registration Statement
on Form S-3, Registration No. 33-94854, filed with the Securities and Exchange Commission on July 21, 1995, as amended)
|10.42   |  | Termination and Repurchase Agreement between the Company and Medeva dated September 18, 1995 (Incorporated by reference to exhibit No. 10.1 to the Company's Registration Statement on Form S-3 (file No.
 33-96556) as filed with the Securities and Exchange Commission on September 25, 1995)                                      
|10.43   |  | Equipment Lease Agreement between the Company and Lease Management Services, Inc. dated August 28, 1995 (Incorporated herein by reference to exhibit No. 10.3 filed with the Company's Form 10-Q as filed with
the Security and Exchange Commission on November 7, 1995)                                                              
|10.44   |  | Contract of Purchase and Sale and Joint Escrow Instructions between the Company and the Federal Deposit Insurance Corporation dated November 2, 1995 (Incorporated herein by reference to the exhibit of the same number
filed with the Company's Form 10-K as filed with the Securities and Exchange Commission on March 1, 1996)    

31



|10.45  |  | Industrial Multi-Tenant Lease agreement dated July 15, 1996 between the Company, as landlord and Advanced Tissue Sciences, Inc., as tenant filed herewith. (Incorporated herein by reference to the exhibit of the same
number filed with the Company's Form 10-Q as filed with the Securities and Exchange Commission on August 8, 1996)        
|------ |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.46* |  | Settlement and License Agreement effective as of May 23, 1997 by and between Collagen Corporation and the Company                                                                                                                                                                                                                                
|10.47* |  | Distribution Agreement made as of August 4, 1997 by and between the Company and Altana, Inc.                                                                                                                                                                                                                                                     
|10.48e |  | 1988 Restricted Stock Plan (Amended and Restated through March 19, 1997)                                                                                                                                                                                                                                                                         
|10.49f |  | Form of Stock Issuance Agreement                                                                                                                                                                                                                                                                                                                 
|10.50g |  | 1991 Directors Stock Option Plan (Amended and Restated through March 19, 1997)                                                                                                                                                                                                                                                                   
|10.51h |  | Form of Non-Statutory Stock Option Agreement                                                                                                                                                                                                                                                                                                     
|10.52  |  | Imperial Bank Credit Agreement date October 8, 1997 (Incorporated herein by reference to the exhibit of the same number filed with the Company's Form 10-K as filed with the Securities and Exchange Commission on
March 27, 1998)                                                                                                               
|10.53  |  | Option Acceleration Program dated January 27, 1998 (Incorporated herein by reference to the exhibit of the same number filed with the Company's Form 10-K as filed with the Securities and Exchange Commission on
March 27, 1998)                                                                                                                
|10.54  |  | Termination of Lease Agreement with Becton Dickinson (Incorporated herein by reference to the exhibit of the same number filed with the Company's Form 10-K as filed with the Securities and Exchange Commission on
March 27, 1998)                                                                                                              
|10.55  |  | Employment Agreement between the Company and Michael D. Casey (Incorporated herein by reference to the exhibit of the same number filed with the Company's Form 10-K as filed with the Securities and Exchange
Commission on March 27, 1998)                                                                                                     
|10.56  |  | Purchase and Sale Agreement and Joint Escrow Instructions by and between Alexandria Real Estate Equities, Inc. and Matrix Pharmaceutical, Inc. dated February 3, 1998 (Incorporated herein by reference to the exhibit of the
same number filed with the Company's Form 10-Q as filed with the Securities and Exchange Commission on May 7, 1998)
|10.57  |  | Lease by and between ARE-4757 Nexus Centre, LLC and Matrix Pharmaceutical, Inc. dated March 25, 1998 (Incorporated herein by reference to the exhibit of the same number filed with the Company's Form 10-Q as
filed with the Securities and Exchange Commission on May 7, 1998)                                                                 
|10.58  |  | Loan and Security Agreement by and between ARE-4757 Nexus Centre, LLC, and Matrix Pharmaceutical, Inc. dated March 25, 1998 (Incorporated herein by reference to the exhibit of the same number filed with the Company's
Form 10-Q as filed with the Securities and Exchange Commission on May 7, 1998)                                          
|10.59  |  | Matrix Pharmaceutical, Inc. v. Chubb Customs Ins. Co., et al. Settlement Agreement (Incorporated herein by reference to the exhibit of the same number filed with the Company's Form 10-Q as filed with the Securities
and Exchange Commission on May 7, 1998)                                                                                   
|10.60* |  | License Agreement by and between Hoechst Marion Roussel, Inc. and Matrix Pharmaceutical, Inc. dated September 22, 1998 (Incorporated herein by reference to the exhibit of the same number filed with the Company's Form
 10-Q as filed with the Securities and Exchange Commission on May 7, 1998)                                              
|10.61i |  | Matrix Pharmaceutical, Inc. 1999 Employee Stock Purchase Plan                                                                                                                                                                                                                                                                                    

32



|10.62 |  | Amendment to the Employment Agreement between the Company and Michael D. Casey
|----- |  | ------------------------------------------------------------------------------
|23.1  |  | Consent of Ernst & Young LLP, Independent Auditors                            
|27    |  | Financial Data Schedule                                                       

---

33





SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

|      |  |                |  | MATRIX PHARMACEUTICAL, INC.
|----- |  | -------------- |  | ---------------------------
|Date: |  | March 14, 2000 |  | By:                        

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS:

That
the undersigned officers and directors of Matrix Pharmaceutical, Inc., a Delaware corporation, do hereby constitute and appoint David G. Ludvigson the lawful attorney and
agent, with power and authority to do any and all acts and things and to execute any and all instruments which said attorney and agent determines may be necessary or advisable or required to enable
said corporation to comply with the Securities Exchange Act of 1934, as amended, and any rules or regulations or requirements of the Securities and Exchange Commission in connection with this
Form 10-K. Without limiting the generality of the foregoing power and authority, the powers granted include the power and authority to sign the names of the undersigned officers and
directors in the capacities indicated below to this Form 10-K, to any and all amendments, and to any and all instruments or documents filed as part of or in conjunction with this
Form 10-K or amendments or supplements thereof, and each of the undersigned hereby ratifies and confirms all that said attorney and agent shall do or cause to be done by virtue
hereof. This Power of Attorney may be signed in several counterparts.

IN
WITNESS WHEREOF, each of the undersigned has executed this Power of Attorney as of the date indicated.

Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates
indicated.

|Date: |  | March 14, 2000 |  | /s/MICHAEL D. CASEYMichael D. Casey Chairman, President and Chief Executive Officer (Principal
Executive Officer)                                              
|----- |  | -------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------
|Date: |  | March 14, 2000 |  | /s/DAVID G. LUDVIGSONDavid G. Ludvigson Senior Vice President, Chief Operating Officer and Chief Financial Officer (Principal
Financial and Accounting Officer)
|Date: |  | March 14, 2000 |  | /s/J. STEPHAN DOLEZALEKJ. Stephan Dolezalek Director                                                                                                           
|      |  |                |  |                                                                                                                                                                

34



|Date: |  | March 14, 2000 |  | /s/JAMES R. GLYNNJames R. Glynn Director                  
|----- |  | -------------- |  | ----------------------------------------------------------
|Date: |  | March 14, 2000 |  | /s/STEPHEN B. HOWELL, M.D.Stephen B. Howell, M.D. Director
|Date: |  | March 14, 2000 |  | /s/MARVIN E. JAFFE, M.D.Marvin E. Jaffe, M.D. Director    
|Date: |  | March 14, 2000 |  | /s/BRADLEY G. LORIMIERBradley G. Lorimier Director        
|Date: |  | March 14, 2000 |  | /s/JULIUS L. PERICOLAJulius L. Pericola Director          

35



MATRIX PHARMACEUTICAL, INC.
(a development stage company)

Consolidated Balance Sheets

|                                                                                                                                                                          |  | December 31, |         
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | --------
|
|
|Assets                                                                                                                                                                    |  |              |         
|Current assets:                                                                                                                                                           |  |              |         
|Cash and cash equivalents                                                                                                                                                 |  | $            | 24,840  
|Short-term investments                                                                                                                                                    |  |              | 41,705  
|Short-term notes from related parties                                                                                                                                     |  |              | 404     
|Other current assets                                                                                                                                                      |  |              | 2,657   
|                                                                                                                                                                          |  |              |         
|Total current assets                                                                                                                                                      |  |              | 69,606  
|Property and equipment, net                                                                                                                                               |  |              | 13,416  
|Long-term notes from related parties                                                                                                                                      |  |              | 600     
|Deposits and other assets                                                                                                                                                 |  |              | 109     
|                                                                                                                                                                          |  |              |         
|                                                                                                                                                                          |  | $            | 83,731  
|                                                                                                                                                                          |  |              |         
|Liabilities and Stockholders' Equity                                                                                                                                      |  |              |         
|Current liabilities:                                                                                                                                                      |  |              |         
|Accounts payable                                                                                                                                                          |  | $            | 1,276   
|Accruals for special charges                                                                                                                                              |  |              | 513     
|Accrued compensation                                                                                                                                                      |  |              | 1,094   
|Accrued clinical trial costs                                                                                                                                              |  |              | 1,505   
|Other accrued liabilities                                                                                                                                                 |  |              | 1,983   
|Current portion of deferred other income                                                                                                                                  |  |              | 560     
|Current portion of debt and capital lease obligations                                                                                                                     |  |              | 1,797   
|                                                                                                                                                                          |  |              |         
|Total current liabilities                                                                                                                                                 |  |              | 8,728   
|Debt and capital lease obligations, less current portion                                                                                                                  |  |              | 13,676  
|Deferred other income                                                                                                                                                     |  |              | 5,455   
|                                                                                                                                                                          |  |              |         
|Total long-term liabilities                                                                                                                                               |  |              | 19,131  
|Stockholders' equity:                                                                                                                                                     |  |              |         
|Common stock, $0.01 par value per share; 30,000,000 shares authorized, 22,154,710 shares issued and outstanding in 1998; 22,707,521 shares issued and outstanding in 1999 |  |              | 220     
|Additional paid-in capital                                                                                                                                                |  |              | 225,090 
|Notes receivable from shareholders                                                                                                                                        |  |              | (2,282  
|Deferred compensation                                                                                                                                                     |  |              | (232    
|Accumulated other comprehensive income (loss)                                                                                                                             |  |              | 45      
|Deficit accumulated during the development stage                                                                                                                          |  |              | (166,969
|                                                                                                                                                                          |  |              |         
|Total stockholders' equity                                                                                                                                                |  |              | 55,872  
|                                                                                                                                                                          |  |              |         
|                                                                                                                                                                          |  | $            | 83,731  
|                                                                                                                                                                          |  |              |         

(See
accompanying notes)

36



MATRIX PHARMACEUTICAL, INC.
(a development stage company)

Consolidated Statements of Operations

|                                                                                      |  |   |         |   |   |         |   | Period from Inception (February 11, 1985) to December 31, 1999 |        
|------------------------------------------------------------------------------------- |  | - | ------- | - | - | ------- | - | -------------------------------------------------------------- | -------
|
|
|
|Revenues                                                                              |  | $ |        |   | $ |        |   | $                                                              |       
|Costs and expenses                                                                    |  |   |         |   |   |         |   |                                                                |        
|Research and development                                                              |  |   | 27,214  |   |   | 20,186  |   |                                                                | 17,743 
|In-license fee                                                                        |  |   |        |   |   | 4,000   |   |                                                                |       
|General and administrative                                                            |  |   | 14,270  |   |   | 6,649   |   |                                                                | 5,762  
|Special charges                                                                       |  |   | 4,518   |   |   |        |   |                                                                |       
|                                                                                      |  |   |         |   |   |         |   |                                                                |        
|Total costs and expenses                                                              |  |   | 46,002  |   |   | 30,835  |   |                                                                | 23,505 
|                                                                                      |  |   |         |   |   |         |   |                                                                |        
|Loss from operations                                                                  |  |   | (46,002 | ) |   | (30,835 | ) |                                                                | (23,505
|Interest income                                                                       |  |   | 5,561   |   |   | 4,491   |   |                                                                | 3,091  
|Other income                                                                          |  |   | 1,819   |   |   | 6,791   |   |                                                                | 969    
|Interest expense                                                                      |  |   | (1,109  | ) |   | (1,796  | ) |                                                                | (1,553 
|                                                                                      |  |   |         |   |   |         |   |                                                                |        
|Net loss                                                                              |  | $ | (39,731 | ) | $ | (21,349 | ) | $                                                              | (20,998
|                                                                                      |  |   |         |   |   |         |   |                                                                |        
|Basic and diluted net loss per common share                                           |  | $ | (1.85   | ) | $ | (0.97   | ) | $                                                              | (0.94  
|                                                                                      |  |   |         |   |   |         |   |                                                                |        
|Weighted average shares used in computing basic and diluted net loss per common share |  |   | 21,536  |   |   | 22,033  |   |                                                                | 22,437 
|                                                                                      |  |   |         |   |   |         |   |                                                                |        

(See
accompanying notes)

37



MATRIX PHARMACEUTICAL, INC.
(a development stage company)

Consolidated Statements of Stockholders' Equity

For the period from inception (February 11, 1985) to December 31, 1999

|                                                                                                                                                                                     |  | Convertible
Preferred
Stock |      | Common
Stock |   | Additional
Paid-in
Capital |   | Notes
Receivable
from
Share-
holders |        | Deferred
Compensation |   | Accumulated
Other
Comprehensive
Income
(Loss) |  | Deficit
Accumulated
During the
Development
Stage |        | Total
Stockholders'
Equity |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | --------------------------- | ---- | ------------ | - | -------------------------- | - | ------------------------------------ | ------ | --------------------- | - | --------------------------------------------- |  | ------------------------------------------------ | ------ | -------------------------- | -
|
|Comprehensive loss:                                                                                                                                                                  |  |                             |      |              |   |                            |   |                                      |        |                       |   |                                               |  |                                                  |        |                            |  
|Net loss from inception (February 11, 1985) to December 31, 1996                                                                                                                     |  | $                           |     |              | $ |                           |   | $                                    |       |                       | $ |                                              |  | $                                                |       |                            | $
|Net unrealized loss on marketable securities                                                                                                                                         |  |                             |     |              |   |                           |   |                                      |       |                       |   |                                              |  |                                                  |       |                            |  
|                                                                                                                                                                                     |  |                             |      |              |   |                            |   |                                      |        |                       |   |                                               |  |                                                  |        |                            |  
|Comprehensive loss                                                                                                                                                                   |  |                             |      |              |   |                            |   |                                      |        |                       |   |                                               |  |                                                  |        |                            |  
|                                                                                                                                                                                     |  |                             |      |              |   |                            |   |                                      |        |                       |   |                                               |  |                                                  |        |                            |  
|Issuance of 926,329 shares of common stock                                                                                                                                           |  |                             |     |              |   | 9                          |   |                                      | 1,957  |                       |   |                                              |  |                                                  | (55    | )                          |  
|Issuance of 3,564,000 shares of common stock at $15.00 per share, less offering costs, in an initial public offering in January 1992                                                 |  |                             |     |              |   | 36                         |   |                                      | 48,950 |                       |   |                                              |  |                                                  |       |                            |  
|Issuance of 5,250,000 shares of convertible preferred stock                                                                                                                          |  |                             | 53   |              |   |                           |   |                                      | 5,272  |                       |   |                                              |  |                                                  |       |                            |  
|Recapitalization of the Company (259,524 shares of common stock converted to 3,500,000 shares of convertible preferred stock)                                                        |  |                             | 35   |              |   | (3                         | ) |                                      | (32    | )                     |   |                                              |  |                                                  |       |                            |  
|Issuance of 4,571,429 shares convertible preferred stock for cash and conversion of $400,000 notes payable to stock-holders (at $1.75 per share) in May 1990, net of offering costs  |  |                             | 45   |              |   |                           |   |                                      | 7,880  |                       |   |                                              |  |                                                  |       |                            |  
|Conversion of 6,343,531 shares of convertible preferred stock to common stock at the time of the initial public offering (after 1-for-2.1 reverse stock split in January 1992)       |  |                             | (133 | )            |   | 63                         |   |                                      | 70     |                       |   |                                              |  |                                                  |       |                            |  
|Issuance of 54,391 shares of common stock to employees and Consultants for cash under stock option plan (from $0.23 to $0.37 per share)                                              |  |                             |     |              |   | 1                          |   |                                      | 13     |                       |   |                                              |  |                                                  |       |                            |  
|Cancellation of promissory note in exchange for the repurchase of 238,095 shares of common stock from an officer in December 1990                                                    |  |                             |     |              |   | (2                         | ) |                                      | (53    | )                     |   |                                              |  |                                                  | 55     |                            |  
|Deferred compensation related to grant of stock options                                                                                                                              |  |                             |     |              |   |                           |   |                                      | 1,740  |                       |   |                                              |  |                                                  | (1,740 | )                          |  
|Issuance of 59,757 shares of common stock to employees, Consultants, and investors for cash under the stock option plan and for exercise of warrants (from $0.23 to $0.37 per share) |  |                             |     |              |   |                           |   |                                      | 17     |                       |   |                                              |  |                                                  |       |                            |  
|Issuance of 200,000 shares of common stock to Medeva PLC in May 1993 at $15.00 per share, less offering costs                                                                        |  |                             |     |              |   | 2                          |   |                                      | 2,833  |                       |   |                                              |  |                                                  |       |                            |  

38



|Issuance of 40,118 shares of common stock to employees and investors for cash under the stock option plan and for exercise of warrants (from $0.23 to $9.00 per share) |  |   |  |  |   | 1   |  |   | 176     |   |   |       |   |   |     |   |   |    |   |   |         |   |   | 177     |  
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | - | - |  | - | --- |  | - | ------- | - | - | ------ | - | - | ---- | - | - | --- | - | - | -------- | - | - | ------- | -
|Issuance of 466,667 shares of common stock to Medeva PLC in May 1994 at $15.00 per share, less offering costs                                                          |  |   |  |  |   | 5   |  |   | 6,600   |   |   |       |   |   |     |   |   |    |   |   |         |   |   | 6,605   |  
|Issuance of 13,334 shares of convertible preferred stock in a private placement in August 1994 at $900 per share, less offering costs                                  |  |   |  |  |   |    |  |   | 11,790  |   |   |       |   |   |     |   |   |    |   |   |         |   |   | 11,790  |  
|Issuance of 10,800 shares to employees at $14.00 per share                                                                                                             |  |   |  |  |   |    |  |   | 151     |   |   |       |   |   |     |   |   |    |   |   |         |   |   | 151     |  
|Issuance of 1,481,982 shares of common stock for cash in a private placement in August 1995 at $12 per share, less offering costs                                      |  |   |  |  |   | 15  |  |   | 16,804  |   |   |       |   |   |     |   |   |    |   |   |         |   |   | 16,819  |  
|Issuance of 4,097,000 shares of common stock for cash in a follow-on public offering in October 1995 at $13.25 per share, less offering costs                          |  |   |  |  |   | 41  |  |   | 50,908  |   |   |       |   |   |     |   |   |    |   |   |         |   |   | 50,949  |  
|Issuance of 3,162,500 shares of common stock for cash in a follow-on public offering in April 1996 at $22.63 per share, less offering costs                            |  |   |  |  |   | 32  |  |   | 67,336  |   |   |       |   |   |     |   |   |    |   |   |         |   |   | 67,368  |  
|Conversion of 13,334 shares of convertible preferred stock into 1,333,400 shares of common stock                                                                       |  |   |  |  |   | 13  |  |   | (357    | ) |   |       |   |   |     |   |   |    |   |   |         |   |   | (344    | )
|Amortization of deferred compensation                                                                                                                                  |  |   |  |  |   |    |  |   | (12     | ) |   |       |   |   | 960  |   |   |    |   |   |         |   |   | 948     |  
|                                                                                                                                                                       |  |   |   |  |   |     |  |   |         |   |   |        |   |   |      |   |  
|Balance at December 31, 1996                                                                                                                                           |  | $ |  |  | $ | 213 |  | $ | 222,043 |   | $ |       |   | $ | (780 | ) | $ | (76 | ) | $ | (105,889 | ) | $ | 115,511 |  
|Comprehensive loss:                                                                                                                                                    |  |   |   |  |   |     |  |   |         |   |   |        |   |   |      |   |   |     |   |   |          |   |   |         |  
|Net loss                                                                                                                                                               |  |   |  |  |   |    |  |   |        |   |   |       |   |   |     |   |   |    |   |   | (39,731  | ) |   | (39,731 | )
|Net unrealized gain on marketable securities                                                                                                                           |  |   |  |  |   |    |  |   |        |   |   |       |   |   |     |   |   | 57  |   |   |         |   |   | 57      |  
|                                                                                                                                                                       |  |   |   |  |   |     |  |   |         |   |   |        |   |   |      |   |   |     |   |   |          |   |   |        
|Comprehensive loss                                                                                                                                                     |  |   |   |  |   |     |  |   |         |   |   |        |   |   |      |   |   |     |   |   |          |   |   | (39,674 | )
|                                                                                                                                                                       |  |   |   |  |   |     |  |   |         |   |   |        |   |   |      |   |   |     |   |   |          |   |   |        
|Issuance of 208,862 shares of common stock to employees and investors for cash under the stock option plan (from $0.23 to $.37 per share)                              |  |   |  |  |   | 2   |  |   | 74      |   |   |       |   |   |     |   |   |    |   |   |         |   |   | 76      |  
|Issuance of 71,582 shares to employees under employee savings and retirement plan (from $4.94 to $6.69 per share)                                                      |  |   |  |  |   |    |  |   | 427     |   |   |       |   |   |     |   |   |    |   |   |         |   |   | 427     |  
|Issuance of 370,000 shares to officers and employees for promissory notes under Shared Investment Program ($6.25 per share)                                            |  |   |  |  |   | 4   |  |   | 2,309   |   |   | (2,313 | ) |   |     |   |   |    |   |   |         |   |   |        |  
|Forfeitures of deferred compensation                                                                                                                                   |  |   |  |  |   |    |  |   | (576    | ) |   |       |   |   | 576  |   |   |    |   |   |         |   |   |        |  

39



|Deferred compensation related to grant of certain stock options                                                                            |  |   |  |  |   |    |  |   | 648     |   |   |       |   |   | (648 | ) |   |     |   |   |         |   |   |        |  
|------------------------------------------------------------------------------------------------------------------------------------------ |  | - | - |  | - | --- |  | - | ------- | - | - | ------ | - | - | ---- | - | - | ---- | - | - | -------- | - | - | ------- | -
|Amortization of deferred compensation                                                                                                      |  |   |  |  |   |    |  |   |        |   |   |       |   |   | 313  |   |   |     |   |   |         |   |   | 313     |  
|                                                                                                                                           |  |   |   |  |   |     |  |   |         |   |   |        |   |   |      |   |  
|Balance at December 31, 1997                                                                                                               |  | $ |  |  | $ | 219 |  | $ | 224,925 |   | $ | (2,313 | ) | $ | (539 | ) | $ | (19  | ) | $ | (145,620 | ) | $ | 76,653  |  
|Comprehensive loss:                                                                                                                        |  |   |   |  |   |     |  |   |         |   |   |        |   |   |      |   |   |      |   |   |          |   |   |         |  
|Net loss                                                                                                                                   |  |   |  |  |   |    |  |   |        |   |   |       |   |   |     |   |   |     |   |   | (21,349  | ) |   | (21,349 | )
|Net unrealized gain on marketable securities                                                                                               |  |   |  |  |   |    |  |   |        |   |   |       |   |   |     |   |   | 64   |   |   |         |   |   | 64      |  
|                                                                                                                                           |  |   |   |  |   |     |  |   |         |   |   |        |   |   |      |   |   |      |   |   |          |   |   |        
|Comprehensive loss                                                                                                                         |  |   |   |  |   |     |  |   |         |   |   |        |   |   |      |   |   |      |   |   |          |   |   | (21,285 | )
|                                                                                                                                           |  |   |   |  |   |     |  |   |         |   |   |        |   |   |      |   |   |      |   |   |          |   |   |        
|Issuance of 186,355 shares of common stock to employees and investors for cash under the stock option plan (from $0.10 to $3.94 per share) |  |   |  |  |   | 1   |  |   | 71      |   |   |       |   |   |     |   |   |     |   |   |         |   |   | 72      |  
|Issuance of 81,026 shares to employees under employee savings and retirement plan (from $2.63 to $4.63 per share)                          |  |   |  |  |   |    |  |   | 309     |   |   |       |   |   |     |   |   |     |   |   |         |   |   | 309     |  
|Amortization of deferred compensation                                                                                                      |  |   |  |  |   |    |  |   |        |   |   |       |   |   | 184  |   |   |     |   |   |         |   |   | 184     |  
|Forfeitures of deferred compensation                                                                                                       |  |   |  |  |   |    |  |   | (123    | ) |   |       |   |   | 123  |   |   |     |   |   |         |   |   |        |  
|Repayment of notes receivable from shareholders                                                                                            |  |   |  |  |   |    |  |   |        |   |   | 31     |   |   |     |   |   |     |   |   |         |   |   | 31      |  
|Treasury stock                                                                                                                             |  |   |  |  |   |    |  |   | (92     | ) |   |       |   |   |     |   |   |     |   |   |         |   |   | (92     | )
|                                                                                                                                           |  |   |   |  |   |     |  |   |         |   |   |        |   |   |      |   |  
|Balance at December 31, 1998                                                                                                               |  | $ |  |  | $ | 220 |  | $ | 225,090 |   | $ | (2,282 | ) | $ | (232 | ) | $ | 45   |   | $ | (166,969 | ) | $ | 55,872  |  
|Comprehensive loss:                                                                                                                        |  |   |   |  |   |     |  |   |         |   |   |        |   |   |      |   |   |      |   |   |          |   |   |         |  
|Net loss                                                                                                                                   |  |   |  |  |   |    |  |   |        |   |   |       |   |   |     |   |   |     |   |   | (20,998  | ) |   | (20,998 | )
|Net unrealized loss on marketable securities                                                                                               |  |   |  |  |   |    |  |   |        |   |   |       |   |   |     |   |   | (153 | ) |   |         |   |   | (153    | )
|                                                                                                                                           |  |   |   |  |   |     |  |   |         |   |   |        |   |   |      |   |   |      |   |   |          |   |   |        
|Comprehensive loss                                                                                                                         |  |   |   |  |   |     |  |   |         |   |   |        |   |   |      |   |   |      |   |   |          |   |   | (21,151 | )
|                                                                                                                                           |  |   |   |  |   |     |  |   |         |   |   |        |   |   |      |   |   |      |   |   |          |   |   |        
|Issuance of 477,100 shares of common stock to employees and investors for cash under the stock option plan (from $0.10 to $3.94 per share) |  |   |  |  |   | 5   |  |   | 1,520   |   |   |       |   |   |     |   |   |     |   |   |         |   |   | 1,525   |  
|Issuance of 91,710 shares to employees under employee savings and retirement plan (from $2.09 to $5.69 per share)                          |  |   |  |  |   | 1   |  |   | 279     |   |   |       |   |   |     |   |   |     |   |   |         |   |   | 280     |  
|Amortization of deferred compensation                                                                                                      |  |   |  |  |   |    |  |   |        |   |   |       |   |   | 155  |   |   |     |   |   |         |   |   | 155     |  
|Repayment of notes receivable from shareholders                                                                                            |  |   |  |  |   |    |  |   |        |   |   | 137    |   |   |     |   |   |     |   |   |         |   |   | 137     |  
|Treasury stock                                                                                                                             |  |   |  |  |   |    |  |   | (62     | ) |   |       |   |   |     |   |   |     |   |   |         |   |   | (62     | )
|                                                                                                                                           |  |   |   |  |   |     |  |   |         |   |   |        |   |   |      |   |  
|Balance at December 31, 1999                                                                                                               |  | $ |  |  | $ | 226 |  | $ | 226,827 |   | $ | (2,145 | ) | $ | (77  | ) | $ | (108 | ) | $ | (187,967 | ) | $ | 36,756  |  
|                                                                                                                                           |  |   |   |  |   |     |  |   |         |   |   |        |   |   |      |   |  

(See accompanying notes)

40



MATRIX PHARMACEUTICAL, INC.
(a development stage company)

Consolidated Statements of Cash Flows

|                                                                              |  |   |         |   |   |         |   | Period from
Inception
(February 11,
1985) to
December 31,
1999 |        
|----------------------------------------------------------------------------- |  | - | ------- | - | - | ------- | - | -------------------------------------------------------------- | -------
|
|
|Cash flows used in operating activities:                                      |  |   |         |   |   |         |   |                                                                |        
|Net loss                                                                      |  | $ | (39,731 | ) | $ | (21,349 | ) | $                                                              | (20,998
|Adjustments to reconcile net loss to net cash used by operating activities:   |  |   |         |   |   |         |   |                                                                |        
|Depreciation and amortization                                                 |  |   | 1,142   |   |   | 2,259   |   |                                                                | 1,954  
|Amortization of deferred compensation                                         |  |   | 313     |   |   | 184     |   |                                                                | 155    
|Amortization of deferred income                                               |  |   |        |   |   | (560    | ) |                                                                | (560   
|Gain on sale & leaseback transaction                                          |  |   |        |   |   | (1,882  | ) |                                                                |       
|Repurchase of marketing rights                                                |  |   | (250    | ) |   | (500    | ) |                                                                | (500   
|Other                                                                         |  |   | 72      |   |   | 218     |   |                                                                | 92     
|Changes in assets and liabilities:                                            |  |   |         |   |   |         |   |                                                                |        
|Other current assets                                                          |  |   | 1,663   |   |   | (1,279  | ) |                                                                | 852    
|Deposits and other assets                                                     |  |   | (418    | ) |   | 482     |   |                                                                | 5      
|Notes receivable from related parties                                         |  |   | (1,350  | ) |   | 346     |   |                                                                | 304    
|Accounts payable                                                              |  |   | 164     |   |   | (1,524  | ) |                                                                | 336    
|Accrued compensation                                                          |  |   | (123    | ) |   | 172     |   |                                                                | 255    
|Deferred other income                                                         |  |   | 2,473   |   |   | (177    | ) |                                                                | (195   
|Restructuring costs                                                           |  |   | 2,063   |   |   | (1,550  | ) |                                                                | (513   
|Accrued clinical trial costs                                                  |  |   | 549     |   |   | (283    | ) |                                                                | (58    
|Other accrued liabilities                                                     |  |   | (936    | ) |   | 346     |   |                                                                | (285   
|                                                                              |  |   |         |   |   |         |   |                                                                |        
|Net cash used in operating activities                                         |  |   | (34,369 | ) |   | (25,097 | ) |                                                                | (19,156
|Cash flows from investing activities:                                         |  |   |         |   |   |         |   |                                                                |        
|Capital expenditures                                                          |  |   | (9,857  | ) |   | (1,016  | ) |                                                                | (398   
|Proceeds from sale of fixed assets                                            |  |   |        |   |   | 17,744  |   |                                                                |       
|Investment in securities                                                      |  |   | (31,100 | ) |   | (23,763 | ) |                                                                | (30,929
|Proceeds from sale of available-for-sale securities                           |  |   |        |   |   |        |   |                                                                |       
|Maturities of securities                                                      |  |   | 65,000  |   |   | 42,707  |   |                                                                | 41,705 
|                                                                              |  |   |         |   |   |         |   |                                                                |        
|Net cash flows provided by (used in) investing activities                     |  |   | 24,043  |   |   | 35,672  |   |                                                                | 10,378 
|Cash flows from financing activities:                                         |  |   |         |   |   |         |   |                                                                |        
|Repayment of mortgage loan from sale                                          |  |   |        |   |   | (9,840  | ) |                                                                |       
|Payments on debt and capital lease obligations                                |  |   | (546    | ) |   | (1,718  | ) |                                                                | (1,900 
|Issuance of convertible promissory notes payable to stockholders              |  |   |        |   |   |        |   |                                                                |       
|Net cash proceeds from issuance of:                                           |  |   |         |   |   |         |   |                                                                |        
|Debt and capital lease financing                                              |  |   | 9,950   |   |   | 6,000   |   |                                                                |       
|Repayment of notes receivable from shareholders                               |  |   |        |   |   | 32      |   |                                                                | 137    
|Preferred stock                                                               |  |   |        |   |   |        |   |                                                                |       
|Common stock                                                                  |  |   | 503     |   |   | 72      |   |                                                                | 1,743  
|                                                                              |  |   |         |   |   |         |   |                                                                |        
|Net cash flows provided by (used in) financing activities                     |  |   | 9,907   |   |   | (5,454  | ) |                                                                | (20    
|Net increase (decrease) in cash and cash equivalents                          |  |   | (419    | ) |   | 5,121   |   |                                                                | (8,798 
|Cash and cash equivalents at the beginning of period                          |  |   | 20,138  |   |   | 19,719  |   |                                                                | 24,840 
|                                                                              |  |   |         |   |   |         |   |                                                                |        
|Cash and cash equivalents at the end of period                                |  | $ | 19,719  |   | $ | 24,840  |   | $                                                              | 16,042 
|                                                                              |  |   |         |   |   |         |   |                                                                |        
|Supplemental schedule of noncash investing and financing activities:          |  |   |         |   |   |         |   |                                                                |        
|Notes receivable from shareholders in exchange for capital stock              |  | $ | 2,313   |   | $ |        |   | $                                                              |       
|Financing of capital equipment                                                |  |   | 943     |   |   |        |   |                                                                |       
|Issuance of stock upon conversion of promissory notes payable to stockholders |  |   |        |   |   |        |   |                                                                |       
|                                                                              |  |   |         |   |   |         |   |                                                                |        
|Supplemental disclosure of cash flow information:                             |  |   |         |   |   |         |   |                                                                |        
|Interest paid                                                                 |  | $ | 1,229   |   | $ | 1,669   |   | $                                                              | 1,443  

(See accompanying notes)

41



MATRIX PHARMACEUTICAL, INC.
(a development stage company)

Notes to Consolidated Financial Statements

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of presentation.Matrix Pharmaceutical, Inc. (the "Company") was incorporated in California on
February 11, 1985 and reincorporated in Delaware in January 1992. The Company's principal activities to date have involved research and development of drug delivery systems using
proprietary technology, in-licensing of a product candidate, recruiting key personnel, establishing a manufacturing process and raising capital to finance its development operations. The
Company is classified as a development stage company.

In
the course of its development activities, the Company has sustained continuing operating losses and expects such losses to continue over the next several years. The Company has
financed its operations and capital acquisitions primarily through stock issuances, capital leases, and subsequent to 1996, by long-term debt.

Certain
amounts have been reclassified to conform with current period classification.

Principles of consolidation.The consolidated financial statements include the accounts of the Company and its wholly
owned subsidiary after elimination of all material intercompany balances and transactions.

Cash and cash equivalents and short-term investments.The Company invests its excess cash in government and
corporate debt securities. Highly liquid investments with maturities of three months or less at the date of acquisition are considered by the Company to be cash equivalents. All other investments are
reported as short-term investments.

Marketable securities available-for-sale.All marketable securities are classified as
available-for-sale. Available-for-sale securities are carried at fair value, with unrealized gains and losses reported as a separate component of
stockholders' equity. The amortized cost of debt securities in this category is adjusted for amortization of premiums and accretions of discounts to maturity. Such amortization is included in interest
income. Realized gains and losses and declines in value judged to be other than
temporary for available-for-sale securities are included in interest and other expense. The cost of securities sold is based on the specific identification method.

Depreciation and amortization.The Company depreciates property and equipment using the straight-line
method over the assets' estimated useful lives. Building and improvements are depreciated over 25 years. Laboratory, operating and office equipment and furniture are depreciated over
10 years and computer equipment over five years. Leasehold improvements are depreciated over the shorter of the estimated useful life or the lease term. Amortization of equipment under capital
leases is included with depreciation expense.

Research and development.The Company expenses research and development costs as incurred.

Stock based compensation.Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"), encourages, but does not require, companies to record compensation costs for stock-based employee compensation plans at fair value. The Company has elected to
continue to account for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB
25"), and related Interpretations. Accordingly, compensation costs for stock options granted to employees and directors is measured as the excess, if any, of the quoted market price of the Company's
stock at the date of

42



the
grant over the amount an employee must pay to acquire the stock. Note 11 to the Consolidated Financial Statements contains a summary of the pro forma effects to reported net loss and per
share data for 1997, 1998 and 1999 as if the Company had elected to recognize compensation cost based upon the fair value of options granted at grant date as prescribed by SFAS 123.

Net loss per share.Basic and diluted loss per share has been calculated using the weighted average common shares
outstanding. Common equivalent shares from stock options and warrants are not included in the diluted loss per share calculations because their inclusion would be antidilutive.

Segments.The Company operates in a single operating segment and therefore no additional segment disclosures have been
provided.

Use of estimates.The preparation of financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from these estimates.

Recent Accounting Pronouncements.In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative Financial Instruments and for Hedging Activities, which provides a comprehensive and consistent standard for the
recognition and measurement of derivatives and hedging activities. SFAS No. 133 is effective for years beginning after June 15, 1999 and is not anticipated to have a significant impact
on the Company's results of operations or financial condition when adopted.

2. FINANCIAL INSTRUMENTS

The following is a summary of available-for-sale securities:

|                           |  | Available-For-Sale Securities
|-------------------------- |  | -----------------------------
|
|
|U.S. government securities |  | $                            
|Certificates of deposit    |  |                              
|Commercial paper           |  |                              
|Master notes               |  |                              
|Repurchase agreements      |  |                              
|                           |  |                              
|                           |  | $                            
|                           |  |                              

43



|                        |  | Available-For-Sale Securities
|----------------------- |  | -----------------------------
|
|
|Certificates of deposit |  | $                            
|Commercial paper        |  |                              
|Master notes            |  |                              
|Repurchase agreements   |  |                              
|                        |  |                              
|                        |  | $                            
|                        |  |                              

Included
in cash equivalents at December 31, 1999 and 1998 are $13,929,000 and $23,575,000, respectively, of available-for-sale securities. The Company
invests in repurchase agreement securities which are collateralized by U.S. government securities which have a market value of 102% of the investment. The securities are marked to market daily to
ensure that the market value of the underlying assets remain sufficient. All available-for-sale securities have maturities of less than one year.

3. GAIN ON SALE AND LEASEBACK TRANSACTION

In March 1998, the Company completed an agreement with a real estate investment trust for the sale and leaseback of its San Diego office/laboratory and
manufacturing facility and an adjacent parcel of
land. The transaction was structured as an $18,425,000 sale and a $6,000,000 convertible loan secured by specific manufacturing related building improvements. Under the terms of the agreement, the
Company will lease the facility for 13 years with options to renew up to an additional 25 years. Matrix will pay an average of $2,108,000 in annual lease expense.

This
rental expense is partially offset by rental income from a portion of the facility leased to another bio-pharmaceutical company. In 1996, the Company entered into an
agreement to lease out a portion of its San Diego manufacturing facility. The original lease which had a term of two years ending July 1998 was extended through July 1999 resulting in
rental income of $4,472,000 during the three-year period. In September 1999, the Company entered into a three-year lease with another company which is expected to result
in $2,429,000 in rental income over the three year term of the lease. Net cash from the lease and loan agreement, after the payment of the existing mortgage and escrow and other related fees, totaled
approximately $13,798,000 and is being used to fund operating expenses and capital purchases. The total gain on the transaction is $5,769,000 of which $1,882,000 was recognized during the year ended
December 31, 1998 as an immediate gain while the remaining balance has been deferred and is being recorded to income over the 13-year lease term.

4. OTHER INCOME

Other income during 1998 of $6,791,000 includes the receipt of $4,000,000 from a settlement with an insurance company, $2,108,000 from the gain on sale and
leaseback of the San Diego facility and $560,000 from amortization of the five year non-compete agreement.

44



5. PROPERTY AND EQUIPMENT

Property and equipment is stated at cost and consists of the following:

|December 31,                                   |  | 1998 |        | 1999 |  
|---------------------------------------------- |  | ---- | ------ | ---- | -
|
|Leasehold improvements                         |  | $    | 8,970  |      | $
|Laboratory and operating equipment             |  |      | 6,177  |      |  
|Office and computer equipment                  |  |      | 3,381  |      |  
|                                               |  |      |        |      |  
|                                               |  |      | 18,528 |      |  
|Less accumulated depreciation and amortization |  |      | (5,112 | )    |  
|                                               |  |      |        |      |  
|Net property and equipment                     |  | $    | 13,416 |      | $
|                                               |  |      |        |      |  

6. DEBT AND CAPITAL LEASE OBLIGATIONS

As noted in Footnote 3, the Company completed an agreement with a real estate investment trust for the sale and leaseback of its San Diego office/laboratory
and manufacturing facility and an adjacent parcel of land. The transaction was structured as an $18,425,000 sale and a $6,000,000 convertible loan secured by specific manufacturing related building
improvements. The loan bears interest at 11% per annum and the entire principal balance is due on March 26, 2002. The Company has the right prior to the maturity date to cause the lender to
convert the loan to a lease agreement based upon the attainment of certain strategic alliances or joint ventures with a cumulative value in excess of $15,000,000 as measured by initial and milestone
payments. In the event the Company meets certain milestones and chooses to exercise this option, rent shall be increased by $660,000 per year from approximately $1,920,000 as per the lease agreement.
The lender also has the right to purchase the improvements in exchange for the outstanding principal balance of the loan up to $6,000,000 and to convert the loan to a lease agreement at any time
during the loan period.

In
October 1997, the Company entered into a five-year equipment financing agreement for $10,000,000. The loan bears 9% interest per annum and matures in 2002.

Assets
purchased under debt (installment notes) or capital lease financing arrangements consist of building and related improvements, leasehold improvements, laboratory, operating,
office and computer equipment with a cost of approximately $14,034,000 at December 31, 1998 and 1999. Accumulated depreciation of these assets totaled approximately $2,545,000 and $4,296,000 at
December 31, 1998 and 1999, respectively. The weighted average interest rate for debt and capital lease obligations was 9.7% in 1998 and 1999. Future payments under capital leases, including
interest of $20,000 total $122,000 as of December 31, 1999.

45



Future
payments under debt obligations, are as follows at December 31, 1999:

|Years ending December 31,  |  | Installment
Notes
|-------------------------- |  | -----------------
|
|2000                       |  | $                
|2001                       |  |                  
|2002                       |  |                  
|                           |  |                  
|                           |  |                  
|Current portion            |  |                  
|                           |  |                  
|Amounts due after one year |  | $                
|                           |  |                  

7. OPERATING LEASE COMMITMENTS

The Company leased facilities in Fremont and San Diego in the State of California. Rent expense under all of these arrangements was approximately $1,764,000 in
1997, $2,346,000 in 1998 and $2,673,000 in 1999. Non-cancellable rental commitments under building and equipment operating leases are as follows at December 31, 1999:

|Years ending December 31,    |  | Total
|---------------------------- |  | -----
|
|2000                         |  | $    
|2001                         |  |      
|2002                         |  |      
|2003                         |  |      
|2004                         |  |      
|Thereafter                   |  |      
|                             |  |      
|Total minimum lease payments |  | $    
|                             |  |      

The
Company entered into an eighteen-year lease agreement beginning in January 1996, for a facility totaling approximately 50,000 square feet in Fremont,
California. This facility includes administrative, and research and development usage. This lease has an escalation clause in which the annual rent expense ranges from $420,000 to $1,034,000.

The
Company entered into an agreement with a real estate investment trust for the sale and leaseback of its San Diego manufacturing facility in March 1998. The lease has a term
of 13 years with options to renew for up to 25 years in which the annual rent expense ranges from $1,920,000 to $2,373,000.

46



MATRIX PHARMACEUTICAL, INC.
(a development stage company)

Notes to Consolidated Financial Statements (Continued)

8.  SPECIAL CHARGES

Special charges of $4,518,000 were recorded during the third quarter of 1997 in connection with the decision to suspend further development and
commercialization of AccuSite. No special charges were recorded in 1998. Management suspended the AccuSite program after the FDA notified the Company that it was not prepared to approve AccuSite as a
treatment for genital warts. In September 1997, restructuring costs to conclude the clinical trials and commercial programs associated with AccuSite were accrued. The Company reduced its
workforce by 63 employees, of which 46 positions related to manufacturing, resulting in severance expenses of $1,478,000. Additional expenses included the write-off of inventory related to
AccuSite of $1,245,000, costs totaling $1,194,000 associated with the shut down of the Company's Northern California facilities and write-off of manufacturing equipment, the closing of
clinical trials with respect to AccuSite of $414,000, and sales and marketing costs associated with AccuSite of $187,000. At December 31, 1999, the reserve had no remaining balance.

9.  LITIGATION

On December 21, 1994, Collagen Corporation ("Collagen") filed a lawsuit against the Company in Santa Clara County Superior Court alleging
misappropriation of trade secrets concerning the Company's manufacturing process for collagen and seeking unspecified damages and injunctive relief. The Company denied all allegations of the complaint
and subsequently filed a cross-complaint against Collagen and Howard Palefsky, Collagen's former Chairman and Chief Executive Officer, seeking recovery of damages for defamation and violations of
state law unfair competition.

On
May 23, 1997, the lawsuit between the parties was settled on mutually agreeable terms and dismissed with prejudice. All claims by and against all parties have been released.
Matrix agreed that for a period of five years it shall not manufacture or sell products directly competitive with Collagen's current core products. Collagen has granted Matrix a
non-exclusive license to certain Collagen intellectual property for certain non-monetary consideration.

10.  STOCKHOLDERS' EQUITY

Preferred Share Purchase Rights Plan.On April 17, 1995, the Company's Board of Directors adopted a Preferred
Share Purchase Rights Plan under which stockholders receive one one-hundredth Series B junior participating preferred share purchase rights for each share of Matrix common stock.
The rights will be distributed as a non-taxable dividend, will expire on May 28, 2005, and will be exercisable only if a person or group acquires 20% or more of the Company's common
stock or announces a tender offer for 20% or more of the Company's common stock. The Board of Directors designated 150,000 shares as Series B junior participating preferred stock. As of
December 31, 1999, no shares were issued or outstanding.

11.  STOCK OPTION PLANS

1991 Directors Stock Option Plan.The Board of Directors adopted a Directors Stock Option Plan (the "Directors Plan")
in 1991. Under the Directors Plan, each individual who first becomes a non-employee member of the Board of Directors is automatically granted a non-statutory option to purchase
40,000 shares of common stock which vest over a three-year period. Each non-employee director (upon re-election to the Board) will automatically receive an option
to purchase 3,000 shares of common stock which vest over a one-year period. In May 1994, an additional 200,000 shares were reserved for

47



issuance
pursuant to the Directors Plan. In March 1997 the Director's Plan was amended such that all vested, unexercised options would remain outstanding for the full 10-year option
term, regardless of whether the optionee continued to serve on the board. At the same time, an additional 250,000 shares were reserved for issuance under the Director's Plan. The aggregate maximum
number of shares which may be issued under the automatic option grant program is 592,858 shares. At December 31, 1999, the total number of common shares reserved for issuance under director's
stock options was 592,858, of which 289,301 were exercisable and 213,033 remain available for grant. In 1999, 18,000 shares were granted.

1988 Restricted Stock Plan.The Company's 1988 Restricted Stock Plan ("the Plan") permits the Company to
(i) grant incentive options at 100 percent of fair value at the date of grant; (ii) grant non-qualified options at 85 percent of fair value or greater; and
(iii) grant purchase rights authorizing the sale of common stock at 85 percent of fair value subject to stock purchase agreements. Options may become exercisable immediately or in
installments over time as specified in each option agreement. Shares purchasable under immediately exercisable options and under purchase rights may be subject to repurchase by the Company in the
event of termination of employment; the Company's repurchase right
shall lapse in one or more installments over the purchaser's period of service. The term of the Plan is ten years. Options have a maximum term of ten years, except options granted to
ten-percent stockholders which have a maximum term of five years. In May 1994, an additional 450,000 shares of common stock were reserved for issuance pursuant to the Plan. In
May 1996, an additional 850,000 shares of common stock were reserved for issuance pursuant to the Plan. In June 1997, an additional 2,000,000 shares were reserved for issuance pursuant
to the Plan. In March 1999, an additional 400,000 shares were reserved for issuance pursuant to the Plan. At December 31, 1999, the total number of common shares reserved for issuance
under restricted stock options was 5,030,953 of which 391,677 remain available for grant.

Shared Investment Program.In March 1997, the Board of Directors authorized a special risk sharing arrangement
designated as the Shared Investment Program ("the Program"). Under the Program, the Company's executive officers and other key managerial personnel were given the opportunity to purchase shares of
Common Stock in an individually designated amount per participant determined by a Committee of the Board of Directors. A total of 370,000 shares were purchased under the Program by nine eligible
employees at $6.25 per share, the fair market value of the Common Stock on June 25, 1997, for an aggregate consideration of $2,312,500. The purchase price was paid through the participant's
delivery of a full-recourse promissory note payable to the Company. Each note bears interest at 6.69% compounded semi-annually and has a maximum term of nine years. The notes
are secured by a pledge of the purchased shares with the Company. The Company recorded notes receivables from participants in this program originally for $2,312,500 in the equity section in the
Consolidated Balance Sheet. In 1998, one employee repaid $31,250 and during 1999 two employees repaid a total of $135,864 resulting in a remaining balance of $2,145,386 at December 31, 1999.

48



Activity
under the 1988 Restricted Stock Plan is as follows:

|                                                 |  | Shares
Available |   | Stock Awards
and Stock
Options
Outstanding |   | Price Per Share |  | Weighted
Average
Exercise
Price
|------------------------------------------------ |  | ---------------- | - | ------------------------------------------ | - | --------------- |  | -------------------------------
|Balances at December 31, 1996                    |  | 248,256          |   | 1,871,636                                  |   | $0.23 - $21.00  |  | $                              
|Additional authorization                         |  | 2,000,000        |   |                                           |   |                 |  |                                
|Shared investment program shares                 |  | (370,000         | ) |                                           |   | $6.25 - $6.25   |  | $                              
|Restricted stock awards                          |  | (185,000         | ) | 185,000                                    |   | $0.00 - $0.00   |  | $                              
|Grants of options                                |  | (3,030,584       | ) | 3,030,584                                  |   | $3.50 - $6.69   |  | $                              
|Exercise of options                              |  |                 |   | (208,862                                   | ) | $0.23 - $0.37   |  | $                              
|Forfeitures                                      |  | 2,411,103        |   | (2,411,103                                 | ) | $3.94 - $21.00  |  | $                              
|                                                 |  |                  |   |                                            |   |                 |  |                                
|Balances at December 31, 1997                    |  | 1,073,775        |   | 2,467,255                                  |   | $0.00 - $15.00  |  | $                              
|Grants of options                                |  | (834,750         | ) | 834,750                                    |   | $2.25 - $4.94   |  | $                              
|Exercise of options and issuance of stock awards |  |                 |   | (186,355                                   | ) | $0.00 - $3.94   |  | $                              
|Forfeitures                                      |  | 580,811          |   | (580,811                                   | ) | $0.00 - $15.00  |  | $                              
|                                                 |  |                  |   |                                            |   |                 |  |                                
|Balances at December 31, 1998                    |  | 819,836          |   | 2,534,839                                  |   | $0.00 - $11.90  |  | $                              
|Additional authorization                         |  | 400,000          |   |                                           |   |                 |  |                                
|Grants of options                                |  | (1,111,575       | ) | 1,111,575                                  |   | $0.00 - $8.50   |  | $                              
|Exercise of options and issuance of stock awards |  |                 |   | (477,100                                   | ) | $0.10 - $3.94   |  | $                              
|Forfeitures                                      |  | 283,416          |   | (283,416                                   | ) | $0.10 - $6.88   |  | $                              
|                                                 |  |                  |   |                                            |   |                 |  |                                
|Balances at December 31, 1999                    |  | 391,677          |   | 2,885,898                                  |   | $0.00 - $11.90  |  | $                              
|                                                 |  |                  |   |                                            |   |                 |  |                                

At
December 31, 1999, options to purchase 1,356,773 shares of common stock were exercisable at a weighted average exercise price of $4.24 per share. At December 31,
1998, options to purchase 1,063,984 shares of common stock were exercisable at a weighted average exercise price of $4.50 per share. At
December 31, 1997, options to purchase 350,279 shares of common stock were exercisable at a weighted average exercise price of $4.67 per share.

Exercise
prices for options outstanding as of December 31, 1999 ranged from $0.00 to $11.90 per share. The weighted average remaining contractual life of those options is
8.0 years.

49



Ranges
of exercise price for 1999 are as follows:

|  |       |  |   | Options Outstanding |  | Options Exercisable
|- | ----- |  | - | ------------------- |  | -------------------
|
|$ | 0.00  |  | $ | 2.60                |  | 568,128            
|$ | 2.61  |  | $ | 5.20                |  | 1,865,147          
|$ | 5.21  |  | $ | 7.80                |  | 373,125            
|$ | 7.81  |  | $ | 10.40               |  | 7,250              
|$ | 10.41 |  | $ | 11.90               |  | 72,248             
|  |       |  |   |                     |  |                    
|  |       |  |   |                     |  | 2,885,898          
|  |       |  |   |                     |  |                    

On
October 29, 1997, the Board of Directors approved a resolution to offer eligible employees, including executive officers, holding stock options granted under the Plan, the
opportunity to exchange their existing stock options for new options at the then current fair market value of $3.94 per share. The resolution maintains the same vesting schedule for unvested shares as
was applicable for the existing stock options, but increases the service period for those shares previously vested. Vested existing options exchanged for the new options will vest 50% after six months
and 50% after one year.

The
Company applies APB 25, "Accounting for Stock Issued to Employees." Pro forma information regarding net loss per share is required by SFAS 123, "Accounting for Stock-Based
Compensation," and has been determined as if the Company had accounted for its employee and director stock options under the fair value method described in that Statement. The Black-Scholes option
pricing model is used to calculate the fair value of these options for 1997, 1998, and 1999 with the following assumptions: dividend yield of zero % for all three years, volatility factors of 0.57 for
1997, 0.74 for 1998 and 1.03 for 1999, risk-free interest rate of 6.2% for 1997, 6.1% for 1998 and 6.7% for 1999, assumed forfeiture rate of 10.57% for 1997 and 1998, 7.65% for 1999 and an
expected life of 4.0 years for all three years.

The
Black-Scholes options valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In
addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing
models do not necessarily provide a reliable single measure of the fair value of its employee stock options. However, the Company has presented the pro forma net loss and pro forma basic and diluted
net loss per common share using the assumptions noted above.

Had
compensation costs for the Company's stock option plans been determined based upon the fair value at the grant date for awards under these plans consistent with the methodology
prescribed under

50



SFAS 123,
the Company's net loss and net loss per share for 1997, 1998, and 1999 would have been as follows:

|                                                 |  | For the Years ended December 31, |        
|------------------------------------------------ |  | -------------------------------- | -------
|
|
|Net lossas reported                             |  | $                                | (39,731
|Net losspro forma                               |  | $                                | (41,006
|Basic and diluted net loss per shareas reported |  | $                                | (1.85  
|Basic and diluted net loss per sharepro forma   |  | $                                | (1.90  

The
weighted average fair value of options granted at fair market value during 1997, 1998, and 1999, is estimated at $2.23, $2.01 and $1.36, respectively on the date of grant. The
weighted average fair value of options granted at below fair market value during 1997 and 1999 is estimated at $2.19 and $0.92 on the date of grant, respectively. No options were granted at below fair
market value in 1998.

SFAS 123
is effective for options granted by the Company commencing January 1, 1995. All options granted before January 1, 1995 have not been valued and no pro
forma compensation expense has been recognized. However, any option granted before January 1, 1995 that was repriced in 1996 is treated as a new grant within 1996 and valued accordingly. In
addition, as compensation expense is recognized over the vesting period of the option, the proforma effect was not fully reflected until 1999.

1999 Employee Stock Purchase Plan.In May 1999, the "1999 Employee Stock Purchase Plan" was approved by the
shareholders with an initial 700,000 shares reserved. The Plan permits eligible employees to acquire shares of the Company's common stock through periodic payroll deductions of up to 15% of total
compensation. No more than 3,000 shares may be purchased on any purchase date per employee. Each offering period will have a maximum duration of 24 months. The price at which the common stock
may be purchased is 85% of the lesser of the fair market value of the Company's common stock on the first day of the applicable offering period or on the last day of the respective purchase period. No
shares were issued under the plan in 1999.

12. INCOME TAXES

As of December 31, 1999, the Company had federal and state net operating loss carryforwards of approximately $182,500,000 and $40,000,000, respectively.
The Company also had federal research and development tax credit carryforwards of approximately $3,900,000. The federal net operating loss and credit carryforwards will expire at various dates
beginning in the year 2000 through 2019, if not utilized. The state of California net operating losses will expire at various dates beginning in 2000 through 2004, if not utilized.

Utilization
of the Company's net operating loss carryforwards and credits may be subject to an annual limitation due to the "change in ownership" provisions of the Internal Revenue
Code of 1986 and similar state provisions. The Company does not expect the limitation to impact its ability to utilize all of its current net operating loss and credit carryforwards.

51



MATRIX PHARMACEUTICAL, INC.
(a development stage company)

Notes to Consolidated Financial Statements (Continued)

12. INCOME TAXES (Continued)

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets for financial reporting and the amount used
for income tax purposes. Significant components of the Company's deferred tax assets for federal and state income taxes for the years ended December 31, 1997, 1998, and 1999 are as follows:

|At December 31,                             |  | 1997 |         | 1998 |   | 1999    |  
|------------------------------------------- |  | ---- | ------- | ---- | - | ------- | -
|
|Deferred tax assets                         |  |      |         |      |   |         |  
|Net operating loss carryforwards            |  | $    | 48,600  |      | $ | 57,100  |  
|Research credits                            |  |      | 4,900   |      |   | 5,900   |  
|Capitalized research expenses               |  |      | 6,700   |      |   | 8,200   |  
|Other                                       |  |      | 3,300   |      |   | 1,500   |  
|                                            |  |      |         |      |   |         |  
|Total deferred tax assets                   |  | $    | 63,500  |      | $ | 72,700  |  
|Valuation allowance for deferred tax assets |  |      | (63,500 | )    |   | (72,700 | )
|                                            |  |      |         |      |   |         |  
|Net deferred tax assets                     |  | $    |        |      | $ |        |  
|                                            |  |      |         |      |   |         |  

The
net valuation allowance increased by $17,800,000, $9,200,000 and $7,300,000 in 1997, 1998 and 1999, respectively.

13. RELATED PARTIES

During the years ended December 31, 1999, 1998, and 1997, legal fees of approximately $72,000, $244,000 and $2,816,000, respectively, were paid to
Brobeck, Phleger & Harrison, a law firm in which a current director of the Company previously served as a senior partner. As of December 31, 1999 and 1998, amounts owed to Brobeck,
Phleger, & Harrison were $4,000 and $16,000, respectively.

In
1997, a director of the Company received $750,000 in exchange for promissory notes secured by a deed of trust. The notes were payable in 1998 and accrued interest at 7% per annum.
In 1998, the director repaid $346,000 of principal and accrued interest of $4,000. The remaining balance of $404,000 was repaid during 1999.

During
1997, two officers received $100,000 and $500,000, respectively, in exchange for non-interest bearing promissory notes secured by deeds of trust. During 1999, one
officer received $100,000 in exchange for an interest bearing promissory note secured by a deed of trust. The outstanding loans are to be forgiven over a period of three to seven years from their
inception and one loan was amended in October 1999 to be forgiven in full upon receipt of marketing approval from the FDA for Intradose. The compensation charge relating to the forgiveness is
being amortized on a straight-line basis over the original note terms.

14. EMPLOYEE SAVINGS AND RETIREMENT PLAN

The Company adopted a 401(k) savings and retirement plan in January 1990. The plan covers all eligible employees who are 21 years of age or
older. In May 1996, the Board of Directors approved a matching contribution under the Company's 401(k) plan. Under this program the Company makes a matching contribution on behalf of each
eligible employee equal to 50% of salary deferral contribution which began on January 1, 1997. At the end of each quarter, the Company issues new shares of its common

52



stock,
using the fair market value, for its matching contribution. Company matching contributions were $424,000, $295,000 and $280,000 in 1997, 1998 and 1999, respectively.

15. FMdC LICENSE AGREEEMENT

In September 1998, the Company entered into an agreement to license a systemic anticancer agent known as FMdC for $4 million. Under the terms of
the license agreement, the Company may be obligated to make additional milestone payments and royalties on product sales.

53



REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

The Board of Directors and Stockholders
Matrix Pharmaceutical, Inc.

We
have audited the accompanying consolidated balance sheets of Matrix Pharmaceutical, Inc. (a development stage company) as of December 31, 1998 and 1999, and the
related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1999 and for the period from inception
(February 11, 1985) to December 31, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial
statements based on our audits.

We
conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.

In
our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Matrix Pharmaceutical, Inc. (a
development stage company) at December 31, 1998 and 1999, and the consolidated results of its operations and cash flows for each of the three years in the period ended December 31, 1999
and for the period from inception (February 11, 1985) to December 31, 1999, in conformity with accounting principles generally accepted in the United States.

|                                       |  | Ernst & Young LLP
|-------------------------------------- |  | -----------------
|Palo Alto, California
January 21, 2000 |  |                  

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