<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 5, 1997
REGISTRATION NO. 333-31281
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- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------
CRESCENDO PHARMACEUTICALS CORPORATION
(EXACT NAME OF REGISTRANT ON FORM S-1 AS SPECIFIED IN ITS CHARTER)
DELAWARE 8521214 77-0460388
(STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER
JURISDICTION OF INDUSTRIAL IDENTIFICATION NO.)
INCORPORATION OR CLASSIFICATION CODE
ORGANIZATION) NUMBER)
1454 PAGE MILL ROAD
PALO ALTO, CALIFORNIA 94304
(650) 494-5600
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
--------------
DAVID R. HOFFMANN
VICE PRESIDENT, FINANCE
CRESCENDO PHARMACEUTICALS CORPORATION
1454 PAGE MILL ROAD
PALO ALTO, CALIFORNIA 94304
(650) 494-5600
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
--------------
COPY TO:
SARAH A. O'DOWD
HELLER EHRMAN WHITE & MCAULIFFE
525 UNIVERSITY AVENUE
PALO ALTO, CALIFORNIA 94301
TELEPHONE: (650) 324-7000
FACSIMILE: (650) 324-0638
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable following the effectiveness of this Registration
Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: [_]
--------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
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<PAGE>
[ALZA LOGO]
September 5, 1997
Dear Stockholder or Debenture Holder:
I am pleased to send you the attached Prospectus concerning Crescendo
Pharmaceuticals Corporation and notify you of the special distribution of
shares of Crescendo Class A Common Stock to the holders of Common Stock of ALZA
Corporation, the holders of ALZA's outstanding 5% convertible subordinated
debentures due 2006 and the holders of ALZA's outstanding 5 1/4% zero coupon
convertible subordinated debentures due 2014. Holders of ALZA Common Stock, 5%
Debentures and 5 1/4% Debentures at the close of business on September 18,
1997, the record date for this distribution, will receive one share of
Crescendo Class A Common Stock (a Crescendo Share) for each 20 shares of ALZA
Common Stock, one Crescendo Share for each 36 shares of ALZA Common Stock into
which the 5% Debentures are convertible, and one Crescendo Share for each 37
shares of ALZA Common Stock into which the 5 1/4% Debentures are convertible.
We expect the distribution to occur on or about September 30, 1997. The
Crescendo Shares will be held in "book-entry" form, although stock certificates
will be available upon request. Boston EquiServe, L.P. is acting as
distribution agent and will be responsible for making book-entry credits to
holders of record on the record date and for mailing stock certificates to
Crescendo stockholders upon request. Application has been made for the
Crescendo Class A Common Stock to be quoted on the Nasdaq National Market under
the symbol "CNDO."
Crescendo has been formed by ALZA to develop human pharmaceutical products
for commercialization, most likely through licensing to ALZA. ALZA will
contribute $300 million to Crescendo for the development of products. ALZA will
have the option to license any products developed by Crescendo and an option to
purchase all of the Crescendo Shares.
Crescendo's product development activities will take place under a
development agreement with ALZA. It is currently expected that a majority of
Crescendo's funds will be directed toward continuing the development of seven
products, the development of which was commenced by ALZA and Therapeutic
Discovery Corporation (TDC): OROS(R) oxybutynin; DUROS(TM) leuprolide; OROS(R)
methylphenidate; IUTS progesterone; D-TRANS(TM) testosterone matrix; E-
TRANS(TM) LHRH; and E-TRANS(TM) (skin interface technology) insulin. Crescendo
is also expected to fund the development of additional products incorporating
ALZA's proprietary drug delivery systems. In addition, Crescendo may fund the
development of pharmaceutical products in therapeutic categories of interest to
ALZA that do not use ALZA's drug delivery technology, but that complement
ALZA's product pipeline or otherwise provide a significant commercialization
opportunity for ALZA.
Until 1993, ALZA's business consisted almost exclusively of a client-
sponsored/royalty-based product development business. As discussed in the
attached Prospectus, in 1993 ALZA made a major commitment to a new business
focused on the development and commercialization of pharmaceutical products by
ALZA. In furtherance of this strategy, ALZA formed TDC to develop and
commercialize, most likely through licensing to ALZA, products incorporating
ALZA's drug delivery systems.
Shortly after the formation of TDC, ALZA established its sales and marketing
division, ALZA Pharmaceuticals. In 1994, ALZA Pharmaceuticals launched
Testoderm(R). In late 1995, ALZA entered into an agreement with U.S.
Bioscience, Inc. to market Ethyol(R), and that product was introduced by ALZA
Pharmaceuticals in the spring of 1996. Through its sales force of approximately
65 people, ALZA Pharmaceuticals now markets Ethyol(R), Testoderm(R),
Testoderm(R) with Adhesive and Mycelex(R) Troche; and co-promotes Duragesic(R),
Hexalen(R), NeuTrexin(R) and the ENACT AirWatch(TM) System.
950 PAGE MILL ROAD P.O. BOX 10950 PHONE 650.494.5000
ALZA CORPORATION PALO ALTO CA 94303-0802 http://www.alza.com
<PAGE>
ALZA's growing product commercialization business offers its security
holders the potential rewards inherent in the direct commercialization of
pharmaceutical products by ALZA, but the development of these products
requires the investment of substantial resources in product selection and
development. When ALZA develops products for commercialization by ALZA, it
must bear most or all of the risks and expenses of product development, but
also has the opportunity to retain all or most of the gross margin resulting
from product sales. Therefore, the risk-reward profile for this business is
significantly different from that of ALZA's traditional client-sponsored
business, in which ALZA's clients bear most of the expenses and risks
associated with product development, and ALZA receives its benefits in the
form of royalties and fees based on sales by its clients of the products
developed with ALZA.
We are very enthusiastic about our progress to date in pursuing ALZA's
growing product commercialization business, and about the possibility of
Crescendo helping to expand this business through the development of products
for commercialization by ALZA.
The Prospectus contains important information about the distribution and
about the proposed business of Crescendo. I encourage you to read it
carefully. Holders of ALZA Common Stock and Debentures on the record date for
the distribution are not required to take any action to participate in the
distribution.
Sincerely,
/s/ Dr. Ernest Mario
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Dr. Ernest Mario
Co-Chairman and Chief Executive Officer
<PAGE>
[LOGO]
PROSPECTUS
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CRESCENDO PHARMACEUTICALS CORPORATION
CLASS A COMMON STOCK
Shares of callable Class A Common Stock ("Crescendo Shares") of Crescendo
Pharmaceuticals Corporation ("Crescendo") will be distributed (the
"Distribution") by ALZA Corporation ("ALZA") to the holders of record (the
"Holders") at the close of business on September 18, 1997 (the "Record Date")
of (i) ALZA Common Stock ("ALZA Common Stock"), (ii) ALZA's outstanding 5%
convertible subordinated debentures due 2006 (the "5% Debentures") and (iii)
ALZA's outstanding 5 1/4% zero coupon convertible subordinated debentures due
2014 (the "5 1/4% Debentures" and, together with the 5% Debentures, the
"Debentures"). Each Holder will receive one Crescendo Share for every 20
shares of ALZA Common Stock held on the Record Date, one Crescendo Share for
every 36 shares of ALZA Common Stock into which the Holder's 5% Debentures
held on the Record Date are convertible and one Crescendo Share for every 37
shares of ALZA Common Stock into which the Holder's 5 1/4% Debentures held on
the Record Date are convertible. The Distribution will result in all of the
then outstanding Crescendo Shares being distributed to the Holders. Assuming
that 85,338,538 shares of ALZA Common Stock (the number of shares outstanding
on September 3, 1997) are outstanding on the Record Date, approximately
4,963,615 Crescendo Shares are expected to be issued in the Distribution, of
which approximately 4,266,926 shares will be issued to Holders of ALZA Common
Stock, 363,678 shares will be issued to Holders of 5% Debentures and 333,011
shares will be issued to Holders of 5 1/4% Debentures, without regard to cash
to be distributed in lieu of fractional shares. After the Distribution, ALZA
will hold 1,000 shares of Crescendo Class B Common Stock, representing all of
the authorized shares of such class. Prior to the Distribution, ALZA will
contribute $300 million in cash to Crescendo.
The Distribution is expected to be taxable to the Holders of ALZA Common
Stock and to the Holders of Debentures. See "Federal Income Tax
Considerations." The Distribution is expected to take place on or about
September 30, 1997, subject to certain conditions specified in the
Distribution Agreement between ALZA and Crescendo dated as of September 5,
1997. Crescendo Shares will be held in "book-entry" form, although stock
certificates will be available upon request. Boston EquiServe, L.P. is acting
as distribution agent and will be responsible for making book-entry credits to
Holders and for mailing stock certificates to Crescendo stockholders upon
request.
There has been no previous public market for the Crescendo Shares.
Application has been made for the Crescendo Shares to be quoted on the Nasdaq
National Market under the symbol "CNDO."
ALZA will have the option to purchase all (but not less than all) of the
outstanding Crescendo Shares at a price determined in accordance with a
formula specified in Crescendo's Restated Certificate of Incorporation (the
"Purchase Option Exercise Price") at any time from and after the Distribution
until the earlier of January 31, 2002 (unless extended pursuant to the terms
contained in Crescendo's Restated Certificate of Incorporation) and the 60th
day after Crescendo provides ALZA with a statement that, as of the end of any
calendar month, there are less than $2.5 million of Available Funds (as
defined in the Glossary) remaining, accompanied by a report of Crescendo's
independent auditors. The Purchase Option Exercise Price may be paid by ALZA
in cash, ALZA Common Stock or any combination of cash and ALZA Common Stock in
ALZA's discretion. See "The Agreements and the Purchase Option--Purchase
Option."
Stockholders and Debenture holders of ALZA with inquiries regarding the
Distribution should contact ALZA Corporation, Corporate and Investor
Relations, 950 Page Mill Road, P.O. Box 10950, Palo Alto, California 94303-
0802; telephone (650) 494-5222.
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THE CRESCENDO SHARES DISTRIBUTED HEREUNDER INVOLVE A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" COMMENCING ON PAGE 16.
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NO APPROVAL OF THE DISTRIBUTION BY STOCKHOLDERS OR DEBENTURE HOLDERS OF
ALZA IS REQUIRED OR SOUGHT. NO PROXY IS REQUESTED AND NO ACTION
IS REQUIRED WITH RESPECT TO THE DISTRIBUTION.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURI-
TIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS SEPTEMBER 5, 1997.
<PAGE>
AVAILABLE INFORMATION
As a result of the Distribution, Crescendo will be required to comply with
the reporting requirements of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), and, in accordance therewith, to file annual, quarterly
and other reports with the Securities and Exchange Commission ("SEC").
Additionally, Crescendo will be subject to the proxy solicitation requirements
of the Exchange Act. Crescendo intends to provide annual reports containing
audited financial statements to its stockholders in connection with its annual
meetings of stockholders.
Crescendo has filed a Registration Statement on Form S-1 (the "Registration
Statement") under the Securities Act of 1933, as amended, with respect to the
securities offered by this Prospectus. This Prospectus does not contain all
the information set forth in the Registration Statement and the exhibits
thereto. Reference is made to the Registration Statement and to the exhibits
thereto for further information with respect to Crescendo and the
Distribution. Statements contained in this Prospectus as to the contents of
any contract or any other document referred to are not necessarily complete,
and, in each instance, reference is made to the copy of such contract or
document filed as an exhibit to the Registration Statement, each such
statement being qualified in all respects by such reference to such exhibit.
The Registration Statement, including exhibits and schedules thereto, may be
inspected without charge at the Public Reference Room of the SEC, 450 Fifth
Street, Washington, D.C. 20549 and at the SEC's regional offices at 7 World
Trade Center, Suite 1300, New York, New York 10048 and at 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661. Reports, proxy statements and
other information filed electronically by Crescendo with the SEC are available
at the SEC's World Wide Web site at http://www.sec.gov. Copies of all or any
part thereof may be obtained from the SEC at its principal offices in
Washington, D.C. after payment of fees prescribed by the SEC.
2
<PAGE>
SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION SET FORTH ELSEWHERE IN THIS PROSPECTUS OR THE REGISTRATION
STATEMENT OF WHICH THIS PROSPECTUS IS A PART.
CERTAIN CAPITALIZED TERMS USED IN THIS SUMMARY ARE DEFINED ELSEWHERE IN THIS
PROSPECTUS, INCLUDING IN THE GLOSSARY BEGINNING ON PAGE 14.
Some of the statements made in this Prospectus and the accompanying letter to
stockholders and debenture holders are forward-looking in nature, including,
but not limited to, Crescendo's and ALZA's product development activities and
plans, particularly with respect to the Identified Products (as defined in the
Glossary), costs of product development, plans concerning the potential
commercialization of products, and other statements that are not historical
facts. The occurrence of the events described and the achievement of the
intended results are subject to the future occurrence of many events, some or
all of which are not predictable or within Crescendo's control; therefore,
actual results may differ materially from those anticipated in any forward-
looking statements. Many risks and uncertainties are inherent in the
pharmaceutical industry; others are more specific to Crescendo's business or
that of ALZA. These risks include the risks associated with technology and
product development, clinical development, attempts to obtain regulatory
clearance to market products and medical acceptance of products, changes in the
health care marketplace, patent and intellectual property matters, regulatory
and manufacturing issues, the ability to commercialize products effectively,
and risks associated with competition from other companies. Many of the risks
are described in "Risk Factors" beginning on page 16 and/or in documents filed
by ALZA under the Exchange Act.
Distributing Company...... ALZA Corporation, a Delaware corporation, is a
leader in the development and commercialization of
innovative pharmaceutical products using advanced
drug delivery technologies to add medical and
economic value to drug therapies.
Distributed Company....... Crescendo Pharmaceuticals Corporation, a Delaware
corporation, is a company recently formed by ALZA
for the purpose of selecting and developing human
pharmaceutical products, and commercializing such
products, most likely through licensing to ALZA.
The Distribution..........
Each Holder will receive one Crescendo Share for
every 20 shares of ALZA Common Stock held on the
Record Date, one Crescendo Share for every 36
shares of ALZA Common Stock into which such
Holder's 5% Debentures held on the Record Date are
convertible and one Crescendo Share for every 37
shares of ALZA Common Stock into which such
Holder's 5 1/4% Debentures held on the Record Date
are convertible. A total of approximately 4,963,615
Crescendo Shares are expected to be distributed,
assuming 85,338,538 shares of ALZA Common Stock
(the number of shares outstanding on September 3,
1997) are outstanding on the Record Date, without
regard to cash to be distributed in lieu of
fractional shares.
No Holder will be required to pay any cash or other
consideration for the Crescendo Shares received in
the Distribution, nor will any action be required
to be taken by any Holder in order to receive
Crescendo Shares.
Crescendo Shares.......... All of the shares of callable Class A Common Stock
of Crescendo ("Crescendo Shares"), whether
distributed by ALZA in the Distribution or later
issued by Crescendo, will be subject to the
3
<PAGE>
Purchase Option. See "The Agreements and the
Purchase Option--Purchase Option" and "Description
of Crescendo Capital Stock."
Record Date; Distribution
Date...................... The Record Date for the Distribution will be the
close of business on September 18, 1997.
Distribution of the Crescendo Shares is expected to
take place on or about September 30, 1997, subject
to certain conditions specified in the Distribution
Agreement.
Trading Market............ Application has been made for quotation of the
Crescendo Shares on the Nasdaq National Market
under the symbol "CNDO."
Contribution by ALZA...... Prior to the Distribution, ALZA will contribute
$300 million in cash to Crescendo, thereby reducing
the amount of ALZA's cash, cash equivalents and
short-term and long-term investments by that
amount. At the time of the Distribution, ALZA's
stockholders' equity will be reduced by the same
amount. Immediately after the Distribution,
Crescendo will have no other assets.
Crescendo Products and
Identified Products....... Crescendo Products generally are expected to
combine ALZA's proprietary controlled drug delivery
technologies with therapeutic agents that are off-
patent, will be off-patent by the time of
commercialization of the Crescendo Product, or are
(or will be) available for license from third
parties. In addition, Crescendo may fund the
development of products licensed from third parties
that complement ALZA's product pipeline or
otherwise may provide a significant
commercialization opportunity for the targeted
sales force of ALZA Pharmaceuticals, ALZA's sales
and marketing division.
It is anticipated that, after the closing of ALZA's
purchase of the outstanding shares of Therapeutic
Discovery Corporation ("TDC"), which is expected to
occur on September 29, 1997 or as soon thereafter
as practicable, Crescendo will continue the
development of seven selected products (the
"Identified Products") currently under development
by ALZA. If Crescendo were to fund the continued
development of the Identified Products through U.S.
Food and Drug Administration ("FDA") review for
marketing clearance (in the case of the first five
products listed below) and through "proof of
principle" studies (in the case of the last two
products listed below), the funding of these
activities would require a majority of the
Available Funds. The Identified Products are:
. OROS(R) oxybutynin, a once-daily dosage form of
oxybutynin for the treatment of urge urinary
incontinence, currently in Phase III clinical
trials.
. DUROS(TM) leuprolide, an osmotically-driven
implantable product designed to administer
leuprolide continuously for up to 12 months for
the palliative treatment of prostate cancer,
currently in Phase I/II clinical trials.
. OROS(R) methylphenidate, a once-daily treatment
for Attention Deficit Disorder/Attention Deficit
Hyperactivity Disorder, as to which preparations
for Phase II clinical trials are underway.
4
<PAGE>
. IUTS progesterone, an intrauterine system for the
delivery of progesterone as adjunctive therapy to
estrogen replacement therapy in post-menopausal
women, currently in Phase III clinical trials.
. D-TRANS(TM) testosterone matrix, a transdermal
testosterone product designed to provide
testosterone replacement therapy to hypogonadal
males through a small, thin transdermal patch
which can be worn on the arm or torso, currently
in Phase I/II clinical trials. The product is a
follow-on to ALZA's Testoderm(R) product line,
which currently includes two marketed products
(Testoderm(R) and Testoderm(R) with Adhesive,
both designed for scrotal placement) and a third
product, non-scrotal Testoderm(R), for which a
New Drug Application ("NDA") is on file with the
FDA.
. E-TRANS(TM) LHRH, an electrotransport product
designed to provide an alternative to injection
therapy for the treatment of infertility,
currently in preclinical development.
. E-TRANS(TM) (skin interface technology) insulin,
an electrotransport product designed to treat
diabetes by delivering insulin without injection.
The product, currently in preclinical
development, utilizes ALZA's E-TRANS(TM)
technology in combination with ALZA's new skin
interface technology to increase drug transport
through the skin.
Pursuant to the Development Agreement, Crescendo
will fund the development of the Identified
Products from the date TDC ceased funding
(August 25, 1997) through October 31, 1997.
Continuation of the development of any Identified
Product after October 31, 1997 will depend upon
whether ALZA proposes and Crescendo's independent
Board of Directors accepts additional work plans
and cost estimates for such Identified Product. See
"The Agreements and the Purchase Option--
Development Agreement."
Crescendo Board of
Directors................. Crescendo currently has three directors, each of
whom is an employee of ALZA. It is anticipated that
shortly after the Distribution, Dr. Gary Neil, who
has served as a director and the President and
Chief Executive Officer of TDC, will be named a
director and the President and Chief Executive
Officer of Crescendo and Crescendo's current
directors will resign. It is expected that Dr. Neil
will appoint additional directors of Crescendo,
none of whom will be an employee of ALZA.
No Fractional Shares...... No fractional Crescendo Shares will be distributed.
Fractional Crescendo Shares will be aggregated and
sold as whole Crescendo Shares by Crescendo's
transfer agent and distribution agent for the
Distribution, Boston EquiServe, L.P. (the
"Distribution Agent"), to provide cash to Holders
in lieu of such fractional Crescendo Shares.
Participation by
Debenture Holders......... Pursuant to the terms of the respective indentures
governing the 5% Debentures and 5 1/4% Debentures,
ALZA's Board of Directors may determine, in its
discretion, to permit the Debenture Holders to
participate in the Distribution on a basis
determined by ALZA's Board of Directors to be fair
and appropriate; otherwise, an adjustment must be
made in the conversion price of the Debentures as a
result of the Distribution.
5
<PAGE>
ALZA's Board of Directors has determined that it is
in the best interests of ALZA and its stockholders
to include the Debenture Holders in the
Distribution and that the basis on which the
Debenture Holders are participating in the
Distribution is fair and appropriate in light of
the basis on which Holders of ALZA Common Stock are
participating. Merrill Lynch, Pierce, Fenner &
Smith Incorporated ("Merrill Lynch") has rendered
an opinion dated September 4, 1997 to the ALZA
Board of Directors in connection with such
determination. Of the total number of Crescendo
Shares to be distributed, approximately 86% will be
distributed to Holders of ALZA Common Stock, 7.3%
to the Holders of 5% Debentures and 6.7% to the
Holders of 5 1/4% Debentures, without regard to
fractional shares.
Reasons for the
Distribution.............. In 1993, ALZA determined to pursue a business of
commercialization of products by ALZA, in addition
to its business of developing products for
commercialization by client companies that make
payments to ALZA based on sales of the resulting
products. To that end, ALZA formed ALZA
Pharmaceuticals, its sales and marketing division,
to commercialize products, and formed TDC to
develop products for commercialization by ALZA
Pharmaceuticals. During the past four years, ALZA
has made significant progress in the establishment
and expansion of its product commercialization
business.
ALZA's growing product commercialization business
offers the potential rewards inherent in the direct
commercialization of pharmaceutical products;
however, the development of products for
commercialization by ALZA requires the investment
by ALZA of substantial resources in product
selection and development, including clinical
evaluation and regulatory activities. When ALZA
develops products for commercialization by ALZA,
ALZA must bear most or all of the risk and expenses
of product development and has the opportunity to
retain all or most of any gross margin resulting
from sales of the product. Therefore, the
risk/reward profile is significantly different from
that of ALZA's traditional client-
sponsored/royalty-based business, in which ALZA's
clients bear most of the expenses and risks
associated with product development and
commercialization activities, and make payments to
ALZA based on their sales of the products developed
jointly with ALZA. Such payments to ALZA generally
represent a relatively small portion of the total
gross margin.
ALZA believes that the formation of Crescendo to
fund the development of products for
commercialization by ALZA, and the arrangements
between ALZA and Crescendo, will provide ALZA with
the opportunity to continue to pursue and expand,
more quickly than would otherwise be possible, its
product commercialization business. ALZA believes
that the arrangements with Crescendo will
significantly benefit ALZA security holders by:
. continuing to separate the risks associated with
developing products for commercialization by ALZA
from ALZA's traditional focus on developing
products for marketing by client companies;
6
<PAGE>
. allowing individual security holders of ALZA to
increase or decrease their level of participation
in the business of developing products for
commercialization by ALZA by varying their level
of investment in Crescendo;
. obtaining for ALZA the exclusive right to
commercialize any successfully developed
Crescendo Product, assuming ALZA's exercise of
the License Option with respect to such product
or exercise of the Purchase Option, thereby
making it possible for ALZA to capture a
potentially greater return on the products
developed with Crescendo than would otherwise be
possible from products developed for
commercialization by client companies; and
. allowing ALZA's near-term financial results to
continue to reflect principally its traditional
client-sponsored business, by providing ALZA with
research and development revenues from Crescendo
to reimburse ALZA for Development Costs incurred
by ALZA.
Development Agreement.....
Crescendo and ALZA have entered into the
Development Agreement for the selection and
development of human pharmaceutical products.
Substantially all of the Available Funds will be
used under the Development Agreement for such
purposes. Products recommended by ALZA and accepted
by Crescendo for development will become Crescendo
Products. Upon the closing of ALZA's purchase of
the outstanding shares of TDC, the Identified
Products will become Crescendo Products. Unless
Crescendo agrees otherwise, all Crescendo Products
will be owned by Crescendo or, in the case of a
product or a therapeutic agent licensed from a
third party, exclusively licensed to Crescendo, in
each case subject to the License Option.
A portion of the Available Funds is expected to be
used to identify potential new products for
possible development by Crescendo under the
Development Agreement. Crescendo may also use
Available Funds under the Development Agreement to
perform Technical Evaluations of product
opportunities involving proprietary therapeutic
agents of third parties which may be available for
licensing or other collaborative arrangements.
Products evaluated under this process, other than
those which become Crescendo Products, will be
Technical Evaluation Products. ALZA will make
payments to Crescendo based on sales of Technical
Evaluation Products, as described below.
Crescendo is required to spend all of the Available
Funds under the Development Agreement. Crescendo is
expected to utilize substantially all of the
Available Funds to reimburse ALZA for its
Development Costs. Development Costs will be
determined on the same basis as charged by ALZA to
its pharmaceutical company clients, and
reimbursement will be recognized by ALZA as
research and development revenue. Under the
Development Agreement, Crescendo also may use
Available Funds for licensing technology, products
or therapeutic agents from third parties and for
the development of Crescendo Products with third
parties; provided, however, that ALZA's consent
will be required if such activities involve ALZA
Technology or could affect ALZA's rights under the
ALZA/Crescendo Agreements.
7
<PAGE>
Subject to the foregoing, the amount and nature of
work to be performed by third parties will be
determined by Crescendo. It is not anticipated that
Crescendo will undertake research and development
without contracting with a third party, as
Crescendo is not expected to have the staffing or
facilities to do so.
The Development Agreement provides that Crescendo
will fund the development of the Identified
Products from the date on which TDC ceased funding
the development of the Identified Products through
October 31, 1997. The Development Costs are
expected to total between $14 million and $18
million for all of the Identified Products for such
period. If Crescendo were to fund the development
of each of the Identified Products as described
under "Business of Crescendo --The Identified
Products," a majority of Available Funds would be
used for such activities.
It is anticipated that Crescendo will spend the
Available Funds under the Development Agreement
over a period of approximately three to four years.
There are no restrictions on Crescendo's use of
funds other than Available Funds to conduct its
business as it determines, subject to the terms of
Crescendo's Restated Certificate of Incorporation
and the ALZA/Crescendo Agreements.
All technology developed or otherwise obtained
pursuant to the Development Agreement ("Developed
Technology") will be owned by ALZA, subject to
Crescendo's right to use Developed Technology in
Crescendo Products. ALZA will pay Crescendo
royalties with respect to products, other than
Crescendo Products, that use any patented Developed
Technology, as described below.
The Development Agreement will terminate upon the
exercise or expiration of the Purchase Option,
which will expire shortly after the expenditure by
Crescendo of substantially all Available Funds.
However, ALZA's obligation under the Development
Agreement to make payments to Crescendo with
respect to Developed Technology Products and
Technical Evaluation Products will continue if the
Purchase Option expires unexercised. See "The
Agreements and the Purchase Option--Development
Agreement."
Technology License
Agreement................. Pursuant to the Technology License Agreement, ALZA
has granted to Crescendo a worldwide license to use
ALZA Technology solely to select and develop
Crescendo Products and to conduct related
activities, and to commercialize such products. In
exchange for the license to use existing ALZA
Technology relating to the Identified Products,
Crescendo will pay a fee (the "Technology Fee") to
ALZA. The Technology Fee will be payable monthly
over a period of three years and will be $1 million
per month for the 12 months following the later of
(i) the date of the Distribution or (ii) the date
of the closing of ALZA's purchase of the
outstanding shares of TDC, $667,000 per month for
the following 12 months and $333,000 per month for
the following 12 months; provided that the
Technology Fee will no longer
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be payable at such time as fewer than two of the
Identified Products are being developed by
Crescendo and/or have been licensed by ALZA
pursuant to ALZA's exercise of the License Option.
License Option............ Crescendo has granted ALZA an option to acquire a
license to each Crescendo Product (the "License
Option"). The License Option for any Crescendo
Product is exercisable on a country-by-country
basis at any time until (i) with respect to the
United States, 30 days after clearance by the FDA
to market such Crescendo Product in the United
States and (ii) with respect to any other country,
90 days after the earlier of (a) clearance by the
appropriate regulatory agency to market the
Crescendo Product in such country and (b) clearance
by the FDA to market the Crescendo Product in the
United States. The License Option will expire, to
the extent not previously exercised, 30 days after
the expiration of the Purchase Option. If and to
the extent the License Option is exercised as to
any Crescendo Product (a "Licensed Product"), ALZA
will acquire a perpetual, exclusive license (with
the right to sublicense) to develop, make, have
made and use the Licensed Product and to sell and
have sold the Licensed Product in the country or
countries as to which the License Option is
exercised, subject to the obligation to make
Product Payments.
Product Payments.......... ALZA will make Product Payments to Crescendo with
respect to each Licensed Product equal to 1% of Net
Sales (as defined in the Glossary) of the Licensed
Product, plus an additional 0.1% of such Net Sales
for each full $1 million of Development Costs of
the Licensed Product that have been paid by
Crescendo.
Because the marketing expenses associated with
newly introduced products during the first few
years after launch are generally significantly
higher than those for established products, the
Product Payments described above will not exceed
2.5% of global Net Sales, on a quarterly basis, for
the first four calendar quarters during which the
Licensed Product is commercially sold in the first
Major Market Country, and 3% of Net Sales, on a
quarterly basis, for the following eight calendar
quarters.
Subject to ALZA's Product Payment buy-out option
described below, Product Payments will be payable,
with respect to all countries for which the License
Option has been exercised, until 15 years after the
first commercial sale of the Licensed Product in
the first Major Market Country in which such
product is commercially sold.
To the extent ALZA does not exercise the License
Option with respect to any Crescendo Product,
Crescendo will retain the rights to develop and
commercialize such Crescendo Product.
Developed Technology
Royalties................. ALZA will pay Crescendo Developed Technology
Royalties, on a country-by-country basis, equal to
1% of Net Sales in the relevant country of any
product (i) covered at the time of sale in a
country by one or more unexpired patents issued in
such country that are included in Developed
Technology and (ii) with respect to which ALZA
receives any consideration (a "Developed Technology
Product"). Developed Technology Royalties will be
payable with respect to a
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Developed Technology Product in any country until
expiration of the last to expire of the relevant
patent or patents.
Technical Evaluation
Product Payments.......... ALZA will make Technical Evaluation Product
Payments to Crescendo equal to 1% of worldwide Net
Sales of each Technical Evaluation Product.
Technical Evaluation Product Payments will be
payable until seven years after such Technical
Evaluation Product is commercially sold in the
first Major Market Country, subject to ALZA's
payment buy-out option.
A product may be both a Technical Evaluation
Product and a Developed Technology Product;
however, in such a case the payment due for any
period for such product will be limited to 1% of
Net Sales.
Payment Buy-Out Options... ALZA has the option to buy out Crescendo's right to
receive Product Payments for any Licensed Product,
Developed Technology Royalties for any Developed
Technology Product, and Technical Evaluation
Product Payments for any Technical Evaluation
Product, in each case, on a country-by-country or
global basis.
A country-by-country buy-out option may be
exercised for any Licensed Product, Developed
Technology Product or Technical Evaluation Product
in any country at any time after the end of the
twelfth calendar quarter during which the product
was commercially sold in such country. The buy-out
price will be 15 times the payments made by or due
from ALZA to Crescendo with respect to sales of
such product in such country for the four calendar
quarters immediately preceding the quarter in which
the buy-out option is exercised (plus, in the case
of a Licensed Product, 15 times such additional
Product Payments as would have been made for such
period but for the 2.5% and 3% limits described
above).
The global buy-out option may be exercised for any
Licensed Product, Developed Technology Product or
Technical Evaluation Product at any time after the
end of the twelfth calendar quarter during which
the product was commercially sold in either the
United States or two other Major Market Countries.
The global buy-out price will be (i) 20 times (a)
the payments made by or due from ALZA to Crescendo
for the relevant product, plus (b) such payments as
would have been made by or due from ALZA to
Crescendo if ALZA had not exercised any country-
specific buy-out option with respect to such
product, plus (c) such additional Product Payments,
in the case of a Licensed Product, as would have
been made but for the 2.5% and 3% limits described
above, in each case for the four calendar quarters
immediately preceding the quarter in which the
global buy-out option is exercised, less (ii) any
amounts previously paid to exercise any country-
specific buy-out option with respect to such
product.
The global buy-out option with respect to any
Licensed Product may be exercised only with respect
to countries as to which ALZA has exercised the
License Option.
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Purchase Option........... Pursuant to Crescendo's Restated Certificate of
Incorporation, ALZA has the right to purchase all
(but not less than all) of the outstanding
Crescendo Shares (the "Purchase Option"). The
Purchase Option will be exercisable by written
notice to Crescendo at any time after the
Distribution until January 31, 2002, provided that
such date will be extended for successive six month
periods if, as of any July 31 or January 31
beginning with July 31, 2001, Crescendo has not
paid (or accrued expenses for) at least 95% of all
Available Funds pursuant to the Development
Agreement. In any event, the Purchase Option will
terminate on the 60th day after Crescendo provides
ALZA with a statement that, as of the end of any
calendar month, there are less than $2.5 million of
Available Funds remaining, accompanied by a report
of Crescendo's independent auditors.
If the Purchase Option is exercised, the exercise
price (the "Purchase Option Exercise Price") will
be the greatest of:
(a)(i) 25 times the actual worldwide payments made
by or due from ALZA to Crescendo with respect to
all Licensed Products, Developed Technology
Products and Technical Evaluation Products (and, in
addition, such payments as would have been made by
or due from ALZA to Crescendo if ALZA had not
previously exercised its payment buy-out option
with respect to any product) for the four calendar
quarters immediately preceding the quarter in which
the Purchase Option is exercised (provided,
however, that for any product which has not been
commercially sold during each of such four calendar
quarters, the portion of the Purchase Option
Exercise Price for such product will be 100 times
the average of the quarterly payments made by or
due from ALZA to Crescendo for each of such
calendar quarters during which such product was
commercially sold) less (ii) any amounts previously
paid to exercise any payment buy-out option for any
product;
(b) the fair market value of one million shares of
ALZA Common Stock;
(c) $325 million less all amounts paid by or due
from Crescendo under the Development Agreement to
the date the Purchase Option is exercised; and
(d) $100 million.
In each case, the amount payable as the Purchase
Option Exercise Price will be reduced to the
extent, if any, that Crescendo's liabilities at the
time of exercise (other than liabilities under the
Development Agreement, the Services Agreement and
the Technology License Agreement) exceed
Crescendo's cash and cash equivalents, and short-
term and long-term investments (excluding the
amount of Available Funds remaining at such time).
ALZA may pay the Purchase Option Exercise Price in
cash, in ALZA Common Stock or in any combination of
cash and ALZA Common Stock.
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Under Crescendo's Restated Certificate of
Incorporation, Crescendo is prohibited from taking
or permitting any action inconsistent with, or
which would in any way alter, ALZA's rights under
the Purchase Option. In addition, until the
expiration of the Purchase Option, Crescendo may
not, without the consent of ALZA as the sole holder
of the Crescendo Class B Common Stock, merge,
liquidate, sell any substantial assets, or amend
its Restated Certificate of Incorporation to alter
the Purchase Option, Crescendo's authorized
capitalization, or certain of the provisions of the
Restated Certificate of Incorporation governing
Crescendo's Board of Directors.
Federal Income Tax
Considerations............ It is expected that the Distribution will be
taxable to each Holder in the amount of the fair
market value of the Crescendo Shares distributed to
such Holder. In early 1998, each recipient of
distributed Crescendo Shares will receive an IRS
Form 1099-DIV and/or an IRS Form 1099-INT
reflecting the fair market value of the Crescendo
Shares distributed; the recipient's basis (for
income tax purposes) in the distributed Crescendo
Shares will be such fair market value.
If ALZA were to exercise the Purchase Option, a
Holder would have a taxable gain or loss equal to
the difference between the value of the
consideration received from ALZA in such exercise
and the Holder's basis in the Crescendo Shares,
unless ALZA were to exercise the Purchase Option
solely for shares of ALZA Common Stock and certain
other conditions were satisfied, in which case
receipt of the ALZA Common Stock should be tax-free
to the Holder under current federal income tax
laws.
The Distribution, any subsequent sale of Crescendo
Shares, and the exercise or expiration of the
Purchase Option may have other federal income tax
consequences to Holders. See "Federal Income Tax
Considerations."
HOLDERS ARE URGED TO CONSULT THEIR OWN TAX
ADVISORS.
Risk Factors.............. Ownership of Crescendo Shares involves a high
degree of investment risk. The risk factors listed
below should be considered carefully in evaluating
the ownership of Crescendo Shares. See "Risk
Factors."
. Crescendo is a newly formed company.
. There can be no assurance of the successful
product selection, development, manufacturing or
marketing of Crescendo Products, including the
Identified Products.
. There can be no assurance that therapeutic
agents, technologies, patents or products can be
licensed by Crescendo or ALZA, if such licenses
are necessary.
. There can be no assurance of patent protection
for Crescendo Products or that such products will
not infringe the patents or proprietary rights of
third parties.
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. There can be no assurance that Crescendo will
have sufficient funds to complete the development
of any or all of the Crescendo Products,
including the Identified Products.
. There can be no assurance that necessary
regulatory approvals and clearances, including
pricing approvals, will be obtained.
. There can be no assurance of the exercise of the
License Option for any Crescendo Product or the
Purchase Option.
. There can be no assurance that Crescendo or ALZA
will effectively commercialize any Crescendo
Products for which regulatory clearance is
obtained.
. ALZA has no sales force outside of the United
States, and there can be no assurance that ALZA
or Crescendo will be able to make appropriate
arrangements for the commercialization of
Crescendo Products outside of the United States.
. Crescendo and ALZA will face competition from
others with greater resources and experience.
. There can be no assurance that ALZA's personnel
and facilities will be adequate for the
performance of its duties to Crescendo under the
Development Agreement.
. The ALZA/Crescendo Agreements and ALZA's rights
as holder of the Crescendo Class B Common Stock
may restrain Crescendo from taking certain
actions, including actions with third parties,
and may limit the ability of Crescendo to raise
additional capital.
. The terms of the ALZA/Crescendo Agreements were
not negotiated at arm's length.
. There may be conflicts of interest between
Crescendo and ALZA, including competition from
ALZA.
. The members of the Crescendo Board of Directors
after the Distribution, other than Dr. Neil, have
not been identified and will not be selected by
the holders of the Crescendo Shares.
. There can be no assurance of a trading market
for, or of the trading value of, the Crescendo
Shares.
Principal Offices......... Crescendo's principal offices are located at 1454
Page Mill Road, Palo Alto, California 94304,
telephone (650) 494-5600.
Reasons for Furnishing
this Prospectus........... This Prospectus is being furnished solely to
provide information for Holders, each of whom will
receive Crescendo Shares in the Distribution. It is
not to be construed as an inducement or
encouragement to buy or sell any securities of
Crescendo or ALZA. The information contained herein
is provided as of the date of this Prospectus
unless otherwise indicated. Crescendo will not
update the information contained in this Prospectus
except in the normal course of its public
disclosure practices.
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GLOSSARY
ALZA/Crescendo
Agreements............... The Distribution Agreement, the Development
Agreement, the Technology License Agreement, the
License Option Agreement, the Services Agreement
and the Purchase Option, collectively.
ALZA Technology.......... All proprietary technology, whether patented or
unpatented, owned by, licensed to or controlled by
ALZA and which ALZA has the right to license or
sublicense, including technology and data relating
to the Identified Products and Developed
Technology.
Available Funds.......... All of the funds contributed to Crescendo by ALZA,
plus any investment income earned thereon, less (i)
Crescendo's reasonable ongoing administrative
expenses, (ii) the Technology Fee and (iii)
reserves of up to $2 million.
Crescendo Product........ An Identified Product, or another human
pharmaceutical product which has been recommended
by ALZA and accepted by Crescendo's independent
Board of Directors for development as such under
the Development Agreement.
Debentures............... The 5% Debentures and the 5 1/4% Debentures.
Developed Technology..... Any technology generated or otherwise obtained
pursuant to the Development Agreement.
Developed Technology
Product.................. Any product, other than a Crescendo Product, (i)
covered at the time of sale in a country by one or
more unexpired patents issued in such country that
are included in Developed Technology and (ii) with
respect to which ALZA receives any consideration.
Developed Technology
Royalties................ The payments made by ALZA to Crescendo with respect
to Net Sales of Developed Technology Products.
Development Agreement.... The Development Agreement between ALZA and
Crescendo providing for the selection and
development of human pharmaceutical products and
conducting related activities.
Development Costs........ The fully-burdened cost of activities undertaken
pursuant to the Development Agreement.
Distribution............. ALZA's distribution of all of the outstanding
Crescendo Shares to the Holders.
Distribution Agreement... The Distribution Agreement between ALZA and
Crescendo relating to the terms and conditions of
the Distribution.
5% Debentures............ ALZA's outstanding 5% convertible subordinated
debentures due 2006.
5 1/4% Debentures........ ALZA's outstanding 5 1/4% zero coupon convertible
subordinated debentures due 2014.
Holders.................. The holders of record, on the Record Date, of ALZA
Common Stock, 5% Debentures and 5 1/4% Debentures.
Identified Products...... The following products upon the closing of ALZA's
purchase of the oustanding shares of TDC: OROS(R)
oxybutynin, DUROS(TM) leuprolide, OROS(R)
methylphenidate, IUTS progesterone, D-TRANS(TM)
testosterone matrix, E-TRANS(TM) LHRH and E-
TRANS(TM) (skin interface technology) insulin.
License Option........... The option granted by Crescendo to ALZA to acquire
a license to each Crescendo Product, exercisable on
a product-by-product and country-by-country basis.
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GLOSSARY
(CONTINUED)
License Option
Agreement................ The License Option Agreement between ALZA and
Crescendo granting the License Option.
Licensed Product......... A Crescendo Product as to which the License Option
has been exercised by ALZA.
Major Market Country..... Any one of the following countries: the United
States, France, Germany, Italy, Japan or the United
Kingdom.
Net Sales................ The total amount invoiced on sales of a Licensed
Product, Developed Technology Product or Technical
Evaluation Product by ALZA (or its affiliates) or
any ALZA sublicensee, distributor or marketing
partner (or its affiliates) to unrelated third
parties such as wholesalers, hospitals and others,
in bona fide arm's-length transactions, less
certain customary deductions. Net Sales shall also
include the fair market value of all other
consideration received (a) by ALZA or its
affiliates with respect to sales by them of the
product to unrelated third parties other than
sublicensees, distributors or marketing partners or
(b) by any ALZA sublicensee, distributor or
marketing partner (or their affiliates) with
respect to their sales of the product to unrelated
third parties, in each case whether such
consideration is in cash, payment in kind, exchange
or other form.
Product Payments......... Payments to be made by ALZA to Crescendo with
respect to Net Sales of Licensed Products.
Purchase Option.......... The option of ALZA to purchase all (but not less
than all) of the outstanding Crescendo Shares.
Purchase Option Exercise
Price.................... The amount payable by ALZA to exercise the Purchase
Option.
Services Agreement....... The Services Agreement between ALZA and Crescendo
pursuant to which ALZA has agreed to provide
Crescendo with administrative services on a fully-
burdened cost reimbursement basis.
Technical Evaluation..... A limited technical evaluation involving a
proprietary therapeutic agent of a third party
undertaken in order to determine the suitability of
such therapeutic agent in an ALZA drug delivery
system or to induce the third party to license the
therapeutic agent to ALZA or Crescendo or otherwise
collaborate with ALZA and Crescendo in the
development of a product.
Technical Evaluation
Product.................. A product, other than one which becomes a Crescendo
Product, for which Crescendo funds a limited
technical evaluation.
Technical Evaluation
Product Payments......... The payments to be made by ALZA to Crescendo with
respect to worldwide Net Sales of Technical
Evaluation Products.
Technology Fee........... The payments to be made over a maximum period of
three years by Crescendo to ALZA in exchange for
ALZA granting Crescendo a license to use existing
ALZA Technology relating to the Identified
Products.
Technology License
Agreement................ The Technology License Agreement between ALZA and
Crescendo pursuant to which ALZA has granted to
Crescendo a worldwide license to use ALZA
Technology solely to select and develop Crescendo
Products and to conduct related activities, and to
commercialize Crescendo Products.
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RISK FACTORS
The following factors, in addition to the other information set forth in
this Prospectus, should be considered carefully in evaluating ownership of
Crescendo Shares.
NEW COMPANY
Crescendo is a newly formed company and is subject to the risks inherent in
the establishment of a new business enterprise in the pharmaceutical industry.
Crescendo will incur substantial losses for several years due to the long-term
nature of the development of pharmaceutical products through product
development and clinical testing and the regulatory process, which losses may
never be recovered. See "Business of Crescendo."
NO ASSURANCE OF SUCCESSFUL COMPLETION OF IDENTIFIED PRODUCTS OR SELECTION OR
DEVELOPMENT OF OTHER CRESCENDO PRODUCTS
There can be no assurance that the independent Crescendo Board of Directors
will approve the continued funding of the development of the Identified
Products, or that the Identified Products can be successfully developed and/or
commercialized within the anticipated cost estimates or time frames, if at
all. Certain of the Identified Products are at critical stages of development,
and technical and clinical outcomes are impossible to predict. Because of the
long-range nature of any pharmaceutical product development plan, development
of a particular product or products could accelerate, slow down or be
discontinued, and other unforeseen events could occur, all of which would
significantly affect the timing and amount of Crescendo's expenditures on a
particular product, or in total. As a result, estimates of costs and timing of
development programs and for the use of Available Funds may not be accurate.
There can be no assurance that ALZA will recommend, or that Crescendo will
approve, appropriate additional products for development as Crescendo
Products. Furthermore, ALZA does not have substantial experience in the
selection of products for development, as ALZA's client companies
traditionally have been responsible for determining both the products to be
developed and the scope of the development and clinical programs relating to
such products.
Although Crescendo has received from ALZA a license to use ALZA Technology
for the purpose of selecting, developing and commercializing Crescendo
Products, some or all of the Crescendo Products may require new drug delivery
technologies or enhancements or modifications to existing ALZA Technology, and
there can be no assurance that such technology can or will be successfully
developed or acquired. If ALZA and Crescendo wish to license a therapeutic
agent or product for development, there can be no assurance that such
therapeutic agent or product will be available on terms acceptable to ALZA and
Crescendo. Even if appropriate Crescendo Products are selected, and
appropriate drug delivery technology is available or developed, there can be
no assurance that such Crescendo Products will be successfully developed (or
be developed in a timely fashion) or be proven to be safe and efficacious in
clinical trials.
NEED FOR REGULATORY CLEARANCE
All Crescendo Products, Developed Technology Products and Technical
Evaluation Products will require FDA clearance before such products may be
lawfully marketed in the United States. Applications for FDA clearance must be
based on costly and extensive clinical trials designed to demonstrate safety
and efficacy. If any of such products incorporate drug delivery systems that
have not previously been incorporated in commercial products, the FDA may
require more extensive testing of such products. Clearance to market such
products will also be required from corresponding regulatory authorities in
foreign countries before such products may be marketed in those countries.
Such clearance often involves pricing and reimbursement approvals in addition
to clearance based on safety and efficacy. Delay in obtaining FDA and/or
foreign regulatory clearance or pricing or reimbursement approvals for any
such product may have a material adverse effect on the commercial success of
such product. There can be no assurance that the necessary regulatory
clearances and approvals will be obtained in a timely fashion or, if obtained,
that such clearances and approvals will not be revoked or withdrawn.
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NO ASSURANCE OF SUFFICIENCY OF FUNDS OR AVAILABILITY OF ADDITIONAL FUNDS
ALZA will contribute $300 million in cash to Crescendo prior to the
Distribution. ALZA has no obligation to contribute additional funds to
Crescendo, and has no present intention to do so. Development of the
Identified Products through FDA review for marketing clearance (in the case of
five of the Identified Products) and through "proof of principle" studies (in
the case of two of the Identified Products) would require a majority of
Available Funds. There can be no assurance that Crescendo will have sufficient
funds to complete the development of any or all of the Crescendo Products,
including the Identified Products. The current development plans for two of
the Identified Products anticipate submission dates for FDA marketing
clearance after the time when Available Funds are likely to be exhausted.
ALZA's rights under the ALZA/Crescendo Agreements may limit Crescendo's
ability to raise funds, or may prevent Crescendo from doing so, if Crescendo
needs additional funds to continue or complete development of any Crescendo
Product. If Crescendo were to attempt to raise funds, Crescendo would have
very little cash, few assets and an undeterminable number of products under
development. ALZA would have the unilateral option to license any or all
Crescendo Products for such countries for which ALZA's License Option had not
previously expired. Third parties might therefore be reluctant to lend money
to Crescendo, or to invest in Crescendo.
NO ASSURANCE OF SUCCESSFUL MANUFACTURING OR MARKETING
Even if Crescendo Products are developed and receive necessary regulatory
clearances and approvals, there can be no assurance that the Crescendo
Products can be successfully manufactured or marketed. If ALZA exercises its
License Option for any Crescendo Product, ALZA may need to expand its
manufacturing capabilities to commercialize such Licensed Product effectively.
If ALZA does not exercise its License Option for a Crescendo Product (and does
not exercise the Purchase Option), Crescendo will have to make alternative
arrangements for manufacturing that Crescendo Product, and there can be no
assurance that Crescendo will be able to do so.
Certain Crescendo Products, particularly those incorporating newer ALZA drug
delivery technologies such as the E-TRANS(TM) and DUROS(TM) technologies, may
utilize materials that may be difficult to obtain or manufacture. Often there
is only one source of supply for such materials. In recent years many
manufacturers have refused to sell their materials to manufacturers of
pharmaceutical products due to product liability concerns. Thus, there can be
no assurances that the materials incorporated in Crescendo Products will be
available, or available on commercially reasonable terms.
If ALZA exercises its License Option for any Crescendo Product, ALZA may
need to develop and/or expand its marketing capabilities to commercialize such
Licensed Product effectively. ALZA Pharmaceuticals' sales force currently is
focused on certain target markets within the United States and has no
operations outside the United States. Therefore, if ALZA exercises its License
Option for any Crescendo Product, and does not at the time the product is to
be commercialized have a sales force in the relevant country or countries,
ALZA will need to arrange for marketing by third parties outside of the United
States and, if the product is not within ALZA Pharmaceuticals' target markets
at such time, within the United States. If ALZA does not exercise its License
Option for a Crescendo Product (and does not exercise the Purchase Option),
Crescendo will need to find other means to commercialize that Crescendo
Product not involving ALZA, and there can be no assurance that Crescendo will
be able to do so.
Crescendo currently has no manufacturing or marketing capability and does
not expect to develop such capability. If Crescendo decides to manufacture or
market one or more Crescendo Products itself, Crescendo will need substantial
additional funds. There is no assurance that additional funds will be
available, or will be available on attractive terms, and ALZA has no
obligation to supply any additional funds to Crescendo. In addition, Crescendo
may not use Available Funds for this purpose without ALZA's consent.
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If either ALZA or Crescendo seeks a third party to manufacture or market a
Crescendo Product, there can be no assurance that satisfactory arrangements
can be successfully negotiated or that any such arrangements will be on
commercial terms acceptable to ALZA or Crescendo. In addition, even if
Crescendo decides to license any Crescendo Product to a third party,
agreements with that third party, if available, may be on terms less favorable
to Crescendo than the terms of the ALZA/Crescendo Agreements.
Even if acceptable manufacturing and marketing resources are available,
there can be no assurance that any Crescendo Products will be accepted in the
marketplace. There can be no assurance that there will be adequate
reimbursement by health insurance companies or other third party payors for
any Crescendo Products that are marketed.
NO ASSURANCE OF EXERCISE OF ALZA'S OPTIONS
ALZA is not obligated to exercise the License Option for any Crescendo
Product or to exercise the Purchase Option, and ALZA will exercise any such
option only if it is in ALZA's best interest to do so. The timing of the
exercise of the Purchase Option is within ALZA's sole discretion, and ALZA may
choose to exercise the Purchase Option at a time when the Purchase Option
Exercise Price is as low as possible. The timing of the exercise of the
License Option with respect to any Licensed Product is also within ALZA's sole
discretion, and thereafter development and funding of any such product will be
controlled by ALZA.
RELIANCE ON PROPRIETARY TECHNOLOGIES; UNPREDICTABILITY OF PATENT PROTECTION
Patent protection generally has been important in the pharmaceutical
industry. Therefore, Crescendo's financial success may depend in part upon
ALZA obtaining strong patent protection for the drug delivery technologies
incorporated in Crescendo Products. ALZA will determine which patent
applications to pursue, and the expense of obtaining and maintaining patents
covering Developed Technology will be shared equally by ALZA and Crescendo
during the term of the Development Agreement. However, there can be no
assurance that patents will issue covering any products, or that any existing
patents or patents issued in the future will be of commercial benefit. In
addition, it is impossible to anticipate the breadth or degree of protection
that any such patents will afford, and there can be no assurance that any such
patents will not be successfully challenged in the future. If ALZA is
unsuccessful in obtaining or preserving patent protection, or if any products
rely on unpatented proprietary technology, there can be no assurance that
others may not commercialize products substantially identical to such
products. Some of ALZA's patents on basic drug delivery technologies have
expired or will expire in the near future. Patent protection on products
incorporating such technology is likely to depend on the ability to obtain
patent protection on Developed Technology.
Patents have been issued to third parties covering various therapeutic
agents, products and drug delivery technologies. There can be no assurance
that any Crescendo Products, Developed Technology Products or Technical
Evaluation Products will not infringe patents held by third parties. In such
event, licenses from such third parties would be required, or their patents
would have to be designed around. There can be no assurance that such licenses
would be available or that they would be available on commercially attractive
terms, or that any necessary redesign could be successfully completed.
COMPETITION
The Crescendo Products are likely to face competition from products
utilizing traditional forms of drug delivery and advanced drug delivery
systems developed or under development by others. In some instances such
competition may come from products incorporating the same therapeutic agents.
Crescendo Products, Developed Technology Products and Technical Evaluation
Products are also likely to face competition from other therapies for the same
indications. Competitors potentially include any of the world's pharmaceutical
and biotechnology companies, including many current ALZA clients. Many
pharmaceutical companies have greater financial resources, technical staffs
and manufacturing and marketing capabilities than ALZA or Crescendo. A number
of companies have developed and are developing competing drug delivery
technologies and products. To the extent that Crescendo Products, Developed
Technology Products and Technical Evaluation Products incorporate
18
<PAGE>
therapeutic agents that are off-patent or therapeutic agents marketed by
multiple companies, such products will face more competition than products
incorporating proprietary therapeutic agents.
ALZA has undertaken and intends to continue to undertake client-sponsored
product development activities with major pharmaceutical companies. Such
client-sponsored activities may involve the development of products that
compete directly with Crescendo Products. In addition, ALZA may develop
products (including Developed Technology Products and Technical Evaluation
Products) for its own account, independent of Crescendo, that compete directly
with Crescendo Products. Finally, Crescendo Products, Developed Technology
Products and Technical Evaluation Products may compete with one another.
DEPENDENCE ON ALZA FOR PERSONNEL AND FACILITIES
Crescendo will depend substantially on ALZA for research and development
activities to be performed under the Development Agreement. Although Crescendo
may perform directly, or engage other third parties to perform on its behalf,
some of these activities, it is likely that ALZA will be responsible for
executing substantially all of Crescendo's research and development
activities. While ALZA believes that its current and planned personnel and
facilities will be adequate for the performance of its duties under the
Development Agreement, such personnel will perform services in the same
facilities for other clients of ALZA and for ALZA itself. Subject to ALZA's
obligation to use diligent efforts under the Development Agreement, ALZA may
allocate its personnel and facilities as it deems appropriate. ALZA's
obligations to its clients and its own development activities may restrict the
resources that otherwise would be available for performing ALZA's duties under
the Development Agreement. See "The Agreements and the Purchase Option--
Development Agreement."
RELATIONSHIP BETWEEN CRESCENDO AND ALZA MAY LIMIT CRESCENDO'S ACTIVITIES AND
MARKET VALUE
The terms of the ALZA/Crescendo Agreements and Crescendo's Restated
Certificate of Incorporation were not determined on an arm's-length basis and
certain terms may limit Crescendo's activities and its market value.
Crescendo's Restated Certificate of Incorporation prohibits Crescendo from
taking or permitting any action that might impair ALZA's rights under the
Purchase Option. Prior to the expiration of the Purchase Option, Crescendo may
not, without the consent of ALZA as the sole holder of Crescendo Class B
Common Stock, merge or liquidate, or sell, lease, exchange, transfer or
dispose of any substantial assets, or amend its Restated Certificate of
Incorporation to alter the Purchase Option, Crescendo's authorized
capitalization, or the provisions of the Restated Certificate of Incorporation
governing Crescendo's Board of Directors. The provisions of Crescendo's
Restated Certificate of Incorporation granting special rights to the holder or
holders of the Crescendo Class B Common Stock, classifying Crescendo's Board
of Directors, and eliminating the right of Crescendo stockholders to call
special meetings of stockholders may prevent a change in control of Crescendo.
The special rights accorded to the holder or holders of the Crescendo Class B
Common Stock will expire upon expiration of the Purchase Option. See "The
Agreements and The Purchase Option--Purchase Option" and "Description of
Crescendo Capital Stock."
So long as the Purchase Option is exercisable, the market value of the
Crescendo Shares will be limited by the Purchase Option Exercise Price. The
Purchase Option Exercise Price was determined by ALZA, giving consideration to
the structure of the Distribution, Crescendo's planned business, the
ALZA/Crescendo Agreements, advice given by Merrill Lynch, and such other
factors as ALZA deemed appropriate. The Purchase Option Exercise Price was not
determined on an arm's-length basis.
The existence of the Purchase Option and ALZA's rights as holder of the
Crescendo Class B Common Stock may inhibit Crescendo's ability to raise
capital. Additional capital raised by Crescendo, if any, would most likely
reduce the per share proceeds available to holder of Crescendo Shares if the
Purchase Option were exercised. The existence of the Purchase Option and
ALZA's rights as the holder of the Crescendo Class B Common Stock may inhibit
a change of control and may make an investment in Crescendo Shares less
attractive to certain potential stockholders, which could adversely affect the
liquidity and market value of Crescendo Shares.
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<PAGE>
If ALZA exercises its License Option for any Crescendo Product, ALZA will
have the right to commercialize the product with third parties on such terms
as ALZA deems appropriate. In such event, payments from ALZA to Crescendo with
respect to the Crescendo Product will be based solely on Net Sales of the
product by such third parties. Crescendo will not share in any payments made
by any third party to ALZA, whether in the form of up-front fees, milestone
payments, royalties or otherwise.
Heller Ehrman White & McAuliffe, counsel to ALZA, has also been counsel to
Crescendo in connection with the ALZA/Crescendo Agreements and the
Distribution. Julian N. Stern, a director and the Secretary of ALZA, is the
sole employee of a professional corporation that is a member of the law firm
of Heller Ehrman White & McAuliffe. Based on share ownership as of July 7,
1997, attorneys in that firm directly involved in the representation of ALZA
are expected to beneficially own 5,418 Crescendo Shares immediately after the
Distribution. It is anticipated that Crescendo will retain separate counsel
after the Distribution to advise Crescendo on appropriate matters.
DIRECTORS NOT INITIALLY ELECTED BY STOCKHOLDERS
The current officers and directors of Crescendo were appointed by and are
employees of ALZA. Shortly after the Distribution, it is expected that one of
the three initial directors will resign and Dr. Gary Neil will be appointed as
a director. It is expected that the two remaining directors will resign
shortly after Dr. Neil's appointment. Thereafter, Dr. Neil will appoint at
least two additional directors. Therefore, at present, a majority of the
directors expected to be appointed shortly after the Distribution are unknown.
In addition, such directors will not be elected by the stockholders, and,
because the directors will serve staggered terms, the holders of the Crescendo
Shares will not have the opportunity to elect the full Board of Directors
until after the third annual meeting following the Distribution.
LIMITATION ON CRESCENDO'S ABILITY TO LICENSE PRODUCTS TO THIRD PARTIES
Crescendo has granted ALZA the License Option, which is exercisable on a
product-by-product and country-by-country basis. During the term of the
License Option for each Crescendo Product, Crescendo will not be able to
license such Crescendo Product to any party other than ALZA.
NO ASSURANCE OF TRADING VALUE OR MARKET FOR CRESCENDO SHARES
There can be no assurance there will be an active trading market for the
Crescendo Shares.
POSSIBLE DILUTION; REDUCTION OF PER SHARE PURCHASE OPTION EXERCISE PRICE
All Crescendo Shares issued by Crescendo after the Distribution (including
shares issued pursuant to any stock options that Crescendo's Board of
Directors may determine to grant) will be subject to the Purchase Option, and
the Purchase Option Exercise Price will not increase as a result of any such
issuance. Accordingly, if additional Crescendo Shares are issued (including
upon the exercise of any options), the percentage of the Purchase Option
Exercise Price payable with respect to each Crescendo Share in the event ALZA
exercises the Purchase Option will be reduced. Crescendo has a stock option
plan permitting the grant of stock options for up to 200,000 Crescendo Shares.
Liabilities, including any debt issued by Crescendo, but excluding any
accounts payable to ALZA, will reduce the Purchase Option Exercise Price to
the extent that such liabilities exceed Crescendo's cash, cash equivalents,
and short-term and long-term investments (excluding Available Funds), unless
repaid or discharged by Crescendo prior to exercise of the Purchase Option.
NO DIVIDENDS
Crescendo's Restated Certificate of Incorporation prohibits the payment of
dividends from Available Funds.
20
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THE DISTRIBUTION
The Board of Directors of ALZA has declared a distribution, payable to
Holders, of one Crescendo Share for every 20 shares of ALZA Common Stock owned
by such Holder on the Record Date, one Crescendo Share for every 36 shares of
ALZA Common Stock into which such Holder's 5% Debentures held on the Record
Date are convertible and one Crescendo Share for every 37 shares of ALZA
Common Stock into which such Holder's 5 1/4% Debentures held on the Record
Date are convertible. As a result of the Distribution, all of the then
outstanding Crescendo Shares will be distributed to the Holders. After the
Distribution, ALZA will hold all of the authorized shares of Crescendo Class B
Common Stock. See "Description of Crescendo Capital Stock."
Pursuant to the terms of the respective indentures governing the Debentures,
ALZA's Board of Directors may determine, in its discretion, to permit the
Debenture Holders to participate in the Distribution on a basis determined by
ALZA's Board of Directors to be fair and appropriate in light of the basis on
which Holders of ALZA Common Stock are participating; otherwise an adjustment
must be made in the conversion price of the Debentures as a result of the
Distribution. The Board of Directors of ALZA has determined that it is in the
best interests of ALZA and its stockholders to include the Debenture Holders
in the Distribution and that the basis on which Crescendo Shares will be
issued to Holders of 5% Debentures and 5 1/4% Debentures is fair and
appropriate in light of the basis on which Holders of ALZA Common Stock are
participating in the Distribution. Merrill Lynch has rendered an opinion dated
September 4, 1997 to the ALZA Board of Directors in connection with such
determination.
Subject to certain conditions set forth in the Distribution Agreement, ALZA
will effect the Distribution (expected to be on or about September 30, 1997)
by delivering all of the Crescendo Shares to the Distribution Agent.
Commencing on or about the date of the Distribution, the Distribution Agent
will begin mailing account statements reflecting ownership of Crescendo Shares
to the Holders. Crescendo stockholders may request stock certificates from the
Distribution Agent.
No fractional shares will be issued as part of the Distribution. The
Distribution Agent will aggregate undistributed fractional shares and sell
such shares at the earliest practicable date at the then-prevailing market
price. Each person who would be otherwise entitled to receive a fractional
share will instead receive a cash payment equal to such person's proportionate
share of the net proceeds of the sale of such aggregated shares.
No Holder will be required to pay any cash or other consideration for the
Crescendo Shares to receive shares in the Distribution. However, income taxes
are likely to be payable. See "Federal Income Tax Considerations."
The general terms and conditions of the Distribution and the arrangements
between ALZA and Crescendo are set forth in the ALZA/Crescendo Agreements. See
"The Agreements and the Purchase Option." The Distribution Agreement
conditions the Distribution on, among other things, the absence of material
adverse changes to ALZA or Crescendo.
Stockholders and debenture holders of ALZA with inquiries regarding the
Distribution should contact ALZA Corporation, Corporate and Investor
Relations, 950 Page Mill Road, P.O. Box 10950, Palo Alto, California 94303-
0802; telephone (650) 494-5222.
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CRESCENDO CAPITALIZATION
The following table sets forth the capitalization and certain other balance
sheet data of Crescendo as of July 7, 1997, as adjusted to give effect to the
contribution by ALZA of $300 million to Crescendo, the filing of the Restated
Certificate of Incorporation of Crescendo and the issuance to ALZA of
Crescendo Shares prior to the Distribution. The data set forth below should be
read in conjunction with the Financial Statements and related Notes included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS ADJUSTED AS OF
JULY 7, 1997(1)
-----------------
<S> <C>
Cash ........................................................ $300,000,000
============
Stockholders' equity:
Class A Common Stock, $.01 par value; 6,000,000 shares
authorized; 4,963,615 shares outstanding as adjusted (2).. $ 49,636
Class B Common Stock, $1.00 par value; 1,000 shares
authorized; 1,000 shares outstanding as adjusted (3)...... 1,000
Additional paid-in capital................................. 299,949,364
------------
Total stockholders' equity............................... $300,000,000
============
</TABLE>
- --------
(1) See notes (a), (b) and (c) to Pro Forma Balance Sheet on page F-5 for a
description of the pro forma adjustments reflected in the as adjusted
balances.
(2) 200,000 Crescendo Shares have been reserved for issuance pursuant to
Crescendo's Stock Option Plan. No options have yet been issued under such
plan. See "Business of Crescendo--Management of Crescendo."
(3) All shares of Class B Common Stock outstanding, as adjusted, are held by
ALZA.
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REASONS FOR THE DISTRIBUTION AND EFFECTS ON ALZA CORPORATION
Since its founding in 1968, ALZA has made a considerable contribution to
improved therapy through the development of important pharmaceutical products
based on controlled drug delivery. Historically, most of ALZA's product
development efforts have been conducted pursuant to joint arrangements with
client companies. Under those arrangements, the client has generally paid all
of the costs to develop the product, and has had the rights to market the
product worldwide, retaining most of any gross margin, while ALZA has received
royalties based on the client's sales of the product.
In 1993, ALZA determined to pursue a business of commercialization of
products by ALZA in addition to its business of developing products for
commercialization by client companies that make payments to ALZA based on
sales of the resulting products. To that end, ALZA formed ALZA
Pharmaceuticals, its sales and marketing division, to commercialize products,
and formed TDC to develop products for commercialization by ALZA
Pharmaceuticals.
ALZA Pharmaceuticals, which now has a sales force of approximately 65 people
in the United States, markets Ethyol(R) (amifostine), Testoderm(R)
(testosterone) and Testoderm(R) with Adhesive and the Mycelex(R)
(clotrimazole) Troche, and co-promotes Duragesic(R) (fentanyl) CII, Hexalen(R)
(altretamine), NeuTrexin(R) (trimetrexate glucuronate) and the ENACT
AirWatch(TM) System. In addition, ALZA continues to explore, on an ongoing
basis, the possibility of acquiring or licensing, from third parties, products
in ALZA Pharmaceuticals' therapeutic categories of interest: urology,
endocrinology, pain management and oncology/AIDS.
During the past four years, ALZA has made significant progress in developing
products for commercialization by ALZA. ALZA and TDC together have undertaken
the development of a number of products, including the Identified Products,
several of which are in human clinical trials. An NDA has been filed with the
FDA requesting clearance to market a non-scrotal Testoderm(R) product
developed by ALZA and TDC.
ALZA's growing product commercialization business offers the potential
rewards inherent in the direct commercialization of pharmaceutical products;
however, the development of products for commercialization by ALZA requires
the investment by ALZA of substantial resources in product selection and
development, including clinical evaluation and regulatory activities. When
ALZA develops products for commercialization by ALZA, ALZA must bear most or
all of the risk and expenses of product development and commercialization and
has the opportunity to retain all or most of any gross margin resulting from
sales of the product. Therefore, the risk/reward profile is significantly
different from that of ALZA's traditional client-sponsored/royalty-based
business, in which ALZA's clients bear most of the expenses and risks
associated with product development and commercialization activities, and make
payments to ALZA (generally in the form of royalties) based on their sales of
the products developed jointly with ALZA. Such payments to ALZA generally
represent a relatively small portion of the total gross margin.
Notwithstanding the growth of ALZA's product commercialization business,
ALZA's operating income currently is derived predominantly from the client-
sponsored/royalty-based business. ALZA would like to maintain and increase
that business, while continuing to expand ALZA's product commercialization
business.
ALZA believes that the formation of Crescendo to fund the development of
products for commercialization by ALZA, and the arrangements between ALZA and
Crescendo, will provide ALZA with the opportunity to continue to pursue and
expand, more quickly than would otherwise be possible, its product
commercialization business. The primary factors that make this opportunity
possible for ALZA and Crescendo are:
. ALZA's broad base of proprietary drug delivery technologies and extensive
product development capabilities, when combined with therapeutic agents
selected from those available because they are off-patent, will come off-
patent during the next several years, or are available for license, can
yield important new pharmaceutical products with significantly improved
cost-benefit characteristics.
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. The increasing concentration of pharmaceutical product purchasing
decisions in large managed care organizations is resulting in greater
focus on the cost-benefit characteristics of pharmaceutical products.
ALZA's drug delivery products are designed to provide benefits (such as
increased efficacy, reduced side effects or increased patient compliance)
that result in a lower cost of patient care.
. It is possible to market pharmaceutical products effectively through a
small, focused direct sales force such as that of ALZA Pharmaceuticals.
. It is possible to realize increased value through initial product
selection and development of new pharmaceutical products resulting from
the generally enhanced returns available in the pharmaceutical industry
to companies that undertake the upfront risks associated with the initial
selection and development of products, whether such products are
ultimately marketed by those companies or pursuant to arrangements with
third parties.
ALZA believes that the arrangements with Crescendo will significantly
benefit ALZA security holders by:
. continuing to separate the risks associated with developing products for
commercialization by ALZA from ALZA's traditional focus on developing
products for marketing by client companies;
. allowing individual security holders of ALZA to increase or decrease
their level of participation in the business of developing of products
for commercialization by ALZA by varying their level of investment in
Crescendo;
. obtaining for ALZA the exclusive right to commercialize any successfully
developed Crescendo Product, assuming ALZA's exercise of the License
Option with respect to such product or exercise of the Purchase Option,
thereby making it possible for ALZA to capture a potentially greater
return on the products developed with Crescendo than would otherwise be
possible from products developed for commercialization by client
companies; and
. allowing ALZA's near-term financial results to continue to reflect
principally its traditional client-sponsored business, by providing ALZA
with research and development revenues from Crescendo to reimburse ALZA
for Development Costs incurred by ALZA.
After reviewing ALZA's goals and objectives and considering other possible
methods of continuing to pursue its growing product commercialization
business, ALZA's management and Board of Directors believe that continuing to
pursue that business through the formation of Crescendo and the Distribution
will significantly benefit the ALZA security holders. The Board of Directors'
final approval of this transaction was conditioned upon the advice and the
delivery of a written opinion of Merrill Lynch. Merrill Lynch has delivered an
opinion dated September 4, 1997, substantially to the effect that, based upon
the factors recited in such opinion and the actions described below, (i) from
a financial point of view, the Distribution provides a reasonable structure to
pursue the financial objectives of ALZA set forth above, (ii) from a financial
point of view, the Distribution is fair to ALZA's stockholders and (iii) from
a financial point of view, the basis on which Crescendo Shares will be
distributed to ALZA's Debenture Holders is fair and appropriate in light of
the basis on which Holders of ALZA Common Stock are participating.
In delivering its opinion, Merrill Lynch has undertaken, among other things,
the following actions: (a) a review of the Prospectus and certain other
material documents; (b) discussions with members of senior management of ALZA
with respect to the businesses and prospects of ALZA and Crescendo and the
strategic objectives of each; (c) discussions concerning the Distribution with
other representatives and advisors of ALZA; (d) a review of financial and
other information concerning ALZA (with and without Crescendo) that was either
publicly available or was furnished to it by ALZA; (e) a review of historical
prices and trading volumes of the ALZA Common Stock and the Debentures; (f) a
review of the terms and conditions of the Debentures and the Indentures
pursuant to which the Debentures were issued (including those contained in
Section 11.10 of the Indenture governing the 5 1/4% Debentures and those
contained in Section 14.5(d) of the Indenture governing the 5% Debentures,
which both provide that no adjustment to the conversion ratio for the
Debentures need be made
24
<PAGE>
if the Debenture Holders are to participate in the transaction "on a basis and
with notice that the Board of Directors determines to be fair and appropriate
in light of the basis and notice on which holders of Common Stock participate"
in such transaction); (g) a review of the terms and conditions of transactions
that are similar to the transactions contemplated in connection with the
Distribution; and (h) a review of such other financial studies and analyses as
it deemed to be appropriate.
The opinion states that Merrill Lynch has relied on the accuracy and
completeness of all information supplied or otherwise made available to it,
discussed with or reviewed by or for it, or publicly available (including the
information contained in this Prospectus), and Merrill Lynch has not assumed
any responsibility for independently verifying such information or undertaken
an independent evaluation or appraisal of any of the assets or liabilities of
ALZA (with or without Crescendo) or been furnished with any such evaluation or
appraisal. In connection with this opinion, Merrill Lynch has not been asked
to, nor has it provided any opinion as to, the valuation or future performance
of Crescendo as an independent public company following the Distribution.
In its opinion, Merrill Lynch does not opine on or give assurances of the
price at which the shares of ALZA Common Stock, the Debentures or the
Crescendo Shares will actually trade after announcement of the Distribution.
The opinion notes that such trading following the Distribution may be
characterized by a redistribution among existing stockholders and other
investors and that accordingly the shares of ALZA Common Stock and the
Crescendo Shares may trade during such period at prices below those at which
they would trade on a fully distributed basis. In addition, the opinion does
not address whether the funds invested by ALZA or Crescendo will be adequate
to accomplish the objective of successfully developing Crescendo Products.
ALZA will pay Merrill Lynch a fee of $2.5 million for its services in
connection with the Distribution. The receipt of this fee is contingent upon
the consummation of the Distribution. Merrill Lynch will also be reimbursed
for up to $125,000 of expenses that it has incurred or will incur in rendering
its services. ALZA has agreed to indemnify Merrill Lynch against certain
liabilities and expenses in connection with its services as financial advisor.
Merrill Lynch has from time to time performed various investment banking and
financial advisory services for ALZA.
Merrill Lynch, as part of its investment banking business, engages in the
valuation of businesses and securities in connection with mergers,
acquisitions, underwritings, sales and distributions of listed and unlisted
securities, private placements, and valuations for estate, corporate and other
purposes. ALZA selected Merrill Lynch as its financial advisor because it is a
nationally recognized investment banking firm that has substantial experience
in transactions similar to the Distribution.
Although Merrill Lynch participated in certain of the discussions regarding
the Distribution, the terms of the Distribution were determined by ALZA's
Board of Directors.
25
<PAGE>
BUSINESS OF CRESCENDO
BACKGROUND
Crescendo was formed to select and develop human pharmaceutical products for
commercialization, most likely through licensing to ALZA. It is anticipated
that most of the products to be developed by Crescendo (including the
Identified Products) will be products combining ALZA's proprietary controlled
drug delivery technologies with therapeutic agents that are off-patent, will
be off-patent by the time of commercialization of the product or are (or will
be) available for license from third parties. The therapeutic agents may
include, among other things, chemical entities, proteins or peptides.
Crescendo may also fund the development of pharmaceutical products licensed by
ALZA or Crescendo in therapeutic categories of interest to ALZA that do not
use ALZA drug delivery technology, but that complement ALZA's product pipeline
or otherwise may provide a significant commercialization opportunity for ALZA
Pharmaceuticals' targeted sales force. Crescendo may also fund Technical
Evaluations of proprietary therapeutic agents of third parties which may be
available for license or other collaborative arrangements.
In order to conduct its business, Crescendo will depend substantially on
ALZA for rights to use ALZA Technology, for research and development
activities, for administrative services and, if ALZA exercises any License
Option, for the commercialization of Crescendo Products. Crescendo may also
perform directly, or engage other third parties to perform on its behalf, some
of these activities. However, it is likely that ALZA will be responsible for
executing substantially all of the operational activities necessary for
Crescendo's business, and that Crescendo's funds will be used primarily to
fund these activities under the Development Agreement and the Services
Agreement and to pay the Technology Fee. Crescendo's Board of Directors will
be responsible for determining which products will be pursued, and for
approving the work plans and cost estimates therefor. Crescendo's Chief
Executive Officer will supervise and review ALZA's ongoing activities on
behalf of Crescendo. See "Risk Factors--Dependence on ALZA for Personnel and
Facilities."
ALZA will contribute to Crescendo a total of $300 million in cash prior to
the Distribution. In the early years, Crescendo's only revenues are expected
to be from investment income. In later years, if ALZA were to exercise its
License Option for any Crescendo Product, or if a Crescendo Product were
commercialized by Crescendo itself or by a third party on behalf of Crescendo,
Crescendo would derive revenues from sales of the Crescendo Product or from
fees paid to Crescendo by third parties for the rights to commercialize the
Crescendo Product.
THE CONCEPT OF "THERAPEUTIC DISCOVERY"
The therapeutic value of a pharmaceutical product is determined by its
efficacy, safety and level of patient compliance with required treatment
regimens. Products developed by ALZA currently on the market demonstrate that
combining appropriate drug delivery technology with existing therapeutic
agents can lead to the discovery and development of important new
pharmaceutical products that can provide significant improvements in one or
more of these parameters, compared with the results achieved with the same
therapeutic agents in traditional dosage forms. ALZA calls this process of
discovering new pharmaceutical products by identifying and achieving the
appropriate patterns and levels of the therapeutic agent required to optimize
therapy the "therapeutic discovery process." Development of the Identified
Products commenced with, and has been undertaken using, the therapeutic
discovery and development process, and the selection and development of other
Crescendo Products will also use this process.
CRESCENDO PRODUCT DEVELOPMENT PROGRAMS
The therapeutic discovery and development process usually encompasses four
successive stages: candidate identification, feasibility evaluation, initial
product development and final product development. However, in the case where
a Crescendo Product is licensed from a third party or where ALZA recommends a
Technical Evaluation Product for further development as a Crescendo Product,
such product may enter the therapeutic discovery and development process after
one or more of these stages.
26
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Candidate Identification. During this first stage of the therapeutic
discovery and development process, potential Crescendo Products will be
identified and evaluated based on such factors as the likelihood that
controlled drug delivery could meaningfully enhance therapeutic value; the
projected technical feasibility of achieving controlled drug delivery; the
availability of well-defined clinical endpoints; access to a discrete patient
population for clinical trials; an acceptable source of the therapeutic agent
being considered; the regulatory approval status of the therapeutic agent; the
potential market opportunity; the fit with ALZA Pharmaceuticals' product
pipeline; the relationship with ALZA's current targeted therapeutic areas
(urology, endocrinology, pain management and oncology/AIDS); and the projected
total Development Costs.
The costs and time for the candidate identification stage are expected to
vary significantly depending on the attractiveness and complexity of the
candidate. The process for a candidate that is fully evaluated is expected to
take up to six months and cost between $50,000 and $250,000. During the term
of the Development Agreement, approximately $1 million to $2 million per year
is expected to be allocated to this process.
After completion of the candidate identification stage, ALZA may propose a
specific therapeutic agent, combined with a specific ALZA therapeutic system,
for development as a Crescendo Product. Such proposal will be supported by
appropriate documentation of the product rationale, based largely on the
factors described above. The proposal will include a detailed work plan and
cost estimate, with well-defined decision points where possible, for the next
stage of development under the Development Agreement, as appropriate, and an
estimation of major activities and the total costs for full development
through FDA clearance to market the product in the United States (a
preliminary lifetime plan). Similar proposals will be made each time ALZA
recommends a product licensed from a third party or a Technical Evaluation
Product for further development funded by Crescendo. Only when Crescendo
accepts such a proposal, including the proposed work plan and cost estimate
for the next stage of development, will the product (including any licensed
product or Technical Evaluation Product) recommended by ALZA for further
development become a "Crescendo Product" under the Development Agreement.
Feasibility Evaluation. After selection of a Crescendo Product based on the
foregoing and other factors, technical feasibility will be evaluated. Using
established preclinical screening techniques, the therapeutic agent generally
will be assessed for incorporation into the selected ALZA therapeutic system.
After preclinical screening, a small clinical evaluation of the therapeutic
agent may be undertaken to test whether an improved predefined clinical
endpoint is achievable by changing the route, rate and/or duration of drug
delivery from those of currently available dosage forms. This second stage of
the therapeutic discovery and development process generally is expected to
take three to 15 months and to cost between $200,000 and $3 million for each
Crescendo Product that incorporates an ALZA drug delivery system.
Initial Product Development. After completion of feasibility evaluation,
ALZA will recommend whether initial product development should commence by
proposing a work plan and cost estimate covering such activities. The initial
product development stage will include product formulation, development or
refinement of analytical methods, in vitro testing of prototypes,
establishment of a small-scale manufacturing process, fabrication of
experimental systems, preclinical in vivo testing, initiation of stability
studies, production of clinical lots, preparation of an appropriate FDA
submission (e.g., an Investigational New Drug Application ("IND") or an IND
amendment) if the Crescendo Product is to be tested in the United States in
humans, and the planning of initial clinical trials. Small-scale human
clinical trials will then be conducted to test the performance of the
Crescendo Product. Initial product development generally is expected to take
between 18 and 36 months and to cost between $2 million and $8 million for
each Crescendo Product that incorporates an ALZA drug delivery system.
Final Product Development. After completion of initial product development,
ALZA will recommend to Crescendo whether final product development of the
Crescendo Product should proceed by proposing a work plan and cost estimate
covering such activities. The final product development stage typically will
begin with expanded human clinical trials to demonstrate whether the Crescendo
Product produces the desired therapeutic effect in the targeted patient
population. Non-clinical activities will include raw materials testing,
refinement of the product formulation, fabrication of additional clinical
lots, scale-up of the manufacturing process to pilot
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<PAGE>
production levels (and later, to commercial levels) and finally, submission
for regulatory clearance to market the Crescendo Product. During the
regulatory clearance process, product manufacturing, quality assurance and
stability studies will continue, as well as any other activities required to
obtain such marketing clearance. Final product development through review of
an NDA by the FDA is generally expected to cost between $15 million and $40
million or more for each Crescendo Product that incorporates an ALZA drug
delivery system, and to take from three to seven years or longer.
Work Plans and Cost Estimates. All development activities under the
Development Agreement will take place pursuant to work plans and cost
estimates submitted by ALZA and accepted by Crescendo. Each work plan and cost
estimate will be revised from time to time to reflect the best estimate of the
work to be performed and the cost and timing of that work. In addition, each
work plan and cost estimate for a Crescendo Product will be updated and
reviewed no less frequently than at the end of each stage of development prior
to a decision as to whether or not to proceed to the next stage of
development. Each Crescendo Product will also have a lifetime development
plan, which is expected to be updated at least every six months.
THE IDENTIFIED PRODUCTS
The Identified Products are currently under development by ALZA. Until
August 1997, the Identified Products were under development by ALZA on behalf
of TDC. ALZA formed TDC to develop and commercialize, most likely through
licensing to ALZA, products incorporating ALZA's drug delivery systems. ALZA
contributed $250 million to TDC in connection with the distribution of TDC
common stock to ALZA stockholders in 1993. From 1993 until August 1997, ALZA
and TDC made significant progress in developing a number of products, several
of which are in human clinical trials. ALZA licensed two products from TDC
during this period, and an NDA was filed with the FDA requesting clearance to
market one of these products. In August 1997, TDC exhausted all of its funds
available for product development and could no longer fund the development of
the Identified Products (or any of its other products). ALZA has exercised its
option to acquire the shares of TDC. Once the closing of this purchase has
occurred, through its ownership of TDC, ALZA will have rights to the
Identified Products. The closing of ALZA's purchase of TDC shares will occur
on September 29, 1997 or such later date on which all regulatory requirements
have been met.
Under the ALZA/Crescendo Agreements, Crescendo will own the Identified
Products. The Development Agreement provides that, after the Distribution,
Crescendo will reimburse ALZA for the Development Costs of the Identified
Products from the date on which TDC ceased funding their development through
October 31, 1997. Such Development Costs are expected to total between $14
million and $18 million for all of the Identified Products for such period.
This arrangement is intended to ensure that development of the Identified
Products continues uninterrupted through and beyond the Distribution. To
continue development of an Identified Product beyond October 31, 1997, ALZA
must propose and Crescendo's independent Board of Directors must accept an
additional work plan and cost estimate for that Identified Product. It is
expected that ALZA will recommend such additional work plans and cost
estimates to Crescendo by October 10, 1997. See "Risk Factors--No Assurance of
Successful Completion of Identified Products or Selection or Development of
Other Crescendo Products."
OROS(R) oxybutynin. OROS(R) oxybutynin is a once-a-day tablet utilizing
ALZA's proprietary OROS(R) technology, which delivers oxybutynin for the
treatment of urge urinary incontinence. An estimated five million to seven
million people in the United States suffer from the condition, with an
increased incidence in the elderly and in women. Incontinence is a major
factor leading to institutionalization of the elderly. Prescription therapies
are currently available; however, patients often discontinue therapy due to
intolerable anticholinergic side effects (such as dry mouth and drowsiness).
In addition, currently available therapies are generally administered two to
four times per day.
The OROS(R) oxybutynin product is designed to provide efficacy equal to or
greater than currently available therapies, with reduced side effects. The
product is in Phase III clinical trials. Following NDA submission, additional
clinical trials are planned, as well as manufacturing scale-up and related
activities. Approximately $40 million of Development Costs are currently
estimated for completion of all clinical and technical activities for three
dosage strengths of the product through submission and FDA review of the NDA.
28
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DUROS(TM) leuprolide. The DUROS(TM) leuprolide product is a small
osmotically-driven implantable product designed to deliver leuprolide
continuously for up to 12 months to provide palliative treatment of prostate
cancer. Prostate cancer is the most common malignancy diagnosed in men, with
more than 300,000 new cases estimated in the United States in 1996.
Currently available leuprolide therapy consists of depot injections every
one to four months. The 12-month DUROS(TM) leuprolide system is designed to be
implanted in the patient's arm by the physician in his or her office in a
brief, simple procedure. Treatment can be discontinued at any time through
removal of the system by the physician.
The DUROS(TM) leuprolide product is currently in Phase I/II clinical trials.
Approximately $60 million of Development Costs are currently estimated for
completion of development and clinical testing of the product through
submission and FDA review of the NDA.
OROS(R) methylphenidate. OROS(R) methylphenidate is a once-a-day treatment
for Attention Deficit Disorder/Attention Deficit Hyperactivity Disorder
(ADD/ADHD). Approximately three million children and adults in the United
States were treated for this condition in 1996. Current therapies for ADD/ADHD
have short duration, with a "rebound" of inattention occurring near the end of
the dosing period. Although there is a once-a-day treatment currently
available, the most commonly prescribed treatment regimen requires two or
three doses per day. This regimen requires dosing for children during the
school day, which can result in failure to take the required medication,
stigma, and possible illegal diversion of the medication.
The OROS(R) methylphenidate product under development is intended to offer
once-daily dosing in the morning, while matching the efficacy of tablets dosed
every four to five hours. Initial pharmacological studies have supported the
effectiveness of the delivery pattern that the product is being designed to
provide.
Preparations are underway for Phase II clinical trials of the product.
Approximately $47 million of Development Costs are currently estimated through
submission and FDA review of the NDA.
IUTS progesterone. The IUTS progesterone product is an intrauterine system
designed to provide the progestin component of hormone replacement therapy in
post-menopausal women. Approximately 10 million women in the United States are
currently receiving hormone replacement therapy. Because the use of unopposed
estrogen as hormone replacement therapy has been shown to increase the risk of
endometrial hyperplasia, a woman with an intact uterus is typically prescribed
a progestin to be taken in conjunction with estrogen. Synthetic oral
progestins are effective, but their use is often discontinued due to side
effects such as headache, bloating, weight gain, mood swings and breast
tenderness.
The IUTS progesterone product delivers the natural hormone progesterone
directly to the uterus and is designed to provide appropriate levels of
progesterone for 18 to 24 months after insertion. The product is designed to
protect the patient from endometrial hyperplasia, with reduced side effects.
The IUTS progesterone product is in Phase III clinical trials. Approximately
$24 million of Development Costs are estimated for completion of the clinical
development of the product through submission and FDA review of the NDA.
D-TRANS(TM) testosterone matrix. D-TRANS(TM) testosterone matrix is a
follow-on transdermal testosterone product for ALZA's Testoderm(R) product
line, which currently includes two marketed products (Testoderm(R) and
Testoderm(R) with Adhesive, both designed for scrotal placement) and a third
product, non-scrotal Testoderm(R), the NDA for which is on file with the FDA.
ALZA's Testoderm(R) products deliver approximately six milligrams of
testosterone per system, providing testosterone replacement therapy for
hypogonadal males. Up to one million men in the United States are believed to
suffer from low testosterone levels; however, only approximately 200,000 are
currently being treated. Common therapies consist of oral tablets (which may
be associated with liver toxicity) and injections (which result in fluctuating
testosterone levels).
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While the use of transdermal testosterone products is growing, some patients
find that the currently available patches are inconvenient or difficult to
wear, or cause skin irritation. The D-TRANS(TM) testosterone matrix product is
designed to be small, thin and more comfortably worn than the currently
available transdermal products. The matrix technology used in the product
utilizes a unique combination of materials and a new manufacturing technique
to produce a thin, flexible and "patient friendly" transdermal patch that can
be worn on the arm or torso. This new technology has not yet been scaled up to
commercial production levels.
The product is currently in Phase I/II clinical trials. Approximately $29
million of Development Costs are currently estimated through submission and
FDA review of the NDA.
E-TRANS(TM) LHRH (luteinizing hormone releasing hormone). The E-TRANS(TM)
LHRH product is designed to provide a simple, effective treatment of
infertility resulting from ovulation problems. Approximately two million women
in the United States are estimated to suffer from infertility, and more than
15% of those are believed to have problems related to ovulation. Injections of
hormones known as gonadotropins can be effective, but are painful and
inconvenient to administer as prescribed. In addition, they can result in up
to a 20% incidence of multiple birth pregnancies. A pump is available for the
administration of LHRH, a natural hormone involved in the ovulation process;
however, its use involves an invasive and inconvenient procedure.
The E-TRANS(TM) LHRH product is being designed to provide a convenient,
painless and unobtrusive alternative to the pump and injections, with equal or
greater efficacy. The product is currently in preclinical development.
Approximately $7 million of Development Costs are currently estimated through
completion of proof of principle studies, designed to test whether the product
meets its initial targeted performance specifications. Development of this
product is not expected to be completed prior to the exhaustion of Available
Funds.
E-TRANS(TM) (skin interface technology) insulin. The E-TRANS(TM) (skin
interface technology) insulin product combines ALZA's E-TRANS(TM)
electrotransport system, and ALZA's new skin interface technology, with
insulin for the treatment of Type I and Type II diabetes. The skin interface
technology has been found to increase drug transport through intact skin,
thereby allowing delivery of large molecules, such as insulin, with reduced
current density.
It is estimated that approximately three million people in the United States
use insulin for the treatment of diabetes. The current worldwide market for
insulin products is over $2 billion per year. Insulin products are
predominantly injectables, which can be inconvenient and painful. The E-
TRANS(TM) (skin interface technology) insulin product, in the early research
stage, is being designed to deliver insulin to control blood glucose levels.
To date, only preliminary research and development activities have been
conducted. Approximately $2 million of additional Development Costs are
currently estimated through completion of proof of principle studies, designed
to test whether the product meets its initial targeted performance
specifications. Development of this product is not expected to be completed
prior to the exhaustion of Available Funds.
TECHNICAL EVALUATION PRODUCTS
In certain circumstances, where an opportunity is considered potentially
attractive but a proprietary therapeutic agent is not immediately available
for licensing from a third party, limited technical evaluation activities may
be proposed by ALZA to Crescendo and undertaken to determine the suitability
of the therapeutic agent in an ALZA drug delivery system or to induce the
third party to license the therapeutic agent to ALZA or Crescendo or otherwise
to collaborate with ALZA and Crescendo in the development of a product. Upon
completion of a Technical Evaluation, ALZA may propose the development of a
Crescendo Product based upon such Technical Evaluation. If ALZA does not make
such a proposal, any product that may ultimately result from further
activities by ALZA alone, or by ALZA and a third party, and that is
commercially sold, will be a Technical Evaluation Product for which Crescendo
will be entitled to Technical Evaluation Product Payments.
It is expected that, pursuant to the Development Agreement, ALZA will
propose three to five Technical Evaluations per year. Each proposal for a
Technical Evaluation will be supported by appropriate documentation
30
<PAGE>
of the product rationale and, as appropriate, a material transfer agreement,
and will include a work plan and cost estimate for such Technical Evaluation.
If Crescendo accepts such a proposal and the accompanying work plan and cost
estimate, the candidate will become a Technical Evaluation Product under the
Development Agreement. A Technical Evaluation is expected to take less than
nine months and to cost between $200,000 and $1 million. During the term of
the Development Agreement, up to $4 million per year is expected to be
allocated to such activities.
POTENTIAL DEVELOPMENT EXPENDITURES
Based on ALZA's experience in other product development programs, Available
Funds are expected to be expended pursuant to the Development Agreement over a
period of approximately three to four years as follows:
<TABLE>
<CAPTION>
1997* 1998 1999 2000 2001
------ -------- ------ ------ -----
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Candidate Identification, Feasibility
Evaluation and Technical Evaluation...... $ 6- 8 $ 14- 20 $ 6- 8 $ 6- 8 $0- 6
Initial and Final Product Development..... 29-39 92-100 65-75 32-42 0-14
------ -------- ------ ------ -----
Total................................... $35-47 $106-120 $71-83 $38-50 $0-20
====== ======== ====== ====== =====
</TABLE>
- --------
*beginning September 1997
These estimates will change as Crescendo Products are selected and
developed. Because of the long-range nature of any pharmaceutical product
development plan, development of a particular product or products could
accelerate, slow down or be discontinued, technology or products could be
purchased or licensed, and other unforeseen events could occur, all of which
would significantly affect the timing and amount of expenditures. See "Risk
Factors--No Assurance of Successful Completion of Identified Products or
Selection or Development of Other Crescendo Products."
ALZA TECHNOLOGY LICENSED TO CRESCENDO
Crescendo will be entitled to use ALZA Technology subject to payment of the
Technology Fee for existing ALZA Technology relating to the Identified
Products. ALZA Technology includes a broad range of therapeutic systems that
can improve the therapeutic value and cost-effectiveness of existing
therapeutic agents by increasing efficacy, decreasing side effects and/or
increasing patient compliance with required treatment regimens. These
improvements can be achieved by a number of different means, including
changing the pharmacodynamic and pharmacokinetic properties of a therapeutic
agent and reducing the frequency and difficulty of administering the
therapeutic agent. The ALZA Technology licensed to Crescendo includes existing
ALZA technology and will also include new technology developed or licensed by
ALZA. The following is a description of some ALZA Technology that may be
incorporated in Crescendo Products.
Transdermal Systems. ALZA's D-TRANS(TM) transdermal therapeutic systems
provide for the controlled delivery of drugs directly into the bloodstream
through intact skin. Transdermal systems are well suited for the delivery of
potent drugs that are poorly absorbed and/or extensively metabolized when
administered orally. ALZA's transdermal products are thin multilayer systems,
in the form of small adhesive patches, that combine a drug reservoir with a
polymer membrane or other mechanism for controlled drug release to the surface
of intact skin, and hence to the bloodstream. To date, seven ALZA-developed D-
TRANS(TM) products have been cleared for marketing by the FDA and commercially
introduced in the United States and other countries by ALZA and its
pharmaceutical company clients. The transdermal products developed by ALZA and
presently marketed in the United States as well as in other countries are:
Transderm Scop(R) (scopolamine), Transderm-Nitro(R) (nitroglycerin), Catapres-
TTS(R) (clonidine), Estraderm(R) (estradiol), Duragesic(R) (fentanyl) CII,
NicoDerm(R) CQ(TM) (nicotine), Testoderm(R) (testosterone) and Testoderm(R)
with Adhesive. A number of additional transdermal products are in various
stages of development and testing.
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Oral Osmotic Systems. ALZA's OROS(R) therapeutic systems deliver therapeutic
agents to the gastrointestinal tract at a predetermined controlled rate. These
systems resemble conventional tablets or capsules in appearance, but use
osmosis to provide pre-programmed, controlled drug delivery. An OROS(R) system
comprises a polymer membrane with one or more laser-drilled holes surrounding
a core containing the drug or drugs, with or without osmotic or other agents.
Water from the gastrointestinal tract is drawn by osmotic pressure through the
membrane at a controlled rate into the drug core, causing the drug to be
released in solution or suspension at a predetermined controlled rate out of
the laser-drilled hole(s). OROS(R) systems are well suited for delivering
therapeutic agents throughout the gastrointestinal tract in constant,
programmed delivery for local treatment or systemic absorption. Seven ALZA-
developed OROS(R) products are marketed in the United States and other
countries by ALZA's client companies. The OROS(R) products currently marketed
are: Procardia XL(R)/Adalat CR(R) (nifedipine), Acutrim(R)
(phenylpropanolamine), Alpress(R) LP (prazosin), Volmax(R) (albuterol),
Glucotrol XL(R) (glipizide), Covera-HS(TM) (verapamil) and DynaCirc CR(R)
(isradipine). Three cold/allergy products, OROS(R) pseudoephedrine, OROS(R)
chlorpheniramine and OROS(R) pseudoephedrine/brompheniramine, have received
FDA clearance for marketing in the United States. A number of OROS(R) products
are in various stages of development and testing or are awaiting regulatory
clearance.
Other oral delivery technologies currently available for use in the
development of products by ALZA include:
. Chronset(R). ALZA's Chronset(R) technology, currently in development for
oral delivery of proteins and peptides, provides for a predetermined delay in
the release of active therapeutic agents from an orally administered capsule.
In the Chronset(R) system, water permeating a semi-permeable portion of the
capsule causes the capsule to separate, releasing the active therapeutic
agents in bolus fashion. The time of separation is precisely controlled,
localizing delivery of the active therapeutic agents to the area of the
gastrointestinal tract where absorption may be optimal. Prior to release, the
active therapeutic agents are protected from the gastrointestinal fluids.
Active components in a Chronset(R) system can include both a therapeutic agent
and permeation enhancers which facilitate drug absorption at the site of
release.
. Push-Stick and Push-Layer. The Push-Stick oral osmotic system can deliver
large quantities of poorly soluble drugs on a once-a-day basis. The Push-Layer
oral osmotic system has the same capability, but has the added feature of
multiple drug layers of any number and thickness. In this way, a wide variety
of drug delivery profiles (delayed, patterned or pulsatile) can be achieved,
as well as multiple pulses of one or more drugs.
. Liquid OROS(R). ALZA's Liquid OROS(R) system is similar in function to the
Push-Stick system, but is designed to deliver highly insoluble liquid drug
formulations or polypeptides in a zero-order fashion. A delivery orifice in
the outer layers of a coated Liquid OROS(R) capsule allows controlled release
of the therapeutic agent, while the internal osmotic layer pushes against the
drug compartment, forcing the liquid formulation of the therapeutic agent from
the system.
. RingCap(TM). ALZA's RingCap(TM) technology has an innovative design, broad
potential applicability and a potentially low manufacturing cost. By
incorporating several insoluble polymeric rings around a tablet, the erosion
of the tablet can be controlled, modulating the release of drug into the
gastrointestinal tract. RingCap(TM) systems can deliver the total dose of drug
evenly over an extended time period and should be especially well-suited to
drugs requiring a large daily dose.
E-TRANS(TM) Systems. ALZA's E-TRANS(TM) (electrotransport) systems involve
the transport of drugs across intact skin through the use of an electrical
potential gradient. ALZA's E-TRANS(TM) systems are thin, flexible, disposable
devices similar in size and appearance to ALZA's D-TRANS(TM) transdermal
systems. Electrotransport systems consist of an adhesive, a drug reservoir,
electrodes and a power source/controller. Electrotransport systems are
designed for the delivery of large molecules (including proteins and peptides)
and potent drugs that are poorly absorbed or extensively metabolized in the
gastrointestinal tract.
DUROS(TM) Systems. ALZA's DUROS(TM) systems are designed to enable the
delivery of peptides, proteins and other bioactive macromolecules arising from
the biotechnology industry. These small implantable drug
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delivery systems have the potential to deliver macromolecules to subcutaneous
sites for systemic therapy or to specific tissues; a single miniature implant
may be able to provide therapy for up to one year.
DUROS(TM) osmotic implants consist of a semipermeable membrane, an osmotic
tablet, a piston, and a protective, water-impermeable drug reservoir.
Following system implantation, water from surrounding tissues is imbibed
through the rate-controlling membrane and into the osmotic layer at a rate
that is controlled by the composition, surface area, and thickness of the
membrane. The imbibed water hydrates and swells the osmotic tablet, which
displaces a piston inside the reservoir, releasing the therapeutic agent at a
rate equal to the inflow of water. Modifications in membrane permeability
allow diversity in release rate profiles and adaptation of a system to
specific delivery needs.
DUROS(TM) osmotic implants allow rate-controlled administration of
therapeutic agents not suited for oral or transdermal delivery. Designed for
easy implantation and removal under local anesthesia in the practitioner's
office, these systems can provide long-term therapy with a single application.
Potential benefits include enhancement of patient compliance, reduction of
drug dosage and side effects associated with bolus injections, and improvement
in a patient's quality of life by eliminating multiple injection therapy.
Skin Interface Technology. ALZA's skin interface technology is expected to
be used in conjunction with E-TRANS(TM) and/or D-TRANS(TM) drug delivery
systems to improve transport of large macromolecules that are difficult or
impossible to deliver at therapeutic levels. Alternatively, it could enable E-
TRANS(TM) or D-TRANS(TM) systems to be worn for shorter periods, or reduce
start-up lag times, by enhancing the rate of transfer of the therapeutic agent
through the skin. The skin interface technology, which is in early research,
may reduce irritation induced by a therapeutic agent or a drug delivery system
by providing better drug delivery distribution and lowering electrically-
induced skin resistance.
GOVERNMENTAL REGULATION
All Crescendo Products, Developed Technology Products and Technical
Evaluation Products will require clearance by the FDA and comparable agencies
in other countries before they can be marketed. During the initial product
development stage and as required, INDs for all new products will be filed
with the FDA prior to the commencement of initial (Phase I) clinical testing
in human subjects in the United States. In some instances this process could
result in substantial delay and expense. INDs have been filed for four of the
Identified Products.
After Phase I/II testing, which is intended to demonstrate the safety and
functional characteristics of a product, extensive efficacy and safety studies
in patients must be conducted. After completion of Phase III clinical testing,
an NDA is submitted, and its clearance involves an extensive review process.
There can be no marketing in the United States of any product for which an NDA
has been submitted until that NDA has been accepted for filing and cleared by
the FDA. It is impossible to determine the amount of time that will be
required to obtain clearance from the FDA to market any product or the cost of
obtaining such clearance.
Whether or not FDA clearance has been obtained, marketing clearance of a
product by the relevant regulatory authorities must be obtained in each
foreign country before the product may be marketed in that country. The
clearance procedures vary from country to country, and the time required may
be longer or shorter than that required for FDA clearance. In many foreign
countries, pricing and reimbursement approvals are also required. Although
there are certain procedures for unified filing in the European Community, in
general each country has its own procedures and requirements.
All facilities and manufacturing techniques used for the manufacture of
products for clinical use or for sale must conform with "Good Manufacturing
Practices", the FDA regulations governing the production of pharmaceutical
products. These regulations govern a range of activities including
manufacturing, packaging, quality assurance and recordkeeping. Other FDA
regulations govern labeling and advertising materials. From time to time, the
FDA and other federal, state and local government agencies may adopt
regulations that affect the manufacturing and marketing of pharmaceutical
products. Environmental regulations may also affect the
33
<PAGE>
manufacture of such products. Pharmaceutical products and their manufacture
often use chemicals and materials that may be classified as hazardous or toxic
and/or require special handling and disposal. ALZA undertakes to minimize
releases into the environment, and exposure of its employees and the public,
to such materials. The cost of these activities continues to increase. Some of
the therapeutic agents used in Crescendo Products (including methylphenidate
and testosterone, the therapeutic agents in two Identified Products),
Developed Technology Products and Technical Evaluation Products may also be
regulated by the United States Drug Enforcement Administration.
PATENTS
As of June 30, 1997, ALZA owned more than 500 United States patents and
approximately 200 pending United States patent applications relating to its
products and the ALZA Technology. ALZA owns in excess of 2,400 foreign patents
and pending patent applications. It is expected that ALZA will attempt to
secure patent coverage for each of the Crescendo Products. ALZA believes that
its current patents, and patents that may be obtained in the future, are
important to its future operations and to Crescendo.
Patent protection generally has been important in the pharmaceutical
industry, and the commercial success of Crescendo Products, Technical
Evaluation Products and Developed Technology Products may depend, in part,
upon ALZA's ability to obtain strong patent protection. Although ALZA's
existing patents, pending patents, and any patents obtained in the future may
be of importance to Crescendo, there can be no assurance that any additional
patents will be issued or that any patents now or hereafter issued will be of
commercial benefit. Some of ALZA's patents on basic drug delivery technologies
have expired or will expire in the near future. Patent protection on products
incorporating such technology is likely to depend on the ability to obtain
patent protection on Developed Technology.
Although a patent has a statutory presumption of validity in the United
States, the issuance of a patent is not conclusive as to such validity or as
to the enforceable scope of the claims therein, and the validity and
enforceability of a patent after its issuance by the United States Patent
Office can be challenged in litigation. If the outcome of such litigation is
adverse to the owner of the patent, third parties may then be able to use the
invention pertaining to the patent, in some cases without payment. There can
be no assurance that patents covering Crescendo Products, Developed Technology
Products or Technical Evaluation Products, if and when issued, will not be
infringed or successfully avoided through design innovation.
It is also possible that third parties will obtain patents or other
proprietary rights that might be necessary or useful to ALZA or Crescendo. In
cases where third parties are the first to invent a particular product or
technology, it is possible that those parties will obtain patents that will be
sufficiently broad so as to prevent ALZA or Crescendo from using certain
Developed Technology or other ALZA Technology or from marketing certain
products. If licenses from third parties are necessary and cannot be obtained,
commercialization of such products could be delayed or prevented. Third
parties may claim that Crescendo Products infringe their patents; in such
event ALZA or Crescendo would need to defend against such claims. Defense of
such claims could be costly and time consuming. If licenses to the third
party's patents are available, the payments required by the third parties
could be significant.
In addition, Crescendo may use substantial unpatented technology. There can
be no assurance that others will not develop similar technology. See "Risk
Factors--Proprietary Technologies; Unpredictability of Patent Protection."
FACILITIES AND PERSONNEL
Crescendo is not expected to hire a significant number of employees or to
acquire significant property or assets. However, pursuant to the Development
Agreement, ALZA has been engaged by Crescendo to develop human pharmaceutical
products under work plans and cost estimates recommended by ALZA and accepted
by Crescendo. Decisions as to whether to hire employees, purchase property or
assets, perform administrative
34
<PAGE>
functions, engage ALZA to perform administrative services under the Services
Agreement, engage others to do so or engage third parties other than or in
addition to ALZA to perform product development activities will be made by
Crescendo.
COMPETITION
Any Crescendo Product successfully developed under the Development Agreement
will face competition both from more traditional forms of drug delivery and
from alternative drug delivery systems. ALZA intends to continue its client-
sponsored development activities, which may result in the development of
products that compete directly with Crescendo Products, Developed Technology
Products and Technical Evaluation Products. ALZA is also free to develop
competitive products for its own account. See "Risk Factors--Competition."
MANAGEMENT OF CRESCENDO
The following table provides information concerning the current officers and
directors of Crescendo. Each of the directors and officers of Crescendo is
employed by ALZA and has held his or her position with Crescendo since its
formation.
<TABLE>
<CAPTION>
AGE ON
NAME POSITION WITH CRESCENDO 6/30/97
---- ----------------------- -------
<S> <C> <C>
Dr. James W. Young...... Director, President and Chief Executive Officer 53
James Butler............ Director 56
Dr. Samuel R. Saks...... Director 42
David R. Hoffmann....... Vice President, Finance and Secretary 53
Suzanne C. Martin....... Vice President, Research and Development Administration 47
</TABLE>
Dr. James W. Young has been ALZA's Senior Vice President, Research and
Development since August 1997. From 1995 until 1997, Dr. Young was ALZA's
Senior Vice President, Commercial Development; he was ALZA Technology
Institute's Vice President and Managing Director from June 1995 until
September 1995, and he was President of Affymax N.V.'s Pharmaceuticals
Division from 1992 until 1995. From 1987 until 1992, he was Senior Vice
President and General Manager of Pharmaceuticals at Sepracor Inc.
James Butler has been ALZA's Senior Vice President, Sales and Marketing
since August 1997. From 1993 until 1997, Mr. Butler was ALZA's Vice President,
Sales and Marketing. From 1987 until 1993, he was Vice President and General
Manager of Glaxo, Inc.'s corporate division. Mr. Butler is a director of
Aronex Pharmaceuticals, Inc.
Dr. Samuel R. Saks has been ALZA's Senior Vice President, Medical Affairs
since 1994. From 1992 until 1994 he was ALZA's Vice President, Medical
Affairs. Prior to joining ALZA, Dr. Saks was Vice President, Clinical
Research, Oncology at Schering-Plough Corporation.
David R. Hoffmann has been Vice President and Treasurer of ALZA since 1994.
He has held other positions with ALZA, including Vice President, Finance and
Controller, since 1976.
Suzanne C. Martin has been ALZA's Vice President, Development Programs since
1994. She has held other positions with ALZA, including Executive Director,
Project Management and Senior Director of Research and Development
Administration since 1988.
Shortly after the Distribution it is expected that Dr. Young will resign,
and Dr. Gary L. Neil will be appointed to be a director and the President and
Chief Executive Officer of Crescendo. Dr. Neil was a director and President
and Chief Executive Officer of TDC from 1993 to 1997; he was Executive Vice
President, Wyeth-Ayerst Research from 1990 to 1993, and from 1989 to 1990, he
was Senior Vice President, Wyeth-Ayerst Research. Prior to 1989, Dr. Neil held
various scientific and other management positions with the Upjohn Company. He
is a director of Allergan Ligand Retinoid Therapeutics, Inc.
It is expected that the two remaining current directors of Crescendo will
resign shortly after Dr. Neil's appointment. Thereafter, it is expected that
Dr. Neil will appoint additional directors, none of whom will be an
35
<PAGE>
employee of ALZA, to fill Board vacancies. Each outside director of Crescendo
will receive an annual retainer, meeting fees for attending meetings of
Crescendo's Board of Directors and committees of the Board of Directors and
options to purchase Crescendo Shares. ALZA employees who act as officers of
Crescendo do not receive any remuneration or stock options from Crescendo.
Crescendo's Board of Directors will be classified, with each member serving
for a staggered term of three years. Dr. Neil will initially be appointed to
complete Dr. Young's three-year term, which will end in 2000. The classified
Board may act to prevent a change in control of Crescendo because only a
portion of the Board will be elected in any given year. Therefore, any person
who acquired a majority of the shares entitled to vote for directors of
Crescendo would generally not be able to elect a majority of the Board of
Directors for two years.
SECURITY OWNERSHIP OF CRESCENDO
Immediately prior to the Distribution, all of the outstanding Crescendo
Shares will be held by ALZA. The following table sets forth the projected
beneficial ownership of Crescendo Shares following the Distribution by each
director and executive officer of Crescendo and all directors and officers of
Crescendo as a group, as well as by any person that owns beneficially more
than 5% of the outstanding shares of ALZA Common Stock.
<TABLE>
<CAPTION>
CRESCENDO SHARES PROJECTED TO BE
BENEFICIALLY OWNED
--------------------------------------
PERCENT OF
NAME NUMBER(1) CLASS
---- ----------------- ----------------
<S> <C> <C>
J.P. Morgan & Co. Incorporated
and its subsidiaries................ 635,791(2) 12.8%
60 Wall Street
New York, NY
Brinson Partners, Inc.
and affiliated entities ............ 321,961(3) 6.5
209 South LaSalle
Chicago, IL
American Express Company and
American Express Financial
Corporation......................... 251,172(4) 5.1
American Express Tower
200 Vesey Street
New York, NY
Dr. James W. Young................... 128 *
James Butler......................... 247 *
Dr. Samuel R. Saks................... 1,250(5) *
David R. Hoffmann.................... 161(6) *
Suzanne C. Martin.................... 254 *
All directors and executive officers
as a group (5 persons).............. 2,040(6) *
</TABLE>
- --------
* Less than 1%
(1) Except as otherwise noted, reflects, in each case, the number of shares of
ALZA Common Stock beneficially owned as of June 30, 1997, excluding shares
issuable upon conversion of Debentures or exercise of options and
warrants, divided by 20.
(2) Information is based on ALZA Common Stock ownership as of May 30, 1997 as
provided by the holders in Amendment No. 23 to their Schedule 13G filed
with the SEC relating to ALZA. Such holders may also own Debentures that
would result in the distribution of additional Crescendo Shares in the
Distribution.
(3) Information is based on ALZA Common Stock ownership as of February 12,
1997 as provided by the holders in Amendment No. 1 to their Schedule 13G
filed with the SEC relating to ALZA.
(4) Information is based on ALZA Common Stock ownership as of December 31,
1996 as provided by the holders in their Schedule 13G filed with the SEC
relating to ALZA.
(5) All of the shares beneficially owned by Dr. Saks are subject to forfeiture
in the event of the termination of his employment with ALZA. The
restrictions on the shares will lapse with respect to 25% of the shares in
December 1999, 50% of the shares in June 2000 and the remaining 25% of the
shares in January 2001. Notwithstanding the foregoing, the restrictions
will lapse with respect to all of the shares in the event of certain
changes in control of ALZA.
(6) Mr. Hoffmann owns Debentures that would result in the receipt of an
additional 5 Crescendo Shares in the Distribution.
36
<PAGE>
SELECTED FINANCIAL DATA
OF CRESCENDO PHARMACEUTICALS CORPORATION
Balance Sheet Data:
<TABLE>
<CAPTION>
JULY 7,
1997(1)
-------
<S> <C>
Cash.............................................................. $1,000
Stockholders' Equity.............................................. 1,000
</TABLE>
- --------
(1) Crescendo was incorporated on June 26, 1997. ALZA contributed $1,000 on
July 3, 1997 in exchange for 100 shares of Common Stock. Crescendo had no
operations through July 7, 1997.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
Crescendo was formed on June 26, 1997. ALZA will contribute a total of $300
million in cash to Crescendo prior to the Distribution of shares of callable
Class A Common Stock to stockholders and Debenture holders of ALZA.
Crescendo's funds are expected to be used primarily to fund activities to be
conducted under the Development Agreement with ALZA and to reimburse ALZA for
the Development Costs of the Identified Products from the date TDC ceased
funding through October 31, 1997 (expected to be between $14 million and $18
million). ALZA's contribution, together with any investment interest earned
thereon, is expected to fund such activities for approximately three to four
years. Crescendo is not expected to require facilities or capital equipment of
its own during the term of the Development Agreement.
There can be no assurance, particularly given the existence of the
ALZA/Crescendo Agreements, that Crescendo will be able to raise any additional
capital. Such additional capital, if raised, would most likely reduce the per
share proceeds available to holders of Crescendo Shares if the Purchase Option
were to be exercised. See "The Agreements and the Purchase Option--Purchase
Option."
OPERATIONS
Prior to the Distribution, Crescendo will not have conducted any operations.
After the Distribution, Crescendo's operations will be conducted largely
pursuant to the ALZA/Crescendo Agreements. See "The Agreements and the
Purchase Option."
In its early years, Crescendo's revenues are expected to consist solely of
investment income (which will become part of the Available Funds). In later
years, Crescendo could receive revenues through the commercialization of
Crescendo Products either from ALZA in the form of Product Payments if ALZA
were to exercise its License Option for any Crescendo Product, or otherwise if
ALZA's License Option for any Crescendo Product were to expire unexercised and
Crescendo were to commercialize the product alone or with a third party.
Crescendo also could receive revenues from ALZA in the form of Developed
Technology Royalties or Technical Evaluation Product Payments. However,
Crescendo is not expected to earn substantial revenues unless or until
Crescendo Products or, to a lesser extent, products incorporating Developed
Technology are successfully commercialized.
37
<PAGE>
Crescendo's expenses largely will be incurred under the ALZA/Crescendo
Agreements. Crescendo will have research and development expenses as a result
of (i) the payment of Development Costs under the Development Agreement, most
likely through reimbursements to ALZA, and (ii) payment of the Technology Fee
to ALZA under the Technology License Agreement. The Development Agreement
provides that, in addition to funding ongoing Development Costs, Crescendo
will reimburse ALZA for the Development Costs of the Identified Products from
the date on which TDC ceased funding their development through October 31,
1997. Such reimbursements are expected to total between $14 million and $18
million for all of the Identified Products for such period. Crescendo also
will incur administrative expenses, which will be paid to ALZA under the
Services Agreement to the extent that Crescendo engages ALZA to perform
administrative services on its behalf.
Crescendo's future cash flow obligations will derive largely from the
ALZA/Crescendo Agreements. Crescendo is required to expend all of the
Available Funds under the Development Agreement and to pay the Technology Fee.
Crescendo is expected to utilize substantially all of the Available Funds to
reimburse ALZA for its Development Costs. However, the rate at which Available
Funds are expended will derive from work plans and cost estimates approved by
Crescendo.
38
<PAGE>
THE AGREEMENTS AND THE PURCHASE OPTION
TECHNOLOGY LICENSE AGREEMENT
Crescendo and ALZA have entered into a Technology License Agreement pursuant
to which ALZA has granted to Crescendo an exclusive, worldwide, perpetual
license, with the right to sublicense, to use ALZA Technology solely to select
and develop Crescendo Products and to conduct related activities, and to
commercialize such products. ALZA will retain the right to use ALZA Technology
in any other manner and for any other purpose it deems appropriate.
In exchange for the license to use the existing ALZA Technology relating to
the Identified Products, Crescendo will pay the Technology Fee to ALZA. The
Technology Fee will be payable monthly over a period of three years and will
be $1 million per month for the first 12 months following the later of (i) the
date of the Distribution or (ii) the date of the closing of ALZA's purchase of
the outstanding shares of TDC, $667,000 per month for the following 12 months
and $333,000 per month for the following 12 months; provided that the
Technology Fee will no longer be payable at such time as fewer than two of the
Identified Products are being developed by Crescendo and/or have been licensed
by ALZA pursuant to ALZA's exercise of the License Option.
Either ALZA or Crescendo may terminate the Technology License Agreement upon
the occurrence of a material breach by the other party which continues for 60
days after written notice. The Technology License Agreement will automatically
terminate (a) upon termination by Crescendo of the Development Agreement other
than due to a breach thereof by ALZA or (b) upon termination by ALZA of the
Development Agreement due to a breach thereof by Crescendo.
DEVELOPMENT AGREEMENT
Under the Development Agreement, ALZA has agreed to perform diligently all
work necessary to conduct the activities agreed upon by ALZA and Crescendo.
ALZA is not required to devote any specific amount of time or resources to
research and development activities under the Development Agreement, and ALZA
expects to devote a substantial amount of its time and resources to activities
for third party clients and for its own account. Activities under the
Development Agreement will be undertaken pursuant to work plans and cost
estimates proposed by ALZA and accepted by Crescendo. Crescendo may approve
all or any portion of a proposed work plan and cost estimate or may determine
not to approve any proposed work plan and cost estimate. Crescendo is not
obligated to fund development of Crescendo Products in excess of amounts
reflected in approved work plans and cost estimates. ALZA is not required to
undertake activities that would result in Development Costs exceeding those in
approved work plans and cost estimates.
Under the Development Agreement, Crescendo is expected to utilize
substantially all of the Available Funds to reimburse ALZA for its Development
Costs. Development Costs will be determined on the same basis as charged by
ALZA to its pharmaceutical company clients, and ALZA will recognize
reimbursement of such amounts as research and development revenue. The
corresponding research and development expenses of ALZA will offset this
revenue. Under the Development Agreement, Crescendo also may use Available
Funds for licensing technology, products or therapeutic agents from third
parties and for the development of Crescendo Products with third parties;
provided, however, that ALZA's consent will be required if such activities
involve ALZA Technology or could affect ALZA's rights under any of the
ALZA/Crescendo Agreements. Any agreements between Crescendo and third parties
relating to Crescendo Products or Developed Technology must include
appropriate provisions for the protection of ALZA Technology and Developed
Technology and ALZA's rights under the ALZA/Crescendo Agreements. Subject to
the foregoing, the amount and nature of the work to be performed by third
parties will be determined by Crescendo.
Pursuant to the Development Agreement, Crescendo will fund the development
of the Identified Products from the date on which TDC ceased funding the
development of the Identified Products through October 31, 1997. Continuation
of the development of any Identified Product after that time will depend upon
whether ALZA proposes, and the independent Crescendo Board of Directors
accepts, additional work plans and cost estimates
39
<PAGE>
for such Identified Product. If Crescendo were to undertake development of
each Identified Product through FDA review for marketing clearance (for five
of the products) and "proof of principle" studies (for two of the products), a
majority of the Available Funds would be used in the development of the
Identified Products.
Crescendo has agreed to use diligent efforts to develop Crescendo Products
in accordance with approved work plans and cost estimates under the
Development Agreement, most likely by paying ALZA or third parties to perform
development services. Crescendo is required to spend all Available Funds under
the Development Agreement. It is anticipated that Crescendo will spend the
Available Funds over a period of approximately three to four years. Prior to
expenditure, Crescendo will invest Available Funds in certain types of high
quality marketable securities. Crescendo may not encumber, pledge or otherwise
take any action with respect to Available Funds that could prevent the full
expenditure of such funds under the Development Agreement. There are no
restrictions on Crescendo's use of its funds other than Available Funds to
conduct its business as it determines, subject to the terms of Crescendo's
Restated Certificate of Incorporation and the ALZA/Crescendo Agreements.
Unless Crescendo agrees otherwise, all Crescendo Products will be owned by
Crescendo or, in the case of a product licensed from a third party (or a
product incorporating a therapeutic agent licensed from a third party),
exclusively licensed to Crescendo, in each case subject to the License Option.
Any such exclusive license will be worldwide, will include the right to
sublicense and will grant rights to Crescendo that are substantially similar
to those rights Crescendo would have as the owner of such product. As between
ALZA and Crescendo, ALZA will own all Developed Technology, including patents,
subject to Crescendo's exclusive license to use Developed Technology to select
and develop Crescendo Products and to conduct related activities, and to
commercialize Crescendo Products. ALZA will determine whether and to what
extent to seek patent protection for Developed Technology. If ALZA declines to
seek patent protection for any technology, Crescendo will not have the right
to do so. Crescendo and ALZA will share equally the costs of obtaining and
maintaining patents covering Developed Technology during the term of the
Development Agreement. Such costs are to be included as Development Costs
under the Development Agreement.
ALZA will pay Developed Technology Royalties to Crescendo, on a country-by-
country basis, equal to 1% of Net Sales in the relevant country of each
Developed Technology Product. Subject to ALZA's payment buy-out option,
Developed Technology Royalties will be payable with respect to a Developed
Technology Product in any country until expiration of the last to expire of
the relevant patent or patents.
ALZA will make Technical Evaluation Product Payments to Crescendo equal to
1% of worldwide Net Sales of each Technical Evaluation Product. Subject to
ALZA's payment buy-out option, Technical Evaluation Product Payments will be
payable with respect to a Technical Evaluation Product until seven years after
the first commercial sale of such Technical Evaluation Product in the first
Major Market Country in which such product is commercially sold.
In the case where ALZA is required to make payments with respect to a
product that is both a Technical Evaluation Product (by virtue of Crescendo
having funded a Technical Evaluation therefor) and a Developed Technology
Product (by virtue of the issuance of a patent covering such product which
claims Developed Technology) in any country, the payment due for any period
with respect to such product will be limited to 1% of Net Sales.
In determining the Developed Technology Royalties and Technical Evaluation
Product Payments due to Crescendo, Net Sales by ALZA will be reduced by the
amount of any license payments or similar payments due to third parties from
ALZA with respect to such Developed Technology Product or Technical Evaluation
Product. If the Developed Technology Product or Technical Evaluation Product
is an electrotransport product, this reduction is likely to include the amount
of any payments due from ALZA to Medtronic, Inc. ("Medtronic") under an
existing agreement between ALZA and Medtronic covering electrotransport
products. It is possible that, to develop certain products using Developed
Technology or Technical Evaluation Products, licenses or other arrangements
with third parties may be necessary or appropriate. Such arrangements could
require payments by ALZA that would reduce payments owed to Crescendo.
40
<PAGE>
ALZA has the option to buy out the right of Crescendo to receive Developed
Technology Royalties and Technical Evaluation Product Payments with respect to
any Developed Technology Product or Technical Evaluation Product, in each
case, on either a country-by-country or worldwide basis.
A country-by-country buy-out option may be exercised for any Developed
Technology Product or Technical Evaluation Product in any country at any time
after the end of the twelfth calendar quarter during which the product was
commercially sold in such country. The buy-out price will be 15 times the
payments made by or due from ALZA to Crescendo with respect to sales of such
product in such country for the four calendar quarters immediately preceding
the quarter in which the buy-out option is exercised. The global buy-out
option may be exercised for any Developed Technology Product or Technical
Evaluation Product at any time after the end of the twelfth calendar quarter
during which the product was commercially sold in either the United States or
two other Major Market Countries. The global buy-out price will be (i) 20
times (a) the payments made by or due from ALZA to Crescendo for the relevant
product, plus (b) such payments as would have been made by or due from ALZA to
Crescendo if ALZA had not exercised any country-specific buy-out option with
respect to such product, in each case, for the four calendar quarters
immediately preceding the quarter in which the global buy-out option is
exercised, less (ii) any amounts previously paid to exercise any country-
specific buy-out option with respect to such product.
The Development Agreement will terminate upon the exercise or expiration of
the Purchase Option; provided, however that ALZA's obligation to pay Developed
Technology Royalties and Technical Evaluation Product Payments will continue
if the Purchase Option expires unexercised. Either party may terminate the
Development Agreement if the other party (i) breaches a material obligation
thereunder or under the Technology License Agreement, the License Option
Agreement or any license thereunder (if such breach continues for 60 days
after written notice by the terminating party), or (ii) enters into any
proceeding, whether voluntary or involuntary, in bankruptcy, reorganization or
similar arrangement for the benefit of creditors. In addition, Crescendo's
expenditures under the Development Agreement relating to a Crescendo Product
in any country will terminate after exercise of the License Option for such
Crescendo Product in such country if the development of such Crescendo Product
is being continued by ALZA, alone or with a third party, and if ALZA elects
not to include Crescendo in the continuing development activities related to
the Crescendo Product. If ALZA does include Crescendo in such development
activities, Crescendo may continue to fund all or a portion of Development
Costs, even after any arrangement with the third party has been executed,
subject to Crescendo's continued approval of the work plans and cost estimates
for the Crescendo Product.
LICENSE OPTION AGREEMENT
Pursuant to the License Option Agreement, Crescendo has granted the License
Option to ALZA pursuant to which ALZA may, on a product-by-product and
country-by-country basis, obtain from Crescendo a perpetual, exclusive license
(with the right to sublicense) to develop, make, have made and use the
Licensed Product and to sell and have sold the Licensed Product in the country
or countries as to which the License Option is exercised (the "Territory") in
exchange for specified Product Payments. ALZA may exercise the License Option
with respect to any Crescendo Product on a country-by-country basis at any
time until (i) with respect to the United States, 30 days after FDA clearance
to market such Crescendo Product in the United States and (ii) with respect to
all other countries, 90 days after the earlier of (a) clearance by the
appropriate regulatory agency to market such Crescendo Product in such
country, or (b) clearance by the FDA to market the Crescendo Product in the
United States. The License Option will expire, to the extent not previously
exercised, 30 days after the expiration of the Purchase Option. ALZA must
exercise the License Option for any country no later than the date of the
first commercial sale of the Crescendo Product in such country. Even if ALZA
exercises its License Option with respect to a Crescendo Product, Crescendo
may continue to fund the development of such product to the extent proposed by
ALZA and accepted by Crescendo's Board of Directors.
If ALZA exercises the License Option for a Crescendo Product, Crescendo and
ALZA will enter into a License Agreement with respect to such product
(thereafter a "Licensed Product"), and ALZA will be required to use diligent
efforts to complete the development of and to commercialize such Licensed
Product in each Major
41
<PAGE>
Market Country covered by the License Agreement. ALZA will devote to its
commercialization efforts the same resources as other pharmaceutical companies
of similar size devote to products with similar market potential and similar
relative importance in their product portfolios and may use reasonable
discretion in allocation of its resources in performing such obligations.
ALZA will make Product Payments to Crescendo with respect to each Licensed
Product equal to: (i) 1% of Net Sales of the Licensed Product in the Territory
plus (ii) an additional 0.1% of such Net Sales for each full $1 million of
Development Costs of the Licensed Product paid by Crescendo. For purposes of
determining the payments due for any quarter, Development Costs will be
determined as of the last day of the immediately preceding calendar quarter.
Because the marketing expenses associated with a newly introduced product
during the first few years after launch are generally significantly higher
than those for an established product, the Product Payments will not exceed
2.5% of Net Sales in the Territory, on a quarterly basis, for the first four
calendar quarters during which the Licensed Product is commercially sold in
the first Major Market Country, and 3% of Net Sales, on a quarterly basis, for
each of the following eight calendar quarters. As a result of this provision,
if a Licensed Product were to be cleared for marketing in a country or
countries that are not Major Market Countries prior to marketing clearance in
the first Major Market Country and Product Payments in such countries would
exceed 2.5% and/or 3% of Net Sales, the Product Payment rates in such
countries will not exceed 2.5% for the first four calendar quarters during
which the Licensed Product is commercially sold in the first Major Market
Country and 3% during the following eight calendar quarters.
In determining the payments due to Crescendo with respect to any Licensed
Product, Net Sales by ALZA will be reduced by the amount of any license or
similar payments made by or due from ALZA to third parties with respect to
sales of such Licensed Product in the Territory. If a Licensed Product is an
electrotransport product, this reduction is likely to include the amount of
any payments due from ALZA to Medtronic under an existing agreement between
ALZA and Medtronic covering electrotransport products. It is possible that, to
develop the Crescendo Products, licenses or other arrangements with third
parties may be necessary or appropriate. Such arrangements could also require
payments by ALZA that would reduce the Product Payments owed to Crescendo.
Subject to ALZA's buy-out option described below, Product Payments will
commence on the date of the first commercial sale of such Licensed Product in
any country for which the License Option has been exercised. ALZA will make
such Product Payments, with respect to all countries for which the License
Option has been exercised, until 15 years after the first commercial sale of
the Licensed Product in the first Major Market Country in which such product
is commercially sold.
ALZA has the option to buy out Crescendo's right to receive Product Payments
for any Licensed Product on either a country-by-country or global basis. The
payment buy-out for any particular Crescendo Product may be exercised only
with respect to countries in the Territory. A country-specific buy-out option
may be exercised for any Licensed Product at any time after the end of the
twelfth calendar quarter during which the product was commercially sold in
such country. The global buy-out option may be exercised for any Licensed
Product, for all countries for which ALZA has exercised the License Option, at
any time after the end of the twelfth calendar quarter during which the
product was commercially sold in either the United States or two other Major
Market Countries. The buy-out price in the case of a country-specific buy-out
will be 15 times the Product Payments made by or due from ALZA to Crescendo
with respect to Net Sales of such Licensed Product in such country for the
four calendar quarters immediately preceding the quarter in which the buy-out
option is exercised. The buy-out price in the case of a global buy-out will be
(i) 20 times (a) the Product Payments made by or due from ALZA to Crescendo
with respect to Net Sales of the Licensed Product, plus (b) such Product
Payments as would have been made by or due from ALZA to Crescendo if ALZA had
not exercised any country-specific buy-out option with respect to such
Licensed Product, in each case for the four calendar quarters immediately
preceding the quarter in which the global buy-out option is exercised, less
(ii) any amounts previously paid to exercise any country-specific buy-out
option with respect to such Licensed Product. In either case, the buy-out
price will be computed as if Product Payments were not limited to 2.5% or 3%
of Net Sales during early marketing as described above. At the time ALZA
exercises the global buy-out option for any Licensed Product, the License
Option for such product will expire for all countries for which it has not
been exercised.
42
<PAGE>
If ALZA exercises the License Option for any Crescendo Product, ALZA will
continue to own and have the right to use any clinical supplies, materials and
other assets purchased, manufactured or developed for use in the development
of such Crescendo Product under approved work plans and cost estimates (the
"Development Assets"), without any additional payment to or reimbursement of
Crescendo. To the extent ALZA does not exercise the License Option for any
Crescendo Product prior to its expiration, or to the extent ALZA notifies
Crescendo that it will not exercise its License Option for any Crescendo
Product, ALZA must make Development Assets relating to such Crescendo Product
available to Crescendo at no charge, unless such Development Assets are being
used under the Development Agreement.
During the term of the License Agreement for a Licensed Product, ALZA will
provide quarterly reports to Crescendo detailing payments due for such period
with respect to the Licensed Product. Such reports will be due 90 days after
the end of each calendar quarter and will indicate the quantity and dollar
amount of Net Sales of the Licensed Product, or other considerations in
respect of Net Sales, during the quarter covered by such report. No more than
once in each calendar year upon reasonable notice and during regular business
hours, ALZA is required to make available for inspection by an independent
public accountant selected by Crescendo such records of ALZA as may be
necessary to verify the accuracy of reports and payments made under the
License Agreement. ALZA must provide similar reports and records with respect
to all Developed Technology Products and Technical Evaluation Products.
A License Agreement may be terminated by Crescendo in the event that ALZA
(i) breaches any material obligation under the License Agreement (which breach
continues for a period of 60 days after written notice by Crescendo) or (ii)
enters into any proceeding, voluntary or involuntary, in bankruptcy,
reorganization or similar arrangement for the benefit of its creditors. ALZA
may terminate a License Agreement as to any country upon 30 days' written
notice to Crescendo.
To the extent ALZA does not exercise the License Option with respect to any
Crescendo Product, Crescendo will retain exclusive rights to develop and
commercialize such Crescendo Product.
PURCHASE OPTION
The Purchase Option is set forth in Crescendo's Restated Certificate of
Incorporation. Pursuant to the Purchase Option, ALZA has an exclusive,
irrevocable option to purchase all, but not less than all, of the issued and
outstanding Crescendo Shares. ALZA may exercise the Purchase Option by written
notice to Crescendo at any time during the period beginning immediately after
the Distribution and ending on January 31, 2002; provided, that such date will
be extended for successive six month periods if, as of any July 31 or January
31 beginning with July 31, 2001, Crescendo has not paid or accrued expenses
for at least 95% of all Available Funds pursuant to the Development Agreement.
The Purchase Option will in any case terminate on the 60th day after Crescendo
provides ALZA with a statement that, as of the end of any calendar month,
there are less than $2.5 million of Available Funds remaining, accompanied by
a report by Crescendo's independent auditors. All certificates evidencing
Crescendo Shares will bear a legend indicating that such Crescendo Shares are
subject to the Purchase Option.
If the Purchase Option is exercised, the exercise price (the "Purchase
Option Exercise Price") will be the greatest of:
(a) (i) 25 times the actual worldwide payments made by or due from ALZA to
Crescendo with respect to all Licensed Products, Developed Technology
Products and Technical Evaluation Products (and, in addition, such
payments as would have been made by or due from ALZA to Crescendo if
ALZA had not previously exercised its payment buy-out option with
respect to any such product) for the four calendar quarters immediately
preceding the quarter in which the Purchase Option is exercised
(provided, however, that for any product which, at the time of exercise
of the Purchase Option, has not been commercially sold during each of
such four calendar quarters, the portion of the Purchase Option
Exercise Price for such product will be 100 times the average of the
quarterly payments made by or due from ALZA to Crescendo for each of
such calendar quarters during which such product was commercially
sold), less (ii) any amounts previously paid to exercise any payment
buy-out option for any product;
43
<PAGE>
(b) the fair market value of one million shares of ALZA Common Stock
determined as of the date ALZA determines to exercise its Purchase
Option;
(c) $325 million less all amounts paid by or due from Crescendo under the
Development Agreement to the date the Purchase Option is exercised; or
(d) $100 million.
In each case, the amount payable as the Purchase Option Exercise Price will
be reduced to the extent, if any, that Crescendo's liabilities at the time of
exercise (other than liabilities under the Development Agreement, the Services
Agreement and the Technology License Agreement) exceed Crescendo's cash and
cash equivalents and short-term and long-term investments (excluding the
amount of Available Funds remaining at such time). For this purpose,
liabilities will include, in addition to liabilities required to be reflected
on Crescendo's financial statements under generally accepted accounting
principles, certain contingent liabilities relating to guarantees and similar
arrangements.
ALZA may pay the Purchase Option Exercise Price in cash, in ALZA Common
Stock, or in any combination of cash and ALZA Common Stock. For the purpose of
determining either the Purchase Option Exercise Price or the fair market value
of the ALZA Common Stock to be issued in payment thereof, the fair market
value of ALZA Common Stock shall be deemed to be the average of the closing
sales price of ALZA Common Stock on the New York Stock Exchange for the 20
trading days ending with the trading day that is two trading days prior to the
date of exercise of the Purchase Option.
The closing of the acquisition of the Crescendo Shares pursuant to exercise
of the Purchase Option will take place on a date selected by ALZA, but no
later than 60 days after the exercise of the Purchase Option unless, in the
judgment of ALZA, a later date is required to satisfy any applicable legal
requirements or to obtain required consents. Between the time of exercise of
the Purchase Option and the time of closing of the acquisition of the
Crescendo Shares, Crescendo may not incur additional debt or operate its
business other than in the ordinary course. Upon exercise of the Purchase
Option, ALZA as the holder of the Class B Common Stock will be entitled to
elect the majority of the Board of Directors of Crescendo.
In the event that prior to ALZA's exercise of the Purchase Option, the
number of outstanding shares of ALZA Common Stock is increased by virtue of a
stock split or a dividend payable in ALZA Common Stock or the number of such
shares is decreased by virtue of a combination or reclassification of such
shares, then the number of shares of ALZA Common Stock used to compute the
Purchase Option Exercise Price (if the Purchase Option Exercise Price is the
fair market value of one million shares of ALZA Common Stock) shall be
increased or decreased, as the case may be, in proportion to such increase or
decrease in the number of outstanding shares of ALZA Common Stock.
DISTRIBUTION AGREEMENT
Under the Distribution Agreement, ALZA will contribute $300 million in cash
to Crescendo in exchange for the Crescendo Shares, and will distribute the
Crescendo Shares to the Holders. Under the Distribution Agreement, ALZA has
agreed to indemnify Crescendo's officers and directors from certain claims by
third parties if ALZA exercises the Purchase Option.
SERVICES AGREEMENT
Crescendo and ALZA have entered into a Services Agreement pursuant to which
ALZA has agreed to provide Crescendo with administrative services, including
accounting and legal services, on a fully-burdened cost reimbursement basis.
The Services Agreement has a one-year term and will be renewed automatically
for successive one-year terms during the term of the Development Agreement,
until six months after the expiration of the Purchase Option. Crescendo may
terminate the Services Agreement at any time upon 60 days' written notice.
44
<PAGE>
FEDERAL INCOME TAX CONSIDERATIONS
The following discussion sets forth the opinion of Heller Ehrman White &
McAuliffe with respect to material federal income tax considerations under the
Internal Revenue Code of 1986, as amended (the "Code"), with respect to the
Crescendo Shares, cash in lieu of fractional Crescendo Shares, or both
Crescendo Shares and cash distributed to Holders in the Distribution. THIS
DISCUSSION DOES NOT ADDRESS THE TAX CONSEQUENCES OF THE ACQUISITION OF
CRESCENDO SHARES BY PURCHASE OR MEANS OTHER THAN THE DISTRIBUTION. In
addition, this discussion is intended only to provide general information
regarding Holders that are subject to United States federal income tax; it may
not address all relevant federal income tax consequences to such persons or to
other categories of Holders, e.g., foreign persons, dealers in securities, and
Holders that are exempt from federal income tax. This discussion is based upon
the Code, Treasury Regulations (including proposed Treasury Regulations)
promulgated thereunder, rulings, official pronouncements and judicial
decisions all as in effect on the date hereof and all of which are subject to
change or different interpretations by the Internal Revenue Service or the
courts, any of which changes or interpretations may have retroactive effect.
Heller Ehrman White & McAuliffe has disclaimed any undertaking to advise as to
any change in the law that may affect its opinion, including changes that may
be made under currently pending legislative proposals, and has expressed no
opinion as to the laws of any jurisdictions other than the federal income tax
laws of the United States of America. An opinion of counsel does not bind the
Internal Revenue Service, which could take a contrary position, but represents
only counsel's judgment as to the likely outcome if the issues involved were
properly presented to a court of competent jurisdiction. This discussion
assumes that the Crescendo Shares will at all relevant times constitute
capital assets of the Holders. This discussion does not address state, local,
or foreign tax considerations. HOLDERS ARE URGED TO CONSULT THEIR OWN TAX
ADVISORS. Heller Ehrman White & McAuliffe acted as United States federal
income tax counsel to Crescendo and assisted in preparing this Prospectus.
TAXABILITY OF THE DISTRIBUTION TO HOLDERS OF ALZA COMMON STOCK
The fair market value of Crescendo Shares, plus the cash intended to
represent the fair market value of a fractional Crescendo Share (together, the
"Taxable Amount"), distributed to a Holder of ALZA Common Stock will
constitute a dividend taxable as ordinary income to the extent that ALZA has
current or accumulated "earnings and profits" for federal income tax purposes,
as of the end of the taxable year in which the Distribution occurs, that are
allocable for federal income tax purposes to the Distribution. Assuming that
there will be a public market for the Crescendo Shares at the time of the
Distribution, the fair market value of a Crescendo Share to a Holder for this
purpose is expected to be the closing trading price on the date of the
Distribution or if such date is not a trading day, on the first trading day
following the Distribution. However, if the Taxable Amount exceeds the
Holder's allocable share of ALZA's current and accumulated earnings and
profits for federal income tax purposes determined as of the end of ALZA's
fiscal year ending December 31, 1997, the excess will generally be treated
first as a basis-reducing, tax-free return of capital to the extent of the
Holder's basis in the Holder's ALZA Common Stock, and after this basis is
reduced to zero, as either short-term or long-term capital gain. ALZA's
management has advised that, based on the information currently available,
ALZA's accumulated earnings and profits at December 31, 1997 are expected to
be such that the Taxable Amount will not exceed the Holder's allocable share
of such earnings and profits.
In early 1998, each Holder of ALZA Common Stock receiving Crescendo Shares
in the Distribution will receive an Internal Revenue Service ("IRS") Form
1099-DIV reflecting the fair market value of Crescendo Shares (and any amount
of cash) distributed to such Holder, as well as any portion of the taxable
amount exceeding ALZA's current and accumulated earnings and profits.
To the extent that the Taxable Amount constitutes ordinary income, it will
generally be subject to back-up withholding with respect to Holders who,
before the Distribution, have not provided their correct taxpayer
identification numbers to ALZA on an IRS Form W-9 or a substitute therefor.
Although this discussion does not generally address tax consequences of the
Distribution to foreign Holders of ALZA Common Stock, such Holders should note
that distribution of the Taxable Amount will generally be subject to U.S.
withholding tax at
45
<PAGE>
the rate of 30%. This rate may be reduced by treaties to which the United
States is a party. Non-resident alien individuals, foreign corporations and
other foreign Holders are urged to consult their own tax advisors regarding
the availability of such reductions and the procedures for claiming them.
For corporate Holders of ALZA Common Stock, the Taxable Amount will be
eligible for a "dividends-received" deduction, subject to limitations and
exclusions provided by the Code, if the Purchase Option is not "in the money"
for at least 45 days during the 90-day period beginning 45 days before the
ALZA Common Stock becomes ex-dividend with respect to the Distribution.
However, for corporate Holders of ALZA Common Stock, the Taxable Amount will
be subject to the Code's extraordinary dividend rules, which could reduce a
corporate Holder's basis in its ALZA Common Stock by the amount of the
deduction, if the Taxable Amount equals at least 10% of the Holder's basis.
TAXABILITY OF THE DISTRIBUTION TO HOLDERS OF ALZA DEBENTURES
The Taxable Amount distributed to a Holder of Debentures will be a taxable
distribution.
In early 1998, each Holder of Debentures receiving Crescendo Shares in the
Distribution will receive an IRS Form 1099-INT reflecting the fair market
value of Crescendo Shares (and any amount of cash) distributed to such Holder.
The distribution to Holders of Debentures will generally be subject to back-
up withholding with respect to individuals who, before the Distribution, have
not provided their correct taxpayer identification numbers to ALZA on an IRS
Form W-9 or a substitute therefor. Although this discussion does not generally
address tax consequences to foreign Holders of Debentures, such Holders should
note that the distribution of Crescendo Shares to them will not qualify for
exemption from U.S. taxation as "portfolio interest" because it is determined
by reference to dividends paid by ALZA, and that the distribution will be
subject to U.S. withholding tax at the rate of 30%. This rate may be reduced
by treaties to which the United States is a party. Non-resident alien
individuals, foreign corporations, and other foreign persons are urged to
consult their own tax advisors regarding the availability of such reductions
and the procedures for claiming them.
SALE OF CRESCENDO SHARES
Upon sale of Crescendo Shares, the Holder will have a capital gain or loss
equal to the difference between the sale price and the Holder's basis in the
Crescendo Shares sold. This gain or loss will be short-term if the Crescendo
Shares have a holding period of one year or less on the sale date. For
individuals, short-term capital gain is subject to federal income tax at a
maximum rate of 39.6%; under recently enacted federal income tax legislation,
capital gain from assets like Crescendo Shares, that have a holding period of
more than a year on the sale date, is subject to federal income tax at rates
that vary from 28% to 10%, depending upon the length of the holding period. If
the holding period is more than one year but less than 18 months, the maximum
stated federal income tax rate upon sale is 28%. If the holding period is more
than 18 months, the maximum stated federal income tax rate may be 20% or 10%.
(The phase-out or elimination of certain deductions and exemptions at higher
income levels has the effect of raising the marginal tax rate at those
levels.) These rules are new and complex and have not yet been interpreted by
the Internal Revenue Service or the courts. In addition, the combination of
the Crescendo Shares and the Purchase Option may be deemed a "straddle," with
the result that the holding period of Crescendo Shares would not begin until
such date as the Purchase Option is exercised or expires. There is presently
no difference in federal income tax rates between ordinary income and capital
gains of corporations. Limitations may apply to deduction of capital loss.
A Holder's initial basis in Crescendo Shares received in the Distribution
will be the fair market value of those Crescendo Shares at the time of the
Distribution.
46
<PAGE>
EXERCISE OF PURCHASE OPTION
If ALZA exercises its Purchase Option solely by delivering ALZA Common Stock
in exchange for Crescendo Shares, no gain or loss will be taxable to the
Holders of Crescendo Shares upon the exchange if: (a) exercise of the Purchase
Option constitutes a "plan of reorganization" for purposes of Section
368(a)(1)(B) of the Code, (b) no consideration other than ALZA Common Stock and
cash in lieu of fractional shares is deemed to be paid by ALZA upon exercise of
the Purchase Option, and (c) the other requirements of Section 368(a)(1)(B) are
met at the time of such exchange. If the requirements for tax-free treatment
are not satisfied (e.g., if ALZA delivers cash (other than cash in lieu of
fractional shares) or both cash (other than cash in lieu of fractional shares)
and ALZA Common Stock), Holders of Crescendo Shares will have a capital gain or
loss due to ALZA's exercise of the Purchase Option equal to the difference
between (a) the sum of the cash and the fair market value of the ALZA Common
Stock (and any other deemed consideration) received and (b) the Holder's basis
in the Crescendo Shares surrendered. Gain or loss due to the exercise of the
Purchase Option should be long-term if the Crescendo Shares have been held for
more than one year at the time of the closing of the exercise of the Purchase
Option. However, the combination of the Crescendo Shares and the Purchase
Option may be deemed a "straddle," with the result that the holding period of
Crescendo Shares would not begin until such date as the Purchase Option is
exercised and that capital gain or loss upon exercise of the Purchase Option
would be therefore short-term. Limitations may apply to deduction of capital
loss.
EXPIRATION OF PURCHASE OPTION
If the Purchase Option expires unexercised, each Holder of Crescendo Shares
on the date it expires may have short-term capital gain in the amount of the
fair market value of the portion of the Purchase Option covering the Holder's
Crescendo Shares on the date of the Distribution; any such gain would increase
the Holder's basis in the Crescendo Shares. ALZA believes that the fair market
value of the Purchase Option is not readily ascertainable.
47
<PAGE>
DESCRIPTION OF CRESCENDO CAPITAL STOCK
At the time of the Distribution, Crescendo's authorized capital stock will
consist of 6,000,000 Crescendo Shares and 1,000 shares of Crescendo Class B
Common Stock (together with Crescendo Shares, the "Crescendo Common Stock").
Holders of Crescendo Common Stock will be entitled to receive dividends
when, as and if declared by the Board of Directors out of funds legally
available therefor. Available Funds may not be used to pay dividends. In the
event of a liquidation, dissolution or winding up of Crescendo, holders of
Crescendo Common Stock will be entitled to receive, pro rata, all remaining
assets of Crescendo available for distribution to stockholders.
No preemptive rights, conversion rights, redemption rights or sinking fund
provisions will be applicable to Crescendo Shares. Upon completion of this
Distribution, all outstanding Crescendo Shares will be fully paid and
nonassessable and will not be subject to any liability for further call. The
Crescendo Shares will be subject to the Purchase Option and certificates
representing such shares and book-entry account statements will bear a legend
to that effect. See "The Agreements and the Purchase Option--Purchase Option."
No preemptive rights, redemption rights or sinking fund provisions will be
applicable to the Crescendo Class B Common Stock. Each share of the Crescendo
Class B Common Stock, all of which are held by ALZA, will automatically
convert into one Crescendo Share upon such date as the Purchase Option
expires.
Until the expiration of the Purchase Option, ALZA, as the sole holder of the
Crescendo Class B Common Stock, will be entitled to vote separately as a class
with respect to any merger or liquidation of Crescendo, the sale, lease,
exchange, transfer or other disposition of any substantial asset of Crescendo,
and any amendments to the Restated Certificate of Incorporation of Crescendo
that would alter the Purchase Option, Crescendo's authorized capitalization,
or the provisions of the Restated Certificate of Incorporation governing
Crescendo's Board of Directors. Accordingly, ALZA could preclude the holders
of the Crescendo Shares from taking any of the foregoing actions during such
period. Prior to exercise of the Purchase Option, the holders of Crescendo
Shares and Crescendo Class B Common Stock will vote together as a class for
the election of directors. Upon exercise of the Purchase Option, ALZA, as the
sole holder of the Crescendo Class B Common Stock, will have the right to
elect a majority of the Crescendo directors. On all other matters, holders of
the Crescendo Shares and Crescendo Class B Common Stock will vote together as
a single class. Holders of Crescendo Common Stock will have one vote for each
share of Crescendo Common Stock held by them.
Crescendo has a classified Board of Directors with directors serving
staggered terms of three years each. Directors may not be removed by the
stockholders without cause. Only the Crescendo Board of Directors, the
Chairman of the Board or the President may call special meetings of the
Crescendo stockholders. The approval of the holder of the Crescendo Class B
Common Stock is required to amend the provisions of Crescendo's Restated
Certificate of Incorporation and bylaws governing the number and
classification of the Board of Directors and certain related matters. The
provisions of Crescendo's Restated Certificate of Incorporation granting
special voting rights to the holder or holders of the Crescendo Class B Common
Stock, classifying Crescendo's Board of Directors, and eliminating the right
of Crescendo stockholders to call special meetings of stockholders may inhibit
a change in control of Crescendo.
48
<PAGE>
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Crescendo Shares is Boston
EquiServe, L.P., 150 Royall Street, Canton, Massachusetts 02021, telephone
(617) 575-2000.
EXPERTS
The balance sheet of Crescendo Pharmaceuticals Corporation as of July 7,
1997 appearing in this Prospectus and the Registration Statement has been
audited by Ernst & Young LLP, independent auditors, as set forth in their
report thereon appearing elsewhere herein, and is included herein in reliance
upon such report given upon the authority of said firm as experts in
accounting and auditing.
LEGAL MATTERS
The statements included in this Prospectus under the caption "Federal Income
Tax Consequences" have been reviewed by, and the validity of the Crescendo
Shares offered hereby will be passed upon by, Heller Ehrman White & McAuliffe,
Palo Alto, California, ALZA's and Crescendo's counsel. Julian N. Stern , a
director and the Secretary of ALZA, is the sole employee of a professional
corporation that is a member of the law firm of Heller Ehrman White &
McAuliffe. Based on share ownership as of July 7, 1997, attorneys in that firm
directly involved in the representation of ALZA are expected to beneficially
own 5,418 Crescendo Shares immediately after the Distribution.
49
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Ernst & Young LLP, Independent Auditors......................... F-2
Crescendo Pharmaceuticals Corporation Balance Sheet and Notes to Balance
Sheet.................................................................... F-3
Crescendo Pharmaceuticals Corporation Pro Forma Balance Sheet............. F-5
</TABLE>
F-1
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We have audited the accompanying balance sheet of Crescendo Pharmaceuticals
Corporation as of July 7, 1997. This balance sheet is the responsibility of
the Company's management. Our responsibility is to express an opinion on this
balance sheet based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain a reasonable assurance about whether the balance sheet is free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the balance sheet. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluation of the overall balance sheet
presentation. We believe that our audit of the balance sheet provides a
reasonable basis for our opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of Crescendo Pharmaceuticals
Corporation as of July 7, 1997, in conformity with generally accepted
accounting principles.
/s/ Ernst & Young LLP
Palo Alto, California
September 4, 1997
F-2
<PAGE>
CRESCENDO PHARMACEUTICALS CORPORATION
BALANCE SHEET
JULY 7, 1997
<TABLE>
<S> <C>
ASSETS
Cash................................................................. $1,000
======
STOCKHOLDER'S EQUITY (NOTE 2)
Common Stock, $1.00 par value,
100 shares authorized, 100 shares issued and outstanding............ $ 100
Additional paid-in capital........................................... 900
------
Total stockholders' equity......................................... $1,000
======
</TABLE>
NOTES TO BALANCE SHEET
1. ORGANIZATION AND OWNERSHIP
Crescendo Pharmaceuticals Corporation (the "Company" or "Crescendo") was
incorporated on June 26, 1997 in the state of Delaware for the purpose of
selecting and developing human therapeutic products combining ALZA
Corporation's ("ALZA") proprietary drug delivery systems with drug compounds,
or other human pharmaceutical products, and for commercializing such products,
most likely through licensing to ALZA.
The Company has not yet commenced significant operations, and its only
activity to date has been the initial funding provided by ALZA, which owns all
of the Company's outstanding Common Stock. Accordingly, no statement of
revenue and expenses or statement of cash flows is presented.
2. COMMON STOCK
Prior to the closing of the distribution contemplated by the Prospectus, of
which this Balance Sheet is a part (the "Prospectus"), the Company intends to
restate its Certificate of Incorporation to provide for Class A Common Stock
and Class B Common Stock. The common stockholders and the debenture holders of
ALZA will receive one share of Crescendo Pharmaceuticals Corporation Class A
Common Stock for each 20 shares of ALZA Common Stock held on the record date,
for each 36 shares of ALZA Common Stock into which their 5% Debentures held on
the record date are convertible and for each 37 shares of ALZA Common Stock
into which their 5 1/4% Debentures held on the record date are convertible.
The shares of the Company's Common Stock owned by ALZA on the date on which
the Restated Certificate of Incorporation is filed will be converted into
1,000 shares of Class B Common Stock. On September 4, 1997, the board of
directors adopted the Crescendo Stock Option Plan pursuant to which 200,000
shares of Class A Common Stock will be reserved for issuance. No options have
yet been issued under such plan.
3. CERTAIN TRANSACTIONS WITH ALZA
On September 4, 1997, the board of directors authorized the Company to enter
into certain agreements with ALZA including a Technology License Agreement, a
Development Agreement, a License Option Agreement, a Services Agreement and a
Distribution Agreement. In addition, under the Company's Restated Certificate
of Incorporation, ALZA will have an option, for a specified period, to
purchase all of the outstanding shares of Class A Common Stock.
Under the terms of the Technology License Agreement, ALZA has granted
Crescendo a worldwide license to use certain ALZA technology solely to select,
develop and commercialize products accepted for development by Crescendo under
the Development Agreement. In exchange for the license to use existing ALZA
technology related to certain specified products, Crescendo will pay ALZA a
fee (the "Technology Fee") monthly over a maximum period of three years as
follows: $1 million per month for 12 months, $667,000 per month for the
following 12 months and $333,000 per month for the following 12 months.
F-3
<PAGE>
Crescendo is required to spend all of the funds contributed by ALZA plus any
investment income earned thereon, less (i) Crescendo's reasonable ongoing
administrative expenses, (ii) the Technology Fee and (iii) reserves of up to
$2 million (the "Available Funds"), under the Development Agreement for the
selection and development of human pharmaceutical products. Crescendo is
expected to utilize substantially all of the Available Funds to reimburse ALZA
for the costs of these activities. Crescendo will own (or have an exclusive
license to) the resulting products. In addition, ALZA will be required to make
certain payments to Crescendo with respect to products incorporating
proprietary agents of third parties which are not developed under the
Development Agreement, but for which a technical evaluation has been conducted
under the Development Agreement, and with respect to products incorporating
technology developed or otherwise obtained pursuant to the Development
Agreement.
Under the Services Agreement, ALZA will provide Crescendo with
administrative services, including accounting and legal services.
Under the Development Agreement and the Services Agreement, ALZA's charges
to Crescendo will consist of ALZA's fully-burdened cost of the services
provided (salaries and benefits, plus overhead) and outside expenses incurred,
charged at cost, which Crescendo believes is the same basis as charged by ALZA
to its pharmaceutical company clients.
4. ACCOUNTING FOR REVENUES AND EXPENSES
The Company's revenues in early years will consist solely of investment
income. In later years the Company may also derive revenues from the sale of
its products, most likely through sale of the products by third parties.
Royalty and other product revenue will be recorded as earned.
The Company expects to incur most of its expenses under agreements with
ALZA. Development costs paid to ALZA under the Development Agreement, and the
Technology Fee paid to ALZA under the Technology License Agreement, will be
recorded as research and development expenses when incurred. Amounts paid to
ALZA under the Services Agreement will be recorded as administrative expenses
when incurred.
F-4
<PAGE>
CRESCENDO PHARMACEUTICALS CORPORATION
PRO FORMA BALANCE SHEET
JULY 7, 1997
The following pro forma balance sheet should be read in conjunction with the
audited balance sheet and notes of Crescendo Pharmaceuticals Corporation as of
July 7, 1997. The pro forma balance sheet is presented to show the financial
position of Crescendo following the receipt of $300,000,000 in cash from ALZA,
the conversion of 100 shares of Common Stock owned by ALZA into 1,000 shares
of Class B Common Stock, and the issuance to ALZA of Crescendo Shares prior to
the Distribution.
ASSETS
<TABLE>
<CAPTION>
PRO FORMA AS ADJUSTED
UNADJUSTED ADJUSTMENTS AS OF JULY 7, 1997
---------- ------------ ------------------
<S> <C> <C> <C>
Cash ........................... $1,000 $299,999,000 (a) $300,000,000
====== ============ ============
STOCKHOLDERS' EQUITY
Common Stock, $1.00 par value
100 shares authorized, 100
shares issued and outstanding
(none as adjusted)............. $ 100 $ (100)(b) $ --
Class A Common Stock, $.01 par
value 6,000,000 shares
authorized, 4,963,615 shares to
be issued and outstanding as
adjusted....................... -- 49,636(c) 49,636
Class B Common Stock, $1.00 par
value 1,000 shares authorized,
1,000 shares to be issued and
outstanding as adjusted........ -- 1,000 (b) 1,000
Additional paid-in capital...... 900 (49,636)(c) 299,949,364
(900)(b)
299,999,000 (a)
------ ------------ ------------
Total stockholders' equity.... $1,000 $299,999,000 $300,000,000
====== ============ ============
</TABLE>
- --------
(a) To reflect the receipt of the remainder of the $300,000,000 contribution
from ALZA.
(b) To reflect the conversion of 100 shares of Common Stock held by ALZA into
1,000 shares of Class B Common Stock.
(c) To reflect the issuance of 4,963,615 Crescendo Shares.
NOTE TO PRO FORMA BALANCE SHEET
1. The Development Agreement provides that Crescendo is obligated to reimburse
ALZA for the Development Costs of the Identified Products from the date on
which Therapeutic Discovery Corporation ceases funding their development
(August 25, 1997) through October 31, 1997. The total amount for such
period is expected to total between $14 million and $18 million. The pro
forma balance sheet at July 7, 1997 does not reflect any such future
liability because no such liability had been incurred as of such date. As
of the date of the Distribution, Crescendo will record a charge for its
obligations incurred prior to that date.
F-5
<PAGE>
EXHIBIT A
Investment Banking
Corporate and
Institutional
Client Group
10900 Wilshire
Boulevard
Suite 900
Los Angeles,
California 90024
LOGO
September 4, 1997
Board of Directors
ALZA Corporation
950 Page Mill Road
Palo Alto, CA 94304
Ladies and Gentlemen:
You have advised us that ALZA Corporation ("ALZA") intends to distribute
(the "Distribution") to its stockholders and the holders (the "Debenture
Holders") of ALZA's outstanding 5% convertible subordinated debentures due
2006 (the "5% Debentures") and ALZA's outstanding 5 1/4% zero coupon
convertible subordinated debentures due 2014 (the "5 1/4% Debentures" and,
together with the 5% Debentures, the "Debentures") shares (the "Crescendo
Shares") of Class A Common Stock of Crescendo Pharmaceuticals Corporation
("Crescendo"). The Distribution is described in detail in the prospectus (the
"Prospectus"), filed as part of a registration statement on Form S-1 file no.
333-31281, which is to be sent to ALZA stockholders and Debenture Holders in
connection with the Distribution. You have asked us for our opinion as to
whether or not (a) from a financial point of view, the Distribution provides a
reasonable structure to pursue the financial objectives of ALZA as set forth
in the Prospectus, (b) from a financial point of view, the Distribution is
fair to the stockholders of ALZA and (c) from a financial point of view, the
basis on which Crescendo Shares will be distributed to ALZA's Debenture
Holders is fair and appropriate in light of the basis on which holders of the
ALZA Common Stock are participating.
In arriving at the opinion set forth below, we have, among other things:
1. reviewed the Prospectus including the following items as presented
therein: (i) the terms and conditions of the Distribution, (ii) the
Distribution Agreement, (iii) the Technology License Agreement, (iv) the
Development Agreement, (v) the License Option Agreement and (vi) the
Restated Certificate of Incorporation of Crescendo including the Purchase
Option;
2. conducted discussions with members of the senior management of ALZA
with respect to the businesses and prospects of ALZA and Crescendo and the
strategic objectives of each;
3. conducted discussions concerning the Distribution with other
representatives and advisors of ALZA, including its independent public
accountants;
4. reviewed the financial and other information concerning ALZA (with and
without Crescendo) that was publicly available or furnished to us by ALZA,
including information provided during discussions with the senior
management of ALZA;
5. reviewed historical trading prices and volume of Common Stock of ALZA
("ALZA Common Stock") and the Debentures;
6. reviewed the terms and conditions of the Debentures, and the
Indentures pursuant to which the Debentures were issued (including those
contained in Section 11.10 of the Indenture governing the 5 1/4% Debentures
and those contained in Section 14.5(d) of the Indenture governing the 5%
Debentures, which both provide that no adjustment
A-1
<PAGE>
to the conversion ratio for the Debentures need be made if the Debenture
Holders are to participate in the transaction "on a basis and with notice
that the Board of Directors determines to be fair and appropriate in light
of the basis and notice on which holders of Common Stock participate" in
such transaction); and
7. reviewed such other financial studies and analyses and took into
account such other matters as we deemed necessary, including our assessment
of general economic, market and monetary conditions.
In preparing our opinion, we have assumed and relied on the accuracy and
completeness of all information supplied or otherwise made available to us,
discussed with or reviewed by or for us, or publicly available (including the
information contained in the Prospectus), and we have not assumed any
responsibility for independently verifying such information or undertaken an
independent evaluation or appraisal of any of the assets or liabilities of
ALZA (with or without Crescendo) or been furnished with any such evaluation or
appraisal. In addition, we have not assumed any obligation to conduct, nor
have we conducted, any physical inspection of the properties or facilities of
ALZA. With respect to the financial forecast information furnished to or
discussed with us by ALZA, we have assumed it has been reasonably prepared and
reflects the best currently available estimates and judgment of ALZA's
management as to the expected future financial performance of ALZA and
Crescendo.
We have also assumed that: (i) the Distribution will occur as described in
the Prospectus, (ii) the Distribution will not be a taxable transaction to
ALZA, and (iii) after the Distribution, Crescendo will be accounted for as an
entity independent of ALZA.
Our opinion is necessarily based upon market, economic and other conditions
as they exist and can be evaluated on, and on the information made available
to us as of, the date hereof. We note that trading in shares of ALZA Common
Stock and the Crescendo Shares for a period following completion of the
Distribution may be characterized by a redistribution of the shares of ALZA
Common Stock and the Crescendo Shares among existing ALZA stockholders,
Debenture Holders and other investors and, accordingly, during such period,
the shares of ALZA Common Stock and the Crescendo Shares may trade at prices
below those at which they would trade on a fully distributed basis. This
opinion does not opine on or give assurances of the price at which the shares
of ALZA Common Stock or the Debentures will actually trade after the
announcement date of the Distribution or the price at which the Crescendo
Shares will actually trade after the Distribution. In addition, this opinion
does not address the valuation or future performance of Crescendo as an
independent public company following the Distribution. We express no opinion
as to whether the funds contributed by ALZA to Crescendo will be adequate to
accomplish the objective of successfully developing the intended
pharmaceutical products.
We are acting as financial advisor to ALZA in connection with the
Distribution and will receive a fee for our services, which fee is contingent
upon the consummation of the Distribution. In addition, ALZA has agreed to
indemnify us for certain liabilities arising out of our engagement. We have,
in the past, provided financial advisory and financing services to ALZA and
may continue to do so and have received, and may receive, fees for the
rendering of such services. In addition, in the ordinary course of our
business, we may actively trade ALZA Common Stock and the Debentures, and we
may, in the future, trade the Crescendo Shares for our own account and for the
accounts of customers and, accordingly, may at any time hold a long or short
position in such securities.
This opinion is for the use and benefit of the Board of Directors of ALZA.
On the basis of and subject to the foregoing, as of the date hereof, it is
our opinion that (a) from a financial point of view, the Distribution provides
a reasonable structure to pursue the financial objectives of ALZA as set forth
in the Prospectus, (b) from a financial point of view, the Distribution is
fair to the stockholders of ALZA and (c) from a financial point of view, the
basis on which Crescendo Shares will be distributed to ALZA's Debenture
Holders is fair and appropriate in light of the basis on which holders of the
ALZA Common Stock are participating. Our conclusions are based on information
available to us as of the date of this letter.
Very truly yours,
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
By /s/ D. Casey Safreno
A-2
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY CRESCENDO. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER TO BUY TO ANY
PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION WOULD BE
UNLAWFUL OR TO ANY PERSON TO WHOM IT IS UNLAWFUL. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY OFFER OR SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF CRESCENDO OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF
ANY TIME SUBSEQUENT TO THE DATE HEREOF.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information.................................................... 2
Summary.................................................................. 3
Glossary................................................................. 14
Risk Factors............................................................. 16
The Distribution......................................................... 21
Crescendo Capitalization................................................. 22
Reasons for the Distribution and Effects on ALZA Corporation............. 23
Business of Crescendo.................................................... 26
Selected Financial Data of Crescendo Pharmaceuticals Corporation......... 37
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 37
The Agreements and the Purchase Option................................... 39
Federal Income Tax Considerations........................................ 45
Description of Crescendo Capital Stock................................... 48
Transfer Agent and Registrar............................................. 49
Experts.................................................................. 49
Legal Matters............................................................ 49
Index to Financial Statements............................................ F-1
Opinion of Merrill Lynch, Pierce, Fenner & Smith Incorporated............ A-1
</TABLE>
UNTIL SEPTEMBER 30, 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE CRESCENDO CLASS A COMMON STOCK OFFERED
HEREBY, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO
DELIVER A PROSPECTUS.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
[LOGO]
CRESCENDO PHARMACEUTICALS
CORPORATION
CLASS A
COMMON STOCK
----------------
PROSPECTUS
----------------
SEPTEMBER 5, 1997
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses incurred by ALZA and
Crescendo in connection with the distribution of the securities being
registered which will be paid by ALZA. All amounts are estimated except the
SEC Registration Fee and the Nasdaq National Market Application Fee.
<TABLE>
<S> <C>
SEC Registration Fee............................................. $ 90,909
Nasdaq National Market Application Fee........................... 30,000
Financial Advisory Fee........................................... 2,500,000
Blue Sky Qualification Fees and Expenses......................... 5,000
Accounting Fees and Expenses..................................... 100,000
Legal Fees and Expenses (including Blue Sky)..................... 275,000
Transfer Agent and Registrar Fees................................ 65,000
Printing and Engraving........................................... 65,000
Miscellaneous.................................................... 9,091
----------
Total.......................................................... $3,140,000
==========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 102 of the Delaware General Corporation Law allows a corporation to
eliminate the personal liability of directors of a corporation to the
corporation or to any of its stockholders for monetary damage for a breach of
his or her fiduciary duty as a director, except in the case where the director
breached his or her duty of loyalty, failed to act in good faith, engaged in
intentional misconduct or knowingly violated a law, authorized the payment of
a dividend or approved a stock repurchase in violation of Delaware corporate
law or obtained an improper personal benefit. Crescendo's Restated Certificate
of Incorporation contains a provision that eliminates directors' personal
liability as set forth above.
Section 145 of the Delaware General Corporation Law, as amended, provides
that a corporation may indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative,
by reason of the fact that he or she is or was a director, officer, employee
or agent of the corporation or is or was serving at its request in such
capacity in another corporation or business association against expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by him or her in connection with such action,
suit or proceeding if he or she acted in good faith and in a manner he or she
reasonably believed to be in or not opposed to the best interests of the
corporation and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his or her conduct was unlawful.
In addition, Article 10 of Crescendo's Restated Certificate of Incorporation
provides as follows:
LIMITATION OF LIABILITY AND INDEMNIFICATION OF DIRECTORS.
(A) ELIMINATION OF CERTAIN LIABILITY OF DIRECTORS. No director of this
corporation shall be personally liable to the corporation or its stockholders
for monetary damages for breach of fiduciary duty as a director except, to the
extent provided by applicable law, for liability (i) for any breach of the
director's duty of loyalty to this corporation or its stockholders, (ii) for
acts or omissions not in good faith or which involve intentional misconduct or
a knowing violation of law, (iii) under Section 174 of the Delaware General
Corporation Law or (iv) for any transaction from which the director derived an
improper personal benefit. No amendment to or repeal of this article shall
apply to or have any effect on the liability or alleged liability of any
director of this corporation for or with respect to any acts or omissions of
such director occurring prior to such amendment.
II-1
<PAGE>
(B) INDEMNIFICATION AND INSURANCE.
(1) RIGHT TO INDEMNIFICATION. Each person who was or is made a party or
is threatened to be made a party to or is involved in any action, suit or
proceeding, whether civil, criminal, administrative or investigative (a
"proceeding"), because he or she, or a person of whom he or she is the
legal representative, is or was a director or officer of this corporation
or is or was serving at the request of this corporation as a director,
officer, employee or agent of another corporation or of a partnership,
joint venture, trust or other enterprise (including service with respect to
employee benefit plans), whether the basis of the proceeding is alleged
action in an official capacity as a director, officer, employee or agent or
in any other capacity while serving as a director, officer, employee or
agent, shall be indemnified and held harmless by this corporation to the
fullest extent authorized by the Delaware General Corporation Law, as the
same exists or may hereafter be amended (but, in the case of any such
amendment, only to the extent that such amendment permits this corporation
to provide broader indemnification rights than that law permitted this
corporation to provide before such amendment), against all expense,
liability and loss (including attorneys' fees, judgments, penalties, fines,
Employee Retirement Income Security Act of 1974 excise taxes or penalties,
and amounts paid or to be paid in settlement) reasonably incurred or
suffered by such person in connection therewith; provided, however, that
this corporation shall indemnify any such person seeking indemnification in
connection with a proceeding (or part thereof) initiated by such person
only if the proceeding (or part thereof) was authorized by the Board of
Directors of this corporation. Such indemnification shall continue as to a
person who has ceased to be a director or officer of this corporation and
shall inure to the benefit of his or her heirs, executors and
administrators. The right to indemnification conferred by this Section
shall be a contract right which may not be retroactively amended and shall
include the right to be paid by this corporation the expenses incurred in
defending any such proceeding in advance of its final disposition;
provided, however, that the payment of such expenses incurred by a director
or officer in his or her capacity as a director or officer (and not in any
other capacity in which service was or is rendered by such person while a
director or officer, including, without limitation, service with respect to
an employee benefit plan) in advance of the final disposition of the
proceeding shall be made only upon delivery to this corporation of an
undertaking, by or on behalf of such director or officer, to repay all
amounts so advanced if ultimately it shall be determined that such director
or officer is not entitled to be indemnified under this Section or
otherwise. This corporation may, by action of its Board of Directors,
provide indemnification to employees and agents of this corporation with
the same scope and effect as the indemnification of directors and officers.
(2) RIGHT OF CLAIMANT TO BRING SUIT. If a claim under Paragraph 1 of this
Section is not paid in full by this corporation within ninety (90) days
after a written claim has been received by this corporation, the claimant
may at any time thereafter bring suit against this corporation to recover
the unpaid amount of the claim and, if successful in whole or in part, the
claimant shall be entitled to be paid also the expense of prosecuting such
claim. It shall be a defense to any such action (other than an action
brought to enforce a claim for expenses incurred in defending any
proceeding in advance of its final disposition where the required
undertaking, if any, has been tendered to this corporation) that the
claimant has not met the standards of conduct which make it permissible
under the Delaware General Corporation Law for this corporation to
indemnify the claimant for the amount claimed, but the burden of proving
such defense shall be on this corporation. Neither the failure of this
corporation (including its Board of Directors, independent legal counsel,
or its stockholders) to have made a determination prior to the commencement
of such action that indemnification of the claimant is proper in the
circumstances because he or she has met the applicable standard of conduct
set forth in the Delaware General Corporation Law, nor an actual
determination by this corporation (including its Board of Directors,
independent legal counsel, or its stockholders) that the claimant has not
met such applicable standard of conduct, shall be a defense to the action
or create a presumption that claimant has not met the applicable standard
of conduct.
(3) NONEXCLUSIVITY OF RIGHTS. The right to indemnification and the
payment of expenses incurred in defending a proceeding in advance of its
final disposition conferred in this Section shall not be exclusive of any
other right which any person may have or hereafter acquire under any
statute, provision of
II-2
<PAGE>
this Restated Certificate of Incorporation, bylaw, agreement, vote of
stockholders or disinterested directors, or otherwise.
(4) INSURANCE. This corporation may maintain insurance, at its expense,
to protect itself and any director, officer, employee or agent of this
corporation or another corporation, partnership, joint venture, trust or
other enterprise against any such expense, liability or loss, whether or
not this corporation would have the power to indemnify such person against
such expense, liability or loss under the Delaware General Corporation Law.
Crescendo intends to purchase directors and officers liability insurance which
would indemnify the directors and officers of Crescendo against damages
arising out of certain kinds of claims which might be made against them based
on their negligent acts or omissions while acting in their capacity as such.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
In July 1997, Crescendo sold 100 shares of Common Stock to ALZA for an
aggregate cash purchase price of $1,000 in a transaction exempt from the
registration requirements of the Securities Act pursuant to Section 4(2)
thereof. In connection with the Distribution contemplated by the Registration
Statement, the 100 shares of Common Stock held by ALZA will be converted into
1,000 shares of Class B Common Stock in a transaction exempt from the
registration requirements of the Securities Act pursuant to Section 3(a)(9)
thereof.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<C> <S>
3.1 Certificate of Incorporation of Crescendo*
3.2 Bylaws of Crescendo*
3.3 Form of Restated Certificate of Incorporation of Crescendo (to be
effective prior to the Distribution)*
4.1 Specimen Certificate of Class A Common Stock of Crescendo*
5.1 Opinion of Heller Ehrman White & McAuliffe as to legality of
Crescendo Shares
8.1 Opinion of Heller Ehrman White & McAuliffe as to tax matters
10.1 Form of Technology License Agreement between ALZA and Crescendo*
10.2 Form of Development Agreement between ALZA and Crescendo*
10.3 Form of License Option Agreement between ALZA and Crescendo*
10.4 Form of Services Agreement between ALZA and Crescendo*
10.5 Form of Distribution Agreement between ALZA and Crescendo*
10.6 Crescendo Stock Option Plan
23.1 Consent of Ernst & Young LLP, Independent Auditors
23.2 Consent of Heller Ehrman White & McAuliffe (included in Exhibits
5.1 and 8.1)
23.3 Consent of Merrill Lynch, Pierce, Fenner & Smith Incorporated
23.4 Consent of Dr. Gary L. Neil
24.1 Power of Attorney*
27.1 Financial Data Schedule*
</TABLE>
- --------
* Previously filed as an Exhibit to this Registration Statement.
II-3
<PAGE>
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes that:
(1) For purpose of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act of 1933 shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act of
1933, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(3) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers, and controlling persons
of the Registrant pursuant to the provisions set forth in Item 14 above, or
otherwise, the Registrant has been advised in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred, or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the Registrant
will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Securities Act of 1933 and the Registrant will be governed by
the final adjudication of such issue.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Crescendo
Pharmaceuticals Corporation has duly caused this Amendment No. 2 to the
Registration Statement on Form S-1 to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Palo Alto, State of
California on September 5, 1997.
Crescendo Pharmaceuticals
Corporation
/s/ Dr. James W. Young
By: _________________________________
DR. JAMES W. YOUNG DIRECTOR,
PRESIDENT AND CHIEF EXECUTIVE
OFFICER
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 2 to the Registration Statement on Form S-1 has been signed by the
following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
--------- -------- ----
<S> <C> <C>
/s/ Dr. James W. Young Director, President September 5,
- ------------------------------------ and Chief Executive 1997
DR. JAMES W. YOUNG Officer (Principal
Executive Officer)
James Butler* Director September 5,
- ------------------------------------- 1997
JAMES BUTLER
Dr. Samuel R. Saks* Director September 5,
- ------------------------------------- 1997
DR. SAMUEL R. SAKS
David R. Hoffmann* Vice President, September 5,
- ------------------------------------- Finance (Principal 1997
DAVID R. HOFFMANN Financial and
Accounting Officer)
*By: /s/ Dr. James W. Young
--------------------------------
DR. JAMES W. YOUNG
(ATTORNEY-IN-FACT)
</TABLE>
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<C> <S>
3.1 Certificate of Incorporation of Crescendo*
3.2 Bylaws of Crescendo*
3.3 Form of Restated Certificate of Incorporation of Crescendo (to be
effective prior to the Distribution)*
4.1 Specimen Certificate of Class A Common Stock of Crescendo*
5.1 Opinion of Heller Ehrman White & McAuliffe as to legality of
Crescendo Shares
8.1 Opinion of Heller Ehrman White & McAuliffe as to tax matters
10.1 Form of Technology License Agreement between ALZA and Crescendo*
10.2 Form of Development Agreement between ALZA and Crescendo*
10.3 Form of License Option Agreement between ALZA and Crescendo*
10.4 Form of Services Agreement between ALZA and Crescendo*
10.5 Form of Distribution Agreement between ALZA and Crescendo*
10.6 Crescendo Stock Option Plan
23.1 Consent of Ernst & Young LLP, Independent Auditors
23.2 Consent of Heller Ehrman White & McAuliffe (included in Exhibits
5.1 and 8.1)
23.3 Consent of Merrill Lynch, Pierce, Fenner & Smith Incorporated
23.4 Consent of Dr. Gary L. Neil
24.1 Power of Attorney*
27.1 Financial Data Schedule*
</TABLE>
- --------
* Previously filed as an Exhibit to this Registration Statement.
<PAGE>
EXHIBIT 5.1
-----------
[LETTERHEAD OF HELLER EHRMAN WHITE & MCAULIFFE, ATTORNEYS]
September 5, 1997
Crescendo Pharmaceuticals Corporation
1454 Page Mill Road
Palo Alto, California 94304
REGISTRATION STATEMENT ON FORM S-1
----------------------------------
Ladies and Gentlemen:
We have acted as counsel to Crescendo Pharmaceuticals Corporation, a
Delaware corporation (the "Company"), in connection with the Registration
Statement on Form S-1 (file no. 333-31281) (the "Registration Statement") filed
with the Securities and Exchange Commission for the purpose of registering under
the Securities Act of 1933, as amended, an aggregate of 5,800,000 shares of its
Class A Common Stock, $.01 par value (the "Shares") pursuant to the terms of a
Distribution Agreement (the "Distribution Agreement") to be entered into between
ALZA Corporation ("ALZA") and the Company, are to be distributed by ALZA to its
stockholders and debenture holders.
In connection with this opinion, we have assumed the authenticity of
all records, documents and instruments submitted to us as originals, the
genuineness of all signatures, the legal capacity of natural persons and the
conformity to the originals of all records, documents and instruments submitted
to us as copies. We have based our opinion upon our review of the following
records, documents and instruments:
(a) The Certificate of Incorporation of the Company certified by the
Secretary of State of the State of Delaware as of September 4,
1997, and certified to us by an officer of the Company as being
complete and in full force and effect as of the date of this
opinion;
(b) The form of Restated Certificate of Incorporation of the Company
filed as an exhibit to the Registration Statement (the "Restated
Certificate");
<PAGE>
Crescendo Pharmaceuticals Corporation
September 5, 1997
Page 2
(c) The Bylaws of the Company certified to us by an officer of the
Company as being complete and in full force and effect as of the
date of this opinion;
(d) The form of Distribution Agreement filed as an exhibit to the
Registration Statement;
(e) A Certificate of the Vice President, Finance of the Company: (i)
attaching records certified to us as constituting all records of
proceedings and actions of the Board of Directors of the Company
relating to the issuance and distribution of the Shares; and (ii)
certifying as to certain factual matters; and
(f) The Registration Statement.
This opinion is limited to the general corporation laws of the State
of Delaware. We disclaim any opinion as to any other statute, rule, regulation,
ordinance, order or other promulgation of any other jurisdiction or any regional
or local governmental body.
Based upon the foregoing and our examination of such questions of law
as we have deemed necessary or appropriate for the purpose of this opinion, and
assuming that: (i) the Registration Statement becomes and remains effective
during the period when the Shares are distributed, (ii) all applicable
securities laws are complied with, (iii) the Restated Certificate is filed with
and accepted by the Delaware Secretary of State, (iv) the Company and ALZA enter
into and perform their respective obligations under the Distribution Agreement,
(v) the consideration for such Shares recited in the Distribution Agreement has
been received, and (vi) appropriate stock certificates evidencing the Shares
will be properly executed and delivered, it is our opinion that the Shares
covered by the Registration Statement when issued by Crescendo will be legally
issued, fully paid and nonassessable.
This opinion is rendered to you in connection with the Registration
Statement and is solely for your benefit. This opinion may not be relied upon by
you for any other purpose, or relied upon by any other person, firm, corporation
or other entity for any purpose, without our prior written consent. We disclaim
any obligation to advise you of any developments that occur after the date of
this opinion.
<PAGE>
Crescendo Pharmaceuticals Corporation
September 5, 1997
Page 3
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement.
Very truly yours,
/s/ HELLER EHRMAN WHITE & MCAULIFFE
32698.01.PA
<PAGE>
EXHIBIT 8.1
[LETTERHEAD OF HELLER EHRMAN WHITE & MCAULIFF, ATTORNEYS]
September 5, 1997
Crescendo Pharmaceuticals Corporation
1454 Page Mill Road
Palo Alto, California 94303
Re: REGISTRATION STATEMENT ON FORM S-1
Dear Ladies and Gentlemen:
We have acted as United States federal income tax counsel to Crescendo
Pharmaceuticals Corporation, a Delaware corporation ("Crescendo"), in connection
with the registration under the Securities Act of 1933, as amended, of 5,800,000
shares of Crescendo's Class A Common Stock (the "Shares"). In that capacity, we
have examined the Registration Statement on Form S-1 (the "Registration
Statement") filed by Crescendo with the Securities and Exchange Commission in
connection with the proposed distribution of the Shares by ALZA Corporation.
We hereby confirm our opinion contained in the Registration Statement
under the caption "Federal Income Tax Considerations."
The foregoing is based on the Internal Revenue Code of 1986, as amended
(the "Code"), Treasury Regulations (including proposed Treasury Regulations)
promulgated thereunder, rulings, official pronouncements and judicial decisions,
all as in effect on the date hereof and all of which are subject to change or
different interpretations by the Internal Revenue Service or the courts, which
change may have retroactive effect. We disclaim any undertaking to advise you
of any change in the law that may affect this opinion. We express no opinion as
to the laws of any jurisdictions other than the federal income tax laws of the
United States of America.
<PAGE>
Crescendo Pharmaceuticals Corporation
September 5, 1997
Page 2
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and further consent to the reference to our firm under
the captions "Federal Income Tax Considerations" and "Legal Matters" in the
Registration Statement and the Prospectus which forms a part thereof.
Very truly yours,
/s/ Heller Ehrman White & McAuliffe
36421.02.PA
<PAGE>
EXHIBIT 10.6
1997 STOCK OPTION PLAN
OF
CRESCENDO PHARMACEUTICALS CORPORATION
1. PURPOSES OF THE PLAN
--------------------
The purposes of the 1997 Stock Option Plan (the "Plan") of CRESCENDO
PHARMACEUTICALS CORPORATION, a Delaware corporation (the "Company"), are to:
(a) Encourage directors and selected employees and consultants to
improve operations and increase profits of the Company;
(b) Encourage directors and selected employees and consultants to
accept or continue employment or association with the Company or its Affiliates
(as defined below); and
(c) Increase the interest of directors and selected employees and
consultants in the Company's welfare through participation in the growth in
value of the Class A Common Stock of the Company (the "Common Stock").
Options granted under this Plan ("Options") may be "incentive stock
options" ("ISOs") intended to satisfy the requirements of Section 422 of the
Internal Revenue Code of 1986, as amended (the "Code"), or "nonqualified
options" ("NQOs").
2. ELIGIBLE PERSONS
----------------
Every person who at the date of grant of an Option is a full time
employee of the Company or of any Affiliate (as defined below) of the Company is
eligible to receive NQOs or ISOs under this Plan. Every person who at the date
of grant is an employee of, a consultant to, or non-employee director of, the
Company or any Affiliate (as defined below) of the Company is eligible to
receive NQOs under this Plan. The term "Affiliate" as used in the Plan means a
parent or subsidiary corporation as defined in the applicable provisions
(currently Sections 424(e) and (f), respectively) of the Code. The term
"employee" includes an officer or director who is an employee, of the Company.
The term "consultant" includes persons employed by, or otherwise affiliated
with, a consultant.
3. STOCK SUBJECT TO THIS PLAN
--------------------------
Subject to the provisions of Section 6.1.1 of the Plan, the total
number of shares of Common Stock which may be issued under options granted
pursuant to this Plan and the total number of shares provided for issuance under
this Plan shall be 200,000 shares. The shares covered by the portion of any
grant under the Plan which
1
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expires unexercised shall become available again for grants under the Plan. If
shares of Common Stock issued pursuant to an Option are repurchased by the
Company, such Common Stock shall not again be available for issuance in
connection with Options. To the extent the number of shares of Common Stock
issued pursuant to an Option is reduced to satisfy withholding tax obligations,
the number of shares withheld to satisfy the withholding tax obligations shall
not be available for later grant under the Plan.
4. ADMINISTRATION
--------------
(a) This Plan shall be administered by the Board of Directors of the
Company (the "Board") or, either in its entirety or only insofar as required
pursuant to Section 4(b) hereof, by a committee (the "Committee") of at least
two Board members to which administration of the Plan, or of part of the Plan,
is delegated (in either case, the "Administrator").
(b) Subject to the other provisions of this Plan, the Administrator
shall have the authority, in its discretion: (i) to grant Options; (ii) to
determine the fair market value of the Common Stock subject to Options; (iii) to
determine the exercise price of Options granted; (iv) to determine the persons
to whom, and the time or times at which, Options shall be granted, and the
number of shares subject to each Option; (v) to interpret this Plan; (vi) to
prescribe, amend, and rescind rules and regulations relating to this Plan; (vii)
to determine the terms and provisions of each Option granted (which need not be
identical), including but not limited to, the time or times at which Options
shall be exercisable; (viii) with the consent of the optionee, to modify or
amend any Option; (ix) to defer (with the consent of the optionee) or to
accelerate the exercise date of any Option; (x) to authorize any person to
execute on behalf of the Company any instrument evidencing the grant of an
Option; and (xi) to make all other determinations deemed necessary or advisable
for the administration of this Plan. Notwithstanding the foregoing, the Option
grants under Section 7 shall be automatic and the Administrator shall have no
authority, discretion or power to select the recipients of such grants, the
number of shares covered by such Options, the exercise price of such Options,
the timing of such grants, or the vesting schedule of such Options. The
Administrator may delegate nondiscretionary administrative duties to such
employees of the Company as it deems proper.
(c) All questions of interpretation, implementation, and application
of this Plan shall be determined by the Administrator. Such determinations
shall be final and binding on all persons.
(d) It is intended that this Plan shall be administered such that the
issuances of Options and shares hereunder shall be exempt transactions pursuant
to Rule 16b-3 ("Rule 16b-3"), promulgated by the Securities and Exchange
Commission under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), or any successor rule thereto. Notwithstanding the above, it shall be
the responsibility of persons subject
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to Section 16 of the Exchange Act, not of the Company or the Administrator, to
comply with the requirements of Section 16 of the Exchange Act; and neither the
Company nor the Administrator shall be liable if this Plan or any transaction
under this Plan fails to comply with the applicable conditions of Rule 16b-3 or
any successor rule thereto, or if any such person incurs any liability under
Section 16 of the Exchange Act.
5. GRANT OF OPTIONS; OPTION AGREEMENT
----------------------------------
(a) No Options shall be granted under this Plan after the termination
of the Plan. This Plan shall terminate automatically on the earlier of (i) ten
(10) years after its effective date or (ii) the date on which ALZA Corporation,
a Delaware corporation ("ALZA"), exercises the Purchase Option (as described in
Section 11), unless terminated earlier by the Board of Directors (the "Board")
under Section 13 hereof (the "Termination Date"). No option grant shall be made
after the Termination Date, but all grants made prior to the Termination Date
shall remain in effect in accordance with their terms.
(b) Each Option shall be evidenced by a written stock option
agreement, in form satisfactory to the Company, executed by the Company and the
person to whom such Option is granted; provided, however, that the failure by
the Company, the optionee, or both to execute such an agreement shall not
invalidate the granting of an Option, although the exercise of each option shall
be subject to Section 6.1.3.
(c) The stock option agreement shall specify whether each Option it
evidences is an NQO or an ISO.
(d) Subject to Section 6.3.3 with respect to ISOs, the Administrator
may approve the grant of Options under this Plan to persons who are expected to
become employees or consultants of the Company, but are not employees or
consultants at the date of approval.
6. TERMS AND CONDITIONS OF OPTIONS
-------------------------------
Each Option granted under this Plan shall be subject to the terms and
conditions set forth in Section 6.1. NQOs shall be also subject to the terms
and conditions set forth in Section 6.2, but not those set forth in Section 6.3.
ISOs shall also be subject to the terms and conditions set forth in Section 6.3,
but not those set forth in Section 6.2.
6.1 Terms and Conditions to Which All Options Are Subject. All
-----------------------------------------------------
Options granted under this Plan shall be subject to the following terms and
conditions:
6.1.1 Changes in Capital Structure. Subject to Section 6.1.2,
----------------------------
if the stock of the Company is changed by reason of a stock split, reverse stock
split, stock dividend, or recapitalization, combination or reclassification,
appropriate adjustments
3
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shall be made by the Board in (a) the number and class of shares of stock
subject to this Plan and each Option outstanding under this Plan, and (b) the
exercise price of each outstanding Option; provided, however, that the Company
shall not be required to issue fractional shares as a result of any such
adjustments. Each such adjustment shall be subject to approval by the Board in
its sole discretion.
6.1.2 Corporate Transactions. In the event of the proposed
----------------------
dissolution or liquidation of the Company, the Administrator shall notify each
optionee at least 30 days prior to such proposed action. To the extent not
previously exercised, all Options will terminate immediately prior to the
consummation of such proposed action. In the event of a merger or consolidation
of the Company with or into another corporation or entity in which the Company
does not survive, or in the event of a sale of all or substantially all of the
assets of the Company in which the stockholders of the Company receive
securities of the acquiring entity or an affiliate thereof, all Options shall be
assumed or equivalent options shall be substituted by the successor corporation
(or other entity) or a parent or subsidiary of such successor corporation (or
other entity). If such successor does not agree to assume the Options or to
substitute equivalent options therefor, unless the Administrator shall determine
otherwise, the Options will expire upon such event.
6.1.3 Time of Option Exercise. Subject to Section 5 and Section
-----------------------
6.3.4, Options granted under this Plan shall be exercisable in accordance with
such schedule as may be set by the Administrator and specified in the written
stock option agreement relating to such Option. Options granted to employees or
consultants may become fully exercisable, subject to reasonable conditions such
as continued employment, at any time or during any period established by the
Board of the Administrator in accordance with this Plan. In any case, no Option
shall be exercisable until a written stock option agreement in form satisfactory
to the Company is executed by the Company and the optionee.
6.1.4 Option Grant Date. Except in the case of advance approvals
-----------------
described in Section 5(d), the date of grant of an Option under this Plan shall
be the date as of which the Administrator approves the grant.
6.1.5 Nonassignability of Option Rights. Except as otherwise
---------------------------------
determined by the Administrator, no Option granted under this Plan shall be
assignable or otherwise transferable by the optionee except by will or by the
laws of descent and distribution and, during the life of the optionee, an Option
shall be exercisable only by the optionee.
6.1.6 Payment. Except as provided below, payment in full, in cash,
-------
shall be made for all stock purchased at the time written notice of exercise of
an Option is given to the Company, and proceeds of any payment shall constitute
general funds of the
4
<PAGE>
Company. At the time an Option is granted or exercised, the Administrator, in
the exercise of its absolute discretion after considering any tax or accounting
consequences, may authorize any one or more of the following additional methods
of payment:
(a) Acceptance of the optionee's full recourse promissory note
for all or part of the Option price, payable on such terms and bearing such
interest rate as determined by the Administrator (but in no event less than the
minimum interest rate specified under the Code at which no additional interest
would be imputed and in no event more than the maximum interest rate allowed
under applicable usury laws), which promissory note may be either secured or
unsecured in such manner as the Administrator shall approve (including, without
limitation, by a security interest in the shares of the Company); and
(b) Delivery by the optionee of Common Stock already owned by
the optionee for all or part of the Option price, provided the fair market value
(determined as set forth in Section 6.1.10) of such Common Stock is equal on the
date of exercise to the Option price, or such portion thereof as the optionee is
authorized to pay by delivery of such stock; provided, however, that if an
optionee has exercised any portion of any Option granted by the Company by
delivery of Common Stock, the optionee may not, within six months following such
exercise, exercise any Option granted under this Plan by delivery of Common
Stock without the consent of the Administrator.
6.1.7 Termination of Employment. If an optionee ceases to be employed
-------------------------
by the Company or any of its Affiliates (such event being called a
"Termination") for any reason other than death or disability, Options held at
the date of Termination (to the extent then exercisable) may be exercised in
whole or in part at any time within ninety (90) days of the date of such
Termination, or such other period of not less than thirty (30) days after the
date of such Termination as is specified in the stock option agreement (but in
no event after the Expiration Date (as defined below)); provided, that if an
optionee dies or becomes disabled (within the meaning of Section 22(e)(3) of the
Code) while employed by the Company or an Affiliate or within the period that
the Option remains exercisable after Termination, Options then held (to the
extent then exercisable) may be exercised, in whole or in part, by the optionee,
by the optionee's personal representative or by the person to whom the Option is
transferred by devise or the laws of descent and distribution, at any time
within twelve (12) months after the death or twelve (12) months after the
disability of the optionee, or such other period of not less than six (6) months
from the date of Termination as is specified in the stock option agreement (but
in no event after the Expiration Date). For purposes of this Section 6.1.7,
"employment" includes service as a director or as a consultant. For purposes of
this Section 6.1.7, an optionee's employment shall not be deemed to terminate by
reason of sick leave, military leave or other leave of absence approved by the
Administrator, if the period of any such leave does not exceed 90 days or, if
longer, if the optionee's right to
5
<PAGE>
reemployment by the Company or any Affiliate is guaranteed either contractually
or by statute.
6.1.8 Withholding and Employment Taxes. At the time of exercise of
--------------------------------
an Option or at such other time as the amount of such obligations becomes
determinable (the "Tax Date"), the optionee shall remit to the Company in cash
all applicable federal and state withholding and employment taxes. If
authorized by the Administrator in its sole discretion after considering any tax
or accounting consequences, an optionee may elect to (i) deliver a promissory
note on such terms as the Administrator deems appropriate, (ii) tender to the
Company previously owned shares of Stock or other securities of the Company, or
(iii) have shares of Common Stock which are acquired upon exercise of the Option
withheld by the Company to pay some or all of the amount of tax that is required
by law to be withheld by the Company as a result of the exercise of such Option.
Any securities tendered or withheld in accordance with this Section 6.1.8 shall
be valued by the Company as of the Tax Date.
6.1.9 Other Provisions. Each Option granted under this Plan may
----------------
contain such other terms, provisions, and conditions not inconsistent with this
Plan as may be determined by the Administrator, and each ISO granted under this
Plan shall include such provisions and conditions as are necessary to qualify
the Option as an "incentive stock option" within the meaning of Section 422 of
the Code.
6.1.10 Determination of Fair Market Value. For purposes of the Plan,
----------------------------------
the fair market value of Common Stock or other securities of the Company shall
be determined in good faith by the Administrator:
6.1.11 Option Term. Subject to Section 6.3.5, no Option shall be
-----------
exercisable more than ten years after the date of grant, or such lesser period
of time as is set forth in the stock option agreement (the end of the maximum
exercise period stated in the stock option agreement is referred to in this Plan
as the "Expiration Date").
6.1.12 Exercise Price. The exercise price of any Option granted to
--------------
any person who owns, directly or by attribution under the Code, stock possessing
more than ten percent of the total combined voting power of all classes of stock
of the Company or of any Affiliate (a "Ten Percent Stockholder") shall in no
event be less than 110% of the fair market value (determined in accordance with
Section 6.1.10) of the stock covered by the Option at the time the Option is
granted.
6.1.13 Limitation on Option Grants to Certain Executive Officers.
---------------------------------------------------------
The Company may not grant Options under the Plan for more than 50,000 shares
during any one year period to any executive officer whose compensation is
required to be disclosed under Item 402 of Regulation S-K.
6
<PAGE>
6.2 Terms and Conditions to Which Only NQOs Are Subject. Options
---------------------------------------------------
granted under this Plan which are designated as NQOs shall be subject to the
following terms and conditions:
6.2.1 Exercise Price. Except as set forth in Section 6.1.12,
--------------
the exercise price of a NQO shall be not less than 85% of the fair market value
(determined in accordance with Section 6.1.10) of the stock subject to the
Option on the date of grant.
6.3 Terms and Conditions to Which Only ISOs Are Subject. Options
---------------------------------------------------
granted under this Plan which are designated as ISOs shall be subject to the
following terms and conditions:
6.3.1 Exercise Price. Except as set forth in Section 6.1.12,
--------------
the exercise price of an ISO shall be determined in accordance with the
applicable provisions of the Code and shall in no event be less than the fair
market value (determined in accordance with Section 6.1.10) of the stock subject
to the Option on the date of grant.
6.3.2 Disqualifying Dispositions. If stock acquired by
--------------------------
of in a "disqualifying disposition" within the meaning of Section 422 of the
Code, the holder of the stock immediately before the disposition shall promptly
notify the Company in writing of the date and terms of the disposition and shall
provide such other information regarding the Option as the Company may
reasonably require.
6.3.3 Grant Date. If an ISO is granted in anticipation of
----------
employment as provided in Section 5(d), the Option shall be deemed granted,
without further approval, on the date the optionee assumes the employment
relationship forming the basis for such grant, and, in addition, satisfies all
requirements of this Plan for Options granted on that date.
6.3.4 Vesting. Notwithstanding any other provision of this Plan,
-------
to the extent that ISOs granted under all incentive stock option plans of the
Company and its subsidiaries "vest" for more than $100,000 in fair market value
of stock (measured on the grant date(s)) in any calendar year, the amount that
vests in excess of $100,000 shall be treated as NQOs. For purposes of the
preceding sentence, an option "vests" when it first becomes exercisable. If, by
their terms, such ISOs taken together would vest to a greater extent in a
calendar year, and unless otherwise provided by the Administrator, the options
with lower exercise prices shall be treated as ISOs up to the $100,000 vesting
limit and the options with higher exercise prices shall be treated as NQOs,
regardless of the grant date.
6.3.5 Term. Notwithstanding Section 6.1.11, no ISO granted to
----
any Ten Percent Stockholder shall be exercisable more than five years after the
date of grant.
7
<PAGE>
7. GRANT OF OPTIONS TO NONEMPLOYEE DIRECTORS
-----------------------------------------
(a) Mandatory Initial Option Grants. Subject to the terms and
-------------------------------
conditions of this Plan, if any person who is not, and has not been in the
preceding twelve months, an officer or employee of the Company and who has not
previously been a member of the Board is elected or appointed as a member of the
Board on or after the date on which shares of Common Stock are first distributed
to ALZA's security holders, then on the effective date of such appointment or
election the Company shall grant to such new director (a "Nonemployee Director")
a NQO to purchase 10,000 shares of Common Stock at an exercise price equal to
the fair market value of such shares (determined in accordance with Section
6.1.10) on the date of such option grant.
(b) Mandatory Additional Option Grants. Subject to the terms and
----------------------------------
conditions of this Plan, on the date of the first meeting of the Board
immediately following the fifth anniversary of a Nonemployee Director's initial
election or appointment to the Board, the Company shall grant to such
Nonemployee Director a NQO to purchase 10,000 shares of Common Stock at an
exercise price equal to the fair market value of such shares on the date of such
Option grant.
(c) Terms; Vesting. Each Option granted under Section 7(a) or Section
--------------
7(b) shall become exercisable with respect to 25% of the number of shares
covered by such Option on each anniversary of the date on which the Option is
granted, so that such Option shall be fully exercisable on the fourth
anniversary of the date such Option was granted.
(d) Limitation on Other Grants. The Administrator shall have no
--------------------------
discretion to grant Options under this Plan to Nonemployee Directors other than
as set forth in Sections 7(a) and 7(b).
8. MANNER OF EXERCISE
------------------
(a) An optionee wishing to exercise an Option shall give written
notice to the Company at its principal executive office, to the attention of the
officer of the Company designated by the Administrator, accompanied by payment
of the exercise price as provided in Section 6.1.6. The date the Company
receives written notice of an exercise hereunder accompanied by payment of the
exercise price will be considered as the date such Option was exercised.
(b) Promptly after receipt of written notice of exercise of an Option,
the Company shall, without stock issue or transfer taxes to the optionee or
other person entitled to exercise the Option, deliver to the optionee or such
other person a certificate or certificates for the requisite number of shares of
stock. An optionee or permitted transferee of an optionee shall not have any
privileges as a stockholder with respect to any shares of stock covered by the
Option until the date of issuance (as evidenced by the
8
<PAGE>
appropriate entry on the books of the Company or a duly authorized transfer
agent) of such shares.
9. EMPLOYMENT, DIRECTOR OR CONSULTING RELATIONSHIP
-----------------------------------------------
Nothing in this Plan or any Option granted thereunder shall interfere
with or limit in any way the right of the Company or of any of its Affiliates to
terminate any optionee's employment or consulting at any time, nor confer upon
any optionee any right to continue in the employ of, or consult with, the
Company or any of its Affiliates, nor interfere in any way with provisions in
the Company's charter documents or applicable law relating to the election,
appointment, terms of office or removal of members of the Board.
10. NO RIGHTS AS A STOCKHOLDER.
--------------------------
An Optionee shall have no rights as a stockholder with respect to any
shares covered by his or her Option until the issuance (as evidenced by the
appropriate entry on the books of the Company or its duly authorized transfer
agent) of a stock certificate evidencing such shares. Subject to Section
6.1.10, no adjustment shall be made for dividends (ordinary or extraordinary,
whether in cash, securities or other property), distributions, or other rights
for which the record date is prior to the date the certificate is issued.
11. PURCHASE OPTION
---------------
All shares of Common Stock issuable pursuant to the Plan are and will
be subject to an option (the "Purchase Option") of ALZA as described in the
Restated Certificate of Incorporation of the Company to purchase stock at a
purchase price determined in accordance with Article Fifth thereof. Copies of
the Restated Certificate of Incorporation are available at the principal place
of business of the Company at 1454 Page Mill Road, Palo Alto, CA 94304 and will
be furnished to any optionee on request and without cost. In the event that ALZA
exercises the Purchase Option, the time at which each outstanding Option may be
exercised shall be automatically accelerated without further action on the part
of the Company, the Board or the Administrator as of the date of exercise of the
Purchase Option such that the optionee (upon exercise of the Option) would be
eligible to receive the consideration payable by ALZA to holders of stock if and
to the extent such Option is exercised in a timely manner. Notwithstanding any
provision of this Plan or any stock option agreement to the contrary, each
outstanding Option shall expire on the fifth business day immediately preceding
the closing of the exercise of the Purchase Option.
9
<PAGE>
12. COMPLIANCE WITH SECURITIES LAWS
-------------------------------
The Company shall not be obligated to issue any shares hereunder
unless the shares are at that time effectively registered or exempt from
registration under federal securities laws and the offer and sale of the shares
are otherwise in compliance with all applicable securities laws. The Company
shall have no obligation to register the shares under federal securities laws or
to take whatever other steps may be necessary to enable the shares to be offered
and sold under federal or other securities laws. Upon exercise of all or any
portion of an Option, an optionee may be required to furnish representations or
undertakings deemed appropriate by the Company to enable the offer and sale of
the subject shares or subsequent transfers of any interest in the shares to
comply with applicable securities laws. Stock certificates evidencing such
shares shall bear any legend required by, or useful for purposes of compliance
with, applicable securities laws, this Plan or the optionee's stock option
agreement.
13. AMENDMENTS TO PLAN
------------------
The Board may at any time amend, alter, suspend or discontinue this
Plan. Without the consent of an optionee, no amendment, alteration, suspension
or discontinuance may adversely affect outstanding Options except to conform
this Plan and ISOs granted under this Plan to the requirements of federal or
other tax laws relating to incentive stock options. No amendment, alteration,
suspension or discontinuance shall require stockholder approval unless (a)
stockholder approval is required to preserve incentive stock option treatment
for federal income tax purposes, or (b) the Board otherwise concludes that
stockholder approval is advisable. Notwithstanding the foregoing, any amendment
which increases the number of shares available for grant under this Plan or
which alters the provisions regarding option grants to Nonemployee Directors
requires the approval of holders of 66-2/3% of the outstanding shares of Common
Stock.
14. EFFECTIVE DATE OF PLAN
----------------------
This Plan shall become effective upon adoption by the Board provided,
however, that no Option shall be exercisable unless and until written consent of
the stockholders of the Company, or approval of stockholders of the Company
voting at a validly called stockholders' meeting, is obtained within 12 months
after adoption by the Board. If such stockholder approval is not obtained within
such time, Options granted hereunder shall terminate and be of no force and
effect from and after expiration of such 12-month period.
15. GOVERNING LAW
-------------
This Plan and the rights of all persons under this Plan shall be
construed in accordance with and under applicable provisions of the Code and the
laws of the State of California.
10
<PAGE>
Plan adopted by the Board of Directors on September 4, 1997.
Plan approved by the sole stockholder on September 4, 1997.
11
<PAGE>
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated September 4, 1997 in Amendment No. 2 to the
Registration Statement on Form S-1 and related Prospectus of Crescendo
Pharmaceuticals Corporation for the registration of 5,800,000 shares of its
Class A Common Stock.
/s/ Ernst & Young LLP
Palo Alto, California
September 4, 1997
<PAGE>
EXHIBIT 23.3
CONSENT OF MERRILL LYNCH, PIERCE,
FENNER & SMITH INCORPORATED
September 5, 1997
We hereby consent to the use of our opinion letter to the Board of Directors
of ALZA Corporation ("ALZA") included as Exhibit A to the Prospectus of
Crescendo Pharmaceuticals Corporation ("Crescendo") which forms a part of the
Registration Statement on Form S-1 of Crescendo originally filed on July 15,
1997, with the Securities and Exchange Commission and to the references
therein to such opinion and to Merrill Lynch, Pierce, Fenner & Smith
Incorporated under the captions "Summary" and "Reasons for the Distribution
and Effects on ALZA Corporation." In giving such consent, we do not admit that
we come within the category of persons whose consent is required under Section
7 of the Securities Act of 1933, as amended, or the rules and regulations of
the Securities and Exchange Commission thereunder, nor do we thereby admit
that we are experts with respect to any part of such Registration Statement
within the meaning of the term "experts" as used in the Securities Act of
1933, as amended, or the rules and regulations of the Securities and Exchange
Commission thereunder.
MERRILL LYNCH, PIERCE, FENNER &
SMITH INCORPORATED
By: /s/ D. Casey Saffreno
----------------------------------
Managing Director
Investment Banking Group
<PAGE>
EXHIBIT 23.4
September 4, 1997
Crescendo Pharmaceuticals Corporation
1454 Page Mill Road
Palo Alto, CA 94304
Ladies and Gentlemen:
I hereby consent to being named as expected to become a director of
Crescendo Pharmaceuticals Corporation ("Crescendo") in the Registration
Statement on Form S-1, file no. 333-31281, filed by Crescendo with the
Securities and Exchange Commission.
Sincerely,
/s/ Dr. Gary L. Neil
----------------------
Dr. Gary L. Neil
