UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
X Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the fiscal year ended
December 31, 1999
Commission File Number 0-22927
CRESCENDO PHARMACEUTICALS CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 77-0460388
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2000 Charleston Road, Mountain View, California 94039
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (650) 564-5600
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Class A
Common Stock
Indicate by check mark whether the registrant: (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein, and
will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference
in Part III of this Form 10-K or any amendment to this Form 10-K.
[X]
State the aggregate market value of the voting stock held by non-
affiliates of the registrant as of March 13, 2000: $90,975,844
Number of shares outstanding of each of the registrant's classes of
common stock as of March 13, 2000:
Class A Common Stock, $.01 par value 4,871,273 shares
Class B Common Stock, $1.00 par value 1,000 shares
DOCUMENTS INCORPORATED BY REFERENCE
Items 10, 11, 12 and 13 of Part III are incorporated by reference to
the definitive proxy statement for the registrant's Annual Meeting
of Stockholders to be held on May 18, 2000
CRESCENDO PHARMACEUTICALS CORPORATION
Annual Report on Form 10-K
for the fiscal year ended December 31, 1999
TABLE OF CONTENTS
Page
PART I
Item 1. Business 3-13
Item 2. Properties 13
Item 3. Legal Proceedings 13
Item 4. Submission of Matters to a Vote of Security Holders 13
EXECUTIVE OFFICERS OF THE REGISTRANT 14
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 15
Item 6. Selected Financial Data 16
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 16-19
Item 7a.Quantitative and Qualitative Disclosures About
Market Risk 19-20
Item 8. Financial Statements and Supplementary Data 21-36
Item 9. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure 37
PART III
Item 10.Directors and Executive Officers of the Registrant 37
Item 11.Executive Compensation 37
Item 12.Security Ownership of Certain Beneficial Owners and
Management 37
Item 13.Certain Relationships and Related Transactions 37
PART IV
Item 14.Exhibits, Financial Statement Schedules and Reports
on Form 8-K. 38-39
Signatures 40
PART I
Item 1. Business
Notice Concerning Forward-Looking Statements
Some of the statements made in this Form 10-K, including,
without limitation, statements in "Management's Discussion and
Analysis of Financial Condition and Results of Operations", are
forward-looking in nature. Forward-looking statements include but
are not limited to statements that are not historical facts and
statements including forms of the words "intend", "believe", "will",
"may", "could", "expect", "anticipate", "possible" and similar
terms. 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 the
control of Crescendo Pharmaceuticals Corporation ("Crescendo")
including, without limitation, any possible future actions by ALZA
Corporation ("ALZA"), and various risk factors; therefore, actual
results may differ materially from those anticipated in any forward-
looking statements. The significant risks related to Crescendo's
business are those associated with product selection, technology and
product development, clinical development, product manufacturing,
regulatory clearance to market products, changes in the health care
marketplace, patent and intellectual property matters, medical and
market acceptance of products (including third party reimbursement),
commercializing products (including competition), conflicts of
interest between ALZA and Crescendo and the risk of a lack of funds
available to complete the development of Crescendo Products (as
defined below).
Overview of Crescendo's Business
Crescendo was incorporated in Delaware on June 26, 1997 and
commenced operations on September 30, 1997. Crescendo was formed by
ALZA for the purpose of selecting and developing human
pharmaceutical products (the "Crescendo Products") and
commercializing such products, most likely through licensing to
ALZA. Crescendo Products generally are expected to combine ALZA's
drug delivery technologies with available therapeutic agents. In
addition, Crescendo may fund the development of products licensed
from third parties that complement ALZA's product pipeline or
otherwise provide a significant commercialization opportunity for
ALZA.
On September 30, 1997, ALZA distributed all of the then
outstanding shares of Crescendo Class A Common Stock (the "Crescendo
Shares"), a total of 4,965,470, to the holders of ALZA's common
stock and ALZA's convertible subordinated debentures. Crescendo
Shares are traded on The Nasdaq Stock Market-Registered Trademark- under
the symbol "CNDO." In connection with the distribution, ALZA contributed
$300 million in cash to Crescendo, which will be used primarily to fund
the development of Crescendo Products. In addition, at the time of
the distribution, Crescendo and ALZA entered into a number of
agreements, including a Development Agreement, Technology License
Agreement, License Option Agreement and Services Agreement,
discussed under "Arrangements with ALZA" below. ALZA holds all
1,000 shares of Crescendo Class B Common Stock.
Since its formation, Crescendo's principal activities have been
conducting product development under its agreements with ALZA. In
accordance with generally accepted accounting principles, Crescendo
is considered a development stage company.
Arrangements with ALZA
DEVELOPMENT AGREEMENT. Crescendo and ALZA have a Development
Agreement pursuant to which ALZA conducts product development and
related activities on behalf of Crescendo under work plans and cost
estimates that have been proposed by ALZA and approved by Crescendo.
Crescendo is required to use the cash initially contributed to it by
ALZA, plus interest thereon, less Crescendo's administrative expenses,
the Technology Fee (discussed below) paid to ALZA, and reserves of up
to $2 million (the "Available Funds") to conduct activities under the
Development Agreement. Activities under the Development Agreement
include the development of Crescendo Products and the identification of
potential new products for development by Crescendo. In addition, ALZA
may, on behalf of Crescendo, perform technical evaluations of product
opportunities involving proprietary agents of third parties that may be
available for licensing or other collaborative arrangements for use in
a Crescendo Product. The fully-burdened costs of all of these
activities are charged by ALZA to Crescendo monthly, as "Development
Costs."
Under the Development Agreement, Crescendo initially agreed to
fund the development of seven products (the "Initial Products"). As
of December 31, 1999, three of the seven Initial Products (OROS-
Registered Trademark-oxybutynin, DUROS-Registered Trademark-leuprolide
and OROS-Registered Trademark-methylphenidate) remained in
active development and/or had been licensed by ALZA. See "Disclosed
Products in Development" below.
All technology developed or otherwise obtained pursuant to the
Development Agreement ("Developed Technology") is owned by ALZA,
subject to Crescendo's right to use such technology in Crescendo
Products. ALZA will pay Crescendo a royalty equal to 1% of net
sales of products, other than Crescendo Products, that use any
patented Developed Technology.
TECHNOLOGY LICENSE AGREEMENT. Crescendo and ALZA have a
Technology License Agreement pursuant to which ALZA has granted to
Crescendo a worldwide license to use ALZA technology solely to
select and develop the Crescendo Products, to conduct related
activities, and to commercialize Crescendo Products. In exchange
for the license to use existing ALZA technology relating to the
Initial Products, Crescendo pays a technology fee (the "Technology
Fee") to ALZA, payable monthly over a period of three years, in the
amount of $1 million per month for the first 12 months following the
distribution of Crescendo Shares, $667,000 per month for the
following 12 months and $333,000 per month for the next 12 months
(beginning in September 1999). The Technology Fee is payable
through August 2000, so long as at least one of the Initial Products
is being developed by Crescendo and/or is licensed by ALZA pursuant
to the License Option (described below). The Technology Fee is
included in research and development expenses.
LICENSE OPTION AGREEMENT. Pursuant to a License Option
Agreement entered into by Crescendo and ALZA, 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 United
States Food and Drug Administration ("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
ALZA's option to purchase all of the outstanding Crescendo Shares
(See "Purchase Option" below). If and to the extent the License
Option is exercised as to any Crescendo Product, ALZA acquires 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.
LICENSE AGREEMENT. Under the License Agreement for each licensed
product (a form of which is attached to the License Option
Agreement), ALZA will make payments to Crescendo with respect to the
licensed product equal to 1% of net sales of the licensed product by
ALZA and its sublicensees, distributors and marketing partners, 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, not to exceed 2.5% of net sales in the first year a
licensed product is sold in a major market country, and not to
exceed 3% for the following two years. ALZA has the right to buy out
Crescendo's right to receive payments for any or all licensed
products on a country-by-country or global basis in accordance with
a formula set forth in the License Agreement. ALZA has exercised its
option to obtain worldwide licenses to two of the Initial Products,
OROS oxybutynin and DUROS leuprolide. See "Licensed Products"
below.
PURCHASE OPTION. Pursuant to Crescendo's Restated Certificate of
Incorporation, ALZA has the right to purchase all (but not less than
all) of the Crescendo Shares (the "Purchase Option"). The Purchase
Option is exercisable by written notice to Crescendo at any time 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 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
Crescendo's Available Funds which have not been expended under the
Development Agreement, accompanied by a report of Crescendo's
independent auditors.
If the Purchase Option is exercised, the exercise price will be
the greatest of:
(a)(i) 25 times the actual payments made by or due from
ALZA to Crescendo under the Development Agreement and the License
Agreement for any product (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 payments) 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
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;
(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 Technology License Agreement and the
Services Agreement, described below) 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 exercise price in cash, in ALZA common stock or in
any combination of cash and ALZA common stock.
At December 31, 1999, Crescendo had $80.8 million of Available
Funds remaining.
SERVICES AGREEMENT. Crescendo and ALZA have a Services Agreement
pursuant to which ALZA provides certain administrative services,
including accounting and legal services, to Crescendo. Specified
charges for such services are generally intended to allow ALZA to
recover its direct costs of providing the services, including fully-
allocated overhead, plus all out-of-pocket costs and expenses, but
without any profit (i.e, ALZA's fully-burdened cost). The Services
Agreement originally had a one-year term and is renewed automatically
for successive one-year terms during the term of the Development
Agreement, unless terminated by Crescendo at any time upon 60 days'
written notice.
Disclosed Products in Development
The disclosed products currently in active development by ALZA for
Crescendo are described below:
- OROS oxybutynin - The OROS oxybutynin product, for the
treatment of overactive bladder with symptoms including urge urinary
incontinence, urgency and frequency, was approved for marketing by
the FDA on December 16, 1998. Phase IV clinical studies of the
product are continuing. See "Licensed Products" below.
- DUROS leuprolide - The DUROS leuprolide product is a small
osmotically-driven implantable system designed to deliver leuprolide
continuously for up to 12 months to provide palliative treatment of
advanced prostate cancer. The product was approved for marketing by
the FDA on March 3, 2000. See "Licensed Products" below. Phase IV
clinical trials of the product are ongoing.
- OROS-Registered Trademark- methylphenidate - The OROS
methylphenidate product is a once-daily treatment for Attention
Deficit Disorder/Attention Deficit Hyperactivity Disorder ("ADD/ADHD").
During the third quarter of 1999, the FDA filed the NDA for the product.
Clinical trials of the product are ongoing.
- E-TRANS-Registered Trademark- fentanyl (acute pain)-
Crescendo is funding the continued development of an E-TRANS fentanyl
product for the patient-controlled treatment of acute pain. The product
had been in development by ALZA for Janssen Pharmaceutica, Inc.
(together with its affiliates, "Janssen") until the end of 1999, when
Janssen determined that it would no longer fund the development program.
Phase I and II, and some Phase III, clinical trials have already
been conducted on more than 1,000 patients and healthy volunteers
and additional Phase III clinical trials are planned later this
year.
ALZA and Crescendo also have, in early development, an E-TRANS
fentanyl product for the treatment of chronic and break-through
pain. Because ALZA and Crescendo are now concentrating on the
development of the acute pain product, development of the chronic
pain product is being continued only on a limited basis. ALZA and
Janssen have an agreement pursuant to which Janssen has an option,
until a specified date, to take over funding the continued
development of the product and to commercialize the product
worldwide. If Janssen does not exercise its option, Crescendo has
the right to continue the development of the product with ALZA.
On ALZA's recommendation, Crescendo has ceased funding further
development of four of the seven Initial Products.
Licensed Products
On December 16, 1998, the FDA approved the OROS oxybutynin
product for marketing in the United States. The product is the
first and only once-a-day treatment for overactive bladder approved
for marketing in the United States. Also on December 16, 1998, ALZA
exercised its option to obtain a worldwide license to OROS
oxybutynin from Crescendo and announced a commercialization
agreement with Sanofi-Synthelabo, under which Sanofi-Synthelabo has
rights to market the product in Europe, after obtaining regulatory
approval. ALZA launched the product in the United States under the
trade name Ditropanr XL on February 1, 1999. Under the terms of the
license agreement between Crescendo and ALZA, Crescendo receives
payments from ALZA based on worldwide net sales of the product. For
the first three years the rate is 2.5%, 3.0%, and 3.0% of net sales,
respectively; thereafter the rate is expected to be between 5.5% and
6.5%, based on the Development Costs to date and future anticipated
Development Costs to be paid by Crescendo. Crescendo's revenue for
1999 included product payments of approximately $2.4 million based
on net sales of Ditropan XL. On January 1, 2000, the payment rate
increased from 2.5% to 3.0%.
On March 3, 2000, the FDA approved DUROS leuprolide for marketing
in the United States. The product, which ALZA named ViadurT, is the
first to incorporate ALZA's DUROS-Registered Trademark-implant technology.
Also on March 3, 2000, ALZA exercised its option to obtain a worldwide
license to DUROS leuprolide from Crescendo. ALZA is currently
conducting its scale-up activities for the commercial manufacture
of the product. Under the terms of the license agreement between
Crescendo and ALZA, Crescendo will receive payments from ALZA based
on worldwide net sales of the product. For the first three years
the rates will be 2.5%, 3.0%, and 3.0% of net sales, respectively;
thereafter the rate is expected to be between 7.5% and 8.5%, based
on the Development Costs to date and future anticipated Development
Costs to be paid by Crescendo.
Certain Risks Associated with Crescendo's Business
PRODUCT SELECTION AND DEVELOPMENT RISKS. Each pharmaceutical
product requires extensive development and clinical activities
before an application can be filed for regulatory clearance to
market the product. It should be expected that some of the products
for which development is initiated by Crescendo and ALZA ultimately
will not become commercial products. Among the many risks inherent
in the development process are the following:
- Product Selection - Under the Development Agreement, ALZA
is responsible for identifying and recommending potential candidates
for development as Crescendo Products. There can be no assurance
that ALZA will recommend, or that Crescendo will approve,
appropriate products for development. In addition, for each new
product, the proper performance characteristics must be defined, and
the product must be designed and developed to meet those
characteristics.
- Technology Risks - Crescendo Products generally are
expected to utilize ALZA's drug delivery technologies. To create
successful products, enhancements or modifications to existing ALZA
technologies may be required. ALZA's DUROS and E-TRANS technologies,
which are being utilized in Crescendo Products that are in active
development, are relatively new, and neither of these technologies
has yet been incorporated in a commercially marketed product. See
"Patents and Patent Applications" below.
- Small-Scale Manufacturing - Once a product is developed,
it must be manufactured, on a small scale, for clinical testing.
Small-scale manufacturing can be costly and time-consuming. ALZA's
drug delivery technologies generally require complex manufacturing
processes. In addition, DUROS products require aseptic
manufacturing.
- Clinical Studies - Once a product has been successfully
manufactured on a small scale, trials to show clinical safety and
efficacy must be undertaken and completed. In general, performance
of a product in clinical studies must be consistent with the
selected performance characteristics for that product in order for
the product to be successful. Clinical studies are costly, and can
take many years to complete. There can be no assurance that the
desired outcomes will be shown in the clinical studies.
- Sufficiency of Funding - Crescendo's initial $300 million
of capital was contributed by ALZA. At December 31, 1999, Crescendo
had $80.8 million of Available Funds remaining. ALZA has no
obligation to contribute additional funds. There can be no
assurance that Crescendo will have sufficient funds to complete the
development of the Crescendo Products. See "Risks Associated with
Crescendo's Relationship with ALZA" below.
- Inability to Raise New Capital - Crescendo most likely
would not be able to raise additional capital or borrow funds before
ALZA's Purchase Option is exercised or expires. If the Purchase
Option expires unexercised, there will remain considerable risk that
Crescendo could not raise sufficient funds to continue to develop
its products.
For risks associated with regulatory clearances and pricing
approvals, see "Governmental Regulation" below.
- PRODUCT MANUFACTURING AND MARKETING RISKS. 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.
There are numerous risks associated with the manufacturing and
marketing of pharmaceutical products, including the following:
- Commercial-Scale Manufacturing - Sometimes small-scale
manufacturing processes must be modified in order to achieve
successful commercial manufacturing and to obtain a reproducible,
robust process. Particularly for products incorporating newer ALZA
technologies, this commercial manufacturing scale-up could take
several years and cost millions of dollars. Facilities that
manufacture commercial pharmaceutical products sold in the United
States must pass a rigorous pre-approval inspection by the FDA.
Failure to pass this inspection could delay the introduction of a
product, sometimes for significant periods.
- Manufacturing Capability - If ALZA exercises its License
Option for any Crescendo Product, ALZA may need to expand its
manufacturing capabilities to provide commercial quantities of such
product. If ALZA does not exercise its License Option for any
Crescendo Product, Crescendo will have to make its own arrangements
for manufacturing such product, because Crescendo currently has no
manufacturing capability and does not expect to develop such
capability. To manufacture any Crescendo Product itself, Crescendo
would need substantial additional funds.
- Sales and Marketing Capability - ALZA's sales organization
is currently focused on certain target markets in the United States
and Canada and has no significant operations outside such countries.
If ALZA exercises its License Option for any Crescendo Product, ALZA
may need to develop and/or expand its sales and marketing
capabilities (or arrange for sales and marketing by third parties)
in order to commercialize such product effectively. If ALZA does
not exercise its License Option for any Crescendo Product, Crescendo
will need to find other means to commercialize such product. Many
pharmaceutical company competitors have far larger sales forces and
significantly greater resources and experience in marketing
pharmaceutical products than ALZA or Crescendo. See "Competition"
below.
- Changes in the Pharmaceutical Marketplace - Because it
takes many years to bring a pharmaceutical product to market, it is
possible that the competitive environment could change during the
period when a Crescendo Product is in development. For example,
because of changes in the marketplace, a Crescendo Product could
have less commercial potential than was anticipated when the product
was conceived and development was initiated. In such an event, ALZA
may not consider the product attractive for commercialization, and
Crescendo may have expended substantial funds to develop a product
that ALZA may not license and that may not be sufficiently
attractive to third parties.
RISKS ASSOCIATED WITH CRESCENDO'S RELATIONSHIP WITH ALZA. The
terms of the agreements between ALZA and Crescendo and Crescendo's
Restated Certificate of Incorporation were not determined on an
arms'-length basis. As a result, certain events are outside
Crescendo's control and there are certain limits on Crescendo's
activities and its market value.
- 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. The timing of the exercise of
the License Option with respect to any Crescendo Product is, to a
certain extent, within ALZA's control, and if ALZA exercises its
License Option for any Crescendo Product, the continued development
and commercialization of any such product will be controlled by
ALZA. The timing of the exercise of the Purchase Option is also
within ALZA's control and, therefore, ALZA may exercise the Purchase
Option, if at all, when the Purchase Option exercise price is as low
as possible.
- Dependence on ALZA for Personnel and Facilities -
Crescendo depends substantially on ALZA for research and development
activities, including the development of the Crescendo Products, and
for administrative services. However, ALZA must use its personnel
and facilities to meet its obligations to other clients and to
conduct its own activities. There can be no assurance that ALZA's
available personnel and facilities will be adequate for the
performance of its duties to Crescendo.
- Limitations on Crescendo's Activities - Crescendo's
Restated Certificate of Incorporation prohibits Crescendo from
taking or permitting any action that might impair ALZA's rights
under the Purchase Option and does not allow Crescendo to amend its
Restated Certificate of Incorporation to alter the Purchase Option
or Crescendo's authorized capitalization without the consent of
ALZA. Crescendo's ability to raise additional funds may be limited,
or even prevented, by such provisions. In addition, during the term
of ALZA's License Option for each Crescendo Product, Crescendo will
not be able to license such product to any other party. If ALZA
exercises its License Option for a Crescendo Product, Crescendo's
involvement in the commercialization of that product will be
substantially limited.
- Limitation on Crescendo's Market Value - So long as the
Purchase Option is exercisable, the market value of Crescendo
Class A Common Stock will be limited by the formula setting forth
the Purchase Option exercise price in Crescendo's Restated
Certificate of Incorporation.
Governmental Regulation
Under the United States Food, Drug and Cosmetic Act, "new
drugs" must obtain clearance from the FDA before they lawfully can
be marketed in the United States. Applications for marketing
clearance must be based on extensive clinical and other testing, the
cost of which is very substantial. Approvals (sometimes including
pricing approvals) are required from health regulatory authorities
in foreign countries, before marketing of pharmaceutical products
may commence in those countries. Requirements for approval may
differ from country to country, and can involve additional testing.
There can be substantial delays in obtaining required clearances
from both the FDA and foreign regulatory authorities after
applications are filed. Even after clearances are obtained in
countries that require pricing approvals, further delays may be
encountered before the products become commercially available.
The manufacture, quality assurance, record-keeping, packaging,
labeling and advertising of all pharmaceutical products are also
subject to extensive FDA regulation and the regulation of comparable
agencies in other countries. Failure to obtain, or any delays in
obtaining, regulatory clearance to market new products, as well as
other regulatory actions and recalls, could adversely affect the
commercial potential of a product.
Patents and Patent Applications
Under the Development Agreement, ALZA determines whether and to
what extent to seek patent protection for Crescendo Products and
Developed Technology. If ALZA declines to seek patent protection
for any Crescendo Product or any Developed Technology, Crescendo
does not have the right to seek such protection on its own.
Patent protection generally has been important in the
pharmaceutical industry and the commercial success of Crescendo
Products may depend, in part, upon ALZA's election to seek patent
protection and its ability to obtain such patents both in the United
States and abroad. Although ALZA's current patents, pending patent
applications, and any patents obtained on future applications
covering any ALZA technology, Developed Technology or Crescendo
Products are likely to be important to Crescendo's future
operations, 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.
In the United States, patents are generally granted for
specified periods of time. Some of ALZA's earlier patents covering
various aspects of certain ALZA technology licensed to Crescendo,
particularly the OROS dosage form, have expired, or will expire,
over the next several years; however, ALZA technology is generally
covered by multiple patents. If a Crescendo Product were not
covered by ALZA patents, third parties would be able to market the
identical product without payment to Crescendo.
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 of the
patent. There can be no assurance that ALZA patents covering any
ALZA technology, Developed Technology or Crescendo Product will not
be successfully challenged in the future. In some cases, third
parties have initiated reexamination by the Patent and Trademark
Office of patents issued to ALZA, and have opposed ALZA patents in
other jurisdictions. The validity or enforceability of ALZA patents
after their issuance has also been challenged in litigation. If the
outcome of such litigation is adverse to ALZA, third parties may
then be able to use the invention covered by the patent, in some
cases without payment. There can be no assurance that ALZA patents
will not be infringed or successfully avoided through design
innovation.
It is also possible that third parties may obtain patent or
other proprietary rights that may be necessary or useful to
Crescendo. With numerous other companies engaged in developing drug
delivery technologies, it can be expected that other parties may in
some circumstances file patent applications or obtain patents that
compete in priority with ALZA's patent applications. Such
competition may result in adversarial proceedings such as patent
interferences and oppositions, which can increase the uncertainty of
patent coverage. In cases where third parties are 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
Crescendo from using certain technology or from further developing
or commercializing certain products. If licenses from third parties
are necessary but cannot be obtained, commercialization of Crescendo
Products would be delayed or prevented.
In addition, Crescendo utilizes significant unpatented
proprietary ALZA technology, and there can be no assurance that
others will not develop similar technology.
Competition
It can be expected that all or most of the Crescendo Products
will face competition from different chemical or other agents
intended for treatment of the same indication. In addition, all
Crescendo Products are likely to face competition both from
traditional formulations of drugs and from advanced delivery systems
being developed by others. ALZA undertakes client-sponsored product
development activities with major pharmaceutical companies in
addition to its activities on behalf of Crescendo. Such client-
sponsored activities may involve the development of products that
compete directly with Crescendo Products. In addition, ALZA may
itself, without Crescendo funds, develop products using ALZA's drug
delivery technology that compete directly with Crescendo Products.
In some instances, because Crescendo is developing products
which incorporate drugs that are off-patent or being developed by
multiple companies, Crescendo will face competition from products
incorporating the same or substantially similar therapeutic agents.
A major challenge faced by Crescendo and other pharmaceutical
companies is competition from generic pharmaceutical manufacturers.
Generic competitors generally are able to obtain regulatory approval
for off-patent drugs without investing in costly and time-consuming
clinical trials, and need only demonstrate bioequivalence to the
drug they wish to copy. Because of their substantially reduced
development costs, generic companies are often able to charge much
lower prices for their products than the originator of a new
product. Crescendo Products may be subject to generic competition
to the extent competitors can demonstrate bioequivalence without
infringing ALZA patents covering Crescendo Products.
Crescendo's competition potentially includes all of the
pharmaceutical companies in the world, including ALZA and ALZA's
clients. Many of these other pharmaceutical companies have greater
financial resources, technical staffs and manufacturing and
marketing capabilities than ALZA or Crescendo.
Competition among pharmaceutical products is generally based on
performance characteristics and price. Acceptance by hospitals,
physicians and patients is crucial to the success of a product.
Health care reimbursement policies of managed care organizations,
insurers and government agencies will continue to exert pressure on
pricing, and various federal and state agencies have enacted
regulations requiring rebates of a portion of the purchase price of
many pharmaceutical products. Cost-effectiveness, although often
difficult to measure, is becoming increasingly critical to a
successful commercial product.
The health care industry has continued to change rapidly as the
public, government, medical practitioners and the pharmaceutical
industry focus on ways to expand medical coverage while controlling
the growth in health care costs. The growth of managed care
organizations and the resulting pressures for cost-containment in
the United States health care system are expected to continue to put
pressures on the prices charged for pharmaceutical products.
Prescription drug reimbursement practices and the growth of managed
care organizations, pharmaceutical benefit management groups and
group buying organizations, as well as generic and therapeutic
substitution (substitution of a different product for the same
indication), could adversely affect Crescendo's business. It is
expected that the United States Congress will continue to review and
consider various proposals that could have the effect of requiring
large discounts on the prices that pharmaceutical companies can
charge for products for Medicare participants. A number of states
are also considering this type of legislation. It is not clear
whether, or when, any of these proposals might be adopted.
Revenues and Net Loss
Revenues, consisting of net interest and investment income
earned on invested funds, and product payments, referred to as
royalty revenue in Crescendo's financial statements, were
approximately $9.8 million in 1999, as compared with approximately
$13.9 million in 1998. For the period from inception (June 26,
1997) through December 31, 1997, revenues were approximately $4.1
million. For the period from inception (June 26, 1997) through
December 31, 1999, revenues were approximately $27.8 million.
Revenues for the year ended December 31, 1999 included product
payments of approximately $2.4 million resulting from sales by ALZA
of Ditropan XL. ALZA launched the product in the United States on
February 1, 1999. Under the terms of ALZA's License Agreement with
Crescendo for Ditropan XL, the product payment rate for Ditropan XL
for 1999 was 2.5% of net sales. On January 1, 2000, the rate was
increased to 3% of net sales and is expected to increase to
approximately 5.5% to 6.5% of net sales on January 1, 2002.
Crescendo reported a net loss for the year ended December 31,
1999 of approximately $88.4 million or $17.89 per share, as compared
with approximately $95.8 million or $19.29 per share for the year
ended December 31, 1998. For the period from inception (June 26,
1997) through December 31, 1997, Crescendo reported a net loss of
approximately $28.4 million or $11.33 per share. For the period
from inception (June 26, 1997) through December 31, 1999, Crescendo
reported a net loss of approximately $212.7 million or $47.62 per
share. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" below.
Research and Development Expenses
Crescendo incurred research and development expenses of
approximately $97.7 million and approximately $106.0 million for the
years ended December 31, 1999 and 1998, respectively. For the
period from inception (June 26, 1997) through December 31, 1997,
research and development expenses were approximately $32.3 million.
For the period from inception (June 26, 1997) through December 31,
1999, Crescendo recorded research and development expenses of
approximately $235.9 million. These expenses related primarily to
development of Crescendo Products through December 31, 1999 and the
payment of the Technology Fee in an amount equal to $6.7 million,
$10.7 million and $4.0 million, for the years ended December 31,
1999 and 1998 and for the period from inception (June 26, 1997)
through December 31, 1997, respectively. The Technology Fee was
$21.4 million from inception (June 26, 1997) through December 31,
1999. The Technology Fee will be $333,000 each month through August
2000, so long as there are not fewer than two of the Initial
Products which are being developed and/or have been licensed by
ALZA. The Technology Fee is no longer payable after August 2000.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" below.
Employees
On December 31, 1999, Crescendo had one employee, Dr. Gary L.
Neil, its President and Chief Executive Officer. Other
administrative services are currently provided to Crescendo by ALZA.
See "Arrangements with ALZA -Services Agreement" above.
Item 2. Properties
Crescendo's corporate offices, which are leased from ALZA,
are located in Mountain View, California. Crescendo does not own
any facilities.
Item 3. Legal Proceedings
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
EXECUTIVE OFFICERS OF THE REGISTRANT
Position(s) with Registrant and
Principal Occupations for
Name Age Past Five Years
______________________________________________________________________
Gary L. Neil, PhD 59 President and Chief Executive Officer
of Crescendo(since September 1997);
President and Chief Executive Officer of
TDC (1993 to September 1997); Executive
Vice President, Wyeth-Ayerst Research(1990
to 1993).
David R. Hoffmann* 55 Vice President, Finance and Secretary
of Crescendo(since June 1997); Vice
President and Treasurer of ALZA(since
1994); other positions with ALZA, including
Vice President, Finance and Vice President
and Controller(since 1976).
Suzanne C. Martin* 50 Vice President, Research and
Development of Crescendo(since June 1997);
Vice President, Program Management of
ALZA(since 1994); other positions with
ALZA, including Executive Director, Project
Management and Senior Director of Research
and Development Administration (since
1988).
* Mr. Hoffmann and Ms. Martin are employees of ALZA who provide
services to Crescendo under its agreements with ALZA. They do
not receive compensation from Crescendo.
PART II
Item 5.Market for Registrant's Common Equity and Related
Stockholder Matters
Crescendo Class A Common Stock is traded on The Nasdaq Stock
Marketr under the symbol "CNDO". Crescendo Class B Common Stock is
not publicly traded. As of March 14, 2000, there were approximately
4,737 holders of record of Crescendo Class A Common Stock and one
holder of Crescendo Class B Common Stock. Crescendo has not paid
any dividends on its Common Stock. Crescendo's Restated Certificate
of Incorporation prohibits the payment of dividends with Available
Funds.
The quarterly high and low closing sales prices of Crescendo
Class A Common Stock for 1999 and 1998 as quoted on The Nasdaq Stock
Marketr were as follows:
1999 1998
High Low High Low
_________________________________________________________________
First Quarter $16 5/16 $13 1/2 $12 7/8 $11 1/2
Second Quarter 17 1/2 14 3/16 13 5/8 12 1/4
Third Quarter 18 1/2 17 1/8 13 3/16 12 1/4
Fourth Quarter 18 3/4 17 7/16 13 7/8 12 1/4
In July 1997, Crescendo sold 100 shares of Common Stock, par
value $1.00, to ALZA at a purchase price of $10 per share. On
September 4, 1997, the 100 shares of Common Stock were converted
into 1,000 shares of Class B Common Stock, $1.00 par value. On
September 29, 1997, Crescendo sold 4,965,470 shares of Class A
Common Stock, $.01 par value, to ALZA at a purchase price of $300
million. On September 30, 1997, ALZA distributed all of the
outstanding shares of Class A Common Stock to its stockholders and
the holders of its convertible subordinated debentures. The sales
of Class A Common Stock and of Common Stock (now Class B Common
Stock) to ALZA were exempt from registration pursuant to Section
4(2) of the Securities Act of 1933. The proceeds from such sales
are being used to fund Crescendo's operations, primarily its
activities under the Development Agreement with ALZA and the
Technology Fee.
<TABLE>
Item 6.Selected Financial Data (in thousands, except per share
amounts)
<CAPTION>
Periods from inception
Years ended (June 26, 1997)to
December 31, December 31,
1999 1998 1997 1999
____________________________________________________________________
<S> <C> <C> <C> <C>
Revenues:
Net interest and
investment income $7,439 $13,912 $ 4,083 $25,434
Royalty revenue 2,385 - - 2,385
_____ ______ _____ ______
Total revenues 9,824 13,912 4,083 27,819
Loss before taxes (89,447) (93,370) (28,441) (211,258)
Income taxes (1,004) 2,425 - 1,421
Net loss (88,443) (95,795) (28,441) (212,679)
Net loss per share (17.89) (19.29) (11.33) (47.62)
Total assets 98,069 193,911 286,587
</TABLE>
Item 7.Management's Discussion and Analysis of Financial Condition
and Results of Operations
Results of Operations
Revenues, consisting of net interest and investment income
earned on invested funds, and royalty revenue, were approximately
$9.8 million for 1999, as compared with approximately $13.9 million
for 1998. For the period from inception (June 26, 1997) through
December 31, 1997 revenues were approximately $4.1 million. For the
period from inception (June 26, 1997) through December 31, 1999
revenues were approximately $27.8 million. Revenue for the year
ended December 31, 1999 included product payments of approximately
$2.4 million resulting from sales by ALZA of Ditropan XL. ALZA
launched the product in the United States on February 1, 1999.
Under the terms of ALZA's License Agreement with Crescendo for
Ditropan XL, the product payment rate for 1999 was 2.5% of net
sales. On January 1, 2000, the rate was increased to 3% of net
sales and it is expected to increase to approximately 5.5% to 6.5%
of net sales on January 1, 2002.
As Crescendo's funds are used under the Development Agreement
and to pay the Technology Fee, lower cash balances are available for
investment and, therefore, interest and investment income has been
decreasing and is expected to continue to decrease. Royalty revenue
is expected to increase if sales of Ditropan XL continue at current
or higher than current levels, due to the increase in the product
payment rate from 2.5% to 3.0% of net sales on January 1, 2000. In
addition, if any other Crescendo Product is launched, Crescendo
will receive product payments on net sales of such product. Under
the License Agreement for each such product, product payment rates
will be 2.5% for the first year of net sales, 3.0% for the following
two years, and thereafter as determined by a formula based on
Development Costs paid by Crescendo for the relevant product. See
"Arrangements with ALZA-License Agreement" above. Overall,
Crescendo's total revenues are expected to decline since royalty
revenue increases, if any, are not anticipated to exceed the
continued decreases in interest and investment income in 2000.
There can be no assurance that revenue relating to commercialized
Crescendo Products will be sufficient in the future to support
Crescendo's operations once Available Funds are exhausted, that
Crescendo Products under development will receive regulatory
clearance or that any Crescendo Product licensed by ALZA will be
successfully commercialized.
Crescendo incurred research and development expenses of
approximately $97.7 million for the year ended December 31, 1999, as
compared with approximately $106.0 million for the year ended
December 31, 1998. For the period from inception (June 26, 1997)
through December 31, 1997, research and development expenses were
approximately $32.3 million. The decrease in research and
development expenses from 1998 to 1999 is primarily related to a
reduction in spending under the development programs for DUROS
leuprolide and OROS methylphenidate in the second half of 1999
following the filing of the NDAs for both products. For the period
from inception (June 26, 1997) through December 31, 1999, Crescendo
recorded research and development expenses of approximately $235.9
million. These expenses related primarily to development of
Crescendo Products through December 31, 1999 and the payment of the
Technology Fee in an amount equal to $6.7 million, $10.7 million,
and $4.0 million for the years ended December 31, 1999 and 1998, and
for the period from inception (June 26, 1997) through December 31,
1997, respectively ($21.4 million from inception (June 26, 1997)
through December 31, 1999). The Technology Fee will be $333,000
each month through August 2000, so long as at least one of the
Initial Products is being developed and/or is licensed by ALZA. The
Technology Fee is no longer payable after August 2000.
Crescendo's research and development expenses are expected to
continue at approximately current levels in 2000, although quarterly
fluctuations may occur. As of December 31, 1999, Crescendo had
$80.8 million of Available Funds which have not been expended under
the Development Agreement. Crescendo expects to exhaust Available
Funds during the second half of the year 2000. How quickly
Available Funds are expended, and the levels of Crescendo's research
and development expenses, will depend upon the progress of Crescendo
Products currently in development, and the development costs of any
future Crescendo Products proposed by ALZA and accepted for
development by Crescendo.
General and administrative expenses for 1999 were approximately
$1.6 million, as compared with $1.3 million for 1998 and $0.2
million for the period from inception (June 26, 1997) to December
31, 1997, respectively. For the period from inception (June 26,
1997) through December 31, 1999, general and administrative expenses
were approximately $3.1 million. Expenses incurred by Crescendo
under its Services Agreement with ALZA were approximately $232,000
in 1999, as compared with $224,000 in 1998 and $42,000 for the
period from inception (June 26, 1997) through December 31, 1997.
Crescendo accrues on a monthly basis these expenses, which include
(i) third party direct expenses paid by ALZA on behalf of Crescendo;
(ii) actual salaries, including benefits, of ALZA's personnel
performing services for Crescendo, and (iii) ALZA's standard
administrative overhead charge calculated as a percent of salaries.
It is expected that general and administrative expenses will remain
at approximately current levels in 2000.
The results of operations of Crescendo currently reflect
primarily interest and investment income on the funds contributed by
AZLA, royalty revenue received from ALZA, and research and
development expenses related to development of Crescendo Products
and the Technology Fee. The relative contribution to Crescendo's
revenues from royalty revenue is expected to increase as interest
and investment income continues to decrease. Crescendo's net loss
for 1999 was $88.4 million or $17.89 per share, as compared with
$95.8 million, or $19.29 per share for 1998, and $28.4 million, or
$11.33 per share from inception (June 26, 1997) through December 31,
1997. The net loss from inception (June 26, 1997) through December
31 1999 was $212.7 million, or $47.62 per share. Crescendo is
expected to continue to record significant net losses for at least
the remainder of 2000 as product development expenses under its
agreements with ALZA are expected to continue to exceed income.
Impact of Year 2000
In prior years, Crescendo discussed the nature and progress of
its plans to become Year 2000 compliant. Crescendo experienced no
significant disruptions in its internal systems or that of its third
party systems at the Year 2000 date change. Crescendo did not incur
any material costs in connection with its Year 2000 assessment.
Crescendo is not aware of any material problems resulting from Year
2000 issues, either with its internal systems or with its third
party systems. Crescendo will continue to monitor it critical
computer applications and those of its vendors, contractors
(including ALZA for administrative functions under the Services
Agreement and for contractual research and development), U.S.
government agencies, and its investment managers throughout the year
2000 to ensure that any latent Year 2000 matters that may arise are
addressed promptly.
Liquidity and Capital Resources
On September 29, 1997, ALZA contributed $300 million in cash to
Crescendo in exchange for the Crescendo Shares. The funds
contributed by ALZA, plus investment income earned thereon, are
being used primarily to fund the development of Crescendo Products
and to conduct related activities. These funds, to the extent not
immediately required for development activities, are invested in low-
risk securities.
At December 31, 1999, Crescendo had cash, cash equivalents and
short-term investments and long-term investments of approximately
$93.1 million. As Crescendo's funds continue to be utilized under
the Development Agreement and to pay the Technology Fee to ALZA,
increasingly lower cash balances will be available for investment.
Based on anticipated spending levels for the continued development
of all Crescendo Products currently under development, it is expected
that Crescendo's funds for product development will be exhausted during
the second half of the year 2000. At that time, product development
funding by Crescendo will cease. However, several factors could impact
the level and timing of Crescendo funding, including the addition of
any new Crescendo Products proposed by ALZA and accepted for
development by Crescendo, the discontinuation of the development of any
Crescendo Products, any commercial arrangements between ALZA and other
companies which would cause ALZA to exercise its License Option with
respect to any Crescendo Product and take over the funding of product
development, any change in the number of projects advancing to or
continuing in later stages of development or any adjustments in the
rate of spending on Crescendo Products currently in development.
When Crescendo's Available Funds are nearly exhausted, which is
anticipated to occur during the second half of the year 2000, certain
critical timetables will be triggered. First, ALZA's 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 Crescendo's Available Funds which have not been
expended under the Development Agreement, accompanied by a report of
Crescendo's independent auditors. In addition, ALZA has the right, for
30 days after expiration of the Purchase Option, to license any or all
Crescendo Products which have not yet been licensed, on a product-by-
product and country-by-country basis. ALZA is under no obligation to
exercise the Purchase Option, or the License Option with respect to any
or all Crescendo Products, and will do so only if ALZA determines that
it is in the best interests of ALZA and its stockholders at the time
the decision is made. In the event that ALZA does not exercise the
Purchase Option, or the License Option for all Crescendo Products,
after Available Funds are exhausted, Crescendo will not have funds to
continue or complete development of any remaining Crescendo Products.
It is not likely that Crescendo would be able to raise any additional
funds during the period when ALZA's Purchase Option is outstanding,
because of the existence of such option. After the expiration of the
Purchase Option, if it is not exercised, Crescendo's ability to obtain
additional funding will be subject to the perception of those investors
with funds available, or the public markets, of the value of
Crescendo's portfolio.
The Board of Directors of Crescendo has initiated activities to
establish a contingency plan for the continued operations of Crescendo
in the event that ALZA chooses not to exercise the Purchase Option.
Possible actions under the contingency plan, which could be implemented
individually or in combination, include the sale or license of
Crescendo Products for which ALZA has not exercised its License Option,
either worldwide or for countries for which ALZA has not exercised its
option; the sale of Crescendo's rights to future payments with respect
to Crescendo Products licensed by ALZA; and the sale of Crescendo's
rights to future payments from ALZA with respect to the Developed
Technology. Once the contingency plan is established, Crescendo's
Board will review the plan on a regular basis. In the event that ALZA
does not exercise the Purchase Option, there can be no assurance that
the contingency plan will result in returns to Crescendo stockholders.
The Board has the right, under its agreements with ALZA, to take
necessary steps to cease development funding and maintain a cash
reserve of up to $2.0 million to ensure Crescendo's ability to meet its
operating cash needs through at least 2000.
Item 7a. Quantitative and Qualitative Disclosures About Market Risk
Crescendo's exposure to market risk for changes in interest
rates relates primarily to Crescendo's investment portfolio and long-
term debt obligations. Crescendo does not use derivative financial
instruments in its investment portfolio. Crescendo's investment
policy requires investments with high credit quality issuers and
limits the amount of credit exposure to any one issuer. The primary
objective of Crescendo's investment activities is to preserve
principal.
The table below presents principal amounts and related weighted-
average interest rates by year of maturity for Crescendo's
investment portfolio and debt obligations:
<TABLE>
<CAPTION>
2000 2001 2002 2003 Thereafter Total Fair Value
_______________________________________________________________________________________
(in millions)
<S> <C> <C> <C> <C> <C> <C> <C>
Cash equivalents
Fixed Rate
Securities $53.6 $53.6 $53.7
Average Rate 5.37% 5.37%
Short-term Investments
Fixed Rate
Securities $ 6.9 $ 6.9 $ 7.0
Average Rate 5.63% 5.63%
Long-term Investments
Fixed Rate
Securities - $2.1 $29.9 $0.2 $ - $32.2 $31.4
Average Rate - 5.44% 6.92% 6.00% - 6.82%
Total Investments
Fixed Rate
Securities $60.5 $2.1 $29.9 $0.2 $ - $92.7 $92.1
Average Rate 5.40% 5.44% 6.92% 6.00% - 5.89%
</TABLE>
Item 8. Financial Statements and Supplementary Data
Crescendo Pharmaceuticals Corporation
(a development stage company)
Statement of Operations
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Periods from inception
Years ended (June 26, 1997) to
December 31, December 31,
1999 1998 1997 1999
_______________________________________________________________________
<S> <C> <C> <C> <C>
Revenues:
Net interest and
investment income $7,439 $13,912 $4,083 $25,434
Royalty revenue
from ALZA Corporation
(a related party) 2,385 - - 2,385
_______ ________ ________ ________
Total revenues 9,824 13,912 4,083 27,819
Expenses:
Research and development
performed under contract
with ALZA Corporation
(a related party) 97,692 105,966 32,279 235,937
General and
administrative 1,579 1,316 245 3,140
________ ________ ________ ________
Total expenses 99,271 107,282 32,524 239,077
________ ________ ________ ________
Loss before taxes (89,447) (93,370) (28,441) (211,258)
Income taxes (1,004) 2,425 - 1,421
________ ________ ________ ________
Net loss $(88,443) $(95,795) $(28,441) $(212,679)
=========================================================================
Net loss per common share
Basic and Diluted $ (17.89) $ (19.29) $ (11.33) $ (47.62)
=========================================================================
</TABLE>
See accompanying notes.
Crescendo Pharmaceuticals Corporation
(a development stage company)
(in thousands, except per share amounts)
Balance Sheet
<TABLE>
<CAPTION>
December 31,
1999 1998
__________________________________________________________________
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 54,682 $ 54,326
Short-term investments 6,989 57,410
Interest receivable 321 1,861
Taxes receivable 3,502 -
Accounts receivable
(from ALZA Corporation
a related party) 707 -
Other current assets 120 627
__________________________________________________________________
Total current assets 66,321 114,224
Employee loan 300 300
Long-term investments 31,448 79,387
__________________________________________________________________
Total assets $ 98,069 $ 193,911
==================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Payable to ALZA Corporation
(a related party) $ 12,120 $ 17,596
Accrued liabilities 97 77
__________________________________________________________________
Total current liabilities 12,217 17,673
Stockholders' equity:
Class A Common Stock,
$0.01 par value, 6,000
shares authorized; 4,909
and 4,965 shares issued
and outstanding at
December 31, 1999 and 1998,
respectively 49 50
Class B Common Stock,
$1.00 par value, 1 shares
authorized, issued and
outstanding 1 1
Additional paid-in capital 298,951 299,949
Accumulated other comprehensive
income (loss) (470) 474
Deficit accumulated during
development stage (212,679) (124,236)
___________________________________________________________________
Total stockholders' equity 85,852 176,238
___________________________________________________________________
Total liabilities and
stockholders' equity $ 98,069 $ 193,911
===================================================================
</TABLE>
See accompanying notes.
Crescendo Pharmaceuticals Corporation
(development stage company)
Statement of Stockholders' Equity
(in thousands, except number of shares and per share amounts)
<TABLE>
<CAPTION>
DEFICIT
ACCUMULATED ACCUMULATED
CLASS A CLASS B ADDITIONAL OTHER DURING TOTAL
COMMON COMMON PAID-IN COMPREHENSIVE DEVELOPMENT STOCKHOLDERS'
STOCK STOCK CAPITAL INCOME (LOSS) STAGE EQUITY
<S> <C> <C> <C> <C> <C> <C>
Issuance of 4,965,470
Shares of Class A
Common Stock
for approximately $60.42
per share for cash to
ALZA in September 1997 $ 50 $ - $ 299,949 $ - $ - $ 299,999
Issuance of
Common Stock for
$10 per share for cash
to ALZA and its
subsequent conversion
in September 1997 into
1,000 shares of Class B
Common Stock - 1 - - - 1
Comprehensive loss:
Net loss - - - - (28,441) (28,441)
Net change in
unrealized loss on
available-for-sale
securities - - - (80) - (80)
________
Total comprehensive
loss - - - - - (28,521)
___________________________________________________________________________________
Balance,
December 31, 1997 50 1 299,949 (80) (28,441) 271,479
Comprehensive loss:
Net loss - - - - (95,795) (95,795)
Net change in
unrealized gain on
available-for-sale
securities - - - 554 - 554
________
Total comprehensive
loss (95,241)
_______________________________________________________________________________________
Balance,
December 31, 1998 50 1 299,949 474 (124,236) 176,238
Repurchase of Class
A Common Stock (1) - (998) - - (999)
Comprehensive loss:
Net loss - - - - (88,443) (88,443)
Net change in
unrealized loss on
available-for-sale
securities - - - (944) - (944)
__________
Total comprehensive
loss (89,387)
________________________________________________________________________________________
Balance,
December 31, 1999 $ 49 $ 1 $ 298,951 $(470) $ (212,679) $ 85,852
_________________________________________________________________________________________
</TABLE>
Crescendo Pharmaceuticals Corporation
(a development stage company)
Statement of Cash Flows
Increases (Decreases) in Cash and Cash Equivalents
(in thousands)
<TABLE>
<CAPTION>
Periods from inception
Years ended (June 26, 1997) to
December 31, December 31,
1999 1998 1997 1999
_______________________________________________________________________________________
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(88,443) $(95,795) $(28,441) $(212,679)
Non-cash adjustments to reconcile
net loss to net cash used in
operating activities:
(Increase) decrease in assets:
Interest receivable 1,540 (894) (967) (321)
Taxes receivable (3,502) - - (3,502)
Accounts receivable from
ALZA Corporation (707) - - (707)
Other current assets 507 (517) (110) (120)
Increase (decrease) in liabilities:
Payable to ALZA Corporation (5,476) 2,528 15,068 12,120
Accrued liabilities 20 37 40 97
________________________________________________________________________________________
Total adjustments (7,618) 1,154 14,031 7,567
________________________________________________________________________________________
Net cash used in
operating activities (96,061) (94,641) (14,410) (205,112)
________________________________________________________________________________________
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of available-for-sale
securities (12,042) (111,299) (105,319) (228,660)
Maturities of available-for-
sale securities 5,000 - - 5,000
Sales of available-for sale
securities 104,458 80,295 - 184,753
Employee loan, long-term - - (300) (300)
________________________________________________________________________________________
Net cash provided by (used in)
investing activities 97,416 (31,004) (105,619) (39,207)
________________________________________________________________________________________
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of common stock to
ALZA Corporation - - 300,000 300,000
Repurchase of common stock (999) - - (999)
________________________________________________________________________________________
Net cash (used in) provided by
financing activities (999) - 300,000 299,001
________________________________________________________________________________________
Net increase (decrease) in cash
and cash equivalents 356 (125,645) 179,971 54,682
________________________________________________________________________________________
Cash and cash equivalents
at beginning of period 54,326 179,971 - -
________________________________________________________________________________________
Cash and cash equivalents
at end of period $ 54,682 $ 54,326 $179,971 $ 54,682
=========================================================================================
</TABLE>
See accompanying notes.
Crescendo Pharmaceuticals Corporation
(a development stage company)
Notes to Financial Statements
Note 1. Basis of Presentation and Significant Accounting Policies
Crescendo was incorporated in Delaware on June 26, 1997 and
commenced operations on September 30, 1997. Crescendo was formed
for the purpose of selecting and developing human pharmaceutical
products and commercializing such products, most likely through
licensing to ALZA. Since its formation, Crescendo's principal
activity has been conducting product development under its
agreements with ALZA. In accordance with generally accepted
accounting principles, Crescendo is considered a development stage
company.
Crescendo incurred research and development expenses of
approximately $97.7 million during 1999, $106.0 million during 1998,
and $32.3 million for the period from inception (June 26, 1997)
through December 31, 1997. Research and development expenses have
totaled approximately $235.9 million for the period from inception
(June 26, 1997) to December 31, 1999. Based on Crescendo's current
rate of expenditures on Crescendo Products, it is expected that
funds for product development will be exhausted during the second
half of 2000 and product development by Crescendo will cease. When
Available Funds are exhausted, ALZA's purchase option with respect
to all of Crescendo's Class A Common Stock and option to license
Crescendo Products on a product-by-product basis will be triggered,
as described more fully in Note 4 below. The Board of Directors of
Crescendo has initiated activities to establish a contingency plan
for the continued operations of Crescendo in the event that ALZA
chooses not to exercise the purchase option, and has the right,
under its agreements with ALZA, to take necessary steps to cease
development funding and maintain a cash reserve of up to $2 million
to ensure Crescendo's ability to meet its operating cash needs
through at least December 31, 2000.
Accounting for Revenues and Expenses
At December 31, 1999, Crescendo's revenue consisted of interest
and investment income and royalty revenue. Since the first quarter
of 1999, Crescendo has accrued royalty revenue based on the net
sales in the United States of one Crescendo Product licensed by
ALZA. Royalties are recognized in the period in which earned(the
period in which product sales are made by third parties from whom
Crescendo receives, directly or indirectly, product royalties),
based on information reported to Crescendo by ALZA.
Crescendo has incurred and expects to incur most of its expenses
under its agreements with ALZA. Development Costs paid to ALZA
under a Development Agreement and amounts paid to ALZA under a
Services Agreement are recorded as research and development expenses
and general and administrative expenses, respectively, and are
recognized on an accrual basis as incurred. These expenses are
recorded in the period in which services have been provided by ALZA
to Crescendo or in which expenses have been incurred by ALZA on
behalf of Crescendo. The Technology Fee paid to ALZA under a
Technology License Agreement is recorded monthly, as incurred, as
research and development expense. See Note 4 for a description of
the agreements between Crescendo and ALZA.
Investment Risk
Crescendo invests excess cash in money market and fixed income
securities of banks and companies with strong credit ratings, from a
variety of industries, and in U.S. government obligations. These
securities typically bear minimal risk and Crescendo has not
experienced any losses on its investments due to institutional failure
or bankruptcy. Crescendo's investment policy is designed to limit
exposure with any one institution.
Use of Estimates
The preparation of financial statements in accordance with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the
financial statements and accompanying notes. Actual results could
differ from those estimates.
Cash, Cash Equivalents and Short-term Investments
Cash and cash equivalents include cash balances and investments
with maturities of three months or less at the time of purchase.
Short-term investments include commercial paper and other highly
liquid investments with maturities less than one year. Cash, cash
equivalents and short-term investments are stated at their fair
value.
Segment Information
Effective January 1, 1998, Crescendo adopted Statement of
Financial Accounting Standard No. 131, "Disclosures about Segments
of an Enterprise and Related Information" ("SFAS 131").
Crescendo has organized its business in one operating segment, since
Crescendo's only business is to engage in pharmaceutical product
development and related activities under its agreements with ALZA.
At December 31, 1999, all of Crescendo's revenue was derived from
its investments in the United States and from product payments on
net sales in the United States.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB")
issued the Statement of Financial Accounting Standard No. 133 ("SFAS
133"), "Accounting for Derivative Instruments and Hedging
Activities". This statement establishes accounting and reporting
standards requiring that every derivative instrument, including
certain derivative instruments embedded in other contracts, be
recorded in the balance sheet as either an asset or liability
measured at its fair value. The statement also requires that changes
in the derivative's fair value be recognized in earnings unless
specific hedge accounting criteria are met. In June 1999, the FASB
issued Statement of Financial Accounting Standard No. 137,
"Accounting for Derivative Instruments and Hedging Activities -
Deferral of the Effective Date of SFAS 133". As a result, Crescendo
is required to adopt SFAS 133 in its fiscal year 2001. Crescendo
believes the adoption of SFAS 133 will not have a material effect on
its financial statements.
Note 2. Investments
Crescendo has classified its entire investment portfolio,
including cash and cash equivalents of approximately $54.7 million
and $54.3 million at December 31, 1999 and 1998, respectively, as
available-for-sale. Investments in the available-for-sale category
are carried at fair market value with unrealized gains and losses
recorded as a separate component of stockholders' equity. The cost
of securities when sold is based upon specific identification.
Realized gains for the years ended December 31, 1999 and 1998 were
approximately $25,000 and $0.2 million, respectively. For the
period from inception (June 26, 1997) through December 31, 1997,
realized gains were not material.
The following is a summary of Crescendo's investment portfolio
(in thousands):
December 31, 1999 Available-for-Sale Securities
____________________________________________________________________
Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
____________________________________________________________________
U.S. Treasury
securities and
obligations of
U.S. government
agencies $10,387 $ - $(89) $10,298
Collateralized
mortgage
obligations and
asset backed
securities 18,270 - (280) 17,990
Corporate debt
securities 16,983 - (101) 16,882
Money market funds 46,928 - - 46,928
____________________________________________________________________
$92,568 $ - $(470) $92,098
December 31, 1998 Available-for-Sale Securities
____________________________________________________________________
Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
____________________________________________________________________
U.S. Treasury
securities and
obligations of
U.S. government
agencies $57,602 $ 228 $ - $57,380
Collateralized
mortgage
obligations and
asset backed
securities 32,364 85 (310) 32,139
Corporate debt
securities 52,896 472 - 53,368
Money market funds 47,091 - - 47,091
____________________________________________________________________
$189,953 $ 785 $(310) $190,428
The amortized cost and estimated fair value of securities at
December 31, 1999 and 1998, by contractual maturity, are shown below
(in thousands). Expected maturities will differ from contractual
maturities because the issuers of the securities may have the right
to prepay obligations without prepayment penalties.
1999 1998
____________________________________________________________________
Estimated Estimated
Amortized Fair Amortized Fair
Cost Value Cost Value
____________________________________________________________________
Due in one year or less $60,653 $60,649 $110,905 $111,041
Due after one year through
three years 31,707 31,244 44,460 44,731
Due after three years
through five years 208 205 34,588 34,656
____________________________________________________________________
$92,568 $92,098 $189,953 $190,428
Note 3. Stockholders' Equity
Common Stock Repurchase
On May 27, 1999, Crescendo's board of directors announced a
program under which Crescendo may purchase Crescendo Shares in the
open market from time to time using product payments received by
ALZA. As of December 31, 1999, Crescendo had purchased 57,272
Crescendo Shares under this program for approximately $1.0 million.
The excess of the purchase price of the Crescendo Shares over their
stated value has been reflected as a decrease in additional paid-in
capital on the accompanying balance sheet. The board of directors
has determined that the program will continue in the first quarter
of 2000.
Per Share Information
Basic loss per share is calculated by dividing net loss by the
weighted average common shares outstanding for the period. Diluted
loss per share is calculated by dividing net loss by the weighted
average common shares outstanding for the period plus the dilutive
effect of stock options.
The following table sets forth the computation of Crescendo's
basic and diluted loss per share (in thousands, except per share
amounts):
<TABLE>
<CAPTION>
Periods from inception
Years ended (June 26, 1997)to
December 31, December 31,
1999 1998 1997 1999
_______________________________________________________________________
<S> <C> <C> <C> <C>
NUMERATOR:
Basic and Diluted
Net loss $ (88,443) $(95,795) $(28,441) $(212,679)
DENOMINATOR:
Basic and Diluted
Weighted average shares
outstanding 4,944 4,966 2,511 4,466
=======================================================================
Basic and Diluted
net loss per share $ (17.89) $ (19.29) $ (11.33) $ (47.62)
=======================================================================
</TABLE>
The potentially dilutive effect of outstanding options to
purchase 100,000 Crescendo Shares in the years ended December 31,
1999 and 1998, and for the periods from inception (June 26, 1997)
through December 31, 1997 and 1999, were excluded from the diluted
per share calculations as they would have been anti-dilutive for all
periods.
Note 4. Arrangements with ALZA Corporation
On September 29, 1997, ALZA contributed $300 million in cash to
Crescendo. On September 30, 1997, all of the then outstanding
Crescendo Shares (a total of 4,965,470 shares) were distributed to
the holders of ALZA common stock and ALZA's convertible subordinated
debentures. Crescendo Shares are traded on The Nasdaq Stock Market
- -Registered Trademark- under the symbol "CNDO." ALZA holds all 1,000
shares of Crescendo Class B Common Stock.
In connection with ALZA's contribution to Crescendo and the
distribution of Crescendo Shares, Crescendo and ALZA entered into a
number of agreements, including a Development Agreement, Technology
License Agreement, License Option Agreement and Services Agreement,
discussed below.
Crescendo and ALZA have a Development Agreement pursuant to
which ALZA conducts product development and related activities on
behalf of Crescendo under work plans and cost estimates which have
been proposed by ALZA and approved by Crescendo. Crescendo is
required to utilize the cash initially contributed to it by ALZA
plus interest thereon, less Crescendo's administrative expenses, the
Technology Fee paid to ALZA and reserves of up to $2 million (the
"Available Funds") to conduct activities under the Development
Agreement.
Under the Development Agreement, Crescendo initially agreed to
fund the development of seven identified products (the "Initial
Products"). As of December 31, 1999, three of the seven Initial
Products (OROS oxybutynin, DUROS leuprolide and OROS
methylphenidate) remained in active development and/or had been
licensed by ALZA. During the third quarter of 1999, the FDA filed
the NDAs for DUROS leuprolide and OROS methylphendidate. For the
years ended December 31, 1999 and 1998 and the period from inception
(June 26, 1997) through December 31, 1997, Crescendo recorded
research and development expenses of $97.7, $106.0 million and $32.3
million, respectively. For the period from inception (June 26,
1997) through December 31, 1999, Crescendo recorded research and
development expenses of approximately $235.9 million. All periods
include a Technology Fee paid by Crescendo to ALZA. These expenses
related primarily to the development of the Crescendo Products.
Crescendo and ALZA have a Technology License Agreement pursuant
to which ALZA has granted to Crescendo a worldwide license to use
ALZA technology solely to select and develop Crescendo Products, to
conduct related activities, and to commercialize such products. In
exchange for the license to use existing ALZA technology relating to
the Initial Products, Crescendo pays a Technology Fee to ALZA,
payable monthly over a period of three years, in the amount of $1
million per month for the first 12 months following the distribution
of Crescendo Shares, $667,000 per month for the following 12 months
and $333,000 per month for the next 12 months (beginning in
September 1999). The Technology Fee will no longer be payable at
such time as fewer than two of the Initial Products are being
developed by Crescendo and/or have been licensed by ALZA pursuant to
the License Option (described below). Crescendo recorded a
Technology Fee expense of $6.7 million, $10.7 million, and $4.0
million for the years ended December 31, 1999 and 1998, and for the
period from inception (June 26, 1997) through December 31, 1997,
respectively which is included in research and development expenses.
Three of the seven Initial Products were in active development
and/or had been licensed at December 31, 1999.
Pursuant to the License Option Agreement entered into by
Crescendo and ALZA, Crescendo has granted ALZA an option to acquire
a license to each Crescendo Product. The License Option for any
such 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 ALZA's Purchase Option,
described below. If and to the extent the License Option is
exercised as to any Crescendo 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.
Under the License Agreement for each licensed product (a form of
which is attached to the License Option Agreement), ALZA will make
payments to Crescendo with respect to the licensed product equal to
1% of net sales of the licensed product by ALZA and its
sublicensees, distributors and marketing partners, 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, not to exceed 2.5% of net sales in the first year a
licensed product is sold in a major market country, and not to
exceed 3% for the following two years. ALZA has the right to buy
out Crescendo's right to receive payments for any or all licensed
products on a country-by-country or global basis in accordance with
a formula set forth in the License Agreement.
In December 1998, ALZA exercised its option to obtain a worldwide
license to OROS oxybutynin (Ditropan XL) from Crescendo. ALZA
launched the product in the United States on February 1, 1999.
Under the terms of the license agreement between Crescendo and ALZA,
Crescendo will receive payments from ALZA based on worldwide net
sales of the product. For the first three years the rates will be
2.5%, 3.0%, and 3.0% of net sales, respectively; thereafter the rate
is expected to be between 5.5% and 6.5%, based on the Development
Costs of the product to date and future anticipated Development
Costs to be paid by Crescendo. Royalty revenue for the year ended
December 31, 1999 totaled approximately $2.4 million and was derived
from net sales of Ditropan XL in the United States. In 1999, the
royalty rate was 2.5% of net sales. Beginning on January 1, 2000
the rate will be increased to 3% of net sales.
Pursuant to Crescendo's Restated Certificate of Incorporation,
ALZA has a Purchase Option which gives ALZA the right to purchase
all (but not less than all) of the Crescendo Shares. The Purchase
Option is exercisable by written notice to Crescendo at any time
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 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 Crescendo's Available Funds which have not been
expended under the Development Agreement, accompanied by a report of
Crescendo's independent auditors.
If the Purchase Option is exercised, the exercise price will be
the greatest of:
(a)(i) 25 times the actual payments made by or due from ALZA to
Crescendo under the Development Agreement and the License
Agreement for any product (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 payments) 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 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
amount
9
C:\ELINK\FILING\LICAGR1999leup.doc/klw
LICENSE AGREEMENT
This License Agreement (the "Agreement") is made this 3rd
day of March, 2000 by and between ALZA Corporation, a Delaware
corporation ("ALZA"), and Crescendo Pharmaceuticals Corporation
("Crescendo"), a Delaware corporation.
BACKGROUND
A. Crescendo and ALZA have entered into a License Option
Agreement and certain other agreements dated as of September 5,
1997.
B. Section 2 of the License Option Agreement provides for a
license, the terms of which are to be set forth herein.
Now, therefore, the parties agree as follows:
1. Definitions.
For purposes of this Agreement, the following terms
shall have the meanings set forth below:
1.1 "Affiliate" shall mean a corporation or any other
entity that directly, or indirectly through one or more
intermediaries, controls, is controlled by, or is under common
control with, the designated party. "Control" shall mean
ownership of at least 50% of the shares of stock entitled to vote
for the election of directors in the case of a corporation, and
at least 50% of the interests in profits in the case of a
business entity other than a corporation.
1.2 "Development Agreement" shall mean the Development
Agreement between ALZA and Crescendo dated as of September 5,
1997.
1.3 "Development Cost(s)" shall mean the cost of
activities undertaken pursuant to the Development Agreement with
respect to the Licensed Product, determined in accordance with
Exhibit A thereto.
1.4 "Infringing Product" shall mean any product sold
by a third party, other than pursuant to an agreement with ALZA,
(i) which incorporates the same therapeutic agent or agents as
incorporated in the Licensed Product and (ii) in the case of a
Licensed Product using an ALZA drug delivery system, which
incorporates a delivery system substantially similar to that
incorporated in the Licensed Product, and (iii) which infringes
or is alleged to infringe any patent or patents owned by,
licensed to or controlled by ALZA.
1.5 "License Option Agreement" shall mean the License
Option Agreement between ALZA and Crescendo dated as of September
5, 1997.
1.6 "Licensed Product" shall mean the product listed
on Attachment A hereto.
1.7 "Major Market Country" shall mean any of the
following countries: the United States, France, Germany, Italy,
Japan or the United Kingdom.
1.8 "Net Sales" shall mean the total amount invoiced in United
States dollars (or converted thereto in accordance with Section
5.2 hereof) on sales of a Licensed 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 the following deductions, in each case related
specifically to the Licensed Product and actually allowed and
taken and not otherwise recovered by or reimbursed to ALZA (or
its Affiliates) or such sublicensee, distributor or marketing
partner (or its Affiliates): (i) trade, cash and quantity
discounts; (ii) taxes on sales (such as sales or use taxes) to
the extent added to the sales price and set forth separately as
such in the total amount invoiced; (iii) freight, insurance and
other transportation charges to the extent added to the sales
price and set forth separately as such in the total amount
invoiced; and (iv) amounts repaid or credited by reason of
rejections, defects or returns or because of retroactive price
reductions, chargebacks or rebates under government programs.
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 Licensed Product to unrelated
third parties from persons other than sublicensees, distributors
or marketing partners (or their Affiliates) or (b) by any
sublicensee, distributor or marketing partner (or its Affiliates)
with respect to their sales of the Licensed Product to unrelated
third parties, in each case whether such consideration is in
cash, payment in kind, exchange or other form.
1.9 "Territory" shall mean the country or
countries listed on Attachment B hereto, as amended from time to
time by the parties in connection with the exercise by ALZA of
its option for additional countries under the License Option
Agreement or the surrender by ALZA of its rights to commercialize
the Licensed Product in any country or countries.
2. Grant of License.
2.1 Grant. Crescendo hereby grants to ALZA an
exclusive, perpetual 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 Territory. ALZA agrees
to use diligent efforts to conduct or have conducted any
remaining activities necessary to complete the development of the
Licensed Product in the Territory through regulatory clearance to
market the Licensed Product in the Territory. Such activities
will be undertaken at no cost to Crescendo, unless Crescendo
agrees otherwise in writing. Promptly after regulatory
clearance, ALZA shall commence and continue to use diligent
efforts to commercialize the Licensed Product in each Major
Market Country of the Territory through the manufacture and sale
or the sublicensing of the Licensed Product, devoting to the
Licensed Product the same resources as other pharmaceutical
companies of similar size devote to products with similar market
potential and with similar relative importance to their product
portfolios. ALZA may use reasonable business discretion in the
allocation of its technological and monetary resources in
performing its obligations hereunder, taking into account not
only the Licensed Product but also activities for its own account
and its obligations under its other agreements with third
parties. Crescendo acknowledges that 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 Licensed Product, without any additional
payment to or reimbursement of Crescendo.
2.2 No Other Commercialization. ALZA shall not
commercialize the Licensed Product in any country except pursuant
to this Agreement.
3. Product Payments.
3.1 Payments.
(a) In consideration of the grant of the license,
ALZA shall make payments to Crescendo ("Product Payments") with
respect to the Licensed Product as follows: 1% of Net Sales of
the Licensed Product in the Territory, plus an additional 0.1% of
such Net Sales for each full $1 million of Development Costs of
the Licensed Product paid by Crescendo. Notwithstanding the
foregoing, Product Payments for any quarter will not exceed 2.5%
of Net Sales, on a quarterly basis, in the Territory 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
completed calendar quarters.
(b) In determining Product Payments, Development
Costs shall be determined as of the last day of each calendar
quarter, in order to determine the rates payable with respect to
Net Sales for the next calendar quarter for all countries
included in the Territory as of the first day of such next
calendar quarter, and for any country added to the Territory
during such next calendar quarter.
(c) In determining Product Payments, Net Sales by
ALZA shall be reduced by the dollar amount of any license or
similar payments made by or due from ALZA or its Affiliates to
third parties with respect to sales of such Licensed Product in
the Territory. If license or similar payments are made to third
parties with respect to sales of both the Licensed Product in the
Territory and to sales of other products, ALZA shall allocate
such payments, if necessary, in a commercially reasonable manner.
3.2 Term of Payments. The obligation to make Product
Payments hereunder shall continue until 15 years after the date
of the first commercial sale of the Licensed Product in any Major
Market Country, and shall terminate as to all countries at the
end of such 15-year period.
3.3 Buy-Out of Payments.
(a) ALZA shall have the option, in its discretion, at any time
after the end of the twelfth calendar quarter during which the
Licensed Product was commercially sold in any country, to buy out
its remaining obligations to make Product Payments with respect
to Net Sales of such Licensed Product in such country. The buy-
out price shall be an amount equal to 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, plus 15 times such additional
Product Payments as would have been made but for the 2.5% and 3%
limits set forth in Section 3.1 on Product Payments for such
period.
(b) ALZA shall have the option, in its discretion, at any time
after the end of the twelfth calendar quarter during which the
Licensed Product was commercially sold in either the United
States or two other Major Market Countries, to buy out its
remaining obligations to make Product Payments with respect to
Net Sales of such Licensed Product in the Territory. The buy-out
price shall be an amount equal to (i) 20 times (A) the Product
Payments made by or due from ALZA to Crescendo for such Licensed
Product in the Territory, 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 Net
Sales of such Licensed Product, plus (C) such additional Product
Payments as would have been made but for the 2.5% and 3% limits
set forth in Section 3.1 on Product Payments for such period, in
each case, for the four calendar quarters immediately preceding
the quarter in which the buy-out option is exercised, less (ii)
any amounts previously paid to exercise any country-specific buy-
out option with respect to Net Sales of such Licensed Product.
4 Accounting.
4.1 Reports. Within 90 days after the end of each
calendar quarter for which Product Payments are due, ALZA shall
render an accounting to Crescendo, on a country-by-country basis,
with respect to all Product Payments due for such quarter. Such
report shall indicate, for such quarter, the quantity and dollar
amount of Net Sales of the Licensed Product by ALZA and its
Affiliates, sublicensees, distributors and marketing partners
(and their Affiliates), or other consideration with respect to
Net Sales, with respect to which payments are due; provided,
however, that if ALZA shall not have received from any
sublicensee, distributor or marketing partner a report of its
(and its Affiliates') sales for such quarter, then such sales
shall be included in the next quarterly report. In case no
Product Payments are due for any calendar quarter, ALZA shall so
report.
4.2 Records; Review by Accountants. ALZA shall keep
and maintain, in accordance with generally accepted accounting
principles, proper and complete records and books of account
documenting all amounts paid or payable by ALZA to Crescendo.
Crescendo shall have the right, once in each calendar year during
regular business hours and upon reasonable notice to ALZA, at
Crescendo's expense, to examine or have examined by a certified
public accountant or similar person, such of the records of ALZA
as may be necessary to verify the accuracy of the reports and
payments made under this Agreement. Such examination shall take
place not later than two years following the year in question,
and only one examination may take place with respect to any
period as to which such books and records are examined. ALZA
shall obtain, for itself and for Crescendo, similar reasonable
rights to audit information pertaining to Net Sales from each
party appointed to commercialize any product as to which payments
are due in Crescendo hereunder.
5 Times and Currencies of Payments.
5.1 Payments. Payments shown by each calendar quarter
report to have accrued shall be due and payable on the date such
report is due and shall be paid in United States dollars. Any
and all taxes due or payable on such payments or with respect to
the remittance thereof shall be deducted from such payments and
shall be paid by ALZA to the proper taxing authorities, and proof
of payment shall be secured and sent to Crescendo as evidence of
such payment. The rate of exchange to be used in computing the
amount of the United States dollars due to Crescendo in
satisfaction of payment obligations with respect to sales in
foreign countries shall be calculated by converting the amount
due in such foreign currency into United States dollars at the
rate for the purchase of United States dollars with such currency
as published in The Wall Street Journal on the last business day
of the calendar quarter for which payment is being made.
5.2 Certain Foreign Payments. If governmental regulations
prevent remittance from any foreign country of any amounts due
under Section 3.1 in respect of that country, ALZA shall so
notify Crescendo in writing, and the obligation under this
Agreement to make payments with respect to sales in that country
shall be suspended (but the amounts due but not paid shall
continue to accrue) until such remittances are possible.
Crescendo shall have the right, upon written notice to ALZA, to
receive payment in any such country in the local currency.
5.3 Late Payments. Any payments due hereunder that
are not made when due shall bear interest at the lesser of 10%
per annum or the maximum rate as may be allowed by law, beginning
on the date when Crescendo has notified ALZA that such payments
are overdue.
6 Patent Infringement.
6.1 Notice. Each party shall promptly notify the
other party of use or sale by a third party of an Infringing
Product.
6.2 Legal Action. If a third party manufactures or
sells an Infringing Product, ALZA may, at its own expense, bring
legal action to restrain such infringement and for damages. Any
recoveries resulting from any such action shall be first applied
to reimburse ALZA for its expenses (including reasonable
attorneys' fees) incurred in bringing the action. Crescendo will
be entitled to a share of the remaining recoveries in the same
percentage as the percentage of Net Sales as to which Product
Payments are due to Crescendo during the period of the
infringement or alleged infringement. If (a) ALZA fails to take
the necessary steps to restrain such infringement or alleged
infringement by litigation or otherwise within 90 days after
either party's notice described in Section 6.1, (b) if the
infringement or alleged infringement occurs during a period for
which Crescendo is entitled to receive Product Payments
hereunder, and (c) if over a period of at least two calendar
quarters such Infringing Product achieves an annualized unit
sales volume in the country of infringement equal to 25% of the
annualized unit sales volume of the Licensed Product sold by ALZA
and its Affiliates, sublicensees, distributors and marketing
partners (and their Affiliates) in such country during such year,
then Crescendo may institute, in its own name, at its own expense
and with the right to all recoveries, such litigation or other
appropriate action as it may deem appropriate to restrain such
infringement, provided that Crescendo has first given to ALZA 60
days advance notice of its intention to take such action, and
provided further, that ALZA has not itself taken appropriate
action during such 60 day period.
6.3 Cooperation. If either party desires to bring an
action in accordance with Section 6.2, the other party agrees to
cooperate fully with the party bringing such action in the
pursuit thereof, at the expense of the party bringing such action
and to the extent reasonably requested by such party. If the
third party in any such action brought by Crescendo brings a
counteraction for invalidation or misuse of a patent covering the
Licensed Product, Crescendo promptly shall notify ALZA and ALZA
may, within six months of the notification, join and participate
in such action at its own expense.
6.4 Settlement. Each party agrees not to settle any
action it brings in a manner that would adversely affect the
other party without the other party's prior written approval.
7 Effective Date and Term.
7.1 Effective Date and Term. This Agreement will
become effective in accordance with Section 2.3 of the License
Option Agreement and, unless terminated in accordance with any of
the provisions hereof, shall remain in full force and effect
thereafter.
8 Indemnification.
8.1 Indemnity. ALZA shall indemnify, defend and hold
Crescendo (and its Affiliates) harmless from and against any and
all liabilities, claims, demands, damages, costs, expenses or
money judgments incurred by or rendered against Crescendo and its
Affiliates, which arise out of the use, design, labeling or
manufacture, processing, packaging, sale or commercialization of
the Licensed Product by ALZA, its Affiliates, subcontractors,
sublicensees, distributors and marketing partners (and their
Affiliates). Crescendo shall permit ALZA's attorneys, at ALZA's
discretion and cost, to control the defense of any claims or
suits as to which Crescendo may be entitled to indemnification
hereunder, and Crescendo agrees not to settle any such claims or
suits without the prior written consent of ALZA. Crescendo shall
have the right to participate, at its own expense, in the defense
of any such claim or demand to the extent it so desires.
8.2 Notice. Crescendo shall give ALZA prompt notice
in writing, in the manner set forth in Section 11.7 below, of any
claim or demand made against Crescendo for which Crescendo may be
entitled to indemnification under Section 8.1.
9 Disclaimers.
CRESCENDO DISCLAIMS ANY EXPRESS OR IMPLIED WARRANTY (A)
THAT THE LICENSED PRODUCT OR ANY TECHNOLOGY INCORPORATED THEREIN,
OR THE MANUFACTURE, USE OR SALE THEREOF, WILL BE FREE FROM CLAIMS
OF PATENT INFRINGEMENT, INTERFERENCE OR UNLAWFUL USE OF
PROPRIETARY INFORMATION OF ANY THIRD PARTY AND (B) OF THE
ACCURACY, RELIABILITY, TECHNOLOGICAL OR COMMERCIAL VALUE,
COMPREHENSIVENESS OR MERCHANTABILITY OF THE LICENSED PRODUCT OR
ANY TECHNOLOGY INCORPORATED THEREIN OR THEIR SUITABILITY OR
FITNESS FOR ANY PURPOSE WHATSOEVER INCLUDING, WITHOUT LIMITATION,
THE DESIGN, DEVELOPMENT, MANUFACTURE, USE OR SALE OF THE LICENSED
PRODUCT. CRESCENDO DISCLAIMS ALL OTHER WARRANTIES OF WHATEVER
NATURE, EXPRESS OR IMPLIED.
10 Termination.
10.1 Termination by Crescendo. Crescendo may, in its
discretion, terminate this Agreement in the event that ALZA:
(a) breaches any of its material obligations
hereunder and such breach continues for a period of 60 days after
written notice thereof; or
(b) enters into any proceeding, whether voluntary
or otherwise, in bankruptcy, reorganization or arrangement for
the appointment of a receiver or trustee to take possession of
ALZA's assets or any other proceeding under any law for the
relief of creditors or makes an assignment for the benefit of its
creditors.
10.2 Termination by ALZA. ALZA may terminate this
Agreement with respect to one or more countries included in the
Territory upon 30 days' prior written notice to Crescendo if ALZA
elects for any reason to discontinue commercialization of the
Licensed Product in such country.
10.3 Consequences of Termination. Termination of this
Agreement for any reason in accordance with the terms hereof
shall be without prejudice to:
(a) Crescendo's right to receive all payments
accrued under Section 3 prior to the effective date of such
termination; and
(b) any other remedies which either party may
then or thereafter have hereunder or otherwise. If this
Agreement terminates pursuant to this Section 10, ALZA shall
immediately discontinue any promotion and sales of the Licensed
Product. Notwithstanding the foregoing, in the event of any
termination under this Section 10, ALZA may sell its inventory in
stock on the date of termination for a period of up to six months
after the termination, and shall remit payments to Crescendo in
respect thereto in accordance with this Agreement.
11 Miscellaneous.
11.1 Waiver, Remedies and Amendment. Any waiver by
either party hereto of a breach of any provisions of this
Agreement shall not be implied and shall not be valid unless such
waiver is recited in writing and signed by such party. Failure
of any party to require, in one or more instances, performance by
the other party in strict accordance with the terms and
conditions of this Agreement shall not be deemed a waiver or
relinquishment of the future performance of any such terms or
conditions or of any other terms and conditions of this
Agreement. A waiver by either party of any term or condition of
this Agreement shall not be deemed or construed to be a waiver of
such term or condition for any other term. All rights, remedies,
undertakings, obligations and agreements contained in this
Agreement shall be cumulative and none of them shall be a
limitation of any other remedy, right, undertaking, obligation or
agreement of either party. This Agreement may not be amended
except in writing signed by both parties.
11.2 Assignment. Neither party may assign its rights
and obligations hereunder without the prior written consent of
the other party, which consent may not be unreasonably withheld;
provided, however, that ALZA may assign such rights and
obligations hereunder to an Affiliate of ALZA or to any person or
entity with which ALZA is merged or consolidated or which
acquires all or substantially all of the assets of ALZA.
11.3 Arbitration.
(a) All disputes which may arise under, out of or in
connection with this Agreement shall be settled by arbitration
conducted in the City of San Francisco, State of California, in
accordance with the then existing rules of the American
Arbitration Association, and judgment upon the award rendered by
the arbitrators may be entered in any court having jurisdiction
thereof. The parties hereby agree that service of any notices in
the course of such arbitration at their respective addresses as
provided for in Section 11.7 of this Agreement shall be valid and
sufficient.
(b) In any arbitration pursuant to this Section 11.3,
the award shall be rendered by a majority of the members of a
board of arbitration consisting of three members who shall be
appointed by the parties jointly, or if the parties cannot agree
as to three arbitrators within 30 days after the commencement of
the arbitration proceeding, then one arbitrator shall be
appointed by ALZA and one arbitrator shall be appointed by
Crescendo within 60 days after the commencement of the
arbitration proceeding. The third arbitrator shall be appointed
by mutual agreement of such two arbitrators. In the event of
failure of the two arbitrators to agree within 75 days after
commencement of the arbitration proceeding upon the appointment
of the third arbitrator, the third arbitrator shall be appointed
by the American Arbitration Association in accordance with its
then existing rules. Notwithstanding the foregoing, in the event
that any party shall fail to appoint an arbitrator it is required
to appoint within the specified time period, such arbitrator and
the third arbitrator shall be appointed by the American
Arbitration Association in accordance with its then existing
rules. For purposes of this Section 11.3, the "commencement of
the arbitration proceeding" shall be deemed to be the date upon
which a written demand for arbitration is received by the
American Arbitration Association from one of the parties.
11.4 Counterparts. This Agreement may be executed in
any number of counterparts, each of which when so executed shall
be deemed to be an original and all of which when taken together
shall constitute this Agreement.
11.5 Governing Law. This Agreement shall be governed
by and construed in accordance with the laws of the state of
California as applied to residents of that state entering into
contracts to be performed in that state.
11.6 Headings. The headings set forth at the beginning
of the various sections of this Agreement are for convenience and
form no part of the Agreement between the parties.
11.7 Notices. Notices required under this Agreement
shall be in writing and sent by registered or certified mail,
postage prepaid, or by facsimile and confirmed by registered or
certified mail, postage prepaid, and addressed as follows:
If to ALZA: ALZA Corporation
1900 Charleston Road
Mountain View, CA 94043
Facsimile: (650) 564-7848
Attention: General Counsel
If to Crescendo: Crescendo Pharmaceuticals
Corporation
2000 Charleston Road Suite 300
Mountain View, CA 94043
Facsimile: (650) 564-7950
Attention: President and Chief
Executive Officer
All notices shall be deemed to be effective five days after the
date of mailing or upon receipt if sent by facsimile (but only if
followed by certified or registered confirmation). Either party
may change the address at which notice is to be received by
written notice pursuant to this Section 11.7.
11.8 Severability. If any provision of this Agreement
is held by a court of competent jurisdiction to be invalid or
unenforceable, it shall be modified, if possible, to the minimum
extent necessary to make it valid and enforceable or, if such
modification is not possible, it shall be stricken and the
remaining provisions shall remain in full force and effect.
11.9 Relationship of the Parties. For all purposes of
this Agreement, Crescendo and ALZA shall be deemed to be
independent contractors and anything in this Agreement to the
contrary notwithstanding, nothing herein shall be deemed to
constitute Crescendo and ALZA as partners, joint venturers, co-
owners, an association or any entity separate and apart from each
party itself, nor shall this Agreement constitute any party
hereto an employee or agent, legal or otherwise, of the other
party for any purposes whatsoever. Neither party hereto is
authorized to make any statements or representations on behalf of
the other party or in any way to obligate the other party, except
as expressly authorized in writing by the other party. Anything
in this Agreement to the contrary notwithstanding, no party
hereto shall assume nor shall be liable for any liabilities or
obligations of the other party, whether past, present or future.
11.10 Survival. The provisions of Sections 1, 4.2,
8, 9, 10.3, 11.1, 11.3, 11.5, 11.6, 11.7, 11.8, 11.9 and this
Section 11.10 shall survive the termination for any reason of
this Agreement. Any payments due under this Agreement with
respect to any period prior to its termination shall be made
notwithstanding the termination of this Agreement. Neither party
shall be liable to the other due to the termination of this
Agreement as provided herein, whether in loss of good will,
anticipated profits or otherwise.
11.11 Force Majeure. Neither party to this
Agreement shall be liable for failure or delay in the performance
of any of its obligations hereunder, if such failure or delay is
due to causes beyond its reasonable control including, without
limitation, acts of God, earthquakes, fires, strikes, acts of
war, or intervention of any governmental authority, but any such
delay or failure shall be remedied by such party as soon as
possible after the removal of the cause of such failure or delay.
IN WITNESS WHEREOF, the parties have executed this Agreement
on the date first set forth above.
ALZA CORPORATION
By: /s/ Peter D. Staple
Title: Executive Vice President
CRESCENDO PHARMACEUTICALS
CORPORATION
By: /s/ Gary L. Neil
Title: President and Chief
Executive Officer
ATTACHMENT A
LICENSED PRODUCT
DUROS-Registered Trademark- Leuprolide (referred to as CPC-2)
ATTACHMENT B
TERRITORY
DATE OF EXERCISE COUNTRY
March 3, 2000 Worldwide
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STATEMENTS INCLUDED IN PART II, ITEM 8 OF FORM 10-K DATED DECEMBER 31, 1999 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATMENTS.
</LEGEND>
<MULTIPLIER> 1,000
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<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
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<RECEIVABLES> 321
<ALLOWANCES> 0
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<CURRENT-ASSETS> 66,321
<PP&E> 0
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<TOTAL-ASSETS> 98,069
<CURRENT-LIABILITIES> 12,217
<BONDS> 0
0
0
<COMMON> 50
<OTHER-SE> 85,802
<TOTAL-LIABILITY-AND-EQUITY> 98,069
<SALES> 0
<TOTAL-REVENUES> 7,439
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 97,692
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (89,447)
<INCOME-TAX> (1,004)
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<EPS-BASIC> (17.89)
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5
G:\VLP\CNDO\dev agr cndo amend II.doc/kw
AMENDMENT NO. 2 TO DEVELOPMENT AGREEMENT
This Amendment No. 2 to Development Agreement (the
"Amendment") is made as of March 23, 2000 by and between
ALZA Corporation, a Delaware corporation ("ALZA"), and
Crescendo Pharmaceuticals Corporation, a Delaware
corporation ("Crescendo").
RECITALS
WHEREAS, ALZA and Crescendo have entered into that
certain Development Agreement dated as of September 5, 1997
(the "Development Agreement") pursuant to which ALZA
performs research and development activities on behalf of
Crescendo directed toward the development of pharmaceutical
products; and
WHEREAS, ALZA is marketing Doxil-Registered Trademark-
(STEALTH-Registered Trademark- liposomal doxorubicin HCI) in
the United States; and
WHEREAS, Doxil-Registered Trademark- has been approved
in the United States by the Food and Drug Administration
("FDA") for marketing only as a treatment for AIDS kaposi
sarcoma and metastatic carcinoma of the ovary in refractory
patients; and
WHEREAS, ALZA and Crescendo desire that Crescendo fund
a program with the goal of receiving clearance by the FDA to
market Doxil-Registered Trademark- for the treatment of
multiple myeloma; and
WHEREAS, such an arrangement is not currently
contemplated by the Development Agreement.
NOW, THEREFORE, in consideration of the foregoing and
the agreements contained herein, ALZA and Crescendo hereby
agree as follows:
1. Funding of the Development Program.
(a) In consideration of the royalty payments set forth
in Section 2 of this Agreement, Crescendo hereby agrees to
fund the Doxil-Registered Trademark- Development Program in
amounts as proposed by ALZA and approved by Crescendo from
time to time (the "Development Payments"). The Doxil-
Registered Trademark- Development Program shall be set forth
in work plans prepared by ALZA which are subject to the
approval (in whole or in part) or the rejection (in whole or
in part) of Crescendo. Each such approved work plan shall
constitute a "Work Plan" within the meaning of the
Development Agreement. The parties agree to review the Work
Plan from time to time (no less often than the end of each
stage of development) and to revise the Work Plan as
appropriate so that it remains a best estimate of the work
to be done under the Doxil-Registered Trademark- Development
Program and the amounts required to fund such work.
Crescendo shall not be obligated to make Development
Payments in excess of those provided for in an approved Work
Plan, and ALZA shall not be obligated to perform work on the
Doxil-Registered Trademark- Development Program which would
result in Development Payments exceeding those in an
approved Work Plan.
(b) ALZA and Crescendo agree that the Development
Payments shall be paid under the Development Agreement,
shall be made on the same basis as "Development Costs" (as
set forth in Sections 4.1 and 4.2 of the Development
Agreement) and shall constitute "Development Costs" within
the meaning of the Development Agreement.
(c) ALZA and Crescendo agree that the Doxil-Registered
Trademark- Development Program constitutes an activity
undertaken pursuant to the Development Agreement within the
meanings of Sections 1.5 and 10.1 thereof.
(d) Developments Payments are intended to be included
as part of the "total amount paid by or due from this
corporation under the Development Agreement" for purposes of
Article FIFTH, Section (A)(18)(c) of the Restated
Certificate of Incorporation of Crescendo (the
"Certificate"), as part of "expenditures pursuant to the
Development Agreement" for purposes of Article FIFTH,
Section (A)(19) of the Certificate, as part of the "total
amounts paid by or due from this corporation pursuant to the
Development Agreement" for purposes of Article FIFTH,
Section (A)(21) of the Certificate, and as part of "any
additional amounts.that are paid by (or due from) this
corporation under the Development Agreement" for purposes of
Article FIFTH, Section (A)(10) of the Certificate.
2. Royalty Payments.
(a) In consideration of Crescendo making Development
Payments with respect to Doxil-Registered Trademark-,
beginning in the first calendar quarter (the "Initial
Quarter") in which any Public Disclosure (as defined below)
is made, ALZA shall pay Crescendo royalties with respect to
sales of Doxil-Registered Trademark- in the United States as
follows: (i) in the Initial Quarter and the following three
calendar quarters, the greatest of (1) 2.5% of Excess Net
Sales (as defined below), (2) 1% of Excess Net Sales plus an
additional 0.1% of such Excess Net Sales for each full one
million dollars of Development Payments paid by Crescendo or
(3) 1% of Net Sales (as defined in the Development
Agreement); and (ii) in each subsequent calendar quarter,
the greatest of (1) 3.0% of Excess Net Sales (as defined
below), (2) 1% of Excess Net Sales plus an additional 0.1%
of such Excess Net Sales for each full one million dollars
of Development Payments paid by Crescendo or (3) 1% of Net
Sales.
(b) ALZA shall notify Crescendo within three business
days after any Public Disclosure referred to in clause (a)
above is first made.
(c) "Public Disclosure" shall mean a presentation at a
public research seminar, lecture, professional meeting or
similar public venue, or any release of an abstract, poster,
summary, article or similar writing to the public (or any
target portion of the medical community), in each case which
(i) is made by or on behalf of ALZA or any person or entity
performing any activities under the Doxil-Registered
Trademark- Development Program, and (ii) reports human
clinical data or results obtained in connection with the
activities conducted under the Doxil-Registered Trademark-
Development Program that support the use of Doxil-Registered
Trademark- for the treatment of multiple myeloma. "Excess
Net Sales" shall mean the amount by which Net Sales exceed
Base Net Sales. "Base Net Sales" shall mean Net Sales of
Doxil-Registered Trademark- in the United States in the
calendar quarter immediately preceding the Initial Quarter.
(d) In determining payments under this Section 2 for
any calendar quarter, the amount of applicable Development
Payments shall be the cumulative amount of Development
Payments paid as of the last day of the preceding calendar
quarter.
(e) Royalty payments under this Section 2 shall be
subject to the requirements set forth in Sections 5.3, 7.6
and 7.8 of the Development Agreement with respect to
payments due under Section 7.4 of the Development Agreement.
3. Not a "Crescendo Product". Notwithstanding any
of the foregoing, ALZA and Crescendo confirm and agree Doxil-
Registered Trademark- shall not be considered a "Crescendo
Product" within the meaning of the Development Agreement,
the Technology License Agreement between ALZA and Crescendo
dated as of September 5, 1997 (the "Technology License
Agreement") and the License Option Agreement between ALZA
and Crescendo dated as of September 5, 1997 (the "License
Option Agreement.")
4. Indemnification. ALZA shall indemnify, defend and
hold Crescendo harmless from and against any and all
liabilities, claims, demands, damages, costs, expenses or
money judgments rendered against Crescendo and its
Affiliates, which arise out of the use, design, labeling or
manufacture, processing, packaging, sale or
commercialization of Doxil-Registered Trademark- by ALZA,
its Affiliates, assignees, subcontractors and sublicensees.
Crescendo shall permit ALZA's attorneys, at ALZA's
discretion and cost, to handle and control the defense of
any claims or suits as to which Crescendo may be entitled to
indemnity hereunder, and Crescendo agrees not to settle any
such claims or suits without the prior written consent of
ALZA. Crescendo shall give ALZA prompt written notice in
writing, in the manner set forth in Section 13.7 of the
Development Agreement, of any claim or demand made against
Crescendo for which Crescendo may be entitled to indemnity
hereunder. Crescendo shall have the right to participate,
at its own expense, in the defense of any such claim or
demand to the extent it so desires.
5. Miscellaneous.
(a) Capitalized terms used but not otherwise defined
herein shall have the meanings set forth in the Development
Agreement.
(b) Except as otherwise expressly provided herein, the
terms of the Development Agreement, the Technology License
Agreement and the License Option Agreement shall remain in
full force and effect.
(c) The provisions of Sections 1(b), 1(c), 1(d), 3 and
4, and this Section 5(c), of this Amendment, and of Section
2 to the extent of obligations under such section relating
to periods prior to termination of the Development
Agreement, shall survive the termination for any reason of
the Development Agreement. Any payments due under this
Amendment with respect to any period prior to termination of
the Development Agreement shall be made notwithstanding the
termination of the Development Agreement.
IN WITNESS WHEREOF, ALZA and Crescendo have caused this
Amendment to be executed as of the date first set forth
above by their duly authorized representatives.
ALZA Corporation
By: __/s/ R. M. Myers__
Name: Robert M. Myers
Title: Senior Vice President, Commercial Development
Crescendo Pharmaceuticals Corporation
By: __/s/ Gary L. Neil PhD___
Name: Gary L. Neil, PhD
Title: President and Chief Executive Officer
4
G:\CPC\1999 10q\dev agr cndo1999.doc/kw
AMENDMENT NO. 1 TO DEVELOPMENT AGREEMENT
This Amendment No. 1 to Development Agreement (the
"Amendment") is made as of March 19, 1998 by and between
ALZA Corporation, a Delaware corporation ("ALZA"), and
Crescendo Pharmaceuticals Corporation, a Delaware
corporation ("Crescendo").
RECITALS
WHEREAS, ALZA and Crescendo have entered into that
certain Development Agreement dated as of September 5, 1997
(the "Development Agreement") pursuant to which ALZA
performs research and development activities on behalf of
Crescendo directed toward the development of pharmaceutical
products; and
WHEREAS, ALZA is marketing Elmiron -Registered
Trademark- (pentosan polysulfate sodium) in the United
States and Canada; and
WHEREAS, Elmiron -Registered Trademark- has been
approved in the United States by the Food and Drug
Administration ("FDA") and in Canada by the Health
Protection Branch of Health Canada ("HPB") for marketing
only as a treatment for interstitial cystitis; and
WHEREAS, ALZA and Crescendo desire that Crescendo fund
a program with the goal of receiving clearance by the FDA
and the HPB to market Elmiron -Registered Trademark- for the
prevention of vascular access graft occlusion (the "Elmiron
- -Registered Trademark- Development Program"); and
WHEREAS, such an arrangement is not currently
contemplated by the Development Agreement.
NOW, THEREFORE, in consideration of the foregoing and
the agreements contained herein, ALZA and Crescendo hereby
agree as follows:
1. Funding of the Development Program.
(a) In consideration of the royalty payments set forth
in Section 2 of this Agreement, Crescendo hereby agrees to
fund the Elmiron -Registered Trademark- Development Program
in amounts as proposed by ALZA and approved by Crescendo
from time to time (the "Development Payments"). The Elmiron
- -Registered Trademark- Development Program shall be set
forth in work plans prepared by ALZA which are subject to
the approval (in whole or in part) or the rejection (in
whole or in part) of Crescendo. Each such approved work
plan shall constitute a "Work Plan" within the meaning of
the Development Agreement. The parties agree to review the
Work Plan from time to time (no less often than the end of
each stage of development) and to revise the Work Plan as
appropriate so that it remains a best estimate of the work
to be done under the Elmiron -Registered Trademark-
Development Program and the amounts required to fund such
work. Crescendo shall not be obligated to make Development
Payments in excess of those provided for in an approved Work
Plan, and ALZA shall not be obligated to perform work on the
Elmiron -Registered Trademark- Development Program which
would result in Development Payments exceeding those in an
approved Work Plan.
(b) ALZA and Crescendo agree that the Development
Payments shall be paid under the Development Agreement,
shall be made on the same basis as "Development Costs" (as
set forth in Sections 4.1 and 4.2 of the Development
Agreement) and shall constitute "Development Costs" within
the meaning of the Development Agreement.
(c) ALZA and Crescendo agree that the Elmiron -
Registered Trademark- Development Program constitutes an
activity undertaken pursuant to the Development Agreement
within the meanings of Sections 1.5 and 10.1 thereof.
(d) Developments Payments are intended to be included
as part of the "total amount paid by or due from this
corporation under the Development Agreement" for purposes of
Article FIFTH, Section (A)(18)(c) of the Restated
Certificate of Incorporation of Crescendo (the
"Certificate"), as part of "expenditures pursuant to the
Development Agreement" for purposes of Article FIFTH,
Section (A)(19) of the Certificate, as part of the "total
amounts paid by or due from this corporation pursuant to the
Development Agreement" for purposes of Article FIFTH,
Section (A)(21) of the Certificate, and as part of "any
additional amounts.that are paid by (or due from) this
corporation under the Development Agreement" for purposes of
Article FIFTH, Section (A)(10) of the Certificate.
2. Royalty Payments.
(a) In consideration of Crescendo making Development
Payments with respect to Elmiron -Registered Trademark-,
beginning in the first calendar quarter (the "Initial
Quarter") in which any Public Disclosure (as defined below)
is made, ALZA shall pay Crescendo royalties with respect to
sales of Elmiron -Registered Trademark- in the United States
and Canada as follows: (i) in the Initial Quarter and the
following three calendar quarters, the greatest of (1) 2.5%
of Excess Net Sales (as defined below), (2) 1% of Excess Net
Sales plus an additional 0.1% of such Excess Net Sales for
each full one million dollars of Development Payments paid
by Crescendo or (3) 1% of Net Sales (as defined in the
Development Agreement); and (ii) in each subsequent calendar
quarter, the greatest of (1) 3.0% of Excess Net Sales (as
defined below), (2) 1% of Excess Net Sales plus an
additional 0.1% of such Excess Net Sales for each full one
million dollars of Development Payments paid by Crescendo or
(3) 1% of Net Sales.
(b) ALZA shall notify Crescendo within three business
days after any Public Disclosure referred to in clause (a)
above is first made.
(c) "Public Disclosure" shall mean a presentation at a
public research seminar, lecture, professional meeting or
similar public venue, or any release of an abstract, poster,
summary, article or similar writing to the public (or any
target portion of the medical community), in each case which
(i) is made by or on behalf of ALZA or any person or entity
performing any activities under the Elmiron-Registered
Trademark- Development Program, and (ii) reports human
clinical data or results obtained in connection with the
activities conducted under the Elmiron -Registered Trademark-
Development Program that support the use of pentosan
polysulfate sodium for the delay/prevention of vascular
access graft occlusion. "Excess Net Sales" shall mean the
amount by which Net Sales exceed Base Net Sales. "Base Net
Sales" shall mean Net Sales of Elmiron -Registered Trademark-
in the United States and Canada in the calendar quarter
immediately preceding the Initial Quarter.
(d) In determining payments under this Section 2 for
any calendar quarter, the amount of applicable Development
Payments shall be the cumulative amount of Development
Payments paid as of the last day of the preceding calendar
quarter.
(e) Royalty payments under this Section 2 shall be
subject to the requirements set forth in Sections 5.3, 7.6
and 7.8 of the Development Agreement with respect to
payments due under Section 7.4 of the Development Agreement.
3. Not a "Crescendo Product". Notwithstanding any
of the foregoing, ALZA and Crescendo confirm and agree
Elmiron -Registered Trademark- shall not be considered a
"Crescendo Product" within the meaning of the Development
Agreement, the Technology License Agreement between ALZA and
Crescendo dated as of September 5, 1997 (the "Technology
License Agreement") and the License Option Agreement between
ALZA and Crescendo dated as of September 5, 1997 (the
"License Option Agreement.")
4. Indemnification. ALZA shall indemnify, defend and
hold Crescendo harmless from and against any and all
liabilities, claims, demands, damages, costs, expenses or
money judgments rendered against Crescendo and its
Affiliates, which arise out of the use, design, labeling or
manufacture, processing, packaging, sale or
commercialization of Elmiron -Registered Trademark- by ALZA,
its Affiliates, assignees, subcontractors and sublicensees.
Crescendo shall permit ALZA's attorneys, at ALZA's
discretion and cost, to handle and control the defense of
any claims or suits as to which Crescendo may be entitled to
indemnity hereunder, and Crescendo agrees not to settle any
such claims or suits without the prior written consent of
ALZA. Crescendo shall give ALZA prompt written notice in
writing, in the manner set forth in Section 13.7 of the
Development Agreement, of any claim or demand made against
Crescendo for which Crescendo may be entitled to indemnity
hereunder. Crescendo shall have the right to participate,
at its own expense, in the defense of any such claim or
demand to the extent it so desires.
5. Miscellaneous.
(a) Capitalized terms used but not otherwise defined
herein shall have the meanings set forth in the Development
Agreement.
(b) Except as otherwise expressly provided herein, the
terms of the Development Agreement, the Technology License
Agreement and the License Option Agreement shall remain in
full force and effect.
(c) The provisions of Sections 1(b), 1(c), 1(d), 3 and
4, and this Section 5(c), of this Amendment, and of Section
2 to the extent of obligations under such section relating
to periods prior to termination of the Development
Agreement, shall survive the termination for any reason of
the Development Agreement. Any payments due under this
Amendment with respect to any period prior to termination of
the Development Agreement shall be made notwithstanding the
termination of the Development Agreement.
IN WITNESS WHEREOF, ALZA and Crescendo have caused this
Amendment to be executed as of the date first set forth
above by their duly authorized representatives.
ALZA Corporation
By: /s/ R.M. Myers
Name: Robert M. Myers
Title: Senior Vice President, Commercial Development
Crescendo Pharmaceuticals Corporation
By: __/s/ Gary L. Neil, PhD_
Name: Gary L. Neil, PhD
Title: President and Chief Executive Officer
