UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the quarterly period ended
March 31, 2000
or
Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the transition period from
__________ to __________
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
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
Number of shares outstanding of each of the registrant's classes
of common stock as of April 30, 2000:
Class A Common Stock, $.01 par value - 4,833,509 shares
Class B Common Stock, $1.00 par value - 1,000 shares
CRESCENDO PHARMACEUTICALS CORPORATION
FORM 10-Q for the Quarter Ended
March 31, 2000
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Statements of Operations 3
Condensed Balance Sheets 4
Condensed Statements of Cash Flows 5
Notes to Condensed Financial Statements 6-12
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 13-16
Item 3. Quantitative and Qualitative Disclosures
about Market Risk 16
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
Exhibits
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Crescendo Pharmaceuticals Corporation
(a development stage company)
Condensed Statements of Operations (unaudited)
(in thousands, except per share amounts)
Period from inception
Three months ended (June 26, 1997)
March 31, to March 31,
2000 1999 2000
_________________________________________
Revenues:
Net interest and
investment income $1,130 $2,261 $26,564
Royalty revenue 1,017 490 3,402
________________________________________
Total revenues 2,147 2,751 29,966
Expenses:
Research & development
performed under
contract with ALZA
Corporation(a related
party) 20,356 22,274 256,293
General &
administrative 232 271 3,372
__________________________________________
Total expenses 20,588 22,545 259,665
__________________________________________
Loss before taxes (18,441) (19,794) (229,699)
Income taxes - - 1,421
__________________________________________
Net loss $(18,441) $(19,794) $(231,120)
==========================================
Net loss per
common share
Basic and Diluted $ (3.79) $ (3.99) $ (51.31)
==========================================
See accompanying notes.
Crescendo Pharmaceuticals Corporation
(a development stage company)
Condensed Balance Sheets (unaudited)
(in thousands, except number of shares and per share amounts)
March 31, December 31,
2000 1999
________________________________________________________________
ASSETS
Current assets:
Cash and cash equivalents $52,999 $ 54,682
Short-term investments 2,049 6,989
Interest receivable 356 321
Taxes receivable 3,209 3,502
Accounts receivable (from
ALZA Corporation, a related party) 1,017 707
Other current assets 83 120
________________________________________________________________
Total current assets 59,713 66,321
Employee loan 300 300
Long-term investments 21,480 31,448
________________________________________________________________
Total assets $81,493 $ 98,069
================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Payable to ALZA Corporation $14,714 $ 12,120
(a related party)
Accrued liabilities 66 97
________________________________________________________________
Total current liabilities 14,780 12,217
Stockholders' equity:
Class A Common Stock, $0.01 par value,
6,000,000 shares authorized;
4,871,273 and 4,908,198 shares issued
and outstanding at March 31, 2000
and December 31, 1999, respectively 49 49
Class B Common Stock, $1.00 par value,
1,000 shares authorized, issued and
outstanding 1 1
Additional paid-in capital 298,273 298,951
Accumulated other comprehensive loss (490) (470)
Deficit accumulated during development
stage (231,120) (212,679)
________________________________________________________________
Total stockholders' equity 66,713 85,852
________________________________________________________________
Total liabilities and
stockholders' equity $81,493 $ 98,069
================================================================
See accompanying notes.
Crescendo Pharmaceuticals Corporation
(a development stage company)
Condensed Statements of Cash Flows (unaudited)
Increases (Decreases) in Cash and Cash Equivalents
(in thousands)
Period from inception
Three months ended (June 26, 1997)
March 31, to March 31,
2000 1999 2000
____________________________________________________________________
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(18,441) $(19,794) $(231,120)
Non-cash adjustments to reconcile
net loss to net cash used in
operating activities:
(Increase) decrease in assets:
Interest receivable (35) 454 (356)
Taxes receivable 293 - (3,209)
Accounts receivable from ALZA
Corporation (a related party) (310) (490) (1,017)
Other current assets 37 (273) (83)
Increase (decrease) in liabilities:
Payable to ALZA Corporation 2,594 (2,700) 14,714
Accrued liabilities (31) (37) 66
__________________________________________________________________
Total adjustments 2,548 (3,046) 10,115
Net cash used in
operating activities (15,893) (22,840) (221,005)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of available-for-sale
securities - (12,042) (228,660)
Sales of available-for-sale
securities 14,888 32,847 199,641
Maturities of available-for-
sale securities - - 5,000
Employee loan, long-term - - (300)
___________________________________________________________________
Net cash provided by (used in)
investing activities 14,888 20,805 (24,319)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock to
ALZA Corporation - - 300,000
Repurchase of common stock (678) - (1,677)
____________________________________________________________________
Net cash provided by
financing activities (678) - 298,323
___________________________________________________________________
Net increase (decrease) in cash and
cash equivalents (1,683) (2,035) 52,999
___________________________________________________________________
Cash and cash equivalents
at beginning of period 54,682 54,326 -
___________________________________________________________________
Cash and cash equivalents
at end of period $ 52,999 $ 52,291 $ 52,999
===================================================================
See accompanying notes.
Crescendo Pharmaceuticals Corporation
(a development stage company)
Notes to Condensed Financial Statements (unaudited)
NOTE 1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
Crescendo Pharmaceuticals Corporation ("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 (the
"Crescendo Products") and commercializing such products, most
likely through licensing to ALZA Corporation ("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 $20.4 million and $22.3 million for the three months
ended March 31, 2000 and March 31, 1999, respectively. Research
and development expenses have totaled approximately $256.3 million
for the period from inception (June 26, 1997) through March 31,
2000. Based on anticipated spending levels for the continued
development of all the Crescendo Products currently under
development, it is expected that funds for product development will
be exhausted during the second half of 2000 and that product
development funding by Crescendo will cease at that time. When
Available Funds (described below) are nearly exhausted, certain
critical timetables relating to ALZA's purchase option with respect
to all of Crescendo's Class A Common Stock (the "Crescendo Shares")
and ALZA's option to license any or all Crescendo Products not yet
licensed by ALZA 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 Crescendo 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.
The information at March 31, 2000, for the three months ended
March 31, 2000 and 1999, and for the period from inception (June
26, 1997) through March 31, 2000 is unaudited, and includes all
adjustments (consisting only of normal recurring adjustments) that
the management of Crescendo believes necessary for fair
presentation of the results for the periods presented. Interim
results are not necessarily indicative of the results for the full
year. The balance sheet for December 31, 1999 was derived from the
audited balance sheet. The financial statements should be read in
conjunction with the audited financial statements and accompanying
notes for the year ended December 31, 1999 included in Crescendo's
1999 Annual Report on Form 10-K.
Accounting for Revenues and Expenses
At March 31, 2000, Crescendo's revenue consisted of interest and
investment income and product payments, referred to as royalty
revenue in Crescendo's financial statements. Since the first
quarter of 1999, Crescendo has accrued royalty revenue based on net
sales in the United States of one Crescendo Product, Ditropan XL-
Registered Trademark-, licensed by ALZA. Royalties in respect of
Ditropan XL are recognized in the period in which earned (the
period in which product sales are made by ALZA from whom Crescendo
receives product payments) 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.
NOTE 2. INVESTMENTS
Crescendo has classified its entire investment portfolio,
including cash and cash equivalents of approximately $53.0 million
and $54.7 at March 31, 2000 and December 31, 1999, respectively,
as available-for-sale. Investments in the available-for-sale
category are generally carried at fair market value with
unrealized gains and losses recorded as a separate component of
stockholders' equity. Realized losses for the periods ended March
31, 2000 and March 31, 1999 were not material. The cost of
securities when sold is based upon specific identification.
The following is a summary of Crescendo's investment portfolio
at March 31, 2000(in thousands):
Available-for-Sale Securities
__________________________________________________________________
Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
__________________________________________________________________
U.S. Treasury
securities and
obligations of
U.S. government
agencies $ 6,989 $ - $(114) $ 6,875
Collateralized
mortgage
obligations and
asset backed
securities 10,408 - (250) 10,158
Corporate debt
securities 10,441 - (126) 10,315
Money market funds 47,497 - - 47,497
__________________________________________________________________
$75,335 $ - $(490) $ 74,845
==================================================================
The amortized cost and estimated fair value of securities at March
31, 2000, 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.
Estimated
Amortized Fair
Cost Value
______________________________________________________________
Due in one year or less $ 53,385 $ 53,365
Due after one year through
three years 21,950 21,480
______________________________________________________________
$ 75,335 $ 74,845
==============================================================
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
from ALZA. During the first quarter of 2000, Crescendo purchased
36,925 Crescendo Shares for approximately $0.7 million.
Subsequent to March 31, 2000, Crescendo repurchased 37,764
Crescendo Shares for an additional $0.7 million. As of April 30,
2000, Crescendo had purchased a total of 131,961 Crescendo Shares
under this program for approximately $2.4 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
second 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:
Period from inception
Three months ended (June 26, 1997)
March 31, to March 31,
2000 1999 2000
_______________________________________________
NUMERATOR (in thousands):
BASIC AND DILUTED
Net loss $(18,441) $(19,794) $(231,120)
===========================================
DENOMINATOR (in thousands):
BASIC AND DILUTED
Weighted average shares
outstanding 4,871 4,966 4,504
===========================================
BASIC NET LOSS
PER SHARE $ (3.79) $ (3.99) $ (51.31)
===========================================
DILUTED NET LOSS
PER SHARE $ (3.79) $ (3.99) $ (51.31)
===========================================
The potentially dilutive effect of outstanding options to
purchase 100,000 Crescendo Shares in the three months ended March
31, 2000 and 1999, and for the period from inception (June 26,
1997) through March 31, 2000, 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 use 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 March 31, 2000, three of the 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. Research
and development expenses for the three months ended March 31, 2000
and 1999 were approximately $20.4 million and $22.3 million,
respectively, including a Technology Fee expense of $1.0 million
and $2.0 million, respectively. For the period from inception
(June 26, 1997) through March 31, 2000, Crescendo recorded research
and development expenses of approximately $256.3 million.
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"). The
Technology Fee is payable through August 2000, so long as there
are at least two of the Initial Products being developed by
Crescendo and/or licensed by ALZA pursuant to the License Option
(defined below). Crescendo recorded a Technology Fee expense of
$1.0 million and $2.0 million for the three months ended March 31,
2000 and 1999, respectively. For the period from inception (June
26, 1997) through March 31, 2000, Crescendo recorded $22.4 million
of Technology Fee expense. The Technology Fee is included in
research and development expenses.
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"). 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 United States Food
and Drug Administration (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 option to purchase all of the outstanding Crescendo
Shares, 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 (as defined in the Development Agreement) 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 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 oxbutynin from Crescendo. ALZA launched the product
in the United States under the name Ditropan-Registered Trademark- 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
rates are 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
first quarter of 2000 was approximately $1.0 million and was derived
from net sales of Ditropan XL in the United States. On January 1,
2000, the payment rate increased from 2.5% to 3.0% of net sales.
On March 3, 2000, DUROS leuporolide (ViadurT) was approved for
marketing by the FDA. Also on March 3, 2000, ALZA exercised its
option to obtain a worldwide license to DUROS leuprolide from
Crescendo. 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 8.5% and 9.0%, based on the Development
Costs of the product to date and future anticipated Development Costs
to be paid by Crescendo.
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"). 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 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.
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. Crescendo accrues estimated expenses
on a monthly basis under the Services Agreement. Such expenses
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. As a result of a change in certain estimates, Crescendo
recorded a net credit of $15,000 from ALZA under the Services
Agreement for the three months ended March 31, 2000. General and
administrative expenses incurred under this agreement for the three
months ended March 31, 1999 were approximately $15,000. General
and administrative expenses incurred under the Services Agreement
for the period from inception through March 31, 2000 were
approximately $483,000.
At March 31, 2000, the amount payable to ALZA under the
Development Agreement and the Services Agreement was approximately
$14.7 million. The Technology Fee is paid in the month it is
accrued.
NOTE 5. SUBSEQUENT EVENTS
On April 5, 2000, ALZA announced that it had entered into a U.S.
commercialization agreement for Viadur with Bayer Corporation
("Bayer"). Under the terms of its license agreement with ALZA,
Crescendo will receive payments from ALZA based on Bayer's net sales
of the product.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
NOTICE CONCERNING FORWARD-LOOKING STATEMENTS
Some of the statements made in this Form 10-Q, and particularly
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 Crescendo's control (including
without limitation any possible future actions by 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 to complete the development of products. Such risks
are described in more detail in Crescendo's Annual Report on Form
10-K for the year ended December 31, 1999.
RESULTS OF OPERATIONS
Revenues, consisting of net interest and investment income
earned on invested funds, and royalty revenue, were approximately
$2.1 million and $2.8 million for the three months ended March 31,
2000 and 1999, respectively. For the period from Crescendo's
inception (June 26, 1997) through March 31, 2000, revenues were
approximately $29.9 million. Royalty revenue was approximately
$1.0 million for the quarter ended March 31, 2000, compared with
approximately $0.5 million for the quarter ended March 31, 1999,
resulting from sales by ALZA of Ditropan XL in the United States
beginning in the first quarter of 1999. Under the terms of
Crescendo's License Agreement with ALZA for Ditropan XL, on January
1, 2000, the product payment rate for Ditropan XL increased from
2.5% to 3.0% 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 over 1999 levels 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
Corporation" above. Viadur, a Crescendo Product which received
approval by the FDA for marketing in the United States, has been
licensed by ALZA from Crescendo on a worldwide basis. ALZA
recently entered into a U.S. commercialization agreement for Viadur
with Bayer. Crescendo's OROS methylphenidate product in
development with ALZA is currently awaiting FDA approval.
Overall, Crescendo's total revenues are expected to decline in
the near term since royalty revenue increases, if any, are not
anticipated to exceed the continued decrease 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 $20.4 million and $22.3 million for the three months
ended March 31, 2000 and 1999, respectively. For the period from
inception (June 26,1997) through March 31, 2000, Crescendo recorded
research and development expenses of approximately $256.3 million.
These expenses related primarily to development of the Crescendo
Products and include payment of the Technology Fee. The Technology
Fee paid to ALZA for the three months ended March 31, 2000 and 1999
was $1.0 million and $2.0 million, respectively ($22.4 million from
inception (June 26,1997) through March 31, 2000). The Technology
Fee will be $333,000 each month through August 2000, so long as
there are at least two of the Initial Products being developed
and/or 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 during 2000, although
quarterly fluctuations may occur. As of March 31, 2000, Crescendo
had $62.4 million of Available Funds which have not been expended
under the Development Agreement. Crescendo expects to exhaust
Available Funds during the second half of 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 products proposed by ALZA and accepted for
development by Crescendo.
General and administrative expenses for the three months ended
March 31, 2000 and 1999 were approximately $0.2 million and $0.3
million, respectively. For the period from inception through March
31, 2000, general and administrative expenses were approximately
$3.4 million. It is anticipated that general and administrative
expenses will remain at approximately current levels during 2000.
Crescendo accrues estimated expenses on a monthly basis under its
Services Agreement with ALZA. As a result of a change in certain
estimates, Crescendo recorded a net credit of $15,000 from ALZA
under the Services Agreement for the three months ended March 31,
2000. General and administrative expenses incurred under this
agreement for the three months ended March 31, 1999 were
approximately $15,000. For the period from inception (June 26,
1997) through March 31, 2000, expenses incurred by Crescendo under
the Services Agreement were approximately $483,000.
The results of operations of Crescendo currently reflect
primarily interest and investment income on the funds contributed
by ALZA, 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 the three months ended March 31, 2000 and 1999 was
approximately $18.4 million or $3.79 per share and $19.8 million or
$3.99 per share, respectively. The net loss from its inception
(June 26, 1997) through March 31, 2000 was approximately $231.1
million or $51.31 per share. Crescendo is expected to continue to
record significant net losses in future periods, as product
development expenses under its Development Agreement 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 its 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 March 31, 2000, and December 31, 1999, Crescendo had cash,
cash equivalents and short-and long-term investments of
approximately $76.5 million and $93.1 million, respectively. 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 the 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 by ALZA, 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 likely 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.
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 certain technology developed by
ALZA while conducting product development funded by Crescendo.
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 3. Quantitative and Qualitative Disclosures about Market Risk
Financial market risks related to changes in interest rates
are described in Part II, Item 7A, Quantitative and Qualitative
Disclosures about Market Risk, in Crescendo's Annual Report on Form
10-K for the year ended December 31, 1999.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
27 Financial Data Schedule
(b) No reports on Form 8-K were filed during the quarter.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
Crescendo Pharmaceuticals Corporation
Date: May 12, 2000 By: /s/ Gary L. Neil
_________________________________
Gary L. Neil
President and
Chief Executive Officer
Date: May 12, 2000 By: /s/ David R. Hoffmann
_________________________________
David R. Hoffmann
Vice President, Finance
and Secretary
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS INCLUDED IN PART II, ITEM 8 OF FORM 10-Q DATED MARCH 31,
2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
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