<PAGE>
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 period ended September 30, 1994
------------------
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 1-6247
ALZA CORPORATION
-----------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 77-0142070
------------------------------- ------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
950 Page Mill Road, P.O. Box 10950, Palo Alto, California 94303-0802
- - - --------------------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (415) 494-5000
--------------
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 October 31, 1994:
Common Stock, $.01 par value - 81,957,030 shares
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
ALZA CORPORATION
Condensed Consolidated Statement of Income (unaudited)
(in thousands, except per share data)
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
September 30, September 30,
1994 1993 1994 1993
-------- -------- -------- ---------
<S> <C> <C> <C> <C>
REVENUES:
Royalties and fees $ 28,377 $ 28,165 $ 89,185 $ 86,885
Net sales 14,226 14,978 51,862 46,856
Product development revenue 17,724 12,086 49,308 33,387
Other revenue, primarily
interest income 5,907 2,571 13,193 17,665
-------- -------- -------- --------
Total revenues 66,234 57,800 203,548 184,793
COSTS AND EXPENSES:
Costs of products shipped 12,734 13,021 40,752 40,936
Research and product
development 18,694 12,785 55,019 38,830
General, administrative
and marketing 8,629 5,236 24,586 14,805
Interest 6,140 5,023 13,940 14,858
-------- -------- -------- --------
Total costs and expenses 46,197 36,065 134,297 109,429
-------- -------- -------- --------
Income before income taxes
and cumulative effect of
accounting change 20,037 21,735 69,251 75,364
Income taxes 7,527 7,608 26,376 26,378
-------- -------- -------- --------
Income before cumulative
effect of accounting change 12,510 14,127 42,875 48,986
Cumulative effect of accounting
change - - - 6,573
-------- -------- -------- --------
NET INCOME $ 12,510 $ 14,127 $ 42,875 $ 55,559
-------- -------- -------- --------
-------- -------- -------- --------
Per common and common
equivalent share:
Income before cumulative
effect of accounting
change $ .15 $ .18 $ .52 $ .62
Cumulative effect of
accounting change - - - .08
-------- -------- -------- --------
Net income $ .15 $ .18 $ .52 $ .70
-------- -------- -------- --------
-------- -------- -------- --------
WEIGHTED AVERAGE COMMON AND
COMMON EQUIVALENT SHARES 82,358 79,393 82,325 79,577
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
See accompanying notes.
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<PAGE>
ALZA CORPORATION
Condensed Consolidated Balance Sheet
(in thousands)
<TABLE>
<CAPTION>
September 30, December 31,
ASSETS 1994 1993(1)
------------- ------------
(unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 73,952 $ 53,683
Short-term investments 257,493 40,399
Receivables, net 79,173 56,563
Inventories, at cost:
Raw materials 18,246 14,635
Work in process 11,167 9,241
Finished goods 5,974 1,287
---------- ----------
Total inventories 35,387 25,163
Prepaid expenses and other
current assets 27,555 22,603
---------- ----------
Total current assets 473,560 198,411
Investments in long-term government
and corporate notes and bonds - 163,391
Property, plant and equipment 299,817 278,483
Less accumulated depreciation
and amortization (66,418) (56,886)
---------- ----------
Net property, plant and
equipment 233,399 221,597
Other assets 66,062 38,425
---------- ----------
$ 773,021 $ 621,824
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Commercial paper $ - $ 249,520
Accounts payable 6,599 11,678
Accrued income taxes 5,726 375
Accrued compensation 10,278 8,212
Other current liabilities 24,527 16,393
---------- ----------
Total current liabilities 47,130 286,178
5.25% zero coupon convertible
subordinated debentures 340,191 -
Deferred income taxes 14,251 9,906
Other long-term liabilities 21,689 19,063
Stockholders' equity:
Common stock and additional
paid-in capital 301,290 295,814
Unrealized losses on available-
for-sale securities ( $8,936 less
$3,668 tax effect) (5,268) -
Retained earnings 53,738 10,863
---------- ----------
Total stockholders' equity 349,760 306,677
---------- ----------
$ 773,021 $ 621,824
---------- ----------
---------- ----------
<FN>
(1) The balance sheet at December 31, 1993 has been derived from the audited financial
statements at that date but does not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
</TABLE>
See accompanying notes.
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<PAGE>
ALZA CORPORATION
Condensed Consolidated Statement of Cash Flows (unaudited)
Increase (Decrease) in Cash and Cash Equivalents
(in thousands)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
1994 1993
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 42,875 $ 55,559
Adjustments to reconcile net
income to net cash provided by
operating activities:
Cumulative effect of accounting change - (6,573)
Depreciation and amortization 9,532 8,992
Accrued interest on 5.25% zero coupon
convertible subordinated debentures 3,661 -
Accrued interest on 7.5% zero coupon
convertible subordinated debentures - 13,016
Deferred income taxes 4,345 4,039
(Increase) decrease in assets:
Receivables (22,610) (9,841)
Inventories (10,224) (428)
Prepaid expenses and other
current assets (1,284) 3,654
Increase (decrease) in liabilities:
Accounts payable (5,079) (6,179)
Accrued income taxes 5,351 (6,597)
Accrued compensation 2,066 (784)
Accrued and other liabilities 11,618 5,245
--------- ---------
Total adjustments (2,624) 4,544
--------- ---------
Net cash provided by
operating activities 40,251 60,103
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (21,334) (25,218)
Purchases of available-for-sale securities (293,544) -
Sales of available-for-sale securities 115,831 -
Maturities of available-for-sale securities 101,074 -
Decrease in short-term investments - 92,230
Decrease in long-term investments - 92,731
(Increase) decrease in net cash surrender
value-life insurance and prepaid premiums (4,702) 4,693
(Increase) decrease in other assets (522) 8,907
--------- ---------
Net cash provided by (used in)
investing activities (103,197) 173,343
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from 5.25% zero coupon
convertible subordinated debentures 328,117 -
Maturities of commercial paper (249,520) -
Principal payments on long-term debt (858) (858)
Issuances of common stock 5,476 6,802
Proceeds from exercise of warrants - 35,474
Distribution of Therapeutic Discovery
Corporation Stock - (250,000)
--------- ---------
Net cash provided by (used in)
financing activities 83,215 (208,582)
--------- ---------
Net increase in cash and cash equivalents 20,269 24,864
Cash and cash equivalents at beginning of period 53,683 26,656
--------- ---------
Cash and cash equivalents at end of period $ 73,952 $ 51,520
--------- ---------
--------- ---------
</TABLE>
See accompanying notes.
-4-
<PAGE>
ALZA CORPORATION
September 30, 1994
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
The information at September 30, 1994 and for the three
months and nine months ended September 30, 1994 and 1993 is
unaudited, but includes all adjustments (consisting only of
normal recurring adjustments) which the management of ALZA
Corporation ("ALZA") believes necessary for fair presentation of
the results for the periods presented. Interim results are not
necessarily indicative of results for a full year. The condensed
consolidated financial statements should be read in conjunction
with the audited consolidated financial statements for the year
ended December 31, 1993 included in ALZA's 1993 Annual Report to
Stockholders.
2. INCOME PER SHARE
As shown in the table included in Exhibit 11 of the Form
10-Q, the computation of weighted average shares includes common
and common equivalent shares. Common equivalent shares include
dilutive warrants and options for the period each was outstanding
(using the Treasury Stock Method).
3. DEBT OBLIGATIONS
In July 1994, ALZA completed a public offering of zero coupon
convertible subordinated debentures. The offering resulted in
approximately $328 million in net proceeds to ALZA.
Approximately $250 million of the proceeds were used to retire
ALZA's outstanding commercial paper during the quarter ended
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<PAGE>
September 30, 1994. The remainder will be used for general
corporate purposes.
4. ROYALTY RESERVE
Royalties and fees for the current quarter, and therefore the
nine months ended September 30, 1994, were reduced by
approximately $6 million to establish a reserve for a potential
reduction in royalty income on sales of Procardia XL-R- by
Pfizer, Inc for the period November 1993 through September 1994.
The reserve resulted from an announcement by Pfizer in
July 1994, that the United States Patent Office had issued to
Bayer AG in November 1993 a composition of matter patent relating to
nifedipine crystals with various surface areas as the active ingredient in
sustained-release formulations of nifedipine. Assuming the
issued claims of the patent appropriately cover the nifedipine
composition used in Procardia XL, royalties otherwise payable
by Pfizer to ALZA on United States sales of the
product would be reduced by up to 11 percent. Until any
additional determination is made ALZA intends to establish a reserve,
in each subsequent quarter, sufficient to cover any possible reduction
in Procardia XL royalties.
5. ACCOUNTING CHANGE
In May 1993, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 115, "Accounting
for Certain Investments in Debt and Equity Securities" ("SFAS
115"). ALZA adopted the provisions of the new standard for
investments held as of or acquired after January 1, 1994. In
accordance with SFAS 115, prior period financial statements have
not been restated to reflect the change in accounting principle.
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<PAGE>
Although ALZA may not dispose of all of the securities in its
investment portfolio within one year, ALZA's investment portfolio
is available for current operations and therefore has been
classified as a current asset in its entirety beginning in 1994.
Previously a portion of the portfolio was classified as a long-
term asset.
The following is a summary of available-for-sale securities
at September 30, 1994:
<TABLE>
<CAPTION>
Available-for-Sale Securities
--------------------------------------
Net Estimated
Unrealized Fair
(in thousands) Cost Losses Value
-------- ----------- ----------
<S> <C> <C> <C>
U.S. Treasury notes and
other U.S. government
securities $173,126 $ (6,269) $166,857
Corporate and other
securities 167,716 (2,667) 165,049
-------- -------- --------
$340,842 $ (8,936) $331,906(1)
-------- -------- --------
-------- -------- --------
</TABLE>
The amortized cost and estimated fair value of debt and
marketable equity securities at September 30, 1994, by
contractual maturity, are shown below. Expected maturities will
differ from contractual maturities because the issuers of the
securities may have the right to prepay certain of the
obligations without prepayment penalties.
__________________
(1) Includes $74,413 of investments classified as cash equivalents.
-7-
<PAGE>
<TABLE>
<CAPTION>
Estimated
Fair
(in thousands) Cost Value
-------- ----------
<S> <C> <C>
Due in one year or less $132,722 $132,458
Due after one year through three years 48,095 50,183
Due after three years 160,025 149,265
--------- --------
$340,842 $331,906
--------- --------
--------- --------
</TABLE>
6. STATEMENT OF CASH FLOWS
Supplemental schedule of noncash investing and financing
activities:
<TABLE>
<CAPTION>
Nine months ended
September 30,
------------------
1994 1993
(in thousands) ---- ----
<S> <C> <C>
Cumulative unrealized
losses on available-for-sale
securities ($8,936 less
$3,668 tax effect) $5,268 $ -
Deferred costs - 5.25% zero coupon
convertible subordinated debentures 8,413 -
</TABLE>
-8-
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
ALZA Corporation ("ALZA") develops, primarily under joint
development and commercialization agreements with pharmaceutical
company clients and Therapeutic Discovery Corporation ("TDC"), a
broad range of pharmaceutical products based on ALZA's
proprietary therapeutic systems technologies. ALZA's therapeutic
systems can often improve the medical value as well as the cost-
effectiveness of drug compounds by increasing efficacy,
minimizing unpleasant or harmful side effects and/or providing
greater patient compliance. ALZA manufactures some or all of
various clients' requirements for certain ALZA-developed
products. ALZA markets certain products it has developed and is
also expanding its marketing activities under co-promotion
arrangements with client companies.
RESULTS OF OPERATIONS
ALZA's net income was $12.5 million or $.15 per common share
for the quarter ended September 30, 1994 (including a charge
equivalent to $.05 per common share, discussed below, to
establish a reserve for a potential reduction in royalty income),
and $42.9 million or $.52 per common share for the nine months
ended September 30, 1994, compared to net income of $14.1 million
or $.18 per common share for the quarter ended September 30, 1993
and $55.6 million or $.70 per common share for the nine months
ended September 30, 1993. Included in the results for the nine
months ended September 30, 1993 was approximately $6.6 million
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<PAGE>
($.08 per share) of benefits related to the cumulative effect of
adoption of Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes". Without this one-time benefit,
ALZA would have reported net income of approximately
$49.0 million or $.62 per share for the nine months ended
September 30, 1993.
Currently, ALZA's net income results primarily from royalties
and fees from client companies. Royalties and fees are derived
from sales by client companies of products developed jointly with
ALZA, and vary from quarter to quarter as a result of changing
levels of product sales by client companies and, occasionally,
the receipt by ALZA of certain one-time fees. Sales of a
particular client-marketed product, and therefore ALZA's
royalties from that product, generally can be expected to
decrease later in the product's life cycle, or when new competing
products are introduced into the marketplace. Because ALZA's
clients generally take responsibility for obtaining necessary
regulatory approvals and make all marketing and commercialization
decisions regarding such products, most of the variables that
affect ALZA's royalties and fees are not directly within ALZA's
control, making royalties and fees difficult to predict. For
example, ALZA's clients determine the extent of selling and
marketing efforts to devote to an ALZA-developed product as
compared with other products they market. In some cases,
marketing of ALZA-developed products may yield lower economic
return for a client than other products marketed by such client
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<PAGE>
due to the royalties payable to ALZA; this may result in reduced
emphasis by the client on the ALZA-developed product.
With increasing pressures for cost containment in the United
States health care system, it can be expected that pharmaceutical
product prices, including those of ALZA's royalty-bearing
products, will not increase as quickly as they have in the past,
and could decrease. Within the next several years, ALZA intends
to become less dependent on royalties and fees as ALZA's sales
and marketing activities expand and as ALZA markets more products
(including products developed with TDC); however, there can be no
assurance that these expanded activities will be successful. In
addition, health care cost containment measures will affect products
marketed by ALZA.
Royalties and fees for the quarter and nine months ended
September 30, 1994 increased slightly from the corresponding
periods in 1993. However, royalties and fees for the current
quarter, and therefore the nine months ended September 30, 1994,
were reduced by approximately $6 million to establish a reserve
for a potential reduction in royalty income on sales of Procardia
XL-R- by Pfizer for the period November 1993 through September
1994 (see discussion in Note 4 to the Condensed Consolidated
Financial Statements). The increase in royalties and fees was
primarily due to higher sales of the Duragesic-R- transdermal fentanyl
system, marketed by Janssen Pharmaceutica, Inc. and co-promoted by ALZA,
and initial royalties on sales of Adalat CR-R- by Bayer AG. During
the nine months ended September 30, 1994, Procardia XL accounted
for approximately 55% ALZA's total royalties and fees, after
the reserve discussed above.
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<PAGE>
Net sales of $14.2 million for the quarter ended September 30,
1994 decreased 5% from the same period in 1993 due to decreased
shipments of certain products manufactured by ALZA. Net sales of
$51.9 million for the nine months ended September 30, 1994
increased approximately 11% from the same period in 1993 due to
increased shipments of Duragesic and initial shipments of
Glucotrol XL-R- and Testoderm-R-, offset by lower Nicoderm-R-
shipments. Initial Testoderm sales were approximately $3.5
million during the nine months ended September 30, 1994. ALZA
recognizes sales revenues at the time of product shipment; sales
are net of discounts, rebates and allowances.
Costs of products shipped decreased 2% for the quarter and
remained virtually unchanged for the nine months ended September
30, 1994 compared to the same periods in 1993. ALZA's
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<PAGE>
manufacturing is predominantly centralized in its large-scale
commercial manufacturing facility in Vacaville, where ALZA
manufactures products for client companies and, to a lesser
extent, for marketing by ALZA. The Vacaville manufacturing
facility was expanded in 1993, and additional equipment will
continue to be added to the facility to meet anticipated
manufacturing needs in certain areas. The utilization of the
facility in any quarter depends on many factors, including client
orders, product approvals and product launches, many of which are
outside ALZA's control. The quantity of any particular
product and the mix of products manufactured in the facility in
any quarter are dependent largely on orders by client companies
and, to a lesser extent, demand for products marketed by ALZA.
Utilization of the facility during the first half of 1994 was
high; utilization was somewhat lower in the third quarter and is
expected to continue at a lower rate for the remainder of the
year. As utilization fluctuates, there could be unused capacity
in certain quarters resulting in increased costs due to
unabsorbed overhead.
ALZA's manufacturing activities, and the products sold by ALZA
and its client companies in the United States and/or exported to
other countries, are subject to extensive regulation by the
United States Food and Drug Administration ("FDA") and comparable
agencies in other countries where the products are distributed.
FDA regulations govern manufacturing, quality assurance,
advertising and record keeping. The continuing trend of more
stringent FDA oversight in product clearance and enforcement has
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<PAGE>
caused longer approval cycles, more uncertainty, greater risks
and higher costs of obtaining clearance to market a product.
Failure to obtain, or delays in obtaining, FDA and other
regulatory clearance to market new products, as well as other
regulatory actions and recalls, could adversely affect ALZA's financial
results.
Good Manufacturing Practices ("GMP") regulations under the
Food, Drug and Cosmetic Act define how drug and device
products are manufactured. ALZA has had in place ongoing
programs to update its GMP compliance procedures. In July 1994,
ALZA received a "warning letter" from the FDA identifying certain
GMP compliance issues related to the manufacture of Duragesic.
A warning letter documents items the FDA identifies as deviations
from GMP and the actions required by the company to correct the
deviations. Remedies available to the FDA for failure to correct
noted deficiencies could include inventory seizure and/or
injunction prohibiting product shipments. As a result of its
discussions with the FDA, ALZA has intensified its program to
update its GMP compliance procedures. ALZA intends that all of
its operations meet or exceed FDA enforcement standards. These
standards change or evolve from time to time, and therefore
require ongoing upgrading by ALZA. The financial impact of
the upgrade program is not known at this time. ALZA is also
implementing manufacturing processes intended to enhance
compliance with environmental requirements; this program may
increase manufacturing costs and could require capital
expenditures.
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<PAGE>
Product development revenue of $17.7 million for the quarter
and $49.3 million for the nine months ended September 30, 1994
increased 47% and 48%, respectively, from the same periods in
1993, due largely to increased product development activities on
behalf of TDC. Product development revenue from TDC was $8.1
million and $21.1 million for the quarter and nine months ended
September 30, 1994, respectively, as compared to $1.4 million and
$1.5 million for the same periods in 1993 (TDC commenced
operations in June 1993). TDC was formed by ALZA for the purpose
of selecting and developing new human pharmaceutical products
combining ALZA's proprietary drug delivery technology with
various drug compounds, and commercializing such products, most
likely through licensing to ALZA. ALZA and TDC have entered into
a development agreement pursuant to which ALZA conducts product
development activities on behalf of TDC, and ALZA has granted to
TDC a royalty-free, nonexclusive, perpetual license to use ALZA's
proprietary drug delivery technologies to develop and
commercialize specified TDC products.
Activities conducted by ALZA under a multi-product agreement
with Wyeth-Ayerst, a division of American Home Products, were at
a lower level during the nine months ended September 30, 1994
compared with the same period of 1993 due to a reduction in the
number of products under development.
Research and product development expenses for the quarter and
nine months ended September 30, 1994 increased approximately 46%
and 42%, respectively, from the same periods in 1993, due to
increased product development activities, primarily on behalf of
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<PAGE>
TDC. As additional products are accepted by TDC for development,
and as product development activities increase, ALZA's
development expenses related to TDC activities (and
correspondingly, ALZA's product development revenue related to
those activities) are expected to continue to increase. Because
products in early stages of development generally require lower
levels of expenditures, the development expenses for TDC
activities for any product (and ALZA's corresponding product
development revenue) can be expected to be lower during the early
stages of product development, but can be expected to increase
substantially if and when the products enter later stages of
development.
ALZA's product development expenses and the corresponding
product development revenue will fluctuate from quarter to
quarter depending upon the number of products in development,
their stages of development, and the clients' desired pace of
development. ALZA's joint development agreements with client
companies generally provide that the client may terminate product
development at any time. Clients may terminate development
programs for many reasons, including changing competitive
conditions, the introduction of new products by third parties,
generic competition, technology issues, and internal client
funding issues. Research and product development expenses, and
corresponding product development revenue, are expected to
continue to grow, due largely to ALZA's activities under
its arrangements with TDC.
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<PAGE>
General, administrative and marketing expenses of $8.6 million
for the quarter and $24.6 million for the nine months ended
September 30, 1994 increased 65% and 66%, respectively, from the
same periods in 1993, due in large part to the formation of
ALZA's sales force and increased marketing expenses. Profits on sales
of products in the ALZA portfolio will not cover all of the
associated sales and marketing expenses in the near term. Future
profitability will depend, in part, on market share attained by ALZA's
existing products as well as the timing of introduction of new products.
Other revenue, which consists primarily of interest income,
increased 130% for the third quarter of 1994 compared to the same
period in 1993, due in part to higher average invested cash
balances following ALZA's offering in July 1994 of 5.25% zero
coupon convertible subordinated debentures which resulted in
approximately $328 million in net proceeds to ALZA. Other revenue
decreased 25% for the nine months ended September 30, 1994 compared
to the same period in 1993, due primarily to the realization during
the quarter ended March 31, 1993 of approximately $5.0 million in
gains related to long-term investments liquidated to fund TDC. Other
revenue for the quarter also included proceeds from company-owned
life insurance policies, offset by the Company's share of initial
losses from activities undertaken by a partnership of ALZA and
Procter & Gamble relating to the development, manufacture and
marketing of certain periodontal products, including the marketing
of the Actisite[Registered Trademark] product.
Interest expense for the quarter ended September 30, 1994
increased 22% from the same period in 1993 due primarily to
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<PAGE>
increased outstanding debt. ALZA used approximately $250
million of the proceeds from the offering of the 5.25% zero
coupon convertible subordinated debentures to
retire all of its outstanding commercial paper as it matured
during the quarter ended September 30, 1994. Interest expense
decreased approximately 6% during the nine months ended September
30, 1994 compared to the corresponding period in 1993. During
the nine months ended September 30, 1993 interest expense
consisted primarily of interest accrued on ALZA's 7.5% zero
coupon convertible subordinated debentures. The replacement of
the 7.5% zero coupon convertible subordinated debentures with a
commercial paper program in late 1993 reduced interest expense.
As a result of the increased debt from the issuance of the 5.25%
debentures, ALZA's interest expense is expected to
increase during the remainder of 1994.
ALZA's effective combined federal and state tax rate for the
quarter and nine months ended September 30, 1994 was
approximately 38% compared to 35% for 1993. This increase is
primarily due to reductions in estimated available tax credits in
1994.
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. Comprehensive
legislative initiatives are being considered at the state and
federal level which, if enacted, could put significant additional
pressures on the prices charged for pharmaceutical products.
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<PAGE>
Similarly, prescription drug reimbursement practices and the
growth of large managed care organizations, as well as generic
and therapeutic substitution (substitution of a different product
for the same indication), could significantly affect ALZA's
business. While ALZA believes the changing health care
environment may increase the value of ALZA's drug delivery
products over the long term, it is impossible to predict the
impact such changes will have on ALZA in the near term.
LIQUIDITY AND CAPITAL RESOURCES
In recent years ALZA has expended substantial amounts on
property, plant and equipment to support its expanding research
and product development and manufacturing activities. A
significant portion of these expenditures has involved the
establishment of the Mountain View, California research and
product development campus and the Vacaville, California
manufacturing facility. While ALZA believes its current and
planned facilities and equipment are sufficient to meet its
current operating requirements, ALZA is significantly expanding
its Mountain View campus and expects to continue to purchase
or lease available facilities or properties to support its long-
term requirements. Expenditures for additions to property,
plant and equipment during the first nine months of 1994 totaled
approximately $21.3 million and are expected to increase
significantly for the remainder of 1994 and beyond.
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<PAGE>
In July 1994, ALZA completed a public offering of zero coupon
convertible subordinated debentures. The debentures were issued
at a price of $354.71 per $1,000 principal amount at maturity.
The offering resulted in approximately $328 million in net
proceeds to ALZA. Approximately $250 million of the proceeds
were used to retire ALZA's outstanding commercial paper during
the quarter ended September 30, 1994. The remainder will be used
for general corporate purposes. The debentures, due July 2014,
have a principal amount at maturity of $948.8 million. The yield
to maturity of the debentures is 5.25% per annum, computed on a
semi-annual bond equivalent basis, and the debentures have no periodic
interest payments. Each debenture is convertible, at the option
of the holder, into 12.987 shares of ALZA Common Stock.
ALZA believes that its existing cash and investment balances
are adequate to fund its current cash needs. In addition, should
the need arise, ALZA believes it would be able to borrow
additional funds or raise additional capital. ALZA may consider
using its capital to make strategic investments or to acquire or
license technology or products. ALZA may also enter into
strategic alliances with third parties which could provide
additional funding for research and product development and
support for product marketing and sales.
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<PAGE>
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
In the ordinary course of business, various suits and claims
are filed against ALZA. In the past, ALZA's liability claims
(including product liability) have not been significant.
On December 2, 1991, Ciba-Geigy Corporation ("Ciba") filed a
patent infringement suit in the United States District Court for
the District of New Jersey ("the Court"), against ALZA and Marion
Merrell Dow, Inc. ("MMD") in connection with the Nicoderm-R-
product. The action sought injunctive relief and damages, and
claimed that Nicoderm infringed a patent exclusively licensed
to Ciba by the University of California. Ciba's motion for a
preliminary injunction against the marketing of the Nicoderm
product was denied in December 1991. On October 5, 1994, the
Court granted a motion for summary judgment brought by ALZA and
MMD and invalidated the patent licensed to Ciba. That ruling
cleared ALZA and MMD of liability for infringement of the patent.
On November 1, 1994, Ciba filed a notice of appeal to the Court
of Appeals of the Federal Circuit.
On April 26 and April 30, 1993, securities class action
lawsuits were filed against ALZA and certain of its officers and
directors in the United States District Court for the Northern
District of California. The lawsuits, which were consolidated
into one lawsuit, claimed that ALZA issued and allowed to be
-21-
<PAGE>
issued various public statements that were materially false and
misleading, primarily with respect to the financial prospects of
Nicoderm. On July 9, 1993, a derivative suit was filed against
certain officers and all of the directors of ALZA. This lawsuit
claimed that some or all of the named persons mismanaged the
company and improperly obtained profits from the sale of ALZA
securities. On April 18, 1994, ALZA announced that it had
reached a preliminary agreement, subject to court approval, to
settle these related lawsuits for $3.7 million. After taking
into account the coverage by the Company's directors and officers
liability insurance, this settlement will not have a material
impact on ALZA's financial statements.
On January 18, 1994, a suit was filed against ALZA by Cygnus
Therapeutics Corporation in the United States District Court for
the Northern District of California seeking a declaration of
unenforceability and invalidity of an ALZA patent relating to
transdermal administration of fentanyl and alleging violation of
antitrust laws. ALZA filed a motion to dismiss the suit. The
court granted this motion on April 22, 1994. The plaintiff then
amended the complaint. ALZA filed a motion to dismiss the
amended complaint. The court has deferred ruling on this motion
pending completion of limited discovery of third parties on or
about December 6, 1994. ALZA believes the suit to be without
merit.
ALZA is not involved in any legal proceedings which, in the
opinion of management, either alone or in the aggregate, will
-22-
<PAGE>
have a material adverse effect on ALZA's financial position or
results of operations.
Item 5. OTHER INFORMATION
Effective September 30, 1994, Jane Shaw, PhD, President and
Chief Operating Officer, resigned her employment with ALZA.
Ernest Mario, PhD, Co-Chairman and Chief Executive Officer, has
assumed Dr. Shaw's responsibilities. Dr. Shaw remains on ALZA's
Board of Directors.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
11. Computation of weighted average common and common
equivalent shares outstanding.
27. Financial Data Schedule.
(b) No reports on Form 8-K were filed during the quarter.
-23-
<PAGE>
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.
ALZA CORPORATION
Date: November 11, 1994 By: /s/ Dr. Ernest Mario
---------------------------
Dr. Ernest Mario
Co-Chairman and
Chief Executive Officer
Date: November 11, 1994 By: /s/ Bruce C. Cozadd
---------------------------
Bruce C. Cozadd
Vice President and
Chief Financial Officer
-24-
<PAGE>
EXHIBIT INDEX
EXHIBIT
11. Statement regarding weighted average
common and common equivalent shares
used in computation of per share
earnings.
27. Financial Data Schedule.
<PAGE>
ALZA CORPORATION
September 30, 1994
EXHIBIT 11
Statement Regarding Weighted Average Common and Common
Equivalent Shares Used in Computation of Per Share Earnings
(in thousands)
<TABLE>
<CAPTION>
Primary
---------------------------------------
Quarter Ended Nine Months Ended
September 30, September 30,
1994 1993 1994 1993
------ ------- ------ ------
<S> <C> <C> <C> <C>
Common stock 81,914 77,524 81,772 76,250
$15 warrants - 1,357 - 2,644
$25 warrants - - - -
$65 warrants - - - -
5.25% zero coupon
convertible
debentures - - - -
Other, principally
stock options 444 512 553 683
------ ------ ------ ------
Weighted average shares 82,358 79,393 82,325 79,577
------ ------ ------ ------
------ ------ ------ ------
Fully Diluted
----------------------------------------
Quarter Ended Nine Months Ended
September 30, September 30,
1994 1993 1994 1993
------- ------ ------- ------
Common stock 81,914 77,524 81,772 76,250
$15 warrants - 1,357 - 2,644
$25 warrants - - - -
$65 warrants - - - -
5.25% zero coupon
convertible
debentures - - - -
7.5% zero coupon
convertible
debentures - - - -
Other, principally
stock options 444 512 553 683
------- ------ ------- ------
Weighted average shares 82,358 79,393 82,325 79,577
------- ------ ------- ------
------- ------ ------- ------
</TABLE>
The 5.25% zero coupon convertible subordinated debentures are
considered common stock equivalents; they were antidilutive for the
quarter and the nine months ended September 30, 1994. The 7.5% zero
coupon convertible subordinated debentures (redeemed in November
<PAGE>
1993) are not included in the calculation for the quarter and nine
months ended September 30, 1993, because they were not considered to
be common stock equivalents and these debentures were antidilutive
for purposes of the fully diluted computation. The $15 warrants, to
the extent not exercised by December 14, 1993, expired on that date.
Fully diluted earnings per share are not presented on the face
of the condensed consolidated statement of income (unaudited) since
dilution is less than 3%.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS INCLUDED IN ITEM 1 OF FORM 10-Q DATED SEPTEMBER 30, 1994
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> SEP-30-1994
<CASH> 74
<SECURITIES> 257
<RECEIVABLES> 79
<ALLOWANCES> 0
<INVENTORY> 35
<CURRENT-ASSETS> 474
<PP&E> 300
<DEPRECIATION> 66
<TOTAL-ASSETS> 773
<CURRENT-LIABILITIES> 47
<BONDS> 340
<COMMON> 301
0
0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 773
<SALES> 52
<TOTAL-REVENUES> 204
<CGS> 41
<TOTAL-COSTS> 134
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 14
<INCOME-PRETAX> 69
<INCOME-TAX> 26
<INCOME-CONTINUING> 43
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 43
<EPS-PRIMARY> .52
<EPS-DILUTED> .52
</TABLE>
