<PAGE>
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, 1995
--------------
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 April 28, 1995:
Common Stock, $.01 par value - 82,106,188 shares
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<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>
Three Months Ended March 31,
1995 1994
--------- ---------
<S> <C> <C>
REVENUES:
Royalties and fees $33,962 $32,849
Research and development 21,700 14,183
Net sales 18,826 17,893
Interest and other 5,752 3,240
------- -------
Total revenues 80,240 68,165
COSTS AND EXPENSES:
Research and development 22,242 16,899
Costs of products shipped 16,422 13,842
General, administrative and marketing 8,502 8,110
Interest and other 5,595 3,712
------- -------
Total costs and expenses 52,761 42,563
------- -------
Income before income taxes 27,479 25,602
Provision for income taxes 10,442 9,985
------- -------
Net income $17,037 $15,617
------- -------
------- -------
Net income per common and common
equivalent share $ .21 $ .19
------- -------
------- -------
Weighted average common and
common equivalent shares 82,389 82,304
------- -------
------- -------
</TABLE>
See accompanying notes.
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<PAGE>
ALZA CORPORATION
Condensed Consolidated Balance Sheet (unaudited)
(In thousands)
<TABLE>
<CAPTION>
March 31, December 31,
1995 1994
-------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 85,755 $ 88,844
Short-term investments 270,843 256,084
Receivables, net 91,748 84,879
Inventories, at cost:
Raw materials 16,379 18,264
Work in process 12,504 10,175
Finished goods 4,571 4,976
-------- --------
Total inventories 33,454 33,415
Prepaid expenses and other current assets 27,925 29,211
-------- --------
Total current assets 509,725 492,433
Property, plant and equipment 323,031 315,688
Less accumulated depreciation and amortization (72,672) (70,238)
-------- --------
Net property, plant and equipment 250,359 245,450
Other assets 68,512 68,369
-------- --------
Total assets $828,596 $806,252
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 9,925 $ 20,006
Accrued income taxes 9,720 1,418
Accrued compensation 7,455 10,099
Other current liabilities 23,689 24,465
-------- --------
Total current liabilities 50,789 55,988
5 1/4% zero coupon convertible subordinated debentures 348,900 344,593
Deferred income taxes 20,361 18,513
Other long-term liabilities 23,450 22,679
Stockholders' equity:
Common stock and additional paid-in capital 303,622 302,967
Unrealized losses on available-for-sale securities,
net of tax effect (4,546) (7,471)
Retained earnings 86,020 68,983
-------- --------
Total stockholders' equity 385,096 364,479
-------- --------
Total liabilities and stockholders' equity $828,596 $806,252
-------- --------
-------- --------
</TABLE>
See accompanying notes.
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<PAGE>
ALZA CORPORATION
Condensed Consolidated Statement of Cash Flows (unaudited)
(In thousands)
<TABLE>
<CAPTION>
Three Months Ended March 31,
1995 1994
----------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 17,037 $ 15,617
Non-cash adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 3,836 2,699
Interest on 5 1/4% zero coupon convertible
subordinated debentures 4,307 -
Deferred income taxes 1,848 2,234
(Increase) decrease in assets:
Receivables (6,869) (13,857)
Inventories (39) (4,161)
Prepaid expenses and other current assets (750) 842
Increase (decrease) in liabilities:
Accounts payable (10,081) (1,525)
Accrued income taxes 8,302 5,025
Accrued compensation (2,644) (1,454)
Other current and long-term liabilities (5) 2,292
-------- --------
Total adjustments (2,095) (7,905)
-------- --------
Net cash provided by operating activities 14,942 7,712
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (8,624) (4,827)
Purchases of available-for-sale securities (23,111) (74,153)
Sales of available-for-sale securities 13,313 41,714
Maturities of available-for-sale securities - 36,194
Increase in cash surrender value-life insurance
and prepaid premiums (1,051) (241)
Decrease in other assets 787 1,689
-------- --------
Net cash provided by (used in) investing
activities (18,686) 376
CASH FLOWS FROM FINANCING ACTIVITIES:
Maturities of short-term debt - (150)
Principal payments on long-term debt - (7)
Issuances of common stock 655 821
-------- --------
Net cash provided by financing activities 655 664
-------- --------
Net increase (decrease) in cash and cash
equivalents (3,089) 8,752
Cash and cash equivalents at beginning
of period 88,844 53,683
-------- --------
Cash and cash equivalents at end
of period $ 85,755 $ 62,435
-------- --------
-------- --------
</TABLE>
See accompanying notes.
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<PAGE>
ALZA CORPORATION
March 31, 1995
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
The information at March 31, 1995 and for the three months ended March
31, 1995 and 1994 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, 1994, included in ALZA's 1994 Annual Report to
Stockholders.
2. SHORT-TERM INVESTMENTS
ALZA has classified its entire investment portfolio, including cash
equivalents of $90.4 million at March 31, 1995, as available-for-sale.
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.
Investments in the available-for-sale category are carried at fair value with
unrealized gains and losses recorded as a separate component of stockholders'
equity. At March 31, 1995, unrealized losses on available-for-sale
securities were $4.5 million, net of a $3.2 million tax effect.
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<PAGE>
ALZA CORPORATION
March 31, 1995
The following is a summary of ALZA's investment portfolio at March 31, 1995.
Gross unrealized gains were immaterial at March 31, 1995 and, as a result,
are not shown separately.
<TABLE>
<CAPTION>
Net Estimated
Unrealized Fair
(In thousands) Cost Losses Value
-------- ---------- ---------
<S> <C> <C> <C>
U.S. Treasury securities and
obligations of U.S.
government agencies $178,595 $ (4,902) $173,693
Collateralized mortgage
obligations and asset
backed securities 41,663 (959) 40,704
Corporate securities 148,739 (1,850) 146,889
-------- -------- --------
$368,997 $ (7,711) $361,286
-------- -------- --------
-------- -------- --------
</TABLE>
The amortized cost and estimated fair value of debt and marketable
equity securities at March 31, 1995, 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.
<TABLE>
<CAPTION>
Estimated
Fair
(In thousands) Cost Value
---------- ---------
<S> <C> <C>
Due in one year or less $137,902 $137,799
Due after one year through four years 95,889 94,168
Due after four years through eight years 135,206 129,319
-------- --------
$368,997 $361,286
-------- --------
-------- --------
</TABLE>
3. LITIGATION
See Part II, Item 1 of this Quarterly Report on Form 10-Q for a description of
legal proceedings.
-6-
<PAGE>
ALZA CORPORATION
March 31, 1995
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
ALZA Corporation ("ALZA" or the "Company") develops, primarily under
joint development and commercialization agreements with client companies, 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.
Therapeutic Discovery Corporation ("TDC"), which commenced operations in
1993, was formed by ALZA for the purpose of selecting and developing new
human pharmaceutical products combining ALZA's proprietary drug delivery
technologies with various drug compounds, and commercializing such products,
most likely through licensing to ALZA. ALZA and TDC currently have more than
20 products in the development pipeline, including several in early clinical
evaluation. Additional product candidates are under consideration.
ALZA markets certain products it has developed and promotes two products
under co-promotion arrangements with client companies. ALZA manufactures all
or a portion of certain clients' requirements for products developed by ALZA,
and also manufactures products marketed by ALZA.
RESULTS OF OPERATIONS
ALZA's net income was $17.0 million or $.21 per common share for the
quarter ended March 31, 1995, compared to net income of $15.6 million or $.19
per common share for the quarter ended March 31, 1994.
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<PAGE>
ALZA CORPORATION
March 31, 1995
ALZA's net income currently 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 will 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.
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. In addition, with
increasing pressures for cost containment in the U.S. 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. Health care cost containment measures will
also affect products marketed by ALZA.
Royalties and fees in the first quarter of 1995 increased to $34.0
million, compared to $32.8 million for the first quarter of 1994, primarily
due to royalties on sales by Bayer AG of Adalat CR-Registered Trademark-
(which is marketed by Pfizer Inc in the United States as Procardia
XL-Registered Trademark-). Royalties and fees for the current quarter were
reduced by more than $2 million to reflect additions to a reserve for a
potential adjustment in royalty revenue on U.S. sales of Procardia
XL-Registered Trademark- due to a U.S. patent issued to Bayer AG. Until a
further determination is made regarding this matter, ALZA intends to maintain
a reserve sufficient to cover the maximum possible reduction in Procardia
XL-Registered Trademark- royalties. Royalties from Procardia XL-Registered
Trademark-
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<PAGE>
ALZA CORPORATION
March 31, 1995
accounted for approximately 50% of ALZA's royalties for the quarter ended
March 31, 1995, after the reserve discussed above, and 60% of ALZA's
royalties for the quarter ended March 31, 1994. ALZA expects that, in the
near term, net income will continue to result primarily from royalty revenue
on sales of currently marketed products and additional products recently
approved or now awaiting approval by the FDA and other regulatory agencies.
Research and development revenue of $21.7 million for the quarter ended
March 31, 1995 increased 53% from the same period in 1994 due to increased
product development activities undertaken on behalf of TDC. Research and
development revenue from TDC was $14.1 million and $5.3 million for the
quarters ended March 31, 1995 and March 31, 1994, respectively. ALZA and TDC
are parties to a development agreement pursuant to which ALZA conducts
product development activities on behalf of TDC. ALZA has granted to TDC a
royalty-free, perpetual license to use ALZA's proprietary drug delivery
technologies to develop and commercialize specified TDC products. Because
products in early stages of development generally require lower levels of
expenditures, ALZA's research and development revenue from TDC for any
product can be expected to be lower during the early stages of development.
Research and development expenses for the quarter ended March 31, 1995
increased approximately 32% from the 1994 level, primarily due to increased
product development activities on behalf of TDC. As additional products are
accepted by TDC into its development pipeline and as products enter later
stages of development, ALZA expects its total research and development
expenses to increase.
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<PAGE>
ALZA CORPORATION
March 31, 1995
Net sales of $18.8 million for the quarter ended March 31, 1995 increased
5% from the same period in 1994, due primarily to increased contract
manufacturing activities, offset in part by decreased shipments of
Testoderm-Registered Trademark-, which was launched during 1994. Costs of
products shipped increased 19% for the current quarter compared to the same
period in 1994. Costs of products shipped increased at a greater rate than
net sales due in part to proportionately higher shipments of lower margin
products during the quarter.
ALZA's Vacaville manufacturing facility provides substantial
manufacturing capacity for ALZA-developed products. Because of the nature of
the substantially fixed costs at this facility, costs of products shipped as
a percent of net sales may vary significantly from period to period due to
the utilization of the facility and the mix of products manufactured. ALZA
expects costs of products shipped, as a percent of net sales, to decline over
the longer term through increased utilization of capacity, greater operating
efficiencies and increased production of ALZA-marketed products.
General, administrative and marketing expenses of $8.5 million for the
quarter ended March 31, 1995 increased 5% from the same period in 1994, due
primarily to sales and marketing activities. ALZA expects its general,
administrative and marketing expenses to increase slightly during the
remainder of 1995 as compared to 1994.
Interest and other revenue, which consists primarily of interest income,
increased from $3.2 million for the quarter ended March 31, 1994 to $5.8
million for the quarter ended March 31, 1995, due to higher invested cash
balances and higher interest rates.
Interest expense for the quarter ended March 31, 1995 increased 51% from
the same period in 1994, due to a higher amount of outstanding debt and a
higher interest rate on such debt. During the first quarter of 1994,
interest expense consisted primarily of interest
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<PAGE>
ALZA CORPORATION
March 31, 1995
expense on ALZA's $250 million commercial paper program. In mid-1994 ALZA
replaced its commercial paper program with approximately $337 million of 5 1/4%
zero coupon convertible subordinated debentures.
ALZA's effective combined federal and state tax rate for the year ended
1994 and the quarter ended March 31, 1995 was 38%.
LIQUIDITY AND CAPITAL RESOURCES
ALZA invested $8.6 million during the first quarter of 1995 in additions
to property, plant and equipment to support its research and development and
manufacturing activities. While ALZA believes its current facilities and
equipment are sufficient to meet its current operating requirements, ALZA
will continue to expand its facilities and equipment to support its long-term
requirements.
ALZA believes that its existing cash balances and investments 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 in the marketplace. 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 development and support for
marketing and sales.
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<PAGE>
ALZA CORPORATION
March 31, 1995
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
In December 1991, a patent infringement suit was filed by Ciba-Geigy
("Ciba") against Marion Merrell Dow Inc. ("MMD") and ALZA in connection with
the commercialization of Nicoderm-Registered Trademark-. In October 1994,
the Court granted a motion for summary judgment brought by ALZA and MMD,
ruling the patent invalid. That ruling cleared ALZA and MMD of liability for
infringement of the patent. In November 1994, an appeal was filed by Ciba.
During January 1995, ALZA and MMD filed a suit against Ciba and LTS Lohmann
Therapy Systems Corporation for infringement of two U.S. patents issued in
1994 to ALZA relating to the transdermal administration of nicotine.
During January 1994, a suit was filed against ALZA by Cygnus Therapeutic
Systems seeking a declaration of unenforceability and invalidity of an ALZA
patent relating to the transdermal administration of fentanyl and alleging
violation of antitrust laws. In April 1995, the Court granted ALZA's motion
to dismiss the lawsuit.
During 1994, several product liability suits were filed against Janssen
Pharmaceutica, Inc. ("Janssen") and ALZA relating to the Duragesic-Registered
Trademark- product. Janssen is managing the defense of these suits in
consultation with ALZA under an agreement between the parties.
Historically, the cost of resolution of ALZA's liability (including
product liability) claims has not been significant, and ALZA is not aware of
any asserted or unasserted claims pending against it, including the suits
mentioned above, the resolution of which would have a material adverse impact
on the operations or financial position of the Company.
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<PAGE>
ALZA CORPORATION
March 31, 1995
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
3.1 Restated Certificate of Incorporation of ALZA Corporation filed
with the Delaware Secretary of State on February 14, 1994(1)
3.2 Composite By-laws of ALZA Corporation as restated on
February 10, 1994 and amended on August 11, 1994(2)
11. Statement regarding weighted average common and common
equivalent shares used in computation of per share earnings
27. Financial Data Schedule
(b) No reports on Form 8-K were filed during the quarter
- ----------------------
(1) Incorporated by reference to ALZA's Form 10-K Annual Report for the year
ended December 31, 1993.
(2) Incorporated by reference to ALZA's Form 10-K Annual Report for the year
ended December 31, 1994.
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<PAGE>
ALZA CORPORATION
March 31, 1995
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: May 12, 1995 By: /s/ Dr. Ernest Mario
-----------------------
Dr. Ernest Mario
Co-Chairman and
Chief Executive Officer
Date: May 12, 1995 By: /s/ Bruce C. Cozadd
------------------------
Bruce C. Cozadd
Vice President and Chief
Financial Officer
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<PAGE>
ALZA CORPORATION
March 31, 1995
EXHIBIT INDEX
Exhibit
- -------
11. Statement regarding weighted average
common and common equivalent shares
used in computation of per share
earnings
27. Financial Data Schedule
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<PAGE>
ALZA CORPORATION
March 31, 1995
EXHIBIT 11
Statement Regarding Weighted Average Common and Common
Equivalent Shares Used in Computation of Per Share Earnings
(In thousands)
<TABLE>
<CAPTION>
Primary Fully Diluted
----------------------- -----------------------
Quarter Ended March 31, Quarter Ended March 31,
1995 1994 1995 1994
--------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
Common stock 82,072 81,651 82,072 81,651
$25 warrants - - - -
$65 warrants - - - -
5 1/4% zero coupon
convertible
subordinated
debentures - - - -
Stock options 317 653 317 653
------ ------ ------ ------
Average shares 82,389 82,304 82,389 82,304
------ ------ ------ ------
------ ------ ------ ------
</TABLE>
Primary and fully diluted earnings per share are based on weighted average
common and dilutive common equivalent shares, including ALZA common stock,
warrants and options, for the period each was outstanding. The 5 1/4% zero
coupon convertible subordinated debentures (issued in July 1994) are
considered common stock equivalents; they were antidilutive for the quarter
ended March 31, 1995.
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% for each period presented.
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<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 MARCH 31, 1995 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> MAR-31-1995
<CASH> 86
<SECURITIES> 271
<RECEIVABLES> 92
<ALLOWANCES> 0
<INVENTORY> 33
<CURRENT-ASSETS> 510
<PP&E> 323
<DEPRECIATION> 73
<TOTAL-ASSETS> 829
<CURRENT-LIABILITIES> 51
<BONDS> 349
<COMMON> 304
0
0
<OTHER-SE> 81
<TOTAL-LIABILITY-AND-EQUITY> 829
<SALES> 19
<TOTAL-REVENUES> 80
<CGS> 16
<TOTAL-COSTS> 53
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6
<INCOME-PRETAX> 27
<INCOME-TAX> 10
<INCOME-CONTINUING> 17
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 17
<EPS-PRIMARY> .21
<EPS-DILUTED> .21
</TABLE>
