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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995
COMMISSION FILE NUMBER 1-6247
ALZA CORPORATION
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(Exact name of registrant as specified in its charter)
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DELAWARE 77-0142070
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(State or other jurisdiction of incorporation or (I.R.S. Employer Identification
organization) No.)
950 PAGE MILL ROAD, P.O. BOX 10950, PALO ALTO, CA 94303-0802
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(Address of principal executive offices) (Zip Code)
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Registrant's telephone number, including area code: (415) 494-5000
Securities registered pursuant to Section 12(b) of the Act:
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NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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Common Stock New York Stock Exchange
Liquid Yield Option-TM- (Notes due 2014 New York Stock Exchange
(Zero Coupon-Subordinated)
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Securities registered pursuant to Section 12(g) of the Act:
Units including ALZA Corporation Warrants (to purchase Common Stock at $65 per
share)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days: Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. /X/
State the aggregate market value of the voting stock held by non-affiliates
of the registrant, as of March 15, 1996: $2,640,251,008.
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of March 15, 1996:
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TITLE OF CLASS NUMBER OF SHARES
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Common Stock 84,137,470
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DOCUMENTS INCORPORATED BY REFERENCE
Part II, Items 5, 6, 7 and 8 are incorporated by reference to the
registrant's Annual Report to Stockholders for the year ended December 31, 1995;
Part III, Items 10, 11, 12 and 13 are incorporated by reference to the
definitive proxy statement for the registrant's Annual Meeting of Stockholders
to be held on May 23, 1996.
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ALZA CORPORATION FORM 10-K ANNUAL REPORT
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995
TABLE OF CONTENTS
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PART I
Item 1. Business..................................................................................... 3
Item 2. Properties................................................................................... 13
Item 3. Legal Proceedings............................................................................ 13
Item 4. Submission of Matters to a Vote of Security Holders.......................................... 13
Executive Officers of the Registrant....................................................................... 14
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters........................ 15
Item 6. Selected Financial Data...................................................................... 15
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations........ 15
Item 8. Financial Statements and Supplementary Data.................................................. 15
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure......... 15
PART III
Item 10. Directors and Executive Officers of the Registrant........................................... 15
Item 11. Executive Compensation....................................................................... 15
Item 12. Security Ownership of Certain Beneficial Owners and Management............................... 15
Item 13. Certain Relationships and Related Transactions............................................... 15
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K............................. 16
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PART I
ITEM 1. BUSINESS
INTRODUCTION
ALZA Corporation ("ALZA") is a leader in the development and
commercialization of innovative pharmaceutical products that incorporate drugs
into advanced dosage forms designed to provide controlled, predetermined rates
of drug release for extended time periods. By administering drugs in preset
patterns and by alternative routes, ALZA's advanced dosage forms, called
therapeutic systems, can add to the medical and economic value of drug therapies
by minimizing their unpleasant or harmful side effects, optimizing their
beneficial actions, simplifying drug therapy, and increasing patient compliance
by decreasing the frequency with which medication must be administered. ALZA was
incorporated under the laws of the State of California on June 11, 1968, and
changed its legal domicile from California to Delaware in 1987. ALZA's mailing
address is 950 Page Mill Road, P.O. Box 10950, Palo Alto, CA 94303-0802.
Historically, most of ALZA's product development activities have been
undertaken pursuant to joint development and commercialization arrangements with
pharmaceutical companies. These agreements normally provide for the
pharmaceutical company client to reimburse ALZA for costs incurred in product
development and clinical evaluation of a specified product, including a portion
of general and administrative expenses. The client receives marketing rights to
the product, and ALZA receives royalties based on the client's sales of the
product. In some cases ALZA manufactures all or a portion of the client's
requirements for the product; in other cases the client manufactures the
product. Among the ALZA-developed products commercialized to date by client
companies are Procardia XL-Registered Trademark- for the treatment of angina and
hypertension, Duragesic-Registered Trademark- for the management of severe
chronic pain, Transderm-Nitro-Registered Trademark- for the prevention and
treatment of angina and Nicoderm-Registered Trademark- for use as an aid in
smoking cessation.
The United States health care industry has changed dramatically in the last
several years. Pharmaceutical companies have slashed sales forces, acquired
pharmacy benefit companies, and built alliances in an effort to cut costs,
ensure market share, and improve research and development productivity. In this
environment, every new pharmaceutical product must add value to the health care
marketplace.
Beginning in the early 1990's and accelerating over the past several years,
ALZA has embarked on a three-part strategy to capitalize on the opportunities
created by the new health care marketplace. First, ALZA has continued its
traditional product development arrangements with client companies. Second, ALZA
has expanded its commercialization capabilities and activities as described
under "ALZA Pharmaceuticals" below. As part of its strategy to expand its
commercialization activities and in order to decrease ALZA's dependence on
client companies, in 1993 ALZA formed Therapeutic Discovery Corporation ("TDC")
to develop, with ALZA, a pipeline of products for commercialization by ALZA. At
the end of 1995, ALZA and TDC had more than 20 products in various stages of
development, including several in clinical evaluation. (See "Therapeutic
Discovery Corporation" below.) Third, in order to extend ALZA's leadership in
drug delivery technology ALZA formed the ALZA Technology Institute ("ATI") in
1994. ATI is increasing ALZA's investment in the research and development of
therapeutic systems, including systems for the delivery of biotechnology
compounds and for use in gene therapy.
NOTICE CONCERNING FORWARD-LOOKING STATEMENTS
Some of the statements made in this Form 10-K are forward-looking in nature,
including but not limited to ALZA's product development plans, plans concerning
the commercialization of products, and other statements that are not historical
facts. The occurrence of the events described, and the achievement of the
intended results, are subject to the future occurrence of many events, some or
all of which are not predictable or within ALZA's control; therefore, actual
results may differ materially from those anticipated in any forward-looking
statements. Many risks and uncertainties are inherent
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in the pharmaceutical industry; others are more specific to ALZA's business.
Many of the significant risks related to ALZA's business are described in this
Form 10-K, including risks associated with technology and product development,
risks relating to clinical development and medical acceptance of products,
changes in the health care marketplace, patent and intellectual property
matters, regulatory and manufacturing issues, and risks associated with
competition from other companies.
ALZA TECHNOLOGIES AND PRODUCTS
TRANSDERMAL SYSTEMS. ALZA's transdermal therapeutic systems provide for the
controlled delivery of drugs directly into the bloodstream through intact skin.
Transdermal systems are well suited for the delivery of potent drugs that are
poorly absorbed and/or extensively metabolized when administered orally. ALZA's
transdermal products are thin, multilayer systems, in the form of small adhesive
patches, that combine a drug reservoir with a polymer membrane or other
mechanism for the control of drug release to the surface of intact skin, and
hence into the bloodstream.
The transdermal products developed by ALZA and marketed in the United States
and/or other countries include:
- TRANSDERM SCOP-REGISTERED TRADEMARK- (scopolamine) -- Applied once every
three days to prevent motion sickness, marketed by Ciba-Geigy Corporation
(together with its affiliates, "Ciba-Geigy").
- TRANSDERM-NITRO-REGISTERED TRADEMARK- (nitroglycerin) -- Applied
once-a-day for the prevention and treatment of angina pectoris, also
marketed by Ciba-Geigy.
- CATAPRES-TTS-REGISTERED TRADEMARK- (clonidine) -- Applied once-a-week for
the treatment of high blood pressure, marketed by Boehringer Ingelheim
Pharmaceutical, Inc. ("Boehringer").
- DURAGESIC-REGISTERED TRADEMARK- (fentanyl) -- A 72-hour system for
management of chronic pain in patients who require continuous opioid
analgesia for pain that cannot be controlled by lesser means, marketed by
Janssen Pharmaceutica, Inc. (together with its affiliates, "Janssen") and
co-promoted by ALZA Pharmaceuticals.
- NICODERM-REGISTERED TRADEMARK- (nicotine) -- Applied once-a-day to aid in
smoking cessation, marketed by Hoechst Marion Roussel Inc. ("HMR").
- TESTODERM-REGISTERED TRADEMARK- (testosterone) -- Applied once-a-day for
testosterone replacement in testosterone-deficient men, marketed by ALZA
Pharmaceuticals.
The Testoderm-Registered Trademark- product was launched in the United
States by ALZA Pharmaceuticals in April 1994. ALZA developed the product for
ALZA TTS Research Partners, Ltd., which receives royalties from ALZA based on
sales of the product. The product is expected to be marketed outside the United
States by distributors. A number of additional transdermal products are in
various stages of development and clinical testing with TDC and other client
companies.
ORAL SYSTEMS. ALZA has developed several therapeutic systems for oral
administration. ALZA's OROS-Registered Trademark- products resemble conventional
tablets or capsules in appearance, but use an osmotic mechanism to provide
pre-programmed, controlled drug delivery to the gastrointestinal tract. An
OROS-Registered Trademark- product is comprised of a polymer membrane with one
or more laser-drilled holes surrounding a core containing the drug or drugs,
with or without osmotic or other agents. Water from the gastrointestinal tract
diffuses through the membrane at a controlled rate into the drug core, causing
the drug to be released in solution or suspension at a predetermined controlled
rate out of the laser-drilled hole(s). OROS-Registered Trademark- systems are
well suited for delivering drug compounds throughout the gastrointestinal tract
in programmed delivery for local treatment or systemic absorption.
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The OROS-Registered Trademark- products developed by ALZA and marketed in
the United States and/or other countries include:
- PROCARDIA XL-REGISTERED TRADEMARK- / ADALAT CR-REGISTERED TRADEMARK-
(nifedipine) -- A once-a-day formulation for the treatment of both angina
and hypertension, marketed by Pfizer Inc., ("Pfizer") in the United States
and Bayer AG ("Bayer") outside the United States.
- MINIPRESS XL-REGISTERED TRADEMARK- / ALPRESS-REGISTERED TRADEMARK- LP
(prazosin) -- A once-a-day formulation for the treatment of hypertension,
marketed in France by Pfizer and approved for marketing in the United
States.
- VOLMAX-REGISTERED TRADEMARK- (albuterol) -- A twice daily dosage form for
the treatment of asthma, marketed by Muro Pharmaceuticals, Inc. and Forest
Laboratories, Inc. in the United States and Glaxo Holdings p.l.c.
internationally.
- EFIDAC 24-REGISTERED TRADEMARK- PSEUDOEPHEDRINE -- An over-the-counter,
once-a-day nasal decongestant product, marketed in the United States by
Ciba Self-Medication, a subsidiary of Ciba-Geigy.
- EFIDAC 24-REGISTERED TRADEMARK- CHLORPHENIRAMINE -- An over-the-counter,
once-a-day allergy product, marketed in the United States by Ciba
Self-Medication.
- GLUCOTROL XL-REGISTERED TRADEMARK- (glipizide) -- A once-a-day treatment
for Type II diabetes, marketed in the United States by Pfizer and
co-promoted by ALZA Pharmaceuticals.
Covera-HS-Registered Trademark-, a controlled-release version of the
anti-hypertensive/anti-anginal medication verapamil, has been cleared for
marketing in the United States by the Food and Drug Administration ("FDA"). The
product was developed jointly by ALZA and G.D. Searle ("Searle"), and is
expected to be launched by Searle in mid-1996. DynaCirc
CR-Registered Trademark-, a controlled-release version of the anti-hypertensive
medication isradipine, has also been cleared for marketing in the United States
by the FDA. This product was developed jointly by ALZA and Sandoz Ltd.
("Sandoz"). Sandoz has announced plans to launch the product in mid-1996. Efidac
24-Registered Trademark- Pseudoephedrine/Brompheniramine, a once-a-day
over-the-counter cold/allergy treatment, has received an approvable letter from
the FDA. Once final approval is obtained, the product will be marketed by Ciba
Self-Medication. A number of additional OROS-Registered Trademark- products are
in various stages of development and testing with TDC and other client
companies.
In addition to the OROS-Registered Trademark- systems described above, ALZA
is currently utilizing other proprietary osmotic technologies in the development
of products. These technologies include:
- CHRONSET-REGISTERED TRADEMARK- -- ALZA's Chronset-Registered Trademark-
therapeutic system, currently in development for oral delivery of
compounds including proteins and peptides, provides for a predetermined
delay in the release of active compounds from an orally administered
capsule in order to target the location of release or for bolus delivery.
- MOTS -- ALZA's mucosal oral therapeutic system uses oral osmotic
technology to deliver drugs to the oral cavity for extended periods of
time. These systems are designed to be retained in the mouth to administer
drugs either systemically or topically.
PERIODONTAL PRODUCTS. The Actisite-Registered Trademark- (tetracycline HCl)
periodontal fiber was developed jointly with On-Site Therapeutics, Inc. The
thread-like polymeric fibers are designed to treat adult periodontal disease by
providing rate-controlled delivery of tetracycline for ten days after placement
in the periodontal pocket by a dental practitioner. The product was introduced
in the United States in July 1994 by a partnership of ALZA and Procter & Gamble
(the "ALZA/P&G Partnership"). ALZA has the rights to market the
Actisite-Registered Trademark- product in most countries outside of the United
States, and is marketing the product, through distributors, in several European
countries (see "ALZA Pharmaceuticals" below). The product is manufactured by
ALZA.
Procter and Gamble ("P&G"), pursuant to the ALZA/P&G Partnership, has also
licensed for sale in Europe a bioerodible product called the Perio
Chip-Registered Trademark-, which delivers chlorhexedine for the treatment of
periodontal disease. The product, licensed by P&G from Perio Products Ltd., an
Israeli company, is
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awaiting regulatory approval in the United Kingdom and other Western European
countries. P&G will market the product, and ALZA and P&G will share equally the
profits from P&G's sales of the product.
BAXTER INFUSOR-REGISTERED TRADEMARK- -- The Baxter
Infusor-Registered Trademark-, a lightweight, disposable device for intravenous
therapy, resulted from a joint development arrangement between ALZA and Baxter
International Inc. ("Baxter"). The product is manufactured and marketed by
Baxter in the United States, Europe and Asia for the delivery of
chemotherapeutic agents and analgesics.
OTHER ALZA PRODUCTS. Three product lines developed by ALZA in its earlier
years are marketed directly by ALZA Pharmaceuticals in the United States, and in
other countries under distribution agreements with third parties. Those products
are:
- OCUSERT-REGISTERED TRADEMARK- -- Ocusert-Registered Trademark-
(pilocarpine) Pilo-20 and Pilo-40 ocular therapeutic systems are used for
the treatment of glaucoma.
- PROGESTASERT-REGISTERED TRADEMARK- -- The
Progestasert-Registered Trademark- (progesterone) intrauterine
contraceptive device provides contraception for one year by releasing the
natural hormone progesterone.
- ALZET-REGISTERED TRADEMARK- -- ALZET-Registered Trademark- mini-osmotic
pumps are implantable, capsule-shaped units that can deliver solutions
containing a wide range of agents in laboratory animals at controlled
rates for up to four weeks.
E-TRANS-SM- SYSTEMS. ALZA's E-TRANS-SM- electrotransport systems are
designed to deliver drugs across intact skin through the use of an electrical
potential gradient. ALZA's E-TRANS-SM- systems are small, easy-to-apply devices
consisting of an adhesive, a drug reservoir, electrodes and a power source/
controller. The systems are designed to deliver large molecules (including
proteins and peptides) and potent drugs that are poorly absorbed or extensively
metabolized in the gastrointestinal tract. ALZA has several products utilizing
this technology under development, including an E-TRANS-SM- fentanyl product
under development with Janssen.
DUROS-SM- SYSTEMS. ALZA's DUROS-SM- implant technology is designed to enable
the delivery of peptides, proteins and other bioactive macromolecules arising
from the biotechnology industry. Osmotic implantable systems incorporating
DUROS-SM- implant technology have the potential to deliver macromolecules to
subcutaneous sites for systemic therapy or to specific tissues; a single
miniature implant may be able to provide therapy for up to one year.
VETERINARY PRODUCTS. ALZA has under development for client companies
veterinary products based on various technologies. These technologies include
ruminal bolus osmotic systems and implantable osmotic systems.
Ivomec-SR-Registered Trademark-, a product combining the antiparasitic agent
ivermectin with ALZA's ruminal bolus technology, controls internal and external
parasites in cattle on pasture for an entire grazing season following a single
administration; the product has been introduced by Merck & Co., Inc. ("Merck")
in the United Kingdom. Merck has filed regulatory applications for clearance to
market the product in the United States and other countries. Other veterinary
products under development include implantable systems for the administration of
growth hormones to food-producing animals under an agreement with Monsanto
Company.
THERAPEUTIC DISCOVERY CORPORATION
FORMATION. TDC 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. In June 1993 ALZA contributed
$250 million in cash to TDC and distributed a special dividend of "Units" to
ALZA stockholders. Each Unit consists of one share of TDC Class A common stock
and one warrant to purchase one-eighth of one share of ALZA common stock.
Holders of record of ALZA common stock received one Unit for every 10 shares of
ALZA common stock owned on May 28, 1993, with cash distributed in lieu of
fractional Units. The Units trade on the Nasdaq Stock Market (under the trading
symbol TDCAZ), and will trade only as Units until the earlier of June 11, 1996
or the date on which
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ALZA exercises the Purchase Option (as defined below) (the "Separation Date"),
at which time the warrants and TDC Class A common stock will trade separately.
The warrants will be exercisable at a per share exercise price of $65 at any
time after the Separation Date and will expire, if not previously exercised, on
December 31, 1999.
ALZA/TDC AGREEMENTS. ALZA and TDC have entered into a development agreement
(the "Development Contract") pursuant to which ALZA conducts research and
development activities on behalf of TDC. ALZA has granted to TDC a royalty-free,
exclusive, perpetual license to use ALZA's proprietary drug delivery
technologies to develop and commercialize specified TDC products.
ALZA has an option to license any product developed by TDC, on a
product-by-product and country-by-country basis, providing ALZA with access to a
potential pipeline of products for commercialization. If ALZA exercises its
license option for any product, ALZA will make royalty payments to TDC with
respect to such product if the product is sold by ALZA (up to a maximum of 5% of
ALZA's net sales) or, if the product is sold by a third party, sublicensing fees
of up to 50% of ALZA's sublicensing revenues with respect to the product. ALZA
has an option, exercisable on a product-by-product basis, to buy out its royalty
obligation to TDC by making a one-time payment that is a multiple of royalties
and sublicensing fees paid in specified periods.
ALZA also has an option to purchase, according to a predetermined formula,
all (but not less than all) of the outstanding shares of TDC Class A common
stock (the "Purchase Option"). The Purchase Option is exercisable at any time
until December 31, 1999 (or later under certain circumstances). However, the
Purchase Option will expire, in any event, on the 60th day after TDC files with
the Securities and Exchange Commission a report on Form 10-K or Form 10-Q
containing a balance sheet showing less than an aggregate of $5 million in cash,
cash equivalents, short-term investments and long-term investments. If ALZA
exercises the Purchase Option, the exercise price will be the greatest of: (a)
$100 million; (b) the fair market value of one million shares of ALZA common
stock; (c) the greater of (i) 25 times the worldwide royalties and sublicensing
fees paid by ALZA to TDC during four specified calendar quarters or (ii) 100
times such royalties and sublicensing fees during a specified calendar quarter
(in either case, less any amounts previously paid by ALZA to exercise a buy-out
option with respect to any product); or (d) $325 million less all amounts paid
by TDC under the Development Contract. The purchase price may be paid in cash,
in ALZA common stock, or any combination of the two, at the option of ALZA.
ALZA performs certain administrative services for TDC under an
administrative services agreement which is terminable at the option of TDC, and
for which ALZA is reimbursed its direct costs, plus certain overhead expenses.
For the years ended December 31, 1995, 1994 and 1993, reimbursement to ALZA
under this agreement was approximately $0.1 million, $0.2 million and $0.1
million, respectively.
In order to choose appropriate product candidates for development, ALZA and
TDC established a product discovery process, a market-driven approach under
which they examine unmet medical needs in selected therapeutic areas and then
target cost-effective products for development. The therapeutic areas on which
ALZA and TDC are focusing are: pain management, supportive therapies in oncology
and AIDS, urology and endocrinology; however, ALZA and TDC are also pursuing
product opportunities outside these therapeutic areas where ALZA's drug delivery
systems can add significant value to drug therapy. Included in the review of
appropriate candidates for incorporation in an ALZA therapeutic system are
compounds currently off-patent or soon to be off-patent, proprietary compounds
available for license, compounds in biotechnology and pharmaceutical pipelines,
and drugs that have been abandoned early in their development due to side
effects or poor efficacy in conventional dosage forms.
TDC PRODUCTS IN DEVELOPMENT. ALZA and TDC have more than 20 products in
various stages of development, including several in clinical evaluation. As is
true throughout the pharmaceutical industry, products in development must
overcome a number of technological, clinical, regulatory,
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proprietary and commercial hurdles in order to become successful products. There
can be no assurance that any or all of the products in development by ALZA and
TDC, including any of those listed below, will reach the marketplace or will
become commercially successful products.
In the pain management area, ALZA and TDC have in development an
OROS-Registered Trademark- hydrocodone product intended to provide controlled,
consistent pain management for mild to moderate chronic pain. Also in
development are OROS-Registered Trademark- morphine and
OROS-Registered Trademark- hydromorphone products, both intended to provide
24-hour pain management for chronic pain requiring potent opioid analgesia. An
E-TRANS-SM- lidocaine product, designed to provide quick onset of local
anesthesia for procedures such as insertion of intravenous lines, lumbar
punctures, lesion removal and venipunctures, is also in development.
Urology products include an OROS-Registered Trademark- oxybutynin product
and a TTS oxybutynin product, each intended to provide treatment for urge
urinary incontinence. Clinical studies are underway to determine which of the
two products offers the greater improvement in efficacy and safety over the
immediate-release dosage form of oxybutynin. Also in the early stages of
development by ALZA and TDC is an E-TRANS-SM- prostaglandin product designed to
treat erectile dysfunction.
In the area of supportive products for oncology, ALZA and TDC have in
development a DUROS-SM- leuprolide product designed for the palliative treatment
of prostate cancer for up to one year, with discontinuation of treatment
possible at any time. ALZA has also performed early clinical studies on a MOTS
beclomethasone product which is designed to provide treatment and temporary
relief of symptoms associated with recurrent oral ulcers.
In the endocrinology area, a second generation
Testoderm-Registered Trademark- product is in Phase III clinical trials. This
product is designed to be worn on multiple sites on the body and is intended for
delivery of testosterone in the normal circadian pattern to treat hypogonadism.
ALZA and TDC also have in development an intrauterine therapeutic system
designed to deliver progesterone and provide endometrial protection for 18 to 24
months as an adjunctive therapy to estrogen replacement therapy. Also in the
early stages of development is an E-TRANS-SM- system intended for the treatment
of infertility.
PRODUCT DEVELOPMENT RISKS
All pharmaceutical products require extensive development and clinical
activities before an application can be filed for regulatory approval to market
the product. There are many risks inherent in this process and it should be
expected that some of the products for which development is initiated ultimately
will not become commercial products. Substantial technical, financial and human
resources are required to successfully complete the development of a product.
The proper performance characteristics for the product must be defined, and the
product must be designed and developed to meet those characteristics. Every
product faces significant technological hurdles, and often one or more of these
cannot be achieved.
After the product is manufactured on a pilot scale, clinical safety and
efficacy must be shown. Clinical studies are very costly, and can take many
years to complete. There can be no assurance that the desired outcomes will be
shown in the clinical studies or that regulatory approval for the product will
be obtained. Several years, and millions of dollars, may be spent before it can
be known whether all technical and clinical requirements for a product can be
met. There are further technology risks in converting a pilot scale
manufacturing process to a commercial scale manufacturing process. Finally, even
once a product is developed, approved by regulatory authorities and
manufactured, there can be no assurance of its commercial success. In order to
provide added value and gain medical and commercial acceptance a product must
show some performance improvements over products incorporating the same or
similar drug compounds. In some cases, these benefits may be difficult to
establish.
ALZA TECHNOLOGY INSTITUTE
The ALZA Technology Institute ("ATI"), established by ALZA in 1994,
consolidated ALZA's research activities in one cohesive group whose mission is
to extend and expand ALZA's drug delivery
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technologies. ATI has been involved in the further development of ALZA's
E-TRANS-SM- electrotransport and DUROS-SM- implant technologies. In 1995, ATI
expanded its research activities to apply ALZA's technology in the biotechnology
area, and to perform initial work in solving the delivery problems of gene
therapy.
RESEARCH AND DEVELOPMENT EXPENDITURES
ALZA spent $82.5 million on client-sponsored product development activities
during 1995 ($58.9 million and $37.9 million in 1994 and 1993, respectively),
excluding reimbursable general and administrative costs, and $20.9 million on
ALZA-sponsored research and development activities during 1995 ($17.2 million
and $15.3 million in 1994 and 1993, respectively). Research and development
costs are expensed as incurred. ALZA had research and development revenue of
$104.0 million during 1995, $68.7 million during 1994 and $46.8 million during
1993 from clients with which ALZA has joint product development agreements
(including $70.1 million in 1995, $31.6 million in 1994 and $4.9 million in 1993
from TDC). ALZA's research and development revenue generally represents clients'
reimbursement of costs, including a portion of general and administrative
expenses. Therefore product development activities do not contribute
significantly to current net income.
MANUFACTURING
ALZA manufactures some or all of the product requirements for certain client
companies, including Duragesic-Registered Trademark- for Janssen,
Nicoderm-Registered Trademark- for HMR, Procardia XL-Registered Trademark- for
Pfizer, Catapres-TTS-Registered Trademark- for Boehringer, Efidac
24-Registered Trademark- Pseudoephedrine and Efidac 24-Registered Trademark-
Chlorpheniramine for Ciba-Geigy. ALZA also manufactures the
Progestasert-Registered Trademark-, ALZET-Registered Trademark-,
Ocusert-Registered Trademark-, Testoderm-Registered Trademark- and
Actisite-Registered Trademark- products. ALZA's 255,000 square foot commercial
manufacturing facility is in Vacaville, California.
ALZA's products can be more complex to manufacture than more traditional
dosage forms and can require a more labor-intensive manufacturing process. As a
result, the cost of manufacturing may be higher than that of other
pharmaceutical products, and the time required to develop an appropriate
manufacturing process may be extensive. Converting a pilot scale manufacturing
process to a robust commercial manufacturing process requires substantial
investment of technical and financial resources.
Some of the materials used in manufacturing ALZA-developed products are
unique and may be available from only one or a limited number of suppliers. ALZA
attempts, where appropriate, to negotiate long-term supply arrangements for some
of these materials. With the increasing cost of product liability in the
pharmaceutical and medical device industries, particularly in the area of
implantable materials, it may become increasingly difficult or more expensive,
and in some cases impossible, for ALZA to obtain some of the materials it may
need for certain of its products. Scarcity or unavailability of materials could
make products more costly, could prevent the commercialization of some products,
or could cause delays in development due to the necessity to design products to
incorporate available or obtainable materials.
ALZA PHARMACEUTICALS
ALZA established its ALZA Pharmaceuticals division in 1993 to expand ALZA's
marketing capabilities in order to commercialize ALZA-developed products,
including those under development with TDC. ALZA Pharmaceuticals now has a sales
force of approximately 50 people located throughout the United States. In April
1994, ALZA Pharmaceuticals introduced in the United States the
Testoderm-Registered Trademark- testosterone transdermal system for hormone
replacement in testosterone-deficient men. Also during 1994, ALZA's sales force
began to co-promote Duragesic-Registered Trademark- with Janssen and Glucotrol
XL-Registered Trademark- with Pfizer, both in the United States. ALZA
Pharmaceuticals also markets ALZA's ALZET-Registered Trademark- mini-osmotic
pumps, Progestasert-Registered Trademark- and Ocusert-Registered Trademark-.
ALZA's marketing organization also supported P&G in the United States launch of
Actisite-Registered Trademark-.
In August 1995, ALZA entered into an agreement with ENACT Health Management
Systems ("ENACT") to promote ENACT's unique airway monitoring system (the "ENACT
Air Watch-TM-
9
<PAGE>
System") for monitoring asthma and other chronic respiratory conditions to
managed care providers and third-party payers. ALZA has the right to promote the
ENACT Air Watch-TM- System to such parties for five and one-half years.
In December 1995, ALZA entered into an agreement with U.S. Bioscience, Inc.
("U.S. Bioscience") to market Ethyol-Registered Trademark- (amifostine), a
unique agent indicated for the reduction of cumulative renal toxicity associated
with the repeated administration of the chemotherapeutic drug cisplatin in
patients with advanced ovarian cancer or non-small cell lung cancer. ALZA has
the right to market the product for five years, with an option to continue
marketing for an additional year. U.S. Bioscience will co-promote the product
with ALZA. At the end of ALZA's marketing period, the marketing rights to the
product will revert to U.S. Bioscience and ALZA will receive residual payments
for ten years.
ALZA Pharmaceuticals is establishing international commercialization
capabilities by developing distribution arrangements to market several
ALZA-developed products. Actisite-Registered Trademark- is distributed in the
United Kingdom, Switzerland, Austria, Sweden and Italy by European distributors,
and an agreement has recently been signed for the distribution of the product in
Japan, after completion of clinical trials. ALZA has signed distribution
agreements for seventeen Asian countries (excluding Japan) for
Testoderm-Registered Trademark-.
ALZA has only recently formed ALZA Pharmaceuticals for commercializing
ALZA's own products and there can be no assurance that ALZA Pharmaceuticals will
be successful in its marketing efforts. There are many risks associated with the
marketing of pharmaceutical products, including the availability of products
(whether through development by ALZA and TDC, in-licensing or otherwise) for
ALZA Pharmaceuticals to market in specialty areas that match the expertise of
the sales force, market acceptance of the products, and changes in the health
care marketplace, including cost containment efforts and the concentration of
providers of medical and pharmaceutical benefits through health maintenance
organizations, formularies and other mechanisms.
GOVERNMENTAL REGULATION
Under the United States Food, Drug and Cosmetic Act, "new drugs" must obtain
clearance from the FDA before they lawfully can be marketed in the United
States. Applications for marketing clearance must be based on extensive clinical
and other testing, the cost of which is very substantial. The packaging and
labeling of all new drug products are also subject to FDA regulation. Approvals
(including pricing approvals) are required from health regulatory authorities in
foreign countries before marketing of pharmaceutical products may commence in
those countries. Requirements for approval may differ from country to country,
and can involve additional testing. There can be substantial delays in obtaining
required clearances from both the FDA and foreign regulatory authorities after
applications are filed. Even after clearances are obtained, further delays may
be encountered before the products become commercially available. Veterinary
products are subject to similar clearance procedures.
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 FDA and comparable agencies in other
countries where the products are distributed. FDA regulations govern a range of
activities including manufacturing, quality assurance, advertising and
record-keeping. The continuing trend of stringent FDA oversight in product
clearance and enforcement has caused longer clearance 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.
Environmental regulations may also affect the manufacturing process. As a
pharmaceutical company, ALZA uses in its business chemicals and materials which
may be classified as hazardous or toxic which require special handling and
disposal. In addition, ALZA undertakes to minimize releases
10
<PAGE>
to the environment and exposure of its employees and the public to such
materials. The costs of these activities have increased substantially in recent
years, and it is possible that such costs may continue to increase significantly
in the future.
PATENTS AND PATENT APPLICATIONS
As of December 31, 1995, ALZA owned approximately 500 United States patents
and had approximately 170 pending United States patent applications relating to
its products and other technologies. ALZA has in excess of 2,400 foreign patents
and pending patent applications covering its various technologies and products.
Patents have been issued, or are expected to be issued, covering ALZA's current
technologies and products, as well as products under development.
Patent protection generally has been important in the pharmaceutical
industry. ALZA believes that its current patents, and patents that may be
obtained in the future, are important to current and future operations. There
can be no assurance that ALZA's currently existing patents will cover future
products, that additional patents will be issued, or that any patents now or
hereafter issued will be of commercial benefit. In the United States, patents
generally are granted for specified periods of time. Some of ALZA's earlier
patents covering various aspects of certain OROS-Registered Trademark- and TTS
dosage forms have begun to expire, or will expire, over the next several years;
however, ALZA technologies and products are generally covered by multiple
patents.
Although a patent has a statutory presumption of validity in the United
States, the issuance of a patent is not conclusive as to such validity or as to
the enforceable scope of the claims of the patent. There can be no assurance
that patents of ALZA will not be successfully challenged in the future. In some
cases, third parties have initiated reexamination by the Patent and Trademark
Office of patents issued to ALZA. The validity or enforceability of ALZA patents
after their issuance have also been challenged in litigation. If the outcome of
such litigation is adverse to ALZA, third parties may then be able to use the
invention covered by the patent, in some cases without payment. There can be no
assurance that ALZA patents will not be infringed or successfully avoided
through design innovation.
It is also possible that third parties may obtain patent or other
proprietary rights that may be necessary or useful to ALZA. With numerous other
companies engaged in developing drug delivery technologies, it can be expected
that other parties may in some circumstances file patent applications or obtain
patents that compete in priority with ALZA's patent applications. Such
competition may result in adversarial proceedings such as patent interferences
and oppositions, which can increase the uncertainty of patent coverage. In cases
where third parties are first to invent a particular product or technology, it
is possible that those parties will obtain patents that will be sufficiently
broad so as to prevent ALZA from using certain technology or from further
developing or commercializing certain products. As ALZA expands its direct
marketing of products, ALZA may attempt to license-in products or compounds or
technologies for use in products. In each of these cases, if licenses from third
parties are necessary but cannot be obtained, commercialization of the products
would be delayed or prevented.
In addition, ALZA utilizes significant unpatented proprietary technology,
and there can be no assurance that others will not develop similar technology.
For a description of certain legal proceedings relating to patents, see
"Legal Proceedings" below.
COMPETITION
All of ALZA's current and future products will face competition both from
traditional forms of drug delivery and from advanced delivery systems being
developed by others. This competition potentially includes all of the
pharmaceutical companies in the world, including current ALZA clients. Many of
these other pharmaceutical companies have greater financial resources, technical
staff and manufacturing and marketing capabilities than ALZA. A number of
smaller companies also are developing drug delivery technologies. As ALZA
becomes increasingly involved in developing products, with TDC or otherwise,
that incorporate drugs that are off-patent or being developed by multiple
companies, ALZA may face increased competition from other companies developing
similar products.
11
<PAGE>
As the pharmaceutical industry continues to consolidate, and as pressures
increase for cost-effective research and development, some pharmaceutical
companies have reduced, and may continue to reduce, their funding of research
and development. Competition for limited client dollars may therefore increase,
and this competition could include the clients' internal research and
development programs, other drug delivery programs and other technologies and
products of third parties.
Competition in drug delivery systems is generally based on performance
characteristics and price. Acceptance by hospitals, physicians and patients is
crucial to the success of a product. Health care reimbursement policies of
managed care organizations, insurers and government agencies will continue to
exert pressure on pricing, and various federal and state agencies have enacted
regulations requiring rebates of a portion of the purchase price of many
pharmaceutical products. Cost-effectiveness, although often difficult to
measure, is becoming increasingly critical.
The health care industry has continued to change rapidly as the public,
government, medical practitioners and the pharmaceutical industry focus on ways
to expand medical coverage while controlling the growth in health care costs.
The growth of managed care organizations and the resulting pressures for
cost-containment in the United States health care system are expected to
continue to put pressures on the prices charged for pharmaceutical products.
Prescription drug reimbursement practices and the growth of 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 these changes may have on ALZA.
REVENUES
In 1995, ALZA received royalty revenue from 14 products in the marketplace.
More than 40% of ALZA's 1995 royalty revenue (more than 50% in 1994 and more
than 60% in 1993) has been the result of royalties on sales of Procardia
XL-Registered Trademark- by Pfizer in the United States. Because the basic
patents covering the drug nifedipine expired several years ago, other companies
are attempting to develop products similar to Procardia
XL-Registered Trademark-. To date no product has been introduced which is
bio-equivalent to Procardia XL-Registered Trademark-. If such a product were to
be developed and introduced, its marketing could have a significant impact on
Procardia XL-Registered Trademark- pricing and sales, and therefore on ALZA's
royalties.
Information as to ALZA's revenues is presented below:
<TABLE>
<CAPTION>
1995 1994 1993
----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Royalties and fees......................................................... $ 145,457 $ 123,748 $ 113,318
Research and development................................................... 103,972 68,715 46,783
Net sales.................................................................. 76,878 68,511 53,630
Interest and other......................................................... 24,317 17,782 20,451
----------- ----------- -----------
Total revenues......................................................... $ 350,624 $ 278,756 $ 234,182
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
Pfizer accounted for 23% of ALZA's total revenues in 1995, 30% in 1994 and
35% in 1993; TDC accounted for 20% of ALZA's total revenues in 1995 and 11% in
1994; Janssen accounted for 12% of ALZA's total revenues in 1995 and in 1994;
HMR (formerly Marion Merrell Dow Inc.) accounted for 10% of ALZA's total
revenues in 1995 and in 1993; and Ciba-Geigy accounted for 13% of ALZA's total
revenues in 1993. The loss of revenues from one or more of these clients would
have a material adverse effect on ALZA's profitability.
INDUSTRY SEGMENTS; EXPORTS
ALZA's business comprises one industry segment. Export sales were $20.1
million in 1995, $16.9 million in 1994 and $18.1 million during 1993,
principally to distributors and client companies in Europe.
12
<PAGE>
EMPLOYEES
On December 31, 1995, ALZA had 1,444 employees, of whom approximately 664
were engaged in research and development activities, approximately 458 were
engaged in manufacturing activities and the remainder were working in general,
administrative and marketing areas.
ITEM 2. PROPERTIES
ALZA's corporate offices are located in Palo Alto, California, and its two
research and development campuses are in Palo Alto and Mountain View,
California. ALZA also occupies a small research facility in Spring Lake Park,
Minnesota. ALZA's large-scale commercial manufacturing facility is located in
Vacaville, California. While ALZA believes that its 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.
ITEM 3. LEGAL PROCEEDINGS
A patent infringement suit was filed by Ciba-Geigy in December 1991 against
Marion Merrell Dow Inc. (now HMR) and ALZA in connection with the
commercialization of Nicoderm-Registered Trademark-. The suit, which was filed
in the United States District Court for the District of New Jersey, alleged that
a patent licensed to Ciba-Geigy was infringed by ALZA and HMR. Ciba-Geigy's
motion for preliminary injunction against the marketing of
Nicoderm-Registered Trademark- was denied in December 1991. ALZA and HMR filed
counterclaims against Ciba-Geigy, including antitrust claims. In October 1994,
the Court granted a motion for summary judgment brought by ALZA and HMR, ruling
the Ciba-Geigy patent invalid. Ciba-Geigy appealed that ruling, and in October
1995, the appellate court upheld the most significant portions of the summary
judgment decision, and sent back to the District Court the issue of validity as
to certain more limited patent claims. In January 1995 ALZA and HMR filed suit
against Ciba-Geigy and LTS Lohmann Therapy Systems Corporation in the United
States District Court for the Southern District of New York for infringement of
two United States patents issued to ALZA relating to the transdermal
administration of nicotine. The suit seeks damages and an injunction against
infringement of the ALZA patents.
During January 1994, a suit was filed against ALZA by Cygnus, Inc.
("Cygnus") 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. In April 1995 the District Court granted ALZA's motion to
dismiss the lawsuit. Cygnus has filed an appeal to the Court of Appeals of the
Federal Circuit.
From time to time during the past several years product liability suits have
been filed against Janssen and ALZA relating to the
Duragesic-Registered Trademark- product. Janssen manages the defense of these
suits in consultation with ALZA under an agreement between the parties.
ALZA has been named as a potentially responsible party in connection with
the cleanup and environmental remediation of the Hillview-Porter Regional Site
Project near ALZA's Palo Alto facilities. ALZA believes that it did not
discharge any of the chemicals of concern at this site. ALZA does not believe
that its liability in this matter, if any, will be material. However, because
the action involves many parties and multiple regulatory authorities, and the
cleanup and allocation of financial responsibility can take many years, it is
impossible to predict the timing or amount of ALZA's potential liability.
Historically, the cost of resolution of ALZA's 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 ALZA.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
13
<PAGE>
EXECUTIVE OFFICERS OF THE REGISTRANT
<TABLE>
<CAPTION>
NAME AGE PRINCIPAL OCCUPATIONS FOR PAST FIVE YEARS
- ----------------------------------- --- -------------------------------------------------------
<S> <C> <C>
Dr. Alejandro Zaffaroni............ 73 Co-Chairman of the Board (since 1987) and founder (in
1968) of ALZA; Chairman of the Board and Chief
Executive Officer (1968-1987); Chairman and Chief
Executive Officer of Affymax N.V., a drug discovery
company (1988-1995).
Dr. Ernest Mario................... 57 Co-Chairman of the Board and Chief Executive Officer of
ALZA (since 1993); Chief Executive of Glaxo Holdings,
p.l.c. (1989-1993); Chief Executive Officer of Glaxo,
Inc. (1988-1989).
Dr. Felix Theeuwes................. 58 President, Research and Development of ALZA (since
1994); Executive Vice President, Research and
Development of ALZA (1991-1994) and Chief Scientist of
ALZA (since 1982).
James Butler....................... 55 Vice President, Sales and Marketing of ALZA (since
1993); Vice President and General Manager of Glaxo,
Inc.'s corporate division (1987-1993).
Bruce C. Cozadd.................... 32 Vice President and Chief Financial Officer of ALZA
(since 1994); Vice President, Corporate Planning and
Analysis (1993); Manager, Strategic Projects
(1991-1993).
Harold Fethe....................... 51 Vice President, Human Resources of ALZA (since 1991);
Senior Director, Human Resources (1987-1991).
Dr. Gary V. Fulscher............... 52 Senior Vice President, Operations of ALZA (since 1994);
Vice President, Administration (1987-1994).
Dr. Samuel R. Saks................. 41 Senior Vice President, Medical Affairs of ALZA (since
1994); Vice President, Medical Affairs (1992-1994);
Vice President, Clinical Research, Oncology,
Schering-Plough Corporation (1991-1992); Vice
President, Clinical Research, XOMA Corporation
(1989-1991).
Peter D. Staple.................... 44 Vice President and General Counsel of ALZA (since
1994); Vice President and Associate General Counsel of
Chiron Corporation (1992-1994); Vice President (from
1990-1992) and Associate General Counsel of Cetus
Corporation (1983-1992).
Dr. James W. Young................. 51 Senior Vice President, Commercial Development of ALZA
(since October 1995); Vice President and Managing
Director of ALZA Technology Institute (June 1995 -
September 1995); President, Pharmaceuticals Division,
Affymax N.V., (1992-1995); Senior Vice President and
General Manager of Pharmaceuticals at Sepracor Inc.
(1987-1992).
</TABLE>
14
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
ALZA incorporates by reference the information concerning the market for its
common stock and related stockholder matters set forth at page 33 in the Annual
Report to Stockholders (the "Annual Report") attached as Exhibit 13.
ITEM 6. SELECTED FINANCIAL DATA
ALZA incorporates by reference the selected consolidated financial data set
forth at page 35 in the Annual Report.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
ALZA incorporates by reference Management's Discussion and Analysis of
Financial Condition and Results of Operations set forth at pages 1 to 10 in the
Annual Report.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ALZA incorporates by reference the consolidated financial statements and
notes thereto set forth at pages 11 to 31 and the Report of Ernst and Young LLP,
Independent Auditors, at page 32 in the Annual Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
ALZA incorporates by reference the information concerning its directors set
forth under the heading "Election of Directors" on pages 1 to 4 in ALZA's
definitive proxy statement dated April 1, 1996, for its Annual Meeting of
Stockholders to be held on May 23, 1996 (the "Proxy Statement"). Information
concerning ALZA's executive officers appears at the end of Part I of this report
on pages 20 and 21.
ITEM 11. EXECUTIVE COMPENSATION
ALZA incorporates by reference the information ("Summary Compensation
Table," "1995 Option Grants", "1995 Aggregated Option Exercises and Fiscal
Year-End Option Values" and "Certain Executive Agreements") set forth under the
heading "Executive Compensation" on pages 5 to 7 in the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
ALZA incorporates by reference the information set forth under the heading
"Beneficial Stock Ownership" on page 13 in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
ALZA incorporates by reference the information set forth under the heading
"Certain Transactions" on page 14 in the Proxy Statement.
15
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents filed as part of this Annual Report on Form 10-K:
1. Consolidated Financial Statements: Incorporated by reference to the
Annual Report (see accompanying Index to Consolidated Financial
Statements).
2. Consolidated Financial Statement Schedule: (see accompanying Index to
Consolidated Financial Statement Schedule).
3. Exhibits:
<TABLE>
<C> <S>
3.1 Restated Certificate of Incorporation of ALZA Corporation filed with the
Delaware Secretary of State on February 14, 1994(1)
3.2 Composite Bylaws of ALZA Corporation as restated on February 10, 1994 and
amended on August 11, 1994 and February 15, 1996
4.1 Indenture dated July 7, 1994 between ALZA Corporation and the Chase
Manhattan Bank, N.A. as Trustee, relating to ALZA's 5 1/4% Liquid Yield
Option-TM- Notes(2)
4.2 Specimen LYONs-TM- Certificate (included in Exhibit 4.1)
4.3 Form of Warrant Agreement between ALZA Corporation and the Chase Manhattan
Bank (with attached Warrant Certificate)(3)
4.4 Speciman Unit Certificate(3)
10.1 Technology License Agreement between ALZA Corporation and Therapeutic
Discovery Corporation(4)
10.2 Development Agreement between ALZA Corporation and Therapeutic Discovery
Corporation(4)
10.3 License Option Agreement between ALZA Corporation and Therapeutic Discovery
Corporation(4)
10.4 Restated Certificate of Incorporation of Therapeutic Discovery
Corporation(4)
10.5 Agreement Regarding Certain Products and Activities and Amendment No. 1 to
Development Agreement between ALZA Corporation and Therapeutic Discovery
Corporation
10.6 Executive Deferral Plans II(5)*
10.7 Executive Deferral Plan Amendments(6)*
10.8 Amendment Number 2 to Executive Deferral Plans II(7)*
10.9 ALZA Corporation Amended and Restated Stock Plan(8)*
10.10 Form of Executive Agreement between ALZA Corporation and Certain Executive
Officers*
11 Statement regarding computation of per share earnings
13 Portions of Annual Report to Stockholders expressly incorporated by
reference herein
21 Subsidiaries
23 Consent of Ernst & Young LLP, Independent Auditors
27 Financial Data Schedule
</TABLE>
(b) No reports on Form 8-K were filed during the quarter ended December 31,
1995.
- ------------------------------
(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-Q Quarterly Report for the
period ended June 30, 1994.
Footnotes continued on following page
16
<PAGE>
(3) Incorporated by reference to ALZA's Form 8-A Registration Statement
(Commission File No. 0-11234) dated March 31, 1993, as amended.
(4) Incorporated by reference to the Form 10 of Therapeutic Discovery
Corporation (Commission File No. 0-21478) dated March 31, 1993, as amended.
(5) Incorporated by reference to ALZA's Form 10-K Annual Report for the year
ended December 31, 1992, and ALZA's Form 10-Q Quarterly Report for the
period ended September 30, 1993.
(6) Incorporated by reference to ALZA's Form 10-K Annual Report for the year
ended December 31, 1992.
(7) Incorporated by reference to ALZA's Form 10-K Annual Report for the year
ended December 31, 1994.
(8) Incorporated by reference to ALZA's Form 10-Q for the quarter ended June
30, 1995.
* A management contract or compensatory plan or arrangement required to be
filed as an Exhibit pursuant to Item 14(c) of Form 10-K.
17
<PAGE>
ALZA CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS, REPORT OF
ERNST & YOUNG LLP, INDEPENDENT AUDITORS AND
CONSOLIDATED FINANCIAL STATEMENT SCHEDULE
(ITEM 14(A))
<TABLE>
<CAPTION>
PAGE NUMBER REFERENCE
--------------------------
ANNUAL REPORT
TO
STOCKHOLDERS FORM 10-K
-------------- ----------
<S> <C> <C>
Consolidated statement of income for the years ended December 31, 1995, 1994 and
1993................................................................................ 11
Consolidated balance sheet at December 31, 1995 and 1994............................. 12
Consolidated statement of stockholders' equity for the years ended December 31, 1995,
1994 and 1993....................................................................... 13
Consolidated statement of cash flows for the years ended December 31, 1995, 1994 and
1993................................................................................ 14
Notes to consolidated financial statements........................................... 15-31
Report of Ernst & Young LLP, Independent Auditors.................................... 32
The following consolidated financial statement schedule of ALZA Corporation is
included:
II -- Consolidated valuation and qualifying accounts................................. 19
</TABLE>
All other schedules have been omitted because the required information is
not present or is not present in amounts sufficient to require submission of the
schedule, or because the information required is included in the consolidated
financial statements, including the notes thereto.
18
<PAGE>
SCHEDULE II
ALZA CORPORATION
CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
BALANCE AT ADDITIONS
BEGINNING CHARGED TO DEDUCTIONS BALANCE AT
OF YEAR INCOME (WRITE-OFFS) END OF YEAR
---------- ---------- ------------ -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Allowance for doubtful
receivables:
1995......................... $259 $66 $(85) $240
----- --- --- -----
----- --- --- -----
1994......................... $211 $53 $ (5) $259
----- --- --- -----
----- --- --- -----
1993......................... $181 $31 $ (1) $211
----- --- --- -----
----- --- --- -----
</TABLE>
19
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
By /s/ [ERNEST MARIO]
-----------------------------------
Dr. Ernest Mario
Co-Chairman of the Board of
Directors, Director and
Chief Executive Officer
Date: March 29, 1996
20
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<C> <S> <C>
/s/ [ALEJANDRO ZAFFARONI] Co-Chairman of the Board
- ------------------------------------------- of Directors and Date: March 29, 1996
Dr. Alejandro Zaffaroni Director
Co-Chairman of the Board
/s/ [ERNEST MARIO] of Directors, Director
- ------------------------------------------- and Chief Executive Date: March 29, 1996
Dr. Ernest Mario Officer
/s/ [WILLIAM G. DAVIS]
- ------------------------------------------- Director Date: March 29, 1996
William G. Davis
/s/ [MARTIN S. GERSTEL]
- ------------------------------------------- Director Date: March 29, 1996
Martin S. Gerstel
/s/ [ROBERT J. GLASER]
- ------------------------------------------- Director Date: March 29, 1996
Dr. Robert J. Glaser
/s/ [DEAN O. MORTON]
- ------------------------------------------- Director Date: March 29, 1996
Dean O. Morton
/s/ [RUDOLPH A. PETERSON]
- ------------------------------------------- Director Date: March 29, 1996
Rudolph A. Peterson
/s/ [ISAAC STEIN]
- ------------------------------------------- Director Date: March 29, 1996
Isaac Stein
/s/ [JULIAN N. STERN]
- ------------------------------------------- Director Date: March 29, 1996
Julian N. Stern
Vice President, Chief
/s/ [BRUCE C. COZADD] Financial Officer and
- ------------------------------------------- Principal Accounting Date: March 29, 1996
Bruce C. Cozadd Officer
</TABLE>
21
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
- -----------
<C> <S> <C>
3.2 Composite Bylaws of ALZA Corporation as restated on February 10, 1994 and amended on August 11,
1994 and February 15, 1996
10.5 Agreement Regarding Certain Products and Activities and Amendment No. 1 to Development Agreement
ALZA Corporation and Therapeutic Discovery Corporation
10.10 Form of Executive Agreement between ALZA Corporation and Certain Executive Officers
11 Statement regarding computation of per share earnings
13 Portions of Annual Report to Stockholders expressly incorporated by reference into Annual Report
on Form 10-K
21 Subsidiaries
23 Consent of Ernst & Young LLP, Independent Auditors
27 Financial Data Schedule
</TABLE>
22
<PAGE>
Exhibit 3.2
COMPOSITE BYLAWS
OF
ALZA CORPORATION
REGISTERED OFFICE AND REGISTERED AGENT
1. REGISTERED OFFICE. The registered office of the corporation shall be
in the City of Wilmington County of New Castle, State of Delaware.
2. OTHER OFFICES. The corporation may also have offices at such other
places, both within or without the State of Delaware, as the Board of Directors
may from time to time determine or the business of the corporation may require.
MEETINGS OF STOCKHOLDERS
3. TIME AND PLACE OF MEETINGS. All meetings of the stockholders shall be
held at such time and place, either within or without the State of Delaware, as
shall be fixed by the Board of Directors and stated in the notice or waiver of
notice of the meeting.
4. ANNUAL MEETING. An annual meeting of the stockholders for the
election of directors and for the transaction of such other business as may
properly come before the meeting shall be held on such date and at such time and
place as the Board of Directors shall each year designate.
5. SPECIAL MEETINGS. Special meetings of the stockholders, for any
purpose or purposes prescribed in the notice of meeting, may be called only by
the Board of Directors, the Chairman of the Board or the President of the
corporation.
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6. NO ACTION WITHOUT MEETING. At any time when the corporation has more
than one stockholder of any class of capital stock, no action required to be
taken or which may be taken at any annual or special meeting of the stockholders
of such class of capital stock of the corporation may be taken without a
meeting, and the power of stockholders to consent in writing without a meeting,
to the taking of any action is specifically denied.
7. NOTICE.
(a) Written notice of the place, date, and time of all meetings of the
stockholders shall be given not less than ten nor more than 60 days before the
date on which the meeting is to be held to each stockholder entitled to vote at
such meeting, except as otherwise provided herein or required by law (meaning,
here and hereinafter, as required from time to time by the Delaware General
Corporation Law or the Certificate of Incorporation of the corporation).
(b) When a meeting is adjourned to another place, date or time, written
notice need not be given of the adjourned meeting if the place, date and time
thereof are announced at the meeting at which the adjournment is taken and the
adjournment is for not more than thirty days; provided, however, that if the
date of any adjourned meeting is more than thirty days after the date for which
the meeting was originally noticed, or if a new record date is fixed for the
adjourned meeting, written notice of the place, date and time of the adjourned
meeting shall be given in conformity herewith. At any adjourned meeting, any
business may be transacted which might have been transacted at the original
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meeting.
8. NOMINATIONS AND PROPOSALS.
(a) The Board of Directors of the corporation may nominate candidates for
election as directors of the corporation and may propose such other matters for
approval of the stockholders as the board deems necessary or appropriate.
(b) Any stockholder entitled to vote for directors may nominate candidates
for election as directors of the corporation; provided, however, that so long as
the corporation has more than one stockholder, no nominations for director of
the corporation by any person other than the Board of Directors shall be
presented to any meeting of stockholders unless the person making the nomination
is a record stockholder and shall have delivered a written notice to the
Secretary of the corporation no later than the close of business 60 days in
advance of the stockholder meeting or ten days after the date on which notice of
the meeting is first given to the stockholders, whichever is later. Such notice
shall (i) set forth the name and address of the person advancing such nomination
and the nominee, together with such information concerning the person making the
nomination and the nominee as would be required by the appropriate Rules and
Regulations of the Securities and Exchange Commission to be included in a proxy
statement soliciting proxies for the election of such nominee, and (ii) shall
include the duly executed written consent of such nominee to serve as director
if elected.
(c) No proposal by any person other than the Board of Directors shall be
submitted for the approval of the stockholders at any regular or special meeting
of the stockholders of the
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corporation unless the person advancing such proposal shall have delivered a
written notice to the Secretary of the corporation no later than the close of
business 60 days in advance of the stockholder meeting or ten days after the
date on which notice of the meeting is first given to the stockholders,
whichever is later. Such notice shall set forth the name and address of the
person advancing the proposal, any material interest of such person in the
proposal, and such other information concerning the person making such proposal
and the proposal itself as would be required by the appropriate Rules and
Regulations of the Securities and Exchange Commission to be included in a proxy
statement soliciting proxies for the proposal.
9. QUORUM AND REQUIRED VOTE.
(a) At any meeting of the stockholders, the holders of a majority of all
of the shares of the stock entitled to vote on the subject matter at the
meeting, present in person or by proxy shall constitute a quorum, unless or
except to the extent that the presence of a larger number may be required by
law. Except as provided in Section 42 of these bylaws or as may be required by
law, the affirmative vote of a majority of shares present in person or
represented by proxy at the meeting and entitled to vote on the subject matter
shall be the act of the stockholders.
(b) If a quorum shall fail to attend any meeting, the chairman of the
meeting or the holders of a majority of the shares of stock entitled to vote who
are present, in person or by proxy, may adjourn the meeting to another place,
date or time.
(c) If a notice of any adjourned special meeting of stockholders is sent
to all stockholders entitled to vote
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thereat, stating that it will be held with those present constituting a quorum,
then, except as provided in Section 42 of these bylaws or as otherwise required
by law, those present at such adjourned meeting shall constitute a quorum, and
all matters shall be determined by a majority of the votes cast at such meeting.
10. VOTE REQUIRED FOR BUSINESS COMBINATION.
(a) In addition to any affirmative vote required by law or this
Certificate of Incorporation, and except as expressly provided in Subparagraph
(b) of this Section 10, any Business Combination (as hereinafter defined) with a
Related Person (as hereinafter defined) shall require the affirmative vote of
the holders of at least eighty percent of the voting power of all of the then
outstanding shares of all classes of stock of the corporation entitled to vote
for the election of directors (the "Voting Stock"), voting together as a single
class. Such affirmative vote shall be required notwithstanding the fact that no
vote may be required, or that a lesser percentage may be specified, by law or in
any agreement.
(b) The provisions of this Section 10 shall not apply to any Business
Combination if:
(i) A majority of the Continuing Directors (as hereinafter defined)
of the corporation then in office has by resolution approved the Business
Combination either in advance of or subsequent to such Related Person's having
become a Related Person;
(ii) The Business Combination is solely between the
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corporation and another corporation, one hundred percent of the Voting Stock of
which is owned directly or indirectly by the corporation; or
(iii) The Business Combination is a merger or consolidation and the
cash or fair market value (as determined by a majority of the Continuing
Directors) of the property, securities or other consideration to be received per
share by holders of stock of the corporation in the Business Combination is not
less than the Highest Per Share Price or the Highest Equivalent Price (as these
terms are hereinafter defined) paid by the Related Person in acquiring any of
the corporation's stock.
(c) For the purpose of this Section 10:
(i) The term "Business Combination" shall mean (A) any merger or
consolidation of the corporation with or into a Related Person, (B) any sale,
lease, exchange, transfer or other disposition, including, without limitation, a
mortgage or any other security device, of assets of the corporation or any
subsidiary of the corporation, to a Related Person if such assets constitute a
Substantial Part (as hereinafter defined), (C) any merger or consolidation of a
Related Person with or into the corporation or a subsidiary of the corporation,
(D) the issuance of any securities of the corporation or a subsidiary of the
corporation to a Related Person, (E) any recapitalization that would have the
effect of increasing the voting power in the corporation of a Related Person,
and (F) any agreement, contract or other arrangement providing for any of the
transactions described in this definition of Business Combination.
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(ii) The term "Related Person" shall mean any individual,
corporation or other entity which, alone or together with (A) its "Affiliates"
and "Associates" (as defined in Rule 12b-2 of the General Rules and Regulations
under the Securities Exchange Act of 1934 as in effect at the date of the
adoption of this Section 10 by the stockholders of the corporation
(collectively, and as so in effect, the "Exchange Act")) or (B) members of a
"group" (as defined with reference to Section 13(d)(3) of the Exchange Act) of
which such individual, corporation or other entity is a member, "beneficially
owns" (as defined in Rule 13d-3 of the Exchange Act) shares of the outstanding
common stock of the corporation which, in the aggregate, have (or, in the case
of convertible securities, would have, if such convertible securities were, at
the time the determination is being made, convertible and had been converted) 20
percent or more of the total combined power to elect directors of the
corporation.
(iii) For the purposes of subparagraph (b)(iii) of this Section 10,
the term "other consideration to be received" shall include, without limitation,
common stock of the corporation retained by its existing stockholders in the
event of a Business Combination in which the corporation is the surviving
corporation.
(iv) The term "Continuing Director" shall mean a director who is
unaffiliated with the Related Person and who was a member of the Board of
Directors of the corporation immediately prior to the time that the Related
Person involved in a Business Combination became a Related Person.
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(v) The term "Substantial Part" shall mean assets having a book
value in excess of 30 percent of the book value of the total consolidated assets
of the corporation and its subsidiaries taken as a whole as of the end of its
most recent fiscal year ended prior to the time the determination is made.
(vi) The terms "Highest Per Share Price" and "Highest Equivalent
Price" shall mean the following: If there is only one class of capital stock of
the corporation issued and outstanding, the Highest Per Share Price shall mean
the highest price that can be determined by a majority of the Continuing
Directors then in office to have been paid at any time by the Related Person for
any share or shares of that class of capital stock. If there is more than one
class of capital stock of the corporation issued and outstanding, the Highest
Equivalent Price shall mean, with respect to each class of capital stock of the
corporation, the amount determined by a majority of the Continuing Directors
then in office, on whatever basis they believe is appropriate, to be the highest
per share price equivalent to the highest per share price that can be determined
to have been paid at any time by the Related Person for any share or shares of
any class of capital stock of the corporation. In determining the Highest Per
Share Price and Highest Equivalent Price, all purchases by the Related Person
shall be taken into account regardless of whether the shares were purchased
before or after the Related Person became a Related Person. Also, the Highest
Per Share Price and the Highest Equivalent Price shall include any brokerage
commissions, transfer taxes and soliciting dealers' fees paid by the Related
Person with respect to the shares of capital stock of the
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corporation acquired by the Related Person.
(d) A majority of the Continuing Directors of the corporation then in
office (including directors purporting, in good faith, to be Continuing
Directors) shall have the power and duty to determine, for the purposes of this
Section 10, on the basis of information then known to them, whether any
individual, corporation or other entity is a Related Person. Any such
determination made in good faith shall be conclusive and binding for all
purposes of this Section 10.
(e) The provisions set forth in this Section 10 may not be repealed or
amended in any respect without:
(i) The affirmative vote of not less than 80 percent of the Board
of Directors and of a majority of the Continuing Directors then in office, and
(ii) The affirmative vote of the holders of 80 percent or more of
the Voting Stock, voting together as a single class;
PROVIDED, HOWEVER, that the provisions of this paragraph (e) shall not apply to
any amendment or repeal of any provision of this Section 10 that is recommended
to the stockholders by a resolution adopted by (A) a majority of the Board of
Directors, and (B) not less than 80 percent of the Continuing Directors then in
office, in which case any such amendment or repeal shall require only the
affirmative vote of a majority of the Voting Stock.
11. ORGANIZATIONS. The Chairman of the Board or, in his or
her absence, the President of the corporation or, in the absence
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of both, such person as may be designated by the Board of Directors or, if there
is no such designation, such person as may be chosen by the holders of a
majority of the shares entitled to vote who are present, in person or by proxy,
shall call to order any meeting of the stockholders and act as chairman of the
meeting.
12. CONDUCT OF BUSINESS. The Chairman of any meeting of stockholders
shall determine the order of business and the procedure at the meeting,
including such regulation of the manner of voting and the conduct of discussion
as seem to him or her in order.
13. PROXIES AND VOTING. At any meeting of the stockholders, every
stockholder entitled to vote may vote in person or by proxy authorized by an
instrument in writing filed in accordance with the procedures established for
the meeting.
14. STOCK LIST. A complete list of stockholders entitled to vote at any
meeting of stockholders, arranged in alphabetical order and showing the address
of each such stockholder and the number of shares of each class registered in
his or her name, shall be open to the examination of any stockholder, for any
purpose germane to the meeting, during ordinary business hours for a period of
at least ten days prior to the meeting, either at a place within the city where
the meeting is to be held, which place shall be specified in the notice of the
meeting or, if not so specified, at the place where the meeting is to be held.
The stock list shall also be kept at the place of the meeting during the whole
time thereof and shall be open to the examination of any stockholder present.
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BOARD OF DIRECTORS
15. POWERS. The business and affairs of the corporation shall be managed
by or under the direction of its Board of Directors.
16. NUMBER, CLASSIFICATION AND TERM OF OFFICE. The number of directors of
the corporation who shall constitute the whole board shall be seven but may be
increased or decreased from time to time either by a resolution or bylaw duly
adopted by the Board of Directors. The Board of Directors shall be and is
divided into three classes: Class I, Class II and Class III, which shall be as
nearly equal in number as possible. Each director shall serve for a term ending
on the date of the third annual meeting of stockholders following the annual
meeting at which the director was elected; provided, however, that each initial
director in Class I shall hold office until the annual meeting of stockholders
in 1988; each initial director in Class II shall hold office until the annual
meeting of stockholders in 1989; and each initial director in Class III shall
hold office until the annual meeting of stockholders in 1990. Notwithstanding
the foregoing, each director shall serve until his successor is duly elected and
qualified or until his death, resignation or removal.
[Section 16 amended by the Board
of Directors on February 15, 1996,
effective May 23, 1996]
17. REMOVAL. Any director may be removed from office, only with cause, by
the holders of a majority of the shares entitled to vote in an election of
directors.
18. RESIGNATIONS. A director may resign at any time by giving written
notice to the corporation. Such resignation shall be effective when given
unless the director specifies a later time. The resignation shall be effective
regardless of whether
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it is accepted by the corporation.
19. NEWLY-CREATED DIRECTORSHIPS AND VACANCIES. In the event of any
increase or decrease in the authorized number of directors, any newly-created or
eliminated directorships resulting from such increase or decrease shall be
apportioned by the Board of Directors among the three classes of directors so as
to maintain such classes as nearly equal in number as possible. No decrease in
the number of directors constituting the Board of Directors shall shorten the
term of any incumbent director. Newly-created directorships resulting from any
increase in the number of directors and any vacancies on the Board of Directors
resulting from death, resignation, disqualification, removal or other cause
shall be filled by the affirmative vote of a majority of the remaining directors
then in office (and not by stockholders), even though less than a quorum of the
Board of Directors. Any director elected in accordance with the preceding
sentence shall hold office for the remainder of the full term of the class of
directors in which the new directorship was created or the vacancy occurred and
until such director's successor shall have been elected and qualified.
20. REGULAR MEETINGS. Regular meetings of the Board of Directors shall be
held at such place or places, on such date or dates, and at such time or times
as shall have been established by the Board of Directors and publicized among
all directors. A notice of each regular meeting shall not be required.
21. SPECIAL MEETINGS. Special meetings of the Board of Directors may be
called by the Chairman of the Board, the President or any two directors.
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22. NOTICE OF MEETINGS.
(a) Special meetings, and regular meetings not fixed as provided in these
Bylaws, shall be held upon four days' notice by mail or two days' notice
delivered personally or by telephone or telegraph to each director who does not
waive such notice. The notice shall state the place, date and time of the
meeting. Unless otherwise indicated in the notice, any and all business may be
transacted at a special meeting.
(b) Notice of a reconvened meeting need not be given if the place, date
and time of the reconvened meeting are announced at the meeting at which the
adjournment is taken and the adjournment is not for more than 24 hours. If a
meeting is adjourned for more than 24 hours, notice of the reconvened meeting
shall be given prior to the time of that reconvened meeting to the directors who
were not present at the time of the adjournment.
23. ACTION WITHOUT MEETING. Except as required by law, any action
required or permitted to be taken at any meeting of the Board of Directors or
any committee thereof may be taken without a meeting if all members of the Board
of Directors or any committee thereof, as the case may be, consent thereto in
writing, and the writing or writings are filed with the minutes of the Board of
Directors or committee.
24. MEETING BY TELEPHONE. Except as required by law, members of the Board
of Directors or any committee thereof may participate in the meeting of the
Board of Directors or committee by means of conference telephone or similar
communications equipment if all persons who participate in the meeting can hear
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each other. Such participation in a meeting shall constitute presence in person
at such meeting.
25. QUORUM AND MANNER OF ACTING. At any meeting of the Board of
Directors, a majority of the directors then in office shall constitute a quorum
for all purposes. A meeting at which a quorum is initially present may continue
to transact business notwithstanding the withdrawal of directors. If a quorum
shall fail to attend any meeting, a majority of those present may adjourn the
meeting to another place, date or time, without further notice or waiver
thereof. Except as provided herein, the act of the majority of the directors
present at any meeting at which a quorum is present shall be the act of the
Board of Directors.
26. COMMITTEES OF THE BOARD OF DIRECTORS. The Board of Directors by a
vote of a majority of the whole Board, may from time to time designate
committees of the Board, with such lawfully delegable powers and duties as it
thereby confers, to serve at the pleasure of the Board and shall for those
committees and any others provided for herein, elect a director or directors to
serve as the member or members, designating, if it desires, other directors as
alternate members who may replace any absent or disqualified member at any
meeting of the committee. Any committee so designated may exercise the power
and authority of the Board of Directors to declare a dividend or to authorize
the issuance of stock if the resolution which designates the committee or a
supplemental resolution of the Board of Directors shall so provide. The
principles set forth in Sections 15
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through 25 of these Bylaws shall apply to committees of the Board of Directors
and to actions taken by such committees. All members of any Audit Committee of
this Company designated by the Board of Directors shall be directors who are not
also employees of the corporation.
27. COMPENSATION OF DIRECTORS. Unless otherwise restricted by the
Certificate of Incorporation or these Bylaws, the Board of Directors shall have
the authority to fix the compensation of directors. The directors may be paid
their expenses, if any, of attendance at each meeting of the Board of Directors
or a committee thereof, and may receive fixed fees and other compensation for
their services as directors. No such payment shall preclude any director from
serving the corporation in any other capacity and receiving compensation for
such service.
OFFICERS
28. TITLES. The officers of the corporation shall be chosen by the Board
of Directors and shall include a Chairman of the Board or a President or both, a
Secretary and a Treasurer. The Board of Directors may also appoint one or more
Vice Presidents, Assistant Secretaries, Assistant Treasurers or other officers.
Any number of offices may be held by the same person. All officers shall perform
their duties and exercise their powers subject to the Board of Directors.
29. ELECTION, TERM OF OFFICE AND VACANCIES. The officers shall be elected
annually by the Board of Directors at its regular meeting following the annual
meeting of the stockholders,
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and each officer shall hold office until the next annual election of officers
and until the officer's successor is elected and qualified, or until the
officer's death, resignation or removal. Any officer may be removed at any
time, with or without cause, by the Board of Directors. Any vacancy occurring
in any office may be filled by the Board of Directors.
30. RESIGNATION. Any officer may resign at any time upon notice to the
corporation without prejudice to the rights, if any, of the corporation under
any contract to which the officer is a party. The resignation of an officer
shall be effective when given unless the officer specifies a later time. The
resignation shall be effective regardless of whether it is accepted by the
corporation.
31. CHIEF EXECUTIVE OFFICER. The Board of Directors shall designate
either the Chairman of the Board or the President as the chief executive officer
and may prescribe the duties and powers of the chief executive officer. In the
absence of such a designation, the Chairman of the Board shall be the chief
executive officer. If there is no Chairman of the Board, the President shall be
the chief executive officer. Subject to the provisions of these Bylaws and to
the direction of the Board of Directors, the chief executive officer shall have
the responsibility for the general management and control of the business and
affairs of the corporation and shall perform all duties and have all powers
which are commonly incident to the office of chief executive or which are
delegated to him or her by the Board of Directors. Either the Chairman of the
Board or the
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President and such other officers as may, from time to time, be expressly
designated by the Board of Directors shall have power to sign all stock
certificates, contracts and other instruments of the corporation which are
authorized.
32. SECRETARY AND ASSISTANT SECRETARIES. The Secretary shall issue all
authorized notices for, and shall keep minutes of, all meetings of the
stockholders and the Board of Directors. He or she shall have charge of the
corporate books and shall perform such other duties as the Board of Directors
may from time to time prescribe. At the request of the Secretary, or in the
Secretary's absence or disability, any Assistant Secretary shall perform any of
the duties of the Secretary and when so acting shall have all the powers of, and
be subject to all the restrictions upon, the Secretary.
33. TREASURER AND ASSISTANT TREASURERS. Unless the Board of Directors
designates another chief financial officer, the Treasurer shall be the chief
financial officer of the corporation. Unless otherwise determined by the Board
of Directors or the chief executive officer, the Treasurer shall have custody of
the corporate funds and securities, shall keep adequate and correct accounts of
the corporation's properties and business transactions, shall disburse such
funds of the corporation as may be ordered by the Board or the chief executive
officer (taking proper vouchers for such disbursements), and shall render to the
chief executive officer and the Board, at regular meetings of the Board or
whenever the Board may require, an account of all transactions and the financial
condition of the
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corporation. At the request of the Treasurer, or in the Treasurer's absence or
disability, any Assistant Treasurer may perform any of the duties of the
Treasurer and when so acting, shall have all the powers of, and be subject to
all the restrictions upon, the Treasurer.
34. OTHER OFFICERS. The other officers of the corporation, if any, shall
exercise such powers and perform such duties as the Board of Directors or the
chief executive officer shall prescribe.
35. COMPENSATION. The Board of Directors shall fix the compensation of
the chief executive officer and may fix the compensation of other employees of
the corporation, including the other officers. If the Board does not fix the
compensation of the other officers, the chief executive officer shall fix such
compensation.
36. ACTIONS WITH RESPECT TO SECURITIES OF OTHER CORPORATIONS. Unless
otherwise directed by the Board of Directors, the Chairman of the Board, the
President or any officer of the corporation authorized by the Chairman of the
Board or the President, shall have power to vote and otherwise act on behalf of
the corporation, in person or by proxy, at any meeting of stockholders of, or
with respect to any action of stockholders of, any other corporation in which
the corporation may hold securities and otherwise shall have power to exercise
any and all rights and powers which the corporation may possess by reason of its
ownership of securities in such other corporation.
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STOCK AND DIVIDENDS
37. CERTIFICATES OF STOCK. Each stockholder shall be entitled to a
certificate signed by, or in the name of, the corporation by the Chairman, the
President or a Vice President, and by the Secretary or an Assistant Secretary,
or the Treasurer or an Assistant Treasurer, certifying the number of shares
owned by him or her. Any or all of the signatures on the certificates may be
facsimile.
38. TRANSFERS OF STOCK. Transfers of stock shall be made only upon the
transfer books of the corporation kept at an office of the corporation or by
transfer agents designated to transfer shares of the stock of the corporation.
Except where a certificate is issued in accordance with the next sentence of
this Section, an outstanding certificate for the number of shares involved shall
be surrendered for cancellation before a new certificate is issued therefor. In
the event of the loss, theft or destruction of any certificate of stock, another
may be issued in its place pursuant to such regulations as the Board of
Directors may establish concerning proof of such loss, theft or destruction and
concerning the giving of a satisfactory bond or bonds of indemnity.
39. REGULATIONS. The issue, transfer, conversion and registration of
certificates of stock shall be governed by such other regulations as the Board
of Directors may establish.
RECORD DATE
40. RECORD DATE. In order that the corporation may determine the
stockholders entitled to notice of or to vote at
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any meeting of stockholders or any adjournment thereof, or entitled to receive
payment of any dividend or other distribution or allotment of any rights, or
entitled to exercise any rights in respect of any change, conversion or exchange
of stock or for the purpose of any other lawful action, the Board of Directors
may fix in advance, a record date, which shall not be more than 60 nor less than
ten days before the date of such meeting, nor more than 60 days prior to any
other action. If no record date is fixed, the record date (1) for determining
stockholders entitled to notice of or to vote at a meeting of stockholders shall
be at the close of business on the day next preceding the day on which notice is
given or, if notice is waived, at the close of business on the day next
preceding the day on which the meeting is held; and (2) for determining
stockholders for any other purpose shall be at the close of business on the day
on which the Board of Directors adopts the resolution relating thereto. A
determination of stockholders of record entitled to notice of or to vote at a
meeting of stockholders shall apply to any adjournment of the meeting; provided,
however, that the Board of Directors may fix a new record date for the
reconvened meeting.
WAIVER OF NOTICE
41. WAIVER OF NOTICE. Whenever notice is required to be given by law or
these Bylaws, a written waiver of notice, signed by the person entitled to
notice, whether before or after the time stated therein, shall be deemed
equivalent to notice. Attendance of a person at a meeting shall constitute a
waiver of notice of such meeting, except when the person attends a meeting
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for the express purpose of objecting, at the beginning of the meeting, to the
transaction of any business because the meeting is not lawfully called or
convened. Unless so required by the Certificate of Incorporation or these
Bylaws, neither the business to be transacted at, nor the purpose of, any
regular or special meeting of the stockholders, directors or members of a
committee of directors need be specified in any written waiver of notice.
AMENDMENTS
42. AMENDMENTS. These Bylaws may be amended or repealed or new bylaws may
be adopted by the stockholders or by the Board of Directors. Notwithstanding
the foregoing, no provision of Section 10 may be amended or repealed except in
accordance with Section 10(e) and no provision of Sections 16 or 19 may be
amended or repealed except by a resolution adopted by the affirmative vote of
not less than 75% of the members of the Board of Directors or by the affirmative
vote of the holders of at least 80% of the outstanding shares of capital stock
entitled to vote in an election of directors.
MISCELLANEOUS
43. FISCAL YEAR. The fiscal year of the corporation shall be as fixed by
the Board of Directors.
44. TIME PERIODS. In applying any provision of these Bylaws which
requires that an act be done or not done within a specified number of days prior
to an event or that an act be done during a period of a specified number of days
prior to an event,
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calendar days shall be used, the day of the doing of the act shall be excluded,
and the day of the event shall be included.
45. FACSIMILE SIGNATURES. In addition to the provisions for use of
facsimile signatures elsewhere specifically authorized in these Bylaws,
facsimile signatures of any officer or officers of the corporation may be used
whenever and as authorized by the Board of Directors.
46. CORPORATE SEAL. The Board of Directors may provide a suitable seal,
containing the name of the corporation, which seal shall be in the charge of the
Secretary. Duplicates of the seal may be kept and used by the Treasurer or by
an Assistant Secretary or Assistant Treasurer.
47. RELIANCE UPON BOOKS, REPORTS AND RECORDS. Each director, each member
of any committee designated by the Board of Directors, and each officer of the
corporation shall, in the performance of his or her duties, be fully protected
in relying in good faith upon the books of account or other records of the
corporation, including reports made to the corporation by any of its officers,
by an independent certified public accountant or by an appraiser.
48. INDEMNIFICATION OF EMPLOYEES. Each person who was or is made a party
or is threatened to be made a party to or is involved in any action, suit or
proceeding, whether civil, criminal, administrative or investigative ("a
proceeding"), because he or she is or was an employee of the corporation or is
or was serving at the request of the corporation as a director, officer,
employee, agent or trustee of another corporation, partnership, joint venture,
trust or other enterprise (including service with respect to employee benefit
plans from the date of plan adoption), shall be indemnified and held harmless by
the corporation against all expense, liability and loss (including attorneys'
fees, judgments, penalties, fines, Employee Retirement Income Security Act of
1974 excise taxes or penalties, and amounts paid or to be paid in settlement)
reasonably incurred or suffered by such person in connection therewith; provided
in any event that such person acted in good faith and in a manner he or she
reasonably believed to be in, or not opposed to, the best interests of the
corporation; and provided further that the corporation shall indemnify any such
person seeking indemnification in connection with a proceeding (or part thereof)
initiated by such person only if the proceeding (or part thereof) was authorized
by the Board of Directors of the corporation. Such indemnification shall
continue as to a person who has ceased to be an employee and shall inure to the
benefit of his or her heirs, executors or administrators.
[Section 48 adopted by the Board
of Directors on August 11, 1994]
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EXHIBIT 10.5
AGREEMENT REGARDING CERTAIN
PRODUCTS AND ACTIVITIES AND
AMENDMENT NO. 1 TO DEVELOPMENT AGREEMENT
DATED AS OF MARCH 10, 1993
This Agreement Regarding Certain Products and Activities and Amendment
No. 1 to Development Agreement dated as of March 10, 1993 (the "Agreement") is
made effective as of October 25, 1994 by and between ALZA Corporation, a
Delaware corporation ("ALZA"), and Therapeutic Discovery Corporation, a
Delaware corporation ("TDC").
RECITALS
WHEREAS, ALZA and TDC have entered into that certain Development
Agreement dated as of March 10, 1993 (the "Development Contract") pursuant to
which ALZA performs research and development activities on behalf of TDC
directed toward the development of pharmaceutical products; and
WHEREAS, ALZA is marketing, on its own behalf, a Testoderm-Registered
Trademark- Testosterone Transdermal System, consisting of a multilayered patch
for the delivery of testosterone ("Testoderm-Registered Trademark-"); and
WHEREAS, Testoderm-Registered Trademark- has been approved in the United
States by the United States Food and Drug Administration (the "FDA") for
marketing only as a treatment for testosterone deficiency in hypogonadal males;
and
WHEREAS, TDC and ALZA desire that TDC fund a program, including further
clinical testing, to be conducted by ALZA with respect to Testoderm-Registered
Trademark-, with the goal of receiving clearance to market Testoderm-Registered
Trademark- for the treatment of AIDS wasting syndrome (the
"Testoderm-Registered Trademark- Development Program"); and
WHEREAS, such an arrangement is not currently contemplated within the
terms of the Development Contract; and
WHEREAS, under the terms of the Development Contract, ALZA is currently
performing research and development activities on behalf of TDC directed toward
the development of an additional product or products for the delivery of
testosterone (any such product is hereby referred to as a "Second Generation
Testoderm-Registered Trademark- Product"); and
WHEREAS, ALZA desires to expand the use of its drug delivery
technologies to biotechnology, gene therapy and other areas and, to this end,
would like to evaluate
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proprietary compounds without extensive business negotiations with the third
party who owns the rights to such compounds before determining whether ALZA's
drug delivery technologies will be useful with such compounds; and
WHEREAS, TDC and ALZA desire that TDC fund such material evaluation
activities, on a project-by-project basis; and
WHEREAS, such an arrangement is not currently contemplated within the
terms of the Development Contract:
NOW, THEREFORE, in consideration of the foregoing and the agreements
contained herein, ALZA and TDC hereby agree as follows:
1. FUNDING OF TESTODERM-REGISTERED TRADEMARK- DEVELOPMENT PROGRAM. In
consideration of the royalty payments set forth in Section 4 of this Agreement,
TDC hereby agrees to fund the Testoderm-Registered Trademark-Development
Program in amounts as approved by TDC from time to time (the "Development
Payments"). The Testoderm-Registered Trademark- Development Program shall be
set forth in a work plan prepared by ALZA which is subject to the approval of
TDC, and the parties agree to revise such work plan from time to time so that
it remains a faithful best estimate of the work to be done under the
Testoderm-Registered Trademark- Development Program as agreed upon by ALZA and
TDC. TDC shall not be obligated to make Development Payments in excess of
those expressly approved by TDC and ALZA shall not be obligated to perform work
on the Testoderm-Registered Trademark- Development Program which would result
in Development Payments exceeding amounts expressly approved by TDC. ALZA and
TDC agree that the Development Payments shall be made on the same basis as
"Development Costs" (as defined in the Development Contract) and shall
constitute "Development Costs" within the meaning of Sections 4.2, 5.1 and 5.3
of the Development Contract and that the funding of the Testoderm-Registered
Trademark- Development Program constitutes an activity undertaken pursuant to
the Development Contract within the meaning of Section 10.1 thereof; as such,
Development Payments are intended to be included as part of the "total amount
paid by this corporation under the Development Contract" for purposes of
Article FIFTH, Section (A)(10)(c) of the Restated Certificate of Incorporation
of TDC, as part of "expenditure[s] pursuant to the Development Contract" for
purposes of Article FIFTH, Section (A)(2) of the Restated Certificate of
Incorporation of TDC, as part of "the total amounts paid by this corporation
pursuant to the Development Contract" for purposes of Article FIFTH, Section
(A)(14) of the Restated Certificate of Incorporation of TDC, and as part of
"any additional amounts paid by this corporation pursuant to the Development
Contract" for purposes of Article FIFTH, Section (A)(5) of the Restated
Certificate of Incorporation of TDC. Notwithstanding the foregoing, TDC and
ALZA confirm and agree that Testoderm-Registered Trademark- shall not be
considered a "Product" within the meaning of the Development Contract, the
Technology License Agreement between ALZA and TDC dated as of March 10, 1993
(the "Technology License Agreement") and the License
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Option Agreement between ALZA and TDC dated as of March 10, 1993 (the "License
Option Agreement").
2. DEVELOPMENT OF SECOND GENERATION TESTODERM-REGISTERED
TRADEMARK-PRODUCT. Except with respect to the royalty payments set forth in
Section 4 of this Agreement, TDC and ALZA hereby confirm that the Second
Generation Testoderm-Registered Trademark- Product is being developed by ALZA
for TDC under, and the relationship of the parties with respect to the Second
Generation Testoderm-Registered Trademark- Product is governed by the terms of,
the Development Contract, the Technology License Agreement and the License
Option Agreement.
3. MATERIAL EVALUATION PROJECTS.
(a) ACCEPTANCE OF MATERIAL EVALUATION PROJECTS. From time to
time, ALZA will provide TDC with work plans and cost estimates for evaluations
of identified proprietary compounds ("Material Evaluation Candidates"). Such
evaluations will include the preparation of preliminary, abbreviated commercial
assessments and an examination of technical feasibility. Within 45 days after
ALZA provides TDC with such a recommendation for a Material Evaluation
Candidate, TDC shall notify ALZA in writing of its acceptance or rejection of
such Material Evaluation Candidate. Upon written acceptance of a Material
Evaluation Candidate by TDC, such Material Evaluation Candidate shall be deemed
to be a "Material Evaluation Project."
(b) FUNDING OF MATERIAL EVALUATION PROJECTS. In consideration of
the royalty payments set forth in Section 4 of this Agreement, TDC hereby hires
ALZA to perform the Material Evaluation Projects and agrees to fund the
Material Evaluation Projects in amounts to be approved by TDC from time to time
(the "Project Payments"). The Material Evaluation Projects shall be set forth
in work plans prepared by ALZA which are subject to the approval of TDC, and
the parties agree to revise approved work plans from time to time so that they
remain faithful best estimates of the work to be done under the Material
Evaluation Projects as agreed upon by ALZA and TDC. TDC shall not be obligated
to make Project Payments in excess of those expressly approved by TDC, and ALZA
shall not be obligated to perform work on the Material Evaluation Projects
which would result in Project Payments exceeding amounts expressly approved by
TDC. ALZA and TDC agree that the Project Payments shall be made on the same
basis as "Development Costs" (as defined in the Development Contract) and shall
constitute "Development Costs" within the meaning of Sections 4.2, 5.1 and 5.3
of the Development Contract and that the funding of the Material Evaluation
Projects constitutes an activity undertaken pursuant to the Development
Contract within the meaning of Section 10.1 thereof; as such, Project Payments
are intended to be included as part of the "total amount paid by this
corporation under the Development Contract" for purposes of Article FIFTH,
Section (A)(10)(c) of the Restated Certificate of Incorporation of TDC, as part
of
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"expenditure[s] pursuant to the Development Contract" for purposes of Article
FIFTH, Section (A)(2) of the Restated Certificate of Incorporation of TDC, as
part of "the total amounts paid by this corporation pursuant to the Development
Contract" for purposes of Article FIFTH, Section (A)(14) of the Restated
Certificate of Incorporation of TDC, and as part of "any additional amounts
paid by this corporation pursuant to the Development Contract" for purposes of
Article FIFTH, Section (A)(5) of the Restated Certificate of Incorporation of
TDC. Notwithstanding the foregoing, TDC and ALZA confirm and agree that such
Material Evaluation Projects are not "Products" within the meaning of the
Development Contract, the Technology License Agreement and the License Option
Agreement, unless and until accepted for development as a "Product" under the
terms set forth in the Development Contract.
4. NEW SECTION 7.4A OF THE DEVELOPMENT CONTRACT. In consideration of
the foregoing, a new Section 7.4A is hereby added to the Development Contract
as follows:
"7.4A ROYALTIES ON CERTAIN PRODUCTS AND ACTIVITIES. For purposes
of this Section 7.4A only, capitalized terms not otherwise defined in
this Agreement shall have the meanings ascribed to them in that certain
Agreement Regarding Certain Products and Activities and Amendment No. 1
to Development Agreement (the "Amendment"), which Amendment is effective
as of October 25, 1994.
(a) TESTODERM-REGISTERED TRADEMARK-. In consideration of
TDC's making Development Payments with respect to Testoderm-
Registered Trademark- pursuant to the Amendment, upon receiving
clearance from the FDA to market Testoderm-Registered Trademark-
as a treatment for AIDS wasting syndrome, ALZA shall pay TDC
royalties with respect to Testoderm-Registered Trademark- as
follows: (i) up to a maximum of 5% of worldwide Net Sales of
Testoderm-Registered Trademark- determined as follows: 1% of such
Net Sales, plus an additional 0.1% of such Net Sales for each full
one million dollars of Development Payments with respect to
Testoderm-Registered Trademark- paid by TDC; plus (ii) up to a
maximum of 50% of worldwide Sublicensing Revenues in respect of
sales of Testoderm-Registered Trademark- determined as follows:
10% of such Sublicensing Revenues, plus an additional 1% of such
Sublicensing Revenues for each full one million dollars of
Development Payments with respect to Testoderm-Registered Trademark-
paid by TDC. In determining payments due under this Section
7.4A(a), Net Sales and Sublicensing Revenues shall be reduced by
the dollar amount of any license or similar payments made to third
parties by ALZA or its Affiliates with respect to the sales of
Testoderm-Registered Trademark-. In determining payments under
this Section 7.4A(a) for any year, the amount of applicable
Development Payments shall be determined as of December 31 of the
preceding calendar year.
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(b) SECOND GENERATION TESTODERM-REGISTERED TRADEMARK-
PRODUCT. If ALZA exercises its License Option with respect to the
Second Generation Testoderm-Registered Trademark- Product, ALZA
shall pay TDC royalties as follows: (i) in any calendar quarter
in which worldwide Net Sales of Testoderm-Registered Trademark-
are greater than worldwide Net Sales of the Second Generation
Testoderm-Registered Trademark- Product, then ALZA shall pay TDC
royalties under the terms set forth in the License Agreement in
the form attached as Exhibit A to the License Option Agreement;
and (ii) in any calendar quarter in which worldwide Net Sales of
Testoderm-Registered Trademark- are less than worldwide Net Sales
of the Second Generation Testoderm-Registered Trademark- Product,
then ALZA shall pay TDC the royalties set forth in Section
7.4A(b)(i) PLUS the royalties set forth in Section 7.4A(a).
Notwithstanding the terms of the License Option Agreement and the
License Agreement in the form attached as Exhibit A thereto, ALZA
and TDC hereby agree that any License Agreement entered into with
respect to the Second Generation Testoderm-Registered Trademark-
Product will reflect the foregoing revised royalty structure.
(c) ROYALTIES IN CONNECTION WITH MATERIAL EVALUATION
PROJECTS. In consideration of TDC making Project Payments with
respect to Material Evaluation Projects pursuant to the Amendment,
if any Material Evaluation Project results in an arrangement
whereby the third party who holds the rights to the proprietary
compound being studied funds the ongoing costs of a development
program conducted by ALZA for a product incorporating such
compound (a "Project Product"), ALZA shall pay TDC royalties with
respect to each such Project Product as follows: (i) up to a
maximum of 5% of worldwide Net Sales of such Project Product
determined as follows: 2% of such Net Sales, plus an additional
0.1% of such Net Sales for each full one million dollars of
Project Payments paid by TDC with respect to such Project Product;
plus (ii) up to a maximum of 50% of worldwide Sublicensing
Revenues with respect of sales of such Project Product determined
as follows: 20% of such Sublicensing Revenues, plus an additional
1% of such Sublicensing Revenues for each full one million dollars
of Project Payments paid by TDC with respect to such Project
Product. If any Material Evaluation Project results in an
arrangement whereby TDC funds the ongoing costs of a development
program conducted by ALZA and TDC for a Project Product accepted
for development as a "Product" under the terms set forth in the
Development Contract, such Project Product shall in all respects
be a "Product" within the meaning of the Development Contract, the
Technology License Agreement and the License Option Agreement and,
if ALZA exercises its License Option for such Project Product,
ALZA shall pay TDC royalties for such Project Product under the
terms set forth in the License Agreement in the form attached as
Exhibit A to the
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License Option Agreement (and Project Payments with respect to such
Project Product shall be included in Development Costs for purposes
of calculating the royalties due to TDC thereunder.) If any
Material Evaluation Project results in a product development and
commercialization arrangement other than an arrangement whereby
either (i) the third party who owns the rights to the proprietary
compound being studied, or (ii) TDC, funds the ongoing costs of a
development program conducted by ALZA for a Project Product, ALZA
and TDC agree to negotiate in good faith an alternative payment
structure or other economic arrangement to compensate TDC for
making Project Payments with respect to the Material Evaluation
Project. In determining payments due under this Section 7.4A(c),
Net Sales and Sublicensing Revenues shall be reduced by the dollar
amount of any license or similar payments made to third parties by
ALZA or its Affiliates with respect to sales of the relevant Project
Product. In determining payments under this Section 7.4A(c) for any
year, the amount of applicable Project Payments shall be determined
as of December 31 of the preceding calendar year."
ALZA and TDC hereby confirm and agree that the royalties or other
payments to TDC described in Section 7.4A of the Development Contract, as
amended by this Agreement, are intended to be included within the definition of
"Royalties" as such term is defined in the Restated Certificate of
Incorporation of TDC.
5. AMENDMENTS TO SECTIONS 7.6 OF THE DEVELOPMENT CONTRACT. Section
7.6 of the Development Contract is hereby amended so that each reference to
"Section 7.4" is deleted and replaced with a reference to "Sections 7.4,
7.4A(a) and 7.4A(c)" and to add the words "Testoderm-Registered Trademark- and
Project Product" after the term "Other Royalty-Bearing Product."
6. APPROVAL OF BOARDS OF DIRECTORS. ALZA and TDC represent and
warrant, each to the other, that the foregoing amendments to the Development
Contract have been approved by their respective Boards of Directors prior to
execution of this Agreement.
7. INDEMNIFICATION. ALZA shall indemnify, defend and hold TDC
harmless from and against any and all liabilities, claims, demands, damages,
costs, expenses or money judgments rendered against TDC and its Affiliates (as
defined in the Development Contract), which arise out of the use, design,
labeling or manufacture, processing, packaging, sale or commercialization of
Testoderm-Registered Trademark- by ALZA, its Affiliates (as defined in the
Development Contract), subcontractors and sublicensees. TDC shall permit
ALZA's attorneys, at ALZA's discretion and cost, to handle and control the
defense of any claims or suits as to which TDC may be entitled to indemnity
hereunder, and TDC agrees not to settle any such claims or suits without
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the prior written consent of ALZA. TDC shall give ALZA prompt notice in
writing, in the manner set forth in Section 13.7 of the Development Contract,
of any claim or demand made against TDC for which TDC may be entitled to
indemnity hereunder. TDC shall have the right to participate, at its own
expense, in the defense of any such claim or demand to the extent it so desires.
8. MISCELLANEOUS. This Agreement shall terminate upon termination of
the Development Contract. Except as otherwise expressly provided herein, the
terms of the Development Contract, the Technology License Agreement and the
License Option Agreement shall remain in full force and effect. This Agreement
may not be amended except in a writing signed by both parties. If any
provision of this Agreement is held by a court of competent jurisdiction to be
invalid or unenforceable, it shall be modified, if possible, to the minimum
extent necessary to make it valid and enforceable or, if such modification is
not possible, it shall be stricken and the remaining provisions remain in full
force and effect; provided, however, that if a provision is stricken so as to
significantly alter the economic arrangements of this Agreement, the
Development Contract or the "Purchase Option" as defined in the Restated
Certificate of Incorporation of TDC, the party adversely affected may terminate
this Agreement upon 60 days' prior written notice to the other party. Neither
party may assign its rights or obligations hereunder without the prior written
consent of the other party, which consent may not be unreasonably withheld;
provided, however, that ALZA may assign such rights and obligations hereunder
to any person or entity with which ALZA is merged or consolidated or which
purchases all or substantially all of the assets of ALZA. This Agreement shall
be governed by the laws of the State of California as applied to residents of
that state entering into contracts to be performed in that state. The headings
set forth at the beginning of the various sections of this Agreement are for
reference and convenience and shall not affect the meanings of the provisions
of this Agreement.
IN WITNESS WHEREOF, ALZA and TDC have caused this Agreement to be
executed as of the date first set forth above by their duly authorized
representatives.
ALZA CORPORATION THERAPEUTIC DISCOVERY
CORPORATION
By: /s/ Peter D. Staple By: /s/ Gary L. Neil
___________________________ ___________________________
Title: Vice President and General Title: President and Chief Executive
Counsel Officer
Date: March 27, 1996 Date: 27 March 1996
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Exhibit 10.10
EXECUTIVE AGREEMENT
THIS AGREEMENT dated November 1, 1995, is made by and between ALZA
Corporation, a Delaware corporation (the "Company"), and _______ (the
"Executive").
WHEREAS, the Company considers it essential to the best interests of
its shareholders to foster the continuous employment of key management
personnel; and
WHEREAS, the Board of Directors of the Company (the "Board")
recognizes that, as is the case with many publicly held corporations, the
possibility of a Change in Control (as defined in the last Section hereof)
exists and that such possibility, and the uncertainty and questions which it may
raise among management, may result in the departure or distraction of management
personnel to the detriment of the Company and its shareholders; and
WHEREAS, the Board has determined that appropriate steps should be
taken to reinforce and encourage the continued attention and dedication of
members of the Company's management, including the Executive, to their assigned
duties without distraction in the face of potentially disturbing circumstances
arising from the possibility of a Change in Control.
<PAGE>
NOW, THEREFORE, in consideration of the premises and the mutual
covenants herein contained, the Company and the Executive hereby agree as
follows:
1. DEFINED TERMS. The definition of capitalized terms used in this
Agreement is provided in the last Section hereof.
2. TERM OF AGREEMENT. This Agreement shall commence on the date
hereof and shall continue in effect through December 31, 1996; provided that,
commencing on January 1, 1996 and each January 1 thereafter, the term of this
Agreement shall automatically be extended for one additional year unless, not
later than October 30 of the preceding year, the Company or the Executive shall
have given notice not to extend this Agreement or a Change in Control shall have
occurred prior to such January 1; provided, however, that if a Change in Control
shall have occurred during the term of this Agreement, this Agreement shall
continue in effect for a period of not less than twenty-four (24) months from
the date on which such Change in Control occurred.
3. COMPANY'S COVENANTS SUMMARIZED. In order to induce the Executive
to remain in the employ of the Company and in consideration of the Executive's
covenants set forth in Section 4 hereof, the Company agrees, under the
conditions described herein, to pay the Executive the "Severance Payments"
described in Section 6.1 hereof and the other payments and benefits described
2
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herein in the event the Executive's employment with the Company is terminated
following a Change in Control and during the term of this Agreement. No amount
or benefit shall be payable under this Agreement unless there shall have been
(or, under the terms hereof, there shall be deemed to have been) a termination
of the Executive's employment with the Company following a Change in Control.
This Agreement shall not be construed as creating an express or implied contract
of employment and, except as otherwise agreed in writing between the Executive
and the Company, the Executive shall not have any right to be retained in the
employ of the Company.
4. THE EXECUTIVE'S COVENANTS. The Executive agrees that, subject to
the terms and conditions of this Agreement, in the event of a Potential Change
in Control during the term of this Agreement, the Executive will remain in the
employ of the Company until the earliest of (A) a date which is twelve (12)
months after the date of such Potential Change in Control, (B) the date of a
Change in Control, (C) the date of termination by the Executive of the
Executive's employment for Good Reason (determined by treating the Potential
Change in Control as a Change in Control in applying the definition of Good
Reason), or by reason of the Executive's death, Disability or Retirement, or (D)
the termination by the Company of the Executive's employment for any reason.
3
<PAGE>
5. COMPENSATION OTHER THAN SEVERANCE PAYMENTS.
5.1 Following a Change in Control and during the term of this
Agreement, during any period that the Executive fails to perform the Executive's
full-time duties with the Company as a result of incapacity due to physical or
mental illness, the Company shall pay the Executive's full salary to the
Executive at the rate in effect at the commencement of any such period, together
with all compensation and benefits payable to the Executive under the terms of
any compensation or benefit plan, program or arrangement maintained by the
Company during such period, until the Executive's employment is terminated by
the Company for Disability.
5.2 If the Executive's employment shall be terminated for any reason
following a Change in Control and during the term of this Agreement, the Company
shall pay the Executive's full salary to the Executive through the Date of
Termination at the rate in effect at the time the Notice of Termination is
given, together with all compensation and benefits payable to the Executive
through the Date of Termination under the terms of any compensation or benefit
plan, program or arrangement maintained by the Company during such period.
5.3 If the Executive's employment shall be terminated for any reason
following a Change in Control and during the term of this Agreement, the Company
shall pay the Executive's normal post-termination compensation and
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<PAGE>
benefits under the circumstances (other than any regular severance benefits) to
the Executive as such payments become due. Such post-termination compensation
and benefits shall be determined under, and paid in accordance with, the
Company's retirement, insurance and other compensation or benefit plans,
programs and arrangements.
6. SEVERANCE PAYMENTS/CONSULTING AGREEMENT.
6.1 Subject to Section 6.2 hereof, the Company shall pay the
Executive the payments described in this Section 6.1 (the "Severance Payments")
upon the termination of the Executive's employment following a Change in Control
and during the term of this Agreement, in addition to the payments and benefits
described in Section 5 hereof, unless such termination is (a) by the Company for
Cause, (b) by reason of death, Disability or Retirement, or (c) by the Executive
without Good Reason. The Executive's employment shall be deemed to have been
terminated following a Change in Control by the Company without Cause or by the
Executive with Good Reason if the Executive's employment is terminated prior to
a Change in Control without Cause at the direction of a Person who has entered
into an agreement with the Company the consummation of which will constitute a
Change in Control or if the Executive terminates his employment with Good Reason
prior to a Change in Control (determined by treating a Potential Change in
Control as a Change in Control in applying the
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<PAGE>
definition of Good Reason) if the circumstance or event which constitutes Good
Reason occurs at the direction of such Person.
(A) In lieu of any further salary and bonus payments to the
Executive for periods subsequent to the Date of Termination and in lieu of
any severance benefit otherwise payable to the Executive, the Company shall
pay to the Executive a lump sum severance payment, in cash, equal to the
product of (x) the sum of (i) the Executive's annual base salary in effect
immediately prior to the occurrence of the event or circumstance upon which
the Notice of Termination is based or in effect immediately prior to the
Change in Control, if higher, and (ii) the amount paid to or accrued by the
Executive pursuant to the Company's regular bonus, incentive cash
compensation or income deferral arrangements (and not including any special
one-time awards not made as part of a regular program) in the one-year
period immediately preceding that in which the Date of Termination occurs
or, if higher, the amount paid or accrued in the one-year period
immediately preceding that in which the Change in Control occurs and (y)
two (2); provided, however, that if the Executive first becomes entitled to
the Severance Payments on or after the first anniversary following a Change
in Control, the number in clause (y) shall be equal to a fraction, the
numerator of which is 24 less the number of full months between
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the first anniversary of the Change in Control and the Date of Termination,
and the denominator of which is 12.
(B) Notwithstanding any provision of the Company's bonus,
incentive cash compensation or income deferral arrangements, the Company
shall pay to the Executive a lump sum amount, in cash, equal to the sum of
(i) any bonus, incentive or deferred cash compensation that has been
allocated or awarded to the Executive for a completed year or other
measuring period preceding the Date of Termination but has not yet been
paid (pursuant to Section 5.2 hereof or otherwise), and (ii) a pro rata
portion of the aggregate value of all contingent bonus, incentive or
deferred cash compensation awards to the Executive for all uncompleted
periods (based on the number of days from the commencement of the
applicable period through the Date of Termination) calculated as to each
such award by a good faith proration of performance toward applicable
objectives prior to the Date of Termination.
(C) All outstanding Options, to the extent not then exercisable,
shall become fully exercisable as of the Date of Termination. In lieu of
Company Shares issuable upon exercise of outstanding Options granted under
the Company's Amended and Restated Stock Plan and 1985 Stock Option Plan
(which Options shall be cancelled upon the making of the
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payment referred to below), the Company shall pay the Executive a lump sum
amount, in cash, equal to the product of (i) the excess of (x) in the case
of ISOs, the closing price of Company Shares as reported on the New York
Stock Exchange on the Date of Termination (or, if such date is not a
trading day, the next trading day, and if the Company Shares are not listed
on such exchange, on the nationally recognized exchange or quotation system
on which trading volume in Company Shares is highest), or (y) in the case
of all other Options, the higher of such closing price or the highest per
share price for Company Shares actually paid in connection with any Change
in Control, over the per share exercise price of each such Option held by
the Executive, times (ii) the number of Company Shares covered by each such
Option. With respect to this paragraph (C), for the purpose of determining
the highest per share price paid in case payment is made in a class of
shares of an acquiring corporation that are traded on a nationally
recognized exchange or quotation system, such price shall be the closing
price of such shares on the national exchange or quotation system on which
trading volume in such shares is highest on the effective date of such
payment.
(D) The Company shall pay the Executive a lump sum amount, in
cash, equal to the excess of (x) the benefits under any re-
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tirement, pension or deferred compensation arrangements that the Executive
would have accrued under the terms of such plan without regard to any
amendments made subsequent to a Change in Control and on or prior to the
Date of Termination, which amendment adversely affects in any manner the
computation of the benefits thereunder, determined as if the Executive were
fully vested thereunder, over (y) the benefits that the Executive is
otherwise entitled to receive under such plan.
(E) For a twenty-four (24) month period after the Date of
Termination (provided that such period shall be reduced by one month for
each full month that the Date of Termination is later than the first
anniversary of the Change in Control), the Company shall arrange to provide
the Executive with life, disability, accident and health insurance benefits
substantially similar to those which the Executive is receiving immediately
prior to the Notice of Termination (without giving effect to any reduction
in such benefits subsequent to a Change in Control which reduction
constitutes Good Reason). Benefits otherwise receivable by the Executive
pursuant to this Section 6.1(E) shall be reduced to the extent comparable
benefits are actually received by or made available to the Executive
without cost during the above-referenced period following the Executive's
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termination of employment (and any such benefits actually received by the
Executive shall be reported to the Company by the Executive).
6.2 In the event that the Executive becomes entitled to the Severance
Payments, and if any of the Severance Payments, and any other payments or
benefits received or to be received by the Executive in connection with a Change
in Control whether pursuant to the terms of this Agreement or any other plan,
arrangement or agreement with the Company, any Person whose actions result in a
Change in Control or any Person affiliated with the Company or any such Person
(all such payments and benefits, including the Severance Payment being
hereinafter referred to as "Total Payments"), will be subject to the Excise Tax,
the Company shall so notify the Executive in writing in the Notice of
Termination (or within five (5) days after receipt of a Notice of Termination by
the Executive). If the Total Payments are subject to the Excise Tax, the
Executive shall have the option, to be exercised within ten (10) days after
receipt of such notice from the Company to either (i) receive the Total Payments
subject to the Excise Tax or (ii) require the Total Payments to be reduced to an
amount which is one dollar less than the amount which would trigger the Excise
Tax, whereupon the Executive and the Company shall enter into a consulting
agreement which shall (a) provide the Executive with payments and benefits,
payable over the term of the agreement, the present value of which in the
aggregate is equal to or greater
10
<PAGE>
than the present value (determined by applying a discount rate equal to the
interest rate provided in Section 1274(b)(2)(B) of the Code) of the balance of
the payments and benefits otherwise payable to the Executive pursuant to Section
6.1, but not in excess of reasonable compensation for the consulting services,
(b) require the Executive to make his services available to the Company for no
more than thirty (30) hours per month, (c) last for a period of not more than
three (3) years (unless the Executive consents to a longer period) and (d)
contain appropriate provisions restricting competition by the Executive from
working in a Listed Drug Delivery Company during the consulting period. For
purposes of determining whether any of the Total Payments will be subject to the
Excise Tax, (i) all "excess parachute payments" within the meaning of section
280G(b)(1) of the Code shall be treated as subject to the Excise Tax, unless in
the opinion of tax counsel selected by the Company's independent auditors, such
payments or benefits (in whole or in part) do not constitute parachute payments,
or such excess parachute payments (in whole or in part) represent reasonable
compensation for services actually rendered, within the meaning of section
280G(b)(4)(B) of the Code, in excess of the Base Amount allocable to such
reasonable compensation, or are otherwise not subject to the Excise Tax and (ii)
the value of any noncash benefits or any deferred payment or benefit shall be
determined by the Company's independent auditors in accordance with the
principles of sections
11
<PAGE>
280G(d)(3) and (4) of the Code. The Executive shall notify the Company of any
notification or claim of the IRS with respect to the Excise Tax and the
Executive and the Company shall each reasonably cooperate with the other in
connection with any administrative or judicial proceedings concerning the
existence or amount of liability for Excise Tax with respect to the Severance
Payments.
6.3 The payments provided for in Sections 6.1 (other than Section
6.1(E)), shall be made not later than the fifteenth (15th) day following the
Date of Termination; provided that, if the amounts of such payments cannot be
finally determined on or before such day, the Company shall pay to the Executive
on such day an estimate, as determined in good faith by the Company, of the
minimum amount of such payments to which the Executive is clearly entitled and
shall pay the remainder of such payments (together with interest at the rate
provided in section 1274(b)(2)(B) of the Code) as soon as the amount thereof can
be determined but in no event later than the thirtieth (30th) day after the Date
of Termination. In the event that the amount of the estimated payments exceeds
the amount subsequently determined to have been due, such excess shall
constitute a loan by the Company to the Executive, payable on the fifth (5th)
business day after demand by the Company (together with interest at the rate
provided in section 1274(b)(2)(B) of the Code). At the time that payments are
made under this Section, the Company shall provide the Executive with a written
statement
12
<PAGE>
setting forth the manner in which such payments were calculated and the basis
for such calculations including, without limitation, any opinions or other
advice the Company has received from outside counsel, auditors or consultants
(and any such opinions or advice which are in writing shall be attached to the
statement).
7. TERMINATION PROCEDURES.
7.1 NOTICE OF TERMINATION. After a Change in Control and during the
term of this Agreement, any purported termination of the Executive's employment
(other than by reason of death) shall be communicated by written Notice of
Termination from one party hereto to the other party hereto in accordance with
Section 10 hereof. For purposes of this Agreement, a "Notice of Termination"
shall mean a notice which shall indicate the specific termination provision in
this Agreement relied upon and shall set forth in reasonable detail the facts
and circumstances claimed to provide a basis for termination of the Executive's
employment under the provision so indicated.
7.2 DATE OF TERMINATION. "Date of Termination," with respect to any
purported termination of the Executive's employment after a Change in Control
and during the term of this Agreement, shall mean (i) if the Executive's
employment is terminated for Disability, thirty (30) days after Notice of
Termination is given (provided that the Executive shall not have returned to the
full-time performance of the Executive's duties during such thirty (30) day
period), and (ii)
13
<PAGE>
if the Executive's employment is terminated for any other reason, the date
specified in the Notice of Termination (which, in the case of a termination by
the Company, shall not be less than thirty (30) days (except in the case of a
termination for Cause) and, in the case of a termination by the Executive, shall
not be less than fifteen (15) days nor more than sixty (60) days, respectively,
from the date such Notice of Termination is given).
8. NO MITIGATION. The Company agrees that, if the Executive's
employment by the Company is terminated during the term of this Agreement, the
Executive is not required to seek other employment or to attempt in any way to
reduce any amounts payable to the Executive by the Company pursuant to Section
6. Further, the amount of any payment or benefit provided for in Section 6
(other than Section 6.1(E)) shall not be reduced by any compensation earned by
the Executive as the result of employment by another employer, by retirement
benefits, by offset against any amount claimed to be owed by the Executive to
the Company, or otherwise.
9. SUCCESSORS; BINDING AGREEMENT.
9.1 In addition to any obligations imposed by law upon any successor
to the Company, the Company will require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Company to expressly
assume
14
<PAGE>
and agree to perform this Agreement in the same manner and to the same extent
that the Company would be required to perform it if no such succession had taken
place. Failure of the Company to obtain such assumption and agreement prior to
the effectiveness of any such succession shall be a breach of this Agreement and
shall entitle the Executive to compensation from the Company in the same amount
and on the same terms as the Executive would be entitled to hereunder if the
Executive were to terminate the Executive's employment for Good Reason after a
Change in Control, except that, for purposes of implementing the foregoing, the
date on which any such succession becomes effective shall be deemed the Date of
Termination.
9.2 This Agreement shall inure to the benefit of and be
enforceable by the Executive's personal or legal representatives, executors,
administrators, successors, heirs, distributees, devisees and legatees. If the
Executive shall die while any amount would still be payable to the Executive
hereunder (other than amounts which, by their terms, terminate upon the death of
the Executive) if the Executive had continued to live, all such amounts, unless
otherwise provided herein, shall be paid in accordance with the terms of this
Agreement to the executors, personal representatives or administrators of the
Executive's estate.
10. NOTICES. For the purpose of this Agreement, notices and all
other communications provided for in this Agreement shall be in writing and
shall
15
<PAGE>
be deemed to have been duly given when delivered or mailed by United States
registered mail, return receipt requested, postage prepaid, addressed to the
respective addresses set forth below, or to such other address as either party
may have furnished to the other in writing in accordance herewith, except that
notice of change of address shall be effective only upon actual receipt:
To the Company:
ALZA Corporation
950 Page Mill Road
P.O. Box 10950
Palo Alto, CA 94303
Attention: General Counsel
To the Executive:
---------------------
---------------------
11. MISCELLANEOUS. No provision of this Agreement may be
modified, waived or discharged unless such waiver, modification or discharge is
agreed to in writing and signed by the Executive and on behalf of the Company by
a duly authorized officer. No waiver by either party hereto at any time of any
breach by the other party hereto of, or compliance with, any condition or
provision of this Agreement to be performed by such other party shall be deemed
a waiver of similar or dissimilar provisions or conditions at the same or at any
prior or subsequent time. No agreements or representations, oral or otherwise,
16
<PAGE>
express or implied, with respect to the subject matter hereof have been made by
either party which are not expressly set forth in this Agreement. The validity,
interpretation, construction and performance of this Agreement shall be governed
by the laws of the State of California. All references to sections of the
Exchange Act or the Code shall be deemed also to refer to any successor
provisions to such sections. Any payments provided for hereunder shall be paid
net of any applicable withholding required under federal, state or local law and
any additional withholding to which the Executive has agreed. The obligations
of the Company and the Executive under Sections 5, 6 and 7 shall survive the
expiration of the term of this Agreement.
12. VALIDITY. The invalidity or unenforceability or any
provision of this Agreement shall not affect the validity or enforceability of
any other provision of this Agreement, which shall remain in full force and
effect.
13. COUNTERPARTS. This Agreement may be executed in several
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same instrument.
14. SETTLEMENT OF DISPUTES; ARBITRATION. All claims by the
Executive for benefits under this Agreement shall be directed to and determined
by the Board or a designated committee of the Board and shall be in writing.
Any denial by the Board of a claim for benefits under this Agreement shall be
17
<PAGE>
delivered to the Executive in writing and shall set forth the specific reasons
for the denial and the specific provisions of this Agreement relied upon. Any
further dispute or controversy arising under or in connection with this
Agreement shall be settled exclusively by arbitration in Palo Alto, California
in accordance with the rules of the American Arbitration Association then in
effect. Judgment may be entered on the arbitrator's award in any court having
jurisdiction; provided, however, that the Executive shall be entitled to be paid
until the Date of Termination during the pendency of any dispute or controversy
arising under or in connection with this Agreement.
5. DEFINITIONS. For purposes of this Agreement, the following
terms shall have the meanings indicated below:
(A) "Base Amount" shall have the meaning defined in section
280G(b)(3) of the Code.
(B) "Beneficial Owner" shall have the meaning defined in Rule
13d-3 under the Exchange Act.
(C) "Board" shall mean the Board of Directors of the Company.
(D) "Cause" for termination by the Company of the Executive's
employment, after any Change in Control, shall mean (i) the willful and
continued failure by the Executive to substantially perform the Executive's
duties with the Company (other than any such failure resulting from the
Executive's incapaci-
18
<PAGE>
ty due to physical or mental illness or any such actual or anticipated failure
after the issuance of a Notice of Termination for Good Reason by the Executive
pursuant to Section 7.1) after a written demand for substantial performance is
delivered to the Executive by the Company, which demand specifically identifies
the manner in which the Company believes that the Executive has not
substantially performed the Executive's duties, (ii) the willful engaging by the
Executive in conduct which is demonstrably and materially injurious to the
Company or its subsidiaries, monetarily or otherwise, (iii) the conviction of
the Executive of a felony involving moral turpitude or (iv) the Executive
becoming eligible for Retirement.
(E) A "Change in Control" shall be deemed to have occurred if
the conditions set forth in any one of the following paragraphs shall have been
satisfied:
(i) any Person is or becomes the Beneficial
Owner, directly or indirectly, of securities of the Company
representing 50% or more of the combined voting power of the
Company's then outstanding securities; or
(ii) during any period of two consecutive years
(not including any period prior to the execution of this
Agreement), a majority of the Board ceases to be comprised of (a)
individuals
19
<PAGE>
who at the beginning of such period constitute the Board and (b)
any new directors (other than a director designated by a Person
who has entered into an agreement with the Company to effect a
transaction described in clause (i), (iii) or (iv) of this
paragraph) whose election by the Board or nomination for election
by the Company's stockholders was approved by a vote of at least
two-thirds (2/3) of the directors then still in office who either
were directors at the beginning of the period or whose election
or nomination for election was previously so approved; or
(iii) the shareholders of the Company approve a
merger or consolidation of the Company with any other
corporation, other than (a) a merger or consolidation which would
result in the voting securities of the Company outstanding
immediately prior thereto continuing to represent (either by
remaining outstanding or by being converted into voting
securities of the surviving entity), in combination with the
ownership of any trustee or other fiduciary holding securities
under an employee benefit plan of the Company, more than 50% of
the combined voting power of the voting securities of the Company
or such surviving entity outstanding immediately after such
merger or consolidation, or (b) a merger or consol-
20
<PAGE>
idation effected to implement a recapitalization of the Company
(or similar transaction) in which no Person acquires more than
50% of the combined voting power of the Company's then
outstanding securities; or
(iv) the shareholders of the Company approve a
plan of complete liquidation of the Company or an agreement for
the sale or disposition by the Company of all or substantially
all the Company's assets.
Notwithstanding the foregoing, a Change in Control shall not include any event,
circumstance or transaction occurring during the six-month period following a
Potential Change in Control which results from the action of any entity or group
which includes, is affiliated with or is wholly or partly controlled by one or
more executive officers of the Company (a "Management Group"); provided that,
such action shall not be taken into account for this purpose if it occurs within
a six-month period following a Potential Change in Control resulting from the
action of any Person which is not a Management Group.
(F) "Code" shall mean the Internal Revenue Code of 1986, as
amended from time to time.
(G) "Company" shall mean ALZA Corporation and any successor to
its business and/or assets (except in determining, under Section 15(E) hereof,
21
<PAGE>
whether or not any Change in Control of the Company has occurred in connection
with such succession).
(H) "Company Shares" shall mean shares of common stock of the
Company or any equity securities into which such shares have been converted.
(I) "Date of Termination" shall have the meaning stated in
Section 7.2 hereof.
(J) "Disability" shall be deemed the reason for the termination
by the Company of the Executive's employment, if, as a result of the Executive's
incapacity due to physical or mental illness, the Executive shall have been
absent from the full-time performance of the Executive's duties with the Company
for a period of six (6) consecutive months, or for any period of eight (8)
months in any twelve-month period, the Company shall have given the Executive a
Notice of Termination for Disability, and, within thirty (30) days after such
Notice of Termination is given, the Executive shall not have returned to the
full-time performance of the Executive's duties.
(K) "Exchange Act" shall mean the Securities Exchange Act of
1934, as amended from time to time.
(L) "Excise Tax" shall mean any excise tax imposed under section
4999 of the Code.
22
<PAGE>
(M) "Executive" shall mean the individual named in the first
paragraph of this Agreement.
(N) "Good Reason" for termination by the Executive of the
Executive's employment shall mean the occurrence (without the Executive's
express written consent) of any one of the following acts by the Company, or
failures by the Company to act, unless, in the case of any act or failure to act
described in paragraph (i), (v) or (vi) below, such act or failure to act is
corrected prior to the Date of Termination specified in the Notice of
Termination given in respect thereof:
(i) the assignment to the Executive of any duties
materially inconsistent with the Executive's status as an
executive officer of the Company or a substantial adverse
alteration in the nature or status of the Executive's
responsibilities from those in effect immediately prior to the
Change in Control; provided, however, that no such alteration
shall be deemed to have occurred solely by virtue of changes in
corporate structure or reporting responsibilities of the
Executive that occur as a result of the Change in Control;
23
<PAGE>
(ii) a reduction by the Company in the
Executive's annual base salary as in effect on the date hereof or
as the same may be increased from time to time;
(iii) the relocation of the Executive's principal
place of employment by the Company to a location outside the Palo
Alto/San Jose metropolitan area (or, if different, the
metropolitan area in which the Executive's employment was located
immediately prior to the Change in Control) or the Company's
requiring the Executive to travel on the Company's business to an
extent substantially inconsistent with the Executive's business
travel obligations as of the date of the Change in Control;
(iv) the failure by the Company, without the
Executive's consent, to pay to the Executive any portion of the
Executive's current compensation, or to pay to the Executive any
portion of an installment of deferred compensation under any
deferred compensation program of the Company, within seven (7)
days of the date such compensation is due;
(v) the failure by the Company to continue in
effect any compensation plan in which the Executive participates
immediately prior to the Change in Control which is material to
the
24
<PAGE>
Executive's total compensation, including but not limited to the
Company's stock option, incentive compensation, bonus and other
plans or any substitute plans adopted prior to the Change in
Control, unless an equitable arrangement (embodied in an ongoing
substitute or alternative plan) has been made with respect to
such plan, or the failure by the Company to continue the
Executive's participation therein (or in such substitute or
alternative plan) on a basis that is not less favorable than that
which existed at the time of the Change in Control; provided
that, in each case under this clause (v), such failure causes a
material adverse change in the annual compensation of the
Executive, taken as a whole and including amounts or awards that
are reasonably expected to be made, compared to the compensation
package that existed at the time of the Change in Control; and
provided, further, that any such determination which is based on
participation in a stock option plan shall take into account,
among other factors, the overall practices and policies of a
parent company with respect to its option plans; or
(vi) the failure by the Company to continue to
provide the Executive with benefits substantially similar to
those enjoyed by the Executive under any of the Company's
pension, life
25
<PAGE>
insurance, medical, health and accident, or disability plans in
which the Executive was participating at the time of the Change
in Control, the taking of any action by the Company which would
directly or indirectly materially reduce any of such benefits or
deprive the Executive of any material fringe benefit enjoyed by
the Executive at the time of the Change in Control, or the
failure by the Company to provide the Executive with the number
of paid vacation days to which the Executive is entitled on the
basis of years of service with the Company in accordance with the
Company's normal vacation policy in effect at the time of the
Change in Control unless any such failure is the result of a
change in policy applicable generally to senior employees of the
Company and of any corporation of which the Company is a
subsidiary.
The Executive's right to terminate the Executive's employment for
Good Reason shall not be affected by the Executive's incapacity due to physical
or mental illness. The Executive's continued employment shall not constitute
consent to, or a waiver of rights with respect to, any act or failure to act
constituting Good Reason hereunder.
(O) "ISOs" shall mean options qualifying as incentive stock
options under section 422 of the Code.
26
<PAGE>
(P) "Listed Drug Delivery Company" shall mean any one of the
following companies, or a business entity controlled by any one of such
companies: Advanced Polymer Systems, Biovail Corp. International, Cygnus
Therapeutic Systems, Elan Corporation Plc., Ethical Holdings Plc., Gensia Corp.,
Genta Inc., KV Pharmaceutical Co., Noven Pharmaceuticals Inc., R.P. Scherer
Corp., or TheraTech Inc.
(Q) "Notice of Termination" shall have the meaning stated in
Section 7.1 hereof.
(R) "Options" shall mean options for Company Shares granted to
the Executive under the Company's Amended and Restated Stock Plan and 1985 Stock
Option Plan.
(S) "Pension Plan" shall mean the ALZA Retirement Plan.
(T) "Person" shall have the meaning given in Section 3(a)(9) of
the Exchange Act, as modified and used in Sections 13(d) and 14(d) thereof;
however, a Person shall not include (i) the Company or any of its subsidiaries,
(ii) a trustee or other fiduciary holding securities under an employee benefit
plan of the Company or any of its subsidiaries, (iii) an underwriter temporarily
holding securities pursuant to an offering of such securities, or (iv) a
corporation owned, directly or indirectly, by the stockholders of the Company in
substantially the same proportions as their ownership of stock of the Company.
27
<PAGE>
(U) "Potential Change in Control" shall be deemed to have
occurred if the conditions set forth in any one of the following paragraphs
shall have been satisfied:
(i) the Company enters into an agreement, the
consummation of which would result in the occurrence of a Change
in Control;
(ii) the Company or any Person publicly announces
an intention to take actions which, if consummated, would
constitute a Change in Control;
(iii) any Person who is or becomes the Beneficial
Owner, directly or indirectly, of securities of the Company
representing 20% or more of the combined voting power of the
Company's then outstanding securities, increases such Person's
beneficial ownership of such securities to 30% or more of such
combined voting power; or
(iv) the Board adopts a resolution to the effect
that, for purposes of this Agreement, a Potential Change in
Control has occurred.
(V) "Retirement" shall be deemed the reason for the termination
by the Company or the Executive of the Executive's employment if such employ-
28
<PAGE>
ment is terminated in accordance with the Company's retirement policy, not
including retirement before the age of 65 (or such later age as may be
established in such policy), generally applicable to its salaried employees, as
in effect immediately prior to the Change in Control, or in accordance with any
retirement arrangement established with the Executive's written consent with
respect to the Executive.
(W) "Severance Payments" shall mean those payments described in
Section 6.1 hereof.
(X) "Shares" shall mean shares of the common stock, $.01 par
value, of the Company.
(Y) "Total Payments" shall mean those payments described in
Section 6.2 hereof.
ALZA Corporation
By:
-----------------------------
Name:
Title:
---------------------------------
29
<PAGE>
EXHIBIT 11
Statement Regarding Computation of Per Share Earnings
(In thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended December 31,
1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
PRIMARY:
Common stock 82,275 81,827 76,845
$15 warrants -- -- 2,216
$25 warrants -- -- 93
$65 warrants -- -- --
5 1/4% zero coupon convertible
subordinated debentures -- -- --
7 1/2% zero coupon convertible
subordinated debentures -- -- --
Stock options 334 459 705
------- ------- -------
Weighted average common and dilutive
common equivalent shares 82,609 82,286 79,859
------- ------- -------
------- ------- -------
Income before extraordinary item
and cumulative effect of accounting
change $72,408 $58,120 $42,869
Extraordinary item - debt refinancing, net
of income taxes -- -- (3,830)
Cumulative effect of change in accounting
for income taxes -- -- 6,573
------- ------- -------
Net Income $72,408 $58,120 $45,612
------- ------- -------
------- ------- -------
Per common and common equivalent share:
Income before extraordinary item and
cumulative effect of accounting change $ .88 $ .71 $ .54
Extraordinary item - debt refinancing, net
of income taxes -- -- (.05)
Cumulative effect of change in accounting
for income taxes -- -- .08
------- ------- -------
Net Income $ .88 $ .71 $ .57
------- ------- -------
------- ------- -------
</TABLE>
31
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
FULLY DILUTED:
Common stock 82,275 81,827 76,845
$15 warrants -- -- 2,249
$25 warrants -- -- 112
$65 warrants -- -- --
5 1/4% zero coupon convertible
subordinated debentures -- -- --
7 1/2% zero coupon convertible
subordinated debentures -- -- --
Stock options 430 459 738
------- ------- -------
Weighted average common and dilutive
common equivalent shares 82,705 82,286 79,944
------- ------- -------
------- ------- -------
Income before extraordinary item
and cumulative effect of accounting
change $72,408 $58,120 $42,869
Extraordinary item - debt refinancing, net
of income taxes -- -- (3,830)
Cumulative effect of change in accounting
for income taxes -- -- 6,573
------- ------- -------
Net Income $72,408 $58,120 $45,612
------- ------- -------
------- ------- -------
Per common and common equivalent share:
Income before extraordinary item and
cumulative effect of accounting change $ .88 $ .71 $ .54
Extraordinary item - debt refinancing, net
of income taxes -- -- (.05)
Cumulative effect of change in accounting
for income taxes -- -- .08
------- ------- -------
Net Income $ .88 $ .71 $ .57
------- ------- -------
------- ------- -------
</TABLE>
Primary and fully diluted earnings per share are based on weighted
average shares of common stock outstanding plus dilutive common equivalent
shares. The 5 1/4% zero coupon convertible subordinated debentures (issued in
July 1994) are considered common stock equivalents; they were antidilutive for
the years ended 1995 and 1994. The 7 1/2% zero coupon convertible debentures
(redeemed in 1993) are not included in the calculation for 1993 since their
inclusion would have had an antidilutive effect. Fully diluted earnings per
share are not presented on the face of the Consolidated Statement of Income
since they are not materially different from primary earnings per share.
32
<PAGE>
PAGE 15 OF PAPER FORMAT ANNUAL REPORT
EXHIBIT 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
ALZA reported net income of $72.4 million in 1995, compared to net income of
$58.1 million in 1994 and $45.6 million in 1993. Included in the 1993 results
were pre-tax charges and allowances of $28.1 million primarily related to
manufacturing activities, a $3.8 million extraordinary charge related to the
redemption of ALZA's 7 1/2% zero coupon convertible subordinated debentures and
$6.6 million of benefits related to the adoption of Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109").
Without these unusual items, ALZA would have reported net income of $61.1
million for 1993.
TOTAL REVENUES (PRESENTED GRAPHICALLY IN PAPER FORMAT ANNUAL REPORT)
<TABLE>
<CAPTION>
(In Millions)
1995 1994 1993 1992 1991
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Royalties and fees $ 145 $ 124 $ 113 $ 115 $ 64
Research and development 104 69 47 39 42
Net sales 77 68 54 76 34
Interest & other 24 18 20 21 22
----- ----- ----- ----- -----
TOTAL REVENUES $ 351 $ 279 $ 234 $ 251 $ 162
</TABLE>
ROYALTIES AND FEES
ALZA's royalties and fees reached record levels in 1995. Royalties and fees,
which are generally derived from sales by client companies of products developed
jointly with ALZA, were $145.5 million in 1995, compared to $123.7 million and
$113.3 million in 1994 and 1993, respectively. Adalat CR-Registered
Trademark-,
-1-
<PAGE>
PAGE 15 OF PAPER FORMAT ANNUAL REPORT
Glucotrol XL-Registered Trademark-, and Duragesic-Registered Trademark-, among
other products, contributed to the growth in royalties and fees in 1995.
Included in royalties and fees for 1995 is a benefit of approximately $7 million
resulting from the reversal of a reserve established after a patent infringement
suit was filed in 1991 by Ciba-Geigy Corporation ("Ciba-Geigy") against ALZA and
Marion Merrell Dow Inc. (now Hoechst Marion Roussel Inc.) relating to the
Nicoderm-Registered Trademark- transdermal nicotine product. In October 1995 a
federal appeals court upheld the most significant portions of a summary judgment
previously granted by a district court in which the broadest claims of the Ciba-
Geigy patent were held invalid.
Royalties and fees for 1995 and 1994 reflect a reduction of approximately $9
million and $8 million, respectively, resulting from additions to the reserve
established in the third quarter of 1994 to account for a potential reduction in
royalty revenue from Pfizer Inc. ("Pfizer") on 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 possible reductions in Procardia XL-Registered Trademark-
royalties. Excluding from total royalties and fees for 1995 the benefit of the
approximately $7 million reserve reversal discussed above, royalties from
Procardia XL-Registered Trademark- accounted for more than 40%, 50% and 60% of
ALZA's royalties and fees in 1995, 1994 and 1993, respectively.
RESEARCH AND DEVELOPMENT
Research and development expenses increased 36% to $103.4 million in 1995
compared to $76.1 million in 1994 due to increased product development
activities undertaken on behalf of Therapeutic Discovery Corporation ("TDC").
ALZA's total research and development expenses in 1993 were $53.2 million.
INVESTMENT IN RESEARCH AND DEVELOPMENT (PRESENTED GRAPHICALLY IN PAPER FORMAT
ANNUAL REPORT)
<TABLE>
<CAPTION>
(In Millions)
1995 1994 1993 1992 1991
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Investment in Research and
Development $ 103 $ 76 $ 53 $ 52 $ 41
</TABLE>
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<PAGE>
PAGE 15-16 OF PAPER FORMAT ANNUAL REPORT
Research and development revenue was $104.0 million in 1995 compared to $68.7
million and $46.8 million in 1994 and 1993, respectively. ALZA's research and
development revenue generally represents client reimbursement of costs,
including a portion of general and administrative expenses. Therefore, product
development activities do not contribute significantly to current net income.
The increase in research and development revenue in 1995 was due to product
development activities undertaken on behalf of TDC. TDC, which commenced
operations in mid-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 have entered into
a development agreement pursuant to which ALZA conducts product development
activities on behalf of TDC. For the years ended 1995, 1994 and 1993, ALZA had
product development revenue from TDC of $70.1 million, $31.6 million and $4.9
million, respectively. At the end of 1995 ALZA and TDC had more than 20
products in the development pipeline, including several in clinical evaluation.
NET SALES AND COSTS OF PRODUCTS SHIPPED
ALZA's net sales increased by $8.4 million to $76.9 million in 1995 compared to
1994. ALZA's 1994 net sales of $68.5 million were higher than 1993 net sales of
$53.6 million in part due to a $6.1 million pre-tax charge in 1993 related
primarily to contract manufacturing activities (see Note Six of the Notes to
Consolidated Financial Statements). Included in net sales are sales generated
from contract manufacturing activities for ALZA's client companies, and ALZA's
sales of products marketed directly by ALZA and through distributors.
Net sales from ALZA's contract manufacturing activities were $63.3 million in
1995 as compared to $57.4 million and $46.9 million for 1994 and 1993,
respectively. The increase in net sales from contract
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<PAGE>
PAGE 16 OF PAPER FORMAT ANNUAL REPORT
manufacturing is the result of larger orders by client companies, predominately
for transdermal products in 1995 and OROS-Registered Trademark- products in
1994. Because of variability in the mix and volume of clients' product
requirements, the level of contract manufacturing sales can fluctuate from
period to period.
ALZA manufactures and directly markets in the U.S. the Testoderm-Registered
Trademark- testosterone transdermal system, the Progestasert-Registered
Trademark- system, ALZET-Registered Trademark- osmotic pumps and the
Ocusert-Registered Trademark- system. In 1994, ALZA launched
Testoderm-Registered Trademark-, the first transdermal testosterone replacement
therapy for testosterone deficient men. ALZA also manufactures the
Actisite-Registered Trademark- periodontal fiber, which is marketed in the U.S.
by a partnership between ALZA and Procter & Gamble for adjunctive treatment of
periodontitis. Progestasert-Registered Trademark-, ALZET-Registered Trademark-,
Ocusert-Registered Trademark-, and Actisite-Registered Trademark- are sold
internationally through other companies under distribution agreements. Net
sales of ALZA-marketed products were $13.6 million in 1995, compared to $11.1
million in 1994 and $6.7 million in 1993. The increase in sales of ALZA-
marketed products for 1995 and 1994 was due to Testoderm-Registered Trademark-
sales of $6.8 million and $4.2 million, respectively.
Costs of products shipped increased to $65.4 million in 1995 compared to $56.6
million in 1994. Although net sales increased in 1995 and 1994, costs of
products shipped rose at a proportionally higher rate due to increased
manufacturing overhead costs, including costs associated with ALZA's ongoing
quality assurance activities. Excluding the $22.0 million pre-tax charge in
1993 related primarily to manufacturing activities, costs of products shipped
for 1994 increased 8% compared to 1993 as a result of higher net sales. As
discussed in Note Six of the Notes to Consolidated Financial Statements, ALZA
wrote off $28.1 million in 1993 related primarily to its manufacturing
activities. Charges relating to the write-off of assets and cash expenditures
for contractual product supply issues in 1994 approximated the original
estimate.
-4-
<PAGE>
PAGE 16-17 OF PAPER FORMAT ANNUAL REPORT
GENERAL, ADMINISTRATIVE AND MARKETING
General, administrative and marketing expenses increased to $41.1 million in
1995 compared to $33.4 million in 1994 and $21.4 million in 1993. The increase
in 1995 was primarily due to a charge of approximately $7 million for a portion
of the amount ALZA paid to U.S. Bioscience, Inc. ("U.S. Bioscience") under the
agreement discussed below under "Outlook." Without this charge, general,
administrative and marketing expenses for 1995 were essentially flat with 1994.
The increase in 1994 from 1993 was due primarily to expenses in 1994 related to
the formation of ALZA Pharmaceuticals (ALZA's sales and marketing division) and
launch expenses related to Testoderm-Registered Trademark-. ALZA
Pharmaceuticals was created for the purpose of expanding ALZA's marketing
capabilities in order to commercialize ALZA-developed products, including those
under development with TDC, and, potentially, licensed-in products. In 1994,
ALZA Pharmaceuticals established a U.S. sales force of approximately 50 people
and began actively promoting Testoderm-Registered Trademark-. ALZA
Pharmaceuticals also co-promotes Glucotrol XL-Registered Trademark- with Pfizer,
and Duragesic-Registered Trademark- with Janssen Pharmaceutica, Inc.
INTEREST AND OTHER REVENUE
Interest and other revenue, which consists primarily of interest income, was
$24.3 million in 1995 compared to $17.8 million and $20.5 million in 1994 and
1993, respectively. The increase in 1995 over 1994 was due in large part to
higher invested cash balances. The decrease in 1994 from 1993 was due
primarily to the realization during 1993 of approximately $5 million in gains
related to long-term investments liquidated to fund TDC.
INTEREST AND OTHER EXPENSE
ALZA reported total interest expense of $23.9 million in 1995 compared to $19.4
million in 1994 and $19.2 million in 1993. In mid-1994, ALZA replaced its $250
million commercial paper program with approximately $337 million of 5 1/4% zero
coupon convertible subordinated debentures due 2014 ("5 1/4% Debentures"). In
late 1993, ALZA initiated the commercial paper program, the proceeds of which
were
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<PAGE>
PAGE 17 OF PAPER FORMAT ANNUAL REPORT
used to redeem its 7 1/2% zero coupon convertible subordinated debentures.
While the average interest rate on ALZA's outstanding debt was lower in 1994
compared to 1993, ALZA had higher average outstanding debt, resulting in a
small increase in total interest expense. The increase in 1995 interest
expense as compared to 1994 was due to higher average outstanding debt and a
higher average interest rate on such debt, as the 5 1/4% Debentures were
outstanding for the full year.
INCOME TAXES
ALZA's effective income tax rate was 38% in 1995 and 1994, and 35% in 1993. The
increased rate in 1995 and 1994 is due primarily to an increase in pre-tax
income without proportionate increases in estimated available tax credits.
Effective January 1, 1993, ALZA adopted SFAS 109, "Accounting for
Income Taxes". As permitted by SFAS 109, prior year financial statements were
not restated to reflect the change in accounting method. The cumulative effect
of adopting SFAS 109 increased ALZA's net income by $6.6 million or $.08 per
share for the year ended December 31, 1993.
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents and short-term investments at the end of 1995 grew 21%
compared to 1994. Unrealized gains on ALZA's investments at December 31, 1995,
which resulted from decreases in prevailing market interest rates, were $1.9
million, net of tax effect. At December 31, 1994, ALZA had unrealized losses on
its investments of $7.5 million, net of tax effect.
NET CASH PROVIDED BY OPERATING ACTIVITIES (PRESENTED GRAPHICALLY IN PAPER
FORMAT ANNUAL REPORT)
<TABLE>
<CAPTION>
(In Millions)
1995 1994 1993 1992 1991
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Net Cash Provided by
operating activities $111 $ 74 $ 76 $ 97 $ 20
</TABLE>
-6-
<PAGE>
PAGE 17-18 OF PAPER FORMAT ANNUAL REPORT
In July 1994, ALZA completed a public offering of 5 1/4% Debentures, which
resulted in $328.1 million of net proceeds to ALZA. ALZA used $249.5 million of
the net proceeds to retire its outstanding commercial paper. The remainder was
invested in ALZA's investment portfolio, to be used for general corporate
purposes. By refinancing its short-term debt with fixed rate, long-term
convertible debt, ALZA significantly increased its working capital, reduced its
interest rate risk, and eliminated the periodic interest payments on its debt.
ALZA invested approximately $46.3 million in 1995 and $37.2 million in 1994 in
additions to property, plant and equipment to support its expanding research and
development and manufacturing activities.
OUTLOOK
The following is intended to provide an outlook for 1996 and beyond. To the
extent any statements made in this Annual Report, including this section, deal
with information that is not historical, these statements are necessarily
forward-looking. As such, they are subject to the occurrence of many events
outside ALZA's control and are subject to various risk factors that could cause
ALZA's results to be materially different from those presented in the outlook.
These factors are described in ALZA's reports on Form 10-K and 10-Q filed with
the Securities and Exchange Commission and include, without limitation, the
inherent risk of product development failure, the risk of clinical outcomes,
regulatory risks and risks related to proprietary rights, market acceptance
(including third-party reimbursement) and competition.
ROYALTIES AND FEES: ALZA expects royalties and fees to continue to increase in
1996 as a result of sales growth from existing royalty-bearing products, and
from the introduction of several products which have recently received marketing
clearance, for which "approvable" letters have been received from the Food and
Drug Administration ("FDA"), or which are awaiting approval by the FDA and
regulatory authorities in other countries. Possible introductions in 1996
include Covera-HS-Registered Trademark-, DynaCirc CR-Registered Trademark- and
Efidac 24-Registered Trademark- Pseudorphedrine/Brompheniramine, as well as the
launch of Duragesic-Registered Trademark- and Adalat CR-Registered Trademark- in
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<PAGE>
PAGE 18 OF PAPER FORMAT ANNUAL REPORT
additional countries. However, sales of Procardia XL-Registered Trademark- by
Pfizer, which accounted for more than 40% of ALZA's royalties and fees in 1995,
decreased 4% in 1995, and ALZA cannot predict 1996 sales levels for this
product.
Products awaiting regulatory approvals cannot be introduced until those
approvals are obtained and until launch quantities have been manufactured.
When, or whether, any particular product approvals will be obtained cannot be
predicted. The timing of the introduction of any of the products mentioned
above will not be within ALZA's control. In addition, sales of products from
which ALZA derives royalties and fees are affected by the clients' marketing
efforts and the introduction and marketing of competing products, among other
factors. Due to increasing pressures for cost containment in the U.S. health
care system, it can be expected that pharmaceutical product prices, including
those of products developed by ALZA, will not increase as quickly as they have
in the past, and could decrease.
RESEARCH AND DEVELOPMENT: At the end of 1995 ALZA and TDC had more than 20
products in development, including several in clinical evaluation. As these
products reach later stages of development, higher levels of expenditures
generally will be required. It can therefore be expected that ALZA's product
development expenses for TDC products (and, correspondingly, ALZA's product
development revenue from TDC) will continue to increase during 1996.
Development agreements with client companies are generally terminable by the
clients on short notice and may be terminated for many reasons, including
technical issues, marketing concerns, reallocation of client resources, and
changes in client priorities. In addition, revenues from any particular client
program will decrease dramatically once the New Drug Application for the product
has been filed. To maintain or increase product development revenues, ALZA will
need to enter into new arrangements with client companies to replace revenues
that are lost when programs terminate or products are submitted for regulatory
approval or are approved.
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<PAGE>
PAGE 18-19 OF PAPER FORMAT ANNUAL REPORT
ALZA expects to increase significantly its internal research expenditures in
1996 through the ALZA Technology Institute in order to continue strengthening
the Company's leadership in the drug delivery field. Areas of focus for 1996
include the further development of the E-TRANS-SM- electrotransprot and
DUROS-SM- implant technologies, and the application of ALZA's technologies to
the biotechnology and gene therapy fields.
NET SALES: If current sales trends of existing client company products
manufactured by ALZA continue, ALZA expects 1996 net sales from contract
manufacturing to approximate or slightly exceed 1995 levels. The launch of any
of the products mentioned above would require ALZA to manufacture launch
quantities of the products, and net sales from contract manufacturing in 1996
could significantly increase as a result. Because a significant portion of
ALZA's net sales are generated from manufacturing products ordered by client
companies, many factors affecting net sales are not within ALZA's control.
Revenues will fluctuate from period to period depending on the volume, mix and
timing of orders received from client companies.
In December 1995, ALZA entered into a marketing and distribution agreement with
U.S. Bioscience for Ethyol-Registered Trademark- (amifostine), a unique agent
for the reduction of the cumulative renal (kidney) toxicity associated with
repeated administration of the chemotherapeutic drug cisplatin in patients with
advanced ovarian cancer. Under the terms of the agreement, ALZA has exclusive
rights to market the product in the United States for five years and will be
responsible for sales and marketing; the U.S. Bioscience sale force will
co-promote the product with ALZA. ALZA expects to launch the product in early
1996, and net sales of the product will be reported by ALZA. ALZA paid U.S.
Bioscience an up-front payment and initial distribution fee totaling $20
million, and expects to pay $15 million in additional distribution fees during
the next few years based on U.S. Bioscience clinical activities relating to
Ethyol-Registered Trademark-. The amortization of the remaining portion of the
marketing and distribution fees paid to U.S. Bioscience will impact costs of
products shipped.
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<PAGE>
PAGE 19 OF PAPER FORMAT ANNUAL REPORT
GENERAL, ADMINISTRATIVE AND MARKETING EXPENSES: General, administrative and
marketing expenses are expected to increase in 1996, in part as a result of the
expenses associated with the launch of Ethyol-Registered Trademark-.
Significant expenses are incurred prior to the launch of any new product, and
whether and when such expenses will be recouped is dependent upon the success of
the product in the marketplace, which cannot be predicted.
LIQUIDITY AND CAPITAL RESOURCES: ALZA believes that its existing cash and
investment balances are adequate to fund its cash needs for 1996 and beyond. In
addition, should the need arise, ALZA believes it would be able to borrow
additional funds or otherwise 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.
LOOKING BEYOND 1996: Over the longer term, ALZA intends to become less
dependent on royalties and fees as ALZA's sales and marketing activities expand
and as ALZA directly markets more products (including products developed with
TDC); however, there can be no assurance that these expanded activities will be
successful due to factors such as the risks of product development, the length
of the regulatory approval process, acceptance of products by the intended
markets, and the current health care cost containment environment.
ALZA also expects that costs of products shipped, as a percent of net sales,
will continue to decline over the longer term although quarter-to-quarter
fluctuations will continue to occur. Higher gross margins may be achieed
through increased utilization of capacity, greater operating efficiencies and a
proportionate increase in the sales of ALZA-marketed products.
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<PAGE>
PAGE 20 OF PAPER FORMAT ANNUAL REPORT
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
Years ended December 31,
(In thousands, except per share amounts) 1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
REVENUES:
Royalties and fees $ 145,457 $ 123,748 $ 113,318
Research and development, including amounts from
TDC (1995-$70,146; 1994-$31,634; 1993-$4,869) 103,972 68,715 46,783
Net sales 76,878 68,511 53,630
Interest and other 24,317 17,782 20,451
---------- ---------- ----------
Total revenues 350,624 278,756 234,182
COSTS AND EXPENSES:
Research and development 103,418 76,099 53,153
Costs of products shipped 65,395 56,638 74,450
General, administrative and marketing 41,085 33,350 21,422
Interest and other 23,939 19,379 19,204
---------- ---------- ----------
Total costs and expenses 233,837 185,466 168,229
---------- ---------- ----------
Income before income taxes, extraordinary item
and cumulative effect of accounting change 116,787 93,290 65,953
Provision for income taxes 44,379 35,170 23,084
---------- ---------- ----------
Income before extraordinary item and
cumulative effect of accounting change 72,408 58,120 42,869
Extraordinary item-debt refinancing, net
of income taxes - - (3,830)
Cumulative effect of change in accounting for
income taxes - - 6,573
---------- ---------- ----------
Net income $ 72,408 $ 58,120 $ 45,612
---------- ---------- ----------
---------- ---------- ----------
PER COMMON AND COMMON EQUIVALENT SHARE:
Income before extraordinary item and
cumulative effect of accounting change $ .88 $ .71 $ .54
Extraordinary item-debt refinancing, net of
income taxes - - (.05)
Cumulative effect of change in accounting for
income taxes - - .08
---------- ---------- ----------
Net income $ .88 $ .71 $ .57
---------- ---------- ----------
---------- ---------- ----------
Weighted average common and dilutive common
equivalent shares 82,609 82,286 79,859
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
See accompanying notes.
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<PAGE>
PAGE 21 OF PAPER FORMAT ANNUAL REPORT
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
December 31,
(In thousands, except share and per share amounts) 1995 1994
---- ----
<S> <C> <C>
ASSETS:
CURRENT ASSETS:
Cash and cash equivalents $ 87,987 $ 88,844
Short-term investments 331,037 256,084
Receivables, net of allowance for doubtful accounts
(1995-$240; 1994-$259) 108,020 84,879
Inventories 34,497 33,415
Prepaid expenses and other current assets 16,527 29,211
---------- ----------
Total current assets 578,068 492,433
PROPERTY, PLANT AND EQUIPMENT:
Buildings and leasehold improvements 178,661 168,001
Equipment 130,009 103,876
Construction in progress 33,757 26,773
Land and prepaid land leases 17,068 17,038
---------- ----------
359,495 315,688
Less accumulated depreciation and amortization (82,511) (70,238)
---------- ----------
Net property, plant and equipment 276,984 245,450
Other assets 82,163 68,369
---------- ----------
TOTAL ASSETS $ 937,215 $ 806,252
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY:
CURRENT LIABILITIES:
Accounts payable $ 20,043 $ 20,006
Accrued liabilities 29,406 18,773
Deferred revenue 17,630 16,340
Current portion of long-term debt 869 869
---------- ----------
Total current liabilities 67,948 55,988
5 1/4% zero coupon convertible subordinated debentures 362,944 344,593
Other long-term liabilities 51,770 41,192
Commitments and contingencies
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value,
300,000,000 shares authorized; 82,506,419 and
82,043,188 shares issued and outstanding at
December 31, 1995 and 1994, respectively 825 820
Additional paid-in capital 310,451 302,147
Unrealized gains (losses) on available-for-sale
securities,net of tax effect 1,886 (7,471)
Retained earnings 141,391 68,983
---------- ----------
Total stockholders' equity 454,553 364,479
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 937,215 $ 806,252
---------- ----------
---------- ----------
</TABLE>
See accompanying notes.
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<PAGE>
PAGE 22 OF PAPER FORMAT ANNUAL REPORT
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Years ended December 31, 1995, 1994 and 1993
(In thousands)
<TABLE>
<CAPTION>
UNREALIZED
GAINS (LOSSES) TOTAL
ADDITIONAL ON AVAILABLE- STOCK-
COMMON PAID-IN FOR-SALE RETAINED HOLDERS'
STOCK CAPITAL SECURITIES EARNINGS EQUITY
---------- ----------- ------------ ---------- ----------
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1992 $ 749 $ 404,947 $ - $ 1,847 $ 407,543
Distribution of TDC Units - (213,404) - (36,596) (250,000)
Exercise of warrants 64 95,811 - - 95,875
Common stock issued 3 7,644 - - 7,647
Net income - - - 45,612 45,612
---------- ----------- ------------ ---------- ----------
BALANCE, DECEMBER 31, 1993 816 294,998 - 10,863 306,677
Common stock issued 4 7,149 - - 7,153
Unrealized losses on
available-for-sale
securities, net of
tax effect - - (7,471) - (7,471)
Net income - - - 58,120 58,120
---------- ----------- ---------- ---------- ----------
BALANCE, DECEMBER 31, 1994 820 302,147 (7,471) 68,983 364,479
Common stock issued 5 8,304 - - 8,309
Unrealized gains on
available-for-sale
securities, net of
tax effect - - 9,357 - 9,357
Net income - - - 72,408 72,408
---------- ----------- ---------- ---------- ----------
BALANCE, DECEMBER 31, 1995 $ 825 $ 310,451 $ 1,886 $ 141,391 $ 454,553
---------- ----------- ---------- ---------- ----------
---------- ----------- ---------- ---------- ----------
</TABLE>
See accompanying notes.
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<PAGE>
PAGE 23 OF PAPER FORMAT ANNUAL REPORT
CONSOLIDATED STATEMENT OF CASH FLOWS
Years ended December 31,
(In thousands)
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 72,408 $ 58,120 $ 45,612
Non-cash adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 15,274 13,673 12,255
Interest on 5 1/4% zero coupon convertible
subordinated debentures 18,351 8,063 -
Interest on 7 1/2% zero coupon convertible
subordinated debentures - - 14,912
Extraordinary item-debt refinancing - - 5,893
Cumulative effect of change in accounting
for income taxes - - (6,573)
Decrease (increase) in assets:
Receivables (23,141) (28,316) (3,351)
Inventories (1,082) (8,252) 4,725
Prepaid expenses and other current assets 6,170 (1,406) (1,859)
Increase (decrease) in liabilities:
Accounts payable 37 8,328 140
Accrued liabilities 10,633 1,358 (1,530)
Deferred revenue 1,290 9,642 (1,102)
Other long-term liabilities 11,437 13,092 7,113
--------- --------- ---------
Total adjustments 38,969 16,182 30,623
--------- --------- ---------
Net cash provided by operating activities 111,377 74,302 76,235
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (46,309) (37,205) (23,784)
Purchases of available-for-sale securities (205,163) (328,944) -
Sales of available-for-sale securities 134,069 147,892 -
Maturities of available-for-sale securities 12,012 102,085 -
Decrease in short-term investments - - 63,567
Decrease in long-term investments - - 44,461
Decrease (increase) in cash surrender
value-life insurance and prepaid premiums (4,100) (12,287) 4,285
Decrease (increase) in other assets (10,193) 4,435 3,965
--------- --------- ---------
Net cash provided by (used in) investing activities (119,684) (124,024) 92,494
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from 5 1/4% zero coupon convertible
subordinated debentures - 328,117 -
Redemption of 7 1/2% zero coupon convertible
subordinated debentures - - (243,878)
Issuances (maturities) of commercial paper, net - (249,520) 249,520
Principal payments on long-term debt (859) (867) (866)
Contribution to TDC - - (250,000)
Issuances of common stock 8,309 7,153 103,522
--------- --------- ---------
Net cash provided by (used in) financing activities 7,450 84,883 (141,702)
--------- --------- ---------
Net increase (decrease) in cash and
cash equivalents (857) 35,161 27,027
Cash and cash equivalents at beginning of year 88,844 53,683 26,656
--------- --------- ---------
Cash and cash equivalents at end of year $ 87,987 $ 88,844 $ 53,683
--------- --------- ---------
--------- --------- ---------
</TABLE>
See accompanying notes.
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PAGE 24 OF PAPER FORMAT ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994, AND 1993
NOTE ONE: BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
ALZA Corporation ("ALZA" or the "Company") develops a broad range of
pharmaceutical products based on ALZA's proprietary therapeutic systems
technologies primarily under joint development and commercialization agreements
with ALZA's client companies, including Therapeutic Discovery Corporation
("TDC").
Royalty revenue and other payments based on sales by ALZA's client companies
of products developed under development and commercialization agreements, and
certain one-time or infrequent fees or similar payments under such agreements,
are reported as royalties and fees.
Revenues from development activities with client companies are reported as
research and development revenue. ALZA's research and development revenue
represents clients' reimbursement to ALZA of costs incurred in product
development and clinical evaluation, including a portion of general and
administrative expenses, and therefore does not contribute significantly to
current net income. ALZA's policy is to expense all costs of research and
product development related both to costs incurred on its own behalf and on
behalf of its clients.
ALZA manufactures all or a portion of the product requirements for certain of
its client companies, including Duragesic-Registered Trademark- for Janssen
Pharmaceutica, Inc. ("Janssen"), Adalat CR-Registered Trademark- for Bayer AG,
Nicoderm-Registered Trademark- for Hoechst Marion Roussel Inc. ("HMR"),
Procardia XL-Registered Trademark- for Pfizer Inc. ("Pfizer"), and Catapres-
TTS-Registered Trademark- for Boehringer Ingelheim Pharmaceutical, Inc. In
addition, ALZA manufactures and markets directly in the U.S. its
Progestasert-Registered Trademark- system, ALZET-Registered Trademark- osmotic
pumps, the Ocusert-Registered Trademark- system and the Testoderm-Registered
Trademark- testosterone transdermal system. ALZA also manufactures the
Actisite-Registered Trademark- periodontal fiber, which is marketed in the
U.S. by a partnership between ALZA and Procter & Gamble. Internationally,
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PAGE 24-25 OF PAPER FORMAT ANNUAL REPORT
Progestasert-Registered Trademark-, ALZET-Registered Trademark-,
Ocusert-Registered Trademark- and Actisite-Registered Trademark- are marketed
by ALZA through distributors. Revenues from all of these activities are
reported as net sales. ALZA recognizes sales revenues at the time of product
shipment; sales are net of discounts, rebates and allowances. Export sales,
principally to distributors and client companies in Europe, were $20.1 million,
$16.9 million and $18.1 million in 1995, 1994 and 1993, respectively.
Included in interest and other revenue are revenues from ALZA's co-promotion
arrangements with client companies and net losses from ALZA's partnership with
Proctor & Gamble. ALZA earned interest income, including realized gains and
losses on sales of investments, of $26.0 million, $17.6 million and $19.6
million in 1995, 1994 and 1993, respectively.
Pfizer accounted for 23% of ALZA's total revenues in 1995, 30% in 1994 and 35%
in 1993; TDC accounted for 20% of ALZA's total revenues in 1995 and 11% in
1994; Janssen accounted for 12% of ALZA's total revenues in 1995 and 1994; HMR
(formerly Marion Merrell Dow Inc.) accounted for 10% of ALZA's total revenues
in 1995 and 1993; and Ciba-Geigy Corporation ("Ciba-Geigy") accounted for 13%
of ALZA's total revenues in 1993.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of ALZA and its
wholly-owned subsidiaries, ALZA Development Corporation, ALZA International,
Inc. and ALZA Limited. All significant intercompany accounts and transactions
have been eliminated.
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.
-16-
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CASH AND CASH EQUIVALENTS
ALZA reports all highly liquid debt instruments purchased with a maturity of
three months or less as cash equivalents. The carrying amount reported on
the balance sheet for cash and cash equivalents approximates their fair value.
SHORT-TERM INVESTMENTS
ALZA has classified its entire investment portfolio, including cash
equivalents of $82.7 million and $86.7 million at December 31,1995 and 1994,
respectively, 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 December 31, 1995, net
unrealized gains on available-for-sale securities were $1.9 million, net of
$1.3 million tax effect. At December 31, 1994, net unrealized losses on
available-for-sale securities were $7.5 million, net of $5.2 million tax effect.
The cost of securities when sold is based upon specific identification.
Realized gains and losses were not material for the years ended December 31,
1995 or 1994.
The following is a summary of ALZA's investment portfolio at December 31,
1995 and 1994:
<TABLE>
<CAPTION>
(In thousands) DECEMBER 31, 1995 DECEMBER 31, 1994
----------------------------------------------- ---------------------------------------------
Estimated Estimated
Unrealized Unrealized Fair Unrealized Unrealized Fair
Cost Gains Losses Value Cost Gains Losses Value
-------- --------- --------- -------- --------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury securities
and obligations of
U.S. government
agencies $150,881 $ 1,431 $ 605 $151,707 $182,677 $ 14 $ 8,751 $173,940
Collateralized mortgage
obligations and asset
backed securities 43,388 319 174 43,533 42,084 5 1,617 40,472
Corporate securities 216,285 2,256 28 218,513 130,670 464 2,788 128,346
(primarily corporate -------- -------- -------- -------- -------- -------- -------- --------
notes and commercial
paper) $410,554 $ 4,006 $ 807 $413,753 $355,431 $ 483 $ 13,156 $342,758
-------- -------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- -------- --------
</TABLE>
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PAGE 26 OF PAPER FORMAT ANNUAL REPORT
The amortized cost and estimated fair value of debt securities at
December 31, 1995 and 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.
<TABLE>
<CAPTION>
(In thousands) 1995 1994
----------------------- ------------------------
<S> <C> <C> <C> <C>
Estimated Estimated
Fair Fair
Cost Value Cost Value
-------- -------- -------- --------
Due in one year or less $176,691 $176,810 $115,372 $115,350
Due after one year through four years 138,145 139,557 107,319 103,768
Due after four years through eight years 95,718 97,386 132,740 123,640
--------- -------- -------- --------
$410,554 $413,753 $355,431 $342,758
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
CREDIT AND INVESTMENT RISK
Most of ALZA's revenues, comprised primarily of royalties and fees, research
and development revenue and net sales, are derived from agreements with major
pharmaceutical company clients and TDC, all of which have significant cash
resources. Therefore, ALZA considers its credit risk related to these
transactions to be minimal.
ALZA invests excess cash in securities of banks and companies from a variety
of industries, with strong credit ratings, and in U.S. government obligations.
These securities typically bear minimal risk and ALZA has not experienced any
losses on its investments due to institutional failure or bankruptcy. ALZA's
investment policy is designed to limit exposure with any one institution.
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PAGE 26-27 OF PAPER FORMAT ANNUAL REPORT
INVENTORIES
Raw materials, work in process and finished goods inventories are stated at
the lower of standard cost (which approximates actual costs on a first-in,
first-out cost method) or market value.
Inventories consist of the following:
<TABLE>
<CAPTION>
(In thousands) 1995 1994
---- ----
<S> <C> <C>
Raw materials $15,786 $18,264
Work in process 15,251 10,175
Finished goods 3,460 4,976
------- -------
Total inventories $34,497 $33,415
------- -------
------- -------
</TABLE>
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost, including capitalized
interest additions of $1.3 million in 1995, $0.3 million in 1994 and $1.9
million in 1993. Additions and improvements are capitalized while maintenance
and repairs are expensed as incurred. Except for certain manufacturing
equipment that is depreciated on a per unit manufactured basis, depreciation
and amortization are computed on the straight-line method, over estimated
useful lives, as follows:
Buildings 30 to 40 years
Leasehold improvements Terms of the leases (1 to 5 years)
Equipment 3 to 9 years
Prepaid land leases Remaining terms of the leases (18 to 62 years)
Prepaid land leases represent ALZA's total cost, paid in advance, of leasehold
rights to land upon which certain of ALZA's buildings in Palo Alto, California
are situated. Included in construction in progress are payments made in
connection with the facilities being constructed or modified, and the
installation of related equipment in Mountain View, California (primarily
research and development) and Vacaville, California (primarily commercial
manufacturing).
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PAGE 27 OF PAPER FORMAT ANNUAL REPORT
ACCRUED LIABILITIES
The details of ALZA's accrued liabilities are as follows:
<TABLE>
<CAPTION>
(In thousands) 1995 1994
---- ----
<S> <C> <C>
Accrued income taxes $ 2,146 $ 1,418
Accrued compensation 13,404 10,099
Other accrued liabilities 13,856 7,256
------- -------
Total accrued liabilities $29,406 $18,773
------- -------
------- -------
</TABLE>
Included in other accrued liabilities at December 31, 1995 is $6.0 million,
which was subsequently paid in January 1996, related to ALZA's $20 million
up-front payment and initial distribution fee under its agreement with U.S.
Bioscience, Inc.
PER SHARE INFORMATION
Per share information is 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 are considered common stock equivalent shares but were not included
in the per share calculation for 1995 and 1994 as their inclusion would have
had an antidilutive effect. Fully diluted earnings per share are not
presented since dilution is less than 3% for each year presented.
NOTE TWO: U.S. BIOSCIENCE, INC. AGREEMENT
In December 1995, ALZA entered into a marketing and distribution agreement
with U.S. Bioscience, Inc. ("U.S. Bioscience") for Ethyol-Registered
Trademark- (amifostine). Under the terms of the agreement, ALZA has exclusive
rights to market the product in the United States for five years and will be
responsible for sales and marketing; the U.S. Bioscience sales force will
co-promote the product with ALZA. ALZA expects to launch the product in early
1996. After the five-year period, which ALZA has an option to extend for one
year, marketing rights to Ethyol-Registered Trademark- will revert to U.S.
Bioscience and ALZA will receive payments from U.S.
-20-
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Bioscience for ten years based on continued sales of the product. ALZA paid
U.S. Bioscience an up-front payment and initial distribution fee totaling $20
million. Of this amount, approximately $13 million was capitalized and
attributed to the product as originally approved by the Food and Drug
Administration. Approximately $7 million was charged to general,
administrative and marketing expenses and was attributed to potential expanded
product indications. ALZA expects to pay an additional $15 million in
distribution fees during the next few years based on U.S. Bioscience clinical
activities relating to Ethyol-Registered Trademark-.
NOTE THREE: DEBT OBLIGATIONS AND OTHER LONG-TERM LIABILITIES
In July 1994, ALZA completed a public offering of 5 1/4% zero coupon
convertible subordinated debentures due 2014 ("5 1/4% Debentures"). The 5 1/4%
Debentures were issued at a price of $354.71 per $1,000 principal amount at
maturity. The offering resulted in $328.1 million of net proceeds to ALZA.
Approximately $250 million of the net proceeds were used to retire ALZA's
outstanding commercial paper; the remainder was available for general
corporate purposes. The 5 1/4% Debentures, due July 2014, have a principal
amount at maturity of $948.8 million, with a yield to maturity of 5 1/4% per
annum, computed on a semiannual bond equivalent basis. There are no periodic
interest payments. At the option of the holder, each 5 1/4% Debenture is
convertible into 12.987 shares of common stock at any time. At the option of
the holder, the 5 1/4% Debentures will be purchased by ALZA on July 14, 1999,
July 14, 2004 or July 14, 2009, at a purchase price equal to the issue price
plus accreted original issue discount to such purchase date. ALZA, at its
option, may elect to deliver either common stock or cash in the event of
conversion or purchase of the 5 1/4% Debentures. ALZA, at its option, may
redeem any or all of the 5 1/4% Debentures for cash after July 14, 1999 at a
redemption price equal to the issue price plus accreted original issue discount.
In connection with the offering, ALZA incurred underwriting fees and other
costs of $9.0 million, which are included in other assets and are being
amortized over the term of the 5 1/4% Debentures. The 5 1/4% Debentures are
listed for trading on the New York Stock Exchange. At December 31, 1995 and
1994 the fair value of the 5 1/4% Debentures was $387.8 million and $315.4
million, respectively.
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PAGE 28 OF PAPER FORMAT ANNUAL REPORT
ALZA's other long-term liabilities are as follows:
<TABLE>
<CAPTION>
(In thousands) 1995 1994
---- ----
<S> <C> <C>
Long-term debt $ 69 $ 928
Deferred income taxes 25,706 18,513
Deferred compensation 25,995 21,751
------- -------
Total other long-term liabilities $51,770 $41,192
------- -------
------- -------
</TABLE>
ALZA has deferred compensation arrangements under which selected employees may
defer a portion of their salaries. ALZA has purchased life insurance policies
that it intends to use to partially finance amounts to be paid in the future to
participants, based on their deferred salary amounts and interest.
NOTE FOUR: CAPITAL STOCK AND WARRANTS
In 1993, approximately 6.4 million warrants, issued in connection with the 1988
Bio-Electro Systems ("BES") subscription offering, were exercised. Net proceeds
to ALZA totaled approximately $96 million.
At December 31, 1995, ALZA had outstanding privately held warrants to purchase
1.0 million shares of common stock at an exercise price of $25 per share, which
were subsequently exercised. Net proceeds to ALZA in 1996 totaled $25 million.
In connection with the formation of TDC, ALZA has outstanding warrants to
purchase approximately 1.0 million shares of common stock at an exercise price
of $65 per share. The warrants, to the extent not exercised will expire on
December 31, 1999.
ALZA is authorized to issue 100,000 shares of preferred stock, $.01 par value,
none of which was outstanding at December 31, 1995 or 1994. The Board of
Directors may determine the rights, preferences and privileges of any preferred
stock issued in the future.
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NOTE FIVE: ARRANGEMENTS WITH THERAPEUTIC DISCOVERY CORPORATION
In June 1993, ALZA completed the distribution of a special dividend of "Units"
to ALZA stockholders. Approximately 7.7 million Units were issued; each Unit
consisted of one share of TDC Class A common stock and one warrant to purchase
one-eighth of one share of ALZA common stock. The Units trade on the Nasdaq
Stock Market (under the trading symbol TDCAZ) and will trade only as Units until
the earlier of June 11, 1996, or the date on which ALZA exercises the Purchase
Option (as defined below) (the "Separation Date"), at which time the warrants
and TDC Class A common stock will trade separately. The warrants will be
exercisable at a per-share exercise price of $65 at any time after the
Separation Date and will expire, if not previously exercised, on December 31,
1999. In connection with the dividend, ALZA contributed $250 million in cash to
TDC. As a result of this contribution and the dividend, ALZA's total assets and
stockholders' equity were each reduced by $250 million in 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 (the "Development Contract") pursuant to which ALZA conducts research
and development activities on behalf of TDC. Product development revenue from
TDC during 1995, 1994 and 1993, under the contract was $70.1 million, $31.6
million and $4.9 million, respectively.
ALZA has an option to license any product developed by TDC, on a product-by-
product basis, providing ALZA with access to a potential pipeline of products
for worldwide commercialization. If ALZA exercises its license option for any
product, ALZA will make royalty payments to TDC if the product is sold by ALZA
(up to a maximum of 5% of ALZA's net sales of such product) or, if the product
is sold by a third party, ALZA will pay TDC up to 50% of ALZA's sublicensing
revenues with respect to the product. The exact percentages of net sales and
ALZA's sublicensing revenue payable to TDC will depend on the amount of
TDC's funding of the product. ALZA has an option, exercisable on a product-by-
product basis, to buy out its royalty obligation to TDC by making a one-time
payment that is a multiple of royalties and sublicensing
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PAGE 29 OF PAPER FORMAT ANNUAL REPORT
fees paid in specified periods.
ALZA also has an option, exercisable at ALZA's sole discretion, to purchase,
according to a predetermined formula, all (but not less than all) of the
outstanding shares of TDC Class A common stock (the "Purchase Option"). The
Purchase Option is exercisable at any time until December 31, 1999, or later
under certain circumstances. The Purchase Option will expire, in any event, on
the 60th day after TDC files a Form 10-K or Form 10-Q containing a balance sheet
showing less than an aggregate of $5.0 million in cash and cash equivalents,
short-term investments and long-term investments. If the Purchase Option is
exercised, the exercise price will be the greatest of: (a) $100 million; (b)
the fair market value of one million shares of ALZA common stock; (c) 25 times
the worldwide royalties and sublicensing fees paid by ALZA to TDC during four
specified calendar quarters or 100 times such royalties and sublicensing fees
during a specified calendar quarter; in each case, less any amounts previously
paid by ALZA to exercise a buy-out option with respect to any product; or (d)
$325 million less all amounts paid by TDC under the Development Contract. The
purchase price may be paid in cash, in ALZA common stock, or any combination of
the two, at the option of ALZA.
ALZA performs certain administrative services for TDC under an administrative
services agreement (terminable at the option of TDC), for which ALZA is
reimbursed its direct costs, plus certain overhead expenses. For the years
ended 1995, 1994 and 1993, administrative service revenue under this agreement
was $0.1 million, $0.2 million and $0.1 million, respectively, and is included
in interest and other revenue.
NOTE SIX: MANUFACTURING WRITE-OFF
In December 1993, ALZA wrote off $28.1 million related primarily to its
manufacturing activities. This write-off resulted from both non-recurring
expenses and allowances related to scale-up of the production of certain
products and to excess transdermal manufacturing capacity and equipment
resulting from
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PAGE 29-30 OF PAPER FORMAT ANNUAL REPORT
ALZA's facility expansion in Vacaville, California. The facility expansion was
followed by lower than anticipated Nicoderm-Registered Trademark- production
requirements, reflecting the decline in Nicoderm-Registered Trademark- sales in
1993. The $28.1 million included $10.1 million of inventory write-downs, $6.8
million of equipment write-offs, $4.6 million of allowances reducing sales and
receivables and $6.6 million of anticipated future cash outlays related to
contractual product supply issues. The effect of the write-off in 1993
increased costs of products shipped by $22.0 million and reduced net sales by
$6.1 million. Charges relating to the write-off of assets and cash expenditures
for contractual product supply issues in 1994 approximated the original
estimate.
NOTE SEVEN: EMPLOYEE COMPENSATION AND BENEFIT PROGRAMS
In 1993, ALZA adopted a company-wide bonus program under which substantially all
employees are eligible to receive a bonus. The annual bonus, if any, is
determined by ALZA's Board of Directors, at its discretion, based on the
Company's performance during the year. Under ALZA's former Executive Incentive
Plan, for which 1993 was the last plan year, selected employees received cash
awards. Bonus and award expenses under these programs for 1995, 1994 and 1993
were $5.3 million, $2.6 million and $2.2 million, respectively.
ALZA has an employee stock purchase plan under which essentially all of ALZA
employees may participate and purchase stock at 85% of its fair market value at
certain specified dates. Employee contributions are limited to 15% of
compensation and no more than 300,000 shares may be purchased by all
participants in any plan year. In 1995, 1994 and 1993, an aggregate of 165,314,
157,075 and 126,905 shares, respectively, of ALZA common stock were purchased by
the participants under the terms of this plan. Since adoption in 1984 of this
plan, 1,167,448 shares have been issued under this plan and 882,552 shares are
available for issuance.
In 1986, ALZA adopted a company-funded, defined contribution retirement plan for
its employees. This plan provides for an annual basic contribution and allows
for additional discretionary contributions on a
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PAGE 30 OF PAPER FORMAT ANNUAL REPORT
year-by-year basis. Such contributions are allocated to participants based on
the participant's salary and age. For 1995, 1994 and 1993, the total expense
for such contributions to this plan was $2.7 million, $2.2 million and $1.9
million, respectively.
ALZA has a stock option plan, adopted in 1992 (prior plans were terminated in
1992), whereby incentive stock options to purchase shares of ALZA common stock
at not less than the fair market value of the stock at the date of the grant,
and nonstatutory stock options to purchase shares of ALZA common stock at not
less than 85% of the fair market value of the stock at the date of grant, have
been and may be granted to certain present and potential employees, directors
and consultants. Grants of restricted stock also may be made under the plan; to
date no restricted stock has been granted. To date, all options granted have
had exercise prices equal to the fair market value of common stock on the date
of grant. In addition, options granted under previous plans remain outstanding,
but no additional options may be granted under such plans. Options generally
expire ten years after the date of grant.
Information as to ALZA's stock options is as follows:
<TABLE>
<CAPTION>
1995 1994
---- ----
Number Exercise Number Exercise
of Shares Price of Shares Price
--------- -------- --------- ---------
<S> <C> <C> <C> <C>
Options outstanding at
beginning of year 4,383,044 $ 5.25-49.25 3,637,210 $ 4.13-49.25
Option activity during
the year:
Granted 1,804,465 $ 20.00-24.75 1,099,870 $ 19.25-25.50
Exercised (304,371) $ 11.50-24.00 (271,688) $ 4.13-25.88
Canceled (220,535) $ 5.25-49.25 (82,348) $ 12.00-49.25
---------- ----------
Options outstanding
at end of year 5,662,603 $ 8.38-49.25 4,383,044 $ 5.25-49.25
----------- ----------
----------- ----------
Options exercisable
at end of year 1,823,540 $ 8.38-49.25 1,382,101 $ 5.25-49.25
----------- ----------
----------- ----------
Options available for
grant at end of year 1,794,713 485,048
----------- ----------
----------- ----------
</TABLE>
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The Company accounts for stock option grants in accordance with APB Opinion No.
25, "Accounting for Stock Issued to Employees" and accordingly, recognizes no
compensation expense for stock option grants.
NOTE EIGHT: COMMITMENTS AND CONTINGENCIES
ALZA leases certain buildings and equipment under operating leases. Rent
expense under these leases during the years ended 1995, 1994 and 1993 was $1.7
million, $1.6 million and $1.7 million, respectively. Aggregate minimum rental
commitments under non-cancelable operating lease arrangements as of December 31,
1995 were $8.3 million and are payable as follows: $2.3 million in 1996, $2.3
million in 1997, $2.3 million in 1998, and $1.4 million in 1999.
NOTE NINE: INCOME TAXES
Effective January 1, 1993, ALZA changed its method of accounting for income
taxes to the liability method required by Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). As permitted
under the new standard, prior years' financial statements have not been
restated. The cumulative effect of adopting SFAS 109 was a benefit of $6.6
million which consisted primarily of the remaining tax benefits resulting from
the BES acquisition in 1991.
The provision for income taxes is as follows for each of the three years ended
December 31:
<TABLE>
<CAPTION>
(In thousands) 1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Federal:
Current $30,047 $23,361 $15,270
Deferred 5,633 4,110 2,782
------- ------- -------
35,680 27,471 18,052
State:
Current 6,398 6,246 4,644
Deferred 2,301 1,453 388
------- ------- -------
8,699 7,699 5,032
------- ------- -------
Provision for income taxes $44,379 $35,170 $23,084
------- ------- -------
------- ------- -------
</TABLE>
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PAGE 31-32 OF PAPER FORMAT ANNUAL REPORT
Tax benefits associated with employee stock option transactions reduced accrued
income taxes by $1.0 million for 1995 and 1994, respectively, and $2.3 million
in 1993.
The provision for income taxes differs from the amount computed by applying the
statutory federal income tax rate to income before income taxes. The sources
and tax effects of the differences are as follows:
<TABLE>
<CAPTION>
(In thousands) 1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Expected federal tax at 35% $40,875 $32,652 $23,084
State income taxes, net of
federal benefit 5,654 5,004 3,271
Investment and research
tax credits (1,266) (1,973) (2,172)
Other (884) (513) (1,099)
------- ------- -------
Provision for income taxes $44,379 $35,170 $23,084
-------- -------- --------
-------- -------- --------
</TABLE>
Temporary differences which give rise to a significant portion of deferred tax
assets and liabilities for 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
(In thousands) 1995 1994
---- ----
<S> <C> <C>
Deferred tax assets:
Inventories $ 6,211 $ 6,709
Compensation 12,951 10,758
Capitalized research expenses 5,836 8,970
Deferred revenue 7,155 6,674
Unrealized losses on available-
for-sale securities - 5,202
State income taxes 2,386 2,021
Other 2,121 4,049
-------- -------
Total deferred tax assets 36,660 44,383
Deferred tax liabilities:
Property, plant and equipment 38,175 32,860
Unrealized gains on available-for-
sale securities 1,313 -
Other 2,100 2,002
---------- ---------
Total deferred tax liabilities 41,588 34,862
---------- ---------
Net deferred tax (liabilities) assets $ (4,928) $ 9,521
---------- ---------
---------- ---------
</TABLE>
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PAGE 32 OF PAPER FORMAT ANNUAL REPORT
NOTE TEN: LITIGATION
In December 1991, a patent infringement suit was filed by Ciba-Geigy against
Marion Merrell Dow Inc., now Hoechst Marion Roussel Inc., 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 HMR, ruling
the Ciba-Geigy patent invalid. During October 1995, the Court of Appeals for
the Federal Circuit upheld the most significant portions of the summary judgment
decision, and sent back to the District Court the issue of validity of certain
other more limited claims. ALZA believes that these narrower claims are invalid
and do not cover the Nicoderm-Registered Trademark- product. Accordingly, ALZA
reversed a reserve that was established after the patient infringement suit was
filed. The effect of the reversal increased royalties and fees by approximately
$7 million during the fourth quarter of 1995. During January 1995, ALZA and HMR
filed a separate suit against Ciba-Geigy and LTS Lohmann Therapy Systems
Corporation for infringement of two U.S. patents issued to ALZA in 1994 relating
to the transdermal administration of nicotine.
In April 1993, two securities class action lawsuits were filed against ALZA and
certain of its officers and directors. The lawsuits, which were consolidated
into one suit, claimed that ALZA issued and allowed to be issued various public
statements that were materially false and misleading, primarily with respect to
the Nicoderm-Registered Trademark- product. In July 1993, a derivative suit was
filed against certain officers and all of the directors of ALZA, which claimed
that some or all of the named persons engaged in mismanagement of the Company
and improperly obtained profits from the sale of ALZA securities. In order to
avoid the continuing cost of litigation, ALZA entered into an agreement in 1994,
which was approved by the court, settling these related lawsuits for $3.7
million. After taking into account the coverage by the Company's directors' and
officers' liability insurance, this settlement did not have a material adverse
impact on the operations or financial position of the Company.
During January 1994, a suit was filed against ALZA by Cygnus, Inc. ("Cygnus")
seeking a declaration of unenforceability and invalidity of an ALZA patent
relating to transdermal administration of fentanyl and alleging
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violation of antitrust laws. In April 1995, the Court granted ALZA's motion to
dismiss the lawsuit. Cygnus has appealed that ruling.
Pharmaceutical companies are subject to product liability claims from time to
time. Product liability suits have been filed against Janssen and ALZA from
time to time 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.
NOTE ELEVEN: STATEMENT OF CASH FLOWS
Supplemental disclosures of cash flow information:
<TABLE>
<CAPTION>
(In thousands) 1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Cash paid during the year for:
Income taxes $ 36,983 $ 25,655 $ 27,866
Interest 2,557 6,321 48,756
</TABLE>
Cash paid for interest in 1993 includes $46.1 million of original issue discount
paid as part of the redemption price for 7 1/2% zero coupon convertible
subordinated debentures ("7 1/2% Debentures") issued in December 1990 and
redeemed in November 1993.
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Supplemental schedule of noncash investing and financing activities:
<TABLE>
<CAPTION>
(In thousands) 1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Conversion of 7 1/2% Debentures $ - $ - $ 267
Distribution of TDC Units - - 250,000
Net unrealized gains (losses)
on available-for-sale
securities, net of tax effect 9,357 (7,471) -
Deferred issuance costs -
5 1/4% Debentures - 8,413 -
</TABLE>
NOTE TWELVE: RECENTLY ISSUED ACCOUNTING STANDARD
In March 1995, the Financial Accounting Standards Board issued Statement No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of" ("SFAS 121"), which requires impairment losses to be
recorded on long-lived assets used in operations when indicators of impairment
are present and the undiscounted cash flows estimated to be generated by those
assets are less than the assets' carrying amount. SFAS 121 also addresses the
accounting for long-lived assets that are expected to be disposed of. The
Company will adopt SFAS 121 in the first quarter of 1996 and, based on current
circumstances, does not believe the effect of adoption will be material.
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PAGE 34 OF PAPER FORMAT ANNUAL REPORT
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
THE BOARD OF DIRECTORS AND STOCKHOLDERS ALZA CORPORATION
We have audited the accompanying consolidated balance sheet of ALZA Corporation
as of December 31, 1995 and 1994, and the related consolidated statements of
income, stockholders' equity and cash flows for each of the three years in the
period ended December 31, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of ALZA Corporation
at December 31, 1995 and 1994, and the consolidated results of its operations,
and its cash flows for each of the three years in the period ended December 31,
1995, in conformity with generally accepted accounting principles.
As discussed in Note Nine of Notes to Consolidated Financial Statements, in 1993
the Company changed its method of accounting for income taxes.
Ernst & Young LLP
Palo Alto, California
February 16, 1996
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<PAGE>
PAGE 34 OF PAPER FORMAT ANNUAL REPORT
ALZA COMMON STOCK
ALZA common stock is listed for trading (symbol AZA) on the New York Stock
Exchange. ALZA common stock prices are reported in the "Wall Street Journal"
and other newspapers. As of December 31, 1995, there were 9,529 holders of
record. ALZA has never paid cash dividends on its common stock and has no plan
to do so in the foreseeable future. The quarterly high and low sales prices for
the calendar years 1995 and 1994, as reported on the composite tape are shown
below:
<TABLE>
<CAPTION>
ALZA COMMON STOCK
-----------------------------------------------
1995 1994
------------------- --------------------
HIGH LOW HIGH LOW
<S> <C> <C> <C> <C>
First Quarter $ 24 1/8 $ 18 1/8 $ 30 3/4 $ 21
Second Quarter 24 5/8 18 3/8 26 5/8 20 1/4
Third Quarter 27 22 1/8 24 1/8 20 1/8
Fourth Quarter 25 1/8 20 1/4 20 3/4 17
</TABLE>
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<PAGE>
PAGE 35 OF PAPER FORMAT ANNUAL REPORT
SELECTED CONSOLIDATED QUARTERLY FINANCIAL DATA (UNAUDITED)
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
1995 1994
----------------------------------------------- ----------------------------------------------
4th 3rd 2nd 1st 4th 3rd 2nd 1st
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total revenues $101,781 $85,598 $83,005 $80,240 $75,208 $66,234 $69,149 $68,165
Operating income 31,495 29,977 27,615 27,322 24,889 20,270 23,654 26,074
Net income 19,698 18,223 17,450 17,037 15,245 12,510 14,748 15,617
Net income per share .24 .22 .21 .21 .19 .15 .18 .19
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
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<PAGE>
PAGE 35 OF PAPER FORMAT ANNUAL REPORT
SELECTED CONSOLIDATED
FINANCIAL DATA
(In thousands, except
per share amounts)
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991 1990 1989 1988 1987 1986
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Total revenues $350,624 $278,756 $234,182 $250,519 $162,349 $109,425 $92,687 $84,189 $70,812 $57,799
Net income (loss) 72,408 58,120 45,612(1) 72,170 (62,076)(2) 24,654 18,774 17,003 13,984 16,753(3)
Net income (loss) per share .88 .71 .57 .90 (.88) .35 .27 .25 .21 .26
Cash, cash equivalents,
short-term and long-term
investments 419,024 344,928 257,473 338,474 296,587 302,383 108,976 121,130 142,804 81,200
Total assets 937,215 806,252 621,824(4) 698,381 580,490 530,868 288,447 261,588 243,479 137,306
Convertible debentures 362,944 344,593 -(5) 228,966 213,220 273,218 75,000 75,000 75,000 -
Total stockholders' equity 454,553 364,479 306,677(4) 407,543 322,854 219,605 186,636 159,757 138,985 121,219
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1)Includes pre-tax charges and allowances of $28.1 million ($.23 per share on
an after-tax basis) related primarily to manufacturing activities. Also
includes $6.6 million ($.08 per share) in one-time benefits resulting from the
adoption of Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes", and a $3.8 million ($0.5 per share) extraordinary charge relating
to the redemption of ALZA's 7 1/2% zero coupon convertible subordinated
debentures.
(2)Includes the effects of a one-time charge of $101.3 million ($1.38 per share)
related to the purchase of in-process technology.
(3)Includes to the utilization of federal net operating loss carryforwards.
(4)Includes the effect of the $250 million contribution to Therapeutic Discovery
Corporation and the related special dividend to ALZA stockholders.
(5)Approximately $249.5 million of Commercial paper (including accrued interest)
was outstanding.
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<PAGE>
Exhibit 21
SUBSIDIARIES
ALZA Development Corporation (incorporated in California)
ALZA International, Inc. (incorporated in Delaware)
ALZA Limited (incorporated in the United Kingdom)
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<PAGE>
Exhibit 23
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report (Form
10-K) of ALZA Corporation of our report dated February 16, 1996, included in
the 1995 Annual Report to Stockholders of ALZA Corporation.
Our audits also included the consolidated financial statement schedule of
ALZA Corporation listed in Item 14(a). This schedule is the responsibility
of ALZA's management. Our responsibility is to express an opinion based on
our audits. In our opinion, the consolidated financial statement schedule
referred to above, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
We also consent to the incorporation by reference in the Registration
Statements (Form S-3 No. 33-53671 and Forms S-8 No. 2-92629, No. 2-97422, No.
33-21810, No. 2-83419, No. 2-77785, No. 2-97421, No. 33-36141, No. 33-49824
and No. 33-51890) and in the related Prospectuses, of our report dated
February 16, 1996 with respect to the consolidated financial statements
incorporated herein by reference, and our report included in the preceding
paragraph with respect to the consolidated financial statement schedule
included in this Annual Report (Form 10-K) of ALZA Corporation.
Ernst & Young LLP
Palo Alto, California
March 29, 1996
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<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS INCLUDED IN PART II, ITEM 8 OF FORM 10-K DATED DECEMBER 31,
1995 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 88
<SECURITIES> 331
<RECEIVABLES> 108
<ALLOWANCES> 0
<INVENTORY> 34
<CURRENT-ASSETS> 578
<PP&E> 359
<DEPRECIATION> 83
<TOTAL-ASSETS> 937
<CURRENT-LIABILITIES> 68
<BONDS> 363
0
0
<COMMON> 311
<OTHER-SE> 141
<TOTAL-LIABILITY-AND-EQUITY> 937
<SALES> 77
<TOTAL-REVENUES> 351
<CGS> 65
<TOTAL-COSTS> 169
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 24
<INCOME-PRETAX> 117
<INCOME-TAX> 44
<INCOME-CONTINUING> 72
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 72
<EPS-PRIMARY> .88
<EPS-DILUTED> .88
</TABLE>
