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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, 1996
Commission File Number 1-6247
ALZA CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 77-0142070
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(State or other jurisdiction of (I.R.S. Employer
incorporation of organization) Identification 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)
Registrant's telephone number, including area code: (415) 494-5000
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Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
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Common Stock New York Stock Exchange
5 1/4% Liquid Yield Option-TM- Notes due 2014 New York Stock Exchange
(Zero Coupon-Subordinated)
5% Convertible Subordinated Debentures due 2006 New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
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. [ ]
State the aggregate market value of the voting stock held by non-affiliates
of the registrant, as of March 17, 1997: $2,410,274,299
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of March 17, 1997:
Title of Class Number of Shares
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Common Stock 84,912,721
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,
1996; 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 8, 1997.
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ALZA CORPORATION FORM 10-K ANNUAL REPORT
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
TABLE OF CONTENTS
Page
PART I
Item 1. BUSINESS. . . . . . . . . . . . . . . . . . . . . . . . . .3
Item 2. PROPERTIES. . . . . . . . . . . . . . . . . . . . . . . . 19
Item 3. LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . . 19
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS . . . 20
EXECUTIVE OFFICERS OF THE REGISTRANT. . . . . . . . . . . 21
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS . . . . . . . . . . . . . . . . . . . 23
Item 6. SELECTED FINANCIAL DATA . . . . . . . . . . . . . . . . . 23
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS . . . . . . . . . . . 23
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA . . . . . . . 23
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE . . . . . . . . . . . 23
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT . . . 24
Item 11. EXECUTIVE COMPENSATION . . . . . . . . . . . . . . . . . 24
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT . . . . . . . . . . . . . . . . . . . . . 24
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS . . . . . 24
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K. . . . . . . . . . . . . . . . . . . . . . . 25
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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 agreements
with large 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 of 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- (nifedipine) for the treatment of angina and hypertension,
Duragesic-Registered Trademark- (fentanyl) CII for the management of severe
chronic pain, Transderm-Nitro-Registered Trademark- (nitroglycerin) for the
prevention and treatment of angina and NicoDerm-Registered Trademark- CQ-TM-
(nicotine) 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 merged and reduced their
combined 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 1990s 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. ALZA currently has products in development with
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several of the world's largest pharmaceutical companies. Second, ALZA has
expanded its commercialization capabilities and activities as described under
"ALZA Pharmaceuticals" below. ALZA now has an approximately 60 person sales
force which promotes Ethyol-Registered Trademark- (amifostine),
Testoderm-Registered Trademark- (testosterone) CIII, Testoderm-Registered
Trademark- with Adhesive and Mycelex-Registered Trademark- (clotrimazole)
Troche, and co-promotes Duragesic-Registered Trademark- (fentanyl) CII,
Glucotrol XL-Registered Trademark- (glipizide), the ENACT AirWatch-TM-
system, Hexalen-Registered Trademark- (altretamine) and NeuTrexin-Registered
Trademark- (trimetrexate glucuronate). 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 1996, ALZA submitted a New Drug Application for a
second-generation transdermal testosterone product under development with
TDC, and a number of additional products were in the ALZA/TDC pipeline,
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 activities
and 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 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,
regulatory clearance to market products 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.
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ALZA TECHNOLOGIES AND PRODUCTS
D-TRANS-TM- 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 D-TRANS-TM- products are thin, multilayer
systems, in the form of small adhesive patches, that combine a drug reservoir
with a polymer membrane or other mechanism to control drug release to the
surface of intact skin, and then through the skin into the bloodstream.
The transdermal products developed by ALZA and marketed in the United
States and/or other countries include:
- CATAPRES-TTS-Registered Trademark- (clonidine) - Applied
once-weekly for the treatment of hypertension, marketed
by Boehringer Ingelheim Pharmaceutical, Inc.
("Boehringer").
- DURAGESIC-Registered Trademark- (fentanyl) CII - 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 in the United States by ALZA
Pharmaceuticals.
- NicoDerm-Registered Trademark- CQ-TM- / NICODERM-Registered
Trademark- (nicotine) - Applied once-daily to aid in
smoking cessation. NicoDerm-Registered Trademark- CQ-TM-
is marketed for over-the-counter use by SmithKline
Beecham as part of a joint venture with Hoechst Marion
Roussel, Inc. ("HMR"), and Nicoderm-Registered Trademark-
is marketed as a prescription product by HMR in
Australia, Canada, South Korea, New Zealand and the
United States.
- TESTODERM-Registered Trademark- AND TESTODERM-Registered
Trademark- WITH ADHESIVE (testosterone) CIII - A
once-daily transdermal system for replacement therapy in
males for conditions associated with a deficiency or
absence of endogenous testosterone, marketed by ALZA
Pharmaceuticals in the United States. In January 1997,
Scitech Genetics Limited introduced Testoderm-Registered
Trademark- and Testoderm-Registered Trademark- with
Adhesive in Singapore under a distribution agreement with
ALZA. ALZA has executed an agreement with Ferring N.V.
("Ferring") pursuant to which Ferring has the right to
market Testoderm-Registered Trademark- and
Testoderm-Registered Trademark- with Adhesive in 12
European countries.
- TRANSDERM-NITRO-Registered Trademark- (nitroglycerin) -
Applied once-daily for the prevention and treatment of
angina pectoris, marketed by Novartis Pharmaceuticals
Corporation (together with its affiliates, "Novartis").
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- TRANSDERM SCOP-Registered Trademark- (scopolamine) -
Applied once every three days for prevention of nausea
and vomiting associated with motion sickness, marketed by
Novartis.
A number of additional transdermal products are in various stages of
development and clinical testing.
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 comprises 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.
The OROS-Registered Trademark- products developed by ALZA and marketed
in the United States and/or other countries include:
- COVERA-HS-TM- (verapamil) - A once-daily
Controlled-Onset-Extended-Release (COER-24-TM-) tablet
for the treatment of hypertension and angina pectoris,
marketed by G.D. Searle ("Searle").
- DynaCirc CR-Registered Trademark- (isradipine) - A
once-daily system for the treatment of hypertension,
marketed by Novartis, introduced in the United States in
early 1997.
- GLUCOTROL XL-Registered Trademark- (glipizide) - A
once-daily treatment for Type II diabetes, marketed in
the United States by Pfizer Inc. ("Pfizer") and
co-promoted by ALZA Pharmaceuticals.
- MINIPRESS XL-Registered Trademark- / ALPRESS-Registered
Trademark- LP (prazosin) - A once-daily
formulation for the treatment of hypertension, marketed
in France and India by Pfizer.
- PROCARDIA XL-Registered Trademark- / ADALAT CR-Registered
Trademark- (nifedipine) - A once-daily formulation for
the treatment of both angina and hypertension, marketed
by Pfizer in the United States and Bayer AG ("Bayer")
outside the United States.
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- VOLMAX-Registered Trademark- (albuterol) - A twice-daily
dosage form for the treatment of asthma, marketed by Muro
Pharmaceutical, Inc. and Forest Laboratories, Inc. in the
United States and by Glaxo Holdings p.l.c. outside the
United States.
An OROS-Registered Trademark- pseudoephedrine product, an
OROS-Registered Trademark- chlorpheniramine product and an OROS-Registered
Trademark- pseudoephedrine/brompheniramine product, all once-daily
over-the-counter cold/allergy treatments, have been cleared for marketing in
the United States by the United States Food and Drug Administration ("FDA").
The pseudoephedrine and chlorpheniramine products were marketed by Ciba Self
Medication prior to the merger between Ciba Geigy Ltd. and Sandoz Ltd. (now
Novartis). ALZA is in discussions with third parties for the
commercialization of the OROS-Registered Trademark- cold/allergy products.
Pharmagenesis, Inc. has the right to market the pseudoephedrine product in
the People's Republic of China, Hong Kong, Macao and Taiwan. Pacific
Pharmaceuticals has the right to market the pseudoephedrine product and/or
the pseudoephedrine/brompheniramine product in South Korea.
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 has developed other proprietary oral delivery technologies including:
- CHRONSET-Registered Trademark- - ALZA's
Chronset-Registered Trademark- therapeutic system,
currently in development for the oral delivery of
compounds including proteins and peptides, provides a
predetermined delay in the release of active compounds
from an orally administered capsule in order to target
the location or the timing of a bolus delivery.
- LIQUID OROS-Registered Trademark- - ALZA is developing a
liquid OROS-Registered Trademark- system designed for the
delivery of highly insoluble liquid drug formulations or
polypeptides. A delivery orifice in the outer layers of
a coated capsule allows controlled release of drug, while
an internal osmotic layer pushes against the drug
compartment, forcing the liquid drug formulation from the
system.
- RingCap-TM- - ALZA has developed its RingCap-TM-
technology, a new oral controlled release technology
designed to have a low manufacturing cost and broad
applicability. By incorporating several insoluble
polymeric rings around a tablet, the erosion of the
tablet can be controlled, modulating the release of drug
in the gastrointestinal tract. RingCap-TM- systems can
deliver the total dose of the selected drug evenly over
an extended period.
PERIODONTAL PRODUCTS. The Actisite-Registered Trademark- (tetracycline
hydrochloride) 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
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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 right 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
licensed for sale in Europe a bioerodible product called the Perio-Chip-TM-,
which delivers chlorhexidine for the treatment of periodontal disease. The
product, licensed by P&G from Perio Products Ltd., an Israeli company, is
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 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.
IVOMEC SR-Registered Trademark- BOLUS (ivermectin). Developed jointly
with Merck & Co., Inc. ("Merck"), IVOMEC SR-Registered Trademark- is a
product combining the antiparasitic agent ivermectin with ALZA's ruminal
bolus technology. The product, which controls internal and external parasites
in cattle for an entire grazing season following a single administration, was
introduced by Merck in the United States in early 1997 and is marketed by
Merck in a number of other countries. Merck has filed regulatory
applications for clearance to market the product in other countries.
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.
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E-TRANS-TM- SYSTEMS. ALZA's E-TRANS-TM- electrotransport systems are
designed to deliver drugs across intact skin through the use of an electrical
potential gradient. ALZA's E-TRANS-TM- 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 products
utilizing this technology under development, including an E-TRANS-TM-
fentanyl product under development with Janssen.
DUROS-TM- SYSTEMS. ALZA's DUROS-TM- human implant technology is
designed to enable the delivery of peptides, proteins and other bioactive
macromolecules arising from the biotechnology industry. Products
incorporating DUROS-TM- 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. In early 1997, ALZA filed an Investigational New Drug application
("IND") with the FDA for a DUROS-TM- leuprolide human implant product in
development with TDC.
SKIN INTERFACE TECHNOLOGY. ALZA is conducting research on a new skin
interface technology designed to increase drug transport across the skin and
enable delivery of larger molecular weight compounds, including proteins and
peptides. This new technology may be used to enhance ALZA's existing
D-TRANS-TM- transdermal and E-TRANS-TM- electrotransport technologies. ALZA's
activities in this area include a research program with TDC related to the
E-TRANS-TM- electrotransport delivery of insulin.
THERAPEUTIC DISCOVERY CORPORATION
FORMATION. In June 1993, ALZA distributed a special dividend of Units
to ALZA stockholders. 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. On June 11, 1996, the component parts of the Units began trading
separately on the Nasdaq Stock Market. The TDC Class A common stock trades
under the symbol TDCA, and the ALZA warrants trade under the symbol ALZAW.
The ALZA warrants are exercisable at a price of $65 per share, and will
expire, if not previously exercised, on December 31, 1999.
ALZA/TDC AGREEMENTS. 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. ALZA
and TDC have 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,
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exclusive, perpetual license to use ALZA's proprietary drug delivery
technologies to develop and commercialize specified TDC products.
ALZA has an option to license all of the products developed by TDC, on
a product-by-product and country-by-country 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) generally up to a maximum of 5% of
ALZA's net sales of such a product, or if the product is sublicensed to a
third party, ALZA will pay TDC generally 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 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, cash equivalents, short-term investments and long-term investments. At
December 31, 1996 TDC reported cash, cash equivalents, short-term investments
and long-term investments of $85.3 million. Based on TDC's current rate of
expenditures, it can be expected that all TDC funds available for product
development will be exhausted during the second half of 1997. Under the
formula set forth in TDC's Restated Certificate of Incorporation, 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 any buy-out option with respect to any product; or (d) $325 million
less all amounts paid by TDC to ALZA under the Development Contract. Based on
information available at the end of 1996, the Purchase Option exercise price
is expected to be $100 million. The purchase price may be paid in cash, in
ALZA common stock, or any combination of the two, at the option of ALZA.
During any period when TDC no longer has funds available for product
development, but ALZA has not yet made a determination whether or not to
exercise its Purchase Option or its License Option for a particular product,
ALZA will need to continue funding TDC product development at its own expense
in order to keep the product development programs intact subject to ALZA's
determination of the continued technical and commercial feasibility of the
product and the compatibility of the product with ALZA's product portfolio
and business objectives.
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 1996, 1995 and 1994, reimbursement to ALZA under this agreement
was approximately $0.2 million, $0.1 million and $0.2 million, respectively.
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In order to choose appropriate product candidates for development, ALZA
and TDC used a market-driven product discovery process under which they
examined unmet medical needs in selected therapeutic areas and then targeted
cost-effective products for development. The therapeutic areas on which ALZA
and TDC focused were pain management, supportive therapies in oncology and
AIDS, urology and endocrinology; however, ALZA and TDC have also pursued
product opportunities outside these therapeutic areas where ALZA's drug
delivery systems could add significant value to drug therapy. Included in
the review of appropriate candidates for incorporation in an ALZA therapeutic
system were compounds currently off-patent or soon to be off-patent,
proprietary compounds available for license, compounds in biotechnology and
pharmaceutical pipelines, and drugs that were abandoned early in their
development due to side effects or poor efficacy in conventional dosage
forms. By the end of 1996, these product discovery activities were
essentially completed.
TDC PRODUCTS IN DEVELOPMENT. ALZA and TDC have a number of 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, proprietary and
commercial hurdles in order to become successful products. Development of
some TDC products has been terminated, and there can be no assurance that any
or all of the products in development by ALZA and TDC will reach the
marketplace or will become commercially successful products.
In 1996 ALZA and TDC focused their product development activities on
products having the greatest commercial potential, some of which are
described below. In the pain management area, ALZA and TDC had in
development at the end of 1996 an OROS-Registered Trademark- hydromorphone
product intended to provide 24-hour pain management for chronic pain
requiring potent opioid analgesia. In early 1997, ALZA licensed the product
worldwide from TDC, and ALZA entered into an agreement with Knoll
Pharmaceutical Company and its parent company Knoll AG for the continued
clinical development and worldwide commercialization of the product.
In the urology area, ALZA and TDC have under development an
OROS-Registered Trademark- oxybutynin product, a once-a-day dosage form
intended to provide treatment for urge urinary incontinence. At the end of
1996, the product was in Phase III clinical studies.
In the area of oncology, ALZA and TDC have in development a DUROS-TM-
leuprolide human implant product designed for the palliative treatment of
prostate cancer for an extended period, with discontinuation of treatment
possible at any time. The IND was submitted for this product in early 1997
and clinical studies are expected to begin during 1997.
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In the endocrinology area, at the end of 1996 ALZA submitted a New Drug
Application to the FDA for a second-generation transdermal testosterone
product to follow Testoderm-Registered Trademark- and Testoderm-Registered
Trademark- with Adhesive. This product is a single patch that can be worn on
the arm or the torso and is designed to provide convenient physiologic
testosterone replacement therapy. In addition, ALZA and TDC have in Phase
III clinical trials an intrauterine therapeutic system for the delivery of
progesterone as an adjunctive therapy to estrogen hormone replacement therapy
in women. The product is designed to provide local delivery of progesterone
to the uterus for 18 up to 24 months.
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 many 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
overcome.
After a product is manufactured on a pilot scale, clinical safety and
efficacy must be shown. Clinical studies are costly, and can take many years
to complete. There can be no assurance that the desired outcomes will be
shown in the clinical studies 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 commercial scale. The regulatory clearance
process can take many years, and may vary in different countries. Pricing
and reimbursement approvals are also required in some countries, particularly
in Europe. 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 generally must show some performance improvement or
other benefits over products incorporating the same or similar drug
compounds. In some cases, these benefits may be difficult to establish.
Finally, the product must be accepted for reimbursement by third-party
healthcare providers.
ALZA TECHNOLOGY INSTITUTE
ALZA Technology Institute ("ATI"), established by ALZA in 1994,
continued its mission to extend and expand ALZA's drug delivery technologies
in 1996. ATI has
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further developed ALZA's E-TRANS-TM- electrotransport and DUROS-TM- implant
technologies, as well as skin interface technology and the
Chronset-Registered Trademark-, Liquid OROS-Registered Trademark- and
RingCap-TM- systems. During 1996, ATI continued to apply ALZA's technology
in the biotechnology area and in addressing the delivery problems of gene
therapy.
RESEARCH AND DEVELOPMENT EXPENDITURES
ALZA spent $114.8 million on client-sponsored product development
activities during 1996 ($85.8 million and $61.4 million in 1995 and 1994,
respectively); such amounts exclude reimbursable general and administrative
costs. ALZA spent $26.8 million on ALZA-sponsored research and development
activities during 1996 ($17.6 million and $14.7 million in 1995 and 1994,
respectively); such amounts exclude allocable general and administrative
costs. Presentation of the 1995 and 1994 research and development activities
have been reclassified to conform with the 1996 presentation. The
ALZA-sponsored research and development activities include expenses of the
ALZA Technology Institute of $20.3 million, $13.8 million and $9.2 million
for 1996, 1995 and 1994, respectively. Research and development costs are
expensed as incurred. ALZA had research and development revenue of $131.2
million during 1996, $104.0 million during 1995 and $68.7 million during 1994
from clients with which ALZA has joint product development agreements
(including $100.7 million in 1996, $70.1 million in 1995 and $31.6 million in
1994 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- CQ-TM- and Nicoderm-Registered Trademark- for
HMR, Covera-HS-TM- for Searle, Procardia XL-Registered Trademark- and Adalat
CR-Registered Trademark- for Pfizer and Catapres-TTS-Registered Trademark-
for Boehringer. ALZA also manufactures the Progestasert-Registered
Trademark-, ALZET-Registered Trademark-, Ocusert-Registered Trademark-,
Testoderm-Registered Trademark-, Testoderm-Registered Trademark- with Adhesive
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 costs associated with
product liability claims in the
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pharmaceutical and medical device industries, particularly in the area of
implantable materials, it may become increasingly difficult, more expensive,
or 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, prevent the commercialization of some
products, or cause delays in development due to the necessity to design
products to incorporate available or obtainable materials.
To the extent ALZA licenses-in products, or promotes products developed
by third parties, ALZA will be dependent on third parties to manufacture
those products. The Ethyol-Registered Trademark- (amifostine) product, a
very important contributor to ALZA's net sales, is manufactured for U.S.
Bioscience, Inc. ("U.S. Bioscience") by a third party contract manufacturer,
and is expected to be manufactured by U.S. Bioscience at its facility in the
Netherlands in the near future. A lack of supply of product from a third
party could adversely affect ALZA's net sales revenues.
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, as well as licensed-in
products. ALZA Pharmaceuticals now has a sales force of approximately 60
people located throughout the United States. In 1996 ALZA Pharmaceuticals
began marketing Ethyol-Registered Trademark- in the United States.
Ethyol-Registered Trademark- is a unique cytoprotective agent developed by
U.S. Bioscience, indicated for the reduction of cumulative renal toxicity
associated with repeated administration of the chemotherapeutic drug
cisplatin in patients with advanced ovarian or non-small cell lung cancer.
U.S. Bioscience co-promotes the product with ALZA. ALZA has the right to
market the product for five years, with an option for a sixth year, and will
receive residual payments for a specified period after the end of ALZA's
marketing term. In 1996 ALZA Pharmaceuticals also began promoting in the
United States Bayer Corporation's Mycelex-Registered Trademark-
(clotrimazole) Troche and co-promoting U.S. Bioscience's Hexalen-Registered
Trademark- (altretamine) and NeuTrexin-Registered Trademark- (trimetrexate
glucuronate) products in the United States. ALZA Pharmaceuticals also
co-promotes Duragesic-Registered Trademark- with Janssen, Glucotrol
XL-Registered Trademark- with Pfizer and the ENACT AirWatch-TM- system, all
in the United States. ALZA Pharmaceuticals also markets ALZET-Registered
Trademark- mini-osmotic pumps, Progestasert-Registered Trademark- and
Ocusert-Registered Trademark-, and supports P&G in the marketing and
promotion of Actisite-Registered Trademark-.
ALZA Pharmaceuticals is establishing international commercialization
capabilities by developing distribution arrangements to market several
ALZA-developed products. Actisite-Registered Trademark- is distributed in
Austria, Denmark, Germany, Italy, Spain, Sweden, Switzerland and the United
Kingdom by distributors, and agreements were recently signed for the
distribution of the product in Japan and South Korea, following regulatory
approval. In 1997, ALZA signed an agreement with Ferring for the rights to
market Testoderm-Registered Trademark- with
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Adhesive, as well as the second-generation testosterone product under
development with TDC, in 12 European countries. In order to enter into the
agreement with Ferring, ALZA exercised its license option for the TDC
testosterone product for those 12 countries. ALZA has also signed
distribution agreements for 17 Asian countries for Testoderm-Registered
Trademark- and for five Asian countries for OROS-Registered Trademark-
pseudoephedrine.
There can be no assurance that ALZA Pharmaceuticals will be successful
in its marketing and sales efforts. There are numerous risks associated with
the marketing and sales 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 (sometimes including pricing approvals) are required
from health regulatory authorities in foreign countries before marketing of
pharmaceutical products may commence in those countries. Requirements for
approval may differ from country to country, and can involve additional
testing. There can be substantial delays in obtaining required clearances
from both the FDA and foreign regulatory authorities after applications are
filed. Even after clearances are obtained, further delays may be encountered
before the products become commercially available.
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 more uncertainty, greater risks and
higher costs of obtaining clearance to market a product, and sometimes longer
clearance cycles. 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.
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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 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, 1996, ALZA owned approximately 500 United States
patents and had approximately 200 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 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 D-TRANS-TM- 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, and have opposed ALZA
patents in other jurisdictions. 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
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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 drug delivery products will face
competition both from traditional forms of drug delivery and from advanced
delivery systems being developed by others. Licensed-in products will face
competition from competing therapies for the same indications. ALZA's
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 companies are developing
drug delivery technologies. To the extent that ALZA develops or markets
products incorporating drugs that are off-patent, or are being developed by
multiple companies, ALZA will face increased competition from other companies
developing and marketing similar products.
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. Similarly, as
pharmaceutical companies search to fill gaps in their product pipelines with
licensed-in products, ALZA will be competing for product in-licensing
opportunities with companies with far greater financial and other resources
than ALZA.
Competition in drug delivery systems is generally based on performance
characteristics and price. Acceptance by hospitals, physicians and patients
is crucial
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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 1996, ALZA received royalty revenue from 16 products in the
marketplace. Sales of Procardia XL-Registered Trademark- in the United
States by Pfizer accounted for approximately 40% of ALZA's royalties and fees
in 1996 (more than 40% in 1995 and more than 50% in 1994). 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
bioequivalent 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 about ALZA's revenues is presented below:
1996 1995 1994
(in millions) ------- ------- -------
Royalties and fees $171.4 $145.4 $123.8
Research and development 131.2 104.0 68.7
Net sales 108.6 76.9 68.5
Interest and other 54.8 24.3 17.8
------- ------- -------
Total revenues $466.0 $350.6 $278.8
------- ------- -------
------- ------- -------
TDC accounted for 22% of ALZA's total revenues in 1996, 20% in 1995 and
11% in 1994; Pfizer accounted for 20% of ALZA's total revenues in 1996, 23%
in 1995 and
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30% in 1994; Janssen accounted for 13% of ALZA's total revenues in 1996 and
12% in each of 1995 and 1994; and HMR accounted for 10% of ALZA's total
revenues in each of 1996 and 1995. 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
$23.0 million in 1996, $20.1 million in 1995 and $16.9 million in 1994,
principally to distributors and client companies in Europe.
EMPLOYEES
On December 31, 1996, ALZA had 1,652 employees, of whom approximately
820 were engaged in research and development activities, approximately 491
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 primary 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
is actively planning to expand its facilities and equipment to support its
long-term requirements.
ITEM 3. LEGAL PROCEEDINGS
In December 1991, a patent infringement suit was filed by Ciba-Geigy
Inc. ("Ciba-Geigy"), now Novartis Pharmaceuticals Corporation, against Marion
Merrell Dow Inc. (now HMR) and ALZA in connection with the commercialization
of Nicoderm-Registered Trademark-. In October 1994, the Court granted a
motion for summary judgment in favor of ALZA and HMR. 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 of a patent
licensed to Ciba-Geigy. During January 1995 ALZA and HMR filed a separate
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 in 1994 relating to
the transdermal administration of nicotine. In June 1996, ALZA and HMR
entered into a settlement agreement with Ciba-Geigy which resolved these
disputes. Ciba-Geigy made a one-time settlement
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payment to HMR and ALZA, and is paying ongoing royalties on its U.S. nicotine
patch sales retroactive to January 1, 1996. ALZA and HMR share the royalty
payments in accordance with the agreements between them.
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 appealed that ruling. During 1996, the
Court of Appeals of the Federal Circuit upheld the District Court's dismissal
of Cygnus' claims against ALZA. Cygnus has no further right of appeal.
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.
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 may
not be resolved for several years, it is impossible to predict the timing or
amount of ALZA's potential liability.
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 ALZA.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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EXECUTIVE OFFICERS OF THE REGISTRANT
<TABLE>
<CAPTION>
Principal Occupations for
Name Age Past Five Years
- ------------------- ------ ---------------------------------------------------------
<S> <C> <C>
Dr. Ernest Mario 58 Co-Chairman of the Board and Chief Executive Officer of
ALZA (since 1993); Chief Executive of Glaxo Holdings,
p.l.c. (1989-1993).
Dr. Felix Theeuwes 59 President, Research and Development of ALZA (since
1994); Executive Vice President, Research and
Development (1991-1994) and Chief Scientist (since
1982).
Bruce C. Cozadd 33 Senior Vice President and Chief Financial Officer of
ALZA (since 1997); Vice President and Chief Financial
Officer (1994-1996); Vice President, Corporate Planning
and Analysis (1993); Manager, Strategic Projects (1991-
1993).
Dr. Gary V. Fulscher 53 Senior Vice President, Operations of ALZA (since 1994);
Vice President, Administration (1987-1994).
Dr. Samuel R. Saks 42 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).
Peter D. Staple 45 Senior Vice President and General Counsel of ALZA (since
1997); Vice President and General Counsel (1994-1996);
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).
</TABLE>
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<PAGE>
<TABLE>
<S> <C> <C>
Dr. James W. Young 52 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).
James Butler 56 Vice President, Sales and Marketing of ALZA (since
1993); Vice President and General Manager of Glaxo,
Inc.'s corporate division (1987-1993).
Harold Fethe 52 Vice President, Human Resources of ALZA (since 1991).
</TABLE>
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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 38 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 39 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 17 to 22 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 23 to 37 in the Annual Report and the
Report of Ernst and Young LLP, Independent Auditors, at page 37 in the Annual
Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
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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 March 27, 1997, for its Annual Meeting of
Stockholders to be held on May 8, 1997 (the "Proxy Statement"). Information
concerning ALZA's executive officers appears at the end of Part I of this
report on pages 21 and 22.
ITEM 11. EXECUTIVE COMPENSATION
ALZA incorporates by reference the information ("Summary Compensation
Table", "1996 Option Grants", "1996 Aggregated Option Exercises and Fiscal
Year-End Option Values" and "Certain Executive Agreements") set forth under
the heading "Executive Compensation" on pages 5 to 10 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.
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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:
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, February 16, 1995,
February 15, 1996 and August 13, 1996(2)
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(3)
4.2 Specimen of 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)(4)
4.4 Indenture dated April 23, 1996 between ALZA Corporation and
the Chase Manhattan Bank, N.A., as Trustee, relating to ALZA's
5% Convertible Subordinated Debentures(5)
4.5 Specimen of 5% Convertible Subordinated Debenture (included in
Exhibit 4.4)
10.1 Technology License Agreement between ALZA Corporation and
Therapeutic Discovery Corporation(6)
10.2 Development Agreement between ALZA Corporation and Therapeutic
Discovery Corporation(6)
10.3 License Option Agreement between ALZA Corporation and
Therapeutic Discovery Corporation(6)
See footnotes on following page
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10.4 Restated Certificate of Incorporation of Therapeutic Discovery
Corporation(6)
10.5 Agreement Regarding Certain Products and Activities and
Amendment No. 1 to Development Agreement between ALZA
Corporation and Therapeutic Discovery Corporation(7)
10.6 Executive Deferral Plans II(8)*
10.7 Executive Deferral Plan Amendments(9)*
10.8 Amendment Number 2 to Executive Deferral Plans II(10)*
10.9 ALZA Corporation Amended and Restated Stock Plan(11)*
10.10 Form of Executive Agreement between ALZA Corporation and
Certain Executive Officers(7)*
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
(b) No reports on Form 8-K were filed during the quarter ended December 31,
1996.
______________________________________________________________
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 September 30, 1996.
3 Incorporated by reference to ALZA's Form 10-Q Quarterly Report for the
period ended June 30, 1994.
4 Incorporated by reference to ALZA's Form 8-A Registration Statement
(Commission File No. 0-11234) dated March 31, 1993, as amended.
5 Incorporated by reference to ALZA's Form S-3 Registration Statement
(Commission File No. 333-2343) dated April 8, 1996, as amended.
6 Incorporated by reference to the Form 10 of Therapeutic Discovery
Corporation (Commission File No. 0-21478) dated March 31, 1993, as amended.
7 Incorporated by reference to ALZA's Form 10-K Annual Report for the year
ended December 31, 1995.
8 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.
9 Incorporated by reference to ALZA's Form 10-K Annual Report for the year
ended December 31, 1992.
10 Incorporated by reference to ALZA's Form 10-K Annual Report for the year
ended December 31, 1994.
11 Incorporated by reference to ALZA's Form 10-Q Quarterly Report for the
period 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.
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<PAGE>
ALZA CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS, REPORT OF
ERNST & YOUNG LLP, INDEPENDENT AUDITORS AND
CONSOLIDATED FINANCIAL STATEMENT SCHEDULE
(Item 14(a))
Page Number Reference
----------------------------
Annual Report Form
to Stockholders 10-K
--------------- ----
Consolidated statement of income for the
years ended December 31, 1996, 1995 and 1994 23
Consolidated balance sheet at
December 31, 1996 and 1995 24
Consolidated statement of stockholders'
equity for the years ended December 31, 1996,
1995 and 1994 25
Consolidated statement of cash flows for
the years ended December 31, 1996, 1995
and 1994 26
Notes to consolidated financial statements 27-37
Report of Ernst & Young LLP, Independent
Auditors 37
The following consolidated financial statement
schedule of ALZA Corporation is included:
II- Consolidated valuation and qualifying 28
accounts
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.
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SCHEDULE II
ALZA CORPORATION
CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
Balance at Additions
Beginning Charged to Deductions Balance at
of Year Income (write-offs) End of Year
------------ ------------ ------------- -------------
(In millions)
Allowance for doubtful
receivables:
1996 $0.2 $0.4 $ - $0.6
------------ ------------ ------------- -------------
------------ ------------ ------------- -------------
1995 $0.3 $ - $(0.1) $0.2
------------ ------------ ------------- -------------
------------ ------------ ------------- -------------
1994 $0.2 $0.1 $ - $0.3
------------ ------------ ------------- -------------
------------ ------------ ------------- -------------
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<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
Chief Executive Officer
Date: March 31, 1997
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<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.
/s/ [Alejandro Zaffaroni] /s/ [Dean O. Morton]
--------------------------- ------------------------
Dr. Alejandro Zaffaroni Dean O. Morton
Co-Chairman of the Board of Director
Directors and Director Date: March 31, 1997
Date: March 31, 1997
/s/ [Ernest Mario] /s/ [Denise M. O'Leary]
--------------------------- ------------------------
Dr. Ernest Mario Denise M. O'Leary
Co-Chairman of the Board of Director
Directors, Director and Chief Date: March 31, 1997
Executive Officer
Date: March 31, 1997
/s/ [William R. Brody] /s/ [Issac Stein]
--------------------------- ------------------------
Dr. William R. Brody Isaac Stein
Director Director
Date: March 31, 1997 Date: March 31, 1997
/s/ [William G. Davis] /s/ [Julian N. Stern]
--------------------------- ------------------------
William G. Davis Julian N. Stern
Director Director
Date: March 31, 1997 Date: March 31, 1997
/s/ [Robert J. Glaser] /s/ [Bruce C. Cozadd]
--------------------------- ------------------------
Dr. Robert J. Glaser Bruce C. Cozadd
Director Senior Vice President, Chief
Date: March 31, 1997 Financial Officer and
Principal Accounting Officer
Date: March 31, 1997
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<PAGE>
EXHIBIT INDEX
Exhibit
- -------
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
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EXHIBIT 11
Statement Regarding Computation of Per Share Earnings
(In millions, except per share data)
Year Ended December 31,
1996 1995 1994
--------- ---------- ----------
PRIMARY:
Common stock 84.2 82.3 81.8
Stock options 0.8 0.3 0.5
$25 warrants - - -
$65 warrants - - -
5 1/4% zero coupon convertible
subordinated debentures 9.2 - -
--------- ---------- ----------
Weighted average common and dilutive
common equivalent shares 94.2 82.6 82.3
--------- ---------- ----------
--------- ---------- ----------
Net income available to common
stockholders $ 92.4 $ 72.4 $ 58.1
Add after-tax interest on 5 1/4% zero
coupon convertible subordinated
debentures 9.2 - -
--------- ---------- ----------
Adjusted net income $ 101.6 $ 72.4 $ 58.1
--------- ---------- ----------
--------- ---------- ----------
Net income per common and common
equivalent share $ 1.08 $ 0.88 $ 0.71
--------- ---------- ----------
--------- ---------- ----------
Primary earnings per share is 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 but were not included in the per share
calculation for 1995 or 1994 as their inclusion would have had an
antidilutive effect. Shares issuable upon an assumed conversion of the 5 1/4%
zero coupon convertible subordinated debentures were dilutive for the last
three quarters of 1996. Consequently, a total of 9.2 million shares are
included in the weighted average common and dilutive common equivalent shares
for the year ended December 31, 1996.
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<PAGE>
Year Ended December 31,
1996 1995 1994
----------- ---------- -----------
FULLY DILUTED:
Common stock 84.2 82.3 81.8
Stock options 0.8 0.4 0.5
$25 warrants - - -
$65 warrants - - -
5 1/4% zero coupon convertible
subordinated debentures 9.2 - -
5% convertible subordinated
debentures - - -
----------- ---------- -----------
Weighted average common and dilutive
common equivalent shares 94.2 82.7 82.3
----------- ---------- -----------
----------- ---------- -----------
Net income available to common
stockholders $ 92.4 $ 72.4 $ 58.1
Add after-tax interest on 5 1/4% zero
coupon convertible subordinated
debentures 9.2 - -
----------- ---------- -----------
Adjusted net income $ 101.6 $ 72.4 $ 58.1
----------- ---------- -----------
----------- ---------- -----------
Net income per common and common
equivalent share $ 1.08 $ 0.88 $ 0.71
----------- ---------- -----------
----------- ---------- -----------
Fully diluted earnings per share is based on weighted average shares of
common stock outstanding plus dilutive common equivalent shares and dilutive
convertible securities. The 5 1/4% zero coupon convertible subordinated
debentures (issued in July 1994) are considered common stock equivalents but
were not included in the per share calculation for 1995 or 1994 as their
inclusion would have had an antidilutive effect. Shares issuable upon an
assumed conversion of the 5 1/4% zero coupon convertible subordinated
debentures were dilutive for the last three quarters of 1996. Consequently,
a total of 9.2 million shares are included in the weighted average common and
dilutive common equivalent shares for the year ended December 31, 1996. The
5% convertible subordinated debentures are not considered common stock
equivalents and were not included in the fully diluted earnings per share
calculation for 1996 as their inclusion would have had an antidilutive
effect. Fully diluted earnings per share is not presented on the face of the
Consolidated Statement of Income since dilution is less than 3% for each year
presented.
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PAGE 17 OF PAPER FORMAT ANNUAL REPORT
EXHIBIT 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
ALZA Corporation ("ALZA" or the "Company") reported net income of $92.4
million in 1996, compared to net income of $72.4 million in 1995 and $58.1
million in 1994. Included in the 1996 results is the net benefit of
approximately $2.3 million in non-recurring items, which are discussed below.
TOTAL REVENUES (PRESENTED GRAPHICALLY IN PAPER FORMAT ANNUAL REPORT)
(In millions)
1996 1995 1994 1993 1992
----- ----- ----- ----- -----
Royalties and fees $ 171 $ 145 $ 124 $ 113 $ 115
Research and development 131 104 69 47 39
Net sales 109 77 68 54 76
Interest & other 55 24 18 20 21
----- ----- ----- ----- -----
TOTAL REVENUES $ 466 $ 351 $ 279 $ 234 $ 251
ROYALTIES AND FEES
Royalties and fees, which are generally derived from sales by client
companies of products developed jointly with ALZA, were $171.4 million in
1996 ($162.2 million before non-recurring items), compared to $145.4 million
($138.0 million before a non-recurring item) in 1995 and $123.8 million in
1994. Excluding the non-recurring items, the growth in royalties and fees in
1996 was due to increased sales of Adalat CR-Registered Trademark-
(nifedipine), Catapres TTS-Registered Trademark- (clonidine),
Duragesic-Registered Trademark- (fentanyl) and Glucotrol XL-Registered
Trademark- (glipizide) and royalties from sales of NicoDerm-Registered
Trademark- CQ-TM- (nicotine) following its introduction in the third quarter
of 1996. In addition, despite lower sales of Procardia XL-Registered
Trademark- (nifedipine), royalties from this product increased due to a higher
effective royalty rate, as discussed below. Reducing royalties and fees in
1996 were lower royalties on sales of Transderm-Nitro-Registered Trademark-
(nitroglycerin).
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PAGE 17 OF PAPER FORMAT ANNUAL REPORT
Royalties and fees for 1996 include a non-recurring benefit of $7.1 million
from the reversal of a portion of the reserve accrued in 1994 and 1995 to
account for a potential reduction in royalty revenue from Procardia
XL-Registered Trademark-, marketed in the U.S. by Pfizer, Inc. ("Pfizer"),
due to a U.S. patent issued to Bayer AG. Pfizer and ALZA entered into an
agreement under which the remainder of the reserve was utilized to satisfy
ALZA's potential obligations related to the resolution of this royalty issue.
Under the agreement, the royalty payable by Pfizer to ALZA on sales of
Procardia XL-Registered Trademark- was reset to 7%, retroactive to January 1,
1996. While ALZA's total royalties from Procardia XL-Registered Trademark-
increased as a result of the higher effective royalty rate, sales of
Procardia XL-Registered Trademark-, as reported by Pfizer, decreased by 11%
during 1996 as compared to 1995.
Royalties and fees for 1996 also include a $6.4 million non-recurring benefit
in connection with the settlement of litigation relating to patent disputes
concerning transdermal nicotine patches. Under the terms of the settlement
announced in June 1996, Ciba-Geigy Corporation ("Ciba"), now Novartis
Pharmaceuticals Corporation ("Novartis"), made a one-time payment to Hoechst
Marion Roussel Inc. ("HMR") and ALZA, and will pay ongoing royalties on
Novartis' U.S. nicotine patch sales, retroactive to January 1, 1996, to be
shared by HMR and ALZA.
Partially offsetting the additions to royalties and fees discussed above was
a non-recurring charge to establish a reserve of $4 million representing the
unamortized portion of a $5 million advance payment made in 1988 to the
former limited partners of the ALZA OROS-Registered Trademark- Products
Limited Partnership (the "Partnership"). The advance payment was made in
connection with ALZA's exercise of its option to acquire all of the limited
partners' interests in the Partnership. Under the terms of the partnership
agreement, the advance payment is creditable by ALZA, within specified
limits, against payments otherwise due to the former limited partners on
sales of the OROS-Registered Trademark- cold/allergy products and
Covera-HS-TM- (verapamil). The reserve was established due to uncertainties
regarding ALZA's ability to utilize the prepayment within the time period
specified in the partnership agreement.
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PAGE 17-18 OF PAPER FORMAT ANNUAL REPORT
Included in royalties and fees for 1995 is a benefit of $7.4 million
resulting from the reversal of a portion of a reserve established after a
patent infringement suit was filed in 1991 by Ciba against ALZA and HMR
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 patent were held invalid. This suit was settled
in 1996.
Royalties and fees for 1995 and 1994 reflect reductions of $9 million and $8
million, respectively, resulting from additions to the reserve established in
the third quarter of 1994 to account for the potential reduction in royalty
revenue from Pfizer on sales of Procardia XL-Registered Trademark- discussed
above. Including the $7.1 million benefit described above, royalties from
Procardia XL-Registered Trademark- accounted for approximately 42% of ALZA's
royalties and fees for 1996. Excluding non-recurring items, Procardia
XL-Registered Trademark- accounted for approximately 40% of ALZA's royalties
and fees for 1996. Excluding from total royalties and fees for 1995 the
benefit of the $7.4 million reserve reversal discussed above, royalties from
Procardia XL-Registered Trademark- accounted for more than 40% and 50% of
ALZA's royalties and fees in 1995 and 1994, respectively.
RESEARCH AND DEVELOPMENT
Research and development expenses increased to $141.6 million in 1996
compared to $103.4 million in 1995 and $76.1 million in 1994. The year over
year increases were due primarily to increased product development activities
undertaken on behalf of Therapeutic Discovery Corporation ("TDC").
INVESTMENT IN RESEARCH AND DEVELOPMENT (PRESENTED GRAPHICALLY IN PAPER
FORMAT ANNUAL REPORT)
(In millions)
1996 1995 1994 1993 1992
Investment in Research and
Development $ 142 $ 103 $ 76 $ 53 $ 52
Research and development revenue was $131.2 million in 1996, compared to
$104.0 million and $68.7 million in 1995 and 1994, respectively. Reducing
research and development revenue for 1996 were $2.1 million of non-recurring
items consisting of a credit from ALZA to TDC for work that was previously
billed and a charge for certain potentially uncollectable receivables.
ALZA's research and development
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PAGE 18 OF PAPER FORMAT ANNUAL REPORT
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 1996 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 a
development agreement pursuant to which ALZA conducts product development
activities on behalf of TDC. For the years ended 1996, 1995 and 1994, ALZA
had product development revenue from TDC of $100.7 million, $70.1 million and
$31.6 million, respectively. At the end of 1996 ALZA filed a New Drug
Application for a second-generation transdermal testosterone product under
development with TDC, and a number of additional TDC products were in the
development pipeline, including several in clinical evaluation.
NET SALES (PRESENTED GRAPHICALLY IN PAPER FORMAT ANNUAL REPORT)
(In millions) 1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Contract manufacturing $ 86 $ 63 $ 58 $ 47 $ 68
ALZA-marketed products 23 14 11 7 7
---- ---- ---- ---- ----
TOTAL NET SALES $ 109 $ 77 $ 69 $ 54 $ 75
NET SALES AND COSTS OF PRODUCTS SHIPPED
ALZA's net sales increased by $31.7 million to $108.6 million in 1996
compared to 1995. Included in net sales are sales generated from contract
manufacturing activities for ALZA's client companies, and sales of products
marketed directly by ALZA and through distributors.
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<PAGE>PAGE 18 OF PAPER FORMAT ANNUAL REPORT
Net sales from ALZA's contract manufacturing activities were $85.4 million in
1996, compared to $63.3 million and $57.4 million in 1995 and 1994,
respectively. The increase in net sales from contract manufacturing in 1996
is the result of shipments of launch quantities of NicoDerm-Registered
Trademark- CQ-TM- and Covera-HS-TM-. Shipments of launch quantities are not
indicative of the potential for future sales of a product. The increase in
net sales from contract manufacturing in 1995 as compared to 1994 was due to
larger orders by client companies in 1995, predominately for transdermal
products . Because of variability in the mix and volume of clients' product
requirements, the level of contract manufacturing sales fluctuates from
period to period.
ALZA manufactures and directly markets in the U.S. the Testoderm-Registered
Trademark- testosterone transdermal system CIII, the Progestasert-Registered
Trademark- intrauterine progesterone contraceptive system, ALZET-Registered
Trademark- osmotic pumps and the Ocusert-Registered Trademark- pilocarpine
ocular therapeutic system. In 1996, ALZA began promoting Ethyol-Registered
Trademark- (amifostine) in the Unites States. Ethyol-Registered Trademark-
is a unique cytoprotective agent developed by U.S. Bioscience, Inc. ("U.S.
Bioscience"), indicated for the reduction of cumulative renal toxicity
associated with repeated administration of the chemotherapeutic drug
cisplatin in patients with advanced ovarian or non-small cell lung cancer.
U.S. Bioscience co-promotes the product with ALZA. In 1994, ALZA launched
Testoderm-Registered Trademark-, the first transdermal testosterone
replacement therapy for testosterone deficient men. ALZA also manufactures
the Actisite-Registered Trademark- (tetracycline hydrochloride) 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 $23.2 million in 1996, compared to $13.6 million
in 1995 and $11.1 million in 1994. The increase in sales of ALZA-marketed
products for 1996 from 1995 was due to Ethyol-Registered Trademark- net sales
of $9.4 million from March 1996 through the end of the year. Sales of
Testoderm-Registered Trademark- were $6.7 million, $6.8 million and $4.2
million for 1996, 1995 and 1994, respectively.
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PAGE 18-19 OF PAPER FORMAT ANNUAL REPORT
Costs of products shipped increased to $85.2 million in 1996 compared to
$65.4 million in 1995. Included in costs of products shipped in 1996 are
$2.4 million of non-recurring charges primarily related to costs associated
with a limited recall of two lots of the Duragesic-Registered Trademark-
product. Gross margin as a precent of net sales increased to 22% for 1996,
primarily due to proportionately greater shipments of higher margin products
and the manufacturing and shipment of launch quantities. Although net sales
increased in 1995 over 1994, gross margin as a percent of net sales decreased
during the same period due to higher manufacturing overhead costs, including
costs associated with ALZA's ongoing quality assurance activities.
GENERAL, ADMINISTRATIVE AND MARKETING
General, administrative and marketing expenses increased to $47.1 million in
1996, compared to $41.1 million in 1995 and $33.4 million in 1994. The
increase in 1996 was due primarily to sales and marketing expenses related to
the launch of Ethyol-Registered Trademark-, the amortization of the upfront
payment ALZA made in 1995 to U.S. Bioscience for Ethyol-Registered Trademark-
and an increase in overall general and administrative expenses in support of
increased corporate activities. The increase in 1995, as compared to 1994,
was primarily due to a charge of approximately $7 million for a portion of
the amount ALZA paid to U.S. Bioscience under the marketing and distribution
agreement for Ethyol-Registered Trademark-. Without this charge, general,
administrative and marketing expenses for 1995 were essentially flat with
1994. In 1994, general, administrative and marketing expenses included costs
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 licensed-in products. In
1994, ALZA Pharmaceuticals established a U.S. sales force of approximately 50
people and began actively promoting Testoderm-Registered Trademark-. In
addition to promoting Ethyol-Registered Trademark- and Testoderm-Registered
Trademark-, ALZA Pharmaceuticals co-promotes Glucotrol XL-Registered
Trademark- with Pfizer and Duragesic-Registered Trademark- with Janssen
Pharmaceutica, Inc. ("Janssen") and in 1996 began promoting Bayer
Corporation's Mycelex-Registered Trademark- (clotrimazole) Troche and
co-promoting U.S. Bioscience's Hexalen-Registered Trademark- (altretamine)
and NeuTrexin-Registered Trademark- (trimetrexate glucuronate) products. At
the end of 1996, ALZA's U.S. sales force had grown to approximately 60
people.
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PAGE 19 OF PAPER FORMAT ANNUAL REPORT
INTEREST AND OTHER REVENUE
Interest and other revenue, which consists primarily of interest income, was
$54.8 million in 1996, compared to $24.3 million and $17.8 million in 1995
and 1994, respectively. The increase in 1996 over 1995 was primarily due to
higher average invested cash balances following ALZA's offering of $500
million of 5% convertible subordinated debentures due 2006 (the "5%
Debentures") in April 1996, which resulted in $489 million in net proceeds to
ALZA, and net realized gains of $8.4 million on sales of investments. Also
included in interest and other revenue in 1996 was a $2.5 million
non-recurring benefit resulting from the issuance to ALZA of shares of common
stock of Vivus, Inc. in exchange for rights to use certain ALZA technology.
Reducing interest and other revenue in 1996 was a non-recurring charge of
$2.8 million related to ALZA's dental business activities and investments.
Operating results of the ALZA and Procter & Gamble partnership have not met
expectations primarily due to lower than expected sales of the Actisite
- -Registered Trademark- periodontal fiber. The increase in interest and other
revenue in 1995 over 1994 was due in large part to higher invested cash
balances.
INTEREST AND OTHER EXPENSE
ALZA reported total interest expense of $43.0 million in 1996, compared to
$23.9 million in 1995 and $19.4 million in 1994. The increase reflects the
interest expense on the 5% Debentures and the higher outstanding balance on
ALZA's 5 1/4% zero coupon convertible subordinated debentures due 2014 (the
"5 1/4% Debentures"). In mid-1994, ALZA replaced its $250 million commercial
paper program with approximately $337 million of 5 1/4% Debentures. The
increase in 1995 interest expense as compared to 1994 was due to higher
average outstanding debt as the 5 1/4% Debentures were outstanding for the
full year and a higher average interest rate on such debt.
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents and short-term investments at the end of 1996
increased 139% as compared to 1995. Unrealized losses on ALZA's investments
at December 31, 1996 were $0.1 million, net of tax effect. At December 31,
1995, ALZA had unrealized gains on its investments of $1.9 million, net of
tax effect.
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PAGE 19-20 OF PAPER FORMAT ANNUAL REPORT
ALZA invested approximately $48.6 million in 1996 and $46.3 million in 1995
in additions to property, plant and equipment to support its expanding
research and development and manufacturing activities.
NET CASH PROVIDED BY OPERATING ACTIVITIES (PRESENTED GRAPHICALLY IN PAPER
FORMAT ANNUAL REPORT)
(In millions)
1996 1995 1994 1993 1992
----- ----- ---- ---- ----
Net Cash Provided by
Operating Activities $ 135 $ 111 $ 74 $ 76 $ 97
NET CASH PROVIDED BY OPERATING ACTIVITIES
In April 1996, ALZA completed a $500 million public offering of the 5%
Debentures which resulted in $489 million of net proceeds to ALZA. The
proceeds of the offering will be used for general corporate purposes, which
may include expansion of ALZA's pharmaceutical business (including sales and
marketing activities); expansion of its research and development and
manufacturing facilities; expenditures under existing or future joint
ventures, partnerships or other similar arrangements; the completion or
continuation of the development of TDC products if ALZA exercises its right
to license any or all of the TDC products or its purchase option with respect
to TDC; the acquisition of assets, technologies, products and businesses to
expand ALZA's operations; and working capital.
In January 1997, ALZA entered into an agreement with U.S. Bioscience under
which U.S. Bioscience will sell approximately 1.2 million of its common
shares to ALZA (4.9% of the outstanding common shares of U.S. Bioscience) at
a purchase price of $18.256 per share, for an aggregate investment of $21.5
million. U.S. Bioscience will spend a portion of the proceeds on programs
supporting the Ethyol-Registered Trademark- product.
In February 1997, ALZA entered into an agreement with Alkermes, Inc.
("Alkermes") under which Alkermes will sell 2.0 million of its common shares
to ALZA (9.7% of the outstanding common shares of Alkermes) at a purchase
price of $25 per share, for an aggregate investment of $50 million.
Separately, ALZA and Alkermes agreed to collaborate on a program for the
development and commercialization of a
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PAGE 20 OF PAPER FORMAT ANNUAL REPORT
product utilizing Alkermes' drug delivery technology. ALZA will fund the
development costs of the program and will have worldwide commercialization
rights to the product. Alkermes will receive royalties based on product
sales and it is anticipated that Alkermes will manufacture the product.
OUTLOOK
The following is intended to provide an outlook for 1997 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
Forms 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 (exclusive of non-recurring items) to
continue to increase in 1997 as a result of sales growth from products
currently marketed by client companies and from the introduction of several
products which have recently received marketing clearance and, to a lesser
extent, products which are awaiting approval by regulatory authorities
outside of the United States. Sales of Procardia XL -Registered Trademark-
by Pfizer, which accounted for approximately 42% of ALZA's royalties and fees
in 1996, decreased 11% from 1995, and are likely to continue to decline.
ALZA cannot predict 1997 sales levels for this product.
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. Most of the factors affecting
royalties and fees are therefore not within ALZA's control.
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PAGE 20-21 OF PAPER FORMAT ANNUAL REPORT
RESEARCH AND DEVELOPMENT
THERAPEUTIC DISCOVERY CORPORATION At the end of 1996, ALZA filed a New Drug
Application for a second-generation transdermal testosterone product and ALZA
and TDC had a number of products in development, including several in
clinical evaluation. If 1996 TDC product development expenditure levels
continue in 1997, it can be expected that all TDC funds available for product
development will be exhausted during the second half of 1997. ALZA has an
option, exercisable at ALZA's sole discretion, to purchase all (but not less
than all) of the outstanding shares of TDC Class A common stock (the
"Purchase Option"). The Purchase Option will expire, if not exercised, on
the 60th day after TDC files a Form 10-K or Form 10-Q with the Securities and
Exchange Commission containing a balance sheet showing less than an aggregate
of $5 million in cash and cash equivalents, short-term investments and
long-term investments. During any period when TDC no longer has funds
available for product development, but ALZA has not yet made a determination
whether or not to exercise its Purchase Option, ALZA will likely need to
continue funding TDC product development at its own expense in order to keep
the product development programs intact.
Under the formula set forth in TDC's Restated Certificate of Incorporation,
the Purchase Option exercise price is expected to be $100 million. The
purchase price may be paid in cash, ALZA common stock or any combination of
the two, at the option of ALZA. If ALZA were to exercise the Purchase
Option, ALZA would incur a one-time charge for the acquisition of in-process
technology and might realize certain tax benefits. If ALZA were to decide
not to exercise the Purchase Option, ALZA would have the right, for an
additional 90 days, to license any or all TDC products, on a
product-by-product and country-by-country basis. ALZA would make payments to
TDC, with respect to any licensed products, for countries as to which the
license option is exercised, based on sales of the licensed products by ALZA
in those countries and any up-front fees or sublicensing revenues received by
ALZA from third parties marketing the licensed products in those countries.
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PAGE 21 OF PAPER FORMAT ANNUAL REPORT
If ALZA were to exercise the Purchase Option, ALZA would need to fund any
continuing development expenses for TDC products. If ALZA were to choose not
to exercise the Purchase Option, but to license some or all of the products,
ALZA would need to fund the additional product development activities
necessary to complete the licensed products. If ALZA were to use its own
funds to cover these expenses, the product development activities would
result in research and development expenses without the corresponding
research and development revenues previously provided by TDC. ALZA could
also choose to fund the expenses by partnering with third parties for the
continued development and commercialization of some or all of the products,
either on a worldwide basis or in specified markets. Alternatively, ALZA
could determine to continue product development through other financing
arrangements.
ALZA has not made a decision as to whether it will exercise the Purchase
Option or its license option for any TDC products (except with respect to the
two products for which ALZA has already exercised the license option), and
ALZA does not anticipate making this decision until TDC has exhausted its
funds available for product development.
PHARMACEUTICAL COMPANY CLIENTS To maintain or increase 1996 product
development revenue levels, ALZA will need to enter into new arrangements
with client companies to replace revenues lost when programs terminate or
products are submitted for regulatory clearance or are cleared for marketing.
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, and could decrease earlier if the client, rather
than ALZA, were to undertake the clinical development of the product. In
addition, to the extent that TDC client revenues are no longer available,
ALZA would need to significantly increase revenues under agreements with
pharmaceutical company clients in order to maintain current research and
development revenue levels.
-11-
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PAGE 21-22 OF PAPER FORMAT ANNUAL REPORT
ALZA TECHNOLOGY INSTITUTE ALZA expects to increase its internal research
expenditures in 1997 through the ALZA Technology Institute in order to
continue strengthening the Company's leadership in the drug delivery field.
Areas of focus for 1997 include the further development of the E-TRANS-TM-
electrotransport, DUROS-TM- implant, D-TRANS-TM- and E-TRANS-TM- skin
interface, Liquid OROS-Registered Trademark- and RingCap-TM- technologies and
the application of ALZA's technologies to the biotechnology and gene therapy
fields.
NET SALES
ALZA expects that contract manufacturing revenues may decrease somewhat in
1997 compared to 1996 levels. In 1996, ALZA manufactured and shipped
significant quantities of product in anticipation of product launches. Net
sales of launch quantities are not necessarily indicative of future net sales
and ALZA does not anticipate manufacturing such launch quantities in 1997.
Because many factors affecting contract manufacturing activities 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. However, net sales of ALZA-marketed products are expected to
increase in 1997, primarily due to anticipated increasing sales of Ethyol
- -Registered Trademark-.
GENERAL, ADMINISTRATIVE AND MARKETING EXPENSES
General, administrative and marketing expenses are expected to remain flat or
slightly higher than 1996 levels based on currently planned operations.
However, if ALZA were to in-license additional products, or to enter into
additional collaborations, general, administrative and marketing expenses
likely would increase as a result of both the costs involved in the
transactions and the costs of the new activities.
ALZA TTS RESEARCH PARTNERS, LTD.
Duragesic-Registered Trademark- has been a very successful product for ALZA
and Janssen, which markets the product under a distribution agreement with
ALZA. ALZA developed Duragesic-Registered Trademark- on behalf of the ALZA
TTS Research Partners, Ltd. (the "TTS Partnership"), a limited partnership
from which ALZA licenses the product. The TTS Partnership receives payments
from ALZA equal to 4% of Janssen's net sales of Duragesic-Registered
Trademark-.
-12-
<PAGE>
PAGE 22 OF PAPER FORMAT ANNUAL REPORT
ALZA's license from the TTS Partnership for Duragesic-Registered Trademark-
will become nonexclusive on December 4, 1998. Once ALZA's license becomes
nonexclusive, the TTS Partnership will need to determine whether to grant
nonexclusive licenses to third parties. Under ALZA's distribution agreement
with Janssen for the Duragesic-Registered Trademark- product, if ALZA's
license from the TTS Partnership becomes nonexclusive and if the TTS
Partnership licenses the product to a third party and the third party
introduces the product, Janssen's royalty payable to ALZA will drop
significantly, however, ALZA will continue to owe the TTS Partnership 4% of
Janssen's net sales.
ALZA has an option to purchase all of the interests in the TTS Partnership
for $120 million less amounts paid by ALZA to the TTS Partnership under its
license to ALZA prior to the date the option is exercised. (As of December
31, 1996, ALZA has paid the Partnership $18.3 million under its license).
The exercise price is payable in cash, ALZA common stock, or a combination of
the two at ALZA's option. Because ALZA's licenses to the Duragesic
- -Registered Trademark- (and Testoderm-Registered Trademark- products) will
become nonexclusive in 1998, ALZA will need to consider, in 1997 or 1998,
whether it wishes to exercise its purchase option or otherwise offer to
purchase all of the limited partnership interests in the TTS Partnership.
LIQUIDITY AND CAPITAL RESOURCES
ALZA believes that its existing cash and investment balances are adequate to
fund its cash needs for 1997 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 1997
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
-13-
<PAGE>
PAGE 22 OF PAPER FORMAT ANNUAL REPORT
development, the length of the regulatory approval process and acceptance of
products by the intended markets.
ALZA also expects that gross margins, as a percent of net sales, will
continue to increase over the longer term, although quarter-to-quarter
fluctuations will continue to occur. Higher gross margins may be achieved
through a proportionate increase in the sales of ALZA-marketed products,
increased utilization of capacity and greater operating efficiencies.
-14-
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PAGE 23 OF PAPER FORMAT ANNUAL REPORT
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
Years ended December 31,
(In millions, except per share amounts) 1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
REVENUES:
Royalties and fees $ 171.4 $ 145.4 $ 123.8
Research and development, including amounts from
TDC (1996-$100.7; 1995-$70.1; 1994-$31.6) 131.2 104.0 68.7
Net sales 108.6 76.9 68.5
Interest and other 54.8 24.3 17.8
------- ------- -------
Total revenues 466.0 350.6 278.8
COSTS AND EXPENSES:
Research and development 141.6 103.4 76.1
Costs of products shipped 85.2 65.4 56.6
General, administrative and marketing 47.1 41.1 33.4
Interest and other 43.0 23.9 19.4
------- ------- -------
Total costs and expenses 316.9 233.8 185.5
------- ------- -------
Income before income taxes 149.1 116.8 93.3
Provision for income taxes 56.7 44.4 35.2
------- ------- -------
Net income $ 92.4 $ 72.4 $ 58.1
------- ------- -------
------- ------- -------
Net income per common and common equivalent share $ 1.08* $ 0.88 $ 0.71
------- ------- -------
------- ------- -------
Weighted average common and dilutive common
equivalent shares 94.2 82.6 82.3
------- ------- -------
------- ------- -------
</TABLE>
See accompanying notes.
* Earnings per share calculation uses adjusted net income of $101.6. See
Note 1 of the Notes to Consolidated Financial Statements.
-15-
<PAGE>
PAGE 24 OF PAPER FORMAT ANNUAL REPORT
CONSOLIDATED BALANCE SHEET
December 31,
(In millions, except per share amounts) 1996 1995
---- ----
ASSETS:
CURRENT ASSETS:
Cash and cash equivalents $ 187.7 $ 88.0
Short-term investments 812.1 331.1
Receivables, net of allowance for doubtful accounts
(1996-$0.6; 1995-$0.2) 116.6 108.0
Inventories 39.2 34.5
Prepaid expenses and other current assets 19.2 16.5
--------- -------
Total current assets 1,174.8 578.1
PROPERTY, PLANT AND EQUIPMENT:
Buildings and leasehold improvements 228.7 178.7
Equipment 144.2 130.0
Construction in progress 18.1 33.8
Land and prepaid land leases 17.1 17.0
--------- -------
408.1 359.5
Less accumulated depreciation and amortization (100.3) (82.5)
--------- -------
Net property, plant and equipment 307.8 277.0
Other assets 131.1 82.1
--------- -------
TOTAL ASSETS $ 1,613.7 $ 937.2
--------- -------
--------- -------
LIABILITIES AND STOCKHOLDERS' EQUITY:
CURRENT LIABILITIES:
Accounts payable $ 28.7 $ 20.0
Accrued liabilities 37.2 29.4
Deferred revenue 0.4 17.6
Current portion of long-term debt 0.9 0.9
--------- -------
Total current liabilities 67.2 67.9
5% convertible subordinated debentures 500.0 -
5 1/4% zero coupon convertible subordinated debentures 382.3 362.9
Other long-term liabilities 67.5 51.8
Commitments and contingencies
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value,
300.0 shares authorized; 84.6 and
82.5 shares issued and outstanding at
December 31, 1996 and 1995, respectively 0.8 0.8
Additional paid-in capital 362.2 310.5
Unrealized (losses) gains on available-for-sale
securities, net of tax effect (0.1) 1.9
Retained earnings 233.8 141.4
--------- -------
Total stockholders' equity 596.7 454.6
--------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,613.7 $ 937.2
--------- -------
--------- -------
See accompanying notes.
-16-
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PAGE 25 OF PAPER FORMAT ANNUAL REPORT
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Years ended December 31, 1996, 1995, and 1994
(In millions)
<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, 1993 $ 0.8 $ 295.0 $ - $ 10.9 $ 306.7
Common stock issued - 7.2 - - 7.2
Unrealized losses on available-for-
sale securities, net of tax effect - - (7.5) - (7.5)
Net income - - - 58.1 58.1
-------- ------------ ------------- ---------- ---------
BALANCE, DECEMBER 31, 1994 0.8 302.2 (7.5) 69.0 364.5
Common stock issued - 8.3 - - 8.3
Unrealized gains on available-for-
sale securities, net of tax effect - - 9.4 - 9.4
Net income - - - 72.4 72.4
-------- ------------ ------------- ---------- ---------
BALANCE, DECEMBER 31, 1995 0.8 310.5 1.9 141.4 454.6
Common stock issued - 51.7 - - 51.7
Unrealized losses
on available-for-
sale securities, net of tax effect - - (2.0) - (2.0)
Net income - - - 92.4 92.4
-------- ------------ ------------- ---------- ---------
BALANCE, DECEMBER 31, 1996 $ 0.8 $ 362.2 $ (0.1) $ 233.8 $ 596.7
-------- ------------ ------------- ---------- ---------
-------- ------------ ------------- ---------- ---------
</TABLE>
See accompanying notes.
-17-
<PAGE>
PAGE 26 OF PAPER FORMAT ANNUAL REPORT
CONSOLIDATED STATEMENT OF CASH FLOWS
Years ended December 31,
(In millions)
1996 1995 1994
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 92.4 $ 72.4 $ 58.1
Non-cash adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 22.0 15.3 13.7
Interest on 5 1/4% zero coupon convertible
subordinated debentures 19.3 18.4 8.1
Decrease (increase) in assets:
Receivables (8.6) (23.1) (28.3)
Inventories (4.7) (1.1) (8.3)
Prepaid expenses and other current assets (1.2) 6.2 (1.4)
Increase (decrease) in liabilities:
Accounts payable 8.7 - 8.3
Accrued liabilities 7.8 10.6 1.4
Deferred revenue (17.2) 1.3 9.6
Other long-term liabilities 16.7 11.4 13.1
--------- ------- -------
Total adjustments 42.8 39.0 16.2
--------- ------- -------
Net cash provided by operating activities 135.2 111.4 74.3
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (48.6) (46.3) (37.2)
Purchases of available-for-sale securities (1,125.2) (205.2) (328.9)
Sales of available-for-sale securities 542.6 134.1 147.9
Maturities of available-for-sale securities 98.1 12.0 102.1
Increase in cash surrender
value-life insurance and prepaid premiums (20.3) (4.1) (12.3)
Decrease (increase) in other assets (21.5) (10.2) 4.4
--------- ------- -------
Net cash used in investing activities (574.9) (119.7) (124.0)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from 5% convertible subordinated
debentures 488.8 - -
Net proceeds from 5 1/4% zero coupon convertible
subordinated debentures - - 328.1
Maturities of commercial paper, net - - (249.6)
Principal payments on long-term debt (1.1) (0.8) (0.9)
Issuances of common stock 51.7 8.3 7.2
--------- ------- -------
Net cash provided by financing activities 539.4 7.5 84.8
--------- ------- -------
Net increase (decrease) in cash and
cash equivalents 99.7 (0.8) 35.1
Cash and cash equivalents at beginning of year 88.0 88.8 53.7
--------- ------- -------
Cash and cash equivalents at end of year $ 187.7 $ 88.0 $ 88.8
--------- ------- -------
--------- ------- -------
See accompanying notes.
-18-
<PAGE>
PAGE 27 OF PAPER FORMAT ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995, AND 1994
NOTE 1: 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").
Royalties and fees include royalty revenue and other payments based on sales
by ALZA's client companies of products developed under joint development and
commercialization agreements, and certain one-time or infrequent fees or
similar payments under such agreements. Fees for promotion and co-promotion
of certain products which are generally contingent on sales performance are
also included in 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 to both 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- (fentanyl)
for Janssen Pharmaceutica, Inc. ("Janssen"), NicoDerm-Registered Trademark-
CQ-TM- and Nicoderm-Registered Trademark- (nicotine) for Hoechst Marion
Roussel, Inc. ("HMR"), Covera-HS-TM- (verapamil) for G.D. Searle,
Catapres-TTS-Registered Trademark- (clonidine) for Boehringer Ingelheim
Pharmaceutical, Inc., Adalat CR-Registered Trademark- (nifedipine) for Bayer
AG and Procardia XL-Registered Trademark- (nifedipine) for Pfizer Inc.
("Pfizer"). In addition, ALZA manufactures and markets directly in the U.S.
its Progestasert-Registered Trademark- (progesterone) system, ALZET
- -Registered Trademark- osmotic pumps, the Ocusert-Registered Trademark-
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<PAGE>
PAGE 27 OF PAPER FORMAT ANNUAL REPORT
pilocarpine ocular therapeutic system and the Testoderm-Registered Trademark-
testosterone transdermal system CIII. ALZA also manufactures the
Actisite-Registered Trademark- (tetracycline hydrochloride) periodontal
fiber, which is marketed in the U.S. by a partnership between ALZA and
Procter & Gamble. Internationally, Progestasert-Registered Trademark-,
ALZET-Registered Trademark-, Ocusert-Registered Trademark- and Actisite
- -Registered Trademark- are marketed by ALZA through distributors. ALZA also
markets Ethyol-Registered Trademark- (amifostine) in the United States.
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 $23.0 million, $20.1 million, and $16.9
million in 1996, 1995 and 1994, respectively.
Included in interest and other revenue are revenues from ALZA's co-promotion
arrangements with client companies that are not contingent on sales and net
losses from ALZA's partnership with Procter & Gamble. ALZA earned interest
income, including realized gains and losses on sales of investments, of $54.6
million, $26.0 million, and $17.6 million in 1996, 1995 and 1994,
respectively.
TDC accounted for 22% of ALZA's total revenues in 1996, 20% in 1995 and 11%
in 1994; Pfizer accounted for 20% of ALZA's total revenues in 1996, 23% in
1995 and 30% in 1994; Janssen accounted for 13% of ALZA's total revenues in
1996 and 12% in each of 1995 and 1994; and HMR accounted for 10% of ALZA's
total revenues in each of 1996 and 1995.
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.
-20-
<PAGE>
PAGE 27-28 OF PAPER FORMAT ANNUAL REPORT
USE OF ESTIMATES
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the amounts reported in the financial statements and accompanying
notes. Actual results could differ from those estimates.
CASH 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 $185.2 million and $82.7 million at December 31, 1996 and
1995, 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, 1996, net
unrealized losses on available-for-sale securities were $0.1 million, net of
$0.1 million tax effect. At December 31, 1995, net unrealized gains on
available-for-sale securities were $1.9 million, net of $1.3 million tax
effect. The cost of securities when sold is based upon specific
identification. Realized gains and losses for the year ended December 31,
1996 were $9.1 million and $0.7 million, respectively. Realized gains and
losses were not material for the year ended December 31, 1995.
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<PAGE>
PAGE 28 OF PAPER FORMAT ANNUAL REPORT
The following is a summary of ALZA's investment portfolio at December 31,
1996 and 1995:
<TABLE>
<CAPTION>
(In millions) December 31, 1996 December 31, 1995
------------------------------------------------ -------------------------------------------------
Estimated Estimated
Amortized Unrealized Unrealized Fair Amortized 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 $ 434.1 $ 1.0 $ 1.8 $ 433.3 $ 150.9 $ 1.4 $ 0.6 $ 151.7
Collateralized mortgage
obligations and asset
backed securities 112.8 0.3 0.4 112.7 43.4 0.3 0.2 43.5
Corporate securities
(primarily corporate
notes and commercial
paper) 450.6 1.9 1.2 451.3 216.3 2.3 - 218.6
----------- ---------- ----------- ---------- ---------- ----------- ----------- ---------
$ 997.5 $ 3.2 $ 3.4 $ 997.3 $ 410.6 $ 4.0 $ 0.8 $ 413.8
----------- ---------- ----------- ---------- ---------- ----------- ----------- ---------
----------- ---------- ----------- ---------- ---------- ----------- ----------- ---------
</TABLE>
The amortized cost and estimated fair value of debt securities at December
31, 1996 and 1995, by contractual maturity, are shown below. Expected
maturities will differ from contractual maturities because the issuers of the
securities may have the right to prepay certain of the obligations without
prepayment penalties.
<TABLE>
<CAPTION>
(In millions) 1996 1995
----------------------------- ----------------------------
Estimated Estimated
Amortized Fair Amortized Fair
Cost Value Cost Value
------------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
Due in one year or less $ 384.5 $ 384.5 $ 176.7 $ 176.8
Due after one year through four years 428.1 427.8 138.2 139.6
Due after four years through eight years 184.9 185.0 95.7 97.4
------------- ------------- ------------- ------------
$ 997.5 $ 997.3 $ 410.6 $ 413.8
------------- ------------- ------------- ------------
------------- ------------- ------------- ------------
</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.
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<PAGE>
PAGE 29 OF PAPER FORMAT ANNUAL REPORT
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
material losses on its investments due to institutional failure or
bankruptcy. ALZA's investment policy is designed to limit exposure with any
one institution.
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:
(In millions) 1996 1995
------ ------
Raw materials $ 17.7 $ 15.8
Work in process 18.0 15.2
Finished goods 3.5 3.5
------ ------
Total inventories $ 39.2 $ 34.5
------ ------
------ ------
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost, including capitalized
interest additions of $2.2 million in 1996, $1.3 million in 1995 and $0.3
million in 1994. Additions and improvements are capitalized; 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 (17 to 61 years)
Depreciation and amortization expense was $17.8 million, $14.8 million and
$13.4 milion for 1996, 1995 and 1994, respectively. Prepaid land leases
represent ALZA's total cost, paid in advance, of leasehold
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PAGE 29-30 OF PAPER FORMAT ANNUAL REPORT
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 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).
ACCRUED LIABILITIES
The details of ALZA's accrued liabilities are as follows:
(In millions) 1996 1995
------ ------
Accrued compensation $ 15.4 $ 13.4
Accrued income taxes 7.3 2.1
Other accrued liabilities 14.5 13.9
------ ------
Total accrued liabilities $ 37.2 $ 29.4
------ ------
------ ------
ADVERTISING COSTS
Advertising costs are accounted for as expenses in the period in which they
are incurred. Advertising expense for the years ended December 31, 1996,
1995 and 1994 was $4.4 million, $3.3 million and $3.7 million, respectively.
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 or 1994 as their inclusion
would have had an antidilutive effect. Shares issuable upon an assumed
conversion of the 5 1/4% zero coupon convertible subordinated debentures were
dilutive for the last three quarters of 1996. Consequently, a total of 9.2
million shares are included in weighted average common and dilutive common
equivalent shares for the year ended December 31, 1996. The 5% convertible
subordinated debentures are not considered common stock equivalents. Fully
diluted earnings per share are not presented since dilution is less than 3%
for each year presented.
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PAGE 30 OF PAPER FORMAT ANNUAL REPORT
NOTE 2: U.S. BIOSCIENCE, INC.
In December 1995, ALZA entered into a marketing and distribution agreement
with U.S. Bioscience, Inc. ("U.S. Bioscience") for Ethyol-Registered
Trademark-. Under the terms of the agreement, ALZA has exclusive rights to
market the product in the United States for five years, and is responsible
for sales and marketing; the U.S. Bioscience sales force co-promotes the
product with ALZA. ALZA launched 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. 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 cleared for marketing 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 through 1999
based on U.S. Bioscience clinical activities relating to Ethyol-Registered
Trademark-. The up-front payment and initial distribution fee are being
amortized on a straight-line basis over the term of the agreement and are
included in general, administrative and marketing expenses. See Note 11 for
additional information related to U.S. Bioscience.
NOTE 3: DEBT OBLIGATIONS AND OTHER LONG-TERM LIABILITIES
In April 1996, ALZA completed a $500 million public offering of 5%
convertible subordinated debentures due 2006 (the "5% Debentures"). The
offering resulted in approximately $489 million of net proceeds to ALZA.
Interest is payable semiannually on May 1 and November 1 of each year,
commencing November 1, 1996. Each 5% Debenture is convertible, at the option
of the holder, at any time prior to maturity, unless previously redeemed or
repurchased, into shares of ALZA common stock at a conversion price of $38.19
per share, subject to certain anti-dilution adjustments. In connection with
the offering, ALZA incurred underwriting fees and other costs of $12.1
million, which are included in other assets and are being amortized over the
term of the 5% Debentures. The 5% Debentures rank pari passu with ALZA's
outstanding 5 1/4% zero coupon convertible subordinated debentures discussed
below. The proceeds of the
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<PAGE>
PAGE 30-31 OF PAPER FORMAT ANNUAL REPORT
offering will be used for general corporate purposes, which may include
expansion of ALZA's pharmaceutical business (including its sales and
marketing activities); expansion of its research and development and
manufacturing facilities; expenditures under existing or future joint
ventures, partnerships or other similar arrangements; the completion or
continuation of the development of TDC products if ALZA exercises its right
to license any or all of the TDC products or its purchase option with respect
to TDC; the acquisition of assets, technologies, products and businesses to
expand ALZA's operations; and working capital. The 5% Debentures are listed
for trading on the New York Stock Exchange. At December 31, 1996 the fair
value of the 5% Debentures was $490 million.
In July 1994, ALZA completed a public offering of 5 1/4% zero coupon
convertible subordinated debentures due 2014 (the "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, 1996 and 1995 the fair value of the 5 1/4% Debentures was $397.3
million and $387.8 million, respectively.
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ALZA's other long-term liabilities are as follows:
(In millions) 1996 1995
------ ------
Deferred compensation $ 31.2 $ 26.0
Deferred income taxes 25.4 25.7
Long-term debt 10.9 0.1
------ ------
Total other long-term liabilities $ 67.5 $ 51.8
------ ------
------ ------
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.
Included in long-term debt are $10.8 million in notes representing the
required future payments under an $11.9 million investment (included in other
assets) in low income housing partnerships. The aggregate annual maturities
of long-term debt at December 31, 1996, payable in each of the years 1998
through 2002 and thereafter are $2.6 million, $1.7 million, $1.6 million,
$1.6 million, $1.5 million and $1.9 million, respectively.
NOTE 4: CAPITAL STOCK AND WARRANTS
In January 1996, privately held warrants to purchase 1.0 million shares of
ALZA common stock were exercised. Net proceeds to ALZA totaled $25 million.
In connection with the formation of TDC, ALZA issued 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, 1996 or 1995. The Board
of Directors may determine the rights, preferences and privileges of any
preferred stock issued in the future.
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PAGE 32 OF PAPER FORMAT ANNUAL REPORT
NOTE 5: ARRANGEMENTS WITH THERAPEUTIC DISCOVERY CORPORATION
In June 1993, ALZA distributed a special dividend of Units to ALZA
stockholders. Each Unit consisted of one share of Therapeutic Discovery
Corporation Class A common stock and one warrant to purchase one-eighth of
one share of ALZA common stock. On June 11, 1996, the component parts of the
Units began trading separately on the Nasdaq Stock Market. The TDC Class A
common stock trades under the symbol TDCA, and the ALZA warrants trade under
the symbol ALZAW.
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 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 1996, 1995 and 1994 under the contract was $100.7 million, $70.1
million and $31.6 million, respectively.
ALZA has an option to license all of the products developed by TDC, on a
product-by-product and country-by-country 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 sublicensed to 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 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
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PAGE 32 OF PAPER FORMAT ANNUAL REPORT
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.
At December 31, 1996, TDC reported cash and cash equivalents, short-term
investments and long-term investments of $85.3 million. Based on TDC's
current rate of expenditures, it can be expected that all TDC funds available
for product development will be exhausted during the second half of 1997.
Under the formula set forth in TDC's Restated Certificate of Incorporation,
the Purchase Option exercise price is expected to be $100 million. 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 1996, 1995 and 1994, administrative service revenue under this
agreement was $0.2 million, $0.1 million and $0.2 million, respectively, and
is included in interest and other revenue.
NOTE 6: EMPLOYEE COMPENSATION AND BENEFIT PROGRAMS
In 1993, ALZA adopted a company-wide bonus program under which substantially
all regular 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. Bonus and award expenses under
this program for 1996, 1995 and 1994 were $6.9 million, $5.3 million and $2.6
million, respectively.
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 32-33 OF PAPER FORMAT ANNUAL REPORT
year-by-year basis. Such contributions are allocated to participants based on
the participant's salary and age. For 1996, 1995 and 1994, the total expense
for such contributions to this plan was $2.9 million, $2.7 million and $2.2
million, respectively.
ALZA has an employee savings plan which permits participants to make
contributions by salary reductions pursuant to section 401(k) of the Internal
Revenue Code. Beginning in 1996, the Company matched contributions up to a
maximum of $1,000 per participant. ALZA's contribution to the plan was $0.7
million in 1996.
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25") and related
interpretations in accounting for its employee stock options and employee
stock purchase plan because, as discussed below, the alternative fair value
accounting provided for under Financial Accounting Standards Board Statement
No. 123, "ACCOUNTING FOR STOCK-BASED COMPENSATION" ("SFAS 123"), requires use
of option valuation models that were not developed for use in valuing
employee stock options. Under APB 25, because the exercise price of the
Company's employee stock options equals the market price of the underlying
stock on the date of grant, no compensation expense is recognized.
ALZA has a stock option plan, adopted in 1992 and amended in 1995, 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. Options typically vest one to three years from
date of grant and generally expire ten years after the date of grant. Grants
of restricted stock also may be made under the plan; to date no restricted
stock has been granted. A total of 5,637,621 shares of ALZA's common stock
have been reserved for common shares issuable under its stock option plan
which was adopted in 1992 and amended in 1995. To date, all options granted
have had exercise prices equal to the
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PAGE 33 OF PAPER FORMAT ANNUAL REPORT
fair market value of common stock on the date of grant. Options granted
under previous plans also remain outstanding, but no additional options may
be granted under such plans.
Pro forma information regarding net income and net income per share is
required by SFAS 123, and has been determined as if the Company had accounted
for its employee stock options under the fair value method of SFAS 123. The
fair value for these options was estimated at the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions for 1996 and 1995: risk-free interest rates in the range of
4.78% to 7.48%; dividend yields of zero; an expected volatility factor of the
market price of the Company's common stock of 0.30; and an expected life of
the option in the range of 2.3 to 5.3 years.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input
of highly subjective assumptions including the expected stock price
volatility and expected option life. Because the Company's employee stock
options have characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions can
materially affect the fair value estimate, in management's opinion, the
existing models do not necessarily provide a reliable single measure of the
fair value of its employee stock options.
ALZA has an employee stock purchase plan under which essentially all ALZA's
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 1996, 1995 and 1994 an aggregate of
237,950, 165,314 and 157,075 shares, respectively, of ALZA common stock were
purchased by the participants under the terms of this plan. Since adoption
of this plan in 1984, 1,405,398 shares have been issued under this plan and
644,602 shares are available for issuance. The fair value of the employees'
purchase rights was estimated using the Black-Scholes option pricing model
with the following weighted-average assumptions for 1996 and
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PAGE 33-34 OF PAPER FORMAT ANNUAL REPORT
1995: risk free interest rate in the range of 4.78% to 5.87%; dividend
yields of zero; an expected votality factor of the market price of the
Company's common stock of 0.30; and an expected life of 6 months. The
weighted-average fair value for shares issued under the employee stock
purchase plan for 1996 and 1995 was $6.21 and $5.62, respectively.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the option vesting periods. The
Company's pro forma net income would have been $85.8 million and $70.0
million for 1996 and 1995, respectively. Pro forma net income per common and
common equivalent share would have been $1.01 and $0.85 for 1996 and 1995,
respectively. Because SFAS 123 is applicable only to options granted
subsequent to December 31, 1994, its pro forma effect will not be fully
realized until 1998. A summary of the Company's stock option activity, and
related information for the years ended December 31 follows:
<TABLE>
<CAPTION>
1996 1995
------------------------------------ -------------------------------------
Options Weighted-Average Options Weighted-Average
(in millions) Exercise Price (in millions) Exercise Price
--------------- ------------------- ---------------- -------------------
<S> <C> <C> <C> <C>
Outstanding-beginning
of year 5.7 $23 4.4 $21
Granted 0.9 27 1.8 23
Exercised (0.9) 20 (0.3) 14
Forfeited (0.2) 25 (0.2) 21
--------------- ----------------
Outstanding-end of year 5.5 24 5.7 23
--------------- ----------------
--------------- ----------------
Exercisable - end of year 2.2 23 1.8 23
Weighted-average fair value
of options granted during
the year $8.13 $7.75
</TABLE>
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<PAGE>
PAGE 34-35 OF PAPER FORMAT ANNUAL REPORT
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------------ ---------------------------------
Number Weighted-Average Number
Range of Outstanding Remaining Weighted-Average Exercisable Weighted-Average
Exercise at 12/31/96 Contractual life Exercise at 12/31/96 Exercise
Prices (in millions) (in years) Price (in millions) Price
- ------------------- ---------------- --------------- ----------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
$12.00-18.75 0.1 2.08 $ 13.01 0.1 $ 13.01
19.00-25.88 4.8 7.67 22.71 1.8 21.63
27.50-34.00 0.5 7.35 30.20 0.2 31.05
44.50-49.25 0.1 5.28 45.72 0.1 45.73
</TABLE>
NOTE 7: COMMITMENTS AND CONTINGENCIES
ALZA leases certain buildings and equipment under operating leases. Rent
expense under these leases during the years ended 1996, 1995 and 1994 was
$3.7 million, $1.7 million and $1.6 million, respectively. Aggregate minimum
rental commitments under non-cancelable operating lease arrangements as of
December 31, 1996 were $8.0 million and are payable as follows: $3.2 million
in 1997, $2.3 million in 1998, $2.0 million in 1999, $0.4 million in 2000 and
$0.1 million in 2001.
NOTE 8: INCOME TAXES
The provision for income taxes is as follows for each of the three years
ended December 31:
(In millions) 1996 1995 1994
------ ------ ------
Federal:
Current $ 47.9 $ 30.1 $ 23.4
Deferred (2.4) 5.6 4.1
------ ------ ------
45.5 35.7 27.5
State:
Current 11.2 6.4 6.2
Deferred - 2.3 1.5
------ ------ ------
11.2 8.7 7.7
------ ------ ------
Provision for income taxes $ 56.7 $ 44.4 $ 35.2
------ ------ ------
------ ------ ------
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Tax benefits associated with employee stock option transactions reduced
accrued income taxes by $3.3 million for 1996 and $1.0 million for each of
1995 and 1994.
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:
(In millions) 1996 1995 1994
------ ------ ------
Expected federal tax at 35% $ 52.2 $ 40.9 $ 32.7
State income taxes, net of
federal benefit 7.3 5.7 5.0
Investment and research
tax credits (2.3) (1.3) (2.0)
Other (0.5) (0.9) (0.5)
------ ------ ------
Provision for income taxes $ 56.7 $ 44.4 $ 35.2
------ ------ ------
------ ------ ------
Temporary differences which give rise to a significant portion of deferred
tax assets and liabilities for 1996 and 1995 are as follows:
(In millions) 1996 1995
------ ------
Deferred tax assets:
Inventories $ 5.7 $ 6.2
Compensation 14.5 13.0
Capitalized intangibles 6.1 5.8
Deferred revenue 0.1 7.2
State income taxes 4.8 2.4
Other 3.3 2.1
------ ------
Total deferred tax assets 34.5 36.7
Deferred tax liabilities:
Property, plant and equipment 39.8 38.2
Unrealized gains (losses) on available-for-
sale securities (0.1) 1.3
Other 2.5 2.1
------ ------
Total deferred tax liabilities 42.2 41.6
------ ------
Net deferred tax liabilities $ 7.7 $ 4.9
------ ------
------ ------
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NOTE 9: LITIGATION
In December 1991, a patent infringement suit was filed by Ciba-Geigy Inc.
("Ciba-Geigy"), now Novartis Pharmaceuticals Corportation, 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 believed that these
narrower claims were invalid and did not cover the Nicoderm-Registered
Trademark- product; therefore, ALZA reversed a portion of a reserve that was
established after the patent infringement suit was filed. The effect of the
reversal increased royalties and fees by approximately $7.4 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 June 1996, ALZA and HMR entered
into a settlement agreement with Ciba-Geigy which resolved these disputes.
Ciba-Geigy made a one-time settlement payment to HMR and ALZA, and is paying
ongoing royalties on its U.S. nicotine patch sales, retroactive to January 1,
1996. ALZA and HMR share the royalty payments in accordance with the
agreements between them.
During January 1994, a suit was filed against ALZA by Cygnus Therapeutic
Systems ("Cygnus") seeking a declaration of unenforceability and invalidity
of an ALZA patent relating to transdermal administration of fentanyl (which
patent covers Duragesic-Registered Trademark-) and alleging violation of
antitrust laws. In April 1995, the court granted ALZA's motion to dismiss
the lawsuit; Cygnus appealed that ruling. During 1996, the Court of
Appeals of the Federal Circuit upheld the District Court's dismissal of
Cygnus' claims against ALZA. Cygnus has no further right of appeal.
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PAGE 36-37 OF PAPER FORMAT ANNUAL REPORT
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 10: STATEMENT OF CASH FLOWS
Supplemental disclosures of cash flow information:
(In millions) 1996 1995 1994
------ ------ ------
Cash paid during the year for:
Income taxes $ 42.2 $ 37.0 $ 25.7
Interest 16.3 2.6 6.3
Supplemental schedule of noncash investing and financing activities:
(In millions) 1996 1995 1994
------ ----- -------
Net unrealized gains (losses)
on available-for-sale
securities, net of tax effect $ (2.0) $ 9.4 $ (7.5)
Deferred issuance costs -
5 1/4% Debentures - - 8.4
Deferred issuance costs -
5% Debentures 11.2 - -
NOTE 11: SUBSEQUENT EVENTS
Subsequent to year end, ALZA entered into an agreement with U.S. Bioscience
under which U.S. Bioscience will sell approximately 1.2 million of its common
shares to ALZA (4.9% of the outstanding common shares of U.S. Bioscience) at
a purchase price of $18.256 per share, for an aggregate investment
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PAGE 37 OF PAPER FORMAT ANNUAL REPORT
of $21.5 million. U.S. Bioscience will spend a portion of the proceeds on
programs supporting the Ethyol-Registered Trademark- product.
Also subsequent to year end, ALZA announced that it had entered into an
agreement under which Alkermes, Inc. ("Alkermes") will sell 2.0 million of
its common shares (9.7% of the outstanding common shares of Alkermes) to ALZA
at a purchase price of $25 per share, for an aggregate investment of $50
million. Separately, ALZA and Alkermes agreed to collaborate on a program for
the development and commercialization of a product utilizing Alkermes' drug
delivery technology. ALZA will fund the development costs of the program and
will have worldwide commercialization rights to the product. Alkermes will
receive royalties based on product sales and it is anticipated that Alkermes
will manufacture the product.
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PAGE 37 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, 1996 and 1995, and the related consolidated
statements of income, stockholders' equity and cash flows for each of the
three years in the period ended December 31, 1996. 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, 1996 and 1995, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1996, in conformity with generally accepted accounting
principles.
Ernst & Young LLP
Palo Alto, California
February 14, 1997
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PAGE 38 OF PAPER FORMAT ANNUAL REPORT
ALZA COMMON STOCK
ALZA common stock is listed for trading (symbol AZA) on the New York Stock
Exchange and ALZA warrants are listed for trading (symbol ALZAW) on the
Nasdaq Stock Market ("Nasdaq"). Both securities are reported in the WALL
STREET JOURNAL and other newspapers. As of December 31, 1996, there were
9,022 holders of record of ALZA common stock and 5,968 holders of record of
ALZA warrants. 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 of ALZA common stock for the calendar years 1996 and 1995, as
reported on the composite tape, and ALZA warrants from the date of initial
trading (June 11, 1996) as quoted on Nasdaq, are shown below:
<TABLE>
<CAPTION>
ALZA COMMON STOCK ALZA WARRANTS
------------------------------------------------- ------------------
1996 1995 1996
------------------------ ---------------------- ------------------
High Low High Low High Low
<S> <C> <C> <C> <C> <C> <C>
First quarter $34 7/8 $24 3/8 $24 1/8 $18 1/8 $ - $ -
Second quarter 32 1/2 26 3/8 24 5/8 18 3/8 3/16 1/8
Third quarter 27 3/4 24 27 22 1/8 3/16 1/16
Fourth quarter 29 25 1/8 25 1/8 20 1/4 1/8 1/16
</TABLE>
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<PAGE>
PAGE 38 OF PAPER FORMAT ANNUAL REPORT
SELECTED CONSOLIDATED QUARTERLY FINANCIAL DATA (UNAUDITED)
(In millions, except per share amounts)
<TABLE>
<CAPTION>
1996 1995
------------------------------------- -----------------------------------
Fourth Third Second First Forth Third Second First
<S> <C> <C> <C> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------
Total revenues $126.2 $114.9 $128.1 $96.8 $101.8 $85.6 $83.0 $80.2
Operating income 36.2 33.2 36.7 31.2 31.5 30.0 27.6 27.3
Net income 25.7 23.1 23.2 20.4 19.7 18.2 17.5 17.0
Net income per share 0.30 0.27 0.27 0.24 0.24 0.22 0.21 0.21
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
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PAGE 39 OF PAPER FORMAT ANNUAL REPORT
SELECTED CONSOLIDATED FINANCIAL DATA
(In millions, except per share amounts)
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------
Total revenues $466.0 $350.6 $278.8 $234.2 $250.5 $162.3 $109.4 $92.7 $84.2 $70.8
Net income (loss) 92.4 72.4 58.1 45.6(1) 72.2 (62.1)(2) 24.7 18.8 17.0 14.0
Net income (loss) per share 1.08(3) 0.88 0.71 0.57 0.90 (0.88) 0.35 0.27 0.25 0.21
Cash, cash equivalents,
short-term and long-term
investments 999.8 419.1 344.9 257.5(4) 338.5 296.6 302.4 109.0 121.1 142.8
Total assets 1,613.7 937.2 806.3 621.8(4) 698.4 580.5 530.9 288.4 261.6 243.5
Convertible debentures 882.3 362.9 344.6 -(5) 229.0 213.2 273.2 75.0 75.0 75.0
Total stockholders' equity 596.7 454.6 364.5 306.7(4) 407.5 322.9 219.6 186.6 159.8 139.0
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes pre-tax charges and allowances of $28.1 million
($0.23 per share on an after-tax basis) related primarily to
manufacturing activities. Also includes $6.6 million ($0.08
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 ($0.05 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) Net income per share calculation uses adjusted net income of $101.6
million.
(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 14, 1997, included in
the 1996 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 (Forms S-3 No. 33-53671 and No. 333-02765 and Forms S-8 No.
2-92629, No. 2-97422, No. 33-21810, No. 33-36141, No. 33-49824, No. 33-51890,
and No. 333-21877) and in the related Prospectuses, of our report dated
February 14, 1997 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 28, 1997
-36-
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<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,
1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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