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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
- ----- Exchange Act of 1934
For the quarterly period ended JUNE 30, 1997
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or
Transition Report Pursuant to Section 13 or 15(d) of the Securities
- ----- Exchange Act of 1934
For the transition period from __________ to __________
Commission File Number 1-6247
ALZA CORPORATION
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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 or organization) Identification No.)
950 Page Mill Road, P.O. Box 10950, Palo Alto, California 94303-0802
- ---------------------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (650) 494-5000
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
----- -----
Number of shares outstanding of each of the registrant's classes of common
stock as of July 18, 1997:
Common Stock, $.01 par value - 85,024,116 shares
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ALZA CORPORATION
FORM 10-Q for the Quarter Ended
June 30, 1997
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statement of Income 3
Condensed Consolidated Balance Sheet 4
Condensed Consolidated Statement of Cash Flows 5
Notes to Financial Statements 6-7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8-16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 19
Exhibits
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PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
ALZA CORPORATION
Condensed Consolidated Statement of Income (unaudited)
(In millions, except per share amounts)
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
June 30, June 30,
1997 1996 1997 1996
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenues:
Royalties, fees and other $ 45.7 $ 49.1 $ 89.9 $ 86.6
Research and development 36.1 35.2 69.9 65.4
Net sales 36.4 33.6 63.9 54.3
------- ------- ------- -------
Total revenues 118.2 117.9 223.7 206.3
Expenses:
Research and development 39.6 38.3 74.6 69.5
Costs of products shipped 23.1 29.6 42.9 45.6
Selling, general and
administrative 12.6 11.9 24.1 22.1
------- ------- ------- -------
Total expenses 75.3 79.8 141.6 137.2
------- ------- ------- -------
Operating income 42.9 38.1 82.1 69.1
Interest expense 13.7 10.9 27.5 17.4
Interest and other income 13.5 10.2 30.5 18.6
------- ------- ------- -------
Net interest and other
expense (income) 0.2 0.7 (3.0) (1.2)
------- ------- ------- -------
Income before income taxes 42.7 37.4 85.1 70.3
Provision for income taxes 16.3 14.2 32.4 26.8
------- ------- ------- -------
Net income $ 26.4 $ 23.2 $ 52.7 $ 43.5
------- ------- ------- -------
------- ------- ------- -------
Net income per common and
common equivalent share $ 0.30 $ 0.27 $ 0.60 $ 0.51
------- ------- ------- -------
------- ------- ------- -------
Weighted average common and
common equivalent shares 98.0 97.4 97.9 91.0
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
See accompanying notes.
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ALZA CORPORATION
Condensed Consolidated Balance Sheet (unaudited)
(In millions)
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
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<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 264.6 $ 187.7
Short-term investments 122.3 199.3
Receivables, net 137.4 116.6
Inventories, at cost:
Raw materials 16.6 17.7
Work in process 15.1 18.0
Finished goods 4.8 3.5
-------- --------
Total inventories 36.5 39.2
Prepaid expenses and other current assets 25.9 19.2
-------- --------
Total current assets 586.7 562.0
Property, plant and equipment 420.0 408.1
Less accumulated depreciation and amortization (111.9) (100.3)
-------- --------
Net property, plant and equipment 308.1 307.8
Investments in long-term securities 631.9 612.8
Other assets 139.6 131.1
-------- --------
Total assets $1,666.3 $1,613.7
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 18.2 $ 28.7
Accrued liabilities 32.0 37.2
Other current liabilities 2.0 1.3
-------- --------
Total current liabilities 52.2 67.2
5% convertible subordinated debentures 500.0 500.0
5-1/4% zero coupon convertible subordinated debentures 392.3 382.3
Other long-term liabilities 74.0 67.5
Stockholders' equity:
Common stock and additional paid-in capital 370.5 363.0
Net unrealized losses on available-for-sale
securities, net of tax effect (9.2) (0.1)
Retained earnings 286.5 233.8
-------- --------
Total stockholders' equity 647.8 596.7
-------- --------
Total liabilities and stockholders' equity $1,666.3 $1,613.7
-------- --------
-------- --------
</TABLE>
See accompanying notes.
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ALZA CORPORATION
Condensed Consolidated Statement of Cash Flows (unaudited)
(In millions)
<TABLE>
<CAPTION>
Six Months Ended June 30,
1997 1996
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 52.7 $ 43.5
Non-cash adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 14.2 9.5
Interest on 5-1/4% zero coupon convertible
subordinated debentures 10.1 9.6
Increase in current assets (18.4) (29.5)
Decrease in current liabilities (16.0) (8.0)
Other 1.8 5.5
------- -------
Net cash provided by operating activities 44.4 30.6
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of available-for-sale securities (269.1) (379.0)
Sales and maturities of available-for-sale securities 311.4 258.8
Capital expenditures (11.9) (21.0)
Other investing activities (11.1) (9.7)
------- -------
Net cash provided by (used in) investing activities 19.3 (150.9)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from 5% convertible
subordinated debentures - 488.8
Issuance of long-term debt 6.6 -
Principal payments on long-term debt (0.9) -
Issuances of common stock 7.5 42.9
------- -------
Net cash provided by financing activities 13.2 531.7
------- -------
Net increase in cash and cash equivalents 76.9 411.4
Cash and cash equivalents at beginning of period 187.7 88.0
------- -------
Cash and cash equivalents at end of period $ 264.6 $ 499.4
------- -------
------- -------
</TABLE>
See accompanying notes.
5
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NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
The information at June 30, 1997 and for the six months ended June 30, 1997
and 1996 is unaudited, but includes all adjustments (consisting only of normal
recurring adjustments) that the management of ALZA Corporation ("ALZA")
believes necessary for fair presentation of the results for the periods
presented. Interim results are not necessarily indicative of results for the
full year. The condensed consolidated financial statements should be read in
conjunction with the audited consolidated financial statements and accompanying
notes for the year ended December 31, 1996 included in ALZA's 1996 Annual
Report to Stockholders.
Beginning with the quarter ended March 31, 1997, ALZA changed the
presentation of its consolidated statement of income and consolidated balance
sheet. In the consolidated statement of income, royalties, fees and other
revenue now include items related to operations that were previously reflected
in interest and other income. Interest expense and income are now shown
separately after operating income. On the consolidated balance sheet, ALZA has
reclassified securities which have maturities of one year or more as
investments in long-term securities; these securities were previously treated
as current assets. Prior year amounts have been changed to conform with the
current year presentation.
2. PER SHARE INFORMATION
Per share information is based on weighted average common equivalent
shares, including ALZA common stock, and dilutive warrants and options, for
the period each was outstanding. The 5-1/4% zero coupon convertible
subordinated debentures due 2014 ("5-1/4% Debentures") are considered to be
common stock equivalents, and shares issuable upon an assumed conversion of
the 5-1/4% Debentures were dilutive for the quarter and six months ended June
30, 1997, and for the quarter ended June 30, 1996. Shares issuable upon an
assumed conversion of the 5-1/4% Debentures would have had an antidilutive
effect for the quarter ended March 31, 1996, and were therefore not included
in the per share calculation for that period. The 5% convertible
subordinated debentures due 2006 ("5%
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Debentures") are not considered common stock equivalents and were not
included in the fully diluted earnings per share calculation for the periods
presented as their inclusion would have had an antidilutive effect. Fully
diluted earnings per share are not shown on the Condensed Consolidated
Statement of Income since dilution is less than 3% for each period presented.
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, EARNINGS PER SHARE ("SFAS 128"), which is required to be adopted on
December 31, 1997. At that time, ALZA will be required to change the method
currently used to compute earnings per share and to restate all prior periods.
Under the new requirements for calculating basic earnings per share, which
replaces primary earnings per share, the dilutive effect of stock options and
other common stock equivalents will be excluded. Diluted earnings per share,
which replaces fully diluted earnings per share, will include the dilutive
effect of stock options, other common stock equivalents and convertible
securities. Basic earnings per share is expected to be $0.01 higher than the
reported primary earnings per share for the quarter and $0.02 higher for the
six months ended June 30, 1997, and $0.01 higher for the six months ended June
30, 1996. No change is expected for the second quarter of 1996. Dilutive
earnings per share is not expected to be materially different than fully
diluted earnings per share for these quarters and six month periods.
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Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
NOTICE CONCERNING FORWARD-LOOKING STATEMENTS
Some of the statements made in this Form 10-Q 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 ALZA's Annual
Report on 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.
SECOND QUARTER EVENTS
In April 1997, ALZA and SmithKline Beecham ("SmithKline") entered into an
agreement under which SmithKline has the right to commercialize ALZA's Nicoderm-
Registered Trademark- transdermal nicotine product in China and Japan upon
receipt of required regulatory clearance to market the product. Under the terms
of the agreement, SmithKline made an upfront payment to ALZA and will make
milestone payments upon the occurrence of certain events related to regulatory
clearance. ALZA will manufacture and sell the product to SmithKline at an all-
inclusive price.
In June 1997, ALZA entered into an international commercialization agreement
with Pfizer, Inc. ("Pfizer") for ALZA's OROS-Registered Trademark-
pseudoephedrine cold/allergy product. Under the terms of the agreement, Pfizer
acquired the rights to commercialize the OROS-Registered Trademark-
pseudoephedrine product in more than 80 countries, including identified
countries in Europe, Asia and South America, but not in the United States or in
Asian countries that are
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subject to a previous agreement. Pfizer made an upfront payment to ALZA and
will make milestone payments upon certain regulatory clearance. ALZA will
manufacture and sell the product to Pfizer at an all-inclusive price. Pfizer
will be responsible for filing for regulatory clearance to market the product
in the countries of its territory.
RESULTS OF OPERATIONS
ALZA's net income was $26.4 million, or $0.30 per share, for the quarter
ended June 30, 1997, compared to net income of $23.2 million, or $0.27 per
share, ($20.9 million, or $0.25 per share, excluding non-recurring items) for
the quarter ended June 30, 1996. Net income for the six months ended
June 30, 1997 was $52.7 million, or $0.60 per share, compared to net income of
$43.5 million, or $0.51 per share, ($41.3 million, or $0.49 per share,
excluding non-recurring items) for the six months ended June 30, 1996.
ALZA's net income currently results primarily from royalties and fees from
client companies. Royalties and fees, which are generally derived from sales
by client companies of products developed jointly with ALZA, vary from quarter
to quarter as a result of changing levels of product sales by client companies
and, occasionally, the receipt by ALZA of certain one-time fees. Because
ALZA's clients generally take responsibility for obtaining necessary regulatory
approvals and make all marketing and commercialization decisions regarding such
products, most of the variables that affect ALZA's royalties and fees are not
directly within ALZA's control.
During the next several years, ALZA intends to become less dependent on
royalties and fees by continuing to expand ALZA's sales and marketing
activities and by directly marketing and selling more products; however, there
can be no assurance that ALZA will be successful in undertaking this expansion,
or that any expanded sales and marketing activities will be successful, due to
factors such as the risks associated with developing or acquiring products to
market, the length of the regulatory approval process, the uncertainties
surrounding the acceptance of new products by the intended markets, the
marketing of competitive products, and the current health care cost containment
environment. ALZA expects that, in the near term, net income will continue to
result primarily from royalties on sales by clients of currently marketed
products.
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ROYALTIES AND FEES
Royalties, fees and other revenue were $45.7 million for the quarter and
$89.9 million for the six months ended June 30, 1997, compared to $49.1 million
and $86.6 million, respectively, for the corresponding periods in 1996.
Excluding non-recurring items, royalties, fees and other revenue for the second
quarter and first half of 1996 were $38.6 million and $76.1 million. The 1996
non-recurring items consisted primarily of a benefit from the reversal of a
reserve for royalties on sales of Procardia XL-Registered Trademark- and a
benefit in connection with the settlement of litigation related to patent
disputes concerning transdermal nicotine patches, which were partially offset
by a charge related to an advance payment to the limited partners of the ALZA
OROS-Registered Trademark- Products Limited Partnership in connection with the
purchase by ALZA of their interests in the partnership.
Excluding the 1996 non-recurring items, royalties, fees, and other income
increased 18% for both the second quarter and first half of 1997 compared to
the corresponding periods in 1996, primarily resulting from increased royalties
due to higher sales of NicoDerm-Registered Trademark- CQ-TM- by SmithKline,
Duragesic-Registered Trademark- by Janssen Pharmaceutica, Inc. ("Janssen") and
Glucotrol XL-Registered Trademark- by Pfizer, which were partially offset by
decreased royalties on sales of Procardia XL-Registered Trademark- by Pfizer.
Royalties, fees and other revenue for the second quarter of 1997 include an
upfront payment from SmithKline in connection with the agreement for the
commercialization of ALZA's Nicoderm-Registered Trademark- transdermal nicotine
product in China and Japan, and an upfront payment from Pfizer for the rights
to commercialize the OROS-Registered Trademark- pseudoephedrine product. For
the first half of 1997, royalties, fees and other revenue also included an
upfront payment from Knoll Pharmaceutical Company in connection with an
agreement for continued development and worldwide commercialization of the OROS-
Registered Trademark- hydromorphone product.
Sales of Procardia XL-Registered Trademark-, as reported by Pfizer,
decreased 14% and 19% during the second quarter and first half of 1997 compared
to the same periods in 1996. Royalties from Procardia XL-Registered Trademark-
accounted for approximately 25% and 30% of ALZA's royalties, fees and other
revenue for the quarter and six months ended June 30, 1997, respectively.
During the second quarter of 1997, Mylan Laboratories Inc. ("Mylan") filed an
Abbreviated New Drug Application ("ANDA") with the United States Food and Drug
Administration ("FDA")
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requesting clearance to market a controlled-release nifedipine tablet as a
generic alternative to Procardia XL-Registered Trademark-. On July 8, 1997,
Pfizer filed a suit in Washington D.C. federal court seeking to prevent the
review of the ANDA and to require Mylan to submit an ANDA suitability
petition. Additionally, Pfizer has filed a suit against Mylan in federal
court in Pennsylvania for infringement of a patent licensed to Pfizer by a
third party relating to nifedipine. Under applicable law, Pfizer's suit may
have the effect of delaying FDA clearance of Mylan's ANDA. However, it is not
possible to predict the outcome of such litigation, nor is it possible to
predict the impact Mylan's product, if cleared for marketing, may ultimately
have on sales of Procardia XL-Registered Trademark- and the resulting
royalties to ALZA.
RESEARCH AND DEVELOPMENT
Research and development revenue was $36.1 million and $69.9 million for
the quarter and six months ended June 30, 1997, compared to $35.2 million and
$65.4 million, respectively, for the corresponding periods in 1996. Research
and development revenue from Therapeutic Discovery Corporation ("TDC") was
$25.9 million for the quarter and $49.3 million for the six months ended
June 30, 1997, and $28.6 million and $51.5 million, respectively, for the
corresponding periods in 1996. Included in the 1996 research and development
revenue were $2.1 million of non-recurring charges related to a credit to TDC
and other uncollectible receivables. Research and development revenue from
other clients increased in the second quarter and first six months of 1997
compared to the same periods in 1996, reflecting an increase in product
development activities conducted under agreements with client companies.
Research and development expenses were $39.6 million for the quarter and
$74.6 million for the six months ended June 30, 1997 compared with $38.3
million and $69.5 million, respectively, for the corresponding periods in 1996,
reflecting the increased activity for client companies other than TDC,
partially offset by decreased product development expenses incurred on behalf
of TDC.
All of TDC funds available for product development will be exhausted during
the third quarter of 1997, and product development funding by TDC will then
cease. Once TDC has expended all of its funds available for product
development, ALZA will be required to determine whether or not to exercise its
option, exercisable at ALZA's sole discretion, to
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purchase, in accordance with a predetermined formula set forth in TDC's
Restated Certificate of Incorporation, 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
("SEC") containing a balance sheet showing less than an aggregate of $5
million in cash and cash equivalents, short-term and long-term investments.
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 in 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 of approximately $100 million due to
the acquisition of in-process technology, and might realize certain tax
benefits. In addition, ALZA would need to fund the continued development
expenses for the TDC products. 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, equal to a specified
percentage of net sales of the licensed products by ALZA in those countries and
a specified portion of any upfront fees and sublicensing revenues received by
ALZA from third parties marketing the licensed products in those countries
under arrangements with ALZA.
If ALZA were to exercise the Purchase Option, or to license some or all of
the TDC products for commercialization in some or all countries, ALZA would
need to fund or obtain funding for any additional product development necessary
to complete the development of each of the products. In addition, ALZA has
agreed to fund certain TDC product development activities that are already
underway and that will not be completed before TDC's funds are exhausted. Such
funding by ALZA would begin, on a product-by-product basis, when TDC no longer
has funds available to pay for such activities, and would continue until the
exercise or the expiration of the Purchase Option and ALZA's option to license
each TDC product, on a product-by-product and country-by-country basis. ALZA
has not yet determined whether it will exercise its Purchase Option or any of
its license options (other than those already exercised).
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On July 15, 1997, ALZA filed a registration statement with the SEC on
behalf of Crescendo Pharmaceuticals Corporation ("Crescendo") with respect to
shares of callable Class A Common Stock ("Crescendo Shares"). Crescendo was
formed by ALZA for the purpose of selecting and developing human
pharmaceutical products for commercialization, most likely through licensing
to ALZA. Subject to the approval of ALZA's Board of Directors and ALZA
exercising its option to purchase all of the outstanding shares of TDC, ALZA
would contribute $300 million to Crescendo in exchange for the Crescendo
Shares, and the Crescendo Shares would be distributed by ALZA to holders of
record of ALZA common stock, 5% Debentures and 5-1/4% Debentures. If ALZA
were to contribute $300 million to Crescendo and distribute the Crescendo
Shares, ALZA would record a one-time charge of $300 million less the fair
market value at the time of distribution of Crescendo Shares distributed to
ALZA stockholders.
If ALZA exercises its option to purchase TDC's outstanding shares and
distributes the Crescendo Shares, Crescendo would continue the development of
certain products which currently are being developed by ALZA and TDC. ALZA
would undertake the development of products for Crescendo under agreements
between the parties. ALZA would have the option to license any products
developed by Crescendo and to purchase all of the Crescendo shares at a price
determined according to a formula included in Crescendo's Certificate of
Incorporation.
NET SALES
Net sales were $36.4 million for the quarter and $63.9 million for the six
months ended June 30, 1997, an increase of 8% and 18%, respectively, compared
to the corresponding periods in 1996. These increases were due to higher sales
of Ethyol-Registered Trademark-, Duragesic-Registered Trademark- and Catapres-
TTS-Registered Trademark-. Partially offsetting these increases were lower
sales by ALZA of NicoDerm-Registered Trademark- CQ-TM- and Covera-HS-TM- in the
second quarter of 1997 compared to the second quarter of 1996. Sales in the
second quarter of 1996 include the shipment of launch quantities of both
products. Net sales of Ethyol-Registered Trademark- for the second quarter and
first half of 1997 were $5.2 million and $8.6 million, respectively, compared
to $0.6 million and $3.1 million for the same periods in 1996, when the product
was launched.
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The timing and quantities of orders for products marketed by client
companies are not within ALZA's control. Net sales, therefore, can be expected
to fluctuate from period to period, sometimes significantly, depending on the
volume, mix and timing of orders of products shipped to client companies, and
in some quarters, due to the shipment of launch quantities of products.
Cost of products shipped declined to $23.1 million for the quarter and
$42.9 million in for the six months ended June 30, 1997, compared to $29.6
million and $45.6 million, respectively, for the corresponding 1996 periods.
The 1996 amounts include a $2.4 million non-recurring charge related primarily
to costs associated with a limited recall of two lots of the Duragesic-
Registered Trademark- product.
ALZA's gross margin (net sales less costs of products shipped) as a percent
of net sales increased to 36% for the quarter and 33% for the six months ended
June 30, 1997 compared to 19% and 20%, excluding the non-recurring charge, for
the quarter and six months ended June 30, 1996, respectively. The increase was
largely due to higher volumes of products shipped to client companies and
increased sales of ALZA-marketed products. Because many of ALZA's
manufacturing costs are substantially fixed, increased shipments in any quarter
can generally be expected to result in a higher gross margin for the quarter.
ALZA expects its gross margin on net sales to increase from historical rates
over the longer term, although quarter-to-quarter fluctuations, even
significant ones, can be expected to continue to occur for the reasons
discussed above. A trend of higher than historical gross margins may
ultimately be achieved through a proportionate increase in the sales of
ALZA-marketed products in relation to sales to client-marketed products,
increased utilization of capacity and greater operating efficiencies.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses were $12.6 million and $24.1
million for the second quarter and first half of 1997, an increase of 6% and
9%, respectively, over the corresponding periods in 1996. The increases were
due to higher sales and marketing expenses by ALZA Pharmaceuticals, primarily
as a result of the expansion of ALZA's sales force in support of Ethyol-
Registered Trademark-.
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INTEREST EXPENSE AND INCOME
Interest expense increased to $13.7 million for the quarter and
$27.5 million for the six months ended June 30, 1997, compared to $10.9 million
and $17.4 million, respectively, during the corresponding periods in 1996,
reflecting the interest expense associated with ALZA's 5% Debentures.
Interest and other income increased to $13.5 million for the quarter and
$30.5 million for the six months ended June 30, 1997, compared to $10.2 million
and $18.6 million, respectively, for the corresponding periods in 1996,
primarily due to higher average invested cash balances following ALZA's
issuance of $500 million of 5% Debentures in April 1996. Gains realized on
sales of securities also contributed to the increase in interest and other
income for the first half of 1997 compared with the same period last year.
EFFECTIVE TAX RATE
ALZA's effective combined federal and state income tax rate for the year
ended 1996 and for the quarter and six months ended June 30, 1997 was 38%.
SUBSEQUENT EVENTS
In July 1997, ALZA acquired Mycelex-Registered Trademark- Troche in the
United States from Bayer Corporation ("Bayer"). Under the terms of the
agreement, ALZA made a $50 million upfront payment to Bayer for the product and
will make a milestone payment if net sales during a certain period are above a
specified level. Bayer will manufacture Mycelex-Registered Trademark- Troche
for ALZA, and ALZA will make payments to Bayer based on net sales of the
product.
LIQUIDITY AND CAPITAL RESOURCES
ALZA invested $11.9 million during the first six months of 1997 in
additions to property, plant and equipment to support its expanding research,
development and manufacturing activities. This compares to $21.0 million
invested in the first six months of 1996. While ALZA believes its current
facilities and equipment are sufficient to meet its current operating
requirements, ALZA is expanding its facilities and equipment to support its
medium-term and long-term requirements.
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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. If ALZA were to exercise its option to purchase all of
the outstanding shares of TDC stock and pay the purchase price in cash, and
were to make the $300 million contribution to Crescendo, ALZA would reduce its
cash and investments by approximately 39%.
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PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
Product liability suits have been filed against ALZA from time to time
relating to products manufactured or marketed by ALZA, including several suits
against ALZA and Janssen relating to the Duragesic-Registered Trademark-
product, which is manufactured by ALZA and marketed by Janssen. Janssen is
managing the defense of these suits in consultation with ALZA under an
agreement between the parties. In the ordinary course of business, ALZA is
also a defendant in suits brought by individuals relating to their employment
with ALZA or the termination of such employment.
Historically, the cost of resolution of 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
(a) The annual meeting of stockholders of ALZA was held on May 8, 1997.
(b) A total of 63,849,242 shares were represented at the annual meeting.
Stock holders approved the following proposals:
(i) Election of Class I Directors:
Votes For Votes Withheld
---------- --------------
Dr. William R. Brody 63,022,240 827,002
William G. Davis 62,941,169 908,073
Julian N. Stern 61,930,956 1,918,286
(ii) An amendment to ALZA's Amended and Restated Stock Plan to
increase by 3,000,000 the number of shares authorized for
issuance under the plan. There were 52,404,712 votes in
favor, 10,335,796 against, 400,576 abstentions and 708,158
broker non-votes.
(iii) The ratification of the appointment of Ernst & Young LLP
as ALZA's independent auditors for the fiscal year ended
December 31, 1997. There were 63,478,956 votes in favor,
104,391 votes against and 265,895 abstentions.
17
<PAGE>
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
10.1 Amendment No. 1 to ALZA's Amended and Restated Stock Plan
10.2 Amendment to Agreements between ALZA and TDC
11 Statement Regarding Computation of Per Share Earnings
27 Financial Data Schedule
(b) No reports on Form 8-K were filed during the quarter
18
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ALZA CORPORATION
Date: August 6, 1997 By: /s/ E. Mario
------------------------------------
Dr. Ernest Mario
Chief Executive Officer
Date: August 6, 1997 By: /s/ Bruce C. Cozadd
------------------------------------
Bruce C. Cozadd
Senior Vice President and
Chief Financial Officer
19
<PAGE>
EXHIBIT INDEX
Exhibit
- -------
10.1 Amendment No. 1 to ALZA's Amended and Restated Stock Plan
10.2 Amendment to Agreements between ALZA and TDC
11 Statement Regarding Computation of Per Share Earnings
27 Financial Data Schedule
20
<PAGE>
Exhibit 10.1
AMENDMENT NO. 1
T0 THE
ALZA CORPORATION
AMENDED AND RESTATED STOCK PLAN
The ALZA Corporation Amended and Restated Stock Plan (the "Plan") is amended
as follows pursuant to the adoption of such amendment by the Board of
Directors of ALZA Corporation ("ALZA") on February 12, 1997 and the approval
of the increase by 3,000,000 in the number of shares reserved for issuance
under the Plan by the stockholders of ALZA on May 8, 1997:
1. The first sentence of Section 3(a) of the Plan is deleted in its
entirety and replaced with the following:
(a) NUMBER AND SOURCE OF SHARES. Subject to the provisions of
Section 9, the total number of shares of stock reserved for grants
under this Plan is 9,000,000 shares of Common Stock, $.01 par value,
of the Company (the "Stock").
2. Section 6(c)(v) of the Plan is deleted in its entirety and replaced
with the following:
(v) NONASSIGNABILITY OF OPTION RIGHTS. Except as otherwise
determined by the Administrator, no option shall be transferable other
than by will or by the laws of descent and distribution or a qualified
domestic relations order and, otherwise during the lifetime of an
optionee, only the optionee may exercise an option.
All other provisions of the Plan remain in full force and effect, without
modification.
<PAGE>
EXHIBIT 10.2
July 30, 1997
Gary L. Neil, Ph.D.
Therapeutic Discovery Corporation
1454 Page Mill Road, Ste. 220
P.O. Box 10051
Palo Alto, CA 94303-0806
Dear Dr. Neil:
This letter serves to set forth the agreement reached by ALZA Corporation
("ALZA") and Therapeutic Discovery Corporation ("TDC") regarding the royalties
payable to TDC in the event ALZA exercises its license option for any TDC
product, and the amount of TDC's operating reserve. I believe that ALZA and
TDC have agreed as follows:
1. The parties agree that the last sentence in Section 3.1 of the form of
License Agreement which is attached as Exhibit A to the License Option
Agreement by and between ALZA and TDC dated as of March 10, 1993 is hereby
deleted and the following replaced therefor in any License Agreement entered
into by ALZA and TDC after June 30, 1997 for any country or countries pursuant
to the License Option Agreement:
"In determining payments under this Section 3.1, Development Costs shall be
determined as of the last day of each calendar quarter (beginning with the
calendar quarter preceding the effective date of the relevant License
Agreement) in order to determine the rates payable for the next calendar
quarter for all countries included in the Territory as of the first day of such
next calendar quarter and for any country added to the Territory during such
next calendar quarter."
In addition, in the event ALZA does not exercise its license option under the
License Option Agreement with respect to a particular product prior to the
expiration of the license option for such product, ALZA agrees, at no
additional charge to TDC, to provide TDC with ongoing technical support in
connection with TDC's efforts to make arrangements with third parties for the
commercialization of such product.
2. TDC agrees to limit to $500,000 the amount that TDC will set aside as its
operating reserve out of "Available Funds" (as such term is defined in the
Development Agreement by and between ALZA and TDC dated as of March 10, 1993).
ALZA acknowledges that the foregoing does not prevent TDC from maintaining all
or any portion of its funds other than Available Funds as an operating reserve.
21
<PAGE>
Page 2
Gary L. Neil
July 30, 1997
If the foregoing accurately reflects your understanding of the agreement
between the parties, please sign the acknowledgment below on behalf of TDC.
Except as otherwise expressly set forth in this letter, the terms of the
outstanding agreements between ALZA and TDC, as previously amended, remain in
full force and effect.
Very truly yours,
ALZA Corporation
/s/ Bruce C. Cozadd
- --------------------------------
Bruce C. Cozadd
Senior Vice President and
Chief Financial Officer
TDC hereby agrees to the foregoing amendments to the agreements between ALZA
and TDC.
Therapeutic Discovery Corporation
/s/ Gary L. Neil, Ph.D.
- --------------------------------
Name: Gary L. Neil, Ph.D.
Title: President and
Chief Executive Officer
22
<PAGE>
EXHIBIT 11
Statement Regarding Computation of Per Share Earnings
(In millions, except per share amounts)
<TABLE>
<CAPTION>
Primary
--------------------------------------------------
Quarter Ended Six Months ended
June 30, June 30,
1997 1996 1997 1996
----- ----- ----- -----
<S> <C> <C> <C> <C>
Common stock 85.0 84.2 84.9 83.9
Common stock options 0.7 0.8 0.7 0.9
$25 warrants - - - -
$65 warrants - - - -
5-1/4% Debentures 12.3 12.3 12.3 6.2
------- ------- ------- -------
Weighted average common and
dilutive common equivalent
shares 98.0 97.3 97.9 91.0
------- ------- ------- -------
------- ------- ------- -------
Net income available to
common stockholders $ 26.4 $ 23.2 $ 52.7 $ 43.5
Add after-tax interest on 5-1/4%
Debentures 3.2 3.0 6.4 3.0
------- ------- ------- -------
Adjusted net income $ 29.6 $ 26.2 $ 59.1 $ 46.5
------- ------- ------- -------
------- ------- ------- -------
Net income per common and
common equivalent share $ 0.30 $ 0.27 $ 0.60 $ 0.51
------- ------- ------- -------
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
Fully Diluted
--------------------------------------------------
Quarter Ended Six Months ended
June 30, June 30,
1997 1996 1997 1996
----- ----- ----- -----
<S> <C> <C> <C> <C>
Common stock 85.0 84.2 84.9 83.9
Common stock options 0.7 0.8 0.7 0.9
$25 warrants - - - -
$65 warrants - - - -
5-1/4% Debentures 12.3 12.3 12.3 6.2
5% convertible subordinated
debentures - - - -
------- ------- ------- -------
Weighted average common and
dilutive common equivalent
shares 98.0 97.3 97.9 91.0
------- ------- ------- -------
------- ------- ------- -------
Net income available to
common stockholders $ 26.4 $ 23.2 $ 52.7 $ 43.5
Add after-tax interest on 5-1/4%
Debentures 3.2 3.0 6.4 3.0
------- ------- ------- -------
Adjusted net income $ 29.6 $ 26.2 $ 59.1 $ 46.5
------- ------- ------- -------
------- ------- ------- -------
Net income per common and
common equivalent share $ 0.30 $ 0.27 $ 0.60 $ 0.51
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
The 5% Debentures are not considered common stock equivalents and were
not included in the fully diluted earnings per share calculation as their
inclusion would have had an antidilutive effect.
24
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS INCLUDED IN ITEM 1 OF FORM 10-Q DATED JUNE 30, 1997 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 265
<SECURITIES> 122
<RECEIVABLES> 137
<ALLOWANCES> 0
<INVENTORY> 37
<CURRENT-ASSETS> 587
<PP&E> 420
<DEPRECIATION> 112
<TOTAL-ASSETS> 1,666
<CURRENT-LIABILITIES> 52
<BONDS> 892
0
0
<COMMON> 1
<OTHER-SE> 647
<TOTAL-LIABILITY-AND-EQUITY> 1,666
<SALES> 64
<TOTAL-REVENUES> 224
<CGS> 43
<TOTAL-COSTS> 118
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 28
<INCOME-PRETAX> 85
<INCOME-TAX> 32
<INCOME-CONTINUING> 53
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 53
<EPS-PRIMARY> .60
<EPS-DILUTED> .60
</TABLE>
