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, 1998
or
( ) Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the transition period
from __________ to __________
Commission File Number 1-6247
ALZA CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 77-0142070
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
950 Page Mill Road
P.O. Box 10950
Palo Alto, California 94303-0802
(Address of principal executive offices)
Registrant's telephone number, including area code (650) 494-5000
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes (X) No ( )
Number of shares outstanding of each of the registrant's classes
of common stock as of July 31, 1998:
Common Stock, $0.01 par value - 86,589,224 shares
ALZA CORPORATION
FORM 10-Q for the Quarter Ended
June 30, 1998
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 6-9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10-17
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 18
Part II. Other Information
Item 1. Legal Proceedings 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 20
Exhibits
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ALZA CORPORATION
Condensed Consolidated Statement of Operations (unaudited)
(In millions, except per share amounts)
Quarter Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
_________________________________________________________________
Revenues:
Net sales $ 58.6 $ 36.4 $113.0 $ 63.9
Royalties, fees and other 51.1 45.7 101.1 89.9
Research and development 32.6 36.1 58.9 69.9
_________________________________________________________________
Total revenues 142.3 118.2 273.0 223.7
Expenses:
Costs of products shipped 33.0 23.1 62.4 42.9
Research and development 35.0 39.6 69.2 74.6
Selling, general and
administrative 18.9 12.6 35.1 24.1
_________________________________________________________________
Total expenses 86.9 75.3 166.7 141.6
Operating income 55.4 42.9 106.3 82.1
Interest expense 14.1 13.7 28.2 27.5
Interest and other income 6.2 13.5 12.7 30.5
_________________________________________________________________
Net interest and other
expense (income) 7.9 0.2 15.5 (3.0)
_________________________________________________________________
Income before income
taxes 47.5 42.7 90.8 85.1
Provision for income
taxes 16.8 16.3 31.8 32.4
_________________________________________________________________
Net income $ 30.7 $ 26.4 $ 59.0 $ 52.7
================================================================
Earnings per share
Basic $0.35 $0.31 $ 0.68 $ 0.62
================================================================
Diluted $0.34 $0.30 $ 0.66 $ 0.60
================================================================
See accompanying notes.
ALZA Corporation
Condensed Consolidated Balance Sheet (unaudited)
(In millions)
June 30, December 31,
1998 1997
_______________________________________________________________
ASSETS
Current assets:
Cash and cash equivalents $ 83.9 $ 65.0
Short-term investments 109.4 109.2
Receivables, net 125.6 119.2
Inventories, at cost:
Raw materials 15.6 16.5
Work in process 6.0 8.5
Finished goods 9.9 12.8
_______________________________________________________________
Total inventories 31.5 37.8
Prepaid expenses and other
current assets 32.9 26.8
_______________________________________________________________
Total current assets 383.3 358.0
Property, plant and equipment 442.5 401.8
Less accumulated depreciation
and amortization (105.7) (91.4)
_______________________________________________________________
Net property, plant and equipment 336.8 310.4
Deferred product and license
acquisition costs 244.3 147.2
Investments in long-term securities 353.1 361.6
Other assets 195.4 192.0
_______________________________________________________________
Total assets $1,512.9 $ 1,369.2
================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Payable to limited partners of
ALZA TTS Research Partners, Ltd. $ 91.2 $ -
Accounts payable 26.2 56.9
Accrued liabilities 31.1 45.9
Other current liabilities 5.0 1.8
_______________________________________________________________
Total current liabilities 153.5 104.6
5% convertible subordinated debentures 500.0 500.0
5 1/4% zero coupon convertible
subordinated debentures 411.9 402.6
Other long-term liabilities 65.5 60.8
Stockholders' equity:
Common stock and additional
paid-in capital 414.3 382.4
Accumulated other comprehensive
income (14.9) (4.8)
Retained earnings (deficit) (17.4) (76.4)
_______________________________________________________________
Total stockholders' equity 382.0 301.2
_______________________________________________________________
Total liabilities and
stockholders' equity $1,512.9 $ 1,369.2
================================================================
See accompanying notes.
ALZA CORPORATION
Condensed Consolidated Statement of Cash Flows (unaudited)
(In millions)
Six Months Ended
June 30,
1998 1997
_______________________________________________________________
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 59.0 $ 52.7
Non-cash adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 17.5 13.7
Amortization of product payments 5.3 0.5
Interest on 5 1/4% zero coupon convertible
subordinated debentures 10.5 10.1
(Increase) decrease in current assets 0.5 (18.4)
Decrease in current liabilities (50.5) (16.0)
Other 1.5 1.8
_______________________________________________________________
Net cash provided by operating activities 43.8 44.4
CASH FLOWS FROM INVESTING ACTIVITIES:
Sales and maturities of available-for-sale
securities 143.2 311.4
Purchases of available-for-sale securities (151.6) (269.1)
Capital expenditures (23.2) (11.9)
Other investing activities (20.2) (4.5)
_______________________________________________________________
Net cash (used in) provided by
investing activities (51.8) 25.9
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuances of common stock 30.7 7.5
Principal payments on long-term debt (3.8) (0.9)
_______________________________________________________________
Net cash provided by financing activities 26.9 6.6
_______________________________________________________________
Net increase in cash and cash equivalents 18.9 76.9
Cash and cash equivalents at
beginning of period 65.0 187.7
_______________________________________________________________
Cash and cash equivalents at end of period $ 83.9 $ 264.6
================================================================
NONCASH INVESTING AND FINANCING ACTIVITIES
_______________________________________________________________
Investment in low-income housing
in exchange for long-term debt $ 10.1 $ 6.6
Acquisition of building in lieu of
repayment of note receivable 17.5 -
Accrued purchase option exercise price
for limited partners' interests in
ALZA TTS Research Partners, Ltd. 91.2 -
Conversion of 5 1/4% Debentures into
ALZA common stock 1.2 -
See accompanying notes.
ALZA CORPORATION
Notes to Condensed Consolidated Financial Statements (unaudited)
1. BASIS OF PRESENTATION
The information at June 30, 1998 and for the three and six
months ended June 30, 1998 and 1997 is unaudited, and 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 balance
sheet at December 31, 1997 was derived from the audited balance
sheet. 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, 1997 included in ALZA's 1997 Annual Report to
Stockholders.
Comprehensive Income
As of January 1, 1998, ALZA adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income"
("SFAS 130"), which establishes standards for reporting
comprehensive income and its components. Total comprehensive
income includes net income plus other comprehensive income which,
for ALZA, primarily comprises net unrealized gains or losses on
available-for-sale securities. Other comprehensive income (loss)
was $(9.8) million and $5.8 million for the quarters ended June
30, 1998 and 1997, respectively, and $(9.9) million and $(9.1)
million for the six months ended June 30, 1998 and 1997,
respectively. Total comprehensive income was $20.9 million and
$32.2 million for the quarters ended June 30, 1998 and 1997,
respectively, and $49.1 million and $43.6 million for the six
months ended June 30, 1998 and 1997, respectively. The adoption
of SFAS 130 had no impact on ALZA's results of operations or
financial condition.
Supplemental Disclosures of Cash Flow Information
In early 1998, ALZA made a payment of $21.5 million to
Janssen Pharmaceutica, Inc. ("Janssen") related to the
modification, effective as of December 31, 1997, of a
development and commercialization agreement for an E-TRANS-
trademark- fentanyl product for the treatment of acute pain.
ALZA recorded a nonrecurring charge for this item in the fourth
quarter of 1997, and the amount was included in accounts payable
at December 31, 1997.
ALZA CORPORATION
Notes to Condensed Consolidated Financial Statements (unaudited)
Recently Issued Accounting Pronouncement
In June 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related
Information" ("SFAS 131"). SFAS 131 establishes standards for
annual and interim disclosures of operating segments, products
and services, geographic areas and major customers. SFAS 131 is
effective beginning with the 1998 fiscal year end financial
statements, and will be applied retroactively, for comparison
purposes, to the 1998 quarters in the 1999 quarterly disclosures.
ALZA is in the process of evaluating the disclosure requirements
of the new standard, the adoption of which will have no impact on
ALZA's results of operations or financial condition.
2. ACQUISITION OF LIMITED PARTNERS' INTERESTS IN ALZA TTS RESEARCH
PARTNERS, LTD.
On June 29, 1998, ALZA Development Corporation, a wholly-owned
subsidiary of ALZA, elected to exercise its option to acquire all of
the outstanding limited partnership interests in the ALZA TTS
Research Partners, Ltd. (the "Partnership"), which was formed in
1982 to develop and commercialize products combining ALZA's
proprietary transdermal drug delivery technology with certain
generic compounds. The exercise price of $91.2 million is to be paid
in cash to the limited partners on August 14, 1998. ALZA has been paying
the Partnership four percent of net sales of Duragesic-registered
trademark- (fentanyl) CII and Testoderm-registered trademark-(testosterone),
two products developed by ALZA on behalf of the Partnership. As a result of
the exercise of the purchase option, ALZA will have all rights to these
products, including the right to retain the full royalty from
Janssen on sales of Duragesic, the full transfer price and royalties
from sales of Testoderm outside the United States, and the full sales
margin on Testoderm in the United States. The purchase price was
recorded as deferred product and license acquisition costs and will
be amortized over a period of 10 years beginning July 1, 1998.
3. PER SHARE INFORMATION
Basic earnings per share is calculated by dividing net
income by the weighted average common shares outstanding for the
period. Diluted earnings per share is calculated by dividing net
income, as adjusted, by the weighted average common shares
outstanding for the period plus the dilutive effect of stock
options, warrants and convertible securities.
ALZA CORPORATION
Notes to Condensed Consolidated Financial Statements (unaudited)
The following table sets forth the computation of ALZA's
basic and diluted earnings per share (in millions, except per
share amounts):
Quarter Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
_______________________________________________________________
NUMERATOR:
Basic
Net income $ 30.7 $ 26.4 $ 59.0 $ 52.7
_______________________________________________________________
Diluted
Net income $ 30.7 $ 26.4 $ 59.0 $ 52.7
Adjustments, net of tax:
Interest on 5 1/4% Deben-
tures 3.4 3.1 6.9 6.2
Interest on 5% Debentures 4.1 - 8.1 -
Amortization expense 0.2 0.1 0.5 0.2
_______________________________________________________________
Adjusted net income $ 38.4 $ 29.6 $ 74.5 $ 59.1
===============================================================
DENOMINATOR:
Basic
Weighted average shares 86.4 85.0 86.1 84.9
===============================================================
Diluted
Weighted average shares 86.4 85.0 86.1 84.9
Effect of dilutive
securities:
Employee stock options 1.8 0.7 1.7 0.7
5 1/4% Debentures 12.3 12.3 12.3 12.3
5% Debentures 13.1 - 13.1 -
_______________________________________________________________
Weighted average shares
and assumed conversions 113.6 98.0 113.2 97.9
===============================================================
Basic earnings per share $ 0.35 $ 0.31 $0.68 $ 0.62
===============================================================
Diluted earnings per share $ 0.34 $ 0.30 $0.66 $ 0.60
===============================================================
Options to purchase approximately 1.5 million shares of
common stock were excluded from the diluted earnings per share
calculation for the quarter and six months ended June 30, 1998
because the exercise price of the options was greater than the
average market price of the common shares during the periods, and
therefore the effect of including those options would have been
anti-dilutive. ALZA's outstanding 5% convertible subordinated
debentures due 2006 were not included in the diluted earnings per
share calculation for the quarter and six months ended June 30,
1997, as their inclusion for those periods would have been
anti-dilutive.
ALZA CORPORATION
Notes to Condensed Consolidated Financial Statements (unaudited)
4. CRESCENDO PHARMACEUTICALS CORPORATION
Under the Development Agreement between ALZA and Crescendo
Pharmaceuticals Corporation ("Crescendo"), ALZA recorded product
development revenues of $24.9 million for the quarter ended June
30, 1998 and $44.9 million for the six months ended June 30,
1998. Disclosed products currently in active development with
Crescendo are OROS-registered trademark- oxybutynin, DUROS-
trademark- leuprolide, OROS-registered trademark- methylphenidate
and E-TRANS-trademark- fentanyl (chronic pain). After the end of
the second quarter of 1998, based upon ALZA's recommendation, Crescendo
determined not to continue funding at this time two products
previously in early development: E-TRANS-trademark- LHRH and E-
TRANS-trademark- Macroflux-trademark- insulin. ALZA intends to
continue basic research on the technologies utilized in these
products.
Under the Technology License Agreement between ALZA and
Crescendo, ALZA recorded technology fee revenue from Crescendo of
$3.0 million for the quarter ended June 30, 1998 and $6.0 million
for the six months ended June 30, 1998.
ALZA has an option to acquire an exclusive, royalty-bearing
license to each product developed by Crescendo under the
Development Agreement. The option is exercisable on a product-by-
product, country-by-country, basis. Under Crescendo's Restated
Certificate of Incorporation, ALZA has the right to purchase all
(but not less than all) of the Class A Common Stock of Crescendo
at a price based upon a pre-established formula.
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, and
particularly in Management's Discussion and Analysis of Financial
Condition and Results of Operations, are forward-looking in
nature, including, without limitation, plans concerning the
commercialization of products, statements concerning potential
product sales, future costs of products shipped (and gross
margins), associated sales and marketing expenses, plans
concerning the development of products and technologies and other
statements that are not historical facts. The occurrence of the
events described, and the achievement of the intended results,
are subject to various risk factors that could cause ALZA's
actual results to be materially different than those presented,
some or all of which are not predictable or within ALZA's
control. The significant risks related to ALZA's business are
described in ALZA's Annual Report on Form 10-K for the year ended
December 31, 1997.
RESULTS OF OPERATIONS
SUMMARY
Quarter Ended Six Months Ended
(In millions, June 30, June 30,
except per share amounts) 1998 1997 1998 1997
_______________________________________________________________
Revenues $ 142.3 $ 118.2 $ 273.0 $223.7
_______________________________________________________________
Operating Income 55.4 42.9 106.3 82.1
_______________________________________________________________
Net Income 30.7 26.4 59.0 52.7
_______________________________________________________________
Earnings per Share (diluted)0.34 0.30 0.66 0.60
_______________________________________________________________
For the quarter ended June 30, 1998, ALZA's net income and
operating income increased 16% and 29%, respectively, compared to
the same quarter of 1997. For the six months ended June 30,
1998, ALZA's net income and operating income increased 12% and
29%, respectively, compared to the six months ended June 30,
1997. These increases were due primarily to a significant
increase in the sales of ALZA-marketed products, reflecting sales
of Elmiron-registered trademark- (pentosan polysulfate sodium)
and Mycelex-registered trademark- (clotrimazole) Troche, which
ALZA began marketing in the second half of 1997, and increased
sales of Ethyol-registered trademark- (amifostine). ALZA's gross
margin on net sales improved to 44% and 45% for the second
quarter and first half of 1998, respectively, compared to 36% and
33% for the second quarter and first half of 1997, respectively,
reflecting the increased sales of ALZA-marketed products. Also
contributing to higher income for both 1998 periods was a 12%
increase in royalties, fees and other revenues, primarily
reflecting an increase in Duragesic royalties and licensing fees,
as well as technology fees from Crescendo. These increases were
partially offset by a 10% and 16% decline in research and
development revenues in the second quarter and first half of
1998, respectively, and substantially lower interest income.
NET SALES AND COSTS OF PRODUCTS SHIPPED
Net Sales
Quarter Ended Six Months Ended
June 30, June 30,
(Dollars in millions) 1998 1997 1998 1997
_______________________________________________________________
ALZA-marketed products
Mycelex-registered trademark-
Troche $ 9.8 $ - $15.7 $ -
Ethyol-registered trademark- 5.8 5.2 13.9 8.6
Elmiron-registered trademark- 3.7 - 10.7 -
Testoderm-registered trademark-
line 2.2 1.6 4.3 2.9
Other 6.6 1.7 12.9 3.9
_______________________________________________________________
Total ALZA-marketed products 28.1 8.5 57.5 15.4
Contract manufacturing 30.5 27.9 55.5 48.5
_______________________________________________________________
Total net sales $ 58.6 $ 36.4 $113.0 $ 63.9
===============================================================
Percentage of total revenues 41% 31% 41% 29%
ALZA-marketed products as a
percentage of net sales 48% 23% 51% 24%
_______________________________________________________________
Net sales for the second quarter and first half of 1998
increased 61% and 77%, respectively, compared to the same periods
of 1997. These increases are attributable to the significant
increase in the sales of ALZA-marketed products, the rights to
several of which ALZA acquired in the second half of 1997. The
United States rights to Mycelex Troche were acquired by ALZA in
July 1997, and the United States and Canadian rights to Elmiron
(as well as the United States rights to BiCitra-registered
trademark-, PolyCitra-registered trademark- and Neutra-Phos-
registered trademark-) were acquired in October 1997. Higher
sales of Ethyol also contributed to the increases in net sales
for the 1998 periods. Net sales for the second quarter and first
half of 1998 included initial sales of Testoderm-registered
trademark- TTS (testosterone), which was launched in March 1998.
The timing and quantities of orders for ALZA-marketed products
may vary from quarter to quarter due to factors such as demand
for the products, ordering patterns of wholesalers, and the
introduction and sales of competing products.
Net sales from contract manufacturing increased 9% and 14%
for the second quarter and first half of 1998, respectively,
compared to the same periods of 1997. The second quarter
increase was primarily due to higher shipments of Covera-HS-
trademark- (verapamil) to G.D. Searle & Co., partially offset by
lower shipments of Nicoderm-registered trademark- and NicoDerm-
registered trademark- CQ-trademark- (nicotine) to Hoechst Marion
Roussel, Inc. and SmithKline Beecham p.l.c. ("SKB"),
respectively, and Catapres TTS-registered trademark- (clonidine)
to Boehringer Ingelheim Pharmaceutical, Inc. The increase in net
sales from contract manufacturing in the first half of 1998
compared with the first half of 1997 was primarily due to higher
shipments of Duragesic and Covera-HS, partially offset by lower
shipments of Catapres TTS and the Nicoderm products. The timing
and quantities of orders for products marketed by client
companies are not within ALZA's control. Net sales to client
companies 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 to the clients.
Costs of products shipped increased to $33.0 million for the
quarter ended June 30, 1998, compared to $23.1 million for the
corresponding quarter of 1997. Cost of products shipped
increased to $62.4 million for the first half of 1998 compared to
$42.9 million for the first half of 1997. These fluctuations
reflect the significant increase in net sales for the 1998
periods.
Quarter Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
_______________________________________________________________
Gross margin as a percentage
of net sales (1) 44% 36% 45% 33%
_______________________________________________________________
(1) Gross margin is net sales less costs of products shipped.
The increase in ALZA's gross margin in the second quarter
and first half of 1998, compared to the same periods of 1997, was
due to the substantial increase in sales of ALZA-marketed
products. ALZA expects its gross margin, as a percentage of net
sales, to increase over the longer term, although quarter-to-
quarter fluctuations will continue to occur. Higher gross
margins may be achieved through continuing the proportionate
increase in the sales of ALZA-marketed products (as compared to
sales from contract manufacturing), increased utilization of
capacity and greater operating efficiencies.
ROYALTIES, FEES AND OTHER REVENUES
Quarter Ended Six Months Ended
June 30, June 30,
(Dollars in millions) 1998 1997 1998 1997
_______________________________________________________________
Royalties, fees and
other revenues $ 51.1 $ 45.7 $101.1 $ 89.9
Percentage of total
revenues 36% 39% 37% 40%
_______________________________________________________________
Royalties, fees and other revenues increased 12% for the
second quarter and first half of 1998, compared to the
corresponding periods of 1997. The second quarter increase was
due primarily to increased royalties from Duragesic as a result
of ALZA Development Corporation electing to exercise its option
to purchase all of the outstanding limited partnership interests
in the Partnership, discussed in Note 2 to the
Condensed Consolidated Financial Statements. Beginning with the
second quarter of 1998, ALZA will retain the full royalty from
Janssen on sales of Duragesic. Also in the second quarter of
1998, ALZA recognized an additional $5.9 million in Duragesic
royalties due to timing differences between product sales,
payments by Janssen of royalties to ALZA and payments by ALZA to
the Partnership. Partially offsetting the increase in Duragesic
royalties were lower royalties on sales of the Nicoderm products,
and on sales of Transderm-Nitro-registered trademark-
(nitroglycerin) by Novartis Pharmaceuticals
Corporation in the second quarter of 1998. Additionally, fee
revenue increased in the second quarter of 1998 compared to the
second quarter of 1997, resulting from a technology licensing fee
from Alkermes, Inc. for ALZA's RingCap-trademark- and Dose
Sipping technologies, and a technology fee of $3.0 million from
Crescendo. In the first half of 1998, royalties, fees and other
revenues increased due to higher royalties on sales of Duragesic
by Janssen and of Glucotrol XL-registered trademark- (glipizide)
by Pfizer, Inc ("Pfizer") and higher fee revenue, including a
technology fee of $6.0 million from Crescendo. This increase was
partially offset by lower royalties on sales of the Nicoderm
products, Transderm-Nitro and Procardia XL-registered trademark-
(nifedipine).
Sales of Procardia XL, as reported by Pfizer, decreased 6%
for the second quarter of 1998, compared to the same period in
1997. Several companies have filed Abbreviated New Drug
Applications with the U.S. Food and Drug Administration ("FDA")
requesting clearance to market generic sustained-release
nifedipine products. Pfizer is involved in litigation concerning
patent infringement and regulatory requirements, in which Pfizer
is seeking to enjoin the introduction of such generic nifedipine
products. It is not possible to predict the timing and amount of
the negative impact on sales of Procardia XL that could result
from competition from these or other potential sustained-release
nifedipine products.
During the next several years, ALZA intends to continue to
reduce its dependence on royalties and fees by further expanding
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, clinically testing and obtaining regulatory clearance
of products for marketing by ALZA, the difficulties and costs
associated with acquiring products from third parties for ALZA 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, the
risks relating to patents and proprietary rights and the current
health care cost containment environment in the United States.
ALZA expects that, in the near term, royalties on sales by
clients of currently marketed products will continue to be a
substantial contributor to net income.
RESEARCH AND DEVELOPMENT
Research and Development Revenues
Quarter Ended Six Months Ended
June 30, June 30,
(Dollars in millions) 1998 1997 1998 1997
_______________________________________________________________
Crescendo Pharmaceuticals
Corporation $ 24.9 $ - $44.8 $ -
Therapeutic Discovery
Corporation (1) - 25.9 - 49.3
Other clients 7.7 10.2 14.1 20.6
_______________________________________________________________
Total research and
development revenues $ 32.6 $ 36.1 $58.9 $ 69.9
================================================================
Percentage of total revenues 23% 31% 22% 31%
_______________________________________________________________
(1) Purchased by ALZA in the third quarter of 1997.
Research and development revenues decreased 10% and 16% in
the second quarter and first half of 1998, respectively, compared
to the same periods in 1997, reflecting a decline in product
development activities under agreements with client companies.
Research and Development Expenses
Quarter Ended Six Months Ended
June 30, June 30,
(Dollars in millions) 1998 1997 1998 1997
_______________________________________________________________
Research and development
expenses $ 35.0 $ 39.6 $69.2 $ 74.6
As a percentage of total
revenues 25% 34% 25% 33%
_______________________________________________________________
Research and development expenses decreased 12% and 7% for
the second quarter and first half of 1998, respectively, compared
to the same periods in 1997. These declines reflect the lower
level of development activity for client companies compared with
the same periods in 1997. For the first half of 1998, the
decline in client development expenses was partially offset by an
increase in internal research and development costs.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Quarter Ended Six Months Ended
June 30, June 30,
(Dollars in millions) 1998 1997 1998 1997
_______________________________________________________________
Sales and marketing
expenses $ 13.7 $ 6.9 $ 24.5 $ 12.8
General and administrative
expenses 2.5 5.4 5.3 10.8
Amortization of product
and license acquisition
payments 2.7 0.3 5.3 0.5
_______________________________________________________________
Total selling, general and
administrative expenses $ 18.9 $ 12.6 $35.1 $ 24.1
================================================================
As a percentage of total
revenues 13% 11% 13% 11%
_______________________________________________________________
Selling, general and administrative expenses rose 51% and
46% for the second quarter and first half of 1998, respectively,
compared to the same periods of 1997. These increases were the
result of ALZA's expanded sales and marketing activities, an
increase in the size of the sales force since the second quarter
of 1997, and the added amortization of payments for product
rights acquired in the second half of 1997, partially offset by a
decrease in general and administrative expenses. The decline in
general and administrative expenses in the second quarter and
first half of 1998 compared with the same periods of 1997 was due
to an increase in the cash surrender value of life insurance
policies, which reduced expenses, and the allocation of certain
computer system expenses from general and administrative expenses
to other expense categories. After the end of the second
quarter, ALZA announced that it is expanding its sales
organization from 100 sales representatives to approximately 360,
under arrangements with VIVUS, Inc. and Innovex, Inc. As a result of
this expansion, sales and marketing expenses are expected to
increase significantly in future quarters. In addition,
amortization of $91.2 million resulting from the acquisition of the
limited partners' interests in the Partnership will begin July 1, 1998.
NET INTEREST
Quarter Ended Six Months Ended
June 30, June 30,
(In millions) 1998 1997 1998 1997
_______________________________________________________________
Interest expense $ 14.1 $ 13.7 $ 28.2 $ 27.5
Interest and other income (6.2) (13.5) (12.7) (30.5)
_______________________________________________________________
Net interest
expense (income) $ 7.9 $ 0.2 $ 15.5 $ (3.0)
================================================================
Interest expense increased 3% in both the second quarter and
first half of 1998 compared to the same periods of 1997,
primarily due to accreted interest on ALZA's outstanding 5 1/4%
zero coupon convertible subordinated debentures due 2014.
Interest and other income declined 54% and 58% in the second
quarter and first half of 1998,
respectively, compared to the same periods in 1997, due to lower
cash balances as a result of the purchase of Therapeutic
Discovery Corporation, the formation of Crescendo and several
product acquisitions, all of which occurred in the second half of
1997. The payment of the purchase price for the limited
partnership interests in the Partnership of $91.2 million to be made
on August 14, 1998 will result in lower interest income in future
quarters.
Effective Tax Rate
For the second quarter and first half of 1998, ALZA's
effective combined federal and state income tax rate was 35%,
compared to 38% for the second quarter and first half of 1997.
ALZA's annual effective tax rate for 1998 is estimated to be 35%,
equal to the rate for 1997.
LIQUIDITY AND CAPITAL RESOURCES
June 30, December 31,
(In millions) 1998 1997
_______________________________________________________________
Working capital $ 229.8 $ 253.4
Cash and investments 546.4 535.8
Total assets 1,512.9 1,369.2
Long-term debt 911.9 902.6
Six Months Ended June 30,
(In millions) 1998 1997
_______________________________________________________________
Net cash provided by
operating activities (1) $ 65.3 $ 44.4
Capital expenditures 23.2 11.9
_______________________________________________________________
(1) Excludes nonrecurring item in the first quarter of 1998 for
payment of $21.5 million to Janssen, included in accounts payable
at December 31, 1997.
ALZA's capital spending for the first half of 1998 was
$23.2 million for additions to facilities and equipment to
support its research, development and manufacturing activities,
compared to capital spending of $11.9 million in the same period
of 1997. 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 future requirements. ALZA is in the process of
constructing buildings under a joint venture agreement entered
into in 1997. In addition to a $36.2 million contribution to the
joint venture made in 1997, which is being applied to the
construction of the buildings, ALZA expects to spend between
$60.0 million and $100.0 million on building improvements. The
joint venture will lease the buildings to ALZA upon completion of
construction, which is currently scheduled for 1999. Capital
expenditures during the remainder of 1998 are expected to
continue to increase over 1997 levels.
As discussed above, ALZA Development Corporation elected to
exercise its option to purchase all of the limited partners'
interests in the Partnership on June 29, 1998. As of June 30,
1998, ALZA had accrued $91.2 million in connection with this
purchase, to be paid to the limited partners on August 14, 1998.
As a result of this payment, ALZA's cash and investments will decline
by approximately 17%.
ALZA believes that its existing cash and investment balances
are adequate to fund its cash needs for 1998 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 that could
provide access to additional capital.
Item 3. Quantitative and Qualitative Disclosures about Market
Risk
Not applicable to ALZA for this reporting period.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Product liability suits have been filed against Janssen and
ALZA from time to time relating to the Duragesic 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 liability claims
against ALZA (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 7, 1998.
(b) A total of 71,464,067 shares were represented at the annual
meeting. Stockholders approved the following proposals:
(i) Election of Class I Directors:
Votes For Votes Withheld
Robert J. Glaser 70,567,795 896,272
Dean O. Morton 70,690,630 773,437
Denise O'Leary 70,690,280 773,787
(ii) An amendment to ALZA's Amended and Restated Employee
Stock Purchase Plan to increase the number of shares
reserved for issuance by 950,000. There were
69,677,066 votes in favor, 1,512,750 against and
274,251 abstentions.
(iii) The ratification of the appointment of Ernst & Young
LLP as ALZA's independent auditors for the fiscal year
ended December 31, 1998. There were 71,268,698 votes
in favor, 71,089 votes against and 124,280
abstentions.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
27 Financial Data Schedule
(b) No reports on Form 8-K were filed during the quarter
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 13, 1998 By: /s/ E. Mario
Dr. Ernest Mario
Chairman and Chief
Executive Officer
Date: August 13, 1998 By: /s/ Bruce C. Cozadd
Bruce C. Cozadd
Senior Vice President and
Chief Financial Officer
EXHIBIT INDEX
Exhibit
27 Financial Data Schedule
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<LEGEND>
This schedule contains summary financial information extracted from the
financial statements included in Part I, Item 1 of Form 10-Q dated June 30, 1998
and is qualified in its entirety by reference to such financial statements.
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<CIK> 0000004310
<NAME> ALZA CORPORATION
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 84
<SECURITIES> 109
<RECEIVABLES> 126
<ALLOWANCES> 1
<INVENTORY> 32
<CURRENT-ASSETS> 383
<PP&E> 443
<DEPRECIATION> 106
<TOTAL-ASSETS> 1,513
<CURRENT-LIABILITIES> 154
<BONDS> 912
0
0
<COMMON> 1
<OTHER-SE> 414
<TOTAL-LIABILITY-AND-EQUITY> 1,513
<SALES> 113
<TOTAL-REVENUES> 273
<CGS> 62
<TOTAL-COSTS> 132
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<INCOME-PRETAX> 91
<INCOME-TAX> 32
<INCOME-CONTINUING> 59
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<EXTRAORDINARY> 0
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<NET-INCOME> 59
<EPS-PRIMARY> .68
<EPS-DILUTED> .66
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