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 September 30, 1999
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.)
1900 Charleston Road
P.O. Box 7210
Mountain View, California 94039-7210
(Address of principal executive offices)
Registrant's telephone number, including area code (650) 564-5000
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 October 29, 1999:
Common Stock, $.01 par value - 102,125,443 shares
<PAGE>
ALZA CORPORATION
FORM 10-Q for the Quarter Ended
September 30, 1999
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 Condensed Consolidated Financial Statements 6-12
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 13-28
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 29
Part II. Other Information
Item 1. Legal Proceedings 29
Item 4. Submission of Matters to a Vote of Security Holders 30
Item 6. Exhibits and Reports on Form 8-K 30
Signatures 31
Exhibits
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ALZA CORPORATION
Condensed Consolidated Statement of Operations (unaudited)
(In millions, except per share amounts)
Quarter Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
__________________________________________________________________
Revenues:
Net sales $136.9 $ 74.7 $336.3 $213.8
Royalties, fees and
other 58.0 65.3 171.7 169.1
Research and development 27.2 32.8 94.8 91.7
________________________________________
Total revenues 222.1 172.8 602.8 474.6
Costs and expenses:
Costs of products shipped 45.2 32.6 119.8 99.1
Research and development 41.3 49.3 133.2 132.2
Selling, general and
administrative 65.9 40.4 181.5 92.1
SEQUUS merger-related
costs - - 32.6 -
________________________________________
Total costs and expenses 152.4 122.3 467.1 323.4
Operating income 69.7 50.5 135.7 151.2
Interest expense 14.1 14.2 43.8 42.7
Interest and other income (7.3) (6.3) (30.7) (19.7)
________________________________________
Net interest and other
expense 6.8 7.9 13.1 23.0
________________________________________
Income before income taxes 62.9 42.6 122.6 128.2
Provision for income taxes 20.1 14.9 41.9 44.6
________________________________________
Net income $ 42.8 $ 27.7 $ 80.7 $ 83.6
========================================
Earnings per share
Basic $ 0.42 $ 0.28 $ 0.80 $ 0.85
========================================
Diluted $ 0.40 $ 0.27 $ 0.78 $ 0.83
========================================
Shares used in per share computation
Basic 101.3 99.3 100.8 99.0
Diluted 129.4 101.2 103.3 101.0
See accompanying notes.
<PAGE>
ALZA Corporation
Condensed Consolidated Balance Sheet (unaudited)
(In millions)
September 30, December 31,
1999 1998
_____________________________
ASSETS
Current assets:
Cash and cash equivalents $ 216.7 $ 110.1
Short-term investments 36.6 86.1
Receivables, net 169.3 148.6
Inventories, at cost:
Raw materials 21.1 18.2
Work in process 10.0 10.6
Finished goods 25.6 25.8
_____________________________
Total inventories 56.7 54.6
Prepaid expenses and other
current assets 35.6 26.3
_____________________________
Total current assets 514.9 425.7
Property, plant and equipment 533.1 504.7
Less accumulated depreciation
and amortization (138.2) (132.3)
_____________________________
Net property, plant and equipment 394.9 372.4
Investments in long-term securities 291.4 317.9
Deferred product acquisition payments 275.9 279.1
Other assets 320.7 271.5
_____________________________
TOTAL ASSETS $ 1,797.8 $ 1,666.6
=============================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 26.3 $ 59.7
Accrued liabilities 75.8 61.5
Other current liabilities 7.5 7.4
_____________________________
Total current liabilities 109.6 128.6
5% convertible subordinated debentures 495.5 500.0
5 1/4% zero coupon convertible
subordinated debentures 438.0 422.6
Other long-term liabilities 83.5 83.5
Stockholders' equity:
Common stock and additional
paid-in capital 701.2 645.5
Accumulated other comprehensive loss (7.7) (10.6)
Accumulated deficit (22.3) (103.0)
______________________________
Total stockholders' equity 671.2 531.9
______________________________
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 1,797.8 $ 1,666.6
==============================
See accompanying notes.
<PAGE>
ALZA CORPORATION
Condensed Consolidated Statement of Cash Flows (unaudited)
(In millions)
Nine Months Ended
September 30,
1999 1998
_________________
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 80.7 $ 83.6
Non-cash adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 30.4 27.0
Amortization of product acquisition payments 18.2 10.4
Interest on 5 1/4% zero coupon convertible
subordinated debentures 16.9 15.9
Changes in current assets:
Receivables (20.7) (32.7)
Inventories (2.1) (1.4)
Prepaid expenses and other current assets (11.2) 6.0
Changes in liabilities:
Accounts payable (13.4) (12.3)
Accrued liabilities 24.2 (18.5)
Other long-term liabilities 3.9 2.5
Gain on sale of real estate and other assets,
net (12.4) -
Asset write-down 11.1 -
_________________
Total adjustments 44.9 (3.1)
_________________
Net cash provided by operating activities 125.6 80.5
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (62.9) (43.1)
Proceeds from sale of real estate assets 20.1 -
Purchase of limited partners' interest in
ALZA TTS Research Partners, Ltd. - (91.2)
Product acquisition payments (35.0) (13.5)
Purchases of available-for-sale securities (126.1) (231.5)
Sales and maturities of available-for-sale
securities 206.7 283.7
Other investing activities (55.6) (17.3)
_________________
Net cash used in investing activities (52.8) (112.9)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuances of common stock 37.4 46.4
Principal repayments of long-term debt, net (3.6) (4.1)
_________________
Net cash provided by financing activities 33.8 42.3
_________________
Net increase in cash and cash equivalents 106.6 9.9
Cash and cash equivalents at
beginning of period 110.1 71.7
_________________
Cash and cash equivalents at end of period $ 216.7 $ 81.6
=================
See accompanying notes.
<PAGE>
ALZA CORPORATION
Notes to Condensed Consolidated Financial Statements (unaudited)
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with generally
accepted accounting principles for interim financial information.
The information at September 30, 1999 and for the three and nine
months ended September 30, 1999 and 1998 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.
Results for any interim period are not necessarily
indicative of results for any future interim period or for the
entire year. The accompanying financial statements should be
read in conjunction with the financial statements and notes
thereto included in ALZA's Annual Report on Form 10-K for the
year ended December 31, 1998 and on ALZA's Report on Form 8-K
filed May 13, 1999, which restates financial information for
prior periods to reflect the combined results of ALZA and SEQUUS
Pharmaceuticals, Inc. ("SEQUUS"). In March 1999, all of the
outstanding shares of SEQUUS were acquired by ALZA in a business
combination accounted for as a pooling of interests.
Accordingly, the financial data for prior periods has been
restated to represent the combined financial results of ALZA and
SEQUUS (Note 5).
Comprehensive Income
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 $1.8 million and $(1.7)
million for the quarters ended September 30, 1999 and 1998,
respectively, and $2.9 million and $(11.6) million for the nine
months ended September 30, 1999 and 1998. Total comprehensive
income was $44.6 million and $26.0 million for the quarters ended
September 30, 1999 and 1998, respectively, and $83.6 million and
$72.0 million for the nine months ended September 30, 1999 and
1998, respectively.
<PAGE>
Supplemental Disclosures of Cash Flow Information
Noncash Investing and Financing Nine months ended September 30,
Activities (In millions) 1999 1998
_________________________________________________________________
Investment in low-income housing
in exchange for long-term debt $ - $ 10.1
Acquisition of building in lieu of
repayment of note receivable - 17.5
Accrued product and license
acquisition costs - 4.0
Conversion of 5% and 5 1/4%
Debentures into ALZA common stock 4.5 1.2
Reclassification
Certain amounts in the prior year's financial statements
have been reclassified to conform to the 1999 presentation.
NOTE 2. MERGER AGREEMENT WITH ABBOTT LABORATORIES
On June 21, 1999, ALZA entered into an Agreement and Plan of
Merger ("Merger Agreement") with Abbott Laboratories,
Inc.("Abbott"), an Illinois corporation. Under the terms of the
Merger Agreement, Abbott would acquire all of ALZA's outstanding
stock in a tax free, stock-for-stock transaction. ALZA's
stockholders would receive 1.2 shares of Abbott common stock for
each share of ALZA common stock held on the record date. The
merger was approved by ALZA's stockholders on September 21, 1999.
Closing of the transaction is subject to the approval of the
Federal Trade Commission ("FTC"), which has required divestiture
of United States rights to ALZA's Viadur-trademark-
leuprolide acetate implant) product. On November 2, 1999
Abbott announced that it had reached an agreement with the
U.S. Food and Drug Administration ("FDA") to a
consent decree involving Abbott's diagnostics manufacturing
operations in Lake County, Illinois. ALZA is analyzing
information relating to the consent decree and its implications.
In addition, several purported class action lawsuits have been
filed on behalf of stockholders of ALZA, alleging that the proxy
statement distributed in connection with the merger did not
include material information regarding regulatory compliance
problems at Abbott diagnostics manufacturing facilities. The
plaintiffs in this litigation have filed a motion for a
preliminary injunction to enjoin the closing of the merger until
additional disclosure is made. Abbott and ALZA have informed the
plaintiffs in such lawsuits that Abbott and ALZA will not close
the proposed merger before December 30, 1999, absent a new vote
of the ALZA stockholders. See "Legal Proceedings" in Part II,
Item 1.
<PAGE>
NOTE 3. EARNINGS 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.
The following table sets forth the computation of ALZA's
basic and diluted earnings per share:
Quarter Ended Nine Months Ended
(In millions except September 30, September 30,
per share amounts) 1999 1998 1999 1998
_________________________________________________________________
NUMERATOR:
Basic
Net income $ 42.8 $ 27.7 $80.7 $ 83.6
_________________________________________________________________
Diluted
Net income $ 42.8 $ 27.7 $80.7 $ 83.6
Adjustments, net of tax:
Interest on 5% and 5 1/4%
Debentures 8.4 - - -
___________________________________________________________________
Adjusted net income $ 51.2 $ 27.7 $80.7 $ 83.6
===================================================================
DENOMINATOR:
Basic
Weighted average shares 101.3 99.3 100.8 99.0
===================================================================
Diluted
Weighted average shares 101.6 99.5 101.1 99.1
Effect of dilutive
securities:
Employee stock options 2.5 1.7 2.2 1.9
5 1/4% Debentures 12.3 - - -
5% Debentures 13.0 - - -
___________________________________________________________________
Weighted average shares
and assumed conversions 129.4 101.2 103.3 101.0
===================================================================
Basic earnings per share $ 0.42 $ 0.28 $0.80 $ 0.85
===================================================================
Diluted earnings per share $ 0.40 $ 0.27 $0.78 $ 0.83
===================================================================
Stock options and warrants to purchase 2.8 million and 2.1
million shares of common stock were excluded from the diluted
earnings per share calculation for the quarter and nine months
ended September 30, 1999, respectively, compared to 2.8 million
shares for the same periods in 1998 because the exercise price of
the options and warrants was greater than the average market price
of the common shares during the periods, and therefore the effect
of including those options and warrants would have been anti-
dilutive. Assumed conversions of ALZA's outstanding 5% convertible
subordinated debentures due 2006 ("5% Debentures") and
<PAGE>
5 1/4% zero coupon convertible subordinated debentures due 2014
("5 1/4% Debentures") were not included in the diluted earnings
per share calculation for the nine months ended September 30, 1999
and for the quarter and nine months ended September 30, 1998 as
their inclusion would have been anti-dilutive.
NOTE 4. CRESCENDO PHARMACEUTICALS CORPORATION (RELATED PARTY)
Under the Development Agreement between ALZA and Crescendo
Pharmaceuticals Corporation ("Crescendo"), ALZA recorded product
development revenues of $21.0 million for the quarter ended
September 30, 1999 and $72.8 million for the nine months ended
September 30, 1999 compared with $25.2 million for the quarter
ended September 30, 1998 and $70.1 million for the nine months
ended September 30, 1998. ALZA expects that Crescendo will have
expended all of its available funds during the second half of
2000.
Under the Technology License Agreement between ALZA and
Crescendo, ALZA recorded technology fee revenues from Crescendo
of $1.7 million for the quarter ended September 30, 1999 and $5.7
million for the nine months ended September 30, 1999, compared
with $2.7 million for the quarter ended September 30, 1998 and
$8.7 million for the nine months ended September 30, 1998, all in
accordance with the terms of the agreement.
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. In December 1998, ALZA
exercised its option to obtain a worldwide license to OROS-
registered trademark- oxybutynin (marketed by ALZA in the United
States as Ditropan-registered trademark- XL). Under the license
agreement for this product, ALZA must pay Crescendo 2.5% of net
sales of the licensed product in the first year of sales (1999)
and 3% in the second and third years. Thereafter, until 15 years
after the date of the first commercial sale of the product, the
percentage owed to Crescendo would be based upon development
costs paid by Crescendo; based upon current information this rate
is expected to be between 5% and 6%.
NOTE 5. ACQUISITION OF SEQUUS PHARMACEUTICALS, INC.
On March 16, 1999, ALZA completed a merger with SEQUUS by
acquiring all of SEQUUS' outstanding stock in a tax-free, stock-
for-stock transaction. SEQUUS stockholders received 0.4 shares
of ALZA common stock for each share of SEQUUS common stock. ALZA
issued 13.2 million shares in the merger. ALZA accounted for the
transaction as a pooling of interests. Accordingly, ALZA's
consolidated financial statements have been retroactively
restated for prior periods to include the combined financial
results of ALZA and SEQUUS. For the quarter and nine months
ended September 30, 1999, the consolidated results of operations
of the combined companies have been presented and no adjustments
were necessary to conform the accounting practices of the two
companies.
<PAGE>
The table below presents the separate results of operations
for ALZA and SEQUUS for the periods prior to the merger and
combined results after the merger:
Merger-
related
(In millions) ALZA SEQUUS adjustments Total
_________________________________________________________________
Nine months ended September 30, 1999
Revenues (a)$ 590.4 $ 12.4 $ - $ 602.8
Net income (a) 111.2 (5.7) (b)(24.8) 80.7
_________________________________________________________________
Nine months ended September 30, 1998
Revenues $ 427.8 $ 46.8 $ - $ 474.6
Net income (loss) 86.9 (5.5) (c) 2.2 83.6
_________________________________________________________________
(a) SEQUUS' results are included in ALZA's combined results
subsequent to March 16, 1999.
(b) Represents expenses (net of tax benefit of $7.8 million)
incurred by ALZA related to the merger.
(c) Represents a 40% tax benefit derived from SEQUUS' net loss.
As a result of the SEQUUS acquisition, ALZA incurred merger-
related costs that consisted of merger transaction costs, exit
costs and employee severance costs. Merger transaction costs
consisted primarily of fees for investment bankers, attorneys and
accountants, filing fees, financial printing costs and other
related charges. Exit costs include costs such as cancellation
of lease agreements and the write-down of SEQUUS assets that will
not be used in continuing operations. The following table shows
the details of the accrual for merger-related costs for the nine
months ended September 30, 1999:
Merger- Balance
related at September 30,
(In millions) costs Utilized 1999
___________________________________________________________________
Merger transaction costs $ 13.2 $ 13.6 $ (0.4)
Exit costs 14.3 10.6 3.7
Employee severance 5.1 5.1 -
_________________________________
Total $ 32.6 $ 29.3 $ 3.3
=================================
NOTE 6. SEGMENT REPORTING
ALZA has two operating segments: ALZA Pharmaceuticals and
ALZA Technologies. The ALZA Pharmaceuticals segment includes
sales of products directly to the pharmaceutical marketplace,
research and development of potential products to be marketed by
ALZA (including revenues and expenses relating to products under
development with Crescendo) and co-promotion revenues for
products co-promoted by ALZA. The ALZA Technologies segment
includes research, development and manufacturing for client
companies and ALZA Pharmaceuticals, and royalties and fees
(including milestone payments) from ALZA's client companies under
joint product development and commercialization agreements. The
"Other" category primarily comprises corporate general and
administrative expenses, including finance, legal, human
<PAGE>
resources, commercial development, executive and other functions
not directly attributable or allocated to the activities of the
operating segments, as well as rental and service fee revenues.
SEQUUS' net sales, costs of products shipped, research and
development for potential products to be marketed by ALZA and
sales and marketing expenses are included in ALZA
Pharmaceuticals; SEQUUS' royalties and fee revenues and research
and development expenses are included in ALZA Technologies; and
SEQUUS' general and administrative expenses are included in
Other.
ALZA evaluates performance and allocates resources based on
operating income or loss from operations (before allocation of
certain general and administrative expenses, net interest
expense, investment gains and losses and income taxes). ALZA
does not assess segment performance or allocate resources based
on a segment's total assets, and therefore ALZA's assets are not
reported by segment. ALZA allocates certain long-lived assets to
operating segments for purposes of allocating depreciation and
amortization expense. The accounting policies of the reportable
segments are the same as those described in the summary of
significant accounting policies in ALZA's Annual Report on Form
10-K for the year ended December 31, 1998. ALZA accounts for
intersegment revenues based on prices negotiated between the
segments, which generally approximate the prices charged to third
parties.
ALZA's reported segments are strategic operating units that
distribute products to different types of customers and provide
different types of services. They are managed differently
because ALZA Pharmaceuticals' sales and marketing efforts are
extensive and disparate from the revenue generation process
resulting from ALZA Technologies' arrangements with client
companies.
The following tables contain information about segment
operating income (loss) for the quarter ended September 30, 1999
and 1998, and nine months ended September 30, 1999 and 1998.
Quarter ended Nine months ended
September 30, September 30,
(In millions) 1999 1998 1999 1998
________________________________________________________________
Revenues from external customers
Net sales
ALZA Pharmaceuticals $ 106.3 $ 43.8 $ 243.0 $127.5
ALZA Technologies 30.6 30.9 93.3 86.3
Royalties, fees and other
ALZA Pharmaceuticals 3.7 6.8 10.0 16.9
ALZA Technologies 54.0 57.9 160.6 150.4
Other 0.3 0.6 1.1 1.8
Research and development
ALZA Pharmaceuticals 21.0 24.7 72.8 68.5
ALZA Technologies 6.2 8.1 22.0 23.2
________________________________________
Total $ 222.1 $ 172.8 $ 602.8 $474.6
========================================
<PAGE>
Intersegment revenues
Net sales
ALZA Pharmaceuticals $ - $ - $ - $ -
ALZA Technologies 5.3 2.1 13.3 5.7
Research and development
ALZA Pharmaceuticals - - - -
ALZA Technologies 21.1 24.7 73.0 68.6
_________________________________________
Total $ 26.4 $ 26.8 $ 86.3 $ 74.3
=========================================
Segment operating income (loss)
ALZA Pharmaceuticals $ 27.5 $ 2.7 $ 33.8 $ 24.5
ALZA Technologies 50.5 55.8 157.0 146.0
Other (8.3) (8.0) (55.1) (19.3)
_________________________________________
Total $ 69.7 $ 50.5 $ 135.7 $151.2
=========================================
The following table contains a reconciliation of ALZA's
income before taxes to that reported by segment in the tables
above:
Quarter ended Nine months ended
September 30, September 30,
(In millions) 1999 1998 1999 1998
________________________________________________________________
Income (loss) before taxes
Total operating income for
reportable segments $ 69.7 $ 50.5 $ 135.7 $ 151.2
Unallocated amounts:
Interest expense (14.1) (14.2) (43.8) (42.7)
Interest and other income 7.3 6.3 30.7 19.7
_________________________________________
Income before income
taxes $ 62.9 $ 42.6 $ 122.6 $ 128.2
=========================================
NOTE 7. SALE OF REAL ESTATE ASSETS
During the second quarter of 1999, ALZA sold five buildings
located in Palo Alto, California, resulting in a total pretax
gain of $12.4 million. ALZA will lease back these buildings
through December 31, 1999, when it expects to complete occupancy of new
buildings in Mountain View, California. In the near term, ALZA
expects to lease out certain other Palo Alto, Menlo Park and
Mountain View, California properties, currently occupied by ALZA,
which could result in additional rental income in 2000 and
beyond.
<PAGE>
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, 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 development 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 various risk factors that could cause ALZA's
actual results to be materially different than those presented,
some or all of which risks are not predictable or within ALZA's
control. 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 for
the year ended December 31, 1998. In addition, while ALZA has
agreed to merge with Abbott, the merger has not yet closed.
There are risks associated with the merger and the closing of the
merger.
RESULTS OF OPERATIONS
SUMMARY
Quarter Ended Nine Months Ended
(In millions September 30, September 30,
except per share amounts) 1999 1998 1999 1998
_________________________________________________________________
Revenues $ 222.1 $ 172.8 $ 602.8 $ 474.6
_________________________________________________________________
Operating income 69.7 50.5 135.7 151.2
_________________________________________________________________
Net income 42.8 27.7 80.7 83.6
_________________________________________________________________
Diluted earnings per share 0.40 0.27 0.78 0.83
_________________________________________________________________
ALZA's net income for the quarter ended September 30, 1999
was $42.8 million or $0.40 per diluted share compared with net
income of $27.7 million or $0.27 per diluted share for the
quarter ended September 30, 1998. ALZA's net income for the nine
months ended September 30, 1999 was $80.7 million or $0.78 per
diluted share compared with net income of $83.6 million or $0.83
per diluted share for the nine months ended September 30, 1998.
Net income for the nine months ended September 30, 1999 included
charges of $24.8 million (net of tax effect of $7.8 million), or
$0.23 per diluted share, related to the merger with SEQUUS, which
should be excluded in order to analyze comparable operating
results for the nine-month periods of 1999 and 1998.
Net income increased 55% for the quarter ended September 30,
1999, compared with the quarter ended September 30, 1998. On a
comparable basis for the nine months ended September 30, 1999,
ALZA's net income increased 26% to $105.5 million, or $1.01 per
diluted share, excluding the merger-related charges discussed
above, compared with $83.6 million or $0.83 per diluted share for
the nine months ended September 30, 1998. The increase in net
income for the quarter and nine months ended September 30, 1999
compared to the same periods in 1998 resulted primarily from the
following:
- Net sales increased 83% to $136.9 million for the quarter
ended September 30, 1999 from $74.7 million for the quarter ended
September 30, 1998, and increased 57% to $336.3 million for the
nine months ended September 30, 1999 from $213.8 million for the
nine months ended September 30, 1998. The increase in net sales
resulted primarily from a 142% increase in sales of products by
ALZA Pharmaceuticals to $106.3 million for the quarter ended
September 30, 1999 from $43.8 million for the quarter ended
September 30, 1998, and a 91% increase in sales to $243.0 million
for the nine months ended September 30, 1999 from $127.5 million
for the nine months ended September 30, 1998. These increases in
ALZA Pharmaceuticals' sales resulted primarily from strong sales
of Ditropan-registered trademark- XL (oxybutynin chloride),
which was launched on February 1, 1999, as well as significant
growth in sales of Doxil-registered trademark-/Caelyx-
registered trademark- (doxorubicin HCl liposome injection),
Mycelex-registered trademark-Troche (clotrimazole) and Ethyol-
registered trademark-(amifostine) for the quarter and nine
months ended September 30, 1999, respectively, compared with the
same periods for 1998. Contract manufacturing sales remained
relatively constant for the quarter ended September 30, 1999
compared to the quarter ended September 30, 1998 and increased 8%
to $93.3 million for the nine months ended September 30, 1999
from $86.3 million for nine months ended September 30, 1998. A
portion of the increases described above may be attributable to
buying in anticipation of potential price increases before and
after the proposed merger with Abbott and some year 2000
stocking.
- Gross margin increased to 67% for the quarter ended
September 30, 1999 from 56% for the quarter ended September 30,
1998, and increased to 64% for the nine months ended September
30, 1999 from 54% for the nine months ended September 30, 1998.
The increase in gross margin was primarily due to the increase in
sales of higher margin ALZA-marketed products as a percentage of
total net sales.
- Royalties, fees and other revenues decreased 11% to $58.0
million for the quarter ended September 30, 1999 from $65.3
million for the quarter ended September 30, 1998, and increased
2% to $171.7 million for the nine months ended September 30, 1999
from $169.1 million for the nine months ended September 30, 1998.
The decrease in royalties, fees and other revenues is primarily
due to a significant decrease in fee revenues. Fee revenues
decreased to $4.7 million for the quarter ended September 30,
1999 from $13.3 million for the quarter ended September 30, 1998,
and to $14.7 million for the nine months ended September 30, 1999
from $29.1 million for the nine months ended September 30, 1998.
The decrease in fee revenues was primarily due to milestone-based
payments from Knoll Pharmaceuticals ("Knoll") and from Schering-
Plough Ltd. ("Schering-Plough") and higher fee revenues from
Janssen Pharmaceutica, Inc. (together with its affliates,
"Janssen") in 1998. Royalties remained relatively constant for
the comparative third quarters, and showed a 9% increase for the
nine months ended September 30, 1999 compared to the nine months
ended September 30, 1998.
- Interest and other income increased 16% to $7.3 million for
the quarter ended September 30, 1999 from $6.3 million for the
quarter ended September 30, 1998, and increased 56% to $30.7
million for the nine months ended September 30, 1999 compared
with $19.7 million for the nine months ended September 30, 1998.
The increase in interest and other income for the quarter ended
September 30, 1999 was primarily due to the sale of common shares
of Alkermes, Inc. The increase in interest and other income for
the nine months ended September 30, 1999 was primarily due to a
pretax gain of $12.4 million on sales of real estate assets that
were completed during the second quarter of 1999.
- ALZA's effective tax rate declined to 32% for the quarter
and nine months ended September 30, 1999, excluding the tax
effect of $7.8 million on merger-related costs of $32.6 million,
compared to 35% for the quarter and nine months ended September
30, 1998.
Substantially offsetting these contributions to net income
in 1999 was the following:
- Selling, general and administrative expenses increased to
$65.9 million for the quarter ended September 30, 1999 from $40.4
million for the quarter ended September 30, 1998, and increased
to $181.5 million for the nine months ended September 30, 1999
from $92.1 million for the nine months ended September 30, 1998.
This increase was due to the expansion of the sales organization
beginning in the second half of 1998, the increase in sales and
marketing expenditures related to the launch and promotion of
Ditropan XL during the nine months ended September 30, 1999 and
increased marketing expenses for ALZA's expanded product
portfolio.
Because net sales in the third quarter of 1999 increased
partially in anticipation of possible price increases and year
2000 stocking, it is not possible to determine at this time
whether net sales in the fourth quarter of 1999 will equal or
exceed third quarter 1999 levels, and net sales could possibly be
lower. It also is not possible to determine at this time whether
net income and earnings per share in the fourth quarter of 1999
will equal or exceed third quarter 1999 levels, and they could
possibly be lower, due to factors including: the potential
decrease in net sales described above; the lack of fees that
might otherwise have been earned absent the proposed merger with
Abbott; potential continued increases in sales and marketing
expenses in the fourth quarter of 1999 for ALZA-marketed products
as ALZA has continued to increase its efforts to market these
products; and a general slow-down in some of ALZA's operations
resulting from the uncertainties (such as the FTC and FDA matters
described above) surrounding the proposed merger with Abbott.
OPERATING SEGMENT SUMMARY
ALZA has two operating segments: ALZA Pharmaceuticals and
ALZA Technologies.
ALZA Pharmaceuticals markets and sells products developed by
ALZA Technologies or others directly to the pharmaceutical
marketplace in the United States and Canada and to distributors
who sell such products outside the United States and Canada.
ALZA Pharmaceuticals also conducts product development, co-
promotes products with third parties, and engages ALZA
Technologies and others to conduct product development and
manufacture products for ALZA Pharmaceuticals.
ALZA Technologies conducts research and development of
ALZA's drug delivery technologies and products for ALZA
Pharmaceuticals and Crescendo and other pharmaceutical company
clients, and manufactures products for sale by ALZA
Pharmaceuticals and client companies.
The "Other" category primarily comprises corporate general
and administrative activities and the associated costs related to
finance, legal, human resources, commercial development,
executive and other functions not directly attributable (or
allocated) to the activities of the operating segments, as well
as rental and service fee revenues.
Quarter ended Nine months ended
OPERATING SEGMENT SUMMARY September 30, September 30,
(In millions) 1999 1998 1999 1998
_________________________________________________________________
Revenues
ALZA PHARMACEUTICALS $ 131.0 $ 75.3 $ 325.8 $212.9
ALZA TECHNOLOGIES 117.2 123.7 362.2 334.2
OTHER 0.3 0.6 1.1 1.8
_________________________________________________________________
Total segment revenues 248.5 199.6 689.1 548.9
Intersegment elimination (26.4) (26.8) (86.3) (74.3)
_________________________________________________________________
Total revenues $ 222.1 $ 172.8 $ 602.8 $474.6
Operating income (loss)
ALZA PHARMACEUTICALS $ 27.5 $ 2.7 $ 33.8 $ 24.5
ALZA TECHNOLOGIES 50.5 55.8 157.0 146.0
OTHER (8.3) (8.0) (55.1) (19.3)
_________________________________________________________________
Total operating income $ 69.7 $ 50.5 $ 135.7 $151.2
_________________________________________________________________
ALZA PHARMACEUTICALS
ALZA Pharmaceuticals' revenues increased 74% and 53% for the
quarter and nine months ended September 30, 1999 compared to the
same periods in 1998 due to a 142% and 91% increase in net sales
of ALZA-marketed products for the quarter and nine months ended
September 30, 1999. The increase in net sales also contributed
to the significant increase in ALZA Pharmaceuticals' operating
income for the quarter and nine months ended September 30, 1999
compared to the quarter and nine months ended September 30, 1998,
which were partially offset by an increase in sales and marketing
expenses. The increases in expenses reflect the substantial
expansion of ALZA's sales organization, increased expenses
related to the launch and promotion of Ditropan XL and ALZA's
expanded product portfolio.
ALZA TECHNOLOGIES
ALZA Technologies' revenues decreased 5% for the quarter
ended September 30, 1999 compared to the quarter ended September
30, 1998 primarily due to fees from Knoll and higher fees from
Janssen in the third quarter of 1998. Revenues increased 8% for
the nine months ended September 30, 1999 compared to the nine
months ended September 30, 1998, largely due to an 8% increase in
contract manufacturing sales as result of an increase in ALZA's
sales of Glucotrol-registered trademark-XL (glipizide) to Pfizer Inc.
("Pfizer"), and a 9% increase in royalties resulting from sales
of Duragesic-registered trademark-(fentanyl), Nicoderm-
registered trademark- and NicoDerm-registered trademark-CQ-trademark-,
and Glucotrol XL, partially offset by a decrease in royalties from
sales of Procardia XL-registered trademark-(nifedipine) and a
decrease in fee revenues. Operating income for ALZA Technologies
decreased 10% for the quarter ended September 30, 1999 as
compared to the quarter ended September 30, 1998, primarily due
to the decline in revenues discussed above. Operating income
increased 8% for the nine months ended September 30, 1999
compared to nine months ended September 30, 1998.
OTHER
Operating loss for the "Other" segment increased to $8.3
million and $55.1 million for the quarter and nine months ended
September 30, 1999, respectively, from $8.0 million and $19.3
million for the quarter and nine months ended September 30, 1998,
respectively. The increase in the operating loss for the nine
months ended September 30, 1999 was due primarily to $32.6
million of merger-related charges recorded in the quarter ended
March 31, 1999 related to the SEQUUS acquisition.
NET SALES
Net Sales Quarter Ended Nine Months Ended
September 30, September 30,
(Dollars in millions) 1999 1998 1999 1998
_________________________________________________________________
ALZA PHARMACEUTICALS
Ditropan-registered trademark-
XL $ 25.4 $ - $ 61.8 $ -
Doxil-registered trademark/
Caelyx-registered trademark 24.0 13.5 52.3 36.0
Ethyol-registered trademark 17.7 9.5 34.8 23.4
Mycelex-registered trademark-
Troche 11.6 5.9 24.3 21.6
Elmiron-registered trademark- 10.0 5.4 22.6 16.1
Testoderm-registered trademark-
TTS line 5.0 2.1 14.7 6.4
Other 12.6 7.4 32.5 24.0
___________________________________________________________________
Total 106.3 43.8 243.0 127.5
___________________________________________________________________
ALZA TECHNOLOGIES
Contract manufacturing 30.6 30.9 93.3 86.3
Intersegment 5.3 2.1 13.3 5.7
___________________________________________________________________
Total 35.9 33.0 106.6 92.0
___________________________________________________________________
Intersegment eliminations (5.3) (2.1) (13.3) (5.7)
___________________________________________________________________
Total net sales $136.9 $ 74.7 $336.3 $213.8
___________________________________________________________________
Total net sales as a percentage
of total revenues 62% 43% 56% 45%
___________________________________________________________________
ALZA PHARMACEUTICALS
Included in net sales of ALZA-marketed products are sales of
the products marketed directly by ALZA in the United States and
Canada, and sales of those products in other countries through
distributors. Net sales of ALZA-marketed products increased 142%
and 91% for the quarter and nine months ended September 30, 1999
compared to the same periods in 1998. This increase in ALZA
Pharmaceuticals' net sales can be primarily attributed to $25.4
million and $61.8 million sales of Ditropan XL, which was launched
on February 1, 1999, for the quarter and nine months ended
September 30, 1999, respectively, as well as an increase of 77% and
45% in sales of Doxil/Caelyx for the quarter and nine months ended
September 30, 1999, respectively, all as compared to the same
periods in 1998. In addition, Mycelex Troche and Ethyol had
significant growth in sales for the quarter and nine months ended
September 30, 1999, compared with the same periods in 1998.
Net sales of ALZA-marketed products can be expected to vary
from quarter to quarter, particularly in the first years after
launch of a new product. Ditropan XL was launched in the first
quarter of 1999, and Doxil, Ethyol , Elmiron-registered trademark-
(pentosan polysulfate sodium) and Testoderm-registered trademark-
TTS (Testosterone Transdermal System) were cleared for marketing
during the past few years. In June 1999 the FDA approved new
indications for Ethyol and Doxil. ALZA believes that its products
have not yet achieved their steady-state sales levels. Wholesaler
stocking patterns, managed care and formulary acceptance, the
introduction of competitive products, and acceptance by patients
and physicians will also affect future sales of ALZA's products.
ALZA TECHNOLOGIES
Net sales from contract manufacturing include sales generated
from contract manufacturing activities for ALZA's client companies
and for ALZA Pharmaceuticals. Net sales from contract
manufacturing for the quarter ended September 30, 1999 remained
relatively constant compared with the quarter ended September 30,
1998. Net sales increased 8% for nine months ended September 30,
1999, compared to the same period in 1998, primarily due to an
increase in ALZA shipments of Glucotrol XL to Pfizer and Nicoderm
and NicoDerm CQ to Hoechst Marion Roussel, Inc. and SmithKline
Beecham p.l.c.("SB"). These increases were partially offset by a
decline in shipments of Duragesic to Janssen and Covera-HS-
trademark-(verapamil) to GD Searle & Co.
The timing and quantities of orders for products marketed by
client companies are not within ALZA's control. Net sales by ALZA
to client companies 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 clients.
GROSS MARGIN
Gross Margin
Quarter Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
_________________________________________________________________
ALZA PHARMACEUTICALS(1) 81% 77% 81% 76%
ALZA TECHNOLOGIES(1) 19% 27% 22% 20%
_________________________________________________________________
Gross margin(2) 67% 56% 64% 54%
___________________________________________________________________
(1) Includes intersegment revenues or expenses.
(2) After intersegment eliminations.
The increase in total gross margin for the quarter and nine
months ended September 30, 1999 compared to the same periods for
1998 was due to increased sales of higher-margin products by ALZA
Pharmaceuticals, as well as an increase in ALZA Pharmaceutical
sales as a percentage of total sales. 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. A trend
of higher gross margins may be achieved through a proportionate
increase in direct sales by ALZA Pharmaceuticals in relation to
sales from contract manufacturing and, to a lesser extent,
increased utilization of capacity and greater operating
efficiencies by ALZA Technologies.
ALZA PHARMACEUTICALS
The gross margin on net sales of ALZA-marketed products
increased in the quarter and nine months ended September 30, 1999
compared to the same periods for 1998 due to a shift in product
mix towards sales of higher-margin products, including Ditropan
XL, which was launched on February 1, 1999.
ALZA TECHNOLOGIES
The gross margin on net sales of products manufactured by
ALZA Technologies for sale by client companies and ALZA
Pharmaceuticals decreased for the quarter ended September 30,
1999 compared with the same period in 1998 as a result of a
relative decrease in shipments of higher-margin products to
client companies. Gross margin for the comparative nine-month
periods increased primarily due to a change in product mix. ALZA
Technologies' gross margin on its contract manufacturing sales is
usually considerably lower than ALZA Pharmaceuticals' gross
margin on its sales of ALZA-marketed products. ALZA's client-
funded product development agreements generally provide for a
supply price that is intended to cover ALZA's costs to
manufacture the product plus a small margin. ALZA also generally
receives royalties on the clients' sales of the products, which
are included in royalties, fees and other revenues. Sales to
ALZA Pharmaceuticals are based upon negotiated prices, which
generally approximate the prices charged to third parties.
ROYALTIES, FEES AND OTHER REVENUES
Royalties, Fees and Other Revenues
Quarter Ended Nine Months Ended
September 30, September 30,
(Dollars in millions) 1999 1998 1999 1998
________________________________________________________________
ALZA PHARMACEUTICALS $ 3.7 $ 6.8 $10.0 $ 16.9
ALZA TECHNOLOGIES 54.0 57.9 160.6 150.4
OTHER 0.3 0.6 1.1 1.8
_________________________________________________________________
Total royalties, fees and
other revenues $ 58.0 $ 65.3 $171.7 $169.1
_________________________________________________________________
Percentage of total revenues 26% 38% 28% 36%
_________________________________________________________________
ALZA PHARMACEUTICALS
For the quarter and nine months ended September 30, 1999,
fee revenues for ALZA Pharmaceuticals included technology fees
from Crescendo of $1.7 million and $5.7 million, respectively,
compared to $2.7 million and $8.7 million for the same periods in
1998, as provided in the agreements between ALZA and Crescendo.
Fee revenues from Crescendo will continue to decline and expected
to end in the second half of 2000. In addition, ALZA
Pharmaceuticals' royalties, fees and other revenue included
milestone-based fee revenues from Schering-Plough of $1.8 million
and $4.0 million for the quarter and nine months ended September
30, 1998.
ALZA TECHNOLOGIES
Royalties, fees and other revenues decreased 7% for the
quarter ended September 30, 1999 compared to the quarter ended
September 30, 1998 primarily due to fees from Knoll and higher
fees from Janssen in the third quarter of 1998. Royalties, fees
and other revenues increased 7% for the nine months ended
September 30, 1999 compared to the nine months ended September
30, 1998 largely due to an increase in royalties resulting from
sales of Duragesic, NicoDerm CQ, and Glucotrol XL, partially
offset by a decrease in royalties from sales of Procardia XL and
a decrease in fee revenues.
Fee revenues for the quarter and nine months ended September
30, 1998 consisted of several upfront, milestone and other one-
time, special, or infrequent payments made under joint
development agreements or by distributors who acquired rights to
market ALZA products outside the United States and Canada, or co-
promotion fees.
Sales of Procardia XL, as reported by Pfizer, decreased 34%
and 30% for the quarter and nine months ended September 30, 1999,
respectively, compared to the same periods in 1998. Several
companies have filed Abbreviated New Drug Applications ("ANDAs")
with the FDA requesting clearance to market generic equivalents
to Procardia XL, and one company has received tentative FDA
approval of its ANDA. Pfizer has filed suit against these
companies for infringement of patent rights relating to the
nifedipine active drug substance in Procardia XL. It is not
possible to predict the timing and amount of the negative impact
on sales of Procardia XL that will result from competition from
these or other potential generic sustained-release nifedipine
products.
RESEARCH AND DEVELOPMENT
Research and Development Revenue
Quarter Ended Nine Months Ended
September 30, September 30,
(Dollars in millions) 1999 1998 1999 1998
__________________________________________________________________
ALZA PHARMACEUTICALS
Crescendo $ 21.0 $ 24.7 $72.8 $ 68.5
_________________________________________________________________
ALZA TECHNOLOGIES
Other clients 6.2 8.1 22.0 23.2
Intersegment 21.1 24.7 73.0 68.6
_________________________________________________________________
Total 27.3 32.8 95.0 91.8
Intersegment elimination (21.1) (24.7) (73.0) (68.6)
_________________________________________________________________
Total research and development
revenues $ 27.2 $ 32.8 $94.8 $ 91.7
_________________________________________________________________
Percentage of total revenues 12% 19% 16% 19%
_________________________________________________________________
ALZA PHARMACEUTICALS
ALZA Pharmaceuticals derives research and development
revenues from Crescendo. Revenues from Crescendo are offset by
intersegment charges from ALZA Technologies for research and
development expenses incurred on behalf of ALZA Pharmaceuticals
related to products under development for marketing by ALZA
Pharmaceuticals. ALZA expects that Crescendo will have expended
all its available funds during the second half of 2000.
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. In December 1998, ALZA
exercised its option to obtain a worldwide license to OROS
oxybutynin (Ditropan XL). Under the license agreement, ALZA must
pay Crescendo 2.5% of net sales of the licensed product for the
first year of sales (1999) and 3% for the second and third years.
Thereafter, until 15 years after the date of the first commercial
sale of the product, the percentage owed to Crescendo would be
based upon development costs paid by Crescendo; based upon
current information this rate is expected to be between 5% and
6%.
ALZA TECHNOLOGIES
Research and development revenues decreased 17% for the
quarter ended September 30, 1999 compared to the quarter ended
September 30, 1998, primarily due to a decrease in intersegment
research and development revenues from ALZA Pharmaceuticals
related to Crescendo products. This decrease resulted primarily
from a decrease in expenditures for DUROS-registered trademark-
leuprolide, which ALZA has named Viadur, and OROS-registered
trademark- methylphenidate, which ALZA has named Concerta-
trademark-, after the submission of the New Drug Applications
("NDAs") for these products in April 1999 and July 1999,
respectively. Research and development revenues increased 3% for
the nine months ended September 30, 1999 compared to the nine
months ended September 30, 1998.
Research and Development Expenses
Quarter Ended Nine Months Ended
September 30, September 30,
(Dollars in millions) 1999 1998 1999 1998
__________________________________________________________________
ALZA PHARMACEUTICALS
Intersegment $ 21.1 $ 24.7 $73.0 $ 68.6
Product development
expense 6.9 7.9 21.0 20.8
__________________________________________________________________
Total 28.0 32.6 94.0 89.4
_________________________________________________________________
ALZA TECHNOLOGIES 34.4 41.4 112.2 111.4
_________________________________________________________________
Intersegment elimination (21.1) (24.7) (73.0) (68.6)
_________________________________________________________________
Total research and development
expenses $ 41.3 $ 49.3 $133.2 $132.2
_________________________________________________________________
Percentage of total revenues 19% 29% 22% 28%
_________________________________________________________________
ALZA PHARMACEUTICALS
ALZA Pharmaceuticals engages ALZA Technologies to provide
research and development services, which are charged under the
same formula ALZA charges client companies. Intersegment
expenses related to these services decreased for the quarter and
increased for the nine months ended September 30, 1999 as
compared to the same periods in 1998 due to timing of the
additional expenses incurred in the preparation of NDA
submissions for Viadur and Concerta, which were submitted in
April 1999 and July 1999, respectively. Research and development
expenses substantially declined in the third quarter of 1999
primarily due to the completion of the NDA submissions. Product
development expense remained relatively constant for the quarter
and nine months ended September 30, 1999 compared to the quarter
and nine months ended September 30, 1998, respectively.
ALZA TECHNOLOGIES
Research and development expenses decreased 17% for the
quarter ended September 30, 1999 compared to September 30, 1998,
reflecting a decrease in product development activities for ALZA
Pharmaceuticals and under agreements with client companies. For
the comparative nine-month periods research and development
expenses remained relatively constant.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, General and Administrative Expenses
Quarter Ended Nine Months Ended
September 30, September 30,
(Dollars in millions) 1999 1998 1999 1998
__________________________________________________________________
ALZA PHARMACEUTICALS
Sales and marketing
expenses $ 51.2 $ 26.7 $139.6 $ 60.6
___________________________________________________________________
ALZA PHARMACEUTICALS
Amortization of product
acquisition payments 3.7 2.8 11.3 8.1
ALZA TECHNOLOGIES
Amortization of product
acquisition payments 2.3 2.3 6.9 2.3
_________________________________________________________________
Total 6.0 5.1 18.2 10.4
_________________________________________________________________
OTHER
General and administrative
expenses 8.7 8.6 23.7 21.1
_________________________________________________________________
Total selling, general
administrative expenses $ 65.9 $ 40.4 $181.5 $ 92.1
==================================================================
Total selling, general and
administrative expenses as a
percentage of total revenues 30% 24% 30% 20%
_________________________________________________________________
ALZA PHARMACEUTICALS
Sales and marketing expenses increased substantially for the
quarter and nine months ended September 30, 1999 compared to the
same periods in 1998 as a result of the significant increase in
the size of ALZA's sales organization, the increased sales and
marketing activities due to the launch and promotion of Ditropan
XL and the increased marketing expenses for ALZA's expanded
product portfolio. During the second half of 1998, ALZA expanded
its sales organization by approximately 260 sales professionals.
In December 1998, ALZA entered into an agreement with UCB Pharma,
Inc.("UCB Pharma") under which approximately 350 sales
professionals of UCB Pharma are co-promoting Ditropan XL in the
United States with ALZA. UCB Pharma receives payments based on
sales of Ditropan XL above certain levels, as well as payments
for sales calls made. The term of the co-promotion arrangement
continues through March 2002. In July 1999, ALZA expanded the
agreement with UCB Pharma to increase the number of calls to
primary care physicians during a three-month period.
In July 1999 ALZA entered into an agreement with Abbott to
co-promote Ditropan XL in the United States, adding 300 more
sales professionals to the sales force currently promoting
Ditropan XL. Co-promotion fees and other expenses were incurred
under this agreement for two months of the quarter ended
September 30, 1999.
Amortization of product acquisition payments for the ALZA
Pharmaceuticals segment increased 31% and 40% for the quarter and
nine months ended September 30, 1999 compared to the same periods
in 1998 due to the amortization of payments for products that
were acquired in the second half of 1998, and the amortization of
additional payments made since the second quarter of 1998 related
to previous product acquisitions.
ALZA TECHNOLOGIES
Amortization of product acquisition payments for ALZA
Technologies relates to three and nine months' amortization of
the $91.2 million exercise price paid in August 1998 to acquire
all of the outstanding limited partnership interests in the TTS
Research Partners, Ltd. ("TTS Partnership").
NET INTEREST
Quarter Ended Nine Months Ended
Net Interest September 30, September 30,
(In millions) 1999 1998 1999 1998
_________________________________________________________________
Interest expense $ 14.1 $ 14.2 $ 43.8 $ 42.7
Interest and other income (7.3) (6.3) (30.7) (19.7)
________________________________________________________________
Net interest and
other expense $ 6.8 $ 7.9 $ 13.1 $ 23.0
________________________________________________________________
Interest and other income increased to $7.3 million for the
quarter ended September 30, 1999 from $6.3 million for the
quarter ended September 30, 1998, and increased to $30.7 million
for the nine months ended September 30, 1999 compared with $19.7
million for the nine months ended September 30, 1998. The
increase in interest and other income for the quarter ended
September 30, 1999 was primarily due to the sale of common shares
of Alkermes, Inc. The increase in interest and other income for
the nine months ended September 30, 1999 was primarily due to a
pretax gain of $12.4 million on sales of real estate assets that
were completed during the second quarter of 1999.
Interest expense was relatively constant for the quarter
ended September 30, 1999 and slightly higher for the nine months
ended September 30, 1999 compared to the same periods for 1998,
primarily due to accreted interest on ALZA's outstanding 5 1/4%
Debentures.
Effective Tax Rate
For the quarter and nine months ended September 30, 1999,
ALZA's effective income tax rate was 32%, excluding the tax
effect of $7.8 million on merger-related costs of $32.6 million,
compared to 35% for the quarter and nine months ended September
30, 1998. ALZA's annual effective combined federal and state
income tax rate for 1999 is estimated to be 31% to 32%, assuming
utilization of SEQUUS' net operating losses. The actual
effective income tax rate will depend upon the actual level of
earnings, potential changes in the tax laws, the amount of
investment and research credits available and ALZA's ability to
utilize such credits.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity and Capital Resources September 30, December 31,
(In millions) 1999 1998
_________________________________________________________________
Working capital $ 405.3 $ 297.1
Cash and investments 544.7 514.1
Total assets 1,797.8 1,666.6
Long-term debt 973.5 966.1
_________________________________________________________________
Nine months ended September 30,
1999 1998
_________________________________________________________________
Net cash provided by
operating activities $ 125.6 $ 80.5
Capital expenditures 62.9 43.1
Product acquisition payments 35.0 13.5
_________________________________________________________________
Cash flow generated by operating activities for the nine
months ended September 30, 1999 was $125.6 million (or $145.3
million excluding payments for merger-related expenses) compared
to $80.5 million for the nine months ended September 30, 1998.
The increase in cash flow provided by operating activities
resulted from an increase in accrued liabilities of $24.2 million
and amortization of higher non-cash charges for product
acquisition payments of $18.2 million.
ALZA's capital spending for the nine months ended September
30, 1999 was $62.9 million for additions to facilities and
equipment to support its research, development and manufacturing
activities, compared to capital spending of $43.1 million in the
same period in 1998. While ALZA believes its current facilities
and equipment (including the facilities currently in the process
of being occupied) are sufficient to meet its current operating
requirements, ALZA has recently expanded its facilities and
equipment to support its medium-term and long-term requirements.
Capital expenditures during the remainder of 1999 are expected to
continue to increase over 1998 levels as a result of spending to
complete the new Mountain View facilities.
As a result of ALZA's investment in a real estate joint
venture and construction of buildings in Mountain View,
California, which are scheduled to be completed in late 1999,
ALZA has been evaluating its real estate holdings and future
facilities needs. During the second quarter of 1999, ALZA sold
five buildings located in Palo Alto, California for a total of
$20.1 million. ALZA will lease back these buildings through
December 31, 1999, when it expects to complete occupancy of its
new buildings in Mountain View. In the near term ALZA expects to
lease out certain other Palo Alto, Menlo Park and Mountain View
properties currently occupied by ALZA, which could result in
lease income in 2000 and beyond.
ALZA believes that its existing cash and investment balances
are adequate to fund its cash needs for 1999 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 technologies or products.
Merger Agreement with Abbott Laboratories
On June 21, 1999, Abbott and ALZA announced that the
companies entered into a merger agreement. Under the terms of
the merger agreement, Abbott would acquire all of ALZA's
outstanding stock in a tax free, stock-for-stock transaction.
ALZA's stockholders would receive 1.2 shares of Abbott common
stock for each share of ALZA common stock held on the record
date. The merger was approved by ALZA's stockholders on
September 21, 1999. Closing of the transaction is subject to
approval of the FTC, which has required divestiture of United
States rights to ALZA's Viadur product. On November 2, 1999
Abbott announced that it had reached an agreement with the FDA to
a consent decree involving Abbott's diagnostics manufacturing
operations in Lake County, Illinois. ALZA is analyzing
information relating to the consent decree and its implications.
In addition, several purported class action lawsuits have been
filed on behalf of stockholders of ALZA, alleging that the proxy
statement distributed in connection with the merger did not
include material information regarding regulatory compliance
problems at an Abbott diagnostic manufacturing facilities. The
plaintiffs in this litigation have filed a motion for a
preliminary injunction to enjoin the closing of the merger until
additional disclosure is made. Abbott and ALZA have informed the
plaintiffs in such lawsuits that Abbott and ALZA will not close
the proposed merger before December 30, 1999, absent a new vote
of the ALZA stockholders. See "Legal Proceedings" in Part II,
Item 1.
Year 2000
ALZA is reliant upon its computer systems and applications,
including scientific and manufacturing equipment containing
computer-related components, to conduct its business. Key
internal systems and applications include manufacturing
production management, raw materials supply, inventory control,
research and development activities and project management,
documentation, marketing and financial systems. The majority of
ALZA's significant internal systems, including financial and
accounting systems, have been tested and found to be Year 2000
compliant. The Year 2000 ("Y2K") testing of all critical
systems are near completion and, to date, no Y2K related issues
have been discovered. Y2K testing and any related issues are
expected to be resolved with respect to all systems critical to
ALZA's business prior to the end of 1999.
In addition to its internal systems, ALZA is also reliant
upon the capabilities of the computer systems of its
distributors, customers, vendors, banks, and government
agencies. ALZA has initiated communications with third parties
with whom it has material direct business relationships in order
to determine their level of Y2K compliance and to identify
contingency plans, where necessary. ALZA has received responses
from certain third parties, indicating that they are or expect
to be Y2K compliant by the end of 1999, and for those third
parties that have not yet responded ALZA has developed
contingency plans.
Y2K costs incurred to date have not been material. Total
costs to modify ALZA's systems for Y2K compliance are expected
to be less than $2.0 million. Such costs do not include normal
system upgrades and replacements, and the actual financial
impact could exceed this estimate.
If ALZA is unable to bring its systems into compliance in
the expected timeframe, any noncompliance could have a material
impact on ALZA's operations, and could result in delays or
failures in manufacturing, research and development and similar
activities. The extent of such impact cannot presently be
determined. ALZA may also experience delays or failures in
manufacturing, distribution, order entry, order processing,
product shipping and distribution, invoicing, payment, or
similar normal business activities, if certain third party
distributors, customers, vendors and banks are not Y2K
compliant. In addition, ALZA may experience some delay in
obtaining approvals to market ALZA products from government
agencies if government computer systems are not Y2K compliant.
There can be no assurance that third parties' failure to ensure
Y2K compliance would not have an adverse impact on ALZA's
financial condition or results of operations.
ALZA has developed specific contingency plans intended to
mitigate the effects of potential Y2K disruptions, including the
effects of operational problems and costs that may result from a
failure of ALZA and certain third parties to complete efforts
necessary to achieve Y2K compliance on a timely basis or from
abnormal buying patterns in anticipation of Y2K. Specific
contingency plans include increasing inventory of raw materials
and finished goods, as well as qualifying secondary sources of
certain goods and services. There can be no assurance that ALZA
will be able to implement contingency plans to adequately
address all issues that may arise in the year 2000 that could
have a material adverse impact on ALZA's financial condition or
results of operations
Item 3. Quantitative and Qualitative Disclosures about Market
Risk
Financial market risks related to changes in interest rates
and foreign currency exchange rates are described in Part II,
Item 7A, Quantitative and Qualitative Disclosure About Market
Risk, in ALZA's Annual Report on Form 10-K for the year ended
December 31, 1998 and the Form 8-K filed May 13, 1999, which
restates financial information for prior periods to reflect the
combined results of ALZA and SEQUUS.
ALZA is exposed to equity price risks on the marketable
portion of equity securities included in its portfolio of
investments entered into to further its business and strategic
objectives. These investments are generally in small
capitalization stocks in the pharmaceutical and biotechnology
industry sector, in companies with which ALZA has research and
development or product agreements. ALZA typically does not
attempt to reduce or eliminate its market exposure on these
securities. A 20% adverse change in equity prices would result
in an approximate $4 million decrease in ALZA'S available-for-
sale securities, based upon a sensitivity analysis performed on
ALZA's financial position at September 30, 1999. However, actual
results may differ materially.
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 product liability
claims against ALZA has not been significant, and ALZA is not
aware of any asserted or unasserted product liability 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.
Pursuant to a Remedial Action Order No. HSA 88/89-016 issued
by the California Department of Toxic Substances Control
("DTSC"), ALZA has been named as one of a number of potentially
responsible parties in connection with the cleanup and
environmental remediation of the Hillview-Porter Regional Site
Project in Palo Alto. The purpose of the DTSC action is, in
part, to apportion responsibility for cleanup costs among the
parties involved. Cleanup costs for the entire region have been
estimated at approximately $16 million. ALZA believes that it
did not discharge any of the chemicals of concern at the site in
question. ALZA has entered into a settlement agreement with the
party that has performed the cleanup remediation. The
settlement did not have a material impact to ALZA's financial
position or operating results.
On June 22, 1999, a purported class action lawsuit was filed
in the Superior Court of the State of California, County of Santa
Clara, against ALZA and all of the current members of its Board
of Directors. The action was captioned Lisa Fruchter v. ALZA
Corporation, et al., No. CV 782725 (Santa Clara County,
California, Superior Court) and alleged that ALZA and its
directors breached fiduciary duties owed to ALZA's stockholders
when they permitted ALZA to enter into the Merger Agreement with
Abbott. In general, the complaint alleged that the exchange
ratio under the Merger Agreement was inadequate and further
alleged that ALZA's board of directors had an obligation to place
ALZA up for auction when it entered into the Merger Agreement.
The action sought both an injunction to prevent the merger and
damages in the event that the merger is completed. On
September 20, 1999 the plaintiffs agreed to dismiss this suit
without any liability for ALZA.
On October 7, 1999 a purported class action lawsuit was
filed in the U.S. District Court for the Northern District of
Illinois, against ALZA, Abbott, and each of their chief executive
officers. The action was captioned Gayle Stahl v. Abbott
Laboratories, ALZA Corporation et al., No. 99 C 6584. Three
additional similar complaints were filed, and the complaints have
been consolidated into one suit captioned In re Abbott-ALZA
Merger Litigation, No. 99 C 6584. The complaints allege that the
proxy materials distributed to ALZA stockholders in connection
with the merger did not include material information regarding
regulatory compliance problems at Abbott diagnostic manufacturing
facilities. The action seeks to enjoin the merger and seeks
unspecified damages. On October 15, 1999, plaintiffs filed a
motion for preliminary injunction to enjoin the merger until
further disclosure has been provided to ALZA stockholders.
Abbott and ALZA have informed the plaintiffs in such lawsuits
that Abbott and ALZA will not close the proposed merger before
December 30, 1999, absent a new vote of the ALZA stockholders.
ALZA is continuing to evaluate the claims brought and issues
raised by this litigation.
Item 4. Submission of Matters to a Vote of Security Holders
(a) A special meeting of the stockholders of ALZA was held on
September 21, 1999.
(b) A total of 75,099,432 shares were represented at the special
meeting. Stockholders approved a proposal to approve the merger
agreement between ALZA and Abbott entered into on June 21, 1999.
There were 74,181,482 votes in favor, 629,165 votes against and
288,785 abstentions.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
27 Financial Data Schedule
(b) On September 20, 1999 ALZA filed a current report on Form 8-
K to announce that the plaintiff in a lawsuit filed as a class
action against ALZA and Abbott had agreed to dismiss the action
as more fully described in the Press Release filed as Exhibit
99.1
<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: November 12, 1999 By: /s/ E. Mario
Dr. Ernest Mario
Chairman and Chief
Executive Officer
Date: November 12, 1999 By: /s/ Bruce C. Cozadd
Bruce C. Cozadd
Senior Vice President and
Chief Financial Officer
<PAGE>
EXHIBIT INDEX
Exhibit
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains financial information extracted from the financial
statements included in Part I, Item 1 of Form 10-Q dated September 30, 1999 and
is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 217
<SECURITIES> 36
<RECEIVABLES> 173
<ALLOWANCES> 4
<INVENTORY> 57
<CURRENT-ASSETS> 515
<PP&E> 533
<DEPRECIATION> 138
<TOTAL-ASSETS> 1,798
<CURRENT-LIABILITIES> 110
<BONDS> 933
0
0
<COMMON> 1
<OTHER-SE> 670
<TOTAL-LIABILITY-AND-EQUITY> 1,798
<SALES> 336
<TOTAL-REVENUES> 603
<CGS> 120
<TOTAL-COSTS> 253
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 44
<INCOME-PRETAX> 123
<INCOME-TAX> 42
<INCOME-CONTINUING> 81
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 81
<EPS-BASIC> .80
<EPS-DILUTED> .78
</TABLE>
