SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
Amendment No. 2
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED
DECEMBER 31, 1997
Commission File Number 1-6247
ALZA CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 77-0142070
(State or other jurisdiction of incorporation (I.R.S.
Employer Identification
of organization) No.)
950 Page Mill Road, P.O. Box 10950, Palo Alto, CA 94303-0802
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (650) 494-
5000
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
Common Stock New York Stock Exchange
5 1/4% Liquid Yield Option Notes due 2014 New York Stock Exchange
(Zero Coupon-Subordinated)
5% Convertible Subordinated Debentures due 2006 New York Stock
Exchange
Securities registered pursuant to Section 12(g) of the Act:
Warrants (to purchase Common Stock at $65 per share)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days: Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of registrant's knowledge,
in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K.[X]
State the aggregate market value of the voting stock held by
non-affiliates of the registrant, as of March 16, 1998:
$3,539,051,440.
Indicate the number of shares outstanding of each of the
registrant's classes of common stock, as of March 16, 1998:
Title of Class Number of Shares
Common Stock 86,052,152
DOCUMENTS INCORPORATED BY REFERENCE
Part III, Items 10, 11, 12 and 13 are incorporated by
reference to the definitive proxy statement for the registrant's
Annual Meeting of Stockholders to be held on May 7, 1998.
ALZA CORPORATION FORM 10-K/A ANNUAL REPORT
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
TABLE OF CONTENTS
Page
Part I
Item 1. BUSINESS 3
Item 2. PROPERTIES 28
Item 3. LEGAL PROCEEDINGS 30
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 30
Part II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS 31
Item 6. SELECTED FINANCIAL DATA 34
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 35
Item 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK 55
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 56
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE 85
Part III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 85
Item 11. EXECUTIVE COMPENSATION 85
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT 85
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 85
Part IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K 85
Signatures
Exhibits
PART I
Item 1. BUSINESS
Introduction
ALZA Corporation ("ALZA") is an emerging pharmaceutical
company with leading drug delivery technologies. ALZA applies
its technologies to develop pharmaceutical products with enhanced
therapeutic value for its own portfolio and for many of the
world's leading pharmaceutical companies. ALZA is currently
focusing its sales and marketing efforts in urology and oncology.
ALZA was incorporated under the laws of the State of California
on June 11, 1968, and changed its legal domicile from California
to Delaware in 1987. ALZA's mailing address is
950 Page Mill Road, P.O. Box 10950, Palo Alto, California, 94303-
0802.
Before the 1990s, ALZA's business consisted almost
exclusively of product development activities undertaken pursuant
to joint development and commercialization agreements with large
pharmaceutical companies. Among the ALZA-developed products
commercialized to date by client companies under these
arrangements are Procardia XL-registered trademark-/Adalat CR-
registered trademark- (nifedipine) for the treatment of angina
and hypertension, Transderm-Nitro-registered trademark-
(nitroglycerin) for the prevention and treatment of angina,
NicoDerm-registered trademark- CQ-trademark- (nicotine) for use
as an aid in smoking cessation, and Glucotrol XL-registered
trademark- (glipizide) for the treatment of Type II diabetes.
Beginning in the early 1990s and increasingly over the past
several years, ALZA has embarked on a new strategy to become a
fully-integrated commercial pharmaceutical company. While ALZA
has continued its traditional product development arrangements
with client companies, and currently has products in development
with a number of major pharmaceutical companies, ALZA has
expanded its commercialization capabilities and activities. In
1994, ALZA formed ALZA Pharmaceuticals, its sales and marketing
division, which now has a sales force of more than 100 sales
personnel. By the end of 1997, ALZA Pharmaceuticals was
marketing Ethyol-registered trademark- (amifostine), Testoderm-
registered trademark- (testosterone), Testoderm-registered
trademark- with Adhesive, Mycelex-registered trademark-
(clotrimazole) Troche, Ditropan-registered trademark-
(oxybutynin), Elmiron-registered trademark- (pentosan polysulfate
sodium), PolyCitra-registered trademark- (potassium citrate
monohydrate), BiCitra-registered trademark- (sodium citrate
dihydrate and citric acid monohydrate) and Neutra-Phos-registered
trademark- (potassium and sodium phosphates), as well as ALZET-
registered trademark- mini-osmotic pumps, Progestasert-registered
trademark- (progesterone) intrauterine contraceptive device
systems and Ocusert-registered trademark- (pilocarpine) ocular
therapeutic systems, three products developed by ALZA in its
early years. In March 1998, ALZA launched Testoderm-registered
trademark- TTS-trademark- (testosterone) CIII, the third product
in the Testoderm line. In addition, ALZA, through ALZA
Pharmaceuticals, co-promotes Duragesic-registered trademark-
(fentanyl), Hexalen-registered trademark- (altretamine),
NeuTrexin-registered trademark- (trimetrexate glucuronate) and
the ENACT AirWatch-trademark- system. A partnership of ALZA and
Procter & Gamble markets the Actisite-registered trademark-
(tetracycline hydrochloride) periodontal fiber for the treatment
of periodontal disease in the United States.
As part of its strategy to expand its commercialization
activities, and in order to decrease ALZA's dependence on client
companies, in 1993 ALZA formed Therapeutic Discovery Corporation
("TDC") to develop, with ALZA, a pipeline of products for
commercialization by ALZA. In the third quarter of 1997, ALZA
purchased all of the outstanding shares of TDC. Also in the
third quarter of 1997, ALZA distributed to its stockholders and
debenture holders the Class A Common Stock of Crescendo
Pharmaceuticals Corporation ("Crescendo"), which was formed by
ALZA to select and develop human pharmaceutical products and to
commercialize those products, most likely through licensing to
ALZA. ALZA and Crescendo have continued development of several
products previously under development by ALZA and TDC; ALZA and
Crescendo have also commenced the development or evaluation of
other products.
At the end of 1997, ALZA and Janssen Pharmaceutica, Inc.
(together with its affiliates, "Janssen") entered into new
arrangements with respect to two E-TRANS-trademark- fentanyl
products - one for the treatment of acute pain and one for the
treatment of chronic pain. Under these arrangements, discussed
below, ALZA will have the opportunity to share in the United
States operating profits from the products in exchange for making
an investment in the product development programs.
ALZA's 1997 activities serve as the foundation for ALZA's
expanding commercial activities.
Notice Concerning Forward-Looking Statements
Some of the statements made in this Form 10-K are forward-
looking in nature, including but not limited to ALZA's sales and
marketing plans, product development activities and plans, and
other statements that are not historical facts. Forward-looking
statements include, but are not limited to, statements that are
not historical facts, and statements including forms of the words
"intend", "believe", "will", "may", "could", "expect",
"anticipate", "possible", and similar terms. The occurrence of
the events described, and the achievement of the intended
results, are subject to the future occurrence of many events,
some or all of which are not predictable or within ALZA's
control; therefore, actual results may differ materially from
those anticipated in any forward-looking statements. Many risks
and uncertainties are inherent in the pharmaceutical industry;
others are more specific to ALZA's business. Many of the
significant risks related to ALZA's business are described in
this Form 10-K, including risks associated with introducing and
commercializing new pharmaceutical products, the risks inherent
in technology and product development, risks relating to clinical
development, regulatory clearance to market products and medical
acceptance of products, changes in the health care marketplace,
competition, patent and intellectual property matters, regulatory
risks and manufacturing issues.
Products Marketed and Co-Promoted by ALZA
At the end of 1997, ALZA, through ALZA Pharmaceuticals, was
marketing 13 pharmaceutical products and was co-promoting four
additional products marketed by third parties. ALZA
Pharmaceuticals has more than 100 field sales personnel. ALZA's
specialty sales force has been specially trained in ALZA's two
current areas of commercial focus - urology and oncology.
ALZA-Marketed Products
Ethyol (amifostine) - In April 1996, ALZA
Pharmaceuticals began marketing Ethyol in the United States.
Ethyol is a unique cytoprotective agent developed by U.S.
Bioscience, Inc. ("USB"), indicated for the reduction of
cumulative renal toxicity associated with repeated administration
of the chemotherapeutic drug cisplatin in patients with advanced
ovarian or non-small cell lung cancer. USB co-promotes the
product with ALZA. ALZA has the right to market the product
until mid-2001, with an option for an additional year, and will
receive residual payments for a specified period after the end of
ALZA's marketing term.
Mycelex (clotrimazole) Troche - ALZA acquired the
exclusive United States rights to this product from Bayer
Corporation ("Bayer") in July 1997. Mycelex Troche is an
antifungal agent for the localized treatment of oral thrush.
Prior to acquiring the rights to the product, ALZA promoted the
product for Bayer.
Elmiron (pentosan polysulfate sodium) - In October
1997, ALZA acquired the exclusive rights in the United States and
Canada to this product, indicated for the treatment of the pain
and discomfort of interstitial cystitis, from IVAX Corporation
and its subsidiary, Baker Norton Pharmaceuticals, Inc. (together,
"IVAX"). In connection with that transaction, ALZA hired most of
the IVAX personnel involved in promoting the product in the
United States and Canada. The product was cleared for marketing
in the United States in late 1996, and in Canada in 1993.
PolyCitra (potassium citrate), BiCitra (sodium citrate
and citric acid) and Neutra Phos (potassium and sodium phosphate)
- - The exclusive rights to these products in the United States and
Canada were acquired from IVAX in the same transaction in which
the rights to Elmiron were acquired. PolyCitra and BiCitra are
used in the treatment of kidney stones, and Neutra Phos is a
nutritional supplement used to treat phosphorous deficiency. All
three products are marketed in the United States; PolyCitra is
also marketed in Canada.
Ditropan (oxybutynin) - In October 1997, ALZA acquired
the exclusive United States rights to the immediate release oral
Ditropan product from Hoechst Marion Roussel, Inc. ("HMRI"). The
product is indicated for the treatment of urge urinary
incontinence. As part of the transaction, ALZA also acquired the
right to use the Ditropan trademark in the United States with
other products. Subject to marketing clearance by the United
States Food and Drug Administration ("FDA"), and if ALZA licenses
the product from Crescendo, ALZA intends to use the Ditropan
trademark with the OROS-registered trademark- oxybutynin product
under development by ALZA and Crescendo. The New Drug
Application ("NDA") for the OROS oxybutynin product is currently
on file with the FDA.
Testoderm (testosterone) line of products - ALZA has
developed three Testoderm products, once-daily transdermal
systems for testosterone replacement therapy in males for
conditions associated with a deficiency or absence of endogenous
testosterone. Testoderm was introduced in 1994; Testoderm with
Adhesive in 1996. Both products are worn on the scrotum. In
March 1998, ALZA launched Testoderm TTS, which was developed by
ALZA and TDC. This product can be worn on the arm, back or upper
buttocks and is also applied once daily.
In addition to the products described above, ALZA
Pharmaceuticals markets the ALZET, Progestasert and Ocusert
products. The Ocusert (pilocarpine) Pilo-20 and Pilo-40 ocular
therapeutic systems are used for the treatment of glaucoma. The
Progestasert (progesterone) intrauterine contraceptive device
provides contraception for one year by releasing the natural
hormone progesterone. ALZET mini-osmotic pumps are implantable,
capsule-shaped units that can deliver solutions containing a wide
range of agents in laboratory animals at controlled rates for up
to four weeks.
Product Marketing Risks
Many of the products described above have been introduced by
ALZA Pharmaceuticals during the last few years. Several, such as
Ethyol and Elmiron, are relatively new therapies that had no
established market at the time of their introduction. Others,
such as the Testoderm line, are used for the treatment of
conditions that may be underdiagnosed or not completely
understood. There can be no assurance that ALZA Pharmaceuticals
will be successful in its marketing and sales efforts. There are
numerous risks associated with the marketing and sales of
pharmaceutical products, including the following:
Commercial Potential - In order to provide added value
and gain medical and commercial acceptance, a product generally
must show some performance improvement or other benefit over
products incorporating the same or similar drug compounds or
other products indicated for the same illness or condition. In
some cases, these benefits may be difficult to establish.
Competition from Other Products - Many companies have a
presence in urology and oncology, in which ALZA is currently
focusing its sales and marketing efforts, including companies
that focus exclusively on oncology. Many competitors have far
larger sales forces, and significantly greater resources and
experience in marketing pharmaceutical products, than ALZA. In
addition, other companies may introduce products that offer
competitive advantages when compared to products marketed by
ALZA.
Availability of Products for In-Licensing and/or
Acquisition - While ALZA has successfully acquired and in-
licensed several products during the past few years, there can be
no assurance of continued success in such activities. Other
companies are attempting to acquire and in-license products,
particularly in the oncology field, and ALZA may not be able to
acquire or in-license additional products on favorable terms.
Pricing and Reimbursement - As pressures for cost
containment increase, particularly in the United States health
care industry, there can be no assurance that the prices ALZA can
charge for the products marketed by ALZA Pharmaceuticals will be
as favorable as historical pharmaceutical product prices.
Reimbursement by payors such as government and managed care
organizations has become increasingly important, as has the
listing of new products on large formularies. There can be no
assurance that innovative new products such as Ethyol and
Elmiron, or drug delivery products such as Testoderm TTS, will
achieve reimbursement and formulary acceptance that will result
in an appropriate return on ALZA's research and development
efforts or investment in the acquisition of the products. Failure
of one or more products to be included on formulary lists, or to
be reimbursed by managed care organizations, could have a
negative impact on the profitability of ALZA Pharmaceuticals.
Physician and Patient Acceptance of Products -
Significant efforts will be required to educate physicians and
other health care practitioners, as well as patients, concerning
some of ALZA's current products in order that the full potential
of the products can be realized. For example, Ethyol is the first
chemoprotective therapy to be cleared for marketing in the United
States. Elmiron, the only oral therapy available for the pain
and discomfort associated with interstitial cystitis, is used in
the treatment of a disease that is often undiagnosed or
misdiagnosed. The Testoderm line is used to treat testosterone
deficiency in men, a condition that is not yet well understood,
and which is believed to be largely undiagnosed.
Dependence on Third Party Manufacturers - The products
in-licensed and acquired by ALZA to date from third parties are
manufactured by the third parties. ALZA is therefore dependent
upon the manufacturing capabilities and capacity of the third
parties for supply of those products to sell in the marketplace.
Need for International Distribution Arrangements -
ALZA's direct sales and marketing efforts are currently limited
to the United States and Canada. ALZA will need to enter into
arrangements with distributors or marketing partners outside the
United States and Canada for products as to which ALZA has rights
in other countries. There can be no assurance that acceptable
distribution partners can be obtained, or that ALZA's return from
the arrangements with international marketing partners will
contribute significantly to ALZA's profits.
Products Co-Promoted by ALZA Pharmaceuticals
In addition to marketing the products described above, ALZA
co-promotes four products with third parties.
Duragesic (fentanyl) is a 72-hour system for management
of chronic pain in patients who require continuous opioid
analgesia for pain that cannot be controlled by lesser means,
marketed by Janssen. ALZA Pharmaceuticals has co-promoted the
product in the United States since 1994.
NeuTrexin (trimetrexate glucuronate) is a product
developed and marketed by USB as an alternate treatment for
moderate to severe pneumocystis carinii pneumonia. ALZA
Pharmaceuticals has co-promoted the product in the United States
since 1996.
Hexalen (altretamine) is a product developed and
marketed by USB for the palliative treatment of patients with
persistent or recurrent ovarian cancer as second-line therapy
following first-time therapy with a cisplatin and/or alkylating
agent-based combination. ALZA Pharmaceuticals has co-promoted
the product in the United States since 1996.
The ENACT AirWatch system is a product developed by
ENACT Health Management Systems for daily monitoring of asthma.
ALZA Pharmaceuticals has co-promoted the product in the United
States since 1995.
For its co-promotion activities, ALZA receives co-promotion fees,
either pursuant to a specified formula or as a percentage of
sales (or incremental sales) of the product.
Arrangements with Pharmaceutical Company Clients
Client-Marketed Products
ALZA develops products under joint development arrangements
with a number of leading pharmaceutical companies. The products
combine one of ALZA's drug delivery systems with a client's
proprietary compound or, in some cases, a compound that is no
longer patented. ALZA's technologies are discussed below under
"ALZA Technologies." Under a typical arrangement with a client
company, the client pays all of ALZA's costs incurred in the
development of the product, and the client markets the product,
making payments to ALZA based on sales of the product. The
client approves the work plans for product development and
clinical testing (which may be conducted by ALZA, the client or
both), and makes the decisions concerning product
commercialization. As a result, decisions affecting the timing
of product development, the clinical plan, regulatory strategy,
and the level of marketing support are not within ALZA's control.
Under its arrangements with client companies, ALZA
undertakes the initial product development, in which ALZA
performs the formulation work, research and testing necessary to
incorporate the drug selected by the client (which may be a
generic compound or the client's proprietary compound) into an
ALZA drug delivery system. ALZA manufactures product for in
vitro and human clinical studies; in other cases, the client
takes this responsibility. ALZA develops pilot scale
manufacturing processes and, usually, commercial manufacturing
capacity. Regulatory filings to conduct clinical studies and to
obtain regulatory approval may be prepared by ALZA, or by the
client, as negotiated. In any case, ALZA's activities are
reimbursed by the client on a cost reimbursement basis.
Under the arrangements with client companies, ALZA retains
the rights to, and owns, any improvements to ALZA's technologies.
The client obtains the right to commercialize the specific
product developed under the arrangement for an agreed upon time
period, and makes payments to ALZA with respect to sales of the
product. The client does not obtain the right to use ALZA
technology except in the specific product covered by the
arrangement.
The products developed by ALZA under these joint development
arrangements and currently marketed by client companies
incorporate ALZA's D-TRANS-trademark- (transdermal) and OROS
technologies. The D-TRANS products developed by ALZA and
currently marketed by client companies include:
Catapres-TTS-registered trademark- (clonidine) -
Applied once-weekly for the treatment of hypertension, marketed
by Boehringer Ingelheim Pharmaceuticals, Inc. ("Boehringer").
Duragesic (fentanyl) - A 72-hour system for management
of chronic pain in patients who require continuous opioid
analgesia for pain that cannot be controlled by lesser means,
marketed by Janssen and co-promoted in the United States by ALZA
Pharmaceuticals.
NicoDerm CQ/Nicoderm (nicotine) - Applied once-daily to
aid in smoking cessation. NicoDerm CQ is marketed for over-the-
counter use in the United States by SmithKline Beecham p.l.c.
("SKB") as part of a joint venture with HMRI, and Nicoderm is
marketed as a prescription product by HMRI in some countries
outside the United States.
Transderm-Nitro (nitroglycerin) - Applied once-daily
for the prevention and treatment of angina pectoris, marketed by
Novartis Pharmaceuticals Corporation (together with its
affiliates, "Novartis").
Transderm Scop-registered trademark- (scopolamine) - Applied
once every three days for prevention of nausea and vomiting
associated with motion sickness, marketed by Novartis in the
United States and several European countries, and by Recordati
Industria Chimica E Farmaceutica SPA in Italy.
The OROS products developed by ALZA and currently marketed
by client companies include:
Covera-HS-trademark- (verapamil) - A once-daily
controlled-onset-extended release (COER-24-trademark-) tablet for
the treatment of hypertension and angina pectoris, marketed by
G.D. Searle ("Searle").
DynaCirc CR-registered trademark- (isradipine) - A once-
daily system for the treatment of hypertension, marketed by
Novartis.
Glucotrol XL (glipizide) - A once-daily treatment for
Type II diabetes, marketed by Pfizer, Inc. ("Pfizer").
Minipress XL-registered trademark- / Alpress-registered
trademark- LP (prazosin) - A once-daily formulation for the
treatment of hypertension, marketed by Pfizer.
Procardia XL / Adalat CR (nifedipine) - A once-daily
formulation for the treatment of both angina and hypertension,
marketed by Pfizer in the United States and by Bayer outside the
United States.
Volmax-registered trademark- (albuterol) - A twice-
daily dosage form for the treatment of asthma, marketed by Muro
Pharmaceutical, Inc. and Forest Laboratories, Inc. in the United
States and by Glaxo Holdings p.l.c. outside the United States.
In early 1998, Warner-Lambert Consumer Healthcare ("Warner-
Lambert") introduced the OROS-registered trademark-
pseudoephedrine product, developed by ALZA, as Sudafed-registered
trademark- 24 Hour. The product is marketed by Warner-Lambert in
the United States as part of its Sudafed-registered trademark-
line, pursuant to semi-exclusive rights granted by ALZA. The
product was previously marketed by Novartis under the Efidac-
registered trademark- brand name.
Other products developed by ALZA and marketed by third
parties include the Actisite (tetracycline hydrochloride)
periodontal fiber, designed to treat adult periodontal disease by
providing rate-controlled delivery of tetracycline for ten days
after placement in the periodontal pocket by a dental
practitioner; the Baxter Infusor-registered trademark-, a
lightweight, disposable device for intravenous therapy; and
IVOMEC SR-registered trademark-, a product combining the
antiparasitic agent ivermectin with ALZA's ruminal bolus
technology which controls internal and external parasites in
cattle for an entire grazing season following a single
administration.
International Activities
Outside the United States and Canada, ALZA has arrangements
to market several of its products through distribution
arrangements with companies in designated countries. Actisite
(tetracycline hydrochloride), for the treatment of periodontal
disease, is distributed in several European countries by
distributors, and agreements were signed during 1996 for the
distribution of the product in Japan and South Korea, following
regulatory approval. In December 1996, ALZA signed agreements
with Ferring NV (together with its affiliate, "Ferring") granting
Ferring the right to market Testoderm, Testoderm with Adhesive
and Testoderm TTS in 12 European countries. ALZA has also signed
distribution agreements for 17 Asian countries (excluding Japan)
for Testoderm and Testoderm with Adhesive. In 1997, ALZA entered
into an agreement with SKB for the commercialization by SKB of
the Nicoderm (nicotine) transdermal product developed by ALZA in
all countries of the world except the United States, Canada,
Australia, New Zealand and Korea, where Hoechst Marion Roussel,
Inc. ("HMR") has rights. (The product is marketed in the United
States through a joint venture between SKB and HMR.)
In order to continue the expansion of its international
activities, in 1997 ALZA opened a small office in London for its
subsidiary ALZA International, Inc. ("ALZA International"). This
presence in Europe is intended to help ALZA identify distributors
for ALZA products, to help identify new opportunities for product
development programs combining ALZA technologies with compounds
developed, or under development by, companies in Europe, and to
identify products under development, or marketed in Europe, for
potential acquisition or in-licensing by ALZA for United States
and Canadian marketing.
Also in 1997, ALZA expanded its sales and marketing
activities into Canada when ALZA acquired the United States and
Canadian rights to Elmiron, PolyCitra, BiCitra and Neutra Phos.
ALZA International now has approximately 12 employees (formerly
IVAX employees) located in Canada, marketing Elmiron and
PolyCitra. ALZA International is doing business in Canada as
ALZA Canada.
Disclosed Products in Development
ALZA has many products in development with Crescendo and
other clients. For competitive reasons, ALZA does not disclose
all of the products in development at any particular time.
Products in development include:
OROS oxybutynin - In December 1997, ALZA submitted a
New Drug Application ("NDA") to the FDA requesting clearance to
market a once-daily OROS dosage form of oxybutynin for the
treatment of urge urinary incontinence. The NDA is currently on
file with the FDA. Subject to FDA clearance and assuming ALZA
licenses the product from Crescendo, ALZA plans to market the
product under the tradename Ditropan-registered trademark- XL-
trademark-. The product was initially developed by ALZA and TDC,
and its development has been continued by ALZA and Crescendo.
DUROS-registered trademark- leuprolide - The DUROS
leuprolide product is a small osmotically-driven implantable
system designed to deliver leuprolide continuously for up to 12
months to provide palliative treatment of prostate cancer. The
product is currently in Phase III clinical trials with Crescendo.
OROS methylphenidate - The OROS methylphenidate product
is designed as a once-daily treatment for Attention Deficit
Disorder/Attention Deficit Hyperactivity Disorder. The product
is in Phase II clinical trials with Crescendo.
OROS hydromorphone - The OROS hydromorphone product is
designed as a once-daily dosage form of the opioid analgesic
hydromorphone. The product is in Phase III clinical trials under
ALZA's agreement with Knoll Pharmaceuticals and its parent Knoll
AG (together, "Knoll").
Cereport-trademark- (bradykinin-based receptor-mediated
permeabilizer) - In September 1997, ALZA entered into a clinical
development and option agreement with Alkermes, Inc. ("Alkermes")
relating to Cereport (previously called RMP-7-trademark-) a
compound intended to facilitate the delivery of chemotherapeutic
agents to the brain. Under the agreement, Alkermes is conducting
additional clinical activities related to Cereport, and ALZA has
the option to acquire exclusive worldwide commercialization
rights to the product.
E-TRANS fentanyl (acute pain) - ALZA and Janssen have
entered into a modified agreement pursuant to which the companies
are jointly developing an E-TRANS fentanyl product for the
treatment of acute pain. Under the modified agreement, ALZA paid
Janssen $21.5 million, and ALZA will receive a share of the
United States operating profits from the product and royalties
from sales of the product outside the United States. ALZA will
have the right to co-promote the product in the United States.
The product is currently in Phase III clinical trials.
E-TRANS fentanyl (chronic pain) - ALZA and Crescendo
are developing an E-TRANS fentanyl product for the treatment of
chronic pain. Under an agreement between ALZA and Janssen,
Janssen will have an option, until a specified time, to take over
funding the continued development of the product and to
commercialize the product worldwide. If Janssen exercises its
option, ALZA will receive a share of the United States operating
profits from the product and royalties from sales of the product
outside the United States. ALZA will have the right to co-
promote the product in the United States. If Janssen does not
exercise its option, ALZA may continue the development of the
product with Crescendo. The product is in early development.
E-TRANS LHRH - The E-TRANS LHRH product is designed to
provide a simple, effective treatment of infertility resulting
from ovulation problems. The product is in early development
with Crescendo.
E-TRANS Macroflux-trademark- Insulin - The E-TRANS
Macroflux insulin product combines ALZA's electrotransport
technology and a new skin interface (Macroflux) technology to
deliver insulin for the treatment of Type I and Type II diabetes.
The product is in preclinical development with Crescendo.
Product Development Risks
All pharmaceutical products require extensive development
and clinical activities before an application can be filed for
regulatory clearance to market the product. There are many risks
inherent in this process, and it should be expected that many of
the products for which development is initiated ultimately will
not become commercial products. Substantial technical, financial
and human resources are required to successfully complete the
development of a product.
Product Circumscription - For each new product, the
proper performance characteristics must be defined, and the
product must be designed and developed to meet those
characteristics. Every product faces significant technological
hurdles as it progresses through development, and often one or
more of these cannot be overcome. ALZA's DUROS, E-TRANS and
Macroflux technologies, as well as some of ALZA's oral
technologies, are relatively new, and none of these technologies
has yet been incorporated in a commercial product.
Pilot-Scale Manufacturing - Once a product is
developed, it must be manufactured, on a pilot scale, for
clinical testing. Pilot-scale manufacturing can be costly and
time consuming, and must comply with all of the FDA's regulations
concerning current Good Manufacturing Practices. Several of
ALZA's drug delivery technologies, such as the D-TRANS, DUROS and
E-TRANS technologies, require a series of complex manufacturing
steps. For example, DUROS products require aseptic
manufacturing, which ALZA has initiated in order to manufacture
clinical supplies of the DUROS leuprolide product.
Clinical Studies - Once a product has been successfully
manufactured on a pilot scale, studies to show clinical safety
and efficacy must be undertaken and completed. Clinical studies
are costly, and can take many years to complete. There can be no
assurance that the desired outcomes will be shown in the clinical
studies.
Commercial-Scale Manufacturing - Once a product has
been developed, manufactured on a pilot scale and clinically
tested, there are further risks in converting a pilot-scale
manufacturing process to commercial scale. Due to the complexity
of drug delivery technologies, this conversion can be
significantly more costly than for other pharmaceutical products.
Sometimes manufacturing processes must be modified in order to
achieve successful commercial manufacturing and to obtain a
reproducible, robust process. For products incorporating newer
ALZA technologies, this commercial manufacturing scale-up can
take several years and cost millions of dollars.
Regulatory Risks - Obtaining regulatory clearance to
market a product can take many years, and the process varies from
country to country. Pricing and reimbursement approvals are also
required in some countries, particularly in Europe. Any delay in
the regulatory process could adversely affect the commercial
potential of a product.
ALZA Technologies
ALZA was the pioneer, and is a recognized leader, in the
development of innovative drug delivery technologies. ALZA's
therapeutic systems are designed to provide controlled,
predetermined rates of drug release for extended time periods.
By administering drugs in preset patterns and by alternative
routes, ALZA's advanced dosage forms, called therapeutic systems,
can add to the medical and economic value of drug therapies by
minimizing their unpleasant or harmful side effects, optimizing
their beneficial actions, simplifying drug therapy, and
increasing patient compliance by decreasing the frequency with
which medication must be administered. ALZA's OROS and D-TRANS
drug delivery systems have been incorporated into more than 20
products currently marketed in many countries of the world.
D-TRANS Transdermal Systems. ALZA's D-TRANS transdermal
therapeutic systems provide for the controlled delivery of drugs
directly into the bloodstream through intact skin. Transdermal
systems are well suited for the delivery of potent drugs that are
poorly absorbed and/or extensively metabolized when administered
orally. ALZA's D-TRANS products are thin, multilayer systems, in
the form of small adhesive patches, that combine a drug reservoir
with a polymer membrane or other mechanism to control drug
release to the surface of intact skin, and then through the skin
into the bloodstream.
Oral Systems. ALZA has developed several therapeutic
systems for oral administration. ALZA's OROS systems include the
push-pull, push-stick and elementary osmotic pump systems.
ALZA's OROS products resemble conventional tablets or capsules in
appearance, but use an osmotic mechanism to provide pre-
programmed, controlled drug delivery to the gastrointestinal
tract. An OROS product comprises a polymer membrane with one or
more laser-drilled holes surrounding a core containing the drug
or drugs, with or without osmotic or other agents. Water from the
gastrointestinal tract diffuses through the membrane at a
controlled rate into the drug core, causing the drug to be
released in solution or suspension at a predetermined controlled
rate out of the laser-drilled hole(s). OROS systems are well
suited for delivering drug compounds throughout the
gastrointestinal tract in programmed delivery for local treatment
or systemic absorption.
ALZA's Chronset-registered trademark- therapeutic system,
which may be useful for the oral delivery of compounds including
proteins and peptides, provides a predetermined delay in the
release of active compounds from an orally administered capsule
in order to target the location or the timing of a bolus
delivery. ALZA is also developing a Liquid OROS system designed
for the delivery of highly insoluble liquid drug formulations or
polypeptides. A delivery orifice in the outer layers of a coated
capsule allows controlled release of drug, while an internal
osmotic layer pushes against the drug compartment, forcing the
liquid drug formulation from the system. ALZA has recently
developed its RingCap-trademark- technology, a new oral
controlled-release technology designed to have a low
manufacturing cost and broad applicability. By incorporating
several insoluble polymeric rings around a tablet, the erosion of
the tablet can be controlled, modulating the release of drug in
the gastrointestinal tract. RingCap systems can deliver the
total dose of the selected drug evenly over an extended period.
E-TRANS Systems. ALZA's E-TRANS electrotransport systems
are designed to deliver drugs across intact skin through the use
of an electrical potential gradient. ALZA's E-TRANS systems are
small, easy-to-apply devices consisting of an adhesive, a drug
reservoir, electrodes and a power source/controller. The systems
are designed to deliver large molecules (including proteins and
peptides) and potent drugs that are poorly absorbed or
extensively metabolized in the gastrointestinal tract.
DUROS Systems. ALZA's DUROS human implant technology is
designed to enable the delivery of peptides, proteins and other
bioactive macromolecules developed by the biotechnology industry.
Products incorporating DUROS implant technology have the
potential to deliver macromolecules to subcutaneous sites for
systemic therapy or to specific tissues; a single miniature
implant may be able to provide therapy for up to one year.
Macroflux. ALZA is conducting research on a new skin
interface technology designed to increase drug transport across
the skin and enable delivery of larger molecular weight
compounds, including proteins and peptides. This new technology
may be used to enhance ALZA's existing D-TRANS transdermal and
E-TRANS electrotransport technologies.
Dose Sipping Technology. ALZA has recently developed its
Dose Sipping Technology to provide a simple, convenient method of
oral drug delivery, particularly for pediatric and geriatric
patients. The simple straw-like systems can provide a pre-
measured dose of the desired compound without the difficulties of
swallowing a tablet or capsule.
Technology Development Risks
The development of ALZA's drug delivery systems requires
tens of millions of dollars and many years of research and
development activity. ALZA's systems can be quite complex, with
many different components. There can be no assurance that any
particular system will perform in the same manner when different
therapeutic agents are incorporated into it. Often special
materials must be fabricated for the first time for use in ALZA
drug delivery systems, or materials may be used in the systems in
a manner different from their customary commercial uses.
Precision and reproducibility of materials can be critical to the
performance of a drug delivery system, so a reliable source of a
consistent supply of materials can be critical. Materials needed
by ALZA may be difficult to obtain on commercially reasonable
terms, particularly when relatively small quantities are
required, or if the materials traditionally have not been used in
pharmaceutical products.
Therapeutic Discovery Corporation
In June 1993, ALZA distributed a special dividend of Units
to ALZA stockholders. Each Unit consisted of one share of TDC
Class A Common Stock and one warrant to purchase one-eighth of
one share of ALZA Common Stock. TDC was formed by ALZA for the
purpose of selecting and developing new human pharmaceutical
products combining ALZA's proprietary drug delivery technologies
with various drug compounds, and commercializing such products,
most likely through licensing to ALZA. Prior to the distribution
of Units to stockholders, ALZA contributed $250 million to fund
TDC. ALZA and TDC had a development agreement pursuant to which
ALZA conducted research and development activities on behalf of
TDC. ALZA had an option to license all of the products developed
by TDC, on a product-by-product and country-by-country basis.
ALZA also had an option, exercisable at ALZA's sole
discretion, to purchase, according to a predetermined formula,
all of the outstanding shares of TDC Class A Common Stock. In
September 1997, ALZA exercised its purchase option and paid $100
million in cash for all of the shares of Class A Common Stock of
TDC; TDC is now a wholly-owned subsidiary of ALZA. The ALZA
warrants issued as part of the Units remain outstanding and are
exercisable at a price of $65 per share until December 31, 1999.
See "Crescendo Pharmaceuticals Corporation" below for the
background concerning the formation of TDC.
Crescendo Pharmaceuticals Corporation
In 1993, ALZA determined to pursue the business of
commercialization of products by ALZA, in addition to its
business of developing products for commercialization by client
companies resulting in payments to ALZA based on sales of the
resulting products. To that end, ALZA formed ALZA
Pharmaceuticals, its sales and marketing division, to
commercialize products. In addition, at that time ALZA formed
TDC to develop products for commercialization by ALZA
Pharmaceuticals. ALZA has made significant progress in the
establishment and expansion of its product commercialization
business.
ALZA's growing product commercialization business offers the
potential rewards inherent in the direct commercialization of
pharmaceutical products; however, the development of products for
commercialization by ALZA requires the investment by ALZA of
substantial resources in product selection and development,
including clinical evaluation and regulatory activities. When
ALZA develops products for commercialization by ALZA, ALZA must
bear most or all of the risk and expenses of product development
and has the opportunity to retain all or most of any gross margin
resulting from sales of the product. Therefore, the risk/reward
profile is significantly different from that of ALZA's
traditional client-sponsored/royalty-based business, in which
ALZA's clients bear most of the expenses and risks associated
with product development and commercialization activities, and
make payments to ALZA based on their sales of the products
developed jointly with ALZA. Such payments to ALZA generally
represent a relatively small portion of the total gross margin.
The formation of TDC, and later Crescendo, to fund the
development of products for commercialization by ALZA provides
ALZA with the opportunity to continue to pursue and expand, more
quickly than would otherwise be possible, its product
commercialization business.
In September 1997, ALZA contributed $300 million to
Crescendo and distributed the shares of Class A Common Stock of
Crescendo (the "Crescendo Shares") to ALZA's stockholders and
debenture holders. Crescendo was formed by ALZA for the purpose
of selecting and developing human pharmaceutical products and
commercializing such products, most likely through licensing to
ALZA. The products may, but are not required to, incorporate
ALZA drug delivery technologies.
ALZA and Crescendo have entered into a Development Agreement
(the "Development Agreement") pursuant to which ALZA conducts
product development and related activities on behalf of Crescendo
under work plans and cost estimates which have been proposed by
ALZA and approved by Crescendo. Development Costs are billed to
Crescendo on a product by product basis under terms consistent
with arrangements with other client companies. Crescendo is
required to spend all of the funds contributed to Crescendo, plus
interest earned thereon, less Crescendo's reasonable
administrative costs, the Technology Fee (described below) paid
to ALZA, and reserves of up to $2 million (the "Available
Funds"), to conduct activities under the Development Agreement.
Under the Development Agreement, Crescendo agreed to fund the
development of seven products (the "Initial Products"), the
development of which was commenced by ALZA and TDC, from August
25, 1997, the date on which TDC ceased funding such products,
through October 31, 1997. Continuation of development of the
Initial Products after October 31, 1997 was subject to ALZA
proposing, and Crescendo's Board of Directors accepting, work
plans and cost estimates for the products. As of the date
hereof, five of the seven Initial Products are continuing in
active development. The five Initial Products currently in
active development are:
OROS oxybutynin (Ditropan XL)
DUROS leuprolide
OROS methylphenidate
E-TRANS Macroflux insulin
E-TRANS LHRH
Two of the Initial Products (the IUTS progesterone and D-TRANS
testosterone matrix products), are no longer under active
development. Crescendo ceased funding the development of these
products on ALZA's recommendation. Crescendo makes the
determination, independent of ALZA, as to whether or not
Crescendo will continue the funding of any particular product.
ALZA may make recommendations to Crescendo as to the continuation
(or discontinuation) of the development of a particular product,
but Crescendo has no obligation to follow ALZA's recommendation.
ALZA and Crescendo have entered into a Technology License
Agreement pursuant to which ALZA has granted to Crescendo a
worldwide license to use ALZA technology solely to select and
develop Crescendo products, to conduct related activities, and to
commercialize such products. In exchange for the license to use
existing ALZA technology relating to the Initial Products,
Crescendo pays ALZA a Technology Fee, payable monthly over a
period of three years, in the amount of $1 million per month for
the first 12 months following the distribution of Crescendo
Shares, $667,000 per month for the following 12 months and
$333,000 per month for the next 12 months. The Technology Fee
will no longer be payable at such time as fewer than two of the
Initial Products are being developed by Crescendo and/or have
been licensed by ALZA pursuant to the license option described
below.
In the License Option Agreement (the "License Option
Agreement") entered into by ALZA and Crescendo, Crescendo has
granted ALZA an option to acquire a license to each product
developed under the Development Agreement, including the Initial
Products. The license option for any such Crescendo product is
exercisable on a country-by-country basis at any time until (i)
with respect to the United States, 30 days after clearance by the
FDA to market such Crescendo product in the United States and
(ii) with respect to any other country, 90 days after the earlier
of (a) clearance by the appropriate regulatory agency to market
the Crescendo product in such country and (b) clearance by the
FDA to market the Crescendo product in the United States. The
license option will expire, to the extent not previously
exercised, 30 days after the expiration of ALZA's option to
purchase all of the outstanding Crescendo Shares, described
below. If and to the extent the license option is exercised as to
any Crescendo product, ALZA will acquire a perpetual, exclusive
license (with the right to sublicense) to develop, make, have
made and use the licensed product, and to sell and have sold the
licensed product in the country or countries as to which the
license option is exercised.
Under the License Agreement for each licensed product, a
form of which is attached to the License Option Agreement (a
"License Agreement"), ALZA will make payments to Crescendo with
respect to the licensed product equal to 1% of net sales of the
licensed product by ALZA and its sublicensees, distributors and
marketing partners, plus an additional 0.1% of such net sales for
each full $1 million of development costs of the licensed product
that have been paid by Crescendo; provided, however, that such
total payments will not exceed 2.5% of net sales in the first
four quarters a licensed product is sold in a major market
country, and will not exceed 3% for the following two years.
ALZA has the right to buy out Crescendo's right to receive
payments for licensed products on a country-by-country or global
basis. A country-by-country buy-out option may be exercised for
any Crescendo product in any country at any time after the end of
the twelfth calendar quarter during which the product was
commercially sold in such country. The buy-out price will be 15
times the payments made by or due from ALZA to Crescendo with
respect to sales of such product in such country for the four
calendar quarters immediately preceding the quarter in which the
buy-out option is exercised (plus 15 times such additional
product payments as would have been made by ALZA to Crescendo for
such period but for the 2.5% and 3% limits described above.) The
global buy-out option may be exercised for any Crescendo product,
at any time after the end of the twelfth calendar quarter during
which the product was commercially sold in either the United
States or two other major market countries. The global buy-out
price will be (i) 20 times (a) the payments made by or due from
ALZA to Crescendo for the relevant product, plus (b) such
payments as would have been made by or due from ALZA to Crescendo
if ALZA had not exercised any country-specific buy-out option
with respect to such product, plus (c) such additional product
payments as would have been made by ALZA to Crescendo but for the
2.5% and 3% limits described above, in each case for the four
calendar quarters immediately preceding the quarter in which the
global buy-out option is exercised, less (ii) any amounts
previously paid to exercise any country-specific buy-out option
with respect to such product.
Pursuant to Crescendo's Restated Certificate of
Incorporation, ALZA has the right to purchase all (but not less
than all) of the Crescendo Shares (the "Purchase Option"). The
Purchase Option will be exercisable by written notice to
Crescendo at any time until January 31, 2002, provided that such
date will be extended for successive six month periods if, as of
any July 31 or January 31 beginning with July 31, 2001, Crescendo
has not paid (or accrued expenses for) at least 95% of Available
Funds pursuant to the Development Agreement. In any event, the
Purchase Option will terminate on the 60th day after Crescendo
provides ALZA with a statement that, as of the end of any
calendar month, there are less than $2.5 million of Available
Funds remaining, accompanied by a report of Crescendo's
independent auditors.
If the Purchase Option is exercised, the exercise price will
be the greatest of:
(a)(i) 25 times the actual payments made by or due from ALZA
to Crescendo under the Development Agreement and the License
Agreement with respect to any product (and, in addition, such
payments as would have been made by or due from ALZA to Crescendo
if ALZA had not previously exercised its payment buy-out option
with respect to any such payments) for the four calendar quarters
immediately preceding the quarter in which the Purchase Option is
exercised (provided, however, that for any product which has not
been commercially sold during each of such four calendar
quarters, the portion of the exercise price for such product will
be 100 times the average of the quarterly payments made by or due
from ALZA to Crescendo for each of such calendar quarters during
which such product was commercially sold) less (ii) any amounts
previously paid to exercise any payment buy-out option;
(b) the fair market value of one million shares of ALZA
Common Stock;
(c) $325 million less all amounts paid by or due from
Crescendo under the Development Agreement to the date the
Purchase Option is exercised; and
(d) $100 million.
In each case, the amount payable as the Purchase Option
exercise price will be reduced to the extent, if any, that
Crescendo's liabilities at the time of exercise (other than
liabilities under the Development Agreement, the Technology
License Agreement and the Services Agreement, described below)
exceed Crescendo's cash and cash equivalents and short-term and
long-term investments (excluding the amount of Available Funds
remaining at such time). ALZA may pay the exercise price in cash,
in ALZA Common Stock or in any combination of cash and ALZA
Common Stock.
ALZA and Crescendo have entered into a Services Agreement
pursuant to which ALZA has agreed to provide Crescendo with
administrative services, including accounting and legal services,
on a fully-burdened cost reimbursement basis. The Services
Agreement has a one year term and will be renewed automatically
for successive one year terms during the term of the Development
Agreement unless terminated by Crescendo at any time upon 60
days' written notice.
Crescendo has a six person Board of Directors, none of whom
is affiliated with ALZA, with many years of experience in
different aspects of the pharmaceutical industry. Crescendo has
a Chief Executive Officer (who is also a director) with more than
30 years of pharmaceutical industry experience, who is the sole
employee of Crescendo. The Crescendo Board of Directors meets
frequently, and reviews in detail all of the activities conducted
by ALZA under the Development Agreement. The Chief Executive
Officer of Crescendo holds regular meetings with the leaders of
the ALZA development teams working on Crescendo products and
provides advice to them on an ongoing basis, as well as providing
regular reports to the Crescendo Board of Directors. Crescendo
approves or disapproves all work plans and cost estimates
proposed by ALZA for activities with respect to Crescendo
products. Crescendo makes the determination as to whether a
product will initially be accepted as a product, and the amount
of Crescendo funding to be allocated for the development of the
product. Work plans are generally approved by Crescendo on a
milestone basis - once a milestone is achieved, Crescendo reviews
the program and the proposed work plan and cost estimate for the
next stage of development to determine whether to continue
funding the product.
ALZA may not continue the development of a product with
Crescendo funding unless the work plan is approved by the
Crescendo Board. If Crescendo determines to stop funding the
development of a product, which decision is in Crescendo's sole
discretion, the product remains a Crescendo product and
development cannot continue, unless ALZA exercises its license
option for the product. Crescendo funding and product decisions
are made by the Crescendo Board of Directors without any ALZA
participation.
ALZA performs, or engages subcontractors such as clinical
investigators, contract research organizations (for clinical
studies) an analytical laboratories to perform the activities
under work plans approved by Crescendo. ALZA charges Crescendo
for these activities pursuant to a formula set forth in the
Development Agreement, which formula is intended to reimburse
ALZA for its fully-burdened costs of performing the activities.
Amounts paid to third parties are billed to Crescendo at cost,
with no mark-up by ALZA. The formula under which ALZA charges
Crescendo for activities under the Development Agreement is the
same formula used by ALZA in charging its pharmaceutical company
clients under ALZA's product development arrangements with them.
As discussed above, the formation of Crescendo (and
previously, TDC) has enabled ALZA to pursue the development of
products for commercialization by ALZA more quickly than
otherwise would have been possible. Had ALZA not formed
Crescendo (or TDC), any research and development activities that
ALZA might nonetheless have decided to undertake would have been
research and development expenses of ALZA, without corresponding
research revenues. Under those circumstances, ALZA might have
determined not to proceed as rapidly with the development of
products for commercialization by ALZA Pharmaceuticals, or could
have reduced the number of such products, because of the
potentially negative impact on ALZA's operating profits.
ALZA TTS Research Partners, Ltd.
ALZA developed the Duragesic product and the original
Testoderm product on behalf of ALZA TTS Research Partners, Ltd.
(the "Transdermal Partnership"), a limited partnership funded in
1983 from which ALZA licensed those products. The Transdermal
Partnership receives payments from ALZA equal to 4% of Janssen's
sales of Duragesic and 4% of ALZA's sales of Testoderm and
Testoderm with Adhesive. The Transdermal Partnership did not
fund the development of, and will not receive payments on sales
of, Testoderm TTS.
ALZA's license from the Transdermal Partnership for
Testoderm will become nonexclusive on July 26, 1998, and ALZA's
license from the Transdermal Partnership for Duragesic will
become nonexclusive on December 4, 1998. Once ALZA's licenses
become nonexclusive, the Transdermal Partnership will need to
determine whether to grant nonexclusive licenses to third
parties. Under ALZA's distribution agreement with Janssen for
the Duragesic product, if ALZA's license from the Transdermal
Partnership becomes nonexclusive, if the Transdermal Partnership
licenses the product to a third party and if the third party
introduces the product, Janssen's royalty payable to ALZA will
drop significantly; however, ALZA will continue to owe the
Transdermal Partnership 4% of Janssen's net sales. ALZA has an
option to purchase all of the interests in the Transdermal
Partnership for $120 million cash, less amounts paid by ALZA to
the Transdermal Partnership under its licenses prior to the date
the option is exercised. As of December 31, 1997, ALZA had paid
the Transdermal Partnership $27.3 million under these licenses.
Research and Development Expenditures
ALZA spent $126.3 million on client-sponsored product
development activities during 1997 ($114.8 million and $85.8
million in 1996 and 1995, respectively); such amounts exclude
reimbursable general and administrative costs. ALZA spent
$30.6 million on ALZA-sponsored research and development
activities during 1997 ($26.8 million and $17.6 million in 1996
and 1995, respectively), also excluding allocable general and
administrative costs. Research and development costs are
expensed as incurred. ALZA had research and development revenue
of $135.0 million during 1997, $131.2 million during 1996 and
$104.0 million during 1995, from clients with which ALZA has
joint product development agreements. These amounts included
$67.8 million from TDC and $29.7 million from Crescendo in 1997,
and $100.7 million and $70.1 million from TDC in 1996 and 1995,
respectively. The payments by TDC and Crescendo were made from
funds contributed by ALZA to TDC and Crescendo at the time of
their respective formation. ALZA's client-sponsored research and
development revenue generally represents clients' reimbursement
of costs, including a portion of general and administrative
expenses. Therefore, product development activities do not
contribute significantly to operating results.
Governmental Regulation
Under the United States Food, Drug and Cosmetic Act, "new
drugs" must obtain clearance from the FDA before they lawfully
can be marketed in the United States. Applications for marketing
clearance must be based on extensive clinical and other testing,
the cost of which is very substantial. Approvals (sometimes
including pricing approvals) are required from health regulatory
authorities in foreign countries before marketing of
pharmaceutical products may commence in those countries.
Requirements for approval may differ from country to country, and
can involve additional testing. There can be substantial delays
in obtaining required clearances from both the FDA and foreign
regulatory authorities after applications are filed. Even after
clearances are obtained, further delays may be encountered before
the products become commercially available in countries requiring
pricing approvals.
Product development generally involves all of the following
steps which are required by the regulatory process:
preclinical development and testing, during which
laboratory development and in vitro and in vivo testing takes
place;
submission to the FDA of an investigational new drug
application, which must become effective before human clinical
studies may begin;
adequate and well-controlled human clinical trials
(Phase I, II and III studies) to establish the safety and
efficacy of the product;
submission of an NDA to the FDA (and comparable filings
to regulatory agencies outside the United States) requesting
clearance to market the product; and
the FDA (and foreign regulatory agencies) must clear
the product for marketing.
All of these steps can take several years and cost tens of
millions of dollars.
The products sold by ALZA and its client companies in the
United States, and/or exported to other countries, are subject to
extensive regulation by the FDA and comparable agencies in other
countries where the products are distributed. Regulations govern
a range of activities including manufacturing, quality assurance,
advertising and record-keeping. The continuing trend of stringent
FDA oversight in product clearance and enforcement has caused
more uncertainty, greater risks and higher costs of obtaining
clearance to market a product, and sometimes longer clearance
cycles. Failure to obtain, or delays in obtaining, regulatory
clearance to market new products, as well as other regulatory
actions and recalls, could adversely affect ALZA's financial
results.
The packaging, labeling and advertising of pharmaceutical
products are also subject to government regulation. The FDA
recommends preclearing advertising materials prior to the launch
of a product, and the launch materials for products receiving an
accelerated FDA clearance must be precleared by the FDA. With an
accelerated FDA clearance (such as was obtained by USB for
Ethyol), all labeling and advertising must be submitted to the
FDA 30 days prior to use, unless the FDA determines otherwise.
In addition, the FDA may require that additional clinical studies-
Phase IV studies-be completed after clearance to market a product
has been granted. If these studies are not completed, or if the
expected outcomes are not achieved, a product could be withdrawn
from the market.
Manufacturing
ALZA manufactures products marketed by its client companies,
and certain products marketed by ALZA, in ALZA's Vacaville,
California commercial manufacturing facility. The Vacaville
facility is the sole manufacturing site for several products,
although some lower-volume products are manufactured in ALZA's
Mountain View and Palo Alto, California research and development
facilities. These facilities were not designed for high volume
commercial manufacturing.
The products acquired and in-licensed by ALZA are
manufactured by the third parties from whom ALZA acquired or
in-licensed the products. Generally these products are also
manufactured at only one site. A shut down in one of these
facilities, or in ALZA's Vacaville facility, resulting in an
interruption in supply of one or more of the products, could have
an adverse impact on ALZA's financial results.
Some of the critical materials and components used in
ALZA's products are sourced from one single supplier. An
interruption in supply from a vendor of a key material could
significantly delay the manufacturing of one or more ALZA
products. Because the vendors of key components and materials
must be named in the NDA for the relevant product, significant
delays can occur if the qualification of a new vendor is
required. Significant delays or an interruption in product
supply could occur if a supplement to the NDA must be filed and
approved before materials obtained from the new vendor can be
used to manufacture a product.
The manufacturing process for pharmaceutical products is
highly regulated. Periodic inspections are conducted by the FDA
and regulatory agencies from other countries. The FDA's current
Good Manufacturing Practices are extensive regulations governing
the manufacturing process, stability testing, record-keeping and
quality standards. Similar, but not identical, regulations are
in effect in other countries. The cost of complying with these
regulations is substantial.
Environmental regulations may also affect the manufacturing
process. As a pharmaceutical company, ALZA uses chemicals and
materials which may be classified as hazardous or toxic, and
which require special handling and disposal. ALZA undertakes to
minimize releases to the environment and exposure of its
employees and the public to such materials. The costs of these
activities have increased substantially in recent years, and it
is possible that such costs may continue to increase
significantly in the future.
Patents and Patent Applications
As of December 31, 1997, ALZA held approximately 540 United
States patents and had approximately 200 pending United States
patent applications relating to its products and other
technologies. ALZA has in excess of 1,500 foreign patents and
770 pending foreign patent applications covering its various
technologies and products. Patents have been issued, or are
expected to be issued, covering ALZA's current technologies and
products, as well as technologies and products under development.
Patent protection generally has been important in the
pharmaceutical industry. ALZA believes that its current patents,
and patents that may be obtained in the future, are important to
current and future operations. ALZA technologies and products
are generally covered by multiple patents. However, there can be
no assurance that ALZA's existing patents will cover future
products, that additional patents will be issued, or that any
patents now or hereafter issued will be of commercial benefit.
In the United States, patents are granted for specified
periods of time. Some of ALZA's earlier patents covering various
aspects of certain OROS and D-TRANS dosage forms have expired, or
will expire, over the next several years.
In 2003, certain significant ALZA patents are due to expire
that relate to ALZA's OROS systems and the Procardia XL
(nifedipine) product developed by ALZA and marketed by Pfizer
(which uses the OROS delivery system). Other forms of sustained
release nifedipine using different delivery systems are reported
to be in various stages of development by other companies, and
two companies (Mylan Laboratories, Inc. and Biovail, Inc.) have
filed Abbreviated New Drug Applications ("ANDAs") with the FDA
requesting clearance to market generic sustained release
nifedipine products. Pfizer has filed suit against Mylan for
infringement of a patent relating to nifedipine particles, and is
also involved in litigation with the FDA and Mylan concerning the
regulatory status of Mylan's product. The Biovail application
was filed in late February 1998, and ALZA and Pfizer are
reviewing information concerning the Biovail product to determine
what actions may be taken. 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.
ALZA commercializes several products it has acquired or
in-licensed from third parties. The extent to which such
products are protected by patent rights varies significantly from
product to product. Ditropan and Mycelex Troche have been sold
for many years and are not covered by patents. The chemical
compounds constituting the active ingredients of Ethyol and
Elmiron are not covered by patents. However, patents have issued
or are pending relating to significant developments in uses and
the formulation of Ethyol, and for certain uses of Elmiron. ALZA
anticipates that additional patents may issue relating to these
products; however, there can be no assurance that any such patent
coverage will be obtained, or if obtained will provide
significant proprietary protection for the products.
Although a patent has a statutory presumption of validity in
the United States, the issuance of a patent is not conclusive as
to such validity or as to the enforceable scope of the claims of
the patent. There can be no assurance that patents of ALZA will
not be successfully challenged in the future. In some cases,
third parties have initiated reexamination by the Patent and
Trademark Office of patents issued to ALZA, and have opposed ALZA
patents in other jurisdictions. The validity or enforceability
of ALZA patents after their issuance have also been challenged in
litigation. If the outcome of such litigation is adverse to
ALZA, third parties may then be able to use the invention covered
by the patent, in some cases without payment. There can be no
assurance that ALZA patents will not be infringed or successfully
avoided through design innovation.
It is also possible that third parties may obtain patent or
other proprietary rights that may be necessary or useful to ALZA.
With numerous other companies engaged in developing new chemical
entities and competitive drug delivery technologies, it can be
expected that other parties may in some circumstances file patent
applications or obtain patents that compete in priority with
ALZA's patent applications. Such competition may result in
adversarial proceedings such as patent interferences and
oppositions, which can increase the uncertainty of patent
coverage. In cases where third parties are first to invent a
particular product or technology, it is possible that those
parties will obtain patents that will be sufficiently broad so as
to prevent ALZA from using certain technology or from further
developing or commercializing certain products. As ALZA expands
its direct marketing of products, ALZA may attempt to in-license
additional products, or compounds or technologies for use in
products. In each of these cases, if licenses from third parties
are necessary but cannot be obtained, commercialization of the
products would be delayed or prevented.
In addition, ALZA utilizes significant unpatented
proprietary technology, and there can be no assurance that others
will not develop similar technology.
Competition
It can be expected that all or most of the products
commercialized by ALZA will face competition at the time of
introduction, or later in their life cycles, from different
chemical or other agents intended for treatment of the same
indications. All of ALZA's current and future drug delivery
products are likely to face competition both from traditional
forms of drug delivery and from advanced delivery systems being
developed by others. ALZA's competition potentially includes all
of the pharmaceutical companies in the world, including current
ALZA clients. Many of these pharmaceutical companies have
greater financial resources, technical staff and manufacturing
and marketing capabilities than ALZA. A large number of companies
are developing drug delivery technologies. To the extent that
ALZA develops or markets products incorporating drugs that are
off-patent, or are being developed by multiple companies, ALZA
will face competition from other companies developing and
marketing similar products.
As the pharmaceutical industry continues to consolidate, and
as pressures increase for cost-effective research and
development, some pharmaceutical companies have reduced, and may
continue to reduce, their funding of research and development.
Competition for limited client dollars may therefore increase,
and this competition could include the clients' internal research
and development programs, other drug delivery programs and other
technologies and products of third parties. Similarly, as
pharmaceutical companies search to fill gaps in their product
pipelines with in-licensed or acquired products, ALZA will be
competing for product in-licensing and acquisition opportunities
with companies with far greater financial and other resources
than ALZA.
Competition among pharmaceutical products is generally based
on performance characteristics and price. Acceptance by
hospitals, physicians and patients is crucial to the success of a
product. Health care reimbursement policies of managed care
organizations, insurers and government agencies will continue to
exert pressure on pricing, and various federal and state agencies
have enacted regulations requiring rebates of a portion of the
purchase price of many pharmaceutical products. Cost-
effectiveness, although often difficult to measure, is becoming
increasingly critical to the commercial success of a new product.
A major challenge faced by ALZA and other pharmaceutical
companies is competition from generic pharmaceutical
manufacturers. Generic competitors generally are able to obtain
regulatory approval for off-patent drugs without investing in
costly and time-consuming clinical trials, and need only
demonstrate bioequivalence to the drug they wish to copy.
Because of their substantially reduced development costs, generic
companies are often able to charge much lower prices for their
products than the originator of a new product. A number of ALZA-
developed products incorporate chemical entities that are not
covered by patents. These products therefore may be subject to
potential generic competition to the extent that competitors can
demonstrate bioequivalence without infringing ALZA patents
relating to its drug delivery technologies. Two companies have
filed ANDAs with the FDA requesting clearance to market generic
versions of Procardia XL (see "Patents and Patent Applications"
above).
The health care industry has continued to change rapidly as
the public, government, medical practitioners and the
pharmaceutical industry focus on ways to expand medical coverage
while controlling the growth in health care costs. The growth of
managed care organizations and the resulting pressures for
cost-containment in the United States health care system are
expected to continue to put pressures on the prices charged for
pharmaceutical products. Prescription drug reimbursement
practices and the growth of large managed care organizations, as
well as generic and therapeutic substitution (substitution of a
different product for the same indication), will significantly
affect ALZA's business. While ALZA believes the changing health
care environment may increase the value of ALZA's drug delivery
products over the long term, it is impossible to predict
accurately the impact these changes may have on ALZA.
Revenues
In 1997, ALZA received royalty revenue based on sales of
approximately 16 products. Sales of Procardia XL in the United
States by Pfizer accounted for approximately 29% of ALZA's
royalties and fees in 1997 (approximately 40% in 1996 and more
than 40% in 1995). ALZA's net sales in 1997 consisted of direct
sales of products in the marketplace and sales to client
companies of products manufactured by ALZA. ALZA's net sales of
ALZA-marketed products were approximately $52.9 million in 1997.
Research and development revenues consist of reimbursement by
client companies, including Crescendo (and previously, TDC), of
research and development expenses incurred by ALZA in developing
products on behalf of the client companies.
Information about ALZA's revenues is presented below:
1997 1996 1995
(in millions)
Royalties, fees and other $ 183.3 173.3 $ 143.7
Net sales 146.1 108.6 76.9
Research and development 135.0 131.2 104.0
Total revenues $ 464.4 $ 413.1 $ 324.6
Pfizer accounted for 17% of ALZA's total revenues in 1997,
22% in 1996, and 26% in 1995; TDC accounted for 15% of ALZA's
total revenues in 1997, 24% in 1996, and 22% in 1995; Janssen
accounted for 15% of ALZA's total revenues in 1997, 14% in 1996,
and 13% in 1995; and HMRI accounted for 10% of ALZA's total
revenues in 1997, and 11% in both 1996 and 1995. The loss of
revenues from one or more of these clients would have a material
adverse effect on ALZA's profitability.
Product Returns; Payment Terms
For products marketed by ALZA, payment terms are generally
net 30 days. From time to time, ALZA has extended its customary
payment terms, for example in the case of new product
introduction and in anticipation of a holiday shut down. ALZA
generally accepts returns of unopened product for full credit.
Industry Segments; Exports
ALZA's business comprises one industry segment. Export
sales were $31.5 million in 1997, $23.0 million in 1996, and
$20.1 million in 1995, principally to distributors and client
companies in Europe.
Employees
On December 31, 1997, ALZA had 1,532 employees, of whom
approximately 670 were engaged in research and development
activities, approximately 493 were engaged in manufacturing
activities, approximately 126 were engaged in sales and marketing
activities and the remainder were working in general and
administrative areas.
Item 2. PROPERTIES
ALZA's corporate offices are located in Palo Alto,
California, and its two primary research and development campuses
are in Palo Alto and Mountain View, California. Most of the
facilities in Palo Alto are held under prepaid ground leases from
Stanford University expiring in approximately 17 to 60 years.
One Palo Alto facility is subleased to ALZA; there are three
years remaining on the sublease and ALZA has an option for an
additional three years. ALZA owns all of its significant
Mountain View facilities, except as described below. ALZA also
occupies a research facility in Spring Lake Park, Minnesota which
is leased from a third party until the year 2000.
ALZA's large-scale commercial manufacturing facility, which
is owned by ALZA, is located in Vacaville, California. Some
smaller scale manufacturing also takes place in the Palo Alto and
Mountain View facilities. While ALZA believes that its facilities
and equipment are sufficient to meet its current operating
requirements, ALZA is actively planning to expand its facilities
and equipment to support its long-term requirements, in
particular in Mountain View, California.
In late 1997, ALZA acquired a 50% interest in a real estate
joint venture, formed as a limited liability company, for the
development of a 13-acre parcel of land in Mountain View,
California. ALZA invested $36.2 million in the joint venture,
which will be applied to the construction of three buildings on
the parcel. ALZA is also obligated to make improvements to the
buildings, the total cost of which is estimated to be between
$60.0 million and $100.0 million. The joint venture will lease
the buildings to ALZA upon completion of construction. The lease
payments due on the Mountain View facility, which begin in May
1999, are based upon the final square footage of the buildings
(which is estimated to be approximately 120,000 square feet per
building). Those lease payments are currently estimated to be
approximately $225,000 per month per building for the first year
and escalate $0.05 per square foot per year for the remainder of
the initial term of the lease. ALZA currently plans to occupy
two of the buildings upon completion, and sublease the third
building for several years. The leases provide for an initial
term of 15 years, with options to extend for approximately 20
additional years, and with scheduled annual rent increases during
the extended term based upon the Consumer Price Index. ALZA will
receive 50% of the joint venture's income (rent less management
fees).
ALZA has also entered into a ground lease agreement for an
adjacent seven-acre parcel of land on which it plans to construct
a pilot plant, laboratories and other technical facilities. The
term of the ground lease is approximately 33 years and includes
options for ALZA to purchase, or to be required to purchase, the
property. Groundlease payments are approximately $140,000 per
month. Under the groundlease for the seven-acre parcel, ALZA's
option to acquire the property may be exercised at any time after
August 31, 2000 and prior to expiration of the lease, and the
landlord may exercise its option to sell the property to ALZA at
any time before August 31, 2000. For a purchase on or before
September 30, 2002, the purchase price is approximately $17
million; thereafter the purchase price is adjusted for inflation.
If neither ALZA nor the landlord exercises its option, then any
improvements constructed by ALZA on the parcel would be the
property of the landlord on termination of the lease.
Item 3. 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.
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 near ALZA's Palo Alto facilities. The purpose of the
DTSC action is, in part, to apportion responsibility for cleanup
costs among the parties involved. Estimates of cleanup costs for
the entire region are approximately $16 million. ALZA believes
that it did not discharge any of the chemicals of concern at the
site in question. ALZA does not believe that its liability in
this matter, if any, will be material. However, the courts have
not determined whether individual parties may be jointly and
severally liable in such matters. Because the action involves
many parties and multiple regulatory authorities, and the cleanup
and allocation of financial responsibility may not be resolved
for several years, it is impossible to predict the timing or
amount of ALZA's potential liability.
Historically, the cost of resolution of 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
None.
EXECUTIVE OFFICERS OF THE REGISTRANT
Principal Occupations for
Name Age Past Five Years
Dr. Ernest Mario 59 Chairman of the
Board and Chief Executive
Officer of ALZA (since
1993); Chief Executive of
Glaxo Holdings, p.l.c.,
a pharmaceutical company
(1989-1993).
Dr. Felix Theeuwes 60 President, New
Ventures of ALZA (since
1997) and Chief Scientist
(since 1982); President,
Research and Development
(1995-1997); President,
ATI (1994-1995);
Executive Vice President,
Research and Development
(1991-1994).
James Butler 57 Senior Vice President,
Sales and Marketing of
ALZA (since 1997); Vice
President, Sales and Marketing
(1993-1996); Vice President
and General Manager of the
corporate division of Glaxo,
Inc., a pharmaceutical company
(1987-1993).
Bruce C. Cozadd 34 Senior Vice President and Chief
Financial Officer of ALZA
(since 1997); Vice President
and Chief Financial Officer
(1994-1996); Vice President,
Corporate Planning and Analysis
(1993); Manager, Strategic
Projects (1991-1993).
Harold Fethe 53 Vice President, Human Resources
of ALZA (since 1991).
Dr. Gary V. Fulscher 54 Senior Vice President, Commercial
Services of ALZA (since 1998);
Senior Vice President, Operations
(1994-1997); Vice President,
Administration (1987-1994).
Dr. Samuel R. Saks 43 Senior Vice President,
Medical Affairs of ALZA
(since 1994); Vice President,
Medical Affairs (1992-1994); Vice
President, Clinical Research,
Oncology, Schering Plough
Corporation, a pharmaceutical
company(1991-1992).
Peter D. Staple 46 Senior Vice President and
General Counsel of ALZA (since
1997); Vice President and
General Counsel (1994-
1996); Vice President and
Associate General Counsel
of Chiron Corporation,
a biotechnology company
(1992-1994).
Janne Wissel 42 Senior Vice President,
Operations of ALZA (since 1998);
Vice President Regulatory and
Quality Management(1995
to 1997); Vice President,
Quality Management (1994-1995);
Senior Director, Regulatory
Affairs (1993 to 1994).
Dr. James W. Young 53 Senior Vice President, Research
and Development of ALZA
(since 1997); Senior Vice
President, Commercial Development
(1995-1997); Vice President and
Managing Director of ALZA
Technology Institute (June 1995-
September 1995); President,
Pharmaceuticals Division, Affymax
N.V., a biotechnology company
(1992-1995).
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
ALZA common stock (symbol AZA) is listed for trading on the
New York Stock Exchange and, as of December 31, 1997, there were
8,242 holders of record. ALZA has never paid cash dividends on
its common stock and has no plan to do so in the near term. The
quarterly high and low sales prices of ALZA common stock for 1997
and 1996, as reported on the composite tape are shown below:
ALZA COMMON STOCK
_________________________________________________________________
1997 1996
_________________________________________________________________
High Low High Low
First quarter $31 3/8 $24 7/8 $34 7/8 $24 3/8
Second quarter 31 3/8 25 1/2 32 1/2 26 3/8
Third quarter 32 1/2 28 1/16 27 3/4 24
Fourth quarter 31 13/16 24 7/8 29 25 1/8
Item 6. SELECTED FINANCIAL DATA
(In millions, except per share amounts)
1997 1996 1995 1994 1993
__________________________________________________________________
Total revenues $ 464.4 $413.1 $324.6 $ 261.2 $ 214.6
Net income (loss) (261.1)(1) 92.4 72.4 58.1 45.6(2)
Earnings (loss)
per share,
Basic (3.07) 1.10 0.88 0.71 0.59
Diluted (3.07) 1.08 0.88 0.71 0.57
Cash and investments 535.8 999.8 419.1 344.9 257.5(3)
Total assets 1,369.2 1,613.7 937.2 806.3 621.8(3)
Total long-term
liabilities 963.4 949.8 414.7 385.8 29.0(4)
Total stockholders'
equity 301.2 596.7 454.6 364.5 306.7(3)
__________________________________________________________________
1 Reflects a total of $368.7 million (or $4.30 per share,
diluted) of charges, including a $247.0 million charge and
$8.0 million of interest expense related to ALZA's
distribution of shares of Crescendo, $108.5 million for
acquired in-process research and development, an asset write-
down of $11.5 million and costs of $1.8 million related to a
workforce reduction, less a tax benefit of $8.1 million.
2 Includes pre-tax charges and allowances of $28.1 million
($0.23 per share, diluted) related primarily to manufacturing
activities. Also includes $6.6 million ($0.08 per share,
diluted) in one-time benefits resulting from the adoption of
SFAS No. 109, "Accounting for Income Taxes", and a $3.8
million ($0.05 per share, diluted) extraordinary charge
relating to the redemption of ALZA's 7 1/2% zero coupon
convertible subordinated debentures.
3 Includes the effect of the $250.0 million contribution to
Therapeutic Discovery Corporation and the related special
dividend of shares of Therapeutic Discovery Corporation to
ALZA stockholders.
4 Approximately $249.5 million of commercial paper (including
accrued interest) was outstanding.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
1997 EVENTS
The following 1997 events are important to understanding the
business and operating results of ALZA Corporation ("ALZA" or the
"Company"). In 1997, ALZA:
Purchased the Class A Common Stock of Therapeutic Discovery
Corporation ("TDC") for $100.0 million. The purchase resulted in
a charge of $77.0 million to acquisition of in-process research
and development. Approximately $23.0 million of the purchase
price was allocated to a deferred tax asset arising from TDC's
net operating loss carryforward and capitalized research and
development expense.
Contributed $300.0 million to Crescendo Pharmaceuticals
Corporation ("Crescendo") and distributed its shares to ALZA
stockholders and debenture holders. ALZA recorded a charge of
$247.0 million (including expenses of $4.0 million) and interest
expense of $8.0 million related to ALZA's contribution to
Crescendo and the distribution to stockholders and debenture
holders, respectively. ALZA also recorded a dividend of $49.1
million to ALZA stockholders in connection with the distribution
of the Crescendo Shares.
Acquired exclusive rights to Mycelex-registered trademark-
(clotrimazole) Troche in the United States from Bayer Corporation
("Bayer"). Under the terms of the agreement, ALZA made a $50.0
million upfront payment to Bayer, which was capitalized, and will
make an additional payment if net sales of the product during a
certain period are above a specified level. Bayer manufactures
Mycelex-registered trademark- Troche for ALZA, and receives
payments from ALZA based on sales of the product.
Acquired the exclusive rights in the United States and
Canada to Elmiron-registered trademark- (pentosan polysulfate
sodium) and three additional urology products, BiCitra-registered
trademark-(sodium citrate and citric acid), PolyCitra-registered
trademark-(potassium citrate) and Neutra-Phos-registered
trademark-(potassium and sodium phosphate), from Baker Norton
Pharmaceuticals, Inc. and its parent, IVAX Corporation (together,
"IVAX"). Under the terms of the agreement, ALZA paid a $75.0
million upfront fee to IVAX, which was capitalized, and will pay
additional fees if specified Elmiron-registered trademark- sales
levels are achieved during the next five years.
Acquired the rights in the United States to the immediate-
release Ditropan-registered trademark- (oxybutynin chloride)
product and
trademark from Hoechst Marion Roussel, Inc. ("HMRI"). Under
the terms of the agreement, ALZA made an upfront payment to
HMRI, which was capitalized, and will make additional
payments if specified sales levels of Ditropan-registered
trademark- are achieved. HMRI manufactures the product for
ALZA for a price based upon net sales. ALZA has the right
to market other products in the United States under the
Ditropan-registered trademark- trademark, and HMRI will
receive royalty payments from ALZA if the trademark is used
by ALZA with other products.
Acquired an option to develop and commercialize the Cereport-
trademark- (RMP-7-trademark-) product, a compound intended to
facilitate the delivery of chemotherapeutic agents to the brain.
Under the terms of the agreement, ALZA paid Alkermes $10.0
million, which was charged to acquisition of in-process research
and development. Under the agreement, Alkermes is conducting
additional clinical activities related to Cereport-trademark-,
and ALZA has the option to acquire exclusive worldwide
commercialization rights to the product.
Modified its arrangements with Janssen Pharmaceutica, Inc.
(together with its affiliates "Janssen") covering E-TRANS-
trademark- fentanyl products for the treatment of acute and
chronic pain. In connection with the modified arrangements, ALZA
made a one-time payment of $21.5 million to Janssen, which was
charged to acquisition of in-process research and development.
ALZA will receive a share of the U.S. operating profits from the
product and royalties from sales of the product outside the
United States.
RESULTS OF OPERATIONS
SUMMARY
(In millions,
except per share amounts) 1997 1996 1995
_________________________________________________________________
Revenues $464.4 $413.1 $324.6
_________________________________________________________________
Operating Income (Loss) (204.0) 139.2 114.7
_________________________________________________________________
Net Income (Loss) (261.1) 92.4 72.4
_________________________________________________________________
Earnings (Loss) per Share (diluted) (3.07) 1.08 0.88
_________________________________________________________________
ALZA's net loss for 1997 was $261.1 million compared with net
income of $92.4 million in 1996 and $72.4 million in 1995. The
1997 loss was due in part to:
Acquisitions of in-process research and development, which
consisted of $77.0 million related to the purchase of the
Class A Common Stock of TDC, a $10.0 million charge in
connection with a development and option agreement for
Cereport-trademark- between ALZA and Alkermes, and $21.5
million related to a development and commercialization
agreement between ALZA and Janssen for an E-TRANS-trademark-
fentanyl product for the treatment of acute pain;
A charge of $247.0 million and interest expense of $8.0
million related to ALZA's contribution to Crescendo and
distribution of shares to stockholders and debenture holders,
respectively;
A write-down of excess manufacturing equipment of $11.5
million;
$1.8 million in costs related to a workforce reduction ($1.4
million included in research and development expenses, and
$0.4 million included in selling, general and administrative
expenses).
Net income for 1996 included:
A $7.1 million benefit from the reversal of a reserve related
to Procardia XL-registered trademark- royalties;
A $6.4 million benefit from the settlement of litigation
related to patent disputes concerning transdermal nicotine
patches;
A $4.0 million charge for the unamortized portion of a
partnership acquisition prepayment;
A $1.9 million charge related to a limited recall of two lots
of Duragesic-registered trademark-, and other joint venture,
partnership and product reserves.
Net income for 1995 included:
A benefit of $7.4 million resulting from the partial reversal
of a reserve established in connection with a patent dispute
concerning transdermal nicotine patches;
A reserve of $9.0 million established to account for a
potential reduction of the royalties from Pfizer on sales of
Procardia XL-registered trademark-;
A charge of $6.7 million for a portion of the initial payment
by ALZA to USB under the marketing and distribution agreement
for Ethyol-registered trademark-.
On a comparable basis, excluding the impact of the 1997
items mentioned above, ALZA's 1997 net income was $107.6 million,
or $1.23 per diluted share, compared with $90.1 million, or 1.06
per diluted share, for 1996 excluding the items mentioned above,
an increase of 19%. This increase resulted primarily from higher
net sales of ALZA-marketed products, which more than doubled in
1997 compared with 1996. Also contributing to the increase in
1997 net income were higher royalties, fees and other revenues
and a lower effective income tax rate. Partially offsetting
these contributions to net income in 1997 were increases in
research and development expenses and sales and marketing
expenses, and the amortization of product acquisition costs, as
well as decreased net interest income.
ALZA's net income increased 16% in 1996 compared to 1995, on
a comparable basis excluding the 1996 and 1995 items mentioned
above. This increase primarily resulted from higher royalties,
fees and other revenues in 1996 compared to 1995, as well as
increases in net sales, research and development revenues and net
interest income. These increases were partially offset by higher
research and development expenses, and increased selling, general
and administrative expenses in 1996 compared with 1995.
(Presented graphically in paper format annual report)
REVENUES
(In millions of dollars)
1997 1996 1995 1994 1993
_________________________________________________________________
Royalties and fees 183 173 144 123 114
Net sales 146 109 77 69 54
Research and development 135 131 104 69 47
_________________________________________________________________
TOTAL REVENUES 464 413 325 261 215
(Presented graphically in paper format annual report)
OPERATING INCOME (LOSS)
(In millions of dollars)
1997 1996 1995 1994 1993
_________________________________________________________________
(204) 139 115 95 66
ROYALTIES, FEES AND OTHER REVENUES
(Dollars in millions) 1997 1996 1995
_________________________________________________________________
Royalties, fees and other revenues $183.3 $173.3 $143.7
Percentage of total revenues 39% 42% 44%
_________________________________________________________________
Royalties, fees and other revenues increased 6% in 1997
compared to 1996, primarily as a result of increased royalties
due to higher sales of Glucotrol XL-registered trademark-
(glipizide) by Pfizer Inc. ("Pfizer"), Duragesic-registered
trademark- (fentanyl) by Janssen, Nicoderm-registered trademark-
and NicoDerm-registered trademark- CQ-trademark- (nicotine) by
HMRI and SmithKline Beecham ("SmithKline"), respectively, and
Catapres-TTS-registered trademark- (clonidine) by Boehringer
Ingelheim Pharmaceuticals,Inc. These increases were partially
offset by decreased royalties on sales of Procardia XL-registered
trademark-(nifedipine) by Pfizer. Royalties, fees and other
revenues for 1996 included a net benefit of $10.5 million from
the reversal of a reserve related to Procardia XL-registered
trademark- royalties and settlement of litigation related to
patent disputes concerning transdermal nicotine patches,
partially offset by a charge for the unamortized portion of a
partnership acquisition prepayment. On a comparable basis,
excluding this net benefit, royalties, fees and other revenues
increased 13% in 1997 compared with 1996.
Commercialization and licensing fees also contributed to the
increase in royalties, fees and other revenues in 1997 compared
with 1996. Fees for 1997 included upfront payments from Knoll
Pharmaceutical Company in connection with an agreement for
continued development and worldwide commercialization of the OROS-
registered trademark- hydromorphone product, from SmithKline in
connection with the agreement for the commercialization of the
Nicoderm-registered trademark- transdermal nicotine product in
numerous international markets, and from Pfizer for the rights to
commercialize the OROS-registered trademark- pseudoephedrine
product in certain countries outside the U.S., and technology fee
revenue of $4.0 million from Crescendo.
Sales of Procardia XL-registered trademark-, as reported by
Pfizer, decreased 18% in 1997 from 1996, and decreased 11% in
1996 from 1995. Royalties from Procardia XL-registered trademark-
accounted for approximately 29% of royalties, fees and other
revenues in 1997, compared with 42% in 1996. In 1997, Mylan
Laboratories Inc. ("Mylan") filed an Abbreviated New Drug
Application ("ANDA") with the United States Food and Drug
Administration ("FDA") requesting clearance to market a
controlled-release nifedipine tablet as a generic alternative to
Procardia XL-registered trademark-. Pfizer subsequently
commenced separate legal proceedings challenging Mylan's product
based on regulatory and patent issues. Under applicable law,
Pfizer's suits may have the effect of delaying FDA clearance of
Mylan's ANDA. However, it is not possible to predict the outcome
of such litigation, nor is it possible to predict the impact
Mylan's product, if cleared for marketing, may ultimately have on
sales of Procardia XL-registered trademark- and the resulting
royalties to ALZA.
The growth in royalties, fees and other revenues in 1996
compared with 1995 was due in part to the $10.5 million in net
benefits recognized in 1996, as discussed above, and to increased
sales of Adalat CR-registered trademark- (nifedipine) by Bayer
AG, Catapres-TTS-registered trademark-, Duragesic-registered
trademark-, Glucotrol XL-registered trademark-, and NicoDerm-
registered trademark- CQ-trademark- following its introduction in
the third quarter of 1996. In addition, despite lower sales of
Procardia XL-registered trademark- in 1996, royalties from this
product increased due to a higher effective royalty rate.
Reducing royalties and fees in 1996 were lower royalties on sales
of Transderm-Nitro-registered trademark- (nitroglycerin) by
Novartis Pharmaceuticals Corporation.
NET SALES AND COSTS OF PRODUCTS SHIPPED
Net Sales
(Dollars in millions) 1997 1996 1995
_________________________________________________________________
ALZA-marketed products
Ethyol-registered trademark- $20.6 $9.4 -
Mycelex-registered trademark- Troche 10.8 - -
Testoderm-registered trademark- 6.3 6.7 6.8
Elmiron-registered trademark- 4.8 - -
Other 10.4 7.1 6.8
_________________________________________________________________
Total ALZA-marketed products 52.9 23.2 13.6
Contract manufacturing 93.2 85.4 63.3
_________________________________________________________________
Total net sales $146.1 $ 108.6 $ 76.9
=================================================================
Percentage of total revenues 31% 26% 24%
ALZA-marketed products as a percentage
of net sales 36% 21% 18%
_________________________________________________________________
Included in net sales are sales of products marketed
directly by ALZA and through distributors, and sales generated
from contract manufacturing activities for ALZA's client
companies. In 1997, net sales increased 35% from 1996, primarily
due to a substantial increase in sales of ALZA-marketed products,
the rights to many of which were acquired by ALZA during 1997.
Sales of Ethyol-registered trademark- (amifostine), which was
launched in April 1996, contributed to the increase in sales of
ALZA-marketed products in 1997, together with sales of Mycelex-
registered trademark- Troche, the U.S. rights to which were
acquired in July 1997, and sales of Elmiron-registered trademark-
, the U.S. and Canadian rights to which were acquired in October
1997. Net sales from contract manufacturing increased 9% in 1997
compared with 1996 primarily due to a 27% increase in ALZA
shipments of Nicoderm-registered trademark- and NicoDerm-
registered trademark- CQ-trademark-, and a 14% increase in ALZA
shipments of Duragesic-registered trademark-.
In July 1997, ALZA acquired exclusive rights to Mycelex-
registered trademark- (clotrimazole) Troche in the United States
from Bayer Corporation ("Bayer"). Under the terms of the
agreement, ALZA made a $50.0 million upfront payment to Bayer,
which was capitalized, and will make an additional payment if net
sales of the product during a certain period are above a
specified level. Bayer manufactures Mycelex-registered trademark-
Troche for ALZA, and receives payments from ALZA based on sales
of the product.
In October 1997, ALZA acquired the exclusive rights in the
United States and Canada to Elmiron-registered trademark-
(pentosan polysulfate sodium) and three additional urology
products, BiCitra-registered trademark-(sodium citrate and citric
acid), PolyCitra-registered trademark-(potassium citrate) and
Neutra-Phos-registered trademark-(potassium and sodium
phosphate), from Baker Norton Pharmaceuticals, Inc. and its
parent, IVAX Corporation (together, "IVAX"). Under the terms of
the agreement, ALZA paid a $75.0 million upfront fee to IVAX,
which was capitalized, and will pay additional fees if specified
Elmiron-registered trademark- sales levels are achieved during
the next five years. IVAX manufactures the products for ALZA and
receives payments from ALZA based on sales of the products.
In October 1997, ALZA acquired the rights in the United
States to the immediate-release Ditropan-registered trademark-
(oxybutynin chloride) product and trademark from Hoechst Marion
Roussel, Inc. ("HMRI"). Under the terms of the agreement, ALZA
made an upfront payment to HMRI, which was capitalized, and will
make additional payments if specified sales levels of Ditropan-
registered trademark- are achieved. HMRI manufactures the
product for ALZA for a price based upon net sales. ALZA has the
right to market other products in the United States under the
Ditropan-registered trademark- trademark, and HMRI will receive
royalty payments from ALZA if the trademark is used by ALZA with
other products.
Net sales increased 41% in 1996 compared to 1995, primarily
due to sales of Ethyol-registered trademark- beginning in April
1996, and increased sales from shipments to client companies of
launch quantities of NicoDerm-registered trademark- CQ-trademark-
and Covera-HS-trademark-.
(Presented graphically in paper format annual report)
NET SALES
(In millions of dollars)
1997 1996 1995 1994 1993
_________________________________________________________________
ALZA-marketed products 53 23 14 11 7
Contract manufacturing 93 86 63 58 47
_________________________________________________________________
TOTAL NET SALES 146 109 77 69 54
_________________________________________________________________
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. Rights to several of the ALZA-marketed
products were acquired by ALZA during 1997. Both Ethyol-
registered trademark- and Elmiron-registered trademark- were
cleared for marketing during the past few years and 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 affect future sales of these products.
ALZA's contract manufacturing activities are undertaken
pursuant to ALZA's client-funded product development
arrangements. Under the third party arrangements, ALZA is
reimbursed for its costs of developing the products; ALZA often
manufactures the product for the client, generally for a supply
price intended to cover ALZA's costs to manufacture the product
plus a small margin; and ALZA receives royalties based on the
client's sales of the products. As a result, ALZA's gross margin
on its contract manufacturing sales is considerably lower than
its gross margin on ALZA-marketed products, since the royalties
received from the client companies for the product are reported
as royalties, fees and other revenue, and are not included in the
gross margin.
The timing and quantities of orders for products marketed by
client companies are not within ALZA's control. Net sales 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 the clients.
Costs of products shipped increased 9% to $92.8 million in
1997 compared to 1996, and 30% to $85.2 million in 1996 compared
with 1995, reflecting the increase in net sales. Costs of
products shipped in 1996 included a charge related to costs
associated with a limited recall of two lots of the Duragesic-
registered trademark- product. Costs of products shipped
increased 12% in 1997 and 27% in 1996 excluding this charge.
1997 1996 1995
_________________________________________________________________
Gross margin as a
percentage of net sales (1) 36% 21% 15%
_________________________________________________________________
(1) Gross margin is net sales less costs of products shipped
The increase in ALZA's gross margin in 1997 compared to 1996
was due to increased sales of higher-margin ALZA-marketed
products and increased margins on products shipped to client
companies. ALZA expects its gross margin on net sales to
increase from historical rates over the longer term, although
quarter-to-quarter fluctuations, even significant ones, can be
expected to continue to occur for the reasons discussed above. A
trend of higher gross margins may be achieved through a
proportionate increase in the sales of ALZA-marketed products in
relation to contract manufacturing activities, increased
utilization of capacity, and greater operating efficiencies.
RESEARCH AND DEVELOPMENT
Therapeutic Discovery Corporation
On September 29, 1997, ALZA purchased all of the outstanding
shares of TDC Class A Common Stock for $100.0 million in cash.
The purchase resulted in a charge of $77.0 million to acquisition
of in-process research and development. Approximately $23.0
million of the purchase price was allocated to a deferred tax
asset arising from TDC's net operating loss carryforwards and
capitalized research and development expense. TDC was formed by
ALZA in 1993 to develop and commercialize products incorporating
ALZA's drug delivery technologies. At the time of its purchase by
ALZA, TDC had a broad range of products in development, although
none of these products had received regulatory approval for
marketing. A significant portion of the purchase price was
charged to the acquisition of in-process research and development
because the TDC products were under development and had not been
approved by the FDA. In addition, because TDC had rights only to
specific products, and not technology, the products acquired had
no alternative future uses.
Crescendo Pharmaceuticals Corporation
On September 29, 1997, ALZA contributed $300.0 million in
cash to Crescendo for Crescendo's Class A Common Stock (the
"Crescendo Shares"). On September 30, 1997, the Crescendo Shares
were distributed to holders of ALZA common stock and ALZA's
outstanding convertible subordinated debentures. ALZA recorded
a charge of $247.0 million (including expenses of $4.0 million)
and interest expense of $8.0 million related to ALZA's contribution
to Crescendo and the distribution to stockholders and debenture
holders, respectively. ALZA also recorded a dividend of $49.1
million to ALZA stockholders in connection with the distribution
of the Crescendo Shares. ALZA's total cash outlay in connection
with establishing Crescendo consisted of the $300 million
contribution and approximately $4 million in expenses.
Under a Development Agreement between ALZA and Crescendo,
Crescendo is funding the development of human pharmaceutical
products proposed by ALZA and accepted by Crescendo. The
development of certain specified products was funded by Crescendo
beginning August 25, 1997, the date on which TDC ceased funding
the development of such products.
Under a Technology License Agreement between ALZA and
Crescendo, ALZA has granted to Crescendo a worldwide license to
use ALZA technology solely to select and develop Crescendo
products, to conduct related activities, and to commercialize
Crescendo products. In exchange for the license to use existing
ALZA technology relating to the products initially under
development by ALZA and Crescendo, Crescendo pays a technology
fee to ALZA, payable monthly over a period of three years, in the
amount of $1.0 million per month for the 12 months following the
distribution of Crescendo Shares, $667,000 per month for the
following 12 months and $333,000 per month for the following 12
months. The technology fee will no longer be payable at such
time as fewer than two of the seven initial products under
development by ALZA and Crescendo are being developed by
Crescendo and/or have been licensed by ALZA pursuant to the
option, granted to it by Crescendo, to license any or all
Crescendo products. ALZA recorded technology fee revenue from
Crescendo of $4.0 million for 1997. Five of the seven initial
products were in development at January 31, 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. In addition, under
Crescendo's Restated Certificate of Incorporation, ALZA has the
right to purchase all (but not less than all) of the Crescendo
Shares at a price based upon a pre-established formula (the
"Purchase Option"). The Purchase Option price will be determined
as the greater of the following:
(a)(i) 25 times the actual payments made by or due from ALZA
to Crescendo under the Development Agreement and the License
Agreement with respect to any product (and, in addition, such
payments as would have been made by or due from ALZA to Crescendo
if ALZA had not previously exercised its payment buy-out option
with respect to any such payments) for the four calendar quarters
immediately preceding the quarter in which the Purchase Option is
exercised (provided, however, that for any product which has not
been commercially sold during each of such four calendar
quarters, the portion of the exercise price for such product will
be 100 times the average of the quarterly payments made by or due
from ALZA to Crescendo for each of such calendar quarters during
which such product was commercially sold) less (ii) any amounts
previously paid to exercise any payment buy-out option;
(b) the fair market value of one million shares of ALZA
Common Stock;
(c) $325 million less all amounts paid by or due from
Crescendo under the Development Agreement to the date the
Purchase Option is exercised; and
(d) $100 million.
In each case, the amount payable as the Purchase Option
exercise price will be reduced to the extent, if any, that
Crescendo's liabilities at the time of exercise (other than
liabilities under the Development Agreement, the Technology
License Agreement and the Services Agreement) exceed Crescendo's
cash and cash equivalents and short-term and long-term
investments (excluding the amount of Available Funds remaining at
such time). ALZA may pay the exercise price in cash, in ALZA
Common Stock or in any combination of cash and ALZA Common Stock.
The Purchase Option structure is intended to eliminate any
possibility of a bargain purchase by ALZA. The first price
option is intended to provide a fair value buy-out option price
since Crescendo's principal source of future earnings will be
product payments and royalties. The remaining three price
options are intended to be minimum amounts to avoid the
possibility of a bargain purchase.
Development and Option Agreements
In September 1997, ALZA entered into a clinical development
and option agreement with Alkermes, Inc. ("Alkermes") relating to
Cereport-trademark-, a compound intended to facilitate the
delivery of chemotherapeutic agents to the brain. Under the
terms of the agreement, ALZA paid Alkermes $10.0 million. As the
product was not approved for development and has no alternative
future use, the payment was charged to acquisition of in-process
research and development. Under the agreement, Alkermes is
conducting additional clinical activities related to Cereport-
trademark-, and ALZA has the option to acquire exclusive
worldwide commercialization rights to the product.
ALZA entered into two agreements with Janssen, effective
December 31, 1997, modifying the previous arrangements between
the parties relating to two E-TRANS-trademark- fentanyl products.
Under a development and commercialization agreement, ALZA and
Janssen modified the agreement pursuant to which the companies
were jointly developing an E-TRANS-trademark- fentanyl product
for the treatment of acute pain. In connection with this
modified agreement, ALZA made a one-time payment of $21.5 million
to Janssen. As the product was not approved for development and
has no alternative future use, the payment was charged to
acquisition of in-process research and development. ALZA will
receive a share of the U.S. operating profits from the product
and royalties from sales of the product outside the United
States. The product is currently in Phase III clinical trials.
Under the second agreement, ALZA will continue the development of
an E-TRANS-trademark- fentanyl product for the treatment of
chronic pain. Janssen will have an option, exercisable until 90
days after ALZA has spent $30 million on the product, to take
over funding the continued development of the product and to
commercialize the product worldwide. If Janssen exercises its
option, ALZA will receive a share of the U.S. operating profits
from the product and royalties from sales of the product outside
the United States. If Janssen does not exercise its option, ALZA
may continue the development of the product, which is currently
under development with Crescendo, and which ALZA did not have the
right to develop independent of Janssen prior to the modification
of the arrangements.
Prior to the modifications described above, the agreement
with Janssen for E-TRANS-trademark- fentanyl was a typical client
arrangement under which Janssen paid all development costs of the
acute pain product, and ALZA would receive a royalty based on
sales of the product, if it were successfully developed.
Research and Development Revenues
(Dollars in millions) 1997 1996 1995
_________________________________________________________________
TDC $ 67.8 $ 100.7 $ 70.1
Crescendo 29.7 - -
Other clients 37.5 30.5 33.9
_________________________________________________________________
Total research and development
revenues $ 135.0 $ 131.2 $ 104.0
=================================================================
Percentage of total revenues 29% 32% 32%
_________________________________________________________________
The increase in research and development revenues in 1997
compared to 1996, and in 1996 compared with 1995, was due to
product development activities undertaken on behalf of client
companies, including TDC and Crescendo. In the third quarter of
1997, TDC ceased funding products under development. Crescendo
commenced operations in the third quarter of 1997, and began
funding certain of the products previously under development by
ALZA and TDC. The 1996 research and development revenues
included charges related to a credit from ALZA to TDC and a write-
off of potentially uncollectible receivables totaling $2.1
million. Research and development revenues from other clients
increased 23% in 1997 compared to 1996, reflecting an increase in
product development activities under ALZA's agreements with these
companies. ALZA's research and development revenues generally
represent client reimbursement of costs, including a portion of
general and administrative expenses. Therefore, product
development activities do not contribute significantly to
operating results.
Research and Development Expenses
(Dollars in millions) 1997 1996 1995
_________________________________________________________________
Research and development expenses $ 156.8 $ 141.6 $ 103.4
As a percentage of total revenues 34% 34% 32%
_________________________________________________________________
The increase in research and development expenses in 1997
compared to 1996 reflects the increased activity for client
companies, including TDC and Crescendo. Research and development
expenses in 1997 include $1.4 million in costs related to
workforce reductions. Research and development expenses
increased in 1996 compared to 1995 as a result of increased
activity for TDC.
(Presented graphically in paper format annual report)
RESEARCH AND DEVELOPMENT EXPENSES
(In millions of dollars)
1997 1996 1995 1994 1993
_________________________________________________________________
Research and Development
Expenses 157 142 103 76 53
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
(Dollars in millions) 1997 1996 1995
_________________________________________________________________
Sales and marketing expenses $28.8 $24.2 $ 23.8
General and administrative expenses 19.0 20.7 17.3
Amortization of product acquisition
payments 4.0 2.2 -
_________________________________________________________________
Total selling, general and
administrative expenses $51.8 $47.1 $ 41.1
=================================================================
As a percentage of total revenues 11% 11% 13%
_________________________________________________________________
Selling, general and administrative expenses increased 10%
in 1997 compared with 1996 as a result of increased sales and
marketing expenses, and amortization of product acquisition
payments primarily related to products acquired in 1997. Higher
sales and marketing expenses in 1997 compared with 1996 resulted
from the expansion of ALZA's sales force and increased marketing
costs in support of Ethyol-registered trademark-, Mycelex-
registered trademark- Troche and Elmiron-registered trademark-.
General and administrative expenses declined 8% in 1997 compared
to 1996. While corporate administrative costs increased 7% in
1997 compared with 1996, including $0.4 million in costs related
to workforce reductions, this increase was offset by an increase
in the cash surrender value of life insurance policies.
Selling, general and administrative expenses increased 15%
in 1996 compared to 1995 due primarily to sales and marketing
expenses related to the launch of Ethyol-registered trademark-,
the amortization of the upfront payment to U.S. Bioscience, Inc.
("USB") for Ethyol-registered trademark-, and an increase in
overall general and administrative expenses in support of
increased corporate activities. Included in 1995 selling,
general and administrative expenses was $6.7 million for a
portion of the initial payment by ALZA to USB under the marketing
and distribution agreement for Ethyol-registered trademark.
Excluding this charge, selling, general and administrative
expenses increased 36% in 1996 compared with 1995.
ASSET WRITE-DOWN
In 1997, ALZA wrote down approximately $11.5 million of
fixed assets, $3.7 million of which related to excess
manufacturing equipment. Lower than expected production
requirements under a supply agreement with G.D. Searle & Co. for
Covera-HS-trademark- (verapamil) contributed to the excess
capacity of manufacturing equipment. Such equipment was written
down to its fair market value, which was determined based upon
estimates of current market prices. ALZA has not yet determined
the ultimate disposition of these assets. The remaining $7.8
million of the write-down is related primarily to custom-designed
manufacturing and research and development equipment that was
determined to have limited or no future use based upon changes in
production volumes or product formulations. ALZA intends to use
this equipment to the extent possible or return or otherwise
dispose of equipment with no alternative future use.
NET INTEREST
(In millions) 1997 1996 1995
_________________________________________________________________
Interest and other income $ (55.6) $ (52.9) $ (26.0)
Distribution to debenture holders 8.0 - -
Interest expense 55.0 43.0 23.9
_________________________________________________________________
Net interest and other
expense (income) $ 7.4 $ (9.9) $ (2.1)
_________________________________________________________________
Interest and other income increased 5% in 1997 compared to
1996, primarily due to higher average invested cash balances
during 1997 following ALZA's issuance of $500.0 million of
5% convertible subordinated debentures due 2006 (the
"5% Debentures") in April 1996. Partially offsetting the higher
interest income were lower realized gains on the sales of
investments in 1997 compared with 1996.
The increase in interest and other income in 1996 compared to
1995 was primarily due to higher average invested cash balances
following the issuance of the 5% Debentures. Also contributing
to the increase in interest and other income in 1996 were net
realized gains of $8.4 million on sales of investments in 1996,
compared with $1.0 million of such gains in 1995.
Interest expense increased 28% in 1997 compared to 1996, as
the 5% Debentures were outstanding for all of 1997. Also
contributing to the increase were lower amounts of capitalized
interest on construction projects and higher interest on the 5 1/4%
zero coupon convertible subordinated debentures due 2014 (the
"5 1/4% Debentures").
The 1997 distribution to debenture holders is related to the
Crescendo transaction and discussed under "Crescendo
Pharmaceuticals Corporation" above.
The increase in interest expense in 1996 compared to 1995
reflects the interest expense on the 5% Debentures and higher
interest on the 5 1/4 % debentures.
EFFECTIVE TAX RATE
In 1997, ALZA recorded income tax expense of $49.7 million
despite ALZA's pretax loss, as certain charges recognized in 1997
are generally not deductible for income tax purposes. Excluding
such items, ALZA's 1997 effective income tax rate was 35%
compared to 38% in 1996 and 1995. The rate declined in 1997 from
prior years primarily due to increased investment and research
tax credits in 1997.
LIQUIDITY AND CAPITAL RESOURCES
(In millions) 1997 1996 1995
_________________________________________________________________
Working capital $ 253.4 $ 494.8 $ 273.2
Cash and investments 535.8 999.8 419.1
Total assets 1,369.2 1,613.7 937.2
Long-term debt 902.6 882.3 362.9
Net cash provided by (used in)
operating activities (185.9) 123.3 111.4
Capital expenditures 38.8 48.6 46.3
Product acquisition payments 140.1 - 13.3
_________________________________________________________________
During 1997, ALZA paid $100.0 million in cash for the
purchase of all of the shares of TDC, and contributed $300.0
million in cash to Crescendo. Also in 1997, ALZA paid Bayer a
$50.0 million upfront fee for the United States rights to Mycelex-
registered trademark- Troche, made a $10.0 million payment to USB
related to Ethyol-registered trademark- and made an upfront
payment of $75.0 million to IVAX for the United States and
Canadian rights to Elmiron-registered trademark- and three
additional urology products. ALZA also paid $10.0 million to
Alkermes under the agreement related to Cereport-trademark-.
Cash provided by operating activities in 1997 excluding the items
discussed above was $149.8 million. During 1997, ALZA also made
a $36.2 million investment in a real estate joint venture,
described below. Cash for these transactions was provided from
the sales and maturities of short- and long-term investments, as
well as from cash and cash equivalents.
(Presented graphically in paper format annual report)
NET CASH PROVIDED BY OPERATING ACTIVITIES
(In millions of dollars)
1997 1996 1995 1994 1993
_________________________________________________________________
Net Cash Provided by
(Used in)Operating
activities (186) 123 111 74 76
In late 1997, ALZA acquired a 50% interest in a real estate
joint venture for the development of a 13-acre parcel of land in
Mountain View, California. ALZA invested $36.2 million in the
joint venture, which will be applied to the construction of
buildings on the parcel. ALZA is also obligated to make
improvements to the buildings, the total cost of which is
estimated to be between $60.0 million and $100.0 million. The
improvements are currently expected to be completed during the
fourth quarter of 1999. The joint venture will lease the
buildings to ALZA upon completion of construction, currently
scheduled for 1999. The leases provide for an initial term of 15
years with scheduled annual rent increases, followed by two 10-
year extension periods with rent increases based upon the
Consumer Price Index. ALZA will receive 50% of the joint
venture's income.
ALZA has also entered into a ground lease agreement for an
adjacent seven-acre parcel of land on which it plans to construct
a pilot plant, laboratories and other technical facilities. The
term of the ground lease is approximately 33 years and includes
options for ALZA to purchase, or to be required to purchase, the
property.
ALZA's capital spending for 1997 was $38.8 million for
additions to property, plant and equipment to support its
expanding research, development and manufacturing activities,
compared to capital spending of $48.6 million in 1996 and $46.3
million in 1995. While ALZA believes its current facilities and
equipment are sufficient to meet its current operating
requirements, ALZA is expanding its facilities and equipment to
support its medium-term and long-term requirements. Capital
expenditures in 1998 are currently expected to increase over 1997
levels due primarily to expenditures related to improvements to
the buildings discussed above.
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.
OUTLOOK
Notice Concerning Forward-Looking Statements
The following is intended to provide an outlook for 1998 and
beyond. To the extent any statements made in this Annual Report
to Stockholders, including this section, deal with information
that is not historical, these statements are forward-looking.
Such statements include, 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 from those presented in this outlook, some
or all of which 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 and discussed below.
ROYALTIES, FEES AND OTHER REVENUES
ALZA expects royalties, fees and other revenues to continue
to increase in 1998 as a result of growth in sales of products
currently marketed by client companies and, to a lesser extent,
products which are awaiting approval by regulatory authorities
outside of the United States. Sales of Procardia XL-registered
trademark-, and therefore ALZA's royalties from this product, are
expected to continue to decline in 1998.
Royalties, fees and other revenues, which are derived
largely from sales by client companies of products developed
jointly with ALZA, vary from quarter to quarter as a result of
changing levels of product sales by client companies and,
occasionally, the receipt by ALZA of certain one-time fees.
Because ALZA's clients generally take responsibility for
obtaining necessary regulatory approvals and make all marketing
and commercialization decisions regarding such products, most of
the variables that affect ALZA's royalties, fees and other
revenues are not directly within ALZA's control. Sales of
products from which ALZA derives royalties and fees are affected
by the clients' marketing efforts and the introduction and
marketing of competing products, among other factors. Fees are
one-time in nature and will vary year to year and quarter to
quarter. Royalties and fees for 1998 are expected to include
$10.7 million in technology fees from Crescendo and may include
upfront fees from third parties in connection with arrangements
for the commercialization of Crescendo products.
During the next several years, ALZA intends to continue
reducing its dependence on royalties and fees by further
expanding ALZA's sales and marketing activities and by directly
marketing and selling more products, including products developed
with Crescendo. 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 ALZA marketing, the difficulties and costs associated with
acquiring from third parties products 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, risks relating to
patents and proprietary rights and the current health care cost
containment environment. 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.
NET SALES
Net sales of ALZA-marketed products are expected to
increase significantly in 1998, as the products acquired in
1997 contribute a full year of sales. Wholesaler stocking
patterns, managed care and formulary acceptance, the
introduction of competitive products, and acceptance by
patients and physicians will affect future sales of these
products. ALZA expects that 1998 contract manufacturing
revenues will remain approximately at 1997 levels. Because
many factors affecting contract manufacturing activities are
not within ALZA's control, revenues will fluctuate from
period to period depending on the volume, mix and timing of
orders received from client companies.
ALZA also expects that gross margins, as a percentage of net
sales, will continue to increase over the longer term, although
quarter-to-quarter fluctuations will continue to occur. Higher
gross margins may be achieved through continuing the
proportionate increase in the sales of ALZA-marketed products (as
compared with sales from contract manufacturing), increased
utilization of capacity and greater operating efficiencies.
RESEARCH AND DEVELOPMENT
Crescendo Pharmaceuticals Corporation
ALZA expects that Crescendo will expend its available funds
over the next three to four years. The rate of expenditure by
Crescendo will depend upon the continued development of products
currently under development by ALZA and Crescendo, and new
products proposed by ALZA and accepted by Crescendo for
development.
Pharmaceutical Company Clients
To maintain or increase 1997 product development
revenue levels, ALZA will need to enter into new
arrangements with client companies to replace revenues lost
when programs terminate or products are submitted for
regulatory clearance or cleared for marketing. Development
agreements with client companies are generally terminable by
the clients on short notice and may be terminated for many
reasons, including technical issues, marketing concerns,
reallocation of client resources, and changes in client
priorities. In addition, revenues from any particular
client program could decrease dramatically once the New Drug
Application for the product has been filed, and could
decrease earlier if the client, rather than ALZA, were to
undertake the clinical development of a product.
ALZA Technology Institute
In 1998, ALZA expects to continue its current level of
internal technology research in order to continue
strengthening ALZA's leadership in the drug delivery field.
These activities consist largely of extending and improving
existing drug delivery technologies, and conducting research
and development of new technologies, as well as some early
stage product development activities.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Sales and marketing expenses are expected to continue to
increase in 1998 primarily due to growth in marketing efforts
resulting from the acquisition of new products and the
introduction of products developed by ALZA. The increase in the
size of ALZA's sales force in late 1997 will increase sales and
marketing expenses in 1998 compared with 1997. In December 1997,
ALZA received clearance from the FDA to market Testoderm-
registered trademark- TTS (testosterone transdermal system) CIII
for men with testosterone deficiency. Sales and marketing
efforts will expand as Testoderm-registered trademark- TTS is
introduced in March 1998. Sales and marketing expenses are also
expected to increase in anticipation of the launch of Ditropan-
registered trademark- XL-trademark-, which may occur in early
1999, and as ALZA increases its activities for recently acquired
products. Selling, general and administrative expenses in 1998
will include amortization of product acquisition fees relating to
products acquired in prior years.
INTEREST AND OTHER INCOME
Interest and other income is expected to be lower in 1998 as
a result of the significant reduction of cash and investment
balances in 1997.
INCOME TAX RATE
ALZA currently expects its combined federal and state 1998
effective income tax rate to be approximately 35%. The actual
effective income tax rate will depend upon the level of actual
earnings, changes in the tax laws, and the amount of investment
and research credits available and ALZA's ability to utilize such
credits.
YEAR 2000
The majority of ALZA's significant operating and accounting
systems are year 2000 compliant. The systems that are not
currently year 2000 compliant are in the process of being
upgraded or replaced. ALZA does not have a comprehensive program
for monitoring whether its suppliers' and vendors' systems are
year 2000 compliant. However, for material new agreements, ALZA
requests assurances of year 2000 compliance. ALZA does not
expect its financial condition or results of operations to be
materially adversely affected by its year 2000 issues.
ALZA TTS RESEARCH PARTNERS, LTD.
ALZA developed the Duragesic-registered trademark- and
Testoderm-registered trademark- products on behalf of the ALZA
TTS Research Partners, Ltd. (the "TTS Partnership"), a limited
partnership from which ALZA licensed the products. The TTS
Partnership receives payments from ALZA equal to 4% of Janssen's
net sales of Duragesic-registered trademark- and 4% of ALZA's
sales of Testoderm-registered trademark-.
ALZA's license from the TTS Partnership for Testoderm-
registered trademark- will become nonexclusive on July 26, 1998;
ALZA's license for Duragesic-registered trademark- will become
nonexclusive on December 4, 1998. Once ALZA's licenses become
nonexclusive, the TTS Partnership will need to determine whether
to grant nonexclusive licenses to third parties. Under ALZA's
distribution agreement with Janssen for the Duragesic-registered
trademark- product, if ALZA's license from the TTS Partnership
becomes nonexclusive, if the TTS Partnership licenses the product
to a third party and if the third party introduces the product,
Janssen's royalty payable to ALZA will drop significantly;
however, ALZA will continue to owe the TTS Partnership 4% of
Janssen's net sales.
ALZA has an option to purchase all of the interests in the
TTS Partnership for $120 million in cash less amounts paid by
ALZA to the TTS Partnership under its licenses prior to the date
the option is exercised. As of December 31, 1997, ALZA had paid
the Partnership $27.3 million under these licenses.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
This Item is not applicable to ALZA for this reporting
period.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ALZA Corporation
CONSOLIDATED STATEMENT OF OPERATIONS
Years ended December 31,
(In millions,
except per share amounts) 1997 1996 1995
_________________________________________________________________
REVENUES
Royalties, fees and other $ 183.3 $ 173.3 $ 143.7
Net sales 146.1 108.6 76.9
Research and development, including
amounts from TDC, a related party
(1997-$67.8,1996-$100.7, 1995-$70.1)
and Crescendo, a related party
(1997-$29.7) 135.0 131.2 104.0
_________________________________________________________________
Total revenues 464.4 413.1 324.6
COSTS AND EXPENSES
Costs of products shipped 92.8 85.2 65.4
Research and development 156.8 141.6 103.4
Selling, general and administrative 51.8 47.1 41.1
Acquisitions of in-process
research and development 108.5 - -
Contribution to Crescendo,
a related party 247.0 - -
Asset write-down 11.5 - -
_________________________________________________________________
Total costs and expenses 668.4 273.9 209.9
_________________________________________________________________
Operating income (loss) (204.0) 139.2 114.7
Interest expense 55.0 43.0 23.9
Distribution to debenture holders 8.0 - -
Interest and other income (55.6) (52.9) (26.0)
_________________________________________________________________
Net interest and other expense
(income) 7.4 (9.9) (2.1)
_________________________________________________________________
Income (loss) before income taxes (211.4) 149.1 116.8
Provision for income taxes 49.7 56.7 44.4
_________________________________________________________________
Net income (loss) $(261.1) $ 92.4 $ 72.4
=================================================================
Earnings (loss) per share
Basic $ (3.07) $ 1.10 $ 0.88
=================================================================
Diluted $ (3.07) $ 1.08 $ 0.88
=================================================================
See accompanying notes.
ALZA Corporation
CONSOLIDATED BALANCE SHEET
December 31,
(In millions, except per share amounts) 1997 1996
_________________________________________________________________
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 65.0 $187.7
Short-term investments 109.2 199.3
Receivables, net of allowance for doubtful
accounts(1997-$0.8; 1996-$0.6) 119.2 116.6
Inventories 37.8 39.2
Prepaid expenses and other current assets 26.8 19.2
_________________________________________________________________
Total current assets 358.0 562.0
PROPERTY, PLANT AND EQUIPMENT
Buildings and leasehold improvements 209.6 228.7
Equipment 145.0 144.2
Construction in progress 22.9 18.1
Land and prepaid land leases 24.3 17.1
_________________________________________________________________
401.8 408.1
Less accumulated depreciation and
amortization (91.4) (100.3)
_________________________________________________________________
Net property, plant and equipment 310.4 307.8
Investments in long-term securities 361.6 612.8
Deferred product acquisition payments 147.2 11.1
Other assets 192.0 120.0
_________________________________________________________________
TOTAL ASSETS $1,369.2 $1,613.7
=================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 56.9 $ 28.7
Accrued liabilities 45.9 37.6
Current portion of long-term debt 1.8 0.9
_________________________________________________________________
Total current liabilities 104.6 67.2
5% convertible subordinated debentures 500.0 500.0
5 1/4% zero coupon convertible subordinated
debentures 402.6 382.3
Other long-term liabilities 60.8 67.5
Commitments and contingencies
STOCKHOLDERS' EQUITY
Common stock, $.01 par value,300.0 shares
authorized; 85.5 and 84.6 shares issued
and outstanding at December 31, 1997 and
1996, respectively 0.9 0.8
Additional paid-in capital 381.5 362.2
Unrealized losses on available-for-sale
securities, net of tax effect (4.8) (0.1)
Retained earnings (deficit) (76.4) 233.8
_________________________________________________________________
Total stockholders' equity 301.2 596.7
_________________________________________________________________
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 1,369.2 $ 1,613.7
=================================================================
See accompanying notes.
ALZA Corporation
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Years ended December 31, 1997, 1996 and 1995
(In millions)
GAINS
(UNREALIZED
LOSSES) TOTAL
ADDITIONALON AVAILABLE- RETAINED STOCK-
COMMON PAID-IN FOR-SALE EARNINGS HOLDERS'
STOCK CAPITAL SECURITIES (DEFICIT) EQUITY
___________________________________________________________________________
Balance, December 31,
1994 $ 0.8 $302.2 $ (7.5) $ 69.0 $ 364.5
Common stock issued - 8.3 - - 8.3
Unrealized gains on
available-for-sale
securities, net of
tax effect - - 9.4 - 9.4
Net income - - - 72.4 72.4
________________________________________________________________________
Balance, December 31,
1995 0.8 310.5 1.9 141.4 454.6
Common stock issued - 51.7 - - 51.7
Unrealized losses on
available-for-sale
securities, net of
tax effect - - (2.0) - (2.0)
Net income - - - 92.4 92.4
________________________________________________________________________
Balance, December 31,
1996 0.8 362.2 (0.1) 233.8 596.7
Common stock issued 0.1 19.3 - - 19.4
Distribution of Crescendo
Shares - - - (49.1) (49.1)
Unrealized losses on
available-for-sale sec-
urities, net of tax
effect - - (4.7) - (4.7)
Net loss - - - (261.1) (261.1)
________________________________________________________________________
Balance, December 31,
1997 $ 0.9 $381.5 $ (4.8) $(76.4) $301.2
========================================================================
See accompanying notes.
ALZA Corporation
CONSOLIDATED STATEMENT OF CASH FLOWS
(In millions)
Years ended December 31, 1997 1996 1995
__________________________________________________________________
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(261.1) $92.4 $72.4
Non-cash adjustments to reconcile net
income (loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization 29.3 19.8 15.3
Amortization of product acquisition
payments 4.0 2.2 -
Interest on 5 1/4% zero coupon
convertible subordinated debentures 20.3 19.3 18.4
Decrease (increase) in assets:
Receivables (2.6) (8.6) (23.1)
Inventories 1.5 (4.7) (1.1)
Prepaid expenses and other current
assets (4.4) (1.2) 6.2
Increase (decrease) in liabilities:
Accounts payable 28.1 8.7 -
Accrued liabilities 8.7 7.8 10.6
Deferred revenue (0.4) (17.2) 1.3
Other long-term liabilities (20.8) 4.8 11.4
Asset write-down 11.5 - -
__________________________________________________________________
Total adjustments 75.2 30.9 39.0
__________________________________________________________________
Net cash provided by (used in)
operating activities (185.9) 123.3 111.4
CASH FLOWS FROM INVESTING ACTIVITIES:
Product acquisition payments (140.1) - (13.3)
Capital expenditures (38.8) (48.6) (46.3)
Investment in real estate joint venture (36.2) - -
Purchase of TDC deferred tax asset (23.0) - -
Purchases of available-for-sale
securities (370.8) (1,125.2) (205.2)
Sales of available-for-sale securities 680.9 542.6 134.1
Maturities of available-for-sale
securities 23.3 98.1 12.0
Increase in cash surrender value-life
insurance and prepaid premiums (12.8) (20.3) (4.1)
Decrease (increase) in other assets 12.4 (9.6) 3.1
__________________________________________________________________
Net cash provided by (used in) investing
activities 94.9 (563.0) (119.7)
CASH FLOWS FROM FINANCING ACTIVITIES:
Distribution of Crescendo Pharmaceuticals
Corporation shares to ALZA
stockholders (49.1) - -
Net proceeds from 5% convertible
subordinated debentures - 488.8 -
Issuances of common stock 19.4 51.7 8.3
Principal payments on long-term debt (2.0) (1.1) (0.8)
__________________________________________________________________
Net cash provided by (used in)
financing activities (31.7) 539.4 7.5
__________________________________________________________________
Net increase (decrease) in cash and
cash equivalents (122.7) 99.7 (0.8)
Cash and cash equivalents at the
beginning of year 187.7 88.0 88.8
__________________________________________________________________
Cash and cash equivalents at the
end of year $ 65.0 $187.7 $88.0
==================================================================
See accompanying notes.
ALZA Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING
POLICIES
ALZA Corporation is an emerging pharmaceutical company with
leading drug delivery technologies. ALZA applies its delivery
technologies to develop pharmaceutical products with enhanced
therapeutic value for its own portfolio and for many of the
world's leading pharmaceutical companies. ALZA is currently
focusing its sales and marketing efforts in urology and oncology.
Nature of Operations
Royalties, fees and other revenues include royalty revenue
and other payments based on sales by ALZA's client companies of
products developed under joint development and commercialization
agreements, and certain one-time or infrequent fees or similar
payments under such agreements. Included in royalties, fees and
other revenues are revenues from ALZA's promotion and copromotion
of certain products, some of which are contingent on sales.
Royalties, fees and other revenues are recognized as earned.
ALZA recognizes upfront fee revenues on or after the effective
date of the licensing, copromotion or other agreement, when there
are no contingencies or conditions to ALZA's receipt of the
payments. ALZA recognizes milestone fee revenues when all of the
conditions to payment have been met and there are no further
contingencies or conditions to ALZA's receipt of payment. Such
fees, when recognized, are not refundable, and do not require any
future performance by ALZA in order to retain them.
Net sales includes sales of products marketed directly by
ALZA and through distributors, and sales generated from contract
manufacturing activities for ALZA's client companies. ALZA
recognizes sales revenues at the time of product shipment, net of
discounts, rebates and allowances. Export sales, principally to
distributors and client companies in Europe, were $31.5 million,
$23.0 million and $20.1 million in 1997, 1996 and 1995,
respectively.
Revenues from research and development activities with client
companies, including Crescendo, are reported as research and
development revenues, and are recognized as earned. ALZA's
research and development revenues represent clients'
reimbursement to ALZA of costs incurred in product development
and clinical evaluation, including a portion of general and
administrative expenses, and therefore do not contribute
significantly to operating results. Research and development
revenues are recognized when billable in accordance with the
terms prescribed in each respective client development agreement
(billed based upon labor and other costs incurred during the
period). Such revenues are not refundable. ALZA's policy is to
expense all costs of research and product development related
both to costs incurred on its own behalf and on behalf of its
clients.
Credit and Investment Risks
Royalties, fees and other revenues and research and
development revenues are derived from agreements with major
pharmaceutical company clients and Crescendo, all of which have
significant cash resources. Therefore, ALZA considers its credit
risk related to these transactions to be minimal. ALZA's net
sales result from sales of ALZA-marketed products primarily to
major pharmaceutical distributors, and sales from contract
manufacturing for ALZA's client companies. If the financial
condition or operations of any of the pharmaceutical distributors
were to deteriorate substantially, ALZA's operating results could
be adversely affected.
ALZA generally invests excess cash in securities of banks
and companies from a variety of industries with strong credit
ratings, and in U.S. government obligations. These securities
typically bear minimal risk and ALZA has not experienced any
losses on its investments due to institutional failure or
bankruptcy. ALZA's investment policy is designed to limit
exposure with any one institution.
Pfizer accounted for 17% of ALZA's total revenues in 1997,
22% in 1996 and 26% in 1995. TDC accounted for 15% of ALZA's
total revenues in 1997, 24% in 1996 and 22% in 1995. Janssen
accounted for 15% of ALZA's total revenues in 1997, 14% in 1996
and 13% in 1995. HMRI accounted for 10% of ALZA's total revenues
in 1997 and 11% in both 1996 and 1995.
Principles of Consolidation
The consolidated financial statements include the accounts
of ALZA and its wholly-owned subsidiaries, ALZA Development
Corporation, ALZA International, Inc., ALZA Land Management,
Inc., ALZA Limited and, since its acquisition in September 1997,
TDC. All significant intercompany accounts and transactions have
been eliminated.
Use of Estimates
The preparation of financial statements in accordance with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported
in the financial statements and accompanying notes. Actual
results could differ from those estimates.
Restatements
In 1997, ALZA changed the presentation of its consolidated
statement of operations and consolidated balance sheet. In the
consolidated statement of operations, royalties, fees and other
revenue now include items related to operations that were
previously reflected in interest and other income. Interest
expense and income are now shown separately after operating
income (loss). On the consolidated balance sheet, ALZA has
reclassified securities which have maturities of one year or more
as investments in long-term securities; these securities were
previously treated as current assets. Prior year amounts have
been changed to conform with the current year presentation.
Cash, Cash Equivalents and Short-term Investments
Cash and cash equivalents include cash balances and
investments with maturities of three months or less at the time
of purchase. Short-term investments include commercial paper and
other highly liquid investments with maturities less than one
year. The carrying amount reported on the balance sheet for
cash, cash equivalents and short-term investments approximates
their fair value.
Inventories
Raw materials, work in-process and finished goods
inventories are stated at the lower of standard cost (which
approximates actual costs on a first-in, first-out cost method)
or market value.
Inventories consist of the following (in millions):
1997 1996
_________________________________________________________________
Raw materials $ 16.5 $17.7
Work in-process 8.5 18.0
Finished goods 12.8 3.5
_________________________________________________________________
Total inventories $ 37.8 $39.2
=================================================================
Property, Plant and Equipment
Property, plant and equipment are stated at cost, including
interest capitalized of $0.7 million in 1997, $2.2 million in
1996 and $1.3 million in 1995. Maintenance and repairs are
expensed as incurred. Depreciation and amortization are
generally computed on the straight-line method, over estimated
useful lives, as follows:
Classification Estimated Useful Life
_________________________________________________________________
Buildings 30 to 40 years
Leasehold improvements Terms of the leases (1 to 5 years)
Equipment 3 to 9 years
Prepaid land leases Remaining terms of the leases (17
to 60 years)
Depreciation and amortization expense for property, plant
and equipment was $24.7 million, $17.8 million and $14.8 million
for 1997, 1996 and 1995, respectively. Prepaid land leases
represent ALZA's total cost, paid in advance, of leasehold rights
to land upon which certain of ALZA's buildings in Palo Alto,
California are situated. Included in construction in progress
are payments made in connection with facilities being constructed
or modified, and the installation of related equipment in Palo
Alto and Mountain View, California (primarily research and
development) and Vacaville, California (primarily commercial
manufacturing).
ALZA routinely evaluates the carrying value of its long-
lived assets. ALZA records impairment losses on long-lived
assets used in operations when events and circumstances indicate
that assets may be impaired and the undiscounted cash flows
estimated to be generated by the assets are less than the
carrying amount of those assets.
In 1997, ALZA wrote down approximately $11.5 million of
fixed assets, $3.7 million of which related to excess
manufacturing equipment. Lower than expected production
requirements under a supply agreement with G.D. Searle & Co. for
Covera-HS-trademark- (verapamil) contributed to the excess
capacity of manufacturing equipment. Such equipment was written
down to its fair market value, which was determined based upon
estimates of current market prices. ALZA has not yet determined
the ultimate disposition of these assets. The remaining $7.8
million of the write-down is related primarily to custom-designed
manufacturing and research and development equipment that was
determined to have limited or no future use based upon changes in
production volumes or product formulations. ALZA intends to use
this equipment to the extent possible or return or otherwise
dispose of equipment with no alternative future use.
Deferred Product Acquisition Costs and Acquisition of In-process
Research and Development
Initial payments and distribution fees for the acquisition
of products that, at the time of acquisition by ALZA, are already
marketed or are approved by the FDA for marketing (or such
approval is imminent) are capitalized and amortized over the
estimated life cycle of the products, which range from 10 to 20
years. At the time of acquisition, the product life cycle is
estimated by ALZA based upon the term of the agreement, the
patent life of the product and, for products that are no longer
covered by patents, the product's historical profitability trend
since it has been off-patent and management's assessment of
future sales and profitability of the product. This estimate is
assessed regularly during the amortization period and the asset
value is reduced when appropriate. Accumulated amortization of
these costs was $6.2 million and $2.2 million at December 31,
1997 and 1996, respectively.
Payments for rights to products acquired by ALZA when they
are in development and not yet approved by the FDA (and which
have no alternative future use) are recognized as charges to
acquisitions of in-process research and development. Charges to
in-process research and development were $108.5 million in 1997.
Accrued Liabilities
Accrued liabilities are as follows(in millions):
1997 1996
_________________________________________________________________
Accrued compensation $ 17.7 $15.4
Accrued income taxes 9.7 7.3
Other accrued liabilities 18.5 14.9
_________________________________________________________________
Total accrued liabilities $ 45.9 $37.6
=================================================================
Advertising Costs
Advertising costs are accounted for as expenses in the
period in which they are incurred. Advertising expense for 1997,
1996 and 1995 was $6.4 million, $4.4 million and $3.3 million,
respectively.
Supplemental Disclosures of Cash Flow Information (in millions)
Cash paid during the year for:
1997 1996 1995
_________________________________________________________________
Income taxes $ 59.5 $ 42.2 $ 37.0
Interest, net of amount
capitalized 36.6 16.3 2.6
Noncash investing and financing activities:
1997 1996 1995
_________________________________________________________________
Net unrealized gains (losses)
on available-for-sale
securities, net of tax effect $(4.7) $(2.0) $ 9.4
Deferred issuance costs for
5% Debentures - 11.2 -
Investment in low-income housing
in exchange for long term debt 17.1 11.9 -
Recently Issued Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards ("SFAS") No.
130, "Reporting Comprehensive Income" ("SFAS 130") and SFAS No.
131 ("SFAS 131"), "Disclosures about Segments of an Enterprise
and Related Information". SFAS 130 establishes standards for
reporting comprehensive income and is effective in 1998. SFAS
131 establishes standards for annual and interim disclosures of
operating segments, products and services, geographic areas and
major customers, and is also effective in 1998. ALZA is in the
process of evaluating the disclosure requirements of the new
standards, the adoption of which will have no impact on ALZA's
results of operations or financial condition.
Note 2. INVESTMENTS
ALZA has classified its entire investment portfolio,
including cash equivalents of $64.1 million and $185.2 million at
December 31, 1997 and 1996, respectively, as available-for-sale.
Investments in the available-for-sale category are generally
carried at fair value with unrealized gains and losses recorded
as a separate component of stockholders' equity. At December 31,
1997, net unrealized losses on available-for-sale securities were
$4.8 million, net of $3.4 million tax effect. At December 31,
1996, net unrealized losses on available-for-sale securities were
$0.1 million, net of $0.1 million tax effect. The cost of
securities when sold is based upon specific identification.
Realized gains and losses for the year ended December 31, 1997
were $7.6 million and $1.5 million, respectively. Realized gains
and losses for the year ended December 31, 1996 were $9.1 million
and $0.7 million, respectively.
The following is a summary of ALZA's investment portfolio:
(in millions)
December 31, 1997
__________________________________________________________________
Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
__________________________________________________________________
U.S. Treasury securities
and obligations of
U.S. government
agencies $ 143.2 $ 0.4 $ (0.3) $ 143.3
Collateralized mortgage
obligations and asset
backed securities 70.9 0.3 (0.2) 71.0
Corporate securities
(primarily corporate
notes and commercial
paper) 329.1 2.0 (10.4) 320.7
__________________________________________________________________
Total $ 543.2 $ 2.7 $ (10.9) $ 535.0
==================================================================
December 31, 1996
__________________________________________________________________
Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
__________________________________________________________________
U.S. Treasury securities
and obligations of
U.S. government
agencies $ 434.1 $ 1.0 $ (1.8) $ 433.3
Collateralized mortgage
obligations and asset
backed securities 112.8 0.3 (0.4) 112.7
Corporate securities
(primarily corporate
notes and commercial
paper) 450.6 1.9 (1.2) 451.3
__________________________________________________________________
Total $ 997.5 $ 3.2 $ (3.4) $ 997.3
==================================================================
The amortized cost and estimated fair value of debt
securities at December 31, 1997 and 1996, by contractual
maturity, are shown below (in millions). Expected maturities will
differ from contractual maturities because the issuers of the
securities may have the right to prepay certain of the
obligations without prepayment penalties.
December 31, 1997 1996
__________________________________________________________________
Estimated Estimated
Amortized Fair Amortized Fair
Cost Value Cost Value
__________________________________________________________________
Due in one year or less $173.5 $173.4 $384.5 $384.5
Due after one year
through four years 235.1 235.6 428.1 427.8
Due after four years
through eight years 134.6 126.0 184.9 185.0
__________________________________________________________________
Total $543.2 $535.0 $997.5 $997.3
==================================================================
In early 1997, ALZA purchased approximately 1.2 million
common shares of USB (4.9% of the outstanding common shares) at a
price of $18.256 per share, for an aggregate investment of $21.5
million. ALZA may not dispose of the shares for one year from the
date of purchase and in accordance with SFAS 115, "Accounting for
Certain Investments in Debt and Equity Securities", they are
considered restricted stock and therefore recorded at cost on the
balance sheet in Investment in long-term securities at December
31, 1997. Beginning in the first quarter of 1998, this stock
will be classified as available for sale and recorded at fair
market value. ALZA and USB are parties to a marketing and
distribution agreement for Ethyol-registered trademark-, which is
described in Note 4.
In early 1997, ALZA purchased 2.0 million common shares of
Alkermes (9.7% of the outstanding common shares) at a price of
$25.00 per share, for an aggregate investment of $50.0 million.
This stock is not restricted and is therefore classified as
available-for-sale. In 1997, ALZA entered into a clinical
development and option agreement with Alkermes for Cereport-
registered trademark-, which is described in Note 4.
NOTE 3. PER SHARE INFORMATION
In February 1997, the Financial Accounting Standards Board
issued SFAS No. 128, "Earnings per Share" ("SFAS 128"), which was
adopted for the year ended December 31, 1997, with restatement of
all prior periods. Under SFAS 128, basic earnings (loss) per
share is calculated by dividing net income (loss) by the weighted
average common shares outstanding for the period. Diluted
earnings (loss) per share is calculated by dividing net income
(loss) 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 (loss) per share (in millions, except
per share amounts):
1997 1996 1995
__________________________________________________________________
NUMERATOR:
Basic
Net income (loss) $(261.1) $ 92.4 $ 72.4
=================================================================
Diluted
Net income (loss) $(261.1) $ 92.4 $ 72.4
Interest on 5 1/4% Debentures,
net of tax - 12.2 -
_________________________________________________________________
Adjusted net income (loss) $(261.1) $104.6 $ 72.4
=================================================================
DENOMINATOR:
Basic
Weighted average shares 85.1 84.2 82.3
==================================================================
Diluted
Weighted average shares 85.1 84.2 82.3
Effect of dilutive securities:
Employee stock options - 0.7 0.3
5 1/4% Debentures - 12.3 -
__________________________________________________________________
Weighted average shares and
assumed conversions 85.1 97.2 82.6
==================================================================
Basic earnings (loss) per share $ (3.07) $ 1.10 $ 0.88
==================================================================
Diluted earnings (loss) per share $ (3.07) $ 1.08 $ 0.88
==================================================================
The potentially dilutive effect of outstanding options to
purchase 6.1 million shares of ALZA's common stock and the
5 1/4% Debentures would have been anti-dilutive in 1997 and were
therefore excluded from the 1997 diluted calculation. The
5% Debentures were not included in the diluted earnings per share
calculation for the periods presented as their inclusion would
have been anti-dilutive.
NOTE 4: ACQUISITIONS OF PRODUCT RIGHTS AND DEVELOPMENT AND OPTION
AGREEMENTS
Product Acquisitions
In late 1995, ALZA entered into a marketing and distribution
agreement with USB for Ethyol-registered trademark-. Under the
terms of the agreement, ALZA has exclusive rights to market the
product in the United States for five years after its launch in
April 1996, and is responsible for sales and marketing; the USB
sales force copromotes the product with ALZA. After the five-year
period, which ALZA has an option to extend for one year,
marketing rights to Ethyol-registered trademark- will revert to
USB, and ALZA will receive payments from USB for ten years based
on continued sales of the product. ALZA paid USB an upfront
payment and initial distribution fees totaling $20.0 million in
1995 and 1996. Of this amount, approximately $13.3 million was
attributed by ALZA to the initial FDA approved indication
(ovarian cancer) and was capitalized. Approximately
$6.7 million, which was attributed by ALZA to potential expanded
product indications not yet approved by the FDA, was charged to
selling, general and administrative expenses. ALZA paid $10.0
million in distribution fees in 1997 based on USB clinical
activities relating to Ethyol-registered trademark-, and paid an
additional $5.0 million in early 1998, both of which were
capitalized.
In July 1997, ALZA acquired exclusive rights to Mycelex-
registered trademark- Troche in the United States from Bayer.
Under the terms of the agreement with Bayer, ALZA made a
$50.0 million upfront payment to Bayer, which was capitalized,
and will make an additional payment if net sales of the product
during a certain period are above a specified level. Bayer
manufactures Mycelex-registered trademark- Troche for ALZA, and
receives payments from ALZA based on sales of the product.
In October 1997, ALZA acquired the exclusive rights in the
United States and Canada to Elmiron-registered trademark- and
three additional urology products, BiCitra-registered trademark-,
PolyCitra-registered trademark- and Neutra-Phos-registered
trademark-, from Baker Norton Pharmaceuticals, Inc. and its
parent, IVAX. Under the terms of the agreement, ALZA paid a
$75.0 million upfront fee to IVAX, which was capitalized, and
will pay additional fees if specified Elmiron-registered
trademark- sales levels are achieved during the next five years.
IVAX manufactures the products for ALZA and receives payments
from ALZA based on sales of the products.
In October 1997, ALZA acquired the rights in the United
States to the immediate-release Ditropan-registered trademark-
product and trademark from HMRI. Under the terms of the
agreement, ALZA made an upfront payment to HMRI, which was
capitalized, and will make additional payments if specified sales
levels of Ditropan-registered trademark- are achieved. HMRI
manufactures the product for ALZA for a price based upon net
sales. ALZA has the right to market other products in the United
States under the Ditropan-registered trademark- trademark. HMRI
will receive royalty payments from ALZA if the trademark is used
by ALZA with other products.
Development and Option Agreements
In September 1997, ALZA entered into a clinical development
and option agreement with Alkermes relating to Cereport-trademark-
, a compound for facilitating chemotherapy drug delivery to the
brain. Under the terms of the agreement, ALZA paid Alkermes
$10.0 million, which was charged to acquisition of in-process
research and development. Alkermes will conduct additional
clinical activities related to Cereport-trademark-, and ALZA has
the option to acquire exclusive worldwide commercialization
rights to the product.
ALZA entered into two agreements with Janssen, effective
December 31, 1997, modifying the arrangements between the parties
related to two E-TRANS-trademark- fentanyl products. Under a
development and commercialization agreement, ALZA and Janssen
modified the agreement pursuant to which they were jointly
developing an E-TRANS-trademark- fentanyl product for the
treatment of acute pain. In connection with this modified
agreement, ALZA made a one-time payment of $21.5 million to
Janssen, which was charged to acquisition of in-process research
and development. ALZA will receive a share of the U.S. operating
profits from the product and royalties from sales of the product
outside the United States. The product is currently in Phase III
clinical trials. Under the second agreement, ALZA will continue
the development of an E-TRANS-trademark- fentanyl product for the
treatment of chronic pain. Janssen will have an option, until a
specified time, to take over funding of the continued development
of the product and to commercialize the product worldwide. If
Janssen exercises its option, ALZA will receive a share of the
U.S. operating profits from the product and royalties from sales
of the product outside the United States. If Janssen does not
exercise its option, ALZA may continue the development of this
product, which is currently under development with Crescendo.
For the arrangements described above, the amounts paid by ALZA
were charged to acquisition of in-process research and
development because the products were under development and had
not been approved by the FDA, and the products had no alternative
future use.
NOTE 5: DEBT OBLIGATIONS AND OTHER LONG-TERM LIABILITIES
In 1996, ALZA issued $500 million of 5% convertible
subordinated debentures due 2006 (the "5% Debentures"). Each 5%
Debenture is convertible, at the option of the holder, into
shares of ALZA common stock at an initial conversion price of
$38.19 per share, subject to certain anti-dilution adjustments.
Interest is payable semiannually. The 5% Debentures rank pari
passu with ALZA's outstanding 5 1/4% Debentures discussed below.
Unamortized costs related to the issuance of the 5% Debentures
were $10.0 million at December 31, 1997 and were included in
other assets. At December 31, 1997 and 1996, the fair value of
the 5% Debentures was $526.9 million and $490.0 million,
respectively.
In 1994, ALZA issued 5 1/4% zero coupon convertible
subordinated debentures due 2014 (the "5 1/4% Debentures"). The 5 1/4%
Debentures were issued at a price of $354.71 per $1,000 principal
amount at maturity. The 5 1/4% Debentures have a principal amount at
maturity of $948.8 million, with a yield to maturity of 5 1/4% per
annum, computed on a semiannual bond equivalent basis. There are
no periodic interest payments. At the option of the holder, each
5 1/4% Debenture is convertible into 12.987 shares of common stock.
At the option of the holder, the 5 1/4% Debentures will be purchased
by ALZA on July 14, 1999, July 14, 2004 or July 14, 2009, at a
purchase price equal to the issue price plus accreted original
issue discount to such purchase date. ALZA, at its option, may
elect to deliver either common stock or cash in the event of
conversion or purchase of the 5 1/4% Debentures. ALZA, at its
option, may redeem any or all of the 5 1/4% Debentures for cash
after July 14, 1999 at a redemption price equal to the issue
price plus accreted original issue discount. Unamortized costs
related to the issuance of the 5 1/4% Debentures were $7.5 million
at December 31, 1997. At December 31, 1997 and 1996, the fair
value of the 5 1/4% Debentures was $441.2 million and $397.3
million, respectively.
Other Long-term Liabilities
ALZA's other long-term liabilities are as follows(in millions):
1997 1996
_________________________________________________________________
Deferred compensation $ 35.8 $31.2
Deferred income taxes - 25.4
Long-term debt 25.0 10.9
_________________________________________________________________
Total other long-term liabilities $60.8 $67.5
=================================================================
ALZA has deferred compensation arrangements under which
selected employees may defer a portion of their salaries. ALZA
has purchased life insurance policies that it intends to use to
partially finance amounts to be paid in the future to
participants, based on their deferred salary amounts plus
interest. The cash surrender value of these policies totaled
$71.2 million and $58.4 million at December 31, 1997 and 1996,
respectively, and is included in other assets.
At December 31, 1997 and 1996, long-term debt consists of
notes representing the required future payments under investments
of $32.1 million and $11.9 million, respectively, in low income
housing partnerships (included in other assets). The aggregate
annual maturities of long-term debt at December 31, 1997 were
$1.8 million in 1998, $5.6 million in 1999, $3.7 million in 2000,
$3.6 million in 2001 and $3.4 million in 2002.
NOTE 6: CAPITAL STOCK AND WARRANTS
In January 1996, privately held warrants to purchase 1.0
million shares of ALZA common stock were exercised. Net proceeds
to ALZA totaled $25.0 million.
In connection with the formation of TDC, ALZA issued
warrants to purchase approximately 1.0 million shares of common
stock at an exercise price of $65 per share. The warrants, to
the extent not exercised, will expire on December 31, 1999.
ALZA is authorized to issue 100,000 shares of preferred
stock, $.01 par value, none of which was outstanding at December
31, 1997 or 1996. The Board of Directors may determine the
rights, preferences and privileges of any preferred stock issued
in the future.
NOTE 7: ARRANGEMENTS WITH THERAPEUTIC DISCOVERY CORPORATION AND
CRESCENDO PHARMACEUTICALS CORPORATION
Therapeutic Discovery Corporation
On September 29, 1997, ALZA purchased all of the Class A
Common Stock of TDC for $100.0 million in cash. This acquisition
was recorded as a purchase and, accordingly, the purchase price
was allocated to assets acquired based upon their fair market
value on the acquisition date. The purchase resulted in a charge
of $77.0 million to acquisitions of in-process research and
development, and the remaining $23.0 million of the purchase
price was allocated to a deferred tax asset arising from TDC's
net operating loss carryforward and capitalized research and
development. The amounts paid by ALZA were charged to
acquisition of in-process research and development because the
TDC products were under development and had not been approved by
the FDA, and they had no alternative future use.
ALZA and TDC had a development contract pursuant to which
ALZA conducted research and development activities on behalf of
TDC. Product development revenues from TDC during 1997, 1996 and
1995 under this development contract were $67.8 million, $100.7
million and $70.1 million, respectively. ALZA performed certain
administrative services for TDC under an administrative services
agreement for which ALZA was reimbursed its direct costs, plus
certain overhead expenses. For the years ended 1997, 1996 and
1995, administrative service revenue under this agreement was
$0.4 million, $0.2 million and $0.1 million, respectively, and is
included in royalties, fees and other revenues.
Crescendo Pharmaceuticals Corporation
Crescendo was formed by ALZA for the purpose of selecting and
developing human pharmaceutical products, and commercializing
such products, most likely through licensing to ALZA. On
September 29, 1997, ALZA contributed $300.0 million in cash to
Crescendo. On September 30, 1997, all of the Crescendo Shares
were distributed to the holders of ALZA common stock and ALZA's
outstanding convertible subordinated debentures. ALZA recorded a
charge of $247.0 million (including expenses of $4.0 million) and
interest expense of $8.0 million related to the distribution to
stockholders and debenture holders, respectively. ALZA also
recorded a dividend of $49.1 million for the distribution of the
Crescendo Shares to ALZA stockholders. The interest expense and
dividend amount were determined according to the fair market
value (based on NASDAQ trading prices immediately following the
distribution) of the Crescendo shares distributed to debenture
holders and stockholders, respectively. The excess of the amount
contributed to Crescendo over the fair market value of the
shares, along with transaction expenses, was recorded as an
expense.
In connection with the contribution to Crescendo and the
distribution of the Crescendo Shares, ALZA and Crescendo entered
into a number of agreements. Crescendo and ALZA entered into a
Development Agreement for the selection and development of human
pharmaceutical products. Under the agreement, Crescendo funds
the development of products recommended by ALZA for development
and accepted by Crescendo. The development of certain specified
products was funded by Crescendo beginning August 25, 1997, the
date on which TDC ceased funding the development of such
products.
Under a Technology License Agreement between ALZA and Crescendo,
ALZA has granted to Crescendo a worldwide license to use ALZA
technology solely to select and develop Crescendo products, and
to conduct related activities, and to commercialize such
products. In exchange for the license to use existing ALZA
technology relating to seven products initially under development
by Crescendo and ALZA, Crescendo pays a technology fee to ALZA,
payable monthly over a period of three years, in the amount of
$1.0 million per month for the 12 months following the
distribution of the Crescendo Shares, $667,000 per month for the
following 12 months and $333,000 per month for the following 12
months. The technology fee will no longer be payable at such
time as fewer than two of the seven initial products are being
developed by Crescendo and/or have been licensed by ALZA pursuant
to the option, granted to it by Crescendo, to license any or all
Crescendo products. ALZA recorded technology fee revenue from
Crescendo of $4.0 million for 1997. Five of the seven initial
products were in development at January 31, 1998.
ALZA recognizes the technology fee from Crescendo when
earned. Since Crescendo owes the fee at the end of each month
if, and only if, at least two of the "Initial Products" remain in
development at the end of each month, the fee is not earned until
the end of each month in which the test is satisfied.
Development of any or all of the Initial Products could be
terminated by Crescendo at any time, and four of these products
are no longer in active development. The monthly technology fee
payments are not guaranteed, and the conditions precedent to
their payment have not been fulfilled and cannot be fulfilled
before the end of each month. At the time ALZA accrues the
Crescendo technology fee, ALZA has no future performance
obligations to Crescendo in order to earn the fee that is being
accrued.
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. Also, under Crescendo's
Restated Certificate of Incorporation, ALZA has the right to
purchase all (but not less than all) of the Crescendo Shares at a
price based upon a pre-established formula.
NOTE 8: EMPLOYEE COMPENSATION AND BENEFIT PROGRAMS
Bonuses and Awards
ALZA has a company-wide bonus program under which
substantially all regular employees are eligible to receive a
bonus. The annual bonus, if any, is determined by ALZA's Board
of Directors, at its discretion, based on ALZA's performance
during the year. Bonus and
award expenses under this program for 1997, 1996 and 1995 were
$7.9 million, $6.9 million and $5.3 million, respectively.
Defined Contribution Plan
ALZA has a company-funded, defined contribution retirement
plan for its employees. This plan provides for an annual basic
contribution and allows for additional discretionary
contributions on
a year-by-year basis. Such contributions are allocated to
participants based on the participants' salaries and ages. For
1997, 1996 and 1995, the total expense for such contributions to
this plan was $3.6 million, $2.9 million and $2.7 million,
respectively.
Employee Savings Plan
ALZA has an employee savings plan which permits participants
to make contributions by salary reductions pursuant to section
401(k) of the Internal Revenue Code. The Company matches
contributions up to a specified amount per participant. In 1997
and 1996, ALZA's contributions to the plan were $1.1 million and
$0.7 million. There were no matching contributions in 1995.
Stock Plan
ALZA has a stock plan whereby incentive stock options to
purchase shares of ALZA common stock at not less than the fair
market value of the stock at the date of the grant may be granted
to employees; nonstatutory stock options to purchase shares of
ALZA common stock at not less than 85% of the fair market value
of the stock at the date of grant may be granted to employees,
directors and consultants; and restricted stock may be issued.
Options typically vest one to three years from date of grant and
generally expire ten years after the date of grant. A total of
8.9 million shares of ALZA's common stock have been reserved for
issuance under its stock plan. To date, all options granted have
had exercise prices equal to the fair market value of common
stock on the date of grant. In 1997, a total of 25,000 shares of
restricted stock were issued to one employee at a price of $0.01
per share, the par value of the common stock. ALZA has the right
to repurchase a declining portion of the shares, at par value, if
the employee's employment with ALZA terminates within three years
of the date of issuance.
Financial Accounting Standards Board SFAS No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123"), effective
beginning in 1996, prescribes a fair value method of accounting
for employee stock options. SFAS 123 gives companies a choice of
recognizing related compensation expense by adopting the new fair
value method or continuing to measure compensation under
Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" ("APB 25"). The Company has elected to
continue to follow APB 25 in accounting for its employee stock
options and employee stock purchase plan.
Had compensation expense for stock options and shares issued
under the stock purchase plan been determined using the fair
value method in accordance with SFAS 123, ALZA's pro forma net
income (loss) and earnings (loss) per share would have been as
follows:
(in millions, except per share
amounts) 1997 1996 1995
_________________________________________________________________
Net income (loss)
As reported $(261.1) $92.4 $72.4
Pro forma (270.4) 85.8 70.0
Earnings (loss) per share (basic)
As reported $(3.07) $1.10 $0.88
Pro forma (3.18) 1.02 0.85
Earnings (loss) per share (diluted)
As reported $(3.07) $1.08 $0.88
Pro forma (3.18) 1.01 0.85
The fair value for these options was estimated at the date
of grant using the Black-Scholes option pricing model with the
following weighted average assumptions:
1997 1996 1995
_________________________________________________________________
Risk-free interest rate 6.4% 6.0% 6.1%
Expected dividend yield 0 0 0
Expected volatility 30% 30% 30%
Expected life (in years) 4.0 3.6 3.9
Changes in the assumptions can materially affect the fair
value estimate and therefore the existing models do not
necessarily provide a reliable single measure of the fair value
of ALZA's employee stock options or shares issued under the
employee stock purchase plan.
A summary of ALZA's stock option activity, and related
information for 1997, 1996 and 1995 follows:
1997 1996 1995
_________________________________________________________________
Weighted Weighted Weighted
Average Average Average
Options Exercise Options Exercise Options Exercise
(in millions) Price (in millions) Price (in millions) Price
_________________________________________________________________
Outstanding-
beginning
of year 5.5 $24 5.7 $ 23 4.4 $ 21
Granted 1.6 29 0.9 27 1.8 23
Exercised (0.6) 21 (0.9) 20 (0.3) 14
Forfeited (0.4) 26 (0.2) 25 (0.2) 21
_________________________________________________________________
Outstanding-end
of year 6.1 25 5.5 24 5.7 23
Exercisable-end
of year 2.7 24 2.2 23 1.8 23
Weighted-average fair
value of options
granted $9.93 $8.13 $7.75
At December 31, 1997 and 1996, shares available for grant under
the stock plan were 2.7 million and 4.0 million, respectively.
OPTIONS OUTSTANDING
_________________________________________________________________
Number Weighted-Average
Range of Outstanding Remaining Weighted-Average
Exercise at 12/31/97 Contractual life Exercise
Prices (in millions) (in years) Price
_________________________________________________________________
$12.00-21.75 1.7 5.79 $19.94
22.00-24.75 1.5 7.39 24.11
24.88-29.06 2.4 8.60 27.51
29.63-49.25 0.5 6.16 34.37
_________________________________________________________________
6.1
OPTIONS EXERCISABLE
_________________________________________________________________
Number
Range of Exercisable Weighted-Average
Exercise at 12/31/97 Exercise
Prices (in millions) Price
_________________________________________________________________
$12.00-21.75 1.4 $19.83
22.00-24.75 0.5 24.33
24.88-29.06 0.5 25.75
29.63-49.25 0.3 36.55
_________________________________________________________________
2.7
Employee Stock Purchase Plan
ALZA has an employee stock purchase plan in which
essentially all ALZA employees may participate and purchase stock
at 85% of its fair market value at certain specified dates.
Employee contributions are limited to 15% of compensation. In
1997, 1996 and 1995 total shares of ALZA common stock purchased
by the participants under the terms of this plan were 260,130,
237,950 and 165,314, respectively. Since adoption of this plan
in 1984, 1,665,528 shares have been issued under this plan and
384,472 shares are available for issuance. The fair value of the
employees' purchase rights was estimated using the Black-Scholes
option pricing model with the following weighted average
assumptions for 1997, 1996 and 1995: risk free interest rates of
5.4%, 5.3% and 4.8%, respectively; dividend yields of zero; an
expected volatility factor of the market price of ALZA's common
stock of 30%; and an expected life of six months. The weighted-
average fair value for shares issued under the employee stock
purchase plan for 1997, 1996 and 1995 was $6.52, $6.00 and $5.62,
respectively.
NOTE 9: INCOME TAXES
The provision for income taxes is as follows (in millions):
1997 1996 1995
_________________________________________________________________
Federal
Current $ 46.9 $47.9 $30.1
Deferred (12.9) (2.4) 5.6
_________________________________________________________________
34.0 45.5 35.7
State
Current 16.5 11.2 6.4
Deferred (0.8) - 2.3
_________________________________________________________________
15.7 11.2 8.7
_________________________________________________________________
Provision for income taxes $ 49.7 $56.7 $44.4
=================================================================
Tax benefits associated with employee stock option transactions
reduced accrued income taxes by $2.3 million, $3.3 million and $1.0
million for 1997, 1996 and 1995, respectively.
The provision for income taxes differs from the amount computed
by applying the statutory federal income tax rate to income before
income taxes. The sources and tax effects of the differences are
as follows (in millions):
1997 1996 1995
_________________________________________________________________
Expected federal tax at 35% $ (73.0) $52.2 $40.9
State income taxes, net of
federal benefit 10.2 7.3 5.7
Investment and research
tax credits (5.2) (2.3) (1.3)
Purchased in-process research and
development 113.4 - -
Other 4.3 (0.5) (0.9)
_________________________________________________________________
Provision for income taxes $ 49.7 $ 56.7 $44.4
=================================================================
Temporary differences which give rise to a significant portion of
deferred tax assets and liabilities at December 31, 1997 and 1996
are as follows (in millions):
1997 1996
_________________________________________________________________
Deferred tax assets:
Capitalized intangibles $ 35.9 $ 6.1
Compensation 16.1 14.5
State income taxes 7.4 4.8
Investments 5.7 1.0
Inventories 5.6 5.7
Bad debt 3.0 2.3
Deferred revenue 0.1 0.1
Other 1.6 -
_________________________________________________________________
Total deferred tax assets 75.4 34.5
_________________________________________________________________
Deferred tax liabilities:
Property, plant and equipment 43.1 39.8
Unrealized losses on
available-for-sale securities (3.4) (0.1)
Other 3.9 2.5
_________________________________________________________________
Total deferred tax liabilities 43.6 42.2
_________________________________________________________________
Net deferred tax assets (liabilities) $ 31.8 $(7.7)
=================================================================
NOTE 10: COMMITMENTS AND CONTINGENCIES
Commitments
ALZA leases certain buildings and equipment under operating
leases, the terms of which range from one to 33 years. Rent
expense under these leases for 1997, 1996 and 1995 was $4.0
million, $3.7 million and $1.7 million, respectively.
In late 1997, ALZA acquired a 50% interest in a real estate
joint venture for the development of a 13-acre parcel of land in
Mountain View, California. ALZA invested $36.2 million in the
joint venture, which will be applied to the construction of
buildings on the parcel. ALZA is also obligated to make
improvements to the buildings, the total cost of which is
estimated to be between $60.0 million and $100.0 million. The
joint venture will lease the buildings to ALZA upon completion of
construction, currently scheduled for 1999. The leases provide
for an initial term of 15 years with scheduled annual rent
increases, followed by two 10-year extension periods with rent
increases based upon the Consumer Price Index. ALZA will receive
50% of the joint venture's income.
ALZA has also entered into a ground lease agreement for an
adjacent seven-acre parcel of land on which it plans to construct
a pilot plant, laboratories and other technical facilities. The
term of the ground lease is approximately 33 years and includes
options for ALZA to purchase, or to be required to purchase, the
property.
Aggregate minimum lease commitments under all non-cancelable
operating lease arrangements as of December 31, 1997 were (in
millions):
1998 $3.9
1999 9.2
2000 10.4
2001 10.2
2002 10.4
Later years 162.1
_________________________________________________________________
Total $206.2
In January 1998, ALZA purchased a building in Mountain View,
California, which it had leased since 1992. The total purchase
price was approximately $19.0 million, the majority of which was
offset by the repayment of an outstanding note receivable from the
seller. The note receivable was included in other assets at
December 31, 1997.
Contingencies
Pharmaceutical companies are subject to product liability
claims. Product liability suits have been filed against Janssen
and ALZA from time to time relating to the Duragesic-registered
trademark- product. Janssen is managing the defense of these suits
in consultation with ALZA under an agreement between the parties.
Historically, the cost of resolution of ALZA's liability
(including product liability) claims has not been significant, and
ALZA is not aware of any asserted or unasserted claims pending
against it, including the suits mentioned above, the resolution of
which would have a material adverse impact on ALZA's results of
operations or financial position.
NOTE 11: QUARTERLY FINANCIAL DATA (UNAUDITED)
(In millions, except per share amounts)
1997
_________________________________________________________________
First Second Third(1) Fourth(2)
_________________________________________________________________
Total revenues $ 105.5 $ 118.2 $ 114.5 $ 126.2
Gross margin 7.8 13.3 14.5 17.7
Operating income (loss) 39.2 42.9 (305.9) 19.8
Net income (loss) 26.3 26.4 (326.5) 12.7
Earnings (loss) per share
Basic $0.31 $0.31 $(3.83) $0.15
Diluted 0.30 0.30 (3.83) 0.15
1996
_________________________________________________________________
First Second Third Fourth
_________________________________________________________________
Total revenues $88.5 $117.9 $98.4 $108.3
Gross margin 4.7 4.0 8.0 6.6
Operating income (loss) 31.0 38.1 33.7 36.4
Net income (loss) 20.4 23.2 23.1 25.7
Earnings (loss) per share
Basic $ 0.24 $ 0.27 $ 0.27 $ 0.30
Diluted 0.24 0.27 0.27 0.30
(1)In the third quarter of 1997, ALZA recorded charges totaling
$353.5 million, or $4.14 per share, diluted. These charges
included a $247.0 million charge and $8.0 million of interest
expense related to the distribution of Crescendo Shares,
$87.0 million for acquired in-process research and
development and an asset write-down of $11.5 million.
(2)In the fourth quarter of 1997, ALZA recorded charges of $21.5
million for acquired in-process research and development and
$1.8 million in costs related to a workforce reduction. Net
of income taxes, these charges totaled $15.2 million, or
$0.17 per share, diluted.
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
THE BOARD OF DIRECTORS AND STOCKHOLDERS
ALZA CORPORATION
We have audited the accompanying consolidated balance sheet of ALZA
Corporation as of December 31, 1997 and 1996, and the related
consolidated statements of operations, stockholders' equity and
cash flows for each of the three years in the period ended December
31, 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion
on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial
position of ALZA Corporation at December 31, 1997 and 1996, and the
consolidated results of its operations and its cash flows for each
of the three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles.
Ernst & Young LLP
Palo Alto, California
February 13, 1998
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
ALZA incorporates by reference the information concerning
its directors set forth under the heading "Election of Directors"
on pages 1 to 4 in ALZA's definitive Proxy Statement dated March
27, 1998, for its Annual Meeting of Stockholders to be held on
May 7, 1998 (the "Proxy Statement") and the information under the
heading "Section 16(a) Beneficial Ownership Reporting Compliance"
at page 7 in the Proxy Statement. Information concerning ALZA's
executive officers appears at the end of Part I of this report on
pages 28 to 30.
Item 11. EXECUTIVE COMPENSATION
ALZA incorporates by reference the information ("Summary
Compensation Table", "1997 Option Grants", "1997 Aggregated
Option Exercises and Fiscal Year-End Option Values" and "Certain
Executive Agreements") set forth under the heading "Executive
Compensation" on pages 5 to 7 in the Proxy Statement.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
ALZA incorporates by reference the information set forth
under the heading "Beneficial Stock Ownership" on page 13 in the
Proxy Statement.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
ALZA incorporates by reference the information set forth
under the heading "Certain Transactions" on page 14 in the Proxy
Statement.
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
(a) Documents filed as part of this Annual Report on Form 10-K:
1. Consolidated Financial Statements: Incorporated by
reference to the Annual Report (see accompanying Index to
Consolidated Financial Statements).
2. Consolidated Financial Statement Schedule: (see
accompanying Index to Consolidated Financial Statement Schedule).
3. Exhibits:
3.1 Restated Certificate of Incorporation of
ALZA Corporation filed with the Delaware Secretary
of State on February 14, 1994(1)
3.2 Composite Bylaws of ALZA Corporation as
restated on February 10, 1994 and amended on
August 11, 1994, February 16, 1995, February 15,
1996, August 13, 1996 and February 10, 1998.
4.1 Indenture dated July 7, 1994 between ALZA
Corporation and the Chase Manhattan Bank, N.A. as
Trustee, relating to ALZA's 5 1/4% Liquid Yield
Option-trademark- Notes(2)
4.2 Specimen of LYONs-trademark- Certificate
(included in Exhibit 4.1)
4.3 Form of Warrant Agreement between ALZA
Corporation and the Chase Manhattan Bank (with
attached Warrant Certificate)(3)
4.4 Indenture dated April 23, 1996 between ALZA
Corporation and the Chase Manhattan Bank, N.A., as
Trustee, relating to ALZA's 5% Convertible
Subordinated Debentures(4)
4.5 Specimen of 5% Convertible Subordinated
Debenture (included in Exhibit 4.4)
10.1Technology License Agreement between ALZA
Corporation and Crescendo Pharmaceuticals
Corporation(5)
See footnotes on page 34.
10.2 Development Agreement between ALZA
Corporation and Crescendo Pharmaceuticals
Corporation(5)
10.3 License Option Agreement between ALZA
Corporation and Crescendo Pharmaceuticals
Corporation(5)
10.4 Restated Certificate of Incorporation of
Crescendo Pharmaceuticals Corporation(5)
10.5 Amended and Restated Executive Deferral
Plan II *
10.6 Executive Deferral Plan II for Chief
Executive Officer(6)*
10.7 Executive Deferral Plan Amendments(7)*
10.8 Amendment Number 2 to Executive Deferral
Plans II(8)*
10.9 ALZA Corporation Amended and Restated
Stock Plan(9)*
10.10 Form of Executive Agreement between
ALZA Corporation and Certain Executive
Officers(10)*
10.11 Lease Agreement between ALZA and
P/A Charleston Road LLC for Building One of
Charleston Road Development Project (a
substantially identical lease is in effect for
each of two other office buildings)
10.12 Construction Agreement between ALZA
and P/A Charleston Road LLC relating to three
office building lease agreements
10.13 Ground Lease between ALZA and the
Peery and Arrillaga Trusts relating to a seven-
acre parcel in Mountain View
21 Subsidiaries (11)
23 Consent of Ernst & Young LLP,
Independent Auditors
(b) No reports on Form 8-K were filed during the quarter ended
December 31, 1997.
______________________________________________________________
(1) Incorporated by reference to ALZA's Form 10-K Annual Report
for the year ended December 31, 1993.
(2) Incorporated by reference to ALZA's Form 10-Q Quarterly Report
for the quarter ended June 30, 1994.
(3) Incorporated by reference to ALZA's Form 8-A Registration
Statement (Commission File No. 0-11234) dated March 31, 1993,
as amended.
(4) Incorporated by reference to ALZA's Form S-3 Registration
Statement (Commission File No. 333-2343) dated April 8, 1996,
as amended.
(5) Incorporated by reference to ALZA's Form 10-Q Quarterly Report
for the quarter ended September 30, 1997.
(6) Incorporated by reference to ALZA's Form 10-Q Quarterly Report
for the quarter ended September 30, 1993.
(7) Incorporated by reference to ALZA's Form 10-K Annual Report
for the year ended December 31, 1992.
(8) Incorporated by reference to ALZA's Form 10-K Annual Report
for the year ended December 31, 1994.
(9) Incorporated by reference to ALZA's Form 10-Q Quarterly Report
for the quarter ended June 30, 1995.
(10) Incorporated by reference to ALZA's Form 10-K Annual Report
for the year ended December 31, 1995.
*A management contract or compensatory plan or arrangement
required to be filed as an Exhibit pursuant to Item 14(c) of
Form 10-K.
ALZA CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS, REPORT OF
ERNST & YOUNG LLP, INDEPENDENT AUDITORS AND
CONSOLIDATED FINANCIAL STATEMENT SCHEDULE
(Item 14(a))
Page Number Reference
Form 10-K/A
Consolidated statement of operations for
the years ended December 31, 1997, 1996,
1995 56
Consolidated balance sheet at
December 31, 1997 and 1996 57
Consolidated statement of stockholders'
equity for the years ended December 31, 1997,
1996 and 1995 59
Consolidated statement of cash flows for
the years ended December 31, 1997, 1996
and 1995 60
Notes to consolidated financial statements 62-72
Report of Ernst & Young LLP, Independent
Auditors 83
The following consolidated financial statement
schedule of ALZA Corporation is included:
II - Consolidated valuation and qualifying
accounts 84
All other schedules have been omitted because the required
information is not present or is not present in amounts sufficient
to require submission of the schedule, or because the information
required is included in the consolidated financial statements,
including the notes thereto.
SCHEDULE II
ALZA CORPORATION
CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS
Years Ended December 31, 1997, 1996 and 1995
Balance at Additions Deductions
Beginning Charged to and Balance at
of Year Income write-offs End of Year
(In millions)
Allowance for
doubtful
receivables:
1997 $ 0.6 $ 0.2 $ - $ 0.8
1996 $ 0.2 $ 0.4 $ - $ 0.6
1995 $ 0.3 $ - $ (0.1) $ 0.2
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
ALZA CORPORATION
By: __________________________
Dr. Ernest Mario
Chief Executive Officer
Date: February 11, 1999
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on
behalf of the registrant and in the capacities and on the dates
indicated.
_____________________________ ____________________________
Dr. Ernest Mario Dean O. Morton
Chairman of the Board of Director
Directors, Director and Chief Date: February 11, 1999
Executive Officer
Date: February 11, 1999
_____________________________ ____________________________
Dr. William R. Brody Denise M. O'Leary
Director Director
Date: February 11, 1999 Date: February 11, 1999
_____________________________ ____________________________
William G. Davis Isaac Stein
Director Director
Date: February 11, 1999 Date: February 11, 1999
_____________________________ ____________________________
Dr. Robert J. Glaser Julian N. Stern
Director Director
Date: February 11, 1999 Date: February 11, 1999
____________________________
Bruce C. Cozadd
Senior Vice President, Chief
Financial Officer and
Principal Accounting Officer
Date: February 11, 1999
EXHIBIT INDEX
Exhibit
23 Consent of Ernst & Young LLP, Independent Auditors
Exhibit 23
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration
Statements (Forms S-3 No. 33-53671 and No. 333-02765 and Forms S-8
No. 2-92629, No. 2-97422, No. 33-21810, No. 33-36141, No. 33-49824,
No. 33-51890, No. 333-21877 and No. 333-70799) and in the related
Prospectuses, of our report dated February 13, 1998 with respect to
the consolidated financial statements and schedule of ALZA
Corporation for the year ended December 31, 1997 included herein.
Ernst & Young LLP
Palo Alto, California
February 11, 1999
