SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED
DECEMBER 31, 1999
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
of organization) Identification No.)
1900 Charleston Road, P.O. Box 7210, Mountain View, CA 94039-7210
___________________________________________________________________
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (650) 564-5000
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-trademark- New York Stock Exchange
Notes due 2014 (Zero Coupon-Subordinated)
5% Convertible Subordinated Debentures New York Stock Exchange
due 2006
Securities registered pursuant to Section 12(g) of the Act:
Warrants (to purchase Common Stock at $65 per share) (such warrants
expired on December 31, 1999 and will be deregistered effective
June 25, 2000).
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 17, 2000:
$3,884,576,524.
Indicate the number of shares outstanding of each of the
registrant's classes of common stock, as of March 17, 2000:
Title of Class Number of Shares
___________________________________________________________________
Common Stock 102,481,583
DOCUMENTS INCORPORATED BY REFERENCE
Part I, Item 1 (with respect to financial information of
operating segments) and Part II, Items 5, 6, 7, 7A and 8 are
incorporated by reference to the 1999 Annual Report to
Stockholders. 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 18, 2000.
ALZA CORPORATION FORM 10-K ANNUAL REPORT
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
TABLE OF CONTENTS
Page
Part I.
Item 1. BUSINESS 3
Item 2. PROPERTIES 33
Item 3. LEGAL PROCEEDINGS 34
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 35
EXECUTIVE OFFICERS OF THE REGISTRANT 36
Part II.
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS 39
Item 6. SELECTED CONSOLIDATED FINANCIAL DATA 39
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 39
Item 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK 39
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 39
Item 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE 40
Part III.
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 40
Item 11. EXECUTIVE COMPENSATION 40
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT 40
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 40
Part IV.
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES,
AND REPORTS ON FORM 8-K 41
SIGNATURES 47
EXHIBIT INDEX 49
PART I
Item 1. BUSINESS
Notice Concerning Forward-Looking Statements
Some of the statements made by ALZA Corporation ("ALZA") in
this Form 10-K Annual Report are forward-looking in nature,
including but not limited to ALZA's sales and marketing plans and
expansion, product development activities and plans, potential
product approvals and launches, 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", "plan", "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 Annual Report, 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, product
marketing risks, changes in the health care marketplace,
competition, patent and intellectual property matters, regulatory
risks and manufacturing issues.
Introduction
ALZA is a research-based 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 commercializes products it develops
as well as products it acquires from third parties. ALZA is
currently focusing its sales and marketing efforts in urology and
oncology, and in the year 2000 expects to add central nervous
system ("CNS")/pediatric marketing and sales activities.
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 1900
Charleston Road, P.O. Box 7210, Mountain View, California 94039-
7210.
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-registered trademark- (nicotine transdermal system)
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, ALZA began to build its own
sales and marketing capabilities, and ALZA has recently expanded
these activities through its ALZA Pharmaceuticals division. As of
the end of 1999, ALZA Pharmaceuticals was marketing more than a
dozen products in the United States.
Currently, ALZA is a fully integrated commercial
pharmaceutical company which operates in two business segments:
-- ALZA Pharmaceuticals: In this segment, ALZA
develops and commercializes products intended for
marketing in North America by the ALZA Pharmaceuticals'
sales forces, and commercializes these products
elsewhere, at the present time, through distributors; and
-- ALZA Technologies: In this segment, ALZA develops
and manufactures products incorporating ALZA's drug
delivery technologies for marketing by client companies,
as well as by ALZA Pharmaceuticals.
In March 1999, ALZA acquired SEQUUS Pharmaceuticals, Inc.
("SEQUUS") in a merger that was accounted for by ALZA as a pooling
of interests. As a result of the merger, ALZA acquired the Doxil-
registered trademark- (doxorubicin HCl liposome injection) product
and the STEALTH-registered trademark- liposomal technology, and
restated its financial statements to include SEQUUS' financial
results. The description of ALZA in this Form 10-K Annual Report
is of the combined business.
ALZA Pharmaceuticals
ALZA Pharmaceuticals commercializes products developed by ALZA
and products acquired from third parties. At December 31, 1999,
ALZA Pharmaceuticals had an oncology business unit with a specialty
United States oncology sales organization and a urology business
unit with a sales organization promoting its urology products in
the United States to urologists and other specialists, as well as
to primary care physicians. In 2000, ALZA expects to begin to build
a new CNS/pediatric business unit in anticipation of the approval
by the United States Food and Drug Administration ("FDA"), and
launch, of Concerta-trademark- (methylphenidate HCl). (See
"Disclosed Products in Development for Marketing by ALZA
Pharmaceuticals" below.) The business units are supported by ALZA
Pharmaceuticals' Health Systems Group which is responsible for
establishing and maintaining relationships with private and
government payers, reimbursement policy agencies, long-term care
providers, physician practice management group networks,
distribution and pharmacy providers and patient advocacy groups.
For financial information about the ALZA Pharmaceuticals
operating segment, see "Operating Segments" in ALZA's 1999 Annual
Report and Note 14 of the Notes to ALZA's Financial Statements
included in Item 8 of this Form 10-K Annual Report.
Urology Business Unit
At the end of 1999, ALZA was marketing 11 urology products.
ALZA's urology sales organization calls on urologists and other
specialists. Under an agreement with UCB Pharma, Inc. ("UCB
Pharma"), UCB Pharma sales professionals are promoting ALZA's
Ditropan XL-registered trademark- (oxybutynin chloride) product to
primary care physicians. Under an agreement with Innovex, Inc.,
additional sales professionals are promoting Ditropan XL, the
Testoderm-registered trademark- TTS (testosterone) line of products
and Mycelex-registered trademark- (clotrimazole) Troche to primary
care physicians. ALZA Pharmaceuticals' urology business unit's
products are:
Ditropan XL - On February 1, 1999, ALZA Pharmaceuticals
launched Ditropan XL, a once-daily treatment for overactive bladder
with symptoms of urge urinary incontinence, urgency and frequency,
developed by ALZA with Crescendo Pharmaceuticals Corporation
("Crescendo"). Ditropan XL is the first and only once-daily
treatment for overactive bladder approved in the United States. In
October 1997, ALZA acquired the exclusive United States rights to
the immediate release oral Ditropan product from Hoechst Marion
Roussel, Inc., now Aventis S.A. ("Aventis"). In 1998, ALZA acquired
the rights to the immediate release Ditropan product in Canada from
Aventis and Procter & Gamble Pharmaceuticals, Inc ("P&G"). This
product is indicated for the treatment of urge urinary
incontinence. As part of these transactions, ALZA also acquired
the right to use the Ditropan-registered trademark- trademark in
the United States and Canada with other products, including
Ditropan XL. In late 1998, ALZA entered into an agreement with
Synthelabo (now Sanofi-Synthelabo) under which Sanofi-Synthelabo
will market the Ditropan XL product in Europe after obtaining
regulatory approval. Regulatory approval for the product is
pending in the United Kingdom (as the rappeuteur country for
several European countries).
-- Testoderm TTS Line of Products - ALZA has developed three
once-daily transdermal systems for testosterone replacement therapy
in males for conditions associated with a deficiency or absence of
endogenous testosterone, referred to as the Testoderm TTS line of
products. These products include Testoderm and Testoderm with
Adhesive, both of which are worn on the scrotum, and Testoderm TTS,
which can be worn on the arm, back or upper buttocks. Ferring N.V.
markets the Testoderm product in several European countries under a
distribution agreement with ALZA.
-- Elmiron-registered trademark- (pentosan polysulfate
sodium) - In October 1997, ALZA acquired the exclusive rights in
the United States and Canada to Elmiron, 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 as ALZA employees most of the IVAX personnel involved in
promoting the product in the United States and Canada.
-- Mycelex 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 ALZA's acquiring the rights to
the product, ALZA Pharmaceuticals promoted the product for Bayer.
-- PolyCitra-registered trademark- (potassium citrate),
BiCitra-registered trademark- (sodium citrate and citric acid) and
Neutra-Phos-registered trademark- (potassium and sodium phospate) -
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, sold over-the-
counter, is a nutritional supplement used to treat phosphorous
deficiency. All three products are marketed in the United States;
PolyCitra is also marketed by ALZA in Canada.
-- Urispas-registered trademark- (flavoxate hydrochloride) -
In November 1998, ALZA acquired the United States rights to Urispas
from SmithKline Beecham Pharmaceuticals ("SB"). Urispas is a
smooth muscle relaxant that counteracts muscle spasms of the
urinary tract. The product is used to relieve symptoms associated
with urinary incontinence and painful urination.
-- MacroBID-registered trademark- (nitrofurantoin
monohydrate/macrocrystals) and Macrodantin-registered trademark-
(nitrofurantoin macrocrystals) - In October 1998, ALZA licensed the
marketing rights to the MacroBID and Macrodantin products in Canada
from P&G. The products are antibacterial agents indicated for the
treatment of acute uncomplicated urinary tract infections.
The Ditropan XL product and the Testoderm TTS line of products
are manufactured by ALZA Technologies for ALZA Pharmaceuticals.
The other products described above are manufactured by the third
parties from which the rights were acquired or by other third party
manufacturers. (See "ALZA Technologies - Manufacturing" below.)
Oncology Business Unit
At the end of 1999, ALZA Pharmaceuticals' oncology business
unit was marketing Doxil and Ethyol-registered trademark-
(amifostine), was promoting Mycelex Troche (described above), and
was co-promoting Duragesic-registered trademark- (fentanyl) CII.
-- Doxil - a liposome formulation of doxorubicin, marketed
in the United States for the treatment of AIDS-related Kaposi's
sarcoma in patients with disease that has progressed on prior
combination chemotherapy or in patients who are intolerant to such
therapy. In June 1999, a supplementary New Drug Application
("sNDA") was approved by the FDA for the marketing of Doxil for the
treatment of metastatic ovarian cancer that is refractory to
paclitaxel and platinum-based therapy. Affiliates of Schering-
Plough Corporation ("SP") distribute the product outside the United
States under the trade name Caelyx-trademark-. Caelyx is available
internationally for the treatment of AIDS-related Kaposi's sarcoma
in many countries including the United Kingdom, Germany, Sweden,
Austria, Denmark, Finland and the Netherlands. SP has filed an
application in the EU for approval of the product for the ovarian
cancer indication.
-- Ethyol - In April 1996, ALZA Pharmaceuticals began
marketing Ethyol in the United States. Ethyol is a unique
cytoprotective agent developed by U.S. Bioscience, Inc., acquired
by MedImmune, Inc. ("MedImmune") in late 1999, 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. In June 1999,
the FDA approved an sNDA for the marketing of the product to reduce
the incidence of moderate to severe xerostomia in post-surgery
patients undergoing radiation therapy for head and neck cancer.
MedImmune co-promotes the product with ALZA. ALZA has the right to
market the product until April 2002, and will receive residual
payments from MedImmune for nine years after the end of ALZA's
marketing term.
-- Duragesic - The oncology business unit also co-promotes
Duragesic, a 72-hour system for management of chronic pain in
patients who require continuous opioid analgesia for pain that
cannot be controlled by lesser means, marketed by Janssen
Pharmaceutica, Inc. (together with its affiliates, "Janssen") under
a distribution agreement with ALZA. ALZA developed the product for
the ALZA TTS Research Partners, Ltd. (the "TTS Partnership"). ALZA
Pharmaceuticals receives fees for its co-promotion activities.
Duragesic is manufactured by ALZA. Doxil is manufactured by a
third party. Ethyol is manufactured by MedImmune. (See "ALZA
Technologies - Manufacturing" below.)
Other Products
In addition to the products described above, ALZA
Pharmaceuticals markets ALZET-registered trademark- mini-osmotic
pumps for laboratory research. 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. ALZA also sells
Progestasert-registered trademark- (progesterone), an intrauterine
implant that provides contraception for one year by releasing the
natural hormone progesterone. Amphotec-registered trademark-
(amphotericin B) cholesteryl sulfate complex for injection, a lipid-
based formulation of amphotericin B, is sold by ALZA
Pharmaceuticals in the United States for the treatment of invasive
aspergillosis in patients where renal impairment or unacceptable
toxicity precludes the use of amphotericin B deoxycholate in
effective doses, and in patients with invasive aspergillosis where
prior amphotericin B deoxycholate therapy has failed. The product
is marketed as Amphocil-trademark- in many countries outside the
United States by various marketing partners.
Disclosed Products in Development for Marketing by ALZA
Pharmaceuticals
ALZA has several products in development with Crescendo. ALZA
has an option to license all such products, on a product-by-product
basis. (See "Crescendo Pharmaceuticals Corporation" below.) ALZA
also has arrangements with other third parties with respect to
other products in development that ALZA Pharmaceuticals may market
or co-promote in the future. Because of the potential marketing by
ALZA Pharmaceuticals, these products are treated as part of the
ALZA Pharmaceuticals segment, and the research and development
expenses related to Crescendo products, and corresponding research
and development revenues from Crescendo, are included in the ALZA
Pharmaceuticals segment. Disclosed products in development for
potential marketing by ALZA Pharmaceuticals include:
-- DUROS-registered trademark- leuprolide (Viadur-trademark-
(leuprolide acetate implant)) - 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 advanced prostate cancer. The product was approved by
the FDA in March 2000. ALZA is currently completing its scale-up
activities for the commercial manufacture of the product, for an
anticipated launch in late 2000 or early 2001. No regulatory
filings have been made outside the United States.
-- OROS-registered trademark- methylphenidate (Concerta) -
The OROS methylphenidate product is designed as a once-daily
treatment for attention deficit disorder/attention deficit
hyperactivity disorder ("ADD/ADHD"). The product, developed with
Crescendo, is awaiting FDA approval.
-- E-TRANS-registered trademark- (electrotransport) fentanyl
system - ALZA and Crescendo are developing an E-TRANS fentanyl
product for the patient-controlled treatment of acute pain. Until
the end of 1999, the product was in development by ALZA for
Janssen, and Phase I and II, and some Phase III, clinical studies
had been conducted on more than 1,000 patients and healthy
volunteers. The clinical studies were put on hold in 1998 as a
result of technical issues that ALZA believes have been resolved.
At the end of 1999, Janssen determined that it would no longer fund
the development program; as a result, ALZA had all rights to the
product. In early 2000, Crescendo agreed to fund the continued
development of the product, and ALZA plans to commence Phase III
clinical trials during 2000.
ALZA and Crescendo also have in development an E-TRANS
fentanyl product for the treatment of chronic and breakthrough
pain. Because ALZA and Crescendo are now concentrating on the
development of the acute pain product, development of the chronic
pain product is being continued on a limited basis. 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 chronic pain product and to commercialize the
product worldwide.
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 TTS product line and Ditropan XL, are used for the
treatment of conditions that may be underdiagnosed. Ditropan XL
and Doxil incorporate drug delivery technologies with proven drug
compounds in products that ALZA believes provide improvements in
therapy, but market acceptance continues to be critical to the
commercial success of these products as compared with the original
formulations and competing therapies. There can be no assurance
that ALZA Pharmaceuticals will be successful in its marketing and
sales efforts for these and other products. 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 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
commercial presence in urology and/or oncology, and many companies
have a commercial presence in the CNS or pediatrics markets which
ALZA is planning to enter with the anticipated launch of Concerta.
Many competitors have far larger sales forces, and significantly
greater resources and experience in marketing pharmaceutical
products, than ALZA Pharmaceuticals. In addition, other companies
are marketing products that compete directly with the products
marketed by ALZA Pharmaceuticals, and may introduce products that
offer competitive advantages when compared to products marketed by
ALZA Pharmaceuticals.
-- Availability of Products for In-Licensing and/or
Acquisition - ALZA Pharmaceuticals plans to acquire and/or in-
license additional products in the next few years. While ALZA has
successfully acquired and in-licensed several products during the
past few years, including through the acquisition of SEQUUS, there
can be no assurance of continued success in such activities. Other
companies are attempting to acquire and in-license products, and
acquire other companies, particularly in the oncology field, and
ALZA may not be able to acquire or in-license additional products,
or acquire companies, on favorable terms.
-- Pricing and Reimbursement - As pressures for cost
containment increase, particularly in the United States and Canada,
there can be no assurance that the prices ALZA Pharmaceuticals can
charge for the products it markets will be as favorable as
historical pharmaceutical product prices. Reimbursement by payers
such as government and managed care organizations has become
increasingly important, as has the listing of new products on large
formularies, such as those of managed care organizations,
pharmaceutical benefit providers and group buying organizations.
There can be no assurance that innovative new products such as
Ethyol and Elmiron, or drug delivery products such as
Testoderm TTS, Doxil, Ditropan XL, Viadur and Concerta, 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. In addition,
legislative proposals have been made that could mandate large
discounts on the prices that pharmaceutical companies can charge
for pharmaceutical products for Medicare participants. It is
impossible to predict whether any such proposals will become laws
or regulations, and what impact their adoption would have on sales
by 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 Pharmaceuticals' products, in order that the full
potential of the products can be realized. Elmiron is used in the
treatment of interstitial cystitis, a disease that is often
undiagnosed or misdiagnosed. The Testoderm TTS line of products is
used to treat testosterone deficiency in men, a condition that is
believed to be largely undiagnosed. Doxil is the first commercial
product to incorporate the STEALTH liposomal technology. Concerta,
currently awaiting FDA approval, is used to treat ADD/ADHD, a
disease that can be difficult to diagnose. In addition, there is
some controversy associated with the diagnosis and treatment of
this disease in the United States. Finally, Viadur, approved by
the FDA in March 2000, is the first product incorporating ALZA's
DUROS-registered trademark- implant technology. The Viadur product
will compete with other forms of therapy and there can be no
assurance that doctors and patients will accept the product.
-- Dependence on Third Party Manufacturers - The products in-
licensed and acquired by ALZA to date (including Doxil) are
manufactured by third parties. ALZA Pharmaceuticals is dependent
upon those parties' manufacturing capabilities and capacity for
supply of those products. A significant interruption in supply of
any of these products could impair ALZA's ability to market the
product successfully.
-- Dependence on Third Parties to Assist in Promoting the
Products - ALZA Pharmaceuticals' urology sales force is relatively
small compared to the sales forces of many of its competitors.
ALZA Pharmaceuticals is increasing its urology sales presence
through a co-promotion arrangement with UCB Pharma for Ditropan XL.
The sales representatives from UCB Pharma are not entirely under
ALZA Pharmaceuticals' control, and they also promote other products
in addition to Ditropan XL.
-- High Costs of Promotional Activities - With the launch of
Ditropan XL and the new indications for Doxil and Ethyol, ALZA
Pharmaceuticals has substantially increased its marketing and
promotional activities and therefore the related costs, including
the costs of direct-to-consumer advertising, which ALZA
Pharmaceuticals had not used in the past. There can be no
assurance that the increased activities and costs will result in
significantly increased sales of products by ALZA Pharmaceuticals.
Additional costs will be incurred in connection with preparation
for the launch of Concerta, including establishing a new
CNS/pediatric business unit and building a sales force to market
the Concerta product. Many of the expenses will be incurred prior
to the launch of the product, and there can be no assurance that
the product will be a commercial success, or that the investment
will be recouped. The same is true for the Viadur product.
-- Need to Reach International Markets - ALZA
Pharmaceuticals' direct sales and marketing efforts are currently
limited to the United States and Canada, which together comprise
approximately one-third of the total world market for
pharmaceutical products. For products for which ALZA
Pharmaceuticals has rights outside the United States and Canada,
ALZA Pharmaceuticals will need to expand its direct marketing and
promotion activities or enter into arrangements with distributors
or marketing partners. There can be no assurance that ALZA
Pharmaceuticals will be able to expand successfully or that
acceptable distribution or marketing partners can be obtained, or
that ALZA Pharmaceuticals' return from its international marketing
activities will contribute significantly to ALZA's profits. In
connection with its arrangements with distributors outside the
United States and Canada, ALZA seeks upfront and milestone
payments, as well as payments on sales of the products. There can
be no assurance that ALZA will be able to structure advantageous
international arrangements for the commercialization of its
products.
ALZA Technologies
The ALZA Technologies segment of ALZA's business encompasses
research and product development for third party clients and ALZA
Pharmaceuticals, and regulatory activities for products
incorporating ALZA's proprietary drug delivery technologies and/or
technologies licensed from third parties. The ALZA Technologies
segment also includes the manufacturing by ALZA and others of
products incorporating ALZA's drug delivery technologies that are
marketed by ALZA Pharmaceuticals and by pharmaceutical company
clients.
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 administration. 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, increasing patient compliance, and in
some cases improving the patient's quality of life. ALZA's osmotic
and D-TRANS-registered trademark- (passive transdermal) drug
delivery systems have been incorporated into more than two dozen
products currently marketed in many countries of the world. ALZA
Technologies develops products (such as Procardia XL, Glucotrol XL
and Duragesic) incorporating ALZA's proprietary technologies that
are marketed by other companies, and products (such as Ditropan XL
and the Testoderm TTS line of products) that are marketed by ALZA
Pharmaceuticals.
For financial information about the ALZA Technologies
operating segment, see "Operating Segments" in ALZA's 1999 Annual
Report and Note 14 of the Notes to ALZA's Financial Statements
included in Item 8 of this Form 10-K Annual Report.
Technologies Developed by ALZA Technologies
-- OROS Osmotic Technology. ALZA Technologies has developed
several therapeutic systems for oral administration. ALZA's OROS
systems include the push-pull, push-stick and elementary osmotic
pump systems. 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. The OROS
technology incorporated in the Concerta product is a tri-layer
capsule-shaped OROS formulation that delivers the drug methylphenidate
in a unique ascending pattern of delivery.
ALZA is also developing a liquid OROS system designed for the
delivery of emulsions or microparticulate suspensions of highly
insoluble drugs or polypeptides. One liquid OROS design involves
coating a gelatin capsule (which contains the liquid formulation)
with multiple layers, including an osmotic agent and a rate
controlling membrane. As with standard OROS systems, a hole is
drilled through the rate-controlling membrane to permit the release
of drug.
-- D-TRANS (Passive Transdermal) Technology. 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.
-- E-TRANS (Electrotransport) Technology. ALZA's E-TRANS
electrotransport systems are designed to deliver drugs across
intact skin through the use of an electrical potential gradient.
E-TRANS systems are small, easy-to-apply delivery systems consisting
of an adhesive, a drug reservoir, electrodes and a power
source/controller. The systems are designed to deliver potent
therapeutic agents through the skin, and can be designed for
patterned or on-demand delivery.
-- Macroflux-trademark- Technology. ALZA is conducting
research on a skin interface technology designed to increase drug
transport across the skin and enable delivery of larger molecular
weight compounds, including proteins, peptides and vaccines. This
new technology, which uses an array of micro-projections to
painlessly open channels for drug transport in the outermost layer
of the skin, may be used alone or may be used to enhance ALZA's
D-TRANS and E-TRANS technologies.
-- DUROS Implant Technology. ALZA's DUROS human implant
technology is designed to enable the delivery of therapeutic
agents, including potent small molecules, peptides, proteins, DNA
and other biactive macromolecules for periods of one month to one
year. DUROS systems use an osmotic engine approach, similar to that
used in OROS systems. Products incorporating DUROS implant
technology have the potential to deliver drugs to subcutaneous
sites for systemic therapy or to specific tissues. The Viadur
product is expected to be the first DUROS product to reach the
market. ALZA licensed certain uses of its DUROS technology to
Durect Therapeutics Corporation ("Durect") for the development of
DUROS products in five specified fields, primarily
involving site-specific drug delivery. Durect has an agreement
with ALZA under which ALZA Technologies may perform research and
development of such products for Durect.
-- DEPOT Injection Technology. ALZA's DEPOT bioerodible
polymer injection technology, which is in preclinical development,
is designed as a platform to deliver therapeutic agents over a
period of up to one month. The bioerodible DEPOT gel has been
demonstrated, when injected into the subcutaneous tissue of
animals, to deliver therapeutic agents with little or no drug burst
upon injection.
-- STEALTH-registered trademark- Liposomal Technology. The
STEALTH liposomal delivery technology is used in the Doxil product.
Liposomes are microscopic lipid spheres used to encapsulate and
deliver medications to areas of disease within the body. STEALTH
liposomes are designed to stay in the blood circulation for
extended periods of time after intravenous administration. The
prolonged circulation time enables the liposomes and their
pharmaceutical contents to concentrate in diseased tissues such as
tumors, and sites of local inflammation and infection. This site-
specific delivery may result in increased efficacy and reduced
toxicity for many potent medications. Therapeutic agents that may
be able to be delivered by STEALTH technology include small
molecules, proteins and peptides, oligonucleotides and gene therapy
vectors.
ALZA manages the ALZA Technologies portfolio of technologies
in a variety of ways. ALZA enters into joint product development
agreements with client companies to develop specific products for
marketing by the client; ALZA Technologies develops products for
marketing by ALZA Pharmaceuticals; ALZA in-licenses and acquires
technologies for product development; and on occasion, ALZA
licenses technologies to third parties for further development or
for the development of particular products.
Technology Development Risks
-- Technical Issues - The development of each of ALZA's drug
delivery systems requires many years of research and development
activity. ALZA's therapeutic 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 used with
different therapeutic agents. ALZA generally encounters technical
issues in the development of its drug delivery products. Although
the issues usually can be solved, they can result in delays in the
development of the product.
-- Special Materials or Components - Often special materials
or components must be fabricated for use in ALZA drug delivery
systems, or materials may be used in the systems in a manner
different from their customary commercial uses. The quality of
materials can be critical to the performance of a drug delivery
system, so a reliable source of a consistent supply of materials is
important. Materials or components needed by ALZA Technologies may
be difficult to obtain on commercially reasonable terms,
particularly when relatively small quantities are required, or if
the materials or components traditionally have not been used in
pharmaceutical products. In addition, companies may be unwilling
to supply materials to ALZA for use in pharmaceutical products due
to product liability concerns, even in light of the relatively
recent enactment of laws limiting such suppliers' exposure to
product liability claims.
-- Manufacturing Processes - For each drug delivery system,
manufacturing processes must be developed in order to produce
products on a commercial sale. Often novel manufacturing processes
are required for both ALZA and its vendors. There is substantial
risk and cost related to the development of these processes, as
well as the potential for delays.
-- Costs of Technology Development - The development of
ALZA's drug delivery systems can cost tens of millions of dollars.
Significant amounts must be invested in technology development
before the development of a specific product commences. Many years
will be required to take a technology from the earliest stages of
development to its incorporation in a product that is sold
commercially.
-- Competition - While ALZA was the first company to have
products incorporating its drug delivery technology commercialized,
other companies have developed their own drug delivery
technologies. Some of the competitors are small companies
specializing in drug delivery. Many large pharmaceutical companies
also have programs to develop drug delivery products.
Client-Marketed Products Incorporating ALZA Technologies
ALZA Technologies 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. Under a typical arrangement with a client
company, the client pays ALZA Technologies' 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 Technologies, 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
Technologies typically undertakes the initial product development,
in which ALZA Technologies performs the system design and
formulation work, research and testing necessary to incorporate the
drug selected by the client into an ALZA drug delivery system.
ALZA Technologies typically manufactures product for animal and
human clinical studies. In some cases, ALZA Technologies performs
the required human clinical studies; in other cases, the client
takes this responsibility. ALZA Technologies develops
manufacturing processes, typically transitioning from laboratory
scale, to small scale and sometimes an intermediate pilot scale,
and finally to commercial manufacturing scale. Regulatory
submissions supporting the conduct of clinical studies and to
obtain regulatory approval may be prepared by ALZA Technologies or
by the client, as negotiated.
Under its 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 generally 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 and OROS technologies.
The D-TRANS products developed by ALZA and currently marketed
by client companies include:
-- Catapres-TTS-registered trademark-(clonidine) - A
product applied once-weekly for the treatment of hypertension,
marketed by Boehringer Ingelheim Pharmaceuticals, Inc.
-- Duragesic - A 72-hour transdermal system for management
of severe 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.
-- Estraderm-registered trademark- (estradiol) - A product
applied twice weekly for treating certain post-menopausal symptoms
and preventing osteoporosis, marketed by Novartis Pharmaceuticals
Corporation ("Novartis").
-- NicoDerm CQ/Nicoderm-registered trademark-/NiQuitin-
registered trademark- CQ/Nicabate-registered trademark- - A product
applied once-daily to the skin to aid in smoking cessation.
NicoDerm CQ is marketed for over-the-counter use in the United
States by SB as part of a joint venture with Aventis, and
Nicoderm/NiQuitin CQ/Nicabate is marketed as a prescription product
by Aventis and/or SB in some countries outside the United States.
SB has rights to market the product in most other countries of the
world, and it has been launched in more than ten countries,
including recently in China. Applications for regulatory approval
have been filed in several other countries.
-- Transderm-Nitro - A product applied once-daily for the
prevention and treatment of angina pectoris, marketed by Novartis.
-- Transderm Scop-registered trademark- (scopolamine) - A
product 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:
-- Cardura XL-registered trademark- (doxazosin mesylate) - A
once-daily product for the treatment of hypertension and benign
prostatic hyperplasia, marketed by Pfizer, Inc. ("Pfizer") in
Germany, Norway and the Netherlands. Pfizer has worldwide
marketing rights to the product.
-- ColorMark-trademark- Tablets - A tablet designed to
deliver Blue Dye #1 to a variety of enteral nutritional fluids,
marketed by the Ross Products division of Abbott Laboratories
("Abbott").
-- Covera-HS-registered trademark- (verapamil hydrochloride)
- - - A once-daily controlled-onset-extended release (COER-24-
registered trademark-) tablet for the treatment of hypertension and
angina pectoris, marketed by G.D. Searle.
-- DynaCirc CR-registered trademark- (isradipine) - A once-
daily extended release tablet for the treatment of hypertension,
marketed by Novartis.
-- Glucotrol XL - A once-daily treatment for Type II
diabetes, marketed by Pfizer.
-- Minipress XL-registered trademark-/Alpress-trademark- LP
(prazosin) - A once-daily formulation for the treatment of
hypertension, marketed by Pfizer.
-- Procardia XL/Adalat CR - 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.
-- Sudafed-registered trademark- 24 Hour (pseudoephedrine) -
A once-daily dosage form for the treatment of cold and allergy
symptoms, marketed by Warner-Lambert Consumer Healthcare ("Warner-
Lambert"). The product has been marketed by Warner-Lambert in the
United States since early 1998 pursuant to semi-exclusive marketing
rights.
-- Volmax-registered trademark- (albuterol) - A twice-daily
dosage form for the treatment of asthma, marketed by Muro
Pharmaceutical, Inc. (an ASTA Medica Company) in the United States
and by Glaxo Holdings p.l.c. outside the United States.
Other products developed by ALZA and marketed by third parties
include the Baxter-registered trademark- Infusor, a lightweight,
disposable device for intravenous therapy; and IVOMEC SR-registered
trademark- Bolus (ivermectin), 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. Finally,
as a result of patents issued to ALZA, ALZA receives royalties on
sales of the following products not developed or marketed by ALZA:
Habitrol-registered trademark- (nicotine transdermal system),
Tiazac-registered trademark- (diltiazem hydrochloride) extended
release capsules, Teczem-registered trademark- (enalapril
maleate/diltiazem maleate) extended release tablets and MUSE-
registered trademark- (alprostadil) urethral suppository.
Disclosed Products in Development by ALZA Technologies with
Client Companies
ALZA Technologies has other products in development with
client companies. For competitive reasons, ALZA does not disclose
all of the products in development at any particular time. At
December 31, 1999, disclosed products in development included:
-- OROS hydromorphone (Dilaudid-registered trademark- CR)-
The OROS hydromorphone product is designed as a once-daily dosage
form of the opioid analgesic hydromorphone. ALZA has an agreement
with Knoll Pharmaceuticals Company (together with its affiliates,
"Knoll") for the development and worldwide commercialization of the
product. The New Drug Application ("NDA") for the product was
filed by the FDA during the first quarter of 2000.
-- Additional Transdermal Fentanyl Products - Under an
agreement with Janssen, ALZA Technologies is developing a 12.5
microgram/hour Duragesic product (the Duragesic product is
currently sold in 25, 50, 75 and 100 microgram/hour doses). Also
under an agreement with Janssen, ALZA is developing a new
transdermal fentanyl system which incorporates different ALZA
technology from that used in Duragesic.
-- DUROS Sufentanil - Under arrangements with Durect, ALZA
Technologies is assisting Durect in the development of a DUROS
sufentanil product for the treatment of severe chronic pain. The
product is in early development.
In addition to the products described above, ALZA Technologies
develops products for marketing by ALZA Pharmaceuticals, such as
DUROS leuprolide and OROS methylphenidate. (See "ALZA
Pharmaceuticals - Disclosed Products in Development for Marketing
by ALZA Pharmaceuticals" and "Crescendo Pharmaceuticals
Corporation".)
Product Development Risks
All pharmaceutical products require extensive technical and
clinical activities before an application can be submitted for
regulatory approval to market the product. There are many risks
inherent in this process, and it should be expected that many of
the products for which
development is initiated ultimately will not become commercial
products. Substantial technical, financial and human resources are
required to successfully complete the development of a product.
-- Product Design - 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, DEPOT, E-TRANS and Macroflux technologies,
as well as some of ALZA's oral technologies and certain design
features of ALZA's D-TRANS and STEALTH technologies, are relatively
new, and have not yet been incorporated in commercialized products.
Technical hurdles are not uncommon in developing products
incorporating ALZA technologies, particularly in the first product
incorporating a new technology.
-- Small Scale Manufacturing - Once a product is developed,
it must be manufactured, on a pilot scale, for clinical testing.
Small-scale manufacturing can be costly and time-consuming, and
must comply with the FDA's regulations concerning current Good
Manufacturing Practices. ALZA's drug delivery technologies
generally require a series of complex manufacturing steps.
-- Clinical Studies - Once a product has been successfully
manufactured on a small 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 small scale and clinically tested,
there are further risks in converting a small 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. In addition, it is possible to fulfill all
NDA submission requirements, but subsequently to fail an FDA pre-
approval inspection of the manufacturing facility, which can result
in significant delay in obtaining FDA approval to market a product.
Some products, such as Ethyol and Doxil, are approved by the FDA on
an accelerated basis, and the approval is conditioned upon further
clinical testing. The approval can be withdrawn if the testing is
not completed in the required time period, or if the clinical
results are not acceptable to the FDA.
Manufacturing
ALZA Technologies generally manufactures products marketed by
ALZA's client companies, and certain products developed by ALZA
Technologies for, and marketed by, ALZA Pharmaceuticals. Most of
the commercial products are manufactured in ALZA's Vacaville,
California commercial manufacturing facility. The Vacaville
facility is the sole manufacturing site for several products,
although some lower-volume and/or recently introduced products are
manufactured in ALZA's Mountain View and Palo Alto, California
research and development facilities. These latter facilities were
not designed for high volume commercial manufacturing.
ALZA Technologies generally manufactures its drug delivery
products for ALZA's client companies on a cost reimbursement basis,
with a small margin over ALZA's costs. As a result, ALZA
Technologies' margins on these products are low. ALZA receives
royalties from the clients on their sales of the products. (The
royalties are not reported as product sales.) ALZA Technologies
manufactures products for ALZA Pharmaceuticals for prices
negotiated between the two segments, which generally approximate
the prices charged by ALZA to third party clients for products
using similar technologies.
The products acquired and in-licensed for marketing by ALZA
Pharmaceuticals are manufactured by the third parties from whom
ALZA acquired or in-licensed the products, or by other third
parties. 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 ALZA-marketed products, could have an adverse impact
on ALZA's financial results.
Some of the critical materials and components used in ALZA-
developed 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-
manufactured 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.
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. The United States Drug Enforcement
Agency ("DEA") also regulates the handling and storage of
"controlled substances" that are used in some of ALZA's products.
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 comply
with all applicable requirements 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.
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 to
commercialize products.
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 Pharmaceuticals. The development
programs undertaken by TDC and ALZA included Testoderm TTS and
Ditropan XL, as well as other products. In the third quarter of
1997, ALZA purchased all of the outstanding shares of TDC.
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 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 (discussed below),
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
(beginning in September 1999) 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 1999, Crescendo paid ALZA a total of $6.7 million of
Technology Fees.
ALZA and Crescendo have a Development Agreement pursuant to
which ALZA Technologies 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 initially contributed to Crescendo, plus interest earned
thereon, less Crescendo's reasonable administrative costs, the
Technology Fee 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").
As of December 31, 1999, three of the Initial Products, OROS
oxybutynin (Ditropan XL), DUROS leuprolide (Viadur) and OROS
methylphenidate (Concerta), were in active development, and ALZA
had licensed OROS oxybutynin from Crescendo for worldwide
marketing. In March 2000, ALZA licensed DUROS leuprolide from
Crescendo for worldwide marketing.
Four of the Initial Products are not currently in active
development. 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 recommendations.
In 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, 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. In late 1998, ALZA exercised its
option to obtain a worldwide license to OROS oxybutynin, and ALZA
and Crescendo executed a License Agreement for the product. The
product was launched by ALZA in the United States on February 1,
1999 under the trade name Ditropan XL. Under the license agreement
for this product, Crescendo received payments equal to 2.5% of net
sales the first year. For the next two years, beginning January 1,
2000, Crescendo will receive payments equal to 3.0% of net sales.
Thereafter, based on Crescendo's funding of product development to
date and anticipated future funding, the payment rate is expected
to be approximately 5.5% to 6.5% of net sales.
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 which have not been expended
under the Development Agreement, accompanied by a report of
Crescendo's independent auditors. As of December 31, 1999,
Crescendo had approximately $80.8 million in Available Funds
remaining.
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 originally had a one
year term and is 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 Board of Directors consisting of six persons,
none of whom is affiliated with ALZA, and all of whom have
extensive experience in different aspects of the pharmaceutical
industry. Crescendo's Chairman and Chief Executive Officer 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 of Directors. 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 contract
manufacturers, clinical investigators, contract research
organizations (for clinical studies) and 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 Technologies in charging its
pharmaceutical company clients under ALZA's product development
arrangements with them, and in charging ALZA Pharmaceuticals for
product development activities.
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 and development
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.
Research and Development Revenues and Expenditures
ALZA had research and development revenue of $120.8 million
during 1999, $124.4 million during 1998, and $135.0 million during
1997, from clients with which ALZA has joint product development
agreements. These amounts included $90.5 million from Crescendo in
1999, $95.0 million from Crescendo in 1998, and $67.8 million from
TDC and $29.7 million from Crescendo in 1997. The payments by TDC
and Crescendo were made from funds contributed by ALZA to TDC and
Crescendo at the time of their respective formation. 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. For research and development
revenues by segment, see Note 14 of the Notes to ALZA's Financial
Statements included in Item 8 of this Form 10-K Annual Report.
ALZA spent $123.9 million on customer-sponsored product
development activities during 1999 ($113.0 million and
$118.9 million in 1998 and 1997, respectively); such amounts
exclude reimbursable general and administrative costs. ALZA spent
$59.7 million on internal research and development activities
during 1999 ($69.8 million in 1998 and $61.7 million in 1997), also
excluding allocable general and administrative costs. Research and
development costs are expensed as incurred.
International Activities
Outside the United States and Canada, ALZA has arrangements to
market several of its products through distribution arrangements
with other companies. Ferring NV currently markets Testoderm in
Germany, the United Kingdom and the Netherlands, has rights to
market Testoderm with Adhesive and Testoderm TTS in numerous
European countries and has submitted applications for regulatory
approval to market Testoderm TTS in those countries. ALZA
Pharmaceuticals also has distribution agreements with various
distributors for many Asian countries (excluding Japan) for
Testoderm and Testoderm with Adhesive. ALZA has an agreement with
SB for the commercialization by SB of the Nicoderm/NiQuitin CQ
transdermal product developed by ALZA in all countries of the world
except the United States, Canada and Korea, where Aventis has those
rights.
In 1997, ALZA Pharmaceuticals expanded its sales and marketing
activities into Canada when ALZA acquired the United States and
Canadian rights to Elmiron, PolyCitra, BiCitra and Neutra-Phos. In
1998, ALZA acquired the Canadian rights to Ditropan, MacroBID and
Macrodantin. ALZA International now has approximately 20 employees
located in Canada, marketing Elmiron, PolyCitra, Ditropan, MacroBID
and Macrodantin. ALZA International is doing business in Canada as
ALZA Canada and maintains an office in London.
Governmental Regulation
Under the United States Food, Drug and Cosmetic Act, "new
drugs" must obtain clearance from the FDA before they can be
marketed lawfully 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, during which initial laboratory
development and in vitro and in vivo testing takes place;
-- submission to the FDA of an investigational new drug
application (IND), 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
-- clearance from the FDA (and foreign regulatory agencies)
must be obtained before the product can be marketed.
All of these steps can take several years and cost tens of millions
of dollars.
The products sold by ALZA Pharmaceuticals and by ALZA
Technologies' 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 for Doxil and
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. ALZA is currently conducting such Phase IV
studies for Elmiron. If these studies are not completed, or if the
expected outcomes are not achieved, a product could be withdrawn
from the market.
Patents and Patent Applications
As of December 31, 1999, ALZA held approximately 675 United
States patents, approximately 250 pending United States patent
applications, approximately 2,600 foreign patents and approximately
875 pending foreign patent applications, all relating to its
various technologies and products. Patents have been issued, or
are expected to be issued, covering both current technologies and
products as well as those 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 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 several companies have filed
Abbreviated New Drug Applications ("ANDAs") with the FDA requesting
clearance to market "generic equivalents" of Procardia XL. Pfizer
has filed suit against these companies for infringement of patent
rights relating to the nifedipine active drug substance in
Procardia XL, and has also been involved in litigation with the FDA
concerning the ANDAs. In March 2000, Pfizer entered into a
settlement agreement with one of the ANDA applicants, Mylan
Laboratories, Inc. ("Mylan"), whose ANDA was approved by the FDA.
The settlement resolved the litigation pending between the parties,
and Mylan announced that it would commercialize a generic version
of Procardia XL to be supplied by Pfizer and incorporating ALZA's
OROS technology. Under its agreement with Pfizer, ALZA will
receive royalties on such products. It is not possible to predict
the amount of negative impact on sales of Procardia XL or royalties
to ALZA that will result from competition from generic sustained
release nifedipine products.
ALZA Pharmaceuticals 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, Mycelex Troche and Urispas 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, and
for the Ditropan XL, Concerta and Viadur products themselves. ALZA
anticipates that additional patents may issue relating to some or
all of 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. For Ditropan
XL, Doxil, Concerta and Viadur, while the products themselves are
patented, the active ingredient is not covered by patents; as a
result, other companies are commercializing products incorporating
the same active ingredient in a generic form, and competitors
either are commercializing, or may in the future commercialize, the
active ingredient in another drug delivery product.
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 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 Pharmaceuticals 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 Technologies 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 developed
or commercialized by ALZA will face competition from different
chemical or other agents intended for treatment of the same
indications or from other products incorporating drug delivery
technologies. The competition potentially includes all of the
pharmaceutical companies in the world. 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 Pharmaceuticals 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 inclusion in formulary listings is critical. Various
federal and state agencies have enacted regulations requiring
rebates of a portion of the purchase price of many pharmaceutical
products, and, in some cases have begun reimbursing the "least
costly alternative" therapy for a specific disease state. 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 products developed by ALZA Technologies
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.
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 managed care organizations, pharmaceutical
benefit management groups and group buying 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.
It is expected that the United States Congress will continue
to review and consider various proposals that could have the effect
of requiring large discounts on the prices that pharmaceutical
companies can charge for pharmaceutical products for Medicare
participants. A number of states are also considering this type of
legislation, or other measures that could secure large discounts
for senior citizens. It is not clear whether, or when, any of these
proposals may be enacted.
Revenues
For a description of ALZA's revenues, see the Financial
Statements included in Item 8 of this Form 10-K Annual Report; for
revenues by segment, see Note 14 to the Financial Statements.
ALZA's dependence on certain important customers is discussed in
Note 14 to the Financial Statements.
Payment Terms; Product Returns
For products marketed by ALZA Pharmaceuticals, payment terms
are generally net 30 days. From time to time, ALZA has extended
its customary payment terms, for example in the case of a new
product introduction or in anticipation of a holiday shutdown.
Until late 1999, ALZA Pharmaceuticals generally accepted returns of
unopened product at any time for full credit; beginning in
September 1999, ALZA conformed its return policy to industry
standards. Payments from client companies for products
manufactured by ALZA Technologies and shipped to the clients
generally are due 30 to 60 days after shipment by ALZA. Such
products generally may be returned only if they do not meet the
applicable product specifications. ALZA maintains reserves on its
financial statements for possible product returns.
Exports
ALZA's export sales were $42.9 million in 1999, $42.6 million
in 1998, and $25.8 million in 1997, principally to distributors and
client companies in Europe. For additional information concerning
export sales, see Note 14 to ALZA's Financial Statements included
in Item 8 of this Form 10-K Annual Report.
Employees
On December 31, 1999, ALZA had 2,034 employees, of whom
approximately 600 were engaged in research and development
activities, approximately 500 were engaged in manufacturing
activities, approximately 400 were engaged in sales and marketing
activities and the remainder were working in general and
administrative areas. ALZA does not have any union contracts, and
believes that its relations with its employees are generally good.
Acquisition of SEQUUS Pharmaceuticals, Inc.
On October 5, 1998, ALZA and SEQUUS announced they had entered
into a definitive merger agreement for ALZA to acquire SEQUUS,
subject to the approval of SEQUUS' stockholders and certain other
conditions. On March 16, 1999, the SEQUUS stockholders approved
the merger, which became effective on that date. As a result of
the merger, SEQUUS stockholders received 0.4 ALZA shares for each
share of SEQUUS common stock. ALZA accounted for the transaction
as a pooling of interests. The description of ALZA in this Form 10-
K Annual Report is of the combined business.
Terminated Merger Agreement with Abbott
In June 1999, ALZA and Abbott announced a proposed merger
under which Abbott would acquire all of the common stock of ALZA,
subject to the approval of ALZA's stockholders, compliance with the
requirements of the United States Federal Trade Commission ("FTC")
and customary closing conditions. Abbott and ALZA were unable to
reach agreement with the FTC to satisfy the FTC's requirements for
approval of the merger, and on December 16, 1999, ALZA and Abbott
announced that the merger would not be completed.
Item 2. PROPERTIES
ALZA's corporate offices are located in Mountain View,
California, and its primary research and development campuses are
in Mountain View and Menlo Park, California, with some facilities
in Palo Alto, California. Most of the facilities in Palo Alto are
held under prepaid ground leases from Stanford University that
expire in approximately 15 to 58 years. One Palo Alto facility is
subleased to ALZA. 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, and ALZA recently determined to close this
facility and move its operations to California. ALZA also owns an
undeveloped parcel in Minnesota. 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, in the last
few years ALZA has been expanding 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
has been applied to the construction of three buildings on the
parcel. ALZA is also obligated to make improvements to the
buildings. The total cost of the buildings and improvements is
estimated to be in excess of $150.0 million; approximately $117.8
million had been spent as of December 31, 1999. The joint venture
is leasing the buildings to ALZA. The lease payments due on the 13-
acre Mountain View parcel, which began in May 1999, are based upon
the final square footage of the buildings (approximately 120,000
square feet per building). Those lease payments are currently
approximately $625,000 per month for all three buildings 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 is
occupying two of the buildings and a portion of the third building,
and is subleasing a portion of the third building. 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 receives 50% of the joint venture's net profits or
losses (rent less building depreciation and management fees).
ALZA has also entered into a ground lease agreement for an
adjacent seven-acre parcel of land on which it may construct a
pilot plant, laboratories and other technical facilities. The
remaining term of the ground lease is approximately 32 years and
includes options for ALZA to purchase, or to be required to
purchase, the property. Ground lease payments are approximately
$140,000 per month. Under the ground lease 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.
ALZA's properties are not allocated to, or divided between,
its operating segments, except that ALZA's Vacaville, California
facility is used almost exclusively for activities in the ALZA
Technologies segment. Other properties house ALZA personnel from
both operating segments, as well as administrative personnel.
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.
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.
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. Cleanup costs for the entire region have been
estimated at approximately $16 million. ALZA believes that it did
not discharge any of the chemicals of concern at the site in
question. During 1999 ALZA entered into a settlement agreement
relating to the location within this project that had previously
been occupied by ALZA, which settlement had no material impact on
ALZA's financial condition.
In June 1999, a purported class action lawsuit entitled
Fruchter v. ALZA, et al., was filed against ALZA and its directors
in the federal district court in the Northern District of
California (CV782725), alleging that ALZA's directors breached
fiduciary and other obligations to stockholders in connection with
the merger agreement between ALZA and Abbott. The suit was
dismissed in September 1999.
In October 1999, purported class action lawsuits were filed
against ALZA, Abbott and certain directors of each company and such
suits were consolidated as In re Abbott/ALZA Merger Litigation in
the federal court in the Northern District of Illinois (99C6584).
The suits alleged that ALZA and Abbott had wrongfully failed to
disclose certain regulatory issues regarding Abbott's diagnostic
business to ALZA stockholders prior to an ALZA stockholders meeting
in September 1999. The suits were dismissed in December 1999.
Attorneys representing the plaintiffs in this litigation have
petitioned the court for attorneys' fees in connection with their
services in this case; ALZA and Abbott have opposed this petition.
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 61 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).
James R. Butler 59 Group Vice President- ALZA International
(since January 2000); Group Vice President
- ALZA Pharmaceuticals (1999); Senior Vice
President, Sales and Marketing of ALZA
(1997-1999); Vice President, Sales and
Marketing of ALZA (1993-1996); Vice President
and General Manager of the corporate division
of Glaxo, Inc., a pharmaceutical company
(1987-1993).
Bruce C. Cozadd 36 Executive Vice President and Chief Operating
Officer of ALZA (since January 2000); Senior
Vice President and Chief Financial Officer
(1997-1999); Vice President and Chief
Financial Officer (1994-1996).
Harold Fethe 55 Senior Vice President, Human Resources of ALZA
(since 1998); Vice President, Human Resources
(1991-1998).
Matthew K. Fust 36 Senior Vice President and Chief Financial
Officer of ALZA (since January 2000); Vice
President, Finance and Controlle (1998-1999);
Executive Director (Accounting and Financial
Reporting) (1996-1998); Manager of Strategic
Consulting, Andersen Consulting (1991-1996).
Carol A. Gamble 47 Senior Vice President and Chief Corporate
Counsel of ALZA (since January 2000); Vice
President and Associate General Counsel (1996
- 1999); Senior Corporate Attorney (1988-1995).
Dr. Ronald P. Haak 47 Senior Vice President, Technology Development
and Principal Scientist - ALZA Technologies
(since 1999); Vice President, Technical
Development (1994-1998);Executive Director,
Electrotransport Products (1991-1993).
Robert M. Myers 36 Senior Vice President, Commercial Development
of ALZA (since 1999); Vice President,
Commercial Development (1997-1999), Senior
Director, Commercial Development (1996-1997);
Director, Commercial Development (1995-1996);
Director, Development Programs (1994-1995).
Dr. Samuel R. Saks 45 Group Vice President - ALZA Pharmaceuticals
(since January 2000); Senior Vice President,
Medical Affairs of ALZA (1994-1999);
Vice President, Medical Affairs (1992-1994).
Peter D. Staple 48 Executive Vice President, Chief Administra-
tive Officer and General Counsel of ALZA
(since January 2000); Senior Vice President
and General Counsel (1997-1999);Vice
President and General Counsel (1994-1996);
Vice President and Associate General
Counsel of Chiron Corporation, a biotechnol-
ogy company (1992-1994).
Daniel N. Swisher, Jr. 36 Senior Vice President, Sales and Marketing of
ALZA (since 2000); Vice President, Marketing
(1997-1999); Executive Director, New Product
Planning (1995-1997); Executive Director,
International Pharmaceuticals (1993-1995);
Manager, Strategic Planning (1992-1993).
Janne Wissel 44 Senior Vice President, Operations of ALZA
(since 1998); Vice President, Regulatory and
Quality Management (1995 to 1997); Vice Pres-
ident, Quality Management (1994 to 1995);
Senior Director, Regulatory Affairs (1993
to 1994).
Dr. James W. Young 55 Group Vice President-ALZA Technologies (since
1999); Senior Vice President, Research and
Development of ALZA (1997-1999); Senior Vice
President, Commercial Developmen (1995-1997);
Vice President and Managing Director of ALZA
Technology Institute (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 incorporates by reference the information concerning the
market for its common stock and related stockholder matters set
forth at page 59 in the Annual Report to Stockholders (the "Annual
Report") attached as Exhibit 13 to this Form 10-K Annual Report.
Item 6. SELECTED CONSOLIDATED FINANCIAL DATA
ALZA incorporates by reference the selected consolidated
financial data set forth at page 59 in the Annual Report.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
ALZA incorporates by reference Management's Discussion and
Analysis of Financial Condition and Results of Operations set forth
at pages 25 to 37 in the Annual Report.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
ALZA incorporates by reference Management's Discussion and
Analysis of Financial Condition and Results of Operations set forth
at pages 25 to 37 in the Annual Report.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ALZA incorporates by reference the consolidated financial
statements and notes thereto set forth at pages 38 to 57 in the
Annual Report and the Report of Ernst & Young LLP, Independent
Auditors, at page 58 in the Annual Report.
Item 9. CHANGES 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" in
ALZA's definitive Proxy Statement dated April 14, 2000, for its
2000 Annual Meeting of Stockholders to be held on May 18, 2000 (the
"Proxy Statement") and the information under the heading "Section
16(a) Beneficial Ownership Reporting Compliance" in the Proxy
Statement. Information concerning ALZA's executive officers
appears at the end of Part I of this Form 10-K Annual Report.
Item 11. EXECUTIVE COMPENSATION
ALZA incorporates by reference the information set forth under
the headings "Summary Compensation Table", "1999 Option Grants",
"1999 Aggregated Option Exercises and Fiscal Year End Option
Values" and "Certain Executive Agreements" 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" in the Proxy Statement.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
ALZA incorporates by reference the information set forth under
the heading "Certain Transactions" 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: (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, February 10, 1998 and March
17, 1999(2)
4.1 Indenture dated July 7, 1994 between ALZA
Corporation and the Chase Manhattan Bank, N.A. as
Trustee, relating to ALZA's 5 1/4% Liquid Yield
Option-trademark- Notes(3)
4.2 Specimen of LYONs-trademark- Certificate
(included in Exhibit 4.1)
4.3 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)
4.4 Specimen of 5% Convertible Subordinated
Debenture (included in Exhibit 4.3)
4.5 Rights Agreement between ALZA Corporation and
BankBoston, N.A., as Rights Agent(5)
4.6 Form of Right Certificate (included in
Exhibit 4.5)
10.1 Technology License Agreement between ALZA
Corporation and Crescendo Pharmaceuticals
Corporation(6)
See footnotes on page 44.
10.2 Development Agreement between ALZA
Corporation and Crescendo Pharmaceuticals
Corporation(6)
10.3 Amendment No. 1 to Development Agreement
between ALZA Corporation and Crescendo
Pharmaceuticals Corporation
10.4 Amendment No. 2 to Development Agreement
between ALZA Corporation and Crescendo
Pharmaceuticals Corporation
10.5 License Option Agreement between ALZA
Corporation and Crescendo Pharmaceuticals
Corporation(6)
10.6 License Agreement between ALZA
Corporation and Crescendo Pharmaceuticals
Corporation for OROS-registered trademark-
oxybutynin(7)
10.7 License Agreement between ALZA
Corporation and Crescendo Pharmaceuticals
Corporation for DUROS-registered trademark-
leuprolide
10.8 Restated Certificate of Incorporation of
Crescendo Pharmaceuticals Corporation(6)
10.9 Amended and Restated Executive Deferral
Plan II(8)*
10.10 Executive Deferral Plan II for
Chief Executive Officer(9)*
10.11 Amendment No. 1998-1 to Executive
Deferral Plan II*
10.12 Amendment No. 1999-1 to Executive
Deferral Plan II*
10.13 Amendment No. 1999-2 to Executive
Deferral Plan II*
10.14 ALZA Corporation Amended and
Restated Stock Plan (as amended through May 6,
1999)(10)*
10.15 Amendment No. 1 to ALZA Corporation
Amended and Restated Stock Plan*
10.16 Form of Executive Agreement between
ALZA Corporation and Certain Executive
Officers(11)*
10.17 Form of Amendment to Executive
Agreement between ALZA Corporation and Certain
Executive Officers(12)*
See footnotes on page 44.
10.18 Executive Agreement between ALZA
Corporation and Dr. Ernest Mario(10)*
10.19 Supplemental ALZA Corporation Retirement Plan*
10.20 Form of Executive Estate Protection
Plan Agreement*
10.21 Form of Executive Estate Protection
Plan Collateral Agreement*
10.22 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)(8)
10.23 Construction Agreement between ALZA
and P/A Charleston Road LLC relating to three
office building lease agreements(8)
10.24 Ground Lease between ALZA and the
Peery and Arrillaga Trusts relating to a seven-
acre parcel in Mountain View(8)
13 Portions of Annual Report to
Stockholders incorporated by reference into Annual
Report on Form 10-K
21 Subsidiaries
23 Consent of Ernst & Young LLP,
Independent Auditors
27.1 Financial Data Schedule for the year
ended December 31, 1999
See footnotes on page 44.
Footnotes to pages 41 through 43.
(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 March 31, 1999.
(3) Incorporated by reference to ALZA's Form 10-Q Quarterly Report
for the quarter ended June 30, 1994.
(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 8-K Current Report
filed December 21, 1999.
(6) Incorporated by reference to ALZA's Form 10-Q Quarterly Report
for the quarter ended September 30, 1997.
(7) Incorporated by reference to ALZA's Form 10-K Annual Report
for the year ended December 31, 1998.
(8) Incorporated by reference to ALZA's Form 10-K Annual Report
for the year ended December 31, 1997.
(9) Incorporated by reference to ALZA's Form 10-Q Quarterly Report
for the quarter ended September 30, 1993.
(10) Incorporated by reference to ALZA's Form 10-Q Quarterly Report
for the quarter ended June 30, 1999.
(11) Incorporated by reference to ALZA's Form 10-K Annual Report
for the year ended December 31, 1995.
(12) Incorporated by reference to ALZA's Form 10-Q/A Quarterly
Report for the quarter ended June 30, 1999.
*A management contract or compensatory plan or arrangement
required to be filed as an Exhibit pursuant to Item 14(c) of
Form 10-K.
(b) On November 23, 1999, ALZA filed a Form 8-K disclosing an
agreement between ALZA and Abbott Laboratories relating to a new
ALZA stockholder vote for the proposed merger between the parties.
Such merger was terminated December 16, 1999. On December 21,
1999, ALZA filed a Form 8-K disclosing the adoption of a
stockholder rights plan by ALZA's Board of Directors. No financial
statements were filed in connection with either such Form 8-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 Annual Report Form
to Stockholders
10-K
Consolidated statement of operations for
the years ended December 31, 1999, 1998,
1997 38
Consolidated balance sheet at
December 31, 1999 and 1998 39
Consolidated statement of stockholders'
equity for the years ended December 31, 1999,
1998 and 1997 40
Consolidated statement of cash flows for
the years ended December 31, 1999, 1998
and 1997 41
Notes to consolidated financial statements 42
Report of Ernst & Young LLP, Independent 58
Auditors
The following consolidated financial statement
schedule of ALZA Corporation is included:
II - Consolidated valuation and qualifying
accounts 46
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, 1999, 1998 and 1997
Balance at Additions Deductions
Beginning Charged to and Balance at
of Year Income write-offs End of Year
(In millions)
Reserves for
uncollectible
accounts and sales
returns and allowances:
1999 $ 3.6 $ 42.2 $ 27.7 $ 18.1
1998 $ 4.6 $ 9.3 $ 10.3 $ 3.6
1997 $ 2.5 $ 6.3 $ 4.2 $ 4.6
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
ALZA CORPORATION
By /s/ Dr. Ernest Mario
Dr. Ernest Mario
Chief Executive Officer
Date: March 29, 2000
POWERS OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose
signature appears below constitutes and appoints Dr. Ernest Mario
and Matthew K. Fust, jointly and severally, his or her attorneys-
in-fact, each with the power of substitution, for him or her in
any and all capacities, to sign any amendments to this Annual
Report on Form 10-K and to file the same, with exhibits thereto
and other documents in connection therewith, with the Securities
and Exchange Commission, hereby ratifying and confirming all that
each of said attorneys-in-fact, or his substitute or substitutes,
may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act
of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities and on
the dates indicated.
/s/ Dr. Ernest Mario /s/ Dean O. Morton
Dr. Ernest Mario Dean O. Morton
Chairman of the Board of Director
Directors, Director and Chief Date: March 29, 2000
Executive Officer
Date: March 29, 2000
/s/Dr. William R. Brody /s/Denise M. O'Leary
Dr. William R. Brody Denise M. O'Leary
Director Director
Date: March 29, 2000 Date: March 29, 2000
/s/Isaac Stein /s/Julian N. Stern
Isaac Stein Julian N. Stern
Director Director
Date: March 29, 2000 Date: March 29, 2000
/s/ Dr. Robert J. Glaser /s/Dr. I. Craig Henderson
Dr. Robert J. Glaser Dr. I. Craig Henderson
Director Director
Date: March 29, 2000 Date: March 29, 2000
/s/Matthew K. Fust
Matthew K. Fust
Senior Vice President,
Chief Financial Officer
and Principal Accounting
Officer
Date: March 29, 2000
EXHIBIT INDEX
Exhibit
10.3 Amendment No. 1 to Development
Agreement between ALZA Corporation and Crescendo
Pharmaceuticals Corporation
10.4 Amendment No. 2 to Development
Agreement between ALZA Corporation and Crescendo
Pharmaceuticals Corporation
10.7 License Agreement between ALZA
Corporation and Crescendo Pharmaceuticals
Corporation for DUROS-registered trademark-
leuprolide
10.11 Amendment No. 1998-1 to Executive
Deferral Plan II
10.12 Amendment No. 1999-1 to Executive
Deferral Plan II
10.13 Amendment No. 1999-2 to Executive
Deferral Plan II
10.15 Amendment No. 1 to ALZA Corporation
Amended and Restated Stock Plan
10.19 Supplemental ALZA Corporation
Retirement Plan
10.20 Form of Executive Estate Protection
Plan Agreement
10.21 Form of Executive Estate Protection
Plan Collateral Agreement
13 Portions of Annual Report to
Stockholders incorporated by reference into
Annual Report on Form 10-K
21 Subsidiaries
23 Consent of Ernst & Young LLP,
Independent Auditors
27.1 Financial Data Schedule for the year
ended December 31, 1999
4
EXHIBIT 10.3
AMENDMENT NO. 1 TO DEVELOPMENT AGREEMENT
This Amendment No. 1 to Development Agreement (the
"Amendment") is made as of March 19, 1998 by and between
ALZA Corporation, a Delaware corporation ("ALZA"), and
Crescendo Pharmaceuticals Corporation, a Delaware
corporation ("Crescendo").
RECITALS
WHEREAS, ALZA and Crescendo have entered into that
certain Development Agreement dated as of September 5, 1997
(the "Development Agreement") pursuant to which ALZA
performs research and development activities on behalf of
Crescendo directed toward the development of pharmaceutical
products; and
WHEREAS, ALZA is marketing Elmiron-registered trademark-
(pentosan polysulfate sodium) in the United States and
Canada; and
WHEREAS, Elmiron-registered trademark- has been
approved in the United States by the Food and Drug
Administration ("FDA") and in Canada by the Health
Protection Branch of Health Canada ("HPB") for marketing
only as a treatment for interstitial cystitis; and
WHEREAS, ALZA and Crescendo desire that Crescendo fund
a program with the goal of receiving clearance by the FDA
and the HPB to market Elmiron-registered trademark- for the
prevention of vascular access graft occlusion (the "Elmiron-
registered trademark- Development Program"); and
WHEREAS, such an arrangement is not currently
contemplated by the Development Agreement.
NOW, THEREFORE, in consideration of the foregoing and
the agreements contained herein, ALZA and Crescendo hereby
agree as follows:
1. Funding of the Development Program.
(a) In consideration of the royalty payments set forth
in Section 2 of this Agreement, Crescendo hereby agrees to
fund the Elmiron Development Program in amounts as proposed
by ALZA and approved by Crescendo from time to time (the
"Development Payments"). The Elmiron-registered trademark-
Development Program shall be set forth in work plans
prepared by ALZA which are subject to the approval (in whole
or in part) or the rejection (in whole or in part) of
Crescendo. Each such approved work plan shall constitute a
"Work Plan" within the meaning of the Development Agreement.
The parties agree to review the Work Plan from time to time
(no less often than the end of each stage of development)
and to revise the Work Plan as appropriate so that it
remains a best estimate of the work to be done under the
Elmiron-registered trademark- Development Program and the
amounts required to fund such work. Crescendo shall not be
obligated to make Development Payments in excess of those
provided for in an approved Work Plan, and ALZA shall not be
obligated to perform work on the Elmiron-registered
trademark- Development Program which would result in
Development Payments exceeding those in an approved Work
Plan.
(b) ALZA and Crescendo agree that the Development
Payments shall be paid under the Development Agreement,
shall be made on the same basis as "Development Costs" (as
set forth in Sections 4.1 and 4.2 of the Development
Agreement) and shall constitute "Development Costs" within
the meaning of the Development Agreement.
(c) ALZA and Crescendo agree that the Elmiron-
registered trademark- Development Program constitutes an
activity undertaken pursuant to the Development Agreement
within the meanings of Sections 1.5 and 10.1 thereof.
(d) Developments Payments are intended to be included
as part of the "total amount paid by or due from this
corporation under the Development Agreement" for purposes of
Article FIFTH, Section (A)(18)(c) of the Restated
Certificate of Incorporation of Crescendo (the
"Certificate"), as part of "expenditures pursuant to the
Development Agreement" for purposes of Article FIFTH,
Section (A)(19) of the Certificate, as part of the "total
amounts paid by or due from this corporation pursuant to the
Development Agreement" for purposes of Article FIFTH,
Section (A)(21) of the Certificate, and as part of "any
additional amounts.that are paid by (or due from) this
corporation under the Development Agreement" for purposes of
Article FIFTH, Section (A)(10) of the Certificate.
2. Royalty Payments.
(a) In consideration of Crescendo making Development
Payments with respect to Elmiron-registered trademark-,
beginning in the first calendar quarter (the "Initial
Quarter") in which any Public Disclosure (as defined below)
is made, ALZA shall pay Crescendo royalties with respect to
sales of Elmiron-registered trademark- in the United States
and Canada as follows: (i) in the Initial Quarter and the
following three calendar quarters, the greatest of (1) 2.5%
of Excess Net Sales (as defined below), (2) 1% of Excess Net
Sales plus an additional 0.1% of such Excess Net Sales for
each full one million dollars of Development Payments paid
by Crescendo or (3) 1% of Net Sales (as defined in the
Development Agreement); and (ii) in each subsequent calendar
quarter, the greatest of (1) 3.0% of Excess Net Sales (as
defined below), (2) 1% of Excess Net Sales plus an
additional 0.1% of such Excess Net Sales for each full one
million dollars of Development Payments paid by Crescendo or
(3) 1% of Net Sales.
(b) ALZA shall notify Crescendo within three business
days after any Public Disclosure referred to in clause (a)
above is first made.
(c) "Public Disclosure" shall mean a presentation at a
public research seminar, lecture, professional meeting or
similar public venue, or any release of an abstract, poster,
summary, article or similar writing to the public (or any
target portion of the medical community), in each case which
(i) is made by or on behalf of ALZA or any person or entity
performing any activities under the Elmiron-registered
trademark- Development Program, and (ii) reports human
clinical data or results obtained in connection with the
activities conducted under the Elmiron Development Program
that support the use of pentosan polysulfate sodium for the
delay/prevention of vascular access graft occlusion.
"Excess Net Sales" shall mean the amount by which Net Sales
exceed Base Net Sales. "Base Net Sales" shall mean Net
Sales of Elmiron-registered trademark- in the United States
and Canada in the calendar quarter immediately preceding the
Initial Quarter.
(d) In determining payments under this Section 2 for
any calendar quarter, the amount of applicable Development
Payments shall be the cumulative amount of Development
Payments paid as of the last day of the preceding calendar
quarter.
(e) Royalty payments under this Section 2 shall be
subject to the requirements set forth in Sections 5.3, 7.6
and 7.8 of the Development Agreement with respect to
payments due under Section 7.4 of the Development Agreement.
3. Not a "Crescendo Product". Notwithstanding any
of the foregoing, ALZA and Crescendo confirm and agree
Elmiron-registered trademark- shall not be considered a
"Crescendo Product" within the meaning of the Development
Agreement, the Technology License Agreement between ALZA and
Crescendo dated as of September 5, 1997 (the "Technology
License Agreement") and the License Option Agreement between
ALZA and Crescendo dated as of September 5, 1997 (the
"License Option Agreement.")
4. Indemnification. ALZA shall indemnify, defend and
hold Crescendo harmless from and against any and all
liabilities, claims, demands, damages, costs, expenses or
money judgments rendered against Crescendo and its
Affiliates, which arise out of the use, design, labeling or
manufacture, processing, packaging, sale or
commercialization of Elmiron-registered trademark- by ALZA,
its Affiliates, assignees, subcontractors and sublicensees.
Crescendo shall permit ALZA's attorneys, at ALZA's
discretion and cost, to handle and control the defense of
any claims or suits as to which Crescendo may be entitled to
indemnity hereunder, and Crescendo agrees not to settle any
such claims or suits without the prior written consent of
ALZA. Crescendo shall give ALZA prompt written notice in
writing, in the manner set forth in Section 13.7 of the
Development Agreement, of any claim or demand made against
Crescendo for which Crescendo may be entitled to indemnity
hereunder. Crescendo shall have the right to participate,
at its own expense, in the defense of any such claim or
demand to the extent it so desires.
5. Miscellaneous.
(a) Capitalized terms used but not otherwise defined
herein shall have the meanings set forth in the Development
Agreement.
(b) Except as otherwise expressly provided herein, the
terms of the Development Agreement, the Technology License
Agreement and the License Option Agreement shall remain in
full force and effect.
(c) The provisions of Sections 1(b), 1(c), 1(d), 3 and
4, and this Section 5(c), of this Amendment, and of Section
2 to the extent of obligations under such section relating
to periods prior to termination of the Development
Agreement, shall survive the termination for any reason of
the Development Agreement. Any payments due under this
Amendment with respect to any period prior to termination of
the Development Agreement shall be made notwithstanding the
termination of the Development Agreement.
IN WITNESS WHEREOF, ALZA and Crescendo have caused this
Amendment to be executed as of the date first set forth
above by their duly authorized representatives.
ALZA Corporation
By: /s/ R.M. Myers
Name: Robert M. Myers
Title: Senior Vice President,
Commercial Development
Crescendo Pharmaceuticals Corporation
By: s/ Gary L. Neil, PhD
Name: Gary L. Neil, PhD
Title: President and Chief
Executive Officer
5
EXHIBIT 10.4
AMENDMENT NO. 2 TO DEVELOPMENT AGREEMENT
This Amendment No. 2 to Development Agreement (the
"Amendment") is made as of March 23, 2000 by and between
ALZA Corporation, a Delaware corporation ("ALZA"), and
Crescendo Pharmaceuticals Corporation, a Delaware
corporation ("Crescendo").
RECITALS
WHEREAS, ALZA and Crescendo have entered into that
certain Development Agreement dated as of September 5, 1997
(the "Development Agreement") pursuant to which ALZA
performs research and development activities on behalf of
Crescendo directed toward the development of pharmaceutical
products; and
WHEREAS, ALZA is marketing Doxil-registered trademark-
(STEALTH-registered trademark- liposomal doxorubicin HCI) in
the United States; and
WHEREAS, Doxil-registered trademark- has been approved
in the United States by the Food and Drug Administration
("FDA") for marketing only as a treatment for AIDS kaposi
sarcoma and metastatic carcinoma of the ovary in refractory
patients; and
WHEREAS, ALZA and Crescendo desire that Crescendo fund
a program with the goal of receiving clearance by the FDA to
market Doxil-registered trademark- for the treatment of
multiple myeloma; and
WHEREAS, such an arrangement is not currently
contemplated by the Development Agreement.
NOW, THEREFORE, in consideration of the foregoing and
the agreements contained herein, ALZA and Crescendo hereby
agree as follows:
1. Funding of the Development Program.
(a) In consideration of the royalty payments set forth
in Section 2 of this Agreement, Crescendo hereby agrees to
fund the Doxil Development Program in amounts as proposed by
ALZA and approved by Crescendo from time to time (the
"Development Payments"). The Doxil Development Program
shall be set forth in work plans prepared by ALZA which are
subject to the approval (in whole or in part) or the
rejection (in whole or in part) of Crescendo. Each such
approved work plan shall constitute a "Work Plan" within the
meaning of the Development Agreement. The parties agree to
review the Work Plan from time to time (no less often than
the end of each stage of development) and to revise the Work
Plan as appropriate so that it remains a best estimate of
the work to be done under the Doxil Development Program and
the amounts required to fund such work. Crescendo shall not
be obligated to make Development Payments in excess of those
provided for in an approved Work Plan, and ALZA shall not be
obligated to perform work on the Doxil Development Program
which would result in Development Payments exceeding those
in an approved Work Plan.
(b) ALZA and Crescendo agree that the Development
Payments shall be paid under the Development Agreement,
shall be made on the same basis as "Development Costs" (as
set forth in Sections 4.1 and 4.2 of the Development
Agreement) and shall constitute "Development Costs" within
the meaning of the Development Agreement.
(c) ALZA and Crescendo agree that the Doxil
Development Program constitutes an activity undertaken
pursuant to the Development Agreement within the meanings of
Sections 1.5 and 10.1 thereof.
(d) Developments Payments are intended to be included
as part of the "total amount paid by or due from this
corporation under the Development Agreement" for purposes of
Article FIFTH, Section (A)(18)(c) of the Restated
Certificate of Incorporation of Crescendo (the
"Certificate"), as part of "expenditures pursuant to the
Development Agreement" for purposes of Article FIFTH,
Section (A)(19) of the Certificate, as part of the "total
amounts paid by or due from this corporation pursuant to the
Development Agreement" for purposes of Article FIFTH,
Section (A)(21) of the Certificate, and as part of "any
additional amounts.that are paid by (or due from) this
corporation under the Development Agreement" for purposes of
Article FIFTH, Section (A)(10) of the Certificate.
2. Royalty Payments.
(a) In consideration of Crescendo making Development
Payments with respect to Doxil, beginning in the first
calendar quarter (the "Initial Quarter") in which any Public
Disclosure (as defined below) is made, ALZA shall pay
Crescendo royalties with respect to sales of Doxil in the
United States as follows: (i) in the Initial Quarter and the
following three calendar quarters, the greatest of (1) 2.5%
of Excess Net Sales (as defined below), (2) 1% of Excess Net
Sales plus an additional 0.1% of such Excess Net Sales for
each full one million dollars of Development Payments paid
by Crescendo or (3) 1% of Net Sales (as defined in the
Development Agreement); and (ii) in each subsequent calendar
quarter, the greatest of (1) 3.0% of Excess Net Sales (as
defined below), (2) 1% of Excess Net Sales plus an
additional 0.1% of such Excess Net Sales for each full one
million dollars of Development Payments paid by Crescendo or
(3) 1% of Net Sales.
(b) ALZA shall notify Crescendo within three business
days after any Public Disclosure referred to in clause (a)
above is first made.
(c) "Public Disclosure" shall mean a presentation at a
public research seminar, lecture, professional meeting or
similar public venue, or any release of an abstract, poster,
summary, article or similar writing to the public (or any
target portion of the medical community), in each case which
(i) is made by or on behalf of ALZA or any person or entity
performing any activities under the Doxil-registered
trademark- Development Program, and (ii) reports human
clinical data or results obtained in connection with the
activities conducted under the Doxil Development Program
that support the use of Doxil-registered trademark- for the
treatment of multiple myeloma. "Excess Net Sales" shall
mean the amount by which
Net Sales exceed Base Net Sales. "Base Net Sales"
shall mean Net Sales of Doxil in the United States in the
calendar quarter immediately preceding the Initial Quarter.
(d) In determining payments under this Section 2 for
any calendar quarter, the amount of applicable Development
Payments shall be the cumulative amount of Development
Payments paid as of the last day of the preceding calendar
quarter.
(e) Royalty payments under this Section 2 shall be
subject to the requirements set forth in Sections 5.3, 7.6
and 7.8 of the Development Agreement with respect to
payments due under Section 7.4 of the Development Agreement.
3. Not a "Crescendo Product". Notwithstanding any
of the foregoing, ALZA and Crescendo confirm and agree Doxil
shall not be considered a "Crescendo Product" within the
meaning of the Development Agreement, the Technology License
Agreement between ALZA and Crescendo dated as of September
5, 1997 (the "Technology License Agreement") and the License
Option Agreement between ALZA and Crescendo dated as of
September 5, 1997 (the "License Option Agreement.")
4. Indemnification. ALZA shall indemnify, defend and
hold Crescendo harmless from and against any and all
liabilities, claims, demands, damages, costs, expenses or
money judgments rendered against Crescendo and its
Affiliates, which arise out of the use, design, labeling or
manufacture, processing, packaging, sale or
commercialization of Doxil by ALZA, its Affiliates,
assignees, subcontractors and sublicensees. Crescendo shall
permit ALZA's attorneys, at ALZA's discretion and cost, to
handle and control the defense of any claims or suits as to
which Crescendo may be entitled to indemnity hereunder, and
Crescendo agrees not to settle any such claims or suits
without the prior written consent of ALZA. Crescendo shall
give ALZA prompt written notice in writing, in the manner
set forth in Section 13.7 of the Development Agreement, of
any claim or demand made against Crescendo for which
Crescendo may be entitled to indemnity hereunder. Crescendo
shall have the right to participate, at its own expense, in
the defense of any such claim or demand to the extent it so
desires.
5. Miscellaneous.
(a) Capitalized terms used but not otherwise defined
herein shall have the meanings set forth in the Development
Agreement.
(b) Except as otherwise expressly provided herein, the
terms of the Development Agreement, the Technology License
Agreement and the License Option Agreement shall remain in
full force and effect.
(c) The provisions of Sections 1(b), 1(c), 1(d), 3 and
4, and this Section 5(c), of this Amendment, and of Section
2 to the extent of obligations under such section relating
to periods prior to termination of the Development
Agreement, shall survive the termination for any reason of
the Development Agreement. Any payments due under this
Amendment with respect to any period prior to termination of
the Development Agreement shall be made notwithstanding the
termination of the Development Agreement.
IN WITNESS WHEREOF, ALZA and Crescendo have caused this
Amendment to be executed as of the date first set forth
above by their duly authorized representatives.
ALZA Corporation
By: /s/ R. M. Myers
Name: Robert M. Myers
Title: Senior Vice President, Commercial Development
Crescendo Pharmaceuticals Corporation
By: /s/ Gary L. Neil PhD
Name: Gary L. Neil, PhD
Title: President and Chief Executive Officer
EXHIBIT 10.7
LICENSE AGREEMENT
This License Agreement (the "Agreement") is made this 3rd
day of March, 2000 by and between ALZA Corporation, a Delaware
corporation ("ALZA"), and Crescendo Pharmaceuticals Corporation
("Crescendo"), a Delaware corporation.
BACKGROUND
A. Crescendo and ALZA have entered into a License Option
Agreement and certain other agreements dated as of September 5,
1997.
B. Section 2 of the License Option Agreement provides for a
license, the terms of which are to be set forth herein.
Now, therefore, the parties agree as follows:
1. Definitions.
For purposes of this Agreement, the following terms
shall have the meanings set forth below:
1.1 "Affiliate" shall mean a corporation or any other
entity that directly, or indirectly through one or more
intermediaries, controls, is controlled by, or is under common
control with, the designated party. "Control" shall mean
ownership of at least 50% of the shares of stock entitled to vote
for the election of directors in the case of a corporation, and
at least 50% of the interests in profits in the case of a
business entity other than a corporation.
1.2 "Development Agreement" shall mean the Development
Agreement between ALZA and Crescendo dated as of September 5,
1997.
1.3 "Development Cost(s)" shall mean the cost of
activities undertaken pursuant to the Development Agreement with
respect to the Licensed Product, determined in accordance with
Exhibit A thereto.
1.4 "Infringing Product" shall mean any product sold
by a third party, other than pursuant to an agreement with ALZA,
(i) which incorporates the same therapeutic agent or agents as
incorporated in the Licensed Product and (ii) in the case of a
Licensed Product using an ALZA drug delivery system, which
incorporates a delivery system substantially similar to that
incorporated in the Licensed Product, and (iii) which infringes
or is alleged to infringe any patent or patents owned by,
licensed to or controlled by ALZA.
1.5 "License Option Agreement" shall mean the License
Option Agreement between ALZA and Crescendo dated as of September
5, 1997.
1.6 "Licensed Product" shall mean the product listed
on Attachment A hereto.
1.7 "Major Market Country" shall mean any of the
following countries: the United States, France, Germany, Italy,
Japan or the United Kingdom.
1.8 "Net Sales" shall mean the total amount invoiced in United
States dollars (or converted thereto in accordance with Section
5.2 hereof) on sales of a Licensed Product by ALZA (or its
Affiliates) or any ALZA sublicensee, distributor or marketing
partner (or its Affiliates) to unrelated third parties such as
wholesalers, hospitals and others, in bona fide arm's-length
transactions, less the following deductions, in each case related
specifically to the Licensed Product and actually allowed and
taken and not otherwise recovered by or reimbursed to ALZA (or
its Affiliates) or such sublicensee, distributor or marketing
partner (or its Affiliates): (i) trade, cash and quantity
discounts; (ii) taxes on sales (such as sales or use taxes) to
the extent added to the sales price and set forth separately as
such in the total amount invoiced; (iii) freight, insurance and
other transportation charges to the extent added to the sales
price and set forth separately as such in the total amount
invoiced; and (iv) amounts repaid or credited by reason of
rejections, defects or returns or because of retroactive price
reductions, chargebacks or rebates under government programs.
Net Sales shall also include the fair market value of all other
consideration received (a) by ALZA (or its Affiliates) with
respect to sales by them of the Licensed Product to unrelated
third parties from persons other than sublicensees, distributors
or marketing partners (or their Affiliates) or (b) by any
sublicensee, distributor or marketing partner (or its Affiliates)
with respect to their sales of the Licensed Product to unrelated
third parties, in each case whether such consideration is in
cash, payment in kind, exchange or other form.
1.9 "Territory" shall mean the country or
countries listed on Attachment B hereto, as amended from time to
time by the parties in connection with the exercise by ALZA of
its option for additional countries under the License Option
Agreement or the surrender by ALZA of its rights to commercialize
the Licensed Product in any country or countries.
2. Grant of License.
2.1 Grant. Crescendo hereby grants to ALZA an
exclusive, perpetual 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 Territory. ALZA agrees
to use diligent efforts to conduct or have conducted any
remaining activities necessary to complete the development of the
Licensed Product in the Territory through regulatory clearance to
market the Licensed Product in the Territory. Such activities
will be undertaken at no cost to Crescendo, unless Crescendo
agrees otherwise in writing. Promptly after regulatory
clearance, ALZA shall commence and continue to use diligent
efforts to commercialize the Licensed Product in each Major
Market Country of the Territory through the manufacture and sale
or the sublicensing of the Licensed Product, devoting to the
Licensed Product the same resources as other pharmaceutical
companies of similar size devote to products with similar market
potential and with similar relative importance to their product
portfolios. ALZA may use reasonable business discretion in the
allocation of its technological and monetary resources in
performing its obligations hereunder, taking into account not
only the Licensed Product but also activities for its own account
and its obligations under its other agreements with third
parties. Crescendo acknowledges that ALZA will continue to own
and have the right to use any clinical supplies, materials and
other assets purchased, manufactured or developed for use in the
development of such Licensed Product, without any additional
payment to or reimbursement of Crescendo.
2.2 No Other Commercialization. ALZA shall not
commercialize the Licensed Product in any country except pursuant
to this Agreement.
3. Product Payments.
3.1 Payments.
(a) In consideration of the grant of the license,
ALZA shall make payments to Crescendo ("Product Payments") with
respect to the Licensed Product as follows: 1% of Net Sales of
the Licensed Product in the Territory, plus an additional 0.1% of
such Net Sales for each full $1 million of Development Costs of
the Licensed Product paid by Crescendo. Notwithstanding the
foregoing, Product Payments for any quarter will not exceed 2.5%
of Net Sales, on a quarterly basis, in the Territory for the
first four calendar quarters during which the Licensed Product is
commercially sold in the first Major Market Country, and 3% of
Net Sales, on a quarterly basis, for each of the following eight
completed calendar quarters.
(b) In determining Product Payments, Development
Costs shall be determined as of the last day of each calendar
quarter, in order to determine the rates payable with respect to
Net Sales for the next calendar quarter for all countries
included in the Territory as of the first day of such next
calendar quarter, and for any country added to the Territory
during such next calendar quarter.
(c) In determining Product Payments, Net Sales by
ALZA shall be reduced by the dollar amount of any license or
similar payments made by or due from ALZA or its Affiliates to
third parties with respect to sales of such Licensed Product in
the Territory. If license or similar payments are made to third
parties with respect to sales of both the Licensed Product in the
Territory and to sales of other products, ALZA shall allocate
such payments, if necessary, in a commercially reasonable manner.
3.2 Term of Payments. The obligation to make Product
Payments hereunder shall continue until 15 years after the date
of the first commercial sale of the Licensed Product in any Major
Market Country, and shall terminate as to all countries at the
end of such 15-year period.
3.3 Buy-Out of Payments.
(a) ALZA shall have the option, in its discretion, at any time
after the end of the twelfth calendar quarter during which the
Licensed Product was commercially sold in any country, to buy out
its remaining obligations to make Product Payments with respect
to Net Sales of such Licensed Product in such country. The buy-
out price shall be an amount equal to 15 times the Product
Payments made by or due from ALZA to Crescendo with respect to
Net Sales of such Licensed 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 but for the 2.5% and 3%
limits set forth in Section 3.1 on Product Payments for such
period.
(b) ALZA shall have the option, in its discretion, at any time
after the end of the twelfth calendar quarter during which the
Licensed Product was commercially sold in either the United
States or two other Major Market Countries, to buy out its
remaining obligations to make Product Payments with respect to
Net Sales of such Licensed Product in the Territory. The buy-out
price shall be an amount equal to (i) 20 times (A) the Product
Payments made by or due from ALZA to Crescendo for such Licensed
Product in the Territory, 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 Net
Sales of such Licensed Product, plus (C) such additional Product
Payments as would have been made but for the 2.5% and 3% limits
set forth in Section 3.1 on Product Payments for such period, in
each case, for the four calendar quarters immediately preceding
the quarter in which the buy-out option is exercised, less (ii)
any amounts previously paid to exercise any country-specific buy-
out option with respect to Net Sales of such Licensed Product.
4 Accounting.
4.1 Reports. Within 90 days after the end of each
calendar quarter for which Product Payments are due, ALZA shall
render an accounting to Crescendo, on a country-by-country basis,
with respect to all Product Payments due for such quarter. Such
report shall indicate, for such quarter, the quantity and dollar
amount of Net Sales of the Licensed Product by ALZA and its
Affiliates, sublicensees, distributors and marketing partners
(and their Affiliates), or other consideration with respect to
Net Sales, with respect to which payments are due; provided,
however, that if ALZA shall not have received from any
sublicensee, distributor or marketing partner a report of its
(and its Affiliates') sales for such quarter, then such sales
shall be included in the next quarterly report. In case no
Product Payments are due for any calendar quarter, ALZA shall so
report.
4.2 Records; Review by Accountants. ALZA shall keep
and maintain, in accordance with generally accepted accounting
principles, proper and complete records and books of account
documenting all amounts paid or payable by ALZA to Crescendo.
Crescendo shall have the right, once in each calendar year during
regular business hours and upon reasonable notice to ALZA, at
Crescendo's expense, to examine or have examined by a certified
public accountant or similar person, such of the records of ALZA
as may be necessary to verify the accuracy of the reports and
payments made under this Agreement. Such examination shall take
place not later than two years following the year in question,
and only one examination may take place with respect to any
period as to which such books and records are examined. ALZA
shall obtain, for itself and for Crescendo, similar reasonable
rights to audit information pertaining to Net Sales from each
party appointed to commercialize any product as to which payments
are due in Crescendo hereunder.
5 Times and Currencies of Payments.
5.1 Payments. Payments shown by each calendar quarter
report to have accrued shall be due and payable on the date such
report is due and shall be paid in United States dollars. Any
and all taxes due or payable on such payments or with respect to
the remittance thereof shall be deducted from such payments and
shall be paid by ALZA to the proper taxing authorities, and proof
of payment shall be secured and sent to Crescendo as evidence of
such payment. The rate of exchange to be used in computing the
amount of the United States dollars due to Crescendo in
satisfaction of payment obligations with respect to sales in
foreign countries shall be calculated by converting the amount
due in such foreign currency into United
States dollars at the rate for the purchase of United States
dollars with such currency as published in The Wall Street
Journal on the last business day of the calendar quarter for
which payment is being made.
5.2 Certain Foreign Payments. If governmental regulations
prevent remittance from any foreign country of any amounts due
under Section 3.1 in respect of that country, ALZA shall so
notify Crescendo in writing, and the obligation under this
Agreement to make payments with respect to sales in that country
shall be suspended (but the amounts due but not paid shall
continue to accrue) until such remittances are possible.
Crescendo shall have the right, upon written notice to ALZA, to
receive payment in any such country in the local currency.
5.3 Late Payments. Any payments due hereunder that
are not made when due shall bear interest at the lesser of 10%
per annum or the maximum rate as may be allowed by law, beginning
on the date when Crescendo has notified ALZA that such payments
are overdue.
6 Patent Infringement.
6.1 Notice. Each party shall promptly notify the
other party of use or sale by a third party of an Infringing
Product.
6.2 Legal Action. If a third party manufactures or
sells an Infringing Product, ALZA may, at its own expense, bring
legal action to restrain such infringement and for damages. Any
recoveries resulting from any such action shall be first applied
to reimburse ALZA for its expenses (including reasonable
attorneys' fees) incurred in bringing the action. Crescendo will
be entitled to a share of the remaining recoveries in the same
percentage as the percentage of Net Sales as to which Product
Payments are due to Crescendo during the period of the
infringement or alleged infringement. If (a) ALZA fails to take
the necessary steps to restrain such infringement or alleged
infringement by litigation or otherwise within 90 days after
either party's notice described in Section 6.1, (b) if the
infringement or alleged infringement occurs during a period for
which Crescendo is entitled to receive Product Payments
hereunder, and (c) if over a period of at least two calendar
quarters such Infringing Product achieves an annualized unit
sales volume in the country of infringement equal to 25% of the
annualized unit sales volume of the Licensed Product sold by ALZA
and its Affiliates, sublicensees, distributors and marketing
partners (and their Affiliates) in such country during such year,
then Crescendo may institute, in its own name, at its own expense
and with the right to all recoveries, such litigation or other
appropriate action as it may deem appropriate to restrain such
infringement, provided that Crescendo has first given to ALZA 60
days advance notice of its intention to take such action, and
provided further, that ALZA has not itself taken appropriate
action during such 60 day period.
6.3 Cooperation. If either party desires to bring an
action in accordance with Section 6.2, the other party agrees to
cooperate fully with the party bringing such action in the
pursuit thereof, at the expense of the party bringing such action
and to the extent reasonably requested by such party. If the
third party in any such action brought by Crescendo brings a
counteraction for invalidation or misuse of a patent covering the
Licensed Product, Crescendo promptly shall notify ALZA and ALZA
may, within six months of the notification, join and participate
in such action at its own expense.
6.4 Settlement. Each party agrees not to settle any
action it brings in a manner that would adversely affect the
other party without the other party's prior written approval.
7 Effective Date and Term.
7.1 Effective Date and Term. This Agreement will
become effective in accordance with Section 2.3 of the License
Option Agreement and, unless terminated in accordance with any of
the provisions hereof, shall remain in full force and effect
thereafter.
8 Indemnification.
8.1 Indemnity. ALZA shall indemnify, defend and hold
Crescendo (and its Affiliates) harmless from and against any and
all liabilities, claims, demands, damages, costs, expenses or
money judgments incurred by or rendered against Crescendo and its
Affiliates, which arise out of the use, design, labeling or
manufacture, processing, packaging, sale or commercialization of
the Licensed Product by ALZA, its Affiliates, subcontractors,
sublicensees, distributors and marketing partners (and their
Affiliates). Crescendo shall permit ALZA's attorneys, at ALZA's
discretion and cost, to control the defense of any claims or
suits as to which Crescendo may be entitled to indemnification
hereunder, and Crescendo agrees not to settle any such claims or
suits without the prior written consent of ALZA. Crescendo shall
have the right to participate, at its own expense, in the defense
of any such claim or demand to the extent it so desires.
8.2 Notice. Crescendo shall give ALZA prompt notice
in writing, in the manner set forth in Section 11.7 below, of any
claim or demand made against Crescendo for which Crescendo may be
entitled to indemnification under Section 8.1.
9 Disclaimers.
CRESCENDO DISCLAIMS ANY EXPRESS OR IMPLIED WARRANTY (A)
THAT THE LICENSED PRODUCT OR ANY TECHNOLOGY INCORPORATED THEREIN,
OR THE MANUFACTURE, USE OR SALE THEREOF, WILL BE FREE FROM CLAIMS
OF PATENT INFRINGEMENT, INTERFERENCE OR UNLAWFUL USE OF
PROPRIETARY INFORMATION OF ANY THIRD PARTY AND (B) OF THE
ACCURACY, RELIABILITY, TECHNOLOGICAL OR COMMERCIAL VALUE,
COMPREHENSIVENESS OR MERCHANTABILITY OF THE LICENSED PRODUCT OR
ANY TECHNOLOGY INCORPORATED THEREIN OR THEIR SUITABILITY OR
FITNESS FOR ANY PURPOSE WHATSOEVER INCLUDING, WITHOUT LIMITATION,
THE DESIGN, DEVELOPMENT, MANUFACTURE, USE OR SALE OF THE LICENSED
PRODUCT. CRESCENDO DISCLAIMS ALL OTHER WARRANTIES OF WHATEVER
NATURE, EXPRESS OR IMPLIED.
10 Termination.
10.1 Termination by Crescendo. Crescendo may, in its
discretion, terminate this Agreement in the event that ALZA:
(a) breaches any of its material obligations
hereunder and such breach continues for a period of 60 days after
written notice thereof; or
(b) enters into any proceeding, whether voluntary
or otherwise, in bankruptcy, reorganization or arrangement for
the appointment of a receiver or trustee to take possession of
ALZA's assets or any other proceeding under any law for the
relief of creditors or makes an assignment for the benefit of its
creditors.
10.2 Termination by ALZA. ALZA may terminate this
Agreement with respect to one or more countries included in the
Territory upon 30 days' prior written notice to Crescendo if ALZA
elects for any reason to discontinue commercialization of the
Licensed Product in such country.
10.3 Consequences of Termination. Termination of this
Agreement for any reason in accordance with the terms hereof
shall be without prejudice to:
(a) Crescendo's right to receive all payments
accrued under Section 3 prior to the effective date of such
termination; and
(b) any other remedies which either party may
then or thereafter have hereunder or otherwise. If this
Agreement terminates pursuant to this Section 10, ALZA shall
immediately discontinue any promotion and sales of the Licensed
Product. Notwithstanding the foregoing, in the event of any
termination under this Section 10, ALZA may sell its inventory in
stock on the date of termination for a period of up to six months
after the termination, and shall remit payments to Crescendo in
respect thereto in accordance with this Agreement.
11 Miscellaneous.
11.1 Waiver, Remedies and Amendment. Any waiver by
either party hereto of a breach of any provisions of this
Agreement shall not be implied and shall not be valid unless such
waiver is recited in writing and signed by such party. Failure
of any party to require, in one or more instances, performance by
the other party in strict accordance with the terms and
conditions of this Agreement shall not be deemed a waiver or
relinquishment of the future performance of any such terms or
conditions or of any other terms and conditions of this
Agreement. A waiver by either party of any term or condition of
this Agreement shall not be deemed or construed to be a waiver of
such term or condition for any other term. All rights, remedies,
undertakings, obligations and agreements contained in this
Agreement shall be cumulative and none of them shall be a
limitation of any other remedy, right, undertaking, obligation or
agreement of either party. This Agreement may not be amended
except in writing signed by both parties.
11.2 Assignment. Neither party may assign its rights
and obligations hereunder without the prior written consent of
the other party, which consent may not be unreasonably withheld;
provided, however, that ALZA may assign such rights and
obligations hereunder to an Affiliate of ALZA or to any person or
entity with which ALZA is merged or consolidated or which
acquires all or substantially all of the assets of ALZA.
11.3 Arbitration.
(a) All disputes which may arise under, out of or in
connection with this Agreement shall be settled by arbitration
conducted in the City of San Francisco, State of California, in
accordance with the then existing rules of the American
Arbitration Association, and judgment upon the award rendered by
the arbitrators may be entered in any court having jurisdiction
thereof. The parties hereby agree that service of any notices in
the course of such arbitration at their respective addresses as
provided for in Section 11.7 of this Agreement shall be valid and
sufficient.
(b) In any arbitration pursuant to this Section 11.3,
the award shall be rendered by a majority of the members of a
board of arbitration consisting of three members who shall be
appointed by the parties jointly, or if the parties cannot agree
as to three arbitrators within 30 days after the commencement of
the arbitration proceeding, then one arbitrator shall be
appointed by ALZA and one arbitrator shall be appointed by
Crescendo within 60 days after the commencement of the
arbitration proceeding. The third arbitrator shall be appointed
by mutual agreement of such two arbitrators. In the event of
failure of the two arbitrators to agree within 75 days after
commencement of the arbitration proceeding upon the appointment
of the third arbitrator, the third arbitrator shall be appointed
by the American Arbitration Association in accordance with its
then existing rules. Notwithstanding the foregoing, in the event
that any party shall fail to appoint an arbitrator it is required
to appoint within the specified time period, such arbitrator and
the third arbitrator shall be appointed by the American
Arbitration Association in accordance with its then existing
rules. For purposes of this Section 11.3, the "commencement of
the arbitration proceeding" shall be deemed to be the date upon
which a written demand for arbitration is received by the
American Arbitration Association from one of the parties.
11.4 Counterparts. This Agreement may be executed in
any number of counterparts, each of which when so executed shall
be deemed to be an original and all of which when taken together
shall constitute this Agreement.
11.5 Governing Law. This Agreement shall be governed
by and construed in accordance with the laws of the state of
California as applied to residents of that state entering into
contracts to be performed in that state.
11.6 Headings. The headings set forth at the beginning
of the various sections of this Agreement are for convenience and
form no part of the Agreement between the parties.
11.7 Notices. Notices required under this Agreement
shall be in writing and sent by registered or certified mail,
postage prepaid, or by facsimile and confirmed by registered or
certified mail, postage prepaid, and addressed as follows:
If to ALZA: ALZA Corporation
1900 Charleston Road
Mountain View, CA 94043
Facsimile: (650) 564-7848
Attention: General Counsel
If to Crescendo: Crescendo Pharmaceuticals
Corporation
2000 Charleston Road Suite 300
Mountain View, CA 94043
Facsimile: (650) 564-7950
Attention: President and Chief Executive
Officer
All notices shall be deemed to be effective five days after the
date of mailing or upon receipt if sent by facsimile (but only if
followed by certified or registered confirmation). Either party
may change the address at which notice is to be received by written
notice pursuant to this Section 11.7.
11.8 Severability. If any provision of this Agreement
is held by a court of competent jurisdiction to be invalid or
unenforceable, it shall be modified, if possible, to the minimum
extent necessary to make it valid and enforceable or, if such
modification is not possible, it shall be stricken and the
remaining provisions shall remain in full force and effect.
11.9 Relationship of the Parties. For all purposes of
this Agreement, Crescendo and ALZA shall be deemed to be
independent contractors and anything in this Agreement to the
contrary notwithstanding, nothing herein shall be deemed to
constitute Crescendo and ALZA as partners, joint venturers, co-
owners, an association or any entity separate and apart from each
party itself, nor shall this Agreement constitute any party
hereto an employee or agent, legal or otherwise, of the other
party for any purposes whatsoever. Neither party hereto is
authorized to make any statements or representations on behalf of
the other party or in any way to obligate the other party, except
as expressly authorized in writing by the other party. Anything
in this Agreement to the contrary notwithstanding, no party
hereto shall assume nor shall be liable for any liabilities or
obligations of the other party, whether past, present or future.
11.10 Survival. The provisions of Sections 1, 4.2,
8, 9, 10.3, 11.1, 11.3, 11.5, 11.6, 11.7, 11.8, 11.9 and this
Section 11.10 shall survive the termination for any reason of
this Agreement. Any payments due under this Agreement with
respect to any period prior to its termination shall be made
notwithstanding the termination of this Agreement. Neither party
shall be liable to the other due to the termination of this
Agreement as provided herein, whether in loss of good will,
anticipated profits or otherwise.
11.11 Force Majeure. Neither party to this
Agreement shall be liable for failure or delay in the performance
of any of its obligations hereunder, if such failure or delay is
due to causes beyond its reasonable control including, without
limitation, acts of God, earthquakes, fires, strikes, acts of
war, or intervention of any governmental authority, but any such
delay or failure shall be remedied by such party as soon as
possible after the removal of the cause of such failure or delay.
IN WITNESS WHEREOF, the parties have executed this Agreement
on the date first set forth above.
ALZA CORPORATION
By: /s/ Peter D. Staple
Title: Executive Vice President
CRESCENDO PHARMACEUTICALS
CORPORATION
By: /s/ Gary L. Neil
Title: President and Chief Executive
Officer
ATTACHMENT A
LICENSED PRODUCT
DUROS-registered teademark- Leuprolide (referred to as CPC-2)
ATTACHMENT B
TERRITORY
DATE OF EXERCISE COUNTRY
March 3, 2000 Worldwide
EXHIBIT 10.11
ALZA Corporation
Executive Deferral Plan II
Amendment 1998-1
Section 7.4 shall be restated in its entirety as follows:
7.4 "Payment of Benefit.
a) Except as otherwise provided in this Section 7.4, payment of
the Primary Account Balance and the Secondary Account Balance
which has vested pursuant to Section 7.3 above, if any, shall be
made in a lump sum within ninety (90) days of the Participant's
Termination of Employment.
b) A Participant may elect to receive benefits over a five (5)
year period or a ten (10) year period, payable annually commencing
within ninety (90) days of Termination of Employment. All
subsequent annual installment payments shall be made prior to
February 28 of each calendar year thereafter until the
Participant's EDP II Account balance is paid in full. Such
election must be made on the Election Form at least one full Plan
Year prior to the date of Termination of Employment. If a valid
election is made under this Section 7.4(b) to receive benefits
over a five (5) year period or a ten (10) year period, the unpaid
balance shall be credited with interest at the Standard Rate from
the date of the Termination of Employment through the date of the
last installment payment, subject to Section 7.4(c).
c) Notwithstanding anything in this Section 7.4 to the contrary,
and whether or not any election is made by the Participant under
Section 7.4(b), a Participant may elect to defer the commencement
of payout of Termination Benefits under this Section 7.4 for 1, 3,
5 or 7 years after Termination of Employment. An election to
defer the receipt of benefits under this Section 7.4 must be made
on the Election Form at least one full Plan Year prior to the date
of Termination of Employment. If a valid election is made to
defer the receipt of benefits under this Section 7.4(c), the
unpaid balance shall be credited with interest at a fixed rate of
five percent (5%) per annum from the date of the Termination of
Employment through the date of the last payment.
d) Other methods of payment shall be at the sole discretion of
the Committee.
The Company has caused this Amendment to be signed by its
duly authorized officer as of the date written below.
ALZA Corporation, a Delaware Corporation
By:/s/David R. Hoffmann
Its:Vice President and Treasurer
Date:December 11, 1998
EXHIBIT 10.12
ALZA Corporation
Amended and Restated Executive Deferral Plan II
1999 Amendment 1
ALZA Corporation, a Delaware corporation (the "Company"),
pursuant to the power granted to it by Section 10.2 of the ALZA
Corporation Amended and Restated Executive Deferral Plan II (the
"Plan"), hereby amends the Plan, as follows, effective as of
February 9, 1999.
1. Section 1.21 is amended in its entirety to read as follows:
" "Retirement" and "Retire" shall mean termination of
employment or severance of directorship with the
Company (i) on or after the attainment of age sixty-
five (65), (ii) at a time when Years of Service are
equal to or greater than 20 or (iii) at a time when the
sum of age at last birthday plus Years of Service equal
65 or more ("Rule of 65")."
2. Except as expressly provided herein, the provisions of the
Plan continue in their entirety as set forth immediately prior to
the effective date of this amendment.
The Company has caused this Amendment to be signed by its
duly authorized officer as of the date written below.
ALZA Corporation, a Delaware Corporation
By: David R. Hoffmann
Its: Vice President and Treasurer
Date: February 15, 1999
EXHIBIT 10.13
ALZA Corporation
Amended and Restated Executive Deferral Plan II
1999 Amendment 2
ALZA Corporation, a Delaware corporation (the "Company"),
pursuant to the power granted to it by Section 10.2 of the ALZA
Corporation Amended and Restated Executive Deferral Plan II (the
"Plan"), hereby amends the Plan, as follows, effective as of May
7, 1999.
1. Section 6.3 is amended in its entirety to read as follows:
"Benefit Period. The Survivor Benefit shall be paid
according to the following schedule:
EDP II Account Balance Distribution Period
Up to $100,000 Lump Sum
$100,001 to $250,000 5 Years
$250,001 to $500,000 10 Years
$500,001 or More 15 Years
Interest shall be credited on the unpaid balance at the
Preferred Distribution Rate. The lump sum payment, or the
initial installment payment, of the Survivor Benefit shall
commence within ninety (90) days of the delivery to the
Company of proof of death, in such form as determined
acceptable by the Committee. Any subsequent annual
installment payments shall be made prior to February 28 of
each calendar year thereafter until the Participant's EDP II
Account balance is paid in full."
2. Except as expressly provided herein, the provisions of the
Plan continue in their entirety as set forth immediately prior to
the effective date of this amendment.
The Company has caused this Amendment to be signed by its
duly authorized officer as of the date written below.
ALZA Corporation, a Delaware Corporation
By: David R. Hoffmann
Its: Vice President and Treasurer
Date:May 14, 1999
EXHIBIT 10.15
Amendment No. 1
to the
ALZA Corporation Amended and Restated Stock Plan
(as previously amended through May 6, 1999)
This Amendment No. 1 (the "Amendment") to the ALZA
Corporation Amended and Restated Stock Plan (the "Plan")
hereby amends the Plan as follows:
1. Effective January 1, 2000, the following is
substituted for Section 5(b) of the Plan:
"(b) Notwithstanding any other provision of this Plan,
directors who are not also employees of the Company may
receive grants under this Plan only in accordance with this
Section 5(b). Automatically and in connection with the
offer of directorship to a person who is not an employee of
the Company and has not been an employee of the Company at
any time in the immediately preceding 12 months, and subject
to that person becoming a director of the Company within the
time period set forth in the offer, the person shall be
granted a non-statutory option to purchase 12,000 shares of
Stock at the fair market value of the Stock on the date of
the offer. Such option shall vest in three equal annual
increments of 4,000 shares for each increment, beginning on
the first anniversary of the date of grant, and shall be
exercisable until the date that is ten (10) years after the
date of grant. On the first business day of December of
each year that a director has served as a non-employee
director for at least six months and continues to serve as a
non-employee director on such date, such director
automatically shall be granted a non-statutory option to
purchase 4,000 shares of Stock at the fair market value of
the Stock on the date of the grant. Each such option shall
vest three years after the date of grant and shall be
exercisable until the date that is ten (10) years after the
date of grant."
2. Except as set forth above, the Plan remains in full
force and effect as existing immediately prior to this
Amendment.
This Amendment No. 1 to the ALZA Corporation Amended
and Restated Stock Plan was approved by the Board of
Directors on December 17, 1999.
EXHIBIT 10.19
ALZA Corporation
Supplemental ALZA Retirement Plan
Master Plan Document
Effective December 1, 1998
TABLE OF CONTENTS
Page
Purpose 1
ARTICLE 1 Definitions 1
ARTICLE 2 Selection, Enrollment, Eligibility 4
2.1 Selection by Committee 4
2.2 Enrollment Requirements 4
2.3 Eligibility; Commencement of Participation 4
ARTICLE 3 SARP Company Contributions/Interest Crediting/Taxes 4
3.1 Annual SARP Company Contribution 4
3.2 Interest Crediting Prior to Distribution 5
3.3 FICA and Other Taxes 5
3.4 Vesting 5
ARTICLE 4 Benefit Distribution 6
4.1 SARP Benefit 6
4.2 Payment of SARP Benefit 6
ARTICLE 5 Beneficiary Designation 6
5.1 Beneficiary 6
5.2 Beneficiary Designation; Change; Spousal Consent 6
5.3 Acceptance 7
5.4 No Beneficiary Designation 7
5.5 Doubt as to Beneficiary 7
5.6 Discharge of Obligations 7
ARTICLE 6 Termination, Freeze, Amendment or Modification 7
6.1 Termination or Freeze 7
6.2 Amendment 8
6.3 Plan Agreement 8
6.4 Effect of Payment 8
ARTICLE 7 Administration 8
7.1 Committee Duties 8
7.2 Agents 9
7.3 Binding Effect of Decisions 9
7.4 Indemnity of Committee 9
7.5 Employer Information 9
ARTICLE 8 Other Benefits and Agreements 9
8.1 Coordination with Other Benefits 9
ARTICLE 9 Claims Procedures 9
9.1 Presentation of Claim 9
9.2 Notification of Decision 9
9.3 Review of a Denied Claim 10
9.4 Decision on Review 10
9.5 Legal Action 10
ARTICLE 10 Trust 10
10.1 Establishment of the Trust 10
10.2 Interrelationship of the Plan and the Trust 10
10.3 Distributions From the Trust 11
ARTICLE 11 Miscellaneous 11
11.1 Status of Plan 11
11.2 Unsecured General Creditor 11
11.3 Employer's Liability 11
11.4 Nonassignability 11
11.5 Not a Contract of Employment 11
11.6 Furnishing Information 12
11.7 Terms 12
11.8 Captions 12
11.9 Governing Law 12
11.10 Notice 12
11.11 Successors 12
11.12 Spouse's Interest 12
11.13 Validity 13
11.14 Incompetent 13
11.15 Court Order 13
11.16 Distribution in the Event of Taxation 13
11.17 Insurance 13
11.18 Legal Fees To Enforce Rights After
Change in Control 14
ALZA CORPORATION
SUPPLEMENTAL ALZA RETIREMENT PLAN
Effective December 1, 1998
Purpose
The purpose of this Plan is to provide specified
benefits to a select group of management or highly compensated
Employees who contribute materially to the continued growth,
development and future business success of ALZA Corporation, a
Delaware corporation, and its subsidiaries, if any, that sponsor
this Plan. This Plan shall be unfunded for tax purposes and for
purposes of Title I of ERISA.
ARTICLE 1
For purposes of this Plan, unless otherwise clearly
apparent from the context, the following phrases or terms shall
have the following indicated meanings:
1.1 "ARP" shall mean the ALZA Retirement Plan and Trust,
effective January 1, 1986, as may be amended from time to time.
1.2 "Annual ARP Contribution" shall mean, for any Participant in
any one Plan Year, the amount actually contributed for a given
Plan Year by the Employer to a Participant's ARP account.
1.3 "Annual Unreduced ARP Contribution" shall mean, for any
Participant in any one Plan Year, the amount which would have been
contributed for a given Plan Year by the Employer to a
Participant's ARP account, if any, were it not for reductions or
limitations imposed by all applicable provisions of the Code,
including, but not limited to, Code Sections 401 through 424, and,
that Participant's participation in the Executive Deferral Plan.
1.4 "Annual SARP Company Contribution" shall mean, for any
Participant in any one Plan Year, the amount determined in
accordance with Section 3.1.
1.5 "Beneficiary" shall mean one or more persons, trusts, estates
or other entities, designated in accordance with Article 5, that
are entitled to receive benefits under this Plan upon the death of
a Participant.
1.6 "Beneficiary Designation Form" shall mean the form
established from time to time by the Committee that a Participant
completes, signs and returns to the Committee to designate one or
more Beneficiaries.
1.7 "Board" shall mean the board of directors of the Company.
1.8 "Change in Control" shall mean the first to occur of any of
the following events:
(a) Any "person" (as that term is used in Section 13 and 14(d)(2)
of the Securities Exchange Act of 1934 ("Exchange Act")) becomes
the beneficial owner (as that term is used in Section 13(d) of the
Exchange Act), directly or indirectly, of 50% or more of the
Company's capital stock entitled to vote in the election of
directors;
(b) During any period of not more than two consecutive years, not
including any period prior to the adoption of this Plan,
individuals who, at the beginning of such period constitute the
board of directors of the Company, and any new director (other
than a director designated by a person who has entered into an
agreement with the Company to effect a transaction described in
clause (a), (c), (d) or (e) of this Section 1.8) whose election by
the board of directors or nomination for election by the Company's
stockholders was approved by a vote of at least three-fourths
(3/4ths) of the directors then still in office, who either were
directors at the beginning of the period or whose election or
nomination for election was previously so approved, cease for any
reason to constitute at least a majority thereof;
(c) The shareholders of the Company approve any consolidation or
merger of the Company, other than a consolidation or merger of the
Company in which the holders of the common stock of the Company
immediately prior to the consolidation or merger hold more than
50% of the common stock of the surviving corporation immediately
after the consolidation or merger;
(d) The shareholders of the Company approve any plan or proposal
for the liquidation or dissolution of the Company; or
(e) The shareholders of the Company approve the sale or transfer
of all or substantially all of the assets of the Company to
parties that are not within a "controlled group of corporations"
(as defined in Code Section 1563) in which the Company is a
member.
1.9 "Claimant" shall have the meaning set forth in Section 9.1.
1.10 "Code" shall mean the Internal Revenue Code of 1986, as it
may be amended from time to time.
1.11 "Committee" shall mean the committee described in Article 7.
1.12 "Company" shall mean ALZA Corporation, a Delaware
corporation, and any successor to all or substantially all of the
Company's assets or business.
1.13 "Crediting Rate" shall mean, with respect to a Participant's
SARP Account for each Plan Year, an interest rate, stated as an
annual rate, determined and announced by the Committee before the
Plan Year for which it is to be used, that is equal to 125% of the
applicable "Moody's Rate." The Moody's Rate for a Plan Year shall
be an interest rate, stated as an annual rate, that (i) is
published in Moody's Bond Record under the heading of "Moody's
Corporate Bond Yield Averages-Av. Corp." and (ii) is equal to the
average corporate bond yield calculated for the month of November
that immediately precedes the Plan Year for which the rate is to
be used.
1.14 "Deduction Limitation" shall mean the following described
limitation on a benefit that may otherwise be distributable
pursuant to the provisions of this Plan. Except as otherwise
provided, this limitation shall be applied to all distributions
that are "subject to the Deduction Limitation" under this Plan.
If an Employer determines in good faith prior to a Change in
Control that there is a reasonable likelihood that any
compensation paid to a Participant for a taxable year of the
Employer would not be deductible by the Employer solely by reason
of the limitation under Code Section 162(m), then to the extent
deemed necessary by the Employer to ensure that the entire amount
of any distribution to the Participant pursuant to this Plan prior
to the Change in Control is deductible, the Employer may defer all
or any portion of a distribution under this Plan. Any amounts
deferred pursuant to this limitation shall continue to be credited
with interest in accordance with Section 3.2 below, even if such
amount is being paid out in installments. The amounts so deferred
and interest thereon shall be distributed to the Participant or
his or her Beneficiary (in the event of the Participant's death)
at the earliest possible date, as determined by the Employer in
good faith, on which the deductibility of compensation paid or
payable to the Participant for the taxable year of the Employer
during which the distribution is made will not be limited by
Section 162(m), or if earlier, the effective date of a Change in
Control. Notwithstanding anything to the contrary in this Plan,
the Deduction Limitation shall not apply to any distributions made
after a Change in Control.
1.15 "Election Form" shall mean the form established from time to
time by the Committee that a Participant completes, signs and
returns to the Committee to make an election under Section 4.2 of
the Plan.
1.16 "Employee" shall mean a person who is an employee of any
Employer.
1.17 "Employer(s)" shall mean the Company and/or any of its
subsidiaries (now in existence or hereafter formed or acquired)
that have been selected by the Board to participate in the Plan
and have adopted the Plan as a sponsor.
1.18 "ERISA" shall mean the Employee Retirement Income Security
Act of 1974, as it may be amended from time to time.
1.19 "Executive Deferral Plan" shall mean the Employer's Executive
Deferral Plan(s).
1.20 "First Plan Year" shall mean the period beginning December 1,
1998, and ending December 31, 1998.
1.21 "Participant" shall mean any Employee (i) who is selected to
participate in the Plan, (ii) who signs a Plan Agreement and a
Beneficiary Designation Form, (iii) whose signed Plan Agreement
and Beneficiary Designation Form are accepted by the Committee,
(iv) who commences participation in the Plan, and (v) whose Plan
Agreement has not terminated. A spouse or former spouse of a
Participant shall not be treated as a Participant in the Plan or
have a SARP Account Balance under the Plan, even if he or she has
an interest in the Participant's benefits under the Plan as a
result of applicable law or property settlements resulting from
legal separation or divorce.
1.22 "Plan" shall mean the Company's Supplemental ALZA Retirement
Plan, which shall be evidenced by this instrument and by each Plan
Agreement, as they may be amended from time to time.
1.23 "Plan Agreement" shall mean a written agreement, as may be
amended from time to time, which is entered into by and between an
Employer and a Participant. Each Plan Agreement executed by a
Participant and the Participant's Employer shall provide for the
entire benefit to which such Participant is entitled under the
Plan; should there be more than one Plan Agreement, the Plan
Agreement bearing the latest date of acceptance by the Committee
shall supersede all previous Plan Agreements in their entirety and
shall govern such entitlement. The terms of any Plan Agreement
may be different for any Participant, and any Plan Agreement may
provide additional benefits not set forth in the Plan or limit the
benefits otherwise provided under the Plan; provided, however,
that any such additional benefits or benefit limitations must be
agreed to by both the Employer and the Participant.
1.24 "Plan Year" shall, for the First Plan Year, begin on December
1, 1998, and end on December 31, 1998. For each Plan Year
thereafter, the Plan Year shall begin on January 1 of each
calendar year and continue through December 31 of such calendar
year.
1.25 "SARP Account" shall mean a credit on the records of the
Employer equal to (i) the sum of the Participant's Annual SARP
Company Contributions, plus (ii) interest credited in accordance
with all the applicable interest crediting provisions of this
Plan. The SARP Account shall be a bookkeeping entry only and
shall be utilized solely as a device for the measurement and
determination of the amounts to be paid to a Participant, or his
or her designated Beneficiary, pursuant to this Plan.
1.26 "SARP Benefit" shall mean the Vested SARP Account as of the
date of Termination of Employment, paid as set forth in Article 4.
1.27 "Termination of Employment" shall mean the severing of
employment with all Employer(s), voluntarily or involuntarily, for
any reason other than an authorized leave of absence.
1.28 "Trust" shall mean the trust established pursuant to that
certain Master Trust Agreement, dated as of the effective date of
the Plan, between the Company and the trustee named therein, as
amended from time to time.
1.29 "Vested" shall mean that portion of a Participant's SARP
Account in which the Participant has a nonforfeitable right or
vested interest as determined in accordance with Section 3.4.
1.30 "Years of Service" shall mean, for a Participant, his or her
years of service as defined under the ARP.
ARTICLE 2
Selection, Enrollment, Eligibility
2.1 Selection by Committee. Participation in the Plan shall be
limited to a select group of management or highly compensated
Employees of the Employer(s), as determined by the Committee, in
its sole discretion. From that group, the Committee shall select,
in its sole discretion, Employees to participate in the Plan.
2.2 Enrollment Requirements As a condition to participation,
each selected Employee shall complete, execute and return to the
Committee a Plan Agreement, an Election Form and a Beneficiary
Designation Form, all within 30 days after he or she is selected
to participate in the Plan. In addition, the Committee shall
establish from time to time such other enrollment requirements as
it determines in its sole discretion are necessary.
2.3 Eligibility; Commencement of Participation Provided an
Employee selected to participate in the Plan has met all
enrollment requirements set forth in this Plan and required by the
Committee, including returning all required documents to the
Committee within the specified time period, that Employee shall
commence participation in the Plan on the first day of the month
following the month in which the Employee completes all enrollment
requirements. If an Employee fails to meet all such requirements
within the period required, in accordance with Section 2.2,
that Employee shall not be eligible to participate in the
Plan until the first day of the Plan Year following the
delivery to and acceptance by the Committee of the required
documents.
ARTICLE 3
SARP Company Contributions/Interest Crediting/Taxes
3.1 Annual SARP Company Contribution.
(a) Other Than First Plan Year. For a Plan Year other than the
First Plan Year, the amount of each Participant's Annual SARP
Company Contribution will be equal to the difference, if any,
between the Annual Unreduced ARP Contribution for a Plan Year and
the Annual ARP Contribution for the corresponding plan year of the
ARP. For any Plan Year, the Annual SARP Company Contribution
amount may be zero. The Annual SARP Company Contribution, if any,
shall be credited as of the last day of the Plan Year.
(b) First Plan Year. For each Participant who was employed by
the Employer(s) on December 31, 1998, and became a participant in
the Plan on or before June 1, 1999, an Annual SARP Company
Contribution shall be calculated in accordance with Section 3.1(a)
above as if that Participant had been enrolled in and participated
in the Plan for the shorter of (i) the 1998 calendar year, or (ii)
his or her participation in the ARP for the 1998 calendar year.
The resulting Annual SARP Contribution, if any, shall be credited
as of December 31, 1998.
3.2 Interest Crediting Prior to Distribution. Except as provided
below, prior to any distribution of benefits under Article 4,
interest shall be credited and compounded annually on a
Participant's SARP Account as if the Annual SARP Company
Contribution, if any, was credited at the end of the Plan Year to
which it relates. The rate of interest for crediting shall be the
Crediting Rate. If a distribution is made under this Plan, for
purposes of crediting interest on the amount to be distributed,
interest shall be credited on such amount up to the last day of
the month preceding the month in which the distribution is made.
3.3 FICA and Other Taxes.
(a) SARP Account. When a participant becomes vested in a portion
of his or her SARP Account, the Participant's Employer(s) shall
withhold from the Participant's compensation, in a manner
determined by the Employer(s), the Participant's share of FICA and
other employment taxes. If necessary, the Committee may reduce
the vested portion of the Participant's SARP Account in order to
comply with this Section 3.3.
(b) Distributions. The Participant's Employer(s), or the trustee
of the Trust, shall withhold from any payments made to a
Participant under this Plan all federal, state and local income,
employment and other taxes required to be withheld by the
Employer(s), or the trustee of the Trust, in connection with such
payments, in amounts and in a manner to be determined in the sole
discretion of the Employer(s) and the trustee of the Trust.
3.4 Vesting.
(a) A Participant shall be vested in his or her SARP Account in
accordance with the following schedule:
Years of Service on Vested Percentage of
Date SARP Account
of Termination of
Employment
Less than 5 years 0%
5 years or more 100%
(b) Notwithstanding subsection (a) above, and except as provided
in subsection (c) below, in the event of a Change in Control, a
Participant's SARP Account shall immediately become 100% Vested
(if it is not already Vested in accordance with the above vesting
schedule).
(c) Notwithstanding subsection (b) above, the vesting schedule
for a Participant's SARP Account shall not be accelerated to the
extent that the Committee determines that such acceleration would
cause the deduction limitations of Section 280G of the Code to
become effective. In the event that all of a Participant's SARP
Account is not vested pursuant to such a determination, the
Participant may request independent verification of the
Committee's calculations with respect to the application of
Section 280G. In such case, the Committee must provide to the
Participant within 15 business days of such a request an opinion
from a nationally recognized accounting firm selected by the
Participant (the "Accounting Firm"). The opinion shall state the
Accounting Firm's opinion that any limitation in the vested
percentage hereunder is necessary to avoid the limits of Section
280G and contain supporting calculations. The cost of such
opinion shall be paid for by the Company.
ARTICLE 4
Benefit Distribution
4.1 SARP Benefit. Subject to the Deduction Limitation, a
Participant who Terminates Employment shall receive his or her
Vested SARP Account.
4.2 Payment of SARP Benefit. A Participant, in connection with
his or her commencement of participation in the Plan, shall elect
on an Election Form to receive the SARP Benefit in a lump sum or
over a five (5) year, ten (10) year or fifteen (15) year period,
payable annually. The Participant may annually change his or her
election to an allowable alternative payout period by submitting a
new Election Form to the Committee, provided that any such
Election Form is submitted at least one year prior to the
Participant's Termination of Employment (other than Termination of
Employment due to death) and is accepted by the Committee in its
sole discretion. The Election Form most recently accepted by the
Committee shall govern the payout of the SARP Benefit. The lump
sum payment shall be made, or the annual payments shall commence
within sixty (60) days of Termination of Employment. Any payment
made shall be subject to the Deduction Limitation.
ARTICLE 5
Beneficiary Designation
5.1 Beneficiary. Each Participant shall have the right, at any
time, to designate his or her Beneficiary(ies) (both primary as
well as contingent) to receive any benefits payable under the Plan
to a beneficiary upon the death of a Participant. The Beneficiary
designated under this Plan may be the same as or different from
the Beneficiary designation under any other plan of an Employer in
which the Participant participates.
5.2 Beneficiary Designation; Change; Spousal Consent. A
Participant shall designate his or her Beneficiary by completing
and signing the Beneficiary Designation Form, and returning it to
the Committee or its designated agent. A Participant shall have
the right to change a Beneficiary by completing, signing and
otherwise complying with the terms of the Beneficiary Designation
Form and the Committee's rules and procedures, as in effect from
time to time. If the Participant names someone other than his or
her spouse as a Beneficiary, a spousal consent, in the form
designated by the Committee, must be signed by that Participant's
spouse and returned to the Committee. Upon the acceptance by the
Committee of a new Beneficiary Designation Form, all Beneficiary
designations previously filed shall be canceled. The Committee
shall be entitled to rely on the last Beneficiary Designation Form
filed by the Participant and accepted by the Committee prior to
his or her death.
5.3 Acceptance. No designation or change in designation of a
Beneficiary shall be effective until received by the Committee or
its designated agent.
5.4 No Beneficiary Designation. If a Participant fails to
designate a Beneficiary as provided in Sections 5.1, 5.2 and 5.3
above or, if all designated Beneficiaries predecease the
Participant or die prior to complete distribution of the
Participant's benefits, then the Participant's designated
Beneficiary shall be deemed to be his or her surviving spouse. If
the Participant has no surviving spouse, the benefits remaining
under the Plan to be paid to a Beneficiary shall be payable to the
executor or personal representative of the Participant's estate.
5.5 Doubt as to Beneficiary. If the Committee has any doubt as
to the proper Beneficiary to receive payments pursuant to this
Plan, the Committee shall have the right, exercisable in its
discretion, to cause the Participant's Employer to withhold such
payments until this matter is resolved to the Committee's
satisfaction.
5.6 Discharge of Obligations. The payment of benefits under the
Plan to a Beneficiary shall fully and completely discharge all
Employer(s) and the Committee from all further obligations under
this Plan with respect to the Participant, and that Participant's
Plan Agreement shall terminate upon such full payment of benefits.
ARTICLE 6
Termination, Freeze, Amendment or Modification
6.1 Termination or Freeze. Although each Employer anticipates
that it will continue the Plan for an indefinite period of time,
there is no guarantee that any Employer will continue the Plan.
Accordingly, each Employer reserves the right at any time to take
one of the following actions with regard to its participating
Employees by the action of its board of directors:
(a) Terminate the Plan. An Employer may discontinue its
sponsorship of the Plan and terminate the Plan. Upon
the termination of the Plan with respect to any
Employer, the Plan Agreement of each Participant who is
employed by that Employer shall terminate. The Employer
shall have the right, in its sole discretion, and
notwithstanding any elections made by any such
Participant, to pay the SARP Account of any such
Participant in a lump sum or pursuant to an Annual
Installment Method of up to fifteen (15) years, with
amounts credited and debited during the installment
period as provided herein. The termination of the Plan
shall not adversely affect any Participant or
Beneficiary who has become entitled to the payment of
any benefits under the Plan as of the date of
termination; provided however, that the Employer shall
have the right to accelerate installment payments
without a premium or prepayment penalty by paying the
SARP Account in a lump sum or pursuant to an Annual
Installment Method using fewer years (provided that the
present value of all payments that will have been
received by a Participant at any given point of time
under the different payment schedule shall equal or
exceed the present value of all payments that would have
been received at that point in time under the original
payment schedule).
(b) Freeze the Plan. An Employer may continue its
sponsorship of the Plan in all respects but decline to
make any further Annual SARP Company Contributions.
6.2 Amendment. Any Employer may, at any time, amend or modify
the Plan in whole or in part with respect to that Employer by the
action of its board of directors; provided, however, that no
amendment or modification shall be effective to decrease or
restrict the value of a Participant's SARP Account in existence at
the time the amendment or modification is made, calculated as if
the Participant had experienced a Termination of Employment as of
the effective date of the amendment or modification.
6.3 Plan Agreement. Despite the provisions of Sections 6.1 and
6.2 above, if a Participant's Plan Agreement contains benefits or
limitations that are not in this Plan document, the Employer may
only amend or terminate such provisions with the consent of the
Participant.
6.4 Effect of Payment. The full payment of the applicable
benefit under Article 4 of the Plan shall completely discharge all
obligations to a Participant and his or her designated
Beneficiaries under this Plan and the Participant's Plan Agreement
shall terminate.
ARTICLE 7
Administration
7.1 Committee Duties. This Plan shall be administered by a
Committee which shall consist of the Board, or such committee as
the Board shall appoint. Members of the Committee may be
Participants under this Plan. The Committee shall also have the
discretion and authority to (i) make, amend, interpret, and
enforce all appropriate rules and regulations for the administra
tion of this Plan and (ii) decide or resolve any and all questions
including interpretations of this Plan, as may arise in connection
with the Plan. Any individual serving on the Committee who is a
Participant shall not vote or act on any matter relating solely to
himself or herself. When making a determination or calculation,
the Committee shall be entitled to rely on information furnished
by a Participant or the Company.
7.2 Agents. In the administration of this Plan, the Committee
may, from time to time, employ agents and delegate to them such
administrative duties as it sees fit (including acting through a
duly appointed representative) and may from time to time consult
with counsel who may be counsel to any Employer.
7.3 Binding Effect of Decisions. The decision or action of the
Committee with respect to any question arising out of or in
connection with the administration, interpretation and application
of the Plan and the rules and regulations promulgated hereunder
shall be final and conclusive and binding upon all persons having
any interest in the Plan.
7.4 Indemnity of Committee. All Employer(s) shall indemnify and
hold harmless the members of the Committee, and any Employee to
whom duties of the Committee may be delegated, against any and all
claims, losses, damages, expenses or liabilities arising from any
action or failure to act with respect to this Plan, except in the
case of willful misconduct by the Committee or any of its members
or any such Employee.
7.5 Employer Information. To enable the Committee to perform its
functions, each Employer shall supply full and timely information
to the Committee on all matters relating to the Participants as
the Committee may reasonably require.
ARTICLE 8
Other Benefits and Agreements
8.1 Coordination with Other Benefits. The benefits provided for
a Participant and Participant's Beneficiary under the Plan are in
addition to any other benefits available to such Participant under
any other plan or program for employees of the Participant's
Employer. The Plan shall supplement and shall not supersede,
modify or amend any other such plan or program except as may
otherwise be expressly provided.
ARTICLE 9
Claims Procedures
9.1 Presentation of Claim. Any Participant or Beneficiary of a
deceased Participant (such Participant or Beneficiary being
referred to below as a "Claimant") may deliver to the Committee a
written claim for a determination with respect to the amounts
distributable to such Claimant from the Plan. If such a claim
relates to the contents of a notice received by the Claimant, the
claim must be made within 60 days after such notice was received
by the Claimant. The claim must state with particularity the
determination desired by the Claimant. All other claims must be
made within 180 days of the date on which the event that caused
the claim to arise occurred. The claim must state with
particularity the determination desired by the Claimant.
9.2 Notification of Decision. The Committee shall consider a
Claimant's claim within a reasonable time, and shall notify the
Claimant in writing:
(a) that the Claimant's requested determination has been made,
and that the claim has been allowed in full; or
(b) that the Committee has reached a conclusion contrary, in
whole or in part, to the Claimant's requested determination, and
such notice must set forth in a manner calculated to be understood
by the Claimant:
(i) the specific reason(s) for the denial of the claim, or any
part of it;
(ii) specific reference(s) to pertinent provisions of the Plan
upon which such denial was based;
(iii) a description of any additional material or information
necessary for the Claimant to perfect the claim, and an
explanation of why such material or information is necessary; and
(iv) an explanation of the claim review procedure set forth in
Section 9.3 below.
9.3 Review of a Denied Claim. Within 60 days after receiving a
notice from the Committee that a claim has been denied, in whole
or in part, a Claimant (or the Claimant's duly authorized
representative) may file with the Committee a written request for
a review of the denial of the claim. Thereafter, but not later
than 30 days after the review procedure began, the Claimant (or
the Claimant's duly authorized representative):
(a) may review pertinent documents;
(b) may submit written comments or other documents; and/or
(c) may request a hearing, which the Committee, in its sole
discretion, may grant.
9.4 Decision on Review. The Committee shall render its decision
on review promptly, and not later than 60 days after the filing of
a written request for review of the denial, unless a hearing is
held or other special circumstances require additional time, in
which case the Committee's decision must be rendered within
120 days after such date. Such decision must be written in a
manner calculated to be understood by the Claimant, and it must
contain:
(a) specific reasons for the decision;
(b) specific reference(s) to the pertinent Plan provisions upon
which the decision was based; and
(c) such other matters as the Committee deems relevant.
9.5 Legal Action. A Claimant's compliance with the foregoing
provisions of this Article 14 is a mandatory prerequisite to a
Claimant's right to commence any legal action with respect to any
claim for benefits under this Plan.
ARTICLE 10
Trust
10.1 Establishment of the Trust. The Company shall establish the
Trust, and each Employer shall at least annually transfer over to
the Trust such assets as the Employer determines, in its sole
discretion, are necessary to provide, on a present value basis,
for its respective future liabilities created with respect to the
Participant's SARP Accounts and interest credits for those amounts
for all periods prior to the transfer, as well as any debits and
credits to the Participants' SARP Accounts for all periods prior
to the transfer, taking into consideration the value of the assets
in the trust at the time of the transfer.
10.2 Interrelationship of the Plan and the Trust. The provisions
of the Plan and the Plan Agreement shall govern the rights of a
Participant to receive distributions pursuant to the Plan. The
provisions of the Trust shall govern the rights of the
Employer(s), Participants and the creditors of the Employer(s) to
the assets transferred to the Trust. Each Employer shall at all
times remain liable to carry out its obligations under the Plan.
The Trustee of the Trust shall be authorized, upon written
instructions received from the Committee or investment manager
appointed by the Committee, to invest and reinvest the assets of
the Trust in accordance with the applicable Trust Agreement.
10.3 Distributions From the Trust. Each Employer's obligations
under the Plan may be satisfied with Trust assets distributed
pursuant to the terms of the Trust, and any such distribution
shall reduce the Employer's obligations under this Agreement.
ARTICLE 11
Miscellaneous
11.1 Status of Plan. The Plan is intended to be a plan that is
not qualified within the meaning of Code Section 401(a) and that
"is unfunded and is maintained by an employer primarily for the
purpose of providing deferred compensation for a select group of
management or highly compensated employee" within the meaning of
ERISA Sections 201(2), 301(a)(3) and 401(a)(1). The Plan shall be
administered and interpreted to the extent possible in a manner
consistent with that intent.
11.2 Unsecured General Creditor. Participants and their Bene
ficiaries, heirs, successors and assigns shall have no legal or
equitable rights, interests or claims in any property or assets of
an Employer. For purposes of the payment of benefits under this
Plan, any and all of an Employer's assets shall be, and remain,
the general, unpledged unrestricted assets of the Employer. An
Employer's obligation under the Plan shall be merely that of an
unfunded and unsecured promise to pay money in the future.
11.3 Employer's Liability. An Employer's liability for the
payment of benefits shall be defined only by the Plan and the Plan
Agreement, as entered into between the Employer and a Participant.
An Employer shall have no obligation to a Participant under the
Plan except as expressly provided in the Plan and his or her Plan
Agreement.
11.4 Nonassignability. Neither a Participant nor any other person
shall have any right to commute, sell, assign, transfer, pledge,
anticipate, mortgage or otherwise encumber, transfer, hypothecate,
alienate or convey in advance of actual receipt, the amounts, if
any, payable hereunder, or any part thereof, which are, and all
rights to which are expressly declared to be, unassignable and non-
transferable. No part of the amounts payable shall, prior to
actual payment, be subject to seizure, attachment, garnishment or
sequestration for the payment of any debts, judgments, alimony or
separate maintenance owed by a Participant or any other person, be
transferable by operation of law in the event of a Participant's
or any other person's bankruptcy or insolvency or be transferable
to a spouse as a result of a property settlement or otherwise.
11.5 Not a Contract of Employment. The terms and conditions of
this Plan shall not be deemed to constitute a contract of
employment between any Employer and the Participant. Such
employment is hereby acknowledged to be an "at will" employment
relationship that can be terminated at any time for any reason, or
no reason, with or without cause, and with or without notice,
unless expressly provided in a written employment agreement.
Nothing in this Plan shall be deemed to give a Participant the
right to be retained in the service of any Employer as an
Employee, or to interfere with the right of any Employer to
discipline or discharge the Participant at any time.
11.6 Furnishing Information. A Participant or his or her
Beneficiary will cooperate with the Committee by furnishing any
and all information requested by the Committee and take such other
actions as may be requested in order to facilitate the administra
tion of the Plan and the payments of benefits hereunder, including
but not limited to taking such physical examinations as the
Committee may deem necessary.
11.7 Terms. Whenever any words are used herein in the masculine,
they shall be construed as though they were in the feminine in all
cases where they would so apply; and whenever any words are used
herein in the singular or in the plural, they shall be construed
as though they were used in the plural or the singular, as the
case may be, in all cases where they would so apply.
11.8 Captions. The captions of the articles, sections and
paragraphs of this Plan are for convenience only and shall not
control or affect the meaning or construction of any of its
provisions.
11.9 Governing Law. Subject to ERISA, the provisions of this Plan
shall be construed and interpreted according to the internal laws
of the State of California without regard to its conflicts of laws
principles.
11.10 Notice. Any notice or filing required or permitted to
be given to the Committee under this Plan shall be sufficient if
in writing and hand-delivered, or sent by registered or certified
mail, to the address below:
ALZA Corporation
Supplemental ALZA Retirement Plan Committee
950 Page Mill Road
P.O. Box 10950
Palo Alto, CA 94303-0802
Attn: Treasurer
Such notice shall be deemed given as of the date of delivery
or, if delivery is made by mail, as of the date shown on the
postmark on the receipt for registration or certification.
Any notice or filing required or permitted to be given to a
Participant under this Plan shall be sufficient if in writing
and hand-delivered, or sent by mail, to the last known
address of the Participant.
11.11 Successors. The provisions of this Plan shall bind and
inure to the benefit of the Participant's Employer and its
successors and assigns and the Participant and the Participant's
designated Beneficiaries.
11.12 Spouse's Interest. The interest in the benefits
hereunder of a spouse of a Participant who has predeceased the
Participant shall automatically pass to the Participant and shall
not be transferable by such spouse in any manner, including but
not limited to such spouse's will, nor shall such interest pass
under the laws of intestate succession.
11.13 Validity. In case any provision of this Plan shall be
illegal or invalid for any reason, said illegality or invalidity
shall not affect the remaining parts hereof, but this Plan shall
be construed and enforced as if such illegal or invalid provision
had never been inserted herein.
11.14 Incompetent. If the Committee determines in its
discretion that a benefit under this Plan is to be paid to a
minor, a person declared incompetent or to a person incapable of
handling the disposition of that person's property, the Committee
may direct payment of such benefit to the guardian, legal
representative or person having the care and custody of such
minor, incompetent or incapable person. The Committee may require
proof of minority, incompetence, incapacity or guardianship, as it
may deem appropriate prior to distribution of the benefit. Any
payment of a benefit shall be a payment for the account of the
Participant and the Participant's Beneficiary, as the case may be,
and shall be a complete discharge of any liability under the Plan
for such payment amount.
11.15 Court Order. The Committee is authorized to make any
payments directed by court order in any action in which the Plan
or the Committee has been named as a party. In addition, if a
court determines that a spouse or former spouse of a Participant
has an interest in the Participant's benefits under the Plan in
connection with a property settlement or otherwise, the Committee,
in its sole discretion, shall have the right, notwithstanding any
election made by a Participant, to immediately distribute the
spouse's or former spouse's interest in the Participant's benefits
under the Plan to that spouse or former spouse.
11.16 Distribution in the Event of Taxation.
(a) General. If, for any reason, all or any portion of a
Participant's benefit under this Plan becomes taxable to the
Participant prior to receipt, a Participant may petition the
Committee before a Change in Control, or the trustee of the Trust
after a Change in Control, for a distribution of that portion of
his or her benefit that has become taxable. Upon the grant of
such a petition, which grant shall not be unreasonably withheld
(and, after a Change in Control, shall be granted), a
Participant's Employer shall distribute to the Participant
immediately available funds in an amount equal to the taxable
portion of his or her SARP Benefit (which amount shall not exceed
a Participant's unpaid Vested SARP Account under the Plan). If
the petition is granted, the tax liability distribution shall be
made within 90 days of the date when the Participant's petition is
granted. Such a distribution shall affect and reduce the benefits
to be paid under this Plan.
(b) Trust. If the Trust terminates and benefits are distributed
from the Trust to a Participant in accordance its terms, the
Participant's benefits under this Plan shall be reduced to the
extent of such distributions.
11.17 Insurance. The Employer(s), on their own behalf or on
behalf of the trustee of the Trust, and, in their sole discretion,
may apply for and procure insurance on the life of the
Participant, in such amounts and in such forms as the Trust may
choose. The Employer(s) or the trustee of the Trust, as the case
may be, shall be the sole owner and beneficiary of any such
insurance. The Participant shall have no interest whatsoever in
any such policy or policies, and at the request of the Employer(s)
shall submit to medical examinations and supply such information
and execute such documents as may be required by the insurance
company or companies to whom the Employer(s) have applied for
insurance.
11.18 Legal Fees To Enforce Rights After Change in Control.
The Company and each Employer is aware that upon the occurrence of
a Change in Control, the Board or the board of directors of the
Participant's Employer (which might then be composed of new
members) or a shareholder of the Company or the Participant's
Employer, or of any successor corporation might then cause or
attempt to cause the Company or the Participant's Employer or such
successor to refuse to comply with its obligations under the Plan
and might cause or attempt to cause the Company or the
Participant's Employer to institute, or may institute, litigation
seeking to deny Participants the benefits intended under the Plan.
In these circumstances, the purpose of the Plan could be
frustrated. Accordingly, if, following a Change in Control, it
should appear to any Participant that the Company, the
Participant's Employer or any successor corporation has failed to
comply with any of its obligations under the Plan or any agreement
thereunder or, if the Company, such Employer or any other person
takes any action to declare the Plan void or unenforceable or
institutes any litigation or other legal action designed to deny,
diminish or to recover from any Participant the benefits intended
to be provided, then the Company and the Participant's Employer
irrevocably authorize such Participant to retain counsel of his or
her choice at the expense of the Company and the Employer (who
shall be jointly and severally liable) to represent such
Participant in connection with the initiation or defense of any
litigation or other legal action, whether by or against the
Company, the Participant's Employer or any director, officer,
shareholder or other person affiliated with the Company, the
Participant's Employer or any successor thereto in any
jurisdiction.
IN WITNESS WHEREOF, the Company has signed this Plan document as
of __________, 1999.
"Company"
ALZA Corporation
a Delaware corporation
By: /s/David R. Hoffmann
Title: Vice President, Treasury
EXHIBIT 10.20
ALZA Corporation
Executive Estate Protection Plan Agreement
FORM OF EXECUTIVE ESTATE PROTECTION PLAN AGREEMENT
This Executive Estate Protection Plan Agreement ("Agreement")
is made, as of ____________, 1999, among ALZA Corporation, a
Delaware corporation, (the "Corporation") and
_________________________ (the "Participant") and
___________________________ ( the "Owner").
RECITALS
A. The Participant desires to insure his or her life for the
benefit and protection of the Participant's family or other
beneficiary under the Policy (as defined below);
B. The Corporation desires to help the Participant provide life
insurance for the benefit and protection of his or her family
or beneficiary by providing funds from time to time to pay
the premiums due on the Policy in accordance with this
Agreement;
C. The Owner desires to assign certain rights and interests in
the Policy to the Corporation, to the extent provided herein, as
security for repayment of certain funds provided by the
Corporation for the acquisition and/or maintenance of the Policy;
and
D. The Corporation has established a trust ("Trust") dated
________________, 1998, by and between the Corporation and
______________________________ ("Trustee") to provide a source of
funds to cover its obligations under the Agreement.
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing, and the mutual
agreements and covenants set forth below, the parties to this
Agreement agree as follows:
1. Definitions. For purposes of this Agreement, unless
otherwise clearly apparent from the context, the following phrases
or terms shall have the following indicated meanings:
(a) "Aggregate Premiums Paid" shall mean, at any time, an amount
equal to (i) the cumulative premiums paid by the Corporation on
the Single Life Policy, plus (ii) the cumulative premiums paid by
the Corporation on the Joint LifePolicy, plus (iii) in the case of
the Joint Life Policy only, interest at the rate of 3.6%per annum
compounded annually on the premiums on such Joint Life Policy.
(b) "Benefit Measurement Date" shall mean the date on which the
first of any of the following events occurs:
(i) termination of this Agreement in accordance with
Section 9 below;
(1) for the Joint Life Policy, the ___________
(____) anniversary of the issuance of the
Joint Life Policy; and
(2) for the Single Life Policy, the _________
(___) anniversary of the issuance of the
Single Life Policy; or
(ii) the death of the Decedent.
(c) "Cash Surrender Value" shall mean an amount that equals,
at any specified time, the cash surrender value as
determined under the terms of the Policy.
(d) "Code" shall mean the Internal Revenue Code of 1986, as
amended.
(e) "Collateral Assignment" shall mean an assignment made by the
Owner in favor of the Corporation in a form mutually agreed to by
the Corporation and the Owner and accepted by the Insurer.
(f) "Collateral Interest" shall mean the Corporation's interest
in the Policy, which shall equal, at any time, the lesser of
Aggregate Premiums Paid or Cash Surrender Value, and which shall
be repaid to the Corporation in accordance with Section 6 below.
(g) "Corporation's Death Benefit" shall mean the portion of the
Policy's death benefit, if any, that exceeds the sum of the
Collateral Interest and the Owner's Death Benefit.
(h) "Decedent" shall mean, as to a Single Life Policy, the
Participant, and, as to a Joint Life Policy, the second to die of
the Participant and his or her spouse.
(i) "Designated Beneficiary" shall mean the beneficiary
designated under the Policy.
(j) "Economic Income" shall mean taxable compensation income for
that portion of the premiums paid by the Corporation that is equal
in amount to the value of the "economic benefit" derived by the
Participant from the Policy's life insurance protection, as
determined for Federal income tax purposes under Revenue Rulings
64-328 and 66-110, plus any economic benefit derived from any
reimbursement for tax liability under Section 3(c). Economic
Income shall include any increase in economic benefit attributable
to the death of the first to die under a Joint Life Policy.
(k) "Insurer(s)" shall mean
.
(l) "Joint Life Policy" means a policy which pays upon the death
of the second to die of the Participant and his or her spouse.
(m) "Owner" shall mean
________________________________________________.
(n) "Owner's Death Benefit" shall mean $__________________.
(o) "Participant" shall mean
_____________________________________________.
(p) "Plan" shall mean the plan described in Section 8(a) below.
(q) "Policy" shall mean the following Joint Life Policy or
Policies or Single Life Policy or Policies on the life of the
Participant that are issued by the Insurer(s):
Insurer Policy Number Type of
Policy
(r) "Single Life Policy" means a policy that pays upon the death
of the Participant.
2. Acquisition of Policy; Ownership of Insurance. The parties
to this Agreement shall cooperate in applying for and
obtaining the Policy. The Policy shall be issued to the
Owner as the sole and exclusive owner of the Policy, subject
to the rights and interests granted to the Corporation as
provided in this Agreement and the Collateral Assignment.
Concurrent with the signing of this Agreement, the Owner will
collaterally assign the Policy to the Corporation, in the
form of the Collateral Assignment, as security for the
payment of the Collateral Interest, which assignment shall
not be altered or changed without the mutual consent of the
Corporation and the Owner.
3. Premium Payments on Policy.
(a) Payments and Reimbursements. Prior to the occurrence of the
Benefit Measurement Date, the Corporation shall pay to the
Insurer, on or before each applicable premium due date, all
applicable premiums for the Policy. In the event that the
Corporation fails to make any such payment, the Owner or the
Participant may make (but is not required to make) any such
payment, and the Corporation shall immediately reimburse the Owner
or the Participant, as the case may be, for any amount so paid.
(b) Additional Compensation. Each calendar year, the Corporation
shall withhold from the compensation paid to the Participant,
including any compensation paid pursuant to Section 6(c) below, in
a manner determined by the Corporation in its reasonable
discretion, the Participant's share of FICA and other employment
and income taxes relating to that compensation.
(c) Tax Reimbursement. On or before March 15 following each
calendar year until the Benefit Measurement Date, the Corporation
shall reimburse the Participant for some or all of the
Participant's state and federal tax liability attributable to the
Participant's Economic Income for such calendar year. The tax
rates used by the Corporation in calculating the reimbursement
under this Section 3(c) shall be selected by the Corporation in
its sole discretion, and the Participant acknowledges that such
reimbursement may or may not offset his or her entire tax
liability with regard to his or her Economic Income. The
Participant also acknowledges that any reimbursement under this
Section 3(c) itself will be Economic Income.
4. Corporation's Rights. The Corporation's rights and interests
in and to the Policy shall be specifically limited to (i) the
right to be paid its Collateral Interest and the
Corporation's Death Benefit, if any, in accordance with
Section 6 below, (ii) the rights specified in the Collateral
Assignment, and (iii) the right to obtain one (1) or more
loans or advances on the Policy, provided, however, that any
such loans shall not, in the aggregate, exceed the Aggregate
Premiums Paid by the Corporation at any specified date
without the written consent of the Participant.
5. Owner's Rights. Subject to the terms of this Agreement and
the Collateral Assignment, the Owner of the Policy shall be
entitled to exercise all rights in the Policy while the
Collateral Assignment is in effect, except for the following,
which may be exercised only in accordance with Section 6:
(a) To borrow against or pledge the Policy;
(b) To surrender, cancel or assign the Policy; or
(c) To take a distribution or withdrawal from the Policy.
In particular, subject to the terms and conditions of the
Policy, and the provisions of Section 6 below, the Owner may
assign its rights under this Agreement and the Collateral
Agreement, including but not limited to an assignment to an
insurance trust of which the Participant is a settlor. In
the event of an assignment of its rights, the Owner shall
promptly notify the Corporation of the name and address of
the new Owner or assignee, including the name and address of
any trustee.
6. Collateral Interest. On the Benefit Measurement Date, the
Collateral Interest (and, if applicable under Section 6(a)
below, the Corporation's Death Benefit) shall be paid or
repaid to the Corporation in the following manner:
(a) Notwithstanding any provision of this Agreement or the
Policy that may be construed to the contrary, if the
Benefit Measurement Date occurs due to the death of the
Decedent, (i) the Corporation shall be entitled to that
portion of the Policy's death proceeds that equals the
sum of the Collateral Interest and the Corporation's
Death Benefit, if any, and (ii) the Owner or the
Designated Beneficiary, as the case may be, shall be
entitled to the Owner's Death Benefit; provided,
however, if the Benefit Measurement Date occurs due to
the suicide of the Decedent, and the proceeds from the
Policy are limited by either a suicide or contestability
provision under the Policy, the Corporation shall be
entitled to that portion of the higher of the Policy's
Cash Surrender Value or death proceeds that does not
exceed the Aggregate Premiums Paid. In either event,
promptly following the Decedent's death, the Corporation
and the Owner or the Designated Beneficiary shall take
all steps necessary to collect the death proceeds of the
Policy by submitting the proper claims forms to the
Insurer. The Corporation shall notify the Insurer of
the amount of the Owner's Death Benefit (except when the
Policy's proceeds are limited because of the Decedent's
death by suicide) and the Corporation's Collateral
Interest in the Policy at the time of such death. Such
amounts shall be paid, respectively, by the Insurer to
the Owner or to the Designated Beneficiary, as the case
may be, and the Corporation.
(b) If the Benefit Measurement Date is other than the date
of the Decedent's death, the Corporation's Death
Benefit, if any, shall be paid to the Owner or the
Designated Beneficiary, as the case may be, thebe. The
Corporation's Collateral Interest in the Policy shall be
repaid in one of the following ways, as elected by the
Corporation (or the Trustee, upon and after a Change in
Control, as such term is defined in the Trust) in
writing and in accordance with Section 6(c) below,
within thirty (30) days after the date the Corporation
first notifies the Participant in writing of the
occurrence of the Benefit Measurement Date:
(i) The Insurer shallmake a loan against the Policy in
an amount equal to the Corporation's Collateral
Interest and shall pay the proceeds to the
Corporation; the Owner shall be considered the
borrower for all purposes under the loan;
(ii) The Insurer shall withdraw funds from the Policy in
an amount equal to the Corporation's Collateral
Interest and shall pay the proceeds to the
Corporation;
(ii) The Insurer shall make a loan against the Policy in
an amount equal to the Corporation's Collateral
Interest and shall pay the proceeds to the
Corporation; the Owner shall be considered the
borrower for all purposes under the loan; or
(iiii) The Owner shall pay to the Corporation, from
the Owner's separate funds, an amount equal to the
Corporation's Collateral Interest.
(c) The Corporation, in its reasonable discretion, may
select any of the three methods described in Section
6(b) to be repaid its Collateral Interest in the Policy;
provided, however, upon and after a Change in Control
(as that term is defined in the Trust), the Corporation
must select the method described in Section 6(b)(i)
above.
(d) The Corporation agrees to keep records of its premium
payments and to furnish the Owner and the Insurer with a
statement of its Collateral Interest whenever either
party requires such statement.
(e) Upon and after the Corporation's Collateral Interest in
the Policy has been repaid pursuant to Section 6(b)
above, the Corporation shall (i) assign its Collateral
Interest in the Policy to the Owner, (ii) execute and
file with the Insurer an appropriate release of the
Corporation's Collateral Interest in the Policy and
(iii) have no further interest in the Policy; provided
that, in all instances, the Corporation has received
payment in full for its Collateral Interest in the
Policy. Further, the Participant and/or Owner hereby
acknowledge, understand and agree that, upon the release
of the Corporation's Collateral Interest, the
Corporation shall not have any responsibility for the
future performance of the Policy and shall have no
obligation to make any additional premium payments.
(f) Upon payment to the Corporation of its Collateral
Interest in accordance with this Section 6, this
Agreement, and the Participant's participation in the
Plan, shall terminate and no party shall have any
further rights or obligations under the Agreement or the
Plan with respect to any other party.
(g) Notwithstanding anything to the contrary in this
Agreement, the Corporation shall not have any obligation
to seek or inquire after the whereabouts of an Owner or
a Participant upon a Benefit Measurement Date.
7. Insurer.
(a) The Insurer is not a party to this Agreement, shall in
no way be bound by or charged with notice of its terms,
and is expressly authorized to act only in accordance
with the terms of the Policy. The Insurer shall be fully
discharged from any and all liability under the Policy
upon payment or other performance of its obligations in
accordance with the terms of the Policy.
(b) The signature(s) required for the Insurer to recognize
the exercise of a right under the Policy shall be
specified in the Collateral Assignment.
8. Plan; Named Fiduciary; Claims Procedure.
(a) This Agreement is part of the ALZA Executive Estate
Protection Plan, which consists of all ALZA Corporation
Executive Estate Protection Plan Agreements that so
reference their association with the Plan.
(b) The Corporation is the named fiduciary of the Plan for
purposes of this Agreement.
(c) The following claims procedure shall be followed in
handling any benefit claim under this Agreement and the
Plan:
(i) The Owner, Participant, or the Designated
Beneficiary, as the case may be, (the "Claimant"),
shall file a claim for benefits by notifying the
Corporation in writing. If the claim is wholly or
partially denied, the Corporation shall provide a
written notice within ninety (90) days specifying
the reasons for the denial, the provisions of this
Agreement on which the denial is based, and
additional material or information, if any, that is
necessary for the Claimant to receive benefits.
Such written notice shall also indicate the steps
to be taken by the Claimant if a review of the
denial is desired.
(ii) If a claim is denied, and a review is desired, the
Claimant shall notify the Corporation in writing
within sixty (60) days after receipt of written
notice of a denial of a claim. In requesting a
review, the Claimant may review Plan documents and
submit any written issues and comments the Claimant
feels are appropriate. The Corporation shall then
review the claim and provide a written decision
within sixty (60) days of receipt of a request for
a review. This decision shall state the specific
reasons for the decision and shall include
references to specific provisions of this
Agreement, if any, upon which the decision is
based.
(iii) If no event shall the Corporation's liability
under this Agreement exceed the amount of proceeds
from the Policy.
9. Amendment of Agreement. This Agreement shall not be modified
or amended except by a writing signed by all the parties
hereto.
10. Binding Agreement. This Agreement shall be binding upon the
heirs, administrators, executors, successors and assigns of
each party to this Agreement.
11. State Law. This Agreement shall be subject to and be
construed under the internal laws of the State of California,
without regard to its conflicts of laws principles.
12. Validity. In case any provision of this Agreement shall be
illegal or invalid for any reason, said illegality or
invalidity shall not affect the remaining parts of this
Agreement, but this Agreement shall be construed and enforced
as if such illegal or invalid provision had never been
inserted in this Agreement.
13. Not a Contract of Employment. The terms and conditions of
this Agreement shall not be deemed to constitute a contract
of employment between the Corporation and the Participant.
Such employment is hereby acknowledged to be an "at will"
employment relationship that can be terminated at any time
for any reason, with or without cause, unless expressly
provided in a separate written employment agreement. Nothing
in this Agreement shall be deemed to give the Participant the
right to be retained in the service of the Corporation or to
interfere with the right of the Corporation to discipline or
discharge the Participant at any time.
14. Examination. Pursuant to his or her duty under Section 2,
the Participant shall submit to a medical examination if
required by the Insurer. In addition, if the Policy is a
Joint Life Policy, the Participant's spouse shall submit to a
medical examination if required by the Insurer.
15. Notice. Any notice or filing required or permitted to be
given under this Agreement to the Owner, Participant or the
Corporation shall be sufficient if in writing and
hand-delivered, or sent by registered or certified mail, to
the address below:
To the Owner: ________________________
________________________
________________________
To the Participant: ________________________
________________________
________________________
To the Corporation: ALZA Corporation
950 Page Mill Road
P.O. Box 10950
Palo Alto, California 94303-0802
Attn: Treasurer
or to such other address as may be furnished to the Owner,
Participant or the Corporation in writing in accordance with
this notice provision. Such notice shall be deemed given as
of the date of delivery or, if delivery is made by mail, as
of the date shown on the postmark on the receipt for
registration or certification. Any notice or filing required
or permitted to be given to the Owner and/or the Participant
or the Designated Beneficiary under this Agreement shall be
sufficient if in writing and hand-delivered, or sent by mail,
to the last known address of the Owner and/or the
Participant, as the case may be.
16. Tax Consequences. The Corporation does not guarantee that
the tax consequences of the Participant's and/or Owner's
participation in the Plan will be as the parties hereto may
have expected, and by signing this Agreement the Participant
and Owner assume the risk that different interpretations of
currently applicable tax law or subsequent changes in
applicable tax law may result in unexpected tax consequences.
17. Entire Agreement. This Agreement constitutes the entire
agreement between the parties hereto with regard to the
subject matter of this Agreement and supersedes all previous
negotiations, agreements and commitments in respect thereto.
No oral explanation or oral information by the parties to
this Agreement shall alter the meaning or interpretation of
this Agreement.
IN WITNESS WHEREOF, the parties hereto have signed this
Agreement as of the date first written above.
"Corporation"
ALZA Corporation, a Delaware
corporation
By:
Its:
"Participant"
Signature
Print Name
"Owner"
Signature
Print Name
EXHIBIT 13
Portions of the 1999 Annual Report to Stockholders
Page 25 of paper format annual report
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
SUMMARY
SUMMARY
(In millions, except per share amounts)
1999 1998 1997
________________________________________________________________
Revenues $ 795.9 $ 646.9 $ 504.4
Operating Income (Loss) 149.2 196.5 (228.8)
Net Income (Loss) 91.0 108.3 (275.2)
Diluted Earnings (Loss) per Share 0.88 1.07 (2.83)
1999 Compared to 1998
ALZA acquired all of the outstanding stock of SEQUUS
Pharmaceuticals, Inc. ("SEQUUS") in a tax-free, stock-for-stock
transaction on March 16, 1999. SEQUUS stockholders received 0.4
shares of ALZA common stock for each share of SEQUUS common stock.
ALZA issued 13.2 million shares to acquire the outstanding shares
of SEQUUS on the closing date. ALZA has accounted for the
transaction as a pooling of interests and accordingly, the
consolidated financial statements and all financial information
presented herein have been restated to reflect the combined
operations, financial position and cash flows of both companies.
On June 21, 1999, ALZA entered into an Agreement and Plan of
Merger with Abbott Laboratories, Inc.("Abbott"), an Illinois
corporation. Under the terms of the merger agreement, Abbott would
have acquired all of ALZA's outstanding stock in a tax-free, stock-
for-stock transaction. On December 16, 1999, ALZA and Abbott
announced that the merger would not be completed due to the
inability of the companies to meet certain requirements of the
Federal Trade Commission ("FTC") for approval of the transaction.
On January 20, 2000, ALZA and Abbott announced the formal
termination of the merger agreement. No payments were made as a
result of the termination.
ALZA's 1999 net income decreased to $91.0 million, or $0.88
per diluted share, compared with 1998 net income of $108.3 million,
or $1.07 per diluted share. The 1999 net income included a total
of $60.6 million ($41.7 million after tax, or $0.40 per share,
diluted) of charges, including $32.3 million relating to the
acquisition of SEQUUS, $13.4 million resulting from the terminated
merger agreement with Abbott, $9.6 million relating to a change in
sales return policy and an increase in the reserve for sales
rebates, and $5.3 million primarily relating to a write-off of
uncollectible accounts receivable. Excluding these charges, net
income for 1999 was $132.6 million, or $1.28 per diluted share. In
addition to the charges mentioned above, the results for 1999 were
impacted primarily by the following:
--Net sales increased 55% to $448.0 million in 1999 from
$289.4 million in 1998. Sales of products by ALZA
Pharmaceuticals increased 84% to $323.4 million in 1999
compared with $175.8 million in 1998.
--Gross margin as a percentage of net sales increased to 65%
in 1999 from 57% in 1998.
--Interest and other income increased 57% to $41.6 million in
1999 from $26.4 million in 1998.
--ALZA's effective tax rate declined to 31% for 1999,
excluding the tax benefit of $13.5 million associated with
merger-related costs, compared to 35% for 1998.
Substantially offsetting these contributions to net income in
1999 were the following:
--Selling, general and administrative expenses increased
substantially to $259.0 million in 1999 from $141.9 million in
1998. This increase was due to the expansion of the ALZA
Pharmaceuticals sales organization beginning in the second
half of 1998, the increase in sales and marketing expenditures
related to the launch and promotion of Ditropan XL-registered
trademark- (oxybutynin chloride) in February 1999 and
increased marketing expenses for ALZA's expanded product
portfolio.
1998 Compared to 1997
ALZA's 1998 net income increased to $108.3 million, or $1.07
per diluted share, compared with 1997 net loss of $(275.2) million,
or $(2.83) per diluted share. The 1997 net income included a total
of $368.7 million (or $3.77 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
Pharmaceuticals Corporation ("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. Excluding these
charges, net income for 1997 was $93.5 million, or $0.94 per
diluted share. The increase in 1998 net income resulted primarily
from the following:
--Net sales increased 60% to $289.4 million in 1998 from
$181.1 million in 1997. Sales of products by ALZA
Pharmaceuticals doubled in 1998 compared with 1997, increasing
to $175.8 million in 1998 from $87.9 million in 1997.
--Gross margin as a percentage of net sales increased to 57%
in 1998 from 45% in 1997.
--Royalties, fees and other revenues increased 24% to $233.1
million in 1998, compared with $188.3 million in 1997.
Page 26 of paper format annual report
Substantially offsetting these contributions to net income in
1998 were the following:
--Selling, general and administrative expenses increased to
$141.9 million in 1998 from $85.3 million in 1997, excluding
$0.4 million in costs related to workforce reductions in 1997.
This increase reflects the substantial increase in the size of
the sales organization and increased marketing expenses
related to ALZA's expanded product portfolio and preparation
for the launch of Ditropan XL in February 1999. Increased
amortization of product acquisition costs also contributed to
the increase in selling, general and administrative expenses
in 1998, as a result of a full year of amortization of the
costs of products acquired by ALZA in 1997.
--Interest income declined 54% in 1998 compared with 1997, due
to lower cash balances as a result of the purchase of all of
the shares of Therapeutic Discovery Corporation ("TDC"), the
formation of Crescendo and several product acquisitions, all
of which occurred in the second half of 1997, and payment of
$91.2 million for the exercise of the option to acquire all of
the outstanding limited partnership interests in ALZA TTS
Research Partners, Ltd. (the "TTS Partnership"), which
occurred in the third quarter of 1998.
OPERATING SEGMENTS
ALZA has two operating segments: ALZA Pharmaceuticals and
ALZA Technologies.
ALZA Pharmaceuticals markets and sells products developed by
ALZA Technologies or others directly to the pharmaceutical
marketplace in the United States and Canada and to distributors who
sell such products outside the United States and Canada. ALZA
Pharmaceuticals also co-promotes products with third parties,
conducts clinical studies and engages ALZA Technologies and others
to conduct product development and manufacture products marketed by
ALZA Pharmaceuticals.
ALZA Technologies conducts research on ALZA's drug delivery
technologies and develops products for ALZA Pharmaceuticals,
Crescendo and other pharmaceutical company clients, and
manufactures products for sale by ALZA Pharmaceuticals and client
companies.
The "Other" category primarily comprises corporate general and
administrative activities and the associated costs related to
finance, legal, human resources, commercial development, executive
and other functions not directly attributable (or allocated) to the
activities of the operating segments, as well as rental and service
fee revenues.
OPERATING SEGMENT SUMMARY
(In millions, except per share amounts)
1999 1998 1997
Revenues
ALZA PHARMACEUTICALS $ 427.9 $ 294.1 $ 191.3
ALZA TECHNOLOGIES 475.8 450.1 409.9
OTHER 1.7 2.4 0.8
______________________________________________________________
Total segment revenues 905.4 746.6 602.0
Intersegment eliminations (109.5) (99.7) (97.6)
______________________________________________________________
Total revenues $ 795.9 $ 646.9 $ 504.4
Operating Income (Loss)
ALZA PHARMACEUTICALS $ 24.7 $ 25.6 $(352.8)(2)
ALZA TECHNOLOGIES 203.3 199.4 153.7(2)
OTHER (78.8)(1) (28.5) (29.7)
______________________________________________________________
Total operating income (loss) $ 149.2 $ 196.5 $(228.8)
(1) In 1999, the operating loss for Other includes merger-related
expenses of $32.3 million relating to the acquisition of SEQUUS
and $13.4 million resulting from the terminated merger
agreement. Excluding these charges, operating loss for Other
would have been $33.1 million in 1999.
(2) In 1997, the operating loss for ALZA Pharmaceuticals includes
charges totaling $334.0 million for the purchase of TDC, the
contribution to Crescendo, and a payment in connection with a
development and option agreement for Cereport-trademark-
(bradykinin-based receptor-mediated permeabilizer) between ALZA
and Alkermes, Inc. Excluding these charges, operating loss for
ALZA Pharmaceuticals would have been $18.8 million in 1997.
Operating income for ALZA Technologies in 1997 included charges
totaling $34.4 million related to a development and
commercialization agreement between ALZA and Janssen
Pharmaceutica, Inc. for E-TRANS-registered trademark- fentanyl,
a write-down of manufacturing and research and development
assets, and costs related to a workforce reduction. Excluding
these charges, operating income for ALZA Technologies would have
been $188.1 million in 1997.
ALZA PHARMACEUTICALS
ALZA Pharmaceuticals derives its revenues from sales of ALZA-
marketed products to the pharmaceuticals marketplace in the United
States and Canada and to distributors who market the products
elsewhere; research and development revenues from Crescendo (and
prior to 1998, TDC); co-promotion fees from third parties, and fees
(including milestone payments) received with respect to rights to
market outside the United States or Canada products marketed or
intended to be marketed by ALZA Pharmaceuticals in the United
States and Canada. Revenues from Crescendo (and previously, TDC)
are offset by intersegment charges from ALZA Technologies for
research and development expenses related to products marketed by,
and potential products for marketing by, ALZA Pharmaceuticals under
development on behalf of Crescendo. Crescendo is expected to
expend its remaining funds during the second half of 2000, at which
time ALZA Pharmaceuticals will no longer have offsetting revenues
for its research and development expenses relating to Crescendo
products, if ALZA Pharmaceuticals continues the development of such
produts. ALZA Pharmaceuticals' costs and expenses include costs of
products shipped for products marketed by ALZA Pharmaceuticals,
including costs of products manufactured by ALZA Technologies and
third party manufacturers, research and development expenses billed
by ALZA Technologies and others, sales and marketing expenses and
amortization of product acquisition payments.
Page 27 of paper format annual report
ALZA Pharmaceuticals' operating income remained relatively
constant in 1999 compared to 1998. ALZA Pharmaceuticals' revenues
increased 45% in 1999 compared to 1998, and gross margin as a
percentage of net sales of ALZA-marketed products increased to 80%
in 1999 compared with 77% in 1998. The increase in revenues was
due to an 84% increase in net sales of ALZA-marketed products as
compared to 1998. These increases in revenues and gross margin
were offset by increased sales and marketing expenses and, to a
lesser extent, an increase in clinical expenses.
ALZA Pharmaceuticals' operating income increased substantially
in 1998 compared to 1997, excluding certain 1997 charges described
above. This improvement was due to a 100% increase in net sales of
ALZA-marketed products and an increase in gross margin as a
percentage of net sales on these products to 77% in 1998 compared
with 76% in 1997, offset by increased sales and marketing expenses
and amortization of product acquisition payments.
ALZA TECHNOLOGIES
ALZA Technologies derives its revenues from net sales of
products manufactured for client companies and for ALZA
Pharmaceuticals, royalty revenues, fee revenues (including
milestone payments) under agreements with client companies, and
revenues for research and development activities undertaken for
client companies and ALZA Pharmaceuticals.
Operating income for 1999 remained relatively constant
compared with operating income for 1998, primarily due to the
increase in both contract manufacturing sales and revenues from
royalties being offset by the decline in fee revenues in 1999
compared to 1998. In 1998, operating income for ALZA Technologies
increased 6% compared to 1997, excluding certain 1997 charges as
described above. This increase was primarily due to a 17% increase
in royalties, fees and other revenues, a 22% increase in contract
manufacturing sales and an improvement in gross margin to 24% in
1998 compared with 15% in 1997.
OTHER
In 1999, the operating loss for the Other segment increased
16%, excluding certain charges described above, compared to 1998,
due primarily to an increase in certain corporate expenses and, to
a lesser extent, lower rent and service revenues in 1999 compared
with 1998, partially offset by higher cash surrender value of
company-owned life insurance policies in 1999 compared with 1998.
In 1998, the operating loss for the "Other" segment was $28.5
million, compared with $29.3 million in 1997, excluding a $0.4
million charge related to a workforce reduction. The decrease in
the operating loss was due primarily to lower allocated internal
expenses, a reduction in certain corporate expenses and higher cash
surrender value of company-owned life insurance policies, all in
1998 compared with 1997.
NET SALES
NET SALES
(Dollars in millions) 1999 1998 1997
_______________________________________________________________
ALZA PHARMACEUTICALS
Ditropan XL-registered
trademark- $ 86.9 $ - $ -
Doxil-registered trademark-
/Caelyx-registered trademark- 66.2 48.4 29.5
Ethyol-registered trademark- 48.3 32.6 20.6
Elmiron-registered trademark- 29.9 23.0 4.8
Mycelex-registered trademark-
Troche 29.2 25.9 10.8
Testoderm-registered trademark-
TTS line 20.8 10.0 6.3
Other 42.1 35.9 15.9
_______________________________________________________________
Total ALZA Pharmaceuticals 323.4 175.8 87.9
ALZA TECHNOLOGIES
Contract manufacturing 124.6 113.6 93.2
Intersegment 18.6 6.6 6.0
_______________________________________________________________
Total ALZA Technologies 143.2 120.2 99.2
Intersegment eliminations (18.6) (6.6) (6.0)
_______________________________________________________________
Total net sales $ 448.0 $ 289.4 $ 181.1
Total net sales as a percentage
of total revenues 56% 45% 36%
ALZA Pharmaceuticals as a percentage
of total net sales 72% 61% 49%
ALZA PHARMACEUTICALS
Included in net sales of ALZA Pharmaceuticals are sales of the
products marketed directly by ALZA in the United States and Canada,
and sales of those products in other countries through distributors
(and to a limited extent, direct sales by ALZA of Amphocil-registered
trademark- (lipid-based amphotericin B) in the United Kingdom). Net
sales of ALZA-marketed products increased 84% in 1999 compared to
1998 due to $86.9 million sales of Ditropan XL, which was launched on
February 1, 1999, as well as an increase of 37% in sales of Doxil-
registered trademark- (doxorubicin HCl liposome injection), in 1999
compared to 1998. Doxil is marketed by Schering-Plough Ltd.
("Schering-Plough") in Europe under the tradename Caelyx-registered
trademark-. In addition, Ethyol-registered trademark- (amifostine),
Elmiron-registered trademark- (pentosan polysulfate sodium) and
Mycelex-registered trademark- (clotrimazole) Troche had significant
growth in sales in 1999 as compared to 1998.
ALZA Pharmaceuticals' net sales increased 100% in 1998
compared to 1997, resulting from a 64% increase in sales of Doxil
and a 58% increase in sales of Ethyol, together with sales of
Mycelex Troche, Elmiron, BiCitra-registered trademark- (sodium
citrate and citric acid), PolyCitra-registered trademark-
(potassium citrate), and immediate release Ditropan-registered
trademark-, the rights to all of which were acquired by ALZA in the
second half of 1997, and sales of Testoderm-registered trademark-
TTS (Testosterone Transdermal System), which was launched in March
1998.
Net sales of ALZA-marketed products can be expected to vary
from significantly from year to year, particularly in the first
years after launch of a new product. Ditropan XL was launched in
the first
Page 28 of paper format annual report
quarter of 1999, and Doxil, Ethyol, Elmiron and Testoderm TTS were
cleared for marketing during the past few years. In June 1999, the
United States Food and Drug Administration ("FDA") approved new
indications for Ethyol and Doxil. Wholesaler stocking patterns,
managed care and formulary acceptance, the introduction of
competitive products, and acceptance by patients and physicians
will also affect future sales of ALZA's products.
Product Acquisitions
In July 1997, ALZA acquired exclusive rights to Mycelex 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. In 1999, ALZA made a milestone
payment of $15.0 million to Bayer, which was also capitalized.
Bayer manufactures Mycelex Troche for ALZA.
In October 1997, ALZA acquired the exclusive rights in the
United States and Canada to Elmiron and three additional urology
products, BiCitra, PolyCitra 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 must pay
additional fees if specified Elmiron sales levels are achieved
during the five years ending October 2002. ALZA incurred
additional milestone fees of $8.5 million in each of 1999 and 1998
based upon Elmiron sales, which were also capitalized. IVAX
manufactures Elmiron for ALZA.
In October 1997, ALZA acquired the rights in the United States
to the immediate-release Ditropan product and trademark from
Hoechst Marion Roussel, Inc. ("HMRI"), now Aventis S.A.
("Aventis"). ALZA also acquired the rights to the product in
Canada in April 1998 from HMRI and Procter & Gamble
Pharmaceuticals, Inc. ("P&G"). Under the terms of the agreements,
ALZA made upfront payments to HMRI and P&G, which were capitalized,
and incurred additional fees of $12.5 million in 1998 to HMRI based
upon Ditropan sales levels in the United States, which were
capitalized. Aventis manufactures the product for ALZA. ALZA has
the right to market other products in the United States and Canada
under the Ditropan trademark, and Aventis will receive royalty
payments from ALZA if the trademark is used by ALZA with other
products, such as Ditropan XL; therefore in 1999 ALZA made royalty
payments to Aventis related to Ditropan XL sales.
In November 1998, ALZA acquired the exclusive marketing and
distribution rights in the United States to Urispas-registered
trademark- (flavoxate hydrochloride) from SmithKline Beecham
("SB"). Under the terms of the agreement, ALZA paid a $25.0
million upfront fee to SB, which was capitalized. ALZA incurred
an additional milestone payment of $5.0 million in 1999 for the
filing of a supplemental New Drug Application ("sNDA") by SB,
which was capitalized, and may be required to make additional
milestone payments. SB manufactures the product for ALZA.
ALZA TECHNOLOGIES
Net sales from contract manufacturing include sales generated
from contract manufacturing activities for ALZA's client companies
and ALZA Pharmaceuticals. Net sales from contract manufacturing
increased 10% in 1999 compared with 1998, primarily due to an
increase in ALZA shipments to client companies of Glucotrol XL-
registered trademark- (glipizide) and NicoDerm-registered trademark-
CQ-registered trademark- (nicotine). Net sales from contract
manufacturing increased 22% in 1998 compared with 1997, primarily
due to a 34% increase in ALZA's shipments of Duragesic-registered
trademark- (fentanyl) to Janssen Pharmaceutica, Inc. ("Janssen").
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 for products shipped to client companies and, in
some quarters, due to the shipment of launch quantities of products
to clients.
GROSS MARGIN
Gross margin as a percentage of net sales
1999 1998 1997
_______________________________________________________________
ALZA PHARMACEUTICALS (1) 80% 77% 76%
ALZA TECHNOLOGIES (1) 24% 24% 15%
Gross margin as a percentage of
total net sales (2) 65% 57% 45%
(1) Includes intersegment revenues or expenses
(2) After intersegment eliminations
The increase in total gross margin in 1999 compared to 1998
was due to increased sales of higher-margin products by ALZA
Pharmaceuticals, as well as an increase in ALZA Pharmaceuticals'
sales as a percentage of total sales. The increase in total gross
margin in 1998 compared to 1997 was due to increased sales of
higher-margin products by ALZA Pharmaceuticals and increased
shipments of higher margin products by ALZA Technologies 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, some of which may be significant, can be
expected to continue to occur. A trend of higher gross margins may
be achieved through a proportionate increase in the sales by ALZA
Pharmaceuticals in relation to sales by ALZA Technologies and, to a
lesser extent, increased utilization of capacity and greater
operating efficiencies by ALZA Technologies.
ALZA PHARMACEUTICALS
The gross margin on net sales of ALZA-marketed products
increased in 1999 compared to 1998 due to a shift in product mix
towards sales of higher-margin products, including Ditropan XL.
The increase in gross margin in 1998 compared
Page 29 of paper format annual report
with 1997 was due to an increase in net sales of higher margin
products, in large part reflecting a full year of sales in 1998 of
products acquired in 1997.
ALZA TECHNOLOGIES
The gross margin on net sales of products manufactured by ALZA
Technologies for sale by client companies and ALZA Pharmaceuticals
remained constant in 1999 compared to 1998. The gross margin on net
sales of products manufactured by ALZA Technologies for sale by
client companies and ALZA Pharmaceuticals increased in 1998
compared with 1997 as a result of an increase in shipments of
higher-margin products to client companies. ALZA Technologies'
gross margin on contract manufacturing sales is usually
considerably lower than ALZA Pharmaceuticals' gross margin on its
sales of ALZA-marketed products. ALZA's client-funded product
development agreements generally provide for a supply price that is
intended to cover ALZA's costs to manufacture the product plus a
small margin. ALZA also receives royalties on the clients' sales
of the products, which are included in royalties, fees and other
revenues. Sales to ALZA Pharmaceuticals are based upon negotiated
prices, which generally approximate the prices charged to third
parties.
ROYALTIES, FEES AND OTHER REVENUES
Royalties, fees and other revenues consist largely of
royalties paid by client companies on products developed under
joint development and commercialization agreements with ALZA and
marketed by the companies. Fee revenues consist of upfront,
milestone and other one-time, special or infrequent payments made
under these joint development agreements, or by distributors who
acquire rights to market ALZA products outside the United States
and Canada, and co-promotion fees.
ROYALTIES, FEES AND OTHER REVENUES
(Dollars in millions) 1999 1998 1997
________________________________________________________________
ALZA PHARMACEUTICALS $ 14.0 $ 25.3 $ 11.9
ALZA TECHNOLOGIES 211.4 205.4 175.6
OTHER 1.7 2.4 0.8
________________________________________________________________
Total royalties, fees and
other revenues $ 227.1 $ 233.1 $ 188.3
Percentage of total revenues 29% 36% 37%
ALZA PHARMACEUTICALS
Fee revenue in 1999 for ALZA Pharmaceuticals included
technology fees of $6.7 million from Crescendo, as provided in the
agreements between ALZA and Crescendo, fees of $1.3 million from
Schering-Plough under an agreement with Schering-Plough, as
describe below, covering Caelyx (marketed as Doxil in the United
States), and $6.0 million in co-promotion fees with respect to
products co-promoted by ALZA Pharmaceuticals. In 1998, fee revenue
for ALZA Pharmaceuticals included technology fees of $10.7 million
from Crescendo, $6.5 million in fees from Synthelabo (now Sanofi-
Synthelabo) for the rights to commercialize OROS-registered
trademark- oxybutynin (marketed as Ditropan XL in the United
States) in Europe, $4.0 million fees from Schering-Plough related
to Caelyx, and $4.1 million in co-promotion fees with respect to
products co-promoted by ALZA Pharmaceuticals. In 1997, ALZA
Pharmaceuticals' fee revenue consisted of $4.0 million in
technology fees from Crescendo, fees from Schering-Plough and co-
promotion fees.
ALZA has a distribution agreement with Schering-Plough,
entered in 1996. Under the agreement, which expires in 2010,
Schering-Plough has obtained exclusive rights to distribute, market
and sell Caelyx worldwide, except for the United States, Japan and
a few other countries. Under the terms of the agreement, ALZA
received an upfront payment of $5.3 million and ALZA receives
payments for product sold to Schering-Plough, with the price
determined based on sales of the product. ALZA will continue to
receive milestone payments upon achievement of certain specified
events. Each party undertakes clinical trials in specific
indications.
ALZA TECHNOLOGIES
Royalties, fees and other revenues for ALZA Technologies
increased 3% for 1999 compared to 1998 primarily due to an increase
in royalties and other revenues in 1999 compared to 1998, partially
offset by lower fee revenues in 1999 compared to 1998. Royalties,
fees and other revenues for ALZA Technologies increased 17% in 1998
compared to 1997, primarily as a result of increased royalties due
to a higher effective royalty rate on and increased sales of
Duragesic by Janssen, and a higher royalty rate on and increased
sales of Glucotrol XL by Pfizer, Inc. ("Pfizer"). Partially
offsetting these increases in royalties were lower royalties on
sales of Procardia XL-registered trademark- (nifedipine) by Pfizer
and NicoDerm CQ by SB. Commercialization and licensing fees also
contributed to the increase in royalties, fees and other revenues
in 1998 compared with 1997.
Fee revenues for 1998 included an upfront payment from Janssen
related to the initiation of a new transdermal fentanyl product
development program. Fees for 1997 included upfront payments from
Knoll Pharmaceuticals Company in connection with an agreement for
continued development and worldwide commercialization of an OROS
hydromorphone product, from SB in connection with an agreement for
the commercialization of the Nicoderm product in numerous
international markets, and from Pfizer for the rights to
commercialize an OROS pseudoephedrine product in certain countries
outside the United States.
On June 29, 1998, ALZA Development Corporation, a wholly-owned
subsidiary of ALZA, elected to exercise its option to acquire all
of the outstanding limited partnership interests in the TTS
Partnership, which was formed in 1982 to develop and commercialize
products combining ALZA's proprietary transdermal drug delivery
technology with certain generic compounds. The exercise price of
$91.2 million
Page 30 of paper format annual report
(determined under a formula set in 1983) was paid in cash to the
limited partners on August 14, 1998. ALZA had been paying the TTS
Partnership four percent of net sales of Duragesic and Testoderm-
registered trademark- (testosterone), two products developed by
ALZA on behalf of the TTS Partnership. As a result of the exercise
of the purchase option, ALZA has all rights to these products, and
therefore retains all royalties paid by Janssen on sales of
Duragesic, the full transfer price and royalties from sales of
Testoderm outside the United States, and the full sales margin on
Testoderm in the United States. The purchase price was recorded as
a deferred product acquisition cost and is being amortized over a
period of 10 years beginning July 1, 1998.
As of September 1998, ALZA and Janssen entered into an
agreement under which Janssen is making a series of eight quarterly
payments to ALZA over two years to help defray ALZA's substantial
purchase price paid for the limited partnership interests in the
TTS Partnership. In exchange, the royalty rate payable by Janssen
to ALZA with respect to Duragesic has been reduced by a portion
of the rate that ALZA had previously paid to the TTS Partnership.
As of March 1998, ALZA and Alkermes, Inc. ("Alkermes") entered
into an exclusive license agreement for two of ALZA's oral drug
delivery technologies: RingCap-trademark- and dose sipping
technology. Under this arrangement, ALZA granted Alkermes
worldwide rights to the two technologies and Alkermes is
responsible for continuing research and development of products
incorporating them. ALZA received upfront payments from Alkermes
and will receive a portion of Alkermes' revenues from the
development and commercialization of products incorporating the
technologies.
Sales of Procardia XL, as reported by Pfizer, decreased 27% in
1999 from 1998, and decreased 13% in 1998 from 1997. Royalties
from Procardia XL declined as anticipated and accounted for
approximately 4% of total revenues in 1999, compared with 7% in
1998 and 11% in 1997. Several companies have filed Abbreviated New
Drug Applications ("ANDAs") with the FDA requesting clearance to
market generic sustained release nifedipine products which are
asserted to be bioequivalent to Procardia XL, and one company has
received FDA approval of its ANDA. Pfizer has filed suit against
the ANDA applicants for infringement of patent rights relating to
the nifedipine active drug substance in Procardia XL. Pfizer also
has filed suit against the FDA, challenging the procedural basis
for the FDA's approval of the generic products, which utilize a
different mechanism of extended release than the OROS technology
used in Procardia XL. In March 2000, Pfizer entered into a
settlement agreement with Mylan Laboratories Inc. ("Mylan"), the
first applicant for a generic version of Procardia XL. The
settlement resolved the litigation pending between the parties, and
Mylan announced that it would commercialize a generic version of
Procardia XL to be supplied by Pfizer and incorporating ALZA's OROS
technology. Under its agreement with Pfizer, ALZA will receive
royalties on such products. 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 generic sustained-release
nifedipine products.
RESEARCH AND DEVELOPMENT
ALZA's research and development revenues generally represent
reimbursement of costs, including a portion of general and
administrative expenses, by clients, including Crescendo (and
previously, TDC) for the development of products. Therefore,
product development activities do not contribute significantly to
operating results.
Research and Development Revenues
(Dollars in millions) 1999 1998 1997
_________________________________________________________________
ALZA PHARMACEUTICALS
Crescendo $ 90.5 $ 93.0 $ 28.2
TDC - - 63.3
_________________________________________________________________
Total ALZA Pharmaceuticals 90.5 93.0 91.5
ALZA TECHNOLOGIES
Crescendo - 2.0 1.5
TDC - - 4.5
Other clients 30.3 29.4 37.5
Intersegment 90.9 93.1 91.6
_________________________________________________________________
Total ALZA Technologies 121.2 124.5 135.1
Intersegment elimination (90.9) (93.1) (91.6)
_________________________________________________________________
Total research and development
revenues $ 120.8 $ 124.4 $ 135.0
Percentage of total revenues 15% 19% 27%
ALZA PHARMACEUTICALS
ALZA Pharmaceuticals derives research and development revenues
from Crescendo and, prior to 1998, TDC. Revenues from Crescendo are
offset by intersegment charges from ALZA Technologies for research
and development expenses incurred on behalf of ALZA Pharmaceuticals
related to products under development for marketing by ALZA
Pharmaceuticals. ALZA expects that Crescendo will have expended
all its available funds during the second half of 2000.
Crescendo Pharmaceuticals Corporation
In September 1997, ALZA contributed $300.0 million in cash to
Crescendo for Crescendo's Class A Common Stock (the "Crescendo
Shares"). Also in September 1997, 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 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.
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
Page 31 of paper format annual report
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
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 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 $6.7 million, $10.7
million and $4.0 million for 1999, 1998 and 1997, respectively.
Three of the seven initial products were in development and/or had
been licensed at December 31, 1999.
ALZA has an option to acquire an exclusive, royalty-bearing
license to each product developed by Crescendo under the
Development Agreement. The option is exercisable on a product-by-
product, country-by-country, basis. In December 1998, ALZA
exercised its option to obtain a worldwide license to OROS
oxybutynin (Ditropan XL). Under the terms of the license
agreement, ALZA makes payments to Crescendo based upon worldwide
sales of the product. In consideration of the grant of the
license, ALZA paid Crescendo 2.5% of net sales of the product in
1999 and will pay 3% for 2000 and 2001. Thereafter, until 15 years
after the date of the first commercial sale of the product, the
percentage of net sales owed to Crescendo will be based upon
development costs of the product paid by Crescendo; based upon
current information, this rate is expected to be between 5.5% and
6.5%. In 1999, ALZA paid Crescendo $2.3 million as royalties on
the sales of Ditropan XL.
On March 3, 2000, the FDA approved DUROS-registered trademark-
leuprolide (which ALZA has named Viadur-trademark-) for marketing
in the United States. The product is the first FDA-approved
product to incorporate ALZA's DUROS-registered trademark- implant
technology. Also on March 3, 2000, ALZA exercised its option to
obtain a worldwide license to DUROS leuprolide from Crescendo.
Under the terms of the license agreement between Crescendo and
ALZA, Crescendo will receive payments from ALZA based on worldwide
net sales of the product. For the first three years after launch
the rates will be 2.5%, 3.0% and 3.0% of net sales, respectively;
thereafter the rate is expected to be between 7.5% and 8.5%.
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, discussed in Note 7 to the consolidated
financial statements.
Therapeutic Discovery Corporation
In September 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 yet 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 yet 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.
ALZA TECHNOLOGIES
Research and development revenues decreased slightly in 1999
compared to 1998 and 8% in 1998 compared to 1997, reflecting
changes in the levels and types of product development activities
under agreements with client companies.
Research and Development Expenses
(Dollars in millions) 1999 1998 1997
_________________________________________________________________
ALZA PHARMACEUTICALS
Intersegment $ 90.9 $ 93.1 $ 91.6
Clinical expenses 33.2 28.5 20.3
_________________________________________________________________
Total ALZA Pharmaceuticals 124.1 121.6 111.9
ALZA TECHNOLOGIES 150.4 154.3 160.3
Intersegment eliminations (90.9) (93.1) (91.6)
_________________________________________________________________
Total research and
development expenses $183.6 $ 182.8 $ 180.6
As a percentage of total revenues 23% 28% 36%
ALZA PHARMACEUTICALS
ALZA Pharmaceuticals engages ALZA Technologies to perform
research and development services, the cost of which is determined
based upon amounts that would be charged to third parties for
similar services. Expenses related to these services remained
relatively constant in 1999 compared to 1998, primarily due to an
increase in clinical expenses offset by a decline in intersegment
expenses reflecting the completion of New Drug Applications ("NDA")
submissions for DUROS leuprolide, which ALZA has named Viadur, and
OROS-registered trademark- methylphenidate, which ALZA has named
Concerta-trademark-, which were submitted to the FDA in
Page 32 of paper format annual report
April 1999 and July 1999, respectively. Research and development
expenses increased 9% in 1998 compared to 1997 due to increased
research and development related to Crescendo products, Doxil and
an increase in clinical expenses.
In September 1997, ALZA entered into a clinical development
and option agreement with Alkermes relating to Cereport, 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, and
ALZA has the option to acquire exclusive worldwide
commercialization rights to the product.
ALZA TECHNOLOGIES
Research and development expenses decreased in 1999 compared
to 1998, and in 1998 compared to 1997, due to a decrease in product
development activities for ALZA Pharmaceuticals and under
agreements with client companies.
Development Arrangements
ALZA entered into two agreements with Janssen, effective
December 31, 1997, modifying the previous arrangements between the
parties relating to two E-TRANS fentanyl products. Under a
development and commercialization agreement, ALZA and Janssen
modified the agreement pursuant to which the companies were jointly
developing E-TRANS fentanyl 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 yet
approved by the FDA and has no alternative future use, the payment
was charged to the acquisition of in-process research and
development. Prior to these modifications, the agreement with
Janssen for E-TRANS fentanyl was a typical client arrangement for
ALZA under which Janssen paid all development costs, and ALZA would
receive a royalty based on sales of the product, if the product was
successfully developed. Janssen has notified ALZA of its intent to
terminate its participation in the E-TRANS fentanyl (acute pain)
program, effective in March 2000. Effective January 2000, the
product became a Crescendo product, and Crescendo began funding
product development. At present ALZA Pharmaceuticals plans to
commercialize the product.
Under the other agreement with Janssen, ALZA Pharmaceuticals
has continued the development, with Crescendo, of an E-TRANS
fentanyl product for the treatment of chronic and breakthough pain.
Janssen has an option to take over funding the continued
development of the product and to commercialize the product
worldwide, once ALZA has expended a specified amount on the
development of the product. The product is currently in limited
development.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
(Dollars in millions) 1999 1998 1997
_________________________________________________________________
ALZA PHARMACEUTICALS
Sales and marketing expenses $ 200.0 $ 95.2 $ 45.8
_________________________________________________________________
Total 200.0 95.2 45.8
ALZA PHARMACEUTICALS
Amortization of product acquisition
payments 15.1 11.1 4.0
ALZA TECHNOLOGIES
Amortization of product acquisition
payments 9.1 4.6 -
_________________________________________________________________
Total 24.2 15.7 4.0
OTHER
General and administrative expenses 34.8 (1) 31.0 35.9
_________________________________________________________________
Total selling, general and
administrative expenses $ 259.0 $ 141.9 $ 85.7
Total selling, general and administrative
expenses a percentage of total revenues 33% 22% 17%
(1) Excludes merger-related expenses of $32.3 million relating to
the acquisition of SEQUUS and $13.4 million resulting from the
terminated merger agreement with Abbott.
ALZA PHARMACEUTICALS
Sales and marketing expenses increased substantially in 1999
compared to 1998, and in 1998 compared to 1997, as a result of the
significant increase in the size of ALZA's sales organization, the
increased marketing expenses for ALZA's expanded product portfolio
and the increased sales and marketing activities due to the launch
and promotion of Ditropan XL in February 1999. During the second
half of 1998, ALZA expanded its sales organization by approximately
260 sales professionals. In December 1998, ALZA entered into an
agreement with UCB Pharma, Inc.("UCB Pharma") under which
approximately 350 sales professionals of UCB Pharma are co-
promoting Ditropan XL in the United States with ALZA. UCB Pharma
receives payments based on sales of Ditropan XL above certain
levels, as well as payments for sales calls made. The term of the
co-promotion arrangement continues through March 2002.
In June 1999, ALZA entered into an agreement with Abbott to co-
promote Ditropan XL in the United States, adding sales calls of 300
more sales professionals to the sales force then promoting Ditropan
XL. Co-promotion fees based on sales call made and other expenses
were incurred under this agreement through December 1999.
Additional co-promotion fees and expenses were incurred in 2000
until the termination of the co-promotion arrangement on January
20, 2000.
Page 33 of paper format annual report
Amortization of product acquisition payments increased in 1999
compared to 1998 due to the amortization of payments for products
that were acquired in the second half of 1998, and the amortization
of additional milestone payments incurred during 1999.
Amortization of product acquisition payments increased
significantly in 1998 compared to 1997 due to a full year of
amortization of the acquisition costs of products acquired in 1997
and, to a lesser extent, products acquired in 1998.
ALZA TECHNOLOGIES
Amortization of product acquisition payments for 1999 and 1998
reflects amortization of the $91.2 million exercise price paid in
August 1998 to acquire all of the outstanding limited partnership
interests in the TTS Partnership, for a full year and six months,
respectively. For reporting purposes, these costs are treated as
product acquisition costs because they primarily relate to the
acquisition of TTS Partnership's rights to Duragesic and ALZA
retaining all royalties paid by Janssen on sales of that product.
OTHER
In 1999, general and administrative expenses increased 12%,
excluding certain merger-related expenses, compared with 1998,
primarily due to a $4.5 million charge for uncollectible accounts
receivable, partially offset by higher cash surrender value of
company-owned life insurance policies. General and administrative
expenses declined 14% in 1998 compared to 1997, excluding $0.4
million in costs related to workforce reductions in 1997. This
decline was due primarily to lower allocated depreciation and
facilities costs, a reduction in certain corporate costs and an
increase in the cash surrender value of company-owned life
insurance policies.
INTEREST INCOME AND EXPENSE
NET INTEREST
(In millions) 1999 1998 1997
_________________________________________________________________
Interest and other income $ (41.6) $ (26.4) $ (57.1)
Distribution to debenture holders - - 8.0
Interest expense 58.1 56.7 55.2
_________________________________________________________________
Net interest and other
expense $ 16.5 $ 30.3 $ 6.1
The increase in interest and other income for 1999 compared to
1998 was primarily due to a pretax gain of $12.4 million on sales
of real estate assets and realized gains on investments of $9.6
million in 1999. Interest and other income decreased in 1998
compared to 1997 primarily due to significantly lower average
invested cash balances during 1998. ALZA's lower cash balances in
1998 were attributable to the purchase of TDC, the formation of
Crescendo and several product acquisitions, all of which occurred
in the second half of 1997, and payment of $91.2 million for the
exercise of the option to acquire all of the outstanding limited
partnership interests in the TTS Partnership, which occurred in the
third quarter of 1998.
Interest expense increased 3% in both 1999 compared to 1998,
and in 1998 compared to 1997, primarily due to accreted interest on
ALZA's 5 1/4% zero coupon convertible subordinated debentures due
2014 (the "5 1/4% Debentures") issued in 1994.
The 1997 distribution to debenture holders is related to the
Crescendo transaction as discussed under "Crescendo Pharmaceuticals
Corporation" above.
INCOME TAXES
ALZA's effective income tax rate was 31% in 1999 on income
before merger-related expenses, compared to 35% in 1998. The tax
benefit associated with merger-related expenses was $13.5 million
(30%), reflecting that certain of the merger-related expenses were
not deductible. The 1999 tax rate was lower than 1998's rate
principally due to realization of previously reserved deferred tax
assets relating to acquired SEQUUS tax loss carryforwards. In
1997, ALZA recorded income tax expense of $40.3 million despite
ALZA's pretax loss, as certain charges recognized in 1997 were
generally not deductible for income tax purposes. ALZA's 1997
effective income tax rate excluding such items was 34%.
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY AND CAPITAL RESOURCES
(In millions) 1999 1998 1997
_________________________________________________________________
Working capital $ 297.8 $ 297.6 $ 276.9
Cash and investments 589.1 514.1 561.1
Total assets 1,852.5 1,666.6 1,450.7
Long-term debt 979.0 966.1 932.2
Net cash provided by (used in)
operating activities 160.2 115.0 (213.1)
Capital expenditures 94.2 65.1 41.8
Product acquisition payments 35.0 127.6 140.1
Cash flow provided by operating activities in 1999 was $193.6
million, excluding $33.4 million in cash payments made for merger-
related expenses as discussed under "Results of Operations". Cash
flow provided by operating activities in 1998 was $136.5 million,
excluding a $21.5 million payment to Janssen in January 1998
discussed above under "Results of Operations". Cash flow provided
by operating activities in 1997 was $122.6 million excluding a
$247.0 million charge and $8.0 million interest expense relating to
ALZA's distribution of shares of Crescendo; a $77 million charge
relating to the purchase of TDC; a $10.0 million payment to
Alkermes under
Page 34 of paper format annual report
an agreement relating to Cereport; and $1.8 million in severance
payments; and an $8.1 million income tax benefit. These items are
discussed above under "Results of Operations."
During 1999, ALZA made fee payments of $15.0 million to Bayer
related to Mycelex Troche, $8.5 million to IVAX related to Elmiron,
$7.5 million to HMRI (now Aventis) related to Ditropan and $4.0
million related to rights to market certain products in Canada.
During 1998, ALZA paid $91.2 million in cash for the purchase of
all of the outstanding limited partnership interests of the TTS
Partnership. Also in 1998, ALZA made an upfront fee payment of
$25.0 million to SB for the United States rights to Urispas, and
made additional fee payments of $6.2 million to HMRI for the
immediate release Ditropan product and $5.0 million to U.S.
Bioscience ("USB") related to Ethyol. 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.
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 Troche, made a
$10.0 million payment to USB related to Ethyol and made an upfront
payment of $75.0 million to IVAX for the United States and Canadian
rights to Elmiron and three additional urology products. ALZA also
paid $10.0 million to Alkermes under the agreement related to
Cereport. Also during 1997, ALZA 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.
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 was applied to the construction of buildings
on the parcel. ALZA is also obligated to make improvements to the
buildings; approximately $117.8 million had been spent as of
December 31, 1999 and ALZA expects to incur an additional $13.0
million in 2000. The improvements were substantially completed as
of December 31, 1999. The joint venture began leasing the
buildings to ALZA in the second half of 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 receives 50%
of the joint venture's net income.
Also in late 1997, ALZA entered into a ground lease agreement
for a seven-acre parcel of land in Mountain View, California on
which it may construct a pilot plant, laboratories or 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.
During 1999, ALZA sold five buildings located in Palo Alto,
California, resulting in a total pretax gain of $12.4 million.
ALZA leased these buildings through December 1999, when it
completed occupancy of its new buildings in Mountain View,
California. ALZA is also leasing out certain other Palo Alto,
Menlo Park and Mountain View, California properties it owns or
leases, which will generate rental income in 2000 and beyond.
ALZA's capital spending for 1999 was $94.2 million; $74.2
million for the Mountain View campus and the remainder for
additions to facilities and equipment to support its expanding
research, development and manufacturing activities, compared to
capital spending of $65.1 million in 1998 and $41.8 million in
1997. Capital expenditures in 2000 are expected to decrease
compared to 1999 levels as result of the completion of the current
development program for the Mountain View campus.
ALZA believes that its existing cash and investment balances
are adequate to fund its cash needs for 2000 and beyond. In
addition, should the need arise, ALZA believes it would be able to
borrow additional funds, although no such borrowing arrangements
are in place, or otherwise raise additional capital. ALZA may use
its capital to make strategic investments or to acquire or license
technology or products.
OUTLOOK
Notice Concerning Forward-Looking Statements
The following is intended to provide an outlook for 2000 and
beyond. To the extent any statements made in this section or
elsewhere in this management's discussion and analysis or in the
financial statements 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 Item 1 of ALZA's Form 10-K Annual Report for the
year ended December 31, 1999, and some are also discussed briefly
below.
Net Sales
Net sales of products marketed by ALZA Pharmaceuticals
are expected to increase significantly in 2000 due to the
anticipated launch of Concerta during the year, full year
sales of Ditropan XL and increases in sales of currently-
marketed products. ALZA also expects Viadur to be
commercialized in late 2000 or early 2001. ALZA has the right
to market Ethyol until April 2002, and will receive residual
payments from MedImmune, Inc. ("MedImmune"), the successor by
merger to USB, for nine years after the end of ALZA's
marketing term. Wholesaler stocking patterns, managed care
and formulary acceptance, the intro-
Page 35 of paper format annual report
duction of competitive products, and acceptance by patients,
physicians and formularies will affect sales in 2000 and
future sales of ALZA's products.
ALZA expects 2000 contract manufacturing revenues for
ALZA Technologies to increase slightly from 1999 levels due to
anticipated increases in orders from customers. Because many
factors affecting contract manufacturing activities are not
within ALZA's control, revenues will continue to fluctuate
from period to period depending on the volume, mix and timing
of orders received from customers.
Gross Margins on Net Sales
ALZA expects that gross margins, as a percentage of net sales,
will continue to increase somewhat in 2000 and 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 direct sales by ALZA Pharmaceuticals (as
compared with sales from contract manufacturing), and, to a lesser
extent, increased utilization of capacity and greater operating
efficiencies by ALZA Technologies.
Royalties, Fees and Other Revenues
Fees for ALZA Pharmaceuticals in 2000 are expected to include
technology fees from Crescendo. Fees for 2000 may also include
upfront and/or milestone fees from third parties in connection with
arrangements for the commercialization of products and/or upfront
fees and/or milestone payments in connection with client
development arrangements.
ALZA expects royalties, fees and other revenues for ALZA
Technologies to continue to increase in 2000 as a result of growth
in sales of products currently marketed by client companies. Sales
of Duragesic, Glucotrol XL and Covera HS-trademark-(verapamil) are
expected to continue increasing in 2000 while sales of Procardia XL
are expected to continue to decline in 2000. ALZA expects fee
revenue to contribute to ALZA Technologies' operating results in
2000.
Royalties, fees and other revenues, which are derived largely
from sales by client companies of products developed by ALZA
Technologies, vary from quarter to quarter as a result of changing
levels of product sales by client companies and, occasionally, the
receipt by ALZA of one-time, infrequent and special fees (such as
upfront fees and milestone payments). Because ALZA's clients
generally take responsibility for obtaining necessary regulatory
approvals and make all marketing and commercialization decisions
regarding these 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 generally one-time in nature and will vary from
year to year and quarter to quarter.
In December 1999 the Securities and Exchange Commission
("SEC") issued Staff Accounting Bulletin No. 101, "Revenue
Recognition in Financial Statements" ("SAB 101"). SAB 101
summarizes the SEC's views in applying generally accepted
accounting principles to revenue recognition in financial
statements. ALZA is evaluating SAB 101's potential future impact
on ALZA's financial position and results of operations. It is
possible that under SAB 101, certain fees would be required to be
deferred or recognized in revenue over or in future periods.
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 through ALZA Pharmaceuticals, including
products developed with Crescendo. However, there can be no
assurance that ALZA will be successful in continuing this
expansion, or that any expanded sales and marketing activities will
be successful, due to factors such as the risks associated with
developing, clinically testing and obtaining regulatory clearance
of products for marketing by ALZA Pharmaceuticals, the difficulties
and costs associated with acquiring from third parties products for
ALZA Pharmaceuticals 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.
Research and Development
ALZA expects that Crescendo will expend its available funds
during the second half of 2000. 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. After
Crescendo expends its available funds, ALZA Pharmaceuticals will
incur significant expenses for research and development services
provided by ALZA Technologies that will no longer be reimbursed by
Crescendo.
If ALZA were to purchase all of Crescendo's shares the
purchase price would be determined pursuant to a formula set forth
in Crescendo's Certificate of Incorporation (See Note 7 to the
Consolidated Financial Statements: Arrangements with Crescendo
Pharmaceuticals Corporation and Therapeutic Discovery Corporation
(Related Parties)). Depending on when the option is exercised, if
at all, the purchase price would be at least $100 million and could
be more.
Page 36 of paper format annual report
Future product development revenues are dependent upon ALZA's
ability to enter into new arrangements with client companies.
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, product development revenues from any particular
client program could decrease dramatically once the NDA 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.
In 2000, ALZA expects to continue internal technology research
in order to continue strengthening ALZA's leadership in the drug
delivery field.
Selling, General and Administrative Expenses
Sales and marketing expenses are expected to increase in 2000
due to the increase in the size of the sales organization in 1999,
costs associated with the launch of Concerta and continued
promotion of ALZA Pharmaceutical's currently-marketed products.
Amortization of product acquisition costs for 2000 will include
ongoing amortization of costs of products acquired in prior years,
amortization of costs of any new products acquired in 2000 and to,
a lesser extent, amortization of additional payments under the
arrangements for the acquisition of acquired products.
Interest and Other Income
Interest and other income could be lower in 2000 compared to
1999 due to the inclusion of gains from the sale of real estate, as
discussed above, and from sale of certain equity investments, both
in 1999. Interest and other income would also be lower in 2000 if
ALZA exercises its option to purchase all of Crescendo's shares, as
discussed above, and pays the purchase price in cash.
Income Tax Rate
ALZA currently expects its combined federal and state
effective income tax rate in 2000 to be approximately 31%. The
actual effective income tax rate will depend upon the actual level
of 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
In prior years and through the first three quarters of 1999,
ALZA discussed the nature and progress of its plans to make its
computer systems and applications, including scientific and
manufacturing equipment containing computer related equipment, Year
2000 ready. In late 1999, ALZA completed its remediation and
testing of systems. As a result of those planning and
implementation efforts, ALZA experienced no significant disruptions
in mission critical information technology and non-information
technology systems and believes those systems successfully
responded to the Year 2000 date change. ALZA expensed less than
$1.0 million in connection with remediating its systems. ALZA is
not aware of any material problems resulting from Year 2000 issues,
either with its products, its internal systems, or the products and
services of third parties. ALZA will continue to monitor its
mission critical computer applications and those of its suppliers
and vendors throughout the year 2000 to ensure that any latent Year
2000 matters that may arise are addressed promptly.
Page 37 of paper format annual report
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
ALZA's exposure to market risk for changes in interest rates
relates primarily to ALZA's investment portfolio and long-term debt
obligations. ALZA does not have derivative financial instruments
in its investment portfolio. ALZA's investment policy requires
investments with high credit quality issuers and limits the amount
of credit exposure to any one issuer.
The table below presents principal amounts and related
weighted-average interest rates by year of maturity for ALZA's
investment portfolio:
There- Fair
2000 2001 2002 2003 2004 after Total Value
_________________________________________________________________
(In millions)
Cash and cash equivalents
Fixed Rate
Securities $118.5 - - - - - $118.5 $118.5
Average Interest
Rate 5.67% - - - - - 5.67%
Short-term Investments
Fixed Rate
Securities $ 68.2 - - - - - $68.2 $68.0
Average Interest
Rate 5.61% - - - - - 5.61%
Long-term Investments
Fixed Rate
Securities - $117.4 $78.8 $52.2 $4.9 - $253.3 $248.6
Average Interest
Rate - 6.28% 6.37% 6.32% 5.00% - 6.29%
Total Investments
Fixed Rate
Securities $186.7 $117.4 $78.8 $52.2 $4.9 - $ 440.0 $435.1
Average Interest
Rate 5.64% 6.28% 6.37% 6.32% 5.00% - 6.02%
ALZA is exposed to equity price risks on the marketable
portion of equity securities included in its portfolio of
investments entered into to further its business and strategic
objectives. These investments are generally in small
capitalization stocks in the pharmaceutical and biotechnology
industry sector, in companies with which ALZA has research and
development or product agreements. ALZA typically does not attempt
to reduce or eliminate its market exposure on these securities. A
20% adverse change in equity prices would result in a decrease of
approximately $2.0 million in ALZA's available-for-sale securities,
based upon a sensitivity analysis performed on ALZA's financial
position at December 31, 1999. However, actual results may differ
materially.
ALZA derives royalty revenues from client companies with
significant sales to customers in foreign countries. ALZA believes
its exposure to foreign currency exchange rate risks is generally
limited to such royalty revenues. ALZA does not use derivative
financial instruments to mitigate this exposure.
Page 38 of paper format annual report
CONSOLIDATED STATEMENT OF OPERATIONS
Years ended December 31,
(In millions, except per share amounts) 1999 1998 1997
_________________________________________________________________
REVENUES
Net sales $ 448.0 $ 289.4 $ 181.1
Royalties, fees and other 227.1 233.1 188.3
Research and development, including
amounts from Crescendo, a related party
(1999-$90.5, 1998-$95.0, 1997-$29.7)
and TDC, a related party
(1997-$67.8) 120.8 124.4 135.0
_________________________________________________________________
Total revenues 795.9 646.9 504.4
COSTS AND EXPENSES
Costs of products shipped 158.4 125.7 99.9
Selling, general and administrative 259.0 141.9 85.7
Research and development 183.6 182.8 180.6
Merger-related expenses 45.7 - -
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 646.7 450.4 733.2
Operating income (loss) 149.2 196.5 (228.8)
Interest expense 58.1 56.7 55.2
Distribution to debenture holders - - 8.0
Interest and other income (41.6) (26.4) (57.1)
_________________________________________________________________
Net interest and other expense 16.5 30.3 6.1
_________________________________________________________________
Income (loss) before income taxes 132.7 166.2 (234.9)
Provision for income taxes 41.7 57.9 40.3
_________________________________________________________________
Net income (loss) $ 91.0 $ 108.3 $(275.2)
Earnings (loss) per share
Basic $ 0.90 $ 1.09 $ (2.83)
Diluted $ 0.88 $ 1.07 $ (2.83)
Shares
Basic 101.1 99.0 97.3
Diluted 103.5 101.5 97.3
See accompanying notes.
Page 39 of paper format annual report
CONSOLIDATED BALANCE SHEET
December 31,
(In millions, except per share amounts) 1999 1998
_________________________________________________________________
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 149.4 $ 110.1
Short-term investments 68.0 86.1
Receivables, net of allowances (1999-$18.1;
1998-$3.6) 113.7 131.1
Receivable from Crescendo, a related party 12.0 17.5
Inventories 69.0 54.6
Prepaid expenses and other current assets 20.6 26.3
_________________________________________________________________
Total current assets 432.7 425.7
PROPERTY, PLANT AND EQUIPMENT
Buildings and leasehold improvements 286.0 229.6
Equipment 209.6 184.1
Construction in progress 34.0 56.6
Land and prepaid land leases 33.9 34.4
_________________________________________________________________
563.5 504.7
Less accumulated depreciation and
amortization (145.7) (132.3)
_________________________________________________________________
Net property, plant and equipment 417.8 372.4
Long-term investments 371.7 317.9
Deferred product acquisition costs 283.4 279.1
Cash surrender value of life insurance 148.4 93.0
Other assets 198.5 178.5
_________________________________________________________________
TOTAL ASSETS $1,852.5 $1,666.6
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 75.9 $ 59.7
Accrued liabilities 51.5 61.0
Current portion of long-term debt 7.5 7.4
_________________________________________________________________
Total current liabilities 134.9 128.1
5% convertible subordinated debentures 495.5 500.0
5 1/4% zero coupon convertible subordinated
debentures 443.7 422.6
Other long-term liabilities 86.6 84.0
Commitments and contingencies
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value, 0.1 shares
authorized - -
Common stock, $.01 par value, 300.0 shares
authorized; 102.2, 100.3 and 97.7 shares
issued and outstanding in 1999, 1998 and
1997; respectively 1.0 1.0
Additional paid-in capital 705.6 644.5
Accumulated other comprehensive loss (2.8) (10.6)
Accumulated deficit (12.0) (103.0)
_________________________________________________________________
Total stockholders' equity 691.8 531.9
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,852.5 $1,666.6
See accompanying notes.
Page 40 of paper format annual report
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Years ended December 31, 1999, 1998 and 1997
(In millions)
ACCUMULATED TOTAL
ADDITIONAL OTHER RETAINED STOCK-
COMMON PAID-IN COMPREHENSIVE EARNINGS HOLDERS'
STOCK CAPITAL INCOME(LOSS) (DEFICIT) EQUITY
_________________________________________________________________________
Balance, December 31,
1996 $1.0 $557.0 $ (0.1) $113.0 $ 670.9
Common stock issued - 24.4 - - 24.4
Distribution of
Crescendo Shares - - - (49.1) (49.1)
Comprehensive loss
Net loss - - - (275.2) (275.2)
Unrealized losses on
securities of $1.0,
net of reclassifica-
tion adjustment for
gains included in net
income of $3.7 - - (4.7) - (4.7)
_________________________________________________________________________
Total comprehensive loss (279.9)
_________________________________________________________________________
Balance, December 31,
1997 1.0 581.4 (4.8) (211.3) 366.3
Common stock issued - 63.1 - - 63.1
Comprehensive income
(loss)
Net income - - - 108.3 108.3
Unrealized losses on
securities of $4.8,
net of
reclassification ad-
justment for gains
included in net
income of $1.0 - - (5.8) - (5.8)
________________________________________________________________________
Total comprehensive
income 102.5
________________________________________________________________________
Balance, December 31,
1998 1.0 644.5 (10.6) (103.0) 531.9
Common stock issued - 61.1 - - 61.1
Comprehensive income
Net income - - - 91.0 91.0
Unrealized gains on
securities of $14.1,
net of reclassifica-
tion adjustment for
gains included in net
income of $6.3 - - 7.8 - 7.8
______________________________________________________________________
Total comprehensive income 98.8
______________________________________________________________________
Balance, December 31,
1999 $1.0 $705.6 $ (2.8) $(12.0) $ 691.8
See accompanying notes.
Page 41 of paper format annual report
CONSOLIDATED STATEMENT OF CASH FLOWS
(In millions)
Years ended December 31, 1999 1998 1997
___________________________________________________________________
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $91.0 $108.3 $(275.2)
Non-cash adjustments to reconcile
net income (loss) to net cash pro-
vided by (used in) operating
activities:
Depreciation and amortization 41.5 34.4 31.3
Amortization of product acquisition
payments 24.2 15.7 4.0
Interest on 5 1/4% zero coupon
convertible subordinated debentures 22.5 21.4 20.3
Issuance of common stock to
401(k) plan - 0.3 0.3
Undistributed income from real
estate joint venture (2.1) - -
Decrease (increase) in assets:
Receivables 22.9 (24.6) 1.5
Inventories (14.4) (12.8) 3.1
Prepaid expenses and other current
assets 0.4 5.8 (4.1)
Prepaid premiums and increase in cash
surrender value of life insurance (55.5) (21.8) (12.8)
Increase (decrease) in liabilities:
Accounts payable 22.8 0.4 27.4
Accrued liabilities 1.3 (16.5) 0.1
Deferred revenue - (0.7) 0.3
Other long-term liabilities 6.7 5.1 (20.8)
Gain on sale of real estate and
other assets, net (12.2) - -
Asset write-down 11.1 - 11.5
___________________________________________________________________
Total adjustments 69.2 6.7 62.1
___________________________________________________________________
Net cash provided by (used in)
operating activities 160.2 115.0 (213.1)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (94.2) (65.1) (41.8)
Proceeds from sale of real estate and
other assets 20.2 - -
Product acquisition payments (35.0) (36.4) (140.1)
Purchase of limited partners' interests in
ALZA TTS Research Partners, Ltd. - (91.2) -
Investment in real estate joint venture - - (36.2)
Purchase of TDC deferred tax asset - - (23.0)
Purchases of available-for-sale
securities (293.8) (323.3) (435.4)
Sales of available-for-sale securities 239.6 317.0 707.5
Maturities of available-for-sale
securities 31.3 82.1 65.7
Decrease (increase) in other assets (19.5) (16.7) 12.4
___________________________________________________________________
Net cash (used in) provided by
investing activities (151.4) (133.6) 109.1
CASH FLOWS FROM FINANCING ACTIVITIES:
Distribution of Crescendo
Pharmaceuticals Corporation shares
to ALZA stockholders - - (49.1)
Issuances of common stock 41.1 61.4 24.1
Principal repayments on long-term
debt, net (10.6) (4.4) 3.0
___________________________________________________________________
Net cash provided by (used in)
financing activities 30.5 57.0 (22.0)
___________________________________________________________________
Net increase (decrease) in cash and
cash equivalents 39.3 38.4 (126.0)
Cash and cash equivalents at the
beginning of year 110.1 71.7 197.7
___________________________________________________________________
Cash and cash equivalents at
the end of year $ 149.4 $ 110.1 $ 71.7
See accompanying notes.
Page 42 of paper format annual report
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
ALZA Corporation is a research-based 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's sales and marketing
efforts are currently focused in urology and oncology.
ALZA acquired all of SEQUUS' outstanding stock in a tax-free,
stock-for-stock transaction on March 16, 1999. SEQUUS was engaged
in the development, manufacturing, marketing and sales of
proprietary liposome and lipid-based products used primarily to
treat cancer. ALZA has accounted for the transaction as a pooling
of interests, and accordingly, the consolidated financial
statements and all financial information have been restated to
reflect the combined operations, financial position and cash flows
of both companies as described in Note 12.
Nature of Operations
Net sales includes sales of products marketed directly by ALZA
and sales of those products to distributors, as well as sales
generated from contract manufacturing activities for ALZA's client
companies. ALZA recognizes sales revenues at the time of product
shipment, net of estimates for discounts, and reserves for sales
returns and allowances and rebates. In 1999, ALZA changed its
policy on product returns to restrict, among other things, returns
of products beyond one year from product expiration, from the
previous policy which allowed expired products to be returned
without any time limits.
ALZA's contract manufacturing activities are undertaken with
respect to products developed as a result of 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.
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, milestones or
similar payments under such agreements. Included in royalties,
fees and other revenues are revenues from ALZA's promotion and co-
promotion of certain products. Royalties, fees and other revenues
are recognized as earned. ALZA recognizes upfront fee revenues on
or after the effective date of the licensing, co-promotion 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 performance contingencies or conditions to ALZA's
receipt of payment. Such license and milestone fees, when
recognized, are not refundable or creditable against future
payments, and do not require any future performance by ALZA in
order to retain them.
Revenues from research and development activities with client
companies, including Crescendo and previously TDC, 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 income. Research and development
revenues are recognized when billable in accordance with the terms
prescribed in each client development agreement (billed based upon
labor and other costs incurred during the period). The payments
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 generally 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
or client companies 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.
Page 43 of paper format annual report
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 SEQUUS for all periods presented, 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. Significant estimates made by
management include the calculation of reserves for uncollectible
accounts, sales returns and allowances and rebates, useful lives of
long-lived assets, including intangibles, and the realizability of
deferred tax assets.
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 of less than one
year. The carrying amount reported on the balance sheet for cash,
cash equivalents and short-term investments approximates their fair
value.
Stock-Based Compensation
ALZA accounts for stock option grants and restricted stock
grants in accordance with APB Opinion No. 25, Accounting for Stock
Issued to Employees. ALZA currently grants stock options for a
fixed number of shares to employees and directors with an exercise
price equal to the fair value of the shares at the date of grant,
and therefore records no compensation expense. ALZA records
compensation expense for all restricted stock grants equal to the
difference between the market price on the date of grant and the
price paid for the shares issued, on a straight-line basis between
the date of grant and the lapse of the restriction.
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 at December 31, consist of the following:
(In millions) 1999 1998
_________________________________________________________________
Raw materials $ 26.0 $18.2
Work in process 10.4 10.6
Finished goods 32.6 25.8
_________________________________________________________________
Total inventories $ 69.0 $54.6
Internal Use Software
ALZA accounts for software developed or obtained for internal
use in accordance with Statement of Position 98-1 "Accounting for
the Costs of Computer Software Developed or Obtained for Internal
Use". The statement requires capitalization of certain costs
incurred in the development of internal-use software, including
external direct material and service costs, employee payroll and
payroll related costs. Capitalized software costs, which have not
been significant to date, are depreciated over three years.
Property, Plant and Equipment
Property, plant and equipment are stated at cost, including
capitalized interest of $3.4 million in 1999, $1.5 million in 1998
and $0.7 million in 1997. 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 or useful life (1
to 34 years)
Equipment 3 to 9 years
Prepaid land leases Terms of the leases (15 to 58 years)
Depreciation and amortization expense for property, plant and
equipment was $29.7 million for 1999, $27.2 million for 1998 and
$26.7 million for 1997. 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 at December 31, 1999 and 1998
are payments made in connection with facilities being constructed
or modified, and the construction and installation of equipment, in
Palo Alto, Mountain View and Menlo Park, California (primarily
research and development) and Vacaville, California (primarily
commercial manufacturing).
Page 44 of paper format annual report
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 for which
such approval is imminent) are capitalized and amortized ratably
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 or useful life
would then be reduced when appropriate. Accumulated amortization
of these costs was $46.2 million, $21.9 million and $6.2 million at
December 31, 1999, 1998 and 1997, 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 acquisition of
in-process research and development. Charges to in-process
research and development were $108.5 million in 1997. There were
no such charges recorded in 1999 and 1998.
Long-Lived Assets
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 1999, ALZA wrote down approximately $11.1 million in fixed
assets, $9.6 million of which related to a write-down of assets
relating to the SEQUUS merger and is included in the merger-related
costs. 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. 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.
Accrued Liabilities
Accrued liabilities as of December 31, are as follows:
(In millions) 1999 1998
_________________________________________________________________
Accrued compensation $ 32.0 $25.3
Accrued income taxes 4.4 22.5
Other accrued liabilities 15.1 13.2
_________________________________________________________________
Total accrued liabilities $ 51.5 $61.0
Advertising Costs
Advertising costs are accounted for as expenses in the period
in which they are incurred. Advertising expense for 1999, 1998 and
1997 was $40.5 million, $16.3 million and $8.5 million,
respectively.
Supplemental Disclosures of Cash Flow Information
(In millions)
Cash paid during the year for:
1999 1998 1997
_________________________________________________________________
Income taxes $ 53.0 $ 34.2 $ 59.5
Interest, net of amount capitalized 31.1 29.8 36.8
Non cash investing and financing activities:
1999 1998 1997
_________________________________________________________________
Net unrealized gains (losses)
on available-for-sale
securities, net of tax effect $7.8 $ (5.8) $(4.7)
Acquisition of building in lieu of
repayment of note receivable - 17.5 -
Accrued product and license
acquisition costs 13.5 20.0 -
Conversion of 5% and 5 1/4%
Debentures into ALZA common stock 6.0 1.4 -
Investment in low-income housing
in exchange for long term debt 7.0 23.6 17.1
Tax benefit for stock option and
stock purchase plan 10.7 9.7 2.3
Page 45 of paper format annual report
Comprehensive Income
As of January 1, 1998, ALZA adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income"
("SFAS 130"), which establishes standards for reporting
comprehensive income and its components. Total comprehensive
income includes net income plus other comprehensive income, which
for ALZA primarily comprises net unrealized gains or losses on
available-for-sale securities. The adoption of SFAS 130 had no
impact on ALZA's results of operations or financial position. The
following table shows the tax effect allocated to each component of
comprehensive income for the years ended December 31, 1999, 1998
and 1997:
Before-Tax Tax(Expense) Net-of-Tax
(In millions) Amount or Benefit Amount
_____________________________________________________________________
Unrealized losses on available-
for-sale securities $(1.9) $ 0.9 $(1.0)
Less: reclassification adjustment
for gains realized in net income 6.1 (2.4) 3.7
____________________________________________________________________
Net unrealized loss for the year
ended December 31, 1997 (8.0) 3.3 (4.7)
Unrealized losses on available-
for-sale securities (8.3) 3.5 (4.8)
Less: reclassification adjustment
for gains realized in net income 1.5 (0.5) 1.0
____________________________________________________________________
Net unrealized loss for the year
ended December 31, 1998 $(9.8) $ 4.0 $(5.8)
Unrealized gains on available-
for-sale securities 22.3 (8.2) 14.1
Less: reclassification adjustment
for gains realized in net income 9.3 (3.0) 6.3
____________________________________________________________________
Net unrealized gains for the year
ended December 31, 1999 $13.0 $(5.2) $7.8
Segment Information
In 1998, ALZA adopted Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and
Related Information" ("SFAS 131"). The new rules establish revised
standards for the reporting of financial and descriptive
information about operating segments in financial statements. The
adoption of SFAS 131 did not have a material effect on ALZA's
financial statements, but did affect the disclosure of segment
information contained in Note 14.
Reclassifications
Certain prior year amounts have been reclassified to conform
to the current presentation.
New Accounting Standards
In July 1999, the Financial Accounting Standards Board
("FASB") announced the delay of the effective date of Statement of
Financial Accounting Standards 133, "Accounting for Derivative
Instruments and Hedging Activities," ("SFAS 133") for one year, to
the first quarter of 2001. SFAS 133 establishes accounting and
reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging
activities. It requires companies to recognize all derivatives as
either assets or liabilities on the balance sheet and measure those
instruments at fair value. Gains or losses resulting from changes
in the values of those derivatives would be accounted for depending
on the use of the derivative and whether it qualifies for hedge
accounting under SFAS 133. The impact of SFAS 133 on ALZA's
financial position and results of operations is not expected to be
material.
In December 1999 the Securities and Exchange Commission
("SEC") issued Staff Accounting Bulletin No. 101, "Revenue
Recognition in Financial Statements" ("SAB 101"). SAB 101
summarizes the SEC's views in applying generally accepted
accounting principles to revenue recognition in financial
statements. ALZA is evaluating SAB 101's potential future impact
on ALZA's financial position and results of operations. It is
possible that under SAB 101, certain fees would be required to be
deferred or recognized in revenue over or in future periods.
Note 2. INVESTMENTS
ALZA has classified its entire investment portfolio as
available-for-sale. Investments in the available-for-sale category
are carried at fair value based on quoted market values, with
unrealized gains and losses recorded as a separate component of
stockholders' equity. At December 31, 1999, net unrealized losses
on available-for-sale securities were $3.4 million, net of $2.0
million tax effect. At December 31, 1998, net unrealized losses on
available-for-sale securities were $10.6 million, net of $7.3
million tax effect. The cost of securities when sold is based upon
specific identification. Realized gains and losses for the year
ended December 31, 1999 were $10.0 million and $0.4 million,
respectively. Realized gains and losses for the year ended
December 31, 1998 were $1.7 million and $0.2 million, respectively.
Realized gains and losses for the year ended December 31, 1997 were
$7.6 million and $1.5 million, respectively.
Page 46 of paper format annual report
The following is a summary of ALZA's investment portfolio (in
millions):
December 31, 1999
____________________________________________________________________
Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
U.S. Treasury securities
and obligations of
U.S. government
agencies $87.9 $ - $(1.4) $ 86.5
Collateralized mortgage
obligations and asset
backed securities 51.7 - (1.1) 50.6
Corporate debt
securities 300.4 - (2.4) 298.0
____________________________________________________________________
Total debt
securities 440.0 - (4.9) 435.1
Investments held
in trust 113.8 - - 113.8
Equity securities 9.8 0.2 (0.7) 9.3
____________________________________________________________________
Total available
for sale 563.6 0.2 (5.6) 558.2
Less cash
equivalents (118.5) - - (118.5)
____________________________________________________________________
Total investments $445.1 $0.2 $(5.6) $439.7
December 31, 1998
____________________________________________________________________
Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
U.S. Treasury securities
and obligations of
U.S. government
agencies $66.3 $0.6 $(0.1) $ 66.8
Collateralized mortgage
obligations and asset
backed securities 58.4 0.4 - 58.8
Corporate debt
securities 332.4 2.0 (0.1) 334.3
____________________________________________________________________
Total debt
securities 457.1 3.0 (0.2) 459.9
Investments held
in trust - - - -
Equity securities 77.6 - (20.7) 56.9
____________________________________________________________________
Total available
for sale 534.7 3.0 (20.9) 516.8
Less cash
equivalents (112.8) - - (112.8)
____________________________________________________________________
Total investments $ 421.9 $3.0 $(20.9) $404.0
A grantor trust was established to fund ALZA's obligation to
certain of its senior employees for benefits provided by the
Executive Estate Protection Plan ("EEPP"), as discussed in Note 5.
As a result of the then-pending merger, the trust was fully funded
in October 1999. The trust funds were invested in accordance with
investment guidelines established by ALZA and, as a result of the
termination of the merger agreement with Abbott, ALZA may withdraw
its investments from the trust at any time upon notification to the
trustee. At December 31, 1999, the trust's investments included
United States Treasury and agency securities, corporate notes and
bonds, and institutional money market funds, with maturities
ranging from one day through nine years.
The amortized cost and estimated fair value of debt securities
at December 31, 1999 and 1998, by contractual maturity, are shown
below. Expected maturities will differ from contractual maturities
because the issuers of the securities may have the right to prepay
certain of the obligations without prepayment penalties.
(In millions)
1999 1998
____________________________________________________________________
Estimated Estimated
Amortized Fair Amortized Fair
Cost Value Cost Value
____________________________________________________________________
Due in one year or less $ 186.7 $ 186.5 $199.0 $198.9
Due after one year
through four years 248.4 244.0 215.3 217.5
Due after four years
through eight years 4.9 4.6 42.8 43.5
____________________________________________________________________
Total $440.0 $435.1 $ 457.1 $ 459.9
In early 1997, ALZA purchased approximately 1.2 million common
shares of USB (4.9% of the outstanding common shares at that time)
at a price of $18.256 per share, for an aggregate investment of
$21.5 million. Beginning in the first quarter of 1998, this stock
was classified as available for sale and recorded at fair market
value. In 1999, USB was acquired by MedImmune and ALZA sold the
shares it received as a result of the merger for total proceeds of
$26.2 million. ALZA and USB (now MedImmune) are parties to a
marketing and distribution agreement for Ethyol, 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 that time) at a
price of $25 per share, for an aggregate investment of
$50.0 million. This stock was not restricted and was therefore
classified as available-for-sale. In 1997, ALZA entered into a
clinical development and option agreement with Alkermes for
Cereport, which is described in Note 4. In 1998, ALZA and
Alkermes entered into an exclusive license agreement for two of
ALZA's oral drug delivery technologies, RingCap and dose sipping
technology, which is described in Note 4. In 1999, ALZA sold all
2.0 million common shares of Alkermes at an average price of $27
per share.
NOTE 3. PER SHARE INFORMATION
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.
Page 47 of paper format annual report
The following table sets forth the computation of ALZA's basic
and diluted earnings (loss) per share:
(In millions, except per share amounts) 1999 1998 1997
____________________________________________________________________
NUMERATOR:
Net income (loss) $ 91.0 $108.3 $(275.2)
DENOMINATOR:
Basic
Weighted average shares 101.1 99.0 97.3
Diluted
Weighted average shares 101.3 99.2 97.3
Effect of dilutive securities:
Employee stock options
and warrants 2.2 2.3 -
____________________________________________________________________
Weighted average shares 103.5 101.5 97.3
Basic earnings (loss) per share $ 0.90 $ 1.09 $(2.83)
Diluted earnings (loss) per share $ 0.88 $ 1.07 $(2.83)
Outstanding options and warrants to purchase 3.0 million and
1.3 million shares of ALZA's common stock were excluded from the
earnings per share calculation for the year ended December 31, 1999
and 1998 because the exercise price of the options was greater than
the average market price of ALZA's common stock. The effect of
assuming conversion of the 5% convertible subordinated debentures
due 2006 (the "5% Debentures")and 5 1/4% Debentures would have been
anti-dilutive in all periods presented, and they were therefore
excluded from the diluted earnings per share calculation. In 1997,
the effect of options and warrants would have been anti-dilutive
and they were therefore excluded from the diluted calculation.
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, now MedImmune, for Ethyol. 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
(with an option to extend for one additional year), and is
responsible for sales and marketing; the MedImmune sales force co-
promotes the product with ALZA. ALZA recently exercised the
option. After the six-year period, marketing rights to Ethyol will
revert to MedImmune, and ALZA will receive payments from MedImmune
for nine 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, and paid an additional $5.0 million
in early 1998, both of which were capitalized. ALZA will owe
additional fees to MedImmune in 2000 and 2001 as a result of the
one year extension.
In July 1997, ALZA acquired exclusive rights to Mycelex Troche
in the United States from Bayer. Under the terms of the agreement,
ALZA made a $50.0 million upfront payment to Bayer, which was
capitalized. In 1999, ALZA made a milestone payment of $15.0
million to Bayer, which was also capitalized. Bayer manufactures
Mycelex Troche for ALZA.
In October 1997, ALZA acquired the exclusive rights in the
United States and Canada to Elmiron and three additional urology
products, BiCitra, PolyCitra and Neutra-Phos, from IVAX. Under the
terms of the agreement, ALZA paid a $75.0 million upfront fee to
IVAX, which was capitalized, and must pay additional fees if
specified Elmiron sales levels are achieved during the five years
ending October 2002. ALZA incurred additional milestone fees of
$8.5 million in each of 1999 and 1998 based upon Elmiron sales,
which were also capitalized. IVAX manufactures Elmiron for ALZA.
In October 1997, ALZA acquired the rights in the United States
to the immediate-release Ditropan product and trademark from HMRI,
now Aventis. ALZA also acquired the rights to the product in
Canada in April 1998 from HMRI and P&G. Under the terms of the
agreements, ALZA made upfront payments to HMRI and P&G, which were
capitalized, and incurred additional fees of $12.5 million in 1998
to HMRI based upon Ditropan sales levels in the United States,
which were capitalized. Aventis manufactures the product for ALZA.
ALZA has the right to market other products in the United States
and Canada under the Ditropan trademark, and Aventis receives
royalty payments from ALZA as a result, based upon sales of
Ditropan XL.
In November 1998, ALZA acquired the exclusive marketing and
distribution rights in the United States to Urispas from SB. Under
the terms of the agreement, ALZA paid a $25.0 million upfront fee
to SB, which was capitalized. ALZA incurred an additional milestone
payment of $5.0 million in 1999 for the filing of a sNDA by SB,
which was capitalized, and may be required to make additional
milestone payments. SB manufactures the product for ALZA.
Development and Option Agreements
In September 1997, ALZA entered into a clinical development
and option agreement with Alkermes relating to Cereport, 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, and
ALZA has the option to acquire exclusive worldwide
commercialization rights to the product.
Page 48 of paper format annual report
ALZA entered into two agreements with Janssen, effective
December 31, 1997, modifying the previous arrangements between the
parties relating to two E-TRANS fentanyl products. Under a
development and commercialization agreement, ALZA and Janssen
modified the agreement pursuant to which the companies were jointly
developing E-TRANS fentanyl 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 yet
approved by the FDA and has no alternative future use, the payment
was charged to the acquisition of the in-process research and
development. Prior to these modifications, the agreement with
Janssen for E-TRANS fentanyl was a typical client arrangement for
ALZA under which Janssen paid all development costs, and ALZA would
receive a royalty based on sales of the product, if the product was
successfully developed. Janssen has notified ALZA of its intent to
terminate its participation in the E-TRANS fentanyl (acute pain)
program, effective in March 2000. Effective January 2000, the
product became a Crescendo product, and Crescendo began funding
product development. At present, ALZA Pharmaceuticals plans to
commercialize the product.
Under the other agreement with Janssen, ALZA Pharmaceuticals
has continued the development, with Crescendo, of an E-TRANS
fentanyl product for the treatment of chronic and breakthough pain.
Janssen has an option to take over funding the continued
development of the product and to commercialize the product
worldwide, once ALZA has expended a specified amount on the
development of the product. The product is currently in limited
development.
In April 1998, ALZA and Alkermes entered into an exclusive
license agreement for two of ALZA's oral drug delivery
technologies: RingCap and dose sipping technology. The arrangement
gives Alkermes worldwide rights to the two technologies and
Alkermes will be responsible for the continued research and
development of products incorporating them.
Alkermes will pay ALZA upfront payments and revenues from the
development and commercialization of products incorporating the
technologies.
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 yet 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 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. At
any time on or after May 1, 2000, the 5% Debentures are redeemable
at ALZA's option at a premium to their face value. In addition,
from May 1, 1999 to May 1, 2000, the 5% Debentures are redeemable
at ALZA's option if ALZA's common stock trades above a certain
level for a specified period. 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 $7.6 million and $8.8 million at
December 31, 1999 and 1998, respectively, and were included in
other assets. At December 31, 1999 and 1998, the fair value based
on quoted market value of the 5% Debentures was $519.0 million and
$723.6 million, respectively. As of December 31, 1999, 11.3
million shares were available for issuance for conversion of the 5%
Debentures.
In 1994, ALZA issued the 5 1/4% Debentures at a price of
$354.71 per $1,000 principal amount at maturity. At December 31,
1999, the outstanding 5 1/4% Debentures had a total principal
amount at maturity of $942.6 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, 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 also 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 $6.6 million
and $7.0 million at December 31, 1999 and 1998. At December 31,
1999 and 1998, the fair value based on quoted market value of the 5
1/4% Debentures was $472.5 million and $650.6 million,
respectively. As of December 31, 1999 12.2 million shares were
available for issuance for conversion of the 5 1/4% Debentures.
Other Long-term Liabilities
ALZA's other long-term liabilities as of December 31, are as
follows:
(In millions) 1999 1998
____________________________________________________________________
Long-term debt $ 39.8 $ 43.5
Deferred compensation 44.9 40.0
Other 1.9 0.5
____________________________________________________________________
Total other long-term liabilities $ 86.6 $ 84.0
At December 31, 1999 and 1998, long-term debt primarily
consists of notes representing the required future payments under
investments of $55.0 million and $52.5 million, respectively, in
low income housing partnerships (included in other assets). The
aggregate annual maturities of long-term debt at December 31,
Page 49 of paper format annual report
1999 were $7.5 million in 2000, $7.4 million in 2001, $7.1 million
in 2002, $6.5 million in 2003 and $11.3 million in later years.
ALZA has deferred compensation arrangements under which
selected employees may defer a portion of their salaries and
bonuses. 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. In addition, certain senior employees participate in
AlZA's EEPP, under which ALZA pays certain life insurance premiums
in exchange for a one-time waiver by the participants of certain
deferred compensation benefits. Under the policies ALZA is
entitled to receive, at a future date, an amount equal to all
premiums paid plus ALZA's cost of funds. The cash surrender value
of ALZA-owned policies related to the deferred compensation
arrangements and the premiums paid under policies for the EEPP
totaled $148.4 million and $93.0 million at December 31, 1999 and
1998, respectively.
NOTE 6: CAPITAL STOCK AND WARRANTS
In connection with the formation of TDC in September 1997,
ALZA issued warrants to purchase approximately 1.0 million shares
of common stock at an exercise price of $65 per share. The
warrants were not exercised and expired on December 31, 1999.
ALZA is authorized to issue 100,000 shares of preferred stock,
$0.01 par value, none of which was outstanding at December 31, 1999
or 1998. The Board of Directors may determine the rights,
preferences and privileges of any preferred stock issued in the
future.
On December 20, 1999, ALZA's Board of Directors adopted a
Stockholder's Rights Plan under which preferred stock purchase
rights (the "rights") were distributed to stockholder's of record
on January 5, 2000 at the rate of one right for each share of
common stock held. The rights become exercisable only upon the
occurrence of certain events related to changes in ownership of
ALZA's common stock. Once exercisable, each right entitles the
holder to purchase, at a price of $200, one one-ten thousandth of a
share of Series RP Preferred Stock. ALZA has initially reserved
30,000 shares of preferred stock pursuant to the exercise of the
rights. The rights expire on December 17, 2009.
NOTE 7: ARRANGEMENTS WITH CRESCENDO PHARMACEUTICALS CORPORATION AND
THERAPEUTIC DISCOVERY CORPORATION (RELATED PARTIES)
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.
Product development revenues from Crescendo for 1999, 1998 and 1997
were $90.5 million, $95.0 million and $29.7 million; respectively.
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 (the "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 $6.7 million, $10.7 million and $4.0 million for
1999, 1998 and 1997, respectively. Three of the seven initial
products were in development or had been licensed at December 31,
1999.
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
and/or have been licensed at the end of each month, the fee is not
earned until the end of each month in which this condition 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 or under license. 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
Page 50 of paper format annual report
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. In December 1998, ALZA
exercised its option to obtain a worldwide license to OROS
oxybutynin (marketed in the United States as Ditropan XL). In
consideration of the grant of the license, ALZA paid Crescendo 2.5%
of net sales of the product in 1999 and will pay 3% for 2000 and
2001. Thereafter, until 15 years after the date of the first
commercial sale of the product, the percentage owed to Crescendo
will be based upon development costs paid by Crescendo; based upon
current information this rate is expected to be between 5.5% and
6.5%.
Under the terms of the services agreement, ALZA performed
certain administrative services for Crescendo for which ALZA was
reimbursed its direct costs plus certain overhead expenses. ALZA
recorded service revenue of $0.2 million in 1999 and 1998; service
revenue in 1997 was insignificant.
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 greatest 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 Crescendo's 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.
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
acquisition 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.
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 under this
development contract were $67.8 million. ALZA performed certain
administrative services for TDC under an administrative services
agreement for which ALZA was reimbursed its direct costs, plus
certain overhead expenses. In 1997, administrative service revenue
under this agreement was $0.4 million and was included in
royalties, fees and other revenues.
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 pool, if any, is determined by ALZA's
Board of Directors, at its discretion, based on ALZA's performance
during the year. Bonus expenses under this program for 1999, 1998
and 1997 were $11.7 million, $10.9 million and $9.5 million,
respectively.
Defined Contribution Plan
ALZA has a company-funded, defined contribution retirement
plan for substantially all 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 1999, 1998 and 1997, the total
expense for such contributions to this plan was $5.2 million, $3.6
million and $3.6 million, respectively. A supplemental plan for
executives provides for contributions in excess of those made to
the above plan. ALZA recognized expense of $0.3 million related to
this plan in both 1999 and 1998, the first two years in which
contributions were accrued.
Page 51 of paper format annual report
Employee Savings Plan
ALZA has an employee savings plan that permits participants to
make contributions by salary reductions pursuant to section 401(k)
of the Internal Revenue Code. ALZA makes small contributions and
matches contributions up to a specified amount per participant. In
1999, 1998 and 1997, ALZA's contributions to the plan were $3.1
million, $1.8 million and $1.1 million, respectively.
SEQUUS had a 401(k) Plan under which it made employer
contributions, in the form of common stock, at the discretion of
the Board of Directors. SEQUUS reserved 55,200 shares (ALZA
equivalent shares) for issuance under the plan. In 1998 and 1997,
SEQUUS' contributions of common stock to the plan were valued at
approximately $0.3 million.
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. SEQUUS' stock plans
included the SEQUUS 1987 Employee Stock Option Plan, the SEQUUS
1987 Consultant Stock Option Plan, the SEQUUS 1990 Director Stock
Option Plan and the SEQUUS Equity Incentive Plan. Most of the
outstanding options under the SEQUUS plans accelerated so as to
become exercisable immediately prior to the closing date of the
acquisition of SEQUUS. Upon closing of the merger in March 1999,
ALZA assumed all remaining options under these plans, which were
converted into outstanding options to purchase ALZA common stock.
A total of 12.4 million shares of ALZA's common stock have been
reserved for issuance under its stock plan. At December 31, 1999
and 1998, shares available for grant under ALZA's stock plan were
2.0 million and 0.4 million, respectively. To date, all options
granted have had exercise prices equal to the fair market value of
common stock on the date of grant.
In 1999 and 1998, a total of 60,772 and 260,773 shares of
restricted stock were issued, respectively, to a limited number of
employees at a price of $0.01 per share, the par value of the
common stock. Restrictions on the 1999 and 1998 issuances of
restricted shares lapse in 2003 and 2002, respectively, or upon
change of control of ALZA. In 1997, 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. Restrictions on these shares
lapse with respect to 25% of the shares in 1999, 50% of the shares
in 2000, and 25% of the shares in 2001. All shares for which
restrictions have not yet lapsed are subject to forfeiture in the
event of termination of the holder's employment with ALZA. ALZA
records expense for all restricted stock grants for the difference
between the market price on the date of grant and the par value on
a straight line basis over the vesting period. Compensation
expense recorded for the restricted stock option grants for
December 31, 1999, 1998 and 1997 was $3.3 million, $1.1 million and
$0.1 million.
A summary of ALZA's stock option activity, and related
information for 1999, 1998 and 1997 follows, which includes SEQUUS
options for all periods presented:
1999 1998 1997
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 8.7 $26 7.7 $ 25 7.1 $ 24
Granted 3.8 34 2.7 41 2.1 26
Exercised (1.5) 20 (1.5) 23 (0.7) 20
Forfeited (0.6) 33 (0.2) 33 (0.8) 27
______ ______ ______
Outstanding-
end of year 10.4 32 8.7 30 7.7 25
Exercisable-
end of year 4.5 26 4.0 24 3.6 23
Weighted-average
fair value of
options granted $10.99 $13.98 $10.17
The following is a summary of ALZA and SEQUUS (on an
equivalent basis) combined options outstanding and options
exercisable:
OPTIONS OUTSTANDING
Number Weighted-Average
Range of Outstanding Remaining Weighted-Average
Average Exercise at 12/31/99 Contractual life Exercise
Prices (in millions) (in years) Price
_______________________________________________________________________
$18.68-23.00 2.1 4.8 $ 20
23.13-29.06 2.3 6.4 27
29.72-35.75 2.3 9.1 31
35.94-46.63 2.1 9.0 37
46.69-54.38 1.6 8.3 47
_______________________________________________________________________
10.4 7.5 32
OPTIONS EXERCISABLE
Number
Range of Exercisable Weighted-Average
Exercise at 12/31/99 Exercise
Prices (in millions) Price
_______________________________________________________________________
$18.68-23.00 2.0 $20
23.13-29.06 1.6 26
29.72-35.75 0.3 32
35.94-46.63 0.2 40
46.69-54.38 0.4 47
_______________________________________________________________________
4.5 26
Financial Accounting Standards Board SFAS No. 123, "Accounting
for Stock-Based Compensation" ("SFAS 123") 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"). ALZA has
elected to continue to follow APB 25 in accounting for its employee
stock options and employee stock purchase plan (discussed below).
Had compensation expense for ALZA's and SEQUUS' stock options
and shares issued under the stock purchase plans been determined
using the fair value method in accordance with
Page 52 of paper format annual report
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) 1999 1998 1997
________________________________________________________________________
Net income (loss)
As reported $ 91.0 $ 108.3 $(275.2)
Pro forma 67.0 88.4 (287.1)
Earnings (loss) per share (basic)
As reported $ 0.90 $ 1.09 $ (2.83)
Pro forma 0.66 0.89 (2.95)
Earnings (loss) per share (diluted)
As reported $ 0.88 $ 1.07 $ (2.83)
Pro forma 0.65 0.87 (2.95)
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:
1999 1998 1997
_______________________________________________________________________
Risk-free interest rate 5.0% to 6.3% 5.5% to 6.2% 6.2% to 6.4%
Expected dividend yield 0% 0% 0%
Expected volatility (1) 31% 30% 30%
Expected life (in years) 2.32-4.36 2.25-3.8 2.25-4.0
(1) SEQUUS' volatility rates for 1998 and 1997 were 83% and 79%
respectively.
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 plans.
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 1999, 1998
and 1997 total shares of ALZA common stock purchased by the
participants under the terms of the plan were 0.3 million, 0.2
million and 0.3 million, respectively. Since adoption of the plan
in 1984, 2.1 million shares have been issued under the plan and 0.9
million 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 1999, 1998 and 1997: risk free interest rates of
5.4%, 5.3% and 5.4%, respectively; dividend yields of zero; an
expected volatility factor of the market price of ALZA's common
stock of 31%; and an expected life of six months. The weighted-
average fair value for rights issued under the employee stock
purchase plan for 1999, 1998 and 1997 was $10.76, $8.26 and $6.52,
respectively.
SEQUUS had a stock purchase plan for its employees, which,
upon closing of the merger was assumed by ALZA. Under this plan,
SEQUUS employees could purchase stock at 85% of the fair market
value at certain specified dates. Employees enrolled in the plan
were allowed to purchase equivalent shares of ALZA stock through
July 1999, when the plan terminated. In 1998 and 1997 total shares
(ALZA equivalent) of SEQUUS common stock purchased by the
participants under the terms of this plan were not significant.
NOTE 9: INCOME TAXES
The provision for income taxes is as follows:
(In millions) 1999 1998 1997
________________________________________________________________________
Federal
Current $ 29.1 $49.8 $46.9
Deferred 1.8 (0.7) (20.2)
________________________________________________________________________
30.9 49.1 26.7
State
Current 11.1 11.1 16.5
Deferred (0.3) (2.3) (2.9)
_________________________________________________________________________
10.8 8.8 13.6
________________________________________________________________________
Provision for income taxes $ 41.7 $ 57.9 $ 40.3
Tax benefits associated with employee stock option transactions
reduced current income taxes by $10.7 million, $9.7 million and $2.3
million for 1999, 1998 and 1997, 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) 1999 1998 1997
________________________________________________________________________
Expected federal tax at 35% $ 46.5 $ 58.3 $(81.2)
State income taxes, net of
federal benefit 7.0 5.7 8.8
Investment and research
tax credits (8.8) (7.5) (5.2)
Non-deductible merger costs
and purchased research costs 4.6 - 113.4
Realization of previously
reserved deferred tax assets (8.8) - -
Other 1.2 1.4 4.5
________________________________________________________________________
Provision for income taxes $ 41.7 $ 57.9 $40.3
Page 53 of paper format annual report
Temporary differences which give rise to a significant portion of
deferred tax assets and liabilities at December 31, 1999 and 1998 are
as follows:
(In millions) 1999 1998
________________________________________________________________________
Deferred tax assets:
Capitalized intangibles $ 47.4 $ 54.7
Net operating loss and credit
carry forwards 41.5 51.8
Compensation 22.6 19.2
Unrealized losses on
available-for-sale securities 2.0 7.3
Inventories 4.4 7.2
Investments 3.9 4.2
Allowance for uncollectible accounts 8.8 4.0
State income taxes 4.0 1.0
Other 8.1 5.9
________________________________________________________________________
Total deferred tax assets 142.7 155.3
Less valuation allowance (21.2) (30.0)
________________________________________________________________________
121.5 125.3
Deferred tax liabilities:
Property, plant and equipment 38.6 43.6
Other 8.7 6.0
Total deferred tax liabilities 47.3 49.6
________________________________________________________________________
Net deferred tax assets $ 74.2 $ 75.7
The net operating losses and credit carryfowards expire
beginning in 2008.
The valuation allowance at December 31, 1999 relates to net
operating losses and tax credit carryforwards which have delayed
availability due to tax "change of ownership" limitations. Of the
valuation allowance, $5.5 million is attributable to stock option
deductions, the benefit of which will be allocated to contributed
capital when realized.
NOTE 10: COMMITMENTS AND CONTINGENCIES
Commitments
ALZA leases certain buildings and equipment under operating
leases, the terms of which range from one to 31 years. Rent
expense under these leases for 1999, 1998 and 1997 was $11.9
million, $5.3 million and $6.5 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, which is being accounted under the
equity method. ALZA invested $36.2 million in the joint venture,
which was applied to the construction of buildings on the parcel
and recorded as other assets. ALZA is also obligated to make
improvements to the buildings, which are being recorded and
depreciated on ALZA's financial statements; approximately $117.8
million had been spent as of December 31, 1999 and ALZA expects to
incur an additional $13.0 million in 2000. The improvements were
substantially completed as of December 31, 1999. The joint venture
began leasing the buildings to ALZA in the second half of 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
receives 50% of the joint venture's net income. For 1999, ALZA
recorded $2.1 million of income related to the joint venture, which
was offset against rental expense.
During 1999, ALZA sold five buildings located in Palo Alto,
California, resulting in a total pretax gain of $12.4 million.
ALZA leased these buildings through December 1999, when it
completed occupancy of its new buildings in Mountain View,
California. ALZA is also leasing out certain other Palo Alto,
Menlo Park and Mountain View, California properties, it owns or
leases, which will generate rental income in 2000 and beyond.
Also in late 1997, ALZA had also entered into a ground lease
agreement for a seven-acre parcel of land in Mountain View,
California on which it may construct a pilot plant, laboratories or
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. Ground lease payments
are approximately $140,000 per month. Under the ground lease 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.
Aggregate minimum lease commitments under all non-cancelable
operating lease arrangements as of December 31, 1999 were (in
millions):
2000 $ 12.1
2001 11.8
2002 12.0
2003 11.1
2004 10.8
Later years 141.1
______
Total $198.9
Aggregate minimum lease payments have not been reduced by
aggregate minimum sublease rentals of $84.5 million which, at
December 31, 1999 were $10.8 million in 2000, $11.5 million in 2001,
$12.1 million in 2002, $11.6 million in 2003, $11.5 million in 2004
and $27.0 million in later years.
Page 54 of paper format annual report
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, 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 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. ACQUISITION OF LIMITED PARTNERS' INTERESTS IN ALZA TTS
RESEARCH PARTNERS, LTD.
On June 29, 1998, ADC, a wholly-owned subsidiary of ALZA, elected
to exercise its option to acquire all of the outstanding limited
partnership interests in the TTS Partnership, which was formed in 1982
to develop and commercialize products combining ALZA's proprietary
transdermal drug delivery technology with certain generic compounds.
The exercise price of $91.2 million was paid in cash to the limited
partners on August 14, 1998. ALZA had been paying the TTS Partnership
four percent of net sales of Duragesic and Testoderm, two products
developed by ALZA on behalf of the TTS Partnership. As a result of
the exercise of the purchase option, ALZA has all rights to these
products, and therefore retains all royalties paid by Janssen on sales
of Duragesic, the full transfer price and royalties from sales of
Testoderm outside the United States, and the full sales margin on
Testoderm in the United States. The purchase price was recorded as
deferred product and license acquisition cost and is being amortized
over a period of 10 years beginning July 1, 1998.
Additionally, as of September 1998 ALZA and Janssen entered
into an agreement under which Janssen is making a series of
quarterly payments to ALZA over two years to help defray ALZA's
substantial purchase price paid for the limited partnership
interests in the TTS Partnership. In exchange, the royalty rate
payable by Janssen to ALZA with respect to Duragesic have been
reduced by a portion of the rate that ALZA had previously paid to
the TTS Partnership. The quarterly payments are being recognized
as revenue when received.
NOTE 12. ACQUISITION OF SEQUUS PHARMACEUTICALS, INC
On March 16, 1999, ALZA completed a merger with SEQUUS by
acquiring all of SEQUUS' outstanding stock in a tax-free, stock-for-
stock transaction. SEQUUS stockholders received 0.4 shares of ALZA
common stock for each share of SEQUUS common stock. ALZA issued
13.2 million shares in the merger. ALZA accounted for the
transaction as a pooling of interests. Accordingly, ALZA's
consolidated financial statements have been retroactively restated
for prior periods to include the combined financial results of ALZA
and SEQUUS.
The following table summarizes the separate and combined results
of operations of ALZA and SEQUUS:
Year ended December 31, 1998
(In millions, except per share amounts) POOLING
ALZA SEQUUS ADJUSTMENT COMBINED
________________________________________________________________________
Revenues $ 584.5 $ 62.4 $ - $ 646.9
Net income (loss) 112.3 (6.7) 2.7(1) 108.3
Earnings (loss) per share
Basic 1.30 (0.21) 1.09
Diluted 1.26 (0.21) 1.07
Year ended December 31, 1997
(In millions, except per share amounts)
POOLING
ALZA SEQUUS ADJUSTMENT COMBINED(2)
________________________________________________________________________
Revenues $ 464.4 $40.0 $ - $ 504.4
Net loss (261.1) (23.6) $ 9.4(1) (275.2)
Loss per share
Basic (3.07) (0.78) (2.83)
Diluted (3.07) (0.78) (2.83)
(1)Represents a 40% tax benefit derived from SEQUUS' net loss.
(2)Net loss for the year ended December 31, 1997 reflects a total of
$368.7 million (or pro forma $3.77 per share, diluted) of
charges, net of a tax benefit of $8.1 million, including a $247.0
million 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 workforce
reductions. Pro forma combined net income excluding these items
would have been $93.5 million (or pro forma $0.94 per share,
diluted).
As a result of the SEQUUS acquisition, ALZA incurred merger-
related costs that consisted of merger transaction costs, exit
costs and employee severance costs. Merger transaction costs
consisted primarily of fees for investment bankers, attorneys and
accountants, filing fees, financial printing costs and other
related charges. Exit costs include costs such as cancellation of
lease agreements and the write-down of SEQUUS assets that will not
be used in continuing operations. Employee severance costs relate
to termination of about 100 employees working in primarily in
research and
Page 55 of paper format annual report
development and general administration departments. The following
table shows the details of the accrual for merger-related costs for
the year ended December 31, 1999:
Merger- Balance at
related Utilized December 31,
(In millions) costs /Adjusted 1999
___________________________________________________________________
Merger transaction costs $ 13.2 $ 13.1 $ 0.1
Exit costs 14.3 13.0 1.3
Employee severance 5.1 5.1 -
___________________________________________________________________
Total $ 32.6 $ 31.2 $ 1.4
NOTE 13: TERMINATED MERGER AGREEMENT WITH ABBOTT LABORATORIES,
INC.
On June 21, 1999, ALZA entered into an Agreement and Plan of
Merger with Abbott. Under the terms of the merger agreement,
Abbott would have acquired all of ALZA's outstanding stock in a tax-
free, stock-for-stock transaction. On December 16, 1999, ALZA and
Abbott announced that the merger would not be completed due to the
inability of the companies to meet certain requirements of the FTC
for approval of the transaction. On January 20, 2000, ALZA and
Abbott announced the formal termination of the merger agreement.
No payments were made as a result of the termination.
As a result of the activities related to the terminated merger
agreement with Abbott, ALZA incurred $13.4 million in merger-
related costs. These costs included merger transaction costs, which
consisted primarily of fees for investment bankers, attorneys and
accountants, filing fees, financial printing costs, as well as
other merger-related costs. The following table shows the details
of the accrual for merger-related costs for the year ended December
31, 1999:
Merger- Balance at
related December 31,
(In millions) costs Utilized 1999
___________________________________________________________________
Transaction costs $ 9.8 $ 8.5 $ 1.3
Other merger-related costs 3.6 3.6 -
___________________________________________________________________
Total $ 13.4 $ 12.1 $ 1.3
NOTE 14: SEGMENT REPORTING
In June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 131, "Disclosures
about Segments of an Enterprise and Related Information" ("SFAS
131"). SFAS 131 establishes standards for annual and interim
disclosures of operating segments, products and services,
geographic areas and major customers using the "management
approach." This approach requires reporting information regarding
operating segments on the same basis used internally by management
to evaluate segment performance.
ALZA has two operating segments: ALZA Pharmaceuticals, which
includes sales of products directly to the pharmaceutical
marketplace, research and development for products marketed by, and
potential products to be marketed by, ALZA (including revenues and
expenses relating to products under development with Crescendo) and
certain co-promotion revenues for products co-promoted by ALZA; and
ALZA Technologies, which includes research, development and
manufacturing for client companies and ALZA Pharmaceuticals, and
royalties and fees resulting from sales by ALZA's client companies
of products developed under joint development and commercialization
agreements. The "Other" category primarily comprises corporate
general and administrative expenses, including finance, legal,
human resources, commercial development, executive and other
functions not directly attributable (or allocated) to the
activities of the operating segments, as well as rental and service
fee revenues.
SEQUUS' net sales, costs of products shipped, research and
development expenses for products marketed by, and potential
products to be marketed by, ALZA Pharmaceuticals, and sales and
marketing expenses are included in the ALZA Pharmaceuticals
segment; SEQUUS' royalty and fee revenues and research and
development revenues and related expenses (largely for activities
undertaken on behalf of ALZA Pharmaceuticals) are included in the
ALZA Technologies segment; and SEQUUS' general and administrative
expenses are included in the Other segment.
ALZA evaluates performance and allocates resources based on
operating income or loss from operations (before allocation of
certain general and administrative expenses, net interest expense,
investment gains and losses and income taxes). ALZA does not
assess segment performance or allocate resources based on a
segment's total assets and therefore, ALZA's assets are not
reported by segment. ALZA allocates certain long-lived assets to
operating segments for purposes of allocating depreciation and
amortization expense. The accounting policies of the reportable
segments are the same as those described in the summary of
significant accounting policies. ALZA accounts for intersegment
sales based upon negotiated prices, which approximate the prices
charged to third parties.
ALZA's reportable segments are strategic units that distribute
products to different types of customers and provide different
types of services. They are managed differently because ALZA
Pharmaceuticals' sales and marketing efforts are extensive and
disparate from the revenue generation process resulting from
arrangements with client companies in ALZA Technologies.
Additionally, ALZA Pharmaceuticals develops products for
commercialization by ALZA, while ALZA Technologies develops
products for commercialization by other companies and ALZA
Pharmaceuticals.
Certain prior year amounts have been reclassified to conform
to the current segment presentation. For the current segment
presentation certain clinical expenses, previously recorded in the
ALZA Technologies segment as research and development expenses,
were moved to the ALZA Pharmaceuticals segment as they related to
products developed and marketed by ALZA Pharmaceuticals.
Page 56 of paper format annual report
The following tables contain information about segment
operating income (loss) for the years ended December 31, 1999, 1998
and 1997:
Year ended December 31, 1999
ALZA ALZA
(In millions) Pharmaceuticals Technologies Other Total
________________________________________________________________________
Revenues from
external customers
Net sales $323.4 $124.6 $ - $448.0
Royalties, fees and other 14.0 211.4 1.7 227.1
Research and development 90.5 30.3 - 120.8
________________________________________________________________________
Total 427.9 366.3 1.7 795.9
Intersegment revenues
Net sales - 18.6 - 18.6
Research & development - 90.9 - 90.9
_________________________________________________________________________
Total - 109.5 - 109.5
Depreciation and amortization
expense (2) 16.0 28.3 12.3 56.6
Segment operating income (loss) 24.7 203.3 (78.8)(1)149.2
Year ended December 31, 1998
ALZA ALZA
(In millions) Pharmaceuticals Technologies Other Total
________________________________________________________________________
Revenues from
external customers
Net sales $175.8 $113.6 $ - $289.4
Royalties, fees and other 25.3 205.4 2.4233.1
Research and development 93.0 31.4 -124.4
________________________________________________________________________
Total 294.1 350.4 2.4 646.9
Intersegment revenues
Net sales - 6.6 - 6.6
Research & development - 93.1 -
93.1
________________________________________________________________________
Total - 99.7 - 99.7
Depreciation and amortization
expense (2) 12.0 23.0 10.2 45.2
Segment operating income(loss) 25.6 199.4 (28.5) 196.5
Year ended December 31, 1997
ALZA ALZA
(In millions) Pharmaceuticals Technologies Other Total
________________________________________________________________________
Revenues from
external customers
Net sales $ 87.9 $ 93.2 $ - $181.1
Royalties, fees and other 11.9 175.6 0.8 188.3
Research and development 91.5 43.5 - 135.0
________________________________________________________________________
Total 191.3 312.3 0.8 504.4
Intersegment revenues
Net sales - 6.0 - 6.0
Research and development - 91.6 - 91.6
_________________________________________________________________________
Total - 97.6 - 97.6
Depreciation and amortization
expense (2) 4.7 16.9 10.3 31.9
Segment operating income
(loss) (352.8)(3) 153.7(4) (29.7) (228.8)
(1)In 1999, the operating loss for Other includes merger-related
expenses of $32.3 million relating to the acquisition of SEQUUS
and $13.4 million resulting from the terminated merger
agreement with Abbott. Excluding these charges operating loss
for Other would have been $33.1 million in 1999.
(2)Includes depreciation expense for property, plant and equipment and
amortization expense for deferred product acquisition costs and
capitalized software.
(3)Includes charges totaling $334.0 million: acquisition of in-
process research and development charges of $77.0 million
relating to the purchase of TDC and $10.0 million for a payment
to Alkermes under an agreement relating to the Cereport product
under development by Alkermes and a $247.0 million contribution
to Crescendo.
(4)Includes charges totaling $34.4 million: $21.5 million related
to a development and commercialization agreement between ALZA
and Janssen for E-TRANS fentanyl, a $11.5 million charge
relating to the write-down of excess or under-utilized
manufacturing equipment and obsolete and idle assets and a $1.4
million charge relating to a work force reduction.
The following table contains a reconciliation of ALZA's total
income before taxes to that reported by segment in the tables
above:
(In millions) 1999 1998 1997
_________________________________________________________________________
Income (loss) before taxes
Total operating income (loss) for
reportable segments $ 149.2 $ 196.5 $ (228.8)
Unallocated amounts:
Interest income 41.6 26.4 57.1
Interest expense (58.1) (56.7) (63.2)
_________________________________________________________________________
Income (loss) before income taxes $ 132.7 $166.2 $ (234.9)
Page 57 of paper format annual report
Company-wide Information:
Geographic Revenues
(In millions) 1999 1998 1997
_________________________________________________________________________
United States $686.5 $538.7 $415.5
Canada 11.8 7.9 6.1
Europe 89.8 94.9 79.3
Other foreign countries 7.8 5.4 3.5
_________________________________________________________________________
Consolidated total $795.9 $646.9 $504.4
Long-lived assets outside the United States were not
significant. Export sales, principally net sales to distributors
and client companies in Europe, were $42.9 million, $42.6 million
and $25.8 million in 1999, 1998 and 1997, respectively.
The following table shows the revenues from ALZA's major
customers as a percentage of total consolidated revenues for the
years ended December 31, 1999, 1998 and 1997.
Percentage of ALZA's Consolidated Revenues
1999 1998 1997
_________________________________________________________________________
Janssen 17% 18% 14%
Crescendo 12 16 *
Pfizer 10 12 16
TDC - - 14
* Less than 10%
The following table shows ALZA's net sales by major products
for the years ended December 31, 1999, 1998 and 1997.
NET SALES
(In millions) 1999 1998 1997
_________________________________________________________________________
ALZA PHARMACEUTICALS
Ditropan XL-registered
trademark- $ 86.9 $ - $ -
Doxil-registered trademark-
/Caelyx-registered trademark- 66.2 48.4 29.5
Ethyol-registered trademark- 48.3 32.6 20.6
Elmiron-registered trademark- 29.9 23.0 4.8
Mycelex-registered trademark-
Troche 29.2 25.9 10.8
Testoderm-registered trademark-
TTS line 20.8 10.0 6.3
Other 42.1 35.9 15.9
_________________________________________________________________________
Total ALZA Pharmaceuticals 323.4 175.8 87.9
ALZA TECHNOLOGIES
Contract manufacturing 124.6 113.6 93.2
Intersegment 18.6 6.6 6.0
_________________________________________________________________________
Total ALZA Technologies 143.2 120.2 99.2
Intersegment eliminations (18.6) (6.6) (6.0)
_________________________________________________________________________
Total net sales $ 448.0 $ 289.4 $ 181.1
NOTE 15: QUARTERLY FINANCIAL DATA (UNAUDITED)
(In millions, except per share amounts)
1999 1998
_________________________________________________________________________
First(1) Second Third Fourth(2) First Second Third Fourth
_________________________________________________________________________
Total revenues $185.5 $195.2 $222.1 $193.1 $143.5 $158.3 $172.8 $172.3
Gross profit on
net sales 61.9 62.9 91.7 73.1 35.4 37.2 42.1 48.9
Operating income 19.3 46.7 69.7 13.5 47.6 53.1 50.5 45.3
Net income 3.7 34.2 42.8 10.3 26.5 29.4 27.7 24.7
Earnings per share
Basic $0.04 $0.34 $0.42 $0.10 $0.27 $0.30 $0.28 $0.25
Diluted 0.04 0.33 0.40 0.10 0.27 0.29 0.27 0.24
(1) In the first quarter of 1999, ALZA recorded charges related to
the SEQUUS merger of $32.6 million ($24.8 million after tax, or
0.24 per diluted share).
(2) In the fourth quarter of 1999, ALZA recorded charges of $13.4
million ($8.0 million after tax, or $0.07 per diluted share)
relating to the terminated merger agreement. Also in the fourth
quarter of 1999, ALZA recorded charges of $9.6 million relating
to a change in sales return policy and an increase in the reserve
for sales rebates and $5.3 million primarily relating to a write-
off of uncollectible accounts receivable.
Page 58 of paper format annual report
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
THE BOARD OF DIRECTORS AND STOCKHOLDERS OF
ALZA CORPORATION
We have audited the accompanying consolidated balance sheets of ALZA
Corporation as of December 31, 1999 and 1998, and the related
consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended December 31,
1999. 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 auditing standards
generally accepted in the United States. 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, 1999 and 1998, and the
consolidated results of its operations and its cash flows for each of
the three years in the period ended December 31, 1999, in conformity
with accounting principles generally accepted in the United States.
/s/Ernst & Young LLP
Palo Alto, California
March 6, 2000
Page 59 of paper format annual report
SELECTED CONSOLIDATED FINANCIAL DATA
(In millions, except per share amounts)
1999 1998 1997 1996 1995
____________________________________________________________________
Total revenues $ 795.9 $ 646.9 $ 504.4 $ 446.1 $ 326.6
Net income (loss) 91.0(1) 108.3 (275.2)(2) 82.1 52.2
Earnings (loss)
per share:
Basic 0.90 1.09 (2.83) 0.86 0.57
Diluted 0.88 1.07 (2.83) 0.84 0.56
Cash and investments 589.1 514.1 561.1 1,032.8 469.4
Total assets 1,852.5 1,666.6 1,450.7 1,698.6 1,018.0
Total long-term
liabilities 1,025.8 1,006.6 968.0 949.8 414.7
Total stockholders'
equity 691.8 531.9 366.3 670.9 527.2
____________________________________________________________________
(1) Reflects a total of $60.6 million ($41.7 million after tax, or
$0.40 per share, diluted) of charges, including $32.3 million
relating to the acquisition of SEQUUS Pharmaceuticals, Inc., $13.4
million resulting from the terminated merger agreement with Abbott
Laboratories, Inc., $9.6 million relating to a change in sales
return policy and an increase in the reserve for sales rebates and
$5.3 million primarily relating to a write-off of uncollectible
accounts receivable.
(2) Reflects a total of $368.7 million (or $3.77 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 Pharmaceuticals Corporation, $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.
ALZA Common Stock (unaudited)
ALZA common stock (symbol AZA) is listed for trading on the
New York Stock Exchange and, as of March 17, 2000 there were
approximately 6,974 holders of record of the common stock. 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 1999 and 1998, as reported on the
composite tape, are shown below:
ALZA COMMON STOCK
1999 1998
High Low High Low
_____________________________________________________________
First quarter $55 3/4 $37 13/16 $45 9/16 $30 7/8
Second quarter 51 1/16 31 52 7/8 40 1/2
Third quarter 53 9/16 41 11/16 45 1/2 33 3/4
Fourth quarter 49 5/8 29 5/8 54 38 9/16
Exhibit 21
SUBSIDIARIES
ALZA Development Corporation (incorporated in California)
ALZA International, Inc. (incorporated in Delaware), doing business
in the United Kingdom, and doing business in Canada as ALZA Canada
ALZA Limited (incorporated in the United Kingdom)
Therapeutic Discovery Corporation (incorporated in Delaware)
ALZA Land Management, Inc. (incorporated in Delaware)
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, No. 333-49483, No. 333-70799,
No. 333-74791 and No. 333-82589) and in the related Prospectuses,
of our report dated March 6, 2000, with respect to the consolidated
financial statements of ALZA Corporation included in this Annual Report
(Form 10-K) for the year ended December 31, 1999. Our audits also
included the consolidated financial statement schedule of ALZA Corporation
listed in Item 14(a). This schedule is the responsibility of
ALZA's management. Our responsibility is to express an opinion
based on our audits. In our opinion, the consolidated financial
statement schedule referred to above, when considered in relation
to the basic financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.
/s/Ernst & Young LLP
Palo Alto, California
March 28, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted
from the financial statements included in Part II, Item 8 of Form
10-K dated December 31, 1999 and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 149
<SECURITIES> 68
<RECEIVABLES> 144
<ALLOWANCES> 18
<INVENTORY> 69
<CURRENT-ASSETS> 433
<PP&E> 564
<DEPRECIATION> 146
<TOTAL-ASSETS> 1,853
<CURRENT-LIABILITIES> 135
<BONDS> 939
0
0
<COMMON> 1
<OTHER-SE> 691
<TOTAL-LIABILITY-AND-EQUITY> 1,853
<SALES> 448
<TOTAL-REVENUES> 796
<CGS> 158
<TOTAL-COSTS> 342
<OTHER-EXPENSES> 305
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 58
<INCOME-PRETAX> 133
<INCOME-TAX> 42
<INCOME-CONTINUING> 91
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 91
<EPS-BASIC> 0.90
<EPS-DILUTED> 0.88
</TABLE>
EXHIBIT 10.21
ALZA Corporation
Executive Estate Protection Plan
FORM OF COLLATERAL ASSIGNMENT
This Collateral Assignment (this "Assignment") is made and
entered into as of _________, 1999, by and between
_________________ (the "Owner"), as the owner of a life insurance
policy, No. _______ (the "Policy"), issued by ____________ (the
"Insurer"), on the life of ___________________________________
(the "Participant"), and the ALZA Corporation, a Delaware
corporation (the "Corporation").
RECITALS
A. The Corporation desires to help the Owner provide life
insurance for the benefit and protection of the Participant's
family or beneficiary by providing funds from time to time to pay
the premiums due on the Policy as more specifically provided in
the ALZA Corporation Executive Estate Protection Plan Agreement
entered into between the Participant, the Owner and the
Corporation as of the date hereof (the "Agreement");
B. In consideration of the Corporation agreeing to provide such
funds in accordance with the terms and conditions of the
Agreement, the Owner agrees to grant to the Corporation, as a
security interest in the Policy, a collateral security interest
for the payment of the Corporation's Collateral Interest (as
defined below); and
C. The Corporation has established a trust ("Trust") dated
________________, 1998, by and between the Corporation and
______________________________ ("Trustee") to provide a source of
funds to cover its obligations under the Agreement.
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing, and the mutual
agreements and covenants set forth below, the parties to this
Assignment agree as follows:
1. Assignment. The Owner hereby assigns, transfers and sets
over to the Corporation, and its permitted successors, those
certain rights and interests described in the Agreement that
are to be assigned to the Corporation in accordance with the
Agreement. Furthermore, this Assignment is made, and the
Policy is to be held as collateral security for, any and all
liabilities of the Owner to the Corporation, either now
existing, or that may hereafter arise, pursuant to the terms
of the Agreement.
2. Signatures. To facilitate the operation of this Assignment,
the parties agree that the Insurer is hereby notified that
the following signatures are sufficient, without the
signature or consent of the other party, to exercise the
following rights under the Policy while the Assignment is in
effect:
(a) The Owner may sign a request to change the beneficiary
under the Policy without the signature or consent of the
Corporation; and
(b) The exercise of any other right under the Policy not
specifically set forth above shall be exercised with the
signature of both the Corporation and the Owner.
3. Policy Proceeds. Any amount payable from the Policy during
the Participant's life or at his or her death shall first be paid
to the Corporation to the extent of its Collateral Interest (as
defined in the Agreement). Any balance will be paid to the Owner
during the Participant's lifetime or to the Designated Beneficiary
(as defined in the Agreement) upon or after the Participant's
death. A settlement option may be elected by the recipient of the
proceeds. For purposes of this Section, the amount of the
Collateral Interest shall be determined for purposes of the
Insurer by an affidavit delivered to the Insurer and signed by the
Corporation.
4. Endorsement. The Trustee shall hold the Policy while this
Assignment is operative and, upon request, forward the Policy to
the Insurer, without unreasonable delay, for endorsement of any
designation or change of beneficiary, any election of optional
mode of settlement, or the exercise of any other right reserved by
the Owner in this Assignment.
5. Insurer. The Insurer is hereby authorized to recognize the
Corporation's claims to rights hereunder without investigating the
reason for any action taken by the Corporation, the validity or
amount of any of the liabilities of the Owner to the Corporation
under the Agreement, the existence of any default therein, the
giving of any notice required herein, or the application to be
made by the Corporation of any amounts to be paid to the
Corporation or the transfer of the Policy to the Corporation. The
Insurer shall not be responsible for the sufficiency or validity
of this Assignment and is not a party to the Agreement (or any
other similar split-dollar agreement) between the Corporation and
the Owner or the Participant.
6. Reassignment. Upon the full payment of the Corporation's
Collateral Interest in accordance with the terms and conditions of
this Assignment and the Agreement, the Corporation shall reassign
to the Owner, if the Owner retains the Policy in accordance with
the Agreement, the Policy and all specific rights included in this
Assignment.
7. Amendment of Assignment; Termination. This Assignment shall
not be modified, amended or terminated, except by a writing signed
by all the parties hereto.
8. Assignment . This Assignment may be collaterally assigned
with the Agreement by the Owner pursuant to the Owner's rights
under Section 5 of the Agreement.
9. Binding Agreement; Assigns. This Assignment shall be binding
upon the heirs, administrators, executors and permitted successors
and assigns of each party to this Assignment.
10. State Law. This Assignment shall be subject to and be
construed under the internal laws of the State of California,
without regard to its conflicts of law principles.
11. Validity. In case any provision of this Assignment shall be
illegal or invalid for any reason, said illegality or invalidity
shall not affect the remaining parts of this Assignment,
but this Assignment shall be construed and enforced as if
such illegal or invalid provision had never been inserted in
this Assignment.
IN WITNESS WHEREOF, the Owner and the Corporation have signed
this Assignment as of the date first written above.
"Corporation"
ALZA Corporation, a Delaware corporation
By:
Its:
"Owner"
Signature
Print Name
Filed with the Insurer:
Date:
Insurer
