PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Crescendo Pharmaceuticals Corporation
(a development stage company)
Condensed Statements of Operations (unaudited)
(in thousands, except per share amounts)
Period from
Three months Six months inception
ended ended (June 26, 1997)
June 30, June 30, to June 30,
2000 1999 2000 1999 2000
__________________________________________________________________________
Revenues:
Net interest and
investment income $ 909 $ 2,057 $ 2,039 $ 4,318 $ 27,473
Royalty revenue 1,377 430 2,394 920 4,779
__________________________________________________
Total revenues 2,286 2,487 4,433 5,238 32,252
Expenses:
Research & development
performed under
contract with ALZA
Corporation(a
related party) 21,830 31,866 42,186 54,140 278,123
General &
administrative 346 290 578 560 3,718
__________________________________________________________________________
Total expenses 22,176 32,156 42,764 54,700 281,841
__________________________________________________________________________
Loss before taxes (19,890) (29,669) (38,331) (49,462) (249,589)
Income taxes - - - - 1,421
__________________________________________________
Net loss $(19,890)$(29,669) $(38,331)$(49,462) $(251,010)
==========================================================================
Net loss per
common share
Basic and Diluted $(4.11) $(5.98) $(7.88) $(9.96) $(55.37)
==========================================================================
See accompanying notes.
Crescendo Pharmaceuticals Corporation
(a development stage company)
Condensed Balance Sheets (unaudited)
(in thousands, except number of shares and per share amounts)
June 30, December 31,
2000 1999
_________________________________________________________________
ASSETS
Current assets:
Cash and cash equivalents $ 42,181 $ 54,682
Short-term investments 66 6,989
Interest receivable 41 321
Taxes receivable 3,209 3,502
Accounts receivable (from
ALZA Corporation, a related party) 1,405 707
Other current assets 44 120
_________________________________________________________________
Total current assets 46,946 66,321
Employee loan 300 300
Long-term investments 14,346 31,448
_________________________________________________________________
Total assets $ 61,592 $ 98,069
=================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Payable to ALZA Corporation $ 15,294 $ 12,120
(a related party)
Accrued liabilities 23 97
_________________________________________________________________
Total current liabilities 15,317 12,217
Stockholders' equity:
Class A Common Stock, $0.01 par value,
6,000,000 shares authorized;
4,833,509 and 4,908,198 shares issued
and outstanding at June 30, 2000
and December 31, 1999, respectively 49 49
Class B Common Stock, $1.00 par value,
1,000 shares authorized, issued and
outstanding 1 1
Additional paid-in capital 297,566 298,951
Accumulated other comprehensive loss (331) (470)
Deficit accumulated during development
stage (251,010) (212,679)
_________________________________________________________________
Total stockholders' equity 46,275 85,852
_________________________________________________________________
Total liabilities and
stockholders' equity $ 61,592 $ 98,069
=================================================================
See accompanying notes.
Crescendo Pharmaceuticals Corporation
(a development stage company)
Condensed Statements of Cash Flows (unaudited)
Increases (Decreases) in Cash and Cash Equivalents
(in thousands)
Period from
inception
Six months ended (June 26, 1997)
June 30, to June 30,
2000 1999 2000
___________________________________________________________________________
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (38,331) $ (49,462) $(251,010)
Non-cash adjustments to reconcile
net loss to net cash used in
operating activities:
(Increase) decrease in assets:
Interest receivable 280 1,075 (41)
Taxes receivable 293 - (3,209)
Accounts receivable from ALZA
Corporation (a related party) (698) - (1,405)
Other current assets 76 (2,276) (44)
Increase (decrease) in liabilities:
Payable to ALZA Corporation 3,174 370 15,294
Accrued liabilities (74) (7) 23
___________________________________________________________________________
Total adjustments 3,051 (838) 10,618
Net cash used in
operating activities (35,280) (50,300) (240,392)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of available-for-sale
securities - (12,042) (228,660)
Sales of available-for-sale
securities 24,164 55,843 208,917
Maturities of available-for-
sale securities - 5,000 5,000
Employee loan, long-term - - (300)
___________________________________________________________________________
Net cash provided by (used in)
investing activities 24,164 48,801 (15,043)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock to
ALZA Corporation - - 300,000
Repurchase of common stock (1,385) (548) (2,384)
___________________________________________________________________________
Net cash provided by
financing activities (1,385) (548) 297,616
___________________________________________________________________________
Net increase (decrease) in cash and
cash equivalents (12,501) (2,047) 42,181
___________________________________________________________________________
Cash and cash equivalents
at beginning of period 54,682 54,326 -
___________________________________________________________________________
Cash and cash equivalents
at end of period $ 42,181 $ 52,279 $ 42,181
===========================================================================
See accompanying notes.
Crescendo Pharmaceuticals Corporation
(a development stage company)
Notes to Condensed Financial Statements (unaudited)
NOTE 1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
Crescendo Pharmaceuticals Corporation ("Crescendo") was
incorporated in Delaware on June 26, 1997 and commenced operations
on September 30, 1997. Crescendo was formed for the purpose of
selecting and developing human pharmaceutical products (the
"Crescendo Products") and commercializing such products, most
likely through licensing to ALZA Corporation ("ALZA"). Since its
formation, Crescendo's principal activity has been conducting
product development under its agreements with ALZA. In accordance
with generally accepted accounting principles, Crescendo is
considered a development stage company.
Crescendo incurred research and development expenses of
approximately $21.8 million and $42.2 million for the three months
and six months ended June 30, 2000, respectively. This compares
with $31.9 million and $54.1 million for the three months and six
months ended June 30, 1999, respectively. Research and development
expenses have totaled approximately $278.1 million for the period
from inception (June 26, 1997) through June 30, 2000. If Crescendo
continues to fund the development of Crescendo Products at the
current rate, funds available for product development will likely
be exhausted by the end of 2000 and product development funding by
Crescendo will cease at that time. When Available Funds (described
below) are nearly exhausted, certain critical timetables relating
to ALZA's purchase option with respect to all of Crescendo's Class
A Common Stock (the "Crescendo Shares") and ALZA's option to
license any or all Crescendo Products not yet licensed by ALZA will
be triggered, as described more fully in Note 4 below. The Board
of Directors of Crescendo has initiated activities to establish a
contingency plan for the continued operations of Crescendo in the
event that ALZA chooses not to exercise the purchase option, and
Crescendo has the right, under its agreements with ALZA, to take
necessary steps to cease development funding and maintain a cash
reserve of up to $2 million to ensure Crescendo's ability to meet
its operating cash needs through at least December 31, 2000.
The information at June 30, 2000, for the three months and six
months ended June 30, 2000 and 1999, and for the period from
inception (June 26, 1997) through June 30, 2000 is unaudited, and
includes all adjustments (consisting only of normal recurring
adjustments) that the management of Crescendo believes necessary
for fair presentation of the results for the periods presented.
Interim results are not necessarily indicative of the results for
the full year. The balance sheet for December 31, 1999 was derived
from the audited balance sheet. The financial statements should be
read in conjunction with the audited financial statements and
accompanying notes for the year ended December 31, 1999 included in
Crescendo's 1999 Annual Report on Form 10-K.
Accounting for Revenues and Expenses
At June 30, 2000, Crescendo's revenue consisted of interest and
investment income and product payments, referred to as royalty
revenue in Crescendo's financial statements. Since the first
quarter of 1999, Crescendo has accrued royalty revenue based on net
sales in the United States of one Crescendo Product, Ditropan XL-
Registered Trademark-, licensed by ALZA. Royalties in respect of
Ditropan XL are recognized in the period in which earned (the
period in which product sales are made by ALZA, from which
Crescendo receives product payments) based on information reported
to Crescendo by ALZA.
Crescendo has incurred and expects to incur most of its expenses
under its agreements with ALZA. Development Costs paid to ALZA
under a Development Agreement, and amounts paid to ALZA under a
Services Agreement, are recorded as research and development
expenses and general and administrative expenses, respectively, and
are recognized on an accrual basis as incurred. These expenses are
recorded in the period in which services have been provided by ALZA
to Crescendo or in which expenses have been incurred by ALZA on
behalf of Crescendo. The Technology Fee paid to ALZA under a
Technology License Agreement is recorded monthly, as incurred, as
research and development expense. See Note 4 for a description of
the agreements between Crescendo and ALZA.
Investment Risk
Crescendo invests excess cash in money market and fixed income
securities of banks and companies with strong credit ratings, from a
variety of industries, and in U.S. government obligations. These
securities typically bear minimal risk and Crescendo has not
experienced any losses on its investments due to institutional failure
or bankruptcy. Crescendo's investment policy is designed to limit
exposure with any one institution.
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.
Cash, Cash Equivalents, and Short-Term Investments
Cash and cash equivalents include cash balances and
investments with maturities of three months or less at the time of
purchase. Short-term investments include commercial paper and
other highly liquid investments with maturities less than one year.
Cash, cash equivalents and short-term investments are stated at
their fair value.
NOTE 2. INVESTMENTS
Crescendo has classified its entire investment portfolio,
including cash and cash equivalents of approximately $42.2 million
and $54.7 at June 30, 2000 and December 31, 1999, respectively, as
available-for-sale. Investments in the available-for-sale
category are generally carried at fair market value with
unrealized gains and losses recorded as a separate component of
stockholders' equity. Realized losses for the periods ended June
30, 2000 and December 31, 1999 were not material. The cost of
securities when sold is based upon specific identification.
The following is a summary of Crescendo's investment portfolio
at June 30, 2000(in thousands):
Available-for-Sale Securities
____________________________________________________________________
Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
____________________________________________________________________
U.S. Treasury
securities and
obligations of
U.S. government
agencies $ 4,991 $ - $(85) $ 4,906
Collateralized
mortgage
obligations and
asset backed
securities 9,752 - (246) 9,506
Corporate debt
securities - - - -
Money market funds 40,232 - - 40,232
____________________________________________________________________
$54,975 $ - $(331) $ 54,644
====================================================================
The amortized cost and estimated fair value of securities at June
30, 2000, by contractual maturity, are shown below (in thousands).
Expected maturities will differ from contractual maturities because
the issuers of the securities may have the right to prepay
obligations without prepayment penalties.
Estimated
Amortized Fair
Cost Value
____________________________________________________________________
Due in one year or less $ 40,299 $ 40,298
Due after one year through
three years 14,676 14,346
____________________________________________________________________
$ 54,975 $ 54,644
===================================================================
NOTE 3. STOCKHOLDERS' EQUITY
Common Stock Repurchase
On May 27, 1999, Crescendo's Board of Directors announced a
program under which Crescendo may purchase Crescendo Shares in
the open market from time to time using product payments received
from ALZA. During the second quarter of 2000, Crescendo
purchased 37,764 Crescendo Shares for approximately $0.7 million.
As of June 30, 2000, Crescendo had purchased a total of 131,961
Crescendo Shares under this program for approximately $2.4
million. The excess of the purchase price of the Crescendo
Shares over their stated value has been reflected as a decrease
in additional paid-in capital on the accompanying balance sheet.
The Board of Directors has determined that the program will
continue in the third quarter of 2000, subject to the
availability of Crescendo Shares at an appropriate price.
Per Share Information
Basic loss per share is calculated by dividing net loss by
the weighted average common shares outstanding for the period.
Diluted loss per share is calculated by dividing net loss by the
weighted average common shares outstanding for the period plus the
dilutive effect of stock options.
The following table sets forth the computation of Crescendo's
basic and diluted loss per share:
Period from
Three months Six months inception
ended ended (June 26, 1997)
June 30, June 30, to June 30,
2000 1999 2000 1999 2000
_____________________________________________________________
NUMERATOR (IN THOUSANDS):
BASIC AND DILUTED
Net loss $(19,890) $(29,669) $(38,331) $(49,460) $(251,010)
==============================================================================
DENOMINATOR (IN THOUSANDS):
BASIC AND DILUTED
Weighted average shares
outstanding 4,843 4,962 4,864 4,964 4,533
==============================================================================
BASIC NET LOSS
PER SHARE $(4.11) $(5.98) $(7.88) $(9.96) $(55.37)
==============================================================================
DILUTED NET LOSS
PER SHARE $(4.11) $(5.98) $(7.88) $(9.96) $(55.37)
==============================================================================
The potentially dilutive effect of outstanding options to
purchase 100,000 Crescendo Shares in the three months and six
months ended June 30, 2000 and 1999, and for the period from
inception (June 26, 1997) through June 30, 2000, were excluded from
the diluted per share calculations as they would have been anti-
dilutive for all periods.
NOTE 4. ARRANGEMENTS WITH ALZA CORPORATION
On September 29, 1997, ALZA contributed $300 million in cash to
Crescendo. On September 30, 1997, all of the then outstanding
Crescendo Shares (a total of 4,965,470 shares) were distributed to
the holders of ALZA common stock and ALZA's convertible
subordinated debentures. Crescendo Shares are traded on The NASDAQ
Stock Market-Registered Trademark- under the symbol "CNDO." ALZA
holds all 1,000 shares of Crescendo Class B Common Stock.
In connection with ALZA's contribution to Crescendo and the
distribution of Crescendo Shares, Crescendo and ALZA entered into a
number of agreements, including a Development Agreement, Technology
License Agreement, License Option Agreement and Services Agreement,
discussed below.
Crescendo and ALZA have a Development Agreement pursuant to
which ALZA conducts product development and related activities on
behalf of Crescendo under work plans and cost estimates which have
been proposed by ALZA and approved by Crescendo. Crescendo is
required to use the cash initially contributed to it by ALZA, plus
interest thereon, less Crescendo's administrative expenses, 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 initially agreed to
fund the development of seven identified products (the "Initial
Products"). As of June 30, 2000, three of the Initial Products
(OROS-Registered Trademark- oxybutynin, DUROS-Registered Trademark-
leuprolide and OROS-Registered Trademark- methylphenidate) remained
in active development and/or had been licensed by ALZA. Research
and development expenses for the three months and six months ended
June 30, 2000, were approximately $21.8 million and $42.2 million,
respectively. This compares with $31.9 million and $54.1 million
for the three and six months ended June 30, 1999, respectively.
All periods include a Technology Fee paid by Crescendo to ALZA.
For the period from inception (June 26, 1997) through June 30,
2000, Crescendo recorded research and development expenses of
approximately $278.1 million.
Crescendo and ALZA 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, Crescendo pays a Technology Fee
to ALZA, payable monthly over a period of three years, in the
amount of $1 million per month for the first 12 months following
the distribution of Crescendo Shares, $667,000 per month for the
following 12 months and $333,000 per month for the next 12
months(beginning in September 1999)(the "Technology Fee"). The
Technology Fee is not payable after August 2000. Crescendo
recorded a Technology Fee expense of $1.0 million and $2.0 million
for the three months and six months ended June 30, 2000, as
compared with $2.0 million and $4.0 million for the three and six
months ended June 30, 1999. For the period from inception (June
26, 1997) through June 30, 2000, Crescendo recorded $23.3 million
of Technology Fee expense. The Technology Fee is included in
research and development expenses.
Pursuant to the License Option Agreement entered into by
Crescendo and ALZA, Crescendo has granted ALZA an option to acquire
a license to each Crescendo Product (the "License Option"). 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 United States Food
and Drug Administration (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 (as defined in the Development Agreement) of the
licensed product that have been paid by Crescendo, not to exceed
2.5% of net sales in the first year a licensed product is sold in a
major market country, and not to exceed 3% for the following two
years. ALZA has the right to buy out Crescendo's right to receive
payments for licensed products on a country-by-country or global
basis in accordance with a formula set forth in the License
Agreement.
In December 1998, ALZA exercised its option to obtain a
worldwide license to OROS oxybutynin from Crescendo. ALZA launched
the product in the United States under the name Ditropan XL on
February 1, 1999. Under the terms of the license agreement between
Crescendo and ALZA, Crescendo receives payments from ALZA based on
worldwide net sales of the product. For the first three years the
rates are 2.5%, 3.0%, and 3.0% of net sales, respectively;
thereafter the rate is expected to be between 5.5% and 6.5%, based
on the Development Costs of the product to date and future
anticipated Development Costs to be paid by Crescendo. On January
1, 2000, the payment rate increased from 2.5% to 3.0% of net sales.
Royalty revenue for the three and six months ended June 30, 2000
was approximately $1.4 million and $2.4 million, respectively, and
was derived from net sales of Ditropan XL in the United States. On
June 19, 2000, Sanofi-Synthelabo, ALZA's marketing partner in
Europe for Ditropan XL, received approval to market Ditropan XL in
the United Kingdom and launched the product in July 2000. Under
the terms of its license agreement with ALZA, Crescendo will
receive payments from ALZA based on Sanofi-Synthelabo's net sales
of the product.
On March 3, 2000, DUROS leuprolide (Viadur-Trademark-) was
approved for marketing by the FDA. 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 the
rates will be 2.5%, 3.0%, and 3.0% of net sales, respectively;
thereafter the rate is expected to be between 9.0% and 9.5%, based on
the Development Costs of the product to date and future anticipated
Development Costs to be paid by Crescendo. On April 5, 2000, ALZA
announced that it had entered into a U.S. commercialization agreement
for Viadur with Bayer Corporation ("Bayer"). Under the terms of its
license agreement with ALZA, Crescendo will receive payments from ALZA
based on Bayer's net sales of the product.
Pursuant to Crescendo's Restated Certificate of Incorporation,
ALZA has a purchase option which gives ALZA the right to purchase all
(but not less than all) of the Crescendo Shares (the "Purchase
Option"). The Purchase Option is 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.
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 for 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.
Crescendo and ALZA have a Services Agreement pursuant to which
ALZA provides certain administrative services, including accounting
and legal services, to Crescendo. Specified charges for such
services are generally intended to allow ALZA to recover its direct
costs of providing the services, including fully-allocated
overhead, plus all out of pocket costs and expenses, but without
any profit (i.e. ALZA's fully-burdened cost). 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 accrues estimated expenses
on a monthly basis under the Services Agreement. Such expenses
include (i) third party direct expenses paid by ALZA on behalf of
Crescendo; (ii) actual salaries, including benefits, of ALZA's
personnel performing services for Crescendo; and (iii) ALZA's
standard administrative overhead charge, calculated as a percent of
salaries. As a result of a change in certain estimates, Crescendo
recorded a net credit of $15,000 from ALZA under the Services
Agreement for the three months ended March 31, 2000. Expenses
incurred under this agreement for the three months ended June 30,
2000 were $81,000, as compared with $15,000 for the three months
ended June 30, 1999. Because of the credit in the first quarter of
2000, expenses under the Services Agreement for the six months
ended June 30, 2000 were approximately $66,000, as compared with
$61,000 for the six months ended June 30, 1999. General and
administrative expenses incurred under the Services Agreement for
the period from inception (June 26, 1997) through June 30, 2000
were approximately $564,000.
At June 30, 2000, the amount payable to ALZA under the
Development Agreement and the Services Agreement was approximately
$15.3 million. The Technology Fee is paid in the month it is
accrued.
NOTE 5. SUBSEQUENT EVENTS
On August 1, 2000, OROS methylphenidate (Concerta-Trademark-) was
approved for marketing by the FDA. Also on August 1, 2000, ALZA
exercised its option to obtain a worldwide license to OROS
methylphenidate 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 the rates will be 2.5%, 3.0%, and 3.0% of net sales,
respectively; thereafter the rate is expected to be between 8.5% and
9.0%, based on the Development Costs of the product to date and future
anticipated Development Costs to be paid by Crescendo. On April 18,
2000, ALZA announced that it had entered into an agreement with McNeil
Consumer Healthcare ("McNeil"), a Johnson & Johnson company, to co-
promote the product in the United States.
