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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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SCHEDULE 13E-3
RULE 13E-3 TRANSACTION STATEMENT
(PURSUANT TO SECTION 13(E) OF THE SECURITIES EXCHANGE ACT OF 1934)
ALZA TTS RESEARCH PARTNERS, LTD.
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(Name of the Issuer)
ALZA DEVELOPMENT CORPORATION and ALZA CORPORATION
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(Name of Person(s) Filing Statement)
Class A Limited Partnership Interests
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(Title of Class of Securities)
Not Applicable
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(CUSIP Number of Class of Securities)
David R. Hoffmann Bruce C. Cozadd
President Senior Vice President and
ALZA Development Corporation Chief Financial Officer
950 Page Mill Road ALZA Corporation
P.O. Box 10950 950 Page Mill Road
Palo Alto, CA 94303-0802 P.O. Box 10950
(650) 494-5300 Palo Alto, CA 94303-0802
(650) 494-5000
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(Name, Address and Telephone Number of Person Authorized to Receive Notices
and Communications on Behalf of Person(s) Filing Statement)
This statement is filed in connection with (check the appropriate box):
(a) [_] The filing of solicitation materials or an information
statement subject to Regulation 14A, Regulation 14C, or Rule
13e-3(c) under the Securities Exchange Act of 1934.
(b) [_] The filing of a registration statement under the Securities
Act of 1933.
(c) [_] A tender offer.
(d) [X] None of the above.
Check the following box if the soliciting materials or information statement
referred to in checking box (a) are preliminary copies. [_]
Calculation of Filing Fee
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Transaction Valuation/1/: $91,176,592.48 Amount of Filing Fee/2/: $18,236
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/1/ For purposes of calculating the filing fee only. This calculation is
based upon the purchase price of $91,176,592.48 million for all issued and
outstanding limited partnership interests to be acquired pursuant to this
transaction.
/2/ The amount of the filing fee, calculated in accordance with Rule
0-11 of the Securities Exchange Act of 1934, as amended, equals 1/50th of one
percent of the aggregate value of cash to be paid by the general partner of ALZA
TTS Research Partners, Ltd. for such limited partnership interests.
[_] Check box if any part of the fee is offset as provided by Rule 0-11(a)(2)
and identify the filing with which the offsetting fee was previously paid.
Identify the previous filing by registration statement number, or the form or
schedule and the date of its filing.
Amount previously paid: Filing party:
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Form or registration no.: Date filed:
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Instruction. Eight copies of this statement, including all exhibits,
should be filed with the Commission.
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INTRODUCTION.
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This Schedule 13E-3 Transaction Statement (the "Statement") relates to the
exercise by ALZA Development Corporation, a California corporation ("ADC"), of
its option to purchase all issued and outstanding limited partnership interests
of ALZA TTS Research Partners, Ltd., a California limited partnership (the
"Issuer"). ADC is the general partner of the Issuer (referred to herein, in
such capacity, as the "General Partner") and a wholly owned subsidiary of ALZA
Corporation, a Delaware corporation ("ALZA"). This Statement is being filed by
ALZA and ADC. Notwithstanding this Statement, ALZA and ADC disclaim application
of Rule 13e-3 under the Securities Exchange Act of 1934, as amended, to the
transaction described herein.
Item 1. Issuer and Class of Security Subject to the Transaction.
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(a) The issuer of the class of equity security which is the subject of
this filing and the address of its principal executive offices is:
ALZA TTS Research Partners, Ltd.
c/o ALZA Development Corporation
950 Page Mill Road
P.O. Box 10950
Palo Alto, California 94303-0802
(b) The exact title of the class of security which is the subject of this
filing is the Class A Limited Partnership Interests of ALZA TTS
Research Partners, Ltd. As of March 31, 1998 (the most recent
practicable date), there were (i) 3,200 Class A Limited Partnership
Interests (the "Class A Limited Partnership Interests") and (ii) one
Class B Limited Partnership Interest (the "Class B Limited Partnership
Interest" and collectively with the Class A Limited Partnership
Interests, the "Limited Partnership Interests") issued and
outstanding. As of March 31, 1998 (the most recent practicable date),
there were approximately 1,972 holders of record of Class A Limited
Partnership Interests and one holder of record of the Class B Limited
Partnership Interest. The rights of the Class A Limited Partnership
Interests and the Class B Limited Partnership Interest are the same
except that the holder of the Class B Limited Partnership Interest has
a right to consult with ADC with respect to certain matters.
(c) There is no established trading market for the Limited Partnership
Interests.
(d) The Issuer has not paid any dividends on the Limited Partnership
Interests in the past two years, except for distributions made to the
holders of
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Limited Partnership Interests pursuant to the terms of the Agreement
of Limited Partnership, as amended (the "Limited Partnership
Agreement"), by and among the General Partner and the limited partners
of the Issuer (the "Limited Partners"). For information with respect
to distributions made by the Issuer in the past two fiscal years, see
Item 3 below.
(e) Not applicable.
(f) Not applicable.
Item 2. Identity and Background.
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The Statement is being filed by ADC and ALZA. ADC is the general partner
of the Issuer and a wholly owned subsidiary of ALZA.
ALZA's principal business is the development and commercialization of
pharmaceutical products. ALZA is incorporated in the State of Delaware and the
address of its principal executive offices is 950 Page Mill Road, P.O. Box
10950, Palo Alto, CA 94303-0802.
ADC's principal business is acting as general partner of the Issuer. ADC
is incorporated in the State of California and the address of its principal
executive offices is 950 Page Mill Road, P.O. Box 10950, Palo Alto, CA 94303-
0802.
During the last five years, neither ALZA nor ADC has been convicted in a
criminal proceeding (excluding traffic violations or similar misdemeanors).
During the last five years, neither ALZA nor ADC has been a party to a civil
proceeding of a judicial or administrative body of competent jurisdiction and as
a result of such proceeding was or is subject to a judgment, decree or final
order enjoining further violations of, or prohibiting activities subject to,
federal or state securities laws or finding any violation of such laws.
Information with Respect to Executive Officers and Directors of ALZA.
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Name: Dr. Ernest Mario (Chairman and Chief Executive Officer)
Business Address: 950 Page Mill Road, Palo Alto, CA 94304
Principal Occupation: Chief Executive Officer of ALZA
Criminal Convictions During Proceeding Five Years: None
Judgments, Decrees or Orders Under Federal or State Securities Laws
During Preceding Five Years: None
Citizenship: United States of America
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Name: William G. Davis (Director)
Business Address: 3532 Bay Road, South Drive, Indianapolis, IN 49240
Principal Occupation: Independent Business Consultant
Criminal Convictions During Proceeding Five Years: None
Judgments, Decrees or Orders Under Federal or State Securities Laws
During Preceding Five Years: None
Citizenship: United States of America
Name: Dr. William R. Brody (Director)
Business Address: 3400 North Charles Street, 242 Garland Hall, Baltimore, MD
21218
Principal Occupation: President of The John Hopkins University (from 1996 to
present); Provost of The University of Minnesota Academic Health Center (from
1994 to 1996); and Martin Donner Professor and Director of the Department of
Radiology at The John Hopkins University (from 1987 to 1994)
Criminal Convictions During Proceeding Five Years: None
Judgments, Decrees or Orders Under Federal or State Securities Laws
During Preceding Five Years: None
Citizenship: United States of America
Name: Robert J. Glaser, M.D. (Director)
Business Address: 1 Elm Place, Atherton, CA 94027
Principal Occupation: Director (retired) for Medical Science and Trustee of the
Lucille P. Markey Charitable Trust
Criminal Convictions During Proceeding Five Years: None
Judgments, Decrees or Orders Under Federal or State Securities Laws
During Preceding Five Years: None
Citizenship: United States of America
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Name: Dean O. Morton (Director)
Business Address: 3200 Hillview Avenue, Palo Alto, CA 94304
Principal Occupation: Executive Vice President and Chief Operating Officer
(Retired in 1992) of Hewlett-Packard Corporation
Criminal Convictions During Proceeding Five Years: None
Judgments, Decrees or Orders Under Federal or State Securities Laws
During Preceding Five Years: None
Citizenship: United States of America
Name: Denise M. O'Leary (Director)
Business Address: c/o Vivra, Inc., 1850 Gateway Drive, Suite 5000, San Mateo,
CA 94404
Principal Occupation: Special Limited Partner with Menlo Ventures
Criminal Convictions During Proceeding Five Years: None
Judgments, Decrees or Orders Under Federal or State Securities Laws
During Preceding Five Years: None
Citizenship: United States of America
Name: Isaac Stein (Director)
Business Address: 525 University Avenue, Suite 700, Palo Alto, CA 94301
Principal Occupation: President of Waverley Associates, Inc.
Criminal Convictions During Proceeding Five Years: None
Judgments, Decrees or Orders Under Federal or State Securities Laws
During Preceding Five Years: None
Citizenship: United States of America
Name: Julian N. Stern (Director and Secretary)
Business Address: 525 University Avenue, Suite 1100, Palo Alto, CA 94301
Principal Occupation: Partner of Heller Ehrman White & McAuliffe
Criminal Convictions During Proceeding Five Years: None
Judgments, Decrees or Orders Under Federal or State Securities Laws
During Preceding Five Years: None
Citizenship: United States of America
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Name: James Butler (Senior Vice President of Sales and Marketing)
Business Address: 950 Page Mill Road, Palo Alto, CA 94304
Principal Occupation: Senior Vice President of Sales and Marketing of ALZA
Criminal Convictions During Proceeding Five Years: None
Judgments, Decrees or Orders Under Federal or State Securities Laws
During Preceding Five Years: None
Citizenship: United States of America
Name: Bruce C. Cozadd (Senior Vice President and Chief Financial Officer)
Business Address: 950 Page Mill Road, Palo Alto, CA 94304
Principal Occupation: Senior Vice President and Chief Financial Officer of ALZA
Criminal Convictions During Proceeding Five Years: None
Judgments, Decrees or Orders Under Federal or State Securities Laws
During Preceding Five Years: None
Citizenship: United States of America
Name: Harold Fethe (Vice President of Human Resources)
Business Address: 950 Page Mill Road, Palo Alto, CA 94304
Principal Occupation: Vice President of Human Resources of ALZA
Criminal Convictions During Proceeding Five Years: None
Judgments, Decrees or Orders Under Federal or State Securities Laws
During Preceding Five Years: None
Citizenship: United States of America
Name: Dr. Gary V. Fulscher (Senior Vice President of Commercial Services)
Business Address: 950 Page Mill Road, Palo Alto, CA 94304
Principal Occupation: Senior Vice President of Commercial Services of ALZA
Criminal Convictions During Proceeding Five Years: None
Judgments, Decrees or Orders Under Federal or State Securities Laws
During Preceding Five Years: None
Citizenship: United States of America
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Name: Dr. Samuel R. Saks (Senior Vice President of Medical Affairs)
Business Address: 950 Page Mill Road, Palo Alto, CA 94304
Principal Occupation: Senior Vice President of Medical Affairs of ALZA
Criminal Convictions During Proceeding Five Years: None
Judgments, Decrees or Orders Under Federal or State Securities Laws
During Preceding Five Years: None
Citizenship: United States of America
Name: Peter D. Staple (Senior Vice President and General Counsel)
Business Address: 950 Page Mill Road, Palo Alto, CA 94304
Principal Occupation: Senior Vice President and General Counsel of ALZA
Criminal Convictions During Proceeding Five Years: None
Judgments, Decrees or Orders Under Federal or State Securities Laws
During Preceding Five Years: None
Citizenship: United States of America
Name: Dr. Felix Theeuwes (President of New Ventures)
Business Address: 950 Page Mill Road, Palo Alto, CA 94304
Principal Occupation: President of New Ventures of ALZA
Criminal Convictions During Proceeding Five Years: None
Judgments, Decrees or Orders Under Federal or State Securities Laws
During Preceding Five Years: None
Citizenship: Belgium
Name: Janne Wissel (Senior Vice President of Operations)
Business Address: 950 Page Mill Road, Palo Alto, CA 94304
Principal Occupation: Senior Vice President of Operations of ALZA
Criminal Convictions During Proceeding Five Years: None
Judgments, Decrees or Orders Under Federal or State Securities Laws
During Preceding Five Years: None
Citizenship: United States of America
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Name: Dr. James W. Young (Senior Vice President of Research and Development)
Business Address: 950 Page Mill Road, Palo Alto, CA 94304
Principal Occupation: Senior Vice President of Research and Development of ALZA
Criminal Convictions During Proceeding Five Years: None
Judgments, Decrees or Orders Under Federal or State Securities Laws
During Preceding Five Years: None
Citizenship: United States of America
Information with Respect to Executive Officers and Directors of ADC.
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Name: David R. Hoffmann (President, Chief Financial Officer, Secretary and
Director)
Business Address: 950 Page Mill Road, Palo Alto, CA 94304
Principal Occupation: Vice President and Treasurer of ALZA
Criminal Convictions During Proceeding Five Years: None
Judgments, Decrees or Orders Under Federal or State Securities Laws
During Preceding Five Years: None
Citizenship: United States of America
Name: Robert M. Myers (Vice President and Director)
Business Address: 950 Page Mill Road, Palo Alto, CA 94304
Principal Occupation: Vice President, Commercial Development of ALZA
Criminal Convictions During Proceeding Five Years: None
Judgments, Decrees or Orders Under Federal or State Securities Laws
During Preceding Five Years: None
Citizenship: United States of America
Name: Dr. James W. Young (Vice President and Director)
Business Address: 950 Page Mill Road, Palo Alto, CA 94304
Principal Occupation: Senior Vice President, Research and Development of ALZA
Criminal Convictions During Proceeding Five Years: None
Judgments, Decrees or Orders Under Federal or State Securities Laws
During Preceding Five Years: None
Citizenship: United States of America
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Item 3. Past Contacts, Transactions or Negotiations.
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(a) (1) The nature and approximate amount in dollars of any transaction
which has occurred since the commencement of the Issuer's second full
fiscal year preceding the date of this Statement between ALZA and ADC
on one hand and the Issuer on the other hand are as follows:
As part of its initial organization and funding, the Issuer
granted ALZA an option (the "License Option") to acquire a license
for any or all of the products (the "Issuer Products") for which
development was funded by the Issuer under its Research and
Development Agreement with ALZA. In 1990, ALZA exercised its License
Option for two Issuer Products: (i) a transdermal fentanyl product
sold in the United States under the name Duragesic(R) and (ii) a
transdermal testosterone product sold under the name Testoderm(R).
Under each license, ALZA makes payments to the Issuer based on
ALZA's and its affiliates' and sublicensees' sales of the licensed
product. ALZA paid the Issuer $2,644,646, $8,776,814 and $6,265,401
for the three months ended March 31, 1998 and the years ended
December 31, 1997 and December 31, 1996, respectively, of which
approximately 97.5%, 95% and 96% were attributed to Duragesic(R) for
the three months ended March 31, 1998 and fiscal 1997 and 1996,
respectively.
The administrative, accounting, contract management and record
keeping services required by the Issuer have been provided in the past
and are currently being provided by ALZA and are billed to the Issuer
at ALZA's standard administrative services rate. The Issuer paid ALZA
$18,835, $105,512 and $86,548 for the three months ended March 31,
1998 and the years ended December 31, 1997 and December 31, 1996,
respectively.
(2) On November 20, 1997, PharmaInvest, L.L.C. ("PharmaInvest") on
behalf of Pharmaceutical Royalties L.L.C., Pharmaceutical Royalty
Investments Ltd. and Pharmaceutical Partners L.L.C. ("Pharmaceutical
Partners") made an unsolicited tender offer (the "Tender Offer") to
purchase up to 1,400 Class A Limited Partnership Interests,
representing approximately 44% of the total outstanding Class A
Limited Partnership Interests, for cash consideration per Class A
Limited Partnership Interest of $12,000. In response to the Tender
Offer, the General Partner filed a Schedule 14D-9 (the "Schedule 14D-
9") with the Securities and Exchange Commission (the "Commission"), in
which the General Partner expressed no opinion with respect to the
Tender Offer to the holders of the Class A Limited Partnership
Interests and stated that the General Partner would remain neutral as
to whether the Limited Partners should tender or refrain from
tendering their Class A Limited Partnership Interests. In its letter
to
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the Limited Partners advising them of its neutrality with respect to
the Tender Offer, the General Partner drew the attention of the
Limited Partners to certain facts, including, (i) the dates on which
ALZA's exclusive rights with respect to Duragesic(R) and Testoderm(R)
were scheduled to expire, (ii) the General Partner's expectation of
the growth of sales of Duragesic(R) and (iii) the report of Securities
Pricing and Research, Inc., an independent appraisal firm ("SPAR"),
estimating that the rounded net asset value and fair market value of a
Class A Limited Partnership Interest as of December 31, 1996 were
$21,200 and $15,900, respectively. None of ADC, ALZA or the Issuer has
any affiliation with SPAR, nor does any of them endorse the report
prepared by SPAR (the "SPAR Report"). In addition, neither the General
Partner nor the Issuer engaged SPAR to prepare the SPAR Report or
participated in the preparation of the SPAR Report. The SPAR Report
was not related to the Tender Offer and is not related to the Purchase
Option.
Also on November 20, 1997, Pharmaceutical Partners, an
affiliate of PharmaInvest, in a letter addressed to ALZA, set forth
its views about the Purchase Option and its effects on the Limited
Partners, the Issuer, the General Partner and ALZA. In connection
with the Issuer's consideration and evaluation of the Tender Offer,
ALZA, on December 2, 1997, advised the Issuer of the matters raised in
Pharmaceutical Partners' letter to ALZA and informed the Issuer of
ALZA's position regarding such matters. A copy of such letter was,
with ALZA's permission, included as an exhibit to the Schedule 14D-9
and sent to the holders of the Limited Partnership Interests. On
January 16, 1998, PharmaInvest amended its offer by increasing the
purchase price of each Class A Limited Partnership Interest from
$12,000 to $13,200. In connection with the increase in the purchase
price, the General Partner filed an amendment to its Schedule 14D-9
stating that the General Partner continued to express no opinion to
the holders of the Class A Limited Partnership Interests and that the
General Partner would continue to remain neutral as to whether the
Limited Partners should tender or refrain from tendering their Class A
Limited Partnership Interests. In addition, the General Partner
informed the Limited Partners that in reaching its conclusion with
respect to the Tender Offer, the General Partner had taken into
account (i) that SPAR had reduced its estimates of the rounded net
asset value and fair market value of the Class A Limited Partnership
Interests as of December 31, 1996, and (ii) the General Partner's
expectation of the growth of sales of Duragesic. On February 2, 1998,
PharmaInvest announced that the Tender Offer had expired and that 72
Class A Limited Partnership Interests were tendered in connection with
the Tender Offer.
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(b) As described in Section (a)(2) above, in November 1997, PharmaInvest
made the Tender Offer. In the last fiscal year, PharmaInvest contacted
the General Partner to make it aware of its possible interest in the
Issuer as an investment opportunity. PharmaInvest sent letters on July
11 and 17, 1997 continuing to express its interest in the Issuer. In
October 1997, PharmaInvest had a conversation with the General Partner
reiterating its interest in the Issuer. Following the conversation,
PharmaInvest acquired two Class A Limited Partnership Interests, and
on October 22, 1997 made a written request to receive a list of names
and addresses of Limited Partners (the "List"). PharmaInvest received
the List on November 2, 1997 and commenced the Tender Offer on
November 20, 1997.
Item 4. Terms of Transaction.
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(a) Pursuant to the terms of the Limited Partnership Agreement, ADC has an
option to purchase all (but not less than all) of the Limited
Partnership Interests (the "Purchase Option"). The exercise price for
exercise of the Purchase Option is $120 million less an amount equal
to all cash distributed to the Limited Partners by the Issuer (the
"Exercise Price"). As of the date hereof, the Exercise Price is
$91,176,592.48. The Exercise Price will be allocated among the
Limited Partners based on their pro rata contributions. At the
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closing (the "Closing"), the holders of record of Class A Limited
Partnership Interests as of the Closing date will receive $27,216.21
per Class A Limited Partnership Interest (purchased in the original
offering for $5,000 each) and the holder of the Class B Limited
Partnership Interest will receive $4,084,720.48 for its Class B
Limited Partnership Interest. The Exercise Price will be paid by
check to each holder of the Limited Partnership Interests.
In accordance with the terms of the Limited Partnership Agreement, the
Limited Partners are not required to take any steps to approve the
exercise of the Purchase Option or the consummation of the
transactions pursuant to the Purchase Option. Title to the Limited
Partnership Interests automatically vests in ADC no later than 30 days
after notice of the exercise of the Purchase Option is given to the
Limited Partners, upon payment of the Purchase Price for the Limited
Partnership Interests. The exact date of Closing will be set forth in
the Notice to Limited Partners of the Issuer to be distributed to the
Limited Partners.
(b) Not applicable.
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Item 5. Plans or Proposals of the Issuer or Affiliate.
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Exercise of the Purchase Option will result in ADC owning all of the
Limited Partnership Interests. Upon purchase of all of the Limited Partnership
Interests by ADC, the Issuer will terminate as a limited partnership and the
General Partner will take all appropriate and necessary actions to suspend the
Issuer's public reporting obligations by filing a Form 15 with the Commission
and to wind up the affairs of the Issuer in accordance with California law. ADC
will continue as a wholly owned subsidiary of ALZA. Although ALZA and ADC have
no specific intentions with respect to the operations of the business of the
Issuer following the exercise of the Purchase Option, ALZA and ADC intend to
operate the business of the Issuer in a manner best designed, in the judgment of
ALZA, to realize the benefit of that business to ALZA and its stockholders.
Item 6. Source and Amount of Funds or Other Consideration.
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(a) In accordance with the terms of the Limited Partnership Agreement, the
Exercise Price is $91,176,592.48. ALZA intends to contribute to ADC
the amount of cash necessary to exercise the Purchase Option, which
contribution ALZA intends to finance with its cash and marketable
securities.
(b) The following tables set forth an estimate (except for the filing fee)
of expenses for the transaction:
Filing fees............................................ $ 18,236
Accounting fees and expenses........................... 5,000
Legal fees and expenses................................ 25,000
Printing expenses...................................... 3,500
Total.............................................. $ 51,736
All of the expenses and fees will be paid by ALZA.
(c) Not applicable.
(d) Not applicable.
Item 7. Purposes, Alternatives, Reasons and Effects.
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(a) The purpose of this transaction is for ALZA, through ADC, to acquire
all rights, on an exclusive basis, to the Issuer Products. ALZA
believes that it is in the best interests of ALZA and ALZA's
stockholders to exercise the Purchase Option at this time. ALZA has
worldwide licenses, including the
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right to sublicense, to make, use and sell Testoderm(R) and
Duragesic(R) products. Such licenses are currently exclusive; however,
ALZA's exclusive rights with respect to Testoderm(R) and Duragesic(R)
would end on July 26, 1998 and December 4, 1998, respectively. Because
ALZA's exclusive rights are limited in duration, ALZA believes that
exercising the Purchase Option is the most effective and comprehensive
method of acquiring continued exclusive rights to Testoderm(R),
Duragesic(R) and other Issuer Products. In addition, because ALZA's
obligations to pay royalties to the Issuer under the licenses for
Testoderm(R) and Duragesic(R) will terminate upon exercise of the
Purchase Option, ALZA will benefit by retaining the full royalty
received on sales of Duragesic(R) and the full sales margin on
Testoderm(R).
(b) ADC and ALZA did not consider alternative means to accomplish the
transaction because of the previously granted Purchase Option.
(c) The structure of the transaction is in accordance with the terms of
the previously granted Purchase Option as set forth in the Limited
Partnership Agreement. The transaction is being undertaken at this
time because of the timing of the expiration of ALZA's exclusive
rights discussed in Item 7(a) above.
(d) As a result of the transaction described herein, the Issuer will
terminate as a limited partnership and the General Partner will take
all appropriate and necessary actions to suspend the Issuer's public
reporting obligations and to wind up the affairs of the Issuer in
accordance with California law. The General Partner will continue as a
wholly owned subsidiary of ALZA. For federal income tax purposes the
Issuer will be treated as terminating on the date of the transaction
and as distributing all of its assets, subject to all of its
liabilities, to the General Partner on that date. The Issuer will not
have taxable gain or loss as a result of the transaction described
herein.
The transaction described herein will cause each Limited Partner to
dispose of its Limited Partnership Interests for consideration equal
to such holder's pro rata share of the Exercise Price. The following
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discussion sets forth general federal income tax considerations under
the Internal Revenue Code (the "Code") for the Limited Partners with
respect to cash received by the Limited Partners for the Limited
Partnership Interests. This discussion is intended only to provide
general information to the Limited Partners that are subject to United
States federal income tax; it may not address all relevant federal
income tax consequences to such persons or to other categories of the
Limited Partners (e.g., foreign persons, dealers in
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securities, and persons that are exempt from federal income tax). This
discussion is based upon present federal income tax laws and does not
attempt to anticipate changes, including changes in tax rates, that
may be made under currently pending legislative proposals. This
discussion assumes that the Limited Partnership Interests were at all
relevant times capital assets of the Limited Partners. This discussion
does not address state, local or foreign tax considerations. ALL
LIMITED PARTNERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS.
Except as described below, the holder of a Limited Partnership
Interest should generally have a capital gain or loss due to ADC's
exercise of the Purchase Option equal to the difference between (i)
the amount of cash received and (ii) the holder's basis in the Limited
Partnership Interest. A Limited Partner's basis in a Limited
Partnership Interest is the Limited Partner's initial purchase price
decreased by any partnership deductions taken by the Limited Partner
and any cash distributed by the Issuer to the Limited Partner and
increased by the Limited Partner's share of the Issuer's income. Under
current law, capital gain or loss will be: (a) long-term if the
Limited Partnership Interest has been held at least 18 months at the
time the Purchase Option is exercised, (b) mid-term if the holding
period is more than one year but less than (or equal to) 18 months,
and (c) short term if the holding period is a year or less. Under
Section 751 of the Code, the difference between the portion of the
cash received by the holder that is attributable to "unrealized
receivables" and "inventory" of the Issuer (together, "Section 751
Property") over the portion of the holder's adjusted tax basis in the
Limited Partnership Interest allocable to Section 751 Property will be
treated as ordinary income or loss, rather than capital gain or loss.
Although this conclusion is not entirely free from doubt, ADC believes
that the only "unrealized receivables" of the Issuer should be the
amount, if any, of accrued, but unpaid royalties under ALZA's licenses
to Duragesic(R) and Testoderm(R). Treasury regulations require each
person who transfers an interest in a partnership possessing Section
751 Property to file a statement with such person's tax return
reporting the transfer and certain other information relating thereto.
Limitations may apply to deduction of capital loss.
To the extent that any holder of a Limited Partnership Interest has
not provided an appropriate taxpayer identification number on IRS Form
W-9 or a substitute therefor, the holder may be subject to backup
withholding by ALZA or ADC.
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(e) The Purchase Price will be amortized by ALZA over a number of
years.
Item 8. Fairness of the Transaction.
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(a) Each of ADC and ALZA reasonably believes that the transaction reported
herein is fair to the Limited Partners. None of ALZA's or the General
Partner's directors dissented to or abstained from voting on such
transaction.
(b) Each of ADC and ALZA has based its respective belief that the
transaction is fair to the holders of the Limited Partnership
Interests on the fact that the Limited Partners were fully aware of
the Purchase Option, which was an essential economic term of the
Limited Partnership Interests, when they purchased their Limited
Partnership Interests. The prospectus, pursuant to which the Limited
Partnership Interests were offered and sold, fully described the
Purchase Option. The Purchase Option, which is contained in the
Limited Partnership Agreement, was also publicly filed with the
Commission. The Limited Partners were also advised of the Purchase
Option in each Form 10-K and each recent Form 10-Q public filing made
by the Issuer with the Commission. In addition, the Limited Partners
were reminded of the Purchase Option in connection with the Tender
Offer and in evaluating whether or not to tender their Limited
Partnership Interests in the Tender Offer. Accordingly, the Purchase
Option was present in the initial public sale, was disseminated in the
Issuer's charter documents and was discussed in the Issuer's periodic
filings. As a result, every Limited Partner received substantial
notice as to the terms of the Purchase Option prior to making any
investment decision with respect to the Limited Partnership Interests.
In addition, in its most recent filings the Issuer has indicated that
ALZA's exclusive rights with respect to Duragesic(R) and Testoderm(R)
would expire soon and that such expiration could lead to the exercise
of the Purchase Option. In connection with its decision whether to
exercise the Purchase Option, ALZA commissioned Frost & Sullivan, an
independent market research firm ("Frost & Sullivan"), to prepare a
market research report (the "Report") of revenue forecasts for
Duragesic(R) (see Item 9 below). ALZA took into account the
information contained in the Report in deciding whether the exercise
of the Purchase Option was in the best interests of ALZA and ALZA's
stockholders; however, because the Report did not assess the fairness
of the exercise price of the Purchase Option, neither ALZA nor ADC
considers that the Report is relevant with respect to the fairness of
the transaction to the Limited Partners.
14
<PAGE>
(c) The exercise of the Purchase Option and the consummation of the
transactions thereunder do not require approval of the Limited
Partners.
(d) No director of ALZA or the General Partner has retained an
unaffiliated representative to act solely on behalf of the Limited
Partners. As a limited partnership, the Issuer does not have any
directors. Each director of the General Partner is an officer of the
General Partner and an employee and officer or vice-president of ALZA.
(e) See Item 8(d) above.
(f) On November 20, 1997, PharmaInvest made the Tender Offer. For further
information with respect to the Tender Offer see Item 3(a)(2) above.
Item 9. Reports, Opinions, Appraisals and Certain Negotiations.
- ---------------------------------------------------------------
(a) In February of 1998, ALZA engaged Frost & Sullivan to prepare the
Report.
(b) ALZA engaged Frost & Sullivan to prepare the Report because of Frost &
Sullivan's expertise with respect to analyzing sales and marketing
information and trends of product sales in the pharmaceutical
industry. Prior to engaging Frost & Sullivan, ALZA contacted several
other market research firms, but chose Frost & Sullivan because of its
availability and experience. ALZA has engaged Frost & Sullivan for
other market research engagements from time to time and has paid
normal service fees in connection with such engagements. The
objectives of the Report were to (i) assess the revenue potential for
Duragesic(R) during the period from 1997 to 2006, (ii) analyze the
market opportunity for the same period, (iii) identify key competitive
factors in the current and future market environment and (iv) identify
key drivers of and restraints to market growth. After research using
both primary and secondary sources, the key findings provided by the
Report were (a) if a second transdermal product does not emerge on the
market, Duragesic(R) is expected to continue to experience substantial
growth throughout the forecast period due to an increased penetration
into an expanding market, increased pricing and increased acceptance
in key foreign markets, and (b) if a second transdermal product
emerges on the market, in order to be competitive, a competitor would
need to undercut the price of Duragesic(R).
(c) A copy of the Report is available for inspection and copying at the
principal executive offices of ALZA during its regular business hours
by any interested Limited Partner or his or her representative who has
been so designated in writing. A copy of the Report will be
transmitted by ALZA
15
<PAGE>
to any interested Limited Partner or his or her
representative who has been so designated in writing upon written
request and at the expense of the requesting Limited Partner. A copy
of the Report is also attached hereto as Exhibit (b).
Item 10. Interest in Securities of the Issuer.
- ----------------------------------------------
(a) None of ADC, ALZA or any of their respective directors or officers own
any Limited Partnership Interests. ALZA is the sole shareholder of the
General Partner and each officer and director of the General Partner
is an employee and officer or vice-president of ALZA. As described in
this Statement, the General Partner may at any time, pursuant to the
Purchase Option, purchase all of the outstanding Limited Partnership
Interests.
(b) None.
Item 11. Contracts, Arrangements or Understandings With Respect to the Issuer's
- -------------------------------------------------------------------------------
Securities.
----------
Article Seven of the Limited Partnership Agreement grants ADC the Purchase
Option. The Purchase Option states that ADC may purchase all (but not less than
all) of the issued and outstanding Limited Partnership Interests at any time
after January 1, 1987 and prior to dissolution of the Issuer. ADC may exercise
the Purchase Option by mailing a notice of exercise to the Limited Partners.
Item 12. Present Intention and Recommendation of Certain Persons With Regard
- -----------------------------------------------------------------------------
to the Transaction.
------------------
(a) Not applicable.
(b) Not applicable.
Item 13. Other Provisions of the Transaction.
- ---------------------------------------------
(a) Appraisal rights are not afforded under applicable law in respect of
the exercise of the Purchase Option and none will be afforded. Neither
ALZA nor the General Partner is aware of any rights available to
objecting holders of the Limited Partnership Interests under
applicable law.
16
<PAGE>
(b) None of ALZA, the General Partner or Issuer is aware of any grant of
access to unaffiliated security holders to the corporate files of the
Issuer or the appointment of counsel or appraisal services for
unaffiliated security holders at the expense of the Issuer.
(c) Not applicable.
Item 14. Financial Information.
- -------------------------------
(a) The Issuer's financial data is attached to this Statement as Exhibits
(g)(1), (g)(2) and (g)(3). The Issuer has no material fixed charges
for the two most recent fiscal years and the appropriate interim
period. Book value per Class A Limited Partnership Interest at
December 31, 1997 was $25.58 and at March 31, 1998 was $23.13. Book
value per Class B Limited Partnership Interest at December 31, 1997
was $8,864 and at March 31, 1998 was $8,500. Book value per General
Partner interest at December 31, 1997 was $900 and at March 31, 1998
was $849.
(b) The Issuer does not believe the pro forma disclosure required by this
Item 14(b) is applicable because the Issuer would terminate upon
giving effect to the transaction contemplated by this Schedule 13E-3.
Item 15. Persons and Assets Employed, Retained or Utilized.
- -----------------------------------------------------------
(a) Not applicable.
(b) None.
Item 16. Additional Information.
- --------------------------------
Not applicable.
Item 17. Material to be filed as Exhibits.
- ------------------------------------------
(a) Not applicable.
(b) Frost & Sullivan Report, "A Market Opportunity Assessment for the
Duragesic Transdermal Patch", dated March 2, 1998.
(c) Agreement of Limited Partnership dated December 30, 1982./(1)/
17
<PAGE>
(d) Form of Notice to the Holders of Limited Partnership Interests of
ALZA TTS Research Partners, Ltd., advising the Limited Partners of
the exercise of the Purchase Option.
(e) Not applicable.
(f) Not applicable.
(g)(1) Financial Statements extracted from the Issuer's Form 10-Q for the
quarterly period ended March 31, 1998./(2)/
(g)(2) Financial Statements and Additional Information extracted from the
Issuer's Form 10-K for the year ended December 31, 1997./(3)/
(g)(3) Financial Statements and Additional Information extracted from the
Issuer's Form 10-K for the year ended December 31, 1996./(4)/
_____________
/(1)/ Incorporated herein by reference to Exhibit 4.1 of the Issuer's Form
10-K for the year ended December 31, 1996.
/(2)/ Incorporated herein by reference to the Issuer's Form 10-Q for the
quarter ended March 31, 1998.
/(3)/ Incorporated herein by reference to the Issuer's Form 10-K for the
year ended December 31, 1997.
/(4)/ Incorporated herein by reference to the Issuer's Form 10-K for the
year ended December 31, 1996.
18
<PAGE>
SIGNATURE
After due inquiry and to the best of my knowledge and belief, the
undersigned certifies that the information set forth in this statement is true,
complete and correct.
ALZA CORPORATION
By: /s/ Bruce C. Cozadd
----------------------------------------
Bruce C. Cozadd, Senior Vice President
and Chief Financial Officer
ALZA DEVELOPMENT CORPORATION
By: /s/ David R. Hoffmann
----------------------------------------
David R. Hoffmann, President
and Chief Financial Officer
19
<PAGE>
EXHIBIT B
A M A R K E T O P P O R T U N I T Y
A S S E S S M E N T F O R T H E D U R A G E S I C
T R A N S D E R M A L P A T C H
MARCH 2, 1998
Frost & Sullivan takes no responsibility for any incorrect information supplied
to us by manufacturers or users. Quantitative market information is based
primarily on interviews and therefore is subject to fluctuation.
Frost & Sullivan reports are limited publications containing valuable and
confidential market information. Frost & Sullivan reports are for our
customers' internal use and not for general publication or disclosure to third
parties.
(C) Copyright 1998 Frost & Sullivan
B-1
<PAGE>
EXECUTIVE SUMMARY
- --------------------------------------------------------------------------------
SCOPE OF THE STUDY
Frost & Sullivan was commissioned by ALZA Corporation to
provide revenue forecasts for Duragesic, a transdermal fentanyl
patch, for the time period 1997-2006.
OBJECTIVES OF THE STUDY
The objectives of the research were to:
. Assess the revenue potential of Duragesic from 1997
through 2006.
. Identify key competitive factors in the current and
future market environment.
. Identify key drivers of and restraints to market growth.
. Analyze the market opportunity for the period 1997-2006.
RESEARCH METHODOLOGY
The information contained in this report was obtained
through primary and secondary research.
Primary research included key discussions with:
B-2
<PAGE>
. Executives at pharmaceutical companies participating in
the chronic pain therapy market
. Experts in the field of opiate therapy and chronic pain
treatment
Secondary sources used to obtain relevant support
information included online data searches, trade journals, and
syndicated publications. In addition, IMS data encompassing
sales of Duragesic and competing products for the period 1995-
1997 were utilized.
Frost & Sullivan's initial approach to this project entailed
in-depth interviews with experts in the field of chronic pain
treatment. In addition, executives at companies involved in the
intractable pain market were interviewed to assess current and
future market trends.
Following the initial phase of research, an in-depth
analysis of the available information was done to develop a clear
assessment and forecast of the market.
KEY FINDINGS
The key findings are as follows:
. For a scenario in which a second transdermal product does
not emerge on the market, Duragesic is expected to
continue to experience substantial growth throughout the
forecast period. This growth will be due to increased
penetration into an expanding market, increased pricing,
and increased acceptance in key foreign markets.
. If a second product emerges on the market, in order to be
competitive, a company would need to undercut the price of
Duragesic.
Expanded market penetration should contribute to Duragesic's
revenue growth.
B-3
<PAGE>
2
DURAGESIC REVENUE FORECASTS
- --------------------------------------------------------------------------------
DURAGESIC REVENUE FORECASTS
MARKET DEFINITION
Intractable pain is pain in which the cause cannot be
removed or otherwise treated, and no relief or cure has been
found. Chronic pain is pain that persists for greater than one
month beyond the course of an illness or injury, pain that
continues sporadically over the span of years, or pain associated
with a long-term disease such as cancer.
For the purposes of this project, the chronic pain market is
defined as the population of people with cancer pain (malignant)
and neuropathic pain (nonmalignant). In 1997, the nonmalignant
pain market totaled approximately 700,000 patients. The total
malignant chronic pain market was estimated to encompass 200,000
patients.
The total value of the market is defined by the combined
revenues generated by the following products: Duragesic, MS
Contin, Oramorph, IR Morphine, Demerol, Dilaudid, and Kadian. In
1997, worldwide sales of Duragesic reached approximately $254.6
million. Approximately 80 percent of revenues were generated
from U.S. sales.
B-4
<PAGE>
MARKET OPPORTUNITY ASSESSMENT: SCENARIO I
Figure 2-1 illustrates Duragesic revenue forecasts in the
world analgesic pharmaceuticals market from 1997 through 2006 if
Duragesic were to remain the only transdermal opiate patch on the
market. Factors expected to contribute to future market trends
include changes in price and market dynamics, additional launches
in new foreign markets, and shifts in the competitive
environment. These changes and factors are discussed in detail
below.
-----------------------------------------------------------------
FIGURE 2-1
DURAGESIC PHARMACEUTICALS MARKET:
REVENUE FORECASTS (WORLD),
1997-2006
<TABLE>
<CAPTION>
SCENARIO I
--------------------------------------------------------------------------------
Revenue
Revenues Growth Rate
Year ($ Million) (%)
--------------------------------------------------------------------------------
<S> <C> <C>
1997............................................. 254.6 26.7
1998............................................. 320.9 26.1
1999............................................. 394.2 22.8
2000............................................. 473.7 20.2
2001............................................. 563.0 18.8
2002............................................. 645.3 14.6
2003............................................. 719.2 11.5
2004............................................. 786.3 9.3
2005............................................. 840.8 6.9
2006............................................. 892.1 6.1
Compound Annual Growth Rate (1997-2006): 14.9%
--------------------------------------------------------------------------------
</TABLE>
Note: All figures are rounded. Source: Frost & Sullivan
B-5
<PAGE>
Increased Penetration
of Duragesic into the Chronic Pain Market
A key component of future revenue growth will probably be a
shift in the perception of opioid therapy. According to leading
experts in the field of opioid therapy, the market landscape in
the United States is ripe for a revolution in how and for whom
narcotic analgesics are prescribed. A combination of regulatory,
societal, and marketing factors will act in favor of
liberalization in the use of these products. This should result
in an increase in prescribing patterns across indications
(chronic cancer pain, neuropathic pain, and acute pain).
According to industry experts, regulatory changes and the
effect of these changes on the medical community and society
should instigate a shift in market dynamics. Recent industry
literature, position statements by patient advocacy
organizations, and statements by the FDA have all focused on the
inadequate treatment many pain patients receive in their final
days of life as well as throughout their lifetime. This trend is
indicative of a significant change emerging in how these drugs
are perceived.
Current misconceptions regarding tolerance and addiction
prevent increased penetration of these products into the chronic
pain market, specifically for chronic nonmalignant pain. As
experts and scientists continue to highlight the clinical
pharmacological reality, these products will become less
stigmatic.
In addition, the industry's continued study into the use of
pain medication in nonmalignant pain patients should prove highly
beneficial to the future market. As scientific knowledge on the
use of opioid therapy in this population of patients grows,
B-6
<PAGE>
industry participants, which have shown clinical effectiveness in
this population, are expected to gain the approval to actively
and aggressively market these products for nonmalignant pain
indications. An increase in marketing efforts directed at a end
users currently undertreated is expected to correlate directly to
an increase in the total number of prescriptions dispensed.
The growing use of Duragesic in the treatment of
nonmalignant pain will be an integral component in the future
sales growth of the product. According to industry sources,
approximately 700,000 patients suffer from neuropathic pain in
the United States. Unlike chronic cancer pain patients, these
individuals are expected to live a typical life span, thus
ensuring long-term annuity for companies.
The combination of a shift in perception, aggressive
marketing, actions taken by patient advocacy groups, and trends
to establish guidelines for the use of these products are
expected to result in an increase in penetration of opioid
therapy in the total pain population.
Increasing Acceptance of Duragesic
in the Following Key Foreign Markets: Spain,
Japan, Germany, United Kingdom, Italy, and France
The successful launch of Duragesic into key foreign markets
is expected to contribute to a healthy growth pattern in the
future. Although some markets are highly profitable, in general,
foreign markets do not generate revenues comparable to those of
the U.S. market. In many foreign markets, the industry cannot
demand a price premium because of economic or regulatory factors.
B-7
<PAGE>
Key markets in western Europe that do command price premiums
include Germany and England. As such, a large portion of future
market growth will depend on these countries. Other markets that
are expected to prove profitable are Spain, Japan, Italy, and
France. The forecast model estimates that Duragesic will be
launched into the Japanese market in 2001.
Price Increase of Duragesic
Based on historical trends, an increase in the price of
Duragesic has been incorporated in the market forecast. This is
translated as an increase in the average price per year for
treatment with Duragesic. Because of a lack of direct
competition in the form of a second transdermal patch or
comparable delivery system, the price in relation to demand is
inelastic (based on calculations made from historical demand and
price increases).
Price elasticity allows companies to predict the effect of
price on demand (and thus, unit sales). It is defined as the
sensitivity of demand with respect to price. Inelastic
translates into demand that is relatively unresponsive to price.
Conversely, an elastic demand translates into demand that
fluctuates greatly with price changes. Factors that determine
price elasticity include whether the necessity of the good and
the availability of substitute products. It is believed that the
consumer (hospitals, private physicians, and managed care
organizations) will accept price increases of 1.0 to 3.5 percent
throughout the forecast period without significant correlating
changes in demand.
B-8
<PAGE>
Shifts in the Future Competitive Environment
An increase in the future competitive environment has also
been integrated into the forecast model. Although only one
product is expected to have a significant impact on the market
during the forecast period, this factor must be included in
future predictions of market growth.
MARKET OPPORTUNITY ASSESSMENT: SCENARIO II
Figure 2-2 shows Duragesic revenue forecasts in the world
analgesic pharmaceuticals market should a second transdermal
patch emerge on the market during the fourth quarter of 2000.
Factors likely to contribute to market trends for this scenario
include a change in market dynamics, reimbursement issues, and
effects on foreign markets.
-----------------------------------------------------------------
FIGURE 2-2
DURAGESIC PHARMACEUTICALS MARKET:
REVENUE FORECASTS (WORLD),
1997-2006
<TABLE>
<CAPTION>
SCENARIO II
-----------------------------------------------------------------------------
Revenue
Revenues Growth Rate
Year ($ Million) (%)
-----------------------------------------------------------------------------
<S> <C> <C>
1997............................................. 254.6 26.7
1998............................................. 320.9 26.1
1999............................................. 394.2 22.8
2000............................................. 470.6 19.4
2001............................................. 535.5 13.8
2002............................................. 586.0 9.4
2003............................................. 631.0 7.7
2004............................................. 671.9 6.5
2005............................................. 705.0 4.9
2006............................................. 739.1 4.8
Compound Annual Growth Rate (1997-2006): 12.6%
-----------------------------------------------------------------------------
</TABLE>
Note: All figures are rounded. Source: Frost & Sullivan
B-9
<PAGE>
The following key analytical factors were utilized to
determine the effect of a second product on the Duragesic
revenues.
Creation Market
Because of the changing environment in the United States,
the net number of individuals treated with opioid therapy is
expected to increase in the future. (This factor is discussed in
the market opportunity assessment section of the first scenario).
The expanding market, due to the growing penetration of opioid
therapy in an undertreated population, will result in a creation
market.
This new market opportunity will allow for competition to
expand market revenues, despite a loss of prescription share due
to increased competition. This mechanism will reflect positively
on Duragesic sales despite the emergence of a second transdermal
patch.
An example of this dynamic occurred in the pharmaceuticals
market in the early 1990s. Prozac (marketed by Eli Lilly),
launched in 1988, established a new class of products for the
treatment of depression. The product is a selective serotonin
re-uptake inhibitor (SSRI). The superior nature of the product
in relation to other available products, combined with five years
of market exclusivity, generated $880 million in revenues in the
United States by 1993.
In 1993, the launch of Zoloft, Pfizer's SSRI changed a
virtual monopoly into a competitive marketplace. In addition,
Zoloft was launched at a price below that of Prozac, thus
significantly increasing the competition for Eli Lilly.
B-10
<PAGE>
At the time Zoloft was launched, the market for a depressive
was expanding because of a growing recognition of the disorder.
This resulted in an increase in the population of potential
users. Although two equivalent drugs were available on the
market, the size of the market had expanded significantly,
leaving room for both competitors to increase penetration.
Therefore, Zoloft gained a novel end-user population (a creation
market) instead of converting patients already on Prozac. Due to
the market expansion, both companies were able to grow revenues
significantly.
Pricing Strategy
To compete in a market already established and dominated by
Duragesic, an emerging product would be forced to compete on the
variable of price. It is highly unlikely that an emerging
product, priced equivalently, would be able to adequately compete
with Duragesic after nine years of market exclusivity. Because
of this "head start," Duragesic will have the advantage of an
already established distribution network; a strong, aggressive,
and knowledgeable sales and marketing team; and most importantly,
a high level of brand loyalty.
To compete with a solid product marketed globally, a second
transdermal patch would most likely be forced to undercut
Duragesic in price. Based on the pricing of generic drugs in the
pharmaceuticals industry, a second transdermal patch may be
priced as much as 20 to 30 percent below Duragesic's price. A
product that is the only generic competitor to a branded
pharmaceutical will undercut the branded product price by a
minimal amount, approximately 20 percent. As more generic
products are launched and begin to compete in the market, generic
manufacturers will further drop their prices.
B-11
<PAGE>
Substitution at the Pharmacy Level
A key market dynamic that allows generic manufacturers to
slightly undercut the branded competition is substitution at the
pharmacy level. Although a physician may prescribe the branded
product, upon filling the prescription, a pharmacist may
substitute a generic version. This often occurs as a cost-
cutting measure.
Substitution at the pharmacy level can be also done between
two branded products if the substituted product is given an AB
rating. This rating, given by the FDA, denotes that these
products are similar enough to be considered bio-equivalent. If
a second transdermal patch were to emerge and gain approval as
bio-equivalent to Duragesic, substitution at the pharmacy level
would be a highly plausible outcome.
An example of this occurred in the attention deficit
disorder (ADD) market. For years, pharmacological treatment of
this disease was dominated by Ritalin (generic name
methylpenidate). Ritalin, the branded product, is marketed by
Novartis. Currently, one generic competitor exists--Medeva--with
the product methylpenidate. Methylpenidate is priced
approximately 35 percent below Ritalin (based on the 1997 Redbook
price).
According to industry sources, although Novartis continues
to dominate in market share owing to its high price premium, the
company is clearly losing in prescription share. Industry
sources claim that even though 80 percent of the prescriptions
written are for Ritalin, less than 70 percent of the
prescriptions dispensed are the branded product. This is due to
generic substitution occurring at the pharmacy level.
B-12
<PAGE>
To substitute a generic product for a branded product, or
potentially a branded product for an equivalent branded product,
the pharmacist must ask the consumer for permission. The main
factor favoring the dispensation of the lower-priced product is
the individual's managed care organization. Although a consumer
does have a choice as to the product dispensed, the HMO plan may
only cover the lower-priced drug, therefore encouraging the
individuals to choose it or pay for the difference themselves.
Effect of Second Product
on Foreign Markets Is Not Substantial
A second transdermal patch is not expected to be launched
immediately on the global market without first generating
substantial revenues in the United States. In addition, because
of the lengthy approval process in many countries, a 2000 launch
in foreign markets is highly unlikely. Because of these factors,
the extent of Duragesic's market share loss in foreign markets
during the forecast period will probably be insignificant.
MARKET DRIVERS
The following factors were determined to be key drivers of
the future market.
Regulatory Changes
According to industry experts, state governments in the
future are expected to establish guidelines and laws for use
opioids that do not impede medical practice.
B-13
<PAGE>
Perceptual Shift
The anticipated favorable shift in the perception of opioid
therapy, within the medical community and within society at
large, should contribute to increased use of such therapy.
Advocacy Groups
Action by patient advocacy groups continue to elevate the
undertreatment of chronic pain as a significant medical issue.
The groups are essential components of the market because they
spur regulatory action by governmental bodies.
Increased Marketing
Based on the solid scientific results of industry studies,
opioid therapy is expected to gain approval to aggressively
market for nonmalignant pain indications. This is expected to
boost penetration into a population that is currently
undertreated.
Potential for Long-Term Annuity
As opioid therapy becomes more widely used to treat
nonmalignant chronic pain, industry participants will gain long-
term annuity, since many of these patients will likely live
typical life spans.
MARKET RESTRAINTS
The following factors were determined to be key restraints
to market growth.
B-14
<PAGE>
Gradual Process of Overcoming Misconceptions
Currently, misconceptions regarding the addictive nature of
opioid analgesics inhibit greater penetration of these products
into the population of chronic pain patients. For many members
of the medical community as well as patients, opioid analgesics
are thought to be associated with a high risk of addiction.
According to experts in the field of opioid therapy,
physical dependency is often used synonymously with addiction,
leading to confusion. As with many other types of drugs,
physiological changes in the body lead to withdrawal symptoms
when individuals cease using opioid narcotics. However, this is
not equivalent to addiction. In patients with no history of
addiction, this issue should not be considered a risk in the
management of their pain. Although addiction is not considered
by knowledgeable physician and patients as a risk, it is a factor
that impedes use among less knowledgeable individuals.
Although a change in the view of the addictive nature of
these products is expected, the process will be gradual,
occurring over a five to ten years. Thus, an immediate
substantial increase in the use of opioid therapy is unlikely.
Increased Competition in the Future Market
The launch of an innovative product offering pain relief
with few side effects is expected to increase the competition in
the market, and projected to significantly affect the chronic
neuropathic pain market.
B-15
<PAGE>
COMPETITIVE ENVIRONMENT
Analysis of Present Market Environment
The current narcotic analgesics market is dominated by seven
participants, which can be stratified into two tiers of
competition. Duragesic and MS Contin control the first tier of
competition. Based on clinical pharmacology, Kadian and Oramorph
can be considered first-tier competitors, although neither
product commands as much prescription share as Duragesic or MS
Contin. Differences in overall equivalency, ease of use,
duration of action, and analgesic effect differentiate these top
competitors from second-tier products such as Dilaudid, Demerol,
and IR morphine.
Second-tier products lack several key competitive advantages
that prevent them from tightening the competitive environment.
The major disadvantages are:
. Comparatively short duration of action
. Less controlled release of opioid
. Oral dosages are less effective than parenteral
counterparts
The shorter duration of action is a major weakness of
second-tier opioid analgesic drugs. This limitation prevents
Demerol (meperidine) from being considered a viable product for
relieving chronic pain (instead of one more appropriate for acute
pain). Furthermore, decreased duration of action prevents all
second-tier competitors from gaining a position of strength in
the total chronic pain market, since they are more suitable for
various niche indications.
First-tier products also offer key advantages in ease of
use, propelling these products into a different class. The
B-16
<PAGE>
limitation of current second-tier products is expected to
continue to prevent them from being a substantial competitive
factor to Duragesic.
Of the first-tier competitors, MS Contin and Oramorph are
similar products offering an oral product administered every 8 to
12 hours. Kadian competes directly with these two standard
treatments, offering a product administered every 24 hours.
Within the first tier of competition, the following factors
continue to effect market dynamics:
RAPID DOSE TITRATION
Duragesic is limited in one arena: it is not suitable for
rapid dose titration. If patients suffer a constant level of
pain, the limitation is not significant, but for patients with
rapid increases in pain intensity, Duragesic is not a suitable
option. Furthermore, in the future, opioid therapy is expected
to expand as a treatment of severe acute pain. Because of the
limited time of opioid use in these patients, Duragesic will be
unable to capitalize on this trend.
EASE OF ADMINISTRATION
Ease of use remains a significant factor that continues to
drive Duragesic sales. The convenience of the transdermal
administration mode is unmatched by other products on the market.
Although oral morphine offers ease of use, the oral formulation
of morphine sulfate is not as potent as the intravenous
formulations.
CONTINUED AGGRESSIVE MARKETING OF KADIAN
Kadian, the newest entrant into the opioid therapy market,
is expected to continue to impact market dynamics and
B-17
<PAGE>
modify the competitive environment. As marketing of Kadian
continues and the product gains prescription share, oral morphine
sulfate is expected to experience the biggest decline in sales.
Kadian intensifies the competitive environment for Duragesic,
offering a product with a significantly long duration of action.
However, prescription share is not forecast to be significantly
affected by this product.
Analysis of Future Market Environment
Research and development efforts in the narcotic analgesic
market are focused on delivering equivalent pain relief to
current marketed products while simultaneously diminishing side
effects. Figure 2-3 shows the products in development for the
treatment of chronic pain in the narcotic analgesic
pharmaceuticals market.
Strategies for delivering novel products tend to take one of
two paths: Companies are developing new administration modes for
already used compounds, or they are developing new compounds that
display their potency through a variant mechanism. It is the
latter of the two strategies that, if successful, may be the
greatest threat to Duragesic sales in the future.
B-18
<PAGE>
- --------------------------------------------------------------------------------
FIGURE 2-3
NARCOTIC ANALGESIC PHARMACEUTICALS MARKET:
SELECTED PRODUCTS IN RESEARCH AND DEVELOPMENT (WORLD),
1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
Clinical
Product Company Type Status
<S> <C> <C> <C>
BCH 3963............ BioChem Pharma Opiate Agonist Preclinical
Actiq............... Abbott Laboratories Fentanyl Citrate Registered
Anesta Corporation Transmucosal
4030W92............. Glaxo Wellcome, Inc. Sodium Channel Blocker Phase II
Not Available....... CytoTherapeutics Adrenal Chrommafin Cells Phase II
Astra AB
CMI-980............. CytoMed, Inc. Not Available Preclinical
Quadramet........... DuPont Merck/Cytogen Sumarium-153-EDTA Registered
Not Available....... Eli Lilly NK1 Antagonist Phase I
Not Available....... Eli Lilly Muscarinic Antagonist Phase I/II
GV196771............ Glaxo Wellcome Glycine Antagonist Preclinical
Hydromorphone Oros.. Alza Corp. Morphine Phase III
Knoll Pharmaceuticals
MorphiDex........... Algos Pharmaceuticals Corp. NMDA Receptor Phase III
Antagonist
Dirame.............. Roberts Pharmaceutical Partial Opiate Agonist Phase III
Ziconotide.......... Neurex Corp. Neuron Specific Phase III
(Intrathecal) Calcium Channel Blocker
Anchor.............. Redcell Opiate Agonist Preclinical
SNC 80.............. Glaxo Wellcome Opiate Antagonist Preclinical
TAN 67.............. Toray Delta Agonist Preclinical
Daichii Pharmaceuticals
- -----------------------------------------------------------------------------------------
</TABLE>
Source: Frost & Sullivan
The majority of products listed in Figure 2-3 will not have
a significant, if any, impact on the future market for Duragesic.
Products early in the developmental process are not expected to
appear on the market until 2004 or 2005, if at all. Many
products in the later stages of development are not believed to
have significant benefits or advantages that will threaten
Duragesic's market share. The exception to this is Ziconotide
B-19
<PAGE>
(formerly SNX-111), which is currently completing Phase III
clinical trials.
Ziconotide, in development by Neurex Corporation (Menlo
Park, California), is a synthetic copy of a natural neurotoxin
taken from cone snail venom. The compound, delivered through an
infusion pump, is a selective neuron specific calcium channel
blocker (a neurochemical pathway through which pain signals
travel to the brain).
The advantages and disadvantages of this product compared to
Duragesic are listed in Figure 2-4. The key advantage of
Ziconotide over Duragesic is the lack of side effects. It
appears that use of Ziconotide is not associated with euphoria or
mental confusion, which tend to accompany morphine-based
analgesics. This will prove a crucial marketing advantage, since
individuals and physicians alike will favor a compound that
relieves pain without diminishing the patient's mental capacity.
-----------------------------------------------------------------
FIGURE 2-4
NARCOTIC ANALGESIC PHARMACEUTICALS MARKET:
COMPARATIVE ANALYSIS OF ZICONOTIDE (WORLD),
1997
<TABLE>
<CAPTION>
ADVANTAGES DISADVANTAGES
================================================================================================================
<S> <C>
No side effects commonly associated with the use of morphine Inconvenient route of delivery
- ----------------------------------------------------------------------------------------------------------------
Tolerance not an issue Limited initial label indication
- ----------------------------------------------------------------------------------------------------------------
Effective in patients who have failed morphine therapy Neurex being new to marketplace
- ----------------------------------------------------------------------------------------------------------------
Partnership with medtronic pump Comparatively high annual cost for
treatment
- ----------------------------------------------------------------------------------------------------------------
No regulatory environment to overcome
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
Source: Frost & Sullivan
-----------------------------------------------------------------
B-20
<PAGE>
The company plans to file an new drug application in
September 1998 with the FDA. The initial label indication that
Neurex will pursue is for use in patients who have failed all
other forms of opiate therapy. According to Neurex, this
population consists of approximately 270,000 malignant and
neuropathic pain patients. The company estimates that
approximately 10 percent of the 700,000 neuropathic pain patients
(70,000) and 200,000 cancer pain patients are not receiving
adequate pain relief from current treatments.
Because there are no existing treatment options for these
patients, according to FDA guidelines, Ziconotide is eligible to
be fast-tracked through the approval process. Therefore, the
launch date for this drug is estimated to be the first quarter of
2000.
Although Ziconotide will not benefit immediately from a
broad indication and thus not appear to be a competitive factor
for Duragesic, "off-label" use is a factor. The key benefits of
Ziconotide are strong incentives for physicians to prescribe the
drug to patients who wish to remit their chronic pain, without
becoming debilitated by morphine-induced side effects.
The main disadvantage expected to inhibit the widespread
success of Ziconotide is the product's delivery method. The only
intrathecal product currently on the market is Infumorph by
Elkins Sinn. It is not widely used and appears to be an option
for treatment only after intravenous and oral therapy have
failed. The inconvenience of an infusion pump will serve as a
restraint to penetration of Ziconotide. Furthermore, the cost
may also retrain the use of Ziconotide, which will be priced at
approximately $3,500 to $5,000 per year.
B-21
<PAGE>
EXHIBIT D
---------
- --------------------------------------------------------------------------------
ALZA DEVELOPMENT CORPORATION
PURCHASE OF CLASS A LIMITED
PARTNERSHIP INTERESTS OF
ALZA TTS RESEARCH PARTNERS, LTD.
----------------------------
NOTICE TO LIMITED PARTNERS OF
ALZA TTS RESEARCH PARTNERS, LTD.
----------------------------
This information is disseminated pursuant to Rule 13e-3 of the Securities
Exchange Act of 1934, as amended.
THIS TRANSACTION HAS NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED
UPON THE FAIRNESS OR MERITS OF SUCH TRANSACTION NOR UPON THE
ACCURACY OR ADEQUACY OF THE INFORMATION CONTAINED IN THIS
DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
- --------------------------------------------------------------------------------
D-1
<PAGE>
THE TRANSACTION
---------------
ALZA Development Corporation ("ADC"), a wholly owned subsidiary of ALZA
Corporation ("ALZA"), and the general partner (the "General Partner") of ALZA
TTS Research Partners, Ltd., a California limited partnership (the
"Partnership") wishes to advise the holders of Class A Limited Partnership
Interests and the Class B Limited Partnership Interest that on
____________, 1998, the General Partner exercised its option to purchase all of
the issued and outstanding Limited Partnership Interests (the "Purchase Option")
as provided in the Agreement of Limited Partnership (the "Agreement of Limited
Partnership"). The Class A Limited Partnership Interests and the Class B Limited
Partnership Interest are referred to collectively in this Notice to Limited
Partners (the "Notice") as the "Limited Partnership Interests".
The purchase price for all issued and outstanding Limited Partnership
Interests is $91,176,592.48 (the "Purchase Price") or $27,216.21 per Class A
Limited Partnership Interest and $4,084,720.48 for the Class B Limited
Partnership Interest. ALZA intends to contribute to ADC the amount of cash
necessary to exercise the Purchase Option, which contribution ALZA intends to
finance with its cash and marketable securities. The closing (the "Closing") of
the purchase of the Limited Partnership Interests will take place on _______,
1998 (the "Closing Date"). Upon the Closing, the General Partner will forward to
each holder of record of a Limited Partnership Interest as of the Closing Date a
check equal to such holder's pro rata interest in the Purchase Price.
--------
D-2
<PAGE>
INTRODUCTION
------------
This Notice relates to the exercise by ADC of its option to purchase all
issued and outstanding Limited Partnership Interests of the Partnership. ADC is
the General Partner of the Partnership and is a wholly owned subsidiary of ALZA.
This Notice is being given by ALZA and ADC.
SPECIAL FACTORS
---------------
Purpose.
The purpose of this transaction is for ALZA, through ADC, to acquire all
rights, on an exclusive basis, to products (the "Partnership Products") for
which development was funded by the Issuer under its Research and Development
Agreement (the "Development Agreement") with ALZA. ALZA believes that it
is in the best interests of ALZA and ALZA's stockholders to exercise the
Purchase Option at this time. ALZA has worldwide licenses, including the right
to sublicense, to make, use and sell (i) a transdermal fentanyl product sold
in the United States under the name Duragesic(R) and (ii) a transdermal
testosterone product sold under the name Testoderm(R). Such licenses are
currently exclusive; however, ALZA's exclusive rights with respect to
Testoderm(R) and Duragesic(R) would end on July 26, 1998 and December 4, 1998,
respectively. Because ALZA's exclusive rights are limited in duration, ALZA
believes that exercising the Purchase Option is the most effective and
comprehensive method of acquiring continued exclusive rights to Testoderm(R),
Duragesic(R) and other Partnership Products. In addition, because ALZA's
obligations to pay royalties to the Partnership under the licenses for
Testoderm(R) and Duragesic(R) will terminate upon exercise of the Purchase
Option, ALZA will benefit by retaining the full royalty received on sales of
Duragesic(R) and the full sales margin on Testoderm(R).
The structure of the transaction is in accordance with the terms of the
previously granted Purchase Option as set forth in the Limited Partnership
Agreement. The transaction is being undertaken at this time because of the
timing of the expiration of ALZA's exclusive rights described above. ADC and
ALZA did not consider alternative means to accomplish the transaction because of
the previously granted Purchase Option.
D-3
<PAGE>
1997 Tender Offer.
On November 20, 1997, PharmaInvest, L.L.C. ("PharmaInvest") on behalf of
Pharmaceutical Royalties L.L.C., Pharmaceutical Royalty Investments Ltd. and
Pharmaceutical Partners L.L.C. ("Pharmaceutical Partners") made an unsolicited
tender offer (the "Tender Offer") to purchase up to 1,400 Class A Limited
Partnership Interests, representing approximately 44% of the total outstanding
Class A Limited Partnership Interests, for cash consideration per Class A
Limited Partnership Interest of $12,000. In response to the Tender Offer, the
General Partner filed a Schedule 14D-9 (the "Schedule 14D-9") with the
Securities and Exchange Commission (the "Commission"), in which the General
Partner expressed no opinion with respect to the Tender Offer to the holders of
the Class A Limited Partnership Interests and stated that the General Partner
would remain neutral as to whether the Limited Partners should tender or refrain
from tendering their Class A Limited Partnership Interests. In its letter to the
Limited Partners advising them of its neutrality with respect to the Tender
Offer, the General Partner drew the attention of the Limited Partners to certain
facts, including, (i) the dates on which ALZA's exclusive rights with respect to
Duragesic(R) and Testoderm(R) were scheduled to expire, (ii) the General
Partner's expectation of the growth of sales of Duragesic(R) and (iii) the
report of Securities Pricing and Research, Inc., an independent appraisal firm
("SPAR"), estimating that the rounded net asset value and fair market value of a
Class A Limited Partnership Interest as of December 31, 1996 were $21,200 and
$15,900, respectively. None of ADC, ALZA or the Partnership has any affiliation
with SPAR, nor does any of them endorse the report prepared by SPAR (the "SPAR
Report"). In addition, neither the General Partner nor the Partnership engaged
SPAR to prepare the SPAR Report or participated in the preparation of the SPAR
Report. The SPAR Report was not related to the Tender Offer and is not related
to the Purchase Option.
Also on November 20, 1997, Pharmaceutical Partners, an affiliate of
PharmaInvest, in a letter addressed to ALZA, set forth its views about the
Purchase Option and its effects on the Limited Partners, the Partnership, the
General Partner and ALZA. In connection with the Partnership's consideration
and evaluation of the Tender Offer, ALZA, on December 2, 1997, advised the
Partnership of the matters raised in Pharmaceutical Partners' letter to ALZA and
informed the Partnership of ALZA's position regarding such matters. A copy of
such letter was, with ALZA's permission, included as an exhibit to the Schedule
14D-9 and sent to the holders of the Limited Partnership Interests. On January
16, 1998, PharmaInvest amended its offer by increasing the purchase price of
each Class A Limited Partnership Interest from $12,000 to $13,200. In
connection with the increase in the purchase price, the General Partner filed an
amendment to its Schedule 14D-9 stating that the General Partner continued to
express no opinion to the holders of the Class A Limited Partnership Interests
and that the General Partner would continue to remain neutral as to whether the
Limited Partners should tender or refrain from tendering their Class A Limited
Partnership Interests. In addition, the General Partner informed the Limited
Partners that in reaching its
D-4
<PAGE>
conclusion with respect to the Tender Offer, the General Partner had taken into
account (i) that SPAR had reduced its estimates of the rounded net asset value
and fair market value of the Class A Limited Partnership Interests as of
December 31, 1996, and (ii) the General Partner's expectation of the growth of
sales of Duragesic(R). On February 2, 1998, PharmaInvest announced that the
Tender Offer had expired and that 72 Class A Limited Partnership Interests were
tendered in connection with the Tender Offer.
As described above, in November 1997, PharmaInvest made the Tender Offer.
In the last fiscal year, PharmaInvest contacted the General Partner to make it
aware of its possible interest in the Partnership as an investment opportunity.
PharmaInvest sent additional letters on July 11 and 17, 1997 continuing to
express its interest in the Partnership. In October 1997, PharmaInvest had a
conversation with the General Partner reiterating its interest in the
Partnership. Following the conversation, PharmaInvest acquired two Class A
Limited Partnership Interests, and on October 22, 1997 made a written request to
receive a list of names and addresses of Limited Partners (the "List").
PharmaInvest received the List on November 2, 1997 and commenced the Tender
Offer on November 20, 1997.
Consequences.
As a result of the transaction described herein, the Partnership will
terminate as a limited partnership and the General Partner will take all
appropriate and necessary actions to suspend the Partnership's public reporting
obligations and to wind up the affairs of the Partnership in accordance with
California law. The General Partner will continue as a wholly owned subsidiary
of ALZA. For federal income tax purposes the Partnership will be treated as
terminating on the date of the transaction and as distributing all of its
assets, subject to all of its liabilities, to the General Partner on that date.
The Partnership will not have taxable gain or loss as a result of the
transaction described herein.
D-5
<PAGE>
The transaction described herein will cause each Limited Partner to dispose
of its Limited Partnership Interests for consideration equal to such holder's
pro rata share of the Exercise Price. The following discussion sets forth
- --------
general federal income tax considerations under the Internal Revenue Code of
1986, as amended (the "Code") for the Limited Partners with respect to cash
received by the Limited Partners for the Limited Partnership Interests. This
discussion is intended only to provide general information to the Limited
Partners that are subject to United States federal income tax; it may not
address all relevant federal income tax consequences to such persons or to other
categories of the Limited Partners (e.g., foreign persons, dealers in
----
securities, and persons that are exempt from federal income tax). This
discussion is based upon present federal income tax laws and does not attempt to
anticipate changes, including changes in tax rates, that may be made under
currently pending legislative proposals. This discussion assumes that the
Limited Partnership Interests were at all relevant times capital assets of the
Limited Partners. This discussion does not address state, local or foreign tax
considerations. ALL LIMITED PARTNERS ARE URGED TO CONSULT THEIR OWN TAX
ADVISORS.
Except as described below, the holder of a Limited Partnership Interest
should generally have a capital gain or loss due to ADC's exercise of the
Purchase Option equal to the difference between (i) the amount of cash received
and (ii) the holder's basis in the Limited Partnership Interest. A Limited
Partner's basis in a Limited Partnership Interest is the Limited Partner's
initial purchase price decreased by any partnership deductions taken by the
Limited Partner and any cash distributed by the Partnership to the Limited
Partner and increased by the Limited Partner's share of the Partnership's
income. Under current law, capital gain or loss will be: (a) long-term if the
Limited Partnership Interest has been held at least 18 months at the time the
Purchase Option is exercised, (b) mid-term if the holding period is more than
one year but less than (or equal to) 18 months, and (c) short term if the
holding period is a year or less. Under Section 751 of the Code, the difference
between the portion of the cash received by the holder that is attributable to
"unrealized receivables" and "inventory" of the Partnership (together, "Section
751 Property") over the portion of the holder's adjusted tax basis in the
Limited Partnership Interest allocable to Section 751 Property will be treated
as ordinary income or loss, rather than capital gain or loss. Although this
conclusion is not entirely free from doubt, ADC believes that the only
"unrealized receivables" of the Partnership should be the amount, if any, of
accrued, but unpaid royalties under ALZA's licenses to Duragesic(R) and
Testoderm(R). Treasury regulations require each person who transfers an interest
in a partnership possessing Section 751 Property to file a statement with such
person's tax return reporting the transfer and certain other information
relating thereto. Limitations may apply to deduction of capital loss.
To the extent that any holder of a Limited Partnership Interest has not
provided an appropriate taxpayer identification number on IRS Form W-9 or a
substitute therefor, the holder may be subject to backup withholding by ALZA or
ADC.
D-6
<PAGE>
The Purchase Price will be amortized by ALZA over a number of years.
Fairness.
Each of ADC and ALZA reasonably believes that the transaction described
herein is fair to the Limited Partners. None of ALZA's or the General Partner's
directors dissented to or abstained from voting on such transaction.
Each of ADC and ALZA has based its respective belief that the transaction
is fair to the holders of the Limited Partnership Interests on the fact that the
Limited Partners were fully aware of the Purchase Option, which was an essential
economic term of the Limited Partnership Interests, when they purchased their
Limited Partnership Interests. The prospectus, pursuant to which the Limited
Partnership Interests were offered and sold, fully described the Purchase
Option. The Purchase Option, which is contained in the Limited Partnership
Agreement, was also publicly filed with the Commission. The Limited Partners
were also advised of the Purchase Option in each Form 10-K and each recent Form
10-Q public filing made by the Partnership with the Commission. In addition,
the Limited Partners were reminded of the Purchase Option in connection with the
Tender Offer and in evaluating whether or not to tender their Limited
Partnership Interests in the Tender Offer. Accordingly, the Purchase Option was
present in the initial public sale, was disseminated in the Partnership's
charter documents and was discussed in the Partnership's periodic filings. As a
result, every Limited Partner received substantial notice as to the terms of the
Purchase Option prior to making any investment decision with respect to the
Limited Partnership Interests. In addition, in its most recent filings the
Partnership has indicated that ALZA's exclusive rights with respect to
Duragesic(R) and Testoderm(R) would expire soon and
that such expiration could lead to the exercise of the Purchase Option.
In connection with its decision whether to exercise the Purchase Option, in
February of 1998 ALZA commissioned Frost & Sullivan, an independent market
research firm ("Frost & Sullivan"), to prepare a market research report (the
"Report") of revenue forecasts for Duragesic. ALZA took into account the
information contained in the Report in deciding whether the exercise of the
Purchase Option was in the best interests of ALZA and ALZA's stockholders;
however, because the Report did not assess the fairness of the exercise price of
the Purchase Option, neither ALZA nor ADC considers that the Report is relevant
with respect to the fairness of the transaction to the Limited Partners. ALZA
engaged Frost & Sullivan to prepare the Report because of Frost & Sullivan's
expertise with respect to analyzing sales and marketing information and trends
of product sales in the pharmaceutical industry. Prior to engaging Frost &
Sullivan, ALZA contacted several other market research firms, but chose Frost &
Sullivan because of its availability and experience. ALZA has engaged Frost &
Sullivan for other market research engagements from time to time and has paid
normal service fees in connection with such engagements. The objectives of the
Report were to (i) assess the revenue potential for Duragesic(R) during the
period from 1997 to 2006, (ii) analyze the market opportunity for the same
period, (iii) identify key
D-7
<PAGE>
competitive factors in the current and future market environment and (iv)
identify key drivers of and restraints to market growth. After research using
both primary and secondary sources, the key findings provided by the Report were
(a) if a second transdermal product does not emerge on the market, Duragesic(R)
is expected to continue to experience substantial growth throughout the forecast
period due to an increased penetration into an expanding market, increased
pricing and increased acceptance in key foreign markets, and (b) if a second
transdermal product emerges on the market, in order to be competitive, a
competitor would need to undercut the price of Duragesic(R). A copy of the
Report is available for inspection and copying at the principal executive
offices of ALZA during its regular business hours by any interested Limited
Partner or his or her representative who has been so designated in writing. A
copy of the Report will be transmitted by ALZA to any interested Limited Partner
or his or her representative who has been so designated in writing upon written
request and at the expense of the requesting Limited Partner.
The exercise of the Purchase Option and the consummation of the
transactions thereunder do not require approval of the Limited Partners.
No director of ALZA or the General Partner has retained an unaffiliated
representative to act solely on behalf of the Limited Partners. As a limited
partnership, the Partnership does not have any directors. Each director of the
General Partner is an officer of the General Partner and an employee and officer
or vice-president of ALZA.
BACKGROUND AND SUMMARY OF TRANSACTION
-------------------------------------
Identification of Partnership and ALZA.
This Notice is being given by ADC in accordance with the terms of the
Limited Partnership Agreement. ADC is the general partner of the Partnership and
a wholly owned subsidiary of ALZA.
ALZA's principal business is the development and commercialization of
pharmaceutical products. ALZA is incorporated in the State of Delaware and the
address of its principal executive offices is 950 Page Mill Road, P.O. Box
10950, Palo Alto, CA 94303-0802.
ADC's principal business is acting as general partner of the Partnership.
ALZA is incorporated in the State of Delaware and the address of its principal
executive offices is 950 Page Mill Road, P.O. Box 10950, Palo Alto, CA 94303-
0802.
During the last five years, neither ALZA nor ADC has been convicted in a
criminal proceeding (excluding traffic violations or similar misdemeanors).
During the last five years, neither ALZA nor ADC has been a party to a civil
proceeding of a judicial
D-8
<PAGE>
or administrative body of competent jurisdiction and as a result of such
proceeding was or is subject to a judgment, decree or final order enjoining
further violations of, or prohibiting activities subject to, federal or state
securities laws or finding any violation of such laws.
Information with Respect to Executive Officers and Directors of ALZA.
- --------------------------------------------------------------------
Name: Dr. Ernest Mario (Chairman and Chief Executive Officer)
Business Address: 950 Page Mill Road, Palo Alto, CA 94304
Principal Occupation: Chief Executive Officer of ALZA
Criminal Convictions During Proceeding Five Years: None
Judgments, Decrees or Orders Under Federal or State Securities Laws
During Preceding Five Years: None
Citizenship: United States of America
Name: William G. Davis (Director)
Business Address: 3532 Bay Road, South Drive, Indianapolis, IN 49240
Principal Occupation: Independent Business Consultant
Criminal Convictions During Proceeding Five Years: None
Judgments, Decrees or Orders Under Federal or State Securities Laws
During Preceding Five Years: None
Citizenship: United States of America
Name: Dr. William R. Brody (Director)
Business Address: 3400 North Charles Street, 242 Garland Hall, Baltimore, MD
21218
Principal Occupation: President of The John Hopkins University (from 1996 to
present); Provost of The University of Minnesota Academic Health Center (from
1994 to 1996); and Martin Donner Professor and Director of the Department of
Radiology at The John Hopkins University (from 1987 to 1994)
Criminal Convictions During Proceeding Five Years: None
Judgments, Decrees or Orders Under Federal or State Securities Laws
During Preceding Five Years: None
Citizenship: United States of America
D-9
<PAGE>
Name: Robert J. Glaser, M.D. (Director)
Business Address: 1 Elm Place, Atherton, CA 94027
Principal Occupation: Director (retired) for Medical Science and Trustee of the
Name: Lucille P. Markey Charitable Trust
Criminal Convictions During Proceeding Five Years: None
Judgments, Decrees or Orders Under Federal or State Securities Laws
During Preceding Five Years: None
Citizenship: United States of America
Name: Dean O. Morton (Director)
Business Address: 3200 Hillview Avenue, Palo Alto, CA 94304
Principal Occupation: Executive Vice President and Chief Operating Officer
(Retired in 1992) of Hewlett-Packard Corporation
Criminal Convictions During Proceeding Five Years: None
Judgments, Decrees or Orders Under Federal or State Securities Laws
During Preceding Five Years: None
Citizenship: United States of America
Name: Denise M. O'Leary (Director)
Business Address: c/o Vivra, Inc., 1850 Gateway Drive, Suite 5000, San Mateo,
CA 94404
Principal Occupation: Special Limited Partner with Menlo Ventures
Criminal Convictions During Proceeding Five Years: None
Judgments, Decrees or Orders Under Federal or State Securities Laws
During Preceding Five Years: None
Citizenship: United States of America
Name: Isaac Stein (Director)
Business Address: 525 University Avenue, Suite 700, Palo Alto, CA 94301
Principal Occupation: President of Waverley Associates, Inc.
Criminal Convictions During Proceeding Five Years: None
Judgments, Decrees or Orders Under Federal or State Securities Laws
During Preceding Five Years: None
Citizenship: United States of America
Name: Julian N. Stern (Director and Secretary)
Business Address: 525 University Avenue, Suite 1100, Palo Alto, CA 94301
Principal Occupation: Partner of Heller Ehrman White & McAuliffe
Criminal Convictions During Proceeding Five Years: None
Judgments, Decrees or Orders Under Federal or State Securities Laws
During Preceding Five Years: None
Citizenship: United States of America
D-10
<PAGE>
Name: James Butler (Senior Vice President of Sales and Marketing)
Business Address: 950 Page Mill Road, Palo Alto, CA 94304
Principal Occupation: Senior Vice President of Sales and Marketing of ALZA
Criminal Convictions During Proceeding Five Years: None
Judgments, Decrees or Orders Under Federal or State Securities Laws
During Preceding Five Years: None
Citizenship: United States of America
Name: Bruce C. Cozadd (Senior Vice President and Chief Financial Officer)
Business Address: 950 Page Mill Road, Palo Alto, CA 94304
Principal Occupation: Senior Vice President and Chief Financial Officer of ALZA
Criminal Convictions During Proceeding Five Years: None
Judgments, Decrees or Orders Under Federal or State Securities Laws
During Preceding Five Years: None
Citizenship: United States of America
Name: Harold Fethe (Vice President of Human Resources)
Business Address: 950 Page Mill Road, Palo Alto, CA 94304
Principal Occupation: Vice President of Human Resources of ALZA
Criminal Convictions During Proceeding Five Years: None
Judgments, Decrees or Orders Under Federal or State Securities Laws
During Preceding Five Years: None
Citizenship: United States of America
Name: Dr. Gary V. Fulscher (Senior Vice President of Commercial Services)
Business Address: 950 Page Mill Road, Palo Alto, CA 94304
Principal Occupation: Senior Vice President of Commercial Services of ALZA
Criminal Convictions During Proceeding Five Years: None
Judgments, Decrees or Orders Under Federal or State Securities Laws
During Preceding Five Years: None
Citizenship: United States of America
Name: Dr. Samuel R. Saks (Senior Vice President of Medical Affairs)
Business Address: 950 Page Mill Road, Palo Alto, CA 94304
Principal Occupation: Senior Vice President of Medical Affairs of ALZA
Criminal Convictions During Proceeding Five Years: None
Judgments, Decrees or Orders Under Federal or State Securities Laws
During Preceding Five Years: None
Citizenship: United States of America
D-11
<PAGE>
Name: Peter D. Staple (Senior Vice President and General Counsel)
Business Address: 950 Page Mill Road, Palo Alto, CA 94304
Principal Occupation: Senior Vice President and General Counsel of ALZA
Criminal Convictions During Proceeding Five Years: None
Judgments, Decrees or Orders Under Federal or State Securities Laws
During Preceding Five Years: None
Citizenship: United States of America
Name: Dr. Felix Theeuwes (President of New Ventures)
Business Address: 950 Page Mill Road, Palo Alto, CA 94304
Principal Occupation: President of New Ventures of ALZA
Criminal Convictions During Proceeding Five Years: None
Judgments, Decrees or Orders Under Federal or State Securities Laws
During Preceding Five Years: None
Citizenship: Belgium
Name: Janne Wissel (Senior Vice President of Operations)
Business Address: 950 Page Mill Road, Palo Alto, CA 94304
Principal Occupation: Senior Vice President of Operations of ALZA
Criminal Convictions During Proceeding Five Years: None
Judgments, Decrees or Orders Under Federal or State Securities Laws
During Preceding Five Years: None
Citizenship: United States of America
Name: Dr. James W. Young (Senior Vice President of Research and Development)
Business Address: 950 Page Mill Road, Palo Alto, CA 94304
Principal Occupation: Senior Vice President of Research and Development of ALZA
Criminal Convictions During Proceeding Five Years: None
Judgments, Decrees or Orders Under Federal or State Securities Laws
During Preceding Five Years: None
Citizenship: United States of America
Information with Respect to Officers and Directors of ADC.
- ---------------------------------------------------------
Name: David R. Hoffmann (President, Chief Financial Officer, Secretary and
Director)
Business Address: 950 Page Mill Road, Palo Alto, CA 94304
Principal Occupation: Vice President and Treasurer of ALZA
Criminal Convictions During Proceeding Five Years: None
Judgments, Decrees or Orders Under Federal or State Securities Laws
During Preceding Five Years: None
Citizenship: United States of America
D-12
<PAGE>
Name: Robert M. Myers (Vice President and Director)
Business Address: 950 Page Mill Road, Palo Alto, CA 94304
Principal Occupation: Vice President, Commercial Development of ALZA
Criminal Convictions During Proceeding Five Years: None
Judgments, Decrees or Orders Under Federal or State Securities Laws
During Preceding Five Years: None
Citizenship: United States of America
Name: Dr. James W. Young (Vice President and Director)
Business Address: 950 Page Mill Road, Palo Alto, CA 94304
Principal Occupation: Senior Vice President, Research and Development of ALZA
Criminal Convictions During Proceeding Five Years: None
Judgments, Decrees or Orders Under Federal or State Securities Laws
During Preceding Five Years: None
Citizenship: United States of America
Securities of the Partnership.
The exact title of the class of security which is the subject of this
Notice is the Class A Limited Partnership Interests of ALZA TTS Research
Partners, Ltd. As of March 31, 1998 (the most recent practicable date), there
were (i) 3,200 Class A Limited Partnership Interests and (ii) one Class B
Limited Partnership Interest issued and outstanding. As of March 31, 1998 (the
most recent practicable date), there were approximately 1,972 holders of record
of Class A Limited Partnership Interests and one holder of record of the Class B
Limited Partnership Interest. The rights of the Class A Limited Partnership
Interests and the Class B Limited Partnership Interest are the same except that
the holder of the Class B Limited Partnership Interest has a right to consult
with ADC with respect to certain matters.
There is no established trading market for the Limited Partnership
Interests.
The Partnership has not paid any dividends on the Class A Limited
Partnership Interests or on the Class B Limited Partnership Interest in the past
two years, except for distributions made to the holders of Limited Partnership
Interests pursuant to the terms of the Limited Partnership Agreement.
Past Contracts, Transactions or Negotiations.
As part of its initial organization and funding, the Partnership granted
ALZA an option (the "License Option") to acquire a license for the Partnership
Products. In 1990, ALZA exercised its License Option for two Partnership
Products: (i)
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<PAGE>
Duragesic(R) and (ii) Testoderm(R). Under each license, ALZA makes payments to
the Partnership based on ALZA's and its affiliates' and sublicensees' sales of
the licensed product. ALZA paid the Partnership $2,644,646, $8,776,814 and
$6,265,401 for the three months ended March 31, 1998 and the years ended
December 31, 1997 and December 31, 1996, respectively, of which approximately
97.5%, 95% and 96% were attributed to Duragesic(R) for the three months ended
March 31, 1998 and fiscal 1997 and 1996, respectively.
The administrative, accounting, contract management and record keeping
services required by the Partnership have been provided in the past and are
currently being provided by ALZA and are billed to the Partnership at ALZA's
standard administrative services rate. The Partnership paid ALZA $18,835,
$105,512 and $86,548 for the three months ended March 31, 1998 and the years
ended December 31, 1997 and December 31, 1996, respectively.
Terms of Transaction.
Pursuant to the terms of the Limited Partnership Agreement, ADC has the
Purchase Option which allows ADC to purchase all (but not less than all) of the
Limited Partnership Interests. The exercise price for exercise of the Purchase
Option is $120 million less an amount equal to all cash distributed to the
Limited Partners by the Partnership (the "Exercise Price"). As of the date
hereof, the Exercise Price is $91,176,592.48. The Exercise Price will
be allocated among the Limited Partners based on their pro rata contributions.
---------
At the Closing, the holders of record of Class A Limited Partnership Interests
as of the Closing Date will receive $27,216.21 per Class A Limited Partnership
Interest (purchased in the original offering for $5,000 each) and the holder of
the Class B Limited Partnership Interest will receive $4,084,720.48 for its
Class B Limited Partnership Interest. The Exercise Price will be paid by check
to each holder of the Limited Partnership Interests.
In accordance with the terms of the Limited Partnership Agreement, the
Limited Partners are not required to take any steps to approve the exercise of
the Purchase Option or the consummation of the transactions pursuant to the
Purchase Option. Title to the Limited Partnership Interests automatically vests
in ADC no later than 30 days after notice of the exercise of the Purchase Option
is given to the Limited Partners, upon payment of the purchase price for the
Limited Partnership Interests. The Closing Date is _______________, 1998.
Exercise of the Purchase Option will result in ADC owning all of the
Limited Partnership Interests. Upon purchase of all of the Limited Partnership
Interests by ADC, the Partnership will terminate as a limited partnership and
the General Partner will take all appropriate and necessary actions to suspend
the Partnership's public reporting obligations by filing a Form 15 with the
Commission and to wind up the affairs
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<PAGE>
of the Partnership in accordance with California law. ADC will continue as a
wholly owned subsidiary of ALZA. Although ALZA and ADC have no specific
intentions with respect to the operations of the business of the Partnership
following the exercise of the Purchase Option, ALZA and ADC intend to operate
the business of the Partnership in a manner best designed, in the judgment of
ALZA, to realize the benefit of that business to ALZA and its stockholders.
ALZA intends to contribute to ADC the amount of cash necessary to exercise
the Purchase Option, which contribution ALZA intends to finance with its cash
and marketable securities. All of the fees and expenses of the transaction will
be paid by ALZA.
Interests in Securities of Partnership.
None of ADC, ALZA or any of their respective directors or officers own any
Limited Partnership Interests. ALZA is the sole shareholder of the General
Partner and each officer and director of the General Partner is an employee and
officer or vice-president of ALZA. As described in this Notice, the General
Partner may at any time, pursuant to the Purchase Option, purchase all of the
outstanding Limited Partnership Interests.
Contracts, Arrangements or Understandings with Respect to Partnership's
Securities.
Article Seven of the Limited Partnership Agreement grants ADC the Purchase
Option. The Purchase Option states that ADC may purchase all (but not less than
all) of the issued and outstanding Limited Partnership Interests at any time
after January 1, 1987 and prior to dissolution of the Partnership. ADC may
exercise the Purchase Option by mailing a notice of exercise to the Limited
Partners.
OTHER PROVISIONS OF THE TRANSACTION
-----------------------------------
Appraisal rights are not afforded under applicable law in respect of the
exercise of the Purchase Option and none will be afforded. Neither ALZA nor ADC
is aware of any rights available to objecting holders of the Limited Partnership
Interests under applicable law.
None of ALZA, ADC or the Partnership is aware of any grant of access to
unaffiliated security holders to the corporate files of the Partnership or the
appointment of counsel or appraisal services for unaffiliated security holders
at the expense of the Partnership.
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<PAGE>
SUMMARY OF FINANCIAL STATEMENTS
-------------------------------
Selected Consolidated Financial Data
Set forth below is a summary of the Partnership's selected consolidated
financial data, which has been excerpted or derived from the information
contained in the Partnership's Annual Reports on Form 10-K for the years ended
December 31, 1997 and 1996, and its Quarterly Report on Form 10-Q for the
quarterly period ended March 31, 1998. More comprehensive information is
included in such reports and other documents filed by the Partnership with the
Commission, and the following information should be read in conjunction with
such reports and other documents and the financial information (including any
related notes and Management's Discussion and Analysis of Financial Condition
and Results of Operations) contained therein.
STATEMENTS OF REVENUE COLLECTED AND EXPENSES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31,
1997 1996 1998 1997
---- ---- ---- ----
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
TOTAL REVENUE $9,058,501 $6,294,396 $2,655,991 $2,089,580
NET INCOME 8,952,989 6,207,848 2,618,740 2,049,577
ALLOCATION OF NET INCOME
GENERAL PARTNER 89,530 62,079 26,187 20,496
CLASS A LIMITED PARTNERS 8,469,527 6,035,020 2,477,328 1,938,900
CLASS B LIMITED PARTNER 393,932 110,749 115,225 90,181
</TABLE>
STATEMENTS OF ASSETS, LIABILITIES AND PARTNER'S CAPITAL (DEFICIT)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1996 MARCH 31, 1998
---- ---- --------------
(unaudited)
<S> <C> <C> <C>
CURRENT ASSETS $109,262 $ 77,586 $120,454
CURRENT LIABILITIES 17,635 146,381 37,098
PARTNERS' CAPITAL (DEFICIT)
CLASS A LIMITED PARTNERS (3,200 UNITS) 81,863 (69,904) 74,007
CLASS B LIMITED PARTNER 8,864 1,805 8,500
GENERAL PARTNER 900 (696) 849
</TABLE>
FIXED CHARGES AND BOOK VALUE.
The Partnership has no material fixed charges for the two most recent
fiscal years and the three months ended March 31, 1998.
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<PAGE>
Book value per Class A Limited Partnership Interest at December 31, 1997
was $25.58 and at March 31, 1998 was $23.13. Book value per Class B Limited
Partnership Interest at December 31, 1997 was $8,864 and at March 31, 1998 was
$8,500. Book value per General Partner interest at December 31, 1997 was $900
and at March 31, 1998 was $849.
CONCLUSION
----------
If you have any questions with respect to this transaction, please
contact Patty Eisenhaur at (650) 494-5300.
ADC and ALZA wish to thank you for your investment and interest in the
Partnership. We sincerely hope that your are pleased with your return on this
investment.
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