<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X Quarterly Report Pursuant To Section 13 or 15(d) of the Securities
- ---- Exchange Act of 1934
For the quarterly period ended MARCH 31, 1997
or
Transition Report Pursuant to Section 13 or 15(d) of the Securities
- ---- Exchange Act of 1934
For the transition period from ______ to ______
Commission File Number 0-21478
----------
THERAPEUTIC DISCOVERY CORPORATION
--------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 94-3173191
---------------------------------- -------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1454 Page Mill Road, Suite 220, P.O. Box 10051, Palo Alto, CA 94303-0806
- -------------------------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (415) 496-8200
--------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----- -----
Number of shares outstanding of each of the registrant's classes of common
stock as of May 12, 1997
Class A Common Stock, $.01 par value - 7,734,424 shares
Class B Common Stock, $.01 par value - 100 shares
-1-
<PAGE>
Part I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
THERAPEUTIC DISCOVERY CORPORATION
(a development stage company)
Statement of Operations (unaudited)
(in thousands, except number of shares and per share data)
<TABLE>
<CAPTION>
Period From
Quarter Ended Inception
March 31, (November 1992)
1997 1996 to March 31, 1997
------- ------ ---------------------
<S> <C> <C> <C>
REVENUES:
Net interest and investment
income and license fees $ 667 $ 2,672 $ 35,003
EXPENSES:
Research and development
paid to ALZA Corporation 22,241 21,573 227,620
General and administrative 655 550 10,111
--------- --------- -----------
Total expenses 22,896 22,123 237,731
--------- --------- -----------
Loss before tax (22,229) (19,451) (202,728)
--------- --------- -----------
Income tax -- -- 301
--------- --------- -----------
Net loss $ (22,229) $ (19,451) $ (202,427)
--------- --------- -----------
--------- --------- -----------
Net loss per common share $ (2.87) $ (2.51)
--------- ---------
--------- ---------
Weighted average common shares 7,734,524 7,734,524
----------- -----------
----------- -----------
</TABLE>
See accompanying notes.
-2-
<PAGE>
THERAPEUTIC DISCOVERY CORPORATION
(a development stage company)
Balance Sheet (unaudited)
(in thousands, except number of shares and per share data)
<TABLE>
<CAPTION>
ASSETS March 31, December 31,
1997 1996
-------------- --------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 6,736 $ 10,597
Short-term investments 55,424 74,707
Interest receivable 521 809
Prepaid expenses and other
current assets 424 1,033
-------------- --------------
Total current assets 63,105 87,146
Long-term assets:
Employee loans, long-term 300 300
Prepaid expenses and other
long-term assets -- --
Organization costs, (net of
accumulated amortization) 835 1,014
-------------- --------------
Total assets $ 64,240 $ 88,460
-------------- --------------
-------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Payable to ALZA Corporation $ 16,719 $ 19,129
Accounts payable and other current
liabilities 31 72
-------------- --------------
Total current liabilities 16,750 19,201
Long-term liabilities:
Deferred compensation 221 115
Total liabilities
Stockholders' equity:
Class A Common Stock, $.01 par
value, 12,000,000
shares authorized, 7,734,424
issued and outstanding 77 77
Class B Common Stock, $.01 par
value, 100 shares authorized,
issued and outstanding -- --
Additional paid-in capital 251,650 251,650
Net unrealized losses on
available-for-sale securities (932) (1,166)
Deficit accumulated during the
development stage (202,427) (180,198)
Deferred compensation (1,099) (1,219)
-------------- --------------
Total stockholders' equity 47,269 69,144
-------------- --------------
Total liabilities and stockholders' equity $ 64,240 $ 88,460
-------------- --------------
-------------- --------------
</TABLE>
See accompanying notes.
-3-
<PAGE>
THERAPEUTIC DISCOVERY CORPORATION
(a development stage company)
Condensed Consolidated Statement of Cash Flows (unaudited)
(in thousands)
<TABLE>
<CAPTION>
Period From
Quarter Ended Inception
March 31, (November 1992) to
1997 1996 March 31, 1997
----------- ---------- ----------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (22,229) $ (19,451) $ (202,427)
Adjustments to reconcile net loss
to net cash used in operating
activities:
Amortization of organization costs 179 179 2,745
Amortization of deferred compensation 120 40 848
(Increase) decrease in assets:
Interest receivable 288 (355) (521)
Other receivable -- -- (252)
Organization costs -- -- (3,581)
Prepaid expenses and other assets 609 (19) (172)
Increase (decrease) in liabilities:
Payable to ALZA Corporation (2,410) (1,161) 16,719
Accounts payable and other current
liabilities (41) (132) 31
Long-term liabilities 106 6 221
----------- ---------- ----------------
Total adjustments (1,149) (1,442) 16,038
----------- ---------- ----------------
Net cash used in operating
activities (23,378) (20,893) (186,389)
CASH FLOWS FROM INVESTING ACTIVITIES:
Investments in available-for-sale
securities -- (5,032) (1,363,067)
Sale of available-for-sale securities 19,517 4,071 606,191
Maturities of available-for-sale
securities -- 20,968 700,523
Employee loans, long-term -- -- (300)
----------- ---------- ----------------
Net cash provided by
(used in) investing activities 19,517 20,007 (56,653)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of Class B Common Stock -- -- 2
Issuance of Class A Common Stock -- -- 249,998
Issuance costs -- -- (222)
----------- ---------- ----------------
Net cash provided by financing
activities -- -- 249,778
----------- ---------- ----------------
Net increase (decrease) in cash and
cash equivalents (3,861) (886) 6,736
Cash and cash equivalents at beginning
of period 10,597 13,314 --
----------- ---------- ----------------
Cash and cash equivalents at end of period $ 6,736 $ 12,428 $ 6,736
----------- ---------- ----------------
----------- ---------- ----------------
</TABLE>
See accompanying notes.
-4-
<PAGE>
THERAPEUTIC DISCOVERY CORPORATION
(a development stage company)
March 31, 1997
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
Therapeutic Discovery Corporation ("TDC") was incorporated in Delaware
on November 12, 1992 and commenced operations on June 11, 1993. TDC was
formed to select and develop new human pharmaceutical products (the "TDC
Products") combining the proprietary drug delivery systems of ALZA
Corporation ("ALZA") with various drug compounds. TDC has been engaged in
these and related activities since its formation. TDC's principal activities
consist of research and development activities under its agreements with
ALZA.
Under generally accepted accounting principles, TDC is considered a
development stage company and, accordingly, must present financial
information for the quarters ended March 31, 1997 and 1996 and for the period
from inception (November 1992) to March 31, 1997.
The information at March 31, 1997, for the quarters ended March 31, 1997
and 1996, and the period from inception (November 1992) to March 31, 1997 is
unaudited, but includes all adjustments (consisting only of normal recurring
adjustments) which the management of TDC believes necessary for fair
presentation of the results for such periods. Interim results are not
necessarily indicative of results for a full year. The financial statements
should be read in conjunction with the audited financial statements of TDC
for the year ended December 31, 1996 included in TDC's 1996 Annual Report on
Form 10-K.
2. SHORT-TERM INVESTMENTS
TDC has classified its entire investment portfolio as
available-for-sale. TDC's investment portfolio is available for current
operations and, therefore, has been classified as a current asset.
Investments in the available-for-sale category are carried at fair market
value with unrealized losses recorded as a separate component of
stockholders' equity. At March 31, 1997, net unrealized losses on
available-for-sale securities were approximately $0.9 million. At March 31,
1996, net unrealized losses on available-for-sale securities were
approximately $1.4 million. The cost of securities when sold is based upon
specific identification.
-5-
<PAGE>
THERAPEUTIC DISCOVERY CORPORATION
(a development stage company)
March 31, 1997
The following is a summary of available-for-sale securities at March 31, 1997:
AVAILABLE-FOR-SALE SECURITIES
<TABLE>
<CAPTION>
Estimated
Unrealized Unrealized Fair
(in thousands) COST Gains Losses Value
----------- ---------- ------------ -------------
<S> <C> <C> <C> <C>
U.S. Treasury securities
and obligations of U.S.
government agencies $ 28,521 $ 0 $ (532) $ 27,989
Collateralized mortgage
obligations and asset
backed securities 12,850 5 (253) 12,602
Corporate securities 21,511 0 (152) 21,359
----------- ---------- ------------ -------------
$ 62,882 $ 5 $ (937) $ 61,950
----------- ---------- ------------ -------------
----------- ---------- ------------ -------------
</TABLE>
The amortized cost and estimated fair value of debt and marketable
securities at March 31, 1997, by contractual maturity, are shown below.
Expected maturities will differ from contractual maturities because the
issuers of the securities may have the right to prepay obligations without
prepayment penalties.
Estimated
Fair
(in thousands) Cost Value
---------- -------------
Due in one year or less $ 29,606 $ 29,492
Due after one year through
four years 26,314 25,773
Due after four years through
eight years 6,962 6,685
---------- -------------
$ 62,882 $ 61,950
---------- -------------
---------- -------------
-6-
<PAGE>
THERAPEUTIC DISCOVERY CORPORATION
(a development stage company)
March 31, 1997
3. ARRANGEMENTS WITH ALZA CORPORATION
TDC was formed by ALZA for the purpose of selecting and developing new
human pharmaceutical products combining ALZA's proprietary drug delivery
technologies with various drug compounds, and commercializing such products,
most likely through licensing to ALZA. In connection with the distribution
to ALZA stockholders of a special dividend of units (each unit includes one
share of TDC Class A Common Stock and one warrant to purchase one-eighth of
one share of ALZA Common Stock at an exercise price of $65 per share), ALZA
made a $250 million cash contribution to TDC's capital. The cash is being
used primarily to fund activities under a development agreement (the
"Development Contract") between ALZA and TDC pursuant to which ALZA conducts
research and development activities on behalf of TDC. In accordance with
TDC's Restated Certificate of Incorporation, on June 11, 1996, the Units
separated into their component securities--TDC Class A Common Stock and ALZA
warrants. As a result of the separation, both securities are listed and
trade independently on the Nasdaq Stock Market. The trading symbol for the
TDC Class A Common Stock is "TDCA".
PRODUCT LICENSE OPTION. TDC has granted to ALZA an option to acquire,
on a product-by-product and country-by-country basis, a perpetual, exclusive,
royalty-bearing license to make, have made, use and sell any or all TDC
Products (the "License Option"). If ALZA exercises its License Option for
any TDC Product (a "Licensed TDC Product"), ALZA will pay the following
royalties ("Product Royalties") to TDC:
(a) if the Licensed TDC Product is sold by ALZA, Product Royalties of
up to a maximum of 5% of ALZA's net sales of the Licensed TDC Product
determined as follows: (i) 1% of net sales, other than sales to distributors
or sublicensees who agree to pay royalties or make percentage of sales
payments to ALZA or any affiliate of ALZA and in respect of which the Product
Royalties are determined as provided in clause (b) below, plus (ii) an
additional 0.1% of such net sales for each full $1 million of the Development
Costs (as defined in the Development Contract) of the Licensed TDC Product
paid by TDC; and
(b) if the Licensed TDC Product is sold by a third party, Product
Royalties of up to a maximum of 50% of third party payments to ALZA with
respect to such Licensed TDC Product determined as follows: (i) 10% of such
third party payments, plus (ii) an additional 1% of such third party payments
for each full $1 million of the Development Costs of the Licensed TDC Product
paid by TDC.
In each case, net sales and other third party payments will be reduced by the
dollar amount of any license or similar payments due to third parties from
ALZA with respect to the Licensed TDC Product. In addition, ALZA has the
option to buy out TDC's right to receive Product Royalties with respect to
any Licensed TDC Product on either a country-by-country or worldwide basis.
-7-
<PAGE>
THERAPEUTIC DISCOVERY CORPORATION
(a development stage company)
March 31, 1997
ALZA may exercise the License Option with respect to any TDC Product, on
a country-by-country basis, at any time until 90 days after the earliest of
the following: (a) approval to market the TDC Product in such country by the
appropriate regulatory agency; (b) approval to market the TDC Product in the
United States by the FDA; or (c) the expiration of the Purchase Option (as
defined below).
PURCHASE OPTION. ALZA has certain rights pursuant to the Restated
Certificate of Incorporation of TDC to purchase all (but not less than all)
of the TDC Class A Common Stock (the "Purchase Option"). Except as otherwise
set forth below, the Purchase Option may be exercised by written notice to
TDC at any time during the period ending on December 31, 1999; provided that
such date will be extended for successive one year periods if, as of any June
30 beginning with June 30, 1999, TDC has not used at least 90% of all funds
available for product development as set forth in the Development Contract.
Notwithstanding the foregoing, the Purchase Option will terminate on the 60th
day after the later of the filing or the due date of a Form 10-K or Form 10-Q
of TDC containing a balance sheet showing less than $5 million of cash, cash
equivalents and short-term and long-term investments. Based on TDC's current
rate of expenditures on TDC Products, it can be expected that TDC's balance
sheet will reach this threshold during the third quarter of 1997.
If the Purchase Option is exercised, the exercise price (the "Purchase
Option Exercise Price") will be the greatest of the following:
(a) $100 million;
(b) the greater (i) of 25 times the worldwide royalties and
sublicensing fees paid by ALZA to TDC during four specified calendar
quarters or (ii) 100 times such royalties and sublicensing fees during a
specified calendar quarter, in each case, less any amounts previously paid
by ALZA to exercise a buy-out option with respect to any product;
(c) the fair market value of one million shares of ALZA Common
Stock; or
(d) $325 million less all amounts spent by TDC under the Development
Contract.
Based on information available at March 31, 1997, the Purchase Option
Exercise Price is expected to be $100 million.
At the time of exercise of the Purchase Option ALZA may decide, in its
discretion, to pay the Purchase Option Exercise Price in cash, in ALZA Common
Stock, or in any combination of cash and ALZA Common Stock.
-8-
<PAGE>
THERAPEUTIC DISCOVERY CORPORATION
(a development stage company)
March 31, 1997
ALZA has not made a decision as to whether it will exercise the Purchase
Option. ALZA is under no obligation to exercise the Purchase Option and will
do so only if ALZA determines that it is in the best interests of ALZA and
its stockholders at the time the decision is made.
For a more detailed discussion of the License Option, the Purchase
Option and the arrangements between ALZA and TDC, see TDC's 1996 Annual
Report on Form 10-K.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
NOTICE CONCERNING FORWARD-LOOKING STATEMENTS:- Some of the statements
made in this quarterly report on Form 10-Q are forward-looking in nature,
including but not limited to statements that are not historical facts and
statements including forms of the words "intend", "believe", "will", "may",
"could", "expect", "anticipate", "possible" and similar terms. The
occurrence of the events described are subject to the future occurrence of
many events which are unpredictable or outside TDC's control (including
without limitation any possible future actions by ALZA) and various risk
factors, many of which are described in TDC's 1996 Annual Report on Form
10-K and include, without limitation, risks associated with technology and
product development, risks relating to clinical development, changes in the
health care marketplace, regulatory risks, risks related to patent and
intellectual property matters, market acceptance of products (including
third-party reimbursement) and competition and the risk of a lack of funds to
complete development of products.
LIQUIDITY AND CAPITAL RESOURCES
TDC was formed in November 1992 by ALZA and was fully capitalized and
commenced operations in June 1993 with approximately $250 million in cash
contributed by ALZA. At March 31, 1997, TDC had cash and cash equivalents,
and short-term investments of approximately $62.2 million, as compared with
approximately $85.3 million at December 31, 1996.
TDC's cash expenditures for operating activities were approximately
$23.4 million for the quarter ended March 31, 1997, as compared with $20.9
million for the quarter ended March 31, 1996. Cash expenditures for
operating activities were approximately $186 million for the period from
inception (November 1992) to March 31, 1997 and differ from TDC's net losses
of approximately $202 million for the same period due primarily to the amount
payable to ALZA for research and development and amortization of organization
expenses. TDC's remaining cash, plus interest earned thereon, less
administrative expenses (including reasonable reserves for TDC's operations)
will be used primarily to fund the development of TDC Products under the
Development Contract. Funds not
-9-
<PAGE>
THERAPEUTIC DISCOVERY CORPORATION
(a development stage company)
March 31, 1997
immediately required for development activities and administrative expenses
have been invested in low risk securities. TDC's investment portfolio
includes investments in collateralized mortgage securities, U.S. Government
securities, corporate notes, and asset backed notes. As TDC's funds continue
to be utilized under the Development Contract, increasingly lower cash
balances will be available for investment.
At March 31, 1997, the cost of short-term investments exceeded their
fair value by approximately $0.9 million.
Based on TDC's current rate of expenditures on TDC Products, it is
expected that funds available for product development will be exhausted
during the third quarter of 1997 and product development funding by TDC will
cease. However, several factors could impact the level and timing of TDC
funding, including the discontinuation of the development of any TDC
Products, any commercial arrangements between ALZA and other companies which
would cause ALZA to exercise its License Option with respect to any TDC
Product, any change in the number of projects advancing to or continuing in
later stages of development or any acceleration or deceleration in the rate
of spending on products currently in development or clinical activities.
When cash available for product development is exhausted, which is
anticipated to occur during the third quarter of 1997, certain critical
timetables will be triggered. First, ALZA's Purchase Option with respect to
all of TDC's Class A Common Stock will expire on the 60th day after the later
of the filing or the due date of a Form 10-K or Form 10-Q of TDC containing a
balance sheet showing less than $5 million of cash, cash equivalents and
short-term and long-term investments. In addition, ALZA has the right, for
90 days after expiration of the Purchase Option, to license any or all TDC
Products which have not yet been licensed, on a product-by-product and
country-by-country basis. ALZA is under no obligation to exercise the
Purchase Option or the License Option with respect to any TDC Product and
will do so only if ALZA determines that it is in the best interests of ALZA
and its stockholders at the time the decision is made. In the event that
ALZA does not exercise the Purchase Option or the License Option for all TDC
Products, TDC will not have funds to continue or complete development of any
remaining products.
ALZA has undertaken to fund certain TDC Product development activities
which will not be completed before available cash is exhausted and which are
described in work plans approved by TDC. Such funding by ALZA would begin on
a product-by-product basis when TDC no longer has funds available to pay for
such activities. Such funding will continue only during the period prior to
the expiration of the Purchase Option and the License Option when ALZA has
not yet made a determination whether or not to exercise its Purchase Option
or its License Option for the particular product. However, this undertaking
is subject to ALZA's determination of the continued technical and commercial
feasibility of the product and the compatibility of the product with ALZA's
product portfolio and business objectives.
-10-
<PAGE>
THERAPEUTIC DISCOVERY CORPORATION
(a development stage company)
March 31, 1997
The Board of Directors of TDC has initiated activities to establish a
contingency plan for the continued operations of TDC in the event that ALZA
chooses not to exercise the Purchase Option. Possible actions under the
contingency plan, which could be implemented individually or in combination,
include the sale or license of TDC Products for which ALZA has not exercised
its License Option, either worldwide or for countries for which ALZA has not
exercised its option; the sale of TDC's rights to future payments with
respect to TDC Products licensed by ALZA, the sale of TDC's rights to future
payments from ALZA with respect to all technology developed or otherwise
obtained pursuant to the Development Contract ("Developed Technology"); and
exploring alternative funding sources to continue or complete development of
TDC Products not licensed by ALZA. TDC's Board will review the contingency
plan on a regular basis. In the event that ALZA does not exercise the
Purchase Option, there can be no assurance that the contingency plan will
result in returns to TDC stockholders.
The Board has the right, under its agreements with ALZA, to take
necessary steps to cease development funding and maintain an adequate reserve
to ensure TDC's ability to meet its operating cash needs through at least
December 31, 1997.
RESULTS OF OPERATIONS
Revenues, consisting of net interest and investment income earned on
invested funds, were approximately $0.7 million for the quarter ended March
31, 1997, as compared with approximately $2.7 million for the quarter ended
March 31, 1996. Revenues totaled approximately $35.0 million for the period
from inception (November 1992) to March 31, 1997. As TDC's funds are
utilized under the Development Contract, lower cash balances are available
for investment, and therefore net interest income continues to decrease.
TDC anticipates that the only income to TDC will be interest income and
sublicensing revenues, if any, resulting from ALZA's exercise of its License
Option for any TDC Product.
TDC spent approximately $22.2 million on research and development
activities in the quarter ended March 31, 1997, as compared with
approximately $21.6 million in the quarter ended March 31, 1996. Research
and development expenses have totaled approximately $227.6 million for the
period from inception (November 1992) to March 31, 1997. TDC's research and
development expenses are expected to continue at approximately current levels
during the second and third quarters of 1997, subject to the occurrence of
various events which could affect the level and timing of TDC's expenditures
on research and development as described above.
TDC incurred general and administrative expenses of approximately $0.7
million for the quarter ended March 31, 1997 as compared with $0.6 million
for the quarter ended March 31, 1996. General and administrative expenses
totaled approximately $10.1 million
-11-
<PAGE>
THERAPEUTIC DISCOVERY CORPORATION
(a development stage company)
March 31, 1997
for the period from inception (November 1992) to March 31, 1997. Expenses
incurred by TDC under its administrative services agreement with ALZA were
approximately $48,000 for the quarter ended March 31, 1997, as compared with
approximately $49,000 for the quarter ended March 31, 1996. The expenses
incurred under such agreement for the period from inception (November 1992)
to March 31, 1997 were approximately $662,000.
TDC reported a net loss of approximately $22.2 million or $2.87 per
common share for the quarter ended March 31, 1997, as compared with a net
loss of approximately $19.5 million or $2.51 per common share for the quarter
ended March 31, 1996. TDC had a net loss of approximately $202.4 million for
the period from inception (November 1992) to March 31, 1997. The increasing
net loss resulted primarily from the increase in development activities
during the relevant periods. It is anticipated that TDC will continue to
record significant net losses as products enter or continue in later stages
of development, if additional products are accepted by TDC for development,
and as investment income decreases as funds available for investment are
reduced.
For the quarter ended March 31, 1997 and the period from inception
(November 1992) to March 31, 1997, the provision for income taxes was not
material.
-12-
<PAGE>
THERAPEUTIC DISCOVERY CORPORATION
(a development stage company)
March 31, 1997
PART II OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
10.8 Agreement and Amendment No. 1 to License
Agreement between ALZA Corporation and Therapeutic
Discovery Corporation dated February 10, 1997.
27 Financial Data Schedule
(b) No reports on Form 8-K were filed during the quarter.
-13-
<PAGE>
THERAPEUTIC DISCOVERY CORPORATION
(a development stage company)
March 31, 1997
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Therapeutic Discovery Corporation
Date: May 13, 1997 By: /s/ Gary L. Neil
------------------------------------
Gary L. Neil
President and
Chief Executive Officer
Date: May 13, 1997 By: /s/ David R. Hoffmann
------------------------------------
David R. Hoffmann
Vice President, Finance
(Principal Financial and
Accounting Officer)
-14-
<PAGE>
EXHIBIT INDEX
EXHIBIT
10.8 Agreement and Amendment No. 1 to License Agreement
between ALZA Corporation and Therapeutic Discovery
Corporation dated February 10, 1997.
27 Financial Data Schedule
<PAGE>
AGREEMENT
AND
AMENDMENT NO. 1 TO LICENSE AGREEMENT
DATED FEBRUARY 10, 1997
This Agreement and Amendment No. 1 to License Agreement dated as of
February 10, 1997 (the "Agreement") is made effective as of the 10th day of
February, 1997 by and between ALZA Corporation ("ALZA") and Therapeutic
Discovery Corporation ("TDC").
RECITALS
WHEREAS, ALZA and TDC have entered into that certain Development
Agreement dated as of March 10, 1993 (the "Development Contract") pursuant to
which ALZA performs research and development activities on behalf of TDC
directed toward the development of pharmaceutical products; and
WHEREAS, under the terms of the Development Contract, ALZA has performed
research and development activities on behalf of TDC directed toward the
development of a product, referred to by the parties as "TDC-4", for the
delivery of hydromorphone by means of ALZA's OROS-Registered
Trademark- technology (the "Licensed Product"); and
WHEREAS, ALZA and TDC have entered into that certain License Option
Agreement dated as of March 10, 1993 (the "Option Agreement") pursuant to
which TDC granted ALZA an option to license any product accepted by TDC for
development under the Development Contract on a product-by-product and
country-by-country basis; and
WHEREAS, ALZA exercised its option to license the Licensed Product on a
worldwide basis effective as of February 10, 1997 and entered into a License
Agreement dated as of February 10, 1997 (the "Product License Agreement"), in
the form required under the Option Agreement, to memorialize ALZA's license
of the Licensed Product; and
WHEREAS, ALZA has entered into an agreement with Knoll Pharmaceutical
Company and its parent Knoll AG (collectively, "Knoll") for the continued
development and worldwide commercialization of the Licensed Product; and
WHEREAS, ALZA and TDC desire to amend the Product License Agreement to
reflect the agreement of the parties with respect to certain payments to be
made by ALZA to TDC under the Product License Agreement and to memorialize
certain other arrangements between the parties.
NOW, THEREFORE, in consideration of the foregoing and the agreements
contained herein, ALZA and TDC hereby agree as follows:
1. DEFINITIONS. Capitalized terms used but not otherwise defined
herein shall have the meanings ascribed to them in the Product License
Agreement.
2. AMENDMENTS TO SECTION 3.1 OF THE PRODUCT LICENSE AGREEMENT. The
first sentence of Section 3.1 of the Product License Agreement is hereby
deleted in its entirety and the following substituted therefor:
-16-
<PAGE>
3.1 PAYMENTS. In consideration of the grant of the license,
ALZA shall pay TDC royalties with respect to the Licensed Product as
follows:
(a) up to a maximum of 5% of Net Sales of the Licensed
Product in the Territory determined as follows: 2% of such Net Sales,
plus an additional 0.1% of such Net Sales for each full one million
dollars of Development Costs of the Licensed Product paid by TDC; plus
(b) up to a maximum of 50% of Sublicensing Revenues in
respect of sales of the Licensed Product in the Territory determined
as follows: 20% of such Sublicensing Revenues, plus an additional 1%
of such Sublicensing Revenues for each full one million dollars of
Development Costs of the Licensed Product paid by TDC.
3. EXCLUSIONS FROM SPECIAL ROYALTY PAYMENTS AND SUBLICENSING REVENUES.
ALZA and TDC hereby agree that, for purposes of the Product License
Agreement, the payments due to ALZA from Knoll in the first quarter of 1997
with respect to the Licensed Product shall not be included within the
definition of Special Royalty Payments or Sublicensing Revenues with respect
to the Licensed Product.
4. LICENSED PRODUCT CLINICAL SUPPLIES. The parties acknowledge that
substantial clinical supplies and other materials have been acquired by ALZA
in connection with the development of the Licensed Product and paid for by
TDC under the Development Contract. Certain of those supplies and other
materials are expected to be utilized by Knoll in the ongoing development of
the Licensed Product. TDC hereby grants to ALZA, and ALZA hereby accepts, the
right to use (i) all clinical supplies of the Licensed Product which have
been manufactured as of the date hereof under the Development Contract, and
(ii) all materials, goods and services (including supplies of hydromorphone,
placebos and comparator drugs to be used in clinical studies) which have been
purchased or manufactured for use under the development program for the
Licensed Product pursuant to the Development Contract (collectively, the
"Supplies"). TDC grants ALZA the right to use, and ALZA accepts, the
Supplies on an "AS-IS" and "WHERE-IS" basis. TDC EXPRESSLY DISCLAIMS ANY AND
ALL WARRANTIES WITH RESPECT TO THE SUPPLIES, WHETHER EXPRESS OR IMPLIED,
INCLUDING ANY WARRANTY OF TITLE, MERCHANTABILITY OR FITNESS FOR A PARTICULAR
PURPOSE.
5. MISCELLANEOUS. Except as otherwise expressly provided herein,
the terms of the Product License Agreement shall remain in full force and
effect. This Agreement may not be amended except by a writing signed by both
parties. This Agreement shall be governed by the laws of the State of
California as applied to residents of that state entering into contracts to
be performed in that state. The headings set forth at the beginning of the
various sections of this Agreement are for reference and convenience and shall
not affect the meanings of the provisions of this Agreement.
-17-
<PAGE>
IN WITNESS WHEREOF, ALZA and TDC have caused this Agreement to be
executed as of the date first set forth above by their duly authorized
representatives.
ALZA Corporation Therapeutic Discovery Corporation
By: /s/ Bruce C. Cozadd By: /s/ Gary L. Neil
----------------------------- ---------------------------------------
Bruce C. Cozadd Gary L. Neil
Senior Vice President and President and Chief Executive Officer
Chief Financial Officer
-18-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS INCLUDED IN ITEM 1 OF FORM 10-Q DATED MARCH 31, 1997
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 7
<SECURITIES> 55
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 63
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 64
<CURRENT-LIABILITIES> 17
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 47
<TOTAL-LIABILITY-AND-EQUITY> 64
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 22
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (22)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (22)
<EPS-PRIMARY> (2.87)
<EPS-DILUTED> (2.87)
</TABLE>
