-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, OVFkZQiKUVWPSeKAy3JwDRxo+6zqq/msDJ8ai5ybfXTe4mQv+LyDWrXH8AzGCocr k0YQ2sj1L5UqPgaOUHjSFQ== 0000004310-97-000008.txt : 19971107 0000004310-97-000008.hdr.sgml : 19971107 ACCESSION NUMBER: 0000004310-97-000008 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971106 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: ALZA CORP CENTRAL INDEX KEY: 0000004310 STANDARD INDUSTRIAL CLASSIFICATION: PHARMACEUTICAL PREPARATIONS [2834] IRS NUMBER: 770142070 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-06247 FILM NUMBER: 97708641 BUSINESS ADDRESS: STREET 1: 950 PAGE MILL RD STREET 2: PO BOX 10950 CITY: PALO ALTO STATE: CA ZIP: 94303-0802 BUSINESS PHONE: 4154945000 MAIL ADDRESS: STREET 1: 950 PAGE MILL RD STREET 2: PO BOX 10950 CITY: PALO ALTO STATE: CA ZIP: 94303 10-Q 1 10-Q TEXT 24 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 September 30, 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 1-6247 ALZA CORPORATION (Exact name of registrant as specified in its charter) Delaware 77-0142070 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 950 Page Mill Road P.O. Box 10950 Palo Alto, California 94303-0802 (Address of principal executive offices) Registrant's telephone number, including area code (650) 494-5000 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 October 24, 1997: Common Stock, $.01 par value - 85,393,375 shares ALZA CORPORATION FORM 10-Q for the Quarter Ended September 30, 1997 INDEX Part I. Financial Information Item 1. Financial Statements Condensed Consolidated Statement of Income 3 Condensed Consolidated Balance Sheet 4 Condensed Consolidated Statement of Cash Flows 5 Notes to Financial Statements 6-9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10-17 Part II. Other Information Item 1. Legal Proceedings 18 Item 6. Exhibits and Reports on Form 8-K 18 Signatures 19 Exhibits PART I. FINANCIAL INFORMATION Item 1. Financial Statements ALZA CORPORATION Condensed Consolidated Statement of Income (unaudited) (In millions, except per share amounts) Quarter Ended Nine Months Ended September 30, September 30, 1997 1996 1997 1996 _________________________________________________________________ Revenues: Royalties, fees and other $ 41.9 $ 39.5 $ 131.8 $ 126.1 Research and development 36.1 29.4 106.0 94.8 Net sales 36.5 29.5 100.4 83.8 _________________________________________________________________ Total revenues 114.5 98.4 338.2 304.7 Expenses: Research and development 41.9 31.7 116.5 101.2 Costs of products shipped 22.0 21.4 64.9 67.0 Selling, general and administrative 11.0 11.6 35.1 33.7 Acquisition of in-process research and development 87.0 - 87.0 - Contribution to Crescendo Pharmaceuticals Corporation 247.0 - 247.0 - Asset write-down 11.5 - 11.5 - _________________________________________________________________ Total expenses 420.4 64.7 562.0 201.9 _________________________________________________________________ Operating income (loss) (305.9) 33.7 (223.8) 102.8 Interest expense 13.8 12.9 41.3 30.3 Distribution to debenture holders 8.0 - 8.0 - Interest and other income (17.8) (16.5) (48.3) (35.0) _________________________________________________________________ Net interest and other expense (income) 4.0 (3.6) 1.0 (4.7) _________________________________________________________________ Income (loss) before income taxes (309.9) 37.3 (224.8) 107.5 Provision for income taxes 16.6 14.2 49.0 40.9 _________________________________________________________________ Net income (loss) $(326.5) $ 23.1 $ (273.8) $ 66.6 ================================================================= Earnings (loss) per share $ (3.83) $ 0.27 $ (3.22) $ 0.78 ================================================================= Weighted average common and common equivalent shares 85.2 97.3 85.0 93.1 ================================================================= See accompanying notes. ALZA Corporation Condensed Consolidated Balance Sheet (unaudited) (In millions) September 30, December 31, 1997 1996 _________________________________________________________________ ASSETS Current assets: Cash and cash equivalents $ 116.7 $ 187.7 Short-term investments 75.3 199.3 Receivables, net 108.1 116.6 Inventories, at cost: Raw materials 18.3 17.7 Work in process 11.8 18.0 Finished goods 9.0 3.5 _________________________________________________________________ Total inventories 39.1 39.2 Prepaid expenses and other current assets 22.4 19.2 _________________________________________________________________ Total current assets 361.6 562.0 Property, plant and equipment 373.6 408.1 Less accumulated depreciation and amortization (71.6) (100.3) _________________________________________________________________ Net property, plant and equipment 302.0 307.8 Investments in long-term securities 460.1 612.8 Other assets 233.5 131.1 _________________________________________________________________ Total assets $ 1,357.2 $ 1,613.7 ================================================================= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 37.8 $ 28.7 Accrued liabilities 46.7 37.2 Other current liabilities 1.9 1.3 _________________________________________________________________ Total current liabilities 86.4 67.2 5% convertible subordinated debentures 500.0 500.0 5 1/4% zero coupon convertible subordinated debentures 397.4 382.3 Other long-term liabilities 84.5 67.5 Stockholders' equity: Common stock and additional paid-in capital 379.3 363.0 Net unrealized losses on available- for-sale securities, net of tax effect (1.3) (0.1) Retained earnings (deficit) (89.1) 233.8 _________________________________________________________________ Total stockholders' equity 288.9 596.7 _________________________________________________________________ Total liabilities and stockholders' equity $ 1,357.2 $ 1,613.7 ================================================================= See accompanying notes. ALZA CORPORATION Condensed Consolidated Statement of Cash Flows (unaudited) (In millions) Nine Months Ended September 30, 1997 1996 _________________________________________________________________ CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $(273.8) $ 66.6 Non-cash adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 24.6 15.8 Interest on 5 1/4% zero coupon convertible subordinated debentures 15.2 14.4 Increase (decrease) in current assets 6.4 (20.2) Decrease (increase) in current liabilities 18.3 (2.2) Asset write-down 11.5 - Other 12.3 5.6 _________________________________________________________________ Net cash (used in) provided by operating activities (185.5) 80.0 CASH FLOWS FROM INVESTING ACTIVITIES: Sales and maturities of available-for-sale securities 596.5 426.1 Purchases of available-for-sale securities (322.0) (736.5) Product acquisition payments (60.0) - Capital expenditures (23.6) (32.1) Purchase of Therapeutic Discovery Corporation's deferred tax asset (23.0) - Other investing activities (26.2) (20.9) _________________________________________________________________ Net cash provided by (used in) investing activities 141.7 (363.4) CASH FLOWS FROM FINANCING ACTIVITIES: Issuances of common stock 16.3 47.2 Issuance of long-term debt 6.5 - Distribution of Crescendo Pharmaceuticals Corporation shares to stockholders (49.1) - Principal payments on long-term debt (0.9) (0.9) Net proceeds from 5% convertible subordinated debentures - 488.8 _________________________________________________________________ Net cash (used in) provided by financing activities (27.2) 535.1 _________________________________________________________________ Net (decrease)increase in cash and cash equivalents (71.0) 251.7 Cash and cash equivalents at beginning of period 187.7 88.0 _________________________________________________________________ Cash and cash equivalents at end of period $ 116.7 $ 339.7 ================================================================= See accompanying notes. ALZA CORPORATION Notes to Consolidated Financial Statements (unaudited) 1. Basis of Presentation The information at September 30, 1997 and for the quarters and nine months ended September 30, 1997 and 1996 is unaudited, and includes all adjustments (consisting only of normal recurring adjustments) that the management of ALZA Corporation ("ALZA") believes necessary for fair presentation of the results for the periods presented. Interim results are not necessarily indicative of results for the full year. The condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes for the year ended December 31, 1996 included in ALZA's 1996 Annual Report to Stockholders. Beginning with the quarter ended March 31, 1997, ALZA changed the presentation of its consolidated statement of income and consolidated balance sheet. In the consolidated statement of income, royalties, fees and other revenue now include items related to operations that were previously reflected in interest and other income. Interest expense and income are now shown separately after operating income. On the consolidated balance sheet, ALZA has reclassified securities which have maturities of one year or more as investments in long-term securities; these securities were previously treated as current assets. Prior year amounts have been changed to conform with the current year presentation. 2. Purchase of Therapeutic Discovery Corporation Shares On September 29, 1997, ALZA purchased all of the Class A Common Stock of Therapeutic Discovery Corporation ("TDC") for $100 million in cash. This acquisition was recorded using the purchase method of accounting and, accordingly, the purchase price has been allocated to assets acquired based upon their fair market value on the acquisition date. The purchase resulted in a charge of $77 million to acquisition of in-process research and development on ALZA's Statement of Income, and the remaining $23 million of the purchase price was allocated to a deferred tax asset arising from TDC's net operating loss carryforward and capitalized research and development. 3. Agreement with Alkermes, Inc. Effective September 30, 1997, ALZA entered into a clinical development and option agreement with Alkermes, Inc. ("Alkermes") relating to RMP-7, a compound for facilitating chemotherapy drug delivery to the brain. Under the terms of the agreement, ALZA paid Alkermes $10 million, which was charged to acquisition of in- process research and development on ALZA's Statement of Income. Under the agreement, Alkermes will conduct additional clinical activities related to the product, and ALZA has the option to acquire exclusive worldwide commercialization rights to RMP-7. ALZA CORPORATION Notes to Consolidated Financial Statements (unaudited) 4. Crescendo Pharmaceuticals Corporation Crescendo Pharmaceuticals Corporation ("Crescendo") was formed by ALZA for the purpose of selecting and developing human pharmaceutical products, and commercializing such products most likely through licensing to ALZA. On September 29, 1997, ALZA contributed $300 million in cash to Crescendo. On September 30, 1997, all of the outstanding shares of Crescendo Class A Common Stock (the "Crescendo Shares") were distributed to the holders of ALZA common stock and ALZA's outstanding convertible subordinated debentures. Holders of record on September 18, 1997 received one Crescendo Share for every 20 shares of ALZA common stock owned on that date, a total of 4,268,760 Crescendo Shares; one Crescendo Share for every 36 shares of ALZA common stock into which the holder's 5% convertible subordinated debentures ("5% Debentures") were convertible, a total of 363,700 Crescendo Shares; and one Crescendo Share for every 37 shares of ALZA stock into which the holder's 5 1/4% zero coupon convertible subordinated debentures ("5 1/4% Debentures") were convertible, a total of 333,010 Crescendo Shares. In each case, cash was distributed in lieu of fractional shares. ALZA recorded a charge of $247 million, including expenses of $4 million, interest expense of $8 million related to the distribution to debenture holders and a dividend of $49 million for the distribution of Crescendo Shares to ALZA common stockholders. In connection with the contribution to Crescendo and the distribution of Crescendo Shares, ALZA and Crescendo entered into a number of agreements, including the Development Agreement and Technology License Agreement, discussed below. The agreements between ALZA and Crescendo are more fully described in the Crescendo Registration Statement on Form S-1 (Registration No. 333-31281) filed with the Securities and Exchange Commission on September 5, 1997, and will be described in the ALZA Form 10-K for the year ended December 31, 1997. Crescendo and ALZA have entered into a Development Agreement for the selection and development of human pharmaceutical products. The development agreement provides, among other things, that Crescendo will fund the development of seven products (the "Initial Products") (OROS-Registered Trademark- oxybutynin, DUROS- Trademark- leuprolide, OROS-Registered Trademark- methylphenidate, IUTS progesterone, D-TRANS-Trademark- testosterone matrix, E-TRANS-Trademark- LHRH and E-TRANS- Trademark- insulin) from August 25, 1997, the date on which TDC ceased funding such products, through October 31, 1997. ALZA recorded revenues of $8.1 million in the third quarter of 1997 as reimbursement from Crescendo for the development costs of the Initial Products through September 30, 1997. Continuation of development of the Initial Products after October 31, 1997 is subject to ALZA proposing and Crescendo's Board of Directors accepting work plans and cost estimates for the products. ALZA CORPORATION Notes to Consolidated Financial Statements (unaudited) 4. Crescendo Pharmaceuticals Corporation (continued) ALZA and Crescendo have entered into a Technology License Agreement pursuant to which ALZA has granted to Crescendo a worldwide license to use ALZA technology solely to select and develop Crescendo products, to conduct related activities, and to commercialize such products. In exchange for the license to use existing ALZA technology relating to the Initial Products, Crescendo will pay a technology fee to ALZA, payable monthly over a period of three years, in the amount of $1 million per month for the 12 months following the distribution of Crescendo Shares, $667,000 per month for the following 12 months and $333,000 per month for the following 12 months. The technology fee will no longer be payable at such time as fewer than two of the Initial Products are being developed by Crescendo and/or have been licensed by ALZA pursuant to the license option described below. ALZA recorded a technology fee from Crescendo of $1 million for the quarter ended September 30, 1997. ALZA has an option to acquire an exclusive, royalty-bearing license to each product developed by Crescendo under the Development Agreement. The option is exercisable on a product by product, country by country basis. Also, under Crescendo's Restated Certificate of Incorporation ALZA has the right to purchase all (but not less than all) of the Crescendo Shares. 5. Asset Write-down During the third quarter of 1997, ALZA wrote down approximately $11.5 million of fixed assets, $8.1 million of which related to excess, under-utilized, or otherwise impaired manufacturing equipment. Lower than expected production requirements under a supply agreement with G.D. Searle & Co. ("Searle") for Covera-HS-Trademark- (verapamil) contributed to under-utilization of the manufacturing equipment. Such equipment was written-down to its fair market value, which was determined based upon estimates of current market prices. ALZA has not yet determined the ultimate disposition of these assets. The remaining $3.4 million of the write-down is related primarily to obsolete and idle assets that have no fair market value. ALZA CORPORATION Notes to Consolidated Financial Statements (unaudited) 6. Earnings (Loss) Per Share For the quarter and nine months ended September 30, 1997, the earnings (loss) per share calculation is based upon weighted average shares of ALZA common stock outstanding during each period. The effect of stock options and the 5 1/4% Debentures were excluded from the calculation for both periods, as their inclusion would have had an anti-dilutive effect. Earnings per share for the quarter and nine months ended September 30, 1996 is based on weighted average shares of ALZA common stock outstanding during each period, plus dilutive warrants and options. The 5 1/4% Debentures are considered to be common stock equivalents, and shares issuable upon an assumed conversion of the 5 1/4% Debentures were dilutive for the quarter and nine months ended September 30, 1996, respectively. The 5% Debentures are not considered common stock equivalents and were not included in the fully diluted earnings per share calculation for the periods presented as their inclusion would have had an anti-dilutive effect. Fully diluted earnings per share are not shown on the Condensed Consolidated Statement of Income since dilution is less than 3% for each period presented. In February 1997, the Financial Accounting Standards Board issued Statement No. 128, Earnings per Share ("SFAS 128"), which is required to be adopted on December 31, 1997. At that time, ALZA will be required to change the method currently used to compute earnings per share and to restate all prior periods. Under the new requirements for calculating basic earnings per share, which replaces primary earnings per share, the dilutive effect of stock options and other common stock equivalents will be excluded. Diluted earnings per share, which replaces fully diluted earnings per share, will include the dilutive effect of stock options, other common stock equivalents and convertible securities. Basic earnings (loss) per share is expected to be the same as the reported primary earnings (loss) per share for the quarter and nine months ended September 30, 1997, and for the third quarter of 1996. Basic earnings per share is expected to be $0.01 higher for the nine months ended September 30, 1996. Diluted earnings (loss) per share is not expected to be materially different from fully diluted earnings (loss) per share for the quarter and nine months ended September 30, 1996 and 1997. 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 Form 10-Q are forward- looking in nature, including but not limited to ALZA's product development activities and plans, plans concerning the commercialization of products, statements concerning potential product sales, future costs of products shipped (and gross margins), and associated marketing and selling expenses and other statements that are not historical facts. The occurrence of the events described, and the achievement of the intended results, are subject to the future occurrence of many events, some or all of which are not predictable or within ALZA's control; therefore, actual results may differ materially from those anticipated in any forward-looking statements. Many risks and uncertainties are inherent in the pharmaceutical industry; others are more specific to ALZA's business. Many of the significant risks related to ALZA's business are described in ALZA's Annual Report on Form 10- K, including risks associated with technology and product development, clinical development, regulatory clearance to market products and medical acceptance of products, changes in the health care marketplace, patent and intellectual property matters, regulatory and manufacturing issues, licensing or acquiring products from third parties, commercializing pharmaceutical products and competition. Third Quarter 1997 Events During the third quarter of 1997, ALZA exercised its option to purchase all of the outstanding Class A Common Stock of TDC, contributed $300 million to Crescendo and distributed the Crescendo Shares. These transactions, and their impact on ALZA's financial statements, are discussed below, and in Notes 2 and 4 of the Notes to Financial Statements. In July 1997, ALZA acquired exclusive rights to Mycelex- Registered Trademark- (clotrimazole) Troche in the United States from Bayer Corporation ("Bayer"). Under the terms of the agreement with Bayer, ALZA made a $50 million upfront payment to Bayer and will make an additional payment if net sales of the product during a certain period are above a specified level. Bayer will manufacture Mycelex-Registered Trademark- Troche for ALZA, and ALZA will make payments to Bayer based on net sales of the product. Effective September 30, 1997, ALZA entered into a clinical development and option agreement with Alkermes relating to RMP-7, a compound intended to facilitate the delivery of chemotherapeutic agents to the brain. Under the terms of the agreement, ALZA paid Alkermes $10 million, which was charged to acquisition of in-process research and development on ALZA's Statement of Income. Under the agreement, Alkermes will conduct additional clinical activities related to the product, and ALZA has the option to acquire exclusive worldwide commercialization rights to RMP-7. During the third quarter of 1997, ALZA wrote down approximately $11.5 million of excess or under-utilized manufacturing equipment and obsolete and idle assets. Lower than expected production requirements under a supply agreement with Searle for Covera-HS-Trademark- contributed to the under- utilization of manufacturing assets. RESULTS OF OPERATIONS ALZA's net loss was $326.5 million, or $3.83 per share, for the quarter ended September 30, 1997, reflecting non-recurring charges of $353.5 million, or $4.14 per share. Excluding the non- recurring items, net income was $27.0 million, or $0.31 per share, for the third quarter of 1997, compared to net income of $23.1 million, or $0.27 per share, for the third quarter of 1996. The net loss for the nine months ended September 30, 1997 was $273.8 million, or $3.22 per share (net income of $79.8 million, or $0.91 per share, excluding non-recurring items), compared to net income of $66.6 million, or $0.78 per share ($64.4 million, or $0.76 per share, excluding non-recurring items), for the nine months ended September 30, 1996. ALZA's net income currently results primarily from royalties and fees from client companies. Royalties and fees, which are generally derived from sales by client companies of products developed jointly with ALZA, vary from quarter to quarter as a result of changing levels of product sales by client companies and, occasionally, the receipt by ALZA of certain one-time fees. Because ALZA's clients generally take responsibility for obtaining necessary regulatory approvals and make all marketing and commercialization decisions regarding such products, most of the variables that affect ALZA's royalties and fees are not directly within ALZA's control. During the next several years, ALZA intends to become less dependent on royalties and fees by continuing to expand ALZA's sales and marketing activities and by directly marketing and selling more products; however, there can be no assurance that ALZA will be successful in undertaking this expansion, or that any expanded sales and marketing activities will be successful, due to factors such as the risks associated with developing, clinically testing and obtaining regulatory clearance of products for ALZA marketing, the difficulties and costs associated with acquiring from third parties products for ALZA to market, the length of the regulatory approval process, the uncertainties surrounding the acceptance of new products by the intended markets, the marketing of competitive products, risks relating to patents and proprietary rights and the current health care cost containment environment. ALZA expects that, in the near term, net income will continue to result primarily from royalties on sales by clients of currently marketed products. Royalties, Fees and Other Revenue Royalties, fees and other revenue were $41.9 million for the quarter and $131.8 million for the nine months ended September 30, 1997, compared to $39.5 million and $126.1 million, respectively, for the corresponding periods in 1996. Excluding non-recurring items, royalties, fees and other revenue for the nine months ended September 30, 1996 were $115.6 million. The 1996 non-recurring items consisted primarily of a benefit from the reversal of a reserve for royalties on sales of Procardia XL-Registered Trademark- and a benefit in connection with the settlement of litigation related to patent disputes concerning transdermal nicotine patches, which were partially offset by a charge related to an advance payment to the limited partners of the ALZA OROS-Registered Trademark- Products Limited Partnership in connection with the purchase by ALZA of their interests in the partnership. Excluding the 1996 non-recurring items, royalties, fees, and other income increased 6% for the third quarter and 14% for the nine months ended September 30, 1997 compared to the corresponding periods in 1996, primarily resulting from increased royalties due to higher sales of Glucotrol XL-Registered Trademark- by Pfizer Inc. ("Pfizer"), Duragesic-Registered Trademark- by Janssen Pharmaceutica, Inc. ("Janssen") and Covera- HS-Trademark- by Searle, which were partially offset by decreased royalties on sales of Transderm-Nitro-Registered Trademark- by Novartis Pharmaceuticals Corporation, Procardia XL-Registered Trademark- by Pfizer and NicoDerm-Registered Trademark- CQ- Trademark- by SmithKline Beecham ("SmithKline"). While sales of NicoDerm-Registered Trademark- CQ-Trademark- increased during the quarter, royalties declined as a result of a reduction in royalty rates under ALZA's agreement covering the product, which provides for a reduction in royalty rates above a specified sales level each year. Royalties, fees and other revenue for the third quarter of 1997 included a technology fee of $1 million from Crescendo, discussed below. Royalties, fees and other revenue for the nine months ended September 30, 1997 also included upfront payments from Knoll Pharmaceutical Company in connection with an agreement for continued development and worldwide commercialization of the OROS-Registered Trademark- hydromorphone product, from SmithKline in connection with the agreement for the commercialization of the Nicoderm-Registered Trademark- transdermal nicotine product in China and Japan, and from Pfizer for the rights to commercialize the OROS-Registered Trademark- pseudoephedrine product outside the U.S. Sales of Procardia XL-Registered Trademark-, as reported by Pfizer, decreased 11% and 16% for the quarter and nine months ended September 30, 1997, respectively, compared to the same periods in 1996. Royalties from Procardia XL-Registered Trademark- accounted for approximately 35% and 30% of ALZA's royalties, fees and other revenue for the quarter and nine months ended September 30, 1997, respectively. In June 1997, Mylan Laboratories Inc. ("Mylan") filed an Abbreviated New Drug Application ("ANDA") with the FDA requesting clearance to market a controlled-release nifedipine tablet as a generic alternative to Procardia XL-Registered Trademark-. On July 8, 1997, Pfizer filed a suit in federal court in Washington D.C. seeking to prevent the review of the ANDA and to require Mylan to submit an ANDA suitability petition. Additionally, Pfizer has filed a suit against Mylan in federal court in Pennsylvania for infringement of a patent licensed to Pfizer by a third party relating to nifedipine. Under applicable law, Pfizer's suit may have the effect of delaying FDA clearance of Mylan's ANDA. However, it is not possible to predict the outcome of such litigation, nor is it possible to predict the impact Mylan's product, if cleared for marketing, may ultimately have on sales of Procardia XL- Registered Trademark- and the resulting royalties to ALZA. Research and Development Research and development revenue was $36.1 million and $106.0 million for the quarter and nine months ended September 30, 1997, compared to $29.4 million and $94.8 million, respectively, for the corresponding periods in 1996. Research and development revenue from TDC was $18.5 million for the quarter and $67.8 million for the nine months ended September 30, 1997, and $22.4 million and $73.9 million, respectively, for the corresponding periods in 1996. Crescendo commenced operations in the third quarter of 1997, and revenues from Crescendo for the quarter and nine months ended September 30, 1997 were $8.1 million. Research and development revenue from other clients increased in the quarter and nine months ended September 30, 1997 compared to the same periods in 1996, reflecting an increase in product development activities under agreements with client companies. Included in research and development revenue for the nine months ended September 30, 1996 were $2.1 million of non- recurring charges related to a credit to TDC and to certain uncollectible receivables. Research and development expenses were $41.9 million for the quarter and $116.5 million for the nine months ended September 30, 1997, compared to $31.7 million and $101.2 million for the corresponding periods in 1996, reflecting the increased activity for client companies, including TDC and Crescendo. Therapeutic Discovery Corporation On September 29, 1997, ALZA purchased all of the outstanding shares of TDC Class A Common Stock for $100 million in cash. The purchase resulted in a charge of $77 million to acquisition of in- process research and development on ALZA's Statement of Income, and the remaining $23 million of the purchase price was allocated to a deferred tax asset arising from TDC's net operating loss carryforward and capitalized research and development. Crescendo Pharmaceuticals Corporation On September 29, 1997, ALZA contributed $300 million in cash to Crescendo. On September 30, 1997, shares Crescendo Shares were distributed to holders of ALZA common stock and ALZA's outstanding convertible subordinated debentures. ALZA recorded a charge of $247 million, including expenses of $4 million, interest expense of $8 million related to the distribution to debenture holders and a dividend of $49 million to ALZA common stockholders for the distribution of Crescendo Shares. Under the Development Agreement between ALZA and Crescendo, Crescendo will fund the development of human pharmaceutical products proposed by ALZA and accepted by Crescendo. The Initial Products (OROS-Registered Trademark- oxybutynin, DUROS-Trademark- leuprolide, OROS-Registered Trademark- methylphenidate, IUTS progesterone, D-TRANS-Trademark- testosterone matrix, E-TRANS- Trademark- LHRH and E-TRANS-Trademark- insulin) from August 25, 1997, the date on which TDC ceased funding such products, through October 31, 1997. ALZA recorded revenues of $8.1 million in the third quarter of 1997 as reimbursement for the development costs of the Initial Products through September 30, 1997. Continuation of development of the products after October 31, 1997, is subject to ALZA proposing and Crescendo's Board of Directors accepting work plans and cost estimates for the products (see Subsequent Events). Under the Technology License Agreement between ALZA and Crescendo, ALZA has granted to Crescendo a worldwide license to use ALZA technology solely to select and develop Crescendo products, and to conduct related activities, and to commercialize such products. In exchange for the license to use existing ALZA technology relating to the Initial Products, Crescendo will pay a technology fee to ALZA, payable monthly over a period of three years in the amount of $1 million per month for the 12 months following the distribution of Crescendo Shares, $667,000 per month for the following 12 months and $333,000 per month for the following 12 months. The technology fee will no longer be payable at such time as fewer than two of the Initial Products are being developed by Crescendo and/or have been licensed by ALZA pursuant to the option, granted to it by Crescendo, to license any or all Crescendo products. ALZA recorded a technology fee from Crescendo of $1 million for the quarter ended September 30, 1997. ALZA has an option to acquire an exclusive, royalty-bearing license to each product developed by Crescendo under the Development Agreement. The option is exercisable on a product by product, country by country basis. Also, under Crescendo's Restated Certificate of Incorporation ALZA also has the right to purchase all (but not less than all) of the Crescendo Shares. Net Sales Net sales were $36.5 million for the quarter and $100.4 million for the nine months ended September 30, 1997, an increase of 24% and 20%, respectively, compared to the corresponding periods in 1996. The increases were due primarily to sales of Mycelex-Registered Trademark- Troche, the U.S. rights to which were acquired in July 1997, and higher sales of Ethyol- Registered Trademark- compared with the same periods last year. Net sales of Ethyol-Registered Trademark- for the quarter and the nine months ended September 30, 1997 were $5.7 million and $14.4 million, respectively, compared to $2.1 million and $5.3 million for the same periods in 1996. Ethyol-Registered Trademark- was launched in April 1996. Net sales of Mycelex- Registered Trademark- Troche were $5.2 million for the third quarter and the nine months ended September 30, 1997. Sales of ALZA-marketed products increased to 39% and 29% of total net sales for the quarter and nine months ended September 30, 1997, respectively, from 19% in each of the corresponding periods in 1996. Net sales to client companies declined 5% for the third quarter of 1997 compared with the third quarter of 1996, and increased 4% for the nine months ended September 30, 1997 compared with the same period in 1996. The timing and quantities of orders for products marketed by client companies are not within ALZA's control. Net sales to client companies, therefore, can be expected to fluctuate from period to period, sometimes significantly, depending on the volume, mix and timing of orders of products shipped to client companies, and in some quarters, due to the shipment of launch quantities of products to the clients. The timing and quantities of orders for ALZA-marketed products may vary from quarter to quarter due to factors such as demand for the products, ordering patterns of wholesalers, introduction and sales of competing products. Costs of products shipped increased to $22.0 million for the quarter and $64.9 million for the nine months ended September 30, 1997, compared to $21.4 million and $67.0 million, respectively, for the corresponding 1996 periods, reflecting the increase in net sales. Costs of products shipped for the nine months ended September 30, 1996 includes a $2.4 million non-recurring charge related primarily to costs associated with a limited recall of two lots of the Duragesic-Registered Trademark- product. ALZA's gross margin (net sales less costs of products shipped) as a percent of net sales increased to 40% for the quarter and 35% for the nine months ended September 30, 1997, compared to 27% and 23% for the quarter and nine months ended September 30, 1996, respectively, excluding the non-recurring charge described above. The increase was largely due to increased sales of ALZA-marketed products and higher margins on products shipped to client companies. ALZA expects its gross margin on net sales to increase from historical rates over the longer term, although quarter-to-quarter fluctuations, even significant ones, can be expected to continue to occur for the reasons discussed above. A trend of higher than historical gross margins may ultimately be achieved through a proportionate increase in the sales of ALZA-marketed products in relation to sales of client-marketed products, increased utilization of capacity, and greater operating efficiencies. Selling, General and Administrative Expenses Selling, general and administrative expenses were $11.0 million and $35.1 million for the third quarter and nine months ended September 30, 1997, compared with $11.6 million and $33.7 million for the corresponding periods in 1996. The decline in selling, general and administrative expenses in the third quarter of 1997 compared with the third quarter of 1996 was due primarily to the higher cash surrender value of life insurance policies, which reduced expenses, partially offset by higher sales and marketing expenses resulting from the expansion of ALZA's sales force in support of Ethyol-Registered Trademark- and Mycelex-Registered Trademark- Troche. Sales and marketing expenses are expected to increase, primarily due to growth in the sales force resulting from the acquisition of new products and the amortization of acquisition fees for those products. Interest Expense and Income Interest expense increased to $13.8 million for the quarter and $41.3 million for the nine months ended September 30, 1997, compared to $12.9 million and $30.3 million, respectively, for the corresponding periods in 1996. The increase in the third quarter of 1997 compared to the third quarter of 1996 was due primarily to lower amounts of capitalized interest and higher interest on the 5 1/4% Debentures in the 1997 quarter. The interest expense associated with ALZA's 5% Debentures, which were issued in April 1996, also contributed to the increase in interest expense for the nine months ended September 30, 1997 compared with the same period in 1996. Interest and other income increased to $17.8 million for the quarter and $48.3 million for the nine months ended September 30, 1997, compared to $16.5 million and $35.0 million, respectively, for the corresponding periods in 1996, primarily due to higher average invested cash balances following ALZA's issuance of $500 million of 5% Debentures. Gains realized on sales of securities were also included in interest and other income for the quarter and nine month periods of 1997 and 1996. Interest and other income is expected to be lower in future quarters as a result of the reduction of cash and investment balances, as described under Liquidity and Capital Resources below. Effective Tax Rate ALZA's 1997 effective combined federal and state income tax rate is estimated to be 38% on income before the non-recurring items. The non-recurring items recognized during the third quarter of 1997 are generally not deductible for income tax purposes. The effective tax rate for the year ended 1996 was 38%. Subsequent Events On October 20,1997, ALZA acquired the rights in the United States to the Ditropan-Registered Trademark- (oxybutynin chloride) product and trademark from Hoechst Marion Roussel, Inc. ("HMRI"). Under the terms of the agreement, ALZA made an upfront payment to HMRI and will make additional payments if specified sales levels of Ditropan-Registered Trademark- are achieved. HMRI will manufacture and package the product for ALZA. ALZA will have the right to market other products in the United States under the Ditropan-Registered Trademark- tradename. On October 21, 1997, the Board of Directors of Crescendo approved, based upon ALZA's recommendation, work plans for the continued development of six of the Initial Products. On ALZA's recommendation, Crescendo determined not to fund additional development of the D-TRANS-Trademark- testosterone matrix product at this time. On October 23, 1997, ALZA acquired the exclusive rights in the United States and Canada to Elmiron-Registered Trademark- (pentosan polysulfate sodium) and three additional urology products, BiCitra-Registered Trademark-(sodium citrate and citric acid), PolyCitra-Registered Trademark-(potassium citrate) and Neutra-Phos-Registered Trademark-(potassium and sodium phosphate), from Baker Norton Pharmaceuticals, Inc., and its parent, IVAX Corporation (together, "IVAX"). Under the terms of the agreement, ALZA paid a $75 million upfront fee to IVAX and will pay additional fees if specified Elmiron-Registered Trademark- sales levels are achieved during the next five years. IVAX will manufacture and package the products for ALZA and will receive payments from ALZA based on sales of the products. As part of the product acquisition, ALZA hired the U.S. sales representatives of IVAX, and effectively doubled the size of its sales force. ALZA has entered into an agreement with the developers Peery and Arrillaga to form a limited liability company for the development of a 13-acre parcel in Mountain View, California. ALZA's initial investment in the partnership is $36 million, which will be paid in November 1997. These funds will be applied to the construction of buildings, which the limited liability company will lease to ALZA. ALZA has also entered into a lease of an adjacent seven acre parcel on which it plans to construct a pilot plant, laboratories and other technical facilities. The lease includes an option for ALZA to purchase the property and for Peery and Arrillaga to sell the property to ALZA. On October 28, 1997, the Mountain View City Council approved construction plans for the site. LIQUIDITY AND CAPITAL RESOURCES During the third quarter of 1997, ALZA paid $100 million in cash for the purchase of all of the shares of TDC Class A Common Stock, and contributed $300 million in cash to Crescendo, the Class A Common Stock of which was distributed to ALZA security holders. Also during the quarter, ALZA paid Bayer a $50 million upfront fee for the United States rights to Mycelex-Registered Trademark- Troche and made a $10 million payment to U.S. Bioscience, Inc. related to Ethyol-Registered Trademark-, in accordance with an agreement between the companies covering that product. In October 1997, ALZA made an upfront payment of $75 million to IVAX for the United States and Canadian rights to Elmiron-Registered Trademark- and three additional urology products, and paid $10 million to Alkermes under the agreement related to RMP-7. Cash was provided for these transactions from the sales and maturities of short- and long-term investments, as well as from cash and cash equivalents. ALZA's capital spending for the nine months ended September 30, 1997 was $23.6 million for additions to property, plant and equipment to support its expanding research, development and manufacturing activities, compared to capital spending of $32.1 million in the same period of 1996. While ALZA believes its current facilities and equipment are sufficient to meet its current operating requirements, ALZA is expanding its facilities and equipment to support its medium-term and long-term requirements. ALZA believes that its existing cash and investment balances are adequate to fund its cash needs for 1997 and beyond. In addition, should the need arise, ALZA believes it would be able to borrow additional funds or otherwise raise additional capital. ALZA may consider using its capital to make strategic investments or to acquire or license technology or products. ALZA may also enter into strategic alliances with third parties which could provide additional funding for research and product development and support for product marketing and sales. PART II. OTHER INFORMATION Item 1. Legal Proceedings Product liability suits have been filed against ALZA from time to time relating to products manufactured or marketed by ALZA, including several suits against ALZA and Janssen relating to the Duragesic-Registered Trademark- product, which is manufactured by ALZA and marketed by Janssen. Janssen is managing the defense of these suits in consultation with ALZA under an agreement between the parties. In the ordinary course of business, ALZA is also a defendant in suits brought by individuals relating to their employment with ALZA or the termination of such employment. Historically, the cost of resolution of liability (including product liability) claims has not been significant, and ALZA does not believe that the resolution of any asserted claims pending against it, including the suits mentioned above, or of any unasserted claims of which it is aware, would have a material adverse impact on the operations or financial position of ALZA. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: 10.1 Restated Certificate of Incorporation of Crescendo, as corrected 10.2 Technology License Agreement between ALZA and Crescendo 10.3 Development Agreement between ALZA and Crescendo 10.4 License Option Agreement between ALZA and Crescendo 10.5 Amended and Restated Stock Plan 11 Statement Regarding Computation of Per Share Earnings 27 Financial Data Schedule (b) Reports on Form 8-K filed during the quarter On October 6, 1997, ALZA filed a Form 8-K to report the special distribution of shares of Crescendo Pharmaceuticals Corporation on September 30, 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. ALZA CORPORATION Date: November 6, 1997 By: /s/ E. Mario Dr. Ernest Mario Chief Executive Officer Date: November 6, 1997 By: /s/ Bruce C. Cozadd Bruce C. Cozadd Senior Vice President and Chief Financial Officer EX-10.1 2 EXHIBIT 10.1 RESTATED CERTIFICATE OF INCORPORATION OF CRESCENDO PHARMACEUTICALS CORPORATION (Originally incorporated under the same name on June 26, 1997) FIRST: Name. The name of this corporation is Crescendo Pharmaceuticals Corporation (the "corporation"). SECOND: Registered Office; Registered Agent. The address of the registered office of this corporation in the State of Delaware is 1013 Centre Road, in the City of Wilmington, County of New Castle. The name of the registered agent of this corporation at such address is Corporation Service Company. THIRD: Purpose. The purpose of this corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of the State of Delaware. FOURTH: Authorized Capital Stock. (A) This corporation is authorized to issue two classes of shares, which shall be known as Class A Common Stock ("Class A Common Stock") and Class B Common Stock ("Class B Common Stock"). The total number of shares of stock of all classes that this corporation is authorized to issue is 6,001,000. The total number of shares of Class A Common Stock which this corporation is authorized to issue is 6,000,000. The total number of shares of Class B Common Stock which this corporation is authorized to issue is 1,000. Each share of Class A Common Stock shall have a par value of $0.01, and each share of Class B Common Stock shall have a par value of $1.00. Effective immediately upon the filing of this Restated Certificate of Incorporation, each share of Common Stock, par value $1.00 per share, of this corporation outstanding immediately prior to such filing shall be converted into and reclassified as ten shares of Class B Common Stock. (B) The powers, designations, preferences, and relative, participating, optional or other special rights granted to, and the qualifications, limitations and restrictions imposed upon, the Class A Common Stock and Class B Common Stock and the respective holders thereof are as follows: (1) Redemption. The shares of Class A Common Stock are redeemable and may be redeemed as provided in (but only as provided in) Article FIFTH, Section (F). (2) Dividends. The holders of shares of Class A Common Stock and Class B Common Stock shall be entitled to receive per share and without preference such dividends as may be declared by the Board of Directors from time to time out of funds legally available therefor. No dividend may be declared on the Class A Common Stock unless the same per share dividend is declared on the Class B Common Stock, and no dividend may be declared on the Class B Common Stock unless the same per share dividend is declared on the Class A Common Stock. Dividends may not be declared, nor may shares of Class A Common Stock or Class B Common Stock be repurchased, or redeemed (other than pursuant to Section (F) of Article FIFTH), if, after payment of such dividend, or after effecting such repurchase or redemption, the amount of this corporation's cash, cash equivalents, short-term and long-term investments would be less than the amount of Available Funds remaining after expenditures pursuant to the Development Agreement, as of the date of such dividend, repurchase or redemption. (3) Liquidation. In the event of voluntary or involuntary liquidation of this corporation, the holders of the Class A Common Stock and Class B Common Stock of the corporation shall be entitled to receive, on a pro rata per share basis and without preference, all of the remaining assets of this corporation available for distribution to its stockholders. (4) Voting Rights. Except as otherwise required by law or provided herein, the holders of Class A Common Stock and Class B Common Stock shall vote together as a single class. Each holder of Class A Common Stock and Class B Common Stock shall have one vote for each share standing in his or her name on all matters submitted to a vote of holders of the common shares. At any meeting of the stockholders of this corporation, the determination of a quorum shall be based upon the presence of shares of Class A Common Stock and Class B Common Stock representing a majority of the voting power of all of the shares of Class A Common Stock and Class B Common Stock. This corporation shall not, without the affirmative vote of the holders of a majority of the issued and outstanding shares of Class B Common Stock, voting separately and as a class, (a) alter or change the powers, designations, preferences and relative, participating, optional or other special rights granted to, or the qualifications, limitations and restrictions imposed upon, the Class A Common Stock or the Class B Common Stock, (b) alter or change this Article FOURTH or any of Articles FIFTH, SIXTH or SEVENTH of this Restated Certificate of Incorporation, or otherwise make any amendment to this Restated Certificate of Incorporation that would alter the rights of the holders of the Class B Common Stock, (c) authorize the creation or issuance of any additional class or series of stock, (d) undertake the voluntary dissolution, liquidation or winding up of this corporation, (e) merge or consolidate this corporation with or into any other corporation or entity, (f) sell, lease, exchange, transfer or otherwise dispose of any substantial asset of this corporation or (g) alter the bylaws of this corporation in a manner described in the last sentence of Article EIGHTH. Furthermore, from and after the Purchase Option Exercise Date, as defined in Article FIFTH, (i) the Board of Directors of this corporation shall cease to be classified and the holders of the Class B Common Stock shall be entitled to remove directors with or without cause; (ii) the number of directors of this corporation shall be increased to a number equal to (a) two times the maximum number of directors then authorized pursuant to Article SEVENTH, Section (A) (counting for this purpose both directors in office and vacant directorships), plus (b) one; and (iii) the holders of the Class B Common Stock shall have the sole right to elect the directors of this corporation, including directors to fill the new directorships created pursuant to clause (ii). No new directorships created as a result of the increase in the size of the Board of Directors pursuant to the preceding sentence shall be filled other than by the holders of the Class B Common Stock. From and after the Purchase Option Exercise Date all directors shall be elected to one year terms; provided, however, that the term of any director then in office shall not be reduced. (5) Conversion. The Class B Common Stock shall automatically convert into fully paid and nonassessable shares of Class A Common Stock of this corporation at 12:01 a.m. New York time on the day immediately following the expiration of the Purchase Option without exercise granted in Article FIFTH. The Class B Common Stock shall convert into Class A Common Stock at the rate of one share of Class A Common Stock for each share of Class B Common Stock. FIFTH: Purchase Option. (A) Definitions. For purposes of this Restated Certificate of Incorporation, the following terms shall have the following definitions: (1) ALZA means ALZA Corporation and its successors, or assigns of the Purchase Option. (2) ALZA Common Stock means the Common Stock of ALZA or, if such Common Stock is converted into or exchanged for another class or series of stock of ALZA or any other corporation, such other class or series of stock. (3) Available Funds means, as of any date of determination, $300 million (contributed by ALZA on or about September 30, 1997), plus any investment income earned thereon, less (i) this corporation's reasonable ongoing administrative expenses, (ii) the Technology Fee and (iii) reserves of up to $2 million as determined in good faith by the Board of Directors. (4) Crescendo Product means an Identified Product, or another human pharmaceutical product which has been recommended by ALZA and accepted by the Board of Directors of this corporation for development as such under the Development Agreement. (5) Developed Technology means any technology generated or otherwise obtained pursuant to the Development Agreement. (6) Developed Technology Product means any product other than a Crescendo Product (i) covered, at the time of sale in a country, by one or more unexpired patents issued in such country that are included in Developed Technology and (ii) with respect to which ALZA receives any consideration. (7) Developed Technology Royalties means the payments made by ALZA to this corporation with respect to sales of Developed Technology Products. (8) Development Agreement means the Development Agreement between ALZA and this corporation, dated as of September 5, 1997, as such agreement may be amended or modified from time to time by amendments approved by ALZA and the Board of Directors of this corporation. (9) Fair Market Value means, with reference to ALZA Common Stock, (a) if ALZA Common Stock is listed on the New York Stock Exchange or any other securities exchange reporting closing sales prices (including without limitation the Nasdaq National Market), the average of the closing sales price of ALZA Common Stock on such exchange (which shall be the New York Stock Exchange or, if ALZA Common Stock is not then traded on such exchange, on the principal exchange on which ALZA Common Stock is then traded), for the twenty trading days ending with the trading day that is two trading days prior to the date of determination, (b) if ALZA Common Stock is not listed on any securities exchange described in clause (a) but is quoted on Nasdaq or another quotation system providing bid prices, the average (over the twenty day period described in clause (a)) of the bid prices for each day in such period on Nasdaq (or, if ALZA Common Stock is not then quoted on Nasdaq, the largest quotation system on which ALZA Common Stock is then quoted), and (c) if ALZA Common Stock is not listed on any exchange or quoted on any quotation system, the value thereof as determined in good faith by ALZA's board of directors. (10) Final Purchase Option Exercise Price means the Purchase Option Exercise Price minus (a) the amount by which this corporation's Liabilities existing at the Purchase Option Exercise Date (other than liabilities under the Development Agreement, Services Agreement and Technology License Agreement) exceed the aggregate of this corporation's then existing cash, cash equivalents and short term and long-term investments (but excluding from such cash, cash equivalents and short-term and long-term investments the amount of Available Funds determined as of the Purchase Option Exercise Date which had not, as of such date, been paid by this corporation in accordance with the Development Agreement) and minus (b), if the Purchase Option Exercise Price was determined based upon the provisions of clause (c) of Section (A)(19) of this Article FIFTH, any additional amounts not already included in the calculation set forth in Article FIFTH, Section (A)(18) that are paid by (or due from) this corporation under the Development Agreement from the date of the last report of such expenditures provided by this corporation to ALZA in a Status Statement through the Purchase Option Exercise Date pursuant to the Development Agreement. (11) Identified Products means the following products: OROSr oxybutynin, DUROST leuprolide, OROSr methylphenidate, IUTS progesterone, D-TRANST testosterone matrix, E-TRANST LHRH and E-TRANST (skin interface technology) insulin. (12) Liabilities means, with respect to this corporation, (a) all liabilities required to be reflected or reserved against in this corporation's financial statements under generally accepted accounting principles consistently applied ("GAAP"), (b) any guaranty of any indebtedness of another person and (c) any reimbursement or similar obligation with respect to any letter of credit issued for the account of this corporation or as to which this corporation is otherwise liable. Liabilities of the type described in (b) and (c) shall be valued at the full amount of the potential liability of the corporation thereon. (13) License Agreement means any License Agreement between ALZA and this corporation entered into upon the exercise by ALZA of the license option granted to it pursuant to the License Option Agreement, as any such agreement may be amended or modified from time to time by amendments approved by ALZA and the Board of Directors of this corporation. (14) License Option Agreement means the License Option Agreement between ALZA and this corporation dated as of September 5, 1997, as such agreement may be amended or modified from time to time by amendments approved by ALZA and the Board of Directors of this corporation. (15) Licensed Product means a Crescendo Product as to which the license option under the License Option Agreement has been exercised by ALZA. (16) Product Payments means payments made by ALZA to this corporation under a License Agreement with respect to Licensed Products. (17) Purchase Option Exercise Date means the date upon which ALZA notifies this corporation in writing of its exercise of the Purchase Option as provided in Section (C) of this Article FIFTH. (18) Purchase Option Exercise Price means the greatest of the following: (a) (i) 25 times the actual worldwide Product Payments, Developed Technology Royalties and Technical Evaluation Product Payments made by or due from ALZA to this corporation with respect to all Licensed Products, Developed Technology Products and Technical Evaluation Products (and, in addition, such Product Payments, Developed Technology Royalties and Technical Evaluation Product Payments as would have been made by or due from ALZA to this corporation if ALZA had not previously exercised its payment buy-out option with respect to any such Licensed Product, Developed Technology Product or Technical Evaluation Product) for the four calendar quarters immediately preceding the quarter in which the Purchase Option is exercised (provided, however, that for any Licensed Product, Developed Technology Product or Technical Evaluation Product which has not been commercially sold during each of the four calendar quarters immediately preceding the quarter in which the Purchase Option is exercised, the portion of the Purchase Option Exercise Price for such Licensed Product, Developed Technology Product or Technical Evaluation Product will be 100 times the average of the quarterly Product Payments, Developed Technology Royalties or Technical Evaluation Product Payments made by or due from ALZA to this corporation for each of such calendar quarters during which such product was commercially sold) less (ii) any amounts previously paid to exercise any payment buy-out option for any Licensed Product, Developed Technology Product or Technical Evaluation Product pursuant to a License Agreement or the Development Agreement. (b) the Fair Market Value of one million shares of ALZA Common Stock (which number of shares shall be proportionately adjusted for any stock dividend, splitup, combination or reclassification of the ALZA Common Stock) determined as of the Purchase Option Exercise Date; (c) $325 million less the total amount paid by or due from this corporation under the Development Agreement as last reported by this corporation to ALZA in a Status Statement through the Purchase Option Exercise Date; and (d) $100 million. (19) Purchase Option Expiration Time means 11:59 p.m. New York time on January 31, 2002; provided that such date will be extended for successive six month periods if, as of any July 31 or January 31 beginning with July 31, 2001, this corporation has not paid (or accrued expenses for) at least 95% of all Available Funds pursuant to the Development Agreement. Notwithstanding the foregoing sentence, the Purchase Option Expiration Time will in no event occur later than 11:59 p.m. New York time on the 60th day after this corporation provides ALZA with a statement that, as of the end of any calendar month, there are less than $2.5 million of Available Funds remaining after expenditures pursuant to the Development Agreement, accompanied by a report of this corporation's independent auditors stating that nothing has come to their attention indicating that there are $2.5 million or more of Available Funds remaining at that date. (20) Services Agreement means the Services Agreement between ALZA and this corporation, dated as of September 5, 1997, as such agreement may be amended or modified from time by amendments approved by ALZA and the Board of Directors of this corporation. (21) Status Statement means, as of any date, a balance sheet prepared by the Company and delivered to ALZA dated as of such date, together with (a) a statement and brief description of all other liabilities of this corporation constituting Total Liabilities as of such date not reflected on such balance sheet, (b) a statement of the amount of Available Funds remaining as of such date, and (c) a statement of the total amounts paid by and due from this corporation pursuant to the Development Agreement through such date. (22) Technical Evaluation means limited technical evaluation involving a proprietary therapeutic agent of a third party undertaken in order to determine the suitability of such therapeutic agent in an ALZA drug delivery system or to induce the third party to license the therapeutic agent to ALZA or this corporation or otherwise collaborate with ALZA and this corporation in the development of a product. (23) Technical Evaluation Product means a product, other than one which becomes a Crescendo Product, for which this corporation funds a Technical Evaluation. (24) Technical Evaluation Product Payments means the payments made by ALZA to this corporation with respect to sales of Technical Evaluation Products. (25) Technology Fee means the payments to be made over a maximum period of three years by this corporation to ALZA in exchange for ALZA granting this corporation a license to use certain technology relating to the Identified Products. (26) Technology License Agreement means the Technology License Agreement between ALZA and this corporation , dated as of September 5, 1997, as such agreement may be amended or modified from time to time by amendments approved by ALZA and the Board of Directors of this corporation. (27) Total Liabilities means (a) all Liabilities, plus (b) any other debts, liabilities or obligations, absolute or contingent, matured or unmatured, liquidated or unliquidated, accrued or unaccrued, known or unknown, whenever arising, including all costs and expenses relating thereto, and including those debts, liabilities and obligations arising under any law, rule or regulation, or under any pending or threatened action, suit or proceeding, or any order or consent decree of any governmental entity or any award of any arbitrator of any kind, and those arising under any contract, commitment or undertaking. (B) Grant of Option. ALZA is hereby granted an exclusive irrevocable purchase option to purchase all issued and outstanding shares of Class A Common Stock of this corporation for the Final Purchase Option Exercise Price (the "Purchase Option"). The Purchase Option, if exercised, must be exercised as to all, but not less than all, issued and outstanding shares of Class A Common Stock and may be exercised at any time at or prior to the Purchase Option Expiration Time. ALZA shall elect, at the time of exercise of the Purchase Option, to pay all or any portion of the Final Purchase Option Exercise Price in cash, ALZA Common Stock (valued at its Fair Market Value determined as of the Purchase Option Exercise Date), or any combination thereof. The Purchase Option, together with the other rights of ALZA under this Article FIFTH and Article SIXTH, may, at ALZA's option, be assigned or otherwise transferred to any person or entity, including this corporation. (C) Manner of Exercise. The Purchase Option shall be exercised, if at all, at or before the Purchase Option Expiration Time by written notice (the "Exercise Notice") from ALZA to this corporation stating that the Purchase Option is being exercised and setting forth (1) the Purchase Option Exercise Price; (2) the portion, if any, of the Final Purchase Option Exercise Price to be paid in cash and the portion, if any, of the Final Purchase Option Exercise Price to be paid in ALZA Common Stock, and if any portion of the Final Purchase Option Exercise Price is to be paid in ALZA Common Stock, stating the Fair Market Value of such ALZA Common Stock determined as of the Purchase Option Exercise Date; and (3) a closing date (the "Closing Date") on which all of the issued and outstanding shares of Class A Common Stock will be purchased. The Purchase Option shall be deemed to be exercised as of the date of mailing by first class mail of the Exercise Notice to this corporation at its principal offices. (D) Closing. (1) Closing Date; Cooperation. Except as set forth below, the Closing Date shall be the date specified as such in the Exercise Notice, which date specified shall be no later than 60 days after the Purchase Option Exercise Date. The Closing Date may be extended by ALZA if, in the judgment of ALZA, an extension of the Closing Date is necessary to obtain any governmental or third party consent to the purchase of the Class A Common Stock, to permit any necessary registration statement or similar filing to be declared effective, or to permit the expiration prior to the Closing Date of any statutory or regulatory waiting period. ALZA may extend the Closing Date for the reasons set forth in the preceding sentence by delivering written notice of such extension to this corporation on or prior to the previously specified Closing Date. This corporation shall cooperate with ALZA to effect the closing of the Purchase Option, including without limitation seeking any required third-party or governmental consents, and filing any applications, notifications, registration statements or the like which may be necessary to effect the closing. (2) Certain Restrictions Following Purchase Option Exercise Date. From the Purchase Option Exercise Date until the Closing Date, this corporation will not take any of the following actions (or permit any such actions to be taken on its behalf) e xcept with the prior written consent of ALZA: (a) borrow money, or mortgage, remortgage, pledge, hypothecate or otherwise encumber any of its assets; (b) sell, lease, lend, exchange or otherwise dispose of any of its assets, other than sales of inventory in the ordinary course of business; (c) pay or declare any dividends or make any distributions on or in respect of any shares of its capital stock; (d) default in its obligations under any material contract, agreement, commitment or undertaking of any kind or enter into any material contract, agreement, purchase order or other commitment; or (e) enter into any other transaction or agreement or arrangement, or incur any liabilities, not in the ordinary course of this corporation's business. (3) Determination of Final Purchase Option Exercise Price. Not later than 15 business days following the Purchase Option Exercise Date, this corporation shall deliver a final Status Statement to ALZA prepared as of the Purchase Option Exercise Date. Following receipt of such Status Statement and completion of any other investigation as ALZA shall deem necessary or appropriate, and prior to the Closing Date, ALZA shall determine the Final Purchase Option Exercise Price by making the adjustments to the Purchase Option Exercise Price contemplated by Section (A)(10) of this Article FIFTH and shall notify this corporation of such determination. (4) Payment of Final Purchase Option Exercise Price. On or before the Closing Date, ALZA shall deposit the full amount of the Final Purchase Option Exercise Price with a bank or banks or similar entities designated by ALZA (which may include ALZA's transfer agent if shares of ALZA Common Stock are being delivered) to pay, on ALZA's behalf, the Final Purchase Option Exercise Price (the "Payment Agent"). Funds, if any, and ALZA Common Stock, if any, deposited with the Payment Agent shall be delivered in trust for the benefit of the holders of Class A Common Stock, and ALZA shall provide the Payment Agent with irrevocable instructions to pay, on or after the Closing Date, the Final Purchase Option Exercise Price for the shares of Class A Common Stock to the holders of record thereof determined as of the Closing Date. Payment for shares of Class A Common Stock shall be mailed to each holder at the address set forth in this corporation's records or at the address provided by each holder or, if no address is set forth in this corporation's records for a holder or provided by such holder, to such holder at the address of this corporation. As soon as practicable upon ALZA's request, this corporation shall provide, or shall cause its transfer agent to provide, to ALZA or to the Payment Agent, free of charge, a complete list of the record holders of shares of Class A Common Stock, as of a specified date, including the number of shares of Class A Common Stock held of record and the address of each record holder as set forth in the records of this corporation's transfer agent. (E) Transfer of Title. Transfer of title to all of the issued and outstanding shares of Class A Common Stock shall be deemed to occur automatically on the Closing Date and thereafter this corporation shall be entitled to treat ALZA as the sole holder of all of the issued and outstanding shares of its Class A Common Stock, notwithstanding the failure of any holder of Class A Common Stock to tender the certificates representing such shares to the Payment Agent, whether or not such tender is required or requested by the Payment Agent. This corporation shall instruct its transfer agent not to accept any shares of Class A Common Stock for transfer on and after the Closing Date. This corporation shall take all actions reasonably requested by ALZA to assist in effectuating the transfer of shares of Class A Common Stock in accordance with this Article FIFTH. (F) Redemption of Class A Common Stock. At ALZA's election (which election may be made at any time, provided it is made, by delivery of written notice thereof to this corporation, not less than five days prior to the Closing Date), this corporation shall, subject to applicable restrictions in the Delaware General Corporation Law, redeem on the Closing Date all issued and outstanding shares of Class A Common Stock for an aggregate redemption price equal to the Final Purchase Option Exercise Price. Such redemption shall be in lieu of ALZA paying the Final Purchase Option Exercise Price directly to the stockholders of this corporation, and shall be subject to ALZA providing the Final Purchase Option Exercise Price to this corporation to allow this corporation to pay the redemption price. SIXTH: Protective Provisions. (A) Legend. Certificates evidencing shares of Class A Common Stock issued by or on behalf of this corporation shall bear a legend in substantially the following form: "The shares of Crescendo Pharmaceuticals Corporation evidenced hereby are subject to an option in favor of ALZA Corporation, its successors and assigns, as described in the Restated Certificate of Incorporation of Crescendo Pharmaceuticals Corporation to purchase such shares at a purchase price determined in accordance with Article FIFTH thereof exercisable by notice delivered to this corporation at or prior to the Purchase Option Expiration Time (as defined in the Restated Certificate of Incorporation of Crescendo Pharmaceuticals Corporation). Copies of the Restated Certificate of Incorporation of Crescendo Pharmaceuticals Corporation are available at the principal place of business of Crescendo Pharmaceuticals Corporation at 1454 Page Mill Road, Palo Alto, California 94304 and will be furnished to any stockholder on request and without cost." (B) No Conflicting Action. This corporation shall not take, nor permit any other person or entity within its control to take, any action inconsistent with ALZA's rights under Article FIFTH. This corporation shall not enter into any arrangement, agreement or understanding, whether oral or in writing, that is inconsistent with or limits or impairs the rights of ALZA and the obligations of this corporation hereunder, including without limitation any arrangement, agreement or understanding which imposes any obligation upon this corporation, or deprives this corporation of any material rights, as a consequence of the exercise of the Purchase Option or the acquisition of the outstanding Class A Common Stock pursuant thereto. (C) Inspection and Visitation Rights; Status Statements. ALZA shall have the right to inspect and copy, on reasonable notice and during regular business hours, the books and records of this corporation. ALZA shall also have the right to request from time to time (but not more frequently than monthly) a Status Statement as of such date as ALZA may request. Each Status Statement shall be sent within seven days of request by ALZA. ALZA shall also have the right to send a non-voting representative to attend all meetings of this corporation's Board of Directors and any committees thereof. Any representative, if designated in writing by ALZA as such, shall receive notice of all meetings of this corporation's Board of Directors and each committee thereof, as well as copies of all documents and other materials provided to any directors of this corporation in connection with any such meeting not later than the time such materials are provided to other directors. Such representative shall also be provided with copies of all resolutions adopted or proposed to be adopted by unanimous written consent not later than the time such resolutions are provided to other directors. SEVENTH: Board of Directors. (A) The number of directors which shall constitute the whole Board of Directors of this corporation shall initially be three, but may be increased or decreased from time to time by a resolution duly adopted by the Board of Directors and shall be automatically increased as provided in Article FOURTH, Section (B)(4). (B) Nomination of candidates for election to the Board of Directors shall be made as provided in the bylaws of this corporation. Election of directors need not be by written ballot. (C) Subject to Article FOURTH, Section (B)(4), the Board of Directors shall be and is divided into three classes: Class I, Class II and Class III. Each director shall serve for a term ending on the date of the third annual meeting of stockholders following the annual meeting at which the director was elected; provided, however, that each initial director in Class I shall hold office until the annual meeting of stockholders in 1998; each initial director in Class II shall hold office until the annual meeting of stockholders in 1999; and each initial director in Class III shall hold office until the annual meeting of stockholders in 2000. Notwithstanding the foregoing provisions of this Article SEVENTH, each director shall serve, until his or her successor is duly elected and qualified or until his or her death, resignation, disqualification or removal. (D) In the event of any increase or decrease in the authorized number of directors, the newly created or eliminated directorships resulting from such increase or decrease shall be apportioned by the Board of Directors among the three classes of directors. No decrease in the number of directors constituting the Board of Directors shall shorten the term of any incumbent director. (E) Except as otherwise provided in Article FOURTH, Section (B)(4), or as required by law, newly created directorships resulting from any increase in the number of directors and any vacancies on the Board of Directors resulting from death, resignation, disqualification, removal or other cause shall be filled by the affirmative vote of a majority of the remaining directors then in office (and not by stockholders), even though less than a quorum of the Board of Directors. Any director elected in accordance with the preceding sentence shall hold office for the remainder of the full term of the class of directors in which the new directorship was created or the vacancy occurred and until such director's successor shall have been elected and qualified. (F) The name and mailing address of each person who is to serve as a director until the annual meeting of the stockholders entitled to vote for the class or until a successor is elected or appointed and qualified are as follows: NAME MAILING ADDRESS CLASS James Butler 950 Page Mill Road I Palo Alto, CA 94304 Dr. Samuel R. Saks 950 Page Mill Road II Palo Alto, CA 94304 Dr. James W. Young 950 Page Mill Road III Palo Alto, CA 94304 EIGHTH: Bylaws. In furtherance and not in limitation of the powers conferred by statute, and subject to the next sentence, the Board of Directors and the stockholders of this corporation are each expressly authorized to adopt, amend or repeal the bylaws of this corporation subject to any particular provisions concerning amendments set forth in this Restated Certificate of Incorporation or the bylaws of this corporation. No amendment to the bylaws may be adopted by the stockholders without the approval of holders of a majority of the Class B Common Stock voting separately as a class if such amendment would affect the classification of the Board of Directors, or would otherwise regulate the conduct of the Board's affairs or the manner in which it may act. NINTH: Stockholder Meetings. (A) Special Meetings. Special meetings of the stockholders for any purpose or purposes whatsoever may be called at any time only by the Board of Directors, the Chairman of the Board or the President of this corporation. (B) No Action Without Meeting. At any time when this corporation has more than one stockholder of any class of capital stock, no action required to be taken or which may be taken at any annual or special meeting of the stockholders may be taken without a meeting, and the power of stockholders to consent in writing, without a meeting, to the taking of any action is specifically denied. Notwithstanding the foregoing, the holder or holders of the Class B Common Stock may take any action permitted to be taken by such holders as a class by written consent without a meeting. TENTH: Limitation of Liability and Indemnification of Directors. (A) Elimination of Certain Liability of Directors. No director of this corporation shall be personally liable to this corporation or its stockholders for monetary damages for breach of fiduciary duty as a director except, to the extent provided by applicable law, for liability (i) for any breach of the director's duty of loyalty to this corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the Delaware General Corporation Law or (iv) for any transaction from which the director derived an improper personal benefit. No amendment to or repeal of this Article TENTH shall apply to or have any effect on the liability or alleged liability of any director of this corporation for or with respect to any acts or omissions of such director occurring prior to such amendment. (B) Indemnification and Insurance. 1. Right to Indemnification. Each person who was or is made a party or is threatened to be made a party to or is involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative (a "proceeding"), because he or she, or a person of whom he or she is the legal representative, is or was a director or officer of this corporation or is or was serving at the request of this corporation as a director, officer, employee or agent of another corporation or of a partnership, joint venture, trust or other enterprise (including service with respect to employee benefit plans), whether the basis of the proceeding is alleged action in an official capacity as a director, officer, employee or agent or in any other capacity while serving as a director, officer, employee or agent, shall be indemnified and held harmless by this corporation to the fullest extent authorized by the Delaware General Corporation Law, as the same exists or may hereafter be amended (but, in the case of any such amendment, only to the extent that such amendment permits this corporation to provide broader indemnification rights than that law permitted this corporation to provide before such amendment), against all expense, liability and loss (including attorneys' fees, judgments, penalties, fines, Employee Retirement Income Security Act of 1974 excise taxes or penalties, and amounts paid or to be paid in settlement) reasonably incurred or suffered by such person in connection therewith; provided, however, that this corporation shall indemnify any such person seeking indemnification in connection with a proceeding (or part thereof) initiated by such person only if the proceeding (or part thereof) was authorized by the Board of Directors of this corporation. Such indemnification shall continue as to a person who has ceased to be a director or officer of this corporation and shall inure to the benefit of his or her heirs, executors and administrators. The right to indemnification conferred by this Section shall be a contract right which may not be retroactively amended and shall include the right to be paid by this corporation the expenses incurred in defending any such proceeding in advance of its final disposition; provided, however, that the payment of such expenses incurred by a director or officer in his or her capacity as a director or officer (and not in any other capacity in which service was or is rendered by such person while a director or officer, including, without limitation, service with respect to an employee benefit plan) in advance of the final disposition of the proceeding shall be made only upon delivery to this corporation of an undertaking, by or on behalf of such director or officer, to repay all amounts so advanced if ultimately it shall be determined that such director or officer is not entitled to be indemnified under this Section or otherwise. This corporation may, by action of its Board of Directors, provide indemnification to employees and agents of this corporation with the same scope and effect as the indemnification of directors and officers. 2. Right of Claimant to Bring Suit. If a claim under Paragraph 1 of this Section is not paid in full by this corporation within ninety (90) days after a written claim has been received by this corporation, the claimant may at any time thereafter bring suit against this corporation to recover the unpaid amount of the claim and, if successful in whole or in part, the claimant shall be entitled to be paid also the expense of prosecuting such claim. It shall be a defense to any such action (other than an action brought to enforce a claim for expenses incurred in defending any proceeding in advance of its final disposition where the required undertaking, if any, has been tendered to this corporation) that the claimant has not met the standards of conduct which make it permissible under the Delaware General Corporation Law for this corporation to indemnify the claimant for the amount claimed, but the burden of proving such defense shall be on this corporation. Neither the failure of this corporation (including its Board of Directors, independent legal counsel, or its stockholders) to have made a determination prior to the commencement of such action that indemnification of the claimant is proper in the circumstances because he or she has met the applicable standard of conduct set forth in the Delaware General Corporation Law, nor an actual determination by this corporation (including its Board of Directors, independent legal counsel, or its stockholders) that the claimant has not met such applicable standard of conduct, shall be a defense to the action or create a presumption that claimant has not met the applicable standard of conduct. 3. Nonexclusivity of Rights. The right to indemnification and the payment of expenses incurred in defending a proceeding in advance of its final disposition conferred in this Section shall not be exclusive of any other right which any person may have or hereafter acquire under any statute, provision of this Restated Certificate of Incorporation, bylaw, agreement, vote of stockholders or disinterested directors, or otherwise. 4. Insurance. This corporation may maintain insurance, at its expense, to protect itself and any director, officer, employee or agent of this corporation or another corporation, partnership, joint venture, trust or other enterprise against any such expense, liability or loss, whether or not this corporation would have the power to indemnify such person against such expense, liability or loss under the Delaware General Corporation Law. IN WITNESS WHEREOF, the undersigned officer has executed this Restated Certificate of Incorporation on September 4, 1997 and does hereby certify that this Restated Certificate of Incorporation, which restates and integrates, and also further amends, the provisions of this corporation's Certificate of Incorporation, was duly adopted by the stockholders of this corporation in accordance with Sections 242 and 245 of the Delaware General Corporation Law. CRESCENDO PHARMACEUTICALS CORPORATION By: /s/Dr. James W. Young _____________________ Dr. James W. Young President and Chief Executive Officer EX-10.2 3 Exhibit 10.2 TECHNOLOGY LICENSE AGREEMENT This Technology License Agreement (this "Agreement") is made as of the 5th day of September, 1997 between ALZA Corporation, a Delaware corporation ("ALZA"), and Crescendo Pharmaceuticals Corporation, a Delaware corporation ("Crescendo"). BACKGROUND A. Crescendo has been formed for the purpose of selecting and developing human pharmaceutical products, including products using ALZA Technology (as defined herein), and commercializing such products, most likely through licensing to ALZA. B. ALZA and Crescendo have entered into the Development Agreement (as defined herein) for the selection and development of such products and related activities. C. ALZA is willing to grant to Crescendo a license to use ALZA Technology solely for the purposes set forth above on the terms set forth herein and in the Development Agreement and the License Option Agreement (as defined herein). Now, therefore, the parties agree as follows: 1. Definitions. For the purposes of this Agreement, the following terms shall have the meanings set forth below: 1.1 "Affiliate" shall mean a corporation or any other entity that directly, or indirectly through one or more intermediaries, controls, is controlled by, or is under common control with, the designated party. "Control" shall mean ownership of at least 50% of the shares of stock entitled to vote for the election of directors in the case of a corporation, and at least 50% of the interests in profits in the case of a business entity other than a corporation. 1.2 "ALZA Technology" shall mean all Proprietary Rights, whether patented or unpatented, owned by, licensed to or controlled by ALZA, as of the date of this Agreement or during the term of the Development Agreement, including the Developed Technology and the Identified Product Technology. 1.3 "Crescendo Product" shall mean an Identified Product, or another human pharmaceutical product which has been recommended by ALZA and accepted by Crescendo's independent Board of Directors for development as such under the Development Agreement. 1.4 "Developed Technology" shall mean Proprietary Rights that (a) are first generated, conceived or reduced to practice, as the case may be, by ALZA or by any third party in the course of performing activities undertaken pursuant to the Development Agreement or (b) are, in any manner, acquired by, or otherwise obtained on behalf of, Crescendo during the term of the Development Agreement from persons other than ALZA and are necessary or useful to the selection, development or commercialization of Crescendo Products or Technical Evaluation Products. 1.5 "Development Agreement" shall mean the Development Agreement dated as of the date hereof between ALZA and Crescendo. 1.6 "Distribution" shall mean ALZA's distribution of all of the outstanding shares of Class A Common Stock of Crescendo to ALZA stockholders and debenture holders of record on September 18, 1997. 1.7 "Identified Product Technology" shall mean all ALZA Technology existing on the date of the closing of ALZA's purchase of the outstanding shares of Therapeutic Discovery Corporation relating to any Identified Product. 1.8 "Identified Products" shall mean, upon the closing of ALZA's purchase of the outstanding shares of Therapeutic Discovery Corporation, the following products: OROSr oxybutynin, DUROST leuprolide, OROSr methylphenidate, IUTS progesterone, D-TRANST testosterone matrix, E-TRANST LHRH and E-TRANST (skin interface technology) insulin. 1.9 "Infringing Product" shall mean any product sold by a third party which infringes or is alleged to infringe any patent or patents licensed to Crescendo hereunder and covering a Crescendo Product. 1.10 "License Agreement" shall mean an exclusive license agreement for a particular Crescendo Product between ALZA and Crescendo, entered into as a result of ALZA's exercise of the License Option for such product. 1.11 "License Option" shall mean the option granted to ALZA pursuant to the License Option Agreement. 1.12 "License Option Agreement" shall mean the License Option Agreement dated as of the date hereof between ALZA and Crescendo. 1.13 "Pre-Existing Rights" shall mean the rights of Ciba-Geigy Limited or one of its Affiliates under those certain agreements dated May 2, 1982 between ALZA and Ciba- Geigy Limited or one of its Affiliates. 1.14 "Proprietary Rights" shall mean data, inventions, information, processes, know-how and trade secrets, and patents or patent applications claiming any of the foregoing, owned by, licensed to or controlled by a person and which such person has the right to license or sublicense. Proprietary Rights shall not include trademarks. 1.15 "Purchase Option" shall mean that certain option contained in Crescendo's Restated Certificate of Incorporation pursuant to which ALZA has the right to purchase all of the outstanding shares of Crescendo Class A Common Stock. 1.16 "Technical Evaluation" shall mean a limited technical evaluation involving a proprietary therapeutic agent of a third party undertaken in order to determine the suitability of such therapeutic agent in an ALZA drug delivery system or to induce the third party to license the therapeutic agent to ALZA or Crescendo or otherwise collaborate with ALZA and Crescendo in the development of a product. 1.17 "Technical Evaluation Product" shall mean a product, other than one which will become a Crescendo Product, for which Crescendo funds a Technical Evaluation. 2. License. 2.1 Grant of License. ALZA hereby grants to Crescendo, on the terms and conditions of this Agreement, a worldwide, exclusive license (subject to the Pre-Existing Rights), in perpetuity, with the right to sublicense (as set forth below), to use the ALZA Technology to select and develop Crescendo Products, to conduct related activities (including Technical Evaluations), and to commercialize Crescendo Products, but for no other purposes whatsoever. Crescendo shall not sublicense any ALZA Technology to, or enter into other arrangements with respect to any ALZA Technology with, any third party for any purpose, except as set forth in Sections 2.2 and 2.3 hereof. 2.2 Permitted Sublicenses. (a) Except as set forth in Section 2.2(b) hereof, Crescendo may grant sublicenses to ALZA and third parties to use the ALZA Technology solely for the purpose of performing activities in connection with the selection and development of Crescendo Products and conducting related activities (including Technical Evaluations); provided however, that, during the term of the Development Agreement, any such sublicenses shall be granted in accordance with the terms of the Development Agreement. (b) If the License Option with respect to any Crescendo Product in one or more countries expires unexercised, from and after expiration of such License Option in any such country, Crescendo may sublicense ALZA Technology to a third party or third parties solely to the extent necessary to complete the development of, or to make (or have made) and use such Crescendo Product, or to sell (or have sold) such Crescendo Product in such country. 2.3 Conditions of Sublicenses. Each sublicensee shall execute such agreements as ALZA reasonably deems appropriate to protect the ALZA Technology and to protect ALZA's rights under all agreements between ALZA and Crescendo and under the Purchase Option. Each sublicensee shall have all the duties of Crescendo hereunder with respect to such sublicense, and each sublicensee shall acknowledge these duties to ALZA in writing. No sublicense shall have the effect of relieving Crescendo of any of its obligations hereunder. 2.4 Prior and Future Grants. Crescendo understands and acknowledges that ALZA is in the business of developing products incorporating the ALZA Technology for its own account and under arrangements with third parties, and as a result, the license granted hereunder is limited strictly to use the ALZA Technology for the purpose of selecting and developing Crescendo Products and conducting related activities (including Technical Evaluations) and commercializing Crescendo Products. Crescendo acknowledges that ALZA may use and may grant third party licenses to use the ALZA Technology for any and all other purposes. 3. Covenants of Crescendo. 3.1 Diligence. Crescendo promptly shall commence and shall use diligent efforts to develop Crescendo Products in accordance with approved work plans and cost estimates under the Development Agreement, subject to ALZA diligently undertaking its obligations thereunder. 3.2 Technology Fee. In consideration of the license granted hereunder by ALZA to Crescendo to use the Identified Product Technology, Crescendo shall pay ALZA in arrears as follows: (a) $1,000,000 thirty days after the later of (i) the date of the Distribution and (ii) the date of the closing of ALZA's purchase of outstanding shares of Therapeutic Discovery Corporation, and $1,000,000 on the same day of each of the next eleven months; (b) $667,000 per month on the same day of each of the next twelve months; and (c) $333,000 per month on the same day of each of the next twelve months; provided, however, that once Crescendo has commenced payment of the Technology Fee hereunder, such obligation will cease on the date on which fewer than two of the Identified Products are under development by Crescendo pursuant to the Development Agreement and/or have been licensed to ALZA pursuant to ALZA's exercise of the License Option. 4. Patents. 4.1 Infringement. Each party shall promptly notify the other of any infringement or alleged infringement known to such party of any patent covering ALZA Technology, by the manufacture, development, use or sale by a third party of any Infringing Product. 4.2 Action by ALZA. Subject to the provisions of the Development Agreement and any License Agreement, in the event of any such alleged infringement, ALZA shall have the right, at its own expense and with the right to all recoveries, to take appropriate action to restrain such alleged infringement. If ALZA takes any such action, Crescendo shall cooperate fully with ALZA in its pursuit thereof, at ALZA's expense, to the extent reasonably requested by ALZA. If ALZA brings an action under this Section 4.2, the parties shall share equally any recoveries, after ALZA is reimbursed for its expenses of bringing the action (including reasonable attorneys' fees). 4.3 Action by Crescendo. If (a) the Infringing Product is substantially similar to a Crescendo Product (in that the Infringing Product incorporates the same active therapeutic agent or agents as such Crescendo Product and, in the case of a Crescendo Product that utilizes ALZA drug delivery technology, a drug delivery system substantially similar to the ALZA drug delivery system) for which the License Option has expired unexercised, and (b) within 90 days after the written notice from either party described above (or at any time thereafter), ALZA has not taken appropriate action to restrain such alleged infringement, and (c) at such time, the annualized unit sales volume of such Infringing Product in a country over a period of at least two calendar quarters, equals or exceeds 25% of the annualized unit sales volume of the related Crescendo Product in such country during the same period, then Crescendo shall have the right, at its own expense and with the right to all recoveries, to take such action as it deems appropriate to restrain such alleged infringement. If Crescendo takes any such action, ALZA shall cooperate with Crescendo in its pursuit thereof, at Crescendo's expense, to the extent reasonably requested by Crescendo. If the third party in any such action brings a counteraction for invalidation or misuse of a patent covering the ALZA Technology or the Crescendo Product, Crescendo shall promptly notify ALZA, and ALZA may, within six months after the notification, join and participate in such action at its own expense. Crescendo shall not settle any such action relating to any alleged infringement which in any manner would adversely affect ALZA Technology without the prior written consent of ALZA. 5. Confidentiality of Information. 5.1 Confidentiality. During the term of this Agreement and for a period of ten years following its termination, Crescendo shall maintain in confidence all ALZA Technology; provided, however, that nothing contained herein shall prevent Crescendo from disclosing any ALZA Technology to the extent such ALZA Technology (a) is required to be disclosed in connection with developing Crescendo Products, conducting Technical Evaluations, conducting related activities, securing necessary governmental authorization for the marketing of Crescendo Products, or directly or indirectly making, using or selling Crescendo Products, as permitted or provided for in the agreements between the parties, (b) is required to be disclosed by law for the purpose of complying with governmental regulations, (c) is disclosed in connection with any sublicense permitted hereunder, (d) is known to or used by Crescendo prior to the date hereof (other than through disclosure by or on behalf of ALZA) as evidenced by Crescendo's written records, (e) is lawfully disclosed to Crescendo by a third party having the right to disclose such information to Crescendo, or (f) either before or after the time of disclosure to Crescendo, becomes known to the public other than by an unauthorized act or omission of Crescendo or any of Crescendo's employees or agents. Any disclosure of ALZA Technology to third parties shall be made subject to similar obligations of confidentiality on the part of such third parties. The obligations of Crescendo pursuant to this Section 5.1 shall survive the termination of this Agreement for any reason. Any breach of this Section 5.1 may result in irreparable harm to ALZA, and in the event of a breach, ALZA shall be entitled to seek injunctive relief (without the need to post a bond) in addition to any other remedies available at law or in equity. 6. Disclaimer. 6.1 Disclaimer Concerning ALZA Technology. ALZA DISCLAIMS ANY EXPRESS OR IMPLIED WARRANTY (A) THAT ANY ALZA TECHNOLOGY, OR THE USE THEREOF, OR ANY PRODUCTS INCORPORATING OR MANUFACTURED BY THE USE THEREOF, WILL BE FREE FROM CLAIMS OF PATENT INFRINGEMENT, INTERFERENCE OR UNLAWFUL USE OF PROPRIETARY INFORMATION OF ANY THIRD PARTY AND (B) OF THE ACCURACY, RELIABILITY, TECHNOLOGICAL OR COMMERCIAL VALUE, COMPREHENSIVENESS OR MERCHANTABILITY OF THE ALZA TECHNOLOGY OR ITS SUITABILITY OR FITNESS FOR ANY PURPOSE WHATSOEVER INCLUDING, WITHOUT LIMITATION, THE DESIGN, DEVELOPMENT, MANUFACTURE, USE OR SALE OF PRODUCTS. ALZA DISCLAIMS ALL OTHER WARRANTIES OF WHATEVER NATURE, EXPRESS OR IMPLIED. 7. Reports of Adverse Reactions. 7.1 Reports of Adverse Reactions. During the term of this Agreement, each party shall promptly inform the other party of any information that it obtains or develops regarding the efficacy or safety of a Crescendo Product and shall promptly report to the other party any information or notice of adverse or unexpected reactions or side effects related to the utilization or medical administration of a Crescendo Product. Further, during the term of this Agreement, each party shall promptly inform the other of any information that it obtains or develops regarding the safety of any ALZA Technology as related to the Crescendo Products. Each such party shall permit the other to comply with the adverse reaction reporting obligations under the United States Food, Drug and Cosmetic Act, or similar statutory provisions, and regulations thereunder and shall assist the other party in complying therewith, with respect to the Crescendo Products. When appropriate, the parties will execute a standard operating procedure to cover the foregoing. Crescendo agrees and acknowledges that ALZA may provide information it obtains under this Section 7.1 to ALZA's other clients developing and/or commercializing products incorporating the same ALZA drug delivery systems as are incorporated in the Crescendo Products. 8. Effective Date; Termination. 8.1 Effective Date. This Agreement shall become effective on the date of the Distribution. 8.2 Termination for Breach. Either party may terminate this Agreement effective upon the giving of written notice of such termination to the other party in the event such other party breaches any of its material obligations hereunder or under the License Option Agreement and such breach continues for a period of 60 days after written notice thereof by the terminating party to the other party. 8.3 Automatic Termination. This Agreement shall automatically terminate upon termination by Crescendo of the Development Agreement other than due to a breach by ALZA, or upon termination by ALZA of the Development Agreement due to a breach by Crescendo. 8.4 Termination of Sublicenses. Termination by ALZA of this Agreement shall automatically terminate any sublicenses granted by Crescendo hereunder. 9. Force Majeure. 9.1 Force Majeure. Neither party to this Agreement shall be liable for failure or delay in the performance of any of its obligations hereunder if such failure or delay is due to causes beyond its reasonable control, including, without limitation, acts of God, earthquakes, fires, strikes, acts of war, or intervention of any governmental authority, but any such delay or failure shall be remedied by such party as soon as possible after the removal of the cause of such failure or delay. 10. Indemnification. 10.1 Indemnity. Crescendo shall indemnify, defend and hold ALZA harmless from and against any and all liabilities, claims, demands, damages, costs, expenses or money judgments incurred by or rendered against ALZA and its Affiliates, which arise out of the use, design, labeling, manufacture, processing, packaging, sale or commercialization of the Crescendo Products by Crescendo, its Affiliates and permitted subcontractors and sublicensees (other than ALZA and its Affiliates, subcontractors, sublicensees, distributors and others operating under arrangements with or through ALZA). ALZA shall permit Crescendo's attorneys, at Crescendo's discretion and cost, to control the defense of any claims or suits as to which ALZA may be entitled to indemnity hereunder, and ALZA agrees not to settle any such claims or suits without the prior written consent of Crescendo. ALZA shall have the right to participate, at its own expense, in the defense of any such claim or demand to the extent it so desires. 10.2 Notice. ALZA shall give Crescendo prompt notice in writing, in the manner set forth in Section 11.7 below, of any claim or demand made against ALZA for which ALZA may be entitled to indemnification under Section 10.1. 11. Miscellaneous. 11.1 Waiver, Remedies and Amendment. Any waiver by either party hereto of a breach of any provisions of this Agreement shall not be implied and shall not be valid unless such waiver is recited in writing and signed by such party. Failure of any party to require, in one or more instances, performance by the other party in strict accordance with the terms and conditions of this Agreement shall not be deemed a waiver or relinquishment of the future performance of any such terms or conditions or of any other terms and conditions of this Agreement. A waiver by either party of any term or condition of this Agreement shall not be deemed or construed to be a waiver of any other term or condition of this Agreement. All rights, remedies, undertakings, obligations and agreements contained in this Agreement shall be cumulative and none of them shall be a limitation of any other remedy, right, undertaking, obligation or agreement of either party. This Agreement may not be amended except in a writing signed by both parties. 11.2 Assignment. Neither party may assign its rights and obligations hereunder without the prior written consent of the other party, which consent may not be unreasonably withheld; provided, however, that ALZA may assign such rights and obligations hereunder to an Affiliate of ALZA or to any person or entity with which ALZA is merged or consolidated or which acquires all or substantially all of the assets of ALZA. 11.3 Arbitration. (a) All disputes which may arise under, out of or in connection with this Agreement shall be settled by arbitration conducted in the city of San Francisco, state of California, in accordance with the then existing rules of the American Arbitration Association, and judgment upon the award rendered by the arbitrators may be entered in any court having jurisdiction thereof. The parties hereby agree that service of any notices in the course of such arbitration at their respective addresses as provided for in Section 11.7 of this Agreement shall be valid and sufficient. (b) In any arbitration pursuant to this Section 11.3, the award shall be rendered by a majority of the members of a board of arbitration consisting of three members who shall be appointed by the parties jointly, or if the parties cannot agree as to three arbitrators within 30 days after the commencement of the arbitration proceeding, then one arbitrator shall be appointed by ALZA and one arbitrator shall be appointed by Crescendo within 60 days after the commencement of the arbitration proceeding. The third arbitrator shall be appointed by mutual agreement of such two arbitrators. In the event of failure of the two arbitrators to agree within 75 days after commencement of the arbitration proceeding upon the appointment of the third arbitrator, the third arbitrator shall be appointed by the American Arbitration Association in accordance with its then existing rules. Notwithstanding the foregoing, in the event that any party shall fail to appoint an arbitrator it is required to appoint within the specified time period, such arbitrator and the third arbitrator shall be appointed by the American Arbitration Association in accordance with its then existing rules. For purposes of this Section 11.3, the "commencement of the arbitration proceeding" shall be deemed to be the date upon which a written demand for arbitration is received by the American Arbitration Association from one of the parties. 11.4 Counterparts. This Agreement may be executed in any number of counterparts, each of which when so executed shall be deemed to be an original and all of which when taken together shall constitute this Agreement. 11.5 Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the state of California as applied to residents of that state entering into contracts to be performed in that state. 11.6 Headings. The section headings contained in this Agreement are included for convenience only and form no part of the Agreement between the parties. 11.7 Notices. Notices required under this Agreement shall be in writing and sent by registered or certified mail, postage prepaid, or by facsimile and confirmed by registered or certified mail, postage prepaid, and addressed as follows: If to ALZA: ALZA Corporation 950 Page Mill Road Palo Alto, CA 94304 Facsimile: (650) 494-8048 Attention: Senior Vice President and General Counsel If to Crescendo: Crescendo Pharmaceuticals Corporation 1454 Page Mill Road Palo Alto, CA 94304 Facsimile: (650) 496-8250 Attention: President and Chief Executive Officer All notices shall be deemed to be effective five days after the date of mailing or upon receipt if sent by facsimile (but only if followed by certified or registered confirmation). Either party may change the address at which notice is to be received by written notice pursuant to this Section 11.7. 11.8 Severability. If any provision of this Agreement is held by a court of competent jurisdiction to be invalid or unenforceable, it shall be modified, if possible, to the minimum extent necessary to make it valid and enforceable or, if such modification is not possible, it shall be stricken and the re maining provisions shall remain in full force and effect. 11.9 Relationship of the Parties. For purposes of this Agreement, Crescendo and ALZA shall be deemed to be independent contractors, and anything in this Agreement to the contrary notwithstanding, nothing herein shall be deemed to constitute Crescendo and ALZA as partners, joint venturers, co-owners, an association or any entity separate and apart from each party itself, nor shall this Agreement constitute any party hereto an employee or agent, legal or otherwise, of the other party for any purposes whatsoever. Neither party hereto is authorized to make any statements or representations on behalf of the other party or in any way obligate the other party, except as expressly authorized in writing by the other party. Anything in this Agreement to the contrary notwithstanding, no party hereto shall assume or be liable for any liabilities or obligations of the other party, whether past, present or future. 11.10 Survival. The provisions of Sections 1, 5, 6, 7, 10, 11.1, 11.3, 11.5, 11.7, 11.8, 11.9 and this Section 11.10 shall survive the termination for any reason of this Agreement. Any payments due under this Agreement with respect to any period prior to its termination shall be made notwithstanding the termination of this Agreement. Neither party shall be liable to the other due to the termination of this Agreement as provided herein, whether in loss of good will, anticipated profits or otherwise. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first set forth above. ALZA CORPORATION By: /s/ Peter D. Staple Title: Senior Vice President and General Counsel CRESCENDO PHARMACEUTICALS CORPORATION By: /s/ Dr. James W. Young Title: President and Chief Executive Officer EX-10.3 4 EXHIBIT 10.3 DEVELOPMENT AGREEMENT This Development Agreement (the "Agreement") is made as of the 5th day of September, 1997 between ALZA Corporation, a Delaware corporation ("ALZA"), and Crescendo Pharmaceuticals Corporation, a Delaware corporation ("Crescendo"). BACKGROUND A. Crescendo has been formed for the purpose of selecting and developing human pharmaceutical products, including products using ALZA Technology (as defined below) and commercializing such products, most likely through licensing to ALZA. B. ALZA is engaged in the business of performing research and development directed toward the development and commercialization of pharmaceutical products. C. Crescendo desires that ALZA perform, on behalf of Crescendo, research and development activities directed toward the selection and development of Crescendo Products (as defined below) and related activities. Now, therefore, the parties agree as follows: 1. Definitions. For the purposes of this Agreement, the following terms shall have the meanings set forth below: 1.1 "Affiliate" shall mean a corporation or any other entity that directly, or indirectly through one or more intermediaries, controls, is controlled by, or is under common control with, the designated party. "Control" shall mean ownership of at least 50% of the shares of stock entitled to vote for the election of directors in the case of a corporation, and at least 50% of the interests in profits in the case of a business entity other than a corporation. 1.2 "ALZA Technology" shall mean all Proprietary Rights, whether patented or unpatented, owned by, licensed to or controlled by ALZA, as of the date of this Agreement or during the term of this Agreement, including the Developed Technology and the Identified Product Technology. 1.3 "Available Funds" shall mean, as of any date of determination, $300 million contributed to Crescendo by ALZA on or about September 30, 1997, plus any investment income earned thereon, less (a) Crescendo's reasonable ongoing administrative expenses, (b) the Technology Fee and (c) reserves of up to $2 million. 1.4 "Crescendo Product" shall mean an Identified Product, or another human pharmaceutical product which has been recommended by ALZA and accepted by Crescendo's independent Board of Directors for development as such under this Agreement. 1.5 "Developed Technology" shall mean Proprietary Rights that (a) are first generated, conceived or reduced to practice, as the case may be, by ALZA or by any third party in the course of performing activities undertaken pursuant to this Agreement or (b) are, in any manner, acquired by, or otherwise obtained on behalf of, Crescendo during the term of this Agreement from persons other than ALZA and are necessary or useful to the selection, development or commercialization of Crescendo Products or Technical Evaluation Products. 1.6 "Developed Technology Product" shall mean any product (other than a Crescendo Product) (i) covered, at the time of sale in a country by one or more unexpired patents issued in such country that are included in Developed Technology and (ii) with respect to which ALZA receives any consideration. 1.7 "Developed Technology Royalties" shall mean the payments made by ALZA to Crescendo with respect to Net Sales of Developed Technology Products. 1.8 "Development Costs" shall mean the cost of the activities undertaken pursuant to this Agreement, determined in accordance with Exhibit A hereto. 1.9 "Distribution" shall mean ALZA's distribution of all of the outstanding shares of Class A Common Stock of Crescendo to ALZA stockholders and debenture holders of record on September 18, 1997. 1.10 "Distribution Agreement" shall mean the Distribution Agreement dated as of the date hereof between ALZA and Crescendo. 1.11 "FDA" shall mean the United States Food and Drug Administration or any successor agency whose clearance is necessary to market a Crescendo Product in the United States. 1.12 "Identified Product Technology" shall mean all ALZA Technology existing on the date of the closing of ALZA's purchase of the outstanding shares of Therapeutic Discovery Corporation relating to any Identified Product. 1.13 "Identified Products" shall mean, upon the closing of ALZA's purchase of the outstanding shares of Therapeutic Discovery Corporation, the following products: OROSr oxybutynin, DUROST leuprolide, OROSr methylphenidate, IUTS progesterone, D-TRANST testosterone matrix, E-TRANST LHRH and E-TRANST (skin interface technology) insulin. 1.14 "License Option" shall mean the option granted to ALZA, pursuant to the License Option Agreement. 1.15 "License Option Agreement" shall mean the License Option Agreement dated as of the date hereof between ALZA and Crescendo. 1.16 "Major Market Country" shall mean any of the following countries: United States, France, Germany, Italy, Japan or the United Kingdom. 1.17 "Net Sales" shall mean the total amount invoiced in United States dollars (or converted thereto in accordance with Section 7.6 hereof) on sales of a product by ALZA (or its Affiliates) or any ALZA sublicensee, distributor or marketing partner (or its Affiliates), to unrelated third parties such as wholesalers, hospitals and others, in bona fide arm's-length transactions, less the following deductions, in each case related specifically to the product in question and actually allowed and taken and not otherwise recovered by or reimbursed to ALZA (or its Affiliates) or such sublicensee, distributor or marketing partner (or its Affiliates): (i) trade, cash and quantity discounts; (ii) taxes on sales (such as sales or use taxes) to the extent added to the sales price and set forth separately as such in the total amount invoiced; (iii) freight, insurance and other transportation charges to the extent added to the sales price and set forth separately as such in the total amount invoiced; and (iv) amounts repaid or credited by reason of rejections, defects or returns or because of retroactive price reductions, chargebacks or rebates under government programs. Net Sales shall also include the fair market value of all other consideration received (a) by ALZA (or its Affiliates) with respect to sales by them of the product to unrelated third parties other than sublicensees, distributors or marketing partners (or their Affiliates) or (b) by any ALZA sublicensee, distributor or marketing partner (or its Affiliates) with respect to their sales of the product to unrelated third parties, in each case whether such consideration is in cash, payment in kind, exchange or other form. 1.18 "Product Candidate" shall mean a potential Crescendo Product for which ALZA proposes a Work Plan in accordance with Section 2.2. 1.19 "Product Development Program" shall mean a program to develop a Crescendo Product. 1.20 "Proprietary Rights" shall mean data, inventions, information, processes, know-how and trade secrets, and patents or patent applications claiming any of the foregoing, owned by, licensed to or controlled by a person and which such person has the right to license or sublicense. Proprietary Rights shall not include trademarks. 1.21 "Purchase Option" shall mean that certain option contained in Crescendo's Restated Certificate of Incorporation pursuant to which ALZA has the right to purchase all of the outstanding shares of Crescendo Class A Common Stock. 1.22 "Technical Evaluation" shall mean a limited technical evaluation involving a proprietary Therapeutic Agent of a third party undertaken in order to determine the suitability of such Therapeutic Agent in an ALZA drug delivery system or to induce the third party to license the Therapeutic Agent to ALZA or Crescendo or otherwise collaborate with ALZA and Crescendo in the development of a product. 1.23 "Technical Evaluation Product" shall mean a product, other than one which will become a Crescendo Product, for which Crescendo funds a Technical Evaluation. 1.24 "Technical Evaluation Product Payments" shall mean the payments made by ALZA to Crescendo pursuant to Section 7.4 with respect to Net Sales of Technical Evaluation Products. 1.25 "Technology Fee" shall mean payments to be made over a maximum period of three years by Crescendo to ALZA in exchange for ALZA granting Crescendo a license to use the Identified Product Technology. 1.26 "Technology License Agreement" shall mean the Technology License Agreement dated as of the date hereof between ALZA and Crescendo. 1.27 "Therapeutic Agent" shall mean a drug, protein, peptide, gene, compound or other pharmaceutically active ingredient. 1.28 "TDC" shall mean Therapeutic Discovery Corporation. 1.29 "Work Plan" shall mean a work plan including a cost estimate. 2. Product Development Program. 2.1 Product Candidate Identification Process. Within 30 days after the date of the Distribution and at least annually thereafter, ALZA shall provide Crescendo with a proposed Work Plan covering activities to be undertaken by ALZA to search for and identify Product Candidates for consideration by Crescendo under Section 2.2 and to identify potential Technical Evaluations for consideration by Crescendo under Section 2.4. Promptly after ALZA provides Crescendo with such proposed Work Plan, Crescendo shall notify ALZA of its acceptance or rejection of such proposed Work Plan. 2.2 Product Candidate Selection. (a) From time to time during the term of this Agreement, ALZA shall present Crescendo with Product Candidates recommended by ALZA for development as Crescendo Products, together with preliminary lifetime plans that provide, for each such Product Candidate, an estimate of the total Development Costs for the Product Development Program for such Product Candidate through FDA review for clearance to market the resulting product, milestones (including the timetable for the development of the resulting product), detailed Work Plans for the first proposed stage of the Product Development Program and any other factors that ALZA deemed appropriate to determine whether to recommend the Product Candidate for development. (b) Promptly after ALZA recommends a Product Candidate for development to Crescendo, Crescendo shall notify ALZA in writing of its acceptance (in whole or in part) or rejection (in whole or in part) of the initial Work Plan included with such recommendation. Upon written acceptance (in whole or in part) of a Work Plan for a Product Candidate under this Section 2.2, such Product Candidate shall be deemed to be a Crescendo Product. (c) If Crescendo fails to accept a recommended Product Candidate for development as a Crescendo Product within 120 days of recommendation by ALZA, then Crescendo shall have no rights with respect to such Product Candidate; provided, however, that, at any time during the term of this Agreement, Crescendo may request ALZA to perform a Product Development Program for such Product Candidate and ALZA shall undertake its duties with respect to such Product Development Program, all in accordance with this Section 2 and Section 3, unless, at the time of such request, ALZA is then undertaking the development of such Product Candidate for its own account or with a third party, or ALZA is otherwise not permitted to undertake such development hereunder because of an arrangement with a third party. 2.3 Identified Products. As set forth in Section 4.1, Crescendo shall fund the Development Costs under ALZA- approved Work Plans for each of the Identified Products during the period from the date on which TDC ceased funding such products through October 31, 1997. On or before October 10, 1997, ALZA shall provide Crescendo with a proposed Work Plan and a lifetime plan for the continued development of each of the Identified Products. On or before October 31, 1997, Crescendo shall notify ALZA in writing of its acceptance (in whole or in part) or rejection (in whole or in part) thereof. 2.4 Technical Evaluations. From time to time during the term of this Agreement, ALZA may provide Crescendo with a proposed Work Plan covering one or more Technical Evaluations with respect to potential Technical Evaluation Products. Promptly after ALZA provides Crescendo with such proposed Work Plan, Crescendo shall notify ALZA of its acceptance (in whole or in part) or rejection (in whole or in part) of such proposed Work Plan. ALZA may propose to Crescendo at any time that any Technical Evaluation Product become a Crescendo Product by complying with the procedures set forth in Section 2.2. 2.5 Partial Acceptance. If Crescendo accepts or rejects a Work Plan in part, ALZA may either (i) perform the activities under the Work Plan as approved by Crescendo or (ii) propose a modified Work Plan to Crescendo for approval. 3. Research and Development Programs; ALZA Services. 3.1 Product Development - Crescendo Obligations. Once Crescendo accepts a Work Plan for a Crescendo Product or a Technical Evaluation pursuant to Section 2.2 or 2.4, Crescendo shall use diligent efforts to complete such Work Plan, as amended from time to time. Crescendo shall request that ALZA or a third party perform the activities under each such Work Plan; provided, however, that ALZA's prior written consent shall be required for a third party to perform any activities that involve ALZA Technology or that could affect ALZA's rights under any agreement between ALZA and Crescendo or ALZA's rights as holder of the Class B Common Stock of Crescendo. Crescendo shall use diligent efforts to cause each third party other than ALZA (or a third party engaged by ALZA) to perform diligently the activities assigned it under a Work Plan. 3.2 Product Development - ALZA Obligations; Other ALZA Activities. Crescendo hereby engages ALZA to perform product identification, evaluation, research, development and related activities in accordance with the tasks assigned to ALZA under the Work Plans accepted under Section 2, and to undertake such other activities as the parties may agree. ALZA diligently shall perform or cause to be performed such activities. In connection therewith, ALZA shall make available such of its scientific, engineering, manufacturing and other personnel, and shall take such steps as it deems necessary in order to perform its obligations in accordance with the terms hereof, but ALZA is not obligated to devote any specific amount of time or resources to activities hereunder. ALZA shall have full discretion to determine from time to time the allocation of resources of ALZA (facilities, equipment and personnel) that are available for activities hereunder, and to determine from time to time the allocation of resources of ALZA among such activities. Crescendo understands, acknowledges and agrees that ALZA may devote substantial time and resources to research and development activities for other persons and for its own account, and as a result, ALZA may develop and commercialize, or have commercialized, products competitive with Crescendo Products, Technical Evaluation Products and Developed Technology Products. 3.3 Work Plans. The parties understand and acknowledge that it is difficult to predict accurately the activities that will be necessary to complete any Work Plan, including the Development Costs thereof, and that significant uncertainties exist in any product development effort. Crescendo and ALZA shall cooperate in good faith to devise mutually acceptable Work Plans for Product Development Programs, Technical Evaluations, candidate identification activities and such other activities as the parties may agree. ALZA and Crescendo shall review each such Work Plan from time to time, and with respect to a Work Plan for a Crescendo Product no less often than at the end of each stage of development, and shall revise each Work Plan as appropriate such that each Work Plan remains a best estimate of the work to be performed to complete the development objectives identified therein and of the Development Costs thereunder. Crescendo shall not be obligated to pay Development Costs in excess of those provided for in approved Work Plans, and ALZA shall not be obligated to perform work which would result in Development Costs exceeding those in approved Work Plans. 3.4 Consultation. Crescendo shall consult with ALZA and shall review with ALZA from time to time the progress toward completion of the activities under the Work Plans for candidate identification activities and for each Crescendo Product and Technical Evaluation, including without limitation, the status in each country for each Crescendo Product for which marketing clearance is being sought. 3.5 Third Party Rights. Subject to the terms and conditions of this Agreement, Crescendo shall have discretion to attempt to obtain, using Available Funds, any Proprietary Rights from any third party that Crescendo reasonably determines to be necessary or useful to conduct any Product Development Program, Technical Evaluation or related activities under this Agreement. Such Proprietary Rights shall be included in the Developed Technology. The costs of obtaining any such Proprietary Rights shall be included in the calculation of Development Costs paid by Crescendo pursuant to this Agreement. 3.6 Development Assets. ALZA shall own and have the right to use any clinical supplies, materials and other assets purchased, manufactured or developed pursuant to approved Work Plans ("Development Assets") and, until such time as the License Option is exercised with respect to the product to which any particular Development Asset pertains, shall use such Development Assets solely in the development of Crescendo Products under approved Work Plans. 3.7 No Use of Available Funds After Expiration of License Option. After such time as the License Option for a Crescendo Product in a country expires unexercised as to such country, no additional Available Funds shall be expended for the development of such Crescendo Product for sale in such country. 3.8 Notices. ALZA shall notify Crescendo within three business days after ALZA receives notice of clearance to market any Crescendo Product in any country. ALZA shall promptly notify Crescendo of the first commercial sale of a Crescendo Product, Developed Technology Product or Technical Evaluation Product in any country. 4. Payment For Services; Timing of Payments. 4.1 Payment of Development Costs. In consideration of the work to be carried out by ALZA hereunder, Crescendo shall reimburse ALZA for all Development Costs incurred by ALZA in accordance with accepted Work Plans. Crescendo shall also reimburse ALZA for Development Costs incurred with respect to the Identified Products from the date on which TDC ceased funding the development of such products through October 31, 1997 in accordance with the ALZA-approved Work Plans for such products in effect as of the date hereof. 4.2 Timing of Payments. Crescendo shall pay to ALZA monthly, in arrears, all such Development Costs incurred by ALZA during the preceding calendar month, within 30 days after ALZA's invoice therefor. 4.3 Sufficiency of Funds. Neither Crescendo nor ALZA makes any warranty, express or implied, that Available Funds will be sufficient to complete the development of any or all Crescendo Products or the other activities contemplated hereunder. 5. Reports and Records. 5.1 Product Development Program Reports. Within 45 days after the end of each calendar quarter, ALZA shall provide to Crescendo, and Crescendo shall require each third party engaged by Crescendo pursuant to Section 3.1 to provide to Crescendo and to ALZA, a reasonably detailed report setting forth (a) a summary of the work performed hereunder by ALZA or such third party, as appropriate, and its employees and agents during such quarter; and (b) the total Development Costs of such activities during such quarter and cumulatively to date, for each Work Plan. 5.2 Available Funds Statement. Within 45 days after the end of each calendar quarter, Crescendo shall provide to ALZA a statement setting forth, as of the end of such quarter, the Available Funds remaining. 5.3 Product Payment Reports. Within 90 days after the end of each calendar quarter for which payments are due under Section 7.4, ALZA shall render an accounting to Crescendo, on a productby-product and country-by-country basis, with respect to all payments due for such quarter under Section 7.4. Such report shall indicate, for such quarter, the quantity and dollar amount of Net Sales of each Developed Technology Product and each Technical Evaluation Product by ALZA and its Affiliates, sublicensees, distributors and marketing partners (and their Affiliates), or other consideration with respect to Net Sales, with respect to which payments are due; provided, however, that if ALZA shall not have received from any foreign sublicensee, distributor or marketing partner a report of its (and its Affiliates') sales for such quarter, then such sales shall be included in the next quarterly report, and payments with respect to such report shall be due in the next quarter. In case no payment is due for any calendar quarter, ALZA shall so report. ALZA shall keep accurate records in sufficient detail to enable the payments due hereunder to be determined. 5.4 Records; Review by Accountants. Each of Crescendo and ALZA shall keep and maintain, in accordance with generally accepted accounting principles, proper and complete records and books of account documenting all Development Costs and amounts paid or payable by ALZA to Crescendo under this Agreement, in the case of ALZA, and remaining Available Funds, in the case of Crescendo. Each of Crescendo and ALZA shall have the right, once in each calendar year during regular business hours and upon reasonable notice to the other party, and at its own expense, to examine or to have examined by a certified public accountant or similar person reasonably acceptable to the other party, pertinent books and records of one another, for the sole purpose of determining the correctness of amounts invoiced, paid or due under this Agreement and the application of Available Funds by Crescendo. Such examination shall take place not later than two years following the year in question, and only one examination may take place with respect to any period as to which such books and records are examined. Each party shall obtain, for itself and for the other party, similar reasonable rights to audit the Development Costs of, and payments with respect to Net Sales by, each third party engaged by Crescendo pursuant to Section 3.1 or appointed or permitted by ALZA to commercialize any product as to which payments are due to Crescendo hereunder. 6. Technology Licensed For Development. 6.1 License to Use ALZA Technology. Crescendo hereby grants to ALZA a sublicense to use the ALZA Technology licensed to Crescendo under the Technology License Agreement solely for the purpose of conducting the activities contemplated hereunder. 6.2 Termination of License. Termination of the license granted under the Technology License Agreement automatically shall terminate the sublicense to the ALZA Technology granted to ALZA pursuant to Section 6.1. 7. Ownership of Crescendo Products and Developed Technology Patents; Payments to Crescendo. 7.1 Ownership of Crescendo Products. Unless Crescendo agrees otherwise, all Crescendo Products will be owned by Crescendo or, in the case of a product licensed from a third party (or a product incorporating a Therapeutic Agent licensed from a third party), exclusively licensed to Crescendo on a worldwide basis, with the right to sublicense, and otherwise on terms granting rights substantially similar to those rights Crescendo would have as an owner, in either case subject to the License Option. 7.2 Ownership of Developed Technology. As between ALZA and Crescendo, ALZA shall own all Developed Technology (which shall be part of the ALZA Technology), subject to the Technology License Agreement. 7.3 Patents Covering Developed Technology. ALZA shall determine whether and to what extent to seek and maintain United States and/or foreign patents covering any Developed Technology. Any such patents and applications therefor shall be in ALZA's name and shall be owned by ALZA. Crescendo and ALZA each shall pay one-half of the costs of obtaining and maintaining any such patents during the term of this Agreement. 7.4 Payments Based on Sales of Developed Technology Products and Technical Evaluation Products. (a) ALZA shall pay Developed Technology Royalties to Crescendo, on a country-by-country basis, equal to 1% of Net Sales in the relevant country of each Developed Technology Product. Only one payment under this Section 7.4 shall be payable by ALZA to Crescendo with respect to Net Sales of each Developed Technology Product in any country, regardless of the number of patents covering such Developed Technology Product in such country. Subject to Section 7.5, payments with respect to sales of a Developed Technology Product in any country shall be made by ALZA until the expiration of the last to expire of the patent or patents covering such Developed Technology Product in any country. (b) ALZA shall make Technical Evaluation Product Payments to Crescendo equal to 1% of Net Sales of each Technical Evaluation Product. Subject to Section 7.5, payments with respect to sales of a Technical Evaluation Product shall be made by ALZA until seven years after the first commercial sale of such Technical Evaluation Product in the first Major Market Country in which such product is commercially sold. (c) In determining payments due under this Section 7.4, Net Sales by ALZA shall be reduced by the dollar amount of any license or similar payments made by or due from ALZA or its Affiliates to third parties with respect to any such sales of such Developed Technology Product or Technical Evaluation Product. If license or similar payments are made to third parties with respect to sales of such products and to sales of other products, ALZA shall allocate such payments, if necessary, in a commercially reasonable manner. (d) Notwithstanding the foregoing, if a product is both a Developed Technology Product and a Technical Evaluation Product, amounts payable under this Section 7.4 with respect to such product for any period of time shall be limited to 1% of Net Sales. 7.5 Buy-Out of Payments Based on Sales of Developed Technology Products and Technical Evaluation Products. (a) ALZA shall have the option with respect to each Developed Technology Product and each Technical Evaluation Product, in its discretion, at any time after the end of the twelfth calendar quarter during which such product was commercially sold in a country, to buy out its remaining obligation to make payments under Section 7.4 with respect to sales of such Developed Technology Product or Technical Evaluation Product in such country. The buy- out price shall be an amount equal to 15 times the payments made by or due from ALZA to Crescendo under Section 7.4 with respect to sales of such Developed Technology Product or Technical Evaluation Product in such country for the four calendar quarters immediately preceding the quarter in which the buy-out option is exercised. (b) ALZA shall have the option with respect to each Developed Technology Product and each Technical Evaluation Product, in its discretion, at any time after the end of the twelfth calendar quarter during which such product was commercially sold in either the United States or two other Major Market Countries, to buy out its remaining worldwide obligations to make payments under Section 7.4 with respect to sales of such Developed Technology Product or Technical Evaluation Product. The buy-out price shall be an amount equal to (i) 20 times (A) the payments made by or due from ALZA to Crescendo under Section 7.4 with respect to sales of such Developed Technology Product or Technical Evaluation Product, plus (B) such payments as would have been made by or due from ALZA to Crescendo if ALZA had not exercised any country-specific buy-out option with respect to such Developed Technology Product or Technical Evaluation Product, in each case, for the four calendar quarters immediately preceding the quarter in which the buy-out option is exercised, less (ii) any amounts previously paid to exercise any country-specific buyout option with respect to such Developed Technology Product or Technical Evaluation Product. 7.6 Payments. Payments shown by each calendar quarter report described in Section 5.3 to have accrued shall be due and payable on the date the report is due and shall be paid in United States dollars. Any and all taxes due or payable on such payments or with respect to the remittance thereof shall be deducted from such payments and shall be paid by ALZA to the proper taxing authorities, and proof of payment shall be secured and sent to Crescendo as evidence of such payment. The rate of exchange to be used in computing the amount of United States dollars due to Crescendo in satisfaction of payment obligations with respect to sales in foreign countries shall be calculated by converting the amount due in such foreign currency into United States dollars based on the rate for the purchase of United States dollars with such currency as published in the Wall Street Journal on the last business day of the calendar quarter for which payment is being made. 7.7 Certain Foreign Payments. If governmental regulations prevent remittance from any foreign country of any amounts due under Section 7.4 with respect to that country, ALZA shall so notify Crescendo in writing, and the obligation under this Agreement to make payments with respect to sales in that country shall be suspended (but the amounts due but not paid shall continue to accrue) until such remittances are possible. Crescendo shall have the right, upon written notice to ALZA, to receive payment in any such country in the local currency. 7.8 Late Payments. Any payments due hereunder that are not made when due shall accrue interest at the lesser of 10% per annum or the maximum rate as may be allowed by law, beginning on the date when Crescendo notifies ALZA that such payments are overdue. 8. Access to Information; Confidentiality. 8.1 Access. Subject to the terms of this Agreement, each party shall be permitted access to the premises of the other during normal business hours, for the purpose of monitoring the progress of activities under this Agreement. Each party shall keep full and complete records and notebooks containing all experiments performed during its work under this Agreement and the results thereof. Such items and copies of all documentation shall be available during normal business hours for inspection by the other party. In addition, each party shall provide to the other such other information as reasonably may be requested. 8.2 Third Parties. Crescendo and ALZA shall cause each third party engaged pursuant to Section 3.1 or 3.2 to provide access similar to that to be provided pursuant to Section 8.1, for the benefit of both Crescendo and ALZA. 8.3 Product Lists. ALZA shall maintain a complete list of Crescendo Products, Developed Technology Products and Technical Evaluation Products at all times. Confirmation of the completeness and accuracy of such list shall be made at any time upon the reasonable request of Crescendo. 8.4 Confidentiality. During the term of this Agreement and for a period of ten years following its termination, each party shall maintain in confidence all Proprietary Rights of the other; provided, however, that nothing contained herein shall prevent either party from disclosing any Proprietary Rights to the extent that such Proprietary Rights (a) are required to be disclosed in connection with selecting and developing Crescendo Products, conducting Technical Evaluations, conducting related activities, securing necessary governmental authorization for the marketing of Crescendo Products, or directly or indirectly making, using or selling Crescendo Products, as permitted or provided for in the agreements between the parties, (b) are required to be disclosed by law for the purpose of complying with governmental regulations, (c) are disclosed to sublicensees, distributors or marketing partners or potential sublicenses, distributors or marketing partners permitted under the agreements between the parties in connection with the proposed or actual development, manufacturing or marketing of Crescendo Products, subject to similar obligations of confidentiality on the part of such third parties as required by the agreements between the parties, (d) are known to or used by the recipient prior to the date hereof (other than through disclosure by or on behalf of the other party) as evidenced by the recipient's written records , (e) are lawfully disclosed to the recipient by a third party having the right to disclose such information to the recipient, or (f) either before or after the time of disclosure to the recipient, become known to the public other than by an unauthorized act or omission of the recipient or any of the recipient's employees or agents; provided that clause (d) does not give ALZA the right to disclose Proprietary Rights that relate exclusively to the Identified Products; provided further that, Crescendo may disclose ALZA Proprietary Rights to third parties only in accordance with the provisions of Section 10.3 hereof and in accordance with the provisions of the Technology License Agreement. The obligations of each of the parties pursuant to this Section 8.4 shall survive the termination of this Agreement for any reason. Any breach of this Section 8.4 may result in irreparable harm, and in the event of a breach, the aggrieved party shall be entitled to seek injunctive relief (without the need to post a bond) in addition to any other remedies available at law or in equity. 9. Public Disclosure. 9.1 Public Disclosure. The parties will work together with respect to public statements disclosing the status of and results under Product Development Programs and related matters. Except to the extent previously disclosed pursuant to the terms hereof, neither party shall disclose to third parties nor originate any publicity, news release or public announcement, written or oral, whether to the public, the press, stockholders or otherwise, referring to activities conducted, or the parties' performance under, this Agreement, except such announcements, as in the opinion of the counsel for the party making such announcement, are required by law, including United States securities laws, rules or regulations, without the prior written consent of the other party. If a party decides to make an announcement it believes to be required by law with respect to this Agreement, it will give the other party such notice as is reasonably practicable and an opportunity to comment upon the announcement. 10. Covenants. 10.1 Use of Available Funds. Unless ALZA agrees otherwise, Crescendo agrees to expend all Available Funds for activities undertaken pursuant to this Agreement. Pending application of all Available Funds as set forth above, Available Funds shall be invested in securities issued or guaranteed as to principal and interest by the United States, or by a person controlled or supervised by or acting as an instrumentality of the government of the United States pursuant to authority granted by the Congress of the United States, or any certificate of deposit for any of the foregoing, or any other types of high quality marketable investment securities that are proposed by Crescendo and are approved by ALZA in its sole discretion. 10.2 Negative Pledge. Crescendo shall not create, incur, assume or suffer to exist any lien upon or with respect to, or otherwise take any action with respect to, Available Funds so as to prevent or interfere with full expenditure of such funds for activities under this Agreement in accordance with Section 10.1. 10.3 No Inconsistent Agreements. Without the written consent of ALZA, Crescendo shall not enter into any agreement or arrangement that is in any way inconsistent with or that could adversely affect ALZA Technology or ALZA's rights under any agreement between ALZA and Crescendo, or that is in any way inconsistent with or that could adversely affect ALZA's rights as holder of the Class B Common Stock of Crescendo. Crescendo must include in any agreement between Crescendo and a third party relating to Crescendo Products and/or activities hereunder such provisions as ALZA reasonably deems appropriate to protect ALZA Technology and to protect ALZA's rights under any agreement between ALZA and Crescendo and as a holder of the Class B Common Stock of Crescendo (including ALZA's rights under the Purchase Option). 11. Effective Date; Term and Termination. 11.1 Effective Date. The effective date of this Agreement shall be the date of the Distribution. 11.2 Automatic Termination. This Agreement shall terminate upon exercise or expiration of the Purchase Option, except that ALZA's obligations to make payments to Crescendo with respect to Developed Technology Products and Technical Evaluation Products shall continue after expiration of the Purchase Option as provided in Section 7 hereof. 11.3 Other Termination. Either party may, in its discretion, terminate this Agreement in the event that the other party: (a) breaches any material obligation hereunder or under the Technology License Agreement, the License Option Agreement, or any license thereunder, and such breach continues for a period of 60 days after written notice thereof by the terminating party to the other party; or (b) enters into any proceeding, whether voluntary or otherwise, in bankruptcy, reorganization or arrangement for the appointment of a receiver or trustee to take possession of its assets or any other proceeding under any law for the relief of creditors, or makes an assignment for the benefit of its creditors. 12. Force Majeure. 12.1 Force Majeure. Neither party to this Agreement shall be liable for failure or delay in the performance of any of its obligations hereunder, if such failure or delay is due to causes beyond its reasonable control including, without limitation, acts of God, earthquakes, fires, strikes, acts of war, or intervention of any governmental authority, but any such delay or failure shall be remedied by such party as soon as possible after the removal of the cause of such failure or delay. 13. Miscellaneous. 13.1 Waiver, Remedies and Amendment. Any waiver by either party hereto of a breach of any provisions of this Agreement shall not be implied and shall not be valid unless such waiver is recited in writing and signed by such party. Failure of any party to require, in one or more instances, performance by the other party in strict accordance with the terms and conditions of this Agreement shall not be deemed a waiver or relinquishment of the future performance of any such terms or conditions or of any other terms and conditions of this Agreement. A waiver by either party of any term or condition of this Agreement shall not be deemed or construed to be a waiver of any other term or condition of this Agreement. All rights, remedies, undertakings, obligations and agreements contained in this Agreement shall be cumulative and none of them shall be a limitation of any other remedy, right, undertaking, obligation or agreement of either party. This Agreement may not be amended except in a writing signed by both parties. 13.2 Assignment. Neither party may assign its rights and obligations hereunder without the prior written consent of the other party, which consent may not be unreasonably withheld; provided, however, that ALZA may assign such rights and obligations hereunder to an Affiliate of ALZA or to any person or entity with which ALZA is merged or consolidated or which acquires all or substantially all of the assets of ALZA. 13.3 Arbitration. (a) All disputes which may arise under, out of or in connection with this Agreement shall be settled by arbitration conducted in the city of San Francisco, State of California, in accordance with the then existing rules of the American Arbitration Association, and judgment upon the award rendered by the arbitrators may be entered in any court having jurisdiction thereof. The parties hereby agree that service of any notices in the course of such arbitration at their respective addresses as provided for in Section 13.7 of this Agreement shall be valid and sufficient. (b) In any arbitration pursuant to this Section 13.3, the award shall be rendered by a majority of the members of a board of arbitration consisting of three members who shall be appointed by the parties jointly, or if the parties cannot agree as to three arbitrators within 30 days after the commencement of the arbitration proceeding, then one arbitrator shall be appointed by ALZA and one arbitrator shall be appointed by Crescendo within 60 days after the commencement of the arbitration proceeding. The third arbitrator shall be appointed by mutual agreement of such two arbitrators. In the event of failure of the two arbitrators to agree within 75 days after commencement of the arbitration proceeding upon the appointment of the third arbitrator, the third arbitrator shall be appointed by the American Arbitration Association in accordance with its then existing rules. Notwithstanding the foregoing, in the event that any party shall fail to appoint an arbitrator it is required to appoint within the specified time period, such arbitrator and the third arbitrator shall be appointed by the American Arbitration Association in accordance with its then existing rules. For purposes of this Section 13.3, the "commencement of the arbitration proceeding" shall be deemed to be the date upon which a written demand for arbitration is received by the American Arbitration Association from one of the parties. 13.4 Counterparts. This Agreement may be executed in any number of counterparts, each of which when so executed shall be deemed to be an original and all of which when taken together shall constitute this Agreement. 13.5 Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the state of California as applied to residents of that state entering into contracts to be performed in that state. 13.6 Headings. The section headings contained in sections of this Agreement are included for convenience only and form no part of the Agreement between the parties. 13.7 Notices. Notices required under this Agreement shall be in writing and sent by registered or certified mail, postage prepaid, or by facsimile and confirmed by registered or certified mail, postage prepaid, and addressed as follows: If to ALZA: ALZA Corporation 950 Page Mill Road Palo Alto, CA 94304 Facsimile: (650) 496-8048 Attention: Senior Vice President and General Counsel If to Crescendo: Crescendo Pharmaceuticals Corporation 1454 Page Mill Road Palo Alto, CA 94304 Facsimile: (650) 496-8250 Attention: President and Chief Executive Officer All notices shall be deemed to be effective five days after the date of mailing or upon receipt if sent by facsimile (but only if followed by certified or registered confirmation). Either party may change the address at which notice is to be received by written notice pursuant to this Section 13.7. 13.8 Severability. If any provision of this Agreement is held by a court of competent jurisdiction to be invalid or unenforceable, it shall be modified, if possible, to the minimum extent necessary to make it valid and enforceable or, if such modification is not possible, it shall be stricken and the remaining provisions shall remain in full force and effect. 13.9 Relationship of the Parties. For purposes of this Agreement, Crescendo and ALZA shall be deemed to be independent contractors, and anything in this Agreement to the contrary notwithstanding, nothing herein shall be deemed to constitute Crescendo and ALZA as partners, joint venturers, co-owners, an association or any entity separate and apart from each party itself, nor shall this Agreement constitute any party hereto an employee or agent, legal or otherwise, of the other party for any purposes whatsoever. Neither party hereto is authorized to make any statements or representations on behalf of the other party or in any way obligate the other party, except as expressly authorized in writing by the other party. Anything in this Agreement to the contrary notwithstanding, no party hereto shall assume or be liable for any liabilities or obligations of the other party, whether past, present or future. 13.10 Survival. The provisions of Sections 1, 7, 8.3, 8.4, 11, 13.1, 13.3, 13.5, 13.6, 13.7, 13.8, 13.9, and this Section 13.10, and of Sections 4 and 5 to the extent of obligations under such sections relating to periods prior to termination of this Agreement, shall survive the termination for any reason of this Agreement. Any payments due under this Agreement with respect to any period prior to its termination shall be made notwithstanding the termination of this Agreement. Neither party shall be liable to the other due to the termination of this Agreement as provided herein, whether in loss of good will, anticipated profits or otherwise. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date set forth above. ALZA CORPORATION By: /s/Peter D. Staple Title: Senior Vice President and General Counsel CRESCENDO PHARMACEUTICALS CORPORATION By: /s/ Dr. James W Young Title: President and Chief Executive Officer EXHIBIT A DEVELOPMENT COSTS Development Costs are equal to the sum of (i) Research Expenses, (ii) General and Administrative Expenses and (iii) Capital Asset Expenditures. (i) Research Expenses include both Direct Expenses and Indirect Expenses, with the cost elements outlined on Exhibit A-1. (a) Direct Expenses include Direct Research Salaries, Clinical Expenses, Supplies and other expenses incurred specifically in connection with the Program. (b) Indirect Expenses include Research Management and support costs of the research and product development organization. (Indirect Expenses are allocated to all projects and billed to clients at a fixed rate* of 160% of Direct Research Salaries.) (ii) General and Administrative Expenses include cost elements outlined on Exhibit A-2. (General and Administrative Expenses are allocated among the research and product development, manufacturing and marketing organizations. The portion allocated to the research and product development organization is then allocated to all projects and billed to clients at a fixed rate* of 80% of Direct Research Salaries.) (iii) Capital Asset Expenditures are the actual costs of new capital assets acquired specifically for the project. * This fixed billing rate will not be changed prior to January 1, 1998 and, if changed on or after January 1, 1998, such changes will be limited to not more than one change per calendar year and shall be a maximum of 10% of the rate in effect at the time of the increase. EXHIBIT A-1 Research Expenses Direct Expenses _________________ Direct Research Salaries* Project Clinical Expenses and Outside Services Project Specific Supplies Project Travel and Related Expenses Miscellaneous Project Expenses Regulatory and Filing Fees and Maintenance Payments Indirect Expenses _________________ Research Management and Indirect Salaries* General Research Supplies and Materials General Research Consulting and Outside Services Facilities Expenses Telephone and Communications Equipment Depreciation, Rent, Maintenance and Services Research Travel and Related Expenses Patent and Trademark Expenses Miscellaneous Indirect Research Expenses *Salaries include Benefits EXHIBIT A-2 General and Administrative Expense Corporate Management, Administrative, and Indirect Salaries* Telephone and Communications Equipment Depreciation, Rent, Maintenance and Services Board of Directors and Corporate Consulting Annual Audit, Accounting and Legal Expenses Facilities Expenses Information Services (Data Processing) Expenses Interest Expense Miscellaneous General and Administrative Expenses *Salaries include Benefits EX-10.4 5 Exhibit 10.4 LICENSE OPTION AGREEMENT This License Option Agreement (the "Agreement") is made as of the 5th day of September, 1997 by and between ALZA Corporation, a Delaware corporation ("ALZA"), and Crescendo Pharmaceuticals Corporation, a Delaware corporation ("Crescendo"). BACKGROUND A. Crescendo has been formed for the purpose of selecting and developing human pharmaceutical products, including products using ALZA Technology (as defined herein) and commercializing such products, most likely through licensing to ALZA. B. As of the date hereof, ALZA and Crescendo have entered into a Technology License Agreement and a Development Agreement. C. Crescendo desires to grant to ALZA an option to commercialize the products developed by Crescendo under the Development Agreement as set forth herein. Now, therefore, the parties agree as follows: 1. Definitions. For purposes of this Agreement, the following terms shall have the meanings set forth below: 1.1 "Affiliate" shall mean a corporation or any other entity that directly, or indirectly through one or more intermediaries, controls, is controlled by, or is under common control with, the designated party. "Control" shall mean ownership of at least 50% of the shares of stock entitled to vote for the election of directors in the case of a corporation, and at least 50% of the interests in profits in the case of a business entity other than a corporation. 1.2 "Crescendo Product" shall mean an Identified Product, or another human pharmaceutical product which has been recommended by ALZA and accepted by Crescendo's independent Board of Directors for development as such under the Development Agreement. 1.3 "Development Agreement" shall mean the Development Agreement dated as of the date hereof between ALZA and Crescendo. 1.4 "Distribution" shall mean ALZA's distribution of all of the outstanding shares of Class A Common Stock of Crescendo to ALZA's stockholders and debenture holders of record on September 18, 1997. 1.5 "FDA" shall mean the United States Food and Drug Administration or any successor agency whose clearance is necessary to market a Crescendo Product in the United States. 1.6 "Identified Products" shall mean, upon the closing of ALZA's purchase of the outstanding shares of Therapeutic Discovery Corporation, the following products: OROSr oxybutynin, DUROST leuprolide, OROSr methylphenidate, IUTS progesterone, D-TRANST testosterone matrix, E-TRANST LHRH and E-TRANST (skin interface technology) insulin. 1.7 "License Agreement" shall mean an exclusive license agreement for a particular Crescendo Product between ALZA and Crescendo, in the form of Exhibit A to this Agreement. 1.8 "License Option" shall mean the option granted to ALZA pursuant to Section 2 of this Agreement. 1.9 "Product Payments" shall have the meaning set forth in Section 3.1 of the License Agreement. 1.10 "Proprietary Rights" shall mean data, inventions, information, processes, know-how and trade secrets, and patents or patent applications claiming any of the foregoing, owned by, licensed to or controlled by a person and which such person has the right to license or sublicense. Proprietary Rights shall not include trademarks. 1.11 "Purchase Option" shall mean that certain option contained in Crescendo's Restated Certificate of Incorporation pursuant to which ALZA has the right to purchase all of the outstanding shares of Crescendo Class A Common Stock. 1.12 "Technology License Agreement" shall mean the Technology License Agreement dated as of the date hereof between ALZA and Crescendo. 2. License Option. 2.1 Grant of License Option. On the terms and subject to the conditions of this Agreement, Crescendo hereby grants to ALZA an option to obtain an exclusive license with respect to each Crescendo Product, exercisable on a product-by-product and country-by-country basis as described in Section 2.2. 2.2 Time for Exercise. (a) ALZA may exercise the License Option with respect to Product on a country-by-country basis at any time during the period beginning on the date hereof and ending (i) with respect to the United States, 30 days after clearance by the FDA to market such Crescendo Product in the United States, and (ii) with respect to any other country, 90 days after the earlier of (A) clearance by the appropriate regulatory agency to market such Crescendo Product in such country and (B) clearance by the FDA to market such Crescendo Product in the United States. Notwithstanding the foregoing, the License Option shall expire, to the extent not previously exercised, at the close of business on the 30th day after the expiration of the Purchase Option or, with respect to a particular Crescendo Product, upon exercise by ALZA of the global buy-out option for such Crescendo Product under the License Agreement for such Crescendo Product. In any case, ALZA must exercise the License Option for a particular Crescendo Product in a particular country prior to the first commercial sale of such product in such country by ALZA or any of its Affiliates, sublicensees, distributors or marketing partners. (b) The License Option for any Crescendo Product in any country will expire if not exercised within the time periods described above. In addition, the License Option for any Crescendo Product will expire, with respect to all countries for which it has not yet been exercised, upon exercise by ALZA of the global buy-out option for such Crescendo Product under the License Agreement for such Crescendo Product. (c) Crescendo will notify ALZA in writing within 10 business days of receipt of each clearance to market any Crescendo Product in any country. 2.3 Manner of Exercise. ALZA shall exercise its License Option by delivering to Crescendo, within the time period described in Section 2.2 above, a written notice of exercise specifying the Crescendo Product and the country or countries as to which the License Option is exercised. A License Agreement for such Crescendo Product shall be deemed to be effective in such country or countries as of the date of such notice of exercise, without the necessity of any additional action by the parties. For the convenience of the parties, however, ALZA shall, promptly after delivery of such notice, forward to Crescendo two executed copies of a License Agreement dated the effective date thereof and containing completed Attachments A and B. Crescendo shall execute both copies and return one to ALZA as soon as possible. Failure of either or both of the parties to execute such License Agreement shall not, however, affect the effectiveness of the license granted thereby. The parties shall enter into a separate License Agreement for each Crescendo Product as to which ALZA elects to exercise a License Option. For convenience, the parties shall amend Attachment B to a License Agreement to add a country or countries in cases where a License Option is being exercised for a Crescendo Product for which a License Option already has been exercised in another country or countries. Such amendment shall set forth the additional country or countries and the dates of exercise of the License Option for such countries. 2.4 Development Assets. If ALZA does not exercise the License Option for any Crescendo Product in any country prior to the expiration of such License Option or, if ALZA notifies Crescendo that it will not exercise the License Option for a Crescendo Product, ALZA shall make available to Crescendo for further development and commercialization activities at no charge, all clinical supplies, materials and other assets purchased, manufactured or developed for use in the development of such Crescendo Product with respect to such country to the extent such assets will not be used under the Development Agreement. 3. No Conflict. Crescendo agrees that no license, sale or other commercialization of any Crescendo Product has been or shall be made or offered to any person or entity on any basis that is or will be in conflict with this Agreement or any License Agreement. 4. Access To Information. 4.1 Information Available to ALZA. Crescendo shall make available to ALZA, at all reasonable times, all available information relating to all Crescendo Products as to which the License Option remains exercisable so as to enable ALZA to determine whether and when to exercise its License Option. 4.2 Consultation with ALZA. Crescendo shall consult with ALZA and inform ALZA on a continuing basis of the current state of development of all Crescendo Products as to which the License Option remains exercisable and will review from time to time with ALZA the progress towards completion of the Crescendo Products. 4.3 Consultation with Crescendo. In the event that the License Option with respect to one or more Crescendo Products in one or more countries expires unexercised, ALZA shall make available to Crescendo all information reasonably available to ALZA relating to such Crescendo Products and ALZA's previous contacts with potential sublicensees, distributors or marketing partners for such Crescendo Products in such countries. 5. Effective Date; Termination. 5.1 Effective Date. This Agreement will become effective on the date of the Distribution. 5.2 Termination. This Agreement shall terminate on the earlier of (a) the date of expiration of the License Option for all of the Crescendo Products and (b) 30 days after expiration of the Purchase Option. 6. Miscellaneous. 6.1 Waiver, Remedies and Amendment. Any waiver by either party hereto of a breach of any provisions of this Agreement shall not be implied and shall not be valid unless such waiver is recited in writing and signed by such party. Failure of any party to require, in one or more instances, performance by the other party in strict accordance with the terms and conditions of this Agreement shall not be deemed a waiver or relinquishment of the future performance of any such terms or conditions or of any other terms and conditions of this Agreement. A waiver by either party of any term or condition of this Agreement shall not be deemed or construed to be a waiver of such term or condition for any other term. All rights, remedies, undertakings, obligations and agreements contained in this Agreement shall be cumulative and none of them shall be a limitation of any other remedy, right, undertaking, obligation or agreement of either party. This Agreement may not be amended except in a writing signed by both parties. 6.2 Assignment. Neither party may assign its rights and obligations hereunder without the prior written consent of the other party, which consent may not be unreasonably withheld; provided, however, that ALZA may assign such rights and obligations hereunder to an Affiliate of ALZA or any person or entity with which ALZA is merged or consolidated or which acquires all or substantially all of the assets of ALZA. 6.3 Arbitration. (a) All disputes which may arise under, out of or in connection with this Agreement shall be settled by arbitration conducted in the city of San Francisco, State of California, in accordance with the then existing rules of the American Arbitration Association, and judgment upon the award rendered by the arbitrators may be entered in any court having jurisdiction thereof. The parties hereby agree that service of any notices in the course of such arbitration at their respective addresses as provided for in Section 6.7 of this Agreement shall be valid and sufficient. (b) In any arbitration pursuant to this Section 6.3, the award shall be rendered by a majority of the members of a board of arbitration consisting of three members who shall be appointed by the parties jointly, or if the parties cannot agree as to three arbitrators within 30 days after the commencement of the arbitration proceeding, then one arbitrator shall be appointed by ALZA and one arbitrator shall be appointed by Crescendo within 60 days after the commencement of the arbitration proceeding. The third arbitrator shall be appointed by mutual agreement of such two arbitrators. In the event of failure of the two arbitrators to agree within 75 days after commencement of the arbitration proceeding upon the appointment of the third arbitrator, the third arbitrator shall be appointed by the American Arbitration Association in accordance with its then existing rules. Notwithstanding the foregoing, in the event that any party shall fail to appoint an arbitrator it is required to appoint within the specified time period, such arbitrator and the third arbitrator shall be appointed by the American Arbitration Association in accordance with its then existing rules. For purposes of this Section 6.3, the "commencement of the arbitration proceeding" shall be deemed to be the date upon which a written demand for arbitration is received by the American Arbitration Association from one of the parties. 6.4 Counterparts. This Agreement may be executed in any number of counterparts, each of which when so executed shall be deemed to be an original and all of which when taken together shall constitute this Agreement. 6.5 Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the state of California as applied to residents of that state entering into contracts wholly to be performed in that state. 6.6 Headings. The section headings contained in this Agreement are included for convenience only and form no part of the greement between the parties. 6.7 Notices. Notices required under this Agreement shall be in writing and sent by registered or certified mail, postage prepaid, or by facsimile and confirmed by registered or certified mail and addressed as follows: If to ALZA: ALZA Corporation 950 Page Mill Road Palo Alto, CA 94304 Facsimile: (650) 496-8048 Attention: Senior Vice President and General Counsel If to Crescendo: Crescendo PharmaceuticalsCorporation 1454 Page Mill Road Palo Alto, CA 94304 Facsimile: (650) 496-8250 Attention: President and Chief Executive Officer All notices shall be deemed to be effective five days after the date of mailing or upon receipt if sent by facsimile (but only if followed by certified or registered confirmation). Either party may change the address at which notice is to be received by written notice pursuant to this Section 6.7. 6.8 Severability. If any provision of this Agreement is held by a court of competent jurisdiction to be invalid or unenforceable, it shall be modified, if possible, to the minimum extent necessary to make it valid and enforceable or, if such modification is not possible, it shall be stricken and the remaining provisions shall remain in full force and effect. 6.9 Relationship of the Parties. For purposes of this Agreement, Crescendo and ALZA shall be deemed to be independent contractors, and anything in this Agreement to the contrary notwithstanding, nothing herein shall be deemed to constitute Crescendo and ALZA as partners, joint venturers, co-owners, an association or any entity separate and apart from each party itself, nor shall this Agreement constitute any party hereto an employee or agent, legal or otherwise, of the other party for any purposes whatsoever. Neither party hereto is authorized to make any statements or representations on behalf of the other party or in any way obligate the other party, except as expressly authorized in writing by the other party. Anything in this Agreement to the contrary notwithstanding, no party hereto shall assume nor shall be liable for any liabilities or obligations of the other party, whether past, present or future. 6.10 Survival. The provisions of Sections 1, 2.4, 4.3, 6.1, 6.3, 6.5, 6.7, 6.8, 6.9 and this Section 6.10 shall survive the termination for any reason of this Agreement. Any payments due under this Agreement with respect to any period prior to its termination shall be made notwithstanding the termination of this Agreement. Neither party shall be liable to the other due to the termination of this Agreement as provided herein, whether in loss of good will, anticipated profits or otherwise. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first set forth above. ALZA CORPORATION By: /s/ Peter D. Staple Title: Senior Vice President and General Counsel CRESCENDO PHARMACEUTICALS CORPORATION By: /s/ Dr. James W. Young Title: President and Chief Executive Officer EXHIBIT A FORM OF LICENSE AGREEMENT This License Agreement (the "Agreement") is made this ____ day of _______________ , _____, by and between ALZA Corporation, a Delaware corporation ("ALZA"), and Crescendo Pharmaceuticals Corporation ("Crescendo"), a Delaware corporation. BACKGROUND A. Crescendo and ALZA have entered into a License Option Agreement and certain other agreements dated as of September 5, 1997. B. Section 2 of the License Option Agreement provides for a license, the terms of which are to be set forth herein. Now, therefore, the parties agree as follows: 1. Definitions. For purposes of this Agreement, the following terms shall have the meanings set forth below: 1.1 "Affiliate" shall mean a corporation or any other entity that directly, or indirectly through one or more intermediaries, controls, is controlled by, or is under common control with, the designated party. "Control" shall mean ownership of at least 50% of the shares of stock entitled to vote for the election of directors in the case of a corporation, and at least 50% of the interests in profits in the case of a business entity other than a corporation. 1.2 "Development Agreement" shall mean the Development Agreement between ALZA and Crescendo dated as of September 5, 1997. 1.3 "Development Cost(s)" shall mean the cost of activities undertaken pursuant to the Development Agreement with respect to the Licensed Product, determined in accordance with Exhibit A thereto. 1.4 "Infringing Product" shall mean any product sold by a third party, other than pursuant to an agreement with ALZA, (i) which incorporates the same therapeutic agent or agents as incorporated in the Licensed Product and (ii) in the case of a Licensed Product using an ALZA drug delivery system, which incorporates a delivery system substantially similar to that incorporated in the Licensed Product, and (iii) which infringes or is alleged to infringe any patent or patents owned by, licensed to or controlled by ALZA. 1.5 "License Option Agreement" shall mean the License Option Agreement between ALZA and Crescendo dated as of September 5, 1997. 1.6 "Licensed Product" shall mean the product listed on Exhibit A hereto. 1.7 "Major Market Country" shall mean any of the following countries: the United States, France, Germany, Italy, Japan or the United Kingdom. 1.8 "Net Sales" shall mean the total amount invoiced in United States dollars (or converted thereto in accordance with Section 5.2 hereof) on sales of a Licensed Product by ALZA (or its Affiliates) or any ALZA sublicensee, distributor or marketing partner (or its Affiliates) to unrelated third parties such as wholesalers, hospitals and others, in bona fide arm's-length transactions, less the following deductions, in each case related specifically to the Licensed Product and actually allowed and taken and not otherwise recovered by or reimbursed to ALZA (or its Affiliates) or such sublicensee, distributor or marketing partner (or its Affiliates): (i) trade, cash and quantity discounts; (ii) taxes on sales (such as sales or use taxes) to the extent added to the sales price and set forth separately as such in the total amount invoiced; (iii) freight, insurance and other transportation charges to the extent added to the sales price and set forth separately as such in the total amount invoiced; and (iv) amounts repaid or credited by reason of rejections, defects or returns or because of retroactive price reductions, chargebacks or rebates under government programs. Net Sales shall also include the fair market value of all other consideration received (a) by ALZA (or its Affiliates) with respect to sales by them of the Licensed Product to unrelated third parties from persons other than sublicensees, distributors or marketing partners (or their Affiliates) or (b) by any ALZA sublicensee, distributor or marketing partner (or its Affiliates) with respect to their sales of the Licensed Product to unrelated third parties, in each case whether such consideration is in cash, payment in kind, exchange or other form. 1.9 "Territory" shall mean the country or countries listed on Exhibit B hereto, as amended from time to time by the parties in connection with the exercise by ALZA of its option for additional countries under the License Option Agreement or the surrender by ALZA of its rights to commercialize the Licensed Product in any country or countries. 2. Grant of License. 2.1 Grant. Crescendo hereby grants to ALZA an exclusive, perpetual license, with the right to sublicense, to develop, make, have made and use the Licensed Product and to sell and have sold the Licensed Product in the Territory. ALZA agrees to use diligent efforts to conduct or have conducted any remaining activities necessary to complete the development of the Licensed Product in the Territory through regulatory clearance to market the Licensed Product in the Territory. Such activities will be undertaken at no cost to Crescendo, unless Crescendo agrees otherwise in writing. Promptly after regulatory clearance, ALZA shall commence and continue to use diligent efforts to commercialize the Licensed Product in each Major Market Country of the Territory through the manufacture and sale or the sublicensing of the Licensed Product, devoting to the Licensed Product the same resources as other pharmaceutical companies of similar size devote to products with similar market potential and with similar relative importance to their product portfolios. ALZA may use reasonable business discretion in the allocation of its technological and monetary resources in performing its obligations hereunder, taking into account not only the Licensed Product but also activities for its own account and its obligations under its other agreements with third parties. Crescendo acknowledges that ALZA will continue to own and have the right to use any clinical supplies, materials and other assets purchased, manufactured or developed for use in the development of such Licensed Product, without any additional payment to or reimbursement of Crescendo. 2.2 No Other Commercialization. ALZA shall not commercialize the Licensed Product in any country except pursuant to this Agreement. 3. Product Payments. 3.1 Payments. (a) In consideration of the grant of the license, ALZA shall make payments to Crescendo ("Product Payments") with respect to the Licensed Product as follows: 1% of Net Sales of the Licensed Product in the Territory, plus an additional 0.1% of such Net Sales for each full $1 million of Development Costs of the Licensed Product paid by Crescendo. Notwithstanding the foregoing, Product Payments for any quarter will not exceed 2.5% of Net Sales, on a quarterly basis, in the Territory for the first four calendar quarters during which the Licensed Product is commercially sold in the first Major Market Country, and 3% of Net Sales, on a quarterly basis, for each of the following eight completed calendar quarters. (b) In determining Product Payments, Development Costs shall be determined as of the last day of each calendar quarter, in order to determine the rates payable with respect to Net Sales for the next calendar quarter for all countries included in the Territory as of the first day of such next calendar quarter, and for any country added to the Territory during such next calendar quarter. (c) In determining Product Payments, Net Sales by ALZA shall be reduced by the dollar amount of any license or similar payments made by or due from ALZA or its Affiliates to third parties with respect to sales of such Licensed Product in the Territory. If license or similar payments are made to third parties with respect to sales of both the Licensed Product in the Territory and to sales of other products, ALZA shall allocate such payments, if necessary, in a commercially reasonable manner. 3.2 Term of Payments. The obligation to make Product Payments hereunder shall continue until 15 years after the date of the first commercial sale of the Licensed Product in any Major Market Country, and shall terminate as to all countries at the end of such 15-year period. 3.3 Buy-Out of Payments. (a) ALZA shall have the option, in its discretion, at any time after the end of the twelfth calendar quarter during which the Licensed Product was commercially sold in any country, to buy out its remaining obligations to make Product Payments with respect to Net Sales of such Licensed Product in such country. The buy out price shall be an amount equal to 15 times the Product Payments made by or due from ALZA to Crescendo with respect to Net Sales of such Licensed Product in such country for the four calendar quarters immediately preceding the quarter in which the buy-out option is exercised, plus 15 times such additional Product Payments as would have been made but for the 2.5% and 3% limits set forth in Section 3.1 on Product Payments for such period. (b) ALZA shall have the option, in its discretion, at any time after the end of the twelfth calendar quarter during which the Licensed Product was commercially sold in either the United States or two other Major Market Countries, to buy out its remaining obligations to make Product Payments with respect to Net Sales of such Licensed Product in the Territory. The buy- out price shall be an amount equal to (i) 20 times (A) the Product Payments made by or due from ALZA to Crescendo for such Licensed Product in the Territory, plus (B) such payments as would have been made by or due from ALZA to Crescendo if ALZA had not exercised any country-specific buy- out option with respect to Net Sales of such Licensed Product, plus (C) such additional Product Payments as would have been made but for the 2.5% and 3% limits set forth in Section 3.1 on Product Payments for such period, in each case, for the four calendar quarters immediately preceding the quarter in which the buy-out option is exercised, less (ii) any amounts previously paid to exercise any country- specific buy out option with respect to Net Sales of such Licensed Product. 4. Accounting. 4.1 Reports. Within 90 days after the end of each calendar quarter for which Product Payments are due, ALZA shall render an accounting to Crescendo, on a country- by-country basis, with respect to all Product Payments due for such quarter. Such report shall indicate, for such quarter, the quantity and dollar amount of Net Sales of the Licensed Product by ALZA and its Affiliates, sublicensees, distributors and marketing partners (and their Affiliates), or other consideration with respect to Net Sales, with respect to which payments are due; provided, however, that if ALZA shall not have received from any sublicensee, distributor or marketing partner a report of its (and its Affiliates') sales for such quarter, then such sales shall be included in the next quarterly report. In case no Product Payments are due for any calendar quarter, ALZA shall so report. 4.2 Records; Review by Accountants. ALZA shall keep and maintain, in accordance with generally accepted accounting principles, proper and complete records and books of account documenting all amounts paid or payable by ALZA to Crescendo. Crescendo shall have the right, once in each calendar year during regular business hours and upon reasonable notice to ALZA, at Crescendo's expense, to examine or have examined by a certified public accountant or similar person, such of the records of ALZA as may be necessary to verify the accuracy of the reports and payments made under this Agreement. Such examination shall take place not later than two years following the year in question, and only one examination may take place with respect to any period as to which such books and records are examined. ALZA shall obtain, for itself and for Crescendo, similar reasonable rights to audit information pertaining to Net Sales from each party appointed to commercialize any product as to which payments are due to Crescendo hereunder. 5. Times and Currencies Of Payments. 5.1 Payments. Payments shown by each calendar quarter report to have accrued shall be due and payable on the date such report is due and shall be paid in United States dollars. Any and all taxes due or payable on such payments or with respect to the remittance thereof shall be deducted from such payments and shall be paid by ALZA to the proper taxing authorities, and proof of payment shall be secured and sent to Crescendo as evidence of such payment. The rate of exchange to be used in computing the amount of the United States dollars due to Crescendo in satisfaction of payment obligations with respect to sales in foreign countries shall be calculated by converting the amount due in such foreign currency into United States dollars at the rate for the purchase of United States dollars with such currency as published in The Wall Street Journal on the last business day of the calendar quarter for which payment is being made. 5.2 Certain Foreign Payments. If governmental regulations prevent remittance from any foreign country of any amounts due under Section 3.1 in respect of that country, ALZA shall so notify Crescendo in writing, and the obligation under this Agreement to make payments with respect to sales in that country shall be suspended (but the amounts due but not paid shall continue to accrue) until such remittances are possible. Crescendo shall have the right, upon written notice to ALZA, to receive payment in any such country in the local currency. 5.3 Late Payments. Any payments due hereunder that are not made when due shall bear interest at the lesser of 10% per annum or the maximum rate as may be allowed by law, beginning on the date when Crescendo has notified ALZA that such payments are overdue. 6. Patent Infringement. 6.1 Notice. Each party shall promptly notify the other party of use or sale by a third party of an Infringing Product. 6.2 Legal Action. If a third party manufactures or sells an Infringing Product, ALZA may, at its own expense, bring legal action to restrain such infringement and for damages. Any recoveries resulting from any such action shall be first applied to reimburse ALZA for its expenses (including reasonable attorneys' fees) incurred in bringing the action. Crescendo will be entitled to a share of the remaining recoveries in the same percentage as the percentage of Net Sales as to which Product Payments are due to Crescendo during the period of the infringement or alleged infringement. If (a) ALZA fails to take the necessary steps to restrain such infringement or alleged infringement by litigation or otherwise within 90 days after either party's notice described in Section 6.1, (b) if the infringement or alleged infringement occurs during a period for which Crescendo is entitled to receive Product Payments hereunder, and (c) if over a period of at least two calendar quarters such Infringing Product achieves an annualized unit sales volume in the country of infringement equal to 25% of the annualized unit sales volume of the Licensed Product sold by ALZA and its Affiliates, sublicensees, distributors and marketing partners (and their Affiliates) in such country during such year, then Crescendo may institute, in its own name, at its own expense and with the right to all recoveries, such litigation or other appropriate action as it may deem appropriate to restrain such infringement, provided that Crescendo has first given to ALZA 60 days advance notice of its intention to take such action, and provided further, that ALZA has not itself taken appropriate action during such 60 day period. 6.3 Cooperation. If either party desires to bring an action in accordance with Section 6.2, the other party agrees to cooperate fully with the party bringing such action in the pursuit thereof, at the expense of the party bringing such action and to the extent reasonably requested by such party. If the third party in any such action brought by Crescendo brings a counteraction for invalidation or misuse of a patent covering the Licensed Product, Crescendo promptly shall notify ALZA and ALZA may, within six months of the notification, join and participate in such action at its own expense. 6.4 Settlement. Each party agrees not to settle any action it brings in a manner that would adversely affect the other party without the other party's prior written approval. 7. Effective Date and Term. 7.1 Effective Date and Term. This Agreement will become effective in accordance with Section 2.3 of the License Option Agreement and, unless terminated in accordance with any of the provisions hereof, shall remain in full force and effect thereafter. 8. Indemnification. 8.1 Indemnity. ALZA shall indemnify, defend and hold Crescendo (and its Affiliates) harmless from and against any and all liabilities, claims, demands, damages, costs, expenses or money judgments incurred by or rendered against Crescendo and its Affiliates, which arise out of the use, design, labeling or manufacture, processing, packaging, sale or commercialization of the Licensed Product by ALZA, its Affiliates, subcontractors, sublicensees, distributors and marketing partners (and their Affiliates). Crescendo shall permit ALZA's attorneys, at ALZA's discretion and cost, to control the defense of any claims or suits as to which Crescendo may be entitled to indemnification hereunder, and Crescendo agrees not to settle any such claims or suits without the prior written consent of ALZA. Crescendo shall have the right to participate, at its own expense, in the defense of any such claim or demand to the extent it so desires. 8.2 Notice. Crescendo shall give ALZA prompt notice in writing, in the manner set forth in Section 11.7 below, of any claim or demand made against Crescendo for which Crescendo may be entitled to indemnification under Section 8.1. 9. Disclaimers. CRESCENDO DISCLAIMS ANY EXPRESS OR IMPLIED WARRANTY (A) THAT THE LICENSED PRODUCT OR ANY TECHNOLOGY INCORPORATED THEREIN, OR THE MANUFACTURE, USE OR SALE THEREOF, WILL BE FREE FROM CLAIMS OF PATENT INFRINGEMENT, INTERFERENCE OR UNLAWFUL USE OF PROPRIETARY INFORMATION OF ANY THIRD PARTY AND (B) OF THE ACCURACY, RELIABILITY, TECHNOLOGICAL OR COMMERCIAL VALUE, COMPREHENSIVENESS OR MERCHANTABILITY OF THE LICENSED PRODUCT OR ANY TECHNOLOGY INCORPORATED THEREIN OR THEIR SUITABILITY OR FITNESS FOR ANY PURPOSE WHATSOEVER INCLUDING, WITHOUT LIMITATION, THE DESIGN, DEVELOPMENT, MANUFACTURE, USE OR SALE OF THE LICENSED PRODUCT. CRESCENDO DISCLAIMS ALL OTHER WARRANTIES OF WHATEVER NATURE, EXPRESS OR IMPLIED. 10. Termination. 10.1 Termination by Crescendo. Crescendo may, in its discretion, terminate this Agreement in the event that ALZA: (a) breaches any of its material obligations hereunder and such breach continues for a period of 60 days after written notice thereof; or (b) enters into any proceeding, whether voluntary or otherwise, in bankruptcy, reorganization or arrangement for the appointment of a receiver or trustee to take possession of ALZA's assets or any other proceedings under any law for the relief of creditors or makes an assignment for the benefit of its creditors. 10.2 Termination by ALZA. ALZA may terminate this Agreement with respect to one or more countries included in the Territory upon 30 days' prior written notice to Crescendo if ALZA elects for any reason to discontinue commercialization of the Licensed Product in such country. 10.3 Consequences of Termination. Termination of this Agreement for any reason in accordance with the terms hereof shall be without prejudice to: (a) Crescendo's right to receive all payments accrued under Section 3 prior to the effective date of such termination; and (b) any other remedies which either party may then or thereafter have hereunder or otherwise. If this Agreement terminates pursuant to this Section 10, ALZA shall immediately discontinue any promotion and sales of the Licensed Product. Notwithstanding the foregoing, in the event of any termination under this Section 10, ALZA may sell its inventory in stock on the date of termination for a period of up to six months after the termination, and shall remit payments to Crescendo in respect thereto in accordance with this Agreement. 11. Miscellaneous. 11.1 Waiver, Remedies and Amendment. Any waiver by either party hereto of a breach of any provisions of this Agreement shall not be implied and shall not be valid unless such waiver is recited in writing and signed by such party. Failure of any party to require, in one or more instances, performance by the other party in strict accordance with the terms and conditions of this Agreement shall not be deemed a waiver or relinquishment of the future performance of any such terms or conditions or of any other terms and conditions of this Agreement. A waiver by either party of any term or condition of this Agreement shall not be deemed or construed to be a waiver of such term or condition for any other term. All rights, remedies, undertakings, obligations and agreements contained in this Agreement shall be cumulative and none of them shall be a limitation of any other remedy, right, undertaking, obligation or agreement of either party. This Agreement may not be amended except in a writing signed by both parties. 11.2 Assignment. Neither party may assign its rights and obligations hereunder without the prior written consent of the other party, which consent may not be unreasonably withheld; provided, however, that ALZA may assign such rights and obligations hereunder to an Affiliate of ALZA or to any person or entity with which ALZA is merged or consolidated or which acquires all or substantially all of the assets of ALZA. 11.3 Arbitration. (a) All disputes which may arise under, out of or in connection with this Agreement shall be settled by arbitration conducted in the City of San Francisco, State of California, in accordance with the then existing rules of the American Arbitration Association, and judgment upon the award rendered by the Arbitrators may be entered in any court having jurisdiction thereof. The parties hereby agree that service of any notices in the course of such arbitration at their respective addresses as provided for in Section 11.7 of this Agreement shall be valid and sufficient. (b) In any arbitration pursuant to this Section 11.3, the award shall be rendered by a majority of the members of a board of arbitration consisting of three members who shall be appointed by the parties jointly, or if the parties cannot agree as to three arbitrators within 30 days after the commencement of the arbitration proceeding, then one arbitrator shall be appointed by ALZA and one arbitrator shall be appointed by Crescendo within 60 days after the commencement of the arbitration proceeding. The third arbitrator shall be appointed by mutual agreement of such two arbitrators. In the event of failure of the two arbitrators to agree within 75 days after commencement of the arbitration proceeding upon the appointment of the third arbitrator, the third arbitrator shall be appointed by the American Arbitration Association in accordance with its then existing rules. Notwithstanding the foregoing, in the event that any party shall fail to appoint an arbitrator it is required to appoint within the specified time period, such arbitrator and the third arbitrator shall be appointed by the American Arbitration Association in accordance with its then existing rules. For purposes of this Section 11.3, the "commencement of the arbitration proceeding" shall be deemed to be the date upon which a written demand for arbitration is received by the American Arbitration Association from one of the parties. 11.4 Counterparts. This Agreement may be executed in any number of counterparts, each of which when so executed shall be deemed to be an original and all of which when taken together shall constitute this Agreement. 11.5 Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the state of California as applied to residents of that state entering into contracts to be performed in that state. 11.6 Headings. The headings set forth at the beginning of the various sections of this Agreement are for convenience and form no part of the Agreement between the parties. 11.7 Notices. Notices required under this Agreement shall be in writing and sent by registered or certified mail, postage prepaid, or by facsimile and confirmed by registered or certified mail, postage prepaid, and addressed as follows: If to ALZA: ALZA Corporation 950 Page Mill Road Palo Alto, CA 94304 Facsimile: (650) 496-8048 Attention: Senior Vice President and General Counsel If to Crescendo: Crescendo Pharmaceuticals Corporation 1454 Page Mill Road Palo Alto, CA 94304 Facsimile: (650) 496-8250 Attention: President and Chief Executive Officer All notices shall be deemed to be effective five days after the date of mailing or upon receipt if sent by facsimile (but only if followed by certified or registered confirmation). Either party may change the address at which notice is to be received by written notice pursuant to this Section 11.7. 11.8 Severability. If any provision of this Agreement is held by a court of competent jurisdiction to be invalid or unenforceable, it shall be modified, if possible, to the minimum extent necessary to make it valid and enforceable or, if such modification is not possible, it shall be stricken and the remaining provisions shall remain in full force and effect. 11.9 Relationship of the Parties. For all purposes of this Agreement, Crescendo and ALZA shall be deemed to be independent contractors and anything in this Agreement to the contrary notwithstanding, nothing herein shall be deemed to constitute Crescendo and ALZA as partners, joint venturers, coowners, an association or any entity separate and apart from each party itself, nor shall this Agreement constitute any party hereto an employee or agent, legal or otherwise, of the other party for any purposes whatsoever. Neither party hereto is authorized to make any statements or representations on behalf of the other party or in any way to obligate the other party, except as expressly authorized in writing by the other party. Anything in this Agreement to the contrary notwithstanding, no party hereto shall assume nor shall be liable for any liabilities or obligations of the other party, whether past, present or future. 11.10 Survival. The provisions of Sections 1, 4.2, 8, 9, 10.3, 11.1, 11.3, 11.5, 11.6, 11.7, 11.8, 11.9, and this Section 11.10 shall survive the termination for any reason of this Agreement. Any payments due under this Agreement with respect to any period prior to its termination shall be made notwithstanding the termination of this Agreement. Neither party shall be liable to the other due to the termination of this Agreement as provided herein, whether in loss of good will, anticipated profits or otherwise. 11.11 Force Majeure. Neither party to this Agreement shall be liable for failure or delay in the performance of any of its obligations hereunder, if such failure or delay is due to causes beyond its reasonable control including, without limitation, acts of God, earthquakes, fires, strikes, acts of war, or intervention of any governmental authority, but any such delay or failure shall be remedied by such party as soon as possible after the removal of the cause of such failure or delay. IN WITNESS WHEREOF, the parties have executed this Agreement on the date first set forth above. ALZA CORPORATION By: /s/ Peter D. Staple Title: Senior Vice President and General Counsel CRESCENDO PHARMACEUTICALS CORPORATION By: /s/ Dr. James W. Young Title: President and Chief Executive Officer ATTACHMENT A LICENSED PRODUCT ATTACHMENT B TERRITORY DATE OF EXERCISE COUNTRY EX-10.5 6 EXHIBIT 10.5 ALZA CORPORATION Amended and Restated Stock Plan (as amended through August 13, 1997) 1. Purpose. The purpose of this ALZA Corporation Amended and Restated Stock Plan (the "Plan") is to attract, retain and motivate key employees (including employees who are also directors), directors and consultants of ALZA Corporation (the "Company") and its subsidiaries by giving them the opportunity to acquire stock ownership in the Company. Grants under this Plan may consist of incentive stock options, intended to satisfy the requirements of Section 422 of the Internal Revenue Code of 1986, as it may be amended from time to time (the "Code"), or nonstatutory stock options (in either case, where unspecified, "options"). This Plan also provides for the award of restricted stock. 2. Effective Date and Term of Plan. The effective date of this Plan is May 4, 1992, the date of the approval of the 1992 Stock Option Plan by the Company's stockholders. This Plan shall terminate automatically ten (10) years after its effective date unless terminated earlier by the Board of Directors (the "Board") under Section 13 hereof. No grant of options or restricted stock shall be made after termination of this Plan, but all grants made prior to termination shall remain in effect in accordance with their terms. 3. Shares Subject to the Plan. (a) Number and Source of Shares. Subject to the provisions of Section 9, the total number of shares of stock reserved for grants under this Plan is 9,000,000 shares of Common Stock, $. 01 par value, of the Company (the "Stock"). If any option terminates or expires without being exercised in full, or if any shares of Stock issued as restricted stock are forfeited prior to conferring on their holder benefits of ownership other than voting rights or accumulated dividends that are not realized, the shares issuable under such option or so forfeited shall become available again for grant under this Plan. The shares to be issued hereunder may consist of authorized and unissued shares or treasury shares. (b) Individual Limitation. The Company may not grant options covering in the aggregate more than 200,000 shares of Stock (subject to adjustments and substitutions as required under Section 9 below) to any one participant in any one-year period, except that, at the time of an offer of employment, the Company may grant options covering in the aggregate up to 750,000 shares of Stock (subject to adjustments and substitutions as required under Section 9 below). 4. Administration of the Plan. This Plan shall be administered by the Board or by a committee that meets the requirements of Rule 16b-3 under the Securities Exchange Act of 1934 (the "Exchange Act") as in effect from time to time (in either case, the "Administrator"). The Administrator (i) may authorize any one or more of its members or any officer of the Company to execute and deliver documents on behalf of the Administrator and (ii) so long as not otherwise required for the Plan to comply with Rule 16b-3, may delegate to one or more officers or directors of the Company authority to grant options to persons who are not subject to Section 16 of the Exchange Act with respect to Stock. The Administrator may delegate nondiscretionary administrative duties to such employees of the Company or a subsidiary as it deems proper. The Administrator may also make rules and regulations which it deems useful to administer this Plan. Any decision or action of the Administrator in connection with this Plan or any options or restricted stock granted or shares of Stock purchased under this Plan shall be final and binding. No member of the Board shall be liable for any decision, action or omission respecting this Plan, or any options or restricted stock granted or shares of Stock issued under this Plan. 5. Eligibility. (a) Incentive stock options may be granted under this Plan only to employees of the Company or a subsidiary, including employees who may also be officers or directors of the Company or any subsidiary of the Company. Nonstatutory options and restricted stock may be granted to employees (including employees who are also directors), directors, consultants and potential employees (in contemplation of and subject to employment) of the Company or any subsidiary of the Company; provided, however, that grants to directors who are not also employees of the Company may be made only in accordance with Section 5(b) below. Participants in this Plan shall be recommended for grants hereunder by the Chief Executive Officer or Chief Operating Officer of the Company and approved by the Administrator. Determination by the Administrator as to eligibility shall be conclusive. (b) Notwithstanding any other provision of this Plan, directors who are not also employees of the Company may receive grants under this Plan only in accordance with this Section 5(b). Automatically and in connection with the offer of directorship to a person who is not an employee of the Company, and subject to that person becoming a director of the Company within the time period set forth in the offer, the person shall be granted a nonstatutory option to purchase 20,000 shares of Stock at the fair market value of the Stock on the date of the offer. Such option shall vest in five equal annual increments of 4,000 shares for each increment, beginning on the first anniversary of the date on which the person first attends a meeting of the Board following his or her election as a director (the "Service Date"), and shall be exercisable until the date that is ten (10) years after the date of grant. Assuming that the director is a nonemployee director on the fifth anniversary of his or her Service Date, such director automatically shall be granted on such fifth anniversary of his or her Service Date a further nonstatutory option to purchase 10,000 shares of Stock at the fair market value of the Stock on the date of the grant. Such additional option shall vest in five equal annual increments of 2,000 shares each, beginning one year after the date of grant, and shall be exercisable until the date that is ten (10) years after the date of grant. Thereafter, on each subsequent fifth anniversary of his or her Service Date, assuming the director is then a nonemployee director, a further option to purchase an additional 10,000 shares of Stock automatically shall be granted to such director on the same basis as set forth in the preceding sentence. The Service Date for a director who is also an employee of the Company but who terminates employment with the Company while remaining a director shall, for purposes of this Section 5(b), be deemed to be the date on which such director first attends a meeting of the Board following the termination of his or her employment with the Company. If such director has not been granted options to purchase Stock within five years prior to his or her Service Date, he or she automatically shall be granted a nonstatutory option to purchase 20,000 shares of Stock on the same basis as set forth above for a grant to a person becoming a director of the Company; and, thereafter, on each subsequent fifth anniversary of his or her Service Date, assuming the director is then a non-employee director, a further option to purchase an additional 10,000 shares of Stock automatically shall be granted to such director on the same basis as set forth above for further options. However, if such director has been granted options to purchase Stock within five years prior to his or her Service Date, he or she shall automatically be granted a nonstatutory option to purchase 10,000 shares of Stock on the same basis as set forth above for further options on the fifth anniversary of the date of the last grant of options by the Company to such person prior to the termination of his or her employment with the Company (the "Initial Grant Date"); and, thereafter, on each subsequent fifth anniversary of his or her Initial Grant Date, assuming the director is then a non employee director, a further option to purchase an additional 10,000 shares of Stock automatically shall be granted to such director on the same basis as set forth above for further options. 6. Options. (a) Grant. The Administrator may, in its discretion, grant options under this Plan at any time and from time to time before the expiration of this Plan. The Administrator shall specify the date of grant or, if it fails to, the date of grant shall be the date of the action taken by the Administrator to grant the option (in either case, the "Grant Date"). If an incentive stock option is approved in anticipation of employment, the Grant Date shall in any event not be prior to the date the intended optionee is first treated as an employee of the Company or any subsidiary for payroll purposes. (b) Option Agreements. As soon as practicable after the Grant Date, the Company will provide the optionee a written stock option agreement (the "Option Agreement"), which designates the option as an incentive stock option or nonstatutory option and which identifies the Grant Date, the number of shares of Stock covered by the option, the option price and the terms and conditions for exercise of the option. (c) Terms and Conditions of Options. Options granted under this Plan shall be subject to the following additional terms and conditions and such other terms and conditions not inconsistent with this Plan as the Administrator may impose: (i) Exercise of Option. In order to exercise all or any portion of an incentive stock option granted under this Plan (or any other option which, by its terms, so requires), an optionee must remain in the employ of the Company or a subsidiary of the Company until the date on which the option (or portion thereof) becomes exercisable (the "Vesting Date"). An option shall be partially exercisable on or after each Vesting Date with respect to the percentage of total shares of Stock covered by the option set out in the Option Agreement. If an option (or portion thereof) is not exercised on the earliest Vesting Date on which it becomes exercisable, it may be exercised thereafter at any time prior to its expiration date; provided, however, that in no event may an incentive stock option granted under this Plan be exercised more than ten (10) years from the Grant Date. If the Company grants an incentive stock option to an optionee who owns, on the Grant Date, directly or by attribution, stock possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the company or any subsidiary, the option shall not be exercisable more than five (5) years after the Grant Date. Notwithstanding any other provision of this Plan, to the extent required by Section 422(d) of the Code, the aggregate value of all shares first becoming exercisable by an optionee during any year, under all incentive stock options granted to such optionee covering stock of the Company (or any company which, at the time of grant, was a parent or subsidiary of the Company), shall not exceed $100,000 or such other amount as may be in effect from time to time. If by their terms such incentive stock options, when taken together, would first become exercisable at a faster rate then, except as otherwise specifically provided by the Administrator in its discretion, the portion thereof which exceeds such amount shall be nonstatutory options. For this purpose, value shall be the fair market value of the option stock when the options were granted and options shall be taken into account in the order in which they were granted. In no event may the operation of this Section 6(c)(i) cause an option to vest before its terms or, having vested, cease to be vested. Nonstatutory options granted to employees under this Plan shall be exercisable until ten (10) years after the Grant Date, unless the Administrator shall determine otherwise. (ii) Option Price. The option price of incentive stock options shall be at least one-hundred percent (100%) of the fair market value of the shares covered by the option on the Grant Date, as determined in good faith by the Administrator and, in the case of nonstatutory options, shall be at least one- hundred percent (100%) of the fair market value of the shares covered by the option on the Grant Date unless the Administrator specifically determines otherwise, in which event the option price of such nonstatutory options shall not be less than eighty- five percent (85%) of the fair market value of the shares covered thereby on the Grant Date, determined in the same manner. If the Company grants an incentive stock option to an optionee owning on the Grant Date, directly or by attribution, shares possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or any subsidiary, the option price shall be at least one-hundred ten percent (110%) of the fair market value of the shares covered by the option on the Grant Date determined in the same manner. (iii) Method of Exercise. To the extent the right to purchase shares has accrued, an option (or portion thereof) may be exercised from time to time in accordance with its terms by written notice from the optionee to the Company stating the number of shares with respect to which the option is being exercised and accompanied by payment in full of the exercise price of the shares. Payment may be made in cash, by check, or by delivery of shares of Stock (duly endorsed in favor of the Company or accompanied by a duly endorsed stock power), by a combination of the above, or any other form of consideration approved by the Administrator (including payment in accordance with a cashless exercise program as permitted under Regulation T promulgated by the Federal Reserve Board, as amended from time to time). Any shares delivered to the Company as payment upon exercise of an option shall be valued at their fair market value as of the date of exercise of the option determined in good faith by the Administrator. Options may not be exercised by any optionee by the delivery of shares of stock more frequently than once every six months. (iv) Restrictions on Option Shares. At the time it grants options under this Plan, the Company may retain for itself (or others) rights to purchase the shares acquired under the option or impose other restrictions on the shares. The terms and conditions of any such rights or other restrictions shall be set forth in the Option Agreement evidencing the option. (v) Nonassignability of Option Rights. Except as otherwise determined by the Administrator, no option shall be transferable other than by will or by the laws of descent and distribution or a qualified domestic relations order and, otherwise during the lifetime of an optionee, only the optionee may exercise an option. (vi) Exercise after Termination of Service or Death. If for any reason other than permanent and total disability or death, an optionee ceases to be employed by, or a consultant or director to (if such relationship forms the sole basis for the grant), the Company or a subsidiary, options held at the date of such termination (to the extent then exercisable) may be exercised at any time within three months after the date of such termination (but in no event after the expiration date of the option as set forth in the Option Agreement). If an optionee becomes permanently and totally disabled (within the meaning of Section 22(e)(3) of the Code) or dies while employed by, or a consultant or director to, the Company or a subsidiary, (or, if the optionee dies within the period that the option remains exercisable after termination of employment, consultancy or directorship), options then held (to the extent then exercisable) may be exercised by the optionee, the optionee's personal representative, or by the person to whom the option is transferred by will or the laws of descent and distribution, at any time within one year after the disability or death or any lesser period specified in the Option Agreement (but in no event after the expiration date of the option as set forth in the Option Agreement). 7. Restricted Stock. (a) Grant. The Administrator may grant restricted stock under this Plan at any time and from time to time before the expiration of this Plan. (b) Restricted Stock Agreement. As soon as practicable after the grant of restricted stock, which in no event shall be later than thirty (30) days after the grant date of the restricted stock, the Company will provide the participant with a written restricted stock agreement setting forth the terms and conditions of the grant (the "Restricted Stock Agreement"). (c) Price. Participants awarded restricted stock, within fifteen (15) days of receipt of the Restricted Stock Agreement, shall pay to the Company the purchase price of the restricted stock set forth in the Restricted Stock Agreement, which shall not be less than the par value of the Stock subject to the grant. If such payment is not made and received by the Company by such date, the grant of restricted stock shall lapse. (d) Restrictions. Subject to the provisions of the Plan and the Restricted Stock Agreement, during a period set by the Administrator, commencing with, and not exceeding ten (10) years from, the grant date of the restricted stock (the "Restriction Period"), the participant shall not be permitted to sell, assign, transfer, pledge or otherwise encumber shares of restricted stock. Within these limits, the Administrator may provide for the lapse of such restrictions in installments and may accelerate or waive such restrictions, in whole or in part, based on service, performance or such other factors or criteria as the Administrator may determine. (e) Dividends. Unless otherwise determined by the Administrator, cash dividends with respect to shares of restricted stock shall be automatically reinvested in additional restricted stock, and dividends payable in Stock shall be paid in the form of restricted stock. (f) Termination. Except to the extent otherwise provided in the Restricted Stock Agreement and pursuant to Section 7(d), upon termination of a participant's employment for any reason during the Restriction Period, all shares still subject to restriction shall be forfeited by the participant. 8. Payment of Taxes. (a) The exercise of an option (regardless of the form of payment for exercise of the option) or the transfer or other disposition of restricted stock shall be conditioned upon payment in cash, or provision satisfactory to the Administrator for payment to the Company, of any federal and state withholding taxes which, in the Administrator's judgement, are payable in connection therewith. (b) If and to the extent consented to by the Administrator in its sole discretion, a person may (i) tender to the Company previously- owned shares of Stock, or (iii) have shares of Stock to be obtained upon exercise of the option withheld by the Company on behalf of the optionee, to pay the amount of tax that the Administrator, in its discretion, determines to be required to be withheld by the Company. 9. Adjustment for Changes in Capitalization. The existence of outstanding options shall not affect the Company's right to effect adjustments, recapitalization, reorganizations, or other changes in its or any other corporation's capital structure or business, any merger or consolidation, any issuance of bonds, debentures, preferred or prior preference stock ahead of or affecting the Stock, the dissolution or liquidation of the Company's, or any other corporation's, assets or business, or any other corporate act whether similar to the events described above or otherwise. Subject to Section 10, if the number of outstanding shares of Stock is increased or decreased in number or changed into or exchanged for a different number or kind of securities of the Company or any other corporation by reason of a recapitalization, reclassification, stock split, combination of shares, stock dividend or other event, the number and kind of securities with respect to which options or restricted stock may be granted under this Plan, the individual limitations under Section 3(b) above, the number and kind of securities as to which outstanding options may be exercised, the option price at which outstanding options may be exercised hereunder shall be proportionately adjusted. 10. Dissolution, Liquidation, Merger. In the event of a dissolution or liquidation of the Company, a merger or consolidation in which the Company is not the surviving corporation, a reverse merger in which the Company is the surviving corporation but in which more than fifty percent (50%) of the shares of its Stock outstanding before the merger are held, after the merger, by holders different from those immediately prior to the merger, or a sale of more than eighty percent (80%) of the assets of the Company, (a) except as otherwise provided in the Option Agreement, the time at which each outstanding option may be exercised (subject, in the case of incentive stock options, to the limitations on exercisability set forth in Section 6(c)(i) of this Plan) shall be accelerated at a time such that the optionee (upon exercise of the option) would be eligible to receive the consideration payable to holders of Stock in connection with such liquidation, dissolution, merger, consolidation, reverse merger or sale, and (b) except as otherwise provided in the Restricted Stock Agreement, the restrictions applicable to any restricted stock shall lapse. 11. Rights as Stockholder. Unless the Plan or the Administrator expressly specify otherwise, a participant shall have no rights as a stockholder with respect to any shares of Stock covered by a grant hereunder until the date of issuance (as evidenced by the appropriate entry on the books of the Company or a duly authorized transfer agent) of a certificate representing the shares of Stock. Subject to Sections 9 and 10, no adjustment shall be made for dividends or other rights for which the record date is prior to the date the certificate is issued. 12. Disqualifying Dispositions. If shares of Stock acquired upon exercise of an incentive stock option are disposed of in a "disqualifying disposition" (within the meaning of Section 422 of the Code), the holder of the shares shall notify the Company in writing, within five days after the disposition, of the date and the terms of such disposition. In the event of any such disposition, the holder will comply with any other requirements imposed by the Company in order to enable the Company to secure the related income tax deduction to which it is entitled. 13. Termination or Amendment. (a) The Board may amend, alter or discontinue this Plan, but no amendment, alteration or discontinuance shall be made which would impair the rights of a participant under an outstanding grant without the participant's consent. In addition, the Board may not amend or alter the Plan without the approval of stockholders of the Company entitled to vote at a duly held stockholders' meeting or by an action by written consent and, if at a meeting, a quorum of the voting power of the Company is represented in person or by proxy, where such amendment or alteration would, except as expressly provided in the Plan, increase the total number of shares reserved for issuance pursuant to grants under the Plan or in such other circumstances as the Board deems appropriate to comply with Rule 16b-3 or with Section 422 of the Code or otherwise. 14. Parent and Subsidiary. As used in this Plan, "parent" and "subsidiary" mean any corporation in an unbroken chain of corporations which includes the Company if, at the relevant time, each of the corporations other than the last corporation in the chain owns stock possessing more than fifty percent (50%) of the total combined voting power of all classes of stock of one of the other corporations in the chain. 15. Governing Law. This Plan and the rights of all persons under this Plan shall be construed in accordance with and under applicable provisions of the Code and the laws of the State of California. * * * * * * * * * The Board adopted the ALZA Corporation 1992 Stock Option Plan on January 30, 1992 and the stockholders approved it on May 4, 1992. The Board amended the ALZA Corporation 1992 Stock Option Plan on February 16, 1995, renaming it the ALZA Corporation Amended and Restated Stock Plan and the stockholders approved the amendments on May 11, 1995. The Board amended the ALZA Corporation Amended and Restated Stock Plan on February 12, 1997 to increase the number of shares from 6,000,000 to 9,000,000 and to provide for the transferability of option rights. The stockholders approved the amendment to increase the number of shares on May 8, 1997. The Board further amended the ALZA Corporation Amended and Restated Stock Plan on August 13, 1997. These amendments did not require stockholder approval. EX-11 7 EXHIBIT 11 Statement Regarding Computation of Per Share Earnings (In millions, except per share amounts) Primary _________________________________________________________________ Quarter Ended Nine Months Ended September 30 September 30 1997 1996 1997 1996 _________________________________________________________________ Common stock 85.2 84.4 85.0 84.1 Common stock options - 0.6 - 0.8 $25 Warrants - - - - 5 1/4% Debentures - 12.3 - 8.2 ___________________________________________________________________ Weighted average common and common equivalent shares 85.2 97.3 85.0 93.1 =================================================================== Net income (loss) available to common stockholders $(326.5) $ 23.1 $(273.8) $ 66.6 Add after-tax interest on 5 1/4% Debentures - 3.1 - 6.1 ___________________________________________________________________ Adjusted net income (loss) $(326.5) $ 26.2 $(273.8) $ 72.7 =================================================================== Earnings (loss) per share $ (3.83) $ 0.27 $ (3.22) $ 0.78 ================================================================= Fully Diluted _________________________________________________________________ Quarter Ended Nine months Ended September 30 September 30 1997 1996 1997 1996 _________________________________________________________________ Common stock 85.2 84.4 85.0 84.1 Common stock options - 0.6 - 0.8 $25 Warrants - - - - 5 1/4% Debentures - 12.3 - 8.2 _________________________________________________________________ Weighted average common and common equivalent shares 85.2 97.3 85.0 93.1 ================================================================= Net income (loss) available to common stockholders $(326.5) $ 23.1 $(273.8) $ 66.6 Add after-tax interest on 5 1/4% Debentures - 3.1 - 6.1 _________________________________________________________________ Adjusted net income $(326.5) $ 26.2 $(273.8) $ 72.7 ================================================================= Earnings (loss) per share $ (3.83) $ 0.27 $ (3.22) $ 0.78 ================================================================= EX-27 8
5 THIS SCEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS INCLUDED IN ITEM 1 OF FORM 10-Q DATED SEPTEMBER 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS 1,000,000 9-MOS DEC-31-1997 SEP-30-1997 117 75 108 0 39 362 374 72 1357 86 897 0 0 1 288 1357 100 338 65 181 346 0 49 (225) 49 (274) 0 0 0 (274) (3.22) (3.22)
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