-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, FXReiljvNWPLuD6dp7UUo4nuqzg/wZ5oGHLsn+NOYvcfLt1uZCCmtie/Skh+iMbk NZr7C4DAvPZx8CgELFgw8g== 0000912057-94-003841.txt : 19941117 0000912057-94-003841.hdr.sgml : 19941117 ACCESSION NUMBER: 0000912057-94-003841 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19940930 FILED AS OF DATE: 19941114 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: ALZA CORP CENTRAL INDEX KEY: 0000004310 STANDARD INDUSTRIAL CLASSIFICATION: 2834 IRS NUMBER: 770142070 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-06247 FILM NUMBER: 94559290 BUSINESS ADDRESS: STREET 1: 950 PAGE MILL RD STREET 2: PO BOX 10950 CITY: PALO ALTO STATE: CA ZIP: 94303-0802 BUSINESS PHONE: 4154945000 10-Q 1 10-Q 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 period ended September 30, 1994 ------------------ 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) (Zip Code) Registrant's telephone number, including area code (415) 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 31, 1994: Common Stock, $.01 par value - 81,957,030 shares PART I. FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS ALZA CORPORATION Condensed Consolidated Statement of Income (unaudited) (in thousands, except per share data)
Quarter Ended Nine Months Ended September 30, September 30, 1994 1993 1994 1993 -------- -------- -------- --------- REVENUES: Royalties and fees $ 28,377 $ 28,165 $ 89,185 $ 86,885 Net sales 14,226 14,978 51,862 46,856 Product development revenue 17,724 12,086 49,308 33,387 Other revenue, primarily interest income 5,907 2,571 13,193 17,665 -------- -------- -------- -------- Total revenues 66,234 57,800 203,548 184,793 COSTS AND EXPENSES: Costs of products shipped 12,734 13,021 40,752 40,936 Research and product development 18,694 12,785 55,019 38,830 General, administrative and marketing 8,629 5,236 24,586 14,805 Interest 6,140 5,023 13,940 14,858 -------- -------- -------- -------- Total costs and expenses 46,197 36,065 134,297 109,429 -------- -------- -------- -------- Income before income taxes and cumulative effect of accounting change 20,037 21,735 69,251 75,364 Income taxes 7,527 7,608 26,376 26,378 -------- -------- -------- -------- Income before cumulative effect of accounting change 12,510 14,127 42,875 48,986 Cumulative effect of accounting change - - - 6,573 -------- -------- -------- -------- NET INCOME $ 12,510 $ 14,127 $ 42,875 $ 55,559 -------- -------- -------- -------- -------- -------- -------- -------- Per common and common equivalent share: Income before cumulative effect of accounting change $ .15 $ .18 $ .52 $ .62 Cumulative effect of accounting change - - - .08 -------- -------- -------- -------- Net income $ .15 $ .18 $ .52 $ .70 -------- -------- -------- -------- -------- -------- -------- -------- WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT SHARES 82,358 79,393 82,325 79,577 -------- -------- -------- -------- -------- -------- -------- --------
See accompanying notes. -2- ALZA CORPORATION Condensed Consolidated Balance Sheet (in thousands)
September 30, December 31, ASSETS 1994 1993(1) ------------- ------------ (unaudited) Current assets: Cash and cash equivalents $ 73,952 $ 53,683 Short-term investments 257,493 40,399 Receivables, net 79,173 56,563 Inventories, at cost: Raw materials 18,246 14,635 Work in process 11,167 9,241 Finished goods 5,974 1,287 ---------- ---------- Total inventories 35,387 25,163 Prepaid expenses and other current assets 27,555 22,603 ---------- ---------- Total current assets 473,560 198,411 Investments in long-term government and corporate notes and bonds - 163,391 Property, plant and equipment 299,817 278,483 Less accumulated depreciation and amortization (66,418) (56,886) ---------- ---------- Net property, plant and equipment 233,399 221,597 Other assets 66,062 38,425 ---------- ---------- $ 773,021 $ 621,824 ---------- ---------- ---------- ---------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Commercial paper $ - $ 249,520 Accounts payable 6,599 11,678 Accrued income taxes 5,726 375 Accrued compensation 10,278 8,212 Other current liabilities 24,527 16,393 ---------- ---------- Total current liabilities 47,130 286,178 5.25% zero coupon convertible subordinated debentures 340,191 - Deferred income taxes 14,251 9,906 Other long-term liabilities 21,689 19,063 Stockholders' equity: Common stock and additional paid-in capital 301,290 295,814 Unrealized losses on available- for-sale securities ( $8,936 less $3,668 tax effect) (5,268) - Retained earnings 53,738 10,863 ---------- ---------- Total stockholders' equity 349,760 306,677 ---------- ---------- $ 773,021 $ 621,824 ---------- ---------- ---------- ---------- (1) The balance sheet at December 31, 1993 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.
See accompanying notes. -3- ALZA CORPORATION Condensed Consolidated Statement of Cash Flows (unaudited) Increase (Decrease) in Cash and Cash Equivalents (in thousands)
Nine Months Ended September 30, 1994 1993 ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 42,875 $ 55,559 Adjustments to reconcile net income to net cash provided by operating activities: Cumulative effect of accounting change - (6,573) Depreciation and amortization 9,532 8,992 Accrued interest on 5.25% zero coupon convertible subordinated debentures 3,661 - Accrued interest on 7.5% zero coupon convertible subordinated debentures - 13,016 Deferred income taxes 4,345 4,039 (Increase) decrease in assets: Receivables (22,610) (9,841) Inventories (10,224) (428) Prepaid expenses and other current assets (1,284) 3,654 Increase (decrease) in liabilities: Accounts payable (5,079) (6,179) Accrued income taxes 5,351 (6,597) Accrued compensation 2,066 (784) Accrued and other liabilities 11,618 5,245 --------- --------- Total adjustments (2,624) 4,544 --------- --------- Net cash provided by operating activities 40,251 60,103 CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (21,334) (25,218) Purchases of available-for-sale securities (293,544) - Sales of available-for-sale securities 115,831 - Maturities of available-for-sale securities 101,074 - Decrease in short-term investments - 92,230 Decrease in long-term investments - 92,731 (Increase) decrease in net cash surrender value-life insurance and prepaid premiums (4,702) 4,693 (Increase) decrease in other assets (522) 8,907 --------- --------- Net cash provided by (used in) investing activities (103,197) 173,343 CASH FLOWS FROM FINANCING ACTIVITIES: Net proceeds from 5.25% zero coupon convertible subordinated debentures 328,117 - Maturities of commercial paper (249,520) - Principal payments on long-term debt (858) (858) Issuances of common stock 5,476 6,802 Proceeds from exercise of warrants - 35,474 Distribution of Therapeutic Discovery Corporation Stock - (250,000) --------- --------- Net cash provided by (used in) financing activities 83,215 (208,582) --------- --------- Net increase in cash and cash equivalents 20,269 24,864 Cash and cash equivalents at beginning of period 53,683 26,656 --------- --------- Cash and cash equivalents at end of period $ 73,952 $ 51,520 --------- --------- --------- ---------
See accompanying notes. -4- ALZA CORPORATION September 30, 1994 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. BASIS OF PRESENTATION The information at September 30, 1994 and for the three months and nine months ended September 30, 1994 and 1993 is unaudited, but includes all adjustments (consisting only of normal recurring adjustments) which 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 a full year. The condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 1993 included in ALZA's 1993 Annual Report to Stockholders. 2. INCOME PER SHARE As shown in the table included in Exhibit 11 of the Form 10-Q, the computation of weighted average shares includes common and common equivalent shares. Common equivalent shares include dilutive warrants and options for the period each was outstanding (using the Treasury Stock Method). 3. DEBT OBLIGATIONS In July 1994, ALZA completed a public offering of zero coupon convertible subordinated debentures. The offering resulted in approximately $328 million in net proceeds to ALZA. Approximately $250 million of the proceeds were used to retire ALZA's outstanding commercial paper during the quarter ended -5- September 30, 1994. The remainder will be used for general corporate purposes. 4. ROYALTY RESERVE Royalties and fees for the current quarter, and therefore the nine months ended September 30, 1994, were reduced by approximately $6 million to establish a reserve for a potential reduction in royalty income on sales of Procardia XL-R- by Pfizer, Inc for the period November 1993 through September 1994. The reserve resulted from an announcement by Pfizer in July 1994, that the United States Patent Office had issued to Bayer AG in November 1993 a composition of matter patent relating to nifedipine crystals with various surface areas as the active ingredient in sustained-release formulations of nifedipine. Assuming the issued claims of the patent appropriately cover the nifedipine composition used in Procardia XL, royalties otherwise payable by Pfizer to ALZA on United States sales of the product would be reduced by up to 11 percent. Until any additional determination is made ALZA intends to establish a reserve, in each subsequent quarter, sufficient to cover any possible reduction in Procardia XL royalties. 5. ACCOUNTING CHANGE In May 1993, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" ("SFAS 115"). ALZA adopted the provisions of the new standard for investments held as of or acquired after January 1, 1994. In accordance with SFAS 115, prior period financial statements have not been restated to reflect the change in accounting principle. -6- Although ALZA may not dispose of all of the securities in its investment portfolio within one year, ALZA's investment portfolio is available for current operations and therefore has been classified as a current asset in its entirety beginning in 1994. Previously a portion of the portfolio was classified as a long- term asset. The following is a summary of available-for-sale securities at September 30, 1994:
Available-for-Sale Securities -------------------------------------- Net Estimated Unrealized Fair (in thousands) Cost Losses Value -------- ----------- ---------- U.S. Treasury notes and other U.S. government securities $173,126 $ (6,269) $166,857 Corporate and other securities 167,716 (2,667) 165,049 -------- -------- -------- $340,842 $ (8,936) $331,906(1) -------- -------- -------- -------- -------- --------
The amortized cost and estimated fair value of debt and marketable equity securities at September 30, 1994, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because the issuers of the securities may have the right to prepay certain of the obligations without prepayment penalties. __________________ (1) Includes $74,413 of investments classified as cash equivalents. -7-
Estimated Fair (in thousands) Cost Value -------- ---------- Due in one year or less $132,722 $132,458 Due after one year through three years 48,095 50,183 Due after three years 160,025 149,265 --------- -------- $340,842 $331,906 --------- -------- --------- --------
6. STATEMENT OF CASH FLOWS Supplemental schedule of noncash investing and financing activities:
Nine months ended September 30, ------------------ 1994 1993 (in thousands) ---- ---- Cumulative unrealized losses on available-for-sale securities ($8,936 less $3,668 tax effect) $5,268 $ - Deferred costs - 5.25% zero coupon convertible subordinated debentures 8,413 -
-8- Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ALZA Corporation ("ALZA") develops, primarily under joint development and commercialization agreements with pharmaceutical company clients and Therapeutic Discovery Corporation ("TDC"), a broad range of pharmaceutical products based on ALZA's proprietary therapeutic systems technologies. ALZA's therapeutic systems can often improve the medical value as well as the cost- effectiveness of drug compounds by increasing efficacy, minimizing unpleasant or harmful side effects and/or providing greater patient compliance. ALZA manufactures some or all of various clients' requirements for certain ALZA-developed products. ALZA markets certain products it has developed and is also expanding its marketing activities under co-promotion arrangements with client companies. RESULTS OF OPERATIONS ALZA's net income was $12.5 million or $.15 per common share for the quarter ended September 30, 1994 (including a charge equivalent to $.05 per common share, discussed below, to establish a reserve for a potential reduction in royalty income), and $42.9 million or $.52 per common share for the nine months ended September 30, 1994, compared to net income of $14.1 million or $.18 per common share for the quarter ended September 30, 1993 and $55.6 million or $.70 per common share for the nine months ended September 30, 1993. Included in the results for the nine months ended September 30, 1993 was approximately $6.6 million -9- ($.08 per share) of benefits related to the cumulative effect of adoption of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes". Without this one-time benefit, ALZA would have reported net income of approximately $49.0 million or $.62 per share for the nine months ended September 30, 1993. Currently, ALZA's net income results primarily from royalties and fees from client companies. Royalties and fees are derived from sales by client companies of products developed jointly with ALZA, and 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. Sales of a particular client-marketed product, and therefore ALZA's royalties from that product, generally can be expected to decrease later in the product's life cycle, or when new competing products are introduced into the marketplace. 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, making royalties and fees difficult to predict. For example, ALZA's clients determine the extent of selling and marketing efforts to devote to an ALZA-developed product as compared with other products they market. In some cases, marketing of ALZA-developed products may yield lower economic return for a client than other products marketed by such client -10- due to the royalties payable to ALZA; this may result in reduced emphasis by the client on the ALZA-developed product. With increasing pressures for cost containment in the United States health care system, it can be expected that pharmaceutical product prices, including those of ALZA's royalty-bearing products, will not increase as quickly as they have in the past, and could decrease. Within the next several years, ALZA intends to become less dependent on royalties and fees as ALZA's sales and marketing activities expand and as ALZA markets more products (including products developed with TDC); however, there can be no assurance that these expanded activities will be successful. In addition, health care cost containment measures will affect products marketed by ALZA. Royalties and fees for the quarter and nine months ended September 30, 1994 increased slightly from the corresponding periods in 1993. However, royalties and fees for the current quarter, and therefore the nine months ended September 30, 1994, were reduced by approximately $6 million to establish a reserve for a potential reduction in royalty income on sales of Procardia XL-R- by Pfizer for the period November 1993 through September 1994 (see discussion in Note 4 to the Condensed Consolidated Financial Statements). The increase in royalties and fees was primarily due to higher sales of the Duragesic-R- transdermal fentanyl system, marketed by Janssen Pharmaceutica, Inc. and co-promoted by ALZA, and initial royalties on sales of Adalat CR-R- by Bayer AG. During the nine months ended September 30, 1994, Procardia XL accounted for approximately 55% ALZA's total royalties and fees, after the reserve discussed above. -11- Net sales of $14.2 million for the quarter ended September 30, 1994 decreased 5% from the same period in 1993 due to decreased shipments of certain products manufactured by ALZA. Net sales of $51.9 million for the nine months ended September 30, 1994 increased approximately 11% from the same period in 1993 due to increased shipments of Duragesic and initial shipments of Glucotrol XL-R- and Testoderm-R-, offset by lower Nicoderm-R- shipments. Initial Testoderm sales were approximately $3.5 million during the nine months ended September 30, 1994. ALZA recognizes sales revenues at the time of product shipment; sales are net of discounts, rebates and allowances. Costs of products shipped decreased 2% for the quarter and remained virtually unchanged for the nine months ended September 30, 1994 compared to the same periods in 1993. ALZA's -12- manufacturing is predominantly centralized in its large-scale commercial manufacturing facility in Vacaville, where ALZA manufactures products for client companies and, to a lesser extent, for marketing by ALZA. The Vacaville manufacturing facility was expanded in 1993, and additional equipment will continue to be added to the facility to meet anticipated manufacturing needs in certain areas. The utilization of the facility in any quarter depends on many factors, including client orders, product approvals and product launches, many of which are outside ALZA's control. The quantity of any particular product and the mix of products manufactured in the facility in any quarter are dependent largely on orders by client companies and, to a lesser extent, demand for products marketed by ALZA. Utilization of the facility during the first half of 1994 was high; utilization was somewhat lower in the third quarter and is expected to continue at a lower rate for the remainder of the year. As utilization fluctuates, there could be unused capacity in certain quarters resulting in increased costs due to unabsorbed overhead. ALZA's manufacturing activities, and the products sold by ALZA and its client companies in the United States and/or exported to other countries, are subject to extensive regulation by the United States Food and Drug Administration ("FDA") and comparable agencies in other countries where the products are distributed. FDA regulations govern manufacturing, quality assurance, advertising and record keeping. The continuing trend of more stringent FDA oversight in product clearance and enforcement has -13- caused longer approval cycles, more uncertainty, greater risks and higher costs of obtaining clearance to market a product. Failure to obtain, or delays in obtaining, FDA and other regulatory clearance to market new products, as well as other regulatory actions and recalls, could adversely affect ALZA's financial results. Good Manufacturing Practices ("GMP") regulations under the Food, Drug and Cosmetic Act define how drug and device products are manufactured. ALZA has had in place ongoing programs to update its GMP compliance procedures. In July 1994, ALZA received a "warning letter" from the FDA identifying certain GMP compliance issues related to the manufacture of Duragesic. A warning letter documents items the FDA identifies as deviations from GMP and the actions required by the company to correct the deviations. Remedies available to the FDA for failure to correct noted deficiencies could include inventory seizure and/or injunction prohibiting product shipments. As a result of its discussions with the FDA, ALZA has intensified its program to update its GMP compliance procedures. ALZA intends that all of its operations meet or exceed FDA enforcement standards. These standards change or evolve from time to time, and therefore require ongoing upgrading by ALZA. The financial impact of the upgrade program is not known at this time. ALZA is also implementing manufacturing processes intended to enhance compliance with environmental requirements; this program may increase manufacturing costs and could require capital expenditures. -14- Product development revenue of $17.7 million for the quarter and $49.3 million for the nine months ended September 30, 1994 increased 47% and 48%, respectively, from the same periods in 1993, due largely to increased product development activities on behalf of TDC. Product development revenue from TDC was $8.1 million and $21.1 million for the quarter and nine months ended September 30, 1994, respectively, as compared to $1.4 million and $1.5 million for the same periods in 1993 (TDC commenced operations in June 1993). TDC was formed by ALZA for the purpose of selecting and developing new human pharmaceutical products combining ALZA's proprietary drug delivery technology with various drug compounds, and commercializing such products, most likely through licensing to ALZA. ALZA and TDC have entered into a development agreement pursuant to which ALZA conducts product development activities on behalf of TDC, and ALZA has granted to TDC a royalty-free, nonexclusive, perpetual license to use ALZA's proprietary drug delivery technologies to develop and commercialize specified TDC products. Activities conducted by ALZA under a multi-product agreement with Wyeth-Ayerst, a division of American Home Products, were at a lower level during the nine months ended September 30, 1994 compared with the same period of 1993 due to a reduction in the number of products under development. Research and product development expenses for the quarter and nine months ended September 30, 1994 increased approximately 46% and 42%, respectively, from the same periods in 1993, due to increased product development activities, primarily on behalf of -15- TDC. As additional products are accepted by TDC for development, and as product development activities increase, ALZA's development expenses related to TDC activities (and correspondingly, ALZA's product development revenue related to those activities) are expected to continue to increase. Because products in early stages of development generally require lower levels of expenditures, the development expenses for TDC activities for any product (and ALZA's corresponding product development revenue) can be expected to be lower during the early stages of product development, but can be expected to increase substantially if and when the products enter later stages of development. ALZA's product development expenses and the corresponding product development revenue will fluctuate from quarter to quarter depending upon the number of products in development, their stages of development, and the clients' desired pace of development. ALZA's joint development agreements with client companies generally provide that the client may terminate product development at any time. Clients may terminate development programs for many reasons, including changing competitive conditions, the introduction of new products by third parties, generic competition, technology issues, and internal client funding issues. Research and product development expenses, and corresponding product development revenue, are expected to continue to grow, due largely to ALZA's activities under its arrangements with TDC. -16- General, administrative and marketing expenses of $8.6 million for the quarter and $24.6 million for the nine months ended September 30, 1994 increased 65% and 66%, respectively, from the same periods in 1993, due in large part to the formation of ALZA's sales force and increased marketing expenses. Profits on sales of products in the ALZA portfolio will not cover all of the associated sales and marketing expenses in the near term. Future profitability will depend, in part, on market share attained by ALZA's existing products as well as the timing of introduction of new products. Other revenue, which consists primarily of interest income, increased 130% for the third quarter of 1994 compared to the same period in 1993, due in part to higher average invested cash balances following ALZA's offering in July 1994 of 5.25% zero coupon convertible subordinated debentures which resulted in approximately $328 million in net proceeds to ALZA. Other revenue decreased 25% for the nine months ended September 30, 1994 compared to the same period in 1993, due primarily to the realization during the quarter ended March 31, 1993 of approximately $5.0 million in gains related to long-term investments liquidated to fund TDC. Other revenue for the quarter also included proceeds from company-owned life insurance policies, offset by the Company's share of initial losses from activities undertaken by a partnership of ALZA and Procter & Gamble relating to the development, manufacture and marketing of certain periodontal products, including the marketing of the Actisite[Registered Trademark] product. Interest expense for the quarter ended September 30, 1994 increased 22% from the same period in 1993 due primarily to -17- increased outstanding debt. ALZA used approximately $250 million of the proceeds from the offering of the 5.25% zero coupon convertible subordinated debentures to retire all of its outstanding commercial paper as it matured during the quarter ended September 30, 1994. Interest expense decreased approximately 6% during the nine months ended September 30, 1994 compared to the corresponding period in 1993. During the nine months ended September 30, 1993 interest expense consisted primarily of interest accrued on ALZA's 7.5% zero coupon convertible subordinated debentures. The replacement of the 7.5% zero coupon convertible subordinated debentures with a commercial paper program in late 1993 reduced interest expense. As a result of the increased debt from the issuance of the 5.25% debentures, ALZA's interest expense is expected to increase during the remainder of 1994. ALZA's effective combined federal and state tax rate for the quarter and nine months ended September 30, 1994 was approximately 38% compared to 35% for 1993. This increase is primarily due to reductions in estimated available tax credits in 1994. The health care industry has continued to change rapidly as the public, government, medical practitioners and the pharmaceutical industry focus on ways to expand medical coverage while controlling the growth in health care costs. Comprehensive legislative initiatives are being considered at the state and federal level which, if enacted, could put significant additional pressures on the prices charged for pharmaceutical products. -18- Similarly, prescription drug reimbursement practices and the growth of large managed care organizations, as well as generic and therapeutic substitution (substitution of a different product for the same indication), could significantly affect ALZA's business. While ALZA believes the changing health care environment may increase the value of ALZA's drug delivery products over the long term, it is impossible to predict the impact such changes will have on ALZA in the near term. LIQUIDITY AND CAPITAL RESOURCES In recent years ALZA has expended substantial amounts on property, plant and equipment to support its expanding research and product development and manufacturing activities. A significant portion of these expenditures has involved the establishment of the Mountain View, California research and product development campus and the Vacaville, California manufacturing facility. While ALZA believes its current and planned facilities and equipment are sufficient to meet its current operating requirements, ALZA is significantly expanding its Mountain View campus and expects to continue to purchase or lease available facilities or properties to support its long- term requirements. Expenditures for additions to property, plant and equipment during the first nine months of 1994 totaled approximately $21.3 million and are expected to increase significantly for the remainder of 1994 and beyond. -19- In July 1994, ALZA completed a public offering of zero coupon convertible subordinated debentures. The debentures were issued at a price of $354.71 per $1,000 principal amount at maturity. The offering resulted in approximately $328 million in net proceeds to ALZA. Approximately $250 million of the proceeds were used to retire ALZA's outstanding commercial paper during the quarter ended September 30, 1994. The remainder will be used for general corporate purposes. The debentures, due July 2014, have a principal amount at maturity of $948.8 million. The yield to maturity of the debentures is 5.25% per annum, computed on a semi-annual bond equivalent basis, and the debentures have no periodic interest payments. Each debenture is convertible, at the option of the holder, into 12.987 shares of ALZA Common Stock. ALZA believes that its existing cash and investment balances are adequate to fund its current cash needs. In addition, should the need arise, ALZA believes it would be able to borrow additional funds or 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. -20- PART II. OTHER INFORMATION Item 1. LEGAL PROCEEDINGS In the ordinary course of business, various suits and claims are filed against ALZA. In the past, ALZA's liability claims (including product liability) have not been significant. On December 2, 1991, Ciba-Geigy Corporation ("Ciba") filed a patent infringement suit in the United States District Court for the District of New Jersey ("the Court"), against ALZA and Marion Merrell Dow, Inc. ("MMD") in connection with the Nicoderm-R- product. The action sought injunctive relief and damages, and claimed that Nicoderm infringed a patent exclusively licensed to Ciba by the University of California. Ciba's motion for a preliminary injunction against the marketing of the Nicoderm product was denied in December 1991. On October 5, 1994, the Court granted a motion for summary judgment brought by ALZA and MMD and invalidated the patent licensed to Ciba. That ruling cleared ALZA and MMD of liability for infringement of the patent. On November 1, 1994, Ciba filed a notice of appeal to the Court of Appeals of the Federal Circuit. On April 26 and April 30, 1993, securities class action lawsuits were filed against ALZA and certain of its officers and directors in the United States District Court for the Northern District of California. The lawsuits, which were consolidated into one lawsuit, claimed that ALZA issued and allowed to be -21- issued various public statements that were materially false and misleading, primarily with respect to the financial prospects of Nicoderm. On July 9, 1993, a derivative suit was filed against certain officers and all of the directors of ALZA. This lawsuit claimed that some or all of the named persons mismanaged the company and improperly obtained profits from the sale of ALZA securities. On April 18, 1994, ALZA announced that it had reached a preliminary agreement, subject to court approval, to settle these related lawsuits for $3.7 million. After taking into account the coverage by the Company's directors and officers liability insurance, this settlement will not have a material impact on ALZA's financial statements. On January 18, 1994, a suit was filed against ALZA by Cygnus Therapeutics Corporation in the United States District Court for the Northern District of California seeking a declaration of unenforceability and invalidity of an ALZA patent relating to transdermal administration of fentanyl and alleging violation of antitrust laws. ALZA filed a motion to dismiss the suit. The court granted this motion on April 22, 1994. The plaintiff then amended the complaint. ALZA filed a motion to dismiss the amended complaint. The court has deferred ruling on this motion pending completion of limited discovery of third parties on or about December 6, 1994. ALZA believes the suit to be without merit. ALZA is not involved in any legal proceedings which, in the opinion of management, either alone or in the aggregate, will -22- have a material adverse effect on ALZA's financial position or results of operations. Item 5. OTHER INFORMATION Effective September 30, 1994, Jane Shaw, PhD, President and Chief Operating Officer, resigned her employment with ALZA. Ernest Mario, PhD, Co-Chairman and Chief Executive Officer, has assumed Dr. Shaw's responsibilities. Dr. Shaw remains on ALZA's Board of Directors. Item 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: 11. Computation of weighted average common and common equivalent shares outstanding. 27. Financial Data Schedule. (b) No reports on Form 8-K were filed during the quarter. -23- 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 11, 1994 By: /s/ Dr. Ernest Mario --------------------------- Dr. Ernest Mario Co-Chairman and Chief Executive Officer Date: November 11, 1994 By: /s/ Bruce C. Cozadd --------------------------- Bruce C. Cozadd Vice President and Chief Financial Officer -24- EXHIBIT INDEX EXHIBIT 11. Statement regarding weighted average common and common equivalent shares used in computation of per share earnings. 27. Financial Data Schedule. EX-11 2 EXHIBIT 11 ALZA CORPORATION September 30, 1994 EXHIBIT 11 Statement Regarding Weighted Average Common and Common Equivalent Shares Used in Computation of Per Share Earnings (in thousands)
Primary --------------------------------------- Quarter Ended Nine Months Ended September 30, September 30, 1994 1993 1994 1993 ------ ------- ------ ------ Common stock 81,914 77,524 81,772 76,250 $15 warrants - 1,357 - 2,644 $25 warrants - - - - $65 warrants - - - - 5.25% zero coupon convertible debentures - - - - Other, principally stock options 444 512 553 683 ------ ------ ------ ------ Weighted average shares 82,358 79,393 82,325 79,577 ------ ------ ------ ------ ------ ------ ------ ------ Fully Diluted ---------------------------------------- Quarter Ended Nine Months Ended September 30, September 30, 1994 1993 1994 1993 ------- ------ ------- ------ Common stock 81,914 77,524 81,772 76,250 $15 warrants - 1,357 - 2,644 $25 warrants - - - - $65 warrants - - - - 5.25% zero coupon convertible debentures - - - - 7.5% zero coupon convertible debentures - - - - Other, principally stock options 444 512 553 683 ------- ------ ------- ------ Weighted average shares 82,358 79,393 82,325 79,577 ------- ------ ------- ------ ------- ------ ------- ------
The 5.25% zero coupon convertible subordinated debentures are considered common stock equivalents; they were antidilutive for the quarter and the nine months ended September 30, 1994. The 7.5% zero coupon convertible subordinated debentures (redeemed in November 1993) are not included in the calculation for the quarter and nine months ended September 30, 1993, because they were not considered to be common stock equivalents and these debentures were antidilutive for purposes of the fully diluted computation. The $15 warrants, to the extent not exercised by December 14, 1993, expired on that date. Fully diluted earnings per share are not presented on the face of the condensed consolidated statement of income (unaudited) since dilution is less than 3%. EX-27 3 ART. 5 FDS FOR 3RD QUARTER 10-Q
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS INCLUDED IN ITEM 1 OF FORM 10-Q DATED SEPTEMBER 30, 1994 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000,000 9-MOS DEC-31-1994 SEP-30-1994 74 257 79 0 35 474 300 66 773 47 340 301 0 0 0 773 52 204 41 134 0 0 14 69 26 43 0 0 0 43 .52 .52
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