-----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, AiYjToBJag3kzSSMrItmrQRZhSADl/4hwTrr3pdvf9JKLvVBoJiVdsISE/bqq/pE x8lV8q8S9HQpCYnHTl9B2g== 0000912057-97-017778.txt : 19970520 0000912057-97-017778.hdr.sgml : 19970520 ACCESSION NUMBER: 0000912057-97-017778 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 14 CONFORMED PERIOD OF REPORT: 19970331 FILED AS OF DATE: 19970515 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: 1934 Act SEC FILE NUMBER: 001-06247 FILM NUMBER: 97606233 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 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q /X/ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended MARCH 31, 1997 -------------- or / / Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from to ---------- ---------- Commission File Number 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 April 30, 1997: Common Stock, $.01 par value - 84,956,839 shares -1- PART I. FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS ALZA CORPORATION Condensed Consolidated Statement of Income (unaudited) (In millions, except per share amounts) Three Months Ended March 31, 1997 1996 -------- -------- Revenues: Royalties, fees and other $44.2 $37.5 Research and development 33.8 30.3 Net sales 27.5 20.7 -------- -------- Total revenues 105.5 88.5 Expenses: Research and development 35.0 31.3 Costs of products shipped 19.7 16.0 Selling, general and administrative 11.6 10.2 -------- -------- Total expenses 66.3 57.5 -------- -------- Operating income 39.2 31.0 Interest income 16.9 8.3 Interest expense 13.7 6.4 -------- -------- Net interest income 3.2 1.9 -------- -------- Income before income taxes 42.4 32.9 Provision for income taxes 16.1 12.5 -------- -------- Net income $26.3 $20.4 -------- -------- -------- -------- Net income per common and common equivalent share* $0.30 $0.24 -------- -------- -------- -------- Weighted average common and common equivalent shares 97.8 84.6 -------- -------- -------- -------- See accompanying notes. * The net income per common and common equivalent share calculation uses adjusted net income of $29.5 for the quarter ended March 31, 1997. -2- ALZA CORPORATION Condensed Consolidated Balance Sheet (unaudited) (In millions) March 31, December 31, 1997 1996 --------- --------- ASSETS Current assets: Cash and cash equivalents $ 240.3 $ 187.7 Short-term investments 133.8 199.3 Receivables, net 114.3 116.6 Inventories, at cost: Raw materials 17.3 17.7 Work in process 16.7 18.0 Finished goods 4.6 3.5 --------- --------- Total inventories 38.6 39.2 Prepaid expenses and other current assets 30.4 19.2 --------- --------- Total current assets 557.4 562.0 Property, plant and equipment 412.4 408.1 Less accumulated depreciation and amortization (105.7) (100.3) --------- --------- Net property, plant and equipment 306.7 307.8 Investments in long-term securities(1) 641.1 612.8 Other assets 134.2 131.1 --------- --------- Total assets $ 1,639.4 $ 1,613.7 --------- --------- --------- --------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 14.3 $ 28.7 Accrued income taxes 22.3 7.3 Accrued compensation 8.1 15.4 Accrued interest 11.5 7.7 Other current liabilities 8.9 8.1 --------- --------- Total current liabilities 65.1 67.2 5% convertible subordinated debentures 500.0 500.0 5 1/4% zero coupon convertible subordinated debentures 387.3 382.3 Other long-term liabilities 73.7 67.5 Stockholders' equity: Common stock and additional paid-in capital 368.3 363.0 Net unrealized losses on available-for-sale securities, net of tax effect (15.1) (0.1) Retained earnings 260.1 233.8 --------- --------- Total stockholders' equity 613.3 596.7 --------- --------- Total liabilities and stockholders' equity $ 1,639.4 $ 1,613.7 --------- --------- --------- --------- See accompanying notes. (1) The balance at December 31, 1996 was previously included in short-term investments and has been reclassified to conform with current year presentation (See Note 1). -3- ALZA CORPORATION Condensed Consolidated Statement of Cash Flows (unaudited) (In millions)
Three Months Ended March 31, 1997 1996 --------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 26.3 $ 20.4 Non-cash adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 6.7 4.0 Interest on 5 1/4% zero coupon convertible subordinated debentures 5.0 4.8 (Increase) decrease in assets: Receivables 2.2 (0.8) Inventories 0.7 (3.0) Prepaid expenses and other current assets (0.8) (6.1) Increase (decrease) in liabilities: Accounts payable (14.5) 0.1 Accrued income taxes 15.0 6.6 Accrued compensation (7.3) (1.9) Accrued interest 3.7 (2.2) Other current and long-term liabilities 1.7 (2.7) --------- -------- Total adjustments 12.4 (1.2) --------- -------- Net cash provided by operating activities 38.7 19.2 CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of available-for-sale securities (189.3) (90.4) Sales of available-for-sale securities 201.2 54.6 Maturities of available-for-sale securities - 20.1 Capital expenditures (4.4) (7.3) Increase in other assets (4.4) (10.9) --------- -------- Net cash provided by (used in) investing activities 3.1 (33.9) CASH FLOWS FROM FINANCING ACTIVITIES: Issuance of long-term debt 6.6 - Principal payments on long-term debt (1.1) - Issuances of common stock 5.3 40.2 --------- -------- Net cash provided by financing activities 10.8 40.2 --------- -------- Net increase in cash and cash equivalents 52.6 25.5 Cash and cash equivalents at beginning of period 187.7 88.0 --------- -------- Cash and cash equivalents at end of period $ 240.3 $ 113.5 --------- -------- --------- --------
See accompanying notes. -4- ALZA CORPORATION March 31, 1997 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. BASIS OF PRESENTATION The information at March 31, 1997 and for the three months ended March 31, 1997 and 1996 is unaudited, but 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 income and expense 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. LITIGATION See Part II, Item 1 of this Quarterly Report on Form 10-Q. -5- ALZA CORPORATION March 31, 1997 3. RECENTLY ISSUED ACCOUNTING STANDARD 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. Basic earnings per share is expected to be $0.01 higher than the reported primary earnings per share for the quarter ended March 31, 1997 and no change is expected for the quarter ended March 31, 1996. The impact of SFAS 128 on the calculation of fully diluted earnings per share for these quarters is not expected to be material. -6- 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, 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, risks relating to 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, and risks associated with competition from other companies. -7- FIRST QUARTER EVENTS In February, ALZA announced it had exercised its option to license from Therapeutic Discovery Corporation ("TDC") an OROS -Registered Trademark- hydromorphone product and entered into an agreement with Knoll Pharmaceutical Company (together with its affiliates, "Knoll") for the development and worldwide commercialization of this product. The OROS -Registered Trademark- hydromorphone product, which utilizes ALZA's advanced oral osmotic technology, is designed for the 24-hour management of chronic pain. Under the agreement, Knoll will fund ongoing development costs for the product and will make milestone payments to ALZA related to key development objectives. ALZA will manufacture and sell the product to Knoll. ALZA also has the right to co-promote the product in the United States and an option to co-promote the product outside the United States after a specified period. Two royalty-bearing products developed by ALZA were launched by ALZA's clients during the first quarter of 1997. Novartis Pharmaceuticals Corporation ("Novartis") launched DynaCirc CR-Registered Trademark- (isradipine) in the United States. DynaCirc CR-Registered Trademark- is a once-daily calcium channel blocker incorporating ALZA's OROS-Registered Trademark- technology. Merck & Co., Inc. ("Merck") introduced the IVOMEC SR-Registered Trademark- Bolus (ivermectin) in the United States. IVOMEC SR-Registered Trademark- is a product combining the antiparasitic agent ivermectin with ALZA's ruminal bolus technology for control of internal and external parasites in cattle. The product is marketed by Merck in a number of countries outside of the United States. During the first quarter of 1997, ALZA filed an Investigational New Drug application with the U.S. Food and Drug Administration ("FDA") for a DUROS-TM- leuprolide -8- human implant product designed for the palliative treatment of prostate cancer for up to 12 months, with discontinuation of treatment possible at any time. Phase I/II clinical trials of the product, which is under development with TDC, began during the first quarter of 1997. Also during the first quarter of 1997, a New Drug Application for a second generation transdermal testosterone product to follow Testoderm-Registered Trademark- and Testoderm-Registered Trademark- with Adhesive was filed with the FDA following its submission in December 1996. This product, under development with TDC, is a single patch that can be worn on the arm or the torso and is designed to provide convenient physiologic testosterone replacement therapy. During the quarter, ALZA purchased two million shares of common stock (9.7% of total outstanding shares) of Alkermes Inc. ("Alkermes"), a drug delivery company. Separately, ALZA and Alkermes agreed in principle to collaborate on a program for the development and commercialization of a product utilizing Alkermes' Prolease-Registered Trademark- or Medisorb-Registered Trademark- drug delivery technology. ALZA also purchased 1,178,882 shares of common stock (4.9% of total outstanding shares) of U.S. Bioscience, Inc. during the quarter. RESULTS OF OPERATIONS ALZA's net income was $26.3 million or $0.30 per share for the quarter ended March 31, 1997, compared to net income of $20.4 million or $0.24 per share for the quarter ended March 31, 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 -9- directly within ALZA's control. The introduction of competitive products can also have an adverse effect on royalties and fees. In addition, with increasing pressures for cost containment in the U.S. health care system, it can be expected that pharmaceutical product prices, including those of products developed by ALZA, will not increase as quickly as they have in the past, and could decrease. 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 more products (including products developed with TDC); however, there can be no assurance that these expanded activities will be successful, due to factors such as the risks of product development and clinical activities, the length of the regulatory approval process, uncertainties surrounding the acceptance of products by the intended markets, the marketing of competitive products, 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 of currently marketed products. Royalties, fees and other revenue for the quarter ended March 31, 1997 increased to $44.2 million, compared to $37.5 million for the same period in 1996. Royalties, fees and other revenue for the quarter ended March 31, 1997 include an upfront payment from Knoll in connection with an agreement for the continued development and worldwide commercialization of the OROS-Registered Trademark- hydromorphone product. The increase in royalties, fees and other revenue also resulted from increased -10- sales of NicoDerm-Registered Trademark- CQ-TM- (nicotine), the over-the-counter version of Nicoderm-Registered Trademark-, by SmithKline Beecham ("SB"), Duragesic-Registered Trademark- by Janssen Pharmaceutica, Inc. ("Janssen") and Glucotrol XL-Registered Trademark- by Pfizer Inc. ("Pfizer"). The increase in royalties was offset in part by decreased royalties on sales of Transderm-Nitro-Registered Trademark- by Novartis and Procardia XL-Registered Trademark- by Pfizer. Sales of Procardia XL-Registered Trademark-, as reported by Pfizer, decreased 22% during the three months ended March 31, 1997 compared to the same period in 1996. Royalties from Procardia XL-Registered Trademark- accounted for approximately 35% of ALZA's royalties and fees for the quarter ended March 31, 1997. Research and development revenue of $33.8 million for the quarter ended March 31, 1997 represents an increase of 12% over the same period in 1996, due to product development activities conducted under agreements with client companies other than TDC. Research and development revenue from TDC was $23.4 million and $22.9 million for the quarters ended March 31, 1997 and March 31, 1996, respectively. Research and development expenses for the quarter ended March 31, 1997 increased 12% to $35.0 million as compared with the corresponding quarter in 1996, reflecting the increased activities described above. If expenditures on product development by TDC continue at approximately current levels, it is expected that all TDC funds available for product development will be exhausted during the third quarter of 1997, and product development funding by TDC will then cease. Several factors could impact the timing of TDC exhausting its funds, including the acceleration or deceleration of product development and/or clinical activities, product development or clinical study results, the licensing of TDC products by ALZA, the issuance of patents to third parties, changes in the competitive commercial environment or other matters. -11- Once TDC has expended all of its funds available for product development, ALZA will be required to determine whether or not to exercise its option, exercisable at ALZA's sole discretion, to purchase, in accordance with a predetermined formula set forth in TDC's Restated Certificate of Incorporation, all (but not less than all) of the outstanding shares of TDC Class A common stock (the "Purchase Option"). The Purchase Option will expire, if not exercised, on the 60th day after TDC files a Form 10-K or Form 10-Q with the Securities and Exchange Commission containing a balance sheet showing less than an aggregate of $5 million in cash and cash equivalents, short-term and long-term investments. Under the formula, the Purchase Option exercise price is expected to be $100 million. The purchase price may be paid in cash, in ALZA common stock, or in any combination of the two, at the option of ALZA. If ALZA were to exercise the Purchase Option, ALZA would incur a one-time charge due to the acquisition of in-process technology and might realize certain tax benefits. In addition, ALZA would need to fund the continued development expenses for the TDC products. If ALZA were to decide not to exercise the Purchase Option, ALZA would have the right, for an additional 90 days, to license any or all TDC products, on a product-by-product and country-by-country basis. ALZA would make payments to TDC, with respect to any licensed products, for countries as to which the license option is exercised, equal to a specified percentage of net sales of the licensed products by ALZA in those countries and a specified portion of any up-front fees and sublicensing revenues received by ALZA from third parties marketing the licensed products in those countries under arrangements with ALZA. If ALZA were to exercise the Purchase Option, or to license some or all of the TDC products for commercialization in some or all countries, ALZA would need to fund any additional product development necessary to complete the development of each of the products. In addition, ALZA has agreed to fund certain TDC product development activities, already underway, which will not be completed before TDC's funds are exhausted. Such funding by ALZA would begin, on a product-by-product basis, when TDC no longer has funds available to pay for such activities. Such funding obligation will continue only until the exercise or the expiration of the Purchase Option and ALZA's option to license each TDC product, on a product-by-product and country-by-country basis. However, this funding by ALZA is subject to ALZA's determination of the continued technical and commercial feasibility of the product and the compatibility of the product with ALZA's product portfolio and business objectives. If ALZA were to use its own funds to cover the continued development of the TDC products, these product development activities would result in research and development expenses without the corresponding research and development revenues previously provided by TDC. ALZA could also choose to fund the expenses by partnering with third parties for the continued development and -12- commercialization of some or all of the products, either on a worldwide basis or in specified markets. Alternatively, ALZA could determine to continue product development through other financing arrangements. Net sales of $27.5 million for the quarter ended March 31, 1997 increased 33% compared to the corresponding period in 1996, primarily due to increased contract manufacturing of NicoDerm-Registered Trademark- CQ-TM-. Net sales of Ethyol-Registered Trademark- (amifostine) for the first quarter of 1997 were $3.5 million compared to $2.5 million for the first quarter of 1996; Ethyol-Registered Trademark- sales in the first quarter of 1996 reflected shipments of launch quantities prior to introduction of the product in April 1996. The timing and quantities of orders for products marketed by client companies are not within ALZA's control. Net sales, therefore, can be expected to fluctuate from period to period, sometimes very 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 prior to their introduction. ALZA's gross margin (net sales less costs of products shipped) as a percent of net sales increased to 28% for the quarter ended March 31, 1997 compared to 23% for the quarter ended March 31, 1996. The increase was largely due to proportionately greater shipments of higher margin products. In addition, because many of ALZA's manufacturing costs are substantially fixed, increased shipments in any quarter can generally be expected to result in a higher gross margin for the quarter. 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 increased utilization of capacity, greater operating efficiencies and a proportionate increase in the sales of ALZA-marketed products. -13- Selling, general and administrative expenses of $11.6 million for the quarter ended March 31, 1997 increased 13% compared to the corresponding period in 1996. The increase was due to higher sales expenses by ALZA Pharmaceuticals, primarily as a result of the expansion of ALZA's sales force in support of Ethyol-Registered Trademark-, and increased overall general and administrative expenses in support of corporate activities. Interest income increased for the quarter ended March 31, 1997 to $16.9 million, compared to $8.3 million during the same period in 1996, primarily due to higher average invested cash balances following ALZA's sale of $500 million of 5% convertible subordinated debentures due 2006 (the "5% Debentures") in April 1996, and also due to gains realized on sales of securities. Interest expense increased to $13.7 million for the quarter ended March 31, 1997, compared to $6.4 million during the same period in 1996, reflecting the interest expense associated with ALZA's 5% Debentures and the higher outstanding balance on ALZA's 5 1/4% zero coupon convertible subordinated debentures due 2014 (the "5 1/4% Debentures"). ALZA's effective combined federal and state income tax rate for the year ended 1996 and for the quarter ended March 31, 1997 was 38%. The number of weighted average common and common equivalent shares for the quarter ended March 31, 1997 includes 12.3 million shares issuable upon conversion of the 5 1/4% Debentures. The 5 1/4% Debentures are considered common stock equivalents, but were excluded from the earnings per share calculation for the quarter ended March 31, 1996 as their inclusion would have had an antidilutive effect. Earnings per share for the quarter ended March 31, 1997 are calculated by adding to net income the after-tax interest incurred on the 5 1/4% Debentures for the period ($3.2 million) and dividing by the number of weighted average common and common equivalent shares. -14- LIQUIDITY AND CAPITAL RESOURCES ALZA invested $4.4 million during the first three months of 1997 in additions to property, plant and equipment to support its expanding research, development and manufacturing activities. 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. -15- PART II. OTHER INFORMATION Item 1. LEGAL PROCEEDINGS Product liability suits have been filed against Janssen and ALZA from time to time 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. Historically, the cost of resolution of liability (including product liability) claims has not been significant, and ALZA is not aware of any asserted or unasserted claims pending against it, including the suits mentioned above, the resolution of which 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: 10.11 Agreement and Amendment No. 1 to License Agreement dated February 10, 1997 between ALZA Corporation and Therapeutic Discovery Corporation 11 Statement Regarding Computation of Per Share Earnings 27.1 Financial Data Schedule for the three months ended March 31, 1997 27.2 Restated Financial Data Schedule for the year ended December 31, 1996 27.3 Restated Financial Data Schedule for the nine months ended September 30, 1996 27.4 Restated Financial Data Schedule for the six months ended June 30, 1996 27.5 Restated Financial Data Schedule for the three months ended March 31, 1996 -16- 27.6 Restated Financial Data Schedule for the year ended December 31, 1995 27.7 Restated Financial Data Schedule for the nine months ended September 30, 1995 27.8 Restated Financial Data Schedule for the six months ended June 30, 1995 27.9 Restated Financial Data Schedule for the three months ended March 31, 1995 27.10 Restated Financial Data Schedule for the year ended December 31, 1994 27.11 Restated Financial Data Schedule for the nine months ended September 30, 1994 (b) No reports on Form 8-K were filed during the quarter -17- 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: May 15, 1997 By: /s/ E. Mario ----------------------------- Dr. Ernest Mario Chief Executive Officer Date: May 15, 1997 By: /s/ Bruce C. Cozadd ------------------------------ Bruce C. Cozadd Senior Vice President and Chief Financial Officer -18- EXHIBIT INDEX EXHIBIT 10.11 Agreement and Amendment No. 1 to License Agreement dated February 10, 1997 between ALZA Corporation and Therapeutic Discovery Corporation 11 Statement Regarding Computation of Per Share Earnings 27.1 Financial Data Schedule for the three months ended March 31, 1997 27.2 Restated Financial Data Schedule for the year ended December 31, 1996 27.3 Restated Financial Data Schedule for the nine months ended September 30, 1996 27.4 Restated Financial Data Schedule for the six months ended June 30, 1996 27.5 Restated Financial Data Schedule for the three months ended March 31, 1996 27.6 Restated Financial Data Schedule for the year ended December 31, 1995 27.7 Restated Financial Data Schedule for the nine months ended September 30, 1995 27.8 Restated Financial Data Schedule for the six months ended June 30, 1995 27.9 Restated Financial Data Schedule for the three months ended March 31, 1995 27.10 Restated Financial Data Schedule for the year ended December 31, 1994 27.11 Restated Financial Data Schedule for the nine months ended September 30, 1994 -19- EX-10.11 2 EXHIBIT 10.11 AGREEMENT AND AMENDMENT NO. 1 TO LICENSE AGREEMENT DATED FEBRUARY 10, 1997 This Agreement and Amendment No. 1 to License Agreement dated as of February 10, 1997 (the "Agreement") is made effective as of the 10th day of February, 1997 by and between ALZA Corporation ("ALZA") and Therapeutic Discovery Corporation ("TDC"). RECITALS WHEREAS, ALZA and TDC have entered into that certain Development Agreement dated as of March 10, 1993 (the "Development Contract") pursuant to which ALZA performs research and development activities on behalf of TDC directed toward the development of pharmaceutical products; and WHEREAS, under the terms of the Development Contract, ALZA has performed research and development activities on behalf of TDC directed toward the development of a product, referred to by the parties as "TDC-4", for the delivery of hydromorphone by means of ALZA's OROS-Registered Trademark- technology (the "Licensed Product"); and WHEREAS, ALZA and TDC have entered into that certain License Option Agreement dated as of March 10, 1993 (the "Option Agreement") pursuant to which TDC granted ALZA an option to license any product accepted by TDC for development under the Development Contract on a product-by-product and country-by-country basis; and WHEREAS, ALZA exercised its option to license the Licensed Product on a worldwide basis effective as of February 10, 1997 and entered into a License Agreement dated as of February 10, 1997 (the "Product License Agreement"), in the form required under the Option Agreement, to memorialize ALZA's license of the Licensed Product; and WHEREAS, ALZA has entered into an agreement with Knoll Pharmaceutical Company and its parent Knoll AG (collectively, "Knoll") for the continued development and worldwide commercialization of the Licensed Product; and WHEREAS, ALZA and TDC desire to amend the Product License Agreement to reflect the agreement of the parties with respect to certain payments to be made by ALZA to TDC under the Product License Agreement and to memorialize certain other arrangements between the parties. NOW, THEREFORE, in consideration of the foregoing and the agreements contained herein, ALZA and TDC hereby agree as follows: 1. DEFINITIONS. Capitalized terms used but not otherwise defined herein shall have the meanings ascribed to them in the Product License Agreement. 2. AMENDMENTS TO SECTION 3.1 OF THE PRODUCT LICENSE AGREEMENT. The first sentence of Section 3.1 of the Product License Agreement is hereby deleted in its entirety and the following substituted therefor: 3.1 PAYMENTS. In consideration of the grant of the license, ALZA shall pay TDC royalties with respect to the Licensed Product as follows: (a) up to a maximum of 5% of Net Sales of the Licensed Product in the Territory determined as follows: 2% of such Net Sales, plus an additional 0.1% of such Net Sales for each full one million dollars of Development Costs of the Licensed Product paid by TDC; plus (b) up to a maximum of 50% of Sublicensing Revenues in respect of sales of the Licensed Product in the Territory determined as follows: 20% of such Sublicensing Revenues, plus an additional 1% of such Sublicensing Revenues for each full one million dollars of Development Costs of the Licensed Product paid by TDC. 3. EXCLUSIONS FROM SPECIAL ROYALTY PAYMENTS AND SUBLICENSING REVENUES. ALZA and TDC hereby agree that, for purposes of the Product License Agreement, the payments due to ALZA from Knoll in the first quarter of 1997 with respect to the Licensed Product shall not be included within the definition of Special Royalty Payments or Sublicensing Revenues with respect to the Licensed Product. 4. LICENSED PRODUCT CLINICAL SUPPLIES. The parties acknowledge that substantial clinical supplies and other materials have been acquired by ALZA in connection with the development of the Licensed Product and paid for by TDC under the Development Contract. Certain of those supplies and other materials are expected to be utilized by Knoll in the ongoing development of the Licensed Product. TDC hereby grants to ALZA, and ALZA hereby accepts, the right to use (i) all clinical supplies of the Licensed Product which have been manufactured as of the date hereof under the Development Contract, and (ii) all materials, goods and services (including supplies of hydromorphone, placebos and comparator drugs to be used in clinical studies) which have been purchased or manufactured for use under the development program for the Licensed Product pursuant to the Development Contract (collectively, the "Supplies"). TDC grants ALZA the right to use, and ALZA accepts, the Supplies on an "AS-IS" and "WHERE-IS" basis. TDC EXPRESSLY DISCLAIMS ANY AND ALL WARRANTIES WITH RESPECT TO THE SUPPLIES, WHETHER EXPRESS OR IMPLIED, INCLUDING ANY WARRANTY OF TITLE, MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. 5. MISCELLANEOUS. Except as otherwise expressly provided herein, the terms of the Product License Agreement shall remain in full force and effect. This Agreement may not be amended except by a writing signed by both parties. This Agreement shall be governed by the laws of the State of California as applied to residents of that state entering into contracts to be performed in that state. The headings set forth at the beginning of the various sections of this Agreement are for reference and convenience and shall not affect the meanings of the provisions of this Agreement. IN WITNESS WHEREOF, ALZA and TDC have caused this Agreement to be executed as of the date first set forth above by their duly authorized representatives. ALZA Corporation Therapeutic Discovery Corporation By: /s/ Bruce C. Cozadd By: /s/ Gary L. Neil ----------------------------- --------------------------------------- Bruce C. Cozadd Gary L. Neil Senior Vice President and President and Chief Executive Officer Chief Financial Officer EX-11 3 EXHIBIT 11 EXHIBIT 11 Statement Regarding Computation of Per Share Earnings (In millions, except per share amounts) PRIMARY ------------------------ Quarter Ended March 31, 1997 1996 --------- --------- Common stock 84.8 83.6 Common stock options 0.7 1.0 $25 warrants - - $65 warrants - - 5 1/4% zero coupon convertible subordinated debentures 12.3 - --------- --------- Weighted average common and dilutive common equivalent shares 97.8 84.6 --------- --------- --------- --------- Net income available to common stockholders $ 26.3 $ 20.4 Add after-tax interest on 5 1/4% zero coupon convertible subordinated debentures 3.2 - --------- --------- Adjusted net income $ 29.5 $ 20.4 --------- --------- --------- --------- Net income per common and common equivalent share $ 0.30 $ 0.24 --------- --------- --------- --------- Primary earnings per share is based on weighted average shares of common stock outstanding plus dilutive common equivalent shares. The 5 1/4% zero coupon convertible subordinated debentures are considered common stock equivalents but were not included in the per share calculation for the quarter ended March 31, 1996, as their inclusion would have had an antidilutive effect. FULLY DILUTED -------------------- Quarter Ended March 31, 1997 1996 ---------- -------- Common stock 84.8 83.6 Common stock options 0.7 1.1 $25 warrants - - $65 warrants - - 5 1/4% zero coupon convertible subordinated debentures 12.3 - 5% convertible subordinated debentures - - ---------- -------- Weighted average common and dilutive common equivalent shares 97.8 84.7 ---------- -------- ---------- -------- Net income available to common stockholders $ 26.3 $ 20.4 Add after-tax interest on 5 1/4% zero coupon convertible subordinated debentures 3.2 - ---------- -------- Adjusted net income $ 29.5 $ 20.4 ---------- -------- ---------- -------- Net income per common and common equivalent share $ 0.30 $ 0.24 ---------- -------- ---------- -------- Fully diluted earnings per share is based on weighted average shares of common stock outstanding plus dilutive common equivalent shares and dilutive convertible securities. The 5 1/4% zero coupon convertible subordinated debentures are considered common stock equivalents but were not included in the per share calculation for the quarter ended March 31, 1996 as their inclusion would have had an antidilutive effect. The 5% convertible subordinated debentures are not considered common stock equivalents and were not included in the fully diluted earnings per share calculation as their inclusion would have had an antidilutive effect. Fully diluted earnings per share is not presented on the face of the Consolidated Statement of Income since dilution is less than 3% for each period presented. EX-27.1 4 ART.5 FDS FOR 1ST QUARTER 10-Q
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS INCLUDED IN ITEM 1 OF FORM 10-Q DATED MARCH 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000,000 3-MOS DEC-31-1997 MAR-31-1997 240 134 114 0 39 557 412 106 1,639 65 887 0 0 1 612 1,639 28 106 20 55 0 0 14 42 16 26 0 0 0 26 0.30 0.30
EX-27.2 5 ART.5 RESTATED FDS FOR 1996 10-K
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS INCLUDED IN PART II, ITEM 8 OF FORM 10-K DATED DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000,000 12-MOS DEC-31-1996 DEC-31-1996 188 199 117 0 39 562 408 100 1,614 67 882 0 0 1 596 1,614 109 411 85 227 0 0 43 149 57 92 0 0 0 92 1.08 1.08
EX-27.3 6 ART.5 RESTATED FDS FOR 3RD QUARTER 1996 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, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000,000 9-MOS DEC-31-1996 SEP-30-1996 340 107 120 0 36 628 392 95 1,566 65 877 0 0 1 565 1,566 84 302 67 168 0 0 30 108 41 67 0 0 0 67 .78 .78
EX-27.4 7 ART.5 RESTATED FDS FOR 2ND QUARTER 1996 10-Q
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS INCLUDED IN ITEM 1 OF FORM 10-Q DATED JUNE 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000,000 6-MOS DEC-31-1996 JUN-30-1996 499 42 130 0 36 733 380 91 1,533 60 873 0 0 1 542 1,533 54 204 46 115 0 0 17 70 27 44 0 0 0 44 .51 .51
EX-27.5 8 ART.5 RESTATED FDS FOR 1ST QUARTER 1996 10-Q
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS INCLUDED IN ITEM 1 OF FORM 10-Q DATED MARCH 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000,000 3-MOS DEC-31-1996 MAR-31-1996 114 83 109 0 38 367 367 86 1,000 65 368 0 0 1 512 1,000 21 88 16 47 0 0 6 33 13 20 0 0 0 20 .24 .24
EX-27.6 9 ART.5 RESTATED FDS FOR 1995 10-K
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS INCLUDED IN PART II, ITEM 8 OF FORM 10-K DATED DECEMBER 31, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000,000 12-MOS DEC-31-1995 DEC-31-1995 88 94 108 0 34 341 359 83 937 68 363 0 0 1 454 937 77 325 65 169 0 0 24 117 44 72 0 0 0 72 .88 .88
EX-27.7 10 ART.5 RESTATED FDS FOR 3RD QUARTER 1995 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, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000,000 9-MOS DEC-31-1995 SEP-30-1995 79 20 100 0 34 257 341 78 894 55 358 0 0 1 431 894 54 230 49 164 0 0 18 85 32 53 0 0 0 53 .64 .64
EX-27.8 11 ART.5 RESTATED FDS FOR 2ND QUARTER 1995 10-Q
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS INCLUDED IN ITEM 1 OF FORM 10-Q DATED JUNE 30, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000,000 6-MOS DEC-31-1995 JUN-30-1995 77 81 95 0 35 315 332 76 862 52 353 0 0 1 410 862 38 151 33 108 0 0 11 56 21 34 0 0 0 34 .42 .42
EX-27.9 12 ART.5 RESTATED FDS FOR 1ST QUARTER 1995 10-Q
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS INCLUDED IN ITEM 1 OF FORM 10-Q DATED MARCH 31, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000,000 3-MOS DEC-31-1995 MAR-31-1995 86 82 92 0 33 321 323 73 829 51 349 0 0 1 384 829 19 74 16 53 0 0 6 27 10 17 0 0 0 17 .21 .21
EX-27.10 13 ART.5 RESTATED FDS FOR 1994 10-K
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS INCLUDED IN PART II, ITEM 8 OF FORM 10-K DATED DECEMBER 31, 1994 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000,000 12-MOS DEC-31-1994 DEC-31-1994 89 29 85 0 33 265 316 70 806 56 345 0 0 1 363 806 69 261 57 185 0 0 19 93 35 58 0 0 0 58 .71 .71
EX-27.11 14 ART.5 RESTATED FDS FOR 3RD QUARTER 1994 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 FINACIAL STATEMENTS. 1,000,000 9-MOS DEC-31-1994 SEP-30-1994 74 58 79 0 35 275 300 66 773 47 340 0 0 1 348 773 52 191 41 134 0 0 14 69 26 43 0 0 0 43 .52 .52
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