-----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, oZyHzvtI+iaKAb/i0R4G8xMgKLuL4HM0mQuk5BGSCzx05Zio2q3yVUYRxB9ZgplW J+tjhiE+1AjI4UqqMUXMLA== 0000912057-95-003713.txt : 19950516 0000912057-95-003713.hdr.sgml : 19950516 ACCESSION NUMBER: 0000912057-95-003713 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19950331 FILED AS OF DATE: 19950515 SROS: AMEX 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: 95538513 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, 1995 -------------- 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 28, 1995: Common Stock, $.01 par value - 82,106,188 shares -1- PART I. FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS ALZA CORPORATION Condensed Consolidated Statement of Income (unaudited) (In thousands, except per share data)
Three Months Ended March 31, 1995 1994 --------- --------- REVENUES: Royalties and fees $33,962 $32,849 Research and development 21,700 14,183 Net sales 18,826 17,893 Interest and other 5,752 3,240 ------- ------- Total revenues 80,240 68,165 COSTS AND EXPENSES: Research and development 22,242 16,899 Costs of products shipped 16,422 13,842 General, administrative and marketing 8,502 8,110 Interest and other 5,595 3,712 ------- ------- Total costs and expenses 52,761 42,563 ------- ------- Income before income taxes 27,479 25,602 Provision for income taxes 10,442 9,985 ------- ------- Net income $17,037 $15,617 ------- ------- ------- ------- Net income per common and common equivalent share $ .21 $ .19 ------- ------- ------- ------- Weighted average common and common equivalent shares 82,389 82,304 ------- ------- ------- -------
See accompanying notes. -2- ALZA CORPORATION Condensed Consolidated Balance Sheet (unaudited) (In thousands)
March 31, December 31, 1995 1994 -------- ------------ ASSETS Current assets: Cash and cash equivalents $ 85,755 $ 88,844 Short-term investments 270,843 256,084 Receivables, net 91,748 84,879 Inventories, at cost: Raw materials 16,379 18,264 Work in process 12,504 10,175 Finished goods 4,571 4,976 -------- -------- Total inventories 33,454 33,415 Prepaid expenses and other current assets 27,925 29,211 -------- -------- Total current assets 509,725 492,433 Property, plant and equipment 323,031 315,688 Less accumulated depreciation and amortization (72,672) (70,238) -------- -------- Net property, plant and equipment 250,359 245,450 Other assets 68,512 68,369 -------- -------- Total assets $828,596 $806,252 -------- -------- -------- -------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 9,925 $ 20,006 Accrued income taxes 9,720 1,418 Accrued compensation 7,455 10,099 Other current liabilities 23,689 24,465 -------- -------- Total current liabilities 50,789 55,988 5 1/4% zero coupon convertible subordinated debentures 348,900 344,593 Deferred income taxes 20,361 18,513 Other long-term liabilities 23,450 22,679 Stockholders' equity: Common stock and additional paid-in capital 303,622 302,967 Unrealized losses on available-for-sale securities, net of tax effect (4,546) (7,471) Retained earnings 86,020 68,983 -------- -------- Total stockholders' equity 385,096 364,479 -------- -------- Total liabilities and stockholders' equity $828,596 $806,252 -------- -------- -------- --------
See accompanying notes. -3- ALZA CORPORATION Condensed Consolidated Statement of Cash Flows (unaudited) (In thousands)
Three Months Ended March 31, 1995 1994 ----------- ---------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 17,037 $ 15,617 Non-cash adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 3,836 2,699 Interest on 5 1/4% zero coupon convertible subordinated debentures 4,307 - Deferred income taxes 1,848 2,234 (Increase) decrease in assets: Receivables (6,869) (13,857) Inventories (39) (4,161) Prepaid expenses and other current assets (750) 842 Increase (decrease) in liabilities: Accounts payable (10,081) (1,525) Accrued income taxes 8,302 5,025 Accrued compensation (2,644) (1,454) Other current and long-term liabilities (5) 2,292 -------- -------- Total adjustments (2,095) (7,905) -------- -------- Net cash provided by operating activities 14,942 7,712 CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (8,624) (4,827) Purchases of available-for-sale securities (23,111) (74,153) Sales of available-for-sale securities 13,313 41,714 Maturities of available-for-sale securities - 36,194 Increase in cash surrender value-life insurance and prepaid premiums (1,051) (241) Decrease in other assets 787 1,689 -------- -------- Net cash provided by (used in) investing activities (18,686) 376 CASH FLOWS FROM FINANCING ACTIVITIES: Maturities of short-term debt - (150) Principal payments on long-term debt - (7) Issuances of common stock 655 821 -------- -------- Net cash provided by financing activities 655 664 -------- -------- Net increase (decrease) in cash and cash equivalents (3,089) 8,752 Cash and cash equivalents at beginning of period 88,844 53,683 -------- -------- Cash and cash equivalents at end of period $ 85,755 $ 62,435 -------- -------- -------- --------
See accompanying notes. -4- ALZA CORPORATION March 31, 1995 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. BASIS OF PRESENTATION The information at March 31, 1995 and for the three months ended March 31, 1995 and 1994 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, 1994, included in ALZA's 1994 Annual Report to Stockholders. 2. SHORT-TERM INVESTMENTS ALZA has classified its entire investment portfolio, including cash equivalents of $90.4 million at March 31, 1995, as available-for-sale. 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. Investments in the available-for-sale category are carried at fair value with unrealized gains and losses recorded as a separate component of stockholders' equity. At March 31, 1995, unrealized losses on available-for-sale securities were $4.5 million, net of a $3.2 million tax effect. -5- ALZA CORPORATION March 31, 1995 The following is a summary of ALZA's investment portfolio at March 31, 1995. Gross unrealized gains were immaterial at March 31, 1995 and, as a result, are not shown separately.
Net Estimated Unrealized Fair (In thousands) Cost Losses Value -------- ---------- --------- U.S. Treasury securities and obligations of U.S. government agencies $178,595 $ (4,902) $173,693 Collateralized mortgage obligations and asset backed securities 41,663 (959) 40,704 Corporate securities 148,739 (1,850) 146,889 -------- -------- -------- $368,997 $ (7,711) $361,286 -------- -------- -------- -------- -------- --------
The amortized cost and estimated fair value of debt and marketable equity securities at March 31, 1995, 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.
Estimated Fair (In thousands) Cost Value ---------- --------- Due in one year or less $137,902 $137,799 Due after one year through four years 95,889 94,168 Due after four years through eight years 135,206 129,319 -------- -------- $368,997 $361,286 -------- -------- -------- --------
3. LITIGATION See Part II, Item 1 of this Quarterly Report on Form 10-Q for a description of legal proceedings. -6- ALZA CORPORATION March 31, 1995 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ALZA Corporation ("ALZA" or the "Company") develops, primarily under joint development and commercialization agreements with client companies, 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. Therapeutic Discovery Corporation ("TDC"), which commenced operations in 1993, was formed by ALZA for the purpose of selecting and developing new human pharmaceutical products combining ALZA's proprietary drug delivery technologies with various drug compounds, and commercializing such products, most likely through licensing to ALZA. ALZA and TDC currently have more than 20 products in the development pipeline, including several in early clinical evaluation. Additional product candidates are under consideration. ALZA markets certain products it has developed and promotes two products under co-promotion arrangements with client companies. ALZA manufactures all or a portion of certain clients' requirements for products developed by ALZA, and also manufactures products marketed by ALZA. RESULTS OF OPERATIONS ALZA's net income was $17.0 million or $.21 per common share for the quarter ended March 31, 1995, compared to net income of $15.6 million or $.19 per common share for the quarter ended March 31, 1994. -7- ALZA CORPORATION March 31, 1995 ALZA's net income currently 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 will 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. 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 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. Health care cost containment measures will also affect products marketed by ALZA. Royalties and fees in the first quarter of 1995 increased to $34.0 million, compared to $32.8 million for the first quarter of 1994, primarily due to royalties on sales by Bayer AG of Adalat CR-Registered Trademark- (which is marketed by Pfizer Inc in the United States as Procardia XL-Registered Trademark-). Royalties and fees for the current quarter were reduced by more than $2 million to reflect additions to a reserve for a potential adjustment in royalty revenue on U.S. sales of Procardia XL-Registered Trademark- due to a U.S. patent issued to Bayer AG. Until a further determination is made regarding this matter, ALZA intends to maintain a reserve sufficient to cover the maximum possible reduction in Procardia XL-Registered Trademark- royalties. Royalties from Procardia XL-Registered Trademark- -8- ALZA CORPORATION March 31, 1995 accounted for approximately 50% of ALZA's royalties for the quarter ended March 31, 1995, after the reserve discussed above, and 60% of ALZA's royalties for the quarter ended March 31, 1994. ALZA expects that, in the near term, net income will continue to result primarily from royalty revenue on sales of currently marketed products and additional products recently approved or now awaiting approval by the FDA and other regulatory agencies. Research and development revenue of $21.7 million for the quarter ended March 31, 1995 increased 53% from the same period in 1994 due to increased product development activities undertaken on behalf of TDC. Research and development revenue from TDC was $14.1 million and $5.3 million for the quarters ended March 31, 1995 and March 31, 1994, respectively. ALZA and TDC are parties to a development agreement pursuant to which ALZA conducts product development activities on behalf of TDC. ALZA has granted to TDC a royalty-free, perpetual license to use ALZA's proprietary drug delivery technologies to develop and commercialize specified TDC products. Because products in early stages of development generally require lower levels of expenditures, ALZA's research and development revenue from TDC for any product can be expected to be lower during the early stages of development. Research and development expenses for the quarter ended March 31, 1995 increased approximately 32% from the 1994 level, primarily due to increased product development activities on behalf of TDC. As additional products are accepted by TDC into its development pipeline and as products enter later stages of development, ALZA expects its total research and development expenses to increase. -9- ALZA CORPORATION March 31, 1995 Net sales of $18.8 million for the quarter ended March 31, 1995 increased 5% from the same period in 1994, due primarily to increased contract manufacturing activities, offset in part by decreased shipments of Testoderm-Registered Trademark-, which was launched during 1994. Costs of products shipped increased 19% for the current quarter compared to the same period in 1994. Costs of products shipped increased at a greater rate than net sales due in part to proportionately higher shipments of lower margin products during the quarter. ALZA's Vacaville manufacturing facility provides substantial manufacturing capacity for ALZA-developed products. Because of the nature of the substantially fixed costs at this facility, costs of products shipped as a percent of net sales may vary significantly from period to period due to the utilization of the facility and the mix of products manufactured. ALZA expects costs of products shipped, as a percent of net sales, to decline over the longer term through increased utilization of capacity, greater operating efficiencies and increased production of ALZA-marketed products. General, administrative and marketing expenses of $8.5 million for the quarter ended March 31, 1995 increased 5% from the same period in 1994, due primarily to sales and marketing activities. ALZA expects its general, administrative and marketing expenses to increase slightly during the remainder of 1995 as compared to 1994. Interest and other revenue, which consists primarily of interest income, increased from $3.2 million for the quarter ended March 31, 1994 to $5.8 million for the quarter ended March 31, 1995, due to higher invested cash balances and higher interest rates. Interest expense for the quarter ended March 31, 1995 increased 51% from the same period in 1994, due to a higher amount of outstanding debt and a higher interest rate on such debt. During the first quarter of 1994, interest expense consisted primarily of interest -10- ALZA CORPORATION March 31, 1995 expense on ALZA's $250 million commercial paper program. In mid-1994 ALZA replaced its commercial paper program with approximately $337 million of 5 1/4% zero coupon convertible subordinated debentures. ALZA's effective combined federal and state tax rate for the year ended 1994 and the quarter ended March 31, 1995 was 38%. LIQUIDITY AND CAPITAL RESOURCES ALZA invested $8.6 million during the first quarter of 1995 in additions to property, plant and equipment to support its research and development and manufacturing activities. While ALZA believes its current facilities and equipment are sufficient to meet its current operating requirements, ALZA will continue to expand its facilities and equipment to support its long-term requirements. ALZA believes that its existing cash balances and investments 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 in the marketplace. 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 development and support for marketing and sales. -11- ALZA CORPORATION March 31, 1995 PART II. OTHER INFORMATION Item 1. LEGAL PROCEEDINGS In December 1991, a patent infringement suit was filed by Ciba-Geigy ("Ciba") against Marion Merrell Dow Inc. ("MMD") and ALZA in connection with the commercialization of Nicoderm-Registered Trademark-. In October 1994, the Court granted a motion for summary judgment brought by ALZA and MMD, ruling the patent invalid. That ruling cleared ALZA and MMD of liability for infringement of the patent. In November 1994, an appeal was filed by Ciba. During January 1995, ALZA and MMD filed a suit against Ciba and LTS Lohmann Therapy Systems Corporation for infringement of two U.S. patents issued in 1994 to ALZA relating to the transdermal administration of nicotine. During January 1994, a suit was filed against ALZA by Cygnus Therapeutic Systems seeking a declaration of unenforceability and invalidity of an ALZA patent relating to the transdermal administration of fentanyl and alleging violation of antitrust laws. In April 1995, the Court granted ALZA's motion to dismiss the lawsuit. During 1994, several product liability suits were filed against Janssen Pharmaceutica, Inc. ("Janssen") and ALZA relating to the Duragesic-Registered Trademark- product. Janssen is managing the defense of these suits in consultation with ALZA under an agreement between the parties. Historically, the cost of resolution of ALZA's 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 the Company. -12- ALZA CORPORATION March 31, 1995 Item 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: 3.1 Restated Certificate of Incorporation of ALZA Corporation filed with the Delaware Secretary of State on February 14, 1994(1) 3.2 Composite By-laws of ALZA Corporation as restated on February 10, 1994 and amended on August 11, 1994(2) 11. Statement regarding weighted average common and common equivalent shares used in computation of per share earnings 27. Financial Data Schedule (b) No reports on Form 8-K were filed during the quarter - ---------------------- (1) Incorporated by reference to ALZA's Form 10-K Annual Report for the year ended December 31, 1993. (2) Incorporated by reference to ALZA's Form 10-K Annual Report for the year ended December 31, 1994. -13- ALZA CORPORATION March 31, 1995 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 12, 1995 By: /s/ Dr. Ernest Mario ----------------------- Dr. Ernest Mario Co-Chairman and Chief Executive Officer Date: May 12, 1995 By: /s/ Bruce C. Cozadd ------------------------ Bruce C. Cozadd Vice President and Chief Financial Officer -14- ALZA CORPORATION March 31, 1995 EXHIBIT INDEX Exhibit - ------- 11. Statement regarding weighted average common and common equivalent shares used in computation of per share earnings 27. Financial Data Schedule -15- EX-11 2 EXHIBIT 11 ALZA CORPORATION March 31, 1995 EXHIBIT 11 Statement Regarding Weighted Average Common and Common Equivalent Shares Used in Computation of Per Share Earnings (In thousands)
Primary Fully Diluted ----------------------- ----------------------- Quarter Ended March 31, Quarter Ended March 31, 1995 1994 1995 1994 --------- ---------- ----------- --------- Common stock 82,072 81,651 82,072 81,651 $25 warrants - - - - $65 warrants - - - - 5 1/4% zero coupon convertible subordinated debentures - - - - Stock options 317 653 317 653 ------ ------ ------ ------ Average shares 82,389 82,304 82,389 82,304 ------ ------ ------ ------ ------ ------ ------ ------
Primary and fully diluted earnings per share are based on weighted average common and dilutive common equivalent shares, including ALZA common stock, warrants and options, for the period each was outstanding. The 5 1/4% zero coupon convertible subordinated debentures (issued in July 1994) are considered common stock equivalents; they were antidilutive for the quarter ended March 31, 1995. 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% for each period presented. -16- EX-27 3 EXHIBIT 27
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 3-MOS DEC-31-1995 MAR-31-1995 86 271 92 0 33 510 323 73 829 51 349 304 0 0 81 829 19 80 16 53 0 0 6 27 10 17 0 0 0 17 .21 .21
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