UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the quarterly period
ended September 30, 2000
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.)
1900 Charleston Road
P.O. Box 7210
Mountain View, California 94039-7210
(Address of principal executive offices)
Registrant's telephone number, including area code (650) 564-5000
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, 2000:
Common Stock, $.005 par value - 236,683,232 shares
ALZA CORPORATION
FORM 10-Q for the Quarter Ended
September 30, 2000
INDEX
Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Statement of Operations 3
Condensed Consolidated Balance Sheet 4
Condensed Consolidated Statement of Cash Flows 5
Notes to Condensed Consolidated Financial Statements 6-13
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 14-27
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 27-28
Part II. Other Information
Item 1. Legal Proceedings 28
Item 6. Exhibits and Reports on Form 8-K 28-29
Signatures 30
Exhibits
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ALZA CORPORATION
Condensed Consolidated Statement of Operations (unaudited)
(In millions, except per share amounts)
Quarter Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
__________________________________________________________________
Revenues:
Net sales $164.8 $136.9 $408.2 $336.3
Royalties, fees and
other 71.6 58.0 225.9 171.7
Research and development 35.1 27.2 92.5 94.8
__________________________________________________________________
Total revenues 271.5 222.1 726.6 602.8
Costs and expenses:
Costs of products shipped 48.6 45.2 125.3 119.8
Research and development 51.5 41.3 144.2 133.2
Selling, general and
administrative 93.3 65.9 250.9 181.5
Merger-related expenses - - - 32.6
__________________________________________________________________
Total costs
and expenses 193.4 152.4 520.4 467.1
__________________________________________________________________
Operating income 78.1 69.7 206.2 135.7
Interest expense 13.5 14.1 44.2 43.8
Interest and
other income (18.1) (7.3) (30.7) (30.7)
__________________________________________________________________
Net interest and other
(income) expense (4.6) 6.8 13.5 13.1
__________________________________________________________________
Income before income taxes 82.7 62.9 192.7 122.6
Provision for income taxes 25.6 20.1 59.7 41.9
__________________________________________________________________
Net income $ 57.1 $ 42.8 $133.0 $ 80.7
==================================================================
Earnings per share (See Note 1)
Basic $ 0.26 $ 0.21 $ 0.63 $ 0.40
==================================================================
Diluted $ 0.23 $ 0.20 $ 0.59 $ 0.39
==================================================================
Shares used in per share computation (See Note 1)
Basic 221.6 202.6 210.4 201.6
==================================================================
Diluted 277.2 258.8 265.2 206.6
==================================================================
See accompanying notes.
ALZA CORPORATION
Condensed Consolidated Balance Sheet (unaudited)
(In millions)
September 30, December 31,
2000 1999
_______________________________________________________________
ASSETS
Current assets:
Cash and cash equivalents $ 844.9 $ 149.4
Short-term investments 118.7 68.0
Receivables, net 172.4 125.7
Inventories, at cost:
Raw materials 20.7 26.0
Work in process 22.7 10.4
Finished goods 32.6 32.6
_______ _______
Total inventories 76.0 69.0
Prepaid expenses and other
current assets 24.2 20.6
_______ _______
Total current assets 1,236.2 432.7
Property, plant and equipment 585.0 563.5
Less accumulated depreciation
and amortization (169.2) (145.7)
_______ _______
Net property, plant and equipment 415.8 417.8
Long-term investments 424.0 381.5
Deferred product acquisition costs 282.5 283.4
Cash surrender value of life insurance 179.8 148.4
Other assets 202.1 188.7
_______ _______
TOTAL ASSETS $2,740.4 $1,852.5
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 68.5 $ 75.9
Accrued liabilities 55.6 51.5
Other current liabilities 9.8 7.5
_______ _______
Total current liabilities 133.9 134.9
5% convertible subordinated debentures - 495.5
5 1/4% zero coupon convertible
subordinated debentures 458.2 443.7
3% zero coupon convertible
subordinated debentures 604.0 -
Other long-term liabilities 107.4 86.6
Stockholders' equity:
Common stock and additional
paid-in capital 1,311.3 706.6
Accumulated other comprehensive loss 4.6 (2.8)
Retained earnings (accumulated deficit) 121.0 (12.0)
_______ _______
Total stockholders' equity 1,436.9 691.8
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $2,740.4 $1,852.5
======== ========
See accompanying notes.
ALZA CORPORATION
Condensed Consolidated Statement of Cash Flows (unaudited)
(In millions)
Nine Months Ended
September 30,
2000 1999
_______________________________________________________________
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 133.0 $ 80.7
Non-cash adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 38.0 30.4
Amortization of product
acquisition payments 17.8 18.2
Interest on 5 1/4% zero coupon convertible
subordinated debentures 16.8 16.9
Interest on 3% zero coupon convertible
subordinated debentures 3.1 -
Undistributed income from real estate
joint venture (3.5) -
Gain on sale of real estate and
other assets, net (3.3) (12.4)
Asset write-down 1.4 11.1
Changes in current assets:
Receivables (44.5) (20.7)
Inventories (10.1) (2.1)
Prepaid expenses and other current assets (8.8) (11.2)
Prepaid premiums and increase in cash surrender
value of life insurance (31.3) (35.9)
Changes in liabilities:
Accounts payable (18.6) (13.4)
Accrued liabilities 38.2 24.2
Other long-term liabilities 7.2 3.9
_____ _____
Total adjustments 2.4 9.0
_____ _____
Net cash provided by operating activities 135.4 89.7
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (27.1) (62.9)
Proceeds from sale of real estate
and other assets 4.8 20.1
Product acquisition payments (5.6) (35.0)
Purchases of available-for-sale securities (187.7) (126.1)
Sales and maturities of available-for-sale
securities 107.5 206.7
Other investing activities 10.8 (12.8)
_____ _____
Net cash used in investing activities (97.3) (10.0)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuances of common stock 77.4 37.4
Net proceeds from 3% convertible
subordinated debentures 587.4 -
Principal repayments of long-term debt, net (7.4) (10.5)
_____ _____
Net cash provided by financing activities 657.4 26.9
Net (decrease) increase in
cash and cash equivalents 695.5 106.6
Cash and cash equivalents at
beginning of period 149.4 110.1
_______ _______
Cash and cash equivalents at end of period $ 844.9 $ 216.7
======= =======
See accompanying notes.
ALZA CORPORATION
Notes to Condensed Consolidated Financial Statements (unaudited)
NOTE 1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with generally
accepted accounting principles for interim financial information.
The information as of September 30, 2000 and for the quarter and
nine months ended September 30, 2000 and 1999 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.
Results for any interim period are not necessarily
indicative of results for any future interim period or for the
entire year. The accompanying financial statements should be
read in conjunction with the financial statements and notes
thereto included in ALZA's Annual Report on Form 10-K for the
year ended December 31, 1999.
Stock Split
On October 31, 2000, ALZA stockholders voted to amend ALZA's
Restated Certificate of Incorporation to increase the authorized
common stock from 300 million shares to one billion shares. ALZA
stockholders also approved a two-for-one split of common stock
for distribution on November 15, 2000 to stockholders of record
on November 1, 2000. The per share par value of Common Stock was
adjusted from $0.01 to $0.005. All share and per share data for
all periods presented in this report have been adjusted to
reflect the split.
Comprehensive Income
Total comprehensive income includes net income plus other
comprehensive income, which, for ALZA, primarily comprises net
unrealized gains or losses on available-for-sale securities.
Total comprehensive income was $64.1 million and $44.6 million
for the quarters ended September 30, 2000 and 1999, respectively,
and $140.4 million and $83.6 million for the nine months ended
September 30, 2000 and 1999, respectively. Other comprehensive
income was $7.0 million and $1.8 million for the quarters ended
September 30, 2000 and 1999, respectively, and $7.4 million and
$2.9 million for the nine months ended September 30, 2000 and
1999, respectively.
Supplemental Disclosures of Cash Flow Information
Noncash Investing and Financing Nine months ended September 30,
Activities (In millions) 2000 1999
_________________________________________________________________
Tax benefit for stock option
and stock purchase plan $ 28.2 $ 9.8
Conversion of 5% and 5 1/4% Debentures
into ALZA common stock 503.9 4.5
Investment in low income housing in
exchange for long-term investment 23.0 7.0
Reclassification
Certain amounts in the prior year's financial statements
have been reclassified to conform to the 2000 presentation.
These reclassifications had no impact on previously reported
results of operations or stockholder's equity.
New Accounting Standards
In July 1999, the Financial Accounting Standards Board
("FASB") announced the delay of the effective date of Statement
of Financial Accounting Standards 133, "Accounting for Derivative
Instruments and Hedging Activities," ("SFAS 133") to the first
quarter of 2001. SFAS 133 establishes accounting and reporting
standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for
hedging activities. It requires companies to recognize all
derivatives as either assets or liabilities on the balance sheet
and measure those instruments at fair value. Gains or losses
resulting from changes in the values of those derivatives would
be accounted for depending on the use of the derivative and
whether it qualifies for hedge accounting under SFAS 133. The
impact of SFAS 133 on ALZA's financial position and results of
operations is not expected to be material.
In December 1999, the Securities and Exchange Commission
("SEC") issued Staff Accounting Bulletin No. 101, "Revenue
Recognition in Financial Statements" ("SAB 101"). SAB 101
summarizes the SEC's views in applying generally accepted
accounting principles to revenue recognition in financial
statements, and is required to be implemented by the fourth
quarter of 2000. ALZA is evaluating SAB 101's potential future
impact on ALZA's financial position and results of operations
with respect to upfront fees and milestone payments earned by
ALZA under distribution agreements, agreements with client
companies and certain other agreements. ALZA continues to
recognize fees in accordance with its historical revenue
recognition policy while it evaluates the impact of SAB 101. It
is possible that, under SAB 101, certain of these fees, including
the $15.0 million upfront fee from Bayer Corporation ("Bayer") as
described in Note 3, would be required to be deferred and
recognized as revenue over future periods rather than immediately
on a one-time basis.
In March 2000, the FASB issued Interpretation No. 44
"Accounting for Certain Transactions involving Stock Compensation-
an Interpretation of Accounting Principles Board (APB) Opinion
No. 25" ("FIN 44"). FIN 44 clarifies the application of APB
Opinion No. 25. FIN 44 was effective July 1, 2000. The adoption
of FIN 44 did not have a material effect on ALZA's financial
position or results of operations.
NOTE 2. EARNINGS PER SHARE INFORMATION
Basic earnings per share is calculated by dividing net
income by the weighted average common shares outstanding for the
period. Diluted earnings per share is calculated by dividing net
income, as adjusted, by the weighted average common shares
outstanding for the period plus the dilutive effect of stock
options, warrants and convertible securities.
The following table sets forth the computation of ALZA's
basic and diluted earnings per share:
Quarter Ended Nine Months Ended
(In millions, except September 30, September 30,
per share amounts) 2000 1999 2000 1999
________________________________________________________________
NUMERATOR:
Basic
Net income $ 57.1 $ 42.8 $133.0 $ 80.7
====== ====== ====== ======
Diluted
Net income $ 57.1 $ 42.8 $133.0 $ 80.7
Adjustments, net of tax:
Interest on 5%, 5 1/4%
and 3% Debentures 7.3 8.4 24.4 -
______ ______ ______ ______
Adjusted net income $ 64.4 $ 51.2 $157.4 $ 80.7
====== ====== ====== ======
DENOMINATOR:
Basic
Weighted average shares 221.6 202.6 210.4 201.6
====== ====== ====== ======
Diluted
Weighted average shares 222.2 203.2 211.0 202.2
Effect of dilutive
securities:
Employee stock options 6.4 5.0 4.4 4.4
5% Debentures 12.8 26.0 21.6 -
5 1/4% Debentures 24.4 24.6 24.4 -
3% Debentures 11.4 - 3.8 -
______ ______ ______ ______
Weighted average shares
and assumed conversions 277.2 258.8 265.2 206.6
====== ====== ====== ======
Basic earnings per share $ 0.26 $ 0.21 $0.63 $ 0.40
====== ====== ====== ======
Diluted earnings per share $ 0.23 $ 0.20 $0.59 $ 0.39
====== ====== ====== ======
Options to purchase 2.2 million shares of common stock were
excluded from the diluted earnings per share calculation for the
nine months ended September 30, 2000, compared to options and
warrants to purchase 5.6 million and 4.2 million shares of common
stock that were excluded for the quarter and nine months ended
September 30, 1999, respectively. These options and warrants were
excluded because their exercise price was greater than the average
market price of the common shares during the periods, and therefore
the effect of including those options and warrants would have been
anti-dilutive. Assumed conversions of ALZA's outstanding
5% convertible subordinated debentures due 2006 ("5% Debentures")
and the 5 1/4% zero coupon convertible subordinated debentures due
2014 ("5 1/4% Debentures") were not included in the diluted
earnings per share calculation for the nine months ended September
30, 1999, as their inclusion would have been anti-dilutive.
NOTE 3. DEBT OBLIGATIONS
On July 19, 2000, ALZA called for the redemption of its
outstanding 5% Debentures on August 18, 2000. Substantially all
holders of the 5% Debentures that were outstanding at July 19,
2000 elected to convert their debentures into shares of ALZA
common stock at a conversion price of $19.09 per share, or
approximately 13.09 shares per $1,000 principal amount of
debentures. The aggregate number of shares issued from
conversion of the 5% Debentures into ALZA common stock was 26.2
million. The amount paid to redeem the remaining 5% Debentures
was not material.
On July 28, 2000, ALZA completed a private offering of 3%
zero coupon convertible subordinated debentures due July 28, 2020
(the "3% Debentures"), which were issued at a price of $551.26
per $1,000 principal amount at maturity. The 3% Debentures have
a total principal amount at maturity of $1.09 billion, with a
yield to maturity of 3% per annum, computed on a semiannual bond
equivalent basis. There are no periodic interest payments. The
offering resulted in approximately $587 million of net proceeds
to ALZA. The 3% Debentures are convertible, at the option of the
holder, at any time prior to maturity, unless previously redeemed
or repurchased, into 14.027 shares of ALZA common stock per
$1,000 principal amount at maturity, at a conversion price of
$39.30 per share, subject to certain anti-dilution adjustments.
At the option of the holder, the 3% Debentures may be repurchased
by ALZA on July 28, 2003, 2008 or 2013, at a purchase price equal
to the issue price plus accreted original issue discount to such
purchase date. ALZA, at its option, may elect to deliver either
ALZA common stock or cash, or a combination of stock and cash, in
the event of repurchase of the 3% Debentures. ALZA, at its
option, may also redeem any or all of the 3% Debentures after
July 28, 2003 at the issue price plus accreted original issue
discount. The proceeds of the offering will be used for general
corporate purposes, which may include acquisition of products,
technology and additional facilities.
NOTE 4. CRESCENDO PHARMACEUTICALS CORPORATION (RELATED PARTY)
On September 29, 2000, ALZA exercised its option to acquire
all of the Class A Common Stock (the "Stock") of Crescendo for a
cash payment of $100.0 million. ALZA exercised its option to
acquire the Crescendo Stock pursuant to the terms of the purchase
option set forth in Crescendo's Restated Certificate of
Incorporation. The closing date of the transaction is November 13,
2000. ALZA is funding the acquisition through available working
capital. The transaction will be accounted for as a purchase, and,
accordingly, the purchase price will be allocated to cash and
investments, a deferred tax asset, developed products and acquired
in-process research and development ("IPR&D"). The cash and
investments (expected to be $14 million to $16 million) will be valued at
their fair market values at the closing date. The valuation of the
deferred tax asset (expected to be $25 million to $30 million) represents
estimated future tax savings that ALZA will likely receive as a
result of the Crescendo acquisition. The remaining purchase price
will be allocated to developed products as deferred product
acquisition costs (expected to be $45 million to $50 million) and IPR&D
(expected to be $8 million to $12 million), which is determined using a
risk adjusted present value calculation of the future royalties
ALZA would have paid for products Crescendo has developed and is
in the process of developing.
After the closing date, Crescendo will be a wholly owned
subsidiary of ALZA. Royalties that would otherwise have been
paid by ALZA to Crescendo on net sales of products licensed from
Crescendo will no longer be payable following the closing date.
Following ALZA's exercise of its purchase option, there will no
longer be research and development revenues from Crescendo.
Under the Development Agreement between ALZA and Crescendo
Pharmaceuticals Corporation ("Crescendo"), ALZA recorded product
development revenues from Crescendo of $24.9 million for the
quarter ended September 30, 2000 and $68.3 million for the nine
months ended September 30, 2000, compared with $21.0 million for
the quarter ended September 30, 1999 and $72.8 million for the
nine months ended September 30, 1999.
Under the Technology License Agreement between ALZA and
Crescendo, ALZA recorded technology fee revenues from Crescendo
of $0.7 million and $2.7 million for the quarter and nine months
ended September 30, 2000, respectively, compared with $1.7
million and $5.7 million for the quarter and nine months ended
September 30, 1999, respectively, all in accordance with the
terms of the agreement.
ALZA had an option to acquire an exclusive, royalty-bearing
license to each product developed by Crescendo under the
Development Agreement. The option was exercisable on a product-
by-product, country-by-country, basis. In December 1998, ALZA
exercised its option to obtain a worldwide license to OROSr
oxybutynin (marketed in the United States as Ditropan XL-registered
trademark). In July 2000, Sanofi-Synthelabo, ALZA's marketing partner for
Ditropan XL in Europe, launched Ditropan XL in the United Kingdom
after receiving regulatory approval to market the product in that
country. In consideration of the grant of the license, ALZA paid
Crescendo 2.5% of net sales of the product in 1999 and 3% of net
sales prior to the purchase option exercise in 2000.
On August 1, 2000, the FDA approved OROS methylphenidate
(Concerta-trademark- (methylphenidate HCl) extended-release tablets (CII))
for marketing in the United States. Also on August 1, 2000, ALZA
exercised its option to obtain a worldwide license to the product
from Crescendo and launched the product in the United States.
NOTE 5. MERGER-RELATED AND OTHER CHARGES
On March 16, 1999, ALZA completed a merger with SEQUUS
Pharmaceuticals, Inc. ("SEQUUS") by acquiring all of SEQUUS'
outstanding stock in a tax-free, stock-for-stock transaction. As
a result of the SEQUUS acquisition, ALZA incurred merger-related
costs that consisted of merger transaction costs, exit costs and
employee severance costs. Merger transaction costs consisted
primarily of fees for investment bankers, attorneys and
accountants, filing fees, financial printing costs and other
related charges. Exit costs include costs such as cancellation
of lease agreements and the write-down of SEQUUS assets that will
not be used in continuing operations.
The following table shows the details of the accrual for merger-
related costs through the nine months ended September 30, 2000:
Merger- Balance at
related Utilized/ September 30,
(In millions) costs Adjusted 2000
_________________________________________________________________
Merger transaction costs $ 13.2 $ 13.2 $ -
Exit costs 14.3 13.7 0.6
Employee severance 5.1 5.1 -
_______ ______ _______
Total $ 32.6 $ 32.0 $ 0.6
======= ====== =======
As a result of the activities related to the termination of
a merger agreement with Abbott Laboratories, Inc. ("Abbott")
during the fourth quarter of 1999, ALZA incurred $13.4 million in
merger-related costs. These costs included merger transaction
costs, which consisted primarily of fees for investment bankers,
attorneys and accountants, filing fees, financial printing costs,
and other merger-related costs. The following table shows the
details of the accrual for costs related to the terminated merger
through the nine months ended September 30, 2000:
Merger- Balance
related at September 30,
(In millions) costs Utilized 2000
________________________________________________________________
Transaction costs $ 9.8 $ 9.6 $ 0.2
Other merger-related costs 3.6 3.6 -
_______ ______ _______
Total $ 13.4 $ 13.2 $ 0.2
======= ====== =======
NOTE 6. SEGMENT REPORTING
ALZA has two operating segments: ALZA Pharmaceuticals, which
includes sales of products directly to the pharmaceutical
marketplace, research and development for products marketed by,
and potential products to be marketed by, ALZA (including
revenues and expenses relating to products which have been under
development with Crescendo) and certain co-promotion revenues for
products co-promoted by ALZA; and ALZA Technologies, which
includes research, development and manufacturing for client
companies and ALZA Pharmaceuticals, and royalties and fees
resulting from sales by ALZA's client companies of products
developed under joint development and commercialization
agreements. The "Other" category primarily comprises corporate
general and administrative expenses, including finance, legal,
human resources, commercial development, executive and other
functions not directly attributable (or allocated) to the
activities of the operating segments, as well as rental and
service fee revenues.
ALZA evaluates performance and allocates resources based on
operating income or loss from operations (before allocation of
certain general and administrative expenses, net interest
expense, investment gains and losses and income taxes). ALZA
does not assess segment performance or allocate resources based
on a segment's total assets, and therefore ALZA's assets are not
reported by segment. ALZA allocates certain long-lived assets to
operating segments for purposes of allocating depreciation and
amortization expense. The accounting policies of the reportable
segments are the same as those described in the summary of
significant accounting policies. ALZA accounts for intersegment
sales and development revenues based upon negotiated prices.
ALZA's reportable segments are strategic units that
distribute products to different types of customers and provide
different types of services. They are managed differently
because ALZA Pharmaceuticals' sales and marketing efforts are
extensive and disparate from the revenue generation process
resulting from arrangements with client companies in ALZA
Technologies. Additionally, ALZA Pharmaceuticals develops
products for commercialization by ALZA, while ALZA Technologies
develops products for commercialization by other companies and
ALZA Pharmaceuticals.
For the current year segment presentation, certain research
and development expenses previously recorded in the ALZA
Technologies segment and charged to ALZA Pharmaceuticals were
moved to the ALZA Pharmaceuticals segment, as they were incurred
directly by ALZA Pharmaceuticals departments. Under the prior
period's segment presentation, intersegment revenues for ALZA
Technologies for the quarter and nine months ended September 30,
2000 would have been $24.9 million and $68.3 million instead of
$11.4 million and $36.1 million under the current segment
presentation.
Certain prior year amounts have been reclassified to conform
to the current segment presentation. These amounts relate to the
cost of sales of in-licensed products marketed by ALZA
Pharmaceuticals, which under the current presentation are
recorded in ALZA Technologies and sold to ALZA Pharmaceuticals at
an intersegment transfer price.
The following tables contain information about segment
operating income (loss) for the quarter and nine months ended
September 30, 2000 and 1999.
Quarter Ended Nine Months Ended
September 30, September 30,
(In millions) 2000 1999 2000 1999
________________________________________________________________
Revenues from external customers
Net sales
ALZA Pharmaceuticals $ 135.7 $ 106.3 $ 315.5 $243.0
ALZA Technologies 29.1 30.6 92.7 93.3
Royalties, fees and other
ALZA Pharmaceuticals 6.6 3.7 13.0 10.0
ALZA Technologies 60.7 54.0 204.0 160.6
Other 4.3 0.3 8.9 1.1
Research and development
ALZA Pharmaceuticals 24.9 21.0 68.3 72.8
ALZA Technologies 10.2 6.2 24.2 22.0
_______ _______ _______ ______
Total $ 271.5 $ 222.1 $ 726.6 $602.8
======= ======= ======= ======
Intersegment revenues
Net sales
ALZA Pharmaceuticals $ - $ - $ - $ -
ALZA Technologies 16.5 12.9 36.2 28.9
Research and development
ALZA Pharmaceuticals 0.2 - 1.1 -
ALZA Technologies 11.4 21.2 36.1 73.0
_______ _______ _______ ______
Total $ 28.1 $ 34.1 $ 73.4 $101.9
======= ======= ======= ======
Segment operating income (loss)
ALZA Pharmaceuticals $ 30.4 $ 28.2 $ 43.9 $ 35.1
ALZA Technologies 54.1 49.8 187.7 155.7
Other (6.4) (8.3) (25.4)1 (55.1)2
_______ _______ _______ ______
Total $ 78.1 $ 69.7 $ 206.2 $135.7
======= ======= ======= ======
________________________________________________________________
1 For the nine months ended September 30, 2000, the operating
loss for Other includes $4.8 million of charges associated with
the consolidation of certain research and development facilities.
Excluding these charges, operating loss for Other would have been
$20.6 million for the nine months ended September 30, 2000.
2 For the nine months ended September 30, 1999, the operating
loss for Other includes merger-related expenses of $32.6
million relating to the acquisition of SEQUUS. Excluding these
charges, operating loss for Other would have been $22.5
million for the nine months ended September 30, 1999.
The following table contains a reconciliation of ALZA's
income before taxes to that reported by segment in the tables
above:
Quarter Ended Nine Months Ended
September 30, September 30,
(In millions) 2000 1999 2000 1999
________________________________________________________________
Income (loss) before taxes
Total operating income for
reportable segments $ 78.1 $ 69.7 $ 206.2 $ 135.7
Unallocated amounts:
Interest and other income 18.1 7.3 30.7 30.7
Interest expense (13.5) (14.1) (44.2) (43.8)
________ ________ ________ ________
Income before income
taxes $ 82.7 $ 62.9 $ 192.7 $ 122.6
======== ======== ======== ========
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, without limitation, plans
concerning the commercialization of products, statements
concerning potential product sales, future costs of products
shipped (and gross margins), associated sales and marketing
expenses, plans concerning development 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 various risk factors that could cause ALZA's
actual results to be materially different than those presented,
some or all of which risks are not predictable or within ALZA's
control. 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 for
the year ended December 31, 1999.
RESULTS OF OPERATIONS
SUMMARY
Quarter Ended Nine Months Ended
(In millions, except September 30, September 30,
per share amounts) 2000 1999 2000 1999
_________________________________________________________________
Revenues $ 271.5 $ 222.1 $ 726.6 $ 602.8
_________________________________________________________________
Operating income 78.1 69.7 206.2 135.7
_________________________________________________________________
Net income 57.1 42.8 133.0 80.7
_________________________________________________________________
Diluted earnings
per share(1) 0.23 0.20 0.59 0.39
_________________________________________________________________
(1) Reflects the two-for-one stock split effective November 1,
2000.
ALZA's net income for the quarter ended September 30, 2000
was $57.1 million or $0.23 per diluted share compared with net
income of $42.8 million or $0.20 per diluted share for the
quarter ended September 30, 1999. ALZA's net income for the nine
months ended September 30, 2000 was $133.0 million or $0.59 per
diluted share compared with $80.7 million or $0.39 per diluted
share for the nine months ended September 30, 1999. Net income
for the nine months ended September 30, 2000 included charges of
$3.3 million (net of tax effect of $1.5 million), or $0.02 per
diluted share, associated with the consolidation of certain
research and development facilities. Net income for the nine
months ended September 30, 1999 included charges related to the
SEQUUS merger of $24.8 million (net of tax effect of $7.8
million), or $0.12 per diluted share. Excluding these charges,
net income for the nine months ended September 30, 2000 and 1999
were $136.3 million or $0.61 per diluted share and $105.5 million
or $0.51 per diluted share, respectively. The increase in net
income for the quarter and nine months ended September 30, 2000
compared to the same periods in 1999 resulted primarily from the
following:
- Net sales increased 20% to $164.8 million for the quarter
ended September 30, 2000 from $136.9 million for the quarter
ended September 30, 1999, and increased 21% to $408.2 million
for the nine months ended September 30, 2000 from $336.3
million for the nine months ended September 30, 1999. The
increase in net sales resulted primarily from a 28% increase in
net sales of ALZA-marketed products to $135.7 million for the
quarter ended September 30, 2000 from $106.3 million for the
quarter ended September 30, 1999, and a 30% increase to $315.5
million for the nine months ended September 30, 2000 from
$243.0 million for the nine months ended September 30, 1999.
- Gross margin increased to 71% for the quarter ended
September 30, 2000 from 67% for the quarter ended September
30, 1999, and increased to 69% for the nine months ended
September 30, 2000 from 64% for the nine months ended
September 30, 1999.
- Royalties, fees and other revenues increased 23% to $71.6
million for the quarter ended September 30, 2000 from $58.0
million for the quarter ended September 30, 1999, and
increased 32% to $225.9 million for the nine months ended
September 30, 2000 from $171.7 million for the nine months
ended September 30, 1999.
- Net interest and other income increased substantially to
$4.6 million for the quarter ended September 30, 2000 from a
net interest and other expense of $6.8 million for the quarter
ended September 30, 1999. Net interest and other expense
increased slightly to $13.5 million for the nine months ended
September 30, 2000 compared with $13.1 million for the nine
months ended September 30, 1999.
Substantially offsetting these contributions to net income
for the quarter and nine months ended September 30, 2000 were the
following:
- Selling, general and administrative expenses increased 42% to
$93.3 million for the quarter ended September 30, 2000 from
$65.9 million for the quarter ended September 30, 1999, and
increased 36% to $246.1 million for the nine months ended
September 30, 2000, excluding the charges described above, from
$181.5 million for the nine months ended September 30, 1999.
OPERATING SEGMENTS
ALZA has two operating segments: ALZA Pharmaceuticals and
ALZA Technologies.
ALZA Pharmaceuticals markets and sells products developed by
ALZA Technologies or others directly to the pharmaceutical
marketplace in the United States and Canada and to distributors
who sell such products outside the United States and Canada.
ALZA Pharmaceuticals also conducts product development, co-
promotes products with third parties, and engages ALZA
Technologies and others to conduct product development and
manufacture products for ALZA Pharmaceuticals.
ALZA Technologies conducts research on ALZA's drug delivery
technologies and products for ALZA Pharmaceuticals, Crescendo and
other pharmaceutical company clients, and manufactures products
for sale by ALZA Pharmaceuticals and client companies.
The "Other" category primarily comprises corporate general
and administrative activities and the associated costs related to
finance, legal, human resources, commercial development,
executive and other functions not directly attributable (or
allocated) to the activities of the operating segments, as well
as rental and service fee revenues.
Quarter Ended Nine Months Ended
OPERATING SEGMENT SUMMARY September 30, September 30,
(In millions) 2000 1999 2000 1999
_________________________________________________________________
Revenues
ALZA PHARMACEUTICALS $ 167.4 $ 131.0 $ 397.9 $325.8
ALZA TECHNOLOGIES 127.9 124.9 393.2 377.8
OTHER 4.3 0.3 8.9 1.1
_________________________________________________________________
Total segment revenues 299.6 256.2 800.0 704.7
Intersegment elimination (28.1) (34.1) (73.4) (101.9)
_________________________________________________________________
Total revenues $ 271.5 $ 222.1 $ 726.6 $602.8
_________________________________________________________________
Operating income (loss)
ALZA PHARMACEUTICALS $ 30.4 $ 28.2 $ 43.9 $ 35.1
ALZA TECHNOLOGIES 54.1 49.8 187.7 155.7
OTHER (6.4) (8.3) (25.4)1 (55.1)2
_________________________________________________________________
Total operating income $ 78.1 $ 69.7 $ 206.2 $ 135.7
_________________________________________________________________
1 For the nine months ended September 30, 2000, the operating
loss for Other includes $4.8 million of charges associated
with the consolidation of certain research and development
facilities. Excluding these charges, operating loss for Other
would have been $20.6 million for the nine months ended
September 30, 2000.
2 For the nine months ended September 30, 1999, the operating
loss for Other includes merger-related expenses of $32.6 million
relating to the acquisition of SEQUUS. Excluding these charges,
operating loss for Other would have been $22.5 million for the
nine months ended September 30, 1999.
ALZA PHARMACEUTICALS
Operating income increased 8% and 25% for the quarter and
nine months ended September 30, 2000, respectively, compared to
the same periods in 1999, primarily due to a 28% and 22% increase
in revenues for the quarter and nine months ended September 30,
2000, respectively, compared to the same periods in 1999. The
increase in revenues was primarily due to a 28% and 30% increase
in net sales of ALZA-marketed products for the quarter and nine
months ended September 30, 2000, respectively, compared to the
same periods in 1999. In addition, research and development
expenses declined 12% for the nine months ended September 30,
2000 compared to the same period in 1999. Offsetting the
increase in revenues was a 46% and 39% increase in sales,
marketing and product amortization expenses for the quarter and
nine months ended September 30, 2000, respectively, compared to
the same periods in 1999.
ALZA TECHNOLOGIES
Operating income increased 9% and 21% for the quarter and
nine months ended September 30, 2000, respectively, compared to
the same periods in 1999, primarily due to a 12% and 27% increase
in revenues from royalties, fees and other for the quarter and
nine months ended September 30, 2000, respectively, compared to
the same periods in 1999, and a 9% and 12% decrease in research
and development expenses for the quarter and nine months ended
September 30, 2000, compared to the same periods in 1999.
Partially offsetting the increase in revenues from royalties,
fees and other and the decrease in research and development
expenses was a 46% and 51% decrease in intersegment research and
development revenues for the quarter and nine months ended
September 30, 2000, respectively, compared to the same periods in
1999.
OTHER
Operating loss decreased slightly for the quarter and nine
months ended September 30, 2000, compared to the same periods in
1999, in both nine month periods excluding certain charges
described above. The decrease in operating loss was primarily
due to substantial increases in rental income for the quarter and
nine months ended September 30, 2000, compared to the same
periods in 1999. Partially offsetting the increase in rental
income was a 21% and 24% increase in general and administrative
expenses for the quarter and nine months ended September 30,
2000, respectively, compared to the same periods in 1999.
NET SALES
Net Sales Quarter Ended Nine Months Ended
September 30, September 30,
(Dollars in millions) 2000 1999 2000 1999
_________________________________________________________________
ALZA PHARMACEUTICALS
Ditropan XL-registered
trademark- $ 47.9 $ 25.4 $126.4 $ 61.8
Doxilr/Caelyx-registered
trademark- 24.6 24.0 52.7 52.3
Ethyol-registered
trademark- 12.3 17.7 33.7 34.8
Elmiron-registered
trademark- 11.1 10.0 24.9 22.6
Concerta-trademark- 24.4 - 24.4 -
Mycelex-registered
trademark-Troche 2.9 11.6 16.5 24.3
Testoderm-registered
trademark-TTS line 3.6 5.0 14.2 14.7
Other 8.9 12.6 22.7 32.5
___________________________________________________________________
Total 135.7 106.3 315.5 243.0
___________________________________________________________________
ALZA TECHNOLOGIES
Contract manufacturing 29.1 30.6 92.7 93.3
Intersegment 16.5 12.9 36.2 28.9
___________________________________________________________________
Total 45.6 43.5 128.9 122.2
___________________________________________________________________
Intersegment eliminations (16.5) (12.9) (36.2) (28.9)
___________________________________________________________________
Total net sales $164.8 $136.9 $408.2 $336.3
___________________________________________________________________
Total net sales as a percentage
of total revenues 61% 62% 56% 56%
___________________________________________________________________
ALZA PHARMACEUTICALS
Included in net sales of ALZA Pharmaceuticals are sales of the
products marketed directly by ALZA in the United States and Canada,
and sales of those products in other countries through distributors
(and to a limited extent, direct sales by ALZA of Amphocil-registered
trademark-(lipid-based amphotericin B) in the United Kingdom).
Net sales of ALZA-marketed products increased 28% and 30% for the quarter and
nine months ended September 30, 2000, respectively, compared to the same
periods in 1999. This increase in ALZA Pharmaceuticals' net sales
can be primarily attributed to substantial increases in sales of
Ditropan XL and sales of Concerta, which was launched in August
2000, for the quarter and nine months ended September 30, 2000,
compared to the same periods in 1999.
Net sales of ALZA-marketed products can be expected to vary
significantly from year to year, particularly in the first years
after launch of a new product. Concerta was launched in August
2000, Ditropan XL was launched in the first quarter of 1999, and
Doxil-registered trademark-(doxorubicin HCl liposome injection), Ethyol-
registered trademark-(amifostine), Elmiron-registered trademark- (pentosan
polysulfate sodium) and Testoderm-registered trademark-TTS (Testosterone
Transdermal System) were cleared for marketing during the past few years. In
September 1999, the FDA approved new indications for Ethyol and Doxil. In
July 2000, Sanofi-Synthelabo, ALZA's marketing partner for Ditropan XL in
Europe, launched Ditropan XL in the United Kingdom after
receiving regulatory approval to market the product in that
country. Wholesaler stocking patterns, managed care and
formulary acceptance, the introduction of competitive products,
and acceptance by patients and physicians will also affect future
sales of ALZA's products.
ALZA TECHNOLOGIES
Net sales include sales generated from contract
manufacturing activities for ALZA's client companies and
manufacturing for ALZA Pharmaceuticals. Net sales from contract
manufacturing for the quarter and nine months ended September 30,
2000 remained relatively constant compared to the same periods in
1999, as ALZA experienced increases in shipments of Duragesic-registered
trademark-(fentanyl) to Janssen Pharmaceutica, Inc. (together with its
affiliates, "Janssen") and Nicoderm-registered trademark- and NicoDerm-
registered trademark-CQ-registered trademark- (nicotine
transdermal system) to Aventis S.A. ("Aventis") and SmithKline
Beecham p.l.c.("SB"), which were offset by a decline in shipments
of Glucotrol XL-registered trademark- (glipizide) to Pfizer Inc. ("Pfizer"),
Covera-HS-registered trademark- (verapamil hydrochloride) to Pharmacia
Corporation and Catapres-TTS-registered trademark- (clonidine) to Boehringer
Ingelheim Pharmaceuticals, Inc.
The timing and quantities of orders for products marketed by
client companies are not within ALZA's control. Net sales by ALZA
to client companies can be expected to fluctuate from period to
period, sometimes significantly, depending on the volume, mix and
timing of orders of products shipped to client companies, and in
some quarters, due to the shipment of launch quantities of products
to clients.
GROSS MARGIN
Gross Margin
Quarter Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
_________________________________________________________________
ALZA PHARMACEUTICALS(1) 80% 81% 80% 81%
ALZA TECHNOLOGIES(1) 16% 14% 23% 17%
_________________________________________________________________
Gross margin as percentage
of total net sales(2) 71% 67% 69% 64%
___________________________________________________________________
(1) Includes intersegment revenues or expenses.
(2) After intersegment eliminations.
The increase in total gross margin for the quarter and nine
months ended September 30, 2000 compared to the same periods for
1999 was due to a relative increase in shipments of higher-margin
products by ALZA Pharmaceuticals, as well as an increase in ALZA
Pharmaceuticals' sales as a percentage of total sales.
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. A trend of higher gross margins may be
achieved through a proportionate increase in direct sales by ALZA
Pharmaceuticals in relation to sales from contract manufacturing
and, to a lesser extent, increased utilization of capacity and
greater operating efficiencies by ALZA Technologies.
ALZA Technologies' gross margin on its contract
manufacturing sales is considerably lower than ALZA
Pharmaceuticals' gross margin on its sales of ALZA-marketed
products. ALZA's client-funded product development agreements
generally provide for a supply price that is intended to cover
ALZA's costs to manufacture the product plus a small margin.
ALZA also generally receives royalties on the clients' sales of
the products, which are included in royalties, fees and other
revenues. Sales to ALZA Pharmaceuticals are based upon
negotiated prices.
ROYALTIES, FEES AND OTHER REVENUES
Royalties, fees and other revenues consist largely of
royalties paid by client companies on products developed under
joint development and commercialization agreements with ALZA and
marketed by the companies. Fee revenues consist of upfront,
milestone and other one-time, special or infrequent payments made
under these joint development agreements, or by distributors who
acquire rights to market ALZA products, and co-promotion fees.
Royalties, Fees and Other Revenues
Quarter Ended Nine Months Ended
September 30, September 30,
(Dollars in millions) 2000 1999 2000 1999
________________________________________________________________
ALZA PHARMACEUTICALS $ 6.6 $ 3.7 $ 13.0 $ 10.0
ALZA TECHNOLOGIES 60.7 54.0 204.0 160.6
OTHER 4.3 0.3 8.9 1.1
Total royalties, fees and
other revenues $ 71.6 $ 58.0 $225.9 $171.7
_________________________________________________________________
Percentage of
total revenues 26% 26% 31% 28%
_________________________________________________________________
ALZA PHARMACEUTICALS
For the quarter and nine months ended September 30, 2000,
fee revenues for ALZA Pharmaceuticals included technology fees
from Crescendo of $0.7 million and $2.7 million, respectively,
compared to $1.7 million and $5.7 million for the same periods in
1999, as provided in the agreements between ALZA and Crescendo.
Fee revenues from Crescendo ended in the third quarter of 2000.
In addition, ALZA Pharmaceuticals' royalties, fees and other
revenues included co-promotion fee revenues of $3.5 million and
$6.4 million for the quarter and nine months ended September 30,
2000, respectively, compared to $2.0 million and $4.3 million for
the same periods in 1999.
ALZA TECHNOLOGIES
Royalties, fees and other revenues increased 12% and 27% for
the quarter and nine months ended September 30, 2000,
respectively, compared to the same periods in 1999. The increase
in royalties, fees and other revenues was primarily due to a
$15.0 million upfront fee from Bayer in the second quarter of
2000 for commercialization rights to Viadur. In addition,
royalties from product sales of Duragesic increased 29% and 34%
for the quarter and nine months ended September 30, 2000,
respectively, compared to the same periods in 1999.
In December 1999, the Securities and Exchange Commission
("SEC") issued Staff Accounting Bulletin No. 101, "Revenue
Recognition in Financial Statements" ("SAB 101"). SAB 101
summarizes the SEC's views in applying generally accepted
accounting principles to revenue recognition in financial
statements, and is required to be implemented by the fourth
quarter of 2000. ALZA is evaluating SAB 101's potential future
impact on ALZA's financial position and results of operations
with respect to upfront fees and milestone payments earned by
ALZA under distribution agreements, agreements with client
companies and certain other agreements. ALZA continues to
recognize fees in accordance with its historical revenue
recognition policy while it evaluates the impact of SAB 101. It
is possible that under SAB 101, certain of these fees, including
the $15.0 million upfront fee from Bayer, would be required to be
deferred and recognized as revenue over future periods rather
than immediately on a one-time basis.
Sales of Procardia XL-registered trademark-(nifedipine), as reported
by Pfizer, decreased 35% and 30% for the quarter and nine months ended
September 30, 2000, respectively, compared to the same periods in
1999. Several companies have filed Abbreviated New Drug
Applications ("ANDAs") with the FDA requesting clearance to
market generic sustained release nifedipine products which are
asserted to be bioequivalent to Procardia XL, and two companies
have received FDA approval of their ANDAs. Pfizer has filed
various suits against certain ANDA applicants for infringement of
patent rights relating to the nifedipine active drug substance in
Procardia XL. In March 2000, Pfizer entered into a settlement
agreement with Mylan Laboratories Inc. ("Mylan"), the first
applicant for a generic version of Procardia XL. The settlement
resolved the litigation pending between the parties, and Mylan
announced that it would commercialize a generic version of
Procardia XL to be supplied by Pfizer and incorporating ALZA's
OROS technology. Under its agreement with Pfizer, ALZA will
receive royalties on such products. It is not possible to predict
the timing and amount of the negative impact on sales of
Procardia XL that will result from competition from generic
sustained-release nifedipine products.
OTHER
Other revenues increased substantially for the quarter and
nine months ended September 30, 2000 compared to the same periods
in 1999, primarily due to rental income from facilities that ALZA
leased out beginning in the second half of 1999 and first half of
2000.
RESEARCH AND DEVELOPMENT
ALZA's research and development revenues generally represent
reimbursement of costs, including a portion of general and
administrative expenses, by clients (including Crescendo) for the
development of products. Therefore, product development
activities do not contribute significantly to ALZA's operating
results.
Research and Development Revenues
Quarter Ended Nine Months Ended
September 30, September 30,
(Dollars in millions) 2000 1999 2000 1999
________________________________________________________________
ALZA PHARMACEUTICALS
Crescendo $ 24.9 $ 21.0 $68.3 $ 72.8
Intersegment 0.2 - 1.1 -
_________________________________________________________________
Total 25.1 21.0 69.4 72.8
_________________________________________________________________
ALZA TECHNOLOGIES
Other clients 10.2 6.2 24.2 22.0
Intersegment 11.4 21.2 36.1 73.0
_________________________________________________________________
Total 21.6 27.4 60.3 95.0
_________________________________________________________________
Intersegment elimination (11.6) (21.2) (37.2) (73.0)
_________________________________________________________________
Total research and development
revenues $ 35.1 $ 27.2 $92.5 $ 94.8
_________________________________________________________________
Percentage of total
revenues 13% 12% 13% 16%
_________________________________________________________________
ALZA PHARMACEUTICALS
ALZA Pharmaceuticals derives research and development
revenues from Crescendo. Revenues from Crescendo are offset by
intersegment charges from ALZA Technologies, under the prior
period's segment presentation, and are partially offset under the
current year segment presentation. Intersegment charges from
ALZA Technologies are for research and development expenses
incurred on behalf of ALZA Pharmaceuticals related to products
under development for marketing by ALZA Pharmaceuticals.
On September 29, 2000, ALZA exercised its option to acquire
all of the Class A Common Stock (the "Stock") of Crescendo for a
cash payment of $100.0 million. ALZA exercised its option to
acquire the Crescendo Stock pursuant to the terms of the purchase
option set forth in Crescendo's Restated Certificate of
Incorporation. The closing date of the transaction is November 13,
2000.
After the closing date, Crescendo will be a wholly-owned
subsidiary of ALZA. Royalties that would otherwise have been
paid by ALZA to Crescendo on net sales of products licensed from
Crescendo will no longer be payable following the closing date.
Following ALZA's exercise of its purchase option, there will no
longer be research and development revenues from Crescendo.
ALZA TECHNOLOGIES
Research and development revenues from clients other than
Crescendo increased 64% and 10% for the quarter and nine months
ended September 30, 2000, respectively, compared to the same
period in 1999, primarily due to several new development
agreements with clients that have been signed since the beginning
of 2000, which increased the level of product development
activities. Revenues from product development activities vary
from quarter to quarter depending upon the mix of projects
underway and the phase of development of each project. The
decrease in the intersegment revenues is due to the change in the
current period's segment presentation for research and
development expenses. In the current year segment presentation,
certain research and development expenses previously recorded in
the ALZA Technologies segment and charged to ALZA Pharmaceuticals
were moved to the ALZA Pharmaceuticals segment, as they were
incurred directly by ALZA Pharmaceuticals departments. Under the
prior period's segment presentation, intersegment revenues for
ALZA Technologies for the quarter and nine months ended September
30, 2000 would have been $24.9 million and $68.3 million,
respectively, instead of $11.4 million and $36.1 million under
the current segment presentation.
Research and Development Expenses
Quarter Ended Nine Months Ended
September 30, September 30,
(Dollars in millions) 2000 1999 2000 1999
_________________________________________________________________
ALZA PHARMACEUTICALS
Intersegment $ 11.4 $ 21.2 $36.1 $ 73.0
Product development
expense 20.2 6.5 46.8 21.1
___________________________________________________________________
Total 31.6 27.7 82.9 94.1
_________________________________________________________________
ALZA TECHNOLOGIES
Intersegment 0.2 - 1.1 -
Product development
expense 31.3 34.8 97.4 112.1
___________________________________________________________________
Total 31.5 34.8 98.5 112.1
_________________________________________________________________
Intersegment elimination (11.6) (21.2) (37.2) (73.0)
_________________________________________________________________
Total research and development
expenses $ 51.5 $ 41.3 $144.2 $133.2
_________________________________________________________________
Percentage of total revenues 19% 19% 20% 22%
_________________________________________________________________
ALZA PHARMACEUTICALS
ALZA Pharmaceuticals engages ALZA Technologies to provide
research and development services, which are charged under the
same formula ALZA charges client companies. Total research and
development expenses increased 14% for the quarter ended
September 30, 2000 compared to the same period in 1999, primarily
due to an increase in development expenses related to certain
Crescendo projects. Total research and development expenses
decreased 12% for the nine months ended September 30, 2000
compared to the same periods in 1999, due to a change in current
period's segment presentation for research and development
expenses. In the current year segment presentation, certain
research and development expenses, including expenses of clinical
studies, previously recorded in the ALZA Technologies segment and
charged to ALZA Pharmaceuticals, were moved to the ALZA
Pharmaceuticals segment, as they were incurred directly by ALZA
Pharmaceuticals departments. Under the prior period's segment
presentation, intersegment expenses for the quarter and nine
months ended September 30, 2000 would have been $24.9 million and
$68.3 million, respectively. Product development expense under
the prior period's segment presentation for the quarter and nine
months ended September 30, 2000 would have been $15.6 million and
$34.0 million, respectively.
ALZA TECHNOLOGIES
Research and development expenses decreased 9% and 12% for
the quarter and nine months ended September 30, 2000,
respectively, compared to same periods in 1999, reflecting the
change in the current period's segment presentation for research
and development expenses. In the current year segment
presentation, certain research and development expenses
previously recorded in the ALZA Technologies segment and charged
to ALZA Pharmaceuticals were moved to the ALZA Pharmaceuticals
segment, as they were incurred directly by ALZA Pharmaceuticals
departments. Under the prior period's segment presentation,
product development expense for the quarter and nine months ended
September 30, 2000 would have been $45.0 million and $120.4
million, respectively.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, General and Administrative Expenses
Quarter Ended Nine Months Ended
September 30, September 30,
(Dollars in millions) 2000 1999 2000 1999
_________________________________________________________________
ALZA PHARMACEUTICALS
Sales and marketing
expenses $ 76.7 $ 51.3 $198.9 $139.6
Amortization of product
acquisition payments 3.8 3.7 10.9 11.3
___________________________________________________________________
Total 80.5 55.0 209.8 150.9
___________________________________________________________________
ALZA TECHNOLOGIES
Amortization of product
acquisition payments 2.2 2.3 6.8 6.9
___________________________________________________________________
OTHER
General and administrative
expenses 10.6 8.6 34.31 23.7
_________________________________________________________________
Total selling, general
administrative expenses $ 93.3 $ 65.9 $250.9 $181.5
___________________________________________________________________
Total selling, general and
administrative expenses
as a percentage of total
revenues 34% 30% 35% 30%
_________________________________________________________________
1 For the nine months ended September 30, 2000, general and
administrative expenses for Other includes $4.8 million of
charges associated with the consolidation of certain research and
development facilities. Excluding these charges, general and
administrative expenses for Other would have been $29.5 million
for the nine months ended September 30, 2000.
ALZA PHARMACEUTICALS
Total sales, marketing and product amortization expenses
increased 46% and 39% for the quarter and nine months ended
September 30, 2000, respectively, compared to the same periods in
1999, as a result of the significant increase in sales and
marketing expenses for ALZA's expanded product portfolio and
commercial organization, as well as the increase in sales and
marketing expenses associated with the promotion of Ditropan XL
and launch of Concerta. During the first half of 2000, ALZA
increased the size of its urology, primary care and oncology
sales forces. During the third quarter of 2000, ALZA expanded
its central nervous system sales force in connection with the
launch of Concerta.
In April 2000, ALZA entered into an agreement with McNeil
Consumer Healthcare ("McNeil"), a Johnson and Johnson company, to
co-promote Concerta in the United States. ALZA and McNeil have
deployed a combined sales force of over 400 sales professionals
to support Concerta, including over 300 sales professionals from
McNeil. McNeil will receive payments based on sales calls made
and based on sales of Concerta above certain levels.
OTHER
General and administrative expenses increased 23% and 24%
for the quarter and nine months ended September 30, 2000,
respectively, compared to the same period in 1999, excluding the
first quarter 2000 charges described above. The increase was
primarily due to an increase in corporate administrative
expenses.
NET INTEREST
Quarter Ended Nine Months Ended
Net Interest September 30, September 30,
(In millions) 2000 1999 2000 1999
_________________________________________________________________
Interest and
other income $ (18.1) $ (7.3) $(30.7) $ (30.7)
Interest expense 13.5 14.1 44.2 43.8
________________________________________________________________
Net interest and
other (income) expense (4.6) 6.8 13.5 13.1
________________________________________________________________
Interest and other income increased significantly for the
quarter ended September 30, 2000, compared to the same period in
1999, primarily due to an increase in interest income related to
investment of the proceeds from the 3% Debenture financing
completed in late July 2000. Interest expense was relatively
constant for the quarter and nine months ended September 30,
2000, compared to the same periods in 1999.
Effective Tax Rate
For the quarter and nine months ended September 30, 2000,
ALZA's combined federal and state effective income tax rate was
31% compared to 32% for same periods in 1999, excluding the tax
benefit of $7.8 million resulting from merger-related costs of
$32.6 million. The actual effective income tax rate will depend
upon the actual level of earnings, changes in the tax laws, and
the amount of investment and research credits available and
ALZA's ability to utilize such credits.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity and Capital Resources September 30, December 31,
(In millions) 2000 1999
_________________________________________________________________
Working capital $ 1,102.3 $ 297.8
Cash and investments 1,387.6 598.9
Total assets 2,740.4 1,852.5
Long-term debt 1,115.2 979.0
_________________________________________________________________
Nine months ended September 30,
(In millions) 2000 1999
_________________________________________________________________
Net cash provided by
operating activities $ 135.4 $ 89.7
Capital expenditures 27.1 62.9
Product acquisition payments 5.6 35.0
_________________________________________________________________
Cash flow generated by operating activities for the nine
months ended September 30, 2000 was $135.4 million compared to
$89.7 million (or $109.4 million excluding payments for merger-
related expenses) for the nine months ended September 30, 1999.
The increase in cash flow provided by operating activities was
primarily due to higher net income of $133.0 million for the nine
months ended September 30, 2000 compared with $80.7 million for
the same period in 1999.
ALZA's capital spending for the nine months ended September
30, 2000 was $27.1 million for additions to facilities and
equipment to support its expanding research, development and
manufacturing activities, compared to capital spending of $62.9
million for the same period in 1999. Capital expenditures for the
remainder of 2000 are expected to be lower than 1999 levels as a
result of the completion of the current phase of development of
the Mountain View campus into which ALZA moved during 1999.
On July 19, 2000, ALZA called for the redemption of its
outstanding 5% Debentures on August 18, 2000. Substantially all
holders of the 5% Debentures that were outstanding at July 19,
2000 elected to convert their debentures into shares of ALZA
common stock at a conversion price of $19.09 per share, or
approximately 13.09 shares per $1,000 principal amount of
debentures. The aggregate number of shares issued upon conversion
was 26.2 million. The amount paid to redeem the remaining 5%
Debentures was not material.
On July 28, 2000, ALZA completed a private offering of the
3% Debentures due July 28, 2020, which were issued at a price of
$551.26 per $1,000 principal amount at maturity. The 3%
Debentures have a total principal amount at maturity of $1.09
billion, with a yield to maturity of 3% per annum, computed on a
semiannual bond equivalent basis. There are no periodic interest
payments. The offering resulted in approximately $587 million of
net proceeds to ALZA. The 3% Debentures are convertible, at the
option of the holder, at any time prior to maturity, unless
previously redeemed or repurchased, into 14.027 shares per $1,000
principal amount at maturity, at a conversion price of $39.30 per
share, subject to certain anti-dilution adjustments. At the
option of the holder, the 3% Debentures may be repurchased by
ALZA on July 28, 2003, 2008 or 2013, at a purchase price equal to
the issue price plus accreted original issue discount to such
purchase date. ALZA, at its option, may elect to deliver either
ALZA common stock or cash, or a combination of stock or cash, in
the event of repurchase of the 3% Debentures. ALZA, at its
option, may also redeem any or all of the 3% Debentures after
July 28, 2003, at the issue price plus accreted original issue
discount. The proceeds of the offering will be used for general
corporate purposes, which may include acquisition of products,
technology and additional facilities.
ALZA believes that its existing cash and investment
balances, including the proceeds from the sale of the 3%
Debentures, are adequate to fund its cash needs for 2000 and
beyond. Should the need arise, ALZA believes it would be
able to borrow additional funds (although no such borrowing
arrangements are in place) or otherwise raise additional capital.
ALZA may use its capital to acquire or license technology or
products and/or to make strategic investments. On September 29,
2000, ALZA exercised its option to acquire all of the Class A
Common Stock of Crescendo for a cash payment of $100.0 million,
which will be paid on the closing date of the transaction on
November 13, 2000.
Item 3. Quantitative and Qualitative Disclosures about Market
Risk
Financial market risks related to changes in interest rates
and foreign currency exchange rates are described in Part II,
Item 7A, Quantitative and Qualitative Disclosure About Market
Risk, in ALZA's Annual Report on Form 10-K for the year ended
December 31, 1999 and have not changed materially since such
date.
ALZA is exposed to equity price risks on the marketable
portion of equity securities included in its portfolio of
investments entered into to further its business and strategic
objectives. These investments are generally in small
capitalization stocks in the pharmaceutical and biotechnology
industry sector, in companies with which ALZA has research and
development or product agreements or certain other commercial
arrangements. ALZA typically does not attempt to reduce or
eliminate its market exposure on these securities. A 20% adverse
change in equity prices would result in an approximate $7.4
million decrease in ALZA's available-for-sale securities, based
upon a sensitivity analysis performed on ALZA's financial
position at September 30, 2000. However, actual results may
differ materially.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Product liability suits have been filed against ALZA from
time to time relating to various products, and a number of suits
have been filed against Janssen and ALZA relating to the
Duragesic product. Janssen is managing the defense of the
Duragesic product suits in consultation with ALZA under an
agreement between the parties.
In October 1999, purported class action lawsuits were filed
against ALZA, Abbott and certain directors of each company and
such suits were consolidated as In re Abbott/ALZA Merger
Litigation in the federal court in the Northern District of
Illinois (99C6584). The suits alleged that ALZA and Abbott had
wrongfully failed to disclose certain regulatory issues regarding
Abbott's diagnostic business to ALZA stockholders prior to an
ALZA stockholders meeting in September 1999. The suits were
dismissed in December 1999. Attorneys representing the
plaintiffs in this litigation have petitioned the court for
attorneys' fees in connection with their services in this case.
ALZA and Abbott opposed this petition, which was denied by the
Court in August 2000.
Historically, the cost of resolution of liability claims
against ALZA (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:
27 Financial Data Schedule
(b) On August 10, 2000 ALZA filed a current report on Form 8-
K to announce that it completed the sale of $1.09 billion
aggregate principal amount at maturity of zero coupon
convertible subordinated debentures due July 28, 2020.
On September 6, 2000 ALZA filed a current report on Form
8-K to announce that it completed the redemption of its
5% Convertible Debentures due 2006.
On September 13, 2000 ALZA filed a current report on
Form 8-K to announce that it called a special meeting of
its stockholders to amend its Restated Certificate of
Incorporation to (1) increase the number of authorized
shares of the Company's Common Stock from its current
level of 300,000,000 to 1,000,000,000 shares, (2) effect
a two-for-one stock split of currently outstanding
shares of Common Stock, and (3) adjust the per share par
value of the Common Stock from $0.01 to $0.005.
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 13, 2000 By: /s/ Dr. Ernest Mario
Dr. Ernest Mario
Chairman and Chief
Executive Officer
Date: November 13, 2000 By: /s/ Matthew K. Fust
Matthew K. Fust
Senior Vice President and
Chief Financial Officer
EXHIBIT INDEX
Exhibit
27 Financial Data Schedule