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, 2001
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 May 4, 2001:
Common Stock, $.005 par value - 238,949,490 shares
ALZA CORPORATION
FORM 10-Q for the Quarter Ended
March 31, 2001
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 6-11
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12-23
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 23
Part II. Other Information
Item 1. Legal Proceedings 24
Item 6. Exhibits and Reports on Form 8-K 24
Signatures 25
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
March 31,
2001 2000
______________________________________________________________
Revenues:
Net sales $ 226.2 $ 108.8
Royalties, fees and other 65.9 67.3
Research and development 6.0 25.4
________ ________
Total revenues 298.1 201.5
Costs and expenses:
Costs of products shipped 53.4 34.7
Research and development 50.4 44.8
Selling, general and administrative 122.6 72.0
Acquisition of in-process research
and development 10.0 -
________ ________
Total costs and expenses 236.4 151.5
________ ________
Operating income 61.7 50.0
Interest expense 14.3 15.4
Interest and other income (26.5) (5.4)
________ ________
Net interest and other (income) expense (12.2) 10.0
________ ________
Income before income taxes and cumulative
effect of changes in accounting principles 73.9 40.0
Provision for income taxes 22.9 12.3
________ ________
Income before cumulative effect of changes
in accounting principles 51.0 27.7
Cumulative effect of changes in accounting
principles (net of income taxes of
$1.5 million and $5.0 million for
2001 and 2000, respectively) 2.2 (7.4)
________ ________
Net income $ 53.2 $ 20.3
======== ========
Earnings per share - basic
Income before cumulative effect of changes
in accounting principles $ 0.21 $ 0.14
Cumulative effect of changes in accounting
principles $ 0.01 $ (0.04)
________ ________
Net income $ 0.22 $ 0.10
======== ========
Earnings per share - diluted
Income before cumulative effect of changes
in accounting principles $ 0.20 $ 0.13
Cumulative effect of changes in accounting
principles $ 0.01 $ (0.03)
________ ________
Net income $ 0.21 $ 0.10
======== ========
Shares used in per share computation (See Note 3)
Basic 237.9 204.3
Diluted 283.7 207.4
See accompanying notes.
ALZA CORPORATION
Condensed Consolidated Balance Sheet (unaudited)
(In millions)
March 31, December 31,
2001 2000
________________________________________________________________
ASSETS
Current assets:
Cash and cash equivalents $ 692.8 $ 867.0
Short-term investments 118.7 146.4
Receivables, net 180.7 169.0
Inventories, at cost:
Raw materials 24.6 15.9
Work in process 18.7 21.8
Finished goods 29.3 27.3
________ ________
Total inventories 72.6 65.0
Prepaid expenses and other
current assets 50.1 27.7
________ ________
Total current assets 1,114.9 1,275.1
Property, plant and equipment 613.6 600.1
Less accumulated depreciation
and amortization (187.1) (178.7)
________ ________
Net property, plant and equipment 426.5 421.4
Long-term investments 629.2 447.5
Deferred product acquisition costs 343.3 324.2
Cash surrender value of life insurance 247.5 201.9
Other assets 267.4 251.5
________ ________
TOTAL ASSETS $3,028.8 $2,921.6
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 79.8 $ 77.6
Accrued liabilities 80.4 63.2
Current portion of long-term debt 9.7 9.8
________ ________
Total current liabilities 169.9 150.6
5 1/4% zero coupon convertible
subordinated debentures 470.0 464.0
3% zero coupon convertible
subordinated debentures 613.0 608.5
Other long-term liabilities 130.1 135.1
Stockholders' equity:
Common stock and additional
paid-in capital 1,375.7 1,342.7
Accumulated other comprehensive income 5.6 9.4
Retained earnings 264.5 211.3
________ ________
Total stockholders' equity 1,645.8 1,563.4
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $3,028.8 $2,921.6
======== ========
See accompanying notes.
ALZA CORPORATION
Condensed Consolidated Statement of Cash Flows (unaudited)
(In millions)
Three Months Ended
March 31,
2001 2000
_________________________________________________________________
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 53.2 $ 20.3
Non-cash adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Depreciation and amortization 13.4 13.2
Amortization of product acquisition payments 7.4 6.1
Cumulative effect of changes in
accounting principles (2.2) 7.4
Tax benefit for stock options and stock
purchase plans 8.3 0.6
Interest on 5 1/4% zero coupon convertible
subordinated debentures 6.1 5.8
Interest on 3% zero coupon convertible
subordinated debentures 4.5 -
Undistributed income from real estate
joint venture (1.1) (1.2)
Gain on sale of assets, net (8.8) -
Asset write-down - 1.9
Changes in current assets:
Receivables (11.7) (25.4)
Inventories (8.8) (0.9)
Prepaid expenses and other current assets (20.1) (3.0)
Prepaid premiums and increase in cash
surrender value of life insurance (45.6) (24.5)
Changes in liabilities:
Accounts payable 10.9 (41.4)
Accrued liabilities 22.5 6.0
Other long-term liabilities 3.4 1.8
________ _______
Total adjustments (21.8) (53.6)
________ _______
Net cash provided by (used in)
operating activities 31.4 (33.3)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (14.0) (11.9)
Proceeds from sale of assets 10.1 -
Product acquisition payments (35.3) (1.0)
Purchases of available-for-sale securities (299.9) (6.6)
Sales and maturities of available-for-sale
securities 144.1 10.3
Other investing activities (19.7) (4.7)
________ _______
Net cash used in investing activities (214.7) (13.9)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuances of common stock 18.0 6.9
Principal repayments of long-term debt, net (8.9) (6.5)
________ _______
Net cash provided by financing activities 9.1 0.4
Net decrease in cash and cash equivalents (174.2) (46.8)
Cash and cash equivalents at
beginning of period 867.0 149.4
________ _______
Cash and cash equivalents at end of period $ 692.8 $ 102.6
======== ========
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 March 31, 2001 and for the quarters ended
March 31, 2001 and 2000 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. The balance sheet at
December 31, 2000 has been derived from the audited financial
statements at that date but does not include all of the
information and footnotes required by generally accepted
accounting principles for complete financial statements.
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, 2000.
Revenue Recognition
ALZA recognizes non-refundable upfront product license fees
and certain other related fees over the periods of continuing
involvement. If, at the execution of the agreement, significant
development risk remains due to the stage of completion of the
product development, then such fees are recognized as revenue on
a straight-line basis over the development period. If, at the
execution of the agreement, the product is approved or product
development risk has been substantially eliminated, then such
fees are recognized as revenue on a straight-line basis over the
longer of the contractual term of the manufacturing obligation or
the expected period over which ALZA will supply the product. Fees
associated with substantive at risk performance milestones are
recognized as revenue upon their completion, as defined in the
respective agreements.
In the fourth quarter of 2000, but effective to January 1,
2000, ALZA changed its method of accounting to that described
above for non-refundable upfront product license fees and certain
other related fees. ALZA historically recognized these fees as
revenues when all of the conditions to payment had been met and
there were no further performance contingencies or conditions to
ALZA's receipt of payment. These fees were generally not
creditable against future payments. ALZA believes the change in
accounting principle is consistent with guidance provided in
Securities Exchange Commission Staff Accounting Bulletin No. 101
- - Revenue Recognition in Financial Statements ("SAB 101")
released in December 1999.
As a result of this change in method of accounting, the
results for the first quarter of 2000 were restated, and a net
charge of $7.4 million ($0.03 per diluted share) for the
cumulative effect of a change in accounting principle, calculated
as of January 1, 2000, was recorded for the quarter ended March
31, 2000. The amount of related deferred income recognized for
the quarter ended March 31, 2001 and 2000 was not significant.
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 $49.4 million and $19.2 million
for the quarters ended March 31, 2001 and 2000, respectively.
Other comprehensive loss was $3.8 million and $1.1 million for
the quarters ended March 31, 2001 and 2000, respectively.
Supplemental Disclosures of Cash Flow Information
Noncash Investing and Financing Three
months ended March 31,
Activities (In millions) 2001 2000
_________________________________________________________________
Net unrealized losses on
available-for-sale securities,
net of tax effect $ 3.3 $ 1.1
Accrued product and license
acquisition costs 1.6 -
Tax adjustment 5.5 -
Reclassification
Certain amounts in the prior year's financial statements
have been reclassified to conform to the 2001 presentation.
These reclassifications had no impact on previously reported
results of operations or stockholder's equity.
Accounting for Derivatives
ALZA implemented Statement of Financial Accounting Standards
133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS 133"), effective January 1, 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. Derivatives that are not designated as hedges
must be adjusted to fair value through income. ALZA's
implementation of SFAS 133 resulted in an after-tax gain of $2.2
million ($0.01 per diluted share) on certain investments for the
cumulative effect of this accounting change, effective as of
January 1, 2001. ALZA also recorded a $1.8 million loss in
interest and other income related to a decrease in fair value of
the investments during the quarter.
NOTE 2. PENDING BUSINESS COMBINATION
In March 2001, ALZA entered into an Agreement and Plan of
Merger (the "Merger Agreement") with Johnson & Johnson, a New
Jersey corporation ("J&J"), and Express Merger Sub Inc., a
Delaware corporation and a wholly-owned subsidiary of J&J.
Under the Merger Agreement, subject to the satisfaction of
closing conditions, including receipt of stockholder and
government approvals, ALZA will become a wholly-owned subsidiary
of J&J and each outstanding share of ALZA common stock will be
exchanged for 0.98 shares of J&J common stock, after adjustment
for a recently announced two-for-one stock split of J&J common
stock, which will be effective on or about June 12, 2001. The
merger is intended to be a tax-free reorganization and is intended
to be treated as a pooling of interests for financial reporting
purposes.
NOTE 3. 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 and convertible securities.
The following table sets forth the computation of ALZA's
basic and diluted earnings per share:
Quarter Ended March 31,
(In millions, except per share amounts)2001 2000
_________________________________________________________________
NUMERATOR:
Basic
Net income $ 53.2 $ 20.3
======= =======
Diluted
Net income $ 53.2 $ 20.3
Net interest expense on
convertible debt 7.5 -
_______ _______
Adjusted net income $ 60.7 $ 20.3
======= =======
DENOMINATOR:
Basic
Weighted average shares 237.9 204.3
Diluted
Weighted average shares 238.2 204.8
Effect of dilutive securities:
Employee stock options 5.9 2.6
5 1/4% Debentures 24.3 -
3% Debentures 15.3 -
_______ _______
Weighted average shares 283.7 207.4
======= =======
Basic earnings per share $ 0.22 $ 0.10
======= =======
Diluted earnings per share $ 0.21 $ 0.10
======= =======
Options to purchase 3.3 million and 10.6 million shares of
common stock were excluded from the diluted earnings per share
calculation for the quarters ended March 31, 2001 and 2000,
respectively. These options 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 would have been anti-dilutive. Assumed conversions of
ALZA's then-outstanding 5% convertible subordinated debentures due
2006 ("5% Debentures"), most of which were converted into ALZA
common stock when called for redemption in July 2000, 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 quarter ended March 31, 2000, as their
inclusion would have been anti-dilutive. The 3% zero coupon
convertible subordinated debentures due 2020 ("3% Debentures") were
issued in July 2000 and therefore were not included in the diluted
earnings per share calculation for the quarter ended March 31,
2000.
NOTE 4. ACQUISITIONS OF PRODUCT RIGHTS
In February 2001, ALZA acquired certain marketing rights to
Flexeril-registered trademark- (cyclobenzaprine) from Merck and
Co., Inc. ("Merck"). Under the terms of the agreement, ALZA
obtained exclusive sales and marketing rights for Flexeril and
the exclusive license to the Flexeril trademark for
pharmaceutical sales in the United States and Canada, excluding
over-the-counter sales. ALZA made a $25.0 million upfront
payment to Merck, which was capitalized as a deferred product
acquisition cost.
In January 2001, ALZA finalized an exclusive license
agreement with PPD GenuPro, Inc. ("PPD"), a subsidiary of
Pharmaceutical Product Development, Inc., for dapoxetine. Under
the agreement, ALZA received worldwide rights to develop and
commercialize dapoxetine as a treatment for genitourinary
disorders, including rapid ejaculation. A payment of $10.0
million was made to PPD and was charged to acquisition of in-
process research and development, as the product is in
development and has not received regulatory approval.
NOTE 5. 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 under development with
Crescendo Pharmaceuticals Corporation ("Crescendo") through the
third quarter of 2000, after which Crescendo was acquired) and
certain co-promotion revenues for products co-promoted by ALZA;
and ALZA Technologies, which includes research, development and
manufacturing for pharmaceutical product development partners and
ALZA Pharmaceuticals, and royalties and fees resulting from sales
by ALZA's pharmaceutical product development partners 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 pharmaceutical product
development partners. Additionally, ALZA Pharmaceuticals
develops products for commercialization by ALZA, while ALZA
Technologies develops products for commercialization by other
companies and ALZA Pharmaceuticals.
The following tables contain information about segment
operating income (loss) for the quarters ended March 31, 2001 and
2000.
Quarter Ended March 31,
(In millions) 2001 2000
________________________________________________________________
Revenues from external customers
Net sales
ALZA Pharmaceuticals $ 189.1 $ 79.8
ALZA Technologies 37.1 29.0
Royalties, fees and other
ALZA Pharmaceuticals 6.3 2.6
ALZA Technologies 56.5 63.3
Other 3.1 1.4
Research and development
ALZA Pharmaceuticals - 20.1
ALZA Technologies 6.0 5.3
_______ _______
Total $ 298.1 $ 201.5
======= =======
Intersegment revenues
Net sales
ALZA Technologies $ 22.1 $ 9.9
Research & development
ALZA Pharmaceuticals - 0.6
ALZA Technologies 10.9 11.5
_______ _______
Total $ 33.0 $ 22.0
======= =======
Segment operating income (loss)
ALZA Pharmaceuticals $ 20.8 $ 5.5
ALZA Technologies 47.8 55.4
Other (6.9) (10.9)
_______ _______
Total $ 61.7 $ 50.0
======= =======
The following table contains a reconciliation of ALZA's
income before taxes to that reported by segment in the tables
above:
Quarter Ended March 31,
(In millions) 2001 2000
_______________________________________________________________
Income before taxes
Total operating income for
reportable segments $ 61.7 $ 50.0
Unallocated amounts:
Interest and other income 26.5 5.4
Interest expense (14.3) (15.4)
________ ________
Income before income taxes and
cumulative effect of changes in
accounting principles $ 73.9 $ 40.0
======== ========
NOTE 6. SUBSEQUENT EVENTS
In April 2001, ALZA sold two of its buildings located in
Palo Alto, California. The net gain from the sale of the
buildings was $10.9 million.
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. In addition, while ALZA has agreed to merge with J&J,
the merger has not yet closed and there can be no assurance that
it will close. There are risks associated with the merger and
the closing of the merger. In addition, 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, 2000.
RESULTS OF OPERATIONS
SUMMARY Quarter Ended March 31,
(In millions, except per share amounts)2001 2000
_________________________________________________________________
Revenues $ 298.1 $ 201.5
_________________________________________________________________
Operating income 61.7 50.0
_________________________________________________________________
Net income 53.2 20.3
_________________________________________________________________
Diluted earnings per share 0.21 0.10
_________________________________________________________________
ALZA's total revenues rose 48% for the quarter ended March
31, 2001, compared to the same period in 2000. Pro forma net
income, excluding certain items discussed below, increased 87% in
the quarter ended March 31, 2001 from the same period in 2000.
Significant factors contributing to ALZA's financial results
include:
- Net sales increased significantly for the quarter ended
March 31, 2001 from the same period in 2000, led by growth in
ALZA Pharmaceuticals product sales revenue, which more than
doubled to $189.1 million for the quarter ended March 31, 2001
from $79.8 million for the same period in 2000. The increase
in net sales resulted primarily from increased sales of
Ditropan XL-registered trademark- (oxybutynin chloride) and
Doxil-registered trademark- (doxorubicin HCl liposome
injection), and sales of Concerta-trademark- (methylphenidate
HCl), which was launched in August 2000.
- Gross margin increased to 76% for the quarter ended March
31, 2001 from 68% for the quarter ended March 31, 2000,
reflecting increased sales of higher margin products by ALZA
Pharmaceuticals.
- Net interest and other income increased substantially to
$12.2 million for the quarter ended March 31, 2001 from a net
interest and other expense of $10.0 million for the quarter
ended March 31, 2000. This increase was primarily due to
higher invested cash balances and an $8.9 million gain from
the sale of the Amphotec-registered trademark- (amphotericin B)
product to InterMune Pharmaceuticals, Inc. ("InterMune").
- Research and development revenues, reflecting work performed
by ALZA for product development partners, decreased 76% to
$6.0 million for the quarter ended March 31, 2001 from $25.4
million for the quarter ended March 31, 2000. The decrease in
revenues was due to the termination of research and
development revenues from Crescendo, which was purchased by
ALZA during the fourth quarter of 2000. Crescendo accounted
for $20.1 million in research and development revenues for the
quarter ended March 31, 2000.
- Selling, general and administrative expenses increased 70% to
$122.6 million for the quarter ended March 31, 2001 from $72.0
million for the quarter ended March 31, 2000. This increase
reflects marketing and sales expenses associated with Concerta,
increased selling expenses related to Ditropan XL, including
the expansion of ALZA's urology, senior care and primary care
sales forces, and additional promotional activities in support
of Doxil.
ALZA's results of operations for the quarter ended March 31,
2001 include the following items:
- $10.0 million ($6.0 million after tax) charge for in-process
research and development relating to a licensing agreement with
PPD for the compound dapoxetine which is under development.
- $3.7 million ($2.2 million after tax) gain for a cumulative
effect of a change in accounting principle in connection with
the adoption of SFAS 133.
ALZA's results of operations for the quarter ended March 31,
2000 include the following items:
- $4.8 million ($2.9 million after tax) charge related to the
consolidation of certain research and development operations.
- $12.4 million ($7.4 million after tax) charge for the
cumulative effect of a change in accounting principle
pertaining to revenue recognition in connection with the
adoption of SAB 101.
Excluding these items, pro forma net income for the quarter
ended March 31, 2001 was $57.0 million, or $0.23 per diluted
share, compared to $30.5 million, or $0.15 per diluted share for
the quarter ended March 31, 2000.
OPERATING SEGMENT SUMMARY Quarter Ended March 31,
(In millions) 2001 2000
_________________________________________________________________
Revenues
ALZA PHARMACEUTICALS $ 195.4 $ 103.1
ALZA TECHNOLOGIES 132.6 119.0
OTHER 3.1 1.4
_________________________________________________________________
Total segment revenues 331.1 223.5
Intersegment elimination (33.0) (22.0)
_________________________________________________________________
Total revenues $ 298.1 $ 201.5
Operating income (loss)
ALZA PHARMACEUTICALS $ 20.8 1 $ 5.5
ALZA TECHNOLOGIES 47.8 55.4
OTHER (6.9) (10.9)2
_________________________________________________________________
Total operating income $ 61.7 $ 50.0
_________________________________________________________________
1 For the quarter ended March 31, 2001, operating income for
ALZA Pharmaceuticals included $10.0 million of in process
research and development charges relating to a licensing
agreement with PPD for the compound dapoxetine which is under
development. Excluding these charges, operating income for
ALZA Pharmaceuticals would have been $30.8 million for the
quarter ended March 31, 2001.
2 For the quarter ended March 31, 2000, the operating loss for
Other included $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 $6.1 million for the quarter ended March 31, 2000.
ALZA PHARMACEUTICALS
ALZA Pharmaceuticals derives its revenues from sales of ALZA
Pharmaceuticals products to the pharmaceuticals marketplace in
the United States and Canada and to distributors who market the
products elsewhere; research and development revenues from
Crescendo through the third quarter of 2000, after which
Crescendo was acquired; co-promotion fees from third parties, and
fees received with respect to rights to market, outside the
United States or Canada, products marketed or intended to be
marketed by ALZA Pharmaceuticals in the United States and Canada.
Revenues from Crescendo were offset by intersegment charges from
ALZA Technologies for research and development expenses related
to products to be marketed by ALZA Pharmaceuticals, which were
under development on behalf of Crescendo. ALZA Pharmaceuticals'
costs and expenses include costs of products shipped for products
marketed by ALZA Pharmaceuticals, including costs of products
manufactured by ALZA Technologies and third party manufacturers,
research and development expenses billed by ALZA Technologies and
others, sales and marketing expenses and amortization of product
acquisition payments.
Operating income increased substantially for the quarter
ended March 31, 2001 compared to the same period in 2000. This
improvement was due to an increase in net sales, which more than
doubled compared to the first quarter of 2000, and an increase in
gross margin to 86% for the quarter ended March 31, 2001 from 82%
for the same period in 2000. Partially offsetting these
increases was an increase in sales and marketing expenses and the
termination of research and development revenues from Crescendo.
ALZA TECHNOLOGIES
ALZA Technologies derives its revenues from net sales of
products manufactured for pharmaceutical product development
partners and for ALZA Pharmaceuticals, royalty revenues, fee
revenues under agreements with partners, and revenues for
research and development activities undertaken for partners and
ALZA Pharmaceuticals.
Operating income decreased 14% for the quarter ended March
31, 2001, compared to the same period in 2000. The decline was
due to a decrease in royalties, fees and other revenue compared
to the first quarter of 2000 and a decrease in gross margin as a
percentage of net sales to 25% for the quarter ended March 31,
2001, compared to 29% for the same period in 2000, as a result of
a shift in product mix.
OTHER
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.
Operating loss remained relatively constant for the quarter
ended March 31, 2001, compared to the same period in 2000,
excluding certain charges for 2000 described above.
NET SALES
Net Sales Quarter Ended March 31,
(Dollars in millions) 2001 2000
_______________________________________________________________
ALZA PHARMACEUTICALS
Concerta-trademark- $ 65.4 $ -
Ditropan XL-registered
trademark- 51.9 32.8
Doxil-registered trademark- 28.1 13.0
Ethyol-registered trademark- 14.7 13.8
Elmiron-registered trademark- 11.5 5.0
Other 17.5 15.2
_______________________________________________________________
Total 189.1 79.8
_______________________________________________________________
ALZA TECHNOLOGIES
Contract manufacturing 37.1 29.0
Intersegment 22.1 9.9
_______________________________________________________________
Total 59.2 38.9
_______________________________________________________________
Intersegment eliminations (22.1) (9.9)
_______________________________________________________________
Total net sales $ 226.2 $ 108.8
ALZA PHARMACEUTICALS
Net sales more than doubled for the quarter ended March 31,
2001, compared to the same period in 2000. This increase in ALZA
Pharmaceuticals' net sales can be primarily attributed to
substantial increases in sales of Ditropan XL and Doxil, and sales
of Concerta, which was launched in August 2000.
ALZA Pharmaceuticals' net sales 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 the
third quarter of 2000, Ditropan XL was launched in the first
quarter of 1999, and Doxil and Testoderm TTS-registered trademark-
(Testosterone Transdermal System) were cleared for marketing during
the past few years. In June 1999, the United States Food and Drug
Administration ("FDA") approved new indications for
Ethyol-registered trademark-(amifostine) and Doxil. 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 from contract manufacturing increased 28% for the
quarter ended March 31, 2001, compared to the same period in
2000. This increase was primarily due to increased manufacture
and shipment by ALZA of Duragesic-registered trademark- (fentanyl)
and Catapres-TTS-registered trademark-(clonidine), and to the
manufacture and shipment of launch quantities of Viadur-registered
trademark- (leuprolide acetate implant) to Bayer Corporation in the
first quarter 2001, offset by decreased shipments of NicoDerm CQ-
registered trademark- (nicotine).
The timing and quantities of orders for products by partner
companies are not within ALZA's control. Therefore, net sales to
partners can be expected to fluctuate from period to period,
sometimes significantly, depending on the volume, mix and timing
of orders for products shipped and, in some quarters, due to the
shipment of launch quantities of products to partners.
GROSS MARGIN
Quarter Ended March 31,
Gross Margin 2001 2000
_________________________________________________________________
ALZA PHARMACEUTICALS(1) 86% 82%
ALZA TECHNOLOGIES(1) 25% 29%
_________________________________________________________________
Gross margin(1) 76% 68%
_________________________________________________________________
(1) After intersegment eliminations.
The increase in total gross margin for the quarter ended
March 31, 2001, compared to the same period in 2000 was due to
increased sales of higher-margin products by ALZA Pharmaceuticals
and increases 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, some of which may be
significant, can be expected to continue to occur. A trend of
higher gross margins may be achieved through a proportionate
increase in the sales by ALZA Pharmaceuticals in relation to
sales by ALZA Technologies and, to a lesser extent, increased
utilization of capacity and greater operating efficiencies by
ALZA Technologies.
ALZA PHARMACEUTICALS
The gross margin on net sales of ALZA Pharmaceuticals
products increased for the quarter ended March 31, 2001 compared
to the same period in 2000 primarily due to a shift in product
mix towards sales of higher-margin products, including sales of
Concerta.
ALZA TECHNOLOGIES
The gross margin on net sales of products manufactured by
ALZA Technologies for sale by partner companies and ALZA
Pharmaceuticals decreased for the quarter ended March 31, 2001,
compared to the same period in 2000, primarily due to a shift in
product mix. ALZA Technologies' gross margin on its contract
manufacturing sales is considerably lower than ALZA
Pharmaceuticals' gross margin on its sales of ALZA
Pharmaceuticals products. ALZA's partner-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
partners' 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 partner companies on products developed under
joint development and commercialization agreements with ALZA and
marketed by the partner 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 March 31,
(In millions) 2001 2000
_________________________________________________________________
ALZA PHARMACEUTICALS $ 6.3 $ 2.6
ALZA TECHNOLOGIES 56.5 63.3
OTHER 3.1 1.4
_________________________________________________________________
Total royalties, fees and
other revenues $ 65.9 $ 67.3
_________________________________________________________________
ALZA PHARMACEUTICALS
Fees and other revenues increased for the quarter ended
March 31, 2001, compared to the same period in 2000 primarily due
to increases in co-promotion fees with respect to products co-
promoted by ALZA Pharmaceuticals.
ALZA TECHNOLOGIES
Royalties, fees and other revenues decreased 11% for the
quarter ended March 31, 2001, compared to the same period in
2000, primarily due to lower royalties on Procardia XL-registered
trademark- (nifedipine) and NicoDerm CQ. In addition, fees were
received from product development partners in the quarter ended
March 31, 2000, for which no corresponding amounts were recorded
in the first quarter of 2001.
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 some companies
have received FDA approval of their ANDAs. Pfizer Inc. ("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.
RESEARCH AND DEVELOPMENT
ALZA's research and development revenues generally represent
reimbursement of costs, including a portion of general and
administrative expenses, by partners for the development of
products. Therefore, product development activities do not
contribute significantly to ALZA's operating results.
Research and Development Revenues Quarter Ended March 31,
(In millions) 2001 2000
_________________________________________________________________
ALZA PHARMACEUTICALS
Crescendo $ - $ 20.1
Intersegment - 0.6
_________________________________________________________________
Total - 20.7
_________________________________________________________________
ALZA TECHNOLOGIES
Product development partners 6.0 5.3
Intersegment 10.9 11.5
_________________________________________________________________
Total 16.9 16.8
_________________________________________________________________
Intersegment elimination (10.9) (12.1)
_________________________________________________________________
Total research and development
revenues $ 6.0 $ 25.4
_________________________________________________________________
ALZA PHARMACEUTICALS
ALZA Pharmaceuticals derived research and development
revenues from Crescendo through the third quarter of 2000.
Revenues from Crescendo were partially offset by intersegment
charges from ALZA Technologies. 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.
In September 2000, ALZA exercised its option to acquire all
of the Class A Common Stock of Crescendo for a cash payment of
$100.0 million. Royalties that would otherwise have been paid by
ALZA to Crescendo on net sales of products licensed from
Crescendo (Ditropan XL, Concerta and Viadur) were no longer
payable following the closing date of the transaction. Research
and development revenues from Crescendo ended upon ALZA's
exercise of its purchase option.
ALZA TECHNOLOGIES
Research and development revenues from partners increased
slightly for the quarter ended March 31, 2001, compared to the
same period in 2000. 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.
Research and Development Expenses Quarter Ended March 31,
(In millions) 2001 2000
_________________________________________________________________
ALZA PHARMACEUTICALS
Intersegment $ 10.9 $ 11.5
Product development expense 15.8 (1) 13.1
_________________________________________________________________
Total ALZA Pharmaceuticals 26.7 24.6
_________________________________________________________________
ALZA TECHNOLOGIES
Intersegment - 0.6
Product development expense 34.6 31.7
_________________________________________________________________
Total ALZA Technologies 34.6 32.3
_________________________________________________________________
Intersegment elimination (10.9) (12.1)
_________________________________________________________________
Total research and development
expenses $ 50.4 $ 44.8
_________________________________________________________________
As a percentage of total revenues 17% 22%
_________________________________________________________________
(1) For the quarter ended March 31, 2001, product development
expense for ALZA Pharmaceuticals excludes $10.0 million of in-
process research and development charges relating to a
licensing agreement with for the compound dapoxetine which is
under development.
ALZA PHARMACEUTICALS
ALZA Pharmaceuticals engages ALZA Technologies to perform
research and development services, the cost of which is
determined based upon amounts that would be charged to third
parties for similar services. Total research and development
expenses remained relatively constant for the quarter ended March
31, 2001, compared to the same period in 2000.
ALZA TECHNOLOGIES
Research and development expenses remained relatively
constant for the quarter ended March 31, 2001, compared to the
same period in 2000.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses
Quarter Ended March 31,
(In millions) 2001 2000
_________________________________________________________________
ALZA PHARMACEUTICALS
Sales and marketing expenses $105.2 $ 53.6
Amortization of product
acquisition payments 4.9 3.8
_________________________________________________________________
Total 110.1 57.4
_________________________________________________________________
ALZA TECHNOLOGIES
Amortization of product
acquisition payments 2.5 2.3
_________________________________________________________________
OTHER
General and administrative expenses 10.0 12.3 (1)
_________________________________________________________________
Total selling, general and
administrative expenses $122.6 $ 72.0
_________________________________________________________________
Total selling, general and administrative
expenses as a percentage of total revenues 41% 36%
_________________________________________________________________
(1) For the quarter ended March 31, 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 $7.5
million for the quarter ended March 31, 2000.
ALZA PHARMACEUTICALS
Total sales, marketing and product amortization expenses
increased significantly for the period ended March 31, 2001,
compared to the same period in 2000, as a result of the
significant increase in sales and marketing expenses for ALZA's
expanded product portfolio and commercial organization, including
expenses associated with the promotion of Ditropan XL, Doxil and
Concerta. ALZA also expanded its commercial organization to a
total of 950 sales professionals, up significantly from the
same period in 2000. In addition to expanding its primary care,
urology and oncology sales organization, ALZA established its
central nervous system sales organization in connection with the
launch of Concerta in the second half of 2000.
ALZA is party to 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 receives payments based on sales calls made and
based on sales of Concerta above certain levels.
OTHER
General and administrative expenses increased 33% for the
quarter ended March 31, 2001, compared to the same period in
2000, excluding the first quarter 2000 charges described above.
The increase was primarily due to an increase in corporate
administrative expenses.
Net Interest Quarter Ended March 31,
(In millions) 2001 2000
_________________________________________________________________
Interest and other income $ (26.5) $ (5.4)
Interest expense 14.3 15.4
_________________________________________________________________
Net interest and other
(income) expense $ (12.2) $ 10.0
_________________________________________________________________
Interest and other income increased significantly for the
quarter ended March 31, 2001, compared to the same period in
2000, primarily due to higher invested cash balances from the
proceeds of the 3% Debenture financing completed in late July
2000 and positive operating cash flow, and a $8.9 million gain
from the sale of the Amphotec product to InterMune during the
first quarter of 2001.
Effective Tax Rate
For the quarters ended March 31, 2001 and 2000, ALZA's
combined federal and state effective income tax rate was 31%,
excluding $10.0 million of in-process research and development
costs in 2001 and $4.8 million associated with the consolidation
of research and development operations in 2000. ALZA expects its
combined federal and state effective tax rate for the full year
2001 to be 31%. 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 March 31, December 31,
(In millions) 2001 2000
_________________________________________________________________
Working capital $ 945.0 $ 1,124.5
Cash and investments 1,440.7 1,460.9
Total assets 3,028.8 2,921.6
Long-term debt 1,127.3 1,125.6
Three months ended March 31,
2001 2000
_________________________________________________________________
Net cash provided by (used in)
operating activities $ 31.4 $ (33.3)
Capital expenditures 14.0 11.9
Product acquisition payments 35.3 1.0
_________________________________________________________________
Cash flow generated by operating activities for the quarter
ended March 31, 2001 was $31.4 million compared to cash used in
operating activities for the quarter ended March 31, 2000 of
$33.3 million. The increase in cash flow provided by operating
activities was primarily due to strong earnings growth.
ALZA's capital spending for the quarter ended March 31, 2001
was $14.0 million, primarily for facilities and equipment,
compared to capital spending of $11.9 million for the same period
in 2000. Capital expenditures for the remainder of 2001 are
expected to be higher than 2000 levels as a result of expansion
of research, development and manufacturing facilities.
ALZA believes that its existing cash and investment balances
are adequate to fund its cash needs for 2001 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.
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, 2000 and have not changed materially since such
date.
ALZA is exposed to equity price risks on the marketable
portion of equity securities included in the portfolio of
investments entered into in furtherance of 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 $3.5
million decrease in ALZA's available-for-sale securities, based
upon a sensitivity analysis performed on ALZA's financial
position at March 31, 2001. However, actual results may differ
materially.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Product liability suits have been filed against Janssen and
ALZA from time to time relating to Duragesic-registered trademark-.
Janssen is managing the defense of these suits in consultation
with ALZA under an agreement between the parties. Product
liability suits have also been filed from time to time relating to
other ALZA-developed products.
In April 2001, PolyMASC Pharmaceuticals PLC ("PolyMASC")
filed an action against ALZA in federal district court in
Delaware alleging that ALZA infringes a patent owned by PolyMASC
by, among other things, commercializing PEGylated liposomes,
including the drug Doxil. ALZA believes the allegations contained
in the complaint are without merit and intends to defend against
such claims.
Historically, the cost of resolution of liability claims
against ALZA (including the claims mentioned above) has not been
significant. Moreover, ALZA management does not believe that, as
to any asserted or unasserted claims pending against it,
including the suits mentioned above, the resolution of any of
said actions would be likely to have a material adverse impact on
ALZA's results of operations or financial position.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
None
(b) On March 28, 2001, ALZA filed a current report on Form 8-
K to report entering into the merger agreement between ALZA
and Johnson & Johnson on March 26, 2001.
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 14, 2001 By: /s/ Dr. Ernest Mario
________________________________
Dr. Ernest Mario
Chairman and Chief
Executive Officer
Date: May 14, 2001 By: /s/ Matthew K. Fust
________________________________
Matthew K. Fust
Senior Vice President and
Chief Financial Officer