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 JUNE 30, 1995
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or
Transition Report Pursuant to Section 13 or 15(d) of the Securities
----- Exchange Act of 1934
For the transition period from to
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Commission File Number 1-6247
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ALZA CORPORATION
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(Exact name of registrant as specified in its charter)
DELAWARE 77-0142070
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
950 PAGE MILL ROAD, P.O. BOX 10950, PALO ALTO, CALIFORNIA 94303-0802
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (415) 494-5000
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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 July 31, 1995:
Common Stock, $.01 par value - 82,349,514 shares
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PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
ALZA CORPORATION
Condensed Consolidated Statement of Income (unaudited)
(In thousands, except per share amounts)
Quarter Ended Six Months Ended
June 30, June 30,
1995 1994 1995 1994
---------- ---------- ----------- ----------
REVENUES:
Royalties and fees $ 34,230 $ 27,959 $ 68,192 $ 60,808
Research and development 23,485 17,401 45,185 31,584
Net sales 19,180 19,743 38,006 37,636
Interest and other 6,110 4,046 11,862 7,286
-------- -------- -------- --------
Total revenues 83,005 69,149 163,245 137,314
COSTS AND EXPENSES:
Research and development 24,144 19,426 46,386 36,325
Costs of products shipped 16,738 14,176 33,160 28,018
General, administrative
and marketing 8,398 7,847 16,900 15,957
Interest and other 5,580 4,088 11,175 7,800
-------- -------- -------- --------
Total costs and expenses 54,860 45,537 107,621 88,100
-------- -------- -------- --------
Income before income taxes 28,145 23,612 55,624 49,214
Provision for income taxes 10,695 8,864 21,137 18,849
-------- -------- -------- --------
Net income $ 17,450 $ 14,748 $ 34,487 $ 30,365
-------- -------- -------- --------
-------- -------- -------- --------
Net income per common and
common equivalent share $ .21 $ .18 $ .42 $ .37
-------- -------- -------- --------
-------- -------- -------- --------
Weighted average common and
common equivalent shares 82,413 82,313 82,401 82,309
-------- -------- -------- --------
-------- -------- -------- --------
See accompanying notes.
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ALZA CORPORATION
Condensed Consolidated Balance Sheet (unaudited)
(In thousands)
June 30, December 31,
ASSETS 1995 1994
------ ------------- ----------------
Current assets:
Cash and cash equivalents $ 77,489 $ 88,844
Short-term investments 305,280 256,084
Receivables, net 94,936 84,879
Inventories, at cost:
Raw materials 19,980 18,264
Work in process 10,307 10,175
Finished goods 4,936 4,976
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Total inventories 35,223 33,415
Prepaid expenses and other current assets 26,455 29,211
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Total current assets 539,383 492,433
Property, plant and equipment 332,082 315,688
Less accumulated depreciation and amortization (75,933) (70,238)
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Net property, plant and equipment 256,149 245,450
Other assets 66,737 68,369
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Total assets $ 862,269 $ 806,252
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LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable $ 12,331 $ 20,006
Accrued income taxes 2,224 1,418
Accrued compensation 9,490 10,099
Other current liabilities 27,656 24,465
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Total current liabilities 51,701 55,988
5 1/4% zero coupon convertible subordinated debentures 353,303 344,593
Deferred income taxes 22,436 18,513
Other long-term liabilities 23,732 22,679
Stockholders' equity:
Common stock and additional paid-in capital 308,174 302,967
Unrealized losses on available-for-sale securities, net
of tax effect (547) (7,471)
Retained earnings 103,470 68,983
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Total stockholders' equity 411,097 364,479
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Total liabilities and stockholders' equity $ 862,269 $ 806,252
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See accompanying notes.
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ALZA CORPORATION
Condensed Consolidated Statement of Cash Flows (unaudited)
(In thousands)
Six Months Ended June 30,
1995 1994
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 34,487 $ 30,365
Non-cash adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 7,217 6,124
Interest on 5 1/4% zero coupon convertible
subordinated debentures 8,710 -
Deferred income taxes 3,923 3,086
Increase in assets:
Receivables (10,057) (8,461)
Inventories (1,808) (6,510)
Prepaid expenses and other current assets (2,064) (1,678)
Increase (decrease) in liabilities:
Accounts payable (7,675) 2,680
Accrued income taxes 806 3,903
Accrued compensation (609) 352
Accrued and other liabilities 4,244 3,564
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Total adjustments 2,687 3,060
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Net cash provided by operating activities 37,174 33,425
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (17,675) (12,867)
Purchases of available-for-sale securities (111,188) (130,356)
Sales of available-for-sale securities 72,356 50,613
Maturities of available-for-sale securities 1,380 59,974
Decrease (increase) in cash surrender value-life
insurance and prepaid premiums 310 (6,434)
Decrease in other assets 1,081 3,184
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Net cash used in investing activities (53,736) (35,886)
CASH FLOWS FROM FINANCING ACTIVITIES:
Maturities of commercial paper, net - (105)
Principal payments on long-term debt - (858)
Issuances of common stock 5,207 5,041
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Net cash provided by financing activities 5,207 4,078
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Net increase (decrease) in cash and cash equivalents (11,355) 1,617
Cash and cash equivalents at beginning of period 88,844 53,683
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Cash and cash equivalents at end of period $ 77,489 $ 55,300
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See accompanying notes.
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ALZA CORPORATION
June 30, 1995
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
The information at June 30, 1995 and for the quarter and six months ended
June 30, 1995 and 1994 is unaudited, but includes all adjustments (consisting
only of normal recurring adjustments) which the management of ALZA Corporation
("ALZA") believes necessary for fair presentation of the results for the periods
presented. Interim results are not necessarily indicative of results for the
full year. The condensed consolidated financial statements should be read in
conjunction with the audited consolidated financial statements for the year
ended December 31, 1994 included in ALZA's 1994 Annual Report to Stockholders.
2. SHORT-TERM INVESTMENTS
ALZA has classified its entire investment portfolio, including cash
equivalents of $79.3 million at June 30, 1995, as available-for-sale. Although
ALZA may not dispose of all of the securities in its investment portfolio within
one year, ALZA's investment portfolio is available for current operations and,
therefore, has been classified as a current asset. Investments in the
available-for-sale category are carried at fair value with unrealized gains and
losses recorded as a separate component of stockholders' equity. At June 30,
1995, unrealized losses on available-for-sale securities were $0.5 million, net
of a $0.4 million tax effect.
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ALZA CORPORATION
June 30, 1995
The following is a summary of ALZA's investment portfolio at June 30, 1995.
ESTIMATED
UNREALIZED UNREALIZED FAIR
(In thousands) COST GAINS LOSSES VALUE
--------- ------------ ------------ --------------
U.S. Treasury securities and
obligations of U.S.
government agencies $175,398 $ 2,238 $(2,826) $174,810
Collateralized mortgage
obligations and asset
backed securities 42,839 136 (465) 42,510
Corporate securities 167,308 526 (538) 167,296
-------- ------- ------- --------
$385,545 $ 2,900 $(3,829) $384,616
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-------- ------- ------- --------
The amortized cost and estimated fair value of debt and marketable equity
securities at June 30, 1995, by contractual maturity, are shown below. Expected
maturities will differ from contractual maturities because the issuers of the
securities may have the right to prepay certain of the obligations without
prepayment penalties.
ESTIMATED
FAIR
(In thousands) COST VALUE
--------- ---------
Due in one year or less $ 160,785 $ 160,492
Due after one year through four years 123,465 122,470
Due after four years through eight years 101,295 101,654
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$ 385,545 $ 384,616
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3. LITIGATION
See Part II, Item 1 of this Quarterly Report on Form 10-Q.
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ALZA CORPORATION
June 30, 1995
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
ALZA Corporation ("ALZA" or the "Company") develops, primarily under joint
development and commercialization agreements with client companies, a broad
range of pharmaceutical products based on ALZA's proprietary therapeutic systems
technologies. ALZA's therapeutic systems can often improve the medical value as
well as the cost-effectiveness of drug compounds by increasing efficacy,
minimizing unpleasant or harmful side effects and/or providing greater patient
compliance.
ALZA is also developing products under an arrangement with Therapeutic
Discovery Corporation ("TDC"). TDC, which commenced operations in 1993, was
formed by ALZA for the purpose of selecting and developing new human
pharmaceutical products combining ALZA's proprietary drug delivery technologies
with various drug compounds, and commercializing such products, most likely
through licensing to ALZA. ALZA and TDC currently have more than 20 products in
the development pipeline, including several in early clinical evaluation.
Additional product candidates are under consideration.
ALZA markets certain products it has developed and promotes two products
under co-promotion arrangements with client companies. ALZA manufactures all or
a portion of certain clients' requirements for products developed by ALZA, and
also manufactures products marketed by ALZA.
RESULTS OF OPERATIONS
ALZA's net income was $17.5 million or $0.21 per common share for the
quarter ended June 30, 1995 and $34.5 million or $0.42 per common share for the
six months ended June 30, 1995, compared to net income of $14.7 million or $0.18
per common
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ALZA CORPORATION
June 30, 1995
share for the quarter ended June 30, 1994 and $30.4 million or $0.37 per common
share for the six months ended June 30, 1994.
ALZA's net income currently results primarily from royalties and fees from
client companies. Royalties and fees are derived from sales by client companies
of products developed jointly with ALZA, and will vary from quarter to quarter
as a result of changing levels of product sales by client companies and,
occasionally, the receipt by ALZA of certain one-time fees. Because ALZA's
clients generally take responsibility for obtaining necessary regulatory
approvals and make all marketing and commercialization decisions regarding such
products, most of the variables that affect ALZA's royalties and fees are not
directly within ALZA's control. In addition, with increasing pressures for cost
containment in the U.S. health care system, it can be expected that
pharmaceutical product prices, including those of ALZA's royalty-bearing
products, will not increase as quickly as they have in the past, and could
decrease. Within the next several years, ALZA intends to become less dependent
on royalties and fees as ALZA markets more products (including products
developed with TDC); however, there can be no assurance that these expanded
activities will be successful, due to factors such as the current health care
cost containment environment.
Royalties and fees for the quarter and six months ended June 30, 1995
increased to $34.2 million and $68.2 million, respectively, compared to $28.0
million and $60.8 million for the same periods in 1994, primarily due to
royalties on sales by Bayer AG of Adalat CR-Registered Trademark- (which is
marketed by Pfizer Inc in the United States as Procardia XL-Registered
Trademark-). ALZA began receiving royalties on sales of Adalat CR-Registered
Trademark- during the third quarter of 1994. Royalties and fees for the six
months ended June 30, 1995 were reduced by approximately $5 million to reflect
additions to a reserve for a potential adjustment in
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ALZA CORPORATION
June 30, 1995
royalty revenue on U.S. sales of Procardia XL-Registered Trademark- due to a
U.S. patent issued to Bayer AG. Until a further determination is made regarding
this matter, ALZA intends to maintain a reserve sufficient to cover the maximum
potential reduction in Procardia XL-Registered Trademark- royalties as a result
of this patent. Royalties from Procardia XL-Registered Trademark- accounted for
approximately 40% and 45% of ALZA's royalties for the quarter and six months
ended June 30, 1995, respectively, after the reserve discussed above. ALZA
expects that, in the near term, net income will continue to result primarily
from royalty revenue on sales of currently marketed products and additional
products recently approved or now awaiting approval by the U.S. Food and Drug
Administration and regulatory agencies in other countries.
Research and development revenue of $23.5 million for the quarter and $45.2
million for the six months ended June 30, 1995 increased 35% and 43%,
respectively, from the same periods in 1994 due to increased product development
activities undertaken on behalf of TDC. Research and development revenue from
TDC was $14.5 million and $28.6 million for the quarter and six months ended
June 30, 1995, respectively, and $7.6 million and $12.9 million for the
corresponding periods in 1994. ALZA and TDC are parties to a development
agreement pursuant to which ALZA conducts product development activities on
behalf of TDC. ALZA has granted to TDC a royalty-free, perpetual license to use
ALZA's proprietary drug delivery technologies to develop and commercialize
specified TDC products. Because products in early stages of development
generally require lower levels of expenditures, ALZA's research and development
revenue from TDC for any product can be expected to be lower during the early
stages of development. Research and development expenses for the quarter and
six months ended June 30, 1995 increased approximately 24% and 28%,
respectively, from the same
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ALZA CORPORATION
June 30, 1995
periods in 1994, primarily due to increased product development activities on
behalf of TDC. As additional products are accepted by TDC into its development
pipeline and as products enter later stages of development, ALZA expects both
its total research and development revenues and expenses for TDC products to
increase.
Net sales of $19.2 million for the quarter ended June 30, 1995 were
slightly lower compared to the corresponding period in 1994, due largely to
shipments of launch quantities of Glucotrol XL-Registered Trademark- to Pfizer
Inc in the second quarter of 1994. Net sales for the six months ended
June 30, 1995 were relatively flat compared to the same period in 1994. Costs
of products shipped increased 18% for the quarter and six months ended
June 30, 1995 over the corresponding periods in 1994 partially due to increased
costs associated with ALZA's program to assure compliance with U.S. Food and
Drug Administration regulations for Good Manufacturing Practices. Also
contributing to the higher costs of products shipped for the six months ended
June 30, 1995 were proportionately higher shipments of lower margin products.
ALZA's Vacaville manufacturing facility provides substantial manufacturing
capacity for ALZA-developed products. Because of the nature of the
substantially fixed costs at this facility, costs of products shipped as a
percent of net sales may vary significantly from period to period due to the
utilization of the facility and the mix of products manufactured. ALZA expects
costs of products shipped, as a percent of net sales, to decline over the longer
term through increased utilization of capacity, greater operating efficiencies
and increased production of ALZA-marketed products.
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ALZA CORPORATION
June 30, 1995
General, administrative and marketing expenses of $8.4 million for the
quarter and $16.9 million for the six months ended June 30, 1995 increased 7%
and 6%, respectively, compared to the same periods in 1994, due primarily to
sales and marketing activities.
Interest and other revenue, which consists primarily of interest income,
increased 51% and 63%, respectively, for the quarter and six months ended June
30, 1995 compared to the same periods in 1994, due to higher invested cash
balances and higher interest rates.
Interest expense for the quarter and six months ended June 30, 1995
increased 36% and 43%, respectively, compared to the same periods in 1994, due
to a higher amount of outstanding debt and a higher interest rate on such debt.
During the first quarter of 1994, interest expense consisted primarily of
interest expense on ALZA's $250 million commercial paper. In mid-1994 ALZA
retired its commercial paper program with proceeds from an offering of 5 1/4%
zero coupon convertible subordinated debentures.
ALZA's effective combined federal and state tax rate for the year ended
1994 and the quarter and six months ended June 30, 1995 was 38%.
LIQUIDITY AND CAPITAL RESOURCES
ALZA invested $17.7 million during the first six months of 1995 in
additions to property, plant and equipment to support its research and
development and manufacturing activities. While ALZA believes its current
facilities and equipment are sufficient to meet its current operating
requirements, ALZA will continue to expand its facilities and equipment to
support its long-term requirements.
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ALZA CORPORATION
June 30, 1995
ALZA believes that its existing cash balances and investments are adequate
to fund its current cash needs. In addition, should the need arise, ALZA
believes it would be able to borrow additional funds or raise additional capital
in the marketplace. ALZA may consider using its capital to make strategic
investments or to acquire or license technology or products. ALZA may also
enter into strategic alliances with third parties which could provide additional
funding for research and development and support for marketing and sales.
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ALZA CORPORATION
June 30, 1995
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In December 1991, a patent infringement suit was filed by Ciba-Geigy
("Ciba") against Marion Merrell Dow Inc., now Hoechst Marion Roussel Inc.
("HMR"), and ALZA in connection with the commercialization of Nicoderm-
Registered Trademark-. In October 1994, the Court granted a motion for summary
judgment brought by ALZA and HMR, ruling the patent invalid. That ruling
cleared ALZA and HMR of liability for infringement of the patent. In November
1994, an appeal was filed by Ciba. During January 1995, ALZA and HMR filed a
suit against Ciba and LTS Lohmann Therapy Systems Corporation for infringement
of two U.S. patents issued to ALZA in 1994 relating to the transdermal
administration of nicotine.
During January 1994, a suit was filed against ALZA by Cygnus Therapeutic
Systems ("Cygnus") seeking a declaration of unenforceability and invalidity of
an ALZA patent relating to the transdermal administration of fentanyl and
alleging violation of antitrust laws. In April 1995, the Court granted ALZA's
motion to dismiss the lawsuit. Cygnus has appealed that ruling.
Pharmaceutical companies are subject to product liability claims from time
to time. During the last two years, six product liability suits have been filed
against Janssen Pharmaceutica, Inc. ("Janssen") and ALZA relating to the
Duragesic-Registered Trademark- product. Janssen is managing the defense of the
Duragesic-Registered Trademark- suits in consultation with ALZA under an
agreement between the parties. Historically, the cost of resolution of ALZA's
liability (including product liability) claims has not been significant, and
ALZA is not aware of any asserted or unasserted claims pending against it,
including the suits mentioned above, the
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ALZA CORPORATION
June 30, 1995
resolution of which would have a material adverse impact on the operations or
financial position of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The annual meeting of stockholders of ALZA was held on May 11, 1995.
(c) 69,469,148 shares were represented at the annual meeting.
Stockholders approved the following proposals:
(i) Election of Class II Directors:
VOTES VOTES
FOR WITHHELD
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Dr. Robert J. Glaser 68,608,542 860,606
Dean O. Morton 68,691,752 777,396
(ii) An amendment and restatement of ALZA's 1992 Stock Option
Plan to (i) increase by 3,000,000 the number of shares of common stock
reserved for issuance under the plan; (ii) to limit the number of
shares as to which options may be granted to any participant under the
plan in any one year period and in connection with an offer of
employment; (iii) to provide for grants of restricted stock under the
plan; and (iv) to rename the plan the ALZA Corporation Amended and
Restated Stock Plan. There were 54,959,655 votes in favor of the
amendment, 11,383,995 votes against, 1,758,172 abstentions and
1,367,326 broker non-votes.
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ALZA CORPORATION
June 30, 1995
(iii) An amendment and restatement of ALZA's 1984 Employee Stock
Purchase Plan (i) to increase by 500,000 the number of shares of
common stock reserved for issuance under the plan; (ii) to provide for
semi-annual (in lieu of annual) purchases and enrollments; and (iii)
to rename the plan the ALZA Corporation Amended and Restated Employee
Stock Purchase Plan. There were 64,315,853 votes in favor of the
amendment, 1,654,361 votes against, 1,753,563 abstentions and
1,745,371 broker non-votes.
(iv) The ratification of the appointment of Ernst & Young LLP as
ALZA's independent auditors for the fiscal year ended December 31,
1995. There were 68,068,969 votes in favor, 948,982 votes against,
451,197 abstentions and no broker non-votes.
Stockholders rejected a stockholder proposal to recommend that
ALZA's Board of Directors take the necessary steps to adopt and
implement a policy of cumulative voting for all elections of
directors. There were 16,005,051 votes in favor of the amendment,
39,014,464 votes against, 2,288,981 abstentions and 12,160,652 broker
non-votes.
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ALZA CORPORATION
June 30, 1995
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
3.2 Composite By-laws of ALZA Corporation as restated on
February 10, 1994 and amended on August 11, 1994 and
February 16, 1995
10.2 ALZA Corporation Amended and Restated Stock Plan
11 Statement regarding weighted average common and common equivalent
shares used in computation of per share earnings
27 Financial Data Schedule
(b) No reports on Form 8-K were filed during the quarter
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ALZA CORPORATION
June 30, 1995
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ALZA CORPORATION
Date: August 11, 1995 By: /s/ Dr. Ernest Mario
------------------------------
Dr. Ernest Mario
Co-Chairman and
Chief Executive Officer
Date: August 11, 1995 By: /s/ Bruce C. Cozadd
------------------------------
Bruce C. Cozadd
Vice President and Chief
Financial Officer
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ALZA CORPORATION
June 30, 1995
EXHIBIT INDEX
EXHIBIT
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3.2 Composite By-laws of ALZA Corporation as restated on February 10, 1994
and amended on August 11, 1994 and February 16, 1995
10.2 ALZA Corporation Amended and Restated Stock Plan
11 Statement regarding weighted average common and common equivalent
shares used in computation of per share earnings
27 Financial Data Schedule
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