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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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SCHEDULE 14D-9
SOLICITATION/RECOMMENDATION STATEMENT PURSUANT TO SECTION 14(D)(4)
OF THE SECURITIES EXCHANGE ACT OF 1934
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ALZA TTS RESEARCH PARTNERS, LTD.
(NAME OF SUBJECT COMPANY)
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ALZA TTS RESEARCH PARTNERS, LTD.
(NAME OF PERSON(S) FILING STATEMENT)
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CLASS A LIMITED PARTNERSHIP INTERESTS OF ALZA TTS RESEARCH PARTNERS, LTD.
(TITLE OF CLASS OF SECURITIES)
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NONE
(CUSIP NUMBER OF CLASS OF SECURITIES)
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DAVID R. HOFFMANN
PRESIDENT
ALZA DEVELOPMENT CORPORATION
950 PAGE MILL ROAD
P.O. BOX 10952
PALO ALTO, CALIFORNIA 94303
(650) 494-5000
(NAME, ADDRESS, AND TELEPHONE NUMBER OF PERSON AUTHORIZED TO RECEIVE
NOTICES AND COMMUNICATIONS ON BEHALF OF THE PERSON(S) FILING STATEMENT)
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ITEM 1. SECURITY AND SUBJECT COMPANY
The name of the subject company is ALZA TTS Research Partners, Ltd., a
California limited partnership (the "Partnership"). The general partner of the
Partnership is ALZA Development Corporation, a California corporation ("ADC"
or the "General Partner"). The address of the principal executive offices of
each of the Partnership and the General Partner is 950 Page Mill Road, P.O.
Box 10950, Palo Alto, California 94303. The title of the class of equity
securities to which this statement relates is outstanding units of Class A
limited partnership interests of the Partnership (the "Units").
ITEM 2. TENDER OFFER OF THE BIDDER
This Solicitation/Recommendation Statement on Schedule 14D-9 relates to the
unsolicited tender offer made by PharmaInvest, L.L.C., a Delaware limited
liability company (the "Bidder"), on behalf of Pharmaceutical Royalties,
L.L.C., a Delaware limited liability company, and Pharmaceutical Royalty
Investments Ltd., a Bermuda company, disclosed in a Tender Offer Statement on
Schedule 14D-1, dated November 20, 1997, (the "Schedule 14D-1"), to purchase
up to 1,400 Units, representing approximately 44% of the total outstanding
units of the Partnership, upon the terms and conditions set forth in the Offer
to Purchase dated November 20, 1997 (the "Offer to Purchase"), and the related
Letter of Transmittal (the "Letter of Transmittal" and together with the Offer
to Purchase, the "Offer"). Neither the Bidder nor any of its affiliates is
affiliated with the Partnership or its General Partner, and the Offer was not
solicited by the Partnership or the General Partner. The Schedule 14D-1 states
that the address of the principal executive offices of the Bidder are located
at 70 East 55th Street, 23rd Floor, New York, New York 10022.
ITEM 3. IDENTITY AND BACKGROUND
(a) This statement is being filed by the Partnership. The business address
of the Partnership is set forth in Item 1, above.
(b) Pursuant to the Agreement of Limited Partnership, dated December 30,
1982 among the General Partner, the Class A Limited Partners ("Unitholders")
and the Class B Limited Partner, as amended (the "Partnership Agreement"), the
sole partner responsible for the management, operations and policies of the
Partnership is the General Partner. Except as described or referred to below,
there exists on the date hereof no material contract, agreement, arrangement
or understanding, and no actual or potential conflict of interest, between the
Partnership and (i) ADC's executive officers, directors or affiliates or (ii)
to ADC's knowledge, the executive officers, directors or affiliates of the
Bidder.
Pursuant to the Partnership Agreement, ALZA Corporation ("ALZA") has
received or will receive certain types of reimbursement for administrative
expenses and the General Partner receives distributions in connection with the
operations of the Partnership. Under the terms of the Partnership Agreement
(the "Partnership Agreement"), net losses were allocated as follows: first, 1%
to the General Partner and 99% to the Class A Limited Partners and then, after
the capital account of the Class A Limited Partners was reduced to zero, 1% to
the General Partner and 99% to the Class B Limited Partner. After the capital
accounts of the Class A and Class B Limited Partners were reduced to zero,
losses were allocated 100% to the General Partner.
Under the terms of the Partnership Agreement, net income is allocated in the
inverse order of the losses previously allocated. To the extent losses were
allocated 100% to the General Partner, net income was allocated 100% to the
General Partner in an amount equal to such losses prior to allocation of net
income to the Class A and Class B Limited Partners. Then, to the extent losses
were allocated 99% to the Class B Limited Partner, any net income was
allocated 99% to the Class B Limited Partner (and 1% to the General Partner)
in an amount equal to such losses prior to any net income being allocated to
the Class A Limited Partners. Then, to the extent losses were allocated 99% to
the Class A Limited Partners, net income was allocated 99% to the Class A
Limited Partners (and 1% to the General Partner.) As provided in the
Partnership Agreement, once the amount of net
2
income allocated to the Class A and the General Partner equaled previously
allocated losses (which occurred during the third quarter of 1996), subsequent
income began to be allocated 99% to the Class A and Class B Limited Partners,
pro rata, and 1% to the General Partner.
The General Partner is required by the Partnership Agreement to distribute,
on a quarterly basis, all of the Partnership's Excess Cash (which consists of
all cash received by the Partnership less all amounts expended in the conduct
of the Partnership's business, including administrative expenses, and working
capital and reserves) in proportion to the Partners' respective capital
contributions.
General and administrative expenses for the continuing administrative
support required for the Partnership are payable to ALZA under an
administrative services agreement between ALZA and the Partnership. General
and administrative expenses were $86,548, $100,253 and $95,452 for the years
ended December 31, 1996, 1995 and 1994, respectively. Payments to ALZA
totalled $172,459, $138,607, and $135,307 for 1996, 1995 and 1994,
respectively. As of October 31, 1997, the Partnership owed ALZA approximately
$27,250 under that agreement for general and administrative expenses.
The General Partner is entitled to indemnification under certain
circumstances from the Partnership pursuant to the Partnership Agreement.
The Directors and executive officers of the General Partner are also
employees of ALZA. David R. Hoffmann, President, Chief Financial Officer,
Secretary and Director of the General Partner is Vice President and Treasurer
of ALZA. James W. Young, Vice President and Director of the General Partner is
Senior Vice President, Research & Development of ALZA. Robert M. Myers, Vice
President and Director of the General Partner is Vice President, Commercial
Development of ALZA.
ALZA has an option (the "Purchase Option") to purchase all of the limited
partnership interests of the Partnership (consisting of the Units and one
Class B limited partnership interest). The Purchase Option is exercisable at
any time for an exercise price of $120 million less cumulative distributions
to the limited partners of the Partnership to the date of exercise. If the
Purchase Option were to be exercised as of the date hereof, each Unit would be
entitled to receive approximately $28,675.
ALZA has licensed from the Partnership two products developed by ALZA on
behalf of the Partnership, the Testoderm(R) transdermal testosterone product
and the Duragesic(R) transdermal fentanyl product. ALZA pays the Partnership
4% of worldwide net sales of each product. ALZA's license from the Partnership
for Testoderm(R) is exclusive until July 26, 1998, after which time the
license will become nonexclusive. ALZA's license for Duragesic(R) is exclusive
until December 4, 1998, after which time that license will become
nonexclusive. Under these licenses, ALZA is obligated to make royalty payments
to the Partnership until April 2006 for Duragesic(R) and until February 2005
for Testoderm(R).
As of November 20, 1997, no directors or executive officers of ALZA or the
General Partner owned any Units.
ITEM 4. THE SOLICITATION OR RECOMMENDATION
(a) At a meeting of the Board of Directors of ADC (the "Board"), all of the
members of which are employees of ALZA, held on December 3, 1997, the Board
unanimously resolved that the Board is expressing no opinion to Unitholders
and is remaining neutral as to whether Unitholders should tender or refrain
from tendering all or any portion of Units pursuant to the Offer. Depending
on, among other things, the personal liquidity needs and tax circumstances of
each Unitholder, certain Unitholders may determine that it is appropriate to
tender their Units. However, the General Partner believes that all Unitholders
should carefully consider the information set forth in Item 4(b) below before
tendering their Units and that these factors may cause a Unitholder to retain
his, her or its Units.
3
(b) The General Partner reached the conclusion set forth in Item 4(a) after
considering a variety of factors, including, but not limited to, the
following:
(i) The General Partner has determined that, subject to each Unitholder's
particular liquidity requirements and tax circumstances, it may not be an
optimal time for Unitholders to sell Units if the Unitholder believes that
the expiration of the exclusive licenses granted to ALZA for Testoderm(R)
and Duragesic(R), which expire on July 26, 1998 and December 4, 1998,
respectively, may cause ALZA to take certain action, such as exercising the
Purchase Option, in order to secure its exclusive rights to one or both of
these products. The General Partner believes that if ALZA were to exercise
the Purchase Option in mid-1998, the price, after estimated distributions
made in early 1998, would be approximately $27,000 per Unit, for a total
payment to all limited partners of approximately $91 million. If ALZA's
license for a product becomes nonexclusive, the General Partner will need
to determine whether to appoint others to market and sell such product.
Under ALZA's agreement with Janssen Pharmaceutica, Inc. (together with its
affiliates "Janssen"), a subsidiary of Johnson & Johnson and ALZA's
distribution partner for Duragesic(R), if Duragesic(R) were to be
introduced by a third party under an agreement with the Partnership after
ALZA's loss of exclusivity from the Partnership, ALZA's royalty rate due
from Janssen with respect to Duragesic(R) would drop significantly.
However, the Partnership's right to receive 4% of net sales from ALZA would
not change. The General Partner believes that this reduction in ALZA's net
royalties, should it occur, would adversely effect ALZA's royalty income
and reported earnings per share. Accordingly, the General Partner believes
ALZA may be motivated to take some sort of action with respect to the
Partnership before exclusivity is lost. On December 2, 1997, ALZA notified
the General Partner that it does not intend to take any action prior to the
scheduled end of the Offer. It further stated that it intended to continue
to evaluate the Partnership and its options over the coming weeks and
months and might or might not take action in that time period. A copy of
ALZA's letter to the Partnership is attached as Appendix A hereto.
(ii) Worldwide sales of Duragesic(R) were approximately $97 million, $135
million and $180 million during 1994, 1995 and 1996, respectively, and $187
million during the first nine months of 1997. Certain factors indicate that
sales of Duragesic(R) could increase in the future, thereby increasing
royalty income to the Partnership. Janssen markets Duragesic(R) in the
United States, Canada and in more than 25 other countries worldwide.
Janssen began marketing Duragesic(R) in six additional countries in 1996
and four additional countries in 1997, and submissions for marketing
clearance are on file in a number of other countries. Sales of Duragesic(R)
have continued to grow in the United States, the market in which the
product has been sold commercially for the longest period of time (seven
years). The General Partner is not aware of any other competitive
transdermal fentanyl products which are likely to be introduced within the
next several years. Although it has been publicly disclosed that ALZA and
Janssen are in Phase III clinical trials for a fentanyl product utilizing
ALZA's E-TRANS(TM) technology, no date for NDA filing has been announced.
It typically takes at least one to two years following an NDA filing before
regulatory clearance of a drug is obtained. Furthermore, the currently
proposed indications for this product are for acute pain relief, rather
than chronic pain relief which is the primary indication for which
Duragesic(R) is indicated. Accordingly, the General Partner believes the
product described above will not compete directly with Duragesic(R).
However, there may be other products not yet publicly disclosed that could
become competitive products after 2000.
ALZA, through ALZA Pharmaceuticals, markets Testoderm(R) in the United
States. ALZA Pharmaceuticals will market Testoderm(R) through distributors
outside the United States. Testoderm(R) sales resulted in less than
approximately 2% of total royalties to the Partnership in the first nine
months of 1997. In contrast to Duragesic(R), the General Partner believes
competitive products will adversely impact Testoderm(R) sales within the
next several years.
There can be no assurance that actual sales of Duragesic(R) and
Testoderm(R) will continue at historical rates. It should be considered
that a decrease in sales of Duragesic(R) would have a material adverse
effect on the financial results and distributions of the Partnership.
(iii) The Bidder is a sophisticated investor who would not be making the
Offer without an expectation of significant profit, either from holding the
Units or reselling them, upon exercise of the Purchase Option
4
or pursuant to some other offer from ALZA or other parties. The General
Partner expects that a distribution of $687 per Unit (approximately $2.2
million in total) will be made in December 1997, representing Excess Cash
received in connection with second quarter royalties for Duragesic(R) and
third quarter royalties for Testoderm(R), and estimates that a distribution
of approximately $750 per Unit (approximately $2.4 million in total) will
be made in March 1998, representing excess cash received in connection with
third quarter royalties for Duragesic(R) and fourth quarter royalties for
Testoderm(R). Based on the Offer Price, the Bidder would make a return on
its investment of approximately 22%, assuming 1998 distributions were equal
to the distributions received or to be received by Unitholders in 1997.
This return would be higher to the extent that future distributions to
Unitholders increase, although there can be no assurance that future
distributions, if any, will increase or remain at historical levels.
Furthermore, based on the estimated per Unit price of $27,000 if ALZA were
to exercise the Purchase Option in early to mid-1998, the estimated return
to the Bidder would be 225%. There can be no assurance, however, that ALZA
will exercise the Purchase Option and that the price would be $27,000 if
ALZA were to make an offer different than the Purchase Option or that there
will be any future opportunity to sell a Unit at a price greater than
$12,000.
(iv) The General Partner has become aware that Securities Pricing And
Research, Inc. ("SPAR"), an appraisal firm, published an independent report
on the valuation of the Units as of December 31, 1996 (the "SPAR Report").
The SPAR Report is available on the Internet for a fee at
http://www.spardata.com:2048/newdata/1996pub.nfs. Based on its independent
investigation and analysis, SPAR concluded that the rounded net asset value
and the rounded fair market value of one Unit as of December 31, 1996 were
$21,200 and $15,900, respectively. Neither the General Partner nor the
Partnership has any affiliation with SPAR nor does either endorse the SPAR
Report. In addition, neither the General Partner nor the Partnership
engaged SPAR to prepare the SPAR Report or participated in preparation of
the SPAR Report. The SPAR Report is not related to the Offer. The General
Partner believes that SPAR based its conclusion on, among other things, its
own valuation methodology, assumptions and internally generated estimates
of future distributions to Unitholders. The General Partner does not
necessarily agree with the valuation methodology used by SPAR but believes
that certain Unitholders may have access to the SPAR Report through their
brokerage firms and that an independent evaluation of the Partnership may
be of interest to the Unitholders. The SPAR Report presents estimated pre-
tax net asset and fair market values of a Unit as of December 31, 1996.
The foregoing factors notwithstanding, the General Partner believes that the
Offer may represent an opportunity for Unitholders to achieve liquidity where
there presently is no public market for the Units. Accordingly, Unitholders
who require or desire immediate liquidity should consider the Offer. For
Unitholders who desire immediate cash, the Offer provides an opportunity to
sell all or a portion of a Unitholder's Units in lieu of continuing to hold
the Units and receiving, on a periodic basis, future cash payments, the
continuation and amount of which cannot be predicted with certainty.
Furthermore, as noted in the Offer, a sale of Units is tax advantaged relative
to continuing to receive distributions.
The terms and conditions of the Offer have been determined and established
by the Bidder and not pursuant to negotiations or discussions with, or input
from, the Partnership or the General Partner.
The Partnership has not engaged any financial advisor to evaluate the terms
of the Offer and determining whether the Offer is fair to Unitholders. As
noted in the Offer, the Offer does provide liquidity and certainty to
Unitholders who wish to achieve such objectives at this time. The amount of
the Offer is, however, significantly less than the Purchase Option exercise
price. ADC has not made any determination as to whether to exercise the
Purchase Option, and ADC will exercise the Purchase Option only if ALZA
believes that doing so is in the best interests of ALZA stockholders and ALZA
causes ADC to do so.
Each Unitholder must make his, her or its own decision whether to tender
such record holder's Units, or any portion thereof, as the case may be, and in
what amount, if applicable. Unitholders are urged to carefully review all the
information contained in or incorporated by reference in the Offer and the
Partnership's publicly available annual, quarterly and other reports, as well
as the Partnership's communications with Unitholders. Unitholders should note
that transfer of Units requires the prior written consent of ADC.
5
The General Partner will not consent to transfers of Units in connection
with the Offer unless it receives (i) appropriate transfer documents and (ii)
an opinion from counsel to the Offeror, reasonably acceptable to the General
Partner, stating that such transfers will not jeopardize the status of the
Partnership as a partnership for federal income tax purposes.
ITEM 5. PERSONS RETAINED, EMPLOYED OR TO BE COMPENSATED
The Partnership has not employed, retained or compensated any person to make
solicitations or recommendations to Unitholders on its behalf concerning the
Offer.
ITEM 6. RECENT TRANSACTIONS AND INTENT WITH RESPECT TO SECURITIES
(a) Neither the Partnership nor the General Partner has effected any
transactions in the Units during the past 60 days. Except as described below,
the Partnership is not aware of any other transactions in the Units during the
past 60 days by any of the General Partner's executive officers, directors,
affiliates or subsidiaries.
(b) Neither the Partnership nor, to the knowledge of the Partnership, any of
the General Partner executive officers, directors, affiliates or subsidiaries
owns any Units.
ITEM 7. CERTAIN NEGOTIATIONS AND TRANSACTIONS BY THE SUBJECT PARTNERSHIP
(a) No negotiation is being undertaken and no discussions are underway by
the Partnership in response to the Offer which relates to or would result in
(1) an extraordinary transaction such as a merger or reorganization, involving
the Partnership; (2) a purchase, sale or transfer of a material amount of
assets by the Partnership; (3) a tender offer for or other acquisition of
securities by or of the Partnership; or (4) any material change in the present
capitalization or dividend policy of the Partnership.
(b) Not applicable.
ITEM 8. ADDITIONAL INFORMATION TO BE FURNISHED
This Schedule 14D-9 and the accompanying letter to Unitholders contain
forward-looking statements within the meaning of Section 21E of the Securities
Exchange Act of 1934, as amended, that are not historical facts and which
reflect numerous assumptions and involve a number of risks and uncertainties.
Forward-looking statements contained in the foregoing include statements
relating to, among other things, the marketing and sale of Duragesic(R) and
Testoderm(R), the royalties that may be derived by ALZA or the Partnership
from such sales, the occurrence and amount of any future distributions made in
connection therewith by the Partnership and any potential action to be taken
by ALZA in connection with the exercise of the Purchase Option or otherwise.
Among the factors which could cause actual results to materially differ from
those expressed by the General Partner are competitive factors affecting the
prices of and markets for Duragesic(R) and Testoderm(R), pricing pressures
affecting the pharmaceutical industry in general, unexpected adverse patient
reactions to Duragesic(R) or Testoderm(R), obtaining and maintaining
regulatory approval of Duragesic(R) and Testoderm(R) in their respective
target and existing markets, the performance of ALZA in marketing Testoderm(R)
and Janssen in marketing Duragesic(R), and other factors discussed in the
Partnership's documents and reports filed with the Securities and Exchange
Commission.
6
ITEM 9. MATERIAL TO BE FILED AS EXHIBITS
(a) 1.1 Agreement of Limited Partnership dated as of December 30, 1982 by
and among ALZA Development Corporation and, each of the Class A Limited
Partners, and the Class B Limited Partners of the Partnership (Filed as
Exhibit 3.A to Amendment No. 1 to Form S-1 Registration Statement No. 2-90595
filed with the Securities and Exchange Commission on February 11, 1983, and
incorporated herein by this reference).
1.2 Form of Letter, dated December 2, 1997, from ALZA Corporation to ALZA
Development Corporation. (See Appendix A to this Solicitation/Recommendation
Statement on Schedule 14D-9).
1.3 Form of Letter, dated December 4, 1997, from ALZA TTS Research Partners,
Ltd. to Limited Partners.
(b) Not applicable.
(c) Not applicable.
7
SIGNATURES
After reasonable inquiry, and to the best of my knowledge, I certify that
the information set forth in this statement is true, complete and correct.
Dated: December 4, 1997
ALZA TTS RESEARCH PARTNERS, LTD.
By: ALZA DEVELOPMENT CORPORATION,
its General Partner
/s/ DAVID R. HOFFMANN
----------------------------------
David R. Hoffmann
President
8
APPENDIX A
[LOGO OF ALZA]
December 2, 1997
ALZA TTS Research Partners, Ltd.
950 Page Mill Road
Palo Alto, California 94303-0802
Attention:ALZA Development Corporation,
General Partner
Re: Offer to Purchase for Cash dated November 20, 1997 (the "Tender
Offer") for up to 1400 units of limited partnership interest (the
"Units") of ALZA TTS Research Partners, Ltd. (The "Partnership") at
$12,000 net per Unit by PharmaInvest, L.L.C. (the "Bidder")
Gentlemen:
In connection with the Partnership's consideration and evaluation of the
Tender Offer, ALZA hereby advises the Partnership of matters raised in a
letter dated November 20, 1997 (the "Bidder's Letter") addressed to ALZA by
Pharmaceutical Partners, L.L.C., an affiliate of the Bidder, and of ALZA's
current position regarding these matters. If you conclude that it is
appropriate to share the contents of this letter, in whole or in part, with
the holders of Units (the "Limited Partners") in connection with your formal
response to the Tender Offer, you have ALZA's permission to do so. Please
note, however, that ALZA is not obligated to take, and is not taking, any
position with respect to the Tender Offer. This letter is solely for your
information and is not intended as a solicitation or recommendation by ALZA
with respect to the Tender Offer.
The Bidder's Letter refers to the option (the "Purchase Option") granted to
ALZA Development Corporation, the General Partner of the Partnership (the
"General Partner") and a wholly-owned subsidiary of ALZA ("ADC"), whether or
not it remains the General Partner of the Partnership, to purchase all Units.
The Purchase Option, which is described in the Partnership's filings with the
Securities and Exchange Commission (the "Partnership Public Filings"), is
exercisable for a cash amount (the "Option Purchase Price") equal to $120
million less all distributions to the Limited Partners (the "Distributions")
of "Excess Cash," as defined in the Agreement of Limited Partnership dated
December 30, 1983 which formed the Partnership (the "Partnership Agreement").
ALZA cannot determine with certainty what the Option Purchase Price would be
at any future time prior to the Partnership's scheduled termination date of
January 31, 2004 because that determination will depend, at any particular
date, upon the then-aggregate amount of all Distributions. Since the only
source of Excess Cash currently available to the Partnership to fund
Distributions is amounts received from time to time by the Partnership from
ALZA under the licenses (the "Product Licenses") ALZA holds to the
Partnership's two commercialized products, Duragesic(R) and Testoderm(R) (the
"Licensed Products"), and since those amounts are calculated as 4% of
worldwide net sales of the Licensed Products, those amounts necessarily depend
on future sales of the Licensed Products. Moreover, the principal source of
Distributions is payments to the Partnership based on sales of Duragesic(R) by
Janssen Pharmaceutica, Inc., a subsidiary of Johnson and Johnson (together
with its affiliates, "Janssen"), which has been engaged by ALZA as the
worldwide distributor of Duragesic(R).
ALZA CORPORATION, 950 PAGE MILL ROAD, P.O. BOX 10950, PALO ALTO, CA 94303-0802
(415) 494-5000 TELEX 345526
[LOGO OF ALZA]
Giving effect to all Distributions made to date, ALZA understands that the
Option Purchase Price currently would be approximately $96 million, or
approximately $28,000 per Unit (the "Current Option Purchase Price").
Accordingly, while ALZA is unable to determine the amount of Distributions
that may be made subsequent to the date of this letter ("Subsequent
Distributions") and thus cannot determine what the Option Purchase Price might
be in the future, the aggregate gross cash payments made to a Limited Partner,
in the form of Subsequent Distributions and such Limited Partner's pro rata
share of the Option Purchase Price (if and when the Purchase Option is
exercised) would necessarily equal the Current Option Purchase Price in the
case of a Limited Partner who continues to hold such Limited Partner's Units
from the date hereof through the date of exercise of the Purchase Option. In
other words, if a Limited Partner continues to own a Unit, then, in the event
that the Purchase Option is exercised at some future date, that Limited
Partner will have received an aggregate of approximately $28,000 in respect of
such Unit by way of Subsequent Distributions and Option Purchase Price,
although the exact allocation of that approximate amount to Subsequent
Distributions, on the one hand, and pro rata share of Option Purchase Price,
on the other hand, is currently not determinable.
The Partnership Public Filings note that ADC is under no obligation to
exercise the Purchase Option and will exercise it only if ALZA deems such
exercise to be in its best interests. ALZA has made no decision at this time
as to whether it wants ADC to exercise the Purchase Option. The Bidder's
Letter suggests that a principal reason why ALZA would consider the exercise
of the Purchase Option is the elimination of any potential conflict of
interest that might arise in the Partnership's weighing of the relative
benefits of maintaining an exclusive license with ALZA or seeking multiple
non-exclusive licenses. This suggestion appears to be derived from a reference
to the disclosures in the Partnership Public Filings that the Product Licenses
become non-exclusive on July 26, 1998 in the case of Testoderm(R) and December
4, 1998 in the case of Duragesic(R); that the General Partner will need to
determine whether to appoint others to market and sell the applicable Licensed
Product when the Product License thereon becomes non-exclusive; that, under
its agreement with Janssen regarding Duragesic(R), if the Partnership were to
grant a nonexclusive license to a third party and that third party were to
introduce a product under its license from the Partnership, the royalties
received by ALZA from Janssen would drop significantly while the Partnership's
right to receive from ALZA 4% of net sales of the Duragesic(R) product
(including sales made through Janssen) would not change; that it is likely
that ADC would have a conflict of interest in connection with any Partnership
decision as to whether the Duragesic(R) product should be licensed to a third
party in addition to ALZA; and that, in such an event, ADC would likely resign
as the General Partner and the Partnership would have to approve a new General
Partner.
While all of the above factors are relevant to ALZA's ongoing evaluation of
the relative advantages and disadvantages to it of the exercise of the
Purchase Option, there are several other factors that ALZA considers
significant, including its own views as to the effect in the relevant product
marketplace (and, thus, on ALZA's revenues) if the Partnership were in fact to
grant nonexclusive licenses to third parties after the respective exclusivity
periods of the Product Licenses expire, as well as alternative uses of the
funds that would otherwise be required to pay the Option Purchase Price.
The Bidder's Letter, having raised these issues regarding the Purchase
Option, goes on to make a suggestion (which it states that the Bidder will
support) as to a means by which ALZA could eliminate the issues presented by
the upcoming end of the respective exclusivity periods on the Product Licenses
without having to pay the Option Purchase Price in a lump sum. Essentially,
the suggestion is that ALZA offer to purchase each Unit (including,
presumably, any Units acquired by the Bidder pursuant to the Tender Offer) in
exchange for a contractual contingent payment right (a "CCPR") that would
entitle a former Limited Partner to receive future payments equivalent to the
Distributions such Limited Partner would have received per Unit. The Bidder's
Letter suggests that the issuance of CCPRs would provide the former Limited
Partners a more tax-efficient way of participating in royalties from the
Licensed Products by converting ordinary income into capital gain.
A-2
[LOGO OF ALZA]
This suggestion raises a number of complex tax and other issues which ALZA
intends to study. There is no assurance that ALZA will conclude that it is
feasible or in the best interests of ALZA to pursue this suggestion or any
other alternative.
In summary, while ALZA intends to study a broad range of issues and
alternatives related to the Partnership and while it is possible that ALZA may
ultimately decide, in its sole discretion, that it is in ALZA's best interests
that the Purchase Option be exercised or that the Limited Partners be
presented with another alternative to their continued ownership of Units
(whether by way of an offer for their Units on a basis other than payment of
the Option Purchase Price or by way of exercise of the Purchase Option), ALZA
does not currently contemplate that it will make any decision within the
timeframe contemplated by the Tender Offer (which is scheduled to expire on
December 19, 1997, unless extended) and there is no assurance that ALZA will
decide to take any action. Of course, ALZA reserves the right to respond to
any new developments regarding the Tender Offer or to accelerate the timetable
regarding its own analysis.
In addition to advising you of the matters raised in the Bidder's Letter, we
also wish to bring to your attention a valuation of the Units prepared by
Securities Pricing and Research, Inc., which (together with a description of
the methodology used to derive it) is available on the Internet at
http://www.spardata.com:2048/newdata/1996pub.nfs. This valuation, which is
dated December 31, 1996, ascribes a "rounded net asset valuation" of $21,200
to each Unit and a "rounded fair market value" of $15,900 to each Unit,
representing a 25% discount from the ascribed "rounded net asset value" to
reflect both "lack of control" and "lack of marketability." This valuation was
not prepared at the request, or with the cooperation, of ALZA and ALZA takes
no responsibility whatsoever for its accuracy or methodology. ALZA also notes
that this valuation is almost a year old and that there may be superior
methodologies for valuing the Units. However, ALZA understands that this
valuation may have been passed on to certain Limited Partners through their
brokerage firm, and, accordingly, you may feel it appropriate to make all
Limited Partners aware of its existence.
ALZA hopes that this letter will be helpful to the Partnership in its
consideration and evaluation of the Tender Offer.
Very truly yours,
ALZA Corporation
By: /s/ Bruce C. Cozadd
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Bruce C. Cozadd
Senior Vice President and
Chief Financial Officer
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