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, 2000
or
Transition Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934 for the transition period
from __________ to __________
Commission File Number 0-22927
CRESCENDO PHARMACEUTICALS CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 77-0460388
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2000 Charleston Road, Mountain View, California 94039
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (650) 564-5600
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 June 30, 2000:
Class A Common Stock, $.01 par value - 4,833,509 shares
Class B Common Stock, $1.00 par value - 1,000 shares
CRESCENDO PHARMACEUTICALS CORPORATION
FORM 10-Q for the Quarter Ended
June 30, 2000
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Statements of Operations 3
Condensed Balance Sheets 4
Condensed Statements of Cash Flows 5
Notes to Condensed Financial Statements 6-13
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 13-16
Item 3. Quantitative and Qualitative Disclosures
about Market Risk 16
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of
Security Holders 17
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
Exhibits
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Crescendo Pharmaceuticals Corporation
(a development stage company)
Condensed Statements of Operations (unaudited)
(in thousands, except per share amounts)
Period from
Three months Six months inception
ended ended (June 26, 1997)
June 30, June 30, to June 30,
2000 1999 2000 1999 2000
____________________________________________________________
Revenues:
Net interest and
investment income $ 909 $2,057 $2,039 $ 4,318 $27,473
Royalty revenue 1,377 430 2,394 920 4,779
__________________________________________________
Total revenues 2,286 2,487 4,433 5,238 32,252
Expenses:
Research & development
performed under
contract with ALZA
Corporation(a
related party) 21,830 31,866 42,186 54,140 278,123
General &
administrative 346 290 578 560 3,718
_____________________________________________________________
Total expenses 22,176 32,156 42,764 54,700 281,841
______________________________________________________________
Loss before taxes (19,890)(29,669) (38,331) (49,462) (249,589)
Income taxes - - - - 1,421
________________________________________________
Net loss $(19,890)$(29,669)$(38,331)$(49,462)$(251,010)
=================================================
Net loss per
common share
Basic and
Diluted $ (4.11)$ (5.98) $ (7.88)$ (9.96)$ (55.37)
==================================================================
See accompanying notes.
Crescendo Pharmaceuticals Corporation
(a development stage company)
Condensed Balance Sheets (unaudited)
(in thousands, except number of shares and per share amounts)
June 30, December 31,
2000 1999
________________________________________________________________
ASSETS
Current assets:
Cash and cash equivalents $42,181 $ 54,682
Short-term investments 66 6,989
Interest receivable 41 321
Taxes receivable 3,209 3,502
Accounts receivable (from
ALZA Corporation, a related party) 1,405 707
Other current assets 44 120
________________________________________________________________
Total current assets 46,946 66,321
Employee loan 300 300
Long-term investments 14,346 31,448
_______________________________________________________________
Total assets $61,592 $ 98,069
===============================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Payable to ALZA Corporation $15,294 $ 12,120
(a related party)
Accrued liabilities 23 97
________________________________________________________________
Total current liabilities 15,317 12,217
Stockholders' equity:
Class A Common Stock, $0.01 par value,
6,000,000 shares authorized;
4,833,509 and 4,908,198 shares issued
and outstanding at June 30, 2000
and December 31, 1999, respectively 49 49
Class B Common Stock, $1.00 par value,
1,000 shares authorized, issued and
outstanding 1 1
Additional paid-in capital 297,566 298,951
Accumulated other comprehensive loss (331) (470)
Deficit accumulated during development
stage (251,010) (212,679)
_______________________________________________________________
Total stockholders' equity 46,275 85,852
_______________________________________________________________
Total liabilities and
stockholders' equity $61,592 $98,069
=================================================================
See accompanying notes.
Crescendo Pharmaceuticals Corporation
(a development stage company)
Condensed Statements of Cash Flows (unaudited)
Increases (Decreases) in Cash and Cash Equivalents
(in thousands)
Period from
inception
Six months ended (June 26, 1997)
June 30, to June 30,
2000 1999 2000
____________________________________________________________________
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(38,331) $(49,462) $(251,010)
Non-cash adjustments to reconcile
net loss to net cash used in
operating activities:
(Increase) decrease in assets:
Interest receivable 280 1,075 (41)
Taxes receivable 293 - (3,209)
Accounts receivable from ALZA
Corporation (a related party) (698) - (1,405)
Other current assets 76 (2,276) (44)
Increase (decrease) in liabilities:
Payable to ALZA Corporation 3,174 370 15,294
Accrued liabilities (74) (7) 23
_____________________________________________________________________
Total adjustments 3,051 (838) 10,618
Net cash used in
operating activities (35,280) (50,300) (240,392)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of available-for-sale
securities - (12,042) (228,660)
Sales of available-for-sale
securities 24,164 55,843 208,917
Maturities of available-for-
sale securities - 5,000 5,000
Employee loan, long-term - - (300)
_____________________________________________________________________
Net cash provided by (used in)
investing activities 24,164 48,801 (15,043)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock to
ALZA Corporation - - 300,000
Repurchase of common stock (1,385) (548) (2,384)
_____________________________________________________________________
Net cash provided by
financing activities (1,385) (548) 297,616
_____________________________________________________________________
Net increase (decrease) in cash and
cash equivalents (12,501) (2,047) 42,181
_____________________________________________________________________
Cash and cash equivalents
at beginning of period 54,682 54,326 -
____________________________________________________________________
Cash and cash equivalents
at end of period $ 42,181 $ 52,279 $ 42,181
=====================================================================
See accompanying notes.
Crescendo Pharmaceuticals Corporation
(a development stage company)
Notes to Condensed Financial Statements (unaudited)
NOTE 1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
Crescendo Pharmaceuticals Corporation ("Crescendo") was
incorporated in Delaware on June 26, 1997 and commenced operations
on September 30, 1997. Crescendo was formed for the purpose of
selecting and developing human pharmaceutical products (the
"Crescendo Products") and commercializing such products, most
likely through licensing to ALZA Corporation ("ALZA"). Since its
formation, Crescendo's principal activity has been conducting
product development under its agreements with ALZA. In accordance
with generally accepted accounting principles, Crescendo is
considered a development stage company.
Crescendo incurred research and development expenses of
approximately $21.8 million and $42.2 million for the three months
and six months ended June 30, 2000, respectively. This compares
with $31.9 million and $54.1 million for the three months and six
months ended June 30, 1999, respectively. Research and development
expenses have totaled approximately $278.1 million for the period
from inception (June 26, 1997) through June 30, 2000. If Crescendo
continues to fund the development of Crescendo Products at the
current rate, funds available for product development will likely
be exhausted by the end of 2000 and product development funding by
Crescendo will cease at that time. When Available Funds (described
below) are nearly exhausted, certain critical timetables relating
to ALZA's purchase option with respect to all of Crescendo's Class
A Common Stock (the "Crescendo Shares") and ALZA's option to
license any or all Crescendo Products not yet licensed by ALZA will
be triggered, as described more fully in Note 4 below. The Board
of Directors of Crescendo has initiated activities to establish a
contingency plan for the continued operations of Crescendo in the
event that ALZA chooses not to exercise the purchase option, and
Crescendo has the right, under its agreements with ALZA, to take
necessary steps to cease development funding and maintain a cash
reserve of up to $2 million to ensure Crescendo's ability to meet
its operating cash needs through at least December 31, 2000.
The information at June 30, 2000, for the three months and six
months ended June 30, 2000 and 1999, and for the period from
inception (June 26, 1997) through June 30, 2000 is unaudited, and
includes all adjustments (consisting only of normal recurring
adjustments) that the management of Crescendo believes necessary
for fair presentation of the results for the periods presented.
Interim results are not necessarily indicative of the results for
the full year. The balance sheet for December 31, 1999 was derived
from the audited balance sheet. The financial statements should be
read in conjunction with the audited financial statements and
accompanying notes for the year ended December 31, 1999 included in
Crescendo's 1999 Annual Report on Form 10-K.
Accounting for Revenues and Expenses
At June 30, 2000, Crescendo's revenue consisted of interest and
investment income and product payments, referred to as royalty
revenue in Crescendo's financial statements. Since the first
quarter of 1999, Crescendo has accrued royalty revenue based on net
sales in the United States of one Crescendo Product, Ditropan XL-
Registered Trademark-, licensed by ALZA. Royalties in respect of
Ditropan XL are recognized in the period in which earned (the
period in which product sales are made by ALZA, from which
Crescendo receives product payments) based on information reported
to Crescendo by ALZA.
Crescendo has incurred and expects to incur most of its expenses
under its agreements with ALZA. Development Costs paid to ALZA
under a Development Agreement, and amounts paid to ALZA under a
Services Agreement, are recorded as research and development
expenses and general and administrative expenses, respectively, and
are recognized on an accrual basis as incurred. These expenses are
recorded in the period in which services have been provided by ALZA
to Crescendo or in which expenses have been incurred by ALZA on
behalf of Crescendo. The Technology Fee paid to ALZA under a
Technology License Agreement is recorded monthly, as incurred, as
research and development expense. See Note 4 for a description of
the agreements between Crescendo and ALZA.
Investment Risk
Crescendo invests excess cash in money market and fixed income
securities of banks and companies with strong credit ratings, from a
variety of industries, and in U.S. government obligations. These
securities typically bear minimal risk and Crescendo has not
experienced any losses on its investments due to institutional failure
or bankruptcy. Crescendo's investment policy is designed to limit
exposure with any one institution.
Use of Estimates
The preparation of financial statements in accordance with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. Actual results
could differ from those estimates.
Cash, Cash Equivalents, and Short-Term Investments
Cash and cash equivalents include cash balances and
investments with maturities of three months or less at the time of
purchase. Short-term investments include commercial paper and
other highly liquid investments with maturities less than one year.
Cash, cash equivalents and short-term investments are stated at
their fair value.
NOTE 2. INVESTMENTS
Crescendo has classified its entire investment portfolio,
including cash and cash equivalents of approximately $42.2 million
and $54.7 at June 30, 2000 and December 31, 1999, respectively, as
available-for-sale. Investments in the available-for-sale
category are generally carried at fair market value with
unrealized gains and losses recorded as a separate component of
stockholders' equity. Realized losses for the periods ended June
30, 2000 and December 31, 1999 were not material. The cost of
securities when sold is based upon specific identification.
The following is a summary of Crescendo's investment portfolio
at June 30, 2000(in thousands):
Available-for-Sale Securities
__________________________________________________________________
Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
__________________________________________________________________
U.S. Treasury
securities and
obligations of
U.S. government
agencies $ 4,991 $ - $(85) $ 4,906
Collateralized
mortgage
obligations and
asset backed
securities 9,752 - (246) 9,506
Corporate debt
securities - - - -
Money market funds 40,232 - - 40,232
___________________________________________________________________
$54,975 $ - $(331) $ 54,644
===================================================================
The amortized cost and estimated fair value of securities at June
30, 2000, by contractual maturity, are shown below (in thousands).
Expected maturities will differ from contractual maturities because
the issuers of the securities may have the right to prepay
obligations without prepayment penalties.
Estimated
Amortized Fair
Cost Value
_________________________________________________________________
Due in one year or less $ 40,299 $ 40,298
Due after one year through
three years 14,676 14,346
_________________________________________________________________
$ 54,975 $ 54,644
=================================================================
NOTE 3. STOCKHOLDERS' EQUITY
Common Stock Repurchase
On May 27, 1999, Crescendo's Board of Directors announced a
program under which Crescendo may purchase Crescendo Shares in
the open market from time to time using product payments received
from ALZA. During the second quarter of 2000, Crescendo
purchased 37,764 Crescendo Shares for approximately $0.7 million.
As of June 30, 2000, Crescendo had purchased a total of 131,961
Crescendo Shares under this program for approximately $2.4
million. The excess of the purchase price of the Crescendo
Shares over their stated value has been reflected as a decrease
in additional paid-in capital on the accompanying balance sheet.
The Board of Directors has determined that the program will
continue in the third quarter of 2000, subject to the
availability of Crescendo Shares at an appropriate price.
Per Share Information
Basic loss per share is calculated by dividing net loss by
the weighted average common shares outstanding for the period.
Diluted loss per share is calculated by dividing net loss by the
weighted average common shares outstanding for the period plus the
dilutive effect of stock options.
The following table sets forth the computation of Crescendo's
basic and diluted loss per share:
Period from
Three months Six months inception
ended ended (June 26, 1997)
June 30, June 30, to June 30,
2000 1999 2000 1999 2000
____________________________________________________
NUMERATOR (IN THOUSANDS):
BASIC AND DILUTED
Net loss $(19,890) $(29,669)$(38,331)$(49,460)$(251,010)
======================================================================
DENOMINATOR (IN THOUSANDS):
BASIC AND DILUTED
Weighted average shares
outstanding 4,843 4,962 4,864 4,964 4,533
=======================================================================
BASIC NET LOSS
PER SHARE $ (4.11) $ (5.98) $ (7.88)$ (9.96)$ (55.37)
=======================================================================
DILUTED NET LOSS
PER SHARE $ (4.11) $ (5.98) $ (7.88)$ (9.96) $ (55.37)
=======================================================================
The potentially dilutive effect of outstanding options to
purchase 100,000 Crescendo Shares in the three months and six
months ended June 30, 2000 and 1999, and for the period from
inception (June 26, 1997) through June 30, 2000, were excluded from
the diluted per share calculations as they would have been anti-
dilutive for all periods.
NOTE 4. ARRANGEMENTS WITH ALZA CORPORATION
On September 29, 1997, ALZA contributed $300 million in cash to
Crescendo. On September 30, 1997, all of the then outstanding
Crescendo Shares (a total of 4,965,470 shares) were distributed to
the holders of ALZA common stock and ALZA's convertible
subordinated debentures. Crescendo Shares are traded on The NASDAQ
Stock Market-Registered Trademark- under the symbol "CNDO." ALZA
holds all 1,000 shares of Crescendo Class B Common Stock.
In connection with ALZA's contribution to Crescendo and the
distribution of Crescendo Shares, Crescendo and ALZA entered into a
number of agreements, including a Development Agreement, Technology
License Agreement, License Option Agreement and Services Agreement,
discussed below.
Crescendo and ALZA have a Development Agreement pursuant to
which ALZA conducts product development and related activities on
behalf of Crescendo under work plans and cost estimates which have
been proposed by ALZA and approved by Crescendo. Crescendo is
required to use the cash initially contributed to it by ALZA, plus
interest thereon, less Crescendo's administrative expenses, the
Technology Fee paid to ALZA and reserves of up to $2 million (the
"Available Funds") to conduct activities under the Development
Agreement.
Under the Development Agreement, Crescendo initially agreed to
fund the development of seven identified products (the "Initial
Products"). As of June 30, 2000, three of the Initial Products
(OROS-Registered Trademark- oxybutynin, DUROS-Registered Trademark-
leuprolide and OROS-Registered Trademark- methylphenidate) remained
in active development and/or had been licensed by ALZA. Research
and development expenses for the three months and six months ended
June 30, 2000, were approximately $21.8 million and $42.2 million,
respectively. This compares with $31.9 million and $54.1 million
for the three and six months ended June 30, 1999, respectively.
All periods include a Technology Fee paid by Crescendo to ALZA.
For the period from inception (June 26, 1997) through June 30,
2000, Crescendo recorded research and development expenses of
approximately $278.1 million.
Crescendo and ALZA have a Technology License Agreement pursuant
to which ALZA has granted to Crescendo a worldwide license to use
ALZA technology solely to select and develop Crescendo Products,
to conduct related activities, and to commercialize such products.
In exchange for the license to use existing ALZA technology
relating to the Initial Products, Crescendo pays a Technology Fee
to ALZA, payable monthly over a period of three years, in the
amount of $1 million per month for the first 12 months following
the distribution of Crescendo Shares, $667,000 per month for the
following 12 months and $333,000 per month for the next 12
months(beginning in September 1999)(the "Technology Fee"). The
Technology Fee is not payable after August 2000. Crescendo
recorded a Technology Fee expense of $1.0 million and $2.0 million
for the three months and six months ended June 30, 2000, as
compared with $2.0 million and $4.0 million for the three and six
months ended June 30, 1999. For the period from inception (June
26, 1997) through June 30, 2000, Crescendo recorded $23.3 million
of Technology Fee expense. The Technology Fee is included in
research and development expenses.
Pursuant to the License Option Agreement entered into by
Crescendo and ALZA, Crescendo has granted ALZA an option to acquire
a license to each Crescendo Product (the "License Option"). The
License Option for any such Crescendo Product is exercisable on a
country-by-country basis at any time until (i) with respect to the
United States, 30 days after clearance by the United States Food
and Drug Administration (the "FDA") to market such Crescendo
Product in the United States and (ii) with respect to any other
country, 90 days after the earlier of (a) clearance by the
appropriate regulatory agency to market the Crescendo Product in
such country and (b) clearance by the FDA to market the Crescendo
Product in the United States. The License Option will expire, to
the extent not previously exercised, 30 days after the expiration
of ALZA's option to purchase all of the outstanding Crescendo
Shares, described below. If and to the extent the License Option
is exercised as to any Crescendo Product, ALZA will acquire a
perpetual, exclusive license (with the right to sublicense) to
develop, make, have made and use the licensed product, and to sell
and have sold the licensed product, in the country or countries as
to which the License Option is exercised.
Under the License Agreement for each licensed product (a form
of which is attached to the License Option Agreement), ALZA will
make payments to Crescendo with respect to the licensed product
equal to 1% of net sales of the licensed product by ALZA and its
sublicensees, distributors and marketing partners, plus an
additional 0.1% of such net sales for each full $1 million of
Development Costs (as defined in the Development Agreement) of the
licensed product that have been paid by Crescendo, not to exceed
2.5% of net sales in the first year a licensed product is sold in a
major market country, and not to exceed 3% for the following two
years. ALZA has the right to buy out Crescendo's right to receive
payments for licensed products on a country-by-country or global
basis in accordance with a formula set forth in the License
Agreement.
In December 1998, ALZA exercised its option to obtain a
worldwide license to OROS oxybutynin from Crescendo. ALZA launched
the product in the United States under the name Ditropan XL on
February 1, 1999. Under the terms of the license agreement between
Crescendo and ALZA, Crescendo receives payments from ALZA based on
worldwide net sales of the product. For the first three years the
rates are 2.5%, 3.0%, and 3.0% of net sales, respectively;
thereafter the rate is expected to be between 5.5% and 6.5%, based
on the Development Costs of the product to date and future
anticipated Development Costs to be paid by Crescendo. On January
1, 2000, the payment rate increased from 2.5% to 3.0% of net sales.
Royalty revenue for the three and six months ended June 30, 2000
was approximately $1.4 million and $2.4 million, respectively, and
was derived from net sales of Ditropan XL in the United States. On
June 19, 2000, Sanofi-Synthelabo, ALZA's marketing partner in
Europe for Ditropan XL, received approval to market Ditropan XL in
the United Kingdom and launched the product in July 2000. Under
the terms of its license agreement with ALZA, Crescendo will
receive payments from ALZA based on Sanofi-Synthelabo's net sales
of the product.
On March 3, 2000, DUROS leuprolide (Viadur-Trademark-) was
approved for marketing by the FDA. Also on March 3, 2000, ALZA
exercised its option to obtain a worldwide license to DUROS leuprolide
from Crescendo. Under the terms of the license agreement between
Crescendo and ALZA, Crescendo will receive payments from ALZA based on
worldwide net sales of the product. For the first three years the
rates will be 2.5%, 3.0%, and 3.0% of net sales, respectively;
thereafter the rate is expected to be between 9.0% and 9.5%, based on
the Development Costs of the product to date and future anticipated
Development Costs to be paid by Crescendo. On April 5, 2000, ALZA
announced that it had entered into a U.S. commercialization agreement
for Viadur with Bayer Corporation ("Bayer"). Under the terms of its
license agreement with ALZA, Crescendo will receive payments from ALZA
based on Bayer's net sales of the product.
Pursuant to Crescendo's Restated Certificate of Incorporation,
ALZA has a purchase option which gives ALZA the right to purchase all
(but not less than all) of the Crescendo Shares (the "Purchase
Option"). The Purchase Option is exercisable by written notice to
Crescendo at any time until January 31, 2002, provided that such date
will be extended for successive six month periods if, as of any July
31 or January 31 beginning with July 31, 2001, Crescendo has not paid
(or accrued expenses for) at least 95% of Available Funds pursuant to
the Development Agreement. In any event, the Purchase Option will
terminate on the 60th day after Crescendo provides ALZA with a
statement that, as of the end of any calendar month, there are less
than $2.5 million of Available Funds which have not been expended
under the Development Agreement, accompanied by a report of
Crescendo's independent auditors.
If the Purchase Option is exercised, the exercise price will be
the greatest of:
(a)(i) 25 times the actual payments made by or due from ALZA to
Crescendo under the Development Agreement and the License
Agreement for any product (and, in addition, such payments as
would have been made by or due from ALZA to Crescendo if ALZA
had not previously exercised its payment buy-out option with
respect to any such payments) for the four calendar quarters
immediately preceding the quarter in which the Purchase Option
is exercised (provided, however, that for any product which has
not been commercially sold during each of such four calendar
quarters, the portion of the exercise price for such product
will be 100 times the average of the quarterly payments made by
or due from ALZA to Crescendo for each of such calendar
quarters during which such product was commercially sold) less
(ii) any amounts previously paid to exercise any payment buy-
out option;
(b) the fair market value of one million shares of ALZA common
stock;
(c) $325 million less all amounts paid by or due from Crescendo
under the Development Agreement to the date the Purchase Option
is exercised; and
(d) $100 million.
In each case, the amount payable as the Purchase Option exercise
price will be reduced to the extent, if any, that Crescendo's
liabilities at the time of exercise (other than liabilities under
the Development Agreement, the Technology License Agreement and the
Services Agreement, described below) exceed Crescendo's cash and
cash equivalents, and short-term and long-term investments
(excluding the amount of Available Funds remaining at such time).
ALZA may pay the exercise price in cash, in ALZA common stock or in
any combination of cash and ALZA common stock.
Crescendo and ALZA have a Services Agreement pursuant to which
ALZA provides certain administrative services, including accounting
and legal services, to Crescendo. Specified charges for such
services are generally intended to allow ALZA to recover its direct
costs of providing the services, including fully-allocated
overhead, plus all out of pocket costs and expenses, but without
any profit (i.e. ALZA's fully-burdened cost). The Services
Agreement originally had a one-year term and is renewed
automatically for successive one-year terms during the term of the
Development Agreement, unless terminated by Crescendo at any time
upon 60 days' written notice. Crescendo accrues estimated expenses
on a monthly basis under the Services Agreement. Such expenses
include (i) third party direct expenses paid by ALZA on behalf of
Crescendo; (ii) actual salaries, including benefits, of ALZA's
personnel performing services for Crescendo; and (iii) ALZA's
standard administrative overhead charge, calculated as a percent of
salaries. As a result of a change in certain estimates, Crescendo
recorded a net credit of $15,000 from ALZA under the Services
Agreement for the three months ended March 31, 2000. Expenses
incurred under this agreement for the three months ended June 30,
2000 were $81,000, as compared with $15,000 for the three months
ended June 30, 1999. Because of the credit in the first quarter of
2000, expenses under the Services Agreement for the six months
ended June 30, 2000 were approximately $66,000, as compared with
$61,000 for the six months ended June 30, 1999. General and
administrative expenses incurred under the Services Agreement for
the period from inception (June 26, 1997) through June 30, 2000
were approximately $564,000.
At June 30, 2000, the amount payable to ALZA under the
Development Agreement and the Services Agreement was approximately
$15.3 million. The Technology Fee is paid in the month it is
accrued.
NOTE 5. SUBSEQUENT EVENTS
On August 1, 2000, OROS methylphenidate (Concerta-Trademark-) was
approved for marketing by the FDA. Also on August 1, 2000, ALZA
exercised its option to obtain a worldwide license to OROS
methylphenidate from Crescendo. Under the terms of the license
agreement between Crescendo and ALZA, Crescendo will receive payments
from ALZA based on worldwide net sales of the product. For the first
three years the rates will be 2.5%, 3.0%, and 3.0% of net sales,
respectively; thereafter the rate is expected to be between 8.5% and
9.0%, based on the Development Costs of the product to date and future
anticipated Development Costs to be paid by Crescendo. On April 18,
2000, ALZA announced that it had entered into an agreement with McNeil
Consumer Healthcare ("McNeil"), a Johnson & Johnson company, to co-
promote the product in the United States.
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, and particularly
in "Management's Discussion and Analysis of Financial Condition and
Results of Operations", are forward-looking in nature. Forward-
looking statements include but are not limited to statements that
are not historical facts and statements including forms of the
words "intend", "believe", "will", "may", "could", "expect",
"anticipate", "possible" and similar terms. The occurrence of the
events described, and the achievement of the intended results, are
subject to the future occurrence of many events, some or all of
which are not predictable or within Crescendo's control (including
without limitation any possible future actions by ALZA) and various
risk factors; therefore, actual results may differ materially from
those anticipated in any forward-looking statements. The
significant risks related to Crescendo's business are those
associated with product selection, technology and product
development, clinical development, product manufacturing,
regulatory clearance to market products, changes in the health care
marketplace, patent and intellectual property matters, medical and
market acceptance of products (including third party
reimbursement), commercializing products (including competition),
conflicts of interest between ALZA and Crescendo and the risk of a
lack of funds to complete the development of products. Such risks
are described in more detail in Crescendo's Annual Report on Form
10-K for the year ended December 31, 1999.
RESULTS OF OPERATIONS
Revenues, consisting of net interest and investment income
earned on invested funds and royalty revenue, were approximately
$2.3 million and $4.4 million for the three months and six months
ended June 30, 2000, as compared with $2.5 million and $5.2 million
for the three and six months ended June 30, 1999, respectively.
For the period from Crescendo's inception (June 26, 1997) through
June 30, 2000, revenues were approximately $32.3 million. Royalty
revenue was approximately $1.4 million and $2.4 million for the
three and six months ended June 30, 2000, as compared with
approximately $0.4 million and $0.9 million for the three and six
months ended June 30, 1999, resulting from sales by ALZA of
Ditropan XL in the United States beginning in the first quarter of
1999. Under the terms of Crescendo's License Agreement with ALZA
for Ditropan XL, on January 1, 2000, the product payment rate for
Ditropan XL increased from 2.5% to 3.0% of net sales and it is
expected to increase to approximately 5.5% to 6.5% of net sales on
January 1, 2002.
As Crescendo's funds are used under the Development Agreement
and to pay the Technology Fee (through August 2000), lower cash
balances are available for investment and, therefore, interest and
investment income has been decreasing and is expected to continue
to decrease. Royalty revenue is expected to increase over 1999
levels if sales of Ditropan XL continue at current levels, due to
the increase in the product payment rate from 2.5% to 3.0% of net
sales on January 1, 2000 and higher net sales of Ditropan XL in the
first two quarters of 2000 as compared with the same quarters in
1999. In addition, if any other Crescendo Product is launched,
Crescendo will receive product payments on net sales of such
product. Under the License Agreement for each such product,
product payment rates will be 2.5% for the first year of net sales,
3.0% for the following two years, and thereafter as determined by a
formula based on Development Costs paid by Crescendo for the
relevant product. See "Arrangements with ALZA Corporation" above.
Viadur and Concerta, Crescendo Products which have received FDA
approval in 2000 for marketing in the United States, have both been
licensed by ALZA from Crescendo on a worldwide basis. In the
second quarter, ALZA entered into a U.S. commercialization
agreement for Viadur with Bayer and an agreement with McNeil to co-
promote Concerta in the United States.
Overall, Crescendo's total revenues are expected to decline in
the near term since royalty revenue increases, if any, are not
anticipated to exceed the continued decrease in interest and
investment income in 2000. There can be no assurance that revenue
relating to commercialized Crescendo Products will be sufficient in
the future to support Crescendo's operations once Available Funds
are exhausted, that Crescendo Products under development will
receive regulatory clearance or that any Crescendo Product licensed
by ALZA will be successfully commercialized.
Crescendo incurred research and development expenses of
approximately $21.8 million and $42.2 million for the three months
and six months ended June 30, 2000, as compared with $31.9 million
and $54.1 million for the three and six months ended June 30, 1999,
respectively. For the period from inception (June 26, 1997)
through June 30, 2000, Crescendo recorded research and development
expenses of approximately $278.1 million. These expenses related
primarily to development of the Crescendo Products and include
payment of the Technology Fee. The Technology Fee paid to ALZA for
the three months and six months ended June 30, 2000 was
approximately $1.0 million and $2.0 million, as compared with $2.0
million and $4.0 million for the three and six months ended June
30, 1999 ($23.3 million from inception (June 26, 1997) through June
30, 2000). The Technology Fee will be $333,000 each month through
August 2000, after which the Technology Fee is no longer payable.
Crescendo's research and development expenses are expected to
continue at approximately current levels during 2000, although
quarterly fluctuations may occur. As of June 30, 2000, Crescendo
had $41.6 million of Available Funds which have not been expended
under the Development Agreement. If Crescendo continues to fund
product development activities at the current rate, Available Funds
will likely be exhausted by the end of 2000. How quickly Available
Funds are expended, and the levels of Crescendo's research and
development expenses, will depend upon the progress of Crescendo
Products currently in development, and the development costs of any
future products proposed by ALZA and accepted for development by
Crescendo.
General and administrative expenses for the three months and
six months ended June 30, 2000 were approximately $0.3 million and
$0.6 million, as compared with $0.3 million and $0.6 million for
the three and six months ended June 30, 1999. For the period from
inception through June 30, 2000, general and administrative
expenses were approximately $3.7 million. It is anticipated that
general and administrative expenses will remain at approximately
current levels during 2000. Crescendo accrues estimated expenses
on a monthly basis under its Services Agreement with ALZA. As a
result of a change in certain estimates, Crescendo recorded a net
credit of $15,000 from ALZA under the Services Agreement for the
three months ended March 31, 2000. Expenses incurred under this
agreement for the three months ended June 30, 2000 were $81,000, as
compared with $15,000 for the three months ended June 30, 1999.
Because of the credit in the first quarter of 2000, expenses under
the Services Agreement for the six months ended June 30, 2000 were
approximately $66,000, as compared with $61,000 for the six months
ended June 30, 1999. For the period from inception (June 26, 1997)
through June 30, 2000, expenses incurred by Crescendo under the
Services Agreement were approximately $564,000.
The results of operations of Crescendo currently reflect
primarily interest and investment income on the funds contributed
by ALZA, royalty revenue received from ALZA, and research and
development expenses related to development of Crescendo Products
and the Technology Fee. The relative contribution to Crescendo's
revenues from royalty revenue is expected to increase as interest
and investment income continues to decrease. Crescendo's net loss
for the three months and six months ended June 30, 2000 was
approximately $19.9 million or $4.11 per share and $38.3 million or
$7.88 per share, respectively, as compared with $29.7 million or
$5.98 per share and $49.5 million or $9.96 per share for the three
and six months ended June 30, 1999. The net loss from Crescendo's
inception (June 26, 1997) through June 30, 2000 was approximately
$251.0 million or $55.37 per share. Crescendo is expected to
continue to record significant net losses in future periods, as
product development expenses under its Development Agreement with
ALZA are expected to continue to exceed income.
LIQUIDITY AND CAPITAL RESOURCES
On September 29, 1997, ALZA contributed $300 million in cash
to Crescendo in exchange for the Crescendo Shares. The funds
contributed by ALZA, plus investment income earned thereon, are
being used primarily to fund the development of Crescendo Products
and to conduct related activities. These funds, to the extent not
immediately required for development activities, are invested in
low-risk securities.
At June 30, 2000, and December 31, 1999, Crescendo had cash,
cash equivalents and short-and long-term investments of
approximately $56.6 million and $93.1 million, respectively. As
Crescendo's funds continue to be utilized under the Development
Agreement and to pay the Technology Fee to ALZA (through August
2000), increasingly lower cash balances will be available for
investment.
Based on anticipated spending levels for the continued development
of all the Crescendo Products currently under development, it is
expected that Crescendo's funds for product development will be
exhausted by the end of 2000. At that time, product development
funding by Crescendo will cease. However, several factors could
impact the level and timing of Crescendo funding, including the
addition of any new Crescendo Products proposed by ALZA and accepted
for development by Crescendo, the discontinuation of the development
of any Crescendo Products, any commercial arrangements between ALZA
and other companies which would cause ALZA to exercise its License
Option with respect to any Crescendo Product and take over the funding
of product development, any change in the number of projects advancing
to or continuing in later stages of development or any adjustments in
the rate of spending on Crescendo Products currently in development.
When Crescendo's Available Funds are nearly exhausted, which is
anticipated to occur by the end of 2000, certain critical timetables
will be triggered. First, ALZA's Purchase Option will terminate on
the 60th day after Crescendo provides ALZA with a statement that, as
of the end of any calendar month, there are less than $2.5 million of
Crescendo's Available Funds which have not been expended under the
Development Agreement, accompanied by a report of Crescendo's
independent auditors. In addition, ALZA has the right, for 30 days
after expiration of the Purchase Option, to license any or all
Crescendo Products which have not yet been licensed by ALZA, on a
product-by-product and country-by-country basis. ALZA is under no
obligation to exercise the Purchase Option, or the License Option with
respect to any or all Crescendo Products, and will do so only if ALZA
determines that it is in the best interests of ALZA and its
stockholders at the time the decision is made. In the event that ALZA
does not exercise the Purchase Option, or the License Option for all
Crescendo Products, after Available Funds are exhausted, Crescendo
will likely not have funds to continue or complete development of any
remaining Crescendo Products. It is not likely that Crescendo would
be able to raise any additional funds during the period when ALZA's
Purchase Option is outstanding, because of the existence of such
option. After the expiration of the Purchase Option, if it is not
exercised, Crescendo's ability to obtain additional funding will be
subject to the perception of those investors with funds available, or
the public markets, of the value of Crescendo.
The Board of Directors of Crescendo has initiated activities to
establish a contingency plan for the continued operations of
Crescendo in the event that ALZA chooses not to exercise the
Purchase Option. Possible actions under the contingency plan,
which could be implemented individually or in combination, include
the sale or license of Crescendo Products for which ALZA has not
exercised its License Option, either worldwide or for countries for
which ALZA has not exercised its option; the sale of Crescendo's
rights to future payments with respect to Crescendo Products
licensed by ALZA; and the sale of Crescendo's rights to future
payments from ALZA with respect to certain technology developed by
ALZA while conducting product development funded by Crescendo.
Once the contingency plan is established, Crescendo's Board will
review the plan on a regular basis. In the event that ALZA does
not exercise the Purchase Option, there can be no assurance that
the contingency plan will result in returns to Crescendo
stockholders.
The Board has the right, under its agreements with ALZA, to
take necessary steps to cease development funding and maintain a
cash reserve of up to $2.0 million to ensure Crescendo's ability to
meet its operating cash needs through at least 2000.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Financial market risks related to changes in interest rates
are described in Part II, Item 7A, Quantitative and Qualitative
Disclosures about Market Risk, in Crescendo's Annual Report on Form
10-K for the year ended December 31, 1999.
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
(a) The annual meeting of stockholders of Crescendo was held on
May 18, 2000.
(b) At the annual meeting, stockholders approved the following
proposal:
Election of Directors: Votes For Votes Withheld
Jerry T. Jackson 4,352,299 5,263
Ley S. Smith 4,352,254 5,308
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
27 Financial Data Schedule
(b) No reports on Form 8-K were filed during the quarter.
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.
Crescendo Pharmaceuticals Corporation
Date: August 11, 2000 By: /s/ Terrence Blaschke
_________________________________
Terrence Blaschke
Vice President and
Director
Date: August 11, 2000 By: /s/ David R. Hoffmann
_________________________________
David R. Hoffmann
Vice President, Finance
and Secretary
EXHIBIT INDEX
27 Financial Data Schedule