UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the quarterly period ended
September 30, 1999
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.)
1454 Page Mill Road, Palo Alto, California 94304
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (650) 494-5600
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 October 31, 1999:
Class A Common Stock, $.01 par value - 4,932,870 shares
Class B Common Stock, $1.00 par value - 1,000 shares
CRESCENDO PHARMACEUTICALS CORPORATION
FORM 10-Q for the Quarter Ended
September 30, 1999
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 13-17
Item 3. Quantitative and Qualitative Disclosures
about Market Risk 17
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 19
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 Nine months inception
ended ended (June 26, 1997)
September 30, September 30, to September 30,
1999 1998 1999 1998 1999
_______________________________________________________
Revenues:
Net interest and
investment income $ 1,699 $ 3,786 $ 6,017 $10,988 $ 24,012
Royalty revenue 762 - 1,682 - 1,682
_______________________________________________________
Total revenues 2,461 3,786 7,699 10,988 25,694
Expenses:
Research & development
performed under
contract with ALZA
Corporation (a related
party) 21,621 28,422 75,762 78,453 214,006
General & administrative 434 331 993 1,004 2,555
______________________________________________________
Total expenses 22,055 28,753 76,755 79,457 216,561
______________________________________________________
Net loss before taxes $ (19,594) $(24,967)$(69,056) $(68,469) $(190,867)
Income taxes - - - - 2,425
______________________________________________________
Net loss $ (19,594) $(24,967)$(69,056) $(68,469) $ (193,292)
======================================================
Net loss per
common share
Basic and Diluted $ (3.97) $ (5.03)$ (13.94) $ (13.79) $ (43.76)
======================================================
See accompanying notes.
Crescendo Pharmaceuticals Corporation
(a development stage company)
Condensed Balance Sheets (unaudited)
(in thousands, except number of shares and per share amounts)
September 30, December 31,
1999 1998
________________________________
ASSETS
Current assets:
Cash and cash equivalents $ 47,109 $ 54,326
Short-term investments 27,843 57,410
Interest receivable 798 1,861
Prepaid expenses and other
current assets 3,275 627
__________________________________
Total current assets 79,025 114,224
Employee loan 300 300
Long-term investments 39,697 79,387
__________________________________
Total assets $ 119,022 $193,911
==================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Payable to ALZA Corporation $ 13,062 $ 17,596
(a related party)
Accrued liabilities 82 77
__________________________________
Total current liabilities 13,144 17,673
Stockholders' equity:
Class A Common Stock, $0.01 par value,
6,000,000 shares authorized; 4,932,870
and 4,965,470 shares issued and
outstanding at September 30, 1999 and
December 31, 1998, respectively 49 50
Class B Common Stock, $1.00 par value,
1,000 shares authorized, issued and
outstanding 1 1
Additional paid-in capital 299,401 299,949
Accumulated other comprehensive
(loss) income (281) 474
Deficit accumulated during development
stage (193,292) (124,236)
__________________________________
Total stockholders' equity 105,878 176,238
__________________________________
Total liabilities and
stockholders' equity $ 119,022 $193,911
==================================
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
Nine months ended (June 26, 1997)
September 30, to September 30,
1999 1998 1999
_____________________________________
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(69,056) $(68,469) $(193,292)
Non-cash adjustments to reconcile
net loss to net cash used in
operating activities:
(Increase) decrease in assets:
Interest receivable 1,063 (928) (798)
Prepaid expenses and other
assets (2,648) (136) (3,275)
Increase (decrease) in liabilities:
Payable to ALZA Corporation (4,534) 1,324 13,062
Accrued liabilities 5 (6) 82
_____________________________________
Total adjustments (6,114) 254 9,071
Net cash used in
operating activities (75,170) (68,215) (184,221)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of available-for-sale
securities (12,042) (111,299) (228,660)
Sales of available-for-sale
securities 75,543 58,033 155,838
Maturities of available-for-sale
securities 5,000 - 5,000
Employee loan, long-term - - (300)
______________________________________
Net cash provided by (used in)
investing activities 68,501 (53,266) (68,122)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock to
ALZA Corporation - - 300,000
Repurchase of common stock (548) - (548)
_______________________________________
Net cash (used in) provided by
financing activities (548) - 299,452
_______________________________________
Net (decrease) increase in cash and
cash equivalents (7,217) (121,481) 47,109
_______________________________________
Cash and cash equivalents
at beginning of period 54,326 179,971 -
________________________________________
Cash and cash equivalents
at end of period $47,109 $58,490 $47,109
========================================
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.
The information at September 30, 1999, for the three and nine
months ended September 30, 1999 and 1998, and for the period from
inception (June 26, 1997) through September 30, 1999 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, 1998 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, 1998 included in Crescendo's
1998 Annual Report on Form 10-K.
Accounting for Revenues and Expenses
At September 30, 1999, Crescendo's revenue consisted of interest
and investment income and royalty revenue. Since the first quarter
of 1999, Crescendo has accrued royalty revenue based on net sales of
one Crescendo Product licensed by ALZA in the United States.
Royalties are recognized in the period in which earned (the period
in which product sales are made by third parties from whom Crescendo
receives, directly or indirectly, product royalties).
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 (described below) 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.
Comprehensive Loss
During the three and nine months ended September 30, 1999 and
1998, comprehensive loss was not materially different from reported
net loss.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standard No. 133 ("SFAS
133"), "Accounting for Derivative Instruments and Hedging
Activities". This statement establishes accounting and reporting
standards requiring that every derivative instrument, including
certain derivative instruments embedded in other contracts, be
recorded in the balance sheet as either an asset or liability
measured at its fair value. The statement also requires that
changes in the derivative's fair value be recognized in earnings
unless specific hedge accounting criteria are met. Crescendo
believes the adoption of SFAS 133 will not have a material effect on
its financial statements. In June 1999, the FASB issued Statement
of Financial Accounting Standard No. 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date
of SFAS 133". As a result, Crescendo is required to adopt SFAS 133
in fiscal year 2001.
Note 2. Investments
Crescendo has classified its entire investment portfolio,
including cash and cash equivalents of approximately $47.1 million
and $54.3 million at September 30, 1999 and December 31, 1998,
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 gains and losses for the three and
nine months ended September 30, 1999 and September 30, 1998 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 September 30, 1999 (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 $ 20,972 $ 6 $ (57) $ 20,921
Collateralized
mortgage
obligations and
asset backed
securities 21,304 - (197) 21,107
Corporate debt
securities 25,544 26 (59) 25,511
Money market funds 46,264 - - 46,264
_________________________________________________
$114,084 $ 32 $ (313) $113,803
=================================================
The amortized cost and estimated fair value of securities at
September 30, 1999, by contractual maturity, are shown below (in
thousands). Expected maturities may 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 $ 59,268 $ 59,268
Due after one year through
three years 14,913 14,922
Due after three years through
five years 39,903 39,613
________________________________
$ 114,084 $ 113,803
================================
Note 3. Stockholders' Equity
Common Stock Repurchase
On May 27, 1999, Crescendo's board of directors announced a program
under which Crescendo may purchase shares of Crescendo Class A Common
Stock (the "Crescendo Shares") in the open market from time to time
using product payments received from ALZA. As of September 30, 1999,
Crescendo had purchased 32,600 Crescendo Shares under this program.
All repurchased shares have been retired. 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. There were no purchases in the third
quarter due to the timing of receipt of the product payments due from
ALZA. The board of directors has determined that the program will
continue in the fourth quarter of 1999.
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 Nine months inception
ended ended (June 26, 1997)
September 30, September 30, to September 30,
1999 1998 1999 1998 1999
NUMERATOR
(in thousands):
Basic and Diluted
Net loss $(19,594) $(24,967) $(69,056) $(68,469) $(193,292)
======================================================
DENOMINATOR
(in thousands):
Basic and Diluted
Weighted average
shares outstanding 4,934 4,966 4,955 4,966 4,417
======================================================
Basic and Diluted
net loss
per share $ (3.97) $ (5.03) $ (13.94) $ (13.79) $ (43.76)
======================================================
The potentially dilutive effect of outstanding options to
purchase 100,000 Crescendo Shares would have been anti-dilutive in
the three and nine months ended September 30, 1999 and 1998, and for
the period from inception through September 30, 1999, and they were
therefore excluded from the diluted per share calculations.
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-
Service Mark- under the symbol "CNDO." ALZA holds 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. During the second quarter of 1999, a merger
agreement between ALZA and Abbott Laboratories was announced. The
acquisition of ALZA by Abbott would not affect any of the agreements
currently in place between ALZA and Crescendo. The completion of
the acquisition could affect the proposals for product development
from ALZA to Crescendo and therefore, the rate at which Crescendo
utilizes its Available Funds (defined 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 utilize 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 products (the "Initial Products"). As
of September 30, 1999, three of the Initial Products (OROS-
Registered Trademark- oxybutynin, DUROS-Trademark- leuprolide and
OROS-Registered Trademark- methylphenidate) remained in active
development and/or had been licensed by ALZA. During the third
quarter, the United States Food and Drug Administration ("FDA")
accepted for filing the New Drug Applications ("NDA") for DUROS
leuprolide and OROS methylphenidate. Research and development
expenses for the three and nine months ended September 30, 1999 were
approximately $21.6 million and $75.8 million, respectively. This
compares with approximately $28.4 million and $78.5 million for the
three and nine months ended September 30, 1998, respectively. All
periods include a Technology Fee paid by Crescendo to ALZA. For the
period from inception (June 26, 1997) through September 30, 1999,
Crescendo recorded research and development expenses of
approximately $214.0 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 (beginning in September 1999) for the next 12
months (the "Technology Fee"). The Technology Fee will no longer be
payable at such time as fewer than two of the Initial Products are
being developed by Crescendo and/or have been licensed by ALZA
pursuant to the License Option (defined below). Crescendo recorded
a Technology Fee of $1.7 million and $5.7 million for the three and
nine months ended September 30, 1999, as compared with $2.7 million
and $8.7 million for the three and nine months ended September 30,
1998. For the period from inception (June 26, 1997) through
September 30, 1999, Crescendo recorded $20.4 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 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 oxbutynin from Crescendo. ALZA launched the product in
the United States as Ditropan-Registered Trademark- XL on February 1,
1999. 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 5 and 6%, based on the Development Costs of the
product to date and future anticipated Development Costs to be paid by
Crescendo. Royalty revenue for the third quarter of 1999 was
approximately $762,000. This amount includes approximately $682,000
based on net sales of Ditropan XL in the third quarter and
approximately $80,000 for first and second quarter adjustments (the
adjustments relate to the difference between the net sales recorded by
ALZA and the net sales as defined in the agreements between ALZA and
Crescendo). Crescendo's royalty revenue for the nine months ended
September 30, 1999 was approximately $1.7 million.
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
Crescendo's 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. General and administrative expenses incurred under
this agreement were approximately $95,000 and $171,000 for the three
and nine months ended September 30, 1999, as compared with $66,000
and $192,000 for the three and nine months ended September 30, 1998.
General and administrative expenses incurred under the Services
Agreement for the period from inception (June 26, 1997) through
September 30, 1999 were approximately $391,000. Crescendo accrues
these expenses on a monthly basis. The 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.
At September 30, 1999, the amount payable to ALZA under the
Development Agreement was approximately $13.0 million.
Item 2. Management's Discussion and Analysis of Financial
Condition
and Results of Operations
Notice Concerning Forward-Looking Statements
Some of the statements made in this Form 10-Q, and particularly
in the 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 or in the event of a
merger between ALZA and Abbott, by Abbott), 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, 1998.
Results of Operations
Revenues, consisting of net interest and investment income
earned on invested funds, and royalty revenue, were approximately
$2.5 million and $7.7 million for the three months and nine months
ended September 30, 1999, as compared with approximately $3.8
million and $11.0 million for the three and nine months ended
September 30, 1998. Revenue for the three months and nine months
ended September 30, 1999 included product payments of approximately
$762,000 and $1.7 million, respectively, resulting from sales by
ALZA of Ditropan XL. ALZA launched the product in the United States
on February 1, 1999. The current product payment rate for Ditropan
XL is 2.5% of net sales. Beginning in the first quarter of 2000,
the rate will be increased to 3% of net sales under the terms of the
License Agreement for Ditropan XL. For the period from Crescendo's
inception (June 26, 1997) through September 30, 1999, total revenues
were approximately $25.7 million. As Crescendo's funds are used
under the Development Agreement and to pay the Technology Fee, lower
cash balances will be available for investment and, therefore,
interest and investment income has been and is expected to continue
decreasing.
Crescendo incurred research and development expenses of
approximately $21.6 million and $75.8 million for the three months
and nine months ended September 30, 1999, as compared with
approximately $28.4 million and $78.5 million in the three and nine
months ended September 30,1998. The decrease in research and
development expenses is primarily related to a reduction in spending
on the development programs for DUROS leuprolide and OROS
methylphenidate in the third quarter following the filing of the
NDAs for both products. For the period from inception (June 26,
1997) through September 30, 1999, Crescendo recorded research and
development expenses of approximately $214.0 million. These
expenses related primarily to development of the Crescendo Products
and include payment of the Technology Fee. The Technology Fee paid
to ALZA was $1.7 million and $5.7 million for the three months and
nine months ended September 30, 1999, as compared with $2.7 million
and $8.7 million for the three and nine months ended September 30,
1998 ($20.4 million from inception (June 26, 1997) through September
30, 1999). The Technology Fee will be $333,000 each month through
August 2000, so long as at least one of the Initial Products is
being developed and/or is licensed by ALZA. The Technology Fee is
no longer payable after August 2000. Total Crescendo research and
development expenses for the fourth quarter of 1999 are expected to
continue at approximately the same level as the third quarter of
1999.
General and administrative expenses for the three months and
nine months ended September 30, 1999 were approximately $0.4 million
and $1.0 million, as compared with $0.3 million and $1.0 million for
the three and nine months ended September 30, 1998. For the period
from inception (June 26, 1997) through September 30, 1999, general
and administrative expenses were approximately $2.6 million.
Expenses incurred by Crescendo under its Services Agreement with
ALZA were approximately $95,000 and $171,000 for the three months
and nine months ended September 30, 1999, as compared with
approximately $66,000 and $192,000 for the three and nine months
ended September 30,1998. For the period from inception (June 26,
1997) through September 30, 1999, expenses incurred by Crescendo
under its Services Agreement with ALZA were approximately $391,000.
It is anticipated that general and administrative expenses will
remain at approximately current levels during the remainder of 1999.
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 relevant 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 and nine months ended September 30, 1999 was
approximately $19.6 million or $3.97 per share and $69.1 million or
$13.94 per share, respectively, as compared with approximately $25.0
million or $5.03 per share and $68.5 million or $13.79 per share for
the three and nine months ended September 30, 1998, respectively.
The net loss from its inception (June 26, 1997) through September
30, 1999 was approximately $193.3 million or $43.76 per share.
Crescendo is expected to continue to record significant net losses
in future periods, as product development expenses under its
agreements with ALZA are expected to continue to exceed income.
Year 2000 Readiness
Crescendo is reliant upon the QuickBooks Pro Version 5.0
software application to record financial information relating to its
business activities. This accounting software has been represented
by the manufacturer to be Year 2000 compliant.
In addition to its internal system, Crescendo is also reliant
upon the capabilities of the computer systems of its vendors,
contractors (including ALZA for administrative functions under the
Services Agreement and for contractual research and development),
U.S. government agencies, and its investment managers. In order to
determine the level of Year 2000 compliance of vendors, contractors
and investment managers, Crescendo has ongoing communications with
third parties with whom it has material direct business
relationships. All of Crescendo's investment managers have
confirmed that they are Year 2000 compliant. If any third parties
experience failures in their computer systems due to Year 2000 non-
compliance, this failure could materially affect Crescendo's ability
to engage in normal business activities and, in particular, the
status of certain product development activities being conducted by
ALZA.
Crescendo has not incurred any material costs in connection
with its Year 2000 assessment and no conversion of its internal
system is required. Due to the general uncertainty surrounding the
Year 2000 readiness of third parties upon whom Crescendo relies,
Crescendo is unable to determine at this time whether or to what
extent Year 2000 failures will have a material impact on its
operations.
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 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 September 30, 1999, and December 31, 1998, Crescendo had
cash, cash equivalents and short-and long-term investments of
approximately $114.6 million and $191.1 million, respectively. As
Crescendo's funds continue to be utilized under the Development
Agreement and to pay the Technology Fee to ALZA, 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 Available Funds will be exhausted during the
second half of the year 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, 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, any change (whether as a result
of ALZA's merger with Abbott or otherwise) 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.
As of September 30, 1999, Crescendo had $102.6 million of Available
Funds which have not been expended under the Development Agreement.
When Crescendo's Available Funds are exhausted, certain critical
timetables will be triggered. First, ALZA's Purchase Option with
respect to all of the Crescendo Shares 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, 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 Crescendo Product 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 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's portfolio.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The 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, 1998.
PART II. OTHER INFORMATION
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: November 12, 1999 By: /s/ Gary L. Neil
_________________________________
Gary L. Neil
President and
Chief Executive Officer
Date: November 12, 1999 By: /s/ David R. Hoffmann
_________________________________
David R. Hoffmann
Vice President, Finance
and Secretary
EXHIBIT INDEX
Exhibit
27 Financial Data Schedule