-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DXLCFVEzFdlH9moVl7I9yuVqcVT7PI/ITU9WSCJMyXCmFaEKPY4KLB345Zk5qAYn RFiAGNqms6akTI/0REJpBg== 0000936392-97-001641.txt : 19971212 0000936392-97-001641.hdr.sgml : 19971212 ACCESSION NUMBER: 0000936392-97-001641 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 7 FILED AS OF DATE: 19971211 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: COMBICHEM INC CENTRAL INDEX KEY: 0001002276 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMMERCIAL PHYSICAL & BIOLOGICAL RESEARCH [8731] IRS NUMBER: 330617379 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1/A SEC ACT: SEC FILE NUMBER: 333-37981 FILM NUMBER: 97736106 BUSINESS ADDRESS: STREET 1: 9050 CAMINO STREET 2: SUITE 200 CITY: SAN DIEGO STATE: CA ZIP: 92121 BUSINESS PHONE: 6195300484 MAIL ADDRESS: STREET 1: 9050 CAMINO SANTA FE CITY: SAN DIEGO STATE: CA ZIP: 92121 S-1/A 1 AMENDMENT #3 TO FORM S-1 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 11, 1997 REGISTRATION NO. 333-37981 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ AMENDMENT NO. 3 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ COMBICHEM, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 8731 33-0617379 (STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
9050 CAMINO SANTA FE, SAN DIEGO, CALIFORNIA 92121 (619) 530-0484 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) DR. VICENTE ANIDO, JR. PRESIDENT AND CHIEF EXECUTIVE OFFICER 9050 CAMINO SANTA FE SAN DIEGO, CALIFORNIA 92121 (619) 530-0484 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) ------------------------ COPIES TO: FAYE H. RUSSELL, ESQ. FREDERICK T. MUTO, ESQ. THOMAS E. HORNISH, ESQ. ERIC J. LOUMEAU, ESQ. LANCE S. KURATA, ESQ. CHRISTOPHER W. KRUEGER, ESQ. BROBECK, PHLEGER & HARRISON LLP COOLEY GODWARD LLP 550 WEST "C" STREET, SUITE 1300 4365 EXECUTIVE DRIVE, SUITE 1100 SAN DIEGO, CALIFORNIA 92101 SAN DIEGO, CA 92121 (619) 234-1966 (619) 550-6000
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the effective date of this Registration Statement. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [ ] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] ____________ If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] ___________ If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ] THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SUCH SECTION 8(a), MAY DETERMINE. ================================================================================ 2 INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. SUBJECT TO COMPLETION, DATED DECEMBER 11, 1997 [LOGO] 2,250,000 SHARES COMMON STOCK All of the 2,250,000 shares of Common Stock offered hereby are being sold by CombiChem, Inc. ("CombiChem" or the "Company"). Prior to this offering, there has been no public market for the Common Stock of the Company. It is currently estimated that the initial public offering price will be between $11.00 and $13.00 per share. See "Underwriting" for information relating to the method of determining the initial public offering price. The Company has applied for quotation of the Common Stock on the Nasdaq National Market under the symbol "CCHM." -------------------------------------------------------- THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 6. -------------------------------------------------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ================================================================================================ UNDERWRITING PRICE TO DISCOUNTS AND PROCEEDS TO PUBLIC COMMISSIONS(1) COMPANY(2) - ------------------------------------------------------------------------------------------------ Per Share................................. $ $ $ Total(3).................................. $ $ $ ================================================================================================
(1) The Company has agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended. See "Underwriting." (2) Before deducting expenses payable by the Company estimated at $700,000. (3) The Company has granted the Underwriters a 30-day option to purchase up to an additional 337,500 shares of Common Stock, solely to cover over-allotments if any. See "Underwriting." If such option is exercised in full, the total Price to Public, Underwriting Discounts and Commissions and Proceeds to Company will be $ , $ and $ , respectively. ---------------------- The Common Stock is offered by the Underwriters as stated herein, subject to receipt and acceptance by them and subject to their right to reject any order in whole or in part. It is expected that delivery of such shares will be made through the offices of BancAmerica Robertson Stephens, San Francisco, California on or about , 1997. BANCAMERICA ROBERTSON STEPHENS DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION UBS SECURITIES THE DATE OF THIS PROSPECTUS IS , 1997. 3 [DEPICTIONS OF COMBICHEM'S DISCOVERY PROCESS] IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. 2 4 NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT RELATES OR AN OFFER TO, OR A SOLICITATION OF, ANY PERSON IN ANY JURISDICTION IN WHICH SUCH AN OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF. UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. ------------------------ TABLE OF CONTENTS
PAGE ----- Summary................................................................................ 4 Risk Factors........................................................................... 6 Use of Proceeds........................................................................ 15 Dividend Policy........................................................................ 15 Capitalization......................................................................... 16 Dilution............................................................................... 17 Selected Financial Data................................................................ 18 Management's Discussion and Analysis of Financial Condition and Results of Operations........................................................................... 19 Business............................................................................... 24 Management............................................................................. 41 Certain Transactions................................................................... 54 Principal Stockholders................................................................. 56 Description of Capital Stock........................................................... 58 Shares Eligible for Future Sale........................................................ 61 Underwriting........................................................................... 63 Legal Matters.......................................................................... 65 Experts................................................................................ 65 Additional Information................................................................. 65 Index to Financial Statements.......................................................... F-1
------------------------ CombiChem was incorporated in California in May 1994 and subsequently reincorporated in Delaware in October 1997. The Company's executive offices are located at 9050 Camino Santa Fe, San Diego, California 92121, and its telephone number is (619) 530-0484. The Company intends to furnish to its stockholders annual reports containing audited financial statements certified by an independent public accounting firm and quarterly reports containing unaudited interim financial information for each of the first three fiscal quarters of each fiscal year of the Company. The Company has filed for trademark protection for the following: Discovery Engine(TM), Universal Informer Library(TM) and Cascader(TM). All other trademarks or service marks appearing in this Prospectus are the property of their respective holders. 3 5 SUMMARY The following summary is qualified in its entirety by the more detailed information, including "Risk Factors," and the Financial Statements and Notes thereto, appearing elsewhere in this Prospectus. This Prospectus may contain forward-looking statements which involve risks and uncertainties. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth under "Risk Factors" and elsewhere in this Prospectus. THE COMPANY CombiChem, Inc. is a computational drug discovery company that is applying its proprietary design technology and rapid synthesis capabilities to accelerate the discovery process for new drugs. The Company believes its approach offers pharmaceutical and biotechnology companies the opportunity to conduct their drug discovery efforts in a more productive and cost-effective manner. Using its proprietary Discovery Engine(TM) process, the Company focuses on the generation, evolution and optimization of potential new lead candidates for its collaborative partners, who will then develop, manufacture, market and sell any resulting drugs. CombiChem believes that its process is widely applicable to a variety of disease targets and therapeutic indications. To date, the Company has established collaborative agreements with Teijin Limited ("Teijin"), Roche Bioscience, a division of Syntex (U.S.A.) Inc. ("Roche Bioscience"), Sumitomo Pharmaceuticals Co., Ltd. ("Sumitomo"), ImClone Systems Incorporated ("ImClone") and Athena Neurosciences, Inc., a wholly owned subsidiary of Elan Corporation, plc ("Elan/Athena"). In addition, the Company intends to use its approach on internal programs to discover new lead candidates and then to outlicense them to third parties, retaining a larger economic interest. The Company's proprietary Discovery Engine is a convergent, iterative process for drug discovery based on libraries (collections of compounds) designed for information rather than merely diversity. The design of such libraries requires the use of various computational and combinatorial chemistry technologies to select molecules that collectively probe the biological target in a systematic way to determine the chemical characteristics required for binding to such target. By identifying features that discriminate between active and inactive compounds, the computer constructs predictive models, called hypotheses, and then uses those models to select a more focused library of compounds. The computer selects compounds from the Company's proprietary Virtual Library, a computational representation of more than 500 billion drug-like molecules chosen for ease of laboratory synthesis. CombiChem believes that, by repeating this process of selecting, synthesizing and screening informative compounds and analyzing the resulting data, the Discovery Engine quickly converges on the most predictive hypothesis. This hypothesis describes the characteristics a compound must possess to be active against the target and, thus, is used to select a variety of potent lead candidates. CombiChem is applying its drug discovery approach to three important types of programs: (i) lead generation, where the goal is to find lead candidates against new biological targets; (ii) lead evolution, where the goal is to develop alternative structural series with the same biological activity profile; and (iii) lead optimization, where the goal is to modify a specific drug template to improve its biological activity. For novel targets where little or no information is available as well as those targets for which no suitable leads have been identified, the Company initiates the Discovery Engine process by making available for screening its Universal Informer Library(TM), which consists of a computer-designed, proprietary collection of approximately 10,000 physical compounds. CombiChem believes that its Discovery Engine has the following advantages: (i) generating lead candidates from multiple structural series that exhibit the same biological activity; (ii) generating lead structures against a wide range of targets including those for which little or no information is available; (iii) achieving rapid generation, evolution and optimization of lead candidates; and (iv) reducing synthesis and screening costs. The Company's design technology facilitates the use of small, informative libraries. The efficiency provided by the use of such informative libraries is expected to shorten the time required for the identification of lead candidates to less than two years. The Company's objective is to be the industry leader in the generation, evolution and optimization of novel lead candidates. The Company intends to utilize its scientific and technology assets in the discovery process through a mix of collaborative and internal programs by applying the following business strategies: (i) to establish multiple collaborations with large pharmaceutical and biotechnology companies focused on biological targets chosen by the collaborators; (ii) to partner with companies to apply discovery technologies to jointly agreed-upon biological targets; (iii) to conduct internal discovery efforts aimed at selected biological targets, retaining a larger economic interest in the subsequently outlicensed lead candidates; (iv) to expand collaborative opportunities in alternative industries such as the agrochemical field; and (v) to maintain technology leadership in both software development and rapid synthesis capabilities. 4 6 THE OFFERING Common Stock Offered by the Company....... 2,250,000 shares Common Stock Outstanding after the Offering................................ 13,168,505 shares(1) Use of Proceeds........................... To fund research and development, expansion of laboratory and office facilities, working capital and general corporate purposes. See "Use of Proceeds." Proposed Nasdaq National Market symbol.... CCHM
SUMMARY FINANCIAL DATA (in thousands, except per share data)
PERIOD FROM MAY 23, 1994 (INCEPTION) YEAR ENDED NINE MONTHS ENDED TO DECEMBER 31, SEPTEMBER 30, DECEMBER 31, ------------------- ----------------------- 1994 1995 1996 1996 1997 ------------- ------- ------- ----------- ------- STATEMENT OF OPERATIONS DATA: Total revenue..................... $ -- $ 50 $ 2,967 $ 1,070 $ 4,599 Total operating expenses.......... (711) (6,763) (8,085) (5,519) (8,341) ----- ------- ------- ------- ------- Loss from operations.............. (711) (6,713) (5,118) (4,449) (3,742) Net loss.......................... $(706) $(6,675) $(5,118) $(4,461) $(3,669) ===== ======= ======= ======= ======= Pro forma net loss per share(2)... $ (0.66) $ (0.45) ======= ======= Shares used in computing pro forma net loss per share(2).......... 7,797 8,192
SEPTEMBER 30, 1997 -------------------------------------------- PRO FORMA AS ACTUAL PRO FORMA(3) ADJUSTED(3)(4) -------- ------------ -------------- BALANCE SHEET DATA: Cash and cash equivalents.......................... $ 4,287 $ 16,120 $ 40,530 Short-term investments............................. 4,115 4,115 4,115 Working capital.................................... 5,288 16,621 41,031 Total assets....................................... 13,363 25,196 49,606 Long-term obligations, less current portion........ 2,377 2,377 2,377 Redeemable convertible preferred stock............. 23,130 -- -- Accumulated deficit................................ (16,168) (14,835) (14,835) Total stockholders' equity (deficit)............... (15,852) 18,611 43,021
- --------------- (1) Based on the number of shares outstanding as of September 30, 1997. Includes: (i) 7,754,933 shares of Common Stock to be issued upon conversion of redeemable convertible preferred stock, par value $0.001 per share (the "Preferred Stock"), of the Company; (ii) an aggregate of 1,250,000 shares of Common Stock issued to ImClone and Elan/Athena in October 1997; and (iii) 901,658 shares of Common Stock which are currently subject to repurchase by the Company. Excludes: (i) 441,696 shares of Common Stock issuable upon the exercise of stock options outstanding as of September 30, 1997, with a weighted average exercise price of $2.81 per share, all of which are exercisable and 26,177 of which are vested; and (ii) 139,478 shares of Common Stock issuable upon the exercise of outstanding warrants, with a weighted average exercise price of $2.27 per share. See "Capitalization." (2) Computed on the basis described for pro forma net loss per share in Note 1 of Notes to Financial Statements. (3) Gives effect to (i) the conversion of the Preferred Stock into Common Stock effective upon the closing of this offering; and (ii) the receipt of $11.833 million for up-front payments and the proceeds from the sale of an aggregate of 1,250,000 shares of Common Stock to ImClone and Elan/Athena in October 1997. (4) Adjusted to reflect the sale of 2,250,000 shares of Common Stock offered hereby, assuming a public offering price of $12.00 per share (the mid-point of the range set forth on the front cover) less estimated underwriting discounts and commissions and other expenses of this offering, resulting in net proceeds to the Company of $24.4 million. See "Use of Proceeds." Except as otherwise indicated herein, all information contained in this Prospectus (i) gives effect to a one-for-four reverse split of the Common Stock, (ii) reflects the conversion of all outstanding shares of Preferred Stock into an aggregate of 7,754,933 shares of Common Stock, effective upon the closing of this offering, and (iii) assumes no exercise of the Underwriters' over-allotment option. 5 7 RISK FACTORS In addition to the other information in this Prospectus, the following risk factors should be considered carefully in evaluating the Company and its business before purchasing shares of the Common Stock offered hereby. The Prospectus may contain forward-looking statements which involve risks and uncertainties. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth in the following risk factors and elsewhere in this Prospectus. NEW AND UNCERTAIN TECHNOLOGY AND BUSINESS The Company's Discovery Engine process is novel and has not yet been shown to be successful in the discovery of lead candidates that have been subsequently developed into commercialized drugs. Furthermore, the Company's drug discovery efforts are focused on some targets the functions of which are not yet known. Development of new pharmaceutical products is highly uncertain, and no assurance can be given that the Company's drug discovery process will result in lead candidates that will be safe or efficacious or commercially successful as products. Failure to validate the Company's technology through the successful discovery of lead candidates would have a material adverse effect on the Company's business, financial condition and results of operations. The Company's strategy, which is unproven, is to use its proprietary design technology for the purpose of rapidly identifying, optimizing and obtaining proprietary rights to as many lead candidates and development candidates as possible. The Company's ability to achieve profitability in the near term depends entirely on its ability to enter into additional collaborative agreements with third parties and to maintain the agreements it currently has in place. The pricing and nature of the Company's collaborative relationships is such that there may only be a limited number of pharmaceutical, biotechnology and agrochemical companies that will be its potential customers. The Company's ability to succeed is also dependent upon the acceptance by potential customers of its Discovery Engine process as an effective tool in new drug discovery. Historically, pharmaceutical, biotechnology and agrochemical companies have conducted lead candidate identification and optimization within their own research departments, due to the highly proprietary nature of the activities being conducted, the central importance of these activities to their drug discovery and development efforts and the desire to obtain maximum patent and other proprietary protection on the results of their internal programs. In order to achieve its business objectives, the Company must convince these companies that its technology and capabilities justify the outsourcing of their programs to the Company. There can be no assurance that the Company will be able to attract any future customers on acceptable terms for its products and services or develop a sustainable, profitable business. Failure to do so will have a material adverse effect on the Company's business, financial condition and results of operations. See "Business." LIMITED OPERATING HISTORY; HISTORY OF OPERATING LOSSES; UNCERTAINTY OF FUTURE PROFITABILITY The Company has had a limited operating history. For the period from May 23, 1994 (inception) to December 31, 1994, and for the years ended December 31, 1995 and 1996, and the nine months ended September 30, 1997, the Company had net losses of approximately $0.7 million, $6.7 million, $5.1 million and $3.7 million, respectively. As of September 30, 1997, the Company had an accumulated deficit of approximately $16.2 million. The Company's expansion of its operations and enhancements to its Discovery Engine and related drug discovery technology will result in significant expenses over the next several years that may not be offset by significant revenue. The Company's ability to achieve profitability in the near term depends entirely on its ability to enter into additional collaborative agreements with third parties and to maintain the agreements it currently has in place. To date, substantially all revenue received by the Company has been from upfront fees and research and development funding paid pursuant to existing collaborative agreements with third parties. The Company has not yet received any revenue from the achievement of milestones or license fees from the discovery, development or sale of a commercial drug by a customer, and no such revenue is expected for at least several years, if at all. An element of the Company's commercialization strategy is 6 8 the potential development and licensing to others of lead compounds or drug development candidates identified by the Company through its internal programs, at its own expense, for potential pharmaceutical development. To date, no such license has been entered into, and there can be no assurance that any such license will be entered into on acceptable terms in the future, if at all. The Company is unable to predict when, or if, it will become profitable. See "Selected Financial Data" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." DEPENDENCE OF COMPANY'S STRATEGY ON THIRD PARTIES The Company's strategy depends upon the formation of multiple collaborative arrangements with third parties on a regular basis. To date, the Company has entered into five such arrangements, and substantially all of its revenue has been from its collaborative arrangements. There can be no assurance that the Company will be able to continue to establish additional collaborative arrangements, that any such arrangements will be on terms favorable to the Company, or that current or any future collaborative arrangements will ultimately be successful. Failure to enter into additional collaborative agreements on favorable terms would have a material adverse effect on the Company's business, financial condition and results of operations. Further, CombiChem's receipt of revenue from collaborative arrangements is affected by the timing of efforts expended by the Company and its collaborators and the timing of lead compound identification by the Company. The Company's products and services will only result in commercialized pharmaceutical products generating milestone payments and royalties upon the successful outcome of significant preclinical and clinical development, the procurement of requisite regulatory approvals, the establishment of manufacturing, sales and marketing capabilities and the achievement of successful marketing. The Company does not currently intend to perform any of these activities. Therefore, the Company will be dependent upon the expertise and dedication of sufficient resources by third parties to develop and commercialize products based on library compounds produced and lead compounds discovered or optimized by the Company. In addition, there can be no assurance that any such development or commercialization efforts by third parties would be successful. Should a collaborative partner fail to develop or commercialize a compound or product to which it has rights from the Company, the Company may not receive any future milestone payments and will not receive any royalties associated with such compound or product. In addition, the Company's collaborative arrangements with its partners do not obligate the partners to develop or commercialize lead compounds discovered or optimized by the Company. Each collaborative partner may independently move forward with a competing lead candidate developed either by such partner internally or by one of such partners, including the Company's competitors. The potential drugs developed by a collaborative partner may be derivative of the lead compounds provided to the customer by the Company. While the Company's existing collaborative agreements provide that the Company retain milestone and royalty payment rights with respect to drugs developed from certain derivative compounds, there can be no assurance that disputes will not arise over the application of payment provisions to such drugs. There can be no assurance that current or future collaborative partners, if any, will not pursue alternative technologies or develop alternative products either on their own or in collaboration with others, including the Company's competitors, as a means for developing treatments for the diseases targeted by collaborative arrangements with the Company. Furthermore, there can be no assurance that conflicts will not arise between collaborative partners as to proprietary rights to particular compounds. The amount and timing of resources that current and future collaborators, if any, devote to collaborations with the Company are not within the control of the Company. There can be no assurance that such collaborators will perform their obligations as expected. Further, the Company's collaborations generally may be terminated by its collaborators upon short notice and following an uncured material breach, which terminations would result in a loss of anticipated revenue. Termination of the Company's existing or future collaborative agreements, if any, could have a material adverse effect on the Company's business, financial condition and results of operations. The Company's strategy also involves conducting its own internally funded discovery programs by choosing biological targets of current scientific interest and working in collaboration with screening 7 9 companies. There can be no assurance that the Company would continue to have access to such targets, novel or otherwise, on an ongoing basis. Furthermore, despite the Company's installation of independent teams to conduct each collaborative project, there can be no assurance that conflicts will not arise among collaborators as to the rights to overlapping lead candidate compounds developed independently as a result of being identified through the use of the Company's technologies. Failure to manage multiple existing and future collaborator relationships successfully, maintain confidentiality among such relationships or prevent the occurrence of such conflicts could lead to disputes that result in, among other things, a significant strain on management resources, legal claims involving significant time and expense and loss of reputation, a loss of capital or a loss of current or future collaborators, any of which could have a material adverse effect on the Company's business, financial condition and results of operations. See "Business -- Strategy" and "Business -- CombiChem's Collaborative Arrangements." SIGNIFICANT FLUCTUATIONS IN QUARTERLY RESULTS To date, all revenue received by the Company has been from the payment of upfront fees and research and development funding paid pursuant to collaborative agreements. The Company expects that a significant portion of its revenue for the foreseeable future will be comprised of such payments. The timing of certain revenue in the future will depend upon the completion of certain milestones as provided for in the Company's collaborative agreements. In any one fiscal quarter the Company may receive multiple or no payments from its several collaborators. Operating results may therefore vary substantially from quarter to quarter and will not necessarily be indicative of results in subsequent periods. There can be no assurance that such quarterly fluctuations in revenue or financial results will not have a material impact on the Company's stock price. COMPANY'S SUCCESS DEPENDENT ON INTELLECTUAL PROPERTY RIGHTS The Company's success will depend in large part on its own, its licensees' and its licensors' ability to obtain and defend patents for each party's respective technologies and the compounds and other products, if any, resulting from the application of such technologies, maintain trade secrets and operate without infringing upon the proprietary rights of others, both in the United States and in foreign countries. The patent positions of pharmaceutical and biotechnology companies, including the Company, are uncertain and involve complex legal and factual questions for which important legal principles are largely unresolved. The Company has pending United States and foreign patent applications relating to various aspects of its technology, certain systems, materials and methods used in screening compounds and the libraries or compounds contained therein. These patent applications are either owned by the Company or rights under them are licensed to the Company. To date, none of the patent applications owned by the Company have been issued. To the extent that any foreign patent application filed in the European Patent Office or the Japanese Patent Office issues as a patent, a challenge to the validity of such patent may be presented in an opposition proceeding. There can be no assurance that patents will issue as a result of any such pending applications or that, if issued, such patents will be sufficiently broad to afford protection against competitors with similar technologies. The Company is aware of three United States patents issued to a third party that claim proprietary rights; two of the three patents are entitled "System and method for automatically generating chemical compounds with desired properties" and the third is entitled "System, method, and computer program for at least partially automatically generating chemical compounds having desired properties." Although the Company believes that its current activities do not infringe these patents, there can be no assurance that the Company's belief would be affirmed in any litigation over the patents or that the Company's future technological developments would be outside the scope of these patents. Further, there can be no assurance that the third party will not seek to assert such patent rights against the Company, which would result in significant legal costs and require substantial management resources, and there can be no assurance that the Company would be able to obtain a license from the third party, if required, on commercially reasonable terms, if at all. The inability of the Company either to demonstrate non-infringement of these and other current and future patents, whether issued in the 8 10 United States or overseas, or to obtain the appropriate licenses, would have a material adverse effect on the Company's business, financial condition and operations. Moreover, there can be no assurance that the Company or its customers will be able to obtain patent protection for lead compounds or pharmaceutical products based upon the Company's or such customers' technologies. There can be no assurance that any patents issued to the Company or its collaborative partners, or for which the Company has license rights, will not be challenged, invalidated or circumvented, or that the rights granted thereunder will provide competitive advantages to the Company. To the extent that the Company or its consultants or collaborators use intellectual property owned by others in their work for the Company, disputes may also arise as to the rights in related or resulting know-how and inventions. Litigation may be necessary to enforce the Company's patent and license rights or to determine the scope and validity of others' proprietary rights. Any such litigation whether or not the outcome thereof is favorable to the Company, could result in substantial cost to and diversion of effort by the Company. Further, United States patents do not provide any remedies for infringement that occurred before the patent is issued. The commercial success of the Company will also depend upon successfully avoiding the infringement of current and future patents issued to competitors and upon maintaining the technology licenses upon which certain of the Company's current products are, or any future products under development might be, based. If competitors of the Company prepare and file patent applications in the United States that claim inventions also claimed by the Company or its collaborators, the Company or its collaborators may have to participate in interference proceedings declared by the United States Patent and Trademark Office ("PTO") to determine the priority of invention, which could result in substantial cost to the Company, even if the outcome is favorable to the Company. An adverse outcome could subject the Company to significant liabilities to third parties and require the Company to license disputed rights from third parties or cease using the technology. A United States patent application is maintained under conditions of confidentiality while the application is pending in the PTO, so that the Company cannot determine the inventions being claimed in pending patent applications filed by its competitors in the PTO. A number of pharmaceutical and biotechnology companies and research and academic institutions have developed technologies, filed patent applications or received patents on various technologies that may be related to the Company's business. Some of these technologies, applications or patents may conflict with the Company's technologies or patent applications. Such conflict could limit the scope of the patents, if any, that the Company may be able to obtain, or result in the denial of the Company's patent applications. In addition, there can be no assurance that the Company would be able to obtain licenses to patents held by third parties that may cover the Company's activities at a reasonable cost, if at all, or that the Company would be able to develop or obtain any alternative technologies. The Company currently has certain licenses from third parties and in the future may require additional licenses from other parties in order to refine its Discovery Engine further and to allow its collaborators to develop, manufacture and market commercially viable products effectively. There can be no assurance that (i) such licenses will be obtainable on commercially reasonable terms, if at all; (ii) any patents underlying such licenses will be valid and enforceable; or (iii) the proprietary nature of any patented technology underlying such licenses will remain proprietary. The Company relies substantially on certain technologies that are not patentable or proprietary and are therefore available to the Company's competitors. The Company also relies on certain proprietary trade secrets and know-how that are not patentable. Although the Company has taken steps to protect its unpatented trade secrets and know-how, in part through the use of confidentiality agreements with its employees, consultants and certain of its contractors, there can be no assurance that (i) these agreements will not be breached, (ii) the Company would have adequate remedies for any breach, or (iii) the Company's trade secrets will not otherwise become known or be independently developed or discovered by competitors. Failure by the Company to protect all or part of its patents, trade secrets and know-how could have a material adverse effect on the Company's business, financial condition and results of operations. See "Business -- Patents and Proprietary Information." 9 11 COMPETITIVE NATURE OF COMPANY'S INDUSTRY AND RISKS OF OBSOLESCENCE OF TECHNOLOGY Many organizations are actively attempting to identify, optimize and generate lead compounds for potential pharmaceutical development. The Company competes with the research departments of pharmaceutical companies, biotechnology companies, combinatorial chemistry companies and research and academic institutions as well as other computationally based drug discovery companies. Many of these competitors have greater financial and human resources and more experience in research and development than the Company. Historically, large pharmaceutical companies have maintained close control over their research activities, including the synthesis, screening and optimization of chemical compounds. Many of these companies, which represent one of the largest potential markets for CombiChem's products and services, are internally developing combinatorial and computational approaches and other methodologies to improve productivity, including major investments in robotics technology to permit the automated parallel synthesis of compounds. In addition, these companies may already have large collections of compounds previously synthesized or ordered from chemical supply catalogs or other sources against which they may screen new targets. Other sources of compounds include compounds extracted from natural products, such as plants and microorganisms, and compounds created using rational drug design. Academic institutions, governmental agencies and other research organizations are also conducting research in areas in which the Company is working, either on their own or through collaborative efforts. The Company anticipates that it will face increased competition in the future as new companies enter the market and advanced technologies become available. The Company's processes may be rendered obsolete or uneconomical by technological advances or entirely different approaches developed by one or more of the Company's competitors. The existing approaches of the Company's competitors or new approaches or technology developed by the Company's competitors may be more effective than those developed by the Company. See "Business -- Competition." SUCCESS OF COMPANY DEPENDENT ON SCALE-UP AND MANAGEMENT OF GROWTH The Company's success will depend on the expansion of its operations to service additional collaborative arrangements and the management of these expanded operations. To be cost-effective in its delivery of services and products, the Company must enhance productivity through further automation of its processes and improvements to its technology generally. In addition, the Company must successfully structure and manage multiple additional collaborative relationships, including maintaining the confidentiality of the research being provided to multiple customers. There can be no assurance that the Company will be successful in adding technical personnel as needed to meet the staffing requirements of any additional collaborative relationship. In addition, there can be no assurance that the Company will be successful in its engineering efforts to automate its processes further or in its initiatives to improve its technology. Failure to achieve any of these goals could have a material adverse effect on the Company's business, financial condition or results of operations. See "Business -- CombiChem's Collaborative Arrangements" and "Business -- Employees." DEPENDENCE OF COMPANY ON KEY EMPLOYEES The Company is highly dependent on the principal members of its scientific and management staff. The loss of one or more key members of the Company's scientific or management staff could have a material adverse effect on the Company's business, financial condition and results of operations. The Company's future success will also depend in part on the continued service of its key design engineering, scientific, software and management personnel and on its ability to identify, hire and retain any additional personnel. There is intense competition for such qualified personnel in the areas of the Company's activities, and there can be no assurance that the Company will be able to continue to attract and retain such personnel necessary for the development of the Company's business. Failure to attract and retain key personnel could have a material adverse effect on the Company's business, financial condition and results of operations. See "Business -- Employees" and "Management." 10 12 GOVERNMENT REGULATION Regulation by governmental entities in the United States and other countries will be a significant factor in the production and marketing of any pharmaceutical products that may be developed by a customer or collaborator of the Company or, in the event the Company decides to develop a drug beyond the preclinical phase, by the Company. The nature and the extent to which such regulation may apply to the Company's customers will vary depending on the nature of any such pharmaceutical products. Virtually all pharmaceutical products developed by the Company's customers will require regulatory approval by governmental agencies prior to commercialization. In particular, human pharmaceutical therapeutic products are subject to rigorous preclinical and clinical testing and other approval procedures established by the United States Food and Drug Administration (the "FDA") and by foreign regulatory authorities. Various federal and, in some cases, state statutes and regulations also govern or influence, among other things, the testing, manufacture, safety, efficacy, labeling, storage, record keeping, approval, advertising and promotion of such products. Non-compliance with applicable requirements can result in fines, warning letters, recall or seizure of products, clinical study holds or delays, total or partial suspension of production, refusal of the government to grant approvals, and civil and criminal penalties. The process of obtaining these approvals and the subsequent compliance with appropriate federal and foreign statutes and regulations are time-consuming and require the expenditure of substantial resources. Generally, in order to gain FDA approval, a company first must conduct preclinical studies in the laboratory and in animal models to gain preliminary information on a compound's efficacy and to identify any safety problems. Preclinical studies must be conducted by laboratories that comply with FDA regulations regarding Good Laboratory Practices. The results of these studies are submitted as a part of an Investigational New Drug application (an "IND") that the FDA must review before human clinical trials of an investigational drug can begin. In order to commercialize any products, the Company or its customer will be required to sponsor and file an IND and will be responsible for initiating and overseeing the clinical studies to demonstrate the safety and efficacy that are necessary to obtain FDA and foreign regulatory authority approval of any such products. Clinical trials are normally done in three phases and generally take two to five years but may take longer to complete. After completion of clinical trials of a new product, FDA and foreign regulatory authority marketing approval must be obtained. If the product is classified as a new drug, the Company or its customer will be required to file a New Drug Application (an "NDA") and receive approval before commercial marketing of the drug. The testing and approval processes require substantial time and effort, and there can be no assurance that any approval will be granted on a timely basis, if at all. NDAs submitted to the FDA can take, on average, two to five years to obtain approval. If questions arise during the FDA review process, approval can take more than five years. Even if FDA regulatory clearances are obtained, a marketed product is still subject to continual review, and later discovery of previously unknown problems or failure to comply with the applicable regulatory requirements may result in restrictions on the marketing of a product or withdrawal of the product from the market, as well as possible civil or criminal sanctions. Domestic manufacturing facilities of the Company or its customers are subject to biannual inspections by the FDA and must comply with the FDA's current Good Manufacturing Practices regulations. To comply with such regulations, a manufacturer must spend funds, time and effort in the areas of production and quality control to ensure full technical compliance. The FDA stringently applies regulatory standards for manufacturing. For marketing outside the United States, the Company or its customer will also be subject to foreign regulatory requirements governing human clinical trials and marketing approval for pharmaceutical products. The requirements governing the conduct of clinical trials, product licensing, pricing and reimbursement vary widely from country to country. FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FUNDING Although the Company anticipates that its existing capital resources, including the proceeds from the October 1997 collaborations and the net proceeds from this offering, will be adequate to fund the Company's operations at least through 1998, there can be no assurance that changes will not occur that would consume available capital resources before such time. The Company anticipates that it will be 11 13 required to raise additional capital over a period of several years in order to continue to conduct its operations. Such capital may be raised through additional public or private financings, as well as collaborative arrangements, borrowings and other available sources. There can be no assurance that the Company's collaborative arrangements will produce revenue adequate to fund the Company's operating expenses. The Company's capital requirements depend on numerous factors, including the ability of the Company to enter into additional collaborative arrangements, competing technological and market developments, changes in the Company's existing collaborative relationships, the cost of filing, prosecuting, defending and enforcing patent claims and other intellectual property rights, the purchase of additional capital equipment, the progress of the Company's drug discovery programs and the progress of the commercialization of milestone- and royalty-bearing compounds by the Company's customers. The Company does not currently plan independently to develop, manufacture or market any drugs it discovers. To the extent that additional capital is needed, it may be raised through the sale of equity or convertible debt securities, and the issuance of such securities could result in dilution to the Company's existing stockholders. There can be no assurance that additional funding, if necessary, will be available on favorable terms, if at all. If adequate funds are not available, the Company may be required to curtail operations significantly or to obtain funds through entering into arrangements with collaborative partners or others that may require the Company to relinquish rights to certain of its technologies, product candidates, products or potential markets that the Company would not otherwise relinquish. The failure to receive additional funding would have a material adverse effect on the Company's business, financial condition and results of operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." UNCERTAINTY OF PHARMACEUTICAL PRICING AND HEALTH CARE REFORM The Company expects that substantially all of its revenue in the foreseeable future will be derived from products and services provided to the pharmaceutical and biotechnology industries. Accordingly, the Company's success in the foreseeable future is directly dependent upon the success of the companies within those industries and their continued demand for the Company's products and services. The level of revenue and profitability of pharmaceutical companies may be affected by the continuing efforts of governmental and third-party payors to contain or reduce the costs of health care through various means and the initiatives of third-party payors with respect to the availability of reimbursement. For example, in certain foreign markets, pricing or profitability of prescription pharmaceuticals is subject to governmental control. In the United States, there have been, and the Company expects that there will continue to be, a number of federal and state proposals to implement similar governmental control. It is uncertain what legislative proposals may be adopted or what actions federal, state or private payors for health care goods and services may take in response to any health care reform proposals or legislation. To the extent that such proposals or reforms have a material adverse effect on the business, financial condition and profitability of pharmaceutical and biotechnology companies that are actual or prospective collaborators for certain of the Company's products and services, the Company's business, financial condition and results of operations may be adversely affected. COMPANY'S USE OF HAZARDOUS MATERIALS The research and development processes of the Company involve the controlled use of hazardous materials. The Company is subject to federal, state and local laws and regulations governing the use, manufacture, storage, handling and disposal of such materials and certain waste products. Although the Company believes that its activities currently comply with the standards prescribed by such laws and regulations, the risk of accidental contamination or injury from these materials cannot be completely eliminated. In the event of such an accident, the Company could be held liable for any damages that result, and any such liability could exceed the resources of the Company. In addition, there can be no assurance that the Company will not be required to incur significant costs to comply with environmental laws and regulations in the future. The occurrence of any such event could have a material adverse effect on the Company's business, financial condition and results of operations. 12 14 SHARES ELIGIBLE FOR FUTURE SALE Future sales of Common Stock in the public market following this offering could adversely affect the market price of the Common Stock. Based on the number of shares outstanding as of September 30, 1997 (after giving effect to the issuance of an aggregate of 1,250,000 shares to collaborative partners in October 1997), upon completion of this offering, the Company will have 13,168,505 shares of Common Stock outstanding, assuming no exercise of currently outstanding options. Of these shares, the 2,250,000 shares sold in this offering (plus any additional shares sold upon exercise of the Underwriters' overallotment option) will be freely transferable without restriction under the Securities Act of 1933, as amended (the "Securities Act"), unless they are held by "affiliates" of the Company as that term is used under the Securities Act and the regulations promulgated thereunder. Each holder who signed a lock-up agreement has agreed, subject to certain limited exceptions, not to sell or otherwise dispose of any of the shares held by them as of the date of this Prospectus for a period of 180 days after the date of this Prospectus without the prior written consent of BancAmerica Robertson Stephens. At the end of such 180-day period, approximately 11,502,437 shares of Common Stock (including approximately 52,657 shares issuable upon exercise of vested options) will be eligible for immediate resale, subject to compliance with Rule 144 and Rule 701. The remainder of the approximately 1,666,068 shares of Common Stock outstanding or issuable upon exercise of options held by existing stockholders or option holders will become eligible for sale at various times over a period of less than two years and could be sold earlier if the holders exercise any available registration rights or upon vesting pursuant to the Company's standard four year vesting schedule. The holders of 7,754,933 shares of Common Stock have the right in certain circumstances to require the Company to register their shares under the Securities Act for resale to the public. If such holders, by exercising their demand registration rights, cause a large number of shares to be registered and sold in the public market, such sales could have an adverse effect on the market price for the Company's Common Stock. If the Company were required to include in a Company-initiated registration shares held by such holders pursuant to the exercise of their piggyback registration rights, such sales may have an adverse effect on the Company's ability to raise needed capital. In addition, the Company expects to file immediately upon the effective date of this registration statement, a registration statement on Form S-8 registering a total of approximately 1,925,606 shares of Common Stock including those outstanding shares which may be repurchased by the Company and shares issuable upon exercise of outstanding stock options or reserved for issuance under the Company's stock incentive plan and employee stock purchase plan. See "Management -- Benefit Plans," "Description of Capital Stock -- Registration Rights," "Shares Eligible for Future Sale" and "Underwriting." CONTROL BY MANAGEMENT AND EXISTING STOCKHOLDERS Upon completion of this offering, the Company's executive officers, directors and affiliated entities together will beneficially own approximately 30.1% of the outstanding shares of Common Stock (29.4% if the Underwriters' overallotment option is exercised in full). As a result, these stockholders will be able to exercise control over matters requiring stockholder approval, including the election of directors and mergers, consolidations and sales of all or substantially all of the assets of the Company. This may prevent or discourage tender offers for Common Stock unless the terms are approved by such stockholders. See "Principal Stockholders." NO PRIOR PUBLIC MARKET FOR COMMON STOCK; POSSIBLE VOLATILITY OF STOCK PRICE Prior to this offering, there has been no public market for the Common Stock, and there can be no assurance that an active public market for the Common Stock will develop or be sustained after the offering. The initial offering price will be determined by negotiations between the Company and the Underwriters and is not necessarily indicative of the market price at which the Common Stock of the Company will trade after this offering. The market prices for securities of life sciences companies have been highly volatile, and the market has experienced significant price and volume fluctuations that are unrelated to the operating performance of particular companies. Announcements of technological 13 15 innovations or new commercial products by the Company or its competitors, developments concerning proprietary rights, including patents and litigation matters, publicity regarding actual or potential results with respect to products or compounds under development by the Company or its strategic partners, regulatory developments in both the United States and foreign countries, public concern as to the efficacy of new technologies, general market conditions, as well as quarterly fluctuations in the Company's revenue and financial results among other factors, may have a significant impact on the market price of the Common Stock. In particular, the realization of any of the risks described in these "Risk Factors" could have a dramatic and adverse impact on such market price. See "Underwriting." ANTI-TAKEOVER EFFECT OF CERTAIN CHARTER AND BY-LAW PROVISIONS AND DELAWARE LAW The Company's Amended and Restated Certificate of Incorporation (the "Certificate of Incorporation") authorizes the Board of Directors to issue, without stockholder approval, 5,000,000 shares of Preferred Stock with voting, conversion and other rights and preferences that could adversely affect the voting power or other rights of the holders of Common Stock. Although the Company has no current plans to issue any shares of Preferred Stock, the issuance of Preferred Stock or of rights to purchase Preferred Stock could be used to discourage an unsolicited acquisition proposal. In addition, the possible issuance of Preferred Stock could discourage a proxy contest, make more difficult the acquisition of a substantial block of the Company's Common Stock or limit the price that investors might be willing to pay in the future for shares of the Company's Common Stock. The Company's Certificate of Incorporation provides for staggered terms for the members of the Board of Directors. A staggered Board of Directors and certain provisions of the Company's by-laws and of Delaware law applicable to the Company could delay or make more difficult a merger, tender offer or proxy contest involving the Company. Further, the Company's stock option plans generally provide for the acceleration of vesting of options granted under such plans in the event of certain transactions which result in a change of control of the Company. In addition, the Company is subject to Section 203 of the General Corporate Law of Delaware which, subject to certain exceptions, restricts certain transactions and business combinations between a corporation and a stockholder owning 15% or more of the corporation's outstanding voting stock (an "interested stockholder") for a period of three years from the date the stockholder becomes an interested stockholder. These provisions may have the effect of delaying or preventing a change of control of the Company without action by the stockholders and, therefore, could adversely affect the price of the Company's Common Stock. See "Management," "Description of Capital Stock -- Preferred Stock" and "Description of Capital Stock -- Possible Anti-Takeover Effect of Certain Charter Provisions -- Delaware Anti-Takeover Statute." BROAD MANAGEMENT DISCRETION IN USE OF PROCEEDS The Company's management will have broad discretion to allocate proceeds of this offering to uses that it believes are appropriate. There can be no assurance that the proceeds of this offering can or will be invested to yield a positive return. See "Use of Proceeds." RISK OF IMMEDIATE AND SUBSTANTIAL DILUTION Purchasers of the shares of Common Stock offered hereby will experience immediate and substantial dilution estimated at $8.73 per share in the net tangible book value of their investment from the initial offering price. Additional dilution will occur upon exercise of outstanding options. See "Dilution" and "Shares Eligible for Future Sale." 14 16 USE OF PROCEEDS The net proceeds to the Company from the sale of the 2,250,000 shares of Common Stock offered hereby are estimated to be approximately $24.4 million ($28.2 million if the Underwriters' over-allotment option is exercised in full), assuming a public offering price of $12.00 per share (the mid-point of the range set forth on the front cover) and after deducting the estimated underwriting discounts and commissions and other estimated offering expenses. The principal purposes of this offering are to increase the Company's equity capital and to create a public market for the Company's Common Stock in order to facilitate future access by the Company to public equity markets as well as to create liquidity for its existing stockholders. The Company intends to use the net proceeds of this offering, together with its existing cash and cash equivalents and short-term investments, to fund research and development (approximately $10.0 million), expansion of laboratory and office facilities (approximately $5.0 million), working capital (approximately $2.0 million) and the remainder for general corporate purposes. The Company may also use a portion of the net proceeds for the acquisition of businesses, technologies or products complementary to those of the Company. There are no present arrangements or agreements for any such acquisitions. The amounts actually expended for each purpose may vary significantly depending upon numerous factors, including the amount and timing of additional collaborative agreements, the progress of the Company's development, technological advances, the commercial potential of the Company's services and the status of the Company's competitors. The Company believes that its existing cash, cash equivalents and short-term investments, combined with the net proceeds of this offering, projected funding from equipment leases and interest income will be adequate to satisfy its capital requirements and fund operations at least through 1998. Pending application of the net proceeds as described above, the Company intends to invest the net proceeds of this offering in short-term investment-grade securities. DIVIDEND POLICY The Company has never declared or paid dividends on its capital stock. The Company does not anticipate paying any cash dividends in the foreseeable future. Payments of future dividends, if any, will be at the discretion of the Company's Board of Directors after taking into account various factors, including the Company's financial condition, operating results, current and anticipated cash needs and plans for expansion. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." 15 17 CAPITALIZATION The following table sets forth as of September 30, 1997 (i) the actual capitalization of the Company, (ii) the pro forma capitalization of the Company, after giving effect to the receipt of up-front payments and the sale of Common Stock to ImClone and Elan/Athena in October 1997 and the conversion of all outstanding shares of Preferred Stock into Common Stock effective upon the closing of this offering, and (iii) pro forma as adjusted to give effect to the sale by the Company of 2,250,000 shares of Common Stock offered hereby, assuming a public offering price of $12.00 per share (the mid-point of the range set forth on the front cover) less estimated underwriting discounts and commissions and other expenses of this offering.
SEPTEMBER 30, 1997 -------------------------------------------- PRO FORMA AS ACTUAL PRO FORMA(2) ADJUSTED(2)(3) -------- ------------ -------------- (in thousands) Cash and cash equivalents............................ $ 4,287 $ 16,120 $ 40,530 Short-term investments............................... 4,115 4,115 4,115 ======== ======== ======== Long-term obligations, less current portion.......... $ 2,377 $ 2,377 $ 2,377 Redeemable convertible preferred stock: Preferred Stock, $0.001 par value; 63,196,296 shares authorized and 7,754,933 shares issued and outstanding actual; 5,000,000 shares authorized and no shares issued and outstanding pro forma and pro forma as adjusted............. 23,130 -- -- Stockholders' equity (deficit):...................... Common Stock, $0.001 par value; 80,000,000 shares authorized actual; 1,913,572 shares issued and outstanding actual; 40,000,000 shares authorized pro forma and pro forma as adjusted; 10,918,505 shares issued and outstanding pro forma; and 13,168,505 shares issued and outstanding pro forma as adjusted(1)............................ 2 11 13 Additional paid-in capital......................... 2,349 35,470 59,878 Notes receivable from stockholders................. (336) (336) (336) Deferred compensation.............................. (1,699) (1,699) (1,699) Accumulated deficit................................ (16,168) (14,835) (14,835) -------- -------- -------- Total stockholders' equity (deficit)............ (15,852) 18,611 43,021 -------- -------- -------- Total capitalization....................... $ 9,655 $ 20,988 $ 45,398 ======== ======== ========
- --------------- (1) Includes 901,658 shares of Common Stock which are currently subject to repurchase by the Company. Excludes: (i) 441,696 shares of Common Stock issuable upon the exercise of stock options outstanding as of September 30, 1997, with a weighted average exercise price of $2.81 per share, all of which are exercisable and 26,177 of which are vested; and (ii) 139,478 shares of Common Stock issuable upon the exercise of outstanding warrants, with a weighted average exercise price of $2.27 per share. (2) Gives effect to (i) the conversion of the Preferred Stock into Common Stock effective upon the closing of this offering; and (ii) the receipt of $11.833 million for up-front payments and the proceeds from the sale of an aggregate of 1,250,000 shares of Common Stock to ImClone and Elan/Athena in October 1997. (3) Adjusted to reflect the sale of 2,250,000 shares of Common Stock offered hereby, assuming a public offering price of $12.00 per share (the mid-point of the range set forth on the front cover) less estimated underwriting discounts and commissions and other expenses of this offering, resulting in net proceeds to the Company of $24.4 million. See "Use of Proceeds." 16 18 DILUTION The pro forma net tangible book value of the Company at September 30, 1997 was $18,611,000 or $1.71 per share of Common Stock. Pro forma net tangible book value per share of Common Stock represents the amount of total tangible assets of the Company less total liabilities divided by the number of shares of the Common Stock outstanding after giving effect to the conversion of all outstanding shares of Preferred Stock into 7,754,933 shares of Common Stock upon the completion of this offering and the sale of an aggregate of 1,250,000 shares of Common Stock to ImClone and Elan/Athena in October 1997. After giving effect to the sale of the 2,250,000 shares of Common Stock offered hereby assuming a public offering price of $12.00 per share, the mid-point of the range set forth on the front cover, less estimated underwriting discounts and commissions and other expenses of this offering, the Company's net tangible book value as of September 30, 1997 would have been $43,021,000 or $3.27 per share of Common Stock. This represents an immediate increase in pro forma net tangible book value per share of Common Stock of $1.56 to existing stockholders and immediate dilution in pro forma net tangible book value of $8.79 per share to new investors purchasing Common Stock in this offering. The following table illustrates the per share dilution: Assumed initial public offering price............................... $12.00 Pro forma net tangible book value of Common Stock as of September 30, 1997........................................... $1.71 Increase attributable to new investors......................... 1.56 Pro forma net tangible book value of Common Stock after this offering.......................................................... 3.27 ------ Dilution to new investors(1)........................................ $ 8.73 ======
- --------------- (1) If the Underwriters' over-allotment option is exercised in full, dilution per share to new investors would be $8.54. The following table summarizes, on a pro forma basis as of September 30, 1997 (after giving effect to the sale of 1,250,000 shares of Common Stock to collaborative partners in October 1997), the number of shares of Common Stock purchased from the Company, the total consideration paid (based on value received by the Company at the time of issuance) and the average price per share paid by the existing stockholders and by new investors purchasing shares in this offering (before deduction of estimated underwriting discounts and commissions and other expenses of this offering):
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE ---------------------- ----------------------- PRICE PER NUMBER PERCENT AMOUNT PERCENT SHARE ----------- ------- ----------- ------- --------- Existing stockholders....... 10,918,505 82.9% $33,833,859 55.6% $ 3.10 New investors............... 2,250,000 17.1 27,000,000 44.4 12.00 ------------ ---- ---------- ---- Total..................... 13,168,505 100.0% $60,833,859 100.0% ============ ==== ========== ====
All of the above computations assume no exercise of outstanding options or warrants to purchase Common Stock. The shares purchased and total consideration paid by existing shareholders reflects the proceeds from the sale of 1,250,000 shares of Common Stock to ImClone and Elan/Athena, and does not include costs incurred by the Company to issue Common and Preferred Stock. As of September 30, 1997, options to purchase 441,696 shares of Common Stock were outstanding at a weighted average exercise price of approximately $2.81 per share under the Company's stock option plan and warrants to purchase 139,478 shares of Common Stock were outstanding at a weighted average exercise price of approximately $2.27 per share. To the extent these options become vested and are exercised, or the warrants are exercised, there will be further dilution to new investors. 17 19 SELECTED FINANCIAL DATA The selected financial data set forth below with respect to the Company's statements of operations for the period from May 23, 1994 (inception) to December 31, 1994, the years ended December 31, 1995 and 1996 and the nine months ended September 30, 1997, and with respect to the Company's balance sheets at December 31, 1995 and 1996 and September 30, 1997, are derived from the financial statements of the Company that have been audited by Ernst & Young LLP, which are included elsewhere herein and are qualified by reference to such financial statements. The balance sheet data at December 31, 1994 has been derived from the financial statements audited by Ernst & Young LLP, which are not included herein. The unaudited statement of operations data for the nine months ended September 30, 1996 have been derived from unaudited financial statements also appearing herein which in the opinion of management include all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the financial position and results of operations for the unaudited interim periods. The selected financial data set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Company's financial statements and notes thereto appearing elsewhere in this Prospectus.
PERIOD FROM MAY 23, 1994 YEAR ENDED NINE MONTHS ENDED (INCEPTION) TO DECEMBER 31, SEPTEMBER 30, DECEMBER 31, ------------------- ------------------- 1994 1995 1996 1996 1997 -------------- ------- ------- ------- ------- (in thousands, except per share data) STATEMENT OF OPERATIONS DATA: Total Revenue...................... $ -- $ 50 $ 2,967 $ 1,070 $ 4,599 Expenses: Research and development: Collaborative................. -- -- 420 263 2,631 Proprietary................... 413 4,763 4,820 3,547 3,354 ------ -------- -------- -------- -------- 413 4,763 5,240 3,810 5,985 General and administrative...... 298 2,000 2,845 1,709 2,356 ------ -------- -------- -------- -------- Total operating expenses........... 711 6,763 8,085 5,519 8,341 Loss from operations............... (711) (6,713) (5,118) (4,449) (3,742) Interest income, net............... 5 38 -- (12) 273 Foreign tax expense................ -- -- -- -- (200) ------ -------- -------- -------- -------- Net loss........................... $ (706) $(6,675) $(5,118) $(4,461) $(3,669) ====== ======== ======== ======== ======== Pro forma net loss per share(1).... $ (0.66) $ (0.45) ======== ======== Shares used in computing pro forma net loss per share(1)........... 7,797 8,192 -------- --------
DECEMBER 31, ---------------------------------- SEPTEMBER 30, 1994 1995 1996 1997 -------- -------- -------- ------------- (in thousands) BALANCE SHEET DATA: Cash and cash equivalents.................... $ 1,622 $ 3,136 $ 367 $ 4,287 Short-term investments....................... -- -- 12,166 4,115 Working capital.............................. 1,420 1,990 9,271 5,288 Total assets................................. 1,796 4,150 16,658 13,363 Long-term obligations, less current portion.................................... -- 424 1,753 2,377 Redeemable convertible preferred stock....... 2,250 9,650 23,107 23,130 Accumulated deficit.......................... (706) (7,381) (12,499) (16,168) Total stockholders' equity (deficit)......... (682) (7,261) (12,363) (15,852)
- --------------- (1) See Note 1 of Notes to Financial Statements for information concerning the computation of pro forma net loss per share and shares used in computing pro forma net loss per share. 18 20 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following Management's Discussion and Analysis of Financial Condition and Results of Operations may contain forward-looking statements which involve risks and uncertainties. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth under "Risk Factors" and elsewhere in this Prospectus. OVERVIEW CombiChem is a computational drug discovery company that is applying its proprietary design technology and rapid synthesis capabilities to accelerate the discovery process for new drugs. The Company believes its approach offers pharmaceutical and biotechnology companies the opportunity to conduct their drug discovery efforts in a more productive and cost-effective manner. Using its proprietary Discovery Engine process, the Company focuses on the generation, evolution and optimization of potential new lead candidates for its collaborative partners, who will then develop, manufacture, market and sell any resulting drugs. CombiChem believes that its process is widely applicable to a variety of disease targets and therapeutic indications. Through September 30, 1997, the Company has established collaborative agreements with Teijin, Roche Bioscience and Sumitomo, and in October 1997 the Company established collaborative agreements with ImClone and Elan/Athena. In addition, the Company intends to use its approach on internal programs to discover new lead candidates and then to outlicense them to third parties, while retaining a larger economic interest. Since inception in May 1994, and including the October 1997 collaborative agreements, the Company has raised $33.8 million through private sales of equity securities. The Company's revenue to date is primarily attributable to three major corporate collaborations: Teijin, entered into in March 1996, Roche Bioscience, entered into in October 1996, and Sumitomo, entered into in August 1997. Under these collaborations, the Company has received aggregate payments of $8.7 million through September 30, 1997 and has recognized an aggregate of $7.5 million as revenue, including $4.5 million of technology access fees and $3.0 million of contract research revenue, of which $1.5 million was recognized in connection with the Teijin collaboration, $3.7 million was recognized in connection with the Roche Bioscience collaboration and $2.3 million was recognized in connection with the Sumitomo collaboration. Revenue from milestone payments will be recognized when the results or events stipulated in the agreement have been achieved. To date, the Company has not achieved any milestones under any of its collaboration agreements. Cost of services under the Company's collaborative agreements generally approximate the research revenue received under the agreement. Technology access fees and milestone payments have no associated cost of services. The Company is also entitled to receive royalty payments if any product is commercialized under the collaborations. To date, the Company has not earned any revenue related to product sales, and such revenue is not expected for the next few years, if at all. The Company has not been profitable since inception and has incurred a cumulative net loss of $16.2 million through September 30, 1997. Losses have resulted principally from costs incurred in research and development activities related to the Company's efforts to develop its technologies and from the associated administrative costs required to support these efforts. The Company's ability to achieve profitability is dependent on its ability to market its technology to pharmaceutical, biotechnology or agrochemical companies. In connection with the collaborative agreements entered into in October 1997, the Company received aggregate proceeds of $10.0 million from the sale of Common Stock and a cash payment of $1.3 million for an upfront technology access fee to be recognized as revenue in the fourth quarter of 1997. 19 21 RESULTS OF OPERATIONS Nine Months Ended September 30, 1997 and 1996 Revenue The Company's revenue for the nine-month period ended September 30, 1997 increased $3.5 million to $4.6 million from $1.1 million for the same period in 1996. The revenue for the nine-month period ended September 30, 1997 included $2.3 million from Sumitomo, $1.8 million from Roche Bioscience and $0.5 million from Teijin. The revenue from the nine-month period ended September 30, 1996 included $0.8 from Teijin. This was attributable to revenue related to the Company's increased number of collaborative agreements and the technology access fee received from Sumitomo. The Company began recognizing revenue from the Teijin and Roche Bioscience collaborations in March and October 1996, respectively. The Company began recognizing contract research revenue from the Sumitomo collaboration in August 1997. In October 1997, the Company entered into collaborations with ImClone and Elan/Athena. To date, all revenue received by the Company has been from the payment of upfront fees and research and development funding paid pursuant to its collaborative agreements. Upfront fees are received from the Company's collaborators upon, or shortly following, execution of the collaborative agreement. Research and development funding is received by the Company in connection with the performance of research and development services under the collaborative agreement. Such funding typically will be received only during the life of the research program under the particular collaboration. The collaborative activities under these agreements for which the Company receives revenue typically occur over a one to three-year period, although the agreements provide for earlier termination in certain circumstances. See "Business -- CombiChem's Collaborative Arrangements." The Company expects that a significant portion of its revenue for the foreseeable future will be comprised of such payments, although the receipt of upfront fees will be dependent on the Company's ability to enter into additional collaborative agreements for which upfront fees are due. In addition, the timing of certain revenue in the future will depend upon the completion of certain milestones as provided for in the Company's collaborative agreements, which are contingent and uncertain. In any one fiscal quarter the Company may receive multiple or no payments from its several collaborators. Operating results may therefore vary substantially from period to period and will not necessarily be indicative of results in subsequent periods. While the termination or conclusion of any individual collaboration, including, without limitation, the agreement with Teijin which it anticipated to conclude in March 1998 would not have a material adverse effect on the Company's financial condition and results of operations, the failure of the Company to enter into additional collaborative agreements on favorable terms would have a material adverse effect on the Company's financial condition and results of operations. Operating Expenses The Company's research and development expenses for the nine-month period ended September 30, 1997 increased $2.2 million to $6.0 million from $3.8 million for the same period in 1996. This increase reflects increased research and development expenses incurred both on behalf of collaborators through the addition of chemists and software application staff for each project team and in support of the development of the Company's technology including the addition of software development and analytical staff, the depreciation of laboratory equipment and the establishment of an advanced technology group. The Company has the ability to direct its scientific personnel to work either on its collaborative agreements or on its internal research projects as needs arise. The Company expects research and development spending to increase over the next several years due to increased activities related to collaborations, internal programs and technology development. The Company's general and administrative expenses for the nine-month period ended September 30, 1997 increased $0.7 million to $2.4 million from $1.7 million for the same period in 1996. This increase reflects increased business development activities, including outside consulting fees and increased travel costs, and administrative support for the Company's expansion in 1997. These expenses will likely continue to increase in future periods to support the projected growth of the Company. 20 22 Net Loss The Company's net loss for the nine-month period ended September 30, 1997 decreased $0.8 million to $3.7 million from $4.5 million for the same period in 1996. The decrease is primarily attributable to additional revenue generated from corporate collaborations during 1997. Years Ended December 31, 1996 and 1995 Revenue The Company's revenue for the year ended December 31, 1996 increased to $3.0 million from $50,000 for the same period in 1995. The revenue for the year ended December 31, 1996 included $2.0 million from Roche Bioscience and $1.0 million from Teijin. No revenue was received from the Company's collaborators in the year ended December 31, 1995. This increase was attributable to revenue related to the Company's collaborative agreements with Teijin and Roche Bioscience which were entered into during 1996. Operating Expenses The Company's research and development expenses for the year ended December 31, 1996 increased $0.4 million to $5.2 million from $4.8 million for the same period in 1995. This increase reflects increased research and development expenses on behalf of collaborators and for the development of the Company's technology, including investment in the Company's discontinued automated synthesis instruments. The Company discontinued development of its automated synthesis instruments in the second quarter of 1996, after incurring expenses of approximately $4.0 million from inception of the Company through discontinuance. The Company's general and administrative expenses for the year ended December 31, 1996 increased $0.8 million to $2.8 million from $2.0 million for the same period in 1995. This increase was primarily due to costs associated with increased business development activities and administrative support, which accompanied the Company's expansion during 1996. Net Loss The Company's net loss for the year ended December 31, 1996 decreased $1.6 million to $5.1 million from $6.7 million for the same period in 1995. The decrease was primarily attributable to the increase in revenue generated from the Teijin and Roche Bioscience collaborations. Year Ended December 31, 1995 and Eight-Month Period Ended December 31, 1994 Revenue The Company's revenue for the year ended December 31, 1995 consisted of $50,000 of grant revenue. No revenue was earned by the Company in 1994. Operating Expenses The Company's research and development expenses for the year ended December 31, 1995 increased $4.4 million to $4.8 million from $0.4 million for the eight-month period ended December 31, 1994. This increase primarily reflects the expansion and development of the Company's technologies and a full year of operations in 1995. The Company's general and administrative expenses for the year ended December 31, 1995 increased $1.7 million to $2.0 million from $0.3 million for the eight-month period ended December 31, 1994, reflecting increased business development activities and administrative support as well as a full year of operations in 1995. Net Loss The Company's net loss for the year ended December 31, 1995 increased $6.0 million to $6.7 million from $0.7 million for the eight-month period ended December 31, 1994. This increase was primarily attributable to the Company's scale-up of research and development activities and a full year of operations. 21 23 LIQUIDITY AND CAPITAL RESOURCES At September 30, 1997, the Company held cash and cash equivalents and marketable securities with a value of $8.4 million. The Company's working capital at September 30, 1997 was $5.3 million. After giving effect to the execution of the two additional collaborative agreements in October 1997 cash and cash equivalents and marketable securities would have been $20.2 million and working capital would have been $16.6 million. The Company has funded operations to date with sales of preferred stock and common stock totaling $33.8 million, payments from corporate collaborators totaling $10.5 million, and the utilization of capital equipment lease financing totaling $4.6 million. The Company has maintained capital lease arrangements since 1994. Under these arrangements, the Company has funded certain capital expenditures with lease terms ranging from 36 to 48 months in duration. As of September 30, 1997, the Company had utilized $4.6 million of the available $7.9 million financing facility. Net cash used in financing activities for the nine-month period ended September 30, 1997 was $164,000, primarily reflecting payments on capital equipment financing. Net cash provided by financing activities for the year ended December 31, 1996 was $12.2 million, largely due to a $13.0 million equity investment. Net cash provided by financing activities for the year ended December 31, 1995 was $7.3 million, resulting mainly from capital contributions and proceeds from bridge financing. Net cash used in operating activities for the nine-month period ended September 30, 1997 and for the year ended December 31, 1996 was $3.7 million and $2.4 million, respectively, primarily due to the Company's scale-up of research and development activities. Net cash provided by investing activities during the nine-month period ended September 30, 1997 was $7.8 million, resulting primarily from maturities of short-term investments. Net cash used in investing activities for the year ended December 31, 1996 was $12.6 million as compared to $0.2 million for the year ended December 31, 1995. This increase primarily reflects purchases of short-term investments. Although the Company anticipates that its existing capital resources, including the proceeds from the October 1997 collaborations and the net proceeds from this offering, will be adequate to fund the Company's operations at least through 1998, there can be no assurance that changes will not occur that would consume available capital resources before such time. The Company anticipates that it will be required to raise additional capital over a period of several years in order to continue to conduct its operations. Such capital may be raised through additional public or private financings, as well as collaborative arrangements, borrowings and other available sources. The Company expects that a significant portion of its revenue for the foreseeable future will be comprised of upfront fees and research and development funding paid pursuant to its collaborative agreements, although the receipt of upfront fees will be dependent on the Company's ability to enter into additional collaborative agreements for which upfront fees are due. There can be no assurance that the Company's collaborative arrangements will produce revenue adequate to fund the Company's operating expenses. The Company's capital requirements depend on numerous factors, including the ability of the Company to enter into additional collaborative arrangements, competing technological and market developments, changes in the Company's existing collaborative relationships, the cost of filing, prosecuting, defending and enforcing patent claims and other intellectual property rights, the purchase of additional capital equipment, the progress of the Company's drug discovery programs and the progress of the commercialization of milestone- and royalty-bearing compounds by the Company's customers. The Company does not currently plan independently to develop, manufacture or market any drugs it discovers. To the extent that additional capital is needed, it may be raised through the sale of equity or convertible debt securities, and the issuance of such securities could result in dilution to the Company's existing stockholders. There can be no assurance that additional funding, if necessary, will be available on favorable terms, if at all. If adequate funds are not available, the Company may be required to curtail operations significantly or to obtain funds through entering into arrangements with collaborative partners or others that may require the Company to relinquish rights to certain of its technologies, product candidates, products or potential markets that the Company would not otherwise relinquish. The failure to receive additional funding would have a material adverse effect on the Company's business, financial condition and results of operations. 22 24 NET OPERATING LOSSES At December 31, 1996, the Company had available net operating loss ("NOL") carryforwards of approximately $11.7 million for federal and California income tax purposes, which will begin to expire in 2009 and 2002, respectively. In addition, the Company had federal and California research and development credit carryforwards of approximately $104,000 and $144,000, respectively, which will begin to expire in 2010. The Company's ability to utilize such NOL carryforwards may be limited under Section 382 of the Internal Revenue Code in the event of certain cumulative changes of ownership of the Company. However, the Company does not believe such limitation will have a material effect upon the utilization of these carryforwards. NEW ACCOUNTING PRONOUNCEMENTS In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, Earnings Per Share (SFAS No. 128), which supersedes APB Opinion No. 15. SFAS No. 128 replaces the presentation of primary earnings per share (EPS) with "Basic EPS" which reflects only the weighted-average common shares outstanding for the period. Companies with complex capital structures, including the Company, will also be required to present "Diluted EPS" that reflect the potential dilution, if any, of common stock equivalents such as employee stock options and warrants to purchase common stock. SFAS No. 128 is effective for financial statements issued for periods ending after December 15, 1997. 23 25 BUSINESS OVERVIEW CombiChem is a computational drug discovery company that is applying its proprietary design technology and rapid synthesis capabilities to accelerate the discovery process for new drugs. The Company believes its approach offers pharmaceutical and biotechnology companies the opportunity to conduct their drug discovery efforts in a more productive and cost-effective manner. Using its proprietary Discovery Engine process, the Company focuses on the generation, evolution and optimization of potential new lead candidates for its collaborative partners who will then develop, manufacture, market and sell any resulting drugs. CombiChem believes that its process is widely applicable to a variety of disease targets and therapeutic indications. To date, the Company has established collaborative agreements with Teijin, Roche Bioscience, Sumitomo, ImClone and Elan/Athena. In addition, the Company intends to use its approach on internal programs to discover new lead candidates and then to outlicense them to third parties, retaining a larger economic interest in such candidates. INDUSTRY BACKGROUND During the past decade, significant advances in life sciences research and the increasing appreciation of the complexity of biological processes have highlighted the productivity limitations of traditional approaches to drug discovery. These limitations, together with increased competition in the pharmaceutical and biotechnology industries, have created intense pressure on companies involved with drug development to reconsider the allocation of their research budgets and to improve the cost-effectiveness of their drug discovery process. Between 1976 and 1996, the number of new chemical entities approved by the FDA remained relatively constant, ranging between 12 to 30 per year, despite a more than 10-fold increase in research and development spending by pharmaceutical and biotechnology companies. Furthermore, it typically takes 12 to 15 years from the original concept of modulating the activity of a particular biological target to the market introduction of a drug that performs such a function. The average cost of bringing a new drug to market has been estimated to be in excess of $300 million. Frustrated with the inefficiencies of traditional drug discovery approaches, pharmaceutical and biotechnology companies are beginning to embrace new enabling technologies, such as combinatorial chemistry, genomics, structure-based drug design, high-throughput screening and information technologies, in order to gain a competitive advantage by accelerating the time to develop and commercialize new compounds. These technologies also have the potential to reduce significantly the cost associated with drug discovery. The Traditional Drug Discovery Process and its Limitations The traditional path to discovering a therapeutic drug compound typically begins with the identification of one or more biological targets that are believed to mediate a disease state. A biological test or assay based on a target is then developed, predicated on the scientific belief that a compound binding with this target may have a therapeutic benefit with respect to the disease under study. Such an assay facilitates the screening (testing to determine which of the compounds have the desired activity against the target) of a collection of hundreds to thousands of candidate compounds (a library) that have been synthesized in the laboratory. Compounds that bind to the target protein and modulate its activity are referred to as hits. Medicinal chemists optimize these hits until they have sufficient potency to become lead candidates and then improve their preclinical characteristics (such as potency, specificity and in vivo profile) further with the goal of producing drug development candidates. 24 26 In summary, the traditional drug discovery process consists of the following steps: LOGO The traditional drug discovery process shown above is extremely expensive, inefficient and unreliable. Failure at any point during this discovery process would typically force the scientist either to abandon the project or to return to the initial starting point and repeat the process. As a result, the discovery of a novel therapeutic agent for a specified target can take years or can fail entirely. In recent years, the advent of robotic high-throughput screening and automated synthesis technologies, such as combinatorial chemistry and parallel synthesis, has begun to relieve one apparent bottleneck involving screening, synthesis and purification of compounds in the library. While these technologies facilitate the mechanics of drug discovery, they address neither the unreliability of the process nor its principal inefficiency: the number of iterations required to find a lead candidate. To address these problems, a novel approach is needed that can provide information to improve the selection of each subsequent library of compounds to synthesize, potentially reducing the number of iterations. Only by improving the processes of data analysis and compound selection can a laborious, iterative procedure be forced to converge on the lead candidates with the most desirable pharmacological profiles. Current Combinatorial Chemistry and Computational Approaches and Their Limitations Combinatorial chemistry involves the rapid creation of large collections of chemical compounds for the purpose of identifying hits through random screening. Combinatorial chemistry has made possible the synthesis of thousands or even millions of molecules in a short period of time instead of the traditional approach of synthesizing only one molecule at a time. Over the last decade, the field of combinatorial chemistry has evolved from only companies that design and synthesize molecules to include those that develop software and automation to facilitate design and synthesis. These companies tend to use highly varied approaches, including: focusing on single, pure compounds versus making mixtures; building large versus small, focused libraries; automating part versus all of the process; and using or not using medicinal chemistry as a principal guiding force. Computational methods are also employed in drug discovery. These methods involve the use of computer-based and information technologies to manage large chemical databases, to examine X-ray crystal structures of the target when available (structure-based drug design), to operate the assorted automated devices available for the synthesis of libraries, to determine how changes in the structure affect the activity of a molecule (SAR activity) and to generate "virtual libraries" using chemical building blocks from readily available sources. Currently, the dominant method of pursuing drug discovery focuses on screening large libraries to search for a lead candidate directly in the library, or at least a hit, which can then be optimized by the more traditional techniques of medicinal chemistry to generate a development candidate. The Company believes this brute-force, trial-and-error approach is flawed because limited or no information has been factored into the library design to force the iterative drug discovery process to converge. This limitation in current combinatorial chemistry approaches is underscored by the fact that most compound libraries used for screening have been constructed with the sole objective of isolating a development candidate with the highest binding affinity to a target. In order to achieve this objective against all possible targets, it is believed such libraries would have to contain in excess of 100 million 25 27 compounds, which size is well beyond current synthesis capabilities. In addition, the challenge of drug discovery is not only to find a lead candidate that exhibits activity against a biological target. It is also important to ensure that the lead candidate will have characteristics that will enable it to overcome the more difficult in vivo hurdles of toxicity, metabolism or problems with oral administration, none of which will become evident until early preclinical testing. Unless information can be extracted about which characteristics are most necessary for binding, it is difficult to know how to modify a compound to maintain tight binding affinity while overcoming in vivo hurdles. Furthermore, if no hits are found after the screening of a traditional combinatorial library, a scientist has no starting point for the drug discovery process. While both combinatorial chemistry and computational approaches are useful in drug discovery to some degree, they are severely taxed by the complexity of properly using the information available for library design, as evidenced by the following drawbacks: (i) the inability to derive and integrate information both from compounds that are active and those that are inactive against the target; (ii) the inability to probe the target in order to compute ways of improving the predictive models or hypotheses; and (iii) the inability to handle the dual requirements of speed and quality when large data sets must be analyzed. The Company believes that these inabilities to use information efficiently constitute fundamental reasons that current discovery approaches have been only moderately successful in generating lead candidates and development candidates, despite the large number of initial hits. COMBICHEM'S SOLUTION AND ADVANTAGES The Company believes that it offers a solution to drug discovery by combining its proprietary design technology and rapid synthesis capabilities in a unique way. The Company's convergent, iterative process for drug discovery -- its Discovery Engine (see the following diagram) -- is based on libraries designed for information. The design of libraries for information involves the selection of compounds that collectively probe the biological target in a systematic way to determine the chemical characteristics required for binding to such target. By identifying features that discriminate between active and inactive compounds, the computer constructs predictive models, called hypotheses, and then uses those models to select a more focused library of compounds. The computer selects compounds from the Company's proprietary Virtual Library, a computational representation of more than 500 billion drug-like molecules chosen for the ease of laboratory synthesis. CombiChem believes that by repeating this process of selecting, synthesizing and screening informative compounds and analyzing the resulting data, the Discovery Engine quickly converges on the most predictive hypothesis. This hypothesis describes the characteristics a compound must possess to be active against the target and, thus, is used to select a variety of potent lead candidates. Each cycle of the Discovery Engine refines the computer's definition of the best hypothesis for the target in question. After several cycles, the resulting hypothesis can be used to design highly potent compounds from a broad range of chemical classes including those not readily amenable to combinatorial synthesis techniques. By facilitating the design of a variety of potent compounds for preclinical testing, the Discovery Engine has the potential to increase greatly the likelihood that at least one of these compounds passes the in vivo and other downstream hurdles and eventually becomes a commercial drug. 26 28 LOGO CombiChem believes that the advantages of its Discovery Engine include the following: Generating lead candidates from multiple structural series that exhibit the same biological activity. By using predictive hypotheses to search the more than 500 billion-molecule Virtual Library, multiple structural series of compounds that have the same effect on the target can be identified. The availability of multiple structural series increases the likelihood that at least one of these molecules will overcome the in vivo hurdles in preclinical development. In addition, this provides an opportunity for the Company and its collaborators to enhance the intellectual property position that potentially can be developed around these compounds by having more than one patentable structural series. Generating lead structures against a wide range of targets including those for which little or no information is available. The Universal Informer Library consists of a computer-designed, proprietary collection of approximately 10,000 physical compounds that can be screened against targets where little or no information is available about the molecular structures that may be active against those targets. Once the Universal Informer Library has been screened, the information obtained can be used to start the Discovery Engine process. In addition, because the technology is not dependent on having prior knowledge about the target (e.g., an X-ray crystal structure representative of the target), it can potentially be used to discover drugs against any target the activity of which could be modified through binding a small molecule. Achieving rapid generation, evolution and optimization of lead candidates. By combining flexible design technology and rapid synthesis, the Company's Discovery Engine can produce lead candidates for any of the three types of drug discovery programs -- lead generation, lead evolution or lead optimization -- with less than two years of effort. See "CombiChem's Discovery Programs." Reducing synthesis and screening costs. The Company's design technology facilitates the use of small, informative libraries. Use of these small libraries decreases the costs associated with synthesis 27 29 and screening. In addition, the Virtual Library of drug-like molecules has been explicitly constructed for the ease of laboratory synthesis. STRATEGY The Company's objective is to be the industry leader in the generation, evolution and optimization of novel lead candidates. The Company intends to utilize its scientific and technology assets in the discovery process through a mix of collaborative and internal programs by applying the following business strategies: To establish multiple collaborations with large pharmaceutical and biotechnology companies focused on biological targets chosen by the collaborators. The Company intends to collaborate with large pharmaceutical and biotechnology companies on fully funded programs aimed at biological targets chosen by these collaborators. The Company's collaborative efforts are exclusively focused on the discovery process, with a particular emphasis on the discovery of novel compounds against biological targets. The Company believes its technology platform provides it with opportunities to establish multiple collaborations, which may be for the same disease state, thereby building a portfolio of opportunities that may include upfront fees, research support, milestone payments and royalties. To partner with companies to apply discovery technologies to jointly agreed-upon biological targets. In addition to collaborations on designated biological targets, the Company intends to establish arrangements for jointly funded discovery programs aimed at jointly agreed-upon biological targets, typically with biotechnology companies. In these arrangements, the Company and its partner will choose an appropriate biological target, the Company will apply its discovery technologies to develop novel compounds against the specific target, and the partner will fully fund and complete the drug development process. The Company and its partner will share in the economic interest resulting from their efforts. To conduct internal discovery efforts aimed at selected biological targets, retaining a larger economic interest in the subsequently outlicensed lead candidates. The Company also intends to conduct its own internally funded discovery programs by choosing biological targets of current scientific interest and working in collaboration with screening companies. After identifying lead candidates that are ready for development, the Company intends to outlicense them, retaining a larger economic interest in such candidates as they are developed and commercialized by a third party. To expand collaborative opportunities in alternative industries such as the agrochemical field. The Company has initially targeted large pharmaceutical and biotechnology companies in its marketing efforts. The Company is considering additional opportunities in alternative industries, including the agrochemical field. To maintain technology leadership in both software development and rapid synthesis capabilities. The Company intends to continue to extend its technology leadership through enhancements of existing software, design of future generations of software and continued advancements of its synthesis capabilities. The Company believes that these developments will allow it to decrease the time required to discover lead candidates and to maintain its technology leadership and competitive advantage. COMBICHEM'S PROCESS: THE DISCOVERY ENGINE The successful implementation of the Company's Discovery Engine process requires the direct involvement of and interaction between its chemists and its software applications team. This process consists of the following steps: Data analysis -- the compilation and analysis of screening data, literature information and available data about the target. The starting point for a drug discovery program varies depending on the amount of prior information that is available. The collaborator may have tested its corporate collection of compounds or some other chemical library and have information regarding structures of compounds that are initial hits (moderately active compounds), information regarding structures that are inactive 28 30 against the particular target or prior information about the target structure itself. On the other hand, if little or no prior information or screening data is available on the initial hits or target, the Company will make available for screening its proprietary Universal Informer Library as a way of generating a relevant set of information with which to initiate the Discovery Engine. See "CombiChem's Proprietary Technologies -- Universal Informer Library." The analysis of the available information is a critical step in the process because it will determine what type of program will be undertaken -- lead generation, lead evolution or lead optimization -- and the resources that will be required. See "CombiChem's Discovery Programs." Hypothesis generation -- the software-based generation of models that predict the biological activity of molecular structures. Once the analysis of the available data is completed by the Company's chemists and software applications team, the information is used as input for hypothesis generation, the first step of which involves conformational analysis. - Conformational analysis. Conformational analysis is performed on each active and inactive molecule to determine which shapes or conformations such molecules can take. Because it is typically unknown which of these shapes a particular molecule will assume when it shows its greatest activity against a biological target, all reasonable conformations are computationally described and analyzed. The Company's proprietary technology allows for the analysis of large data sets and complex molecular structures to be completed with both quality and speed. - Hypothesis generator. Using the screening data and the results of conformational analysis, the hypothesis generation software produces computational models (called hypotheses) that attempt to explain the observed differences in biological activity between active and inactive molecules. In the early phases of a discovery program, the hypothesis generator will often generate many hypotheses that are consistent with the data, but the repeated application of the Discovery Engine systematically tests the hypotheses, eliminating some while strengthening others by providing supporting data. Repeating this procedure quickly results in predictive hypotheses. The Company believes that its proprietary design technology differs from others currently in use in that it (i) includes all of the screening data (including inactives) in generating hypotheses, (ii) takes into account a much broader characterization of molecule-target interaction and (iii) forces convergence to a predictive model of the important binding features by probing the target systematically using rapid synthesis and screening. Virtual Library search -- the computational search of the Virtual Library to find molecular structures that fit the hypotheses. Once the hypotheses have been generated, they are used to search the Company's proprietary Virtual Library to identify molecular structures that have the features represented in the hypotheses. The Virtual Library is a computational representation of more than 500 billion drug-like molecules chosen for the ease of laboratory synthesis. For each hypothesis that is generated, a more focused library of tens to hundreds of molecules from the Virtual Library will be chosen by the computer for synthesis in the laboratory. The Virtual Library is generated and searched by proprietary design technology, which can exploit much larger libraries than is possible with commercially available tools. See "CombiChem's Proprietary Technologies -- Virtual Library." Library synthesis -- the laboratory synthesis of molecular structures that are selected from the Virtual Library using a wide range of chemistries. Once the more focused library of compounds is designed, using molecules chosen from the Virtual Library, the Company's chemists are responsible for synthesizing the compounds in the laboratory. Unlike many combinatorial chemistry groups, the chemists are not restricted to particular chemical reactions or a limited list of structural templates, thus providing maximum flexibility to synthesize the libraries quickly. See "CombiChem's Proprietary Technologies -- Synthesis and Analytical Chemistry Technology." The above four steps in the Discovery Engine process are completed by project teams within the Company. Once the molecules are synthesized, those libraries are then sent to the partner (or a contract group) for screening. Data from these assays will be available to the Company for the next 29 31 iteration of the cycle. With each such iteration, the Discovery Engine provides more information, improving the hypotheses and increasing the likelihood of discovering active molecules with desirable pharmacological characteristics. Eventually, the hypotheses will converge to provide lead compounds that warrant further testing as development candidates. It currently takes the Company's scientists approximately three months to advance through the steps in one Discovery Engine cycle. Depending upon the information available to start a project, it may take two to four iterations of the cycle to generate strongly predictive hypotheses that may eventually yield novel and highly active lead candidates. The Company's Discovery Engine process is being validated by both its active collaborative programs and retrospective analysis of drug discovery examples taken from the recent scientific literature. In one such example, the Company applied its design technology to a project where the data provided was a compilation of third-party research into the design of HIV protease inhibitors. The objective was to determine whether CombiChem's process could be used to discover novel inhibitors for the enzyme given a collection of only weakly active hits from screening. The Company generated hypotheses with distinct features by collecting information on eight weakly active HIV protease inhibitors and 500 randomly selected inactive molecules with the same drug-like characteristics as the weakly active compounds. Each of these weakly active compounds was found by either an academic or commercial team in the early phases of trying to discover an HIV protease drug. To assess whether the generated hypotheses are, in fact, able to predict the activities of new molecules, several highly potent HIV protease inhibitors, including currently marketed drugs, were added to a virtual library of several hundred inactive compounds. Using the hypotheses, the computer searched the Virtual Library, and the search produced a list of highly ranked protease inhibitors with a variety of chemical structures, including some of the highly potent HIV protease inhibitors currently under development or marketed by major pharmaceutical companies. The structures selected from the Virtual Library differ significantly from those used to develop the hypotheses, validating the Company's capabilities in lead evolution. The Company has similarly validated its technology on over a dozen other literature data sets and on several programs with collaborators. In one lead evolution program with a collaborator, for example, the Company has already been successful in evolving from one structural series to multiple, novel structural series while improving the biological activity. These results and a variety of equally successful applications of the Discovery Engine demonstrate the viability of the Company's computational drug discovery methods and the strength of its proprietary technology. COMBICHEM'S PROPRIETARY TECHNOLOGIES To implement its Discovery Engine process, CombiChem has developed and assembled an integrated set of proprietary technologies. These include the following: Universal Informer Library The use of many traditional drug discovery approaches presupposes the existence of prior information to start the process. However, recent efforts such as the Human Genome Project and others are producing a number of novel targets about which there is limited prior information. In addition, there are many known targets for which no suitable leads have been identified. To address these situations, CombiChem completed development of a Universal Informer Library ("UIL") in mid-1997. The UIL consists of a computer-designed, proprietary collection of approximately 10,000 physical compounds. Unlike other libraries that are used to identify lead structures directly after screening, the UIL is used to gather information concerning the relevant binding features that are important to the target. The compounds in the UIL are highly promiscuous molecules, which are molecules with the potential to bind to many different targets. Screening against the UIL is therefore intended to provide a few, weakly active compounds against the background of many, varied inactive compounds. Using this data, hypotheses may be extracted, which allow the Discovery Engine to be initiated. The UIL was designed to provide hits for virtually all possible targets, but if there is some reason to expect certain structural features to be relevant to a particular target, the UIL can be augmented 30 32 with compounds that contain those features. In this way, information gained from prior experience can be incorporated into the UIL; this may improve the hypotheses and therefore reduce the number of cycles required to converge. The Company completed validation of its UIL approach by screening a subset of the UIL against a wide range of targets and achieving an outcome comparable to that typically seen in the pharmaceutical industry with libraries containing hundreds of thousands of compounds. Virtual Library CombiChem's Virtual Library is a computational representation of more than 500 billion drug-like molecules chosen for the ease with which they can be synthesized in the laboratory. To maximize the likelihood that the Virtual Library will contain potent, patentable compounds active against most targets, the Company has populated it with hundreds of novel structural templates, each of which has two to four sites at which a wide variety of structural changes can be made synthetically using available chemicals. This chemistry can also be scaled up to give ready access to quantities of each lead candidate sufficient to perform early preclinical testing. The Virtual Library is generated and searched by two components of the Company's proprietary software: Virtual Library Cascader(TM) software and Virtual Library Search software. See "-- Design Technology." Synthesis and Analytical Chemistry Technology Once the Virtual Library is searched for collections of molecules that match the hypotheses, the Company's chemists initiate synthesis of these molecules in the laboratory. The challenge for CombiChem's chemists is to select the technique that will most quickly achieve the synthesis of the library. While there is considerable debate throughout the industry about the relative merits of various methods of chemical synthesis (solid versus solution phase, for example), CombiChem's chemists have the flexibility to use the appropriate approach for each specific synthesis task. The Company believes it has expertise in most or all of the readily used techniques and, in addition, has access to a number of new proprietary methods. As long as relatively straightforward chemistry is applied to library production, synthesis is generally not the rate-limiting step. The challenge lies in the isolation and purification of the library compounds. The Company applies several approaches, including a number of proprietary semi-automated techniques, to facilitate these procedures in order to achieve its purity standards of greater than 85%. Design Technology The Company relies on its proprietary design technology in order to complete several of the key steps in its Discovery Engine. The proprietary design technology includes: Conformational analysis software -- a computer program for identifying the distinct three-dimensional shapes of a molecule. Conformational analysis is performed on each active and inactive molecule to determine which shapes or conformations such molecules can take. Because it is typically unknown which of these shapes a particular molecule will assume when it shows its greatest activity against a biological target, all reasonable conformations are computationally described and analyzed. The Company has developed proprietary conformational analysis software, which rapidly determines all the distinct, reasonable shapes each molecule can assume. Both the speed and the thoroughness of the conformational analysis software distinguish it from commercial chemistry software and permit the Discovery Engine to handle large data sets. Hypothesis generation software -- a computer program for analyzing screening data to identify the requirements a potential drug must satisfy to bind to this target. Once conformational analysis has been applied to each of the screened molecules, the Company's proprietary hypothesis generation software produces computational models that can estimate the biological activity of chemical structures. These 31 33 models, called hypotheses, are generated by applying methods from statistics, information theory, physical chemistry and computer science to the screening data in order to identify the differences between active compounds and inactive compounds. The predictive capabilities of the computational models and the novel algorithms used to produce them distinguish the Company's hypothesis generator from commercial chemistry software. Virtual Library Cascader software -- a computer program for conveniently describing virtual libraries. The Cascader software facilitates the rapid specification of virtual libraries to the computer. By providing databases of reagents and descriptions of reactions to the Cascader, a chemist can quickly describe large libraries of compounds to the computer. The Cascader can use the resulting description to construct explicit subsets of the large virtual library and to present the structures to the chemist and to the Virtual Library Search software. Virtual Library Search software -- a computer program for selecting molecules from the Virtual Library that, when synthesized and screened, will provide the most information about additional binding requirements. The Virtual Library search software uses hypotheses to estimate computationally the potency of prospective compounds in order to increase the likelihood that the chemists devote their synthesis efforts to compounds that fit the hypotheses and are thus most likely to bind to the target. By using the computer to test the compounds in the Virtual Library against the hypotheses, the Discovery Engine can rapidly identify both putatively active compounds (which satisfy several different hypotheses) and informative ones (which discriminate among hypotheses). Searching virtual libraries with billions of compounds has generally not been possible with commercial chemistry software. Each cycle of the Discovery Engine refines the computer's assessment of the best hypothesis for the target in question. After several cycles, the resulting hypothesis can be used to design highly potent compounds from a broad range of chemical classes including those not readily amenable to combinatorial synthesis techniques. By facilitating the design of a variety of potent compounds for preclinical testing, the Discovery Engine has the potential to increase greatly the likelihood that at least one of these compounds passes the in vivo and other downstream hurdles and eventually becomes a commercial drug. COMBICHEM'S DISCOVERY PROGRAMS The Company has applied, and intends to continue to apply, its technology to discover lead compounds for biological targets chosen by its collaborators. In addition, the Company will select, either jointly with a partner (most likely a biotechnology company) or on its own, a biological target of interest. In the first instance, where the Company is working on a target chosen by a collaborator, the commercial terms are negotiated based on a number of factors, including the number of targets to be included in the collaboration and the type of program -- lead generation, lead evolution or lead optimization. Depending upon the type of program, CombiChem will work on the program for a period of one to two years. A dedicated project team, funded by the collaborator, consisting of applications scientists and synthetic, medicinal and analytical chemists will be assigned. The team composition and size is dependent upon the type of program and its objectives. To ensure confidentiality, the Company provides target exclusivity to each of its collaborators, and each team works in a dedicated laboratory. At the conclusion of the program, assuming its objectives have been met, the program team will transfer the lead structure(s) to the collaborator. At this point, the work at CombiChem will be completed, but the partner will continue to develop the lead candidate. As the collaborator develops the lead candidate and reaches certain agreed-to objectives, the Company will receive milestone payments. Eventually, when the lead candidate becomes a marketed drug, the Company will receive royalties on the sales of the drug. In the jointly funded programs or the internal programs, the Company will pay for all or part of the work to be completed and, either jointly or on its own, will outlicense the lead structures to a partner for the development and commercialization phases. 32 34 Depending upon the data available, the Discovery Engine can be applied to three types of discovery programs undertaken by the Company: lead generation, lead evolution and lead optimization. Lead generation uses the UIL to generate information for the Discovery Engine in situations where little or no prior information is known about the target. Lead evolution begins with existing information (either from the collaborator or from the scientific literature) regarding a lead candidate with the objective of identifying different structural series that can provide either other development options or an enhanced patent position. The evolution path may be chosen either as an outgrowth of a lead optimization program or directly from a collaborator's established lead candidate series. Lead optimization involves a lead candidate provided by a collaborator that requires improvement prior to being identified as a drug development candidate. Using CombiChem's computational drug discovery approach, initial libraries are constructed around a given template. Using a convergent, iterative process, subsequent libraries are increasingly focused as increased activity (e.g., affinity, selectivity) is achieved. Current Collaborative Discovery Programs The Company's current collaborative discovery programs are as follows:
- --------------------------------------------------------------------------------------------------- COMPANY NAME TARGET OR THERAPEUTIC AREA OF FOCUS TYPE OF PROGRAM - --------------------------------------------------------------------------------------------------- Teijin G-protein coupled receptor Lead evolution(1) Roche Bioscience Protein-Protein interaction Lead optimization Enzyme Lead evolution Receptor Lead optimization Sumitomo Target implicated in osteoarthritis Lead evolution and rheumatoid arthritis ImClone Multiple targets in oncology Lead generation, lead evolution Elan/Athena Multiple targets in central nervous Lead generation, lead evolution, system conditions lead optimization - ---------------------------------------------------------------------------------------------------
(1) Started as a lead optimization program. Internal Discovery Programs The Company intends to pursue a number of internal programs as a means of enhancing its ability to generate revenue and profits. The Company has selected dopamine D-4, a target believed to have a role in schizophrenia, as its first internally funded program. The Company believes the schizophrenia market has significant potential, as currently marketed drugs have a number of unwanted side effects. The Company intends to identify lead candidates for the D-4 receptor (with partial D-2 activity) as well as other future internal targets and thereafter to outlicense such lead candidates to third parties, retaining a larger economic interest in these programs. Additional internal programs will be identified and funded as the Company's resources allow. COMBICHEM'S COLLABORATIVE ARRANGEMENTS The Company's business model is to enter into collaborative arrangements focused on drug discovery efforts to improve the Company's chances of achieving profitability and to minimize its financing requirements. Commercial terms of a collaborative arrangement are driven by the number and nature of the targets. The key components of the commercial terms typically contained in the Company's collaborations include upfront fees, research support, milestone payments and royalties. 33 35 The Company has the following collaborative arrangements: Teijin Limited In March 1996, the Company entered into a collaborative agreement with Teijin providing for a one-year program on a G-protein coupled receptor target. In March 1997, the Company and Teijin amended their agreement to extend the collaboration for an additional year. While the initial focus of the collaboration was lead optimization, the effort was redirected to lead evolution during the course of the research. Under the agreement, Teijin made an upfront payment to CombiChem and agreed to provide research funding and milestone payments upon the achievement of certain preclinical and clinical milestones. Teijin also committed internal resources to the discovery effort. Teijin will make royalty payments on products resulting from the collaboration. CombiChem retains the rights to the compounds arising under this collaboration in North and South America; Teijin has rights to these compounds in Asia and Europe with a right of first negotiation to acquire CombiChem's rights. Under the original agreement, Teijin has rights to expand or extend the program for up to two successive one-year terms. Either party may terminate the agreement in the event of a material breach remaining uncured for 60 days. As of September 30, 1997, Teijin had paid the Company an aggregate of $1.5 million. Roche Bioscience, a division of Syntex (U.S.A.) Inc. In October 1996, the Company entered into a collaborative agreement with Roche Bioscience providing for a broad two-year program to perform research against three initial targets, including a protein-protein interaction, an enzyme and a receptor, with an option to add additional targets. Roche Bioscience can elect one of the approaches -- lead generation, lead evolution or lead optimization -- for each research program against each collaboration target. A program may be initiated at any time during the term of the collaboration, thereby extending the term to allow for completion of each program. Under the agreement, Roche Bioscience made an upfront payment to CombiChem and agreed to provide research funding and to make milestone payments upon the achievement of certain preclinical and clinical milestones. Roche Bioscience will make royalty payments on worldwide sales of products resulting from the collaboration. Upon completion of the first year of the agreement, Roche Bioscience may terminate the collaboration at any time upon six months' prior written notice. Certain special conditions could also allow Roche Bioscience to terminate with 45 days' prior written notice. As of September 30, 1997, Roche Bioscience had paid the Company an aggregate of $4.0 million. Sumitomo Pharmaceuticals Co., Ltd. In August 1997, the Company entered into a collaborative agreement with Sumitomo providing for a two-year lead evolution program on a target that is believed to play a fundamental role in osteoarthritis and rheumatoid arthritis. Under the agreement, Sumitomo made an upfront payment and agreed to provide research funding and milestone payments upon the achievement of certain preclinical and clinical milestones. Sumitomo will make royalty payments on worldwide sales of products resulting from the collaboration. Sumitomo may extend the research period for up to four successive six-month periods upon mutual agreement. The agreement may be terminated by either party 90 days following an uncured material breach. As of September 30, 1997, Sumitomo had paid the Company an aggregate of $3.3 million. ImClone Systems Incorporated In October 1997, the Company entered into a collaborative agreement with ImClone providing for a two-year program to identify and characterize novel small molecule inhibitors to multiple targets for development in oncology. The agreement provides for ImClone's access to the Company's Universal Informer Library and Virtual Library under the supervision of the research management committee composed of representatives of the Company and ImClone. Under the terms of the agreement, ImClone will provide the Company with research support payments, milestone payments upon the 34 36 achievement of certain program objectives and royalties on worldwide product sales of therapeutic products that may arise out of the collaboration. The agreement may be terminated by either party 90 days following an uncured material breach or by ImClone within 30 days prior to the one-year anniversary by providing 90 days' prior written notice. In connection with the collaborative agreement, ImClone purchased 250,000 shares of Common Stock for $2.0 million, and made an advance payment for contract research of $500,000. Athena Neurosciences, Inc., a wholly owned subsidiary of Elan Corporation, plc In October 1997, the Company entered into a collaborative agreement with Athena Neurosciences, Inc., a wholly owned subsidiary of Elan Corporation, plc. providing for a three-year program to discover novel therapeutic compounds for treatment of central nervous system conditions. The agreement provides for Elan/Athena's access to the Universal Informer Library as deemed necessary by the research management committee composed of Elan/Athena and CombiChem representatives. Under the agreement, Elan/Athena will provide the Company with upfront and research support payments, as well as milestone payments upon the achievement of pre-determined objectives. Elan/Athena will also make royalty payments on worldwide sales of products resulting from the collaboration. The agreement may be terminated by either party 90 days following an uncured material breach or by Elan/Athena after the one-year anniversary upon 90 days prior written notice. In connection with the collaborative agreement, Elan International Services Ltd., an affiliate of Elan/Athena, purchased 1,000,000 shares of Common Stock for $8.0 million and made a cash payment of $1.333 million for an up-front technology license and access fee. RESEARCH AND DEVELOPMENT The Company's expenses for Company-sponsored research and development activities for the years ended December 31, 1994, 1995 and 1996 were $0.4 million, $4.8 million and $4.8 respectively. The Company's expenses for collaborator-sponsored research and development activities for the years ended December 31, 1994, 1995 and 1996 were $0, $0 and $0.4 million respectively. COMPETITION Many organizations are actively attempting to identify, optimize and generate lead compounds for potential pharmaceutical development. The Company competes with the research departments of pharmaceutical companies, biotechnology companies, combinatorial chemistry companies and research and academic institutions as well as other computationally based drug discovery companies. Many of these competitors have greater financial and human resources and more experience in research and development than the Company. Historically, large pharmaceutical companies have maintained close control over their research activities, including the synthesis, screening and optimization of chemical compounds. Many of these companies, which represent one of the largest potential markets for CombiChem's products and services, are internally developing combinatorial and computational approaches and other methodologies to improve productivity, including major investments in robotics technology to permit the automated parallel synthesis of compounds. In addition, these companies may already have large collections of compounds previously synthesized or ordered from chemical supply catalogs or other sources against which they may screen new targets. Other sources of compounds include compounds extracted from natural products, such as plants and microorganisms, and compounds created using rational drug design. Academic institutions, governmental agencies and other research organizations are also conducting research in areas in which the Company is working, either on their own or through collaborative efforts. The Company anticipates that it will face increased competition in the future as new companies enter the market and advanced technologies become available. The Company's processes may be rendered obsolete or uneconomical by technological advances or entirely different approaches developed by one or more of the Company's competitors. The existing approaches of the Company's competitors or new approaches or technology developed by the Company's competitors may be more effective than those developed by the Company. 35 37 PATENTS AND PROPRIETARY INFORMATION The Company's success will depend in large part on its own, its licensees' and its licensors' ability to obtain and defend patents for each party's respective technologies and the compounds and other products, if any, resulting from the application of such technologies, maintain trade secrets and operate without infringing upon the proprietary rights of others, both in the United States and in foreign countries. The patent positions of pharmaceutical and biotechnology companies, including the Company, are uncertain and involve complex legal and factual questions for which important legal principles are largely unresolved. The Company has pending United States and foreign patent applications relating to various aspects of its technology, certain systems, materials and methods used in screening compounds and the libraries or compounds contained therein. These patent applications are either owned by the Company or rights under them are licensed to the Company. To date, none of the patent applications owned by the Company have been issued. To the extent that any foreign patent application filed in the European Patent Office or the Japanese Patent Office issues as a patent, a challenge to the validity of such patent may be presented in an opposition proceeding. There can be no assurance that patents will issue as a result of any such pending applications or that, if issued, such patents will be sufficiently broad to afford protection against competitors with similar technologies. The Company is aware of three United States patents issued to a third party that claim proprietary rights; two of the three patents are entitled "System and method for automatically generating chemical compounds with desired properties" and the third is entitled "System, method, and computer program for at least partially automatically generating chemical compounds having desired properties." Although the Company believes that its current activities do not infringe these patents, there can be no assurance that the Company's belief would be affirmed in any litigation over the patents or that the Company's future technological developments would be outside the scope of these patents. Further, there can be no assurance that the third party will not seek to assert such patent rights against the Company, which would result in significant legal costs and require substantial management resources, and there can be no assurance that the Company would be able to obtain a license from the third party, if required, on commercially reasonable terms, if at all. The inability of the Company either to demonstrate non-infringement of these and other current and future patents, whether issued in the United States or overseas, or to obtain the appropriate licenses, would have a material adverse effect on the Company's business, financial condition and operations. Moreover, there can be no assurance that the Company or its customers will be able to obtain patent protection for lead compounds or pharmaceutical products based upon the Company's or such customers' technologies. There can be no assurance that any patents issued to the Company or its collaborative partners, or for which the Company has license rights, will not be challenged, invalidated or circumvented, or that the rights granted thereunder will provide competitive advantages to the Company. To the extent that the Company or its consultants or collaborators use intellectual property owned by others in their work for the Company, disputes may also arise as to the rights in related or resulting know-how and inventions. Litigation may be necessary to enforce the Company's patent and license rights or to determine the scope and validity of others' proprietary rights. Any such litigation, whether or not the outcome thereof is favorable to the Company, could result in substantial cost to and diversion of effort by the Company. Further, United States patents do not provide any remedies for infringement that occurred before the patent is issued. The commercial success of the Company will also depend upon successfully avoiding the infringement of current and future patents issued to competitors and upon maintaining the technology licenses upon which certain of the Company's current products are, or any future products under development might be, based. If competitors of the Company prepare and file patent applications in the United States that claim inventions also claimed by the Company or its collaborators, the Company or its collaborators may have to participate in interference proceedings declared by the PTO to determine the priority of invention, which could result in substantial cost to the Company, even if the outcome is favorable to the Company. An adverse outcome could subject the Company to significant liabilities to third parties and require the Company to license disputed rights from third parties or cease using the technology. 36 38 A United States patent application is maintained under conditions of confidentiality while the application is pending in the PTO, so that the Company cannot determine the inventions being claimed in pending patent applications filed by its competitors in the PTO. A number of pharmaceutical and biotechnology companies and research and academic institutions have developed technologies, filed patent applications or received patents on various technologies that may be related to the Company's business. Some of these technologies, applications or patents may conflict with the Company's technologies or patent applications. Such conflict could limit the scope of the patents, if any, that the Company may be able to obtain, or result in the denial of the Company's patent applications. In addition, there can be no assurance that the Company would be able to obtain licenses to patents held by third parties that may cover the Company's activities at a reasonable cost, if at all, or that the Company would be able to develop or obtain any alternative technologies. The Company currently has certain licenses from third parties and in the future may require additional licenses from other parties in order to refine its Discovery Engine further and to allow its collaborators to develop, manufacture and market commercially viable products effectively. There can be no assurance that (i) such licenses will be obtainable on commercially reasonable terms, if at all; (ii) any patents underlying such licenses will be valid and enforceable; or (iii) the proprietary nature of any patented technology underlying such licenses will remain proprietary. The Company relies substantially on certain technologies that are not patentable or proprietary and are therefore available to the Company's competitors. The Company also relies on certain proprietary trade secrets and know-how that are not patentable. Although the Company has taken steps to protect its unpatented trade secrets and know-how, in part through the use of confidentiality agreements with its employees, consultants and certain of its contractors, there can be no assurance that (i) these agreements will not be breached, (ii) the Company would have adequate remedies for any breach, or (iii) the Company's trade secrets will not otherwise become known or be independently developed or discovered by competitors. Failure by the Company to protect all or part of its patents, trade secrets and know-how could have a material adverse effect on the Company's business, financial condition and results of operations. GOVERNMENT REGULATION Regulation by governmental entities in the United States and other countries will be a significant factor in the production and marketing of any pharmaceutical products that may be developed by a customer or collaborator of the Company or, in the event the Company decides to develop a drug beyond the preclinical phase, by the Company. The nature and the extent to which such regulation may apply to the Company's customers will vary depending on the nature of any such pharmaceutical products. Virtually all pharmaceutical products developed by the Company's customers will require regulatory approval by governmental agencies prior to commercialization. In particular, human pharmaceutical therapeutic products are subject to rigorous preclinical and clinical testing and other approval procedures established by the FDA and by foreign regulatory authorities. Various federal and, in some cases, state statutes and regulations also govern or influence, among other things, the testing, manufacture, safety, efficacy, labeling, storage, record keeping, approval, advertising and promotion of such products. Non-compliance with applicable requirements can result in fines, warning letters, recall or seizure of products, clinical study holds or delays, total or partial suspension of production, refusal of the government to grant approvals, and civil and criminal penalties. The process of obtaining these approvals and the subsequent compliance with appropriate federal and foreign statutes and regulations are time-consuming and require the expenditure of substantial resources. Generally, in order to gain FDA approval, a company first must conduct preclinical studies in the laboratory and in animal models to gain preliminary information on a compound's efficacy and to identify any safety problems. Preclinical studies must be conducted by laboratories that comply with FDA regulations regarding Good Laboratory Practices. The results of these studies are submitted as a part of an IND that the FDA must review before human clinical trials of an investigational drug can begin. In order to commercialize any products, the Company or its customer will be required to sponsor and file an IND and will be responsible for initiating and overseeing the clinical studies to 37 39 demonstrate the safety and efficacy that are necessary to obtain FDA and foreign regulatory authority approval of any such products. Clinical trials are normally done in three phases and generally take two to five years but may take longer to complete. After completion of clinical trials of a new product, FDA and foreign regulatory authority marketing approval must be obtained. If the product is classified as a new drug, the Company or its customer will be required to file an NDA and receive approval before commercial marketing of the drug. The testing and approval processes require substantial time and effort, and there can be no assurance that any approval will be granted on a timely basis, if at all. NDAs submitted to the FDA can take, on average, two to five years to obtain approval. If questions arise during the FDA review process, approval can take more than five years. Even if FDA regulatory clearances are obtained, a marketed product is still subject to continual review, and later discovery of previously unknown problems or failure to comply with the applicable regulatory requirements may result in restrictions on the marketing of a product or withdrawal of the product from the market, as well as possible civil or criminal sanctions. Domestic manufacturing facilities of the Company or its customers are subject to bannial inspections by the FDA and must comply with the FDA's current Good Manufacturing Practices regulations. To comply with such regulations, a manufacturer must spend funds, time and effort in the areas of production and quality control to ensure full technical compliance. The FDA stringently applies regulatory standards for manufacturing. For marketing outside the United States, the Company or its customer will also be subject to foreign regulatory requirements governing human clinical trials and marketing approval for pharmaceutical products. The requirements governing the conduct of clinical trials, product licensing, pricing and reimbursement vary widely from country to country. The research and development processes of the Company involve the controlled use of hazardous materials. The Company is subject to federal, state and local laws and regulations governing the use, manufacture, storage, handling and disposal of such materials and certain waste products. Although the Company believes that its activities currently comply with the standards prescribed by such laws and regulations, the risk of accidental contamination or injury from these materials cannot be completely eliminated. In the event of such an accident, the Company could be held liable for any damages that result, and any such liability could exceed the resources of the Company. In addition, there can be no assurance that the Company will not be required to incur significant costs to comply with environmental laws and regulations in the future. The occurrence of any such event could have a material adverse effect on the Company's business, financial condition and results of operations. MARKETING The Company markets its products directly to customers through participation in trade conferences and seminars and publications in scientific and trade journals. To date, the Company has sold its product offering to its collaborative partners primarily through the efforts of its senior management and dedicated business development professionals. In addition, the Company utilizes outside consultants to supplement its business development activities in targeted geographies or industries. FACILITIES The Company currently leases and occupies approximately 34,000 square feet of laboratory and office space in San Diego, California. The Company also leases office space in Palo Alto, California at two separate locations and under two separate leases; one lease is for approximately 4,500 square feet and the other is for approximately 6,000 square feet. The Company is currently planning to move its Palo Alto operations from the smaller location to the larger location and to sublet the smaller space. The San Diego lease expires in May 2006; the Palo Alto lease for 4,500 square feet expires in October 1998; and the Palo Alto lease for 6,000 square feet expires in October 2002. 38 40 EMPLOYEES As of September 30, 1997, the Company had 56 full-time employees, 31 of whom have Ph.D. degrees. Of these employees, 42 were engaged in research and development and 14 were engaged in marketing and general administration. None of the Company's employees is covered by collective bargaining agreements. Management considers its relations with its employees to be good. LEGAL PROCEEDINGS The Company is not a party to any legal proceedings. SCIENTIFIC ADVISORY BOARD The Company has formed a Scientific Advisory Board ("SAB"), which consists of eight individuals with demonstrated expertise in the fields of molecular biology, medicinal and synthetic chemistry, computer science and biochemistry. Members of the SAB review the Company's research, development and operations activities and are available for consultation with the Company's management and staff relating to their respective areas of expertise. The SAB holds regular meetings. The Scientific Advisors are reimbursed for their expenses in connection with their service and are paid for attending meetings. In addition, the Scientific Advisors either hold options to purchase Common Stock or own varying amounts of Common Stock of the Company that were purchased pursuant to their individual consulting agreements with the Company. The Scientific Advisors are expected to devote only a small portion of their time to the business of the Company. The Scientific Advisors are all employed by or have consulting agreements with entities other than the Company. Each Scientific Advisor has entered into a consulting agreement with the Company that contains confidentiality and nondisclosure provisions that prohibit the disclosure of confidential information to anyone outside the Company. Also, the consulting agreements contain exclusivity provisions restricting the Scientific Advisors from providing service to or investing in any competitor of the Company without the Company's consent. All inventions, discoveries or other intellectual property that comes to the attention of each Scientific Advisor while performing services under a consulting agreement with the Company will be assigned to the Company. The current members of the SAB are as follows: Sydney Brenner, Ph.D. Dr. Brenner is the President and Director of Science at The Molecular Sciences Institute, Inc. This follows an academic career at the University of Cambridge, UK, where he pioneered many of the developments in modern biology and molecular biology. Dennis Curran, Ph.D. Dr. Curran is the Distinguished Service Professor of Chemistry and the Bayer Professor of Chemistry at The University of Pittsburgh. His research focus is fluorous chemistry. Samuel J. Danishefsky, Ph.D. Dr. Danishefsky holds a Chair in Chemistry at Columbia University and the Kettering Chair at The Sloan-Kettering Institute for Cancer Research. Following the award of his Ph.D. by Harvard University in 1962, he has had a distinguished career in synthetic and medicinal chemistry. Kim Janda, Ph.D. Dr. Janda is the Ely R. Callaway, Jr., Professor of Chemistry at The Scripps Research Institute ("TSRI"), Department of Chemistry and holds a joint appointment with The Skaggs Institute for Chemical Biology at TSRI. Dr. Janda is widely recognized for his work in combinatorial chemistry and biochemistry. Dr. Janda received a B.S. in Clinical Chemistry from the University of South Florida, a M.S. in Organic Chemistry from the University of Arizona and a Ph.D. in Organic Chemistry with a minor in Medicinal Chemistry from the University of Arizona. William Jorgensen, Ph.D. Dr. Jorgensen is the Whitehead Professor of Chemistry at Yale University, where he has been since 1990. Dr. Jorgensen is widely known for his work in organic and 39 41 computational chemistry. He received a B.A. in Chemistry from Princeton and a Ph.D. in Chemical Physics from Harvard University. Richard Lathrop, Ph.D. Dr. Lathrop is an Assistant Professor at the University of California, Irvine in the Department of Information and Computer Science, where he has been since July 1995. Dr. Lathrop is widely recognized for his work in the area of advanced computational techniques with applications in the domain of molecular biology. Dr. Lathrop received a B.A. in Mathematics from Reed College in Portland, and an M.S. in Computer Science and a Ph.D. in Artificial Intelligence from the Massachusetts Institute of Technology. His research interests are focused on artificial intelligence and advanced computational techniques. William Scott, Ph.D. Dr. Scott received a Ph.D. in Biochemistry in 1967 from the California Institute of Technology. His subsequent career has spanned both academia at Rockefeller University, and industry with Bristol-Myers Squibb. Dr. Scott is also a Director of the Company. See "Management -- Executive Officers, Key Employees and Directors." Chi-Huey Wong, Ph.D. Dr. Wong is a Professor and Ernest W. Hahn Chair in Chemistry at TSRI, where he has been since 1989, and holds a joint appointment with The Skaggs Institute for Chemical Biology at TSRI. Dr. Wong has published numerous papers in the area of Bioorganic and Synthetic Chemistry. Dr. Wong received a B.S. in Chemistry and Biochemistry and an M.S. in Biochemistry from National Taiwan University, received a Ph.D. in Organic Chemistry from the Massachusetts Institute of Technology and was a Postdoctoral Fellow in Chemistry at Harvard University. 40 42 MANAGEMENT EXECUTIVE OFFICERS, KEY EMPLOYEES AND DIRECTORS The executive officers, key employees and directors of the Company as of October 15, 1997, are as follows:
NAME AGE POSITION - ------------------------------------------ --- ------------------------------------------ Pierre R. Lamond(1)(3).................... 67 Chairman of the Board and Director Vicente Anido, Jr., Ph.D.(1).............. 44 President, Chief Executive Officer and Director Peter L. Myers, Ph.D...................... 53 Vice President, Chief Scientific Officer, Chief Operating Officer and Director Karin Eastham............................. 47 Vice President, Finance and Administration and Chief Financial Officer Klaus Gubernator, Ph.D. .................. 44 Vice President, Special Projects Lee R. McCracken.......................... 39 Vice President, Business Development John Saunders, Ph.D....................... 49 Vice President, Medicinal Chemistry Steven L. Teig............................ 36 Vice President, Advanced Technology Philippe O. Chambon, M.D., Ph.D.(1)(2).... 39 Director Arthur Reidel(3).......................... 46 Director William Scott, Ph.D.(2)................... 57 Director
- --------------- (1) Member of Executive Committee. (2) Member of Compensation Committee. (3) Member of Audit Committee. Pierre R. Lamond. Mr. Lamond has served as Chairman of the Board and a Director of the Company since May 1995. Mr. Lamond is a General Partner of Sequoia Capital, a venture capital limited partnership with over $500 million under management. Prior to joining Sequoia Capital in 1981, Mr. Lamond was a Vice President and Technical Director of National Semiconductor Corporation ("National Semiconductor") from 1976 to 1981. He began his career in 1957 at Transitron Corporation and joined Fairchild Semiconductor Company in 1961. In 1967, he was one of the co-founders of National Semiconductor where he managed the semiconductor division until 1974. From 1974 through 1975, he was President of Coherent, Inc., a laser company. He served as President of Advent, an early pioneer of projection television from 1975 through 1976. Mr. Lamond is Chairman of Cypress Semiconductor Corporation and Vitesse Semiconductor Corporation, Director of CKS Group, and a director of a number of private companies. Vicente Anido, Jr., Ph.D. Dr. Anido has served as President and Chief Executive Officer and as a Director of the Company since joining the Company in March 1996. Prior to that, Dr. Anido served as President of the Americas Region at Allergan, Inc. from June 1993, where he was responsible for that company's commercial operations for North and South America with approximately $500 million in revenue. Prior to that, Dr. Anido spent almost 18 years at Marion Laboratories and Marion Merrell Dow, Inc. and served as Vice President, Business Management of its U.S. Prescription Products Division from 1991 until June 1993. Dr. Anido holds a B.S. in Pharmacy from West Virginia University, an M.S. in Pharmaceutical Sciences from West Virginia University and a Ph.D. in Pharmacy Administration from the University of Missouri, Kansas City. Peter L. Myers, Ph.D. Dr. Myers has served as a Director, Vice President and Chief Scientific Officer of the Company since joining the Company in March 1995. Dr. Myers has also served as Chief Operating Officer of the Company since September 1995 and served as the acting Chief Executive Officer from September 1995 to March 1996. Prior to joining the Company, Dr. Myers served as Vice President, Drug Discovery and Development at Onyx Pharmaceuticals Inc. from November 1993 41 43 through March 1995, where he was responsible for all aspects of drug discovery and development leading to potential novel classes of anti-cancer drugs. Prior to that, Dr. Myers served as Vice President, Chemistry Research of Glaxo Inc. Research Institute from January 1991 through December 1993. Dr. Myers holds a B.S. in Chemistry and a Ph.D. in Organic Chemistry from Leeds University. Karin Eastham. Ms. Eastham joined the Company as Vice President, Finance and Administration and Chief Financial Officer in April 1997. Prior to joining the Company, Ms. Eastham served as Vice President, Finance and Administration and Chief Financial Officer of Cytel Corporation, a drug research and development company, from October 1992 through April 1997. Prior to that, Ms. Eastham was Vice President, Finance and Administration of Pritsker Corporation, a simulation-based computer software company, from May 1990 through October 1992. Ms. Eastham received a B.S. in Accounting and an M.B.A. from Indiana University. She is a Certified Public Accountant. Klaus Gubernator, Ph.D. Dr. Gubernator joined the Company in August 1997 as Vice President, Special Projects. Prior to joining the Company, he served as Research Section Head in Pharmaceutical Research at F. Hoffmann-La Roche Ltd. in Basel, Switzerland from 1987 to 1997, contributing to cardiovascular and antibacterial projects as well as developing structure-based design and bioinformatics technologies. Dr. Gubernator received his Ph.D. degree in Chemistry from the University of Heidelberg. Lee R. McCracken. Mr. McCracken has served as Vice President, Business Development since joining the Company in May 1996. Prior to joining the Company, Mr. McCracken served as Vice President, Business Development at Watson Laboratories, the operating subsidiary of Watson Pharmaceuticals, from January 1996 through May 1996. Prior to that, Mr. McCracken served as Managing Director of Pacific Pharma and as Director, Business Development, for the Americas Region at Allergan, Inc. from May 1992 through December 1995. Prior to entering the pharmaceutical industry, Mr. McCracken was a venture capitalist with 3i Capital and Union Venture Corporation. Mr. McCracken received a B.S. in Marketing from Santa Clara University, an M.S. in Computer Science from the University of Dayton and an M.B.A. from The Anderson School at UCLA. John Saunders, Ph.D. Dr. Saunders joined the Company in October 1995 as Vice President, Medicinal Chemistry. Prior to joining the Company, Dr. Saunders served as Head of Medicinal Chemistry II from August 1989 through September 1995 and also as Head of the Antiviral Research Management Committee from July 1995 through September 1995 at Glaxo-Wellcome, plc. Dr. Saunders received a first class honors degree in Chemistry from Newcastle University in England and a Ph.D. from Cambridge University. Steven L. Teig. Mr. Teig has served as Vice President, Advanced Technology since February 1997 and previously served as Vice President, Design Technology from July 1995. Prior to joining the Company, Mr. Teig co-founded BioCAD Corp., a commercial developer of drug discovery software for medicinal chemists, in June 1989 and served as its Chief Technical Officer until its merger with Molecular Simulations, Inc. ("MSI"). Thereafter, Mr. Teig served as President and Chief Technical Officer of Entropix Corporation, a subsidiary of MSI, from August 1994 through July 1995. Prior to pursuing drug discovery technology, Mr. Teig co-founded Tangent Systems Corporation, a developer of integrated circuit design software, which was subsequently acquired by Cadence Design Systems, Inc. Mr. Teig holds a B.S.E. in Electrical Engineering and Computer Science from Princeton University. Philippe O. Chambon, M.D., Ph.D. Dr. Chambon is a General Partner of the Sprout Group. He joined Sprout in May 1995. From May 1993 to April 1995, Dr. Chambon served as Manager in the Healthcare Practice of The Boston Consulting Group, a leading management consulting firm. Previously, Dr. Chambon was an executive with Sandoz Pharmaceuticals Corporation, a leading pharmaceutical company, from September 1987 to April 1993. In his last capacity there, he was the Executive Director of New Product Management. He is currently a director of Transcend Therapeutics and of several private companies. Dr. Chambon received an M.D. (with honors) and Ph.D. from the University of Paris and an M.B.A. from Columbia University. 42 44 Arthur Reidel. Mr. Reidel has served as a director of the Company since September 1997. He currently serves as President, Chief Executive Officer and Chairman of the Board of Pharsight Corporation, a privately held software corporation, a position he has held since April 1996, and as a director from April 1995. Prior to that, he was a private investor/consultant from April 1995 to March 1996. From October 1994 to March 1995, he served as Vice President, Business Development of Viewlogic Systems, Inc., a publicly held software firm. Mr. Reidel has served as a director of MacNeil Schwendler from December 1993 and as a director of Formation Systems, Inc. from 1996 to the present. Mr. Reidel has also served as President and Chief Executive Officer, Sunrise Test Systems, Inc., a privately held software firm, from December 1992 to March 1994 (Viewlogic Systems, Inc. acquired Sunrise Test Systems, Inc. in September 1994), and Vice President of Weitek Corporation from July 1991 to December 1992. Mr. Reidel received an B.S. in mathematics from Massachusetts Institute of Technology. William Scott, Ph.D. Dr. Scott has served as a director of the Company since January 1997. Since March 1997, Dr. Scott has served as the Chief Executive Officer of Physiome Sciences, Inc. From 1983 until December 1996, Dr. Scott served in various executive positions with Bristol-Myers Squibb Pharmaceutical Research Institute and as its Senior Vice President, Drug Discovery Research since 1991. Dr. Scott received a B.S. in Chemistry from the University of Illinois and a Ph.D. in Biochemistry from the California Institute of Technology and was an NIH Postdoctoral Fellow at The Rockefeller University. Dr. Scott serves on the Board of Directors of a private company. Members of the Board currently hold office and serve until the next annual meeting of the stockholders of the Company or until their respective successors have been elected. The Board is currently comprised of six directors. Under the Company's Bylaws, as amended, beginning with the next annual meeting of stockholders the Company's Board will be classified into three classes of directors serving staggered three-year terms, with one class of directors to be elected at each annual meeting of stockholders. The classification of directors has the effect of making it more difficult to change the composition of the Board. See "Description of Capital Stock -- Possible Anti-Takeover Effect of Certain Charter Provisions." All executive officers are appointed annually by and serve at the discretion of the Board. All of the Company's executive officers are employed by the Company at will. Pursuant to the Company's 1997 Stock Incentive Plan, which was adopted by the Board and approved by the Company's stockholders in October, 1997, directors who are not officers or employees of the Company will receive periodic option grants beginning with the next annual meeting of stockholders. See "-- Benefit Plans." COMMITTEES OF THE BOARD OF DIRECTORS The Company has a standing Compensation Committee currently composed of Dr. Chambon and Dr. Scott. The Compensation Committee reviews and acts on matters relating to compensation levels and benefit plans for executive officers and key employees of the Company, including salary and stock options. The Compensation Committee is also responsible for granting stock awards, stock options and stock appreciation rights and other awards to be made under the Company's existing incentive compensation plans. The Company also has a standing Audit Committee composed of Mr. Lamond and Mr. Reidel. The Audit Committee assists in selecting the Company's independent auditors and in designating services to be performed by, and maintaining effective communication with, those auditors. The Company also has a standing Executive Committee currently composed of Mr. Lamond, Dr. Anido and Dr. Chambon. The Executive Committee has the authority to exercise all powers of the Board of Directors not designated to another committee when the Board of Directors is not in session. 43 45 EXECUTIVE COMPENSATION Summary of Cash and Certain Other Compensation The following table sets forth the aggregate compensation earned by the Company's President and Chief Executive Officer (both current and former) and each of the other four most highly compensated executive officers whose salary and bonus for 1996 exceeded $100,000 (the "Named Executive Officers") for services rendered in all capacities to the Company for the year ended December 31, 1996: SUMMARY COMPENSATION TABLE(1)
LONG-TERM COMPENSATION AWARDS ANNUAL COMPENSATION --------------- ------------------------------------ SECURITIES OTHER ANNUAL UNDERLYING ALL OTHER NAME AND PRINCIPAL POSITION SALARY(2) BONUS(3) COMPENSATION OPTIONS/SARS(#) COMPENSATION - -------------------------------- --------- -------- ------------- --------------- ------------ Vicente Anido, Jr., Ph.D.(4) President, Chief Executive Officer and Director.......... $ 200,417 $55,226 $ -- 422,417 $ -- Peter L. Myers, Ph.D.(5) Chief Scientific Officer and Chief Operating Officer, Acting Chief Executive Officer and Director.......... 225,233 43,050 -- -- -- John Saunders, Ph.D. Vice President, Medical Chemistry............. 145,000 23,200 27,125(6) -- -- Lee R. McCracken(7) Vice President, Business Development.......... 101,740 16,917 -- 72,500 -- Steven L. Teig Vice President, Advanced Technology........... 137,025 21,924 -- -- -- Lynn Caporale, Ph.D.(8) Vice President, Strategic Development................... 144,834 22,000 -- -- 130,572(9)
- --------------- (1) Pursuant to Instruction to Item 402(b) of Regulation S-K promulgated by the Securities and Exchange Commission (the "Commission"), information with respect to fiscal years prior to 1996 has not been included as the Company was not a reporting company pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the information has not been previously reported to the Commission in response to a filing requirement. (2) Includes amounts deferred pursuant to the Company's 401(k) Plan. (3) Includes cash payments for bonuses earned by the Named Executive Officers during 1996. (4) Dr. Anido was hired in March 1996. (5) Dr. Myers served as the Company's Chief Executive Officer from August 1995 until March 1996. (6) Payments to cover relocation expenses. (7) Mr. McCracken was hired in May 1996. (8) Dr. Caporale resigned from the Company in November 1996. 44 46 (9) Represents payments of $27,572 made in 1996 for accrued vacation and severance benefits, and payments of $103,000 made in 1997 for severance payments accrued in 1996. See "-- Employment Arrangements and Change of Control Arrangements." Stock Options The following table sets forth information concerning stock option grants made to each of the Named Executive Officers for the year ended December 31, 1996. The Company granted no stock appreciation rights ("SARs") to Named Executive Officers during 1996. OPTION GRANTS IN LAST FISCAL YEAR
POTENTIAL REALIZABLE INDIVIDUAL GRANTS VALUE AT ASSUMED ------------------------------------------------------- ANNUAL RATES OF NUMBER OF % OF TOTAL STOCK PRICE SECURITIES OPTIONS APPRECIATION FOR UNDERLYING GRANTED TO EXERCISE OPTION TERMS(3) OPTIONS/SARS EMPLOYEES IN PRICE EXPIRATION ------------------- NAME GRANTED(1) FISCAL YEAR PER SHARE(2) DATE 5% 10% - --------------------------- ------------ ------------ ------------ ---------- -------- -------- Vicente Anido, Jr., Ph.D..................... 422,417 79.5% $ 0.30 03/13/06 $208,717 $343,050 Peter L. Myers, Ph.D....... -- -- -- -- -- -- John Saunders, Ph.D........ -- -- -- -- -- -- Lee R. McCracken........... 72,500 13.6 0.30 05/08/06 35,822 58,878 Steven L. Teig............. -- -- -- -- -- -- Lynn Caporale, Ph.D........ -- -- -- -- -- --
- --------------- (1) The grant dates for these options are as follows: March 14, 1996 for Dr. Anido's option and May 9, 1996 for Mr. McCracken's option. Each option has a maximum term of 10 years measured from the grant date, subject to earlier termination upon the optionee's cessation of service with the Company. Each option is immediately exercisable for all the option shares; however, any shares purchased under the option will be subject to repurchase by the Company, at the option exercise price paid per share, should the optionee leave the Company prior to vesting in the shares. Dr. Anido's option was fully vested with respect to 10% of the option shares on the grant date, another 15% of the option shares vested upon his completion of one year of service measured from the grant date, and the balance of the option shares vest in a series of equal monthly installments over Dr. Anido's 36-month period of service measured from the first anniversary of the grant date. The shares subject to Mr. McCracken's option vest as follows: 25% upon his completion of one year of service measured from the grant date and the balance in a series of 36 successive equal monthly installments over his continued period of service thereafter. The options were granted under the 1995 Stock Option/Stock Issuance Plan and will be incorporated into the new 1997 Stock Option Plan on the effective date of the Offering, but will continue to be governed by their existing terms. See "Benefit Plans -- 1997 Stock Incentive Plan." (2) The exercise price per share of options granted represented the fair market value of the underlying shares of Common Stock on the dates the respective options were granted as determined by the Board, considering all relevant factors. The exercise price may be paid in cash or in shares of Common Stock valued at fair market value on the exercise date or a combination of cash and shares or any other form of consideration approved by the Board. After the effective date of the Registration Statement of which this Prospectus is a part, the fair market value of shares of Common Stock will be determined in accordance with certain provisions of the Company's 1995 Stock Option/Stock Issuance Plan based on the closing selling price per share of Common Stock on the date in question on the primary exchange or national market system on which the Company's common stock is listed or reported. If shares of the Common Stock are not listed or admitted to trading on any stock exchange nor traded on the Nasdaq National Market, then the fair market value shall be determined by the Plan Administrator after taking into account such factors as the Plan Administrator shall deem appropriate. 45 47 (3) The 5% and 10% assumed annual rates of compounded stock price appreciation are mandated by rules of the Commission. The price used for computing this appreciation is the exercise price of the options, not the price of Common Stock in this offering. There is no assurance provided to any executive officer or any other holder of the Company's securities that the actual stock price appreciation over the 10-year option term will be at the assumed 5% or 10% levels or at any other defined level. Option Exercises and Holdings The following table provides information concerning option exercises during 1996 by the Named Executive Officers and the value of unexercised options held by each of the Named Executive Officers as of December 31, 1996. No SARs were exercised during 1996 or outstanding as of December 31, 1996. AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS SHARES DECEMBER 31, 1996(#) AT DECEMBER 31, 1996(3) ACQUIRED ON VALUE ------------------------------ ------------------------------ NAME EXERCISE(#) REALIZED(1) EXERCISABLE(2) UNEXERCISABLE EXERCISABLE(2) UNEXERCISABLE - --------------------- ----------- ----------- -------------- ------------- -------------- ------------- Vicente Anido, Jr., Ph.D............... -- $-- 422,417 -- $ 42,242 $-- Peter L. Myers, Ph.D............... -- -- -- -- -- -- John Saunders, Ph.D............... -- -- -- -- -- -- Lee R. McCracken..... 72,500 -- -- -- -- -- Steven L. Teig....... -- -- -- -- -- -- Lynn Caporale, Ph.D............... -- -- -- -- -- --
- --------------- (1) "Value realized" is calculated on the basis of the fair market value of the Common Stock on the date of exercise minus the exercise price and does not necessarily indicate that the optionee sold such stock. (2) The options are immediately exercisable, but any shares purchased thereunder will be subject to repurchase by the Company, at the original option exercise price paid per share, should Dr. Anido leave the Company prior to vesting in the shares. As of October 15, 1997, Dr. Anido had vested in 167,204 of those shares. (3) "Value" is defined as fair market price of the Common Stock at fiscal year-end ($0.40) less exercise price. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION During the year ended December 31, 1996, the Compensation Committee of the Company's Board established the levels of compensation for the Company's executive officers. The current members of the Company's Compensation Committee are Dr. Chambon and Dr. Scott. See "Certain Transactions." EMPLOYMENT ARRANGEMENTS AND CHANGE OF CONTROL ARRANGEMENTS In March 1996, the Company and Dr. Anido entered into an agreement whereby Dr. Anido is employed as President and Chief Executive Officer of the Company. Pursuant to his agreement, Dr. Anido receives an annual base salary of $260,000, which is reviewed annually by the Board of Directors, and is eligible for a bonus of up to 25% of his annual base salary to be awarded at the discretion of the Board of Directors. In the event the Company terminates Dr. Anido's employment without "cause," Dr. Anido will be entitled to receive an aggregate severance benefit of 12 months of his base salary and benefits less amounts received by Dr. Anido from other full-time employment during that period. In addition, pursuant to his employment agreement Dr. Anido received options to 46 48 purchase 420,000 shares of Common Stock with an exercise price of $0.30 per share. The shares subject to the option vest over Dr. Anido's four-year period of service with the Company measured from the option grant date. Dr. Anido's employment agreement also provides Dr. Anido with a right to maintain his pro rata interest in the Company by purchasing new securities issued in a financing other than a public offering, subject to certain exceptions. In March 1995, the Company and Dr. Myers entered into an agreement whereby Dr. Myers is employed as Chief Scientific Officer and Chief Operating Officer of the Company. Pursuant to his agreement, Dr. Myers (i) received a signing bonus of $26,250 towards the purchase of Company stock, (ii) receives an annual base salary of $210,000, which is reviewed annually by the President and Chief Executive Officer, and (iii) is eligible for a bonus of up to 25% of his annual base salary to be awarded at the discretion of the Board of Directors. In connection with the employment agreement, Dr. Myers was provided a home loan. In the event the Company terminates Dr. Myers' employment without "cause," Dr. Myers will be entitled to receive an aggregate severance benefit of nine months of his base salary and benefits, unless he obtains full-time employment prior to the end of that period, and nine months accelerated vesting to be applied to any vesting requirements under any stock option or stock purchase agreements outstanding between Dr. Myers and the Company at the time of his termination without cause. Simultaneous with the execution of Dr. Myers' employment agreement, the Company and Dr. Myers entered into a Stock Purchase Agreement whereby Dr. Myers purchased 87,500 shares of Common Stock at $0.30 per share. Those shares vest over Dr. Myers' four-year period of service with the Company measured from the option grant date. In March 1997, the Company and Ms. Eastham entered into an agreement whereby she is employed as Vice President, Finance and Administration and Chief Financial Officer. Pursuant to her agreement, Ms. Eastham (i) receives an annual base salary of $186,000, which is reviewed annually by the Chief Executive Officer and Board of Directors, and (ii) is eligible for a bonus of up to 20% of her annual base salary to be awarded at the discretion of the Board of Directors. In the event the Company terminates Ms. Eastham's employment without "cause" within two years after her date of hire, Ms. Eastham will be entitled to receive an aggregate severance benefit of her base salary and benefits for six months, unless she obtains full-time employment prior to the end of that six-month period. Simultaneous with the execution of Ms. Eastham's employment agreement, the Company and Ms. Eastham entered into a Stock Option Agreement granting her an option to purchase 87,500 shares of Common Stock with an exercise price of $0.40 per share. The shares subject to the option vest over her four-year period of service with the Company measured from the grant date. In January 1996, the Company and Dr. Saunders entered into an agreement whereby Dr. Saunders is employed as Vice President, Medicinal Chemistry of the Company. Pursuant to his agreement, Dr. Saunders receives an annual base salary of $145,000, which is reviewed annually by the President and Chief Executive Officer, and is eligible for a bonus of up to 20% of his annual base salary to be awarded at the discretion of the Board of Directors. Simultaneous with the execution of the employment agreement, the Company and Dr. Saunders entered into a stock option agreement granting him an option to purchase 83,825 shares of the Company's common stock with an exercise price of $0.248 per share. The shares subject to that option vest over Dr. Saunders' four-year period of service with the Company measured from the option grant date. In May 1996, the Company and Mr. McCracken entered into an agreement whereby he is employed as Vice President, Business Development of the Company. Pursuant to his agreement, Mr. McCracken received a signing bonus of $10,000 and receives an annual base salary of $145,000, which is reviewed annually by the President and Chief Executive Officer. In addition, Mr. McCracken is eligible for a bonus of up to 20% of his annual base salary. In the event the Company terminates Mr. McCracken's employment without "cause," Mr. McCracken will be entitled to receive an aggregate severance benefit of nine months of his base salary and benefits. Simultaneous with the execution of Mr. McCracken's employment agreement, the Company and Mr. McCracken entered into a stock option agreement granting Mr. McCracken an option to purchase 72,500 shares of Common 47 49 Stock with an exercise price of $0.30 per share. The shares subject to the option vest over Mr. McCracken's four-year period of service measured from the option grant date. In July 1995, the Company and Mr. Teig entered into an agreement whereby he is employed as Vice President of the Company. Pursuant to his agreement, Mr. Teig receives an annual base salary of $135,000, which is reviewed annually by the Board of Directors. In addition, Mr. Teig is eligible for a bonus of up to 20% of his annual base salary to be awarded at the discretion of the Board of Directors. Simultaneous with the execution of the employment agreement, the Company and Mr. Teig entered into a stock purchase agreement whereby Mr. Teig purchased 50,000 shares of Common Stock at $0.30 per share. Under such stock purchase agreement, the shares will vest, and the Company's repurchase rights will accordingly lapse over Mr. Teig's four-year period of employment measured from the date of issuance. Pursuant to his employment agreement, Mr. Teig was granted, and subsequently exercised, an option to purchase 61,250 shares of Company's Common Stock with an exercise price of $0.40 per share. Those shares vest over Mr. Teig's four-year period of service measured from option grant date. In November 1994, the Company and Dr. Caporale entered into an agreement whereby she was employed as Vice President, Strategic Development. Pursuant to the agreement, Dr. Caporale received an annual base salary of $160,000 subject to review and adjustments by the Board of Directors, and a bonus of up to 20% of her annual base salary. In November 1996, Dr. Caporale resigned from the Company and the employment agreement terminated. As a result of her termination, Dr. Caporale received an aggregate severance benefit of nine months of her base salary and benefits. Simultaneous with the execution of the employment agreement, the Company and Dr. Caporale entered into a stock purchase agreement, whereby Dr. Caporale purchased 43,750 shares of Common Stock at $0.20 per share, and 29,785 were vested at the termination of Dr. Caporale's employment with the Company. In connection with an acquisition of the Company by merger or asset sale, each outstanding option held by the Chief Executive Officer and the other Named Executive Officers under the Predecessor Plan will terminate, unless those options are assumed by the successor corporation. However, any options granted to such individuals in the future under the 1997 Stock Incentive Plan will automatically accelerate in full, except to the extent such options are to be assumed by the successor corporation. See "Benefit Plans -- 1997 Stock Incentive Plan." In addition, the Compensation Committee as Plan Administrator of the 1997 Stock Incentive Plan will have the authority to provide for the accelerated vesting of the shares of Common Stock subject to outstanding options held by the Chief Executive Officer and the Named Executive Officers, or any unvested shares of Common Stock subject to direct issuances held by such individuals, in connection with the termination of the officer's employment following: (i) a merger or asset sale in which these options are assumed or the repurchase rights applicable to those shares are assigned or (ii) certain changes in control of the Company. DIRECTOR COMPENSATION The Company reimburses its directors for all reasonable and necessary travel and other incidental expenses incurred in connection with their attendance at meetings of the Board. Directors are not currently compensated for serving on the Board. The Company has previously granted to certain non-employee Board members an option to purchase 20,000 shares of Common Stock. Each non-employee Board member who is serving as such on the effective date of the 1997 Stock Incentive Plan will receive a similar 20,000-share option, provided he or she has not received a prior option grant from the Company. Each individual who first becomes a non-employee Board member at any time after this offering will receive a 20,000-share option grant on the date such individual joins the Board. In addition, beginning with the first annual meeting of stockholders following this offering, each such non-employee Board member who is to continue to serve as a non-employee Board member will automatically be granted an option to purchase 5,000 shares of Common Stock, provided such individual has served on the Board for at least six months. These options will have an exercise price equal to 100% of the fair market value of the Common Stock on the grant date. The shares subject to each 20,000-share automatic option grant will vest over a four-year period, with 25% of the option 48 50 shares vesting upon completion of one year of Board service from the grant date and the balance of the option shares vesting in equal monthly installments over the optionee's continued period of Board service over the next three years. The shares subject to each 5,000-share annual automatic option will vest upon the optionee's completion of one year of Board service measured from the grant date. See "-- Benefit Plans -- 1997 Stock Incentive Plan." BENEFIT PLANS 1997 Stock Incentive Plan The Company's 1997 Stock Incentive Plan (the "1997 Plan") is intended to serve as the successor equity incentive program to the Company's 1995 Stock Option/Stock Issuance Plan, as amended (the "Predecessor Plan"). The 1997 Plan was adopted by the Board and the stockholders on October 7, 1997. The 1997 Plan is to become effective on the date the Underwriting Agreement for this offering is executed (the "Plan Effective Date"). A total of 1,080,603 shares of Common Stock have been authorized for issuance under the 1997 Plan. Such share reserve consists of (i) the number of shares available for issuance under the Predecessor Plan on the Plan Effective Date, including the shares subject to outstanding options, and (ii) an additional increase of approximately 800,000 shares. To the extent any unvested shares of Common Stock issued under the Predecessor Plan are repurchased by the Company after the Plan Effective Date, at the exercise price paid per share, in connection with the holder's termination of service, those repurchased shares will be added to the reserve of Common Stock available for issuance under the 1997 Plan. In no event may any one participant in the 1997 Plan receive option grants, separately exercisable stock appreciation rights or direct stock issuances for more than 500,000 shares of Common Stock in the aggregate per calendar year. On the Plan Effective Date, outstanding options and unvested shares issued under the Predecessor Plan will be incorporated into the 1997 Plan, and no further option grants will be made under the Predecessor Plan. The incorporated options will continue to be governed by their existing terms, unless the Plan Administrator elects to extend one or more features of the 1997 Plan to those options. Except as otherwise noted below, the incorporated options have substantially the same terms as will be in effect for grants made under the Discretionary Option Grant Program of the 1997 Plan. The 1997 Plan is divided into five separate components: (i) the Discretionary Option Grant Program under which eligible individuals in the Company's employ or service (including officers, non-employee Board members and consultants) may, at the discretion of the Plan Administrator, be granted options to purchase shares of Common Stock at an exercise price not less than 100% of their fair market value on the grant date, (ii) the Stock Issuance Program under which such individuals may, in the Plan Administrator's discretion, be issued shares of Common Stock directly, through the purchase of such shares at a price not less than 100% of their fair market value at the time of issuance or as a bonus tied to the performance of services, (iii) the Salary Investment Option Grant Program which may, in the Plan Administrator's sole discretion, be activated for one or more calendar years and, if so activated, will allow executive officers and other highly compensated employees the opportunity to apply a portion of their base salary to the acquisition of special below-market stock option grants, (iv) the Automatic Option Grant Program under which option grants will automatically be made at periodic intervals to eligible non-employee Board members to purchase shares of Common Stock at an exercise price equal to 100% of their fair market value on the grant date and (v) the Director Fee Option Grant Program which may, in the Plan Administrator's sole discretion, be activated for one or more calendar years and, if so activated, will allow non-employee Board members the opportunity to apply a portion of the annual retainer fee, if any, otherwise payable to them in cash each year to the acquisition of special below-market option grants. The Discretionary Option Grant Program and the Stock Issuance Program will be administered by the Compensation Committee. The Compensation Committee as Plan Administrator will have complete discretion to determine which eligible individuals are to receive option grants or stock issuances 49 51 under those programs, the time or times when such option grants or stock issuances are to be made, the number of shares subject to each such grant or issuance, the status of any granted option as either an incentive stock option or a non-statutory stock option under the Federal tax laws, the vesting schedule to be in effect for the option grant or stock issuance and the maximum term for which any granted option is to remain outstanding. The Compensation Committee will also have the exclusive authority to select the executive officers and other highly compensated employees who may participate in the Salary Investment Option Grant Program in the event that program is activated for one or more calendar years, but neither the Compensation Committee nor the Board will exercise any administrative discretion with respect to option grants under the Salary Investment Option Grant Program or under the Automatic Option Grant or Director Fee Option Grant Program for the non-employee Board members. All grants under those three latter programs will be made in strict compliance with the express provisions of each such program. The exercise price for the shares of Common Stock subject to option grants made under the 1997 Plan may be paid in cash or in shares of Common Stock valued at fair market value on the exercise date. The option may also be exercised through a same-day sale program without any cash outlay by the optionee. In addition, the Plan Administrator may provide financial assistance to one or more optionees in the exercise of their outstanding options or the purchase of their unvested shares by allowing such individuals to deliver a full-recourse, interest-bearing promissory note in payment of the exercise price and any associated withholding taxes incurred in connection with such exercise or purchase. The Plan Administrator will have the authority, with the consent of the affected option holders, to effect the cancellation of outstanding options under the Discretionary Option Grant Program (including options incorporated from the Predecessor Plan) in return for the grant of new options for the same or different number of option shares with an exercise price per share based upon the fair market value of the Common Stock on the new grant date. Stock appreciation rights are authorized for issuance under the Discretionary Option Grant Program which provide the holders with the election to surrender their outstanding options for an appreciation distribution from the Company equal to the excess of (i) the fair market value of the vested shares of Common Stock subject to the surrendered option over (ii) the aggregate exercise price payable for such shares. Such appreciation distribution may be made in cash or in shares of Common Stock. None of the incorporated options from the Predecessor Plan contain any stock appreciation rights. In the event that the Company is acquired by merger or asset sale, each outstanding option under the Discretionary Option Grant Program which is not to be assumed by the successor corporation will automatically accelerate in full, and all unvested shares under the Discretionary Option Grant and Stock Issuance Programs will immediately vest, except to the extent the Company's repurchase rights with respect to those shares are to be assigned to the successor corporation. The Plan Administrator will have complete discretion to grant one or more options under the Discretionary Option Grant Program which will become fully exercisable for all the option shares in the event those options are assumed in the acquisition and the optionee's service with the Company or the acquiring entity terminates within a designated period following such acquisition. The vesting of outstanding shares under the Stock Issuance Program may be accelerated upon similar terms and conditions. The Plan Administrator will also have the authority to grant options which will immediately vest upon an acquisition of the Company, whether or not those options are assumed by the successor corporation. The Plan Administrator is also authorized under the Discretionary Option Grant and Stock Issuance Programs to grant options and to structure repurchase rights so that the shares subject to those options or repurchase rights will immediately vest in connection with a change in control of the Company (whether by successful tender offer for more than 50% of the outstanding voting stock or a change in the majority of the Board by reason of one or more contested elections for Board membership), with such vesting to occur either at the time of such change in control or upon the subsequent termination of the individual's service within a designated period following such change in control. The options 50 52 incorporated from the Predecessor Plan will terminate upon an acquisition of the Company by merger or asset sale, unless those options are assumed by the successor entity. However, the Plan Administrator will have the discretion to extend the acceleration provisions of the 1997 to those options. In the event the Plan Administrator elects to activate the Salary Investment Option Grant Program for one or more calendar years, each executive officer and other highly compensated employee of the Company selected for participation may elect, prior to the start of the calendar year, to reduce his or her base salary for that calendar year by a specified dollar amount not less than $10,000 nor more than $50,000. If such election is approved by the Plan Administrator, the individual will automatically be granted, on the first trading day in January of the calendar year for which that salary reduction is to be in effect, a non-statutory option to purchase that number of shares of Common Stock determined by dividing the salary reduction amount by two-thirds of the fair market value per share of Common Stock on the grant date. The option will be exercisable at a price per share equal to one-third of the fair market value of the option shares on the grant date. As a result, the total spread on the option shares at the time of grant (the fair market value of the option shares on the grant date less the aggregate exercise price payable for those shares) will be equal to the amount of salary invested in that option. The option will vest in a series of 12 equal monthly installments over the calendar year for which the salary reduction is to be in effect and will be subject to full and immediate vesting upon certain changes in the ownership or control of the Company. The Company has previously granted to certain non-employee Board members an option to purchase 20,000 shares of Common Stock, and each non-employee Board member who is serving as such on the Plan Effective Date and who has not received such a grant will automatically receive an option at that time to purchase 20,000 shares of Common Stock. Each individual who first becomes a non-employee Board member at any time after the Plan Effective Date will also receive a 20,000-share option grant on the date such individual joins the Board. In addition and on the date of each Annual Stockholders Meeting held after the Plan Effective Date, each such non-employee Board member who is to continue to serve as a non-employee Board member will automatically be granted an option to purchase 5,000 shares of Common Stock, provided such individual has served on the Board for at least six months. Each automatic grant for the non-employee Board members will have a term of 10 years, subject to earlier termination following the optionee's cessation of Board service. Each automatic option will be immediately exercisable for all of the option shares; however, any unvested shares purchased under the option will be subject to repurchase by the Company, at the exercise price paid per share, should the optionee cease Board service prior to vesting in those shares. The shares subject to each initial 20,000-share automatic option grant will vest over a four-year period, as follows: (i) 25% of the option shares upon the optionee's completion of one year of Board service measured from the grant date and (ii) the balance of the option shares in a series of 36 successive equal monthly installments upon the optionee's completion of each additional month of service measured from the first anniversary of the grant date. The shares subject to each annual 5,000-share grant will vest upon the optionee's completion of one year of Board service measured from the grant date. However, the shares subject to each automatic option grant will immediately vest in full upon certain changes in control or ownership of the Company or upon the optionee's death or disability while a Board member. Should the Director Fee Option Grant Program be activated in the future, each non-employee Board member will have the opportunity to apply all or a portion of any annual retainer fee otherwise payable in cash to the acquisition of a below-market option grant. The option grant will automatically be made on the first trading day in January in the year for which the retainer fee would otherwise be payable in cash. The option will have an exercise price per share equal to one-third of the fair market value of the option shares on the grant date, and the number of shares subject to the option will be determined by dividing the amount of the retainer fee applied to the program by two-thirds of the fair market value per share of Common Stock on the grant date. As a result, the total spread on the option (the fair market value of the option shares on the grant date less the aggregate exercise price payable for those shares) will be equal to the portion of the retainer fee invested in that option. The option will 51 53 become exercisable for the option shares in a series of 12 equal monthly installments over the calendar year for which the election is to be in effect. However, the option will become immediately exercisable for all the option shares upon (i) certain changes in the ownership or control of the Company or (ii) the death or disability of the optionee while serving as a Board member. The shares subject to each option under the Salary Investment Option Grant, Automatic Option Grant and Director Fee Option Grant Programs will immediately vest upon (i) an acquisition of the Company by merger or asset sale or (ii) the successful completion of a tender offer for more than 50% of the Company's outstanding voting stock or a change in the majority of the Board effected through one or more contested elections for Board membership. Limited stock appreciation rights will automatically be included as part of each grant made under the Automatic Option Grant, Salary Investment Option Grant and Director Fee Option Grant Programs and may be granted to one or more officers of the Company as part of their option grants under the Discretionary Option Grant Program. Options with such a limited stock appreciation right may be surrendered to the Company upon the successful completion of a hostile tender offer for more than 50% of the Company's outstanding voting stock. In return for the surrendered option, the optionee will be entitled to a cash distribution from the Company in an amount per surrendered option share equal to the excess of (i) the highest price per share of Common Stock paid in connection with the tender offer over (ii) the exercise price payable for such share. The Board may amend or modify the 1997 Plan at any time, subject to any required stockholder approval. The 1997 Plan will terminate on the earliest of (i) October 31, 2007, (ii) the date on which all shares available for issuance under the 1997 Plan have been issued as fully vested shares or (iii) the termination of all outstanding options in connection with certain changes in control or ownership of the Company. 1997 Employee Stock Purchase Plan The Company's 1997 Employee Stock Purchase Plan (the "Purchase Plan") was adopted by the Board and approved by the stockholders in October 1997 and will become effective immediately upon the execution of the Underwriting Agreement for this offering. The Purchase Plan is designed to allow eligible employees of the Company and participating subsidiaries to purchase shares of Common Stock, at semi-annual intervals, through their periodic payroll deductions under the Purchase Plan, and a reserve of 150,000 shares of Common Stock has been established for this purpose. The Purchase Plan will be implemented in a series of successive offering periods, each with a maximum duration for 12 months. However, the initial offering period will begin on the execution date of the Underwriting Agreement and will end on the last business day in January 1999. The next offering period will commence on the first business day in February 1999, and subsequent offering periods will commence as designated by the Plan Administrator. Individuals who are eligible employees (scheduled to work more than 20 hours per week for more than 5 calendar months per year) on the start date of any offering period may enter the Purchase Plan on that start date or on any subsequent semi-annual entry date (the first business day of February or August each year). Individuals who become eligible employees after the start date of the offering period may join the Purchase Plan on any subsequent semi-annual entry date within that offering period. Payroll deductions may not exceed 10% of the employee's base salary, and the accumulated payroll deductions of each participant will be applied to the purchase of shares on his or her behalf on each semi-annual purchase date (the last business day in January and July each year) at a purchase price per share equal to 85% of the lower of (i) the fair market value of the Common Stock on the participant's entry date into the offering period or (ii) the fair market value on the semi-annual purchase date. In no event, however, may any participant purchase more than 1,250 shares on any one semi-annual purchase date. 52 54 Should the fair market value per share of Common Stock on any purchase date be less than the fair market value per share on the start date of the two-year offering period, then that offering period will automatically terminate, and a new two-year offering period will begin on the next business day, with all participants in the terminated offering to be automatically transferred to the new offering period. In the event the Company is acquired by merger or asset sale, all outstanding purchase rights will automatically be exercised immediately prior to the effective date of such acquisition. The purchase price will be equal to 85% of the lower of (i) the fair market value per share of Common Stock on the participant's entry date into the offering period in which such acquisition occurs or (ii) the fair market value per share of Common Stock immediately prior to such acquisition. The Purchase Plan will terminate on the earlier of (i) the last business day in July 2007, (ii) the date on which all shares available for issuance under the Purchase Plan shall have been sold pursuant to purchase rights exercised thereunder or (iii) the date on which all purchase rights are exercised in connection with an acquisition of the Company by merger or asset sale. The Board may at any time alter, suspend or discontinue the Purchase Plan. However, certain amendments to the Purchase Plan may require stockholder approval. LIMITATIONS ON LIABILITY AND INDEMNIFICATION MATTERS The Company's Certificate of Incorporation eliminates, subject to certain exceptions, directors' personal liability to the Company or its stockholders for monetary damages for breaches of fiduciary duties. The Certificate of Incorporation does not, however, eliminate or limit the personal liability of a director for (i) any breach of the director's duty of loyalty to the Company or its stockholders, (ii) acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) unlawful payments of dividends or unlawful stock repurchases or redemptions as provided in Section 174 of the Delaware General Corporation Law or (iv) any transaction from which the director derived an improper personal benefit. The Company's Bylaws provide that the Company shall indemnify its directors and executive officers to the fullest extent permitted under the Delaware General Corporation Law and may indemnify its other officers, employees and other agents as set forth in the Delaware General Corporation Law. In addition, the Company has entered into indemnification agreements with its directors and officers. The indemnification agreements contain provisions that require the Company, among other things, to indemnify its directors and executive officers against certain liabilities (other than liabilities arising from intentional or knowing and culpable violations of law) that may arise by reason of their status or service as directors or executive officers of the Company or other entities to which they provide service at the request of the Company and to advance expenses they may incur as a result of any proceeding against them as to which they could be indemnified. The Company believes that these provisions and agreements are necessary to attract and retain qualified directors and officers. The Company has obtained an insurance policy covering directors and officers for claims that such directors and officers may otherwise be required to pay or for which the Company is required to indemnify them, subject to certain exclusions. 53 55 CERTAIN TRANSACTIONS Since its formation in May 1994, the Company has issued, in private placement transactions, shares of its Preferred Stock as follows (not adjusted for the one-for-four reverse stock split): 1,000,000 shares of Series A Preferred Stock at a price of $0.50 per share in August and November 1994; 2,226,667 shares of Series B Preferred Stock at a price of $0.75 per share in November 1994; 17,158,486 shares of Series C Preferred Stock at a price of $0.62 per share in August 1995, September 1995 and April 1996; 9,869,205 shares of Series D Preferred Stock at a price of $1.00 per share in November 1996; 232,500 shares of Series J Preferred Stock at a price of $0.10 per share in June 1997; 200,000 shares of Series Z Preferred Stock at a price of $0.50 in October 1994; and 337,777 shares of Series Z as consideration pursuant to an asset purchase agreement. The purchasers of Preferred Stock include, among others, the following directors, executive officers and holders of more than 5% of the Company's outstanding stock and their respective affiliates (all shares of Preferred Stock are convertible into Common Stock on a four-for-one basis):
PREFERRED STOCK EXECUTIVE OFFICERS, DIRECTORS -------------------------------------------------------- TOTAL AND 5% STOCKHOLDERS SERIES A SERIES B SERIES C SERIES D SERIES J CONSIDERATION - ---------------------------------------- -------- --------- --------- --------- --------- ------------- Pierre R. Lamond(1)..................... 400,000 1,333,334 2,169,801 948,837 -- $ 3,494,114 Philippe O. Chambon, M.D., Ph.D.(2)..... -- -- 4,838,710 1,168,198 -- 4,168,198 Vicente Anido, Jr., Ph.D................ -- -- -- 240,000 -- 240,000 Lee R. McCracken(3)..................... -- -- -- 35,000 -- 35,000 Steven L. Teig.......................... -- -- -- 20,000 122,500 32,250 Entities affiliated with Sequoia Capital(1)............................ 400,000 1,333,334 2,169,801 948,837 -- 3,494,114 Entities affiliated with Sprout Capital(2)............................ -- -- 4,838,710 1,168,198 -- 4,168,198 Entities affiliated with Sorrento Growth Partners(4)........................... -- -- 2,419,357 584,099 -- 2,084,100 Entities affiliated with Brinson Venture Capital Fund(5)....................... -- -- 3,225,807 600,000 -- 2,600,000
- --------------- (1) Includes 4,348,842 shares purchased by Sequoia Capital VI, 238,949 shares purchased by Sequoia Technology Partners VI, 128,043 shares purchased by Sequoia XXIV and 63,115 shares purchased by Sequoia 1995, each of which is affiliated with Sequoia Partners. Sequoia Partners is the general partner of Sequoia Capital VI. Sequoia Partners has eight general partners, who are also the general partners of Sequoia Technology Partners VI. Also includes 73,023 shares issuable to the entities affiliated with Sequoia Partners upon exercise of warrants at an exercise price of $0.62 per share. In addition, the entities affiliated with Sequoia Partners purchased 100,000 shares of Common Stock of the Company in November 1994 (see below). Mr. Lamond is a Director of the Company and a general partner of Sequoia Partners. Mr. Lamond disclaims beneficial ownership of such shares except to the extent of his pecuniary interest therein. (2) Includes 5,545,317 shares purchased by Sprout Capital VII, L.P. and 461,591 shares purchased by DLJ Capital Corporation. Dr. Chambon is a Director of the Company and a general partner of Sprout Capital VII, L.P., and DLJ Capital Corporation is the general partner of Sprout Capital VII, L.P. Dr. Chambon is a Divisional Vice President of DLJ Capital Corporation. Dr. Chambon disclaims beneficial ownership of such shares except to the extent of his pecuniary interest therein. (3) Held by The Rufus L. McCracken Trust, dated 6/21/91, of which Mr. McCracken is the sole trustee. (4) Includes 999,206 shares purchased by Sorrento Ventures II, L.P. and 2,004,250 shares purchased by Sorrento Growth Partners I, L.P. (5) Includes 536,452 shares purchased by the First National Bank of Chicago as Custodian to the Brinson Trust Company as Trustee of the Brinson MAP Venture Capital Fund III and 3,289,355 54 56 shares purchased by the First National Bank of Chicago as Custodian to the Brinson Venture Capital Fund III, L.P. Holders of Preferred Stock are entitled to certain registration rights with respect to the Common Stock issued or issuable upon conversion thereof. See "Description of Capital Stock -- Registration Rights." In November 1994, the Company sold the following number of shares of Common Stock to the respective entities at a price of $0.20 per share: 22,750 shares to Sequoia Capital VI; 1,250 shares to Sequoia Technology Partners VI; and 1,000 shares to Sequoia XXIV. In October 1997, the Company sold 1,000,000 shares of its Common Stock to Elan International Services Ltd. in conjunction with entering into a collaborative agreement. In February 1997, the Company made a loan in the amount of $96,000 to Dr. Anido, the President, Chief Executive Officer and a Director of the Company, which loan is secured by shares of Common Stock issuable to Dr. Anido upon the exercise of options. The loan is represented by a promissory note which is due and payable on the earlier of February 23, 2002 or the occurrence of certain events, such as the expiration of the 190-day period following completion of an initial public offering. The loan bears no interest. The entire amount of the loan is currently outstanding. In June 1997, the Company made a loan in the amount of $23,044 to Dr. Anido which is secured by shares of Common Stock issuable to Dr. Anido upon the exercise of options. The loan is represented by a promissory note which is due and payable in three annual installments and is due in full upon the third anniversary of the loan. The loan bears an interest rate of 6.14%. The entire amount of the loan is currently outstanding. In September 1995, the Company made a loan in the amount of $150,000 to Dr. Myers, the Vice President, Chief Scientific Officer, Chief Operating Officer and a Director of the Company, which loan is secured by shares of Common Stock. The loan is represented by a promissory note which is due and payable on the earlier of September 5, 2000 or the occurrence of certain events, such as the expiration of the 180-day period following completion of a public offering. The loan bears an interest equal to the applicable minimum Federal rate on the date of the loan. The entire amount of the loan is currently outstanding. In August 1996, the Company made a loan in the amount of $66,125 to Dr. Saunders for relocation in connection with employment, which is secured by a deed of trust. The loan is represented by a promissory note which is due and payable on the earlier of August 28, 1999 or the occurrence of certain events, such as the expiration of the 30-day period following the date Dr. Saunders ceases to be a full-time employee of the Company. The loan bears no interest. Dr. Saunders has made a principal payment of $22,000. For information regarding employment agreements with Named Executive Officers, see "Management -- Employment Agreements and Change of Control Arrangements." All of the Company's officers are employed by the Company at will. The Company has entered into indemnification agreements with each of its directors and executive officers. See "Management -- Limitations on Liability and Indemnification Matters." The Company expects that all future transactions between the Company and its officers, directors and principal stockholders and their affiliates will be approved in accordance with the Delaware General Corporation Law by a majority of the Board, as well as by a majority of the independent and disinterested directors of the Board, and will be on terms no less favorable to the Company than could be obtained from unaffiliated third parties. 55 57 PRINCIPAL STOCKHOLDERS The following table sets forth certain information regarding the beneficial ownership of the Common Stock as of October 15, 1997, and as adjusted to reflect the sale of the shares of the Common Stock offered hereby by the Company, by (i) all those known by the Company to be beneficial owners of more than 5% of its outstanding Common Stock, (ii) each director of the Company, (iii) each of the Named Executive Officers of the Company and (iv) all directors and executive officers of the Company as a group.
PERCENTAGE OF SHARES SHARES BENEFICIALLY OWNED(2) BENEFICIALLY ---------------------------------- NAME AND ADDRESS OF BENEFICIAL OWNER OWNED(1) PRIOR TO OFFERING AFTER OFFERING - -------------------------------------------------------- ------------ ----------------- -------------- Sprout Capital VII, L.P. and affiliated entities(3)..... 1,501,729 13.7% 11.4% 3000 Sand Hill Road Building 3, Suite 170 Menlo Park, CA 94025 Sequoia Capital VI and affiliated entities(4)........... 1,237,999 11.3% 9.4% 3000 Sand Hill Road Building 4, Suite 280 Menlo Park, CA 94025 Elan International Services Ltd......................... 1,000,000 9.1% 7.6% 102 St. James Court Flatts Smiths, FL04 Bermuda Brinson MAP Venture Capital Fund III and affiliated entities(5)........................................... 956,453 8.7% 7.2% 209 S. LaSalle Street Chicago, IL 60604-1295 Sorrento Growth Partners I, L.P. and affiliated entities(6)........................................... 750,867 6.8% 5.7% 4370 La Jolla Village Dr., Suite 1040 San Diego, CA 92122 Pierre R. Lamond(4)..................................... 1,237,999 11.3% 9.4% Vicente Anido, Jr., Ph.D.(7)............................ 582,417 5.3% 4.4% Peter L. Myers, Ph.D.(8)................................ 272,500 2.5% 2.0% Philippe O. Chambon, MD., Ph.D.(3)...................... 1,501,729 13.7% 11.4% Arthur Reidel(9)........................................ 20,000 * * William Scott, Ph.D.(10)................................ 20,000 * * Lee R. McCracken(11).................................... 93,750 * * John Saunders, Ph.D..................................... 83,825 * * Steven L. Teig(12)...................................... 246,875 2.2% 1.9% Lynn Caporale, Ph.D..................................... 38,062 * * One Sherman Square New York, NY 10023 All directors and executive officers as a group (9 persons)(13)............................ 4,067,145 36.2% 30.1%
- --------------- * Represents beneficial ownership of less than one percent of the outstanding shares of the Company's Common Stock. (1) Except as indicated in the footnotes to this table, the persons named in the table have sole voting and investment power with respect to all shares of Common Stock shown as beneficially owned by them. Share ownership in each case includes shares issuable upon exercise of certain 56 58 outstanding options as described in the footnotes below. The address for those individuals for which an address is not otherwise indicated is: 9050 Camino Santa Fe, San Diego, CA 92121. (2) Percentage of ownership is calculated pursuant to Commission Rule 13d-3(d)(1). (3) Includes 1,386,331 shares purchased by Sprout Capital VII, L.P. and 115,398 shares purchased by DLJ Capital Corporation. DLJ Capital Corporation is the managing general partner of Sprout Capital VII, L.P. Dr. Chambon is a Director of the Company, a general partner of Sprout Capital VII, L.P. and Divisional Vice President of DLJ Capital Corporation. Dr. Chambon disclaims beneficial ownership of such shares except to the extent of his pecuniary interest therein. (4) Includes 1,109,962 shares held by Sequoia Capital VI, 60,988 shares held by Sequoia Technology Partners VI, 33,012 shares held by Sequoia XXIV and 15,780 shares held by Sequoia 1995, each of which is affiliated with Sequoia Partners. Sequoia Partners is the general partner of Sequoia Capital VI. Sequoia Partners has eight general partners, who are also the general partners of Sequoia Technology Partners VI. Also includes 16,613, 913 and 731 shares held by Sequoia Capital VI, Sequoia Technology Partners VI and Sequoia XXIV, respectively, issuable upon exercise of warrants exercisable within 60 days of October 15, 1997. Mr. Lamond is a Director of the Company and a general partner of Sequoia Partners. Mr. Lamond disclaims beneficial ownership of such shares except to the extent of his pecuniary interest therein. (5) Includes 134,113 shares purchased by the First National Bank of Chicago as Custodian to the Brinson Trust Company as Trustee of the Brinson MAP Venture Capital Fund III and 822,340 shares purchased by The First National Bank of Chicago as Custodian to the Brinson Venture Capital Fund III, L.P. (6) Includes 249,803 shares held by Sorrento Ventures II, L.P. and 501,064 shares held by Sorrento Growth Partners I, L.P. (7) Includes 100,000 shares issuable upon exercise of options exercisable within 60 days of October 15, 1997. (8) Includes 50,000 shares issuable upon exercise of options exercisable within 60 days of October 15, 1997. (9) Includes 20,000 shares issuable upon exercise of options exercisable within 60 days of October 15, 1997. (10) Includes 20,000 shares issuable upon exercise of options exercisable within 60 days of October 15, 1997. (11) Includes 8,750 shares held by the Rufus L. McCracken Trust, dated 6/21/91, of which Mr. McCracken is the sole Trustee. (12) Includes 50,000 shares issuable upon exercise of options exercisable within 60 days of October 15, 1997. (13) Includes 270,757 shares issuable upon the exercise of options or warrants exercisable within 60 days of October 15, 1997. 57 59 DESCRIPTION OF CAPITAL STOCK Upon completion of this offering, the Company will be authorized to issue 40,000,000 shares of Common Stock, $0.001 par value per share, and 5,000,000 shares of undesignated Preferred Stock, $0.001 par value per share. COMMON STOCK As of September 30, 1997, there were 9,668,505 shares of Common Stock outstanding and held of record by approximately 125 stockholders. The holders of Common Stock are entitled to one vote for each share held of record on all matters submitted to a vote of the stockholders. Subject to preferences that may be applicable to any outstanding shares of Preferred Stock, holders of Common Stock are entitled to receive ratably such dividends as may be declared by the Board out of funds legally available. See "Dividend Policy." All outstanding shares of Common Stock are fully paid and nonassessable. PREFERRED STOCK After completion of this offering, the Board will have the authority, without further action by the stockholders, to issue up to 5,000,000 shares of Preferred Stock in one or more series and to fix the rights, priorities, preferences, qualifications, limitations and restrictions, including dividend rights, conversion rights, voting rights, terms of redemption, terms of sinking funds, liquidation preferences and the number of shares constituting any series or the designation of such series, which could decrease the amount of earnings and assets available for distribution to holders of Common Stock or adversely affect the rights and powers, including voting rights, of the holders of the Common Stock. The issuance of Preferred Stock could have the effect of delaying or preventing a change in control of the Company or make removal of management more difficult. Additionally, the issuance of Preferred Stock may have the effect of decreasing the market price of the Common Stock and may adversely affect the voting and other rights of the holders of Common Stock. There are currently no shares of Preferred Stock outstanding and the Company has no current plans to issue any of the Preferred Stock. WARRANTS In December 1994, in conjunction with an equipment lease financing, the Company issued a warrant to Comdisco, Inc. to purchase up to 20,914 shares of Common Stock at $2.00 per share, exercisable at any time and prior to the earlier of December 20, 2004 or five years following the Company's initial public offering. The warrant contains provisions for the adjustment of the exercise price and the aggregate number of shares issuable upon exercise of the warrant under certain circumstances, including stock dividends, stock splits, reorganizations, reclassifications or consolidations. The warrant provides that the warrant holder may exercise the warrant without payment of cash by surrendering the warrant and receiving shares of Common Stock equal to the value of the warrant surrendered. In June 1995, in connection with a product development collaboration, the Company issued a warrant to LJL BioSystems, Inc. to purchase 8,750 shares of Common Stock, exercisable at any time and prior to June 15, 2000, at $0.30 per share. The warrant contains provisions for the adjustment of the exercise price and the aggregate number of shares issuable upon exercise of the warrant under certain circumstances, including stock dividends, stock splits, reorganizations, reclassifications or consolidations. In August 1995, in connection with the Series C Preferred Stock private placement, the Company issued warrants to five investors to purchase an aggregate of 30,242 shares of Common Stock, exercisable at any time and prior to August 2000 at $2.48 per share. Each warrant contains provisions for the adjustment of the exercise price and the aggregate number of shares issuable upon exercise of the warrant under certain circumstances, including stock dividends, stock splits, reorganizations, reclassifications or consolidations. Each warrant provides that the warrant holder may exercise the 58 60 warrant without payment of cash by surrendering the warrant and receiving shares of Common Stock equal to the value of the warrant surrendered. In April 1996, in conjunction with equipment lease financings, the Company issued warrants to Comdisco, Inc. to purchase up to an aggregate of 35,383 shares of Common Stock at $2.48 per share, exercisable at any time and prior to the earlier of April 2003 or three years after the Company's initial public offering. The number of shares issuable pursuant to these warrants was dependent on the aggregate amount financed with Comdisco, and pursuant to these warrants, Comdisco has the right to purchase an aggregate of 26,647 shares of the Company. Each warrant contains provisions for the adjustment of the exercise price and the aggregate number of shares issuable upon exercise of each warrant under certain circumstances, including stock dividends, stock splits, reorganizations, reclassifications or consolidations. Each warrant provides that the warrant holder may exercise the warrant without payment of cash by surrendering the warrant and receiving shares of Common Stock equal to the value of the warrant surrendered. In May 1996, in conjunction with an equipment lease financing, the Company issued warrants to Silicon Valley Bank and MMC/GATX Partnership No. 1 to purchase up to 6,896 and 21,331 shares of Common Stock, respectively, at $2.48 per share, respectively, exercisable at any time and prior to the earlier of May 2006 or five years following the Company's initial public offering. Each warrant contains provisions for the adjustment of the exercise price and the aggregate number of shares issuable upon exercise of each warrant under certain circumstances, including stock dividends, stock splits, reorganizations, reclassifications or consolidations. Each warrant provides that the warrant holder may exercise the warrant without payment of cash by surrendering the warrant and receiving shares of Common Stock equal to the value of the warrant surrendered. In June 1996, in conjunction with equipment lease financings, the Company issued warrants to Comdisco, Inc. to purchase up to an aggregate of 24,698 shares of Common Stock at $2.48 per share, exercisable at any time and prior to the earlier of June 2003 or three years after the Company's initial public offering. Each warrant contains provisions for the adjustment of the exercise price and the aggregate number of shares issuable upon exercise of each warrant under certain circumstances, including stock dividends, stock splits, reorganizations, reclassifications or consolidations. Each warrant provides that the warrant holder may exercise the warrant without payment of cash by surrendering the warrant and receiving shares of Common Stock equal to the value of the warrant surrendered. REGISTRATION RIGHTS The holders of approximately 7,754,933 shares of Common Stock or their permitted transferees (the "Holders") are entitled to certain rights with respect to the registration of such shares under the Securities Act. Under the terms of agreements between the Company and such Holders, if the Company proposes to register any of its securities under the Securities Act for its own account, such Holders are entitled to notice of such registration and are entitled to include shares of such Common Stock therein, provided, among other conditions, that the underwriters of any such offering have the right to limit the number of shares included in such registration. In addition, Holders of at least 50% of approximately 7,754,933 shares of Common Stock with demand registration rights may require the Company to prepare and file a registration statement under the Securities Act with respect to the shares entitled to demand registration rights, and the Company is required to use its diligent best efforts to effect such registration, subject to certain conditions and limitations. The Company is not obligated to effect more than two of these stockholder-initiated registrations nor to effect such a registration within 180 days following an offering of the Company's securities, including the Offering made hereby. The Holders may also request the Company to register such shares on Form S-3 provided the shares registered have an aggregate market value of at least $500,000. The Company is not obligated to effect more than one of these registrations pursuant to Form S-3 in any 12-month period. Generally, the Company is required to bear the expense of all such registrations. The registration rights of each Holder expires at such time after the Offering as all shares held by such Holder can be 59 61 sold within any three-month period pursuant to Rule 144. All rights of the Holders to require registration of the resale of their shares in connection with this Offering have been waived. POSSIBLE ANTI-TAKEOVER EFFECT OF CERTAIN CHARTER PROVISIONS Restated Certificate of Incorporation and Restated Bylaws The Company's Restated Certificate of Incorporation authorizes the Board to establish one or more series of undesignated Preferred Stock, the terms of which can be determined by the Board at the time of issuance. See "-- Preferred Stock." The Restated Certificate of Incorporation also provides that all stockholder action must be effected at a duly called meeting of stockholders and not by a consent in writing. The Company's Restated Bylaws provide that the Company's Board will be classified into three classes of directors beginning at the next annual meeting of stockholders. See "Management -- Executive Officers, Key Employees and Directors." In addition, the Restated Bylaws do not permit stockholders of the Company to call a special meeting of stockholders; only the Company's Chief Executive Officer, President, Chairman of the Board or a majority of the Board are permitted to call a special meeting of stockholders. The Restated Bylaws also require that stockholders give advance notice to the Company's secretary of any nominations for director or other business to be brought by stockholders at any stockholders' meeting and require a supermajority vote of members of the Board and/or stockholders to amend certain Restated Bylaw provisions. These provisions of the Restated Certificate of Incorporation and the Restated Bylaws could discourage potential acquisition proposals and could delay or prevent a change in control of the Company. Such provisions may also have the effect of preventing changes in the management of the Company. Delaware Anti-Takeover Statute The Company is subject to Section 203 of the Delaware General Corporation Law ("Section 203") which, subject to certain exceptions, prohibits a Delaware corporation from engaging in any business combination with any interested stockholder (defined as any person or entity that is the beneficial owner of at least 15% of a corporation's voting stock) for a period of three years following the time that such stockholder became an interested stockholder, unless: (i) prior to such time, the board of directors of the corporation approved either the business combination or the transaction that resulted in the stockholder's becoming an interested stockholder; (ii) upon consummation of the transaction that resulted in the stockholder's becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced, excluding, for purposes of determining the number of shares outstanding, those shares owned (x) by persons who are directors and also officers and (y) by employee stock plans in which employee participants do not have the right to determine confidentially whether shares held subject to the plan will be tendered in a tender or exchange offer; or (iii) at or subsequent to such time, the business combination is approved by the Board and authorized at an annual or special meeting of stockholders, and not by written consent, by the affirmative vote of at least two-thirds of the outstanding voting stock that is not owned by the interested stockholder. Section 203 defines business combination to include:. (i) any merger or consolidation involving the corporation and the interested stockholder; (ii) any sale, lease, exchange, mortgage, transfer, pledge or other disposition involving the interested stockholder and 10% or more of the assets of the corporation; (iii) subject to certain exceptions, any transaction which results in the issuance or transfer by the corporation of any stock of the corporation to the interested stockholder; (iv) any transaction involving the corporation that has the effect of increasing the proportionate share of the stock of any class or series of the corporation beneficially owned by the interested stockholder; or (v) the receipt by the interested stockholder of the benefit of any loans, advances, guarantees, pledges or other financial benefits provided by or through the corporation. TRANSFER AGENT AND REGISTRAR The transfer agent and registrar for the Common Stock is American Stock Transfer and Trust Company. 60 62 SHARES ELIGIBLE FOR FUTURE SALE Based upon the number of shares outstanding as of September 30, 1997 (after giving effect to the issuance of an aggregate of 1,250,000 shares to collaborative partners in October 1997), upon completion of this offering, there will be 13,168,505 shares of Common Stock of the Company outstanding. There were also approximately 26,177 shares covered by vested options outstanding, which are not considered to be outstanding shares. Of the outstanding shares, 3,183,575 shares, including the 2,250,000 shares of Common Stock sold in this offering, will be immediately eligible for resale in the public market without restriction under the Securities Act, except that any shares purchased in this offering by affiliates of the Company ("Affiliates"), as that term is defined in Rule 144 under the Securities Act ("Rule 144"), may generally only be resold in compliance with applicable provisions of Rule 144. Beginning approximately 90 days after the date of this Prospectus, approximately 867,573 additional shares of Common Stock (including approximately 42,727 shares covered by options exercisable within the 90-day period following the date of this Prospectus) will become eligible for immediate resale in the public market, subject to compliance as to certain of such shares with applicable provisions of Rules 144 and 701. The Company, the executive officers and directors of the Company and certain security holders have agreed pursuant to lock-up agreements that they will not, without the prior written consent of BancAmerica Robertson Stephens, offer, sell or otherwise dispose of the shares of Common Stock beneficially owned by them for a period of 180 days from the date of this Prospectus. Each holder who signed a lock-up agreement has agreed, subject to certain limited exceptions, not to sell or otherwise dispose of any of the shares held by them as of the date of this Prospectus for a period of 180 days after the date of this Prospectus without the prior written consent of BancAmerica Robertson Stephens. At the end of such 180-day period, approximately 11,502,437 shares of Common Stock (including approximately 52,657 shares issuable upon exercise of vested options) will be eligible for immediate resale, subject to compliance with Rule 144 and Rule 701. The remainder of the approximately 1,666,068 shares of Common Stock outstanding or issuable upon exercise of options held by existing stockholders or option holders will become eligible for sale at various times over a period of less than two years and could be sold earlier if the holders exercise any available registration rights or upon vesting pursuant to the Company's standard four year vesting schedule. In general, under Rule 144 as recently amended, beginning approximately 90 days after the effective date of the Registration Statement of which this Prospectus is a part, a stockholder, including an Affiliate, who has beneficially owned his or her restricted securities (as that term is defined in Rule 144) for at least one year from the later of the date such securities were acquired from the Company or (if applicable) the date they were acquired from an Affiliate is entitled to sell, within any three-month period, a number of such shares that does not exceed the greater of 1% of the then outstanding shares of Common Stock (approximately 132,000 shares immediately after the offering) or the average weekly trading volume in the Common Stock during the four calendar weeks preceding the date on which notice of such sale was filed under Rule 144, provided certain requirements concerning availability of public information, manner of sale and notice of sale are satisfied. In addition, under Rule 144(k), if a period of at least two years has elapsed between the later of the date restricted securities were acquired from the Company or (if applicable) the date they were acquired from an Affiliate of the Company, a stockholder who is not an Affiliate of the Company at the time of sale and has not been an Affiliate of the Company for at least three months prior to the sale is entitled to sell the shares immediately without compliance with the foregoing requirements under Rule 144. Securities issued in reliance on Rule 701 (such as shares of Common Stock that may be acquired pursuant to the exercise of certain options granted prior to this offering) are also restricted securities and, beginning 90 days after the date of this Prospectus, may be sold by stockholders other than an Affiliate of the Company subject only to the manner of sale provisions of Rule 144 and by an Affiliate under Rule 144 without compliance with its one-year holding period requirement. 61 63 Prior to this offering, there has been no public market for the Common Stock. No prediction can be made as to the effect, if any, that market sales of shares or the availability of shares for sale will have on the market price of the Common Stock prevailing from time to time. The Company is unable to estimate the number of shares that may be sold in the public market pursuant to Rule 144, since this will depend on the market price of the Common Stock, the personal circumstances of the sellers and other factors. Nevertheless, sales of significant amounts of the Common Stock of the Company in the public market could adversely affect the market price of the Common Stock and could impair the Company's ability to raise capital through an offering of its equity securities. In addition, the Company intends to register on the effective date of this offering a total of 1,925,606 shares of Common Stock subject to outstanding options or reserved for issuance under the Company's 1997 Stock Incentive Plan or outstanding shares which are subject to repurchase by the Company plus 150,000 shares of Common Stock reserved for issuance under its 1997 Employee Stock Purchase Plan. Further, upon expiration of such lock-up agreements, holders of approximately 7,754,933 shares of Common Stock will be entitled to certain registration rights with respect to such shares. If such holders, by exercising their registration rights, cause a large number of shares to be registered and sold in the public market, such sales could have a material adverse effect on the market price of the Common Stock. 62 64 UNDERWRITING The Underwriters named below, acting through their representatives, BancAmerica Robertson Stephens, Donaldson, Lufkin & Jenrette Securities Corporation and UBS Securities LLC (the "Representatives"), have severally agreed with the Company, subject to the terms and conditions of the Underwriting Agreement, to purchase the numbers of shares of Common Stock set forth opposite their respective names below. The Underwriters are committed to purchase and pay for all such shares if any are purchased.
NUMBER OF UNDERWRITER SHARES ------------------------------------------------------------------ ---------- BancAmerica Robertson Stephens.................................... Donaldson, Lufkin & Jenrette Securities Corporation............... UBS Securities LLC................................................ --------- Total................................................... 2,250,000 =========
The Representatives have advised the Company that the Underwriters propose to offer shares of the Common Stock to the public at the initial public offering price set forth on the cover page of this Prospectus and to certain dealers at such price less a concession of not in excess of $ per share, of which $ may be reallowed to other dealers. After the initial public offering, the public offering price, concession and reallowance to dealers may be reduced by the Representatives. No such reduction shall change the amount of proceeds to be received by the Company as set forth on the cover page of this Prospectus. The Company has granted to the Underwriters an option, exercisable during the 30-day period after the date of this Prospectus, to purchase up to 337,500 additional shares of Common Stock, at the same price per share as will be paid for the 2,250,000 shares that the Underwriters have agreed to purchase. To the extent that the Underwriters exercise such option, each of the Underwriters will have a firm commitment to purchase approximately the same percentage of such additional shares that the number of shares of Common Stock to be purchased by it shown in the above table represents as a percentage of the 2,250,000 shares offered hereby. If purchased, such additional shares will be sold by the Underwriters on the same terms as those on which the 2,250,000 shares are being sold. The Underwriting Agreement contains covenants of indemnity among the Underwriters and the Company against certain civil liabilities, including liabilities under the Securities Act and liabilities arising from breaches of representations and warranties contained in the Underwriting Agreement. Each officer and director and certain holders of shares of the Company's Common Stock have agreed with the Representatives, for a period of 180 days after the date of this Prospectus (the "Lock-Up Period"), subject to certain exceptions, not to offer to sell, contract to sell, or otherwise sell, dispose of, loan, pledge or grant any rights with respect to any shares of Common Stock, any options or warrants to purchase any shares of Common Stock, or any securities convertible into or exchangeable for shares of Common Stock owned as of the date of this Prospectus or thereafter acquired directly by such holders or with respect to which they have or hereafter acquire the power of disposition, without the prior written consent of BancAmerica Robertson Stephens. However, BancAmerica Robertson Stephens may, in its sole discretion and at any time without notice, release all or any portion of the securities subject to lock-up agreements. There are no agreements between the Representatives and any of the Company's stockholders providing consent by the Representatives to the sale of shares prior to the expiration of the Lock-Up Period. The Company has agreed that during the Lock-Up Period, the Company will not, subject to certain exceptions, without the prior written consent of BancAmerica Robertson Stephens, (i) consent to the disposition of any shares held by stockholders prior to the expiration of the Lock-Up Period or (ii) issue, sell, contract to sell or otherwise dispose of, any shares of Common Stock, any options or warrants to purchase any shares of Common Stock or any securities convertible into, exercisable for or exchangeable for shares of Common Stock, other than the Company's sale of shares in this offering, the issuance of Common Stock upon the exercise of 63 65 outstanding options and warrants and the Company's issuance of options and stock under the existing stock option and stock purchase plans. See "Shares Eligible for Future Sale." The Underwriters do not intend to confirm sales to any accounts over which they exercise discretionary authority in excess of 5% of the number of shares of Common Stock offered hereby. Prior to this offering, there has been no public market for the Common Stock of the Company. Consequently, the initial public offering price for the Common Stock offered hereby will be determined through negotiations between the Company and the Representatives. Among the factors to be considered in such negotiations are prevailing market conditions, certain financial information of the Company, market valuations of other companies that the Company and the Representatives believe to be comparable to the Company, estimates of the business potential of the Company, the present state of the Company's development and other factors deemed relevant. Certain persons participating in this offering may engage in transactions, including syndicate covering transactions or the imposition of penalty bids, which may involve the purchase of Common Stock on the Nasdaq National Market or otherwise. Such transactions may stabilize or maintain the market price of the Common Stock at a level above that which might otherwise prevail in the open market and, if commenced, may be discontinued at any time. The Representatives have advised the Company that, pursuant to Regulation M under the Securities Act, certain persons participating in the offering may engage in transactions, including stabilizing bids, syndicate covering transactions or the imposition of penalty bids, which may have the effect of stabilizing or maintaining the market price of the Common Stock at a level above that which might otherwise prevail in the open market. A "stabilizing bid" is a bid for or the purchase of the Common Stock on behalf of the Underwriters for the purpose of fixing or maintaining the price of the Common Stock. A "syndicate covering transaction" is the bid for or the purchase of the Common Stock on behalf of the Underwriters to reduce a short position incurred by the Underwriters in connection with the offering. A "penalty bid" is an arrangement permitting the Representatives to reclaim the selling concession otherwise accruing to an Underwriter or syndicate member in connection with the offering if the Common Stock originally sold by such Underwriter or syndicate member is purchased by the Representatives in a syndicate covering transaction and has therefore not been effectively placed by such Underwriter or syndicate member. The Representatives have advised the Company that such transactions may be effected on the Nasdaq National Market or otherwise and, if commenced, may be discontinued at any time. The offering is being conducted in accordance with Rule 2720 ("Rule 2720") of the National Association of Securities Dealers, Inc. (the "NASD") which provides that, among other things, when an NASD member firm participates in the offering of equity securities of a company with whom such member has a "conflict of interest" (as defined in Rule 2720), the initial public offering price can be no higher than that recommended by a "qualified independent underwriter" (as defined in Rule 2720) (a "QIU"). BancAmerica Robertson Stephens is serving as the QIU in the offering and will recommend a price in compliance with the requirements of Rule 2720. BancAmerica Robertson Stephens has performed due diligence investigations and reviewed and participated in the preparation of this Prospectus and the Registration Statement of which this Prospectus forms a part. BancAmerica Robertson Stephens, in its capacity as QIU, will receive no additional compensation as such in connection with the offering. 64 66 LEGAL MATTERS The validity of the Common Stock offered hereby will be passed upon for the Company by Brobeck, Phleger & Harrison LLP, San Diego, California. Partners of such firm own 2,500 shares of the Company's Common Stock. Certain legal matters will be passed upon for the Underwriters by Cooley Godward LLP, San Diego, California. EXPERTS The financial statements of CombiChem for the period from May 23, 1994 (inception) to December 31, 1994, the years ended December 31, 1995 and 1996 and the nine months ended September 30, 1997 appearing in this Prospectus and the Registration Statement have been audited by Ernst & Young LLP, independent auditors, as set forth in their report thereon appearing elsewhere herein and are included in reliance upon such report given upon the authority of such firm as experts in accounting and auditing. ADDITIONAL INFORMATION The Company has filed with the Commission the Registration Statement under the Securities Act with respect to the Common Stock offered hereby. This Prospectus, which is part of the Registration Statement, does not contain all of the information set forth in the Registration Statement and the exhibits and schedules filed therewith. For further information with respect to the Company and the Common Stock offered hereby, reference is hereby made to such Registration Statement and to the exhibits and schedules filed therewith. Statements contained in this Prospectus regarding the contents of any contract or other document are not necessarily complete, and in each instance reference is made to the copy of such contract or document filed as an exhibit to the Registration Statement, each such statement being qualified in all respect by such reference. The Registration Statement, including the exhibits and schedules thereto, may be inspected without charge at the principal office of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the regional offices of the Commission located at Seven World Trade Center, Suite 1300, New York, New York 10048 and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661, and copies of all of any part thereof may be obtained at prescribed rates from the Commission's Public Reference Section at such addresses. Also, the Commission maintains a World Wide Web site on the Internet at http://www.sec.gov that contains reports, proxy and information statements and other information regarding registrants that file electronically with the Commission. Upon approval of the Common Stock for quotation on the Nasdaq National Market, such reports, proxy and information statements and other information also can be inspected at the office of Nasdaq Operations, 1735 K Street, N.W., Washington, D.C. 20006. 65 67 COMBICHEM, INC. INDEX TO FINANCIAL STATEMENTS Report of Ernst & Young LLP, Independent Auditors..................................... F-2 Balance Sheets at December 31, 1995 and 1996 and September 30, 1997................... F-3 Statements of Operations for the period from May 23, 1994 (inception) to December 31, 1994, the years ended December 31, 1995 and 1996 and the nine months ended September 30, 1996 (unaudited) and 1997....................................................... F-4 Statements of Redeemable Preferred Stock and Stockholders' Equity (Deficit) for the period from May 23, 1994 (inception) through September 30, 1997..................... F-5 Statements of Cash Flows for the period from May 23, 1994 (inception) to December 31, 1994, the years ended December 31, 1995 and 1996 and the nine months ended September 30, 1996 (unaudited) and 1997....................................................... F-6 Notes to Financial Statements......................................................... F-7
F-1 68 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS The Board of Directors and Stockholders CombiChem, Inc. We have audited the accompanying balance sheets of CombiChem, Inc. as of December 31, 1995 and 1996 and September 30, 1997, and the related statements of operations, redeemable preferred stock and stockholders' equity (deficit), and cash flows for the period from May 23, 1994 (inception) to December 31, 1994, the years ended December 31, 1995 and 1996 and the nine months ended September 30, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of CombiChem, Inc. at December 31, 1995 and 1996 and September 30, 1997, and the results of its operations and its cash flows for the period from May 23, 1994 (inception) to December 31, 1994, the years ended December 31, 1995 and 1996 and the nine months ended September 30, 1997, in conformity with generally accepted accounting principles. ERNST & YOUNG LLP San Diego, California October 15, 1997 F-2 69 COMBICHEM, INC. BALANCE SHEETS ASSETS
PRO FORMA STOCKHOLDERS' EQUITY AT DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30, --------------------------- ------------- ------------- 1995 1996 1997 1997 ----------- ------------ ------------- ------------- (unaudited) Current assets: Cash and cash equivalents.................... $ 3,135,588 $ 366,983 $ 4,286,957 Short-term investments....................... -- 12,166,132 4,114,700 Restricted cash.............................. -- 325,000 -- Prepaid expenses and other current assets.... 191,076 543,647 518,568 ----------- ------------ ------------ Total current assets................. 3,326,664 13,401,762 8,920,225 Property and equipment, net.................... 634,230 2,899,155 4,080,130 Deposits and other assets...................... 36,018 138,095 156,481 Notes receivable from employee/stockholders.... 152,866 218,991 206,301 ----------- ------------ ------------ Total assets......................... $ 4,149,778 $ 16,658,003 $ 13,363,137 =========== ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current liabilities: Accounts payable and accrued expenses........ $ 636,033 $ 1,243,139 $ 1,422,516 Deferred revenue............................. -- 2,130,000 1,187,501 Notes payable................................ 540,000 -- -- Current portion of obligations under capital leases.................................... 160,521 758,085 1,021,946 ----------- ------------ ------------ Total current liabilities............ 1,336,554 4,131,224 3,631,963 Deferred rent.................................. -- 30,409 76,023 Obligations under capital leases, less current portion...................................... 423,711 1,752,646 2,377,410 Commitments Redeemable convertible preferred stock, $.001 par value, 63,196,296 shares authorized; 3,868,063, 7,696,808 and 7,754,933 shares issued and outstanding at December 31, 1995 and 1996 and September 30, 1997, respectively (5,000,000 shares authorized, no shares issued and outstanding pro forma)............ 9,650,425 23,106,728 23,129,968 $ -- Stockholders' equity (deficit): Common stock, $.001 par value, 80,000,000 shares authorized; 660,165, 711,605, and 1,913,572 shares issued and outstanding at December 31, 1995 and 1996 and September 30, 1997, respectively, (40,000,000 shares authorized, 9,668,505 shares issued and outstanding pro forma).................... 660 712 1,913 9,668 Additional paid-in capital................... 119,057 135,340 2,349,325 25,471,538 Deferred compensation........................ -- -- (1,698,494) (1,698,494) Notes receivable from stockholders........... -- -- (336,562) (336,562) Accumulated deficit.......................... (7,380,629) (12,499,056) (16,168,409) (16,168,409) ----------- ------------ ------------ ------------ Total stockholders' equity (deficit).......................... (7,260,912) (12,363,004) (15,852,227) 7,277,741 ----------- ------------ ------------ ------------ Total liabilities and stockholders' equity (deficit)................... $ 4,149,778 $ 16,658,003 $ 13,363,137 $ 13,363,137 =========== ============ ============ ============
See accompanying notes. F-3 70 COMBICHEM, INC. STATEMENTS OF OPERATIONS
PERIOD FROM MAY 23, 1994 NINE MONTHS ENDED (INCEPTION) TO YEAR ENDED DECEMBER 31, SEPTEMBER 30, DECEMBER 31 ------------------------- ------------------------- 1994 1995 1996 1996 1997 -------------- ----------- ----------- ----------- ----------- (unaudited) Revenue: Revenue under collaborative agreements................ $ -- $ -- $ 2,920,000 $ 1,022,500 $ 4,598,999 Grant revenue................ -- 50,440 47,400 47,400 -- --------- ----------- ----------- ----------- ----------- Total revenue........ -- 50,440 2,967,400 1,069,900 4,598,999 Operating expenses: Research and development: Collaborative............. -- -- 420,000 262,500 2,630,775 Proprietary............... 413,305 4,763,043 4,820,253 3,547,828 3,354,590 --------- ----------- ----------- ----------- ----------- 413,305 4,763,043 5,240,253 3,810,328 5,985,365 General and administrative... 297,313 2,000,652 2,845,074 1,708,842 2,355,942 --------- ----------- ----------- ----------- ----------- Total operating expenses........... 710,618 6,763,695 8,085,327 5,519,170 8,341,307 Loss from operations........... (710,618) (6,713,255) (5,117,927) (4,449,270) (3,742,308) Interest income................ 4,547 94,737 144,639 86,153 437,594 Interest expense............... -- (56,040) (145,139) (97,570) (164,639) Foreign tax expense............ -- -- -- -- (200,000) --------- ----------- ----------- ----------- ----------- Net loss....................... $ (706,071) $(6,674,558) $(5,118,427) $(4,460,687) $(3,669,353) ========= =========== =========== =========== =========== Pro forma net loss per share... $ (0.66) $ (0.45) =========== =========== Shares used in calculating pro forma net loss per share..... 7,797,050 8,191,596 =========== ===========
See accompanying notes. F-4 71 COMBICHEM, INC. STATEMENTS OF REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)
STOCKHOLDERS' EQUITY (DEFICIT) REDEEMABLE CONVERTIBLE ---------------------------------------------- PREFERRED STOCK COMMON STOCK ADDITIONAL ----------------------- ------------------ PAID-IN DEFERRED SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION --------- ----------- --------- ------ ---------- ------------ Issuance of common stock...................... -- $ -- 433,125 $ 433 $ 23,567 $ -- Sale of Series A preferred stock.............. 250,000 500,000 -- -- -- -- Issuance of Series Z preferred stock for technology.................................. 50,000 100,000 -- -- -- -- Sale of Series B preferred stock.............. 550,000 1,650,000 -- -- -- -- Net loss...................................... -- -- -- -- -- -- --------- ----------- --------- ------ ---------- ---------- Balance at December 31, 1994.................... 850,000 2,250,000 433,125 433 23,567 -- Sale of common stock.......................... -- -- 194,750 195 58,230 -- Issuance of common stock for technology....... -- -- 100,000 100 39,900 -- Sale of Series B preferred stock.............. 6,669 20,000 -- -- -- -- Sale of Series C preferred stock.............. 2,808,702 6,877,749 -- -- -- -- Conversion of notes payable and interest into Series C preferred stock.................... 202,692 502,676 -- -- -- -- Repurchase and cancellation of common stock... -- -- (67,710) (68) (2,640) -- Net loss...................................... -- -- -- -- -- -- --------- ----------- --------- ------ ---------- ---------- Balance at December 31, 1995.................... 3,868,063 9,650,425 660,165 660 119,057 -- Sale of common stock.......................... -- -- 74,000 74 22,126 -- Sale of Series C preferred stock.............. 1,278,240 3,142,045 -- -- -- -- Sale of Series D preferred stock.............. 2,467,310 9,853,345 -- -- -- -- Conversion of notes payable and interest into Series Z preferred stock.................... 83,195 460,913 -- -- -- -- Repurchase and cancellation of common stock... -- -- (22,560) (22) (5,843) -- Net loss...................................... -- -- -- -- -- -- --------- ----------- --------- ------ ---------- ---------- Balance at December 31, 1996.................... 7,696,808 23,106,728 711,605 712 135,340 -- Sale of common stock.......................... -- -- 32,500 32 19,718 -- Sale of Series J preferred stock.............. 58,125 23,240 Deferred compensation related to stock options..................................... -- -- -- -- 1,773,972 (1,773,972) Amortization of deferred compensation......... -- -- -- -- -- 75,478 Sale of common stock for notes receivable..... -- -- 1,169,467 1,169 420,295 -- Repayment of notes receivable................. -- -- -- -- -- -- Net loss...................................... -- -- -- -- -- -- --------- ----------- --------- ------ ---------- ---------- Balance at September 30, 1997................... 7,754,933 $23,129,968 1,913,572 $1,913 $2,349,325 $(1,698,494) ========= =========== ========= ====== ========== ========== NOTES RECEIVABLE TOTAL FROM ACCUMULATED STOCKHOLDERS' STOCKHOLDERS DEFICIT EQUITY (DEFICIT) ------------ ------------ ---------------- Issuance of common stock...................... $ -- $ -- $ 24,000 Sale of Series A preferred stock.............. -- -- -- Issuance of Series Z preferred stock for technology.................................. -- -- -- Sale of Series B preferred stock.............. -- -- -- Net loss...................................... -- (706,071) (706,071) --------- ------------ ------------ Balance at December 31, 1994.................... -- (706,071) (682,071) Sale of common stock.......................... -- -- 58,425 Issuance of common stock for technology....... -- -- 40,000 Sale of Series B preferred stock.............. -- -- -- Sale of Series C preferred stock.............. -- -- -- Conversion of notes payable and interest into Series C preferred stock.................... -- -- -- Repurchase and cancellation of common stock... -- -- (2,708) Net loss...................................... -- (6,674,558) (6,674,558) --------- ------------ ------------ Balance at December 31, 1995.................... -- (7,380,629) (7,260,912) Sale of common stock.......................... -- -- 22,200 Sale of Series C preferred stock.............. -- -- -- Sale of Series D preferred stock.............. -- -- -- Conversion of notes payable and interest into Series Z preferred stock.................... -- -- -- Repurchase and cancellation of common stock... -- -- (5,865) Net loss...................................... -- (5,118,427) (5,118,427) --------- ------------ ------------ Balance at December 31, 1996.................... -- (12,499,056) (12,363,004) Sale of common stock.......................... -- -- 19,750 Sale of Series J preferred stock.............. Deferred compensation related to stock options..................................... -- -- -- Amortization of deferred compensation......... -- -- 75,478 Sale of common stock for notes receivable..... (421,464) -- -- Repayment of notes receivable................. 84,902 -- 84,902 Net loss...................................... -- (3,669,353) (3,669,353) --------- ------------ ------------ Balance at September 30, 1997................... $ (336,562) $(16,168,409) $(15,852,227) ========= ============ ============
See accompanying notes. F-5 72 COMBICHEM, INC. STATEMENTS OF CASH FLOWS
PERIOD FROM MAY 23, 1994 NINE MONTHS ENDED (INCEPTION) TO YEAR ENDED DECEMBER 31, SEPTEMBER 30, DECEMBER 31, ------------------------- ------------------------- 1994 1995 1996 1996 1997 -------------- ----------- ----------- ----------- ----------- (unaudited) Cash flows from operating activities: Net loss......................................... $ (706,071) $(6,674,558) $(5,118,427) $(4,460,687) $(3,669,353) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization.................... 4,946 106,763 310,765 211,094 559,823 Deferred rent.................................... -- -- 30,409 -- 45,614 Deferred revenue................................. -- -- 2,130,000 212,500 (942,499) In-process research and development acquired for convertible notes payable and accrued interest....................................... -- 591,358 -- -- -- In-process research and development acquired for note payable................................... 35,000 -- -- -- -- Amortization of deferred compensation............ -- -- -- -- 75,478 Stock issued for technology...................... 100,000 40,000 -- -- -- Interest payable converted to preferred stock.... -- 2,676 20,913 20,913 -- Change in operating assets and liabilities: Prepaid expenses and other current assets...... (26,081) (135,440) (352,571) (333,809) 25,079 Accounts payable and accrued expenses.......... 192,938 443,095 607,106 (50,909) 179,377 ---------- ----------- ----------- ----------- ----------- Net cash used in operating activities..... (399,268) (5,626,106) (2,371,805) (4,400,898) (3,726,481) Cash flows from investing activities: Purchases of short-term investments.............. -- -- (12,166,132) -- (3,601,045) Maturities of short-term investments............. -- -- -- -- 11,652,477 Purchases of property and equipment.............. (107,061) -- (238,315) (237,590) (235,203) Deposits and other assets........................ (45,941) 9,923 (102,077) 7,444 (18,386) Notes receivable from employees.................. -- (179,555) (66,125) (79,165) 12,690 ---------- ----------- ----------- ----------- ----------- Net cash provided by (used in) investing activities.............................. (153,002) (169,632) (12,572,649) (309,311) 7,810,533 Cash flows from financing activities: Principal payments under capital lease obligations.................................... -- (108,870) (410,876) (176,528) (616,970) Issuance of redeemable convertible preferred stock, net of issuance costs................... 2,150,000 6,897,749 12,995,390 3,151,156 11,063 Issuance of common stock, net of repurchased shares......................................... 24,000 55,717 16,335 (2,195) 116,829 Payments on note payable......................... -- (35,000) (100,000) (100,000) -- Restricted cash given as collateral for letter of credit......................................... -- -- (325,000) (325,000) 325,000 Proceeds from convertible notes payable.......... -- 750,000 -- -- -- Repayments of convertible notes payable.......... -- (250,000) -- -- -- ---------- ----------- ----------- ----------- ----------- Net cash provided by (used in) financing activities.............................. 2,174,000 7,309,596 12,175,849 2,547,433 (164,078) ---------- ----------- ----------- ----------- ----------- Net increase (decrease) in cash and cash equivalents...................................... 1,621,730 1,513,858 (2,768,605) (2,162,776) 3,919,974 Cash and cash equivalents at beginning of period... -- 1,621,730 3,135,588 3,135,588 366,983 ---------- ----------- ----------- ----------- ----------- Cash and cash equivalents at end of period......... $1,621,730 $ 3,135,588 $ 366,983 $ 972,812 $ 4,286,957 ========== =========== =========== =========== =========== Supplemental disclosures of cash flow information Interest paid...................................... $ -- $ 56,040 $ 124,226 $ 64,636 $ 169,329 ========== =========== =========== =========== =========== Supplemental schedule of noncash investing and financing activities Capital lease obligations entered into for equipment........................................ $ -- $ 693,102 $ 2,337,375 $ 1,168,828 $ 1,523,627 ========== =========== =========== =========== =========== Conversion of convertible notes payable and interest payable to redeemable convertible preferred stock.................................. $ -- $ 502,676 $ 440,000 $ 440,000 $ -- ========== =========== =========== =========== ===========
See accompanying notes. F-6 73 COMBICHEM, INC. NOTES TO FINANCIAL STATEMENTS (INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 IS UNAUDITED) 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization and Business CombiChem, Inc. is a computational drug discovery company that is applying its proprietary design technology and rapid synthesis capabilities to accelerate the discovery process for new drugs. The Company believes its approach offers pharmaceutical and biotechnology companies the opportunity to conduct their drug discovery efforts in a more productive and cost-effective manner. Using its Discovery Engine(TM) process, the Company focuses on the generation, evolution and optimization of potential new lead candidates for its collaborative partners, who will then develop, manufacture, market and sell any resulting drugs. CombiChem believes that its process is widely applicable to a variety of disease targets and therapeutic indications. In addition, the Company intends to use its approach on internal programs to discover new lead candidates and then to outlicense them to third parties, retaining a larger economic interest in such candidates. Cash, Cash Equivalents and Short-term Investments Cash and cash equivalents consist of cash and highly liquid investments with maturities of three months or less when purchased. The Company generally invests its excess cash in U.S. government securities. Short-term investments are recorded at amortized cost plus accrued interest which approximates market value. The Company applies Statement of Financial Accounting Standards No. 115, Accounting for Certain Investments in Debt and Equity Securities (SFAS No. 115) to its investments. Under SFAS No. 115, the Company classifies its short-term investments as "Available-for-Sale" and records such assets at estimated fair value in the balance sheet, with unrealized gains and losses, if any, reported in stockholders' equity. As of December 31, 1996 and September 30, 1997, the cost of cash equivalents and short-term investments approximated estimated fair value. Concentration of Credit Risk The Company invests its excess cash in debt instruments of financial institutions and corporations with strong credit ratings. The Company has established guidelines relative to diversification and maturities that maintain safety and liquidity. The Company historically has not experienced any material losses on its cash equivalents or short-term investments. Property and Equipment Property and equipment are carried at cost. Depreciation of equipment is computed using the straight-line method over the estimated useful lives of the assets, generally three to seven years. Leasehold improvements are amortized over the shorter of the estimated useful lives of the assets or the remaining term of the lease. Amortization of equipment under capital leases is reported with depreciation of property and equipment. Impairment of Long-Lived Assets In 1996, the Company adopted Statement of Financial Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of (SFAS No. 121), which requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amount. SFAS No. 121 also addresses the accounting for F-7 74 COMBICHEM, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 IS UNAUDITED) 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) long-lived assets that are expected to be disposed of. The adoption had no impact on the Company's financial statements. New Accounting Standards In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, Earnings Per Share (SFAS No. 128), which supersedes APB Opinion No. 15. SFAS No. 128 replaces the presentation of primary earnings per share (EPS) with "Basic EPS" which reflects only the weighted-average common shares outstanding for the period. Companies with complex capital structures, including the Company, will also be required to present "Diluted EPS" that reflect the potential dilution, if any, of common stock equivalents such as employee stock options and warrants to purchase common stock. SFAS No. 128 is effective for financial statements issued for periods ending after December 15, 1997. Revenues under Collaborative Agreements and Research and Development Costs The Company currently generates revenue primarily through its collaborative agreements, which provide for the analysis of data, design of informative compound libraries and synthesis of compounds utilizing the Company's proprietary technology. Contract research revenue is recognized at the time that research activities are performed under the terms of the research contracts. Contract payments are generally received in advance of the performance of the related research activities. Such payments received in excess of amounts earned are recorded as deferred contract research revenue. Technology access fees are recognized as revenue when earned. These fees are nonrefundable, and the Company has no future performance obligations related to such fees. Research and development costs are expensed as incurred. Costs of services under the Company's collaborative agreements generally approximate the research revenue received under such agreements. Technology access fees and milestone payments do not have associated cost of services. Net Loss Per Share Historical net loss per share is computed using the weighted average number of common shares outstanding during the periods presented. Common equivalent shares resulting from stock options, warrants to purchase redeemable convertible preferred stock and redeemable convertible preferred stock are excluded from the computation as their effect would be antidilutive, except that the Securities and Exchange Commission requires common and common share equivalents issued during the twelve-month period prior to the initial filing of a proposed public offering to be included in the calculation as if they were outstanding for all periods presented (using the treasury stock method and the assumed initial public offering price). Historical net loss per share information is as follows:
PERIOD FROM MAY 23, 1994 (INCEPTION) TO YEAR ENDED DECEMBER 31, NINE MONTHS ENDED DECEMBER 31, SEPTEMBER 30, -------------- ------------------------ ----------------------- 1994 1995 1996 1996 1997 -------------- ---------- ---------- ---------- ---------- Net loss per share......................... $ (0.29) $ (2.33) $ (1.73) $ (1.51) $ (1.24) ========= ========= ========= ========= ========= Shares used in computing net loss per share.................................... 2,406,794 2,869,475 2,962,113 2,962,113 2,962,113 ========= ========= ========= ========= =========
F-8 75 COMBICHEM, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 IS UNAUDITED) 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Pro Forma Net Loss Per Share Pro forma net loss per share has been computed as described above and also gives effect to the conversion of the redeemable convertible preferred stock, which will convert to common stock upon completion of the Company's initial public offering, using the as if-converted method from the original date of issuance. Stock-Based Compensation As permitted by Statement of Financial Accounting Standards No. 123, the Company has elected to follow Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25), and related Interpretations in accounting for its employee stock options. Under APB 25, when the exercise price of the Company's employee stock options is not less than the market price of the underlying stock on the date of grant, no compensation expense is recognized. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Interim Financial Information The accompanying financial statements for the nine months ended September 30, 1996 are unaudited but include all adjustments (consisting only of normal recurring adjustments) which the Company considers necessary for a fair statement of the operating results and cash flows for such period. Pro Forma Stockholders' Equity In September 1997, the Board of Directors authorized management of the Company to file a Registration Statement with the Securities and Exchange Commission for the Company to sell shares of its common stock in an initial public offering. If the initial public offering contemplated by this Prospectus is consummated under the terms presently anticipated, all outstanding shares of redeemable convertible preferred stock at September 30, 1997 will automatically convert into 7,754,933 common shares. The pro forma stockholders' equity does not reflect the equity investments made in conjunction with the collaboration agreements described in Note 10. 2. BALANCE SHEET INFORMATION Investments There were no realized gains or losses on the sale of securities for either the period ended September 30, 1997 or the year ended December 31, 1996. F-9 76 COMBICHEM, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 IS UNAUDITED) 2. BALANCE SHEET INFORMATION (CONTINUED) The amortized cost of debt securities at September 30, 1997, by contractual maturity, are shown below. The amortized costs approximates fair value. Actual maturities may differ from contractual maturities because the issuers of the securities may have the right to prepay obligations with out prepayment penalties.
COST ---------- Available for sale: Due in one year or less........................................ $3,610,293 Due in one to five years....................................... 504,407 ---------- $4,114,700 ==========
Property and Equipment Property and equipment consist of the following:
DECEMBER 31, SEPTEMBER 30, ---------------------- ------------- 1995 1996 1997 --------- ---------- ------------- Laboratory and computer equipment......... $ 670,948 $1,759,990 $ 3,055,611 Leasehold improvements.................... -- 1,373,465 1,689,685 Office furniture, fixtures and equipment............................... 74,991 188,174 317,131 --------- ----------- ----------- 745,939 3,321,629 5,062,427 Less accumulated depreciation and amortization............................ (111,709) (422,474) (982,297) --------- ----------- ----------- $ 634,230 $2,899,155 $ 4,080,130 ========= =========== ===========
3. NOTES PAYABLE During 1996, the Company repaid a $100,000 non-interest bearing note with cash and converted two notes payable totaling $440,000 and the related accrued interest into 83,195 shares of Series Z convertible preferred stock. 4. COMMITMENTS Leases The Company leases its facilities under an operating lease agreement that expires in May 2006. Rent expense was approximately $86,000, $383,000, $232,000 and $395,000 for the years ended December 31, 1995 and 1996, and the nine months ended September 30, 1996 and 1997, respectively. Lease payments are subject to future increases based upon the Consumer Price Index. The Company leases certain equipment under capital lease obligations. Cost and accumulated amortization of equipment under capital leases were $349,000 and $104,000 at December 31, 1995, $3,054,000 and $349,000 at December 31, 1996 and $4,578,000 and $845,000 at September 30, 1997, respectively. F-10 77 COMBICHEM, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 IS UNAUDITED) 4. COMMITMENTS Annual future minimum obligations for operating and capital leases as of September 30, 1997 are as follows:
OPERATING CAPITAL LEASES LEASES ---------- ----------- Three months ending December 31: 1997.................................. $ 113,524 $ 358,431 Year ending December 31: 1998.................................. 458,365 1,433,722 1999.................................. 421,201 1,194,044 2000.................................. 437,638 641,923 2001.................................. 449,966 296,634 2002.................................. 346,207 -- Thereafter....................................... 1,862,189 -- ---------- ----------- Total minimum lease payments....................... $4,089,090 3,924,754 ========== Less amount representing interest.................. (525,398) ----------- Present value of obligations under capital leases........................................... 3,399,356 Less current portion............................... (1,021,946) ----------- Long-term obligations under capital leases......... $ 2,377,410 ===========
Consulting Agreements The Company has entered into various consulting agreements with members of its Scientific Advisory Board and others for aggregate minimum annual fees of approximately $118,000. The agreements are cancelable by either party with limited notice. During the years ended December 31, 1995 and 1996 and the nine months ended September 30, 1996 and 1997, the Company expensed approximately $27,000, $43,000, $35,000 and $42,000, respectively, for fees and expense reimbursements paid to these consultants. 5. REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT) Changes in Capitalization In September 1997, the Company's Board of Directors approved the reincorporation of the Company in Delaware which was accomplished through a merger of the existing California corporation into a new Delaware corporation. The ratio of exchange was one share of the California corporation to one share of the Delaware corporation. Subsequent to the reincorporation, the Company effected a one-for-four reverse stock split of the Common Stock. The number of authorized shares of the new Delaware corporation are 40,000,000 shares of Common Stock and 5,000,000 shares of Preferred Stock. All share and per share amounts and stock option data have been restated to retroactively give effect to the reincorporation, the reverse stock split and the related change in shares outstanding. F-11 78 COMBICHEM, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 IS UNAUDITED) 5. REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED) Redeemable Convertible Preferred Stock A summary of redeemable convertible preferred stock issued and outstanding is as follows:
LIQUIDATION SHARES PREFERENCE ---------- ----------- Series A.............................................. 250,000 $ 500,000 Series B.............................................. 556,669 1,670,000 Series C.............................................. 4,289,634 10,638,261 Series D.............................................. 2,467,310 9,869,205 --------- ----------- 7,563,613 $22,677,466 ========= ===========
In 1994, the Company issued Series A and B redeemable convertible preferred stock for cash at $2.00 and $3.00 per share, respectively. In October 1994, the Company acquired certain intellectual property rights in exchange for 50,000 shares of the Company's Series Z convertible preferred stock valued at $2.00 per share. During 1996, the Company converted two outstanding notes and related accrued interest totalling $460,913 into 83,195 shares of Series Z convertible preferred stock. In August 1995, the Company received approximately $6.9 million in net proceeds from the issuance of 2,808,702 shares of Series C redeemable convertible preferred stock at $2.48 per share. Pursuant to the terms of certain promissory notes, the Company converted $502,676 of principal and accrued interest into 202,692 shares of Series C redeemable convertible preferred stock at $2.48 per share. In April 1996, upon the achievement of certain milestones, the Company received an additional $3.1 million in net proceeds from the issuance of an additional 1,278,240 shares of Series C redeemable convertible preferred stock at $2.48 per share. In November 1996, the Company received approximately $9.9 million in net proceeds from the issuance of 2,467,310 shares of Series D redeemable convertible preferred stock at $4.00 per share. At the option of the holder, the shares of Series A, B, C and D redeemable convertible preferred stock and Series Z convertible preferred stock are convertible at any time into common stock on a one-for-four basis, subject to certain anti-dilution adjustments. The preferred shares automatically convert into common stock upon the earlier of: 1) the closing of an underwritten public offering of common stock at not less than $16.00 per common share and an aggregate offering price of not less than $12 million or 2) the written election of at least 70% of the preferred stockholders. The preferred stockholders have voting rights equal to the common shares they would own upon conversion. The Company has reserved 7,563,613 shares of common stock for issuance upon conversion of the Series A, B, C and D redeemable convertible preferred stock. The Company's Amended and Restated Articles of Incorporation provide for redemption of Series A, B, C and D redeemable convertible preferred stock at any time after December 31, 1998, at the request of at least 70% of the holders of such series. The redemption price is equal to the original issue price plus any declared but unpaid dividends. The preferred shareholders are entitled to noncumulative annual dividends of $0.16, $0.24, $0.20, $0.32 and $0.16 per share of Series A, B, C and D redeemable convertible preferred stock and Series Z convertible preferred stock, respectively, if and when such dividends are declared by the Board of Directors. No dividends have been declared to date. In connection with employment agreements, certain employees received options to purchase the Company's Series J convertible preferred stock exercisable upon the achievement of certain mile- F-12 79 COMBICHEM, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 IS UNAUDITED) 5. REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED) stones. Some of the milestones were met during 1997, and in connection therewith, the Company issued 58,125 shares of Series J convertible preferred stock to the employees. 1995 Stock Option/Stock Issuance Plan In 1995, the Board of Directors adopted the 1995 Stock Option/Stock Issuance Plan (the Plan), under which 2,355,069 shares of common stock are reserved for issuance upon exercise of options or stock issuances by the Company to certain employees of and consultants to the Company. Under the stock option program, options may be designated as incentive stock options or nonstatutory stock options. Options under the Plan have a term of up to ten years from the date of grant. The exercise price of incentive stock options must equal at least the fair market value on the date of grant, and the exercise price of nonstatutory stock options may be no less than 85% of the fair market value on the date of grant. Options generally vest over four to five years. The Company recorded $1,613,550 of deferred compensation for options granted during the nine months ended September 30, 1997, representing the difference between the option exercise price and the deemed fair value for financial statement presentation purposes. The Company is amortizing the deferred compensation over the vesting period of the options. The Company recorded $75,476 of compensation expense during the nine months ended September 30, 1997. The Company recorded $160,422 of additional deferred compensation representing the difference between the option exercise price and the deemed fair value for financial statement presentation purposes for stock options granted in October 1997. Under the stock issuance program, selected employees and consultants may be issued shares of common stock at no less than 85% of the fair market value on the date of grant. The vesting schedule for each share issuance is determined by the Board of Directors as Plan Administrator. The Company has the option to repurchase, at the original issue price, the unvested shares in the event of termination of service. At September 30, 1997, 901,658 shares were subject to repurchase by the Company. Information with respect to the Plan is as follows:
WEIGHTED AVERAGE SHARES EXERCISE PRICE ---------- -------------- Granted........................................... 562,980 $ 0.30 Exercised......................................... -- -- Cancelled......................................... -- -- ---------- Balance at December 31, 1995........................ 562,980 0.30 Granted........................................... 531,479 0.30 Exercised......................................... (72,589) 0.30 Cancelled......................................... (12,536) 0.30 ---------- Balance at December 31, 1996........................ 1,009,334 0.30 Granted........................................... 621,813 2.15 Exercised......................................... (1,159,377) 0.36 Cancelled......................................... (30,074) 0.33 ---------- ----- Balance at September 30, 1997....................... 441,696 $ 2.81 ========== =====
F-13 80 COMBICHEM, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 IS UNAUDITED) 5. REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED) At September 30, 1997, options to purchase 441,696 shares were exercisable and 681,407 shares remain available for grant. Following is a further breakdown of the options outstanding as of September 30, 1997:
WEIGHTED AVERAGE WEIGHTED WEIGHTED EXERCISE RANGE OF AVERAGE AVERAGE PRICE OF EXERCISE OPTIONS REMAINING EXERCISE OPTIONS OPTIONS PRICES OUTSTANDING LIFE IN YEARS PRICE EXERCISABLE EXERCISABLE - ------------- ----------- ------------- -------- ----------- ----------- $0.30 - $0.40 107,195 8.54 $ 0.33 107,195 $0.33 $1.00 29,375 9.81 1.00 29,375 1.00 $2.00 - $3.00 28,879 8.45 2.43 28,879 2.43 $4.00 276,247 4.90 4.00 276,247 4.00 ------- ---- ----- ------- ----- 441,696 6.37 $ 2.81 441,696 $2.81 ======= ==== ===== ======= =====
Adjusted pro forma information regarding net loss and net loss per share is required by SFAS 123, and has been determined as if the Company had accounted for its employee stock options and stock purchase plan under the fair value method of SFAS 123. The fair value for these options was estimated at the date of grant using the "Minimum Value" method for option pricing with the following assumptions for 1995, 1996 and 1997: risk-free interest rates of 6.50%; dividend yield of 0%; and a weighted-average expected life of the options of five years. For purposes of adjusted pro forma disclosures, the estimated fair value of the options are amortized to expense over the vesting period. The Company's adjusted pro forma information is as follows:
NINE MONTHS YEAR ENDED DECEMBER 31, ENDED --------------------------- SEPTEMBER 30, 1995 1996 1997 ----------- ----------- ------------- Adjusted pro forma net loss............ $(6,678,067) $(5,137,253) $(3,692,783) Adjusted pro forma net loss per share................................ $ (2.33) $ (0.66) $ (0.45)
The weighted-average fair value of options granted during 1995 and 1996 was $.08 and during 1997 was $0.56. The pro forma effect on net loss for 1995, 1996 and 1997 is not likely to be representative of the pro forma effects on reported net income or loss in future years because these amounts reflect less than four year of vesting. Warrants At September 30, 1997, the Company has issued warrants to purchase an aggregate of 130,728 shares of redeemable convertible preferred stock at prices ranging from $2.00 to $2.48 per share. The warrants are exercisable in whole or in part through various dates. The Company also has issued warrants to purchase 8,750 shares of common stock at $0.30 per share. The warrants are exercisable in whole or in part at any time at or prior to June 2000. F-14 81 COMBICHEM, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 IS UNAUDITED) 6. NOTES RECEIVABLE FROM EMPLOYEE/STOCKHOLDERS During 1995, the Company lent $150,000 to an employee and stockholder for the purchase of a residence in connection with the individual's employment agreement. The note bears interest at approximately 5.8% and matures on the earlier of (i) September 5, 2000, (ii) 30 days following cessation of employment, (iii) 180 days following the date at which the Company completes a successful initial public offering of shares of its common stock, or (iv) the date on which more than 50% of the Company's outstanding shares of common stock are acquired by a single purchaser or a group of purchasers. The note is secured by 87,500 shares of the Company's common stock owned by the employee at the date of the note, plus any capital stock thereafter acquired. In August 1996, the Company lent $66,125 to an employee for relocation in connection with employment, which is secured by a deed of trust. The loan is represented by a promissory note which is due and payable on the earlier of August 28, 1999 or the occurrence of certain events, such as expiration of the 30-day period following the date the individual ceases to be a full time employee of the Company. The loan bears no interest, and principal payments of $22,000 have been made to date. During 1997, the Company instituted an employee loan program whereby the proceeds of the loan are used to purchase common stock from the exercise of the employee's stock options. Under the program, the employee pays 25% of the total exercise price, and the Company loans the employee the remaining 75% of the purchase price. The loans bear interest at an adjustable rate that is the minimum rate allowable by the Internal Revenue Service, subject to quarterly adjustments by the Company. The loans will be repaid through 3 equal payments on the first three anniversary dates of the loan. The Company has $337,000 in loans outstanding at September 30, 1997. 7. COLLABORATIVE RESEARCH AND DEVELOPMENT AGREEMENTS Teijin Limited In March 1996, the Company entered into a collaborative agreement with Teijin Limited ("Teijin") providing for a one-year program on a G-protein coupled receptor target. In March 1997, the Company and Teijin amended their agreement to extend the collaboration for an additional year. While the initial focus of the collaboration was lead optimization, the effort was redirected to lead evolution during the course of the research. Under the agreement, Teijin made an upfront payment to CombiChem and agreed to provide research funding and milestone payments upon the achievement of certain preclinical and clinical milestones. Teijin also committed internal resources to the discovery effort. Teijin will make royalty payments on products resulting from the collaboration. CombiChem retains the rights to the compounds arising under this collaboration in North and South America; Teijin has rights to these compounds in Asia and Europe with a right of first negotiation to acquire CombiChem's rights. Under the original agreement, Teijin has rights to expand or extend the program for up to two successive one-year terms. Either party may terminate the agreement in the event of a material breach remaining uncured for 60 days. As of September 30, 1997, Teijin had paid the Company an aggregate of $1.5 million. Roche Bioscience, a division of Syntex (U.S.A.) Inc. In October 1996, the Company entered into a collaborative agreement with Roche Bioscience providing for a broad two-year program to perform research against three initial targets, including a protein-protein interaction, an enzyme and a receptor, with an option to add additional targets. Roche Bioscience can elect one of the approaches -- lead generation, lead evolution or lead optimization -- for each research program against each collaboration target. A program may be initiated at any time F-15 82 COMBICHEM, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 IS UNAUDITED) 7. COLLABORATIVE RESEARCH AND DEVELOPMENT AGREEMENTS (CONTINUED) during the term of the collaboration, thereby extending the term to allow for completion of each program. Under the agreement, Roche Bioscience made an upfront payment to CombiChem and agreed to provide research funding and to make milestone payments upon the achievement of certain preclinical and clinical milestones. Roche Bioscience will make royalty payments on worldwide sales of products resulting from the collaboration. Upon completion of the first year of the agreement, Roche Bioscience may terminate the collaboration at any time upon six months' prior written notice. Certain special conditions could also allow Roche Bioscience to terminate with 45 days' prior written notice. As of September 30, 1997, Roche Bioscience had paid the Company an aggregate of $4.0 million. Sumitomo Pharmaceuticals Co., Ltd. In August 1997, the Company entered into a collaborative agreement with Sumitomo Pharmaceuticals, Co., Ltd. (Sumitomo) providing for a two-year lead evolution program on a target that is believed to play a fundamental role in osteoarthritis and rheumatoid arthritis. Under the agreement, Sumitomo made an upfront payment and agreed to provide research funding and milestone payments upon the achievement of certain preclinical and clinical milestones. Sumitomo will make royalty payments on worldwide sales of products resulting from the collaboration. Sumitomo may extend the research period for up to four successive six-month periods upon mutual agreement. The agreement may be terminated by either party 90 days following an uncured material breach. As of September 30, 1997, Sumitomo had paid the Company an aggregate of $3.3 million. 8. BENEFIT PLAN Company sponsors a benefit plan which covers employees who meet certain age and service requirements. Employees may contribute a portion of their earnings each plan year subject to certain Internal Revenue Service limitations. The Company made no contributions to the Plan for the years ended December 31, 1994, 1995 and 1996, and the nine months ended September 30, 1996 and 1997, respectively. 9. INCOME TAXES At December 31, 1996, the Company had federal and California income tax net operating loss carryforwards of approximately $11,694,000 and $11,652,000, respectively. The federal and California tax loss carryforwards will begin to expire in 2009 and 2002, respectively, unless previously utilized. The Company also has federal and California research tax credit carryforwards of approximately $104,000 and $144,000, respectively, which will begin to expire in 2010 unless previously utilized. Pursuant to Sections 382 and 383 of the Internal Revenue Code, annual use of the Company's net operating loss and credit carryforwards may be limited because of cumulative changes in ownership of more than 50% which occurred during 1995. However, the Company does not believe such limitation will have a material effect upon the utilization of these carryforwards. Significant components of the Company's deferred tax assets are shown below. A valuation allowance, which was increased by $2,253,000 in 1996, has been recognized to offset the deferred tax assets as of December 31, 1995 and 1996 as realization of such assets is uncertain. F-16 83 COMBICHEM, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 IS UNAUDITED) 9. INCOME TAXES (CONTINUED)
DECEMBER 31, --------------------------- 1995 1996 ----------- ----------- Deferred tax assets: Net operating loss carryforwards................ $ 2,651,000 $ 4,792,000 Research and development credits................ 179,000 198,000 Other........................................... 29,000 122,000 ----------- ----------- Total deferred tax assets......................... 2,859,000 5,112,000 Valuation allowance for deferred tax assets....... (2,859,000) (5,112,000) ----------- ----------- Net deferred tax assets........................... $ -- $ -- =========== ===========
The Company recorded foreign tax expense of $200,000 in the nine months ended September 30, 1997 for taxes payable to a Japanese tax authority resulting from the revenue recognized on the Sumitomo collaboration. 10. SUBSEQUENT EVENTS Collaborative Agreements ImClone Systems Incorporated In October 1997, the Company entered into a collaborative agreement with ImClone Systems Incorporated (ImClone) providing for a two-year program to identify and characterize novel small molecule inhibitors to multiple targets for development in oncology. The agreement provides for ImClone's access to the Company's Universal Informer Library and Virtual Library under the supervision of the research management committee composed of representatives of the Company and ImClone. Under the terms of the agreement, ImClone will provide the Company with research support payments, milestone payments upon the achievement of certain program objectives and royalties on worldwide product sales of therapeutic products that may arise out of the collaboration. The agreement may be terminated by either party 90 days following an uncured material breach or by ImClone within 30 days prior to the one-year anniversary by providing 90 days' prior written notice. In connection with the collaborative agreement, ImClone purchased 250,000 shares of Common Stock for $2.0 million, and made an advance payment for contract research of $500,000. Athena Neurosciences, Inc., a wholly owned subsidiary of Elan Corporation, plc In October 1997, the Company entered into a collaborative agreement with Athena Neurosciences, Inc., a wholly owned subsidiary of Elan Corporation, plc. (Elan/Athena) providing for a three-year program to discover novel therapeutic compounds for treatment of central nervous system conditions. The agreement provides for Elan/Athena's access to the Universal Informer Library as deemed necessary by the research management committee composed of Elan/Athena and CombiChem representatives. Under the agreement, Elan/Athena will provide the Company with upfront and research support payments, as well as milestone payments upon the achievement of pre-determined objectives. Elan/Athena will also make royalty payments on worldwide sales of products resulting from the collaboration. The agreement may be terminated by either party 90 days following an uncured material breach or by Elan/Athena after the one-year anniversary upon 90 days prior written notice. In connection with the collaborative agreement, Elan International Services Ltd., an affiliate of Elan/Athena, purchased 1,000,000 shares of Common Stock for $8.0 million and made a cash payment of $1.333 million for an up-front technology license and access fee. F-17 84 COMBICHEM, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 IS UNAUDITED) 10. SUBSEQUENT EVENTS (CONTINUED) 1997 Stock Incentive Plan The Company's 1997 Stock Incentive Plan (the 1997 Plan) is intended to serve as the successor equity incentive program to the Company's 1995 Stock Option/Stock Issuance Plan, as amended (the "Predecessor Plan"). The 1997 Plan was adopted by the Board and the stockholders on October 7, 1997, and a total of 1,080,603 shares of Common Stock have been authorized for issuance under the 1997 Plan. Under the stock option program, options may be designated as incentive stock options or nonstatutory stock options. Options under the plan have a term of up to ten years from the date of grant. The exercise price of options shall be fixed by the plan administrator, but shall not be less than 100% of the fair market value per share of common stock on the option grant dates. 1997 Employee Stock Purchase Plan In October 1997, the Company adopted the 1997 Employee Stock Purchase Plan (the "Purchase Plan") and reserved 150,000 shares for issuance, thereunder. The Purchase Plan permits eligible employees of the Company to purchase shares of Common Stock, at semi-annual intervals, through periodic payroll deductions. Payroll deductions may not exceed 10% of the participant's base salary, and the purchase price will not be less than 85% of the lower of the fair market value of the stock at either the beginning or the end of the semi-annual intervals. F-18 85 [DEPICTIONS OF ACTIVE SITES AND COMPOUNDS] Using only the structures of compounds screened against a known HIV protease target, CombiChem's Discovery Engine(TM) has generated a hypothesis (a computational model), as depicted here, which illustrates potentially important characteristics of the HIV protease active site. X-ray crystallography has determined the actual three-dimensional structure of the active site of the HIV protease target, as shown here. CombiChem's computer-generated hypothesis has accurately identified the important characteristics of the HIV protease active site in detail as demonstrated by the lock-and-key structural fit depicted in this overlay. 86 [LOGO] 87 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The following table sets forth all expenses, other than underwriting discounts and commissions, payable by the Registrant in connection with the sale of the Common Stock being registered. All the amounts shown are estimates, except for the registration fee, the Nasdaq National Market filing fee and the NASD fee. Registration fee.................................................. $ 10,194 Nasdaq National Market fee........................................ 50,000 NASD fee.......................................................... 3,864 Blue Sky fees and expenses........................................ 10,000 Printing and engraving expenses................................... 180,000 Legal fees and expenses........................................... 250,000 Accounting fees and expenses...................................... 125,000 Transfer Agent and Registrar fees................................. 5,000 Miscellaneous expenses............................................ 65,942 -------- TOTAL................................................... $700,000 ========
ITEM 14. INDEMNIFICATION OF OFFICERS AND DIRECTORS. Section 145 of the Delaware General Corporation Law permits indemnification of officers and directors of the Company under certain conditions and subject to certain limitations. Section 145 of the Delaware General Corporation Law also provides that a corporation has the power to purchase and maintain insurance on behalf of its officers and directors against any liability asserted against such person and incurred by him or her in such capacity, or arising out of his or her status as such, whether or not the corporation would have the power to indemnify him or her against such liability under the provisions of Section 145 of the Delaware General Corporation Law. Article VII, Section 1 of the Restated Bylaws of the Company provides that the Company shall indemnify its directors and executive officers to the fullest extent not prohibited by the Delaware General Corporation Law. The rights to indemnity thereunder continue as to a person who has ceased to be a director, officer, employee or agent and inure to the benefit of the heirs, executors and administrators of the person. In addition, expenses incurred by a director or executive officer in defending any civil, criminal, administrative or investigative action, suit or proceeding by reason of the fact that he or she is or was a director or officer of the Company (or was serving at the Company's request as a director or officer of another corporation) shall be paid by the Company in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of such director or officer to repay such amount if it shall ultimately be determined that he or she is not entitled to be indemnified by the Company as authorized by the relevant section of the Delaware General Corporation Law. As permitted by Section 102(b)(7) of the Delaware General Corporation Law, Article V, Section (A) of the Company's Restated Certificate of Incorporation provides that a director of the Company shall not be personally liable for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the Company or its stockholders, (ii) for acts or omissions not in good faith or acts or omissions that involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the Delaware General Corporation Law or (iv) for any transaction from which the director derived any improper personal benefit. The Company has entered into indemnification agreements with each of its directors and executive officers. Generally, the indemnification agreements attempt to provide the maximum II-1 88 protection permitted by Delaware law as it may be amended from time to time. Moreover, the indemnification agreements provide for certain additional indemnification. Under such additional indemnification provisions, however, an individual will not receive indemnification for judgments, settlements or expenses if he or she is found liable to the Company (except to the extent the court determines he or she is fairly and reasonably entitled to indemnity for expenses), for settlements not approved by the Company or for settlements and expenses if the settlement is not approved by the court. The indemnification agreements provide for the Company to advance to the individual any and all reasonable expenses (including legal fees and expenses) incurred in investigating or defending any such action, suit or proceeding. In order to receive an advance of expenses, the individual must submit to the Company copies of invoices presented to him or her for such expenses. Also, the individual must repay such advances upon a final judicial decision that he or she is not entitled to indemnification. The Company has purchased directors' and officers' liability insurance. The Company intends to enter into additional indemnification agreements with each of its directors and executive officers to effectuate these indemnity provisions. The Underwriting Agreement (Exhibit 1.1 hereto) contains provisions by which the Underwriters have agreed to indemnify the Company, each person, if any, who controls the Company within the meaning of Section 15 of the Securities Act, each director of the Company, and each officer of the Company who signs this Registration Statement, with respect to information furnished in writing by or on behalf of the Underwriters for use in the Registration Statement. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES. Since September 30, 1994, the Company has sold and issued the following unregistered securities (which numbers have not been adjusted for the one-for-four reverse stock split effected in October 1997). (1) From September 30, 1994 to September 30, 1997, the Company issued an aggregate of 6,694,638 options to purchase Common Stock with exercise prices ranging from $0.062 to $0.25 per share under the Predecessor Plan and an aggregate of 4,927,858 shares of Common Stock were issued through the exercise of options granted under the Predecessor Plan for an aggregate exercise price of $405,241. For additional information concerning these transactions, reference is made to the information contained under the caption "Management -- Benefit Plans" in the form of the Prospectus included herein. (2) On October 12, 1995, the Company issued 200,000 shares of Series Z Preferred Stock to Sydney Brenner for an aggregate consideration of $100,000. (3) On October 18, 1994, the Company issued 500,000 shares of Common Stock to Robert A. Curtis, former Chief Executive Officer of the Company, at $.01 per share, of which 229,160 were vested as of the date of the termination of his employment in October 1995. (4) On October 18, 1994, the Company issued an aggregate of 2,500 shares of Common Stock to one investor for an aggregate consideration of $25. (5) On November 1, 1994, the Company issued an aggregate of 400,000 shares of Series A Preferred Stock to certain funds advised by Sequoia Capital for an aggregate consideration of $200,000. (6) From November 23, 1994 through January 15, 1995, the Company issued an aggregate of 2,226,667 shares of Series B Preferred Stock to certain funds advised by Sequoia Capital, Forward Ventures II, L.P. and an individual investor for an aggregate consideration of $1,670,000. (7) On November 1, 1994, the Company issued an aggregate of 100,000 shares of Common Stock to certain venture funds advised by Sequoia Capital for an aggregate consideration of $5,000. (8) On November 8, 1994, the Company issued an aggregate of 175,000 shares of Common Stock to one investor for an aggregate consideration of $8,750. II-2 89 (9) On November 18, 1994, the Company issued an aggregate of 10,000 shares of Common Stock to one investor for an aggregate consideration of $500. (10) In December 1994, the Company issued a warrant to purchase 83,655 shares of Series Z Preferred Stock to Comdisco, Inc. at an exercise price of $0.50 per share in connection with an equipment lease financing. (11) From January 1, 1995 through April 24, 1995, the Company issued an aggregate of 130,000 shares of Common Stock to eight investors for an aggregate consideration of $9,750. (12) On March 20, 1995, the Company issued an aggregate of 400,000 shares of Common Stock to The Scripps Research Institute for an aggregate consideration of $40,000. (13) From April 25, 1995 through July 30, 1995, the Company issued an aggregate of 650,000 shares of Common Stock to three investors for an aggregate consideration of $48,750. (14) On June 15, 1995, the Company issued a warrant to purchase 35,000 shares of Common Stock to LJL BioSystems, Inc. at an exercise price of $0.075. (15) In connection with an asset purchase agreement dated August 4, 1995, the Company issued an aggregate of 332,777 shares of Series Z Preferred Stock to Molecular Simulations, Inc. from June 1996 through July 1996 in consideration for certain technology rights. (16) On August 5, 1995, the Company issued 6,000 shares of Common Stock to Ken Rubenstein at $.075 per share in connection with a consulting agreement. (17) On August 17, 1995, August 25, 1995 and September 11, 1995, the Company issued an aggregate of 12,045,576 shares of Series C Preferred Stock to various venture capital funds and certain other investors for an aggregate consideration of $7,468,257. (18) On August 17, 1995, the Company issued warrants to purchase 120,968 shares of Series C Preferred Stock at an exercise price of $0.62 per share. (19) On September 7, 1995, the Company issued 8,065 shares of Series C Preferred Stock to one investor for an aggregate consideration of $5,000. (20) In December 1995, the Company issued an aggregate of 232,500 shares of Series J Preferred Stock to three employees upon the exercise of options to purchase Series J Preferred Stock at an exercise price of $0.10. (21) On April 9, 1996, the Company issued an aggregate of 5,104,845 shares of Series C Preferred Stock to various venture capital funds and certain other investors for an aggregate consideration of $3,165,003. (22) In April 1996 and June 1996, the Company issued warrants to purchase an aggregate of 240,321 shares of Series C Preferred Stock to Comdisco, Inc. at an exercise price of $0.62 per share in connection with an equipment lease financing. (23) In May 1996, the Company issued warrants to purchase an aggregate of 112,903 shares of Series Z Preferred Stock to Silicon Valley Bank and MMC/GATX Partnership No. 1 at an exercise price of $0.62 per share in connection with an equipment lease financing. (24) On November 15, 1996, the Company issued an aggregate of 9,869,205 shares of Series D Preferred Stock to various venture capital funds and certain other investors for an aggregate consideration of $9,869,205. (25) On January 23, 1997, the Company issued an aggregate of 5,000 shares of Common Stock to one investor at $0.10 per share pursuant to a Restricted Stock Issuance Agreement for an aggregate consideration of $500. II-3 90 (26) On June 11, 1997, the Company issued an aggregate of 40,000 shares of Common Stock to one investor at $0.075 per share for an aggregate consideration of $4,000. (27) On July 1, 1997, the Company issued an aggregate of 45,000 shares of Common Stock to the University of Pittsburgh for technology rights valued at $11,250. (28) On October 7, 1997, the Company issued an aggregate of 50,000 shares of Common Stock to two investors for past services rendered to the Company. (29) On October 10, 1997, the Company issued an aggregate of 1,000,000 shares of Common Stock to ImClone Systems Incorporated in conjunction with a collaboration agreement. (30) On October 15, 1997, the Company issued an aggregate of 4,000,000 shares of Common Stock to Elan International Services Ltd., in conjunction with a collaboration agreement. The sales and issuances of securities in the above transactions were deemed to be exempt under the Act by virtue of Section 4(2) thereof and/or Regulation D and Rule 701 promulgated thereunder as transactions not involving any public offering. The purchasers in each case represented their intention to acquire the securities for investment only and not with a view to the distribution thereof. Appropriate legends were affixed to the stock certificates issued in such transactions. Similar representations of investment intent were obtained and similar legends imposed in connection with any subsequent transfers of any such securities. The Company believes that all recipients had adequate access, through employment or other relationships, to information about the Company to make an informed investment decision. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. (a) Exhibits.
EXHIBIT NUMBER DESCRIPTION - -------- -------------------------------------------------------------------------------- 1.1++ Form of Underwriting Agreement. 3.1++ Certificate of Incorporation of the Company, as amended. 3.2++ Form of Amended and Restated Certificate of Incorporation of the Company to become effective immediately prior to the Offering. 3.3++ Bylaws of the Company, as amended. 3.4++ Form of Restated Bylaws of the Company to be effective upon completion of the Offering. 4.1++ Form of Certificate for Common Stock. 5.1++ Opinion of Brobeck, Phleger & Harrison LLP with respect to the Common Stock being registered. 10.1++ Preferred Stock Purchase Agreement for Series A Preferred Stock between the Company and Forward Ventures II, L.P., dated August 26, 1994. 10.2++ Preferred Stock Purchase Agreement for Shares of Series Z Preferred Stock between the Company and Sydney Brenner, dated October 14, 1994. 10.3++ Stock Purchase Agreement for Shares of Series A Preferred Stock and Common Stock between the Company and the investors listed on Exhibit A thereto, dated November 1, 1994. 10.4++ Stock Purchase Agreement Series B Preferred Stock between the Company and the purchasers listed on Exhibit A thereto, dated November 29, 1994. 10.5++ Series C Preferred Stock Purchase Agreement between the Company and the purchasers listed on Schedule A thereto, dated August 17, 1995. 10.6++ Stock Purchase Agreement for Series C Preferred Stock between the Company and Todd Schmidt dated September 7, 1995.
II-4 91
EXHIBIT NUMBER DESCRIPTION - -------- -------------------------------------------------------------------------------- 10.7*++ Supplemental Purchase Agreement between the Company and the purchasers on Schedule A thereto, dated April 8, 1996. 10.8*++ Series D Preferred Stock Purchase Agreement between the Company and the purchasers listed on Schedule A thereto, dated November 15, 1996. 10.9++ Amended and Restated Investors' Rights Agreement between the Company and the stockholders listed on Schedule A thereto, dated November 15, 1996. 10.10++ Series J Preferred Stock Purchase Agreement between the Company and Steve Teig, dated June 10, 1997. ' 10.11++ Series J Preferred Stock Purchase Agreement between the Company and Jonathan Greene, dated June 11, 1997. 10.12++ Series J Preferred Stock Purchase Agreement between the Company and Andrew Smellie, dated June 11, 1997. 10.13++ Warrant Agreement to Purchase Shares of the Series Z Preferred Stock, as amended between the Company and Comdisco, Inc., dated December 20, 1994. 10.14++ Common Stock Purchase Warrant between the Company and LJL BioSystems, Inc., dated June 15, 1995. 10.15++ Form of Warrant to Purchase Shares of Series C Preferred Stock between the Company and the purchasers listed on Schedule A thereto, dated August 17, 1995. 10.16++ Form of Warrant Agreement to Purchase Shares of Series C Preferred Stock of the Company, between the Company and Comdisco, Inc. in the amounts listed on Schedule A thereto. 10.17++ Form of Warrant to Purchase Shares of Series Z Preferred Stock between the Company and the purchasers listed on Schedule A thereto, dated May 20, 1996. 10.18++ Master Lease Agreement with the Company and Comdisco Inc., dated November 6, 1994, Schedule VL-1, dated November 11, 1994, Schedule VL-2 dated April 15, 1996 and Schedule VL-3 dated April 15, 1996. 10.19* Collaboration Agreement between the Company and Teijin Limited, dated March 29, 1996, as amended. 10.20* Collaborative Research and License Agreement between the Company and Roche Bioscience, dated October 25, 1996. 10.21* Research and Technology Development Agreement between the Company and Sumitomo Pharmaceuticals Co., Ltd., dated August 18, 1997. 10.22* Collaborative Research and License Agreement between the Company and ImClone Systems Incorporated, dated October 10, 1997. 10.23* Collaborative Research and License Agreement between the Company and Athena Neurosciences, Inc., dated October 15, 1997. 10.24++ Full Recourse Secured Promissory Note and Stock Pledge Agreement between the Company and Peter Myers, dated September 5, 1995. 10.25++ Promissory Note Secured by Deed of Trust between the Company and John Saunders, dated August 30, 1996. 10.26++ Promissory Note between the Company and Vicente Anido, Jr., dated February 24, 1997. 10.27++ Pledge Agreement between the Company and Vicente Anido, Jr., dated February 24, 1997. 10.28++ Promissory Note Secured by Stock Pledge Agreement between the Company and Vicente Anido, Jr., dated June 6, 1997 10.29++ Stock Pledge Agreement between the Company and Vicente Anido, Jr., dated June 6, 1997. 10.30++ Employment Agreement with Peter Myers, dated March 1, 1995.
II-5 92
EXHIBIT NUMBER DESCRIPTION - -------- -------------------------------------------------------------------------------- 10.31++ Employment Agreement with John Saunders, dated January 1, 1996. 10.32++ Employment Agreement with Steven Teig, dated July 1, 1995. 10.33++ Employment Agreement with Vicente Anido, Jr., dated March 14, 1996. 10.34++ Employment Agreement with Lee R. McCracken, dated May 13, 1996. 10.35++ Employment Letter with Karin Eastham, dated March 14, 1997. 10.36++ Standard Industrial/Commercial Single-Tenant Lease between the Company and Campson corporation, dated December 22, 1995. 10.37++ Standard Office Lease-Full Service between the Company and Nearon Enterprises, LLC, dated October 24, 1996. 10.38++ Lease Agreement between Harbor Investment Partners and the Company, dated October 6, 1997. 10.39++ 1995 Stock Option/Stock Issuance Plan. 10.40++ 1995 Stock Option/Stock Issuance Plan Form of Notice of Grant. 10.41++ 1995 Stock Option/Stock Issuance Plan Form of Stock Option Agreement. 10.42++ 1995 Stock Option/Stock Issuance Plan Form of Stock Purchase Agreement. 10.43++ 1995 Stock Option/Stock Issuance Plan Form of Restricted Stock Issuance Agreement. 10.44++ 1997 Stock Incentive Plan. 10.45++ 1997 Employee Stock Purchase Plan. 10.46++ Form of Indemnification Agreement between the Company and each of its directors. 10.47++ Form of Indemnification Agreement between the Company and each of its officers. 10.48++ 1997 Stock Incentive Plan Form of Notice of Grant of Stock Option 10.49++ 1997 Stock Incentive Plan Form of Stock Option Agreement 10.50++ 1997 Stock Incentive Plan Form of Addendum to Stock Option Agreement (Involuntary Termination Following Corporate Transaction/Change in Control) 10.51++ 1997 Stock Incentive Plan Form of Addendum to Stock Option Agreement (Limited Stock Appreciation Right) 10.52++ 1997 Stock Incentive Plan Form of Stock Issuance Agreement 10.53++ 1997 Stock Incentive Plan Form of Addendum to Stock Issuance Agreement (Involuntary Termination Following Corporate Transaction/Change in Control) 10.54++ 1997 Stock Incentive Plan Form of Notice of Grant of Automatic Stock Option (Initial Grant) 10.55++ 1997 Stock Incentive Plan Form of Notice of Grant of Automatic Stock Option (Annual Grant) 10.56++ 1997 Stock Incentive Plan Form of Automatic Stock Option Agreement 10.57++ 1997 Employee Stock Purchase Plan Form of Stock Purchase Agreement 11.1++ Statement of Computation of pro forma net loss per share. 23.1++ Consent of Brobeck, Phleger & Harrison LLP (contained in their opinion filed as Exhibit 5.1). 23.2 Consent of Ernst & Young LLP, Independent Auditors. 24.1++ Power of Attorney (see page II-8). 27.1++ Financial Data Schedule.
- --------------- ++ Previously filed with the Commission. II-6 93 * Certain confidential portions of this Exhibit were omitted by means of redacting a portion of the text (the "Mark"). This Exhibit has been filed separately with the Secretary of the Commission without the Mark pursuant to the Company's Application Requesting Confidential Treatment under Rule 406 under the Securities Act. (b) Financial Statement Schedules included separately in the Registration Statement. All other schedules are omitted because they are not required, are not applicable or the information is included in the Financial Statements or Notes thereto. ITEM 17. UNDERTAKINGS. The undersigned hereby undertakes to provide to the Underwriters at the closing specified in the Underwriting Agreement certificates in such denominations and registered in such names as required by the Underwriters to permit prompt delivery to each purchaser. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Company pursuant to the provisions described in Item 14, or otherwise, the Company has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Company of expenses incurred or paid by a director, officer or controlling person of the Company in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Company will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. The undersigned registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-7 94 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Company has duly caused this Amendment No. 3 to this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of San Diego, County of San Diego, State of California, on the 11th day of December, 1997. COMBICHEM, INC. By: /s/ VICENTE ANIDO, JR. ------------------------------------ Vicente Anido, Jr. President and Chief Executive Officer Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed below by the following persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE - ----------------------------------- ----------------------------------- ------------------ /s/ VICENTE ANIDO, JR. President, Chief Executive Officer December 11, 1997 - ----------------------------------- and Director (Principal Executive (Vicente Anido, Jr.) Officer) Vice President of December 11, 1997 Finance and Administration and Chief /s/ KARIN EASTHAM Financial Officer (Principal - ----------------------------------- Financial (Karin Eastham) and Accounting Officer) * Chairman of the Board and Director December 11, 1997 - ----------------------------------- (Pierre Lamond) /s/ PETER L. MYERS Director December 11, 1997 - ----------------------------------- (Peter L. Myers) * Director December 11, 1997 - ----------------------------------- (Philippe O. Chambon) * Director December 11, 1997 - ----------------------------------- (Arthur Reidel) * Director December 11, 1997 - ----------------------------------- (William Scott)
By: /s/ VICENTE ANIDO, JR. ---------------------------------- Vicente Anido, Jr., Attorney-in-fact II-8 95 EXHIBIT INDEX
SEQUENTIALLY EXHIBIT NUMBERED NUMBER DESCRIPTION PAGE - -------- ------------------------------------------------------------------- ------------ 1.1++ Form of Underwriting Agreement. 3.1++ Certificate of Incorporation of the Company, as amended. 3.2++ Form of Amended and Restated Certificate of Incorporation of the Company to become effective immediately prior to the Offering. 3.3++ Bylaws of the Company, as amended. 3.4++ Form of Restated Bylaws of the Company to be effective upon completion of the Offering. 4.1++ Form of Certificate for Common Stock. 5.1++ Opinion of Brobeck, Phleger & Harrison LLP with respect to the Common Stock being registered. 10.1++ Preferred Stock Purchase Agreement for Series A Preferred Stock between the Company and Forward Ventures II, L.P., dated August 26, 1994. 10.2++ Preferred Stock Purchase Agreement for Shares of Series Z Preferred Stock between the Company and Sydney Brenner, dated October 14, 1994. 10.3++ Stock Purchase Agreement for Shares of Series A Preferred Stock and Common Stock between the Company and the investors listed on Exhibit A thereto, dated November 1, 1994. 10.4++ Stock Purchase Agreement Series B Preferred Stock between the Company and the purchasers listed on Exhibit A thereto, dated November 29, 1994. 10.5++ Series C Preferred Stock Purchase Agreement between the Company and the purchasers listed on Schedule A thereto, dated August 17, 1995. 10.6++ Stock Purchase Agreement for Series C Preferred Stock between the Company and Todd Schmidt dated September 7, 1995. 10.7*++ Supplemental Purchase Agreement between the Company and the purchasers on Schedule A thereto, dated April 8, 1996. 10.8*++ Series D Preferred Stock Purchase Agreement between the Company and the purchasers listed on Schedule A thereto, dated November 15, 1996. 10.9++ Amended and Restated Investors' Rights Agreement between the Company and the stockholders listed on Schedule A thereto, dated November 15, 1996. 10.10++ Series J Preferred Stock Purchase Agreement between the Company and Steve Teig, dated June 10, 1997. 10.11++ Series J Preferred Stock Purchase Agreement between the Company and Jonathan Greene, dated June 11, 1997. 10.12++ Series J Preferred Stock Purchase Agreement between the Company and Andrew Smellie, dated June 11, 1997. 10.13++ Warrant Agreement to Purchase Shares of the Series Z Preferred Stock, as amended between the Company and Comdisco, Inc., dated December 20, 1994. 10.14++ Common Stock Purchase Warrant between the Company and LJL BioSystems, Inc., dated June 15, 1995. 10.15++ Form of Warrant to Purchase Shares of Series C Preferred Stock between the Company and the purchasers listed on Schedule A thereto, dated August 17, 1995.
96
SEQUENTIALLY EXHIBIT NUMBERED NUMBER DESCRIPTION PAGE - -------- ------------------------------------------------------------------- ------------ 10.16++ Form of Warrant Agreement to Purchase Shares of Series C Preferred Stock of the Company, between the Company and Comdisco, Inc. in the amounts listed on Schedule A thereto. 10.17++ Form of Warrant to Purchase Shares of Series Z Preferred Stock between the Company and the purchasers listed on Schedule A thereto, dated May 20, 1996. 10.18++ Master Lease Agreement with the Company and Comdisco Inc., dated November 6, 1994, Schedule VL-1, dated November 11, 1994, Schedule VL-2 dated April 15, 1996 and Schedule VL-3 dated April 15, 1996. 10.19* Collaboration Agreement between the Company and Teijin Limited, dated March 29, 1996, as amended. 10.20* Collaborative Research and License Agreement between the Company and Roche Bioscience, dated October 25, 1996. 10.21* Research and Technology Development Agreement between the Company and Sumitomo Pharmaceuticals Co., Ltd., dated August 18, 1997. 10.22* Collaborative Research and License Agreement between the Company and ImClone Systems Incorporated, dated October 10, 1997. 10.23* Collaborative Research and License Agreement between the Company and Athena Neurosciences, Inc., dated October 15, 1997. 10.24++ Full Recourse Secured Promissory Note and Stock Pledge Agreement between the Company and Peter Myers, dated September 5, 1995. 10.25++ Promissory Note Secured by Deed of Trust between the Company and John Saunders, dated August 30, 1996. 10.26++ Promissory Note between the Company and Vicente Anido, Jr., dated February 24, 1997. 10.27++ Pledge Agreement between the Company and Vicente Anido, Jr., dated February 24, 1997. 10.28++ Promissory Note Secured by Stock Pledge Agreement between the Company and Vicente Anido, Jr., dated June 6, 1997 10.29++ Stock Pledge Agreement between the Company and Vicente Anido, Jr., dated June 6, 1997. 10.30++ Employment Agreement with Peter Myers, dated March 1, 1995. 10.31++ Employment Agreement with John Saunders, dated January 1, 1996. 10.32++ Employment Agreement with Steven Teig, dated July 1, 1995. 10.33++ Employment Agreement with Vicente Anido, Jr., dated March 14, 1996. 10.34++ Employment Agreement with Lee R. McCracken, dated May 13, 1996. 10.35++ Employment Letter with Karin Eastham, dated March 14, 1997. 10.36++ Standard Industrial/Commercial Single-Tenant Lease between the Company and Campson corporation, dated December 22, 1995. 10.37++ Standard Office Lease-Full Service between the Company and Nearon Enterprises, LLC, dated October 24, 1996. 10.38++ Lease Agreement between Harbor Investment Partners and the Company, dated October 6, 1997. 10.39++ 1995 Stock Option/Stock Issuance Plan. 10.40++ 1995 Stock Option/Stock Issuance Plan Form of Notice of Grant.
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SEQUENTIALLY EXHIBIT NUMBERED NUMBER DESCRIPTION PAGE - -------- ------------------------------------------------------------------- ------------ 10.41++ 1995 Stock Option/Stock Issuance Plan Form of Stock Option Agreement. 10.42++ 1995 Stock Option/Stock Issuance Plan Form of Stock Purchase Agreement. 10.43++ 1995 Stock Option/Stock Issuance Plan Form of Restricted Stock Issuance Agreement. 10.44++ 1997 Stock Incentive Plan. 10.45++ 1997 Employee Stock Purchase Plan. 10.46++ Form of Indemnification Agreement between the Company and each of its directors. 10.47++ Form of Indemnification Agreement between the Company and each of its officers. 10.48++ 1997 Stock Incentive Plan Form of Notice of Grant of Stock Option 10.49++ 1997 Stock Incentive Plan Form of Stock Option Agreement 10.50++ 1997 Stock Incentive Plan Form of Addendum to Stock Option Agreement (Involuntary Termination Following Corporate Transaction/Change in Control) 10.51++ 1997 Stock Incentive Plan Form of Addendum to Stock Option Agreement (Limited Stock Appreciation Right) 10.52++ 1997 Stock Incentive Plan Form of Stock Issuance Agreement 10.53++ 1997 Stock Incentive Plan Form of Addendum to Stock Issuance Agreement (Involuntary Termination Following Corporate Transaction/Change in Control) 10.54++ 1997 Stock Incentive Plan Form of Notice of Grant of Automatic Stock Option (Initial Grant) 10.55++ 1997 Stock Incentive Plan Form of Notice of Grant of Automatic Stock Option (Annual Grant) 10.56++ 1997 Stock Incentive Plan Form of Automatic Stock Option Agreement 10.57++ 1997 Employee Stock Purchase Plan Form of Stock Purchase Agreement 11.1++ Statement of Computation of pro forma net loss per share. 23.1++ Consent of Brobeck, Phleger & Harrison LLP (contained in their opinion filed as Exhibit 5.1). 23.2 Consent of Ernst & Young LLP, Independent Auditors. 24.1++ Power of Attorney (see page II-8). 27.1++ Financial Data Schedule.
- --------------- ++ Previously filed with the Commission. * Certain confidential portions of this Exhibit were omitted by means of redacting a portion of the text (the "Mark"). This Exhibit has been filed separately with the Secretary of the Commission without the Mark pursuant to the Company's Application Requesting Confidential Treatment under Rule 406 under the Securities Act. EX-10.19 2 EXHIBIT 10.19 1 EXHIBIT 10.19 COLLABORATION AGREEMENT BETWEEN COMBICHEM, INC. AND TEIJIN LIMITED March 29, 1996 2 TABLE OF CONTENTS
Page ARTICLE 1 DEFINITIONS................................................................. 1 ARTICLE 2 COLLABORATION RESEARCH AND SCREENING........................................ 7 2.1 Collaboration Research Activities........................................... 7 2.2 Research Plan............................................................... 9 2.3 Option to Expand the Research Program or to Extend the Research Program Term................................................................ 9 2.4 Records..................................................................... 9 2.5 Permitted Activities......................................................... 9 2.6 Post-Research Program Activities............................................. 9 2.7 Reports...................................................................... 9 2.8 Excluded Products........................................................... 10 2.9 Retained Rights............................................................. 10 2.10 Restricted Activities; Rights Following Termination of0Exclusivity.......... 10 ARTICLE 3 MANAGEMENT.................................................................. 11 3.1 Research Committee.......................................................... 11 3.2 Membership of RC............................................................ 11 3.3 RC Meetings................................................................. 12 3.4 Decision Making............................................................. 12 ARTICLE 4 OPTIONS..................................................................... 12 4.1 Right of First Negotiation to Acquire Commercialization Rights in the CombiChem Territory......................................................... 12 4.2 Right of First Refusal to Acquire Commercialization Rights in the CombiChem Territory......................................................... 13 4.3 Access to Data.............................................................. 13 ARTICLE 5 LICENSES.................................................................... 14 5.1 Licenses to Teijin.......................................................... 14 5.2 Licenses to CombiChem....................................................... 14 5.3 Sublicenses................................................................. 15 5.4 Direct Affiliate Licenses................................................... 15 5.5 No Liability Regarding Third Party Rights................................... 15 5.6 Research License............................................................ 16 5.7 No Other Products........................................................... 16 ARTICLE 6 PAYMENTS.................................................................... 16 6.1 Up-front Payment............................................................ 16 6.2 Collaboration Funding....................................................... 16 6.3 Milestone Payments.......................................................... 17
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6.4 Royalties to CombiChem...................................................... 18 6.5 Royalties to Teijin......................................................... 18 6.6 Third Party Royalties....................................................... 19 ARTICLE 7 PAYMENTS; BOOKS AND RECORDS................................................. 19 7.1 Royalty Reports and Payments................................................ 19 7.2 Method for Payments......................................................... 19 7.3 Place of Royalty Payment and Currency Conversions........................... 20 7.4 Records; Inspection......................................................... 20 7.5 Tax Matters................................................................. 20 ARTICLE 8 DUE DILIGENCE............................................................... 21 8.1 Due Diligence............................................................... 21 8.2 License Back................................................................ 21 8.3 Regulatory Filings.......................................................... 22 ARTICLE 9 INTELLECTUAL PROPERTY....................................................... 22 9.1 Ownership of Inventions..................................................... 22 9.2 Patent Prosecution.......................................................... 23 9.3 Enforcement and Defense..................................................... 24 ARTICLE 10 CONFIDENTIALITY............................................................. 25 10.1 Confidential Information.................................................... 25 10.2 Permitted Use and Disclosures............................................... 26 10.3 Nondisclosure of Terms...................................................... 26 10.4 Publication................................................................. 26 ARTICLE 11 REPRESENTATIONS AND WARRANTIES.............................................. 27 11.1 Teijin...................................................................... 27 11.2 CombiChem................................................................... 27 11.3 Disclaimer.................................................................. 27 11.4 No Consequential Damages.................................................... 28 ARTICLE 12 INDEMNIFICATION............................................................. 28 12.1 Teijin...................................................................... 28 12.2 CombiChem................................................................... 28 12.3 Procedure................................................................... 29 ARTICLE 13 DISPUTE RESOLUTION.......................................................... 29 13.1 General Arbitration......................................................... 29 13.2 Arbitration Procedures...................................................... 29 13.3 Disqualification............................................................ 30 13.4 Confidentiality............................................................. 30 13.5 Equity...................................................................... 30
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ARTICLE 14 TERM AND TERMINATION........................................................ 30 14.1 Term........................................................................ 30 14.2 Termination for Cause....................................................... 31 14.3 Termination for Insolvency.................................................. 31 14.4 Effect of Breach or Termination............................................. 31 14.5 Survival.................................................................... 32 ARTICLE 15 MISCELLANEOUS............................................................... 32 15.1 Governing Laws.............................................................. 32 15.2 No Implied Licenses......................................................... 32 15.3 Waiver...................................................................... 32 15.4 Assignment.................................................................. 32 15.5 Independent Contractors..................................................... 32 15.6 Compliance with Laws........................................................ 32 15.7 Patent Marking.............................................................. 33 15.8 Notices..................................................................... 33 15.9 Severability................................................................ 33 15.10 Force Majeure............................................................... 33 15.11 Complete Agreement; Amendment............................................... 33 15.12 Headings.................................................................... 34 15.13 Counterparts................................................................ 34 Exhibits Exhibit A -- Research Plan Exhibit B -- Libraries Exhibit C -- Initial Representatives on the Research Committee -iii-
5 COLLABORATION AGREEMENT This COLLABORATION AGREEMENT (the "Agreement"), effective as of March 29, 1996 (the "Effective Date"), is made by and between CombiChem, Inc., a California corporation, having a principal place of business at 9050 Camino Santa Fe, San Diego, California 92121, U.S.A. ("CombiChem"), and Teijin Limited, an entity organized and existing under the laws of Japan, having a principal place of business at 6-7 Minami-hommachi 1-chome, Chuo-ku, Osaka 541, Japan ("Teijin"). BACKGROUND A. Teijin has discovered lead compounds that are *** ***. B. CombiChem has developed novel proprietary methods for the generation of compound libraries. CombiChem believes that its technology, by rapidly producing diverse and targeted compound libraries, will accelerate the drug discovery process and increase productivity of drug discovery programs. C. Teijin and CombiChem desire to collaborate to design, synthesize and screen compound libraries to identify Collaboration Compounds (as defined herein). D. CombiChem desires to grant to Teijin rights of first negotiation and first refusal to acquire exclusive commercialization rights in North America, Middle America and South America to compounds identified pursuant to this Agreement, and Teijin desires to accept such rights. NOW, THEREFORE, for and in consideration of the covenants, conditions, and undertakings hereinafter set forth, it is agreed by and between the Parties (as defined below) as follows: ARTICLE 1 DEFINITIONS The following capitalized terms used herein shall have the respective meanings set forth below. Certain other capitalized terms are defined elsewhere in this Agreement. 1.1 "Affiliate" shall mean any corporation or other business entity which during the term of this Agreement controls, is controlled by or is under common control with CombiChem or Teijin, but only for so long as such entity controls, is controlled by or is under common control with CombiChem or Teijin. For this purpose, control means the possession of the power to direct or cause the direction of the management and the policies of an entity whether through ownership directly or indirectly of over fifty percent (50%) of the *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. -1- 6 stock entitled to vote, and for non-stock organizations, the right to receive over fifty percent (50%) of the profits by contract or otherwise, or if not meeting the preceding requirement, any company owned or controlled by or owning or controlling CombiChem or Teijin at the maximum control or ownership right permitted in the country where such company exists. 1.2 "Aggregate Annual Research Fee" shall mean the aggregate Annual Research Fee for a contract year as set in Sections 1.3 and 6.2, unless modified by mutual agreement of the Parties. 1.3 "Annual Research Fee" shall mean on a per scientist full-time basis (a) for the first year of the Research Program, *** per CombiChem scientist, (b) for the first year of the Research Program, *** per Teijin scientist sited at CombiChem's facility and (c) for any subsequent year of the Research Program, the Annual Research Fee per scientist for the previous year increased by *** of the percentage increase during the previous year in the CPI. If such index ceases to be published, then such index shall be replaced with the index which most closely resembles the performance of such index, as determined by the mutual agreement of the Parties. 1.4 " *** Active Compound" shall mean a Library Compound screened during the *** Exclusivity Period which has *** Receptor Activity. 1.5 " *** Compound" shall mean any (a) *** Active Compound or (b) Derivative Compound which demonstrates *** Receptor Activity as well as any compositions-of-matter claimed in patent applications filed or patents issued under Article 9 of this Agreement with respect to compounds described in (a) or (b) above. 1.6 " *** Exclusivity Period" shall mean the period of time constituting the Research Program Term and a period of *** thereafter. 1.7 "*** Receptor Activity" shall mean *** and *** as an *** with respect to *** for *** of the ***. 1.8 "Collaboration" shall comprise the activities described in Article 2 below. 1.9 "Collaboration Compounds" shall mean *** and *** Compounds. 1.10 "CombiChem Territory" shall mean North America, Middle America and South America. 1.11 "CPI" means the Consumer Price Index, All Urban Consumers, as published by the U.S. Bureau of Labor Statistics. 1.12 "Derivative Compound" shall mean any compound that demonstrates activity against a particular molecular target, which compound is derived from a Library Compound *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. -2- 7 active against that molecular target by CombiChem, or Teijin or its Affiliates, or by a third party under authority from Teijin. A compound shall be deemed to have been "derived from" a Library Compound if it: (i)(A) results from a chemical synthesis program based on a Library Compound or (B) is based on structure-activity data relating to a Library Compound (with or without *** Activity or *** Receptor Activity, and (ii) is a compound synthesized during the *** Exclusivity Period (with respect to a Library Compound with *** Activity or the *** Exclusivity Period (with respect to a Library Compound with *** Receptor Activity). It is understood that "Derivative Compound" shall include compounds derived from a Library Compound or from another Derivative Compound. 1.13 "Due Diligence" shall have the meaning set forth in Section 8.1 of this Agreement. 1.14 "Europe" shall mean the geographic territory encompassed on the date of this Agreement by all of those countries which are the members of the European Free Trade Association or the European Union (formerly the European Community), all countries that were formerly members of COMECON, the independent republics of the former Republic of Yugoslavia, and all of the former republics of the Union of Soviet Socialist Republics, together with any additional nations or states that may be created in such geographical territory after the date of the Agreement. 1.15 "Excluded Product" shall mean any product in the Field with *** Activity or *** Receptor Activity, as the case may be, which, prior to the Effective Date, Teijin has synthesized and either tested or has expressed an intention to test for *** Activity or *** Receptor Activity as the case may be, in each case, as shown by contemporaneous documentation, subject to reasonable verification. 1.16 "Existing Patent Rights" shall mean (i) all patents and patent applications existing as of the Effective Date that claim a Collaboration Compound or method of use or process thereof or composition-of-matter thereof, (ii) any divisions, continuations, continuations-in-part, reissues, reexaminations, extensions or other governmental actions which extend any of the subject matter of a patent in subsection (i) above, (iii) all patents and patent applications listed in subsections (i) or (ii) above that are subsequently withdrawn and re-filed, and (iv) any substitutions, confirmations, registrations, revalidations, or additions of any of the foregoing, in each case, which is owned or controlled, in whole or part, by license, assignment or otherwise by CombiChem during the term of this Agreement. 1.17 "Existing Know-How" shall mean all ideas, inventions, data, know-how, instructions, processes, formulas, expert opinion and information, existing as of the Effective Date owned or controlled in whole or part by CombiChem, by license, assignment or otherwise, in each case, which are necessary for the development, manufacture, use, sale or commercialization of a Collaboration Compound or Product, in each case, to the extent CombiChem has the right to license or sublicense the same, and subject to any limitations or prohibitions of any license or sublicense. Excluded from Existing Know-How are any inventions otherwise included in the definition of any Existing Patent Rights in this Agreement. *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. -3- 8 1.18 "Field" shall mean the therapeutic or prophylactic treatment or prevention of diseases and conditions in humans and animals. 1.19 "FDA" shall mean the U.S. Food and Drug Administration or any corresponding foreign registration or regulatory authority. 1.20 "Future Patent Rights" shall mean (i) all patents and patent applications that claim a Collaboration Compound or method of use or process thereof conceived and reduced to practice by CombiChem in the period from the Effective Date until the expiration of the Exclusivity Period and (ii) any divisions, continuations, continuations-in-part, reissues, reexaminations, extensions or other governmental actions which extend any of the subject matter of the patent applications or patents in (i) above, and any substitutions, confirmations, registrations, revalidations or additions of any of the foregoing, in each case, which is owned or controlled, in whole or part, by license, assignment or otherwise by CombiChem or its Affiliates during the term of this Agreement. Excluded from Future Patent Rights are patents and patent applications otherwise included in Existing Patent Rights in this Agreement. 1.21 "Future Know-How" shall mean all ideas, inventions, data, know-how, instructions, processes, formulas, expert opinion and information owned or controlled by CombiChem in whole or part by license, assignment or otherwise in the period from the Effective Date until the expiration of the *** Exclusivity Period (with respect to *** ) or the *** Exclusivity Period (with respect to *** which are necessary for the development, manufacture, use or sale or commercialization of a Collaboration Compound or Product, in each case, to the extent CombiChem or its Affiliates has the right to license or sublicense the same, and subject to any limitations or prohibitions of any license or sublicense. Excluded from Future Know-How are any inventions otherwise included in the definition of any Future Patent Rights in this Agreement. 1.22 "IND" shall mean an Investigational New Drug application, as defined in the U.S. Food, Drug, and Cosmetic Act and the regulations promulgated thereunder for initiating human clinical trials in the United States, or any corresponding foreign application, registration or certification. 1.23 "In Vitro Activity" shall mean: (a) with respect to an *** (i) *** and (ii) *** ; and (b) with respect to *** , (i) *** and (ii) *** . 1.24 "In Vivo Activity" shall mean *** *** as set forth in the Research Plan. 1.25 "Library" shall mean a chemical compound library whose design has been approved by the Research Committee (as defined below) containing approximately *** *** molecules prepared by CombiChem specifically for screening in the Collaboration based on proprietary structures (a) with activity disclosed by Teijin to CombiChem or (b) generated by CombiChem on behalf of Teijin, in each case, in connection with the Collaboration. *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. -4- 9 1.26 "Library Compound" shall mean any compound which is contained in a Library provided by CombiChem to Teijin in connection with the Collaboration. 1.27 "Licensed Technology" shall mean Existing Patent Rights, Future Patent Rights, Existing Know-How and Future Know-How. 1.28 " *** Active Compound" shall mean a Library Compound screened during the *** Exclusivity Period which has *** Activity. 1.29 " *** Activity" shall mean *** and *** as an *** . 1.30 " *** Compound" shall mean any (a) *** Active Compound or (b) Derivative Compound which demonstrates *** Activity as well as any compositions-of-matter claimed in patent applications filed or patents issued under Article 9 of this Agreement with respect to compounds described in (a) or (b) above. 1.31 " *** Exclusivity Period" shall mean the period of time constituting the Research Program Term and a period of *** thereafter. 1.32 "NDA" shall mean a New Drug Application, as defined in the U.S. Food, Drug, and Cosmetic Act and the regulations promulgated thereunder, or any corresponding foreign application, registration or certification. 1.33 "Net Sales" shall mean the invoice price billed by a Party, its Affiliates or Sublicensees to third parties for the sale of Products, after deduction of (i) cash, trade and/or quantity discounts actually allowed; (ii) amounts repaid or credited- by reason of rejections or returns of goods, recalls, chargebacks, defects, or rebates; (iii) freight, postage, and duties paid for and separately identified on the invoice or other documentation maintained in the ordinary course of business; and (iv) excises, sales taxes, value added taxes, and duties paid for and separately identified on the invoice or other documentation maintained in the ordinary course of business. Net Sales shall also include the amount or fair market value of all other consideration received by a Party, its Affiliates or Sublicensees in respect of Products, whether such consideration is in cash, payment in kind, exchange or another form; provided, however, Net Sales shall not include up-front payments, reimbursements or payments in connection with research and development activities or payments for equity or other securities of a Party. A "sale" of an Product is deemed to occur upon the earliest of invoicing, shipment or transfer of title in the Product by a Party to a person other than such Party or its Affiliate or Sublicensee, unless such Affiliate or Sublicensee is an end user of the Product. In the event that an Product is sold bundled with one or more other products (Products or otherwise) or provided in conjunction with any services, in either case, in connection with a capitation pricing arrangement or any other aggregated payment agreement or program, Net Sales from such bundled sales and/or services for purposes of calculating Net Sales allocated to the Product shall be equal to the bona fide list price of the Product when sold separately in comparable quantities. *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. -5- 10 1.34 "Other Library Compounds" shall mean Library Compounds other than Collaboration Compounds. 1.35 "Party" shall mean CombiChem or Teijin, and their permitted successors and assigns, as the case may be. 1.36 "Phase I", "Phase II", and "Phase III" shall mean Phase I (or Phase I/II), Phase II (or Phase II/III), and Phase III clinical trials, respectively, in each case as prescribed by applicable FDA IND Regulations, or any corresponding foreign statutes, rules or regulations. 1.37 "Product(s)" shall mean any product containing a Collaboration Compound. Products shall not include Excluded Products or products containing an Other Library Compound. 1.38 "Product Development Candidate" shall mean any *** or *** *** which (a) merits initiation of expanded animal toxicology studies, data of which are required to be submitted to FDA for an IND, including, without limitation: (i) formulation/stability studies; (ii) pharmacokinetic studies; (iii) drug metabolism studies; (iv) dose ranging (prior to toxicology) studies; and (v) one-month toxicology studies in two species; and (b) has satisfied, in Teijin's reasonable judgment, the following criteria (and any other criteria which may seem relevant to Teijin in its reasonable judgment, excluding criteria set forth in (a) above): (i) demonstrated In Vitro Activity; (ii) demonstrated In Vivo Activity; (iii) demonstrated safety pharmacology in two species (e.g., rat and dog) showing satisfactory therapeutic index and efficacy as compared to a central nervous system and cardiovascular profile; (iv) demonstrated an appropriate cellular toxicity profile; (v) demonstrated appropriate mutagenicity results; and (vi) demonstrated appropriate single dose and two-week non-GLP toxicology results in two species (e.g., rat and dog). 1.39 "Research Committee" or "RC" shall mean the oversight committee described in Article 3. 1.40 "Research Plan" shall mean the written overall plan (a copy of which is attached hereto as Exhibit A) for the Research Program the Parties will conduct to optimize Library Compounds with *** Activity and/or *** Receptor Activity during the Research Program Term. The Research Plan may be revised as necessary by agreement of the RC. 1.41 "Research Program" shall mean the research to be conducted in accordance with the Research Plan as part of the Collaboration, and shall include the activities and items set forth in Section 2.1 of this Agreement. 1.42 "Research Program Term" shall mean the period commencing on March 29, 1996 and terminating on the first anniversary thereof, unless extended pursuant to Section 2.3. 1.43 "Sublicensee" shall mean, with respect to a particular Product, a third party to whom a Party has granted a license or sublicense under the Licensed Technology or the Teijin Technology and/or the Teijin Know-How, as the case may be, to make, use and/or sell such *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. -6- 11 Product, including, without limitation, a collaborative partner of Teijin or CombiChem. As used in this Agreement, it is understood that "Sublicensee" shall also include a third party to whom a Party has granted the right to distribute such Product, provided that such third party has the primary responsibility for marketing and promotion at its expense of such Product within the field or territory for which such distribution rights are granted, which marketing and promotional activities are not subsidized directly or indirectly by a Party or its Affiliates. 1.44 "Teijin Technology" shall mean any patent application or patent (a) arising in connection with or out of the Research Program or (b) necessary to make, use or sell a Collaboration Compound or Product, and is owned or controlled, in whole or in part, by Teijin or its Affiliates at any time during the term of this Agreement that claims the synthesis, composition-of-matter or method of use of a Library Compound, a Collaboration Compound or a Product. 1.45 "Teijin Know-How" shall mean all ideas, inventions, data, know-how, instructions, processes, formulas, expert opinion and information owned or controlled in whole or in part by Teijin, by license, assignment or otherwise during the term of this Agreement, which are necessary for the development, manufacture, use or sale or commercialization of a Collaboration Compound or Product, to the extent Teijin has the right to license or sublicense the same, and subject to any limitation and prohibitions of any license or sublicense. Excluded from Teijin Know-How are any inventions otherwise included in the definition of Teijin Technology in this Agreement. 1.46 "Territory" shall mean Japan, China, North Korea, South Korea, Taiwan, Thailand, Cambodia, Laos, Vietnam, Indonesia, the Philippines, Singapore, Malaysia, Hong Kong, Burma, Australia, New Zealand and Europe; provided that in the event either of the rights set forth in Article 4 are exercised and definitive agreements executed in connection therewith, the "Territory" shall also include the CombiChem Territory with respect to the specified Product Development Candidate and the Products therefrom. ARTICLE 2 COLLABORATION RESEARCH AND SCREENING 2.1 Collaboration Research Activities. Subject to the terms and conditions set forth herein, the Parties shall conduct research under the Research Plan with respect to Collaboration Compounds on a collaborative basis with the goal of developing Products. 2.1.1 CombiChem Responsibilities. (a) During the Research Program Term, CombiChem shall synthesize *** Libraries. Such Libraries shall be provided to Teijin according to the schedule set forth in the Research Plan. The Libraries shall be provided in 96-well plates or Eppendorf tubes, and shall contain the quantities of Library Compounds set forth on Exhibit B; *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. -7- 12 (b) During the Research Program Term, CombiChem shall keep the RC fully informed of its activities performed in connection with the Collaboration, including, without limitation, by providing the RC with data and information regarding Libraries, Collaboration Compounds and structures thereof; (c) During the Research Program Term, CombiChem shall provide an average of *** *** to conduct CombiChem's activities under the Research Program; and (d) During the Research Program Term, CombiChem shall provide space and resources to accommodate the FTE Teijin chemist (described in Section 2.1.2(c) below). 2.1.2 Teijin Responsibilities. (a) Teijin shall use reasonable efforts to provide CombiChem with support and assistance useful or necessary for the conduct of the Research Plan, including, but not limited to, providing chemical intermediates, if available, information concerning assay methods and screening data; (b) During the Research Program Term Teijin shall keep the RC fully informed of its activities performed in connection with the Collaboration, including, without limitation, by providing the RC with data and information regarding Collaboration Compounds, and structures thereof, and *** assays developed and used by Teijin to test Library Compounds; (c) During the Research Program Term, Teijin shall provide an average of one (1) FTE research position to conduct Teijin's activities at CombiChem's facility under the Research Program; (d) During the Research Program Term and during the *** Exclusivity Period and the *** Exclusivity Period, Teijin shall screen the Libraries for *** Activity and for *** Receptor Activity. Any compound identified as having *** Activity as a result of such screening shall be considered *** Compound for all purposes of this Agreement, and any compound identified as having *** Receptor Activity as a result of such screening shall be considered a *** Compound for all purposes of this Agreement; and *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. -8- 13 (e) During and following the Research Program Term, Teijin shall use Due Diligence to optimize Collaboration Compounds into Products, as set forth in Section 8.1 below. 2.2 Research Plan. The Parties hereby agree that the Research Program shall be carried out in accordance with the Research Plan, a copy of which is attached hereto as Exhibit A. The RC shall review the Research Plan on an ongoing basis and may make changes to the Research Plan; provided, however, the Research Plan shall not be modified except as mutually agreed by CombiChem and Teijin. 2.3 Option to Expand the Research Program or to Extend the Research Program Term. Teijin shall have the right to expand or extend the term of the Research Program for up to two successive one (1) year terms. To expand the Research Program, Teijin shall promptly notify CombiChem of its desire. To extend the Research Program Term, Teijin must notify CombiChem no later than three (3) months prior to the then current expiration date for the Research Program Term. Following such notification, the Parties shall negotiate the terms of any such expansion or extension in good faith. 2.4 Records. CombiChem and Teijin and their respective Affiliates shall maintain records of the Research Program (or cause such records to be maintained) in sufficient detail and in good scientific manner as will properly reflect all work done and results achieved in the performance of the Research Program (including all data in the form required under any applicable governmental regulations and as directed by the RC). Each Party shall allow the other to have reasonable access to all pertinent materials and data generated by or on behalf of such Party with respect to each Collaboration Compound in connection with the Research Program, as set forth in the Research Plan. 2.5 Permitted Activities. Subject in all cases to Section 2.10, each of Teijin and CombiChem may screen the Libraries, both during the Research Program Term and thereafter, for activity other than *** Activity or *** Receptor Activity. CombiChem and Teijin may further collaborate with respect to any Other Library Compounds discovered pursuant to this Section 2.5 and the terms and conditions of any such further collaboration shall be subject to good-faith negotiations. 2.6 Post-Research Program Activities. Except as expressly provided elsewhere under the terms of this Agreement, Teijin shall, at Teijin's or its Affiliates or Sublicensees' expense, be responsible for conducting all development and commercialization of Collaboration Compounds and Products to which Teijin retains rights under this Agreement following the Research Program Term. 2.7 Reports. 2.7.1 Collaboration Compounds. Following the Research Program Term, Teijin shall keep CombiChem fully informed of its activities with respect to Collaboration Compounds. Teijin shall provide CombiChem with written *** reports within *** *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. -9- 14 *** of the end of each *** period providing at least the following information regarding the status of all Collaboration Compounds: (i) description of the status of the research and development activities conducted with respect to each Collaboration Compound, including decisions made to discontinue development of any Collaboration Compound; and (ii) the status of all patent applications claiming such Collaboration Compounds. Such reports shall contain sufficient information to allow CombiChem to monitor Teijin's obligations under this Agreement, including, without limitation, Teijin's obligations with respect to Due Diligence set forth in Section 8.1 below and the accomplishment of the milestones set forth in Section 6.2 below. Until first commercial introduction of each royalty-bearing Product by or on behalf of Teijin hereunder, Teijin shall keep CombiChem apprised of the status of the pre-clinical, clinical and commercial development of that Product by semi-annually providing CombiChem with a written report detailing such activities with respect to each applicable Product during the term of this Agreement. 2.7.2 Library Compounds. During the Research Program Term, Teijin shall keep CombiChem fully informed of its activities with respect to Library Compounds, including, without limitation, notification by Teijin to CombiChem of its intent to screen such Library Compound against an assay other than an assay designed to determine *** Activity or *** Receptor Activity prior to performing any such screening. Teijin shall provide CombiChem with written *** reports within *** of the end of each *** period providing such information. 2.7.3 Confidentiality. All reports and information provided under this Section 2.7 shall be deemed Confidential Information of Teijin. 2.8 Excluded Products. Within thirty (30) days of the filing of an IND with respect to each Excluded Product, Teijin shall notify CombiChem of such filing, and provide a detailed description of why such Excluded Product is not an Product hereunder. If a dispute arises between the Parties which the Parties are unable to resolve regarding whether or not a product is an Excluded Product, the dispute shall be settled by binding arbitration pursuant to Article 13 herein. 2.9 Retained Rights. CombiChem shall retain ownership of the tangible property embodied in the physical Libraries and in the Library Compounds provided to Teijin hereunder. 2.10 Restricted Activities; Rights Following Termination of Exclusivity. 2.10.1 *** Exclusivity. During the *** Exclusivity Period, CombiChem will not (i) knowingly make compounds or combinatorial libraries for or with any third person or entity specifically for screening for *** Activity, (ii) enter into contract screening for or with any third person or entity with respect to *** Activity or (iii) perform for its own account any screening with respect to *** Activity; provided, that, after the right of first negotiation set forth in Section 4.1 of this Agreement has been exercised and lapsed, CombiChem may confidentially provide information and data concerning *** Compounds designated to be Product Development Candidates to a potential or actual collaborator of *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. -10- 15 CombiChem in the CombiChem Territory during the *** Exclusivity Period solely with respect to the specified Product Development Candidate with prior notice of the name of such potential or actual collaborator to Teijin. 2.10.2 *** Exclusivity. During the *** Exclusivity Period, CombiChem (a) will not enter into contract screening for or with any third person or entity of the Libraries, any Library Compound or any Derivative Compound with respect to *** Receptor Activity and (b) will not perform for its own account any screening of the Libraries, any Library Compound or any Derivative Compound with respect to *** Receptor Activity; provided, that, after the right of first negotiation set forth in Section 4.1 of this Agreement has been exercised and lapsed, CombiChem may confidentially provide information and data concerning *** Compounds designated to be Product Development Candidates to a potential or actual collaborator of CombiChem in the CombiChem Territory during the *** Exclusivity Period solely with respect to the specified Product Development Candidate with prior notice of the name of such potential or actual collaborator to Teijin. 2.10.3 All Other Molecular Targets. During the Research Program Term, CombiChem will not enter into contract screening of the Libraries, any Library Compound or any Derivative Compound for or with any third person or entity, with respect to any activity and will not perform for its own account any screening of the Libraries or any Library Compound with respect to any activity. 2.10.4 Commercialization Rights. Teijin's rights to develop and commercialize each Collaboration Compound as set forth in and subject to the terms and conditions of this Agreement, shall be exclusive in the Territory exclusive even as to CombiChem and its Affiliates) for as long as Teijin continues to develop and commercialize such Collaboration Compound with Due Diligence. 2.10.5 Rights Following Termination of Exclusivity. After the expiration of the *** Exclusivity Period, the *** Exclusivity Period or the Research Program Term, as the case may be, CombiChem and Teijin shall have co-exclusive rights to the Libraries and the Library Compounds and each may use any Library itself or provide such Library to others on either an exclusive or non-exclusive basis, subject to the terms and conditions regarding Collaboration Compounds from such Library expressly set forth in this Agreement. ARTICLE 3 MANAGEMENT 3.1 Research Committee. Teijin and CombiChem will establish a RC to oversee, review and coordinate the conduct of the Research Program, including, without limitation, the design of the Libraries, and provide advice regarding prosecution of patent applications. 3.2 Membership of RC. The RC shall be comprised of representatives from each of Teijin and CombiChem, each Party's members selected by that Party. The initial representatives of each Party are listed on Exhibit C attached hereto. Each Party shall *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. -11- 16 designate the chief representative for its members ("Chief Representative"). CombiChem and Teijin may change its RC representatives at any time, upon written notice to the other Party. The RC shall be chaired as agreed by the Parties. From time to time, the RC may establish subcommittees to oversee particular projects or activities, and such subcommittees will be constituted as the RC agrees. 3.3 RC Meetings. 3.3.1 Research Program Term. During the Research Program Term, the RC shall meet up to four (4) times per year at regular intervals, or more often as agreed by the Parties, at such locations as the Parties agree. At such meetings, the RC will formulate and review the Research Program objectives, monitor the progress of the Research Program toward those objectives, and take such other actions as may be specified under this Agreement or as the Parties deem appropriate. With the consent of the Parties, other representatives of CombiChem or Teijin or their Affiliates or Sublicensees may attend such RC meetings as observers. Each Party shall be responsible for all of its own expenses. The first meeting of the RC shall occur as soon as practicable after the Effective Date, but in no event later than forty-five (45) days after the Effective Date. 3.3.2 After Research Program Term. After the Research Program Term and during the term of this Agreement, the RC shall meet as mutually agreed by the Parties. At such meetings, the RC will take such other actions as may be specified under this Agreement or as the Parties deem appropriate. Each Party shall be responsible for all of its own expenses. 3.4 Decision Making. Decisions of the RC shall be made by agreement between the Teijin Chief Representative and the CombiChem Chief Representative. Certain decisions must be approved by CombiChem's Chief Executive Officer and Teijin's General Manager of the Planning and Research Division, Medical and Pharmaceutical Group. In the event that agreement is not achieved, the dispute will be referred to CombiChem's Chief Executive Officer (or designee of similar rank) and Teijin's General Manager of the Planning and Research Division, Medical and Pharmaceutical Group (or designee of similar rank), who shall promptly meet and endeavor to resolve the dispute in a timely manner. ARTICLE 4 OPTIONS CombiChem hereby grants to Teijin the exclusive rights set forth in Section 4.1 and 4.2 below exercisable to acquire exclusive rights to commercialize Collaboration Compounds or Products in the CombiChem Territory. 4.1 Right of First Negotiation to Acquire Commercialization Rights in the CombiChem Territory. Following the time an *** Compound or a *** Compound has been designated a Product Development Candidate, either Party may notify the other Party in writing (the "Rights Notice") of its desire to negotiate to provide Teijin with exclusive rights to commercialize such Product Development Candidate in the CombiChem Territory *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. -12- 17 ("Commercialization Rights"). Such notice shall be deemed an offer to Teijin to enter into definitive agreements with respect to such Commercialization Rights. CombiChem and Teijin shall have a period of *** from receipt of the Rights Notice in which to negotiate the terms and conditions of the definitive agreements. In the event that definitive agreements are not entered into within such *** period, CombiChem may immediately thereafter enter into discussions with third parties regarding the Commercialization Rights with prior notice of the names of such third parties to Teijin and the right of first negotiation set forth in this Section 4.1 shall lapse with respect to the specified Product Development Candidate and the right of first refusal set forth in Section 4.2 below shall be operative thereafter. 4.2 Right of First Refusal to Acquire Commercialization Rights in the CombiChem Territory. For a period of *** following the lapse of the right of first negotiation set forth in Section 4.1 with respect to a specified Product Development Candidate, prior to entering into any agreement with a third party to grant the Commercialization Rights with respect to a Product Development Candidate, CombiChem shall notify Teijin in writing of the material terms and conditions of any such proposed agreements. Such notice shall be deemed an offer to Teijin to enter into definitive agreements on the same proposed terms and conditions. Teijin shall have *** to accept the offer contained in such notice. Upon acceptance by Teijin, the Parties will negotiate in good faith to draft and execute definitive agreements within *** of acceptance. If no definitive agreements have been executed in such *** period, the right of first refusal set forth in this Section 4.2 shall lapse with respect to the specified Product Development Candidate. 4.3 Access to Data. In order to make it possible for CombiChem to search for a Sublicensee to the rights to commercialize a Product Development Candidate in the CombiChem Territory, Teijin agrees that it will give access, following the lapse of the right of first negotiation set forth in Section 4.1, solely to data regarding activity of the specified Product Development Candidate free of charge to such potential Sublicensee solely for the purpose of the evaluation of the Product Development Candidate by such third party; any other data which Teijin has generated in connection with the Collaboration may be provided to the third party only upon agreement with Teijin on terms applicable to providing such data. No non-clinical or clinical data to which Teijin provides access under this Section 4.3 may be submitted to the regulatory authorities for IND or NDA applications by CombiChem, its Affiliates or its Sublicensees without agreement with Teijin on terms applicable to such submission including sharing of the cost of the generation of the data; provided that CombiChem and/or Teijin and/or a Sublicensee of either party will provide free of charge to the other Party and/or its Sublicensees any information or data required by law to be reported to the relevant regulatory authorities outside of any drug approval process. *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. -13- 18 ARTICLE 5 LICENSES 5.1 Licenses to Teijin. 5.1.1 Exclusive License to Licensed Technology in the Territory. Subject to the terms and conditions of this Agreement, CombiChem agrees to grant, and hereby grants, to Teijin an exclusive license (exclusive even as to CombiChem and its Affiliates) under the applicable Licensed Technology to make, have made and use Collaboration Compounds, and to make, have made, use, have used, sell and have sold Products in the Field within the Territory. It is understood that such licenses shall include the right to discover and develop Collaboration Compounds and Products after the Research Program Term if still during the term of this Agreement. 5.1.2 Exclusive License to Joint Inventions Relating to Collaboration Compounds and Products in the Territory. Subject to the terms and conditions of this Agreement, CombiChem agrees to grant, and hereby grants, to Teijin an exclusive license under CombiChem's interest in any Joint Inventions to make, have made and use Collaboration Compounds, and to make, have made, use, have used, sell and have sold Products in the Field within the Territory. 5.1.3 Exclusivity and Term for Collaboration Compounds. Such licenses shall be exclusive in relation to each Collaboration Compound and Product so long as Teijin continues to develop and commercialize such Collaboration Compound and/or Product with Due Diligence. 5.1.4 Co-Exclusive License to Joint Inventions Relating to Library Compounds. Subject to the terms and conditions of this Agreement, CombiChem agrees to grant and hereby grants to Teijin, effective upon the expiration of the *** Exclusivity Period, *** Exclusivity Period or the Research Program Term, as the case may be, a co-exclusive, worldwide, royalty-free license under CombiChem's interest in any Joint Inventions relating to Library Compounds from such Library (excluding Collaboration Compounds) to make, have made, use, import, sell and have sold products. 5.2 Licenses to CombiChem. 5.2.1 Exclusive License to Teijin Technology and Teijin Know-How in the CombiChem Territory. Subject to the terms and conditions of this Agreement, Teijin agrees to grant, and hereby grants, to CombiChem an exclusive license (exclusive even as to Teijin and its Affiliates) under the applicable Teijin Technology and Teijin Know-How to make, have made and use Collaboration Compounds, and to make, have made, use, have used, sell and have sold Products in the Field within the CombiChem Territory. It is understood that such licenses shall include the right to discover and develop Collaboration Compounds and Products after the Research Program Term if still during the term of this Agreement. *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. -14- 19 5.2.2 Exclusive License to Joint Invention Relating to Collaboration Compounds and Products in the CombiChem Territory. Subject to the terms and conditions of this Agreement, Teijin agrees to grant, and hereby grants, to CombiChem an exclusive license under Teijin's interest in any Joint Inventions to make, have made and use Collaboration Compounds, and to make, have made, use, have used, sell and have sold Products in the Field within the CombiChem Territory (subject to Article 4). 5.2.3 Co-Exclusive License to Joint Inventions Relating to Library Compounds. Subject to the terms and conditions of this Agreement, Teijin agrees to grant, and hereby grants, to CombiChem, effective upon the expiration of the *** Exclusivity Period, the *** Exclusivity Period or the Research Program Term, as the case may be, a co-exclusive, worldwide, royalty-free license under Teijin's interest in any Joint Inventions relating to Library Compounds from such Library (excluding Collaboration Compounds) to make, have made, use, import, sell and have sold products. 5.2.4 Physical Transfer. In the event that elements or components of Teijin Technology and/or Teijin Know-How are to be physically transferred to CombiChem, its Affiliates or Sublicensees in connection with the license grants contained herein, CombiChem and Teijin shall negotiate in good faith the terms and conditions for such physical transfer. 5.3 Sublicenses. Subject to the terms and conditions of this Agreement, each Party shall have the right to sublicense the rights granted in this Article 5. Each such sublicense shall be consistent with all the terms and conditions of this Agreement, and shall be subject to the prior consent of the other Party, which consent shall not be unreasonably withheld. The Party sublicensing its rights hereunder shall remain responsible to the other Party for all of each such Sublicensee's applicable financial and other obligations under the sublicense. Each sublicense shall provide for its continuation following early termination of the license rights of the Party sublicensing its rights hereunder, and, except in the case of Excluded Products, its assignment to the other Party. 5.4 Direct Affiliate Licenses. Whenever Teijin shall reasonably demonstrate to CombiChem that, in order to facilitate direct royalty payments by an Affiliate, it is desirable that a separate license agreement be entered into between CombiChem and such Affiliate, CombiChem will grant such licenses directly to such Affiliate by means of an agreement which shall be consistent with all of the provisions hereof, and Teijin shall guarantee the Affiliate's obligations thereunder and otherwise provide to CombiChem assurances of performance satisfactory to CombiChem. Teijin shall reimburse CombiChem for its reasonable attorneys' fees and costs incurred in connection with any such separate license agreement. 5.5 No Liability Regarding Third Party Rights. It is understood and agreed that even if CombiChem complies with its obligations under this Agreement, that compounds provided to third parties in the course of CombiChem's other business activities may result in third party patent applications and patents, including patent applications and patents owned by such third parties, or owned jointly by CombiChem and such third parties, which could conflict with patent applications and patents owned by Teijin, or jointly owned by Teijin and *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. -15- 20 CombiChem hereunder. CombiChem will use its reasonable efforts to avoid such conflict; provided, that unless Teijin is damaged as a proximate result of a material breach by CombiChem of the terms of Article 2 or any of the representations and warranties in Article 11, then CombiChem shall have no liability under this Agreement with respect to any such conflict. 5.6 Research License. Notwithstanding Section 5.1 above and subject to Section 2.10, CombiChem shall retain the right under the Licensed Technology to make, have made and use Library Compounds for its own research purposes. 5.7 No Other Products. Except as otherwise agreed or specifically provided in the terms of this Agreement, neither Teijin nor its Affiliates nor Sublicensees shall commercialize any Library Compound or Collaboration Compound, other than as a Product in accordance with this Agreement. ARTICLE 6 PAYMENTS 6.1 Up-front Payment. In consideration of the licenses contained in this Agreement, Teijin agrees to pay to CombiChem an up-front payment of *** , such amount to be paid within thirty (30) days of the Effective Date. Except as otherwise specifically set forth in this Agreement, this up-front payment shall not be refundable nor shall it be creditable against any other amounts due under this Agreement. 6.2 Collaboration Funding. In consideration for CombiChem's performance of its obligations under the Research Program, within *** of the Effective Date and within *** of the first *** of each subsequent *** interval of the Research Program Term, Teijin shall pay CombiChem an amount equal to *** of the Aggregate Annual Research Fee set forth below:
Aggregate Contract Year Annual Research Fee 1 ***
The Aggregate Annual Research Fee shall be the maximum amount Teijin shall be obligated to pay CombiChem for its services as part of the Research Program (even if the product of the Annual Research Fee multiplied by the number of CombiChem scientists and Teijin scientists sited at CombiChem's facility and used in the Research Program on a FTE basis would exceed such amount) and CombiChem shall be responsible for any additional costs incurred by CombiChem, unless Teijin has agreed in writing in advance to pay any amount beyond the Aggregate Annual Research Fee. The amounts to be paid hereunder shall not be refundable nor shall they be creditable against any other amounts due under this Agreement. *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. -16- 21 6.3 Milestone Payments. 6.3.1 Collaboration Compound Milestones. Teijin agrees to pay to CombiChem the amounts set forth in Table 6.3.1 below upon completion by Teijin, its Affiliates, Sublicensees or other designees of each of the milestones set forth in Table 6.3.1 with respect to the first *** Compound to reach such milestone and the first *** Compound to reach such milestone. Teijin shall have no obligation to pay any of the following milestone payments more than *** *** with respect to *** Compounds or *** Compounds directed at the same molecular target, regardless of how many applicable Products are commercialized. No milestone payments shall be due to CombiChem in respect of (a) Excluded Products in any event or (b) a *** Compound unless and until Teijin has notified CombiChem in writing of its intention to designate such *** Compound as a Product Development Candidate. Following the notification by Teijin discussed in subsection (b) of the immediately preceding sentence, Teijin shall pay to Combichem all milestone payments which would have otherwise have been due with respect to such *** Compound. For example, Teijin shall have no obligation to make a milestone payment for the first *** Compound which demonstrates *** or *** until it has designated a *** Compound directed at a particular molecular target as a Product Development Candidate. Following such designation and assuming that such *** Compound has demonstrated *** Teijin would be required to pay to CombiChem an aggregate of *** representing the milestones achieved through the time of such designation. Table 6.3.1
- ------------------------------------------------------------------------------------------------- First *** Compound and MILESTONES *** Compound (against a specific molecular target) Identified - ------------------------------------------------------------------------------------------------- *** U.S. *** *** U.S. *** *** U.S. *** *** U.S. *** *** U.S. *** Total Payments U.S. *** - -------------------------------------------------------------------------------------------------
6.3.2 Payments. Except as set forth in Section 6.3.1 solely with respect to *** Compounds, all payments made to CombiChem by Teijin pursuant to this Section 6.3 shall be due within thirty (30) days after the occurrence of the corresponding milestone. Except as otherwise specifically set forth in this Agreement, milestone payments made pursuant to this Section 6.3 shall not be *** nor shall they be *** against any other amounts due under this Agreement. It is understood that the milestone payments set forth above shall be made with respect to the first *** Compound and the first *** Compound to attain such milestone; provided, however, that if Teijin ceases all development of a particular *** *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. -17- 22 Compound or *** Compound (or corresponding Product) after having made payments with respect to such *** Compound or *** Compound (or corresponding Product) under this Section 6.3 on the accomplishment of milestones specified herein, there shall be no payment due upon the accomplishment of those same milestones with respect to the *** Compound or *** Compound (or corresponding Product) hereunder that is directed at the same molecular target. Amounts due with respect to milestones achieved with respect to *** Compound or *** Compound (or corresponding Product) which were not previously paid with respect to an *** Compound or *** Compound (or corresponding Product) shall be paid pursuant to this Section 6.3. 6.4 Royalties to CombiChem. 6.4.1 Base Royalty on Products. Teijin shall pay to CombiChem in respect of Net Sales of Products by Teijin, its Affiliates and Sublicensees, royalties of *** of Net Sales of each Product within the Territory. 6.4.2 Trade Secret Royalties. The Parties acknowledge and agree that the principal value contributed by CombiChem is a potential acceleration in time to market, enhanced probability of success and the potential for multiple target leads and that CombiChem may not own or control patents that cover the manufacture, sale or use of a particular Product. Teijin acknowledges and agrees that Teijin receives value hereunder in obtaining the access to the Collaboration Compounds and, accordingly, Teijin shall pay the royalties at the rate specified in this Section 6.4, regardless of whether a Product is covered by a patent application or patent within the Licensed Technology. 6.4.3 Single Royalty: Nonroyalty Sales. No royalty shall be payable under this Section 6.4 with respect to sales of Products among Teijin, its Affiliates and Sublicensees for resale; and in no event shall more than one royalty be due hereunder with respect to any Product unit even if covered by more than one patent included in the Licensed Technology. 6.4.4 Royalty Term. Teijin's obligation to pay royalties to CombiChem under this Section 6.4 shall continue for each Product, on a country-by-country basis, until the date which is the later of (i) ten (10) years after the first commercial sale of such Product in such country by Teijin, its Affiliates or Sublicensees, (ii) the expiration of the last-to-expire issued patent within the Licensed Technology containing any claim which would be infringed by making, using or selling the applicable Product in the applicable country in the absence of the license grants in this Agreement. 6.4.5 Currency of Payments. All payments made pursuant to this Section 6.4 shall be made in U.S. dollars. 6.5 Royalties to Teijin. 6.5.1 Base Royalty on Products. CombiChem shall pay to Teijin in respect of Net Sales of Products by CombiChem, its Affiliates and Sublicensees, royalties of *** *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. -18- 23 *** of Net Sales of each Product within the CombiChem Territory. 6.5.2 Trade Secret Royalties. CombiChem acknowledges and agrees that CombiChem receives value hereunder in obtaining the access to the Product Development Candidates and accordingly, CombiChem shall pay the royalties at the rate specified in this Section 6.5, regardless of whether a Product is covered by a patent application or patent within the Teijin Technology, or by the Teijin Know-How. 6.5.3 Single Royalty: Nonroyalty Sales. No royalty shall be payable under this Section 6.5 with respect to sales of Products among CombiChem, its Affiliates and Sublicensees for resale; and in no event shall more than one royalty be due hereunder with respect to any Product unit even if covered by more than one patent included in the Teijin Technology, or by the Teijin Know-How. 6.5.4 Royalty Term. CombiChem's obligation to pay royalties to Teijin under this Section 6.5 shall continue for each Product, on a country-by-country basis, until the date which is the later of (i) ten (10) years after the first commercial sale of such Product in such country by CombiChem, its Affiliates or Sublicensees, (ii) the expiration of the last-to-expire issued patent within the Teijin Technology containing any claim which would be infringed by making, using or selling the applicable Product in the applicable country in the absence of the license grants in this Agreement. 6.5.5 Currency of Payments. All payments made pursuant to this Section 6.5 shall be made in Japanese yen. 6.6 Third Party Royalties. Except as otherwise specifically set forth in this Agreement, each Party shall be responsible for the payment of any royalties due to third parties upon the manufacture, use, marketing, sale or distribution of Products by such Party, its Affiliates or Sublicensees under the Licensed Technology, the Teijin Technology and/or the Teijin Know-How. ARTICLE 7 PAYMENTS; BOOKS AND RECORDS 7.1 Royalty Reports and Payments. After the first commercial sale of a Product on which royalties are payable by a Party, its Affiliates or Sublicensees hereunder, such Party shall make quarterly written reports to the other Party within ninety (90) days after the end of each calendar quarter, stating in each such report the number, description, and aggregate Net Sales of each Product sold during the calendar quarter upon which a royalty is payable under Section 6.4 or 6.5, as the case may be. Concurrently with the making of such reports, the selling Party shall pay to the other Party royalties due at the rates specified in Section 6.4 or 6.5, as the case may be. 7.2 Method for Payments. All payments due under this Agreement shall be made by bank wire transfer in immediately available funds to an account designated by the *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. -19- 24 receiving Party. Any payments that are not paid on the date such payments are due under this Agreement shall bear interest to the extent permitted by applicable law at the prime rate as reported by the Chase Manhattan Bank, New York, New York, on the date such payment is due, plus an additional *** calculated on the number of days such payment is delinquent. 7.3 Place of Royalty Payment and Currency Conversions. If any currency conversion shall be required in connection with the calculation of royalties hereunder, such conversion shall be made using the selling exchange rate for conversion quoted for current transactions reported in the Western edition of The Wall Street Journal for the last business day of the calendar quarter to which such payment pertains. If at any time legal restrictions prevent the prompt remittance of any royalties owed on Net Sales in any jurisdiction, the payor may make such payments by depositing the amount thereof in local currency in a bank account or other depository in such country in the name of the payee. The payor shall promptly notify the payee of the circumstances leading to such deposit and, at the payee's request, cooperate with the payee to repatriate such amounts. 7.4 Records; Inspection. The selling Party and its Affiliates and Sublicensees shall keep complete, true and accurate books of account and records for the purpose of determining the royalty amounts payable under this Agreement. Such books and records shall be kept at the principal place of business of CombiChem if CombiChem is the selling party or at the Tokyo Head office of Teijin at 1-1 Uchisaiwai-cho 2-chome, Chiyoda-ku, Tokyo, Japan if Teijin is the selling party for at least three (3) years following the end of the calendar quarter to which they pertain. Such records will be open for inspection during such three (3) year period by a public accounting firm mutually acceptable to Teijin and CombiChem, solely for the purpose of verifying royalty statements hereunder. Such inspections may be made no more than once each calendar year, at reasonable times and on reasonable notice. Inspections conducted under this Section 7.4 shall be at the expense of the inspecting Party, unless a variation or error producing an increase exceeding *** of the amount stated for any period covered by the inspection is established in the course of any such inspection, whereupon all reasonable costs relating to the inspection for such period and any unpaid amounts that are discovered will be paid promptly by the other Party together with interest thereon from the date such payments were due at the prime rate as reported by the Chase Manhattan Bank, New York, New York, plus an additional *** . The public accounting firm employees shall sign a customary confidentiality agreement as a condition precedent to their inspection, and shall report to the inspecting Party only that information which would be contained in a properly prepared royalty report by the other Party. 7.5 Tax Matters. 7.5.1 Withholding Taxes Paid by Teijin. All amounts required to be paid by Teijin pursuant to this Agreement shall be paid with deduction for withholding for or on account of any taxes (other than taxes imposed on or measured by net income) or similar governmental charge imposed by a jurisdiction other than the United States (collectively, "Teijin Withholding Taxes") to the extent CombiChem and/or its Affiliates or their successors has the lawful rights to utilize the Teijin Withholding Taxes paid by Teijin as a credit against *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. -20- 25 CombiChem and/or its Affiliates regular U.S. tax liability. Teijin shall provide CombiChem a certificate evidencing payment of any Teijin Withholding Taxes hereunder. 7.5.2 Withholding Taxes Paid by CombiChem. All amounts required to be paid by CombiChem pursuant to this Agreement shall be paid with deduction for withholding for or on account of any taxes (other than taxes imposed on or measured by net income) or similar governmental charge imposed by a jurisdiction other than Japan ("CombiChem Withholding Taxes") to the extent Teijin and/or its Affiliates or their successors has the lawful rights to utilize the CombiChem Withholding Taxes paid by CombiChem as a credit against Teijin's and/or its Affiliates regular Japanese tax liability. CombiChem shall provide Teijin a certificate evidencing payment of any CombiChem Withholding Taxes hereunder. 7.5.3 Sales Taxes. Any sales taxes, use taxes, transfer taxes or similar governmental charges required to be paid in connection with the transfer of the Libraries by CombiChem to Teijin shall be the sole responsibility of Teijin. In the event that CombiChem is required to pay any such amounts, and reasonably documents payment, Teijin shall promptly remit payment to CombiChem of such amounts. ARTICLE 8 DUE DILIGENCE 8.1 Due Diligence. The selection of Collaboration Compounds and Products for development and commercialization in the Territory shall be in the sole discretion of Teijin. Teijin shall, at Teijin's expense, be responsible for conducting all development of Collaboration Compounds and Products in the Territory, and all commercialization of Products in the Territory. Teijin shall use its reasonable efforts, comparable to other internal development candidates of comparable value, to develop and commercialize Products as expeditiously as practicable and take such other actions as are necessary to obtain government approvals to market each Product in the Territory (which shall include, without limitation, the filing of an IND with respect to a Product Development Candidate within *** of designation of such Library Compound as a Product Development Candidate as long as Teijin does not suspend the development of such Product Development Candidate due to a biological profile problem and thereafter to promote each Product and meet the market demand therefor in such markets) ("Due Diligence"). The Parties acknowledge and agree that any requirements necessary to meet Due Diligence may be modified with the mutual written consent of the Parties. 8.2 License Back. If (a) Teijin does not use Due Diligence pursuant to Section 8.1 of this Agreement to actively develop and commercialize a Collaboration Compound or Product or (b) determines that it will not commercialize a Collaboration Compound or Product associated with a specific molecular target and in each case so notifies CombiChem, and in each case Teijin has not sublicensed such, then the exclusivity of Teijin's rights in the Territory to such particular Collaboration Compound or Product associated with such molecular target shall terminate and CombiChem shall have co-exclusive rights in the Territory to such Collaboration Compound or Product associated with such molecular target. *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. -21- 26 CombiChem shall have the right to first negotiate to obtain an exclusive license under the Teijin Technology and the Teijin Know-How, to make, use and sell such particular Collaboration Compound or Product in the Territory. 8.3 Regulatory Filings. If the exclusivity of Teijin's rights with respect to a Collaboration Compound or Product shall terminate under Section 8.2, Teijin shall (i) promptly provide to CombiChem a complete listing and description of all governmental permits and health registrations and other rights pertaining to the Product, (ii) without undue delay provide CombiChem with access to all regulatory filings made by Teijin or its Affiliates or Sublicensees to the extent possible with respect to such Product, together with the underlying pre-clinical and clinical data with respect to such Product, and (iii) (A) agree and assist CombiChem, its Affiliates or Sublicensees in obtaining government permits and health registrations pertaining to the Product and necessary to practice the co-exclusive or exclusive rights granted to CombiChem by Teijin under Section 8.2 or (B) if CombiChem acquires exclusive rights under Section 8.2 and if possible, without undue delay assign or cause to be assigned or otherwise transferred to CombiChem or CombiChem's designee, at CombiChem's expense, all of such government permits and health registrations and all other rights pertaining to the Product and requested in writing by CombiChem. The Parties shall negotiate in good faith to reach agreement regarding sharing of costs. No non-clinical or clinical data including those for such Collaboration Compound or Product may be submitted to the regulatory authorities for IND or NDA applications by CombiChem, its Affiliates or Sublicensees without agreement with Teijin on terms applicable to such submission, including sharing of the cost of the generation of the data; provided, that Teijin, its Affiliates or Sublicensees will provide free of charge to CombiChem, its Affiliates and Sublicensees any information or data required by law to be reported to the relevant regulatory authorities outside of any drug approval process. In such event, CombiChem, its Affiliates and Sublicensees may use and incorporate such filings and data in support of applications for approval of such Product in the Territory, provided that such filings and data are not those of the pivotal studies which CombiChem, its Affiliates or Sublicensees are required to conduct if such filings and data are not available. ARTICLE 9 INTELLECTUAL PROPERTY 9.1 Ownership of Inventions. Title to all inventions and other intellectual property made solely by employees of Teijin or its Affiliates, but not CombiChem or its Affiliates, in connection with and arising out of the Research Program ("Teijin Inventions") shall be deemed owned by Teijin. Title to all inventions and other intellectual property made solely by employees of CombiChem or its Affiliates, but not Teijin or its Affiliates, in connection with and arising out of with the Research Program ("CombiChem Inventions") shall be deemed owned by CombiChem. Subject to Section 9.2.1(c), title to all inventions and other intellectual property made jointly by employees of Teijin or its Affiliates and employees of CombiChem or its Affiliates in connection with and arising out of the Research Program ("Joint Inventions") shall be deemed jointly owned by CombiChem and Teijin. -22- 27 9.2 Patent Prosecution. 9.2.1 Responsibilities. (a) CombiChem Inventions. Subject to Sections 9.2.2 and 9.2.3, CombiChem shall be responsible for (i) preparing, filing, prosecuting and maintaining in such countries designated by the RC patent applications and patents relating to all CombiChem Inventions included within the Licensed Technology and (ii) conducting any interferences, re-examinations, reissues, oppositions or requests for patent term extension or governmental equivalents thereto relating to such Inventions. (b) Teijin Inventions. Subject to Sections 9.2.2 and 9.2.3, Teijin shall be responsible for (i) preparing, filing, prosecuting and maintaining in such countries designated by the RC patent applications and patents relating to all Teijin Inventions included within the Teijin Technology and (ii) conducting any interferences, re-examinations, reissues, oppositions or requests for patent term extension or governmental equivalents thereto relating to such Inventions. (c) Joint Inventions. Subject to Sections 9.2.2 and 9.2.3, each Party shall be responsible for (i) preparing, filing, prosecuting and maintaining in their respective territories (Territory or CombiChem Territory, as the case may be) patent applications and patents relating to all Joint Inventions and (ii) conducting any interferences, re-examinations, reissues, oppositions or requests for patent term extension or governmental equivalents thereto relating to such Inventions in their respective territories (Territory or CombiChem Territory, as the case may be). On agreement between CombiChem and Teijin, either Party may, on behalf of the other Party, prepare, file, prosecute and maintain patent applications and patents relating to Joint Inventions in countries in the other Party's territory. In the event of such an agreement, Joint Inventions for which a Party makes filings in the other Party's territory (in the CombiChem Territory with respect to Teijin and in the Territory with respect to CombiChem) shall continue to be jointly owned by CombiChem and Teijin only if the non-filing Party reimburses the filing Party for all of any reasonable costs incurred with respect to such activities, such reimbursement to occur within a reasonable time following receipt of an invoice and verification thereof. CombiChem and Teijin shall keep the RC informed concerning such activities with respect to Joint Inventions in their respective territories. 9.2.2 Failure to Prosecute. (a) CombiChem Failure. CombiChem may elect upon ninety (90) days prior notice to discontinue prosecution of any patent applications filed pursuant to Sections 9.2.1(a) or (c) above and/or not to file or conduct any further activities with respect to the patent applications or patents subject to such Sections. In the event CombiChem declines to file or having filed fails to further prosecute or maintain any patent applications or patents subject to Sections 9.2.1(a) or (c) above, or conduct any interferences, re-examinations, reissues, oppositions, then, subject to CombiChem's agreements with third parties, Teijin shall have the right to prepare, file, prosecute and maintain such patent applications and patents in such countries worldwide (with respect to elections under Section 9.2.1(a)) or in the CombiChem Territory (with respect to elections under Section 9.2.1(c)) it -23- 28 deems appropriate, and conduct any interferences, re-examinations, reissues or oppositions at its sole expense; provided, costs incurred under this Section 9.2.2(a) shall be deducted from royalties owed by Teijin to CombiChem. (b) Teijin Failure. Teijin may elect upon ninety (90) days prior notice to discontinue prosecution of any patent applications filed pursuant to Sections 9.2.1(b) or (c) above and/or not to file or conduct any further activities with respect to the patent applications or patents subject to such Sections. In the event Teijin declines to file or having filed fails to further prosecute or maintain any patent applications or patents subject to Sections 9.2.1(b) or (c) above, or conduct any interferences, re-examinations, reissues, oppositions, then, subject to Teijin's agreements with third parties, CombiChem shall have the right to prepare, file, prosecute and maintain such patent applications and patents in such countries worldwide (with respect to elections under Section 9.2.1(b)) or in the Territory (with respect to elections under Section 9.2.1(c)) it deems appropriate, and conduct any interferences, re-examinations, reissues or oppositions at its sole expense; provided, costs incurred under this Section 9.2.2(b) shall be deducted from royalties owed by CombiChem to Teijin. 9.2.3 Cooperation. Each of Teijin and CombiChem shall keep the other fully informed as to the status of patent matters described in this Article 9, including, without limitation, by providing the other the opportunity to fully review and comment on any documents as far in advance of filing dates as practicable which will be filed in any patent office, and providing the other copies of any substantive documents that such Party receives from such patent offices promptly after receipt, including notice of all interferences, reissues, re-examinations, oppositions or requests for patent term extensions. Teijin and CombiChem shall each reasonably cooperate with and assist the other at its own expense in connection with such activities, at the other Party's request. 9.2.4 Costs. Subject to Section 9.2.2, CombiChem shall pay all costs incurred pursuant to Section 9.2.1(a) and Teijin shall pay all costs incurred pursuant to Section 9.2.1(b). 9.2.5 Copies. Teijin shall promptly provide to CombiChem a copy of any patent applications filed by Teijin and its Affiliates during the term of this Agreement with respect to any Library Compound, Collaboration Compound and/or Product, except with respect to Excluded Products. CombiChem, shall promptly provide to Teijin a copy of any patent applications filed by CombiChem and its Affiliates during the term of this Agreement with respect to any Collaboration Compounds and/or Products. 9.3 Enforcement and Defense. 9.3.1 Enforcement. Each Party shall promptly notify the other of its knowledge of any potential infringement of the Licensed Technology or the Teijin Technology by a third party. Each Party agrees to render such reasonable assistance as the prosecuting Party may request. Costs of maintaining any such action and damages recovered therefrom shall be paid by and belong to the Party bringing the action. -24- 29 (a) Teijin has the right, but not the obligation, to take reasonable legal action necessary to protect the Licensed Technology against infringements by third parties within the Territory. If within six (6) months following receipt of notice of infringement, Teijin fails to take such action to halt a commercially significant infringement within the Territory, CombiChem shall, in its sole discretion, have the right, at its expense, to take such action as it deems warranted in its own name or in the name of Teijin or jointly to cease any infringement with respect to the Licensed Technology. (b) CombiChem has the right, but not the obligation, to take reasonable legal action necessary to protect the Teijin Technology against infringements by third parties within the CombiChem Territory. If within six (6) months following receipt of notice of infringement, CombiChem fails to take such action to halt a commercially significant infringement within the CombiChem Territory, Teijin shall, in its sole discretion, have the right, at its expense, to take such action as it deems warranted in its own name or in the name of CombiChem or jointly to cease any infringement with respect to the Teijin Technology. 9.3.2 Defense. Each Party shall be solely responsible for defending at its own expense any infringement suit brought against itself for infringement of third party intellectual property rights (whether or not covered by patent or other protection) by manufacturing, selling or using any Product. ARTICLE 10 CONFIDENTIALITY 10.1 Confidential Information. Except as otherwise expressly provided herein, the Parties agree that, for the term of this Agreement and for ten (10) years thereafter, the receiving Party shall not, except as expressly provided in this Article 10, disclose to any third party or use for any purpose any confidential information furnished to it by the disclosing Party hereto pursuant to this Agreement ("Confidential Information"), except to the extent that it can be established by the receiving Party by competent proof that such information: (a) was already known to the receiving Party, other than under an obligation of confidentiality, at the time of disclosure; (b) was generally available to the public or otherwise part of the public domain at the time of its disclosure to the receiving Party; (c) became generally available to the public or otherwise part of the public domain after its disclosure and other than through any act or omission of the receiving Party in breach of this Agreement; (d) was independently developed by the receiving Party as demonstrated by documented evidence prepared contemporaneously with such independent development; or -25- 30 (e) was subsequently lawfully disclosed to the receiving Party by a person other than a Party. 10.2 Permitted Use and Disclosures. Each Party hereto may use or disclose information disclosed to it by the other Party to the extent such information is included in the Licensed Technology, the Teijin Technology or the Teijin Know-How, as the case may be, and to the extent such use or disclosure is reasonably necessary and permitted in the exercise of such rights granted hereunder in filing or prosecuting patent applications, prosecuting or defending litigation, complying with applicable governmental regulations or court order or otherwise submitting information to tax or other governmental authorities, conducting clinical trials, or making a permitted sublicense or otherwise exercising license rights expressly granted by the other Party to it pursuant to the terms of this Agreement, provided that if a Party is required to make any such disclosure of another Party's Confidential Information, other than pursuant to a confidentiality agreement, it will give reasonable advance notice to the other Party of such disclosure and, save to the extent inappropriate in the case of patent applications, will use its reasonable best efforts to secure confidential treatment of such information in consultation with the other Party prior to its disclosure (whether through protective orders or otherwise) and disclose only the minimum necessary to comply with such requirements. 10.3 Nondisclosure of Terms. Each of the Parties hereto agrees not to disclose the terms of this Agreement to any third party without the prior written consent of the other Party hereto, which consent shall not be unreasonably withheld, except to such Party's attorneys, advisors, investors and others on a need to know basis under circumstances that reasonably ensure the confidentiality thereof, or to the extent required by law. Notwithstanding the foregoing, the Parties shall agree upon a press release to announce the execution of this Agreement, together with a corresponding Q&A outline for use in responding to inquiries about the Agreement; thereafter, CombiChem and Teijin may each disclose to third parties the information contained in such press release and Q&A without the need for further approval by the other. In addition, Teijin and CombiChem may make public statements regarding the progress of the Research Program and the achievement of milestones and fees with respect thereto, following consultation and mutual agreement, the consent of neither Party to be unreasonably withheld. 10.4 Publication. Any manuscript by CombiChem or Teijin or its Affiliates describing the scientific results of the Research Program to be published at any time or within *** after the end of the Research Program Term shall be subject to the prior review of the Parties *** prior to submission. Further, to avoid loss of patent rights as a result of premature public disclosure of patentable information, the receiving Party shall notify the disclosing Party in writing within *** after receipt of any disclosure whether the receiving Party desires to file a patent application on any invention disclosed in such scientific results. In the event that the receiving Party desires to file such a patent application, the disclosing Party shall withhold publication or disclosure of such scientific results until the earlier of (i) a patent application is filed thereon, or (ii) the Parties determine after consultation that no patentable invention exists, or (iii) *** *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. -26- 31 after receipt by the disclosing Party of the receiving Party's written notice of the receiving Party's desire to file such patent application, or such other period as is reasonable for seeking patent protection. Further, if such scientific results contain the information of the receiving Party that is subject to use and nondisclosure restrictions under this Article 10, the disclosing Party agrees to remove such information from the proposed publication or disclosure. Following the filing of any patent application with respect to the Licensed Technology or the Teijin Technology, in the eighteen (18) month period prior to the publication of such a patent application neither Party shall make any public disclosure regarding any invention claimed in such patent application without the prior consent of the other Party. ARTICLE 11 REPRESENTATIONS AND WARRANTIES 11.1 Teijin. Teijin represents and warrants on its own behalf and on behalf of its Affiliates that: (i) it has the legal right and power to extend the rights granted in this Agreement; (ii) it has the legal power, authority and right to enter into this Agreement and to fully perform its obligations hereunder; (iii) it has not previously granted, and during the term of this Agreement will not knowingly make any commitment or grant any rights, which in any material way conflict with the rights and licenses granted herein; (iv) to the best of its knowledge as of the Effective Date, there are no existing or threatened actions, suits or claims pending against it with respect to the Teijin Technology or the Teijin Know-How; and (v) to the best of its knowledge as of the Effective Date, neither the Teijin Technology nor the Teijin Know-How includes intellectual property licensed from third parties that would require CombiChem to pay to such third parties a royalty to make, have made, use and sell Products. 11.2 CombiChem. CombiChem represents and warrants on its own behalf and on behalf of its Affiliates that: (i) it has the legal right and power to extend the rights granted in this Agreement; (ii) it has the legal power, authority and right to enter into this Agreement, and to fully perform its obligations hereunder; (iii) it has not previously granted, and during the term of this Agreement will not knowingly make any commitment or grant any rights, which in any material way conflict with the rights and licenses granted herein; (iv) to the best of its knowledge as of the Effective Date, there are no existing or threatened actions, suits or claims pending against it with respect to the Licensed Technology; and (v) to the best of its knowledge as of the Effective Date, the Licensed Technology does not include intellectual property licensed from third parties that would require Teijin to pay to such third parties a royalty to make, have made, use and sell Products. 11.3 Disclaimer. Teijin and CombiChem specifically disclaim any guarantee that the Research Program will be successful, in whole or in part. The failure of the Parties to successfully develop Collaboration Compounds or Products will not constitute a breach of any representation or warranty or other obligation under this Agreement. Neither Teijin nor CombiChem makes any representation or warranty or guaranty that the Research Program will be successful. EXCEPT AS OTHERWISE EXPRESSLY SET FORTH IN THIS AGREEMENT, COMBICHEM AND TEIJIN AND THEIR RESPECTIVE AFFILIATES MAKE NO REPRESENTATIONS AND EXTEND NO WARRANTIES OR CONDITIONS OF ANY KIND, EITHER EXPRESS OR IMPLIED, WITH RESPECT TO THE LICENSED -27- 32 TECHNOLOGY, TEIJIN TECHNOLOGY, TEIJIN KNOW-HOW, LIBRARIES, *** COMPOUNDS, *** COMPOUNDS, INFORMATION DISCLOSED PURSUANT TO ARTICLE 10 OR PRODUCTS INCLUDING, BUT NOT LIMITED TO, WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, VALIDITY OF ANY LICENSED TECHNOLOGY, TEIJIN TECHNOLOGY OR TEIJIN KNOW-HOW, PATENTED OR UNPATENTED, OR NONINFRINGEMENT OF THE INTELLECTUAL PROPERTY RIGHTS OF THIRD PARTIES. 11.4 No Consequential Damages. In no event shall either Party to this Agreement have any liability to the other for any special, consequential or incidental damages arising under this Agreement under any theory of liability. ARTICLE 12 INDEMNIFICATION 12.1 Teijin. Teijin agrees to indemnify, defend and hold CombiChem and its Affiliates and their directors, officers, employees and agents (the "CombiChem Indemnitees") harmless from and against any losses, costs, claims, damages, liabilities or expense (including without limitation, fees and disbursements of counsel incurred by the CombiChem Indemnitee in any action or proceeding between Teijin and the CombiChem Indemnitee and the CombiChem Indemnitee and any third party or otherwise) (collectively, "Liabilities") arising out of or in connection with third party claims relating to (i) any Products developed, manufactured, used, sold or otherwise distributed by or on behalf of Teijin, its Affiliates, Sublicensees or other designees (including, without limitation, product liability claims), (ii) Teijin and its Affiliates performance of the Research Program (including, without limitation, the Teijin chemist located at CombiChem's facility during the Research Program Term), or (iii) any breach by Teijin of the representations and warranties made in this Agreement, except, in each case, to the extent such Liabilities result from the gross negligence or intentional misconduct of CombiChem. 12.2 CombiChem. CombiChem agrees to indemnify, defend and hold Teijin, its Affiliates and Sublicensees and their respective directors, officers, employees and agents (the "Teijin Indemnitees") harmless from and against any losses, costs, claims, damages, liabilities or expense (including without limitation, fees and disbursements of counsel incurred by the Teijin Indemnitee in any action or proceeding between CombiChem and the Teijin Indemnitee and the Teijin Indemnitee and any third party or otherwise) (collectively, "Liabilities") arising out of or in connection with third party claims relating to (i) any Products developed, manufactured, used, sold or otherwise distributed by or on behalf of CombiChem, its Affiliates, Sublicensees or other designees (including, without limitation, product liability claims), (ii) the performance of the Research Program by CombiChem, or (iii) any breach by CombiChem of its representations and warranties made in this Agreement, except, in each case, to the extent such Liabilities resulted from the gross negligence or intentional misconduct of Teijin. *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. -28- 33 12.3 Procedure. In the event that any Indemnitee intends to claim indemnification under this Article 12 it shall promptly notify the other Party in writing of the alleged Liability. The indemnifying Party shall have the right to control the defense thereof with counsel of its choice; provided, however, that any Indemnitee shall have the right to retain its own counsel at its own expense, for any reason, including if representation of any Indemnitee by the counsel retained by the indemnifying Party would be inappropriate due to actual or potential differing interests between such Indemnitee and any other Party reasonably represented by such counsel in such proceeding. The affected Indemnitees shall cooperate with the indemnifying Party and its legal representatives in the investigation of any action, claim or liability covered by this Article 12. The indemnified Party shall not, except at its own cost, voluntarily make any payment or incur any expense with respect to any claim or suit without the prior written consent of the indemnifying Party, which such Party shall not be required to give. ARTICLE 13 DISPUTE RESOLUTION 13.1 General Arbitration. Any and all disputes between the Parties arising in connection with or relating in any way to the validity, construction, meaning, enforceability or performance of this Agreement or any of its provisions, or the intent of the Parties in entering into this Agreement, or (to the extent permitted by applicable law) any dispute relating to patent validity or infringement arising under or in connection with this Agreement, shall be settled by final and binding arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association ("AAA"). 13.2 Arbitration Procedures. 13.2.1 Any Party electing to refer a matter to arbitration pursuant to this Article (the "Petitioner") shall promptly notify the other Party in writing that it wishes to commence an arbitration proceeding under this Article 13 (the "Arbitration Notice"). The Arbitration Notice shall set forth: (i) the matter being referred to arbitration, (ii) the applicable Section of this Article 13 and (iii) the name of the individual selected by the Petitioner as one of the arbitrators. 13.2.2 Except as otherwise provided in this Article 13, there shall be three (3) arbitrators. Each Party shall select one (1) arbitrator. The Petitioner having appointed the first arbitrator in the Arbitration Notice, the other Party shall appoint the second arbitrator within twenty (20) days of receipt of the Arbitration Notice and shall notify the Petitioner of such appointment and submit its counter statement, if any, of the matter being referred to arbitration; provided, however, that if the other Party fails to make such appointment within such period, the Petitioner may request the AAA President to appoint a second arbitrator. Within twenty (20) days dafter the appointment of the second arbitrator, the two arbitrators shall appoint the third arbitrator; provided, however, that if the two arbitrators are unable to agree upon the third arbitrator within such period, either Party may request the AAA President to appoint the third arbitrator, who shall have appropriate qualifications in relation to the matter(s) in dispute. -29- 34 13.2.3 The arbitration proceedings shall be conducted in English in Los Angeles, California, unless otherwise agreed by the Parties, in accordance with the AAA Rules then in effect. Written evidence originally in a language other than English shall be submitted in English translation accompanied by the original or a true copy thereof. In any arbitration, the award of the arbitrators shall be final and binding upon the Parties and judgement upon the award may be entered in and enforced by any court of competent jurisdiction in accordance with the New York Convention on the Recognition and Enforcement of Arbitral Awards. The successful Party in such arbitration, in addition to all other relief provided, shall be entitled to an award of all its reasonable costs and expenses including attorney fees and deposits and payments to the AAA. Neither Party shall be required to provide security or post bond in respect of such costs, expenses and fees prior to rendering of an award. 13.3 Disqualification. Notwithstanding anything to the contrary herein, no person may serve as an arbitrator pursuant to this Article 13 if such person has a material interest or relationship (through employment, stock ownership, business dealings or otherwise) in or with a Party involved in the arbitration or any of its Affiliates, directors, officers or employees; provided, however, that serving as an arbitrator hereunder shall not constitute such a material interest or relationship for purposes of future arbitrations. 13.4 Confidentiality. All arbitration proceedings under this Article 13 shall be confidential and the arbitrators may issue appropriate protective orders to safeguard the Parties' Confidential Information (as such capitalized term is defined in Section 10.1 hereof). Except as required by law, neither Party shall make (or instruct any arbitrator to make) any public announcement with respect to the proceedings or decisions of any arbitration without the prior written consent of the other. The existence of any dispute submitted to arbitration pursuant to this Article 13, and the award of the arbitrators, shall be kept in confidence by the Parties and the arbitrators, except as required in connection with the enforcement of such award of implementation of such decisions, as mutually agreed by the Parties or as required by law. 13.5 Equity. This Article 13 shall not limit the rights of any Party to seek in any court of competent jurisdiction equitable relief in the circumstances referred to herein and/or such interim relief, and only such interim relief, as may be needed to maintain the status quo or otherwise protect the subject matter of the arbitration until the arbitrators shall have been appointed and shall have had an opportunity to act. ARTICLE 14 TERM AND TERMINATION 14.1 Term. Except as set forth below, the term of this Agreement shall begin as of the Effective Date, and shall continue in full force and effect on a country-by-country and Product-by-Product basis unless terminated as provided in this Article 14 until Teijin or CombiChem, or their respective Affiliates and Sublicensees, have no remaining royalty payment obligations in a country, at which time the Agreement shall expire in its entirety in such country. -30- 35 14.2 Termination for Cause. Either Party to this Agreement may terminate this Agreement in the event the other Party shall have materially breached or defaulted in the performance of any of its material obligations hereunder, and such default shall have continued for sixty (60) days after written notice thereof was provided to the breaching Party by the nonbreaching Party. Any termination shall become effective at the end of such sixty (60) day period unless the breaching Party (or any other party on its behalf) has cured any such breach or default prior to the expiration of the sixty (60) day; provided in the case of a failure to pay any amount due hereunder, such default may be the basis of termination fifteen (15) business days following the date that notice of such default was provided to the breaching Party. 14.3 Termination for Insolvency. If voluntary or involuntary proceedings by or against a Party are instituted in bankruptcy under any insolvency law, or a receiver or custodian is appointed for such Party, or proceedings are instituted by or against such Party for corporate reorganization or the dissolution of such Party, which proceedings, if involuntary, shall not have been dismissed within sixty (60) days after the date of filing, or if such Party makes an assignment for the benefit of creditors, or substantially all of the assets of such Party are seized or attached and not released within sixty (60) days thereafter, the other Party may immediately terminate this Agreement effective upon notice of such termination. 14.4 Effect of Breach or Termination. 14.4.1 Accrued Obligations. Termination of this Agreement for any reason shall not release either Party hereto from any liability which, at the time of such termination, has already accrued to the other Party or which is attributable to a period prior to such termination nor preclude either Party from pursuing all rights and remedies it may have hereunder or at law or in equity with respect to any breach of this Agreement. 14.4.2 Return of Materials. Subject to the terms and conditions of this Agreement, upon any termination of this Agreement, Teijin and CombiChem shall promptly return to the other all Confidential Information (including, without limitation, all Licensed Technology (in the case of Teijin) and all Teijin Technology and Teijin Know-How (in the case of CombiChem)), received from the other Party (except one copy of which may be retained for archival purposes); provided, however, in the event licenses remain in effect pursuant to Section 14.4.4 hereunder, the licensee under such license may retain all Confidential Information required to practice under such license. 14.4.3 Post-Termination Product Sales. In the event of the cancellation or termination of any license rights with respect to an Product prior to the expiration of this Agreement, inventory of the Product may be sold for up to six (6) months after date of termination, provided earned royalties are paid thereon. 14.4.4 Licenses. The licenses granted to Teijin herein shall terminate in the event of a termination by CombiChem pursuant to Section 14.2 or 14.3. The licenses granted to CombiChem shall terminate in the event of a termination by Teijin pursuant to Section 14.2 or 14.3; provided in the event of a termination by either Party, the licenses granted by -31- 36 the other Party shall remain in effect with respect to Licensed Technology (in the case of termination by Teijin) and Teijin Technology and Teijin Know-How (in the case of termination by CombiChem) existing as of the effective date of such termination, subject to the terms and conditions of this Agreement. If more than one Product is being commercially developed or exploited by a Party, its Affiliates or Sublicensees hereunder and a breach entitling the other Party to terminate this Agreement relates solely to a single Product, then the terminating Party shall be entitled to terminate this Agreement only with respect to the applicable Product. 14.5 Survival. Articles 6, 7, 8, 9, 10, 11, 12, 13 and 15 of this Agreement, as well as Sections 2.4, 2.5, 2.6, 2.7, 2.8, 2.9, 2.10, 5.3, 14.4 and this Section 14.5 shall survive the expiration or termination of this Agreement for any reason. ARTICLE 15 MISCELLANEOUS 15.1 Governing Laws. This Agreement and any dispute arising from the performance or breach hereof shall be governed by and construed and enforced in accordance with, the laws of the state of California, without reference to conflicts of laws principles. 15.2 No Implied Licenses. Only the licenses granted pursuant to the express terms of this Agreement shall be of any legal force or effect. No other license rights shall be created by implication, estoppel or otherwise. 15.3 Waiver. It is agreed that no waiver by either Party hereto of any breach or default of any of the covenants or agreements herein set forth shall be deemed a waiver as to any subsequent and/or similar breach or default. 15.4 Assignment. This Agreement shall not be assignable by either Party to any third party hereto without the written consent of the other Party hereto, except in the case of a Party to its designated Affiliate(s), provided such Party guarantees the performance of such Affiliate(s) in a customary manner; except either Party may assign this Agreement, without such consent, to an entity that acquires all or substantially all of the business or assets of such Party to which this Agreement pertains, whether by merger, reorganization, acquisition, sale, or otherwise. This Agreement shall be binding upon and accrue to the benefit any permitted assignee, and any such assignee shall agree to perform the obligations of the assignor. 15.5 Independent Contractors. The relationship of the Parties hereto is that of independent contractors. The Parties hereto are not deemed to be agents, partners or joint venturers of the others for any purpose as a result of this Agreement or the transactions contemplated hereby. 15.6 Compliance with Laws. In exercising their rights under this Agreement, the Parties shall fully comply in all material respects with the requirements of any and all applicable laws, regulations, rules and orders of any governmental body having jurisdiction over the exercise of rights under this Agreement including, without limitation, those -32- 37 applicable to the discovery, development, manufacture, distribution, import and export and sale of pharmaceutical products pursuant to this Agreement. 15.7 Patent Marking. Each Party agrees to mark and have its Affiliates and Sublicensees mark all Products sold pursuant to this Agreement in accordance with the applicable statute or regulations relating to patent marking in the country or countries of manufacture and sale thereof. 15.8 Notices. All notices, requests and other communications hereunder shall be in writing and shall be personally delivered or by registered or certified mail, return receipt requested, postage prepaid, in each case to the respective address specified below, or such other address as may be specified in writing to the other Parties hereto and shall be deemed to have been given upon receipt: CombiChem: CombiChem, Inc. 9050 Camino Santa Fe San Diego, California 92121 U.S.A. Attn: Chief Executive Officer Teijin: Teijin Limited 1-1, Uchisaiwai-cho 2-chome Chiyoda-ku, Tokyo Japan Attn: General Manager of the Planning Department, Medical and Pharmaceutical Group 15.9 Severability. In the event that any provision of this Agreement becomes or is declared by a court of competent jurisdiction to be illegal, unenforceable or void, this Agreement shall continue in full force and effect without said provision, and the Parties shall amend the Agreement to the extent feasible to lawfully include the substance of the excluded term to as fully as possible realize the intent of the Parties and their commercial bargain. 15.10 Force Majeure. Nonperformance of either Party (except for payment obligations) shall be excused to the extent that performance is rendered impossible by strike, fire, earthquake, flood, governmental acts or orders or restrictions, failure of suppliers, or any other reason where failure to perform is beyond the reasonable control and not caused by the negligence, intentional conduct or misconduct of the nonperforming Party, provided such Party uses diligent efforts to resume performance as promptly as possible. 15.11 Complete Agreement; Amendment. This Agreement with its Exhibits constitutes the entire agreement between the Parties with respect to the subject matter hereof. No amendment or change hereof or addition hereto shall be effective or binding on either of the Parties hereto unless reduced to writing and executed by the respective duty authorized representatives of CombiChem and Teijin. -33- 38 15.12 Headings. The captions to the several Sections hereof are not a part of this Agreement, but are included merely for convenience of reference only and shall not affect its meaning or interpretation. 15.13 Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed to be an original and all of which together shall be deemed to be one and the same agreement. [Remainder of This Page Intentionally Left Blank] -34- 39 IN WITNESS WHEREOF, the Parties hereto have caused this Agreement to be duly executed by their authorized representatives and delivered in duplicate originals as of the Effective Date. TEIJIN LIMITED COMBICHEM, INC. By: /s/ Takeshi Hara By: /s/ Vicente Anido, Jr. ----------------- ---------------------- Name: Takeshi Hara Name: Vicente Anido, Jr. ----------------- -------------------- Title: Director, Member of the Board Title: President & CEO ------------------------------ -------------------- -35- 40 EXHIBIT A Research Plan (Outline) *** *** *** *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. A-1 41 EXHIBIT B Library Compounds Each tube will contain a minimum of *** of a Library Compound *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. B-1 42 EXHIBIT C Initial Representatives on the Research Committee CombiChem: John Saunders (Chief Representative) Christine Darby Daniel Sun Teijin: Yoshinori Kato (Chief Representative) Noriaki Endo Atsuo Hazato C-1 43 AMENDMENT TO THE COLLABORATION AGREEMENT This Amendment (the "Amendment"), effective as of the date March 29, 1997 (the "Effective Date"), is made by and between CombiChem, Inc., a California corporation, having a principal place of business at 9050 Camino Santa Fe, San Diego, California 92121, U.S.A. ("CombiChem") and Teijin Limited, an entity organized and existing under the laws of Japan, having a principal place of business at 6-7 Minami-hommachi 1-chome, Chuo-ku, Osaka 541, Japan ("Teijin"). BACKGROUND A. CombiChem and Teijin entered into the COLLABORATION AGREEMENT dated March 29, 1996 relating to *** and the *** (hereinafter referred to as Original Agreement); and B. CombiChem and Teijin desire to amend the Original Agreement in order to modify the Research Program (as defined in the Original Agreement) and to extend the Research Program Term (as defined in the Original Agreement); NOW THEREFORE, for and in consideration of the covenants, conditions, and undertakings hereinafter set forth, it is agreed by and between CombiChem and Teijin as follows: ARTICLE 1 CombiChem and Teijin hereby agree that the Research Program Term shall be extended for additional one (1) year term from March 29, 1997 in accordance with Section 2.3 of the Original Agreement. ARTICLE 2 CombiChem and Teijin agree to modify the Original Agreement as follows: 1.25 "Library" shall mean a chemical compound library whose design has been approved by the Research Committee (as defined below) containing: i) for the one year period beginning March 29, 1996 approximately *** *** prepared by CombiChem ii) for the one year period beginning March 29, 1997, approximately *** *** prepared by CombiChem specifically for screening the Collaboration based on proprietary structures (a) with activity disclosed by Teijin to CombiChem or (b) generated by CombiChem on behalf of Teijin, in each case, in connection with the Collaboration. *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. -1- 44 1.29 Section 1.29 will be amended so reflect the following: "*** Activity" shall mean *** and *** as an *** *** that may contain *** of the *** *** *** . 2.1.1 (a) During the Research Program Term, CombiChem shall synthesize libraries as follows: i) for the one year period beginning March 29, 1996, *** libraries ii) for the one year period beginning March 29, 1997, *** libraries 6.2 Section 6.2 will be amended to reflect the following:
Contact Year Aggregate Annual Research Fee 2 *** (for the one year period beginning March 29, 1997)
EXHIBIT A Exhibit A attached to the Original Agreement will be supplemented with the attached Exhibit A-2 for one year period beginning March 29, 1997. EXHIBIT B Exhibit B attached to the Original Agreement will be supplemented with the attached Exhibit B-2 for one year period beginning March 29, 1997. EXHIBIT C Exhibit C attached to the Original Agreement will be supplemented with the attached Exhibit C-2 for one year period beginning March 29, 1997. ARTICLE 3 This Amendment shall be effective as of the Effective Date. *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. -2- 45 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed by their authorized representatives and delivered in duplicate originals as of the Effective Date. TEIJIN LIMITED COMBICHEM, INC. By: /s/ Tatsuyuki Naruchi By:/s/ Vicente Anido, Jr. -------------------------- ----------------------- Name: Tatsuyuki Naruchi Name: Vicente Anido, Jr. Title: Managing Director, General Manager Title: President & C.E.O. Planning & Research Division Medical & Pharmaceutical Group -3- 46 EXHIBIT A-2 Research Plan (Outline)# *** *** *** *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. 47 EXHIBIT B-2 LIBRARY COMPOUNDS Each tube will contain a minimum of *** of a Library Compound. *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. 48 EXHIBIT C-2 Representatives on the Research Committee Teijin: Yoshinori Kato (Chief Representative) Noriaki Endo Atsuo Hazato CombiChem: Christine Tarby (Chief Representative) John Saunders EX-10.20 3 EXHIBIT 10.20 1 EXHIBIT 10.20 COLLABORATIVE RESEARCH AND LICENSE AGREEMENT BETWEEN ROCHE BIOSCIENCE AND COMBICHEM, INC. October 25, 1996 2 TABLE OF CONTENTS
Page ---- 1. DEFINITIONS................................................................. 1 2. RESEARCH COLLABORATION...................................................... 6 2.1 CCI Responsibilities................................................. 6 2.2 RBS Responsibilities................................................. 6 2.3 Participation by RBS Affiliates...................................... 6 3. RESEARCH PROGRAMS........................................................... 6 3.1 Selection of Approach................................................ 6 3.2 Lead Generation Program.............................................. 6 3.3 Lead Evolution Program............................................... 7 3.4 Lead Optimization Program............................................ 7 3.5 Termination *** ...............................7 3.6 Termination *** ............................ 7 3.7 Extension of Programs................................................ 7 4. TARGETS..................................................................... 8 4.1 Initial Targets...................................................... 8 4.2 Optional Targets..................................................... 8 4.3 Related Targets...................................................... 8 4.3.1 Identification of Related Targets Prior to Commencement of Research Program..................................................... 8 4.3.2 Identification of Related Targets During Research Progr8m..... 8 4.4 Related Target Becoming Optional Target.............................. 9 4.5 Refining Collaboration Targets....................................... 9 4.6 Maximum Number of Targets............................................ 9 5. TARGET EXCLUSIVITY.......................................................... 9 5.1 Collaboration Target Exclusivity..................................... 9 5.2 Related Target Exclusivity........................................... 9 6. COLLABORATION COMPOUNDS..................................................... 10 6.1 Collaboration Compound Exclusivity................................... 10 6.2 Pre-Existing and Restricted Compounds................................ 10 6.3 Intellectual Property Rights......................................... 10 6.4 Screening Rights..................................................... 10 6.5 Active Collaboration Compounds Against Related Targets............... 11 6.6 Supply of Collaboration Compounds.................................... 11
*** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. (i) 3 7. RESEARCH MANAGEMENT & PLAN.................................................. 11 7.1 Research Management Committee........................................ 11 7.2 Project Teams........................................................ 12 7.3 Research Plans....................................................... 12 8. COLLABORATION TERM AND TERMINATION.......................................... 12 8.1 Term................................................................. 12 8.2 Termination by RMC................................................... 12 8.3 Termination by RBS or CCI............................................ 12 8.4 Termination of Research Funding...................................... 12 9. PAYMENT OBLIGATIONS......................................................... 13 9.1 Project Initiation Fee............................................... 13 9.2 Research Funding..................................................... 13 9.3 Milestone Payments................................................... 13 9.4 Royalties............................................................ 13 9.4.1 Royalty Rates................................................. 13 9.4.2 Other Patents................................................. 14 9.4.3 Combination Product........................................... 14 9.5 Option to Purchase Equipment......................................... 14 10. LOGISTICS OF PAYMENT; REPORTS; RECORDS; AUDITS.............................. 15 10.1 Payment and Reports.................................................. 15 10.2 Method of Payment.................................................... 15 10.3 Roche Exchange Rate.................................................. 15 10.4 CCI Exchange Rate.................................................... 15 10.5 Financial Records and Audit Rights................................... 16 10.6 Time Records......................................................... 16 10.7 Taxes................................................................ 16 11. LICENSE GRANT............................................................... 16 11.1 CCI Grant to RBS..................................................... 16 11.2 RBS Due Diligence Failure............................................ 17 11.2.1 RBS Grant Back to CCI......................................... 17 11.2.2 Flat Fee...................................................... 17 11.2.3 *** ......................................... 17 12. TERM AND TERMINATION OF THE AGREEMENT....................................... 17 12.1 Term................................................................. 17 12.2 Termination.......................................................... 17 12.3 Results of Termination............................................... 17 13. CONFIDENTIAL INFORMATION.................................................... 18 13.1 Nondisclosure........................................................ 18 13.2 Exceptions........................................................... 18
*** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. (ii) 4 14. PUBLICATIONS................................................................ 18 15. PUBLIC STATEMENTS........................................................... 19 16. INDEMNIFICATION............................................................. 19 17. ASSIGNABILITY............................................................... 19 18. DISPUTE RESOLUTION PROCEDURES............................................... 19 18.1 Senior Executives Discussions........................................ 19 18.2 Non-Binding Mediation................................................ 20 18.3 Binding Arbitration.................................................. 20 18.4 Injunctive Relief.................................................... 20 19. NOTICES..................................................................... 21 20. INDEPENDENT CONTRACTOR...................................................... 22 21. SURVIVAL.................................................................... 22 22. ADDITIONAL TERMS............................................................ 22 22.1 Entire Agreement..................................................... 22 22.2 Amendments; No Waiver................................................ 22 22.3 Validity............................................................. 22 22.4 Headings............................................................. 22 22.5 Counterparts......................................................... 22
(iii) 5 COLLABORATIVE RESEARCH AND LICENSE AGREEMENT THIS COLLABORATIVE RESEARCH AND LICENSE AGREEMENT (the "Agreement") is entered into on October 25, 1996 (the "Effective Date"), by and between ROCHE BIOSCIENCE, a division of Syntex (U.S.A.) Inc., a Delaware corporation, having offices at 3401 Hillview Avenue, Palo Alto, California 94304 ("RBS") and COMBICHEM, INC. a California corporation having offices at 9050 Camino Santa Fe, San Diego, California 92121 ("CCI"). RBS and CCI may be referred to herein as a "Party" or, collectively, as "Parties." WHEREAS, CCI has developed and owns certain drug discovery technology and intellectual property rights, including chemical library design software, combinatorial organic synthesis methods, chemical libraries suitable for high throughput biological screening assays and medicinal chemistry; WHEREAS, the Parties wish to collaborate with the objective of accelerating RBS's drug discovery activities using CCI Technology (as defined below) in Research Programs (as defined below) against Collaboration Targets (as defined below) (the "Collaboration"); NOW, THEREFORE, the Parties agree as follows: 1. DEFINITIONS 1.1 "Additional Royalties" has the meaning set forth in Section 9.4.2. 1.2 "ADR" has the meaning set forth in Section 18.2. 1.3 "Affiliate" of a Party means any corporation or other business entity controlled by, controlling or under common control with such Party. For this purpose "control" shall mean direct or indirect beneficial ownership of more than fifty percent (50%) of the voting or income interest in such corporation or other business entity, or if not meeting the preceding requirement, any company owned or controlled by or owning or controlling a Party at the maximum control or ownership right permitted in the country where such company exists; provided, however, Genentech, Inc., with offices located at 460 Point San Bruno Boulevard, South San Francisco, California, 94080, shall not be considered an Affiliate of RBS unless RBS so notifies CCI that Genentech shall be deemed an Affiliate. 1.4 "CCI Net Sales" means the gross sales invoiced by CCI or its Affiliates or sublicensees for Returned Products to non-Affiliated third parties less (i) actual deductions of returns (including withdrawals and recalls), rebates (price reductions, including Medicaid and similar types of rebates e.g. chargebacks), volume (quantity) discounts, discounts granted at the time of invoicing, sales taxes and other taxes (other than income taxes) directly linked to and included in the gross sales amount as computed on a product-by-product basis for the countries concerned, whereby the amount of such sales in foreign currencies is converted into United States dollars in accordance with Section 10.4 (the "CCI Adjusted Gross Sales"), and 1 6 (ii) less a lump sum deduction of *** of *** for those sales related deductions which are not accounted for on a product-by-product basis. 1.5 "CCI Technology" means those CCI Patents and know-how related exclusively to the Collaboration Compounds. 1.6 "Collaboration" has the meaning set forth in the preamble. 1.7 "Collaboration Compound Exclusivity Period" for a Collaboration Compound means (a) with respect to a Collaboration Compound with Target Activity, the earlier of (i) the publication of a Patent covering the Collaboration Compound or (ii) five (5) years following the end of the applicable Research Program Period; and (b) with respect to a Collaboration Compound with no Target Activity, the earlier of (i) the publication of a Patent covering the Collaboration Compound or (ii) two (2) years following the end of the applicable Research Program Period. 1.8 "Collaboration Compounds" means Library Compounds and Derivative Compounds synthesized under the direction of the RMC, by either RBS or CCI or their respective Affiliates. 1.9 "Collaboration Library" means a library synthesized under the direction of the RMC, containing compounds designed to provide information regarding activity against a specific Collaboration Target. 1.10 "Collaboration Product(s)" means any product containing a compound which has demonstrated activity against a Collaboration Target and is either (i) a Library Compound or (ii) a Derivative Compound. 1.11 "Collaboration Target" means either an Initial Target or an Optional Target. 1.12 "Collaboration Target Exclusivity Period" for a Collaboration Target means two years following the end of the applicable Research Program Period. 1.13 "Collaboration Term" has the meaning set forth in Section 8. 1. 1.14 "Combination Product" has the meaning set forth in Section 9.4.3. 1.15 "Confidential Information" includes (i) all information and materials received by either Party from the other Party either prior to execution of or pursuant to this Agreement; (ii) all structure-activity data or structure data relating to a Collaboration Compound; and (iii) the material financial terms of this Agreement. 1.16 "Development Candidate" means a Collaboration Compound that has been selected by RBS for *** studies for an Initial Target, Optional Target or Related Target. *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. 2 7 1.17 "Derivative Compound" is a compound which meets the following criteria: If a compound is synthesized ***the relevant If a compound is synthesized during the time Collaboration Target Exclusivity Period, it period***the relevant Collaboration Target must Exclusivity Period and***the relevant Collaboration Compound Exclusivity Period, it must (i) result from a chemical synthesis program (i) result from a chemical synthesis program directly based on*** or directly based on*** or (ii) be based on *** *** *** (ii)*** data *** under *** AND (iii) be a compound that is *** ***(as defined below) in existence at the time the Research Program is terminated shall not be deemed a Derivative Compound.
1.18 "$" or "dollar" means United States currency. 1.19 "Due Diligence" means the use of Roche resources in a manner which is consistent with the exercise of prudent scientific and business judgment as applied to other Roche programs targeting products aimed at markets or patient groups of similar sizes and of similar scientific and commercial potential. 1.20 "Field" means all therapeutic and diagnostic indications for the Collaboration Targets and the Related Targets. 1.21 "First Commercial Sale" of a Product shall mean the first sale for use or consumption of such Product in a country after required marketing and pricing approval has been granted by the governing health regulatory authority of such country. Sale to an Affiliate or sublicensee shall not constitute a First Commercial Sale unless the Affiliate or sublicensee is the end user of the Product. 1.22 "Flat Fee" has the meaning set forth in Section 11.2.2. 1.23 "Initial Targets" has the meaning set forth in Section 4. 1. 1.24 "Lead Evolution Program" has the meaning set forth in Section 3.3. 1.25 "Lead Generation Program" has the meaning set forth in Section 3.2. *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. 3 8 1.26 "Lead Optimization Program" has the meaning set forth in Section 3.4. 1.27 "Library Compound" means a compound contained in a Collaboration Library and which compound is not a Pre-existing Compound or a Restricted Compound (unless that Restricted Compound becomes a Development Candidate). 1.28 "Losses" has the meaning set forth in Section 16. 1.29 "Net Sales" means the gross sales invoiced by RBS or its Affiliates or sublicensees for Products to non-Affiliated third parties less (i) actual deductions of returns (including withdrawals and recalls), rebates (price reductions, including Medicaid and similar types of rebates e.g. chargebacks), volume (quantity) discounts, discounts granted at the time of invoicing, sales taxes and other taxes (other than income taxes) directly linked to and included in the gross sales amount as computed in the central Roche's Swiss Francs Sales Statistics on a product-by-product basis for the countries concerned, whereby the amount of such sales in foreign currencies is converted into Swiss Francs in accordance with Section 10.3 (the "Adjusted Gross Sales"), and (ii) less a lump sum deduction of *** of Adjusted Gross Sales for those sales related deductions which are not accounted for on a product-by-product basis. 1.30 "Non-Royalty Bearing Component(s)" has the meaning set forth in Section 9.4.3. 1.31 "Optional Targets" means a Target that is added to the Collaboration in accordance with Section 4.2. 1.32 "Patent" means (i) valid and enforceable Letters Patent, including any extension (including Supplemental Protection Certificate), registration, confirmation, reissue, continuation, divisionals, continuation-in-part, reexamination or renewal thereof, and (ii) pending applications for any of the foregoing. 1.33 "Patent Protected" means that a Product is covered by a Valid Claim of patent rights with respect to such Product in the country where sold. 1.34 "Pre-existing Compound" means any compound that is in existence at the commencement of a Research Program which may be contributed to the Collaboration Library by RBS or CCI and with such contributed compound owned by any of RBS, CCI, their Affiliates or a Third Party. 1.35 "Prior Art" with respect to determining whether a compound is a Derivative Compound shall be determined by using the standards of patentability of such compound with respect to either chemical or biological activity. 1.36 "Product(s)" means Collaboration Product(s) and/or Related Product(s). 1.37 "Project Leader" means the person appointed by a Party to supervise and be *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. 4 9 accountable for that Party's responsibilities with respect to a Research Program. 1.38 "Publications Committee" shall consist of the co-chairs of the RMC. 1.39 "Related Product(s)" shall mean any product containing a compound which has demonstrated activity against a Related Target in accordance with Section 6.5 and is either (i) a Library Compound or (ii) a Derivative Compound. 1.40 "Related Target" means a Target which the parties have identified, in accordance with Section 4.3, as being closely related to a Collaboration Target. 1.41 "Related Target Exclusivity Period" means the term of a Research Program for the associated Initial Target or Optional Target plus twelve (12) months. 1.42 "Related Target Notice' has the meaning set forth in Section 6.5. 1.43 "Research Program" means any or all of a Lead Evolution Program or a Lead Generation Program or a Lead Optimization Program. 1.44 "Research Program Period" means two years from commencement of a Lead Generation Program and one year from commencement of a Lead Optimization Program or a Lead Evolution Program, unless any such Research Program is terminated early or extended pursuant to the terms of this Agreement. 1.45 "Restricted Compound" means a compound that RBS may synthesize during the course of a Research Program as part of another collaboration against a Target other than a Collaboration Target or Related Target but which RBS screens against a Collaboration Target or Related Target. 1.46 "Returned Product" has the meaning set forth in Section 11.2.l. 1.47 "Roche" means RBS and its Affiliates. 1.48 "Royalty Bearing Component(s)" has the meaning set forth in Section 9.4.3. 1.49 "Royalty Paying Party" has the meaning set forth in Section 10.5. 1.50 "Royalty Receiving Party" has the meaning set forth in Section 10.5. 1.51 "Royalty Term" means, in the case of any Product, in any country, the period of time commencing on the First Commercial Sale and ending upon the later of (a) ten (10) years from the date of First Commercial Sale in such country; or (b) the expiration of the last to expire issued Patent with claims covering that Product in the relevant country. 1.52 "Target" means a biomolecular entity that a small molecule is synthesized against demonstrating relevant activity. 5 10 1.53 "Target Activity" means having activity that meets *** of the criteria specified for the *** for the appropriate Collaboration Target during the relevant Research Program Period, which criteria are set forth on Appendix A. 1.54 "Territory" means all countries world-wide. 1.55 "Third Party" means any entity other than CCI or RBS or an Affiliate of CCI or RBS. 1.56 "UIL" means CCI's proprietary Universal Informer Library(TM). 1.57 "Valid Claim" means a claim of an issued Patent which claim has not lapsed, been canceled or become abandoned and has not been declared invalid by an unreversed and unappealable decision or judgment of a court or other appropriate body of competent jurisdiction, and which has not been admitted to be invalid or unenforceable through reissue or disclaimer. 2. RESEARCH COLLABORATION 2.1 CCI RESPONSIBILITIES. CCI will conduct Research Programs against Collaboration Targets in accordance with the terms of this Agreement. 2.2 RBS RESPONSIBILITIES. RBS will provide funding for the Collaboration as outlined in Article 9.2, provide screening, biological, and structural data to CCI with respect to the Collaboration Compounds necessary for CCI to perform its duties under this Agreement, and will assume scientific, financial and administrative responsibility for screening and biological support activities, drug development and regulatory filings during and after the term of Collaboration in accordance with the terms of this Agreement. 2.3 PARTICIPATION BY RBS AFFILIATES. Upon an Affiliate of RBS agreeing in writing to be bound by the terms and conditions of this Agreement, RBS may propose Optional Targets on behalf of such Affiliate. Employees of such Affiliate may become Project Leaders and RBS may designate employees of such Affiliate to be members of the RMC as specified in Article 7 hereof. 3. RESEARCH PROGRAMS 3.1 SELECTION OF APPROACH. The parties shall agree upon one of the approaches set forth below for each Research Program against each Collaboration Target. The start date of each Research Program shall be as decided by the RMC, but at least one of the Research Programs for the Initial Targets shall have commenced by January 1, 1997, and the final two Research Programs for the Initial Targets shall have commenced by May 1, 1997. 3.2 LEAD GENERATION PROGRAM. In a Lead Generation Program, only the Target is known. There are no robust structural hypotheses available that will facilitate rapid inhibitor, agonist or antagonist design. The Lead Generation Program requires use of the UIL. *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. 6 11 Potential Development Candidates will be identified through iterative generations of Collaboration Libraries resulting in compounds with increased selectivity/affinity with respect to the Collaboration Target. A Lead Generation Program will last *** unless terminated *** sooner pursuant to Section 3.5 or Section 8.2 or Section 8.3 or extended pursuant to Section 3.7. 3.3 LEAD EVOLUTION PROGRAM. A Lead Evolution Program is a research program in which RBS provides CCI data on a lead series for evolution to a different structural series or there exists a robust structural hypothesis available that will facilitate rapid inhibitor, agonist or antagonist design. Potential Development Candidates will be identified through iterative generations of Collaboration Libraries. A Lead Evolution Program will last *** unless terminated *** sooner pursuant to Section 3.6 or Section 8.2 or Section 8.3 or extended pursuant to Section 3.7. 3.4 LEAD OPTIMIZATION PROGRAM. A Lead Optimization Program is a research program in which RBS provides CCI with data on a suboptimal lead series for iteration and refinement. A Lead Optimization Program will last *** unless terminated sooner pursuant to Section 8.2 or Section 8.3 or extended pursuant to Section 3.7. 3.5 TERMINATION *** . If the first milestone is not achieved in a Timely Fashion for any Lead Generation Program, the Program will either be terminated or *** depending on which of these options is more appropriate in the determination of the RMC. "Timely Fashion" for any Lead Generation Program shall mean the time necessary to accomplish all of the following: (i) screening of the UIL to generate hypotheses; (ii) synthesis and screening of a library designed based upon hypotheses generated in (i); and (iii) synthesis and screening of a library designed based upon hypotheses generated in (ii). A program cannot be terminated for failure to meet the milestone in a Timely Fashion in less than *** following initiation of such Research Program unless the RMC agrees otherwise. 3.6 TERMINATION *** If the first milestone is not achieved in a Timely Fashion for any Lead Evolution Program, the Program will either be terminated or *** depending on which of these options is more appropriate in the determination of the RMC. "Timely Fashion" for any Lead Evolution Program shall mean the time necessary to accomplish the following: (i) synthesis and screening of libraries designed based upon data from RBS or CCI or existing literature; (ii) synthesis and screening of a library designed based upon hypotheses generated in (i); and (iii) synthesis and screening of a library designed based upon hypotheses generated in (ii). A program cannot be terminated for failure to meet the milestone in a Timely Fashion in less than *** following initiation of such Research Program unless the RMC agrees otherwise. 3.7 EXTENSION OF PROGRAMS. The term of any Research Program may be extended up to an additional six (6) months per Research Program upon the recommendation of the RMC, provided, however, that the aggregate amount of extensions for Research Programs shall not exceed an incremental aggregate total of FTEs equal to *** *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. 7 12 *** over the life of this Agreement for all such Research Program extensions. 4. TARGETS 4.1 INITIAL TARGETS. The Collaboration will initially focus on the following Targets: *** *** *** *** (collectively, the "Initial Targets"). Prior to the proposed commencement date of a Research Program for an Initial Target, RBS may substitute another Target as an Initial Target. Acceptance of a proposed substitute Initial Target shall follow the procedures set forth in Section 4.2 for selection of Optional Targets. 4.2 OPTIONAL TARGETS. During the Collaboration Term, RBS may add up to *** additional Targets to the Collaboration as Optional Targets with the Research Program for such Optional Target to begin with ninety (90) days of notification or as mutually agreed by the parties. If RBS is interested in adding a Target to the Collaboration, RBS shall notify CCI in writing that it wishes to make such Target an Optional Target. If CCI has delivered a term sheet to any Third Party and remains engaged in discussions to enter into a binding agreement with such Third Party with respect to the proposed Target at the time of notification, CCI shall inform RBS that such proposed Target is not available. Otherwise CCI shall negotiate with RBS in good faith, based upon reasonable scientific judgment, to add such Target as an Optional Target. The RMC will establish the specific scientific achievements for such Target that correspond to (i) the Milestone Structure Schedule in Appendix A and (ii) the commercial terms of Appendix C. Any such scientific achievements must be mutually-agreed between RBS and CCI within *** of delivery of such notification and upon such agreement, such Target may be added to the Collaboration as an Optional Target. Mutual agreement under this Section 4.2 and under Section 4.3 shall mean the agreement of RBS and CCI without recourse to the dispute resolution mechanism set forth in Section 7. 1. 4.3 RELATED TARGETS. RBS may designate *** during each Research Program *** of certain Related Targets to be mutually agreed upon by the parties based on reasonable scientific arguments. 4.3.1 IDENTIFICATION OF RELATED TARGETS PRIOR TO COMMENCEMENT OF RESEARCH PROGRAM. Related Targets for the Initial Targets will be identified and agreed upon by RBS and CCI and will be detailed in a Appendix B. Related Targets for the Optional Targets will be identified and agreed upon by RBS and CCI prior to commencement of the Research Program for such Optional Target, based on reasonable scientific arguments consistent with the format and approach set forth on Appendix A. 4.3.2 IDENTIFICATION OF RELATED TARGETS DURING RESEARCH PROGRAM. Either Party may identify Targets as being Related Targets throughout the applicable Research Program, which shall be agreed upon by the RMC based on reasonable scientific arguments as *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. 8 13 applied to the associated *** , if any, and set forth in an amendment to Appendix B; provided, however, that if CCI has delivered a term sheet to any Third Party and remains in discussions to enter into a binding agreement with such Third Party with respect to the proposed Target prior to such Target being identified as a potential Related Target, then such Target shall not become a Related Target. 4.4 RELATED TARGET BECOMING OPTIONAL TARGET. If RBS proposes to make a Target an Optional Target and such Target is already a Related Target, the provisions set forth in Section 4.3 relating to the format and approach would supersede the provisions of Section 4.2; provided, however, that the commercial terms of Appendix C rather than Appendix D shall apply to such Optional Target. If there is a dispute, the dispute resolution mechanism set forth in Section 7.1 shall be utilized. 4.5 REFINING COLLABORATION TARGETS. The RMC may refine the definition of a Collaboration Target based upon reasonable scientific judgment. 4.6 MAXIMUM NUMBER OF TARGETS. The Collaboration may be expanded to a total of *** projects subject to the provisions of Section 4.2; provided, however that after the Collaboration initiates *** Collaboration Targets, RBS shall pay an upfront fee of *** *** per Optional Target for the final *** Optional Targets (Collaboration Target numbers *** ) upon the commencement of the Research Program for each such Optional Target. 5. TARGET EXCLUSIVITY 5.1 COLLABORATION TARGET EXCLUSIVITY. During the Collaboration Target Exclusivity Period, CCI shall not work on such Collaboration Target with any party other than RBS or its Affiliates; provided, however, that if RBS (i) elects not to continue development of Collaboration Compounds against a Collaboration Target or (ii) ceases to pursue development of any Collaboration Compound with Due Diligence against a Collaboration Target and is not pursuing another Collaboration Compound against the same Collaboration Target, the Collaboration Target Exclusivity Period for such Collaboration Target will terminate and CCI will thereafter be free to work with any Third Party with respect to such Collaboration Target. In addition, following termination of the relevant Collaboration Target Exclusivity Period, CCI shall be free to work with any Third Party on a Collaboration Target. 5.2 RELATED TARGET EXCLUSIVITY. During the Related Target Exclusivity Period, CCI will not work on any Related Target with any party other than RBS or its Affiliates except as set forth herein. If CCI is approached by a Third Party to work on a Related Target, CCI shall notify RBS in writing of the existence of Third Party interest with respect to such Related Target. RBS has *** from receipt of such notice to notify CCI in writing that RBS wishes to make such Related Target an Optional Target. If RBS fails to respond within such *** period, RBS shall be deemed to have approved CCI moving forward with negotiations with a Third Party with respect to such Related Target; provided, however, that RBS shall retain all rights to the Collaboration Compounds with *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. 9 14 respect to such Related Target subject to the terms hereof. If the *** is not a business day, the *** shall be deemed to be the next business day following. Upon commencement of the Research Program, such Related Target becomes an Optional Target and all of the terms and conditions applicable to a Optional Target, including but not limited to, application of the Collaboration Target Exclusivity Period rather than the Related Target Exclusivity Period apply to such Target. Nothing contained in this Agreement shall imply that CCI may not work with other parties on Related Targets using compounds other than Collaboration Compounds provided that any libraries utilized in such work are designed independently of Confidential Information provided by RBS. 6. COLLABORATION COMPOUNDS 6.1 COLLABORATION COMPOUND EXCLUSIVITY. Except as set forth in Section 6.2 and 6.4 and subject to Section 11.2, RBS shall have exclusive rights with respect to the Collaboration Compounds during the applicable Collaboration Compound Exclusivity Period. 6.2 PRE-EXISTING AND RESTRICTED COMPOUNDS. CCI shall have no rights to any RBS Pre-existing Compound or to any Restricted Compound, unless and until such Restricted Compound is designated as a Development Candidate. RBS shall have no rights to any CCI Pre-existing Compound unless and until such CCI Pre-existing Compound is designated as a Development Candidate; provided, however, that CCI shall retain all rights to all compounds in the UIL. 6.3 INTELLECTUAL PROPERTY RIGHTS. Subject to Section 11.2, RBS shall retain exclusive rights to all intellectual property with respect to the Collaboration Compounds during the applicable Collaboration Compound Exclusivity Period. RBS shall not obtain any rights in the UIL as a result of the Collaboration. RBS shall be responsible for filing, maintaining and prosecuting all Patents with claims covering Collaboration Compounds at its sole expense. Immediately prior to filing of a patent application for a Collaboration Compound, CCI shall assign all intellectual property rights it may have in such Collaboration Compound to RBS or its designee. RBS may elect upon *** prior written notice to CCI (given at least *** prior to any relevant deadline to (a) discontinue prosecution or maintenance or (b) not to file or conduct any further activities (including conducting any interferences, re-examinations, reissues, or oppositions) with respect to a Patent. CCI shall have the right to request that RBS or its designee prosecute, maintain, file or conduct further activities. If RBS or its designee elects not to file, maintain, or prosecute a Patent, CCI shall have the right to take over such filing, maintenance or prosecution, at its sole expense. 6.4 SCREENING RIGHTS. Each Party shall be free to screen Collaboration Compounds made during the applicable Research Program Period as follows: (a) following expiration of the relevant Collaboration Target Exclusivity Period, against any Target; (b) at any time, for screening against any Target other than the Collaboration Targets; and (c) at any time, for screening for *** but such screening may be done either *** *** , against Related Targets and to use the information from such screening to develop *** to generate new compounds and evolve to a novel *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. 10 15 structural series which is a patentable chemical entity. 6.5 ACTIVE COLLABORATION COMPOUNDS AGAINST RELATED TARGETS. If either Party determines that a Collaboration Compound has in-vitro activity, *** *** against a Related Target (which level of in-vitro activity may be altered for a particular Related Target at such time as the Related Target is identified in accordance with Section 4.3), such Party shall provide written notice to the other Party within *** following such determination (the "Related Target Notice"). Within *** of receipt of such Related Target Notice, the parties shall begin negotiations to add such Related Target as a Research Program on terms and conditions as set forth in Appendix C with the specific lead approach to be determined by the RMC and other terms and conditions to be mutually agreed. If RBS and CCI are unable to come to mutually-agreeable terms within an additional *** , RBS will notify CCI (a) whether RBS (or Roche or a sublicensee) will pursue independent development of the Collaboration Compound against the Related Target in which case CCI shall receive compensation as set forth in Appendix D or (b) if RBS does not choose such independent development, CCI may pursue independent development of the Collaboration Compound against the Related Target in which case RBS shall receive compensation as set forth in Appendix D; or (c) that CCI and RBS may each pursue independent development of the Collaboration Compound against the Related Target in which case neither Party shall owe the other Party royalties. *** made *** . 6.6 SUPPLY OF COLLABORATION COMPOUNDS. Aliquots of at least *** of any Collaboration Compound that has been synthesized and characterized will be prepared and given to RBS *** of such synthesis and characterization. CCI shall replenish that amount within *** of RBS's reasonable request. CCI shall keep aliquots of any Collaboration Compound that has been synthesized at CCI. RBS will have primary responsibility for synthesizing large amounts of Collaboration Compounds, but CCI will assist RBS as agreed to by CCI's Vice President of Chemistry at the time of such request. 7. RESEARCH MANAGEMENT & PLAN 7.1 RESEARCH MANAGEMENT COMMITTEE. The design, review and conduct of the Research Program for each Collaboration Target will be coordinated by a Research Management Committee ("RMC"), which will meet quarterly. The RMC will consist of an equal number of members from RBS (or Roche if RBS so elects) and CCI, will include the Project Leaders and other appropriate representatives from RBS and CCI as mutually agreed, and will be co-chaired by scientists from each of RBS and CCI. Decisions of the RMC shall be by consensus. If a decision is not reached by the RMC with respect to management of the applicable Research Program during the term of such Research Program, the dispute will be referred to the co-chairs of the RMC. The co-chairs of the RMC will initially be the VP-Chemistry of CCI and Therapy Head Director of RBS and subsequently may change as mutually-agreed upon by the Parties. If the co-chairs of the RMC are unable to resolve the dispute, the dispute will be referred to CCI's Chief Scientific Officer and to a VP, Chemical and Pharmaceutical Services from RBS. If they are unable to reach an agreement, such dispute will be referred to CCI's Chief Executive Officer and the Senior Vice President, Head *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. 11 16 of the Inflammatory Disease Unit of RBS. If such officers are unable to reach an agreement, CCI's Chief Executive Officer will have the option to present the issues/circumstances surrounding the dispute to RBS' President. However, such dispute shall be *** *** . 7.2 PROJECT TEAMS. Project Teams, comprised of an equal number of representatives from RBS and CCI, will be established to coordinate individual programs, and will meet monthly. Each Project Team will be co-chaired by two Project Leaders, one from RBS and one from CCI, who will also serve on the RMC. The Project Team may be expanded to include additional members upon the mutual agreement of the Parties. 7.3 RESEARCH PLANS. The RMC shall prepare a Research Plan at the beginning of each Research Program which may be refined and amended by the RMC as appropriate. 8. COLLABORATION TERM AND TERMINATION 8.1 TERM. The initial term of the Collaboration shall be two years from the date of the first meeting of the RMC (the "Collaboration Term"). The parties may extend the term of the Collaboration upon mutual agreement. In addition, the term of any Research Program initiated on a Collaboration Target will last for that length of time set forth in Article 3 for each type of Research Program. A Research Program may begin any time during the Collaboration Term and may extend beyond the term of the Collaboration Term, i.e. a Lead Generation Program that begins at the end of the Collaboration Term may terminate two years later. 8.2 TERMINATION BY RMC. A Research Program may be terminated by the RMC for any reason; provided, however, that if the RMC does not re-allocate FTEs among other Research Programs, RBS will continue funding such FTEs for an additional period of *** *** from the date of such decision to terminate. If another Research Program commences during such *** period, then the amount of FTE payments shall be credited against the new Research Program. 8.3 TERMINATION BY RBS OR CCI. A Research Program may be terminated by RBS or CCI upon thirty (30) days prior written notice to the other party if (a) there is a negative outcome in a key proof of principle experiment for the specific target as determined by the RMC or (b) a mechanism-based toxicity is discovered and confirmed by the RMC, whether by RBS, CCI or otherwise. Either Party may terminate a Research Program if there is a material breach which remains uncured for ninety (90) days following notice of such material breach by the other Party with respect to the relevant Research Program. 8.4 TERMINATION OF RESEARCH FUNDING. All Research Funding for a given Research Program shall terminate upon termination of such Research Program except as set forth in Section 8.2 or unless the FTEs are re-allocated by the RMC. Following termination of a Research Program pursuant to Section 8.2 or Section 8.3, RBS and CCI shall be free to pursue independent opportunities with respect to the relevant Collaboration Target, unless the termination of the Research Program is due to CCI's material uncured breach (subject to the *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. 12 17 cure provisions of Section 8.3), in which case CCI shall be prevented from pursuing any such opportunities against such Collaboration Target for a period of three (3) years after any such termination. Following termination of a Research Program pursuant to Section 8.3 or pursuant to Section 8.2 if no milestone payments have been made, the Collaboration Compounds shall be deemed to have no Target Activity and CCI shall be free to pursue independent opportunities with respect to the Collaboration Compounds upon the termination of the relevant Collaboration Compound Exclusivity Period, provided, however, that if the termination of the Research Program is due to CCI's material uncured breach (subject to the cure provisions of Section 8.3), then CCI shall be prevented from pursuing any such opportunities for the longer of (i) the relevant Collaboration Compound Exclusivity Period or (ii) *** after any such termination. 9. PAYMENT OBLIGATIONS 9.1 PROJECT INITIATION FEE. RBS shall pay CCI a one-time only, non-refundable, non-contingent project initiation fee of *** upon execution of this Agreement. 9.2 RESEARCH FUNDING. Research Programs will be generally staffed by CCI senior scientific management and approximately 4.5 CCI scientists, consisting of 3 FTE chemists, 1/2 FTE software, 1/2 FTE analytical and 1/2 FTE instrumentation at *** per Research Program per year or approximately *** per FTE. Research support will be paid to CCI quarterly on the first day of the quarter for which such payment is due; provided, however, that the first two quarters' payment for the Initial Target Research Programs, consisting of *** will be made upon execution of this Agreement; and provided, further, that such payments shall be credited by CCI to the appropriate Research Program and the first payment due following commencement of the Research Program shall be at the beginning of the third quarter of such Research Program. 9.3 MILESTONE PAYMENTS. The milestone payments set forth in Appendix C (as further specified in the applicable Research Program set forth in Appendix A) shall be made by RBS within **** of (i) notice to RBS by CCI of the achievement of or (ii) achievement by RBS of each such milestone. The milestone payments set forth in Appendix D shall be made by the applicable Party within *** the achievement of each such milestone. 9.4 ROYALTIES. 9.4.1 ROYALTY RATES. During the Royalty Term, RBS will pay CCI royalties on Net Sales on a country-by-country basis as follows:
ROYALTY ROYALTY RATE MINIMUM RATE (Product Not ROYALTY LEAD PROGRAM (Product Patent Patent RATE (If Other APPROACH EXAMPLE Protected) Protected) Patents) - ------------- ------- --------------- ------------- -------------- OPTIMIZATION *** *** *** *** EVOLUTION *** *** *** *** GENERATION *** *** *** ***
*** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. 13 18 (1) Royalties in a country will be paid at *** on the portion of *** *** worldwide Net Sales of up to and including ***; *** on the portion of *** *** worldwide Net Sales above *** . (2) Royalties in a country will be paid *** on the portion of *** *** worldwide Net Sales of up to and including *** on the portion of *** *** worldwide Net Sales above *** . 9.4.2 OTHER PATENTS. If RBS is required to pay royalties to a Third Party, to make, use or sell a Product for which RBS is currently paying royalties to CCI either to avoid infringing such Third Party's compound patent rights or to obtain a license for a patent (including but not limited to patents covering drug delivery devices) that RBS or Roche deems necessary to effectively market the Product (the "Additional Royalties"), then the royalties to be paid to CCI by RBS shall be reduced by *** of the amount of the Additional Royalties, provided, however, that at no time during the Royalty Term will CCI receive less than the Minimum Royalty Rates set forth in the chart above. 9.4.3 COMBINATION PRODUCT. If a Product includes both component(s) for which royalties are due hereunder ("Royalty Bearing Component(s)") and a component which is diagnostically useable or therapeutically active alone or in a combination which does not require a Royalty Bearing Component ("Non-Royalty Bearing Component(s)") (such Product being a "Combination Product"), then Net Sales shall be the amount which is normally received by RBS, its Affiliates or sublicensees from a sale of the Royalty Bearing Component(s) in an arm's length transaction with a Third Party. If the Royalty Bearing Component(s) are not sold separately, then Net Sales upon which a royalty is paid shall be the Net Sales of the Combination Product *** the numerator of which is the *** and the denominator of which is the *** . 9.5 OPTION TO PURCHASE EQUIPMENT. CCI is developing automation instrumentation for internal purposes and is currently evaluating its options for making such instrumentation available to its collaborators or for commercial sale, either directly or through a Third Party. An automation summary has been provided in Appendix E to serve as a *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. 14 19 guideline with respect to the potential availability of such equipment and its potential pricing. 10. LOGISTICS OF PAYMENT; REPORTS; RECORDS; AUDITS 10.1 PAYMENT AND REPORTS. All royalty payments due to either Party under this Agreement shall be paid in U.S. dollars within sixty (60) days, or ninety (90) days if the Product is sublicensed to a Third Party, of the end of each calendar quarter unless otherwise specifically provided herein. Each payment of royalties shall be accompanied by a report of Net Sales or CCI Net Sales, as appropriate, in sufficient detail to permit confirmation of the accuracy of the royalty payment made. 10.2 METHOD OF PAYMENT. All payments, including royalties, to CCI under this Agreement will be made according to the wire transfer instructions set forth in Appendix F, which may be amended from time to time by CCI upon submission of a new Appendix F to RBS. Any payments to RBS under this Agreement shall be made by wire transfer as instructed by RBS prior to such payment being made. 10.3 ROCHE EXCHANGE RATE. For countries other than the United States, the conversion to U.S. dollars from any foreign currency shall be made as follow: (a) For Roche: (i) when calculating the Adjusted Gross Sales, the amount of such sales in foreign currencies shall be converted into Swiss Francs as computed in the central Roche's Swiss Francs Sales Statistics for the countries concerned, using the average monthly rate of exchange at the time for such currencies as retrieved from the Reuters System; (ii) when calculating the royalties on Net Sales, such conversion shall be at the average rate of the Swiss Franc to the United States dollars as retrieved from the Reuters System for the applicable calendar quarter. (b) for a sublicensee in a country: when calculating the Adjusted Gross Sales, the amount of such sales shall be reported by the sublicensee to Roche within thirty (30) days from the end of a calendar quarter, after having converted each applicable monthly sales in foreign currency into United States dollars using the average monthly rate of exchange published in the Wall Street Journal (or some other source agreed upon in writing by the parties for a particular country) of the applicable calendar quarter. 10.4 CCI EXCHANGE RATE. Royalty payments and reports of CCI Net Sales shall be calculated and reported for each calendar quarter. With respect to each quarter, for countries other than the United States, whenever for the purpose of calculating royalties conversion from any foreign currency to United States dollars shall be required, such conversion shall be made as follows: when calculating the Adjusted Gross Sales, the amount of such sales in foreign currencies shall be converted into United States dollars for the countries concerned, 15 20 using the average monthly rate of exchange at the time for such currencies as retrieved from the Reuters System. 10.5 FINANCIAL RECORDS AND AUDIT RIGHTS. During the term of this Agreement and for a period of two years thereafter, any Party paying royalties (the "Royalty Paying Party") shall keep complete and accurate records pertaining to the sale or other disposition of Products in sufficient detail to permit the other Party (the "Royalty Receiving Party") to confirm the accuracy of all payments due hereunder. The Royalty Receiving Party shall have the right to cause an independent, major (big six) certified public accountant firm reasonably acceptable to Roche to audit such records to confirm the Net Sales or CCI Net Sales, as appropriate, for the preceding year. Any information obtained during such audit shall be treated as Confidential Information. Such audits may be exercised during normal business hours once a year upon at least thirty (30) working days' prior written notice to the Royalty Paying Party. The Royalty Receiving Party shall bear the full cost of such audit unless such audit discloses a variance of more than five percent (5 %) from the amount of the Net Sales or CCI Net Sales, as appropriate, reported by the Royalty Paying Party for such audited period. In such case, the Royalty Paying Party shall bear the full cost of such audit. 10.6 TIME RECORDS. During the term of this Collaboration and for a period of two years thereafter, CCI shall keep complete and accurate records documenting the time spent by CCI employees in direct support of the Collaboration. RBS shall have the right to audit such records to confirm CCI time records and research costs for the preceding year upon thirty (30) working days' prior written notice. Such audits may be exercised during normal business hours once a year upon notice to CCI. 10.7 TAXES. All turnover and other taxes levied on account of the royalties and other payments accruing to each Party under this Agreement shall be paid by the Party receiving such royalty or other payment for its own account, including taxes levied thereon as income to the receiving Party. If provision is made in law or regulation for withholding, such tax shall be deducted from the royalty or other payment made by the Party making such payment to the proper taxing authority and a receipt of payment of the tax secured and promptly delivered to the Party entitled to the royalty. Each Party agrees to assist the other Party in claiming exemption from such deductions or withholdings under any double taxation or similar agreement or treaty from time to time in force. 11. LICENSE GRANT 11.1 CCI GRANT TO RBS. Subject to the terms and conditions of this Agreement, CCI hereby grants to RBS an exclusive (even as to CCI and its Affiliates), worldwide license, with the right to sublicense under the CCI Technology to make, have made and use Collaboration Compounds, and to make, have made, use, have used, sell, have sold and import Products in the Field. Such license shall remain exclusive in relation to each Collaboration Compound so long as Roche or its sublicensees continues to develop and commercialize such Collaboration Compound and/or a Product containing such Collaboration Compound against a Collaboration Target with Due Diligence. 16 21 11.2 RBS DUE DILIGENCE FAILURE. 11.2.1 RBS GRANT BACK TO CCI. Upon termination of the relevant Collaboration Compound Exclusivity Period and subject to the terms and conditions of this Agreement, if Roche has failed to develop and commercialize with Due Diligence a Development Candidate or a Product, as the case may be (a "Returned Product"), RBS will grant to CCI an exclusive (exclusive even as to RBS and its Affiliates), worldwide license under those RBS Patents and know-how related exclusively to the Development Candidate to make, have made, use, have used, sell, have sold and import such Returned Product in the Field. 11.2.2 FLAT FEE. Rather than returning such Development Candidate or Product to CCI, RBS may pay CCI a flat fee equal to *** *** in *** *** , as determined by an independent market researcher, who shall be mutually agreed upon between the parties (the "Flat Fee"). However, if having paid such Flat Fee, the compound is ultimately commercially sold, milestones and royalties will be reinstated and such Flat Fee will be credited against future payments. 11.2.3 RECIPROCAL ROYALTIES. If a Returned Product is commercialized by CCI or one of its partners or sublicensees, after such transfer of such Returned Product to CCI hereunder, the royalties set forth above and in the Appendices C and D which would otherwise be payable to CCI shall be payable to RBS on the CCI Net Sales. In addition, if a Returned Product incorporates a Restricted Compound, CCI shall pay the royalties owed by RBS to the Third Party who has rights to such Restricted Compound and the royalties payable to RBS by CCI shall be decreased in accordance with Section 9.4.2. 12. TERM AND TERMINATION OF THE AGREEMENT 12.1 TERM. This Agreement shall terminate at the end of the Royalty Term for the last Collaboration Compound for which a Party is paying royalties hereunder. 12.2 TERMINATION. This Agreement may be terminated (a) by either Party upon a material breach which remains uncured for ninety days following notice to the breaching Party; or (b) after the first twelve (12) months of the Collaboration Term, by RBS upon 180 days prior written notice; or (c) by RBS until the end of the term of the last-to-expire Research Program, upon 45 days prior written notice if both *** and *** leave CCI and CCI does not receive RBS's agreement that one or both have been adequately replaced. 12.3 RESULTS OF TERMINATION. All Research Support shall terminate upon termination of this Agreement. Royalties and milestone payments shall survive any such termination; provided however that if such termination is by RBS due to a material breach by CCI of this Agreement, RBS will only owe CCI royalties and milestones payments for any Product resulting from those Collaboration Compounds generated for the Research Program prior to CCI's uncured material breach. In addition, the provisions of Section 8.4 with *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. 17 22 respect to CCI's rights to work with the Collaboration Targets and the Collaboration Compounds shall apply; provided, however, that if the relevant Collaboration Target Exclusivity Period and/or the Collaboration Compound Exclusivity Period has expired, CCI shall have no such constraints on their actions. 13. CONFIDENTIAL INFORMATION 13.1 NONDISCLOSURE. During the term of the Collaboration and for a period of five years after termination thereof, each Party will maintain all Confidential Information in trust and confidence and will not disclose any Confidential Information to any Third Party or use any Confidential Information for any purpose except (i) as expressly authorized by this Agreement, (ii) as required by law or court order, (iii) to its consultants, sublicensees, subcontractors or agents who need to know to accomplish the purposes of this Agreement. Each Party may use such Confidential Information only to the extent required to accomplish the purposes of this Agreement. Each Party will use at least the same standard of care as it uses to protect proprietary or confidential information of its own to ensure that its Affiliates, employees, agents, consultants, sublicensees, and other representatives do not disclose or make any unauthorized use of the Confidential Information. Each Party will promptly notify the other upon discovery of any unauthorized use or disclosure of the Confidential Information. 13.2 EXCEPTIONS. Confidential Information shall not include any information which the receiving Party can prove by competent evidence: (a) is now, or hereafter becomes, through no act or failure to act on the part of the receiving Party, generally known or available; (b) is known by the receiving Party at the time of receiving such information, as evidenced by its records; (c) is hereafter furnished to the receiving Party by a Third Party, as a matter of right and without restriction on disclosure; (d) is independently developed by the receiving Party without the aid, application or use of Confidential Information; or (e) is the subject of a written permission to disclose provided by the disclosing Party. 14. PUBLICATIONS Neither Party shall publish any information with respect to Collaboration Compounds without the prior written permission of the Publications Committee (i) for the relevant Collaboration Target Exclusivity Period plus three years for Collaboration Compounds with Target Activity and (ii) for the Collaboration Target Exclusivity Period for Collaboration Compounds without Target Activity. Should a Collaboration Compound be designated by a Party as a Development Candidate, the other Party shall not publish any information with 18 23 respect to that Collaboration Compound or structurally similar Collaboration Compounds without the prior written consent of the other Party. 15. PUBLIC STATEMENTS Neither Party shall use the name of the other Party in any prospectus, annual report, press release or other public statement without the prior written approval of the other Party, which may not be unreasonably withheld or delayed; provided, however, that both Parties shall endeavor in good faith to give the other Party a minimum of five business days to review such prospectus, annual report, press release, or other public statement; and provided, further, that if a Party does not approve such public statement, either Party may still use the name of the other Party in any prospectus, annual report, press release or other public statement without the prior written approval of the other Party, if such Party is advised by counsel that such disclosure is required to comply with applicable law. 16. INDEMNIFICATION Each Party hereby agrees to save, defend and hold the other Party and its officers, directors, employees, consultants and agents harmless from and against any and all suits, claims, actions, demands, liabilities, expenses and losses, including reasonable legal expense and attorneys' fees ("Losses") resulting directly or indirectly from the manufacture, development, use, handling, storage, sale or other disposition of chemical agents, Collaboration Compounds or Products by such Party, its Affiliates or sublicensees except to the extent such Losses result from the gross negligence or willful misconduct of the Party claiming a right of indemnification under this Article 16. If either Party seeks indemnification under this Section 16, it shall inform the other Party of a claim as soon as reasonably practicable after it receives notice of the claim, shall permit the other Party to assume direction and control of the defense of the claim (including the right to settle the claim solely for monetary consideration), and shall cooperate as requested (at the expense of the other Party) in the defense of the claim. 17. ASSIGNABILITY This Agreement may not be assigned by either Party without the prior written consent of the other Party; provided, however, that either Party may assign this Agreement, in whole or in part, to an Affiliate or to a successor of a Party in connection with the merger, consolidation, or sale of all or substantially of such Party's assets or that portion of its business pertaining to the subject matter of this Agreement. RBS also has the right to extend its rights and benefits under this Agreement to any Affiliate. 18. DISPUTE RESOLUTION PROCEDURES 18.1 SENIOR EXECUTIVES DISCUSSIONS. If a decision is not reached by the RMC, the dispute will be resolved as set forth in Section 7.1 above. If a dispute arises between RBS and CCI with respect to matters other than the management of a Research Program, either during or after the Research Period, such dispute will be referred to the appropriate senior management in the area of the dispute. If such senior management are unable to resolve such dispute, such dispute will be referred to CCI's Chief Executive Officer and RBS's President (or equivalent 19 24 senior Roche officer). If such officers are unable to reach an agreement within *** following the initiation of discussions between CCI's Chief Executive Officer and RBS's President (or equivalent senior Roche officer), such dispute shall be settled first by non-binding mediation and thereafter by arbitration as described in Sections 18.2 and 18.3 below. 18.2 NON-BINDING MEDIATION. Any dispute which is not resolved by the parties within the time period described in Section 18.1 shall be submitted to an alternative dispute resolution process ("ADR"). Within five (5) business days after the expiration of the thirty (30) day period set forth in Section 18. 1, each Party shall select for itself a representative with the authority to bind such Party and shall notify the other Party in writing of the name and title of such representative. Within ten (10) business days after the date of delivery of such notice, the representatives shall schedule a date for engaging in non-binding ADR with a neutral mediator or dispute resolution firm mutually acceptable to both representatives. Any such mediation shall be held in a mutually agreeable location; provided, however that if the parties cannot so agree, such mediation shall occur in San Diego, California if brought by RBS or in Palo Alto, California, if brought by CCI. Thereafter, the representatives of the parties shall engage in good faith in an ADR process under the auspices of such individual or firm. If the representatives of the parties have not been able to resolve the dispute within thirty (30) business days after the conclusion of the ADR process, or if the representatives of the parties fail to schedule a date for engaging in non-binding ADR within the ten (10) day period set forth above, the dispute shall be settled by binding arbitration as set forth in Section 18.3 below. If the representatives of the parties resolve the dispute within the thirty (30) day period set forth above, then such resolution shall be binding upon the parties. If either Party fails to abide by such resolution, the other Party can immediately refer the matter to arbitration under Section 18.3. 18.3 BINDING ARBITRATION. If the parties have not been able to resolve the dispute as provided in Sections 18.1 and 18.2 above, the dispute shall be finally settled by binding arbitration. Any arbitration hereunder shall be conducted under rules of the American Arbitration Association. The arbitration shall be conducted before three arbitrators chosen according to the following procedure: each of the parties shall appoint one arbitrator and the two so nominated shall choose the third. If the arbitrators chosen by the parties cannot agree on the choice of the third arbitrator within a period of *** after their appointment, then the third arbitrator shall be appointed by the Court of Arbitration of the American Arbitration Association. Any such arbitration shall be held in a mutually agreeable location; provided, however that if the parties cannot so agree, such arbitration shall occur in San Diego, California if brought by RBS or in Palo Alto, California, if brought by CCI. The arbitrators shall have the authority to grant specific performance, and to allocate between the parties the costs of arbitration in such equitable manner as they determine. The arbitral award (i) shall be final and binding upon the parties; and (ii) may be entered in any court of competent jurisdiction. 18.4 INJUNCTIVE RELIEF. Nothing contained in this Section or any other provisions of this Agreement shall be construed to limit or preclude a Party from bringing any action in any court of competent jurisdiction for injunctive or other provisional relief to compel the other Party to comply with its obligations hereunder before or during the pendency of mediation or arbitration proceedings. *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. 20 25 19. NOTICES Any notice required or permitted to be given hereunder shall be deemed sufficient if sent by facsimile letter or overnight courier, or if delivered by hand to a Party at the respective addresses and facsimile numbers as set forth below or at such other address and facsimile number as such Party may designate. If sent by facsimile letter, notice shall be deemed given when the transmission is completed if the sender has a confirmed transmission report. If a confirmed transmission report does not exist, then the notice will be deemed given when the notice is actually received by the person to whom it is sent. If delivered by overnight courier, notice shall be deemed given when it has been signed for. If delivered by hand, notice shall be deemed given when received. if to CCI, to: CombiChem, Inc. 9050 Camino Santa Fe San Diego, California 92121 Attention: President Fax number: 619/530-9998 with a copy to: Brobeck, Phleger & Harrison LLP 550 West C Street, Suite 1300 San Diego, California 92101 Attention: Faye H. Russell, Esq. Fax number: (619) 234-3848 if to RBS, to: Roche Bioscience, a division of Syntex (U.S.A.) Inc. 3401 Hillview Avenue Palo Alto, California 94304 Attn: President Fax number: 415-852-2595 with a copy to Roche Bioscience, a division of Syntex (U.S.A.) Inc. 3401 Hillview Avenue Palo Alto, California 94304 Attn: Legal Department Fax number: 415-852-1338 21 26 20. INDEPENDENT CONTRACTOR Nothing in this Agreement is intended or shall be deemed to constitute a partnership, agency, employer-employee or joint venture relationship between the parties. No Party shall incur any debts or make any commitments for the other, except to the extent, if at all, specifically provided for herein. 21. SURVIVAL The provisions of Sections 9, 10, 13, 14, 15, 16, 18, 19, and 22.3 shall survive termination of this Agreement. 22. ADDITIONAL TERMS 22.1 ENTIRE AGREEMENT. This Agreement (including the Exhibits and Appendices) constitutes the entire understanding between the parties with respect to the subject matter hereto and supersedes and replaces all previous negotiations, understandings, representations, writings, and contract provisions and rights relating hereof. The parties agree that all services provided hereunder shall be subject to and governed by the terms and provisions set forth herein, and none of the terms and conditions contained on any proposal, purchase order, invoice, or other writing, shall have any effect or change the provisions of this Agreement. 22.2 AMENDMENTS; NO WAIVER. No provision of this Agreement may be amended, revoked or waived except by a writing signed and delivered by an authorized officer of each Party. Any waiver on the part of either Party of any breach or any right or interest hereunder shall not imply the waiver of any subsequent breach or waiver of any other right or interest. 22.3 VALIDITY. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, each of which shall remain in full force and effect. 22.4 HEADINGS. The descriptive headings are inserted for convenience of reference only and are not intended to be part of or to affect the meaning of or interpretation of this Agreement. 22.5 COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, and all of which together shall be deemed to be one and the same instrument. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] 22 27 IN WITNESS WHEREOF, the parties have executed this Agreement to be effective as of the Effective Date. COMBICHEM, INC. SYNTEX (U.S.A.) INC. By: /s/ Vicente Anido /s/ James N. Woody - -------------------------------------- ------------------------------------ Vicente Anido, Ph.D. James N. Woody, M.D., Ph.D. President and Chief Executive Officer President Appendix A - Description of Research Programs Appendix B - Related Targets Appendix C - Collaboration Financial Summary Appendix D - Related Product Milestone Summary Appendix E - CombiSyn Automation Instruments Appendix F - Wire Transfer Instructions 23 28 *** *** *** *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. Appendix A Page A-1 29 *** *** *** *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. Appendix A Page A-2 30 *** *** *** *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. Appendix A Page A-3 31 *** *** *** *** *** *** *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. Appendix A Page A-4 32 APPENDIX B RELATED TARGETS None at this time 33 APPENDIX C COLLABORATION FINANCIAL SUMMARY ($ in millions)
Lead Lead Lead Optimization Evolution Generation(i) ------------ --------- ------------- UPFRONT FEE *** RESEARCH SUPPORT *** target per year (1) Lead Optimization *** *** (2) Lead Evolution *** *** (3) Lead Generation *** *** DISCOVERY MILESTONES Lead Optimization Milestone: LO-1 *** Milestone: LO-2 *** Lead Evolution Milestone: LE-1 *** Milestone: LE-2 *** Lead Generation Milestone: LG-1 *** Milestone: LG-2 *** Milestone: LG-3 *** ADDITIONAL MILESTONES (1) IND (ii) *** *** *** (2) Earlier of acceptance into Roche development pipeline or initiation of Phase III Clinical Trials (iii) *** *** *** (3) NDA or equivalent approval in Japan or the European Community, whichever of these approvals occurs first (iv) *** *** *** --- --- --- *** *** *** Royalty Rates *** *** ***
Footnotes - --------- (i) project utilizes Universal Informer Library (ii) to be paid *** *** for a Discovery Milestone or Additional Milestone except for *** *** (iii) to be paid only for *** (iv) to be paid for each *** provided that no milestone shall be paid for *** *** (v) if patented; lower under the circumstances set forth in Section 9; split royalty structure *** *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. 34 APPENDIX D MILESTONES FOR RELATED PRODUCTS SUMMARY ($ in millions)
Lead Discovery Milestones Optimization - -------------------- ------------ Lead Optimization *** Milestone: A(i) ADDITIONAL MILESTONES (1) IND (ii) *** (2) Acceptance into Roche development pipeline or initiation of Phase III Clinical Trials (iii) *** (3) NDA or equivalent approval in Japan or the European Community, whichever of these approvals occurs first (iv) *** --- *** ROYALTY RATE ***
FOOTNOTES - --------- (I) ESTABLISHMENT OF A DEVELOPMENT CANDIDATE (II) TO BE PAID *** *** FOR DISCOVERY MILESTONES OR ADDITIONAL MILESTONES EXCEPT FOR *** (III) TO BA PAID ONLY FOR *** (IV) TO BE PAID FOR EACH *** PROVIDED THAT NO MILESTONE SHALL BE PAID FOR *** *** *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. 35 APPENDIX E COMBISYN AUTOMATION SUMMARY 1. CombiSyn SP40 Synthesizers SP40 synthesizers are currently project to be priced at *** per unit, if made available to collaborators or for commercial sale. This instrument is in its beta stage and, if commercialized, would potentially become available in 1998 (subject to the extent of modifications resulting from beta test). 2. CombiSyn PWS-20 PWS-20 purification/work-up stations are currently expected to be priced at *** per unit, if made available to collaborators or for commercial sale. This unit is in the development stage and, if commercialized, would potentially become available in 1998 (subject to the extent of modifications resulting from beta test). 3. PE-SCIEX MS-LC PE-SCIEX API-100LC Mass Spectrometer systems may be purchased from PE-SCIEX directly. This unit is currently available. [***] Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. 36 APPENDIX F COMBICHEM, INC. INCOMING WIRE TRANSFER INSTRUCTIONS (into *** Transfer Funds to: *** New York, NY Routing Transit/ABA Number: *** For Account of: *** Account Number: *** For Further Credit to: *** CombiChem, Inc. Funds must be received by NFSC by 11:00 a.m. PST for same day credit. Please call to advise regarding funds transferred: At CombiChem, Inc.: *** (619) 530-0484, ext. 113 - Telephone (619) 530-9998 - Fax *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. EX-10.21 4 EXHIBIT 10.21 1 EXHIBIT 10.21 RESEARCH AND TECHNOLOGY DEVELOPMENT AGREEMENT BETWEEN COMBICHEM, INC. AND SUMITOMO PHARMACEUTICALS CO., LTD. AUGUST 18, 1997 2 RESEARCH AND TECHNOLOGY DEVELOPMENT AGREEMENT THIS RESEARCH AND TECHNOLOGY DEVELOPMENT AGREEMENT (the "Agreement") is entered into on August 18, 1997 (the "Effective Date"), by and between COMBICHEM, INC., a corporation having its principal offices at 9050 Camino Santa Fe, San Diego, California ("CombiChem"), and SUMITOMO PHARMACEUTICALS CO., LTD., a corporation having its principal offices located at 2-8, Doshomachi 2-chome, Chuo-Ku, Osaka, 541, Japan ("Sumitomo"). WHEREAS, CombiChem has developed and owns certain drug discovery technology and intellectual property rights, including chemical library design software, multi-parallel synthesis and purification methods, chemical libraries suitable for high throughput biological screening assays and medicinal chemistry (collectively, "CombiChem Technology"); WHEREAS, Sumitomo desires to utilize CombiChem Technology for its drug discovery activities under Sumitomo Know-how concerning *** *** ("Objective"); WHEREAS, the parties wish to collaborate on the Objective in a Research Program against a Collaboration Target ("Collaboration"); NOW, THEREFORE, the Parties agree as follows: 1. DEFINITIONS 1.1 "Active Compound(s)" means a compound ( or compounds ) which (a)(i) is selected by either Party under the Research Program from Collaboration Compounds, or (ii) is derived from a Collaboration Compound *** the Research Period; and (b) shows in vitro activity of at least *** ***. 1.2 "Affiliate" of a Party means any corporation or other business entity controlled by, controlling or under common control with, such Party. For this purpose "control" shall mean direct or indirect beneficial ownership of more than fifty percent (50%) of the voting securities or income interest in such corporation or other business, or if not meeting the preceding requirements, any company owned or controlled by or owning or controlling such Party at the maximum control or ownership right permitted in the country where such company exists. 1.3 "Collaboration" has the meaning set forth in the preamble. 1.4 "Collaboration Compound(s)" means a compound (or compounds) which (a) is synthesized following the Effective Date for screening against the Collaboration Target, under *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. 1 3 the Research Program, or (b) is a pre-existing CombiChem compound which CombiChem desires to designate as a Collaboration Compound. 1.5 "Collaboration Target(s)" means *** ***. 1.6 "CombiChem Technology" has the meaning set forth in the preamble. 1.7 "Confidential Information" includes, but is not limited to, (a) all information and materials received by either Party from the other Party pursuant to this Agreement; (b) all information and materials developed in the course of the Collaboration; and (c) the material financial terms of this Agreement. 1.8 "Development Compound(s)" means a compound ( or compounds ) which (a)(i) is a Lead Compound or (ii) is derived from a Lead Compound and synthesized *** ; and (b) are determined by Sumitomo to be appropriate for preclinical studies for the purpose of IND filing by Sumitomo. 1.9 "Exclusivity Period" means the Research Period plus twelve (12) months. 1.10 "Field" means all therapeutic and diagnostic indications of human disease for the Collaboration Target. 1.11 "First Commercial Sale" of a Product shall mean the first sale for use or consumption of such Product in a country after required marketing and pricing approval has been granted by the governing health regulatory authority of such country. Sale to an Affiliate or sublicensee shall not constitute a First Commercial Sale unless the Affiliate or sublicensee is the end user of the Product. 1.12 "Inactive Compound(s)" means a Collaboration Compound(s) which is confirmed by the RMC that it does not have the in vitro activity required for an Active Compound. 1.13 "Lead Compound(s)" means a compound (or compounds ) which (a)(i) is selected from an Active Compound(s) by either Party under the Research Program, or (ii) is derived from Active Compound(s); (b) is defined by the RMC at *** ; and (c) shows in vitro activity with *** confirmed by the RMC ***. 1.14 "Net Sales" means the gross sales invoiced by Sumitomo or its Affiliates or licensees for Products to non-Affiliated third parties less actual deductions of returns (including withdrawals and recalls), rebates (price reductions, including Medicaid and similar types of rebates e.g. chargebacks), volume (quantity) discounts, discounts granted at the time of invoicing, the cost of transport, insurance, delivery, sales taxes and other taxes (other than *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. 2 4 income taxes) directly linked to and included in the gross sales amount as computed on a product-by-product basis for the countries concerned, whereby the amount of such sales in foreign currencies is converted into United States dollars at the exchange rate of the last business day for each calendar quarter as reported by Sumitomo Bank (Tokyo). 1.15 "Other *** " means *** ***. 1.16 "Patent" means, (a) valid and enforceable Letters Patent, including any extension (including Supplemental Protection Certificate), registration, confirmation, reissue, continuation, divisionals, continuation-in-part, reexamination or renewal thereof, or (b) pending applications for any of the foregoing. 1.17 "Party" means CombiChem or Sumitomo, as the case may be; and including their respective Affiliates and their permitted successors and assigns. 1.18 "Product(s)" means any product containing a Development Compound with such compound as the active ingredient and which is granted regulatory approval by the governing health regulatory authority of the applicable country for marketing in the Field. 1.19 "Research Management Committee" or "RMC" has the meaning set forth in Article 5 below. 1.20 "Research Period" means the initial twenty-four (24) month term of the Collaboration, which can be extended in accordance with Section 6.1 below. 1.21 "Research Program" means the research to be conducted as part of the Collaboration under the mutually-agreed research plan, and shall include, without limitation, the activities and items set forth in Sections 2.1 and 2.2 of this Agreement. 1.22 "Royalty Term" means, in the case of any Product, in any country, the period of time commencing on the First Commercial Sale and ending upon the later of (a) seven (7) years from the date of First Commercial Sale in such country; or (b) the expiration of the last-to-expire Patent resulting from the Research Program filed in the Field during the Exclusivity Period with claims covering that Product in the relevant country. 1.23 "Territory" means the entire world. 2. RESEARCH COLLABORATION 2.1 CombiChem Responsibilities. CombiChem shall conduct the following activities under the Research Program in accordance with the terms of this Agreement and as more fully described in the Research Plan: (a) During the Research Period, CombiChem shall (i) review data and information regarding the Collaboration Targets provided by Sumitomo ; (ii) based on those data and information and using the CombiChem Technology , design compound libraries; and (iii) synthesize compounds as provided in Section 4.4 below. *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. 3 5 (b) During the Research Period, CombiChem shall keep Sumitomo fully informed of its activities performed in connection with the Collaboration, including, without limitation, by providing Sumitomo with data and information regarding Collaboration Compounds prior to the meetings of the Research Management Committee. (c) During the Research Period, CombiChem shall provide space and resources to accommodate the Sumitomo scientists described in Section 2.2 below. (d) During the Research Period, CombiChem shall provide a minimum of four (4) FTEs. (e) During the Research Period and while Sumitomo's FTE research chemists are present at CombiChem's facilities, CombiChem shall provide Sumitomo with reasonable technical support to facilitate Sumitomo's establishment of an *** *** which Sumitomo may utilize for its internal research programs other than the Research Programs at no additional cost to Sumitomo, provided the payments in Section 7.1 are paid. 2.2 Sumitomo Responsibilities. Sumitomo shall provide CombiChem, with the following resources under the Research Program as more fully described in the Research Plan: (a) Sumitomo shall provide CombiChem with support and assistance useful or necessary for the conduct of the Research Program, including providing data input from in-house lead series and screening hits, chemical intermediates, information concerning assay methods and screening data. (b) During the Research Period, Sumitomo shall provide CombiChem with data and information regarding Collaboration Compounds and the Collaboration Target assays developed by Sumitomo under the Research Program prior to the meetings of the Research Management Committee. (c) During the Research Period and in connection with CombiChem providing the services in Section 2.1(e) above , Sumitomo may send one (1) to two (2) FTE research chemists to conduct Sumitomo activities at CombiChem's facilities under the Research Program. Sumitomo shall have sole responsibility for the expenses associated with its visiting chemists, including, without limitation, salary, travel, living and other associated expenses of such chemists. (d) During the Exclusivity Period, Sumitomo shall screen Collaboration Compounds for in vitro and, where appropriate, in vivo activity against the Collaboration Target, devoting the same degree of attention, resources and diligence to these screening activities as it devotes to other compounds in its own discovery activities. 2.3 Research Plan. The Parties hereby agree that the Research Program shall be carried out in accordance with the Research Plan which is attached hereto as Exhibit A. The Research Management Committee shall review the Research Plan on an ongoing basis and may make changes to the Research Plan so long as such changes are mutually agreed to by CombiChem and Sumitomo. 2.4 Sumitomo Due Diligence. Sumitomo shall screen Lead Compounds and endeavor to determine Development Compounds. Sumitomo shall devote the same degree of attention, resources and diligence to its obligations above and the development of *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. 4 6 Development Compounds as it devotes to other compounds of its own development ("Due Diligence"). Timelines associated with Due Diligence for the first IND filing are outlined in Exhibit A which timelines may be extended upon the mutual agreement of Sumitomo and CombiChem. 2.5 Annual Reports. Following the first IND filing through First Commercial Sale, Sumitomo shall provide CombiChem with an annual report summarizing Sumitomo's activities in developing Development Compounds. 2.6 Third Party Licenses. Each party shall be solely responsible for any third party license fees required to perform its obligations under this Agreement. 3. EXCLUSIVITY 3.1 Collaboration Target Exclusivity. So long as Sumitomo is proceeding with Due Diligence, CombiChem shall not work on a Collaboration Target with any third parties. 3.2 Other ***. An Active Compound shall be available to both Parties for direct or indirect use against *** following the Exclusivity Period. 3.3 ***. An Active Compound shall be available to both Parties for direct or indirect use against targets other than a Collaboration Target or *** following the Research Period. 3.4 Inactive Compounds. An Inactive Compound shall be available to both Parties for any purpose following the designation of a Collaboration Compound as an Inactive Compound. 4. COLLABORATION COMPOUNDS 4.1 Pre-Existing Compounds. Sumitomo shall have no rights to any pre-existing CombiChem compound unless and until such compound is designated as a Collaboration Compound by CombiChem. CombiChem shall have no rights to any pre-existing Sumitomo compound which is not utilized in the Research Program. 4.2 Intellectual Property Rights. Subject to Article 8, Sumitomo shall retain all exclusive rights to all intellectual property relating solely to the Active Compounds and resulting from the Research Program during the Exclusivity Period and thereafter so long as Sumitomo continues to show Due Diligence. With respect to Active Compounds, Lead Compounds, and Development Compounds, Sumitomo shall be responsible for filing, maintaining and prosecuting all Patents at its sole expense. Sumitomo shall have ownership of such Patents. Prior to the filing of any such related Patent applications, CombiChem shall assign all intellectual property rights it may have in the Active Compound which is necessary for development and commercialization by Sumitomo or its designee. If Sumitomo fails to so file, maintain or prosecute such Patent or related Patent applications, CombiChem shall have the right to request Sumitomo to do so. If Sumitomo elects not to file, maintain or prosecute such Patent or related Patent applications, CombiChem shall have the right to take over such *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. 5 7 filing, maintenance or prosecution of such Patent or related Patent applications, at its sole expense, and Sumitomo shall assign all intellectual property rights it may have in the Compound which is necessary for development and commercialization by CombiChem or its designee. 4.3 Structural Information. Neither Party shall disclose the structure of any Active Compound to any Third Party without the other Party's written permission, unless required to do so by law. 4.4 Supply of Collaboration Compounds. Aliquots of at least *** of any Collaboration Compound that has been synthesized will be prepared and given to Sumitomo. Aliquots of at least *** of *** Lead Compounds will be prepared and given to Sumitomo upon their reasonable request. In addition, aliquots of at least *** of *** Lead Compounds will be prepared and given to Sumitomo upon their reasonable request. For additional requirements of samples, CombiChem shall provide Sumitomo with them at ***. 5. RESEARCH MANAGEMENT & PLAN The design, review and conduct of the Research Program will be coordinated by the Research Management Committee, which will meet regularly on a mutually-agreeable schedule. The Research Management Committee may establish and amend or revise the research plan as necessary to reflect the scientific progress and work performed under the Research Program, such amendments to be mutually agreed to by Sumitomo and CombiChem. The Research Management Committee will consist of an equal number of members from Sumitomo and CombiChem and will include appropriate representatives from Sumitomo and CombiChem as mutually agreed. The co-chairs of the Research Management Committee will initially be the Vice President, Chemistry of CombiChem and a Research Manager of Sumitomo and subsequently may change as mutually-agreed upon by the Parties. Decisions of the Research Management Committee shall be by consensus. At the end of Research Period, the Research Management Committee shall define Lead Compounds. 6. RESEARCH PERIOD, EXTENSION AND TERMINATION OF RESEARCH PROGRAM 6.1 Research Period : Option to extend the Research Period. The initial term of the Collaboration shall be the Research Period. Sumitomo shall have the right to extend the Research Period for up to four (4) successive six (6) month periods upon mutual agreement. To extend the Research Period, Sumitomo must notify CombiChem no later than three (3) months prior to the then-current expiration date and the Parties shall negotiate in good faith the terms and conditions of any such extension. 6.2 Termination of Research Program. The Research Program may be terminated by a Party ninety (90) days following the uncured material breach of obligations under the Research Program of the other Party. 7. PAYMENT OBLIGATIONS *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. 6 8 7.1 Program Funding. Sumitomo shall support CombiChem's efforts in conducting the Research Program by making payments in the following amounts at the following times:
AMOUNT (U$ IN MILLIONS) DUE DATE $3.25 Signing of this Agreement (representing a *** upfront fee and the first *** as research support) *** Six (6) months after signing this Agreement as research support *** Twelve (12) months after signing of this Agreement as research support *** Eighteen (18) months after signing of this Agreement as research support
7.2 Milestone Payments. Within thirty (30) days of the occurrence of a development milestone shown in Exhibit B, whether such milestone is triggered by the activities of Sumitomo or those of its sublicensee, Sumitomo shall pay CombiChem the related milestone payment in United States dollars. The schedule for such payments is set forth in Exhibit B of this Agreement. 7.3 Royalties. During the Royalty Term, Sumitomo will pay CombiChem a running royalty of *** of Net Sales in all countries in the Territory except Asia. (In this Agreement, "Asia" means Burma, China, India, Indonesia, Japan, Kampuchea, Korea, North Korea, Laos, Malaysia, Maldives, Mongol, Nepal, Philippines, Singapore, SriLanka, Thailand, Taiwan, and Viet Nam) With respect to sales in Asia, during the Royalty Term, Sumitomo will pay CombiChem a running royalty of *** of Net Sales. All Royalty payments due to CombiChem under this Agreement shall be paid in United States dollars within sixty (60) days of the end of each calendar quarter, in case Products are sold by Sumitomo and within ninety (90) days, in case Products are sold by its Affiliates or its licensees. In case Products are sold by Sumitomo's licensees, Parties will discuss the conditions of payment separately. Each payment of royalties shall be accompanied by a report of Net Sales of Products in sufficient detail to permit confirmation of the accuracy of the royalty payment made. 7.4 Manner and Place of Payment. Royalty payments and reports for Net Sales of Products shall be calculated in local currencies and reported for each calendar quarter. All payments owed under this Agreement shall be made by wire transfer to the bank account to be designated by CombiChem separately with at least fifteen (15) business days prior written notice to Sumitomo. 7.5 Records and Audit. During the term of this Agreement and for a period of two (2) years thereafter, Sumitomo shall keep complete and accurate records pertaining to the sale or other disposition of Products in sufficient detail to permit CombiChem to confirm the accuracy of all payments due hereunder. CombiChem shall have the right to cause an *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. 7 9 independent certified public accounting firm reasonably acceptable to Sumitomo to audit such records to confirm Sumitomo's Net Sales for the preceding year, Any information obtained during such audit shall be treated as Confidential Information. Such audits may be exercised during normal business hours of Sumitomo no more than once each year. CombiChem shall bear the full cost of such audit unless such audit discloses a variance of more than *** *** from the amount of the Net Sales reported by Sumitomo for such audited period. In such case, Sumitomo shall bear the full cost of such audit. 7.6 Taxes. All income and other taxes levied on account of the royalties and other payments accruing to CombiChem under this Agreement shall be paid by CombiChem, including taxes levied thereon as income to CombiChem. If provision is made in law or regulation for withholding, such tax shall be deducted from the royalty or other payment made by Sumitomo to the proper taxing authority and a receipt of payment of the tax secured and promptly delivered to CombiChem. Each Party agrees to assist the other Party in claiming exemption from such deductions or withholdings under any double taxation or similar agreement or treaty from time to time in force. 8. LICENSE GRANT; OUT LICENSE 8.1 CombiChem License Grant to Sumitomo. Subject to the terms and conditions of this Agreement, CombiChem hereby grants to Sumitomo an non-exclusive license, with the right to sublicense, to use such CombiChem Technology as is necessary to make, have made use, have used, sell, have sold and import Development Compounds or Products in the Field in the Territory. 8.2 Sumitomo Outlicense. Sumitomo shall have a right to outlicense the Patents covering the Product subject to the following terms and conditions. Sumitomo shall remain responsible for each obligation set forth herein, including obligations to make royalty and milestone payments to CombiChem hereunder. The fee for the right to such outlicense shall be as set forth in Exhibit B to this Agreement and shall be sent to CombiChem the earlier *** *** from execution of an agreement by Sumitomo or within *** after Sumitomo's receipt of the fee from its licensee. 8.3 Sumitomo License Grant to CombiChem. Subject to the terms and conditions of this Agreement and following the failure of Sumitomo to develop and commercialize with Due Diligence a Lead Compound, a Development Compound or Product, as the case may be, ( "Returned Compound"), Sumitomo shall grant to CombiChem an exclusive license (exclusive even as to Sumitomo and its Affiliates), with the right to sublicense, under those Sumitomo Patents and know-how which are resulting from the Research Program and related exclusively to the Returned Compound to make, have made, use, have used, sell, have sold and import such Returned Compound in the Field in the Territory. 8.4 Rights Outside the Field. Each of Sumitomo and CombiChem shall have rights to make, have made, use, have used, sell, have sold and import Inactive Compounds outside the Field. *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. 8 10 9. TERM AND TERMINATION OF THE AGREEMENT 9.1 Term. The term of this Agreement shall commence upon the Effective Date of this Agreement, and shall expire on the expiration of the last royalty obligation under this Agreement, except as provided hereunder. 9.2 Termination by Sumitomo or CombiChem. If either Party materially breaches this Agreement and fails to remedy that breach within ninety (90) days of receiving written notice thereof from the other Party, or enters into any arrangement of composition with its creditors or goes into liquidation, insolvency, bankruptcy, receivership or reorganization proceedings, whether voluntarily or compulsorily which is not dismissed within ninety (90) days, then the other Party may at any time, by notice in writing or by telefax, terminate this Agreement. 9.3 Termination by Sumitomo. If Sumitomo fails to identify any Development Compounds, commercialize any Development Compounds or Products, or decides to discontinue all sales of the Products, Sumitomo may terminate this Agreement by ninety (90) days prior written notice without prejudice to Sections 4.2 and 8.3. 9.4 After Termination. Any termination of this Agreement or the Research Program shall be without prejudice to the accrued rights of either Party prior to the termination. In case of termination of this Agreement or the Research Program by CombiChem according to the Article 9.2 above, all royalty and milestone obligations for any Collaboration Compound shall survive any such termination. 10. CONFIDENTIAL INFORMATION 10.1 Nondisclosure. During the term of the Collaboration and for a period of five (5) years after termination thereof, each Party will maintain all Confidential Information in trust and confidence and will not disclose any Confidential Information to any third party or use any Confidential Information for any purpose except (i) as expressly authorized by this Agreement, (ii) as required by law or court order, (iii) to its consultants, subcontractors or agents who need to know to accomplish the purposes of this Agreement. Each Party may use such Confidential Information only to the extent required to accomplish the purposes of this Agreement. Each Party will use at least the same standard of care as it uses to protect proprietary or confidential information of its own to ensure that its Affiliates, employees, agents, consultants and other representatives do not disclose or make any unauthorized use of the Confidential Information. Each Party will promptly notify the other upon discovery of any unauthorized use or disclosure of the Confidential Information. 10.2 Exceptions. Confidential Information shall not include any information which the receiving Party can prove by competent evidence: (a) is now, or hereafter becomes, through no act or failure to act on the part of the receiving Party, generally known or available; (b) is known by the receiving Party at the time of receiving such information, as evidenced by its records; (c) is hereafter disclosed to the receiving Party by a Third Party, as a matter of right and without restriction on disclosure; (d) is independently developed by the receiving Party without the aid, application or use of Confidential Information; or (e) is the subject of a written permission to disclose provided by the disclosing Party. 9 11 11 PUBLICATIONS AND PUBLIC STATEMENTS 11.1 Publications. Neither Party shall publish any information with respect to Collaboration Compounds or Development Compound without the prior written permission of the other party during the Exclusivity Period. Such permission shall be approved or disapproved within twenty-one (21) days of written request for permission. Such permission shall not be unreasonably withheld. 11.2 Public Statements. Neither Party shall use the name of the other Party in any public statement, prospectus, annual report or press release without the prior written approval of the other Party, which may not be unreasonably withheld or delayed ; provided, however, that both Parties shall endeavor in good faith to give the other Party a minimum of five (5) business days to review such public statement, prospectus, annual report or press release ; and provided, further, that if a Party does not approve such public statement, either Party may still use the name of the other Party in any public statement, prospectus, annual report or press release without the prior written approval of the other Party, if such Party is advised by counsel that such disclosure is required to comply with applicable law. 12. INDEMNIFICATION 12.1 EACH PARTY HEREBY AGREES TO SAVE, DEFEND AND HOLD THE OTHER PARTY AND ITS OFFICERS, DIRECTORS, EMPLOYEES, CONSULTANTS AND AGENTS HARMLESS FROM AND AGAINST ANY AND ALL SUITS, CLAIMS, ACTIONS, DEMANDS, LIABILITIES, EXPENSES AND LOSSES, INCLUDING REASONABLE LEGAL EXPENSES AND ATTORNEYS' FEES ("LOSSES") RESULTING DIRECTLY OR INDIRECTLY FROM THE MANUFACTURE, DEVELOPMENT, USE, HANDLING, STORAGE, SALE OR OTHER DISPOSITION OF CHEMICAL AGENTS, COLLABORATION COMPOUNDS, DEVELOPMENT COMPOUNDS OR PRODUCTS BY SUCH PARTY, ITS AFFILIATES OR SUBLICENSEES except to the extent such Losses result from the gross negligence or willful misconduct of the Party claiming a right of indemnification under this Article 12. 12.2 Intellectual Property Infringement. Each Party shall hold the other Party and its officers, directors, employees, consultants and agents harmless from and against any and all losses resulting from infringement of any Patent controlled by the indemnifying Party with claims covering the allegedly infringing Product. THE FOREGOING IS IN LIEU OF ANY WARRANTIES OF NONINFRINGEMENT, WHICH ARE HEREBY DISCLAIMED. The foregoing obligation does not apply with respect to Product or portions or components thereof (i) combined with other products processes or materials where the alleged infringement relates to such other products, processes or materials or such combination ; (ii) where the indemnified Party continues allegedly infringing activity after being notified thereof ; or (iii) where the indemnified Party's use of the product is incident to an infringement not resulting primarily from the Product or is not strictly in accordance with the terms of this Agreement. 10 12 12.3 Procedures. If either Party seeks indemnification under this Article 12, it shall inform the other Party of a claim as soon as reasonable practicable after it receives notice of the claim, shall permit the other Party to assume direction and control of the defense of the claim ( including the right to settle the claim solely of the other Party ), and shall give reasonable cooperation (at the expense of the other Party ) in the defense of the claim. 13. ASSIGNABILITY This Agreement may not be assigned by either Party without the prior written consent of the other Party; provided, however, that either Party may assign this Agreement, in whole or in part, to an Affiliate or to a successor of a Party in connection with the merger, consolidation or sale of all or substantially all of such Party's assets or that portion of its business pertaining to the subject matter of this Agreement. 14. DISPUTE RESOLUTION PROCEDURES 14.1 Arbitration. All disputes arising in connection with this Agreement shall be finally settled by arbitration under the Rules of Conciliation and Arbitration of the International Chamber of Commerce in force at the time of such dispute. The arbitration shall take place in the United States by three arbitrators appointed in accordance with such Rules. 14.2 Injunctive Relief. Nothing contained in this Section or any other provisions of this Agreement shall be construed to limit or preclude a Party from bringing any action in any court of competent jurisdiction for injunctive or other provisional relief to compel the other Party to comply with its obligations hereunder before or during the pendency of arbitration proceedings. 15. NOTICES Any notice required or permitted to be given hereunder shall be deemed sufficient if sent by facsimile letter or overnight courier, or delivered by hand to Sumitomo or CombiChem at the respective addresses and facsimile numbers as set forth below or at such other address and facsimile number as either Party hereto may designate. if to CombiChem, to: CombiChem, Inc. 9050 Camino Santa Fe San Diego, California 92121 Attention: President Fax number: (619) 530-9998 with a copy to: Brobeck, Phleger & Harrison LLP 550 West C Street, Suite 1300 San Diego, California 92101 Attention: Faye H. Russell, Esq. Fax number: (619) 234-3848 11 13 if to Sumitomo, to: Research Coordination & Planning Department 1-98, Kasugadenaka 3 -choume, Konohana-ku Osaka 554 Japan Sumitomo Pharmaceuticals Co., Ltd. Attn.: Dr. Kei-ichi Ono Fax number: 06-466-1890 16. SURVIVAL The provisions of Sections 8.4 and 17.6, and Article 12 shall survive termination of this Agreement in addition to those provisions which by their terms survive. 17. ADDITIONAL TERMS 17.1 Entire Agreement. This Agreement and that certain Confidentiality Agreement between CombiChem and Sumitomo dated February 5, 1997 constitutes the entire understanding between the Parties with respect to the subject matter hereto and supersedes and replaces all previous negotiations, understandings, representations, writings and contract provisions and rights relating hereof. The Parties agree that all services provided hereunder shall be subject to and governed by the terms and provisions set forth herein, and none of the terms and conditions contained on any proposal, purchase order, invoice or other writing shall have any effect or change the provisions of this Agreement. 17.2 Amendment; No Waiver. No provision of this Agreement may be amended, revoked or waived except by a writing signed and delivered by an authorized officer of each Party. Any waiver on the part of either Party of any breach or any right or interest hereunder shall not imply the waiver of any subsequent breach or waiver of any other right or interest. 17.3 Validity. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, each of which shall remain in full force and effect . 17.4 Headings. The descriptive headings are inserted for convenience of reference only and are not intended to be part of or to affect the meaning of or interpretation of this Agreement. 17.5 Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, and all of which together shall be deemed to be one and the same instrument. 17.6 Governing Law. This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of California, without reference to conflicts of laws principles. 12 14 IN WITNESS WHEREOF, the parties have executed this Agreement to be effective as of the Effective Date. COMBICHEM, INC. SUMITOMO PHARMACEUTICALS CO., LTD. By: /s/ Vicente Anido, Jr. By: /s/ M. Takeuchi ----------------------------- ------------------------------- Its: President and CEO Its: M. Takeuchi ----------------------------- ------------------------------- President ------------------------------- 13 15 EXHIBIT A I. Research Plan *** *** *** *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. 16 *** *** *** *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. 17 *** *** *** *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. 18 II. CRITERIA FOR ACTIVE COMPOUNDS, LEAD COMPOUNDS AND DEVELOPMENT COMPOUNDS *** *** *** III. DUE DILIGENCE Sumitomo will file the IND after a selection of a Development Compound within *** *** which may be extended upon mutual agreement of Sumitomo and CombiChem. *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. 19 EXHIBIT B FINANCIAL SUMMARY ($ IN USD MILLIONS) SIGNING OF AGREEMENT $*** RESEARCH SUPPORT PAYMENTS Signing of Agreement $*** Six (6) months after signing Agreement $*** Twelve (12) months after signing Agreement $*** Eighteen (18) months after signing Agreement $*** MILESTONES *** $*** *** *** $*** *** $*** *** $*** SUBTOTALS *** --- TERRITORY WORLDWIDE ROYALTY ASIA *** REST OF THE WORLD *** LICENSING FEE UPON SUMITOMO OUTLICENSE a) *** Outlicensing Partners for North/South America & Europe - North/South America $*** - Europe $*** b) *** Outlicensing Partner for North/South America $*** & Europe
FOOTNOTES (i) to be paid only for *** directed at the molecular target (ii) to be paid only for *** for compound(s) which meets the milestone (iii) to be paid for *** which meets the milestone *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. 20 EXHIBIT C *** *** *** *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. EX-10.22 5 EXHIBIT 10.22 1 EXHIBIT 10.22 COLLABORATIVE RESEARCH AND LICENSE AGREEMENT BETWEEN COMBICHEM, INC. AND IMCLONE SYSTEMS INCORPORATED OCTOBER 10, 1997 2 COLLABORATIVE RESEARCH AND LICENSE AGREEMENT THIS COLLABORATIVE RESEARCH AND LICENSE AGREEMENT (the "Agreement") is entered into and made effective as of October 10, 1997 (the "Effective Date"), by and between COMBICHEM, INC., a Delaware corporation having its principal offices at 9050 Camino Santa Fe, San Diego, California ("CombiChem"), and IMCLONE SYSTEMS INCORPORATED, a Delaware corporation having its principal offices located at 180 Varick Street, 7th Floor, New York, New York ("ImClone"). WHEREAS, CombiChem has developed and owns certain drug discovery technology and intellectual property rights, including but not necessarily limited to chemical library design software, multi-parallel synthesis and purification methods, chemical libraries suitable for biological screening assays and medicinal chemistry (collectively, "CombiChem Technology"); WHEREAS, ImClone desires to utilize CombiChem Technology for its drug discovery activities under ImClone know-how concerning the identification and characterization of novel small molecule inhibitors for development as therapeutics for treatment of human disease in the area of oncology; WHEREAS, the parties wish to collaborate in a Research Program against Collaboration Target(s) ("Collaboration"); WHEREAS, for purposes of the Collaboration, the Parties intend to focus on up to *** Collaboration Targets per *** related to ImClone's Areas of Interest; NOW, THEREFORE, the Parties agree as follows: 1. DEFINITIONS 1.1 "Abandoned Compound" shall have the meaning set forth in Section 3.1. 1.2 "Abandoned Target" shall have the meaning set forth in Section 3.1. 1.3 "Active Compound(s)" means a compound (or compounds) which (a) (i) is selected by either Party under the Research Program from Collaboration Compounds, or (ii) is derived from a Collaboration Compound; and (b) shows In Vitro Activity. 1.4 "Additional Target(s)" means a Target that is added to the Collaboration in accordance with Section 4.2. *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. 1 3 1.5 "Affiliate" of a Party means any corporation or other business entity controlled by, controlling or under common control with, such Party. For this purpose "control" shall mean direct or indirect beneficial ownership of more than fifty percent (50%) of the voting securities or income interest in such corporation or other business, or if not meeting the preceding requirements, any company owned or controlled by or owning or controlling such Party at the maximum control or ownership right permitted in the country where such company exists. 1.6 "Areas of Interest" shall include *** ***. 1.7 "Collaboration" has the meaning set forth in the preamble. 1.8 "Collaboration Compound(s)" means a compound (or compounds) which (a) is synthesized following the Effective Date for screening against a Collaboration Target under the Research Program, (b) is a pre-existing CombiChem Compound which CombiChem desires to designate as a Collaboration Compound, or (iii) is a pre-existing ImClone Compound which ImClone desires to designate as a Collaboration Compound. 1.9 "Collaboration Target(s)" means either an Initial Target or an Additional Target. 1.10 "CombiChem Compound" means a chemical compound that is proprietary to CombiChem, or whose use or manufacture is proprietary to CombiChem. 1.11 "CombiChem Technology" has the meaning set forth in the preamble. 1.12 "Confidential Information" includes, but is not limited to, (a) all information and materials received by either Party from the other Party pursuant to this Agreement; (b) all information and materials developed in the course of the Collaboration; and (c) the material financial terms of this Agreement. 1.13 "Development Compound(s)" means a compound (or compounds) which (a) (i) is a Lead Compound or (ii) is derived from a Lead Compound; and (b) are determined by ImClone to be appropriate for preclinical studies for the purpose of IND filing by ImClone. 1.14 "Due Diligence" means the use of the resources of ImClone or its licensees or CombiChem in a manner which is consistent with the exercise of prudent scientific and *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. 2 4 business judgment as applied to other programs of ImClone or CombiChem, as the case may be, targeting products aimed at markets or patient groups of similar sizes and of similar scientific and commercial potential. With respect to any Development Compound, "Due Diligence" shall also require ImClone or its licensees to conduct all necessary preclinical studies and to file an IND for such Development Compound within *** from the date upon which ImClone has designated such Development Compound from any Lead Compound or its derivatives. 1.15 "Exclusivity Period" means the Research Period plus twelve (12) months. 1.16 "Field" means all therapeutic indications of human disease for the Collaboration Target. 1.17 "First Commercial Sale" of a Product shall mean the first sale for use or consumption of such Product in a country after required marketing and pricing approval has been granted by the governing health regulatory authority of such country. Sale to an Affiliate or licensee shall not constitute a First Commercial Sale unless the Affiliate or licensee is the end user of the Product. 1.18 "FTE" means full time equivalent with respect to employees of CombiChem. 1.19 "ImClone Compound" means a chemical compound that is proprietary to ImClone, or whose use or manufacture is proprietary to ImClone. 1.20 "Inactive Compound(s)" means a Collaboration Compound(s) which does not have the In Vitro Activity required for an Active Compound. 1.21 "In Vitro Activity" shall mean the observation of *** *** . 1.22 "Initial Target" shall have the meaning set forth in Section 4.1 hereof. 1.23 "Lead Compound(s)" means a compound (or compounds) which (a) is selected from an Active Compound(s) by the RMC under the Research Program, or (b) is derived from Active Compound(s) and is selected by the RMC. 1.24 "Net Sales" means the gross sales invoiced by ImClone or its Affiliates or licensees for Products to non-Affiliated Third Parties less actual deductions of returns (including withdrawals and recalls), rebates (price reductions, including Medicaid and similar types of rebates e.g. chargebacks), volume (quantity) discounts, discounts granted at the time of invoicing, the cost of transport, insurance, delivery, sales taxes and other taxes (other than income taxes) directly linked to and included in the gross sales amount, as computed on a product-by-product basis for the countries concerned, whereby the amount of such sales in foreign currencies is *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. 3 5 converted into United States dollars at the exchange rate of the last business day for each calendar month as reported by Citibank, N.A. (New York). 1.25 "Patent" means, (a) valid and enforceable Letters Patent, including any extension (including Supplemental Protection Certificate), registration, confirmation, reissue, continuation, divisionals, continuation-in-part, reexamination or renewal thereof, or (b) pending applications for any of the foregoing. 1.26 "Payments" shall have the meaning set forth in Section 9.3 1.27 "Party" means CombiChem or ImClone, as the case may be, including their respective Affiliates, permitted successors and assigns. 1.28 "Product(s)" means any product containing a Development Compound with such compound as the active ingredient and which is granted regulatory approval by the governing health regulatory authority of the applicable country for marketing in the Field. 1.29 "Project Team" shall have the meaning set forth in Section 2.1(c). 1.30 "Research Management Committee" or" RMC" has the meaning set forth in Article 6 below. 1.31 "Research Period" means the initial twenty-four (24) month term of the Collaboration, which can be extended in accordance with Section 7.1 below. 1.32 "Research Plan" means the mutually-agreed research plan for the Collaboration attached hereto as Appendix A. 1.33 "Research Program" means the research to be conducted as part of the Collaboration under the Research Plan, and shall include, without limitation, the activities and items set forth in Sections 2.1 and 2.2 of this Agreement. 1.34 "Returned Compound" shall have the meaning set forth in Section 9.2. 1.35 "Royalty Term" means, in the case of any Product, in any country, the period of time commencing on the First Commercial Sale and ending upon the later of (a) fifteen (15) years from the date of First Commercial Sale in such country; or (b) the expiration of the last-to-expire Patent resulting from the Research Program filed in the Field with claims covering that Product in the relevant country. 1.36 "Target" means a biomolecular entity that a small molecule is screened against in order to determine whether the small molecule demonstrates relevant activity. 1.37 "Territory" means the entire world. 1.38 "Third Party" means an entity other than CombiChem or ImClone or their respective Affiliates. 4 6 1.39 "Universal Informer Library" shall mean CombiChem's proprietary Universal Informer Library of compounds. 2. RESEARCH COLLABORATION 2.1 CombiChem Responsibilities. CombiChem shall with Due Diligence conduct the following activities under the Research Program in accordance with the terms of this Agreement and as more fully described in the Research Plan: (a) During the Research Period, CombiChem shall (i) review data and information regarding the Collaboration Targets provided by ImClone; (ii) based on such data and information and using the CombiChem Technology, design informative compound libraries; and (iii) supply all lead chemistries and synthesize compounds as provided in Section 5.3 below. (b) During the Research Period, CombiChem shall keep ImClone informed of its activities performed in connection with the Collaboration, including, without limitation, providing ImClone with data and information regarding Collaboration Compounds prior to the meetings of the Research Management Committee. (c) Subject to Article 4 and at all times during the Research Period, CombiChem shall dedicate a project team of five (5) FTEs comprised of synthetic and analytical chemists, compound control scientists, and a computational scientist (the "Project Team") to conduct all of its activities in connection with the Collaboration; provided, however, that the RMC may at any time during the Research Period substitute employees for the FTEs described above; provided, further, that ImClone may request that CombiChem expand its Project Team by adding additional FTEs to work on the Collaboration at the rate and in the manner specified in Section 8.2(b). 2.2 ImClone Responsibilities. ImClone shall with Due Diligence provide CombiChem with the following resources under the Research Program as more fully described in the Research Plan: (a) ImClone shall provide CombiChem with support and assistance useful or necessary for the conduct of the Research Program, including providing data and information (including leads and/or screening hits to the extent available) relating to Collaboration Targets, certain chemistries useful in compound synthesis, information concerning assay methods and screening data. (b) During the Research Period, ImClone shall provide CombiChem with data and information regarding Collaboration Compounds and 5 7 the Collaboration Target assays developed by ImClone under the Research Program prior to the meetings of the Research Management Committee. (c) During the Exclusivity Period and with Due Diligence, ImClone shall screen Collaboration Compounds for In Vitro and, where appropriate, in vivo activity against the Collaboration Target. (d) During the Exclusivity Period and with Due Diligence, ImClone shall (i) screen Lead Compounds, (ii) endeavor to determine Development Compounds, and (iii) develop Products. 2.3 Research Plan. The Parties hereby agree that the Research Program shall be carried out in accordance with the Research Plan which is attached hereto as Appendix A. At the direction of the RMC, the Research Program shall involve the use of CombiChem's Universal Informer Library in order to initiate CombiChem's discovery process with the objective of identifying Lead Compounds with respect to a specific Collaboration Target. The Research Management Committee shall review the Research Plan on an ongoing basis and may make changes to the Research Plan so long as such changes are mutually agreed to by CombiChem and ImClone. 2.4 Annual Reports. Following the first IND filing through First Commercial Sale, ImClone shall provide CombiChem with an annual report summarizing ImClone's activities in developing Development Compounds. 2.5 Third Party Licenses. Each Party shall be solely responsible for any Third Party license fees required to perform its obligations under this Agreement subject to Section 8.4. Any agreements between a Party and a Third Party shall in all material respects permit performance under this Agreement. 3. EXCLUSIVITY 3.1 Collaboration Target Exclusivity. So long as ImClone or its licensee is proceeding with Due Diligence, CombiChem shall not work on a Collaboration Target with any Third Parties. In the event that ImClone or its licensee fails to exercise Due Diligence with respect to, or notifies CombiChem that it has abandoned work on, any Collaboration Target (an "Abandoned Target") and any Collaboration Compound, other than an ImClone Compound which is subject to the rights of a Third Party licesor, associated with such Collaboration Target (together with all derivatives of such Collaboration Compound, an "Abandoned Compound"), then, (a) such Abandoned Target shall not be subject to any provision hereunder, and (b) such Abandoned Compound shall be available to CombiChem for any purpose thereafter. 3.2 Active Compounds. (a) Following the designation of any Collaboration Compound as an Active Compound, such Active Compound shall be exclusively available to ImClone during the 6 8 Research Period. Following the expiration of the Research Period, Active Compounds with respect to which ImClone fails to proceed with Due Diligence shall be deemed to be Inactive Compounds for all purposes hereunder; provided, that any Active Compound which is the subject of claim(s) under a pending Patent shall continue to be treated as an Active Compound during the Exclusivity Period so long as ImClone exercises Due Diligence with respect to any Collaboration Compound. (b) Prior to the existence of Patent(s) in accordance with Section 5.2, ImClone shall have exclusive rights in all intellectual property relating to Active Compounds, their use, and method of manufacture so long as ImClone continues to show Due Diligence under this Agreement; provided, however, that ImClone acknowledges and agrees that CombiChem reserves the right to assign or grant exclusive rights, including rights to Active Compounds, to a third party collaborator who first identifies a novel compound, a novel use of a compound, or a novel method of manufacturing a compound, to the extent CombiChem is obligated to do so under its existing contractual obligations. Upon notice by ImClone that it intends to file a Patent application with respect to any Active Compound, Lead Compound, Development Compound or Product, CombiChem shall promptly inform ImClone whether CombiChem has the power to grant the exclusive rights in accordance with this Section 3.2 and the assignments in accordance with Section 5.2; provided, however, that under no circumstances CombiChem will grant assurances to ImClone to the effect that any Active Compound, Lead Compound, Development Compound or Product is not covered under the patent claims of Third Parties wherein such claims are not the direct result of a collaboration between the Third Party and CombiChem. 3.3 Inactive Compounds/Returned Compounds. Subject to Section 9.4, Inactive Compounds and Returned Compounds shall be available to both Parties for any purpose. 4. TARGETS 4.1 Initial Targets. During the Research Period, ImClone may designate up to *** Collaboration Targets per *** under the Research Program. During the initial *** *** of the Research Program, subject to the Research Plan it is anticipated that the Collaboration shall initially focus on up to *** Targets as follows: **** *** (collectively, the "Initial Targets"). With respect to Colloboration Targets, the RMC will determine whether to continue to pursue work against designated Collaboration Targets and will prioritize the activities of teh Project Team against such Collaboration Targets. In the event that the results of the initial screeening activities of ImClone with respect to the Initial Targets specified in Section 4.1 *** *** which shall determine whether such Targets are suitable for designation as Additional Targets. Subject to the dispute resolution mechanism provided for in Article 6, ImClone shall have the right to make a final determination as to whether to continue or pursue work against any Collaboration Target if the respective Chief Executive Officers of CombiChem and ImClone are unable to resolve any dispute concerning the same. In addition, ImClone's right to designate or substitute a Target (including those Additional Targets set forth in Section 4.2) relating to ImClone's Areas of Interest shall be subject to the written notice and approval requirements specified in Section 4.2(b). *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. 7 9 4.2 Additional Targets. (a) Within ninety (90) days prior to the commencement of the second 12-month period of the Research Program, ImClone may add up to *** relating to ImClone's Areas of Interest to the Collaboration by notifying CombiChem in writing that it wishes to designate such Target(s) as Additional Target(s); it being understood that the Project Team shall be obligated to simultaneously work on no more than *** Collaboration Targets as directed by the RMC. (b) If CombiChem has already committed to wkring on a proposed Additional Target or has delivered a term sheet to any Third Party and remains in discussions to enter into a binding agreement with such Third Party with respect to the proposed Target at the time of notification, CombiChem shall inform ImClone that such proposed Additional Target is not available. Otherwise, the RMC shall establish the specific scientific achievements (to be mutually agreed between CombiChem and ImClone) for such Target and the same shall be designated as an Additional Target for the Collaboration and subject to the terms (including the commercial terms) of this Agreement. 4.3 Expansion of Project Team. Notwithstanding the provisions of Sections 4.1 and 4.2, ImClone may request that CombiChem expand its Project Team during the Research Period in order to accelerate work on Collaboration Targets and/or to add additional Target(s). In such event, the RMC shall promptly confer as to the appropriate number of FTEs to be added to Project Team to work on the Collaboration at a cost to ImClone as specified in Section 2.1(c). 5. COLLABORATION COMPOUNDS 5.1 Pre-Existing Compounds. ImClone shall have no rights to any pre-existing CombiChem Compound unless and until such compound is designated as a Collaboration Compound by CombiChem. Additionally, CombiChem may decline to synthesize a particular compound or library of compounds by reason of existing Patents or contractual obligations. CombiChem shall have no rights to any pre-existing ImClone Compound which is not utilized in the Research Program. 5.2 Intellectual Property Rights; Assignment to ImClone. Subject to Section 3.2(b) above, ImClone shall have the right and responsibility at ImClone's expense to file, maintain and prosecute Patents relating to Active Compounds, Lead Compounds, Development Compounds and Products, their use, and their methods of manufacture. At ImClone's request, CombiChem shall assign all its right, title and interest in such Patents to ImClone. If ImClone fails to so file, maintain or prosecute such Patent, CombiChem shall have the right to request ImClone to do so. If ImClone elects not to file, maintain or prosecute such Patent, CombiChem shall have the right to take over such filing, maintenance or prosecution of such Patent, at its sole expense, and ImClone shall assign all intellectual property rights it may have in the Active Compound, Lead Compound, Development Compound or Product to CombiChem. 5.3 Supply of Collaboration Compounds. Aliquots of *** of any Collaboration Compound that has been synthesized will be prepared and given to ImClone. *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. 8 10 CombiChem shall replenish that amount upon ImClone's reasonable request. CombiChem shall maintain aliquots of any Collaboration Compound that has been synthesized by CombiChem. CombiChem shall also provide ImClone with additional requirements of samples at CombiChem's cost. 6. RESEARCH MANAGEMENT COMMITTEE The design, review and conduct of the Research Program will be coordinated by the Research Management Committee, which will meet regularly on a mutually-agreeable schedule. The Research Management Committee may establish and amend or revise the Research Plan as necessary to reflect the scientific progress and work performed under the Research Program, such amendments to be mutually agreed to by ImClone and CombiChem. The Research Management Committee will consist of an equal number of members from ImClone and CombiChem and will include appropriate representatives from ImClone and CombiChem as mutually agreed. The co-chairs of the Research Management Committee will initially be the Vice President, Chemistry of CombiChem and the Vice President for Research of ImClone and subsequently may change as mutually-agreed upon by the Parties. Decisions of the Research Management Committee shall be by consensus. If a decision is not reached by the RMC with respect to management of the Research Program, the dispute will be referred to the co-chairs of the RMC. If the co-chairs of the RMC are unable to resolve the dispute, the dispute will be referred to the respective Chief Executive Officers of CombiChem and ImClone. 7. RESEARCH PERIOD; TERMINATION OF RESEARCH PROGRAM 7.1 Research Period: Option to Extend the Research Period. The initial term of the Collaboration shall be the Research Period, subject to extension upon mutual agreement. To extend the Research Period, ImClone must notify CombiChem no later than ninety (90) days prior to the then-current expiration date and the Parties shall negotiate in good faith the terms and conditions of any such extension. 7.2 Termination of Research Program. (a) The Research Program may be terminated by a Party for the material breach by the other Party of obligations under the Research Program by giving the breaching party notice of the breach and of the intent of the non-breaching Party to terminate the Research Program unless the breach is cured within ninety (90) days of notification. The non-breaching Party may terminate the Research Program following such ninety (90) day period by providing the breaching party with ninety (90) days' prior written notice that the Research Program is terminated, and the Research Program shall be terminated on the 90th day following such date. (b) Within thirty (30) days prior to the one (1) year anniversary of this Agreement, ImClone and CombiChem senior and scientific management personnel shall meet to review the status of the Collaboration. If, based upon such review, the status of the Collaboration is satisfactory to ImClone, ImClone shall make the Second Research Payment described in Section 8.2 to CombiChem on or before the one (1) year anniversary of this Agreement; provided, however, that ImClone may, in its discretion, make such Second Research Payment at any time 9 11 prior to the date which is the one (1) year anniversary of this Agreement. If however, based upon such review, the status of the Collaboration is unsatisfactory to ImClone, ImClone may terminate the Research Program by providing 90-days' prior written notice to CombiChem that the Research Program shall be terminated. Upon receipt of such notice by CombiChem, ImClone shall have no further obligation to make the Second Research Payment to CombiChem (if such payment has not already been made to CombiChem), and the Research Program shall be terminated on the 90th day following such date. (c) CombiChem shall, within thirty (30) days following the effective date of termination under Section 7.2(a) or 7.2(b), pay to ImClone such amount as is calculated by taking *** *** *** shall be based upon ***. Any amount due by CombiChem under this Section 7.2(c) may be in the form, at CombiChem's discretion, of *** *** ***. 8. CONSIDERATION 8.1 Equity Purchase. Upon execution of this Agreement, ImClone shall purchase 1,000,000 shares (on a pre-split basis and subject to adjustment) of Common Stock of CombiChem at a per share purchase price equal to $2.00 per share for an aggregate purchase price of U.S. $2 million, pursuant to the terms of that certain Common Stock Purchase Agreement, dated as of the Effective Date, by and between CombiChem and ImClone (together with all ancillary agreements thereto, the "Stock Purchase Agreement"). In the event that CombiChem closes an initial public offering of its common stock at a sales price per share to the public (the "IPO Price") which is less than $2.50 per share (on a pre-split basis), then, upon the closing of such initial public offering, CombiChem shall issue to ImClone, without further consideration other than the purchase price paid by ImClone pursuant to the Stock Purchase Agreement, such additional number of shares of CombiChem common stock equal to: 2,000,000 -------------- = 1,000,000 Adjusted Price wherein the "Adjusted Price" = the IPO Price X .80 if the IPO Price is less than $2.50 per share. All shares of CombiChem common stock issued pursuant to this Section 8.1 shall be deemed to be "Shares" within the meaning of the Stock Purchase Agreement. 8.2 Program Funding. (a) ImClone shall support CombiChem's efforts in conducting the Research Program by making a payment upon the execution of this Agreement in the sum of U.S. *** . In addition, subject to Section 7.2(b), ImClone shall make a payment (the "Second Research Payment") to CombiChem prior to October 10, 1998 in the amount of *** *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. 10 12 in the form either, at ImClone's discretion, of (i) cash, or (ii) ImClone common stock by delivering to CombiChem that number of shares of ImClone common stock equal to the quotient obtained by dividing (i) *** by (ii) the average of the last reported sales price of the ImClone common stock as quoted on the National Market System of the National Association of Securities Dealer's Automated Quotation System during the thirty (30) consecutive trading days ending on the day prior to delivery of such shares (the "ImClone Price Per Share"). (b) In the event that the Project Team is expanded in accordance with Section 4.3, ImClone shall make payments, in cash, to CombiChem, at a per annum rate of U.S. *** payable quarterly in advance of the work to be performed by such additional FTE(s). (c) Any shares of the ImClone common stock issued to CombiChem under this Section 8.2 shall be restricted securities under the Securities Act of 1933, as amended and shall be issued pursuant to a stock issuance agreement between ImClone and CombiChem which shall contain provisions for representations and warranties equivalent to, and registration rights and indemnification (and such other relevant provisions) with respect to the shares of ImClone common stock issued thereunder no less favorable than, those contained in the Stock Purchase Agreement. 8.3 Milestone Payments. Within thirty (30) days of the occurrence of a development milestone triggered by the activities of ImClone as shown on Appendix B, ImClone shall pay CombiChem the related milestone payment in U.S. dollars as set forth on Appendix B. Alternatively, in the event that ImClone shall outlicense the Patents covering any Product, CombiChem shall be entitled to the payments set forth in Section 9.3 in lieu of any payments pursuant to this Section 8.3. 8.4 Royalties. (a) Direct Sales by ImClone (i) Subject to Section 8.4(c), during the Royalty Term, ImClone will pay CombiChem a running royalty of *** of Net Sales of Products sold by ImClone or its Affiliates in all countries in the Territory. Each payment of royalties shall be accompanied by a report of Net Sales of Products in sufficient detail to permit confirmation of the accuracy of the royalty payment made. (ii) The royalties owed under Section 8.4(a)(i) shall not be reduced in accordance with Sections 8.4(c)(i) through 8.4(c)(iii) in an amount which results in a royalty payable to CombiChem of less than *** of Net Sales for Products sold directly by ImClone or its Affiliate. (b) Sales by ImClone's Licensees In the event that ImClone outlicenses Active Compounds, Lead Compounds, Development Compounds and resulting Products are sold by ImClone's licensees *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. 11 13 in any country in the Territory, ImClone's royalty payable to CombiChem shall be as follows:
ImClone Royalty from Outlicensing CombiChem Royalty due to Outlicensing - ----------------- ------------------------------------- Greater than *** (1) *** of ImClone royalty, but no greater than *** (2) Subject to reduction as outlined in Sections 8(c)(i) through 8(c)(iii), but such reductions shall not reduce CombiChems royalty below *** except as otherwise provided in Section 8.4(c)(iii). Less than or equal to *** (1) *** of ImClone royalty and not subject to reduction as outlined in Sections 8(c)(i) and and 8(c)(ii).
(c) Royalty Reductions (i) In any country in which Patents do not include a valid issued patent covering a Product sold by ImClone or its licensee, and/or where a generic equivalent has been approved for sale and is being sold in such country, the royalty provided for in Section 8.4(a)(i) and in Section 8.4(b), as indicated therein, shall be reduced by *** . (ii) In any country in which ImClone pays a Third Party royalty for patents and related technology in order to sell a Product, *** of such Third Party royalty shall be *** the royalty payment owed by ImClone to CombiChem in accordance with Section 8.4(a)(i) and Section 8.4(b), as indicated therein. During the Research Period, the RMC will make the determination whether to include any Third Party royalty-bearing patents and related technology in the Collaboration. After the Research Period, ImClone shall, in its discretion, make the determination whether to enter into any agreements with respect to Third Party royalty-bearing patents and related technology for purposes of this Agreement. (iii) In any country in which CombiChem receives any Additional Payments in respect of payments received by ImClone which are treated as an advance against royalties due ImClone from its licensee, such Additional Payments shall be *** the royalties provided for in Section 8.4(b) that are derived from such licensee. 8.5 Manner and Place of Payment. Royalty payments and reports for Net Sales of Products shall be calculated in local currencies and reported for each calendar quarter. All royalty payments owed under this Agreement shall be made by wire transfer to the bank account to be designated by CombiChem within thirty (30) days following the end of each such calendar quarter. 8.6 Records and Audit. During the term of this Agreement and for a period of five (5) years thereafter, ImClone shall keep complete and accurate records pertaining to the sale or other disposition of Products in sufficient detail to permit CombiChem to confirm the accuracy of all payments due hereunder. CombiChem shall have the right to cause an independent certified public accounting firm reasonably acceptable to ImClone to audit such *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. 12 14 records to confirm ImClone's Net Sales for the preceding year. Any information obtained during such audit shall be treated as Confidential Information. Such audits may be exercised during normal business hours of ImClone no more than once each year. CombiChem shall bear the full cost of such audit unless such audit discloses a variance of more than five percent (5%) in ImClone's favor from the amount of the Net Sales reported by ImClone for such audited period. In such case, ImClone shall bear the fill cost of such audit. 8.7 Taxes. All income and other taxes levied on account of the royalties and other payments accruing to CombiChem under this Agreement shall be paid by CombiChem, including taxes levied thereon as income to CombiChem. If provision is made in law or regulation for withholding, such tax shall be deducted from the royalty or other payment made by ImClone to the proper taxing authority and a receipt of payment of the tax secured and promptly delivered to CombiChem. Each Party agrees to assist the other Party in claiming exemption from such deductions or withholdings under any double taxation or similar agreement or treaty from time to tune in force. 9. LICENSE GRANTS; OUTLICENSE 9.1 CombiChem License Grant to ImClone. Subject to the terms and conditions of this Agreement, CombiChem hereby grants to ImClone an exclusive worldwide license, with the right to sublicense, to use such CombiChem Technology as is necessary to make, have made, use, have used, sell, have sold and import Collaboration Compounds or Products in the Territory. Such license shall remain exclusive in relation to each Collaboration Compound and/or Product so long as ImClone or its licensee continues to develop and commercialize such Collaboration Compound and/or Product containing such Collaboration Compound against a Collaboration Target with Due Diligence. 9.2 ImClone License Grant to CombiChem. Subject to the terms and conditions of this Agreement and following the failure of ImClone or its licensee to develop and commercialize with Due Diligence a Lead Compound, a Development Compound or Product, as the case may be, (collectively, and together with all Abandoned Compounds, "Returned Compound"), ImClone shall grant to CombiChem an exclusive license (exclusive even as to ImClone and its Affiliates), with the right to sublicense, under those ImClone Patents and know-how which are resulting from the Research Program and related exclusively to the Returned Compound to make, have made, use, have used, sell, have sold and import such Returned Compound in the Territory. 9.3 ImClone Outlicense. ImClone shall have a right to outlicense the Patents covering the Product to a Third Party subject to CombiChem's right to receive (a) royalties as provided in Section 8.4(b), and (b) additional payments ("Additional Payments") such that CombiChem has received, as of each Payment Date, the greater of (i) the cumulative amount due CombiChem by ImClone upon the attainment of the milestones set forth in Appendix B by ImClone' s licensee, or (ii) the cumulative amount equal to *** of the *** *** *** *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. 13 15 *** *** but excluding, to the extent reasonable and customary, all *** *** (collectively, the royalties described in clause (a) and the payments described in clause (b) of this sentence, the "Payments") received by ImClone from such Third Party in connection with such license. The royalty Payments described in clause (a) of the preceding sentence shall be remitted to CombiChem within thirty (30) days after receipt by ImClone of such Payments from its licensee. The Additional Payments described in clause (b) of the preceding sentence shall be paid to CombiChem within thirty (30) days following each date (a "Payment Date") upon which any milestone designated in Appendix B is achieved and/or ImClone receives a payment (as described above) from its licensee. As an express condition of any such outlicense, any such licensee shall be required to agree in writing to be bound by royalty reporting and recordkeeping and inspection provisions consistent with those contained in this Agreement. In addition, CombiChem shall have the right to receive all audit reports relating to sales of Products of ImClone's licensees, and to cause ImClone or its successor to have an independent certified public accounting firm audit such licensees records on the same terms as those specified in Section 8.6. All payments shall be made by wire transfer to such bank account designated by CombiChem. Failure of such licensee to make any milestone or royalty payment in respect of such Product shall not relieve ImClone of its obligations to make royalty and milestone payments to CombiChem hereunder. 9.4 Rights to Inactive Compounds/Returned Compounds. No provision of this Agreement shall prevent either Party from making, having made, using, having used, selling, having sold, or importing Inactive Compounds, products containing Inactive Compounds, Returned Compounds or products containing Returned Compounds or screening Inactive Compounds and Returned Compounds against any target other than the Collaboration Targets. In the event that either ImClone or CombiChem (the "Contracting Party") shall enter into a binding agreement with a Third Party to develop, market and/or sell any product containing any Inactive Compound or Returned Compound as an active ingredient (a "Third Party Transaction"), then the other Party hereto (the "Other Party") shall be entitled to *** of *** by the Contracting Party from such Third Party in respect of such Third Party Transactions. All such payments shall be sent by wire transfer to such bank account designated by the Other Party within thirty (30) days after the Contracting Party's receipt of such payments and shall be subject to the recording and auditing provisions of Section 8.6. 9.5 Miscellaneous License. In addition to any other rights granted by either Party in accordance with this Article 9, each Party grants to the other party a non-exclusive license without the right to grant sublicenses, under any intellectual property rights the granting Party has the power to grant in order for the other Party to carry out its rights and obligations under this Agreement including, but not necessarily limited to, conducting the Research Program and manufacturing, developing, selling and importing Products. 10. TERM AND TERMINATION 10.1 Term. The term of this Agreement shall commence upon the Effective Date of this Agreement, and shall expire on the expiration of the last royalty obligation under this *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. 14 16 Agreement, except as provided hereunder. 10.2 Termination by ImClone or CombiChem. Subject to Section 7.2, if either Party materially breaches this Agreement and fails to remedy that breach within ninety (90) days of receiving written notice thereof from the other Party, or enters into any arrangement of composition with its creditors or goes into liquidation, insolvency, bankruptcy, receivership or reorganization proceedings, whether voluntarily or compulsorily which is not dismissed within ninety (90) days, then the other Party may at any time, by notice in writing or by telefax, terminate this Agreement. 10.3 After Termination. (a) Upon any termination of the Research Program under Section 7.2(a) due to a material breach of this Agreement by ImClone, ImClone's rights pursuant to Sections 3.1, 3.2, 5.3, 9.1, 9.3 and 9.5 shall immediately cease, and all rights granted hereunder with respect to Targets and Collaboration Compounds, Active Compounds, Lead Compounds, Development Compounds, or Products shall immediately revert to CombiChem without further obligation to ImClone. ImClone's rights pursuant to Section 5.2 and 9.3 above that accrue prior to such termination shall be retained by ImClone. ImClone may make, use, sell and import Active Compounds, Lead Compounds, Development Compounds or Products under rights retained by ImClone pursuant to this Section 10.3(a) so long as ImClone continues to satisfy all of its royalty, milestone, and Payment obligations in accordance with Sections 8.3, 8.4, 9.3 and 9.4. (b) Upon any termination of the Research Program under Section 7.2(a) due to a material breach of this Agreement by CombiChem with respect to a Collaboration Compound, Active Compound, Lead Compound, Development Compound or Product, all of ImClone's rights pursuant to Sections 3.1, 3.2, 5.2, 5.3, 9.1, 9.3 and 9.5 shall be retained by ImClone. ImClone may make, use, sell or import Active Compounds, Lead Compounds, Development Compounds and Products with respect to which ImClone is not in material breach under rights retained by ImClone pursuant to this Section 10.3(b) so long as ImClone continues to satisfy all of its royalty, milestone, and Payment obligations in accordance with Sections 8.3, 8.4, 9.3 and 9.4, except that ImClone shall not be required to satisfy such obligations with respect to any Collaboration Compound, Active Compound, Lead Compound, Development Compound or Product with respect to which CombiChem is in material breach. (c) If ImClone materially breaches this Agreement following the Research Period with respect to an Active Compound, Lead Compound, Development Compound or Product for any reason including, but not limited to, failing to satisfy its royalty, milestone and Payment obligations pursuant to Sections 8.3, 8.4, 9.3 and 9.4, ImClone shall not make, use, sell or import Active Compounds, Lead Compounds, Development Compounds or Products with respect to which ImClone is in material breach. ImClone shall retain the right to make, use, sell and import Active Compounds, Lead Compounds, Development Compounds or Products with respect to which ImClone is not in material breach so long as ImClone continues to satisfy all of its royalty, milestone, and Payment obligations in accordance with Sections 8.3, 8.4, 9.3 and 9.4. 15 17 (d) If CombiChem materially breaches this Agreement following the Research Period for any reason including, but not limited to, failing to satisfy its confidentiality and warranty obligations under Articles 11 and 19, ImClone shall have the right to make, use, sell or import Active Compounds, Lead Compounds, Development Compounds and Products with respect to which ImClone is not in material breach so long as ImClone continues to satisfy all of its royalty, milestone, and Payment obligations in accordance with Sections 8.3, 8.4, 9.3 and 9.4. (e) Upon any expiration or earlier termination of this Agreement for any reason, ImClone shall not be entitled to any refund of any payments made to CombiChem hereunder except as provided in Section 7.2(c). 10.4 Effect of Termination on Licensees. In the event of any termination of this Agreement pursuant to this Article 10 where such termination shall not have been caused by the action or inaction on the part of any respective licensee of ImClone or CombiChem, or by any breach by such licensee of its obligations under its licensee from ImClone or CombiChem, as appropriate, such termination of this Agreement shall be without prejudice to the rights of each non-breaching licensee and such licensee shall be deemed to be a direct licensee hereunder. 11. CONFIDENTIAL INFORMATION 11.1 Nondisclosure. During the term of the Collaboration and for a period of five (5) years after termination thereof, each Party will maintain all Confidential Information in trust and confidence and will not disclose any Confidential Information to any third party for any purpose except (i) as expressly authorized by this Agreement, or (ii) as required by law or court order, or (iii) to its consultants, subcontractors or agents who need to know to accomplish the purposes of this Agreement. Each Party may use such Confidential Information only to the extent required to accomplish the purposes of this Agreement. Each Party will use at least the same standard of care as it uses to protect proprietary or confidential information of its own to ensure that its Affiliates, employees, agents, consultants and other representatives do not disclose or make any unauthorized use of the Confidential Information. Each Party will promptly notify the other upon discovery of any unauthorized use or disclosure of the Confidential Information. Confidential Information is understood to include, but not necessarily to be limited to, the structures of chemical compounds and the identification of chemical compounds as Collaboration Compounds, Active Compounds, Inactive Compounds, Lead Compounds, Development Compounds, or Products. 11.2 Exceptions. Confidential Information shall not include any information which the receiving Party can prove by competent evidence: (a) is now, or hereafter becomes, through no act or failure to act on the part of the receiving Party, generally known or available; (b) is known by the receiving Party at the time of receiving such information, as evidenced by its records; (c) is hereafter disclosed to the receiving Party by a Third Party, as a matter of right and without restriction on disclosure; (d) is independently developed by the receiving Party without the aid, application or use of Confidential Information; (e) is the subject of a written permission to disclose provided by the disclosing Party; or (f) is necessary to obtain regulatory approval for a Product, or patent protection with respect to Active Compounds, Lead Compounds, Development Compounds, or Products, and the uses and methods of manufacturing thereof. 16 18 12. PUBLICATIONS AND PUBLIC STATEMENTS 12.1 Publications. Each Party shall be permitted to publish any information, except Confidential Information, relating to the Research Program as long as the Party has the prior written permission of the other Party. Such permission shall be approved or disapproved within twenty-one (21) days of written request for permission. Such permission shall not be unreasonably withheld. 12.2 Public Statements. Neither Party shall use the name of the other Party in any public statement, prospectus, annual report or press release or other public communication (collectively "Public Statements") without the prior written approval of the other Party, which may not be unreasonably withheld or delayed; provided, however, that both Parties shall endeavor in good faith to give the other Party a minimum of two (2) business days to review such Public Statements; provided, further, that, upon approval of any such Public Statement, both Parties may disclose to third parties the information contained in such Public Statement without the further approval of the other; and provided, further, that if a Party does not approve such Public Statement, either Party may still use the name of the other Party in any Public Statement without the prior written approval of the other Party, if such Party is advised by counsel that such disclosure is required to comply with applicable law. 13. INDEMNIFICATION 13.1 EACH PARTY HEREBY AGREES TO SAVE, DEFEND AND HOLD THE OTHER PARTY AND ITS OFFICERS, DIRECTORS, EMPLOYEES, CONSULTANTS AND AGENTS HARMLESS FROM AND AGAINST ANY AND ALL SUITS, CLAIMS, ACTIONS, DEMANDS, LIABILITIES, EXPENSES AND LOSSES, INCLUDING REASONABLE LEGAL EXPENSES AND ATTORNEYS' FEES ("LOSSES") RESULTING DIRECTLY OR INDIRECTLY FROM ANY ACTIVITY PERFORMED BY THE INDEMNIFYING PARTY PURSUANT TO THIS AGREEMENT, INCLUDING BUT NOT NECESSARILY LIMITED TO THE MANUFACTURE, DEVELOPMENT, USE, HANDLING, STORAGE, SALE OR OTHER DISPOSITION OF CHEMICAL AGENTS, COLLABORATION COMPOUNDS, ACTIVE COMPOUNDS, LEAD COMPOUNDS, DEVELOPMENT COMPOUNDS OR PRODUCTS BY SUCH PARTY, ITS AFFILIATES OR LICENSEES except to the extent such Losses result from the gross negligence or willful misconduct of the Party claiming a right of indemnification under this Article 13. 13.2 Indemnification. (a) Subject to Section 13.2(c) below, ImClone shall hold CombiChem and its officers, directors, employees, consultants, and agents harmless from and against any and all losses resulting from the infringement of any Patent of a Third Party due to the performance by ImClone of any activity contemplated hereunder, including, but not necessarily limited to, ImClone's responsibilities under Section 2.2 above, developing Products, and selling Products. (b) Subject to Section 13.2(c) below, CombiChem shall hold ImClone and its officers, directors, employees, consultants, and agents harmless from and against any and all losses resulting from the infringement of any Patent of a Third Party due to the performance 17 19 by CombiChem of any activity contemplated hereunder, including, but not necessarily limited to, CombiChem's responsibilities under Section 2.1 above. (c) The indemnity provided in Sections 13.2(a) and 13.2(b) above shall not apply where the loss is due to the breach by the indemnified Party of a warranty made in Article 19. 13.3 Procedures. If either Party seeks indemnification under this Article 13, it shall inform the other Party of a claim as soon as reasonable practicable after it receives notice of the claim, shall permit the other Party to assume direction and control of the defense of the claim (including the right to settle me claim solely of the other Party), and shall give reasonable cooperation (at the expense of the other Party) in the defense of the claim. 14. ASSIGNABILITY This Agreement may not be assigned by either Party without the prior written consent of the other Party; provided, however, that either Party may assign this Agreement, in whole or in part, to an Affiliate or to a successor of a Party in connection with the merger, consolidation or sale of all or substantially all of such Party's assets or that portion of its business pertaining to the subject matter of this Agreement. 15. DISPUTE RESOLUTION PROCEDURES 15.1 Senior Executives Discussions. If a decision is not reached by the RMC, the dispute will be resolved as set forth in Article 6 above. If a dispute arises between CombiChem and ImClone with respect to matters other than the management of the Research Program, either during or after the Research Period, such dispute will be referred to the appropriate senior management in the area of the dispute. If such senior management are unable to resolve such dispute, such dispute will be referred to the Chief Executive Officers of CombiChem and ImClone. If such officers are unable to reach an agreement within thirty (30) days following the initiation of discussions between them, such dispute shall be settled by arbitration as described in Section 15.2 below. 15.2 Binding Arbitration. If the parties have not been able to resolve the dispute as provided in Section 15.1 above, the dispute shall be finally settled by binding arbitration. Any arbitration hereunder shall be conducted under rules of the American Arbitration Association. The arbitration shall be conducted before one (1) arbitrator chosen by mutual agreement of the Parties. If the Parties cannot agree on the choice of the arbitrator within a period of thirty (30) days after submission, then the arbitrator shall be appointed by the Court of Arbitration of the American Arbitration Association. Any such arbitration shall be held in a mutually agreeable location; provided, however that if the parties cannot so agree, the location(s) for such arbitration(s) shall alternate between San Diego, California and New York, New York, with the first such arbitration to be located in San Diego, California. The arbitrators shall have the authority to grant specific performance, and to allocate between the parties the costs of arbitration in such equitable manner as he or she may determine. The arbitral award (i) shall be final and binding upon the parties; and (ii) may be entered in any court of competent jurisdiction. 18 20 15.3 Injunctive Relief. Nothing contained in this Article 15 or any other provisions of this Agreement shall be construed to limit or preclude a Party from bringing any action in any court of competent jurisdiction for injunctive or other provisional relief to compel the other Party to comply with its obligations hereunder before or during the pendency of arbitration proceedings. 16. NOTICES Any notice required or permitted to be given hereunder shall be deemed sufficient if sent by facsimile letter or overnight courier, or delivered by hand to ImClone or CombiChem at the respective addresses and facsimile numbers as set forth below or at such other address and facsimile number as either Party hereto may designate. If sent by facsimile letter, notice shall be deemed given when the transmission is completed if the sender has a confirmed transmission report. If a confirmed transmission report does not exist, then the notice will be deemed given when the notice is actually received by the person to whom it is sent. If delivered by overnight courier, notice shall be deemed given when it has been signed for. If delivered by hand, notice shall be deemed given when received. if to CombiChem, to: CombiChem, Inc. 9050 Camino Santa Fe San Diego, California 92121 Attention: President Fax number: (619) 530-9998 with a copy to: Brobeck, Phleger & Harrison LLP 550 South Hope Street, 21st Floor Los Angeles, California 90071 Attention: Laurie A. Allen, Esq. Fax number: (213) 239-1324 if to ImClone, to: ImClone Systems Incorporated 180 Varick Street New York, New York 10014 Attn: Vice President, Business Development Fax number: (212) 645-2054 with a copy to: Hoffmann and Baron 350 Jericho Turnpike Jericho, New York 11753 Attn: Irving N. Feit, Esq. Fax number: (516) 822-3582 17. SURVIVAL The provisions of Sections 2.5, 5.1, 5.2, 7.2(c),10.3, 10.4, and Articles 1, 3, 8, 9, 11, 12, 13, 14, 15, 16, 18 and this Article 17 shall survive termination of this Agreement in addition to those provisions which by their terms survive. 19 21 18. ADDITIONAL TERMS 18.1 Entire Agreement. This Agreement and the Common Stock Purchase Agreement constitute the entire understanding between the Parties with respect to the subject matter hereto and supersedes and replaces all previous negotiations, understandings, representations, writings and contract provisions and rights relating hereof. The Parties agree that all services provided hereunder shall be subject to and governed by the terms and provisions set forth herein, and none of the terms and conditions contained on any proposal, purchase order, invoice or other writing shall have any effect or change the provisions of this Agreement. 18.2 Amendment; No Waiver. No provision of this Agreement may be amended, revoked or waived except by a writing signed and delivered by an authorized officer of each Party. Any waiver on the part of either Party of any breach or any fight or interest hereunder shall not imply the waiver of any subsequent breach or waiver of any other right or interest. 18.3 Validity. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, each of which shall remain in full force and effect. In addition, should the invalidity or unenforceability of any provision of this Agreement cause an unintended result or result in any unfairness to either Party, then ImClone and CombiChem shall promptly meet and negotiate in good faith to modify or amend this Agreement to change such result or to eliminate such unfairness. 18.4 Headings. The descriptive headings are inserted for convenience of reference only and are not intended to be part of or to affect the meaning of or interpretation of this Agreement. 18.5 Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, and all of which together shall be deemed to be one and the same instrument. 18.6 Governing Law. This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of California, without regard to conflicts of laws principles. 19. WARRANTY Each Party warrants that it has the power to grant all of the rights granted and make such required assignments, and to assume all of the obligations required, under this Agreement. If, at the time a Patent application is to be filed by ImClone with respect to any Active Compound, Lead Compound, Development Compound or Products, CombiChem informs ImClone that CombiChem has the power to grant the exclusive rights to such Active Compound, Lead Compound, Development Compound or Products, and to assign such Patents related thereto, to ImClone in accordance with Sections 3.2 and 5.2 above, CombiChem further warrants that, in fact, as of such date, it has such power subject to the proviso that under no circumstances does CombiChem warrant to ImClone that its rights in any Active Compound, Lead Compound, Development Compound or Products are exclusive to the extent such Active Compound, Lead 20 22 Compound, Development Compound or Products may be covered under the patent claims of Third Parties wherein such claims are not the direct result of a collaboration between the Third Party and CombiChem. IN WITNESS WHEREOF, the parties have executed this Agreement to be effective as of the Effective Date. COMBICHEM, INC. IMCLONE SYSTEMS INCORPORATED By: /s/ Vicente Anido By: /s/ illegible -------------------- -------------------------------------------- Its: President and CEO Its: CFO 21 23 Appendix A *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. 24 Appendix B Milestone Payments (Triggered by Activities of ImClone or Its Licensees)
Development Milestone Milestone Payment - --------------------- ----------------- *** *** U.S. *** *** U.S. *** *** *** U.S. *** *** *** U.S. *** *** *** ------------ Total U.S. ***
*** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. EX-10.23 6 EXHIBIT 10.23 1 EXHIBIT 10.23 COLLABORATIVE RESEARCH AND LICENSE AGREEMENT BETWEEN COMBICHEM, INC. AND ATHENA NEUROSCIENCES, INC. OCTOBER 15, 1997 2 COLLABORATIVE RESEARCH AND LICENSE AGREEMENT THIS COLLABORATIVE RESEARCH AND LICENSE AGREEMENT (the "Agreement") is entered into and made effective as of October 15, 1997 (the "Effective Date"), by and between COMBICHEM, INC., a Delaware corporation having its principal offices at 9050 Camino Santa Fe, San Diego, California 92121 ("CombiChem") and ATHENA NEUROSCIENCES, INC., a Delaware corporation and a wholly-owned subsidiary of Elan Corporation, plc ("Elan"), having its principal offices located at 800 Gateway Boulevard, South San Francisco, California 94080 ("Athena"). WHEREAS, CombiChem has developed and owns certain drug discovery technology and intellectual property rights, including chemical library design software, multi-parallel synthesis and purification methods, chemical libraries suitable for high throughput biological screening assays and medicinal chemistry (collectively, "CombiChem Technology"); WHEREAS, as of the Effective Date, Elan, Athena and their Affiliates have developed and own certain drug discovery and intellectual property rights, including certain assays, methods and know how regarding the Initial Targets and the Optional Targets, among other things (collectively "Athena Technology"); WHEREAS, Athena desires to utilize CombiChem Technology for its drug discovery activities under Athena know-how concerning the identification and characterization of novel small molecule inhibitors for development as therapeutics for treatment of central nervous system conditions in humans; WHEREAS, the parties wish to collaborate in a Research Program against Collaboration Target(s) ("Collaboration"); WHEREAS, during the Research Period and for purposes of the Collaboration, the Parties intend to focus on up to six (6) Collaboration Targets; NOW, THEREFORE, the Parties agree as follows: 1. DEFINITIONS 1.1 "Abandoned Target" shall have the meaning given in Section 4.1. 1.2 "Abandoned Compound" shall have the meaning given in Section 4.1. 1.3 "Active Compound(s)" means a compound (or compounds) which (a) (i) is selected by the RMC under the Research Program from Collaboration Compounds under Section 4.2, or 1 3 (ii) is a Derivative of a Collaboration Compound which is so selected by the RMC; and (b) shows In Vitro Activity. 1.4 "Affiliate" of a Party means any corporation or other business entity controlled by, controlling or under common control with, such Party. For this purpose "control" shall mean direct or indirect beneficial ownership of more than fifty percent (50%) of the voting securities or income interest in such corporation or other business, or if not meeting the preceding requirements, any company owned or controlled by or owning or controlling such Party at the maximum control or ownership right permitted in the country where such company exists. 1.5 "Athena Compound" means a chemical compound that is proprietary to Athena or whose use or manufacture is proprietary to Athena or its Affiliates. 1.6 "Athena Technology" shall have the meaning set forth in the preamble of this Agreement. 1.7 "Collaboration" has the meaning set forth in the preamble. 1.8 "Collaboration Compound(s)" means a compound (or compounds) which (a) is synthesized following the Effective Date for screening against a Collaboration Target under the Research Program, (b) is a pre-existing or hereafter acquired CombiChem compound which CombiChem desires to designate as a Collaboration Compound, or (iii) is a pre-existing or hereafter acquired Athena compound which Athena desires to designate as a Collaboration Compound. 1.9 "Collaboration Library" means a library synthesized under the direction of the RMC, containing compounds designed to provide information regarding activity against a specific Collaboration Target. 1.10 "Collaboration Target(s)" means either an Initial Target or an Optional Target. 1.11 "CombiChem Compound" means a chemical compound that is proprietary to CombiChem, or whose use or manufacture is proprietary to CombiChem. 1.12 "CombiChem Technology" has the meaning set forth in the preamble. 1.13 "Confidential Information" includes, but is not limited to, (a) all information and materials received by either Party from the other Party pursuant to this Agreement which is confidential under Article 11; 2 4 (b) all information and materials by either Party arising out of the Collaboration during the Research Period; (c) all Daughter Libraries, excluding Inactive Compounds and Returned Compounds; and (d) the financial terms of this Agreement. 1.14 "Daughter Libraries" shall mean the compound libraries which are designed and synthesized as a part of the Collaboration. 1.15 "Derivative" shall mean a compound (or compounds) which has resulted from subsequent chemical synthesis to generate an Active Compound or Development Compound in support of the Research Program. 1.16 "Development Compound(s)" means a compound (or compounds) which (a) (i) is an Active Compound or (ii) is a Derivative of an Active Compound; and (b) is determined by Athena to be appropriate for preclinical studies for the purpose of IND filing by Athena. 1.17 "Due Diligence" means the use of by a Party of its or its Affiliates' resources in a manner which is consistent with the exercise of reasonable and prudent scientific and business judgment as applied to other programs of Athena or CombiChem, as the case may be, targeting products aimed at markets or patient groups of similar sizes and of similar scientific and commercial potential. With respect to any Development Compound, "Due Diligence" shall also require Athena or its Affiliates to use commercially reasonable efforts to conduct all necessary preclinical studies and to file an IND for such Development Compound within two (2) years from the date upon which Athena has designated such Development Compound from any Active Compound or its Derivatives. For purposes of this Agreement, failure to exercise Due Diligence by any Party shall be established if such Party receives written notice describing such failure and does not cure such failure within ninety (90) days of the receipt of such notice. 1.18 "Exclusivity Period" means the Research Period plus twelve (12) months. 1.19 "Field" means all therapeutic and diagnostic indications in humans for any target against which an Active Compound, Development Compound or Products may be directed. 1.20 "First Commercial Sale" of a Product shall mean the first sale for use or consumption of such Product in a country after required marketing and pricing approval has been granted by the governing health regulatory authority of such country. Sale to an Affiliate shall not constitute a First Commercial Sale unless the Affiliate is the end user of the Product. 3 5 1.21 "FTE" shall mean a full-time equivalent employee of CombiChem. For purposes of this Agreement, the FTEs shall include synthetic and analytical chemists, compound control scientists and computational scientists. 1.22 "Inactive Compound(s)" means a Collaboration Compound(s) which does not have the In Vitro Activity required for an Active Compound. 1.23 "In Vitro Activity" shall mean the observation of *** in assays as described by Athena in the Research Plan for each Collaboration Target. 1.24 "Initial Target" shall have the meaning set forth in Section 3.1 hereof. 1.25 "Net Sales" means the gross sales invoiced by Athena or its Affiliates for Products to non-Affiliated Third Parties (and to Affiliates who are the end users of such Products) less actual deductions or returns (including withdrawals and recalls), rebates (price reductions, including formulary or Medicaid and similar types of rebates, e.g. chargebacks), cash, trade or volume (quantity) discounts, discounts granted at the time of invoicing, the cost of transport, insurance, delivery, sales taxes and use, tariff, excise or other taxes (other than income taxes) directly linked to and included in the gross sales amount as computed on a product-by-product basis for the countries concerned, whereby the amount of such sales in foreign currencies is converted into United States dollars at the exchange rate of the last business day for each calendar month as reported in The Wall Street Journal. 1.26 "Optional Target(s)" means a Target that is added to the Collaboration in accordance with Section 3.2. 1.27 "Patent" means (a) valid and enforceable Letters Patent, and any non-U.S. equivalent, including any extension (including Supplemental Protection Certificates), registration, confirmation, reissue, continuation, divisionals, continuation-in-part, reexamination or renewal thereof, or (b) pending applications for any of the foregoing, whether filed or issued before or after the Effective Date of this Agreement. 1.28 "Party" means CombiChem or Athena, as the case may be, including their respective Affiliates, permitted successors and assigns. 1.29 "Product(s)" means any product containing an Active Compound or Development Compound with such compound as the active ingredient and which is granted regulatory approval by the governing health regulatory authority of the applicable country for marketing in the Field. 1.30 "Project Team" shall have the meaning set forth in Section 2.1(c). 1.31 "Proposed Targets" shall have the meaning given in Section 3.1. *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. 4 6 1.32 "Related Target(s)" shall mean those targets identified by Athena in writing to CombiChem as having a direct relationship to Collaboration Targets or Proposed Targets, which will provide Athena exclusivity as outlined in Section 4.5. 1.33 "Research Management Committee" or "RMC" has the meaning set forth in Article 6 below. 1.34 "Research Period" means the initial term of the Collaboration commencing on the Effective Date and ending on December 31, 2000, unless earlier terminated, which can be extended in accordance with Section 7.1 below. 1.35 "Research Plan" means the research plan to be agreed in writing between the Parties, which describes the research activities to be performed for each Collaboration Target. 1.36 "Research Program" means the research to be conducted for the Collaboration including, without limitation, the activities described in the Research Plan and set forth in Sections 2.1 and 2.2 of this Agreement. 1.37 "Returned Compound" shall have the meaning set forth in Section 9.2. 1.38 "Royalty Term" means, in the case of any Product, in any country, the period of time commencing on the First Commercial Sale and ending upon the later of (a) ten (10) years from the date of First Commercial Sale in such country; or (b) the expiration of the last-to-expire Patent resulting from the Research Program filed in the Field during the Exclusivity Period with claims covering that Product in the relevant country. 1.39 "Target" means a biomolecular entity that a small molecule is synthesized against wherein the small molecule demonstrates relevant activity. 1.40 "Territory" means the entire world. 1.41 "Third Party" means an entity other than CombiChem or Athena or their respective Affiliates. 1.42 "UIL" means CombiChem's proprietary Universal Informer Library(TM). 2. RESEARCH COLLABORATION 2.1 CombiChem Responsibilities. CombiChem shall with Due Diligence provide the following resources to Athena and conduct the following activities under the Research Program and as more fully described in the Research Plan: (a) During the Research Period, CombiChem shall (i) review data and information regarding the Collaboration Targets provided by Athena; (ii) based on such data and information and using the 5 7 CombiChem Technology, design Daughter Libraries; and (iii) supply all lead chemistries and synthesize compounds as provided in Section 5.4 below. (b) During the Research Period, CombiChem shall keep Athena informed of its activities performed in connection with the Collaboration, including, without limitation, providing Athena with data and information (and, upon Athena's request, reasonable quantities of samples pursuant to Section 5.4) regarding the status of all Collaboration Compounds prior to the meetings of the Research Management Committee. (c) Subject to Section 2.3, Article 3 and Section 8.3, and at all times during the Research Period, Combichem shall dedicate, in separate laboratory facilities as to its chemistry efforts, one or more project team(s) ("Project Team"), each consisting of such number of FTEs as determined by the RMC to conduct all of CombiChem's activities in connection with the collaboration at a per annum rate of U.S. *** to be paid by Athena. The initial Project Team shall consist of a minimum of five (5) CombiChem FTEs, unless the RMC determines other use. 2.2 Athena Responsibilities. Athena shall with Due Diligence provide the following resources to CombiChem and conduct the following activities under the Research Program as more fully described in the Research Plan: (a) Athena shall provide CombiChem with funding for the Collaboration as set forth in Article 8, provide screening, biological and structural data and information (including leads and/or screening hits and assay methods relating to Collaboration Compounds) to CombiChem with respect to the Collaboration necessary for CombiChem to perform its duties under this Agreement, and will assume scientific, financial and administrative responsibility for screening and biological support activities, drug development and regulatory filings during and after the term of the Collaboration on the terms set forth below. At its option, Athena may also provide pre-existing screening data and related information for the Collaboration. (b) During the Research Period, Athena shall provide CombiChem with data and information regarding Collaboration Compounds and the Collaboration Target assays developed by Athena under the Research Program prior to the meetings of the Research Management Committee. *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. 6 8 (c) During the Exclusivity Period, Athena shall screen Collaboration Compounds for In Vitro Activity and, where appropriate, in vivo activity against the Collaboration Target. (d) During the Exclusivity Period, with respect to any Collaboration Target against which an Active Compound has designated by the RMC, Athena shall (i) screen Active Compound, (ii) endeavor to determine Development Compounds, and (iii) endeavor to develop Products. At any time during the Collaboration, Athena may apply chemistry effort to any Collaboration Compound, including synthesis, as coordinated by the RMC. (e) Following the first IND filing through First Commercial Sale, Athena shall provide CombiChem with an annual report summarizing Athena's activities in developing Development Compounds. 2.3 Conduct of Research Program. The Parties hereby agree that the Research Programs shall be carried out in accordance with the Research Plan, as amended from time to time. The Research Management Committee shall review the Research Plan on an ongoing basis and may make changes to the Research Plan so long as such changes are mutually agreed to by CombiChem and Athena. For each Research Program, the RMC will determine the appropriate size and composition of the Project Team (i.e., the identity and number of CombiChem FTEs in each relevant scientific discipline), and shall prioritize the activities of the Project Team against such Collaboration Target(s) within the scope of that Research Program. Athena shall designate the first Collaboration Target from the Proposed Targets by notice in writing to CombiChem. The Research Program against that Target shall commence *** against the *** Collaboration Target. The commencement date of the Research Program(s) for the subsequent Initial Targets (other than the first Collaboration Target) and any Optional Targets shall be as set forth in Section 3.1. 2.4 Third Party Licenses. Each Party shall be solely responsible for any Third Party license fees required to perform its obligations under this Agreement. 3. TARGETS 3.1 Initial Targets. During the Research Period, Athena may designate *** "Proposed Targets" (with the right of substitution) as "Initial Targets" to be worked on by Project Teams for purposes of the Collaboration. The Proposed Targets and the Initial Targets shall be those designated in writing by the Chief Operating Officer of Elan within *** of the Effective Date. No activity with respect to any Initial Targets shall be conducted by the Project Teams until a date to be mutually agreed upon by the Parties. The Project Teams *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. 7 9 shall work on Initial Targets as directed by the RMC. The project fee set forth in Section 8.1(a) shall include all *** Initial Targets. 3.2 Optional Targets. Subject to timely payment of its obligations set forth in Article 8 (including the project initiation fee set forth in Section 8.1(b) and the payments required in Sections 8.3, 8.4, 8.5 and 9.3) and provided that all *** Initial Targets have been designated by Athena and the Research Programs covering such Initial Targets are or have been active, during the Research Period, Athena may designate (by providing written notice in the manner described in Section 3.1) *** additional Proposed Targets (or other Targets as may be mutually agreed) as Optional Targets, with the Research Program for each such Optional Target to begin within ninety (90) days of such written notification or as mutually agreed by the parties; it being understood that the Project Teams shall work on Optional Targets as directed by the RMC. The project initiation fee set forth in Section 8.1(b) shall include *** Optional Targets. Upon such designation, the RMC shall establish the specific scientific achievements (to be mutually agreed between CombiChem and Athena) for such Optional Target and the same shall be designated as an Optional Target for the Collaboration and subject to the terms (including the commercial terms) of this Agreement. 4. EXCLUSIVITY 4.1 Collaboration Target Exclusivity. Prior to designating a Collaboration Target for an active Research Program under Article 3, and thereafter so long as Athena or its Affiliates are proceeding with Due Diligence for that Target, CombiChem shall not knowingly work on or knowingly provide information regarding a Collaboration Target with or to any Third Parties, except (a) as provided for in Section 12.2 with regard to any Public Statements, and (b) with respect to any Third Parties who are collaborators or proposed collaborators of CombiChem, CombiChem shall have the right, consistent with its corporate policy (but without identifying any Collaboration Target), to notify any such Third Party of its decision and/or inability to work on such Target with that Third Party. In the event that Athena or its Affiliates have not transferred or assigned control of its program for that Target to a Third Party under due diligence obligations no less stringent than those set forth herein and have failed to exercise Due Diligence with respect to, or notifies CombiChem in writing that it has abandoned work on, any Collaboration Target (an "Abandoned Target") and any Collaboration Compound associated with such Abandoned Target (together with all Derivatives of such Collaboration Compound, an "Abandoned Compound"), then such Abandoned Target and/or Abandoned Compound shall be available to CombiChem (excluding any Athena Compounds and Athena Technology) and to Athena for any purpose thereafter. 4.2 Active Compounds. Following the designation of any Collaboration Compound as an Active Compound, such Active Compound shall be exclusively available to Athena for research or application to any Target, within or outside the Collaboration, during the Exclusivity Period and CombiChem shall not knowingly work on or knowingly provide information regarding such Active Compound to any Third Party, except to reject and take any steps necessary to protect Athena's exclusivity hereunder. Following the expiration of the Exclusivity Period Active Compounds for that Target upon which a Patent has not been filed *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. 8 10 within ninety (90) days following the Research Period shall be deemed to be Inactive Compounds for all purposes hereunder; provided, that any Active Compound which is the subject of claim(s) under a pending Patent shall continue to be treated as Active Compounds until a Patent is issued with respect to one or more of such claims; or until all of such Patent claims have been denied, at which time the compounds which are the subject to those claims shall be Inactive Compounds hereunder. 4.3 Inactive and Returned Compounds. Any Inactive Compounds and Returned Compounds shall be available to CombiChem (except for any pre-existing Athena Compound) and Athena for any purpose following the designation of a Collaboration Compound as an Inactive Compound or Returned Compound. 4.4 Duration of Exclusivity for Collaboration Targets. Notwithstanding any other provision of this Agreement, it is understood and agreed that once a research Program has been initiated by the RMC for a Collaboration Target, CombiChem's obligations under Section 4.1 shall continue until Athena has (a) released CombiChem from the effect of this Section 4.4 by written notice from the Chief Operating Officer of Elan, or (b)(i) failed to exercise Due Diligence with respect to that Target, and (ii) has not transferred or assigned its control of the development of its program for that Target to a Third Party with due diligence requirements no less stringent than those set forth in this Agreement. In the event of such transfer or assignment to a Third Party, the Exclusivity Period provided in this Section 4.4 with respect to such Target shall continue until the earlier of (a) receipt by CombiChem of a written release from such Third Party or (b) the failure of such Third Party to exercise Due Diligence with respect to that Target. 4.5 Exclusivity of Related Targets. (a) During the Research Period (and thereafter, as provided in Section 4.5(c) below), CombiChem shall not knowingly work on or knowingly provide information regarding a Related Target with or to any Third Party, except (i) as provided for in Section 12.2 with regard to any Public Statements, and (ii) with respect to any Third Parties who are collaborators or proposed collaborators of CombiChem, CombiChem shall have the right, consistent with its corporate policy (but without identifying any Collaboration Target or Related Target) to notify any such Third Party of its decision and/or inability to work on such Target with that Third Party. (b) *** *** has conducted scientific inquiry or research regarding that Target. The RMC may from time to time discuss the status of Athena's inquiry or research into any such additional Related Targets. Athena shall notify CombiChem in writing if it abandons its inquiry or research regarding any additional Related Targets, at which point it shall no longer be a Related Target. (c) The exclusivity provided in Section 4.5(a) shall be extended for an additional year following the Research Period upon the initiation of a Research Program for each of the *** Collaboration Targets, for a maximum extension of three years following the Research Period. *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. 9 11 (d) If a Related Target or additional Related Target becomes a Collaboration Target, then all of the other provisions of this Agreement (including without limitation the exclusivity provisions of this Article 4) shall apply to such Collaboration Target. 4.6 Survival. This Article 4 shall survive termination or expiration of this Agreement. 5. COLLABORATION COMPOUNDS 5.1 Pre-Existing Compounds. Neither Party shall have any rights to any pre-existing compound of the other Party unless and until such compound is designated as a Collaboration Compound by such Party. Additionally, CombiChem may decline (after informing Athena) to synthesize a particular compound or library of compounds by reason of existing Patents or contractual obligations. 5.2 Intellectual Property Rights; License to Athena. Subject to Section 9.2, and except as set forth in this Section 5.2, Athena shall own and have exclusive rights in all Patents and intellectual property (whether or not patentable) relating to Active Compounds and the subject matter contained therein and resulting from the Research Program during the Exclusivity Period and thereafter so long as Athena continues to show Due Diligence for that Target. Notwithstanding the foregoing, Athena acknowledges and agrees that CombiChem reserves the right to assign or grant exclusive rights to any compound to a third party collaborator who completes an act of invention with regard to such compound to the extent CombiChem is obligated to do so under CombiChem's existing contractual obligations and further provided that CombiChem has timely (but in any event within *** after notification from Athena that such compound shows In Vitro Activity) notified Athena in writing of such assignment or grant and its designation as an unavailable compound. Athena shall be responsible for filing, maintaining and prosecuting all Patents relating to Active Compounds at its sole expense. Prior to the filing of any such Patent applications, CombiChem shall assign to Athena or its designee all intellectual property rights it may have in the Active Compounds and the subject matter claimed therein which are necessary for the development and commercialization by Athena or its designee. If Athena fails to so file, maintain or prosecute such Patent, CombiChem shall have the right to request Athena to do so. If Athena elects not to file, maintain or prosecute such Patent, on a country-by-country basis, CombiChem shall have the right to take over such filing, maintenance or prosecution of such Patent, at its sole expense, and, as a result, *** shall be entitled to recover from the proceeds of any infringement action brought by CombiChem in any such country (i) *** , and (ii) *** , with the remainder to be paid *** . 5.3 Structural Information. Neither Party shall disclose the structure of any Active Compound to any Third Party without the other Party's written permission, unless required to do so by law, in which case such Party shall promptly notify the other Party of such required disclosure. If a subpoena or other legal process concerning the same is served upon either Party, the other Party shall cooperate with the Party served in any effort to contest the validity of such subpoena or other legal process. *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. 10 12 5.4 Supply of Collaboration Compounds. Aliquots of at least *** milligrams of any Collaboration Compound that has been synthesized will be prepared and given to Athena. CombiChem shall replenish that amount upon Athena's reasonable request. CombiChem shall maintain aliquots of any Collaboration Compound that has been synthesized by CombiChem. CombiChem shall also provide Athena with additional requirements of samples at CombiChem's cost. 6. RESEARCH MANAGEMENT COMMITTEE The design, review and conduct of the Research Program will be coordinated by the Research Management Committee, which will meet regularly on a mutually-agreeable schedule. Each Party shall bear its own expenses related to such meetings. The Research Management Committee may establish and amend or revise the Research Plan as reasonable and necessary to reflect the scientific progress and work performed under the Research Program, such amendments to be mutually agreed to in writing by Athena and CombiChem. The Research Management Committee will consist of an equal number of members from Athena and CombiChem and will include appropriate representatives from Athena and CombiChem as mutually agreed. The co-chairs of the Research Management Committee will initially be the Vice President, Chemistry of CombiChem and the Vice President, Research of Athena and subsequently may change as each Party determines for its co-chair. Decisions of the Research Management Committee shall be by consensus. If Athena elects not to file, maintain or prosecute such Patent, on a country-by-country basis, CombiChem shall have the right to take over such filing, maintenance or prosecution of such Patent, at its sole expense, and, as a result, CombiChem shall be entitled to recover from the proceeds of any infringement action brought by CombiChem in any such country (i) 200% of its out-of-pocket costs, and (ii) 50% of the balance of the proceeds of such action, with the remainder to be paid to Athena. 7. RESEARCH PERIOD; TERMINATION OF RESEARCH PROGRAM 7.1 Research Period: Option to Extend the Research Period. The initial term of the Collaboration shall be the Research Period subject to extension upon mutual agreement. To extend the Research Period, Athena must notify CombiChem no later than ninety (90) days prior to the then-current expiration date and the Parties shall negotiate in good faith the terms and conditions of any such extension. 7.2 Termination of Research Program Upon Breach. The Research Program and/or this Agreement may be terminated by a Party for the material breach by the other Party as provided by Section 10.2. 7.3 Termination by Athena. Athena may terminate this Agreement effective at any time after one (1) year from the Effective Date, in its sole discretion, upon ninety (90) days' prior written notice. Athena may also terminate any part of the Research Program directed at one or more of the Collaboration Targets, also upon ninety (90) days' prior written notice, at any time during the Collaboration, in which case the RMC shall reallocate the FTEs affected to any of the other Collaboration Targets. *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. 11 13 8. CONSIDERATION 8.1 Project Initiation Fee. Athena shall pay CombiChem (a) within ten (10) days following the Effective Date a non-refundable, noncontingent project initiation fee of U.S. *** in cash to initiate the Research Program for the Initial Targets (Collaboration Targets *** ) and (b) upon the designation of any Optional Target (Collaboration Targets *** ), a non-refundable project initiation fee of U.S. *** per Optional Target (for a total of *** ), payable upon the later of (i) the date of commencement of a Research Program with respect to such Optional Target, or (ii) *** . 8.2 Equity Purchase. Elan International Services, Ltd. ("EIS"), an Affiliate of Athena, shall purchase shares of Common Stock of CombiChem pursuant to the terms of that certain Common Stock Purchase Agreement, dated as of the Effective Date, by and between CombiChem and EIS (the "Stock Purchase Agreement"). In the event that CombiChem closes an initial public offering of its common stock at a sales price per share to the public (the "IPO Price") which is less than $2.50 per share (on a pre-split basis), then, upon the closing of such initial public offering, CombiChem shall issue to ImClone, without further consideration other than the purchase price paid by ImClone pursuant to the Stock Purchase Agreement, such additional number of shares of CombiChem common stock equal to: 2,000,000 --------- = 1,000,000 Adjusted Price wherein the "Adjusted Price" = the IPO Price X .80 if the IPO Price is less than $2.50 per share. All shares of CombiChem common stock issued pursuant to this Section 8.1 shall be deemed to be "Shares" within the meaning of the Stock Purchase Agreement. 8.3 Program Funding. (a) Research Support for Project Team. At all times during the Research Period, Athena shall make payments to CombiChem for direct research support for its Project Team, which shall consist of a minimum of five (5) full time employees ("FTEs") of CombiChem, unless the RMC determines otherwise. The total amount payable per FTE shall be U.S. *** . All payments for direct research support shall be paid by Athena to CombiChem, quarterly in advance, and adjusted as necessary in subsequent quarters, of such amounts as are equal to the product of (i) the number of CombiChem FTEs (a minimum of five (5) FTEs at all times unless the RMC determines otherwise) allocated to the Research Program by the RMC for the calendar quarter to which each such payment applies, multiplied by (ii) U.S. *** (i.e., the quarterly amount per Combichem FTE on the basis of U.S. *** ). All such FTEs shall be CombiChem's employees. Athena shall not be responsible for, and CombiChem shall indemnify and hold Athena harmless from, any salary, benefits, or employment-related claims of any kind asserted by CombiChem's employees. (b) Expansion of Project Team. Athena may request that CombiChem expand its Project Team during the Research Period in order to accelerate work on Collaboration Targets and/or to add Optional Targets. In such event, the RMC shall promptly confer as to the appropriate number of FTEs to be added to the Project Team, at a cost to Athena of U.S. *** per FTE to be paid as specified in Section 8.3(a). 8.4 Milestone Payments. Within thirty (30) days of the occurrence of a development milestone triggered by the activities of Athena or its Affiliates as shown on Appendix A, Athena shall pay CombiChem the related milestone payment in U.S. dollars as set forth on Appendix A. Such payments shall apply to any milestone reached by an Active Compound, Development Compound or Product, whether the Target is within or outside the Collaboration. *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. 12 14 8.5 Royalties. During the Royalty Term, Athena will pay CombiChem a *** of Net Sales of Products sold by Athena or its Affiliates in all countries in the Territory. Each payment of royalties shall be accompanied by a report of Net Sales of Products in sufficient detail to permit confirmation of the accuracy of the royalty payment made. 8.6 Manner and Place of Payment. Royalty payments and reports for Net Sales of Products shall be calculated in local currencies and reported for each calendar quarter. All royalty payments owed under this Agreement shall be made by wire transfer to the bank account to be designated by CombiChem within sixty (60) days following the end of each such calendar quarter. 8.7 Records and Audit. During the term of this Agreement and for a period of three (3) years thereafter, Athena shall keep complete and accurate records pertaining to the sale or other disposition of Products in sufficient detail to permit CombiChem to confirm the accuracy of all payments due hereunder. CombiChem shall have the right to cause an independent certified public accounting firm reasonably acceptable to Athena to audit such records to confirm Athena's Net Sales for the preceding year. Any information obtained during such audit shall be treated as Confidential Information. Such audits may be exercised after reasonable notice during normal business hours of Athena no more than once each year. CombiChem shall bear the full cost of such audit unless such audit discloses a deficiency of the greater of *** or more than *** from the amount of the Net Sales reported by Athena for such audited period. In such case, Athena shall bear the reasonable cost of such audit. 8.8 Taxes. All income and other taxes levied on account of the royalties and other payments accruing to CombiChem under this Agreement shall be paid by CombiChem, including taxes levied thereon as income to CombiChem. If provision is made in law or regulation for withholding, such tax shall be deducted from the royalty or other payment made by Athena to the proper taxing authority and a receipt of payment of the tax secured and promptly delivered to CombiChem. Each Party agrees to assist the other Party reasonably in claiming exemption from such deductions or withholdings under any double taxation or similar agreement or treaty from time to time in force. 9. LICENSE GRANTS; OUTLICENSE 9.1 CombiChem License Grant to Athena. Subject to the terms and conditions of this Agreement, CombiChem hereby grants to Athena an exclusive, royalty-free, worldwide license, with the right to sublicense to use such CombiChem Technology as is necessary to make, have made, use, have used, sell, have sold, import and export Collaboration Compounds or Products in the Territory. Such license shall remain exclusive (including as to CombiChem) in relation to each Active Compound, Development Compound and/or Product so long as Athena or its licensee continues to develop and commercialize such Active Compound, Development Compound and/or Product against a Collaboration Target with Due Diligence. *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. 13 15 9.2 Athena License Grant to CombiChem. Subject to Article 4 and following the failure of Athena or its licensee to develop and commercialize with Due Diligence an Active Compound, a Development Compound or Product, as the case may be (collectively, and together with all Abandoned Compounds, "Returned Compounds"), Athena shall grant to CombiChem a non-exclusive, royalty-free license, with the right to sublicense, under those Athena Patents and know-how which are resulting from the Research Program and related exclusively to the Returned Compound, to make, have made, use, have used, sell, have sold, import and export such Returned Compound in the Territory. 9.3 Athena Outlicense. Athena shall have the right to transfer, assign or outlicense to a Third Party the Products or Patents covering the Products, subject to CombiChem's right to receive (a) royalties as provided in Appendix A, and (b) the percentage of the Third Party Payments set forth in Appendix A. For purpose of this Section 9.3, "Third party Payments" shall mean all payments **** *** , which shall include, but not be limited to, *** *** *** . All Payments shall be made to CombiChem by wire transfer to such bank account designated by CombiChem within five (5) business days after receipt by Athena or its Affiliates of such Payments from the Third Party. As an express condition of any such outlicense, any such licensee shall be required to agree in writing to be bound by due diligence, royalty reporting and recordkeeping and inspection provisions no less stringent than those contained in this Agreement. In addition, CombiChem shall have the right to receive all audit reports relating to sales of Products of Athena's licensees, and to cause Athena or its Affiliates or successors to have an independent certified public accounting firm (reasonably acceptable to Athena) audit such licensee's records on the same terms as those specified in Section 8.6. Failure of such licensee to make any milestone or royalty payment in respect of such Product shall not relieve Athena of its obligations to make royalty and milestone payments to CombiChem hereunder. 9.4 Rights to Inactive Compounds. Except for any Athena Compounds (which remain proprietary to Athena), each of Athena and, subject to Athena's Patent rights, CombiChem shall have rights to make, have made, use, have used, sell, have sold, import and export Inactive Compounds or products containing Inactive Compounds. Specifically, each party shall be free to screen Inactive Compounds against any target other than the Collaboration Targets. In the event that either Athena or CombiChem shall develop, market and/or sell, or enter into a binding agreement with a Third Party to develop, market and/or sell, any product containing the Inactive Compound as an active ingredient, then the other Party hereto shall not be entitled to any payments, milestones, royalties, fees or compensation of any kind. 10. TERM AND TERMINATION OF THE AGREEMENT 10.1 Term. The term of this Agreement shall commence upon the Effective Date of this Agreement, and unless earlier terminated as provided in this Agreement, shall expire on December 31, 2000. *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. 14 16 10.2 Termination by Athena or CombiChem. If either Party materially breaches this Agreement and fails to remedy that breach within ninety (90) days of receiving written notice thereof from the other Party, or enters into any arrangement of composition with its creditors or goes into liquidation, insolvency, bankruptcy, receivership or reorganization proceedings, whether voluntarily or compulsorily which is not dismissed within ninety (90) days, then the other Party may at any time, by notice in writing or by telefax, terminate this Agreement. Within sixty (60) days following termination for any Research Program and/or research related to any Target under this Agreement, the RMC shall prepare a detailed, final written report to each Party, and provide any remaining supply of compounds in synthesis to date, for each Target or Research Program being terminated. 10.3 After Termination. Any termination of this Agreement or the Research Program shall be without prejudice to the accrued rights of either Party prior to the termination. In case of termination of this Agreement or the Research Program pursuant to Section 10.2 above, all royalty, milestone, Payment and confidentiality obligations set forth in Sections 8.1, 8.4, 8.5, 9.3, 9.4 and Articles 11 and 12 shall survive any such termination. Moreover, Athena shall not be entitled to any refund of any payments made to CombiChem hereunder upon the expiration of the term of this Agreement or earlier termination pursuant to this Article 10. 10.4 Effect of Termination on Licensees. In the event or any termination of this Agreement pursuant to this Article 10 where such termination shall not have been caused by the action of inaction on the part of any respective licensee of Athena or CombiChem, or by any breach by such licensee of its obligations under its licensee from Athena or CombiChem, as appropriate, such termination of this Agreement shall be without prejudice to the rights of each non-breaching licensee and such licensee shall be deemed to be a direct licensee hereunder. 11. CONFIDENTIAL INFORMATION 11.1 Nondisclosure. During the term of this Agreement and for a period of *** *** after termination thereof, each Party will maintain all Confidential Information in trust and confidence and will not disclose any Confidential Information to any third party or use any Confidential Information for any purpose except (i) as expressly authorized by this Agreement, (ii) as required by law or court order, after as much advance notice as is practical to the other Party, (iii) to its consultants, subcontractors or agents who need to know to accomplish the purposes of this Agreement and who are bound by equivalent written confidentiality obligations. Each Party may use the other Party's Confidential Information only to the extent required to accomplish the purposes of this Agreement. Each Party will use at least the same standard of care as it uses to protect proprietary or confidential information of its own to ensure that its Affiliates, employees, agents, consultants and other representatives do not disclose or make any unauthorized use of the Confidential Information. Each Party will promptly notify the other upon discovery of any unauthorized use or disclosure of the Confidential Information. 11.2 Exceptions. Confidential Information shall not include any information which the receiving Party can prove by competent evidence: (a) is now, or hereafter becomes, through no act or failure to act on the part of the receiving Party, generally known or available; *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. 15 17 (b) is known by the receiving Party at the time of receiving such information, as evidenced by its records; (c) is hereafter disclosed to the receiving Party by a Third Party, as a matter of right and without restriction on disclosure; (d) is independently developed by the receiving Party without the aid, application or use of Confidential Information; or (e) is the subject of a written permission to disclose provided by the disclosing Party. 12. PUBLICATIONS AND PUBLIC STATEMENTS 12.1 Publications. Without affecting obligations under Article 11 above, neither Party shall publish any information with respect to Collaboration Compounds or Development Compound during the Exclusivity Period without the prior written permission of the other Party. Such permission shall be approved or disapproved within thirty (30) days of written request for permission unless the other Party requests additional time (not to exceed ninety (90) days) for the purpose of protecting its intellectual property position. Such permission shall not be unreasonably withheld. The Party proposing to publish such information shall give the other Party ninety (90) days prior written notice and an opportunity to review such manuscript in order to determine the patentability of the information contained therein. 12.2 Public Statements. Neither Party shall use the name of the other Party in any public statement, prospectus, annual report or press release or other public communication (collectively "Public Statements") without the prior written approval of the other Party, which may not be unreasonably withheld or delayed; provided, however, that both Parties shall endeavor in good faith to give the other Party a minimum of two (2) business days to review such Public Statements; provided, further, that, upon approval of any such Public Statement, both Parties may disclose to Third Parties the information contained in such Public Statement without the further approval of the other; and provided, further, that if a Party does not approve such Public Statement, either Party may still use the name of the other Party in any Public Statement without the prior written approval of the other Party, if such Party is advised by counsel that such disclosure is required to comply with applicable law. 13. INDEMNIFICATION 13.1 EACH PARTY HEREBY AGREES TO SAVE, DEFEND AND HOLD THE OTHER PARTY AND ITS OFFICERS, DIRECTORS, EMPLOYEES, CONSULTANTS AND AGENTS HARMLESS FROM AND AGAINST ANY AND ALL SUITS, CLAIMS, ACTIONS, DEMANDS, LIABILITIES, EXPENSES AND LOSSES, INCLUDING REASONABLE LEGAL EXPENSES AND ATTORNEYS' FEES ("LOSSES") RESULTING DIRECTLY OR INDIRECTLY FROM THE INDEMNIFYING PARTY'S ACTS OR OMISSIONS IN CONNECTION WITH THE MANUFACTURE, DEVELOPMENT, USE, HANDLING, STORAGE, SALE OR OTHER DISPOSITION OF CHEMICAL AGENTS, COLLABORATION COMPOUNDS, ACTIVE COMPOUNDS, DEVELOPMENT COMPOUNDS OR PRODUCTS BY SUCH PARTY, ITS AFFILIATES OR LICENSEES except to the extent such Losses result from the negligence, breach of this Agreement or willful misconduct of the Party claiming a right of indemnification under this Article 13. 16 18 13.2 Infringement (a) Subject to Section 13.2(c) below, Athena shall hold CombiChem and its officers, directors, employees, consultants, and agents harmless from and against any and all losses resulting from the infringement of any Third Party's Patent issued as of the Effective Date due to the performance by Athena or its Affiliates of any activity contemplated hereunder, including, but not necessarily limited to, Athena's responsibilities under Section 2.2 above, developing Products, and selling Products. (b) Subject to Section 13.2(c) below, CombiChem shall hold Athena and its officers, directors, employees, consultants, and agents harmless from and against any and all losses resulting from the infringement of any Third Party's Patent issued as of the Effective Date due to the performance by CombiChem of any activity contemplated hereunder, including, but not necessarily limited to, CombiChem's responsibilities under Section 2.1 above. (c) The indemnity provided in Sections 13.2(a) and 13.2(b) above shall not apply where the loss is due to the breach by the indemnified Party of a warranty made in Article 19. 13.3 Procedures. If either Party (the "Indemnified Party") seeks indemnification under this Article 13, it shall inform the other Party (the "Indemnifying Party") of a claim as soon as reasonably practicable after it receives notice of the claim, shall permit the Indemnifying Party to assume direction and control of the defense of the claim (including the right to settle any claim brought against the Indemnified Party upon prior written consent, which shall not be unreasonably withheld), and shall give reasonable cooperation (at the expense of the Indemnifying Party) in the defense of such claim. 14. ASSIGNABILITY This Agreement may not be assigned by either Party without the prior written consent of the other Party, not to be unreasonably withheld; provided, however, that either Party may assign this Agreement, in whole or in part, to an Affiliate (which may, in Athena's case, include an *** or to a successor of a Party in connection with the merger, consolidation or sale of all or substantially all of such Party's assets or that portion of its business pertaining to the subject matter of this Agreement (and upon doing so will promptly notify the other Party in writing); provided that the assigning Party remains fully liable as obligated hereunder. 15. DISPUTE RESOLUTION PROCEDURES 15.1 Senior Executives Discussions. If a decision on a matter regarding the management of the Research Program as provided herein is not reached by the RMC, the dispute will be resolved as set forth in Article 6 above. If a dispute arises between CombiChem and Athena with respect to matters other than the management of the Research Program, either during or after the Research Period, such dispute will be referred to the appropriate senior management in the area of the dispute. If such senior management are unable to resolve such dispute, such *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. 17 19 dispute will be referred to the Chief Operating Officer of Elan and the Chief Executive Officer of CombiChem. If such officers are unable to reach an agreement within thirty (30) days following the initiation of discussions between them, such dispute shall be settled by arbitration as described in Section 15.2 below. 15.2 Binding Arbitration. If the parties have not been able to resolve the dispute as provided in Section 15.1 above, the dispute shall be finally settled by binding arbitration. Any arbitration hereunder shall be conducted under rules of the American Arbitration Association. The arbitration shall be conducted before three arbitrators chosen according to the following procedure: each of the parties shall appoint one arbitrator and the two so nominated shall choose the third. If the arbitrators chosen by the parties cannot agree on the choice of the third arbitrator within a period of thirty (30) days after their appointment, then the third arbitrator shall be appointed by the Court of Arbitration of the American Arbitration Association. If CombiChem brings an arbitration action, such arbitration shall occur in San Francisco, California. If Athena brings an arbitration action, such arbitration shall occur in San Diego, California. The arbitrators shall have the authority to grant specific performance, and to allocate between the parties the costs of arbitration in such equitable manner as they determine. The arbitral award (i) shall be final and binding upon the parties; and (ii) may be entered in any court of competent jurisdiction. 15.3 Injunctive Relief. Nothing contained in this Article 15 or any other provisions of this Agreement shall be construed to limit or preclude a Party from bringing any action in any court of competent jurisdiction for injunctive or other provisional relief to compel the other Party to comply with its obligations hereunder before or during the pendency of arbitration proceedings. 16. NOTICES Any notice required or permitted to be given hereunder shall be deemed sufficient if sent by facsimile letter or overnight courier, or delivered by hand to Athena or CombiChem at the respective addresses and facsimile numbers as set forth below or at such other address and facsimile number as either Party hereto may designate. If sent by facsimile letter, notice shall be deemed given when the transmission is completed if the sender has a confirmed transmission report. If a confirmed transmission report does not exist, then the notice will be deemed given when the notice is actually received by the person to whom it is sent. If delivered by overnight courier, notice shall be deemed given when it has been signed for. If delivered by hand, notice shall be deemed given when received. if to CombiChem, to: CombiChem, Inc. 9050 Camino Santa Fe San Diego, California 92121 Attention: President Fax number: (619) 530-9998 18 20 with a copy to: Brobeck, Phleger & Harrison LLP 550 South Hope Street, 21st Floor Los Angeles, California 90071 Attention: Laurie A. Allen, Esq. Fax number: (213) 239-1324 if to Athena, to: Athena Neurosciences, Inc. 800 Gateway Boulevard South San Francisco, California 94080 Attn: General Counsel Fax number: (415) 875-3620 17. SURVIVAL The provisions of Sections 2.4, 5.1, 5.2, 5.3, 10.3, 10.4 and Articles 4, 8, 9, 11, 12, 13, 15, and this Article 17 shall survive termination of this Agreement in addition to those provisions which by their terms survive. 18. ADDITIONAL TERMS 18.1 Entire Agreement. This Agreement and the Common Stock Purchase Agreement constitute the entire understanding between the Parties with respect to the subject matter hereto and supersedes and replaces all previous negotiations, understandings, representations, writings and contract provisions and rights relating hereof. 18.2 Amendment; No Waiver. No provision of this Agreement may be amended, revoked or waived except by a writing signed and delivered by an authorized officer of each Party. Any waiver on the part of either Party of any breach or any fight or interest hereunder shall not imply the waiver of any subsequent breach or waiver of any other right or interest. 18.3 Validity. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, each of which shall remain in full force and effect. 18.4 Headings. The descriptive headings are inserted for convenience of reference only and are not intended to be part of or to affect the meaning of or interpretation of this Agreement. 18.5 Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, and all of which together shall be deemed to be one and the same instrument. 19 21 18.6 Governing Law. This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of California, without regard to conflicts of laws principles. 18.7 Further Assurances. At any time and from time to time after the Effective Date, the Parties shall each do, execute, acknowledge and deliver, and cause to be done, executed, acknowledged or delivered, all such further acts, transfers, conveyances, or assignments as may be reasonably required to carry out the transactions contemplated by this Agreement 19. REPRESENTATIONS AND WARRANTIES 19.1 Authorization. All action on the part of each of CombiChem, Athena and their respective officers, directors and stockholders necessary for the authorization, execution and delivery of this Agreement and the performance of all obligations of CombiChem, Athena and Athena, respectively, hereunder has been taken. CombiChem represents that it has no present intention of materially changing the manner in which it generally conducts its activities which are the subject of the Collaboration. 19.2 Compliance with Other Instruments. The execution, delivery and performance by CombiChem of this Agreement and the consummation of the Research Program hereunder will not result in a violation of, or be in material conflict with, or constitute a material default, under any agreement in existence as of the Effective Date between CombiChem and its Third Party Collaborators. Subject to Section 5.2 and except for the rights expressly reserved by CombiChem therein, from the Effective Date until the expiration or termination of this Agreement, CombiChem agrees that it shall not enter into any agreement with any Third Party collaborator which would be in material conflict with, or cause a default under, this Agreement. 19.3 Rights to Intellectual Property. Each Party warrants that it has the power to grant all of the rights granted and make such required assignments, and to assume all of the obligations required, under this Agreement. Under no circumstances does CombiChem warrant to Athena that its rights in any Active Compound, Development Compound or Products are exclusive to the extent such Active Compound, Development Compound or Products may be covered under the patent claims of Third Parties wherein such claims are not the direct result of a collaboration between the Third Party and CombiChem. 20 22 IN WITNESS WHEREOF, the parties have executed this Agreement to be effective as of the Effective Date. COMBICHEM, INC. ATHENA NEUROSCIENCES, INC. By: /s/ Vicente Anido By: /s/ Illegible ---------------------- --------------------- Its: President & CEO Its: Vice President & General Counsel [SIGNATURE PAGE TO THE COLLABORATIVE RESEARCH AND LICENSE AGREEMENT] 21 23 Appendix A A. Milestones - Direct Marketing By Athena/Affiliates Milestone Payments (in U.S. Dollars)
Milestone(1) Milestone Payment(2) *** *** in: *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** Total ***
(1) Based on Athena or its Affiliates having marketing responsibility for Products (2) Paid for each Compound which achieves the stated milestone B. Outlicense By Athena/Affiliates Royalty: *** of royalties received by Athena or its Affiliates, up to a maximum of *** of all licensee net sales Third Party Payments: *** of Third Party Payments received by Athena or its Affiliates. In the case of outlicensing in *** a maximum of *** (each), inclusive of any *** . *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. EX-23.2 7 EXHIBIT 23.2 1 EXHIBIT 23.2 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the reference to our firm under the captions "Selected Financial Data" and "Experts" and to the use of our report dated October 15, 1997, in Amendment No. 3 to the Registration Statement (Form S-1) and related Prospectus of CombiChem, Inc. for the registration of 2,587,500 shares of its common stock. San Diego, California /s/ Ernst & Young LLP December 10, 1997 -----END PRIVACY-ENHANCED MESSAGE-----